Wednesday, March 17, 2010

More Bogus Lehman Tidbits

This is from the Lehman Taskforce report.

"Liquidity was an important factor in the stress testing that Lehman was required to run under the CSE Program. After March 2008 when the SEC and FRBNY began on‐ site daily monitoring of Lehman, the SEC deferred to the FRBNY to devise more rigorous stress‐testing scenarios to test Lehman’s ability to withstand a run or potential run on the bank. The FRBNY developed two new stress scenarios: “Bear Stearns” and “Bear Stearns Light.” Lehman failed both tests. The FRBNY then developed a new set of assumptions for an additional round of stress tests, which Lehman also failed. However, Lehman ran stress tests of its own, modeled on similar assumptions, and passed. It does not appear that any agency required any action of Lehman in response to the results of the stress testing."

What was effectively happening was that Tim "Bogus Stress Test" Geithner was administering these tests that Lehman was continually failing. Even after taking the stress tests to retard level, Lehman was still failing them. The only reason Lehman passed was they themselves administered their own test, of which they passed because they are testing themselves.

Of course the FRBNY was praising Lehman. This is similar to taking and failing a Calculus test over and over again. You are in fact the teachers pet and make sure he or she gets a shiny new apple everyday so that the teachers will make the failing grades go away by giving you a much easier test to pass. You then fail that one as well. Finally the teacher gives up and says: "Why don't you just give yourself a self exam and grade yourself?" Effectively what happens is you pass a Calculus exam by correctly answering what is 1+1.

In Lehman's case 1+1 was 35.

Forget Fractional Reserve Banking

If there was ever evidence of what Wall Street's ambitions are its here.

http://www.federalreserve.gov/newsevents/testimony/bernanke20100210a.htm#fn9

"The authority to pay interest on reserves is likely to be an important component of the future operating framework for monetary policy. For example, one approach is for the Federal Reserve to bracket its target for the federal funds rate with the discount rate above and the interest rate on excess reserves below. Under this so-called corridor system, the ability of banks to borrow at the discount rate would tend to limit upward spikes in the federal funds rate, and the ability of banks to earn interest at the excess reserves rate would tend to contain downward movements. Other approaches are also possible. Given the very high level of reserve balances currently in the banking system, the Federal Reserve has ample time to consider the best long-run framework for policy implementation. The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system"

What Ben Bernanke is actually proposing is to end all reserve requirements for depository institutions. He seems to believe that having a cushion to insure depositors would "impose costs and distortions on the banking system." Lets forget for the moment that Bear Stearns, Lehman, And Wamu were taken to the woodshed because of bank runs. This happened in a fractional reserve system. What do you think can happen in a zero reserve system?

Everybody knows that banks create money out of thin air. Bernanke wants to make them more insanely rich by eliminating any reserve requirement. This would allow unlimited leverage for banks to speculate with customer deposits. They would speculate with client deposits and let the government sort out the mess. This is of course after the Fed gets full resolution authority as proposed by the Dodd Bil. The Fed would allow Banks to lever up to any level without oversight and look away at any speculation. If in the event of a crisis they will just print more money to mask the real problems.

If you don't believe me read this.

http://www.newyorkfed.org/newsevents/speeches/2009/dud090729.html

"Based on how monetary policy has been conducted for several decades, banks have always had the ability to expand credit whenever they like. They don’t need a pile of “dry tinder” in the form of excess reserves to do so. That is because the Federal Reserve has committed itself to supply sufficient reserves to keep the fed funds rate at its target. If banks want to expand credit and that drives up the demand for reserves, the Fed automatically meets that demand in its conduct of monetary policy. In terms of the ability to expand credit rapidly, it makes no difference."

What William Dudley is saying in this piece is that the banks do create money out of thin air. If there ever was a problem and or crisis the Fed would come in and rescue the banks. Of course the spin here is that they are doing this for the public's benefit.

Both Dudley and Bernanke are in full power grab mode. They know they have royally screwed up the finances of the country and need to claim back lost ground. Even with a fractional reserve system they are fearful of losing power. So their main objective is not to fix whats wrong but to make it worse by moving to a zero reserve system. This will insure their power over monetary matters and it ultimately makes the banks even more powerful. The commercial banks run the Federal Reserve Banking System. They own the most powerful Regional Fed Bank the FRBNY.

