Thursday, December 24, 2009

Well it's a marvelous night for a moondance : which voodoo do you do?

"Millionaires don't use astrologers. Billionaires do." -J.P. Morgan

"The stars in the heavens sing a music if only we had ears to hear."-Pythagoras

"The only randomness is the natural law which we do not yet understand." -Albert Einstein

'Perhaps there is a pattern set up in the heavens for one who desires to see it, and having seen it, to find one in himself.' -Plato

'When the student is ready the teacher will arrive.' -Zen proverb

'When you have eliminated the impossible, whatever remains, however improbable, must be the truth.' -Arthur Conan Doyle

'W.D. Gann himself has been quoted as saying that he made his greatest market discovery on August 8th, 1908. Gann’s Financial Table, compiled within one year of 1908, is entirely based on the moon’s north node, which completes a full cycle every 18.6 years.' -Daniel T. Ferrera

'Well it's a marvelous night for a moondance
With the stars up above in your eyes
You know the night's magic
One more moondance with you
- Van Morrison

Have always prided myself on going where the facts lead me, regardless of ideology, assumptions, opinions, precepts, dogma, or theories of faith. It is the method of an empiricist to let experience, especially that of the senses, divine knowledge.

No one said it was easy. But no one ever said it would be so hard.

It is a process of unlearning...

The Austrailan via Cryptogon
By Leo Lewis
December 23, 2009 7:10AM

Imploding equities, exploding credit default swaps, soaring gold and slumping oil -- if, at any time over the past 18 months, it seemed that markets were in the grip of lunacy, it may be because investors are, technically, lunatics.

The market mayhem since the global financial meltdown began in 2008 has provided fertile soil for proponents of a branch of investment theory which holds that market cycles move in phase with the Moon.

Now, backed with decades of data and behaviour that can no longer be explained by purely rational analysis, the lunar theory has slipped into the mainstream.

In a piece of research that involved 14 of its senior analysts from across five leading financial centres scrutinising data from 32 leading indices over several decades, Macquarie Securities has arrived at a startling discovery: the two days on either side of the new lunar month represent most of the positive returns on equity markets for the next four weeks.

"Using data since 1988 for a wide variety of indices," the report concluded, "it is quite clear that a strong surge in returns can be seen leading into the turn of the (lunar) month."

The analysts are quick to dismiss the idea that the theory applies only to markets in Asia -- a part of the world where belief in the lunar theory, especially in Hong Kong and Japan, is better established.

"The effect is not just an Asian effect, it happens globally," the Macquarie report said.

"Of the 32 markets we examined, all showed higher than average returns around the turn of the (lunar) month ... and for many of the markets, the average return for the rest of the month was below, or close to, zero."

Equity markets, it seems, act as a particularly sensitive barometer for the invisible impact of lunar cycles on human psychology -- an influence that has been widely assumed for centuries, but never solidly proven by science.

Macquarie points to two academic studies, which found that returns around the new moon are nearly double that of the corresponding full moon phase.

Using MSCI index data from the same 32 equity bourses and tracking decades of data, the Macquarie report found that: "In many markets, a very clear increase in average returns can be seen leading into the lunar new month."

The results, the analysis said, showed that without exception every market showed a very slight increase in the average return over the new moon period.

Other brokerage firms have latched on to parts of the lunar theory. Analysts at CLSA recently pointed out to clients that the recent near-collapse of the global credit and financial system was presaged by the lunar cycle.

As markets teetered on the brink of oblivion in 2008, the true panic began exactly on the 27th day of the seventh lunar cycle. Eerily, that same phase marked the height of panic during the great market crashes of 1857, 1907, 1929, 1987 and 1997.

The Macquarie report, which acknowledges that investors are unlikely to adapt their strategies to fit the new research, concludes that the relevance of the theory is "probably slightly more powerful than, say, betting that good value stocks outperform in the long run".

AM here :

For what it is worth here are the two days on either side of the new lunar month for 2010:

January 14th and 16th (16th is a Saturday)
February 13th and 15th (13th is a Saturday)
March 14th and 16th (14th is a Sunday)
April 13th and 15th
May 13th and 15th (15th is a Saturday)
June 11th and 13th (13th is a Sunday)
July 10th and 12th (10th is a Saturday)
August 9th and 11th
September 7th and 9th
October 6th and 8th
November 5th and 7th (7th is a Sunday)
December 4th and 6th (4th is a Saturday)

Wednesday, December 23, 2009

There was a crime. There was a victim. And there is punishment.

(A forensic analysis of the crime of a lifetime. Failure to liquidate the insolvent banksters has liquidated a large part of the productive economy. A taxpayer financed distribution to save rich folks from bad speculative bets is why Goldie is still around. We should have let the fire burn them down, a political administration that gave a damn about its' citizens could have built a firewall to keep the ATM's working. Instead the middle class is being slowly and insidiously reduced to kindling. See it, even if it is hard to truly believe it. -AM)

From Naked Capitalism Blog

By Thomas Adams, at Paykin Krieg and Adams, LLP, and a former managing director at Ambac and FGIC.

Readers may have noticed Janet Tavakoli’s recent article at Huffington Post on Goldman Sachs and AIG. While much of it covers territory that Yves and I already wrote about previously, Ms. Tavakoli stops short of telling the whole story. While she is very knowledgeable on this market, perhaps she is unaware of the full extent of the wrongdoings Goldman committed by getting themselves paid on the AIG bailout. The Federal Reserve and the Treasury aided and abetted Goldman Sachs in committing financial and ethical crimes at an astounding level.

She notes, accurately, that Goldman used AIG to hedge its bet on CDO’s, either for itself with the Abacus deals, or for its clients, with the Davis Square deal. Had AIG failed, Goldman would have been on the hook for the losses: to execute the CDO with synthetic mortgage bonds, Goldman went “long” the CDS and then turned around and went “short” with AIG, effectively taking the risk of the mortgage bonds defaulting and then transferring it to AIG.

But Ms. Tavakoli fails to note that the collapse of the CDO bonds and the collapse of AIG were a deliberate strategy by Goldman. To realize on their bet against the housing market, Goldman needed the CDO bonds to collapse in value, which would cause AIG to be downgraded and lead to AIG posting collateral and Goldman getting paid for their bet. I am confident that Goldman Sachs did not reveal to AIG that they were betting on the housing market collapse.

To help hasten the housing market collapse, Goldman ran a huge mortgage lending and issuance program with low quality loans virtually designed to fail, including dozens of deals backed by completely toxic non-prime second lien loans (these loans help pump up the housing bubble and let borrower’s suck the equity out of their homes). In soliciting AIG’s insurance for the CDOs, Goldman was not disclosing that the transaction was highly speculative. Goldman was offering AAA, or even super AAA bonds. Goldman designed and sold these bonds and purchased a rating from the rating agencies that represented the risk to be AAA. In fact, the bonds did not provide real protection, despite their AAA rating, and when the housing market turned down, the AAA CDO bonds collapsed in value exactly as they were designed to do.

Goldman never wanted these CDOs to succeed – their bet depended on them failing. This is why they used AIG as their insurer – AIG posted collateral, which enabled Goldman to still get paid even when AIG inevitably got downgraded for taking on such toxic deals.

Goldman needed AIG’s insurance to complete this bet and get them off risk for the CDO they created. Hedge fund manager John Paulson and others used the same strategy. Goldman’s bet was risky because they depended on AIG being solvent in order to get paid. Other parties who made similar bets, but relied on the other bond insurers to pay them off, ended up getting hurt when the bond insurers got downgraded and the trade did not pay off, as well.

Months before AIG received its bailout, Goldman was well aware of the risk that insurers would pay less than the full amount of the CDOs – Goldman was advising FGIC in its restructuring efforts and FGIC negotiated a CDO commutation for ten cents on the dollar. Goldman mitigated the risk of downgrade by dealing exclusively with AIG, which was required to post collateral in the event of a downgrade.

Goldman also misled shareholders and investors by proclaiming that they were not exposed to toxic CDOs because they were hedged with AIG, even as the bond insurers (AIG’s direct competitors in the CDO market), were getting downgraded.

It is bad enough that the creators and sellers of the CDOs, such as Goldman, BlackRock and TCW, have not been held to account for selling worthless bonds while representing them to be of AAA quality. Most of these influential power brokers have succeeded in blaming the victim (investors and insurers who believed their lies about the quality of the bonds) for the financial crisis to distract from their own questionable activities.

Goldman goes quite a few steps further into despicable territory with their other actions and the body count from Goldman’s actions is so enormous that it crosses over into criminal territory, morally and legally, by getting taxpayer money for their predation.

Goldman made a huge bet that the housing market would collapse. They profited, on paper, from the tremendous pain suffered by homeowners, investors and taxpayers across the country, they helped make it worse. Their bet only succeeded because they were able to force the government into bailing out AIG.

In addition, the Federal Reserve and the Treasury, by helping Goldman Sachs to profit from homeowner and investor losses, conceal their misrepresentations to shareholders, destroy insurers by stuffing them with toxic bonds that they marketed as AAA, and escape from the consequences of making a risky bet, committed a grave injustice and, very likely, financial crimes.

Since the bailout, they have actively concealed their actions and mislead the public. Goldman, the Fed and the Treasury should be investigated for fraud, securities law violations and misappropriation of taxpayer funds. Based on what I have laid out here, I am confident that they will find ample evidence.

While the subprime deals and CDOs were obviously going bad, an argument was made by many people at the time that the aggressive mark downs by AIG acelerated the death spiral for the market. It is pretty clear, here and elsewhere, that Goldman was the one that initiated the mark downs of collateral value. it would be interesting to explore this all the way through. Though not discussed in this article, Goldman shorted subprime through the Abacus deals, and perhaps elsewhere. this gave them an incentive to force mark downs. The intermediation deals described in the article, combined with AIG’s collateral posting, gave them another incentive to be agressive with mark downs. They were acting like they wanted to grab the money before anyone else could get their hands on it. This would have raised some issues in an AIGFP bankruptcy. (note – Hank Greenberg suggested that this was going on in his october 2008 testimony but there was a chorus of attacks on him for being a crook and unreliable, thanks to his problems with Spitzer.)

So here we have the pattern:

1. Goldman creates or sells $23 billion (or more) of CDOs and stuffs them into AIG.

2. Goldman proclaims to the world they have no exposure to CDOs and warns that banks and insurers with CDO exposure will get downgraded.

3. Goldman initiates the mark downs of CDOs with AIG and others, acelerating the market’s downward spiral.

4. Huge mark to market losses lead insurer and bank credit to freeze, short term markets to lock up, ABCP to collapse.

5. AIG posts as much collateral as it has to Goldman, who has more aggressively marked down the exposure.

6. Bond insurers are downgraded, banks begin commutations with them.

7. AIG fails, Fed steps in, Goldman gets bailed out at par.

Interview with Pythagoras of Samos

Anonymous Monetarist : Pythagoras thank you for resurrecting yourself for this conversation. You were a great mathematician, mystic,and scientist who made influential contributions to philosophy and religious teaching in the late 6th century BC.

Pythagoras : Indeed. Thanks nice to be here. Nice to be anywhere.

Can I call you Pyth?

Why not? What can I do for you?

Was hoping you could imagine how you might approach the markets if you were trading today.

OK. Well I would probably call my trading theories something fancy, like, 'hyperdimensional spiral geometry' and charge a lot of money for it.

Well Pyth this blog is free so we're just going to have to give away your initial lessons.

OK then...Lesson one would go like this.

History repeats itself and the combined price and time movement of the stock market will arrange itself into regular,repeating units. Furthermore, each unit will have the same length, and will end up pointing in a direction that can be calculated using geometry. I'd call these vectors "Pyth vectors" and they would represent an impulse travelling in a given direction at a given speed. What is of interest in a market are both the high points and the low points and these points do not happen by accident they are determined exactly by the principles of harmonics. If you were to draw a straight line between the nearest high and low points on a chart you would then have a Pyth vector that would represent the combined value of price and time that determines the market's movement. Once you calculate how long your line is, as a number of "price-time" units, you automatically can deduce that the next Pyth vector will be exactly the same length.

So you are saying that the markets have a hidden harmonic structure to them?

Quite so. The markets move in even and predictable patterns over time. These patterns can be drawn as straight lines between neighboring high and low points on a graph. Once you calculate the length of the line, as a value of price-time units, you know how far it will move the next time ... the key is determining the direction of the Pyth vector.

That's it? Don't cycles have an impact?

Yes, cycles can come in and shift how this operates however what I am describing is the theme that cycles might provide variation around.

So to summarize, a Pyth vector is a geometric entity endowed with both length,as a value of price-time units, and direction, namely where the line is.

Once you know where your line is, no matter which way your graph moves, it will never fall outside the boundary of a simple,harmonic, oval or ellipse that can be drawn around your line. The ellipse is the same length as the Pyth vector, and it will always be exactly half as wide.

So you are saying that the stock graph will never move outside the perimeter of this ellipse, providing that you accurately know the true length and direction of the Pyth vector?

Exactly! So let's focus on how you can calculate the true length and direction of the Pyth vector.

Each Pyth vector has a number, indicating its actual length in 'price-time'. These numbers keep repeating. However, when you draw out the lines on your stock market graph, they will appear different in length.

That would appear to be a contradiction.

The resolution is to 'square your charts'. The key to squaring your charts is to establish a perfect one-to-one relationship between price and time in the chart. You want one unit of price to have the same weight as one unit of time. Then, your Pyth vectors will appear to be almost the same length on paper. It's rather easy to do. Let's say for example you are examining a stock where it's price moves an average of 8 cents an hour. You want to square this on a chart where time is represented on the X-axis as moving one hour every 5 millimeters. In order to create the proper price- time Pyth vector you would simply define the Y-axis as representing 8 cents every 5 millimeters. Now the movement between price and time will be balanced. Your Pyth vectors will now appear to be just about the same length and you will discover something quite profound. Each Pyth vector will be 60 degrees apart from the one next to it.


Well, let's say, the vast majority of times. Cycles as mentioned can introduce variations on this theme.

OK. Earlier you stated a simple,harmonic oval or ellipse can be drawn around each Pyth vector equal to the vector's length but half as wide. What happens when you reach the end of this Pyth vector?

Cycles notwithstanding, when you reach the end of a Pyth vector, you make an educated guess on the direction of the next move. You already know exactly how far it will go in terms of length before it ends. Once you feel that you have pinpointed the new direction then you place your bet with the appropriate stop. You'll be right more times than not. The key is that once you have determined how long each Pyth vector will be, as a combined number of price-time units, then you can calculate market turns before they happen.

How so?

The secret formula is A squared plus B squared equals C squared.

By the way, Pyth we call that the Pythagorean Theorem.

Really? That's cool. OK, well here's the application of it. Draw a line from the bottom to the top of a stock market graph - the two closest points where you see a clear bottom and a clear top. The goal is determine how long that line is in price-time, you want to come up with a single price-time number. To apply the formula, A is time and B is price. For A, we add up how many units of time have passed on the chart from the clear bottom to the clear top or vice-versa. For B, we add up how many units of price have passed on the chart from the clear bottom to the clear top or vice-versa. Now simply square your time number, square your price number and add them together. Take the square root of the result and you have the price-time length of the Pyth vector. You will see this same line length appearing again and again as you square your chart and each line, in the vast majority of cases, will be exactly 60 degrees apart.

That's it?

Yeah, that's it and believe me, in my day, I made a killing with this.

So you're saying that there are hidden geometric movements in the markets?

Yes but life does not exist in two dimensions. There is a third dimension. So to there is a third dimension to the markets.

How so?

As mentioned, when you square a chart, Pyth vectors are joined to each other at 60 degree angles. All equilateral triangles are built from 60-degree angles, every angle in the equilateral triangle is 60 degrees. The tetrahedron, octahedron and icosahedron have equilateral triangles for each face. In other words, when you start putting Pyth vectors together you start seeing geometric patterns. These patterns, I believe, are cross-sections of three dimensional forms. These geometric forms reveal themselves in an "unwrapped" form as a two-dimensional stock market graph.

You're starting to get freaky Pyth.

Well then buckle up, because I believe that the markets move directly in line with the faces of these three-dimensional forms, one face at a time. They move in line with the faces' edge, the Pyth vector, and within the formentioned simple, harmonic oval or ellipse surrounding the vector.For example a stock graph moves along say a tetrahedral geometry contained by elliptical Pyth vectors where the ellipses in effect trace out the path of a spiral that forms this geometric shape as it moves along. The ellipse that surrounds each of the Pyth vectors actually defines those places where the spiral is buckling out of the geometric shape as it continues its rotating motion.

So, in effect, if you were to fold this hidden geometry, like the back cover of a Mad Magazine, you would then get a simple stock market graph.

If I knew what Mad Magazine was I'd probably agree with that.

Thanks, Pyth.

Tuesday, December 22, 2009

Repost: The Anonymous Monetarist Recovery Plan

Originally posted January 12, 2009

(Just kidding- AM)

The median sale price of new homes sold in November was $220,400.
The total outstanding inventory is 4.27 million homes.

Spend 941,108,000,000 (941 billion) and buy every available home outstanding and then ...

burn 'em to the ground.

Expert Advice : Three Little Flying Monkeys

This list is whittling down given the musical chairs.

Analyst / S&P 2008 EOY prediction / S&P 2009 EOY prediction / S&P 2010 EOY prediction

Thomas Lee 1590 / 1100 / 1300
JP Morgan

Tobias Levkovich 1675 / 1000 / 1150

Larry Adam 1640 / 1025 / 1200
Deutsche Bank

Repost : It is a consumer in debt stupid

Originally posted on September 24, 2009

The dollar is the trade.

Fed says no new ponies for you and by the way the ponies already promised are going to be stretched out a bit ... that's dollar positive.

When folks are trading based on the knowledge that it is just a confidence game and that the the fundamentals don't matter, any small crack in confidence can start de-risking, i.e., reducing the 'custodes premium' - that they will use the dollar carry trade to jack asset values into the skies.

At this point at the end of the trend - 2009 low besting the 2002 low breaking a line of lower lows from 1897 up- our prosperity is now in the hands of Fleck's battle of unarmed combatants (currencies) where the U.S. is the dealer (reserve), at least for the near term.

To hold hands with the Federales near term is to be a dollar bull for they of course realize with bubbles needed to bring our troubles to a safe landing, we can't let the confidence proxies (markets) get ahead of the political will for future bailouts. They can signal tightening without tightening, for example by purposely not explicitly stating the context within which reverse repos might occur in the near term.

Such magicians they are with models they built that show no chance of fail when the money is easy and free. It is merely a matter of scale not design. These models rate the probability as 100% that our blessed leaders can manufacture the economic consent of consumers by getting them to add more debt because same consumer will believe that prices will be higher in the future.

These models and the besotted following are both trading without respect to fundamentals.

Inflation expectations were well anchored in the Great Depression.

They also were well anchored in Japan which is presumably the Federales highest probablity target ... flat beer for everyone.

If you believe in the adage 'as above, so below', then one might suggest that the real damage yet to come will be caused by the Federales pushing the pedal again too hard. The rubber band pulled up snaps back, its' pulled harder up and snaps back even harder and then paging ... Dr. Faber, Dr. Grant, Dr. Faber.

What we need is a Holden Caulfield to scratch, 'it is a consumer in debt stupid', on each computer terminal housing such models.

Monday, December 21, 2009

Vice before virtue, farce before reason, the question vexing? Duck or Rabbit Season?

'What do you think the Devil is going to look like if he's around? Nobody is going to be taken in if he has a long, red, pointy tail. No. I'm semi-serious here. He will look attractive and he will be nice and helpful and he will get a job where he influences a great God-fearing nation and he will never do an evil thing... he will just bit by little bit lower standards where they are important. Just coax along flash over substance... Just a tiny bit. And he will talk about all of us really being salesmen. And he'll get all the great women.'
-Aaron Altman (Broadcast News)

'Hey, don't you know it's a waste of your day
Caught up in endless solutions
That have no meaning, just another hunch
Based upon jumping conclusions
Caught up in endless solutions
Backed up against a wall of confusion
Living a life of illusion.
-Joe Walsh

'Have you ever had a dream, Neo, that you were so sure was real? What if you were unable to wake from that dream? How would you know the difference between the dream world and the real world?'

'Now those memories come back to haunt me they haunt me like a curse. Is a dream a lie if it don't come true? Or is it something worse?'
-Bruce Springsteen

'History repeats itself, first as tragedy, second as farce..'
-Karl Marx

As mentioned in FT weekend, it is slightly more profitable to be amoral, but even more so to be immoral. :In stocks, vice outperforms virtue, according to the study “Sin Stock Returns” by Frank Fabozzi. Fabozzi and his co-authors created a portfolio of stocks in six vice industries — adult entertainment, alcohol, biotech, gaming, tobacco, and weapons industries — across 21 countries and tracked its performance against stock market index returns. The average sin stock produced an annual return of 19.02% compared to an annual average stock market return of 7.87%. The sin portfolio also outperformed the market in 35 of the 37 years tracked.