The one way to reduce or eliminate bank runs and leverage is to move to a full reserve banking system. This unfortunately for the FED eliminates the need for a lender of last resort. The FED wants a zero reserve system so that they can keep the perpetual fear of crisis so that they can keep their jobs.

The only reason we don't have a full reserve system is because of Wall Street. They need financial intermediation to run their business and pay out billions in bonus money. Also a full reserve system would not allow exponential debt explosion that again pads the bank accounts of bankers.

The single reason central banks were create was because of the fractional reserve system. Its the only thing that sustains both entities.

We have just witnessed the worst credit crisis of our lifetimes. Instead of prudent regulations and thoughtful reforms we get these type of proposals from policymakers because after all the Banks and Wall Street own the policy makers and they obscure the obvious to get what they want which is unlimited leverage, zero transparency, and even less accountability. Their number one concern that they use to strike fear into over leveraged debt consumed Americans? If you regulate us there will be no more financial engineering or innovation needed to create more credit for already credit drowned Americans.

Tuesday, March 16, 2010

Bagholders Of The World Unite

Now that everything is all right with Greece again. Can everyone just go back to buying Equity Futures? I mean if S&P has affirmed Greece rating at BBB+, this only means that Greece is off to the races once again correct? So is it safe to say that S&P will only look to downgrade Greece if they reach 500B in debt? Till then is everyone safe in Europe? Why would Greece default now when S&P has just given them the green light to add a couple hundred more billions in debt? Look for more Greek Bond issuance in the coming weeks and months. Only after some 50-100B in extra debt issuance will Greece formally default. You can be assured that they will then blame all of the speculators for their default. Greece is doing a Russia in the sense that they will issue more worthless debt to the same clowns that bought all of the prior worthless debt. It’s just a matter of time before the inevitable default happens. When that happens Greece will de-link from the Euro and the Euro will wave bye bye!

But for the time being…

….Does this means that the markets can just shrug off sovereign debt issues along with the Dubai Debt incident last November? From watching the talking heads on CNBC and Bloomberg that is exactly what they are saying.

All we have heard over the last few weeks is this:

http://www.guardian.co.uk/world/2010/mar/12/eu-agrees-greece-bailout

Then this:

http://abcnews.go.com/Business/wireStory?id=10091357

Then these items:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aKGVY62QnP.g&pos=4

http://online.wsj.com/article/SB10001424052748704131404575117963361743800.html?mod=WSJ_Markets_section_WorldMarkets

So the question remains: Will Germany which is the strongest and largest European country bailout Greece now or just wait it out and let them default on their own?

All quiet on the Gyro Front.

If there was going to be a bailout of Greece, it would have happened all ready. But since Greece has raised some 5B the need for an immediate bailout is not needed.

Also the ECB is looking into creating a European Monetary Fund to soak up all of the excess bonds that nobody wants. Jean-Claude Trichet has already stated:

"We have seen the proposal. I would say it deserves examination about creating a body for European nations kin to the IMF.”

Well, all the IMF really is in its simplest form is a bailout entity. Once the IMF comes in, its restructure and default time.

Let’s get something straight. All this amounts to is a bailout mechanism along the lines of TARP. The Europeans know that Greece can’t get their austerity measures to the point where their finances are running of the cliff. So there is two choices for Greece, Default or Bailout. The Germans along with the French citizens have no stomach for bailouts. There would be riots in their countries because unlike America, there is no American Idol to fool the public. So the ECB is trying feverishly for a back door bailout ala AIG/GS. They like everyone else on the planet knows that Greece is going to default. After all Greece has been in a state of default for decades. It was only after their CDS blew up that people noticed. Sovereign countries are like people. From my experience you should never lend money unless you can then turn around and sell that loan to some other guy who is as stupid as you. The idea of the bagholder is a central theme in modern financial markets and within capitalism itself. This is what true innovation is. Financial innovation doesn’t work if we don’t have bagholders. S-CDO’s wouldn’t have worked without AIG being the dumping ground for Goldman Sachs. This is the main purpose of Financial Innovation. This is the reason the banks don’t want an independent CFPA. The US Tax Payer doesn’t want to be the bagholder, patsy, or the Oswald anymore, but the banks need more and more people in the Texas School Book Depository to hang around and look like idiots. In its simplest form, innovation is a tool that they use to obscure what’s really going on to create more bagholders.