FT notes that a $10,000 investment in sin stocks would have become $6,300,000 versus just $164,000 in standard equities.

Isn't that special?

The struggle of virtue and vice is writ large as the debate between deflationistas and debasionistas. Ones' lens depends on what one means by ones' ends. The deflationistias mean that deflation is the midwife of hyperinflation. The debasionistas mean that America's resilient wealth exporting machine will import higher asset values. The former pines for reason before farce, the latter embraces the tragedy.

This ends with bubbles, in gold and equities. And then a crash and then more bubbles.

Most probably we break the 2007 downtrend next year and bounce off the 1982 uptrend.

If we break the 1982 uptrend, we really risk a hyperinflationary episode for deflation is the hemlock of the elites.

The higher the lower and the lower the higher. The cycle of strife, as it were.

Vice before virtue, farce before reason, the question vexing? Duck or Rabbit Season?

The answer both ... in due time.

Hobbes first law of nature is that every man ought to endeavour peace, as far as he has hope of obtaining it; and when he cannot obtain it, that he may seek and use all helps and advantages of war.

The dollar is the bullet, the Fed is the weapon. The key to the gun cabinet is for Members Only.

Saturday, December 19, 2009

A picture says a thousand words...

In all three periods inflation expectations were well anchored.

Friday, December 18, 2009

Since this life delights you, do you wish to taste it yourself and make fortune of my trial?

The truth squad caught the latest Federales lie. The Big Lie is always a lie in plain sight. It is discerned by a bottoms -up approach, the application of the empirical method. The first to catch it was the venerable Bill King of the King Report, who actually reads government reports before he comments on them, it was picked up by Art Cashin in his morning note yesterday, and then picked up by the New York Post.

Posted: 1:56 AM, December 17, 2009
by John Crudele
New York Post

Washington announced last week that retail sales rose a very healthy 1.3 percent during November from the previous month. Wall Street told us to applaud and the media, right on cue, proclaimed that the consumer was back in business.

The trouble is, the 1.3 percent gain was very misleading. In fact, misleading is a kind term for it. It was a lie -- but not one perpetrated by the Commerce Department, which released the figure.

Why am I questioning the 1.3 percent growth in retail sales? Because the Commerce Department questioned it, in a cryptic fine-print note, a sort of footnote, only it was at the top -- the top -- of the press release announcing the figure.

In a box, highlighted in the Dec. 11 release, was this statement: "Special Notice -- The advance estimates in this report are the first estimates from a new sample. The new sample for the Advance Monthly Retail Trade Survey is selected about once every two and a half years." The problem is, you actually have to ask the Commerce Department what that means if you want to know. Government bureaucrats aren't known for clarity. And nobody I could find bothered to ask.

One news organization, which should be ashamed of itself, proclaimed after seeing the release that "consumer spending was solid in November, suggesting that the economy is on sounder footing than previously thought." Not even close…

Well, here's the answer. It seems that the Commerce Department surveyed only 2,600 of the same retailers and restaurants in both October and November. The other 2,700 or so were new to the survey and were only asked about business conditions in November. ..

But this time a lot of the retailers that weren't questioned in November might have gone out of business because of the economy. To borrow a tired, old phrase -- the Commerce Department was trying to tell us that it was comparing apples in October with oranges in November. And the comparison really didn't add up to 1.3 percent growth. But there's more.

That 1.3 percent gain -- even if you were to accept it as valid -- was seasonally adjusted. That means the Commerce Department's computers changed a number here and there because of what has come to be expected over the last five Novembers…

Without the seasonal adjustment retail sales were absolutely flat from October to November -- 0.0 percent. Flat. No change.

AM here : Obviously this does not matter until it does. It is but another piece of kindling on the fire of deceit and fraud.

For this humble blogger, the tipping point for the common man, is looming as a sword of Damocles, the horsehair splintering, the capitulation towards the American Scheme as the American Dream.

The stealth stimulus of sending the banks jingle mail, the vitriol of opinion on both fences couched in either moralizing or justifying, would seem to suggest that many others also view this as a seminal event that will train-wreck itself through 2010.

To understand the markets think of water ... this tide will come back in and drown the fire. And then ... the Federales will spew kerosene.

Some of the smartest folks in the room have recommended that individuals should view their investment portfolio as if they were their own central bank.

Not exactly the right role model dontcha think?

The butterfly wings of the bankster enabling Federales and the insolvent prospering banksters, are causing the hurricane that is the true emulation advised in being your central bank... be you're own corporatocracy.

Life liberty and synarchy for all is one hell of a way to go through life son.

On that path, most assuredly the devil will have his due.

Thursday, December 17, 2009

Destroy this invisible government ... dissolve the unholy alliance between business and corrupt politics ...wink

'Don't believe everything you breathe
Someone keeps sayin I'm insane to complain
Forces of evil in a bozo nightmare
'Cause one's got a weasel and the other's got a flag
You can't write if you can't relate
Trade the cash for the beef for the body for the hate

'One of the great strengths of our nation is an independent Fed, and this idea that's coming out of the House, which is populist fervor... is absolutely wrong.'
- Senator Judd Gregg

'You see I may be a Christian but I am also a capitalist. And I will defend our capitalist system against all enemies unless there's a way to profit from its' demise. Some conspiracy theorists out there have criticized the Fed as a secretive cabal that only benefits the well connected when in fact the Fed is merely an extra constitutional star chamber that controls our monetary policy with no oversight.'
-Stephen Colbert

'Your motto is God,guns,guts,and American.'-CNN interviewer

'Actually its' God, guns,guts,and American pick-up trucks.' -Missouri car dealer that is giving away free AK-47s with purchase of a truck

'Some might wonder why God is included in a motto that also includes guns.'-CNN interviewer

'You don't have a problem with God do you?'-Missouri car dealer

'Future tax rises and public sector cuts could act as a trigger for social unrest'. -Moody's

'Will our Alpha Males be able to maintain Omega Zen? Regardless any revolution that might occur will most probably be plagiarized.' -Anonymous Monetarist

Populism is best defined as the juxtaposition of "the people" with "the elites". Its' flag has been hoisted by the left and the right, the irrational and the rational, and its manifestation per the prevailing zeitgeist is often appropriated by a demagogue.

For Ben Tillman, African Americans were the scourge of white society; for James Michael Curley, Anglo-Saxons were the bane of the browbeaten Irish; and for Joseph McCarthy, liberal elites(commies) were an evil upon America. They all fought on behalf of and for the protection of the 'good way of life.' - they all fought against that which stood in opposition to a presumed American norm.

To borrow liberally from Sigmund Neumann's, 'The Steadfast Rules of the Demagogue', and Douglas Walton's,'One-Sided Arguments: A Dialectical Analysis of Bias' : the most recognizable traits of a demagogue are the simplicity of message content and an entirely unilateral point-of-view presentation - summarized as unidimensionality.

The demagogue appeals to the crowd and commonly adds the logical fallacies of appeals to pity, appeals to reverence and appeals to personality as well as other rhetorical devices such as omission not for literary elegance or brevity but rather for gain, influence and deception. The demagogue is anti-Aristotelian, in that rhetoric is not seen as the counterpart of the dialectic -instead, there is no desire to reconcile using opposing views but rather the demagogue presents a view in opposition to some Other. The Other is responsible for cultural and social upheaval, the Other is to blame for all current adverse conditions and "we" the true Americans, in opposition, need to uphold all that is good.

The demagogue capitalizes on vulnerabilities due to ignorance and fear.

The first Populist party in America called itself the Greenback Party. It opposed the shift from greenbacks, paper money issued after the American Civil War, to a bullion based standard. Its platform supported an income tax, an eight hour day, and called for allowing women to vote. After 1884 it was no longer a force in American politics.

The Populist party in the United States came about in the 1892 election. Its' platform called for the abolition of national banks, a graduated income tax, civil service reform, direct election of Senators, a working day of eight hours, and the nationalization of telegraphs, telephones and railroads. This party was gestated for economic reasons namely the desire to repeal the gold standard to counter high deflation in agricultural prices. The party was co-opted by the Democratic Party of 1896 and never recovered from its' defeat.

The platform of the Progressive Party of 1912, formed by Theodore Roosevelt, was 'to destroy this invisible Government, to dissolve the unholy alliance between business and corrupt politics [it]... is the first task of statesmanship of the day.' The platform called for women's suffrage, recall of judicial decisions, easier amendment of the U.S. Constitution, social welfare legislation for women and children, workers' compensation, limited injunctions in strikes, farm relief, revision of banking to assure an elastic currency, required health insurance in industry, new inheritance taxes and income taxes, improvement of inland waterways, and limitation of naval armaments. The Progressive Party did poorly in the 1914 elections and faded away.

The United States Progressive Party of 1924 was a continuation of the Progressive Party of 1912, after gaining only 17% of the popular vote in the 1924 elections it disbanded.

The last true populist party was Huey Long's 'Share our Wealth' movement begun during the Great Depression. Its' platform was:

'No person would be allowed to accumulate a personal net worth of more than 100 to 300 times the average family fortune, which would limit personal assets to between $1.5 million and $5 million. Income taxes would be levied to ensure this. Annual capital levy taxes would be assessed on all persons with a net worth exceeding $1 million.

Every family was to be furnished with a homestead allowance of not less than one-third the average family wealth of the country. Every family was to be guaranteed an annual family income of at least $2,000 to $2,500, or not less than one-third of the average annual family income in the United States. Yearly income, however, cannot exceed more than 100 to 300 times the size of the average family income.

An old-age pension would be made available for all persons over 60.

To balance agricultural production, the government will preserve/store surplus. This is made so no food is wasted.

Veterans are paid what they are owed.

Education and training for all children to be equal in opportunity in all schools, colleges, universities, and other institutions for training in the professions and vocations of life.

The raising of revenue and taxes for the support of this program was to come from the reduction of swollen fortunes from the top, as well as for the support of public works to give employment whenever there may be any slackening necessary in private enterprise.'

Huey Long's slogan was 'Every Man a King'. The movement died with his assassination.

Not every demagogue is a populist and not every populist is a demagogue, but when the two combine it is often combustible. The most salient example would be the conspiracist scapegoating in Germany promulgated as national socialist populism and articulated by a failed painter who did not become a German citizen until 1932.

Fast-forward to today.

Rasmussen Reports : 'In a three-way Generic Ballot test, the latest Rasmussen Reports national telephone survey finds Democrats attracting 36% of the vote. The Tea Party candidate picks up 23%, and Republicans finish third at 18%. Another 22% are undecided. Among voters not affiliated with either major party, the Tea Party comes out on top. Thirty-three percent (33%) prefer the Tea Party candidate, and 30% are undecided. Twenty-five percent (25%) would vote for a Democrat, and just 12% prefer the GOP. Among Republican voters, 39% say they’d vote for the GOP candidate, but 33% favor the Tea Party option.'

And what is the platform of this nascent political movement?

Limited government, fiscal restraint, opposition to further stimulus spending and a determination to push back against "a federal government that is too big, too intrusive and all-too-eager to seize power from the states." Repeal the death tax, implement a flat tax, keep the internet tax-free, control the border, support free trade, personal accounts instead of social security, school choice, medicare reform, healthcare reform etc...

A populist movement with 21st century characteristics. It will most probably be co-opted by one of the established parties.

It may even marry up with a demagogue.

LA Times : Obama's new Gallup Poll job approval number is 47%. Last month it was 53%.

The new CNN/Opinion Research Poll shows Palin now at 46% favorable.

Move along nothing to see here.


Wednesday, December 16, 2009

Damn Dirty Apes ... Its' a Madhouse

The ability to analogize the madness that is the current pablum narrative is being stretched by the incessant, perpetual and ubiquitous Orwellian strategerizin' of the bankster enabling Federales.

But we'll give it a shot anyway.

First up, B.S. Bernanke, awarded the Crime Man of the Year.

Oh, we just avoided a Great Depression!

Yeah in the sense that the wealth equalization that occurs through creative destruction after a boom setting the stage for prudent capital allocation and organic income growth has been replaced by a balls-to-the-wall casino marketplace and an approaching tax redistribution that will eviscerate the middle class.

Yea beer!

This Great Depression is being imprinted with the absurdity of a continuing separation of wealth. B.S. sure did internalize that history lesson eh?

Second, the illegal and fraudulent practice of monetizing losses that spearheaded the Smells Fargo -Wachovia hookup and the PNC-National City groupin', although repealed by the Congress was ...what would be the word? unrepealed? in order to gift Bandit a cool 38 billion.

Good times, good times.

Third, page 2 of today's FT, supplicant Guha repeats divinations from the Oracle at Eccles ...when it starts raising should it communicate its policy stance in terms of an interest rate on bank reserves rather than a target for the Fed funds rate as in the past? Maybe......its favoured new tool:the ability to pay interest on bank reserves...but many officials would like to end up in a situation in which reserves are substantially higher than they were pre-crisis...

When Goldie took Trader Hank aside during one long weekend to inform him that AIG was systemic, it was clear that a tough hard decision had to be made to liquidate in order to forgive past debts ... unfortunately it turned out to be a bankster jubilee.

Failure to liquidate the insolvent banksters liquidated a large part of the productive economy.

We are doubling down to turn a lost decade into a lost generation.

Excess reserves are nothing more than DIP financing for a generational workout...

How much is a couple points on a trillion?

Thank you, drive through. Would you like TLGP or TALF with that?

And J6P, of course, is getting hosed at the drive thru. Damn dirty apes ...Its' a Madhouse.

(By the way, the chart at top is Via SomeAssemblyRequired blog.)

Tuesday, December 15, 2009

Interview with James Grant

(Mr. Grant comes to us, in part, via Grant's Interest Rate Observer Vol 27, No.24, 'The case of the reluctant recovery' -AM)

Anonymous Monetarist : Mr. Grant thank you for imagining yourself for this conversation. You originated the "Current Yield" column in Barron's before founding Grant's Interest Rate Observer in 1983 and pride your medium as that which least resembles CNBC.

James Grant : Thanks. Surprised to be here.

I get that a lot. I have heard you say that in the past you were a bear in a bull market, and you admitted that was wrong. You said that the really seasoned observer is supposed to be in step with things, not credulous of the existing trend, but still not fighting it. Does that explain your heralded conversion from bear to bull?

In part. We built our case for a growth spurt in hiring and GDP on the long-established tendency for strong recoveries to issue from deep recessions and weak recoveries to follow mild ones. In this country, the business-cycle record of the postwar era, and, indeed, of the past 100 years, seems to admit no exception to this rule (if rule it be).

So it's a Zip-a-dee-doo-dah recovery and Mr. Bluebird is on your shoulder?

Well we did just come out of a briar patch. Compared to the 10 preceding postwar downturns, this one will almost certainly prove to be the longest and, in terms of loss of employment, the costliest. Financially, we rank it as the scariest, what with the world almost coming to an end.

We are on record predicting a jobful, not a jobless, recovery in the context of red-blooded GDP growth.

You initiated this call around Labor Day and have put out a few newsletters since expanding upon and supporting this position. So far how would you mark this thesis to market?

A recovery of some kind, we are going to assume, got under way in June, though it seems not to be the kind we had predicted. We say "seems." Revisions to real-time data can be extensive, even transforming.

The stock market, it's true, has caught fire. Credit spreads, too, have collapsed. However, our anticipated barn-burning recovery has -evidently- smoldered.

Since the hypothetical trough in June, nonfarm payrolls have dropped by 20 basis points, only slightly less discreditable than the declines of 30 and 40 basis points registered in the certifiably jobless and joyless aftermath of the recessions of 1991 and 2001, respectively. A year after their (1991 & 2001) respective troughs, payroll employment was actually down by .2 and .4 of a percentage point, respectively. To judge by payrolls alone, this recovery is stronger than the jobless, but weaker,by far, than the jobful.

Per the Bureau of Labor Statistics joblessness by duration in three of the four segments (fewer than five weeks, five to 14 weeks, and 15 to 26 weeks) appears to have peaked for this cycle. Initial claims for state unemployment insurance have fallen by 32% from their evident peak in March.

The 27 weeks and over segment does not appear to have peaked yet. On average, and excluding the outlying cycles of 1991 and 2001, the 27-week segment peaks 7.4 months after the trough.

Do you believe that segment is about to put in a top?

It would be a very good thing for the Grant's job thesis if it did.

Earlier you stated that data revisions can be transforming. The opposing thesis to a V recovery is in part based on the empirical evidence that unemployment levels are at Great Depression levels.

Would agree to disagree that joblessness bears any comparison to the tribulations of the early 1930s however the most one can say about the integrity of real-time data is that it will most certainly be revised. Consider for instance, January-March 1983, the first full quarter of the retrospectively brisk recovery from the 1981-1982 recession, the last cycle where the unemployment rate topped 10%. Growth at an annual rate of 3.1% was the advance, or flash, estimate, disclosed in the second quarter of 1983. In the first revision to that advance estimate, however, released in the third quarter, 3.1% was whittled down to 2.6%. But that was not the final word, nor anything close to it. Ten revisions later -the most recent produced in the third quarter of 2009, just the other day- annualized growth for the third quarter of 1983 was fixed at 5.1%.

So rather than waiting a quarter century for the final numbers what would you say, per the admittedly flawed data available, the recovery looks like so far?

After one quarter, GDP has shown real, unannualized growth of 0.7%, or less than half the postwar average of 1.8%. The three prior recoveries that interest us most -the ones beginning in 1982,1991 and 2001 -led off with gains of 1.2%,0.7% and 0.9%, respectively. So far,then,GDP, is tracking much closer to the subdued pace of the prior two recoveries than that of the unbound 1982 experience. In 1983, real GDP jumped by 7.7%. The half-hearted upswings following the recessions of 1990-91 and 2001 produced 12 month growth of just 2.6% and 1.9%,respectively. Score a point for the GDP bears, although, as noted, they may be laughing out of the other side of their faces in 25 years.

What other data series are you following?

Industrial production constitutes another marker of cyclical progress. It too, is subject to extensive revision, but as the data reach back to 1919, you can hardly beat it for perspective. Studying the prewar data, you may stare in wonder (as we do) at their volatility.Thus, industrial production fell by 32% in 1920-21, by 52% in 1929-33 and by 32% in 1937-38. Then again in the four quarters following the troughs of those respective slumps, it zoomed by 32%,45% and 27%.

In the recession lately (presumably) concluded, industrial production fell off the table, down by 15%, peak to assumed trough. It seems to have bottomed in June, which is notable, because it so happens that industrial production inflection points have tended to correspond almost to the month of the cyclical reference dates of the National Bureau of Economic Research. Industrial production bottomed in June and has grown every month since, for a cumulative increase of 3% after four months. This puts our current (presumed) recovery above the postwar average of 2.5% after four months and well ahead of 1991(2.2%) and 2001(1.3%) and even 1982(1.5%). Of course, four months is not much of a test. The question is, after one year, will the recovery look like 1991 or 2001, with 3.5% and 3% growth in industrial production, respectively, or 1982, which started slowly but finished up with 9.6% growth in 12 months following the cyclical low-ebb? Then, again, 9.6% was not how it looked in real time. What the investors and traders and pundits of 1983 saw was a leap of 15.9%. Only with 13 revisions was it whittled down to 9.6% -pending further revision, of course.

As a fellow skeptical empiricist I'm sure that you would agree that, the claim of a V shaped recovery, like any proper scientific hypothesis, can only be falsified. Are there signs in your opinion, that perhaps this time it is different?

Notwithstanding the succession of synchronously volatile American contractions and expansions being just a coincidence there is a rather glum data point for us macroeconomic bulls. Real income less transfer payments is still falling, down by 0.4% after one quarter from our June trough, compared to a one-quarter increase of 1.3% for all previous postwar recessions. In the post-1945 era, real income less transfer payments has never declined in the first quarter of a recovery, although it did come close in what turned out to be a pretty fair recovery, that of 1975. In the cases of 1982, 1991, and 2001, through one quarter, growth in real wages and salaries (which includes employer contributions to retirement and Social Security, proprietors' income, rental income and interest and dividend income) was higher by 0.5%, 0.4% and 0.3%, respectively. Another series we like, manufacturing and trade sales, sends no clear signal about our cyclical progress or lack thereof.

Any additional risks to the V theory?

Bank lending has fallen by 4.2% in the past five months. Loans and leases were flattish in the opening months of the recoveries from the recessions of 1981-1982, 1991 and 2001, but in no case was there weakness on the scale of today's. Also money supply is troubling. We have collected data back to 1959. Therefore, looking at recessions of 1961-vintage and after, we find that M-2 has risen by an average of 9.2% in the 12 months following a cycle trough. This time around, over the last four months, M-2 has fallen slightly. There is a risk too, that debt destruction, or de-leveraging, might get rolling again, crushing jobs and incomes as it proceeds. There has only been one sustained de-leveraging since the 1920s. From 1933 to the early 1950s, the debt-to-GDP ratio fell from around 260% to 130%. Yet, over, the same period, real GDP grew at an average compound average rate of 6.1%. That was a notably different world of course. Today, the ratio of total credit market debt to GDP weighs in at more than 370%. Any takers on the proposition that a massive new cycle of de-leveraging would form the credit backdrop for another 20 years of wonderful growth? We wouldn't bet that way.