We all know that Greece lied about their finances to join the Eurozone with a little help from Goldman Sachs. Normal people who lie to gain access to a club would get kicked out, but you see while they were in this club they proceeded to pump up French and German banks with their bad debts. I am not letting these banks off the hook, they know what they are doing, but since the Europeans cannot afford a second crisis at this very moment because frankly they never fixed the first one correctly is the reason for all of these shenanigans. The last thing the French and Germans want is a wholesale bailout of Greece. It’s not like this in the USA. In the US, if people start to panic, we have planes flying into the IRS and people shooting off guns, so the government does its best to keep people in a mass confusion. The Europeans starting an EMF is like the US version of TARP but with an American Idol angle to it. They are trying to keep the focus off of what their own governments are doing long enough to screw you.

With the S&P affirmation it’s quite simple what needs to be done. Create a short squeeze not only in Greek debt but in global equities. So that European and Wall Street banks can offload their bad bets unto unsuspecting bagholders. This will only lead to a much worse unraveling later on but as long as Goldman Sachs is saved it’s all good. One thing is certain as the day is long. No matter what nationality, creed, race, or religion policy makers are, their desire to extend and pretend is the one constant. Obama knows that the deficits are unsustainable. He surely knows that current policies are inherently flawed. This is why he has ordered Bernanke and Geithner to make sure it blows up for the next guy.

Decades Of Pain Ahead

The US Economy is in a massive consumer debt deleveraging cycle, anything to the contrary is borderline nonsensical.

Albert Edwards from SocGen has an excellent report out on the flow of funds data.

http://www.federalreserve.gov/releases/z1/Current/z1.pdf

Everyone in the media is stating that this report is further evidence of an impending US Economic recovery. To which MR. Edwards says Bullshit.
I tend to agree.

http://ftalphaville.ft.com/blog/2010/03/16/176396/the-recovery-cannot-be-sustained/

Household Leverage:

"With nominal GDP actually managing to inch up some 0.8% in the year to Q4 2009, the economy managed its first baby step along the long and winding road to normality, with US debt dipping under 350% of GDP. Household leverage has returned to 94% from its peak of 96% in both 2007 and 2008. But consider this: at the peak of the Nasdaq bubble, household leverage was just shy of 70%. There is a very, very long way to go."

Non Financial Debt:

"In the case of the non-financial debt/GDP ratio, it remained at a record 240% high at end-2009. We need to “lose” some 60% of GDP worth of debt to get back to where we were at the peak of the Nasdaq bubble (I use this reference point for no other reason than these levels seem obscenely high relative to history at that time). Either way, investors should accept we have a long hard slog ahead."

I have stated that we are in the early innings of a great balance sheet recession. The debt simply needs to be paid back and paying it back will kill the US Economy for the next 20 years.

Dodd Bill = Useless

Question: Why did the markets rally in the afternoon yesterday and go green at the close?

Answer: Market participants realized that the Dodd Financial Regulation Bill was another useless giveaway to Wall Street. There were rumors that this bill would be Tax Payer friendly, hence the weakness in the markets earlier on, but once the secret handshake society realized that the bill was impotent it was all systems go.

It was the ultimate dog and pony show, Of course the bait and switch was just taking the place of the dog and pony.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aIYoey051ty4&pos=1

"Dodd would let the Federal Reserve force firms to divest holdings if they pose a “grave threat” to the economy, make hedge funds overseeing more than $100 million register with regulators and require central clearing for derivatives, according to a summary released today."

This is so ludicrous that its borderline insulting. Does anyone in their right minds think or believe that Bernanke and his pawns at the Fed will act on this? Does Dodd actually believe the same guy who didn't see the housing bubble or even the recession coming is suddenly going to find the sense to break up the 40 Thieves? This is beyond infuriating. Bernanke is the same guy who wants to put a floor on interest rates by paying interest to the 40 Thieves to take care of the excess reserves problem. Pay interest to Wall Street! I would have to walk the earth backwards to find someone more useless then Uncle Ben. What's worse is there is not anyone who can remotely do this nitwits job at the moment. What decent human being would want this job? This is the state of our regulatory system at the moment. If we can't find a suitable replacement for a useless moron what good is country let alone our financial system?