Neither would we. Final word?

One of our favorite epigrams is the following one from English economist Arthur C. Pigou :'The error of optimism dies in the crisis, but in dying it gives birth to an error of pessimism. The new error is born not an infant, but a giant...' So we hew to history, contrary opinion -and to the profound professor. However, if 2010 growth comes in at less than 4%, considerably less than the average 6.6% inflation-adjusted growth in the 12 months following the trough of all postwar slumps, we will have to admit that, as a certain number of subscribers are already convinced, we have utterly missed the boat.

Roger that. Thanks James.

Monday, December 14, 2009

American Schemer : Synarchy for all

'Without the slightest artificiality of face, without the faintest counterfeit of voice,and without more than a slight exaggeration of natural manner, he could become the typical American schemer'.
- Famous American Actors of To-day (1896)

'Populism espouses government by the people as a whole (that is to say, the masses). This is in contrast to elitism, aristocracy, synarchy or plutocracy, each of which is an ideology that espouse government by a small, privileged group above the masses.'

'The story that democracy is not to last for ever is as true, and as little to the point, as the assertion that human reason is not to last for ever, since only democracy provides an institutional framework that permits reform without violence, and so the use of reason in political matters.'
-Karl R. Popper

The butterfly wings of the banks, too bankrupt to go broke, need imaginary pricing for their imaginary collateral -tis too humptied to get dumptied.

The state, too captured to go real, pressures the squints to 'Less Nessman' the bad speculative bets.

The bets, whilst still on the books, are an option ... the regulatory put socializing the downside, the upside beholden only to imagination.

Such an imagining is the MSR(mortgage servicing rights) bucketshop, where there is no active trading and hence the value in the bucket depends largely on the expected life of the mortgage.

Extend and pretend is the proposed means to mend. Pay no attention to the marks behind the curtain. What ever the banks want to show they show.

The Nancy Capitalists proclaim its' all good, and we all should support that which brings recovery home.

But a storm is being created.

What they fail to realize is that they are corrupting, not supporting the American Dream; through their desire to be prophets they have ceased to be makers of their own fate.

The American Dream is becoming the American Scheme as moral hazard is writ large.

With Mr. & Mrs. America feeling no compunction to walk away from their home if their neighbor does it, with the neverending Federales policy of exalting drunks and punishing the sober, with the phrase 'the whole thing's a Ponzi' being uttered by even the most ardent of conservatives at family functions - life is imitating the arts of the elites.

People are losing faith.

Lies have consequences.

Trust can be gained once and lost once. Once lost, it's lost forever.

The American Dream of working hard, making it, and making a better life for your children is being replaced by synarchy for all.

Saturday, December 12, 2009

The Unbearable Brightness of Doing Nothing

Charts are from Nathan at
The top is 1929-30
The middle is 2008-2009
The bottom is the onset First Great Depression

My recollection is that it was not until 1934 that the term Great Depression was in wide use. Think about that for a moment.

If you click on the link to the right called Rhyming you can read reports from 79 years ago. The similarities smack you right in the face.

Mom asked me the other day if the markets were going to go up or down. I said yes. I'm confident that I am right.

The markets are a riddle, wrapped in a mystery, inside an enigma; but there is a key. That key is the Amerikantura's (copyright applied for) interest.

On the one Hand are the forces of darkness; if you have read past entries on this blog it is clear that empirically, per employment levels, we are in the Second Great Depression.

On the other Hand, there are the dark forces, namely THE HAND ... determined to sawtooth the markets through the midterm elections, liftng asset values with a gentle wind - an upward trend that is the lubrication of debasement.

The 'regulatory put' is a spigot of liquidity that fills the Nancy Capitalists' chalice of confidence.

Intellectually, giving both the deflationista and debasionista camps their due, it seems to me that we are at a stalemate, that we are stuck in a moment.

Graphs supporting this can be seen to the right at Thought Offerings in the posting entitled : 'Deadlock! Total Borrowing Has Stabilized at a Mild Contraction Rate as Private Debt Reduction Stops Increasing and Government Borrowing Stays Steady.'

Do not envy the folks that over the next few years either manage money or will be held accountable for their financial advice.

FWIW,I sold my local phone company in 2000. My current enterprise was predicated in part, on the expectation of a Great Depression.

If, gun to head, had to offer in a nutshell the investment theme for 2010?

It would be The Unbearable Brightness of Doing Nothing.

Opting out, once again.

Friday, December 11, 2009

Screw the leaders, screw the parking meters, circling the drain... let's go to Disneyland!

'I felt so good, like anything was possible.
Hit the cruise control, rubbed my eyes.
There's somethin' good, waiting down this road.
I'm pickin' up whatever's mine.
Running down a dream.
-Tom Petty

'I was sitting around a dead dial
Just another lost number in a file
I was trying to find my way home
This is Radio Nowhere.
-The Boss

'Karma police, arrest this man
He talks in maths
I've given all I can
It's not enough
I lost myself.

'Its a primal thing, this very unconscious place with the fears of what can happen to your children and will you be able to keep them safe. Then there's that place of utter desperation where you wonder if you're completely insane.'
-Jodie Foster

Retail sales better than expected!

Yea beer!

Uh well, only place seeing sales growth are the discount houses and gas huts. A gazillion bucks buys you a couple bips up off the Apocalypse.

The 1.3% 'leap' off about a 350 billion base is ~4 billion.

If employment is at First Great Depression levels and credit is till slippin' down the sloppy slope where is this V shape recoverin' extrapolatin' moolah coming from?

Almost nose-snotted by coffee when I read this in the WSJ yesterday:

By Mark Whitehouse

People's increasing willingness to abandon their own piece of America illustrates a paradoxical change wrought by the housing bust: Even as it tarnishes the near-sacred image of home ownership, it might be clearing the way for an economic recovery.

Thanks to a rare confluence of factors -- mortgages that far exceed home values and bargain-basement rents -- a growing number of families are concluding that the new American dream home is a rental.

Some are leaving behind their homes and mortgages right away, while others are simply halting payments until the bank kicks them out. That's freeing up cash to use in other ways.

(Moral hazard writ large! And its' good boys and girls, its' good! -AM)

Stiffing the bank is bad for peoples' credit, and bad for banks. Swelling defaults could also mean more losses for taxpayers through bank bailouts.

(Punish the sober, exalt the drunk, the Oracle at Eccles has junk in the trunk. -AM)

"It's just a better life. It really is," says Ms. Richey. Before defaulting on her mortgage, she owed about $230,000 more than the home was worth. Ms. Richey's family of five used some of the money to buy season tickets to Disneyland, and plans to take a Carnival cruise to Mexico in March.

"We're saving lots of money," Ms. Richey says.

(Good times. Good times. -AM)

For the 4.8 million U.S. households that data provider LPS Applied Analytics estimates haven't paid their mortgages in at least three months, the added cash flow could amount to about $5 billion a month (there's your retail sales ladies and gentleman -AM) -- an injection that in the long term could be worth more than the tax breaks in the Obama administration's economic-stimulus package.

"It's a stealth stimulus," says Christopher Thornberg of Beacon Economics, a consulting firm specializing in real estate and the California economy. "The quicker these people shed their debts, the faster the economy is going to heal and move forward again."

(The American Dream as the American Scheme. Necessity is the mother of invective. Its' all clear to me now. Should not have paid off the house, could have taken out a federally guaranteed mortgage, short sold it to the bank, dropped the proceeds and a couple bars into a triple index long fund with some gold and gun stocks on the side , ka-chinged off the debasement of our standard of living, and chased it down with some sweet ambrosia from the skull cup of the common man. What was I thinking?

How can this not end in a short-hair curling moment? -AM

Thursday, December 10, 2009

Success from failure, failure from success; when the student is ready the teacher will arrive

'In ancient rome
There was a poem
About a dog
Who found two bones
He picked at one
He licked the other
He went in circles
He dropped dead

Then if you got it you don’t want it
Seems to be the rule of thumb
Don’t be tricked by what you see
You got two ways to go

Freedom of choice
Is what you got
Freedom from choice
Is what you want

'There is no fate but what we make for ourselves.'
-Kyle Reese

'Progress is impossible without change; and those who cannot change their minds cannot change anything. It's your place in the world, it's your life. Go on and do all you can with it, and make it the life you want to live.'
-George Bernard Shaw

'Failure is success turned inside out.'

'When the student is ready the teacher will arrive.'
-Zen proverb

'To be mindful is a discontinuous process, our senses allow us a glimpse at the perfect form (truth) but that view can often be distorted by the flickering fire of perception that illuminates the shapes we perceive to believe.'
-Anonymous Monetarist

Have learned nothing from my successes for success has nothing to teach.

Failure though has schooled me well. Embracing, accepting and ultimately searching for failure has allowed me to be and accept that I am the luckiest of fools.

Not diminished by failure but rather, shall we say, contained, I am a Black Swan, mindful of my nature to go to extremes, thankful in the wisdom that, while most certainly still under development,keeps me balanced.

Back in the day at the University of Illinois had a classical civ teacher who used to dress up as the Oracle at Delphi every Friday and predict the winner of the upcoming Fighting Illini football game.

The class was huge, about 800 or so students, but this instructor was marvelous, able to connect with you even though he was but a speck on the stage.

One day he said something that I really did not 'hear' until many years later.

He told a story of a Victorious General that was returning to Rome. To honor the General, the Emperor held a gala where throngs of adoring citizens regaled the champion as he was paraded through the city centre with all the pomp and pageantry that could be afforded. The General stood alone in the chariot receiving the adulation of his countryman, alone save for one individual that was placed next to the General. This individual had been assigned a task by the Emperor. His job was to as, the General basked in his glory, whisper into the General's ear every secret, every failing, every unknown known - or in the words of a famous Louisiana politician, every dead girl and live boy - every bit of dirt the Emperor had on the war hero.

The purpose was to make sure that the General's perspective remained, shall we say, balanced.

That is why whenever I feel good about myself I tell myself to go f@&# myself.

There are a lot of folks that we read about nowadays that very much need to get a memo like that.

For as we collectively double down on a lost decade to avoid a lost generation our inability to allow folks to be schooled by failure will ultimately ensure that success will only be achieved ideologically and not literally.

Failure to liquidate the insolvent banksters, failure to implement real insurance, and more importantly entitlement, reform, failure to end the madness of foreign adventurism, is a failure of the tough over the easy and the truth over the specious.