The systemic risk is that commercial banks borrow from the tax payer at zero interest rates and then speculate with that money. You cant get anymore systemic than that. The Fed is powerless to do anything about it because they are the first link in the problem. The balance sheets for all of the commercial banks are littered with toxic crap that is being marked to fantasy. If these were marked anywhere near the real market, they all would be insolvent. This is not news to anyone yet this is allowed to go on.

Greenspan along with the Fed failed in their duties to regulate and reign in Wall Street excess. This is the truth. Bernanke is just following Greenspans lead.

Giving the Fed more resolution authority is like housing the RICO Task force inside Sparks Steakhouse. It will gutted from the inside. The Fed has had the authority to regulate commercial banks but never did. This is why securitization went out of control. This is why Neg Am, Pay Option, and Option ARM mortgages exploded at WAMU and Wachovia. Now that Wells Fargo and JP own these entities, do you think the Fed has the onions to actually regulate these outfits?

If the Dodd bill gets passed it will do nothing. The Volcker Rule attachment does nothing if the Repo Markets are not reigned in. If Congress is really serious about reform, there would be a clear separation of powers and we would have an independent CFPA. Why do we need a regulation authority anyway? Just get rid of the unofficial TBTF mandate that the 40 Thieves currently enjoy.

The Fed will continue to do nothing because Wall Street wants it that way. The Dodd Bill make TBTF an official policy as it doesn't offer a real solution. They are just making up solutions to problems that don't exist in an attempt to avoid the challenges that Tax Payers currently face. Its a gloss over and total giveaway to Wall Street.

Monday, March 15, 2010

Another Sign Of A Top

Bloomberg US Financial Conditions Index

http://www.bloomberg.com/apps/cbuilder?ticker1=BFCIUS%3AIND


Hitting multi year highs. You don't have to be an idiot to see whats going on. They should rename this index the Bloomberg US Financial ZIRP Bailout Greed Index. Why would it not hit highs?

Some say this is a measure of market strength.
The market is all about Fear and Greed.
I say its a vulgar measure of Wall Street Greed and greed is topping out.

BlackWater? Or BlackRock?

No wonder the markets go up everyday. Why not? With these type of puff pastry pieces you ever wonder if we indeed ever had a serious economic crisis.

http://www.vanityfair.com/business/features/2010/04/fink-201004

Has it come to the point that taxpayer freeloaders like Larry Fink of Blackrock need to be thought of like some sort of epic mythic creatures? Where have all of the Cowboys gone? Where are you Joe DiMaggio? Has it come to this point that people who live off of the citizens generosity are thought of as hero's?

Why do we have to keep up the hero worship of these freeloaders?

Besides the trillions in government guarantee's and backstops of toxic mortgage loans, outfits like Blackrock have benefited from numerous highly questionable conflicts of interest combined with a seriously problematic FED and Treasury refusing to disclose critical information about such conflicts. Blackrock has gotten sweetheart deals on both ends and there is to this day not a proper accounting of them. Is this Blackrock or Blackwater we are talking about? We rake David Patterson over the coals but not Geithner or Bernanke? This is absurd.

The article goes in depth about Blackrock's superior modeling skills with their Aladdin program. Again, did these models help them during a crisis? Did they work when they needed to work? The answer is no. Not to pick on Aladdin, but every quant based model took it on the chin, so I don't want to here about the 200MM calculations a week that this thing does. This model was like every other model out there. These models did a great job of measuring day to day risk, and a horrible one of preparing investors for the sort of price movements that will kill investors using leverage during a downturn. The worst part is that its this same model that is being used to analyze the roughly hundreds of billions of toxic loans that Blackrock has been entrusted with by the government. So what we have is less transparency and more complex models that don't work in a crisis.

Another problem I have with this piece is the entire Merrill fiasco. Merrill owned 40% of Blackrock and was swimming in CDO losses. All of this was news to Larry Fink? How can he not know about the garbage that was on Merrill's book? The answer is that Blackrock had the same garbage and it was don't ask don't tell.