Notwithstanding the claim of that silly television show, most folks do not lie. They are good, reasonable and honest. That is why the Big Lie works. It is so very difficult for them to process that the truths that they hold to be most dear are lies told to them by liars. They just can't grasp the delusion that those in a place of power and privilege have been captured by, a mindset that feeds them the pablum narrative that the ends justify the means.

The cold hard fact of our age is that the bankrupt ideology of the rich that had greatly succeeded in drafting the inner monologue of regular folks so that they would vote against their self-interests is colliding head-on with a Mr. Market that is a bit pissed off that we've inflated it out of the business cycle for the last quarter century.

Reality is the tail risk and payback is a bitch.

I am a fierce social liberal (and fiscal conservative.)

Mr. President you are losing my faith and you are losing my vote.

And Barry, if you're losin' me, you are down deep in the hole my friend.

The time will come when you will have to make a choice Mr. Dunham, will you be schooled and do the right thing or will you just ask for a bigger shovel?

Choose wrong and a demagogue like the Manchurian Mountain Mama might just have a shot of taking you on and winning.

If Palin gets in even the most avowed liberal would award Incurious George the Nobel Prize in comparison.

Wednesday, December 9, 2009

Kids say the damnedest things, are we stuck in a moment? Lies have consequences.

'We may become the makers of our fate when we have ceased to pose as its prophets. It is always flattering to belong to the inner circle of the initiated, and to possess the unusual power of predicting the course of history. Besides, there is a tradition that intellectual leaders are gifted with such powers, and not to possess them may lead to loss of caste. The danger, on the other hand, of their being unmasked as charlatans is very small, since they can always point out that it is certainly permissible to make less sweeping predictions; and the boundaries between these and augury are fluid. If you know that things are bound to happen whatever you do, then you may feel free to give up the fight against them. You may, more especially, give up the attempt to control those things which most people agree to be social evils, such as war; or, to mention a smaller but nevertheless important thing, the tyranny of a petty official
.' -Karl R. Popper

'I'm not afraid
Of anything in this world
There's nothing you can throw at me
That I haven't already heard
I never thought you were a fool
You've got to get yourself together
You've got stuck in a moment
And now you can't get out of it

'For a moment there, I thought we were in trouble'
-Butch Cassidy

As stated previously on this blog: During the First Great Depression the Unemployment Rate peaked at 23.53% in 1932, 24.75% in 1933 and 21.6% in 1934.( Source :U.S. Bureau of the Census, Historical Statistics of the United States, Colonial Times to 1957)

Back in those days, before the Federales massaged the relevancy of statistics into the pablum narrative rabbithole it was pretty simple to calculate the unemployment rate.

In 1932 there were 12,060,000 unemployed out of a labor force of 51,250,000, returning 23.53%.

In 1933 there were 12,830,000 unemployed out of a labor force of 51,840,000, returning 24.75%.

In 1934 there were 11,340,000 unemployed out of a labor force of 53,140,000, returning 21.60%.

Of course back then the labor force grew, now we bid the unemployed adieu.

And back then the labor force was 'defined' a tad differently.

From the Congressional Research Service's : The Labor Market during the Great Depression and the Current Recession.

The 1940 census of the population was the first statistical undertaking to include questions on the labor force defined as persons who are employed or without jobs but actively seeking work within a prescribed period of time. Before then, the 1930 census of the population, the 1937 census of unemployment, and the occasional survey conducted in various states and cities utilized a very different concept—the “gainful worker”—that is, individuals who had at some time worked in an occupation in which they earned money or the equivalent, or in which they assisted in the production of marketable goods.

With passage of the Fair Labor Standards Act (FLSA) in 1938,the age limit for employment in manufacturing industries was raised to 16 years, which effectively reduced the number of job opportunities for young persons. This, in turn, might have prompted some teenagers to refrain from entering the workforce and instead, remain voluntarily in school after reaching age 14.

The increase in unemployment was greatest among young workers. The number of unemployed 14 to 24 year olds rose by 251% between 1930 and 1940. The Fair Labor Standards Act (which prohibited 14-and 15-year-olds from working for manufacturers) effectively limited the job options of the very youngest workers as well.

AM here : Was under the impression that in the First Great Depression the Unemployment Rate counted everyone over the age of 16 that did not have a job. In a previous entry had stated: In 1916 the Child Labor Act passed, setting a national minimum age of 14 in industries producing nonagricultural goods for interstate commerce or for export and the Keating-Owen Act passed, forbidding the transportation among states of products of factories, shops or canneries employing children under 14 years of age, of mines employing children under 16 years of age, and the products of any of these employing children under 16 who worked at night or more than eight hours a day.

It would appear though that prior to 1938, there were a lot of unemployed 14 and 15 year olds that were included in the unemployment rate.

That makes the following study even more frightening.

It speaks for itself: the first column represents 12/07 and the second column represents 12/09.

Center for Working-Class Studies at Youngstown State University


Officially Unemployed 4.9%, 10.0%
Marginally Attached .8%, 1.5%
Discouraged 02%, .05%
Underemployed 3.1%, 6.0%
Excess disability 6.0%, 6.0%
Government programs 4.0%, 4.0%
Subtotal 18.52%, 28.35%


Officially Unemployed- Persons who worked less than one hour during the nationally determined reference period (one week), looked for during this period, and were available for work during this period.

Latent Job Candidates

Marginally attached workers - Persons not in the labor force who want and are available for work and who have looked for a job sometime in prior 12 months (or since the end of their last job if they held one within the past 12 months), but were not counted as unemployed because they had not searched for work in the four weeks preceding the survey.

Discouraged workers - Persons not is labor force who want are available for a job and who have looked for work sometime in the past 12 months (or since the end of their last job if they held one within the past 12 months)
Underemployed -Persons who would like to work full-time but are not able to do so for economic reasons such as unavailability of full-time work or reduced demand for hours by current employer

Excess disability - Persons who are excluded from labor force because of sick leave or early retirement

Government Programs - Persons receiving government subsidized or government provided programs. For example, low wage workers receiving Earned Income Tax Credits

These estimates may be low given what has happened in the economy and the lack of current data. For example, individuals going to colleges and universities have increased dramatically during the current recession/regional depression but are not counted as part of labor market

For more information about the de-facto unemployment rate, contact John Russo at the Center of Working-Class Studies at

AM here: Kids say the damnedest things don't they?

Good luck going home and explaining to your relatives living in the Matrix that it is a Great Depression ... maybe you can try grounding some red pills into the gravy.

I'll go ask a smartypants about the age 14 thing and let you know in an add-on.

But let's be clear, of course it is a Great Depression.

It is not merely a question of semantics, it matters. How can we the people have any voice to articulate the solution when we are being corn-fed a specious premise?

Lies have consequences.

Tuesday, December 8, 2009

Top ten reasons why this ends in tears or (hopefully not)fireworks

Here's tonight's top ten list let's go.

Thank you so much Paul, here to present tonight's top ten list please welcome Chicago's very own Anonymous Monetarist ladies and gentlemen.

Can I call you Money?

Sure Dave.

Quick question, will the market go up or down?

Yes Dave.

OK Money, why is he out here Paul?

Top ten, he's reading the top ten, what is the topic?

Pardon me Money, category.. top ten reasons why this ends in tears or (hopefully not)fireworks ... sounds like my personal life. OK here we go ... Number 10.

Nancy Capitalists in a Sovereign Democracy that are Hell Bent to Seek Rent.

How about that? Number 9.

Although we walk through the Valley of Debt we fear 'No Easing'.

Now there's a reason...Number 8.

Socialized Guts will lead to diminished glories.

OK ... Number 7.

Failure to liquidate the insolvent banksters has led to the liquidation of a large part of the productive economy.A taxpayer financed bailout of rich folks' bad speculative bets has resulted in zombie banks and zombie customers... a fiscal tide that lifts no boats.

Uh-huh ... Number 6.

The cold hard fact of our age is that the bankrupt ideology of the rich that had greatly succeeded in drafting the inner monologue of regular folks so that they would vote against their self-interests is colliding head-on with a Mr. Market that is a bit pissed off that we've inflated it out of the business cycle for the last quarter century.

Whoa... let me guess Money you don't get invited out much do you?

Only if I bring the liquor Dave.

Heh heh OK that makes sense ... Number 5.

Mr. Hand's strong dollar policy is the chimera of currency debasement masquerading as America's wealth exporting machine that is regularly promulgated by our leaders as an exceptional example of America's resiliency.

Whew... you must have to bring top shelf. Did that make sense to you Paul?

It's heavy man, heavy...

Number 4.

Yes Virginia, there is no collateral.

Number 3.

Leno is on at 9.

What! What! How did that one get in there? OK Number 2.

Employment, inflation, productivity, GDP, and other sundry stats are massaged into irrelevance ... the markets are rigged.

Rigged? What does that mean Money?

The government is 'all in' and can't pull out.

Whoa! Good thing this is late night Paul.

And the number one reason why this ends in tears or (hopefully not)in fireworks?

After World War 2, our blessed leaders, impressed by German 'organizational' skills crafted a policy of manufacture of consent.Over time these techniques moved to the economic realm in an attempt to manufacture content.Federales now risk the manufacture of contempt, for it is only a Great Depression if they say it is.

Anonymous Monetarist ladies and gentleman!

Don't need to be a weatherman to know which way this wind blows...the approaching storm

(Was in New York for the weekend. It was a melancholy visit; uplifting, affirming and yet downcast. Our current predicament is plain to many but these many, although often engaged in 'doing the good work', are for various reasons often a bit handcuffed in broadcasting from the highest cathedral that 'yes it is a great depression' and naming the responsible names without crypticism, fear of censor, or caveat.

My cloudiness was dispelled however by a ray of sunshine put forth by Chris Whalen at IRA in honor of the venerable Mark Pittman, as incendiary as anything I've seen him publish.

But first the transcript of Mark Pittman's interview with the Columbia Journalism Review {The Audit : TA} on Feburary 27, 2009 -AM

TA: How’d you get onto the crisis story?

MP: I had a conversation with a couple of people in late 2006/early 2007, and people were talking about what’s wrong with asset-backed securities and where all this is headed. I’d also covered derivatives contracts. When they first started doing credit-default swaps on companies, I covered that. That was like ‘99-2000. You could tell it was going to be a really hot thing.

When they started talking about doing derivatives on mortgage-backed securities , I was like “oh, man, that means the banks are scared!” That was 2006, and we wrote a whole series about this.

You always want to be around the hot story. If you’re not around the hot story, you’re screwed.

TA: So did you go into that pretty much full-time? How’d you convince your editors to let you do that?

MP: You know it really wasn’t hard. They’ve really let me take a lot of chances here, and they’re extremely generous with my time. They recognize it as an important part of the reporting process. They give me a lot of rope. They let me figure stuff out. That’s something that’s in real short supply with a lot of news organizations now. You’ve got to let reporters run and figure out what’s going on.

TA: Not many others have the resources to do much of that nowadays.

MP: Instead of doing the sixth sidebar on a bailout program that probably won’t work anyway, let the person figure out what’s actually happening. And you’ve got to let your people do that. We did a five-part series [the one that won the Loeb] on the whole idea of why the subprime crisis occurred, and it starts with this story about how a bunch of traders at Deutsche Bank, Goldman Sachs, JP Morgan got together and said “We need a standard contract to be able to short the mortgage market.” As soon as I realized they were going to try and short the mortgage market I said, “Ohhh. That means they think the market is going down.”

TA: And these are the guys who’ve come out pretty okay in this.

MP: You’ll notice UBS and Merrill aren’t in the group. The thing about this entire series of events is this is so complicated and so intertwined that we don’t have —journalists are not qualified to cover the story. We don’t have the background. These guys are doing stuff that you had no idea was happening. The off-balance-sheet accounting stuff is crazy.

TA: Well, if the ex-chairman of the Fed Alan Greenspan, formerly regarded as a near god, didn’t understand what this stuff was, who did? He had access to all the people and all the information he could want.

MP: He had no idea what was going on. How is it possible for them to sell themselves, to an off-balance-sheet entity, risk that is now exploding all over everybody? Why would that be allowed and why would you be able to book a profit on this? Who was in charge of this?

We haven’t got to the bottom of this whole thing yet. Somebody’s going to do this big forensic—and it might be me!—somebody’s going to do the deep dive into how everything happened and they’re going to find out that this system was just on autopilot and was spinning money out to a whole bunch of people. And it included you and me.

TA: In the form of cheap credit?

MP: Yes. The spreads should never have gotten to that level.

This goes back to why AIG is all screwed up. The banks sold AIG all their risk in 2007, when it was really blowing up. AIG had sworn that they weren’t going to do any more of this and then (the banks) restuffed the CDO’s with new stuff. So (AIG) had newer collateral that they weren’t really aware of.

TA: So the banks were stuffing the CDO’s with new stuff but AIG didn’t know they were replacing the stuff?

MP: Right.

TA: An MBS, you can’t move things in or out, but a CDO you can. Are the banks liable for this? AIG got blown up, but these guys knew what they were doing.

MP: You know what, the lawsuits will have to sort that out. And it’s going to be going on for years. It’s going to be just a debacle. Congress is going to have go through and force people to say “Okay, so what did you do with this, and where did it go from here?” They need to have very talented investigators go in and find out what the deal is.

TA: Tell me how your cops background plays into what you’re doing now.

MP: You end up with a big BS detector as a cops reporter because the cops lie to you, the victims lie to you, the people helping the victims lie to you. And you’ve got to sort through and there will be a story that seems a certain way and it just won’t be—and you know it. That’s what this is about.

The reporters who didn’t question the tight, tight spreads [the narrow difference in interest rates offered by Treasury bills and other, less secure instruments] that were going on in corporate [bonds], it was wrong. Where is this demand coming from? How can you guys sell this issue in thirty minutes? Who the hell’s buying this stuff like that? We’re going to come to the answer that it was going off balance sheet, at least temporarily, and then it might be sold to other customers.

TA: So they were buying it themselves and…

MP: They were buying it themselves. Yeah. And not every deal. But you know what—it happened enough. We don’t have enough journalists in America who understand what a spread does, which is the essence of banking. I just finished Dean’s piece in Mother Jones recently. We’ve got 9,000 business journalists and maybe twenty of them know what a spread is. This is not business journalism’s finest hour. But it is our biggest opportunity ever.

TA: How does the Bloomberg terminal inform your reporting or help you find leads?

MP: Well, I’ll give you an example. The first best story that I did about this—I’m gonna brag about this—was in June of ‘07. It said that subprime bonds are failing and they’re failing at an alarming rate, and they’re going up a lot, and they all need to be downgraded. The ratings companies aren’t following their own criteria for what makes a bond a certain rating. I did that through data that’s available on the Bloomberg. We’ve got a function called DQRP, which gives you delinquency reports on every RMBS, dividing it up by category. So you can pick the worst bonds with the worst stuff and you can divide it up by rating—all kinds of sorting. Nobody has that but us.

TA: I didn’t even know that capability was out there.

MP: Hell yes, man. And it works. Then you can pull up each individual bond and you’ve got a complete description of its geographic reach—how much is in California, all kinds of great stuff. What a weapon! And if you know how to use it, it works pretty well.

TA: So what’s your prescription for business journalists? What do they need to know and do? Not everybody’s going to have a $20,000 a year Bloomberg terminal to play with.

MP: Hardly anyone has a Bloomberg machine and the ones that do don’t know how to use it

But you know what? The government needs to make this kind of data much more publicly available than it is now. We purchase a lot of this. But, for instance, a lot of the bond deals were (not subject to disclosure). And all the CDO’s were private placements. We know why—because they placed them with themselves. The number of secret deals going bad is astounding, it’s probably 90 percent of them were secret deals.

TA: Bloomberg’s got a ton of people on bonds, but I’ve said before that a part of why the business press failed here was that it has so many times more people covering equities than debt. And debt markets are many, many times the size of the equity markets. That’s kind of a major problem right there, right?

MP: It is huge. Most reporters, it’s shocking how few of them actually understand the difference between price and yield. Hardly any business journalist actually covers the financing. If you cover a company and all of a sudden their borrowing costs go from 100 (basis points) over to 250 or 300 over [meaning investors believe the risk has increased substantially], and no one asks a question. There’s a problem there when that happens and nobody asks a question. I think we have training issues in a huge way in our profession. We brought a knife to a gunfight.

TA: Does there need to be regulation just to simplify things to where it makes sense to more people?

MP: If it was all transparent the complexity wouldn’t matter. If the CDO market had had publicly available prospectuses with the contents of the CDO disclosed, we wouldn’t have this issue, because Bloomberg probably would have made fun of anybody who bought anything like this. But there was this enormous shadow banking system going on. We did a series about that, too. A lot of times people don’t see what we do.

TA: That’s one of the problems I’ve noticed. We’ve consciously tried at The Audit to make sure people are reading your stuff. I don’t think it’s become a habit for a lot of people even in the biz to go over to Bloomberg.

MP: It kinda bums you out, because you want to do things that have big (impact) because that’s why you’re in the business. And public policy would work a lot better if they actually understood what the hell was going on.

TA: Like adding up the total number of trillions that the government is on the hook for in this bailout. Nobody else is doing that but you. Why not?

MP: Because it’s a big pain. You start off with whatever you can remember off the top of your head—oh, they’re doing this, they’re doing that—you start writing it down on a piece of paper and you go “Wow, this is real money.” It starts adding up.

The thing that people don’t realize is that the Fed is now the “bad bank.” That’s just something that people don’t understand. They’ve taken collateral, and they refuse to tell us how they valued it…

We have numerous banks— dozens, maybe hundreds that are insolvent. And they become more insolvent every day because more people quit paying their mortgage loans, and more guys move out of the shopping center, and more people quit paying their credit cards. But nobody wants to have the adult conversation…We need to be honest about what the problem is here, how big it is, and how we’re going forward to clean it up, and who’s going to pay for it.

TA: Basically the charade that’s going on here is that they haven’t marked these assets down yet because that would show they’re insolvent.

MP: But a lot of [the assets] have gone to the Fed, though, as collateral for loans. They’re still on their balance sheet, but you borrowed against them. We don’t know if those are cracked CDO’s or prime RMBS…

TA: That’s what you guys are suing (the Federal Reserve) for—to find out what the collateral is.

MP: Yeah, and that’s the secret part of the story that nobody wants to let you know.

TA: Because it’s worth pennies on the dollar or dimes on the dollar.

MP: Yeah, and then everybody’s going to go “Oh my God, we’re lending ninety cents on something that’s worth twenty or thirty?”

(Yes Virginia there is no collateral. -AM)

TA: They say they don’t want to disclose it because it would interfere with the markets, is that right?

MP: Their basic argument is this would cause chaos, and they’re probably right. But that doesn’t mean that the American taxpayer ought to be on the hook for this.

TA: Why would it cause chaos?

MP: Because people would realize that we’re lending eighty cents on the dollar for something that’s worth twenty cents.

TA: So political chaos?

MP: And maybe market chaos, too. Well, you know the market’s probably pretty savvy about this thing, and everybody knows what’s going on but we just haven’t communicated with the public.

(Here's a flashback: I have spoken to the heads of various Wall Street equity derivative trading desks and every single one of the senior managers told me that Bernie Madoff was a fraud. Of course no one wants undue career risk by sticking their head up and saying that the emperor isn't wearing any clothes. As a result of this case several careers on Wall Street and in Europe will be ruined. Therefore, I have not signed nor put my name on this report. I am worried about the personal safety of myself and my family.'
-Harry Markopolos in 2005.

A ponzi by any other name will still destroy your standard of living. -AM

When you say “political chaos” you might well be right. That may be what it was. Congress is going to go “We’re lending this much money on this Triple-C security? What are we thinking here?”

TA: One thing I really like about you guys is in your reporting and writing, you have a sense of outrage that’s not in the Journal, say. This thing is so huge, and you guys are conveying the magnitude of it better than some, and there’s a sense of urgency that’s lacking elsewhere. Is this a conscious thing in the newsroom?

MP: We have been primary movers for transparency in markets since our existence. Bloomberg’s reason for being was to give the buy side enough tools so they wouldn’t get screwed by the investment banks. That’s what we’re about. So we’re a weapon for the buy side and a de facto weapon for every one who has a mutual fund. We just need to level the playing field and let everybody know what’s going on. This is from Matt Winkler on down. This is what we do.

It’s also that we realize this is a defining moment for business journalism and for Wall Street. I think that this organization, this news department, was built for this crisis. We’ve got more tools than anybody, we’ve got the will, we have the assets to go after this in a huge way. Everybody believes that in this room.

Hopefully, we will be able to inform the people enough to know how badly we’re getting screwed (laughs). We need to know how to prevent it from happening again, and we need to know who did it. There’s renewed energy on this front because we’ve staffed up the people who cover banks, the securities firms. We have a lot more people going at real estate and a bunch of different areas that this involves. That was a conscious move from meetings we started having in 2007. We hired people and we moved people from one area to another area.

Our issue is we have readers who are very interested in very small things. That’s why they have the terminal. It’s because they’re interested in natural gas or things that aren’t connected with the biggest story in twenty years, maybe longer. This is a big deal and it’s going to be going on—I swear to God I’m going to retire on this story, because it’s just going to keep happening.

(Melancholy thy essence is the last sentence above. And now Mr. Whalen carries the baton. -AM)

By Chris Whalen

To us, the confirmation hearings last week before the Senate Banking Committee only reaffirm in our minds that Benjamin Shalom Bernanke does not deserve a second term as Chairman of the Board of Governors of the Federal Reserve System. Including our comments on Bank of America (BAC) featured by Alan Abelson this week in Barron’s, we have three reasons for this view:

(Barrons: The seeming stability of the largest banks springs from government intervention in the securities markets, notably by dressing up the value of toxic assets by buying them in the open market, and gobs of subsidies, along with investors' speculative urge that makes raising fresh capital less than a Herculean task. Whalen's reservations about the outlook lead him to conclude the plan to repay the government loan is a great argument for why the Fed should be taken out of the business of bank supervision. The responsible position, he feels, would have been for the powers-that-be to nudge BofA to raise more capital now when the equity markets are accommodating and delay paying off the feds until the first half of next year is over. That way, they could better gauge how much of a hit the bank may have to eventually absorb from its various and sundry bum assets, on and off its balance sheet. -AM)

First is the law. The bailout of American International Group (AIG) was clearly a violation of the Federal Reserve Act, both in terms of the “loans” made to the insolvent insurer and the hideous process whereby the loans were approved, after the fact, by Chairman Bernanke and the Fed Board. The loans were not adequately collateralized. This is publicly evidenced by the fact that the Fed of New York (FRBNY) exchanged debt claims on AIG itself for equity stakes in two insolvent insurance underwriting units. What more need be said?

As we’ve noted in The IRA previously, we think the AIG insurance operations are more problematic than the infamous financial products unit where the credit default swaps pyramid scheme resided. And we doubt that any diligence was performed by Geither and/or the FRBNY staff on AIG prior to the decision taken by Tim Geithner to make the loan.

Of interest, members of the Senate Banking Committee who want more background on the AIG fiasco, particularly who did what and when, need to read the paper by Phillip Swagel, “The Financial Crisis: An Inside View,” Brookings Papers on Economic Activity, Spring 2009, The Brookings Institution.

We hear in the channel that Fed officials were furious when Swagel, who served at the US Treasury with former Secretary Hank Paulson, published his all-to-detailed apology. We understand that several prominent members of the trial bar also are interested in the Swagel document.

Last week the Senate Banking Committee spent a lot of time talking with Chairman Bernanke about why payouts were made to AIG counterparties like Goldman Sachs (GS) and Deutsche Bank (DB), but the real issue is why Tim Geithner and the GS-controlled board of directors of the FRBNY were permitted to make the supposed “loans” to AIG in the first place. The primary legal duty of the Fed Board is to supervise the activities of the Reserve Banks. In this case, Chairman Bernanke and the rest of the Board seemingly got rolled by Tim Geithner and GS, to the detriment of the Fed’s reputation, the financial interests of all taxpayers and due process of law.

Martin Mayer reminded us last week that the Fed is meant to be “independent” from the White House, not the Congress from which its legal authority comes by way of the Constitution. Nor does Fed independence mean that the officers of the Federal Reserve Banks or the Board are allowed to make laws. None of the officials of the Fed are officers of the United States. No Fed official has any power to make commitments on behalf of the Treasury, unless and except when directed by the Secretary. Given the losses to the Treasury due to the Fed’s own losses, this is an important point that members of the Senate need to investigate further.

The FRBNY not only used but abused the Fed’s power’s under Section 13(3) of the Federal Reserve Act. In AIG, the FRBNY under Tim Geithner invoked the “unusual and exigent” clause again and again, but there is a serious legal question whether the then-FRBNY President and the FRBNY’s board had the right to commit trillions without any due diligence process or deliberate, prior approval of the Fed Board in Washington, as required by law. The financial commitments to GS and other dealers regarding AIG were made always on a weekend with Geithner “negotiating” alone in New York, while Chairman Bernanke, Vice Chairman Donald Kohn and the rest of the BOG were sitting in DC without any real financial understanding of the substance of the transactions or the relationships between the people involved in the negotiations.

Was Tim Geithner technically qualified or legally empowered to “make deals’ without the prior consent of the Fed Board? We don’t think so. Shouldn’t there have been financial fairness opinions re: the transactions? Yes.

(The seduction of Barry Dunham. -AM)

We understand that the first order of business in any Fed audit sought by members of the Senate opposed to Chairman Bernanke’s re-appointment is to review the internal Fed legal memoranda and FRBNY board minutes supporting the AIG bailout. These documents, if they exist at all, should be provided to the Senate before a vote on the Bernanke nomination. Indeed, if the panel established to review the AIG bailout and related events investigates the issue of how and when certain commitments were made by the FRBNY, we wouldn’t be surprised if they find that Geithner acted illegally and that Bernanke and the Fed Board were negligent in not stopping this looting of the national patrimony by Geithjner, acting as de facto agent for the largest dealer banks in New York and London.

(Damn Chris you are on fire. -AM)

The second strike against Chairman Bernanke is leadership. In an exchange with SBC Chairman Christopher Dodd (D-CT), Bernanke said that he could not force the counterparties of AIG to take a haircuts on their CDS positions because he had “no leverage.” Again, this goes back to the issue of why the loan to AIG was made at all.

Having made the first error,Bernanke and other Fed officials seek to use it as justification for further acts of idiocy. Chairman Dodd look incredulous and replied “you are the Chairman of the Federal Reserve,” to which Bernanke replied that he did not want to abuse his “supervisory powers.” Dodd replied “apparently not” in seeming disgust.

We have been privileged to know Fed chairmen going back to Arthur Burns. Regardless of their politics or views on economic policies, Fed Chairmen like Burns, Paul Volcker and even Alan Greenspan all knew that the Fed’s power is as much about moral suasion as explicit legal authority. After all, the Chairman of the Fed is essentially the Treasury’s investment banker. In the financial markets, there are times when Fed Chairmen have to exercise leadership and, yes, occasionally raise their voices and intimidate bank executives in the name of the greater public good. AIG was such as test and Chairman Bernanke failed, in our view.

Chairman Bernanke does not seem to understand that leadership is a basic part of the Fed Chairman’s job description and the wellspring from which independence comes. The handling of AIG by Chairman Bernanke and the Fed Board seems to us proof, again, that Washington needs to stop populating the Fed’s board with academic economists who have no real world leadership skills, nor operational or financial experience. Just as we need to end the de facto political control of the banksters over America’s central bank, we need also to end the institutional tyranny of the academic economists at the Federal Reserve Board.

The third reason that the Senate should vote no on Chairman Bernanke’s second four-year term as Fed Chairman is independence. While Bernanke publicly frets about the Fed losing its political independence as a result of greater congressional scrutiny of its operations, the central bank shows no independence or ability to supervise the largest banks for which it has legal responsibility. And Chairman Bernanke has the unmitigated gall to ask the Congress to increase the Fed’s supervisory responsibilities. As we wrote in The IRA Advisory Service last week:

“Indeed, if you want a very tangible example of why the Fed should be taken out of the business of bank supervision, it is precisely the TARP repayment by Bank of America (BAC). The responsible position for the Fed and OCC to take in this transaction is to make BAC raise more capital now, when the equity markets are receptive, but wait on TARP repayment until we are through Q2 2010 and have a better idea on loss severity for on balance sheet and OBS exposures, HELOCs and second lien mortgages, to name a few issues. Apparently allowing outgoing CEO Ken Lewis to take a victory lap via TARP repayment is more important to the Fed than ensuring the safety and soundness of BAC.”

One close observer of the mortgage channel, who we hope to interview soon in The IRA, says that given the recent deterioration of mortgage credit, it is impossible that BAC has not gotten its pari passu portion of the losses which are hitting the FHA. The same source says that using conservative math, FHA has another $75 billion in losses to take, with zero left in the FHA insurance fund. Worst case for FHA is double that number, we’re told. How could the Fed believe that BAC, which is the biggest owner of mortgages and HELOCs, is immune from this approaching storm? Because the Fed is cooking the books of the largest banks.

The observer confirms our view that trading gains on the books of banks such as BAC are due to the Fed’s open market purchases, which drove up prices for MBS and other types of toxic waste. In effect, the Fed’s manipulation of the prices of various toxic securities is giving the largest US banks and their auditors a “pass” on accounting write-downs in Q4 2009 and for the full year – assuming that MBS prices do not drop sharply before the end of the month.

Question: Is not the Fed’s manipulation of securities prices and the window-dressing of bank financial statements not a violation of securities laws and SEC regulations?

(Answer: Oh hell yes! -AM)

Of note, in her column on Sunday about the widely overlooked issue of second lien mortgages, “Why Treasury Needs a Plan B for Mortgages,” Gretchen Morgenson of The New York Times writes that “Unfortunately, there is a $442 billion reason that wiping out second liens is not high on the government’s agenda: that is the amount of second mortgages and home equity lines of credit on the balance sheets of Bank of America, Wells Fargo, JPMorgan Chase and Citigroup. These banks – the very same companies the Treasury is urging to modify loans that they service – have zero interest in writing down second liens they hold because it would mean further damage to their balance sheets.”

Thus the Fed is not only allowing insolvent zombie banks to repay TARP funds before the worst of the credit crisis is past, but the “independent” central bank is engaged in a massive act of accounting fraud to prop up prices for illiquid securities and thereby help banks avoid another round of year-end write downs, the banks the Fed supposedly regulates. This act of deliberate market manipulation suggests that the Fed’s bank stress tests were a complete fabrication. Only by artificially propping up prices for illiquid securities can the Fed make the banks look good enough to close their books in 2009 and, most important, attract private equity investors back to the table.

Of note, the perversion of accounting rules in the name of helping the largest global banks is also well-underway in the EU. Our friends at CFO Zone published a comment on same last week that deserves your attention: “International Accounting Standards Board has ‘disgraced itself.’

(Let's see; a 'violation', 'hideous', 'not adequately collateralized', 'doubt that any diligence', 'used but abused', 'acted illegally', 'failed', 'de facto political control of the banksters over America's central bank', 'institutional tyranny', 'cooking the books', 'violation of securities laws and SEC regulations', 'massive act of accounting fraud','deliberate market manipulation', 'complete fabrication', and 'perversion of accounting rules'. His next interview on Bubblevision or Hee-Haw ought to be interesting. -AM)