The best part is the entire Stuyvesant Town disaster. This so called CMO Genius actually thought that this was a good deal? At the height of the market? He based his assumptions he would be able to kick out rent regulated tenants and raise rents in a environment where real estate prices were soon likely to fall off a cliff?

Aladdin told him to do the deal, that was it. You don't need hundreds of people running thousands of computers churning out millions of calculations to let you know that you were not going to be able to kick out rent regulated tenants.

The question here remains. Where would Larry Fink and Blackrock be without the FDIC? The Fed's ZIRP? Maiden Lane? Treasury? Tax Payers? Why is there not an audit of the fees being handed over to Blackrock?

Articles like this from clueless journalists leave us scratching our heads. If this guy is truly a genius we don't need idiots. Just more of the same stuff rooted in bailout economics based on delusions.

Beware The Ides Of March

This is the day that Julius Caesar bought the farm

http://en.wikipedia.org/wiki/Ides_of_March

Reading a lot of fluff about how great the markets are and where they are going.
Just Beware.

Friday, March 12, 2010

Centralized Clearing

Fannie Mae which has some $3T in Interest Rate Swap exposure announced that they will start to use centralizes counter parties to clear their swap positions. This is roughly 20% of the total gross IRS market.

http://blogs.reuters.com/financial-regulatory-forum/2010/03/12/fannie-freddie-to-clear-interest-rate-swaps/

This is on the backs of Gary Gensler views that all OTC Derivative be cleared by centralized counter parties on exchanges.

http://tradersutra.blogspot.com/2010/03/gensler-on-cds-and-regulation.html

Further to the point of all that finger pointing coming out of Europe about banning CDS and the such, we are starting to get more transparency in these markets.

Its nice to see the government put their money where their mouth is.

KKR News = Market Top?

Do we really need this after the markets have rallied some 70%?

http://ftalphaville.ft.com/blog/2010/03/12/174131/party-like-its-2007-kkr-finally-files-for-a-nyse-listing/

This could be just the news we need to get a Top in equity prices.

This mornings retail sales numbers rallied equity futures, but what was not noticed was the downward revisions to Jan figures. February is usually a clearance month for most retailers, but it was still a decent figure that has to be somewhat respected. The investor bull/bear figures also are back to Mid-January levels. A lot of people have given up on the short side and are looking for higher equity prices. The banks which are effectively insolvent have rallied and broken out to the upside. It all seems to good to be true.

From reading the 2200 page mammoth train wreck that was Lehman, it is very easy to understand that even today the giant fraud that is the US Economy/Financial System is allowed to go on as business as usual. All of this is not surprising. This is why Lehman was allowed to continue to operate. Its Ali Baba and the 40 Thieves all over again. After the Dot Com Bubble blew up we all looked exhausted saying that this type of institutionalized fraud and willful negligence will not be tolerated and that Wall Street has lost the investment public for a generation. Well today I am reading similar missives on the credit implosion. This behavior is allowed to go on because the enablers that is primarily the US Government/Congress allows it. The auditors betrayed us with regards to Enron, Worldcom, and Adelphia, where were they in regards to Lehman? Ernst and Young should die like Arthur Anderson for their willful neglect to detect fraud. Everyone who knows anything about how Repo Markets work now about Repo 105. This is accounting slight of hand. These guys are whores not only for the companies they contract work for but for Wall Street in general. This just allows upper management at these companies to blame short seller and CDS markets for their own willful negligence. They come on CNBC and Bloomberg and flaunt their Ivy League degrees and pull the wool over everyone's eyes. You would think after the 2000 NASDAQ Meltdown, the media would be up to taking on these charlatans to task, but no! Some of the TV press who relied on access to their subjects, actually rallied to the defense of these CEOs, and blamed the short sellers. The SEC which is completely clueless and don't have the faintest idea of how markets really work come out with policies that actually legislate CEO fraud. The ban on short selling was 100% an SEC WTF moment!

We have seen this play out a million times. It will happen again. Why? Because Obama, Geithner, Bernanke, Shapiro, and Congress want it that way. Its so painfully obvious that Obama doesn't have the onions to take on Wall Street. Most people never got over the NASDAQ Implosion, the ones that were able to, got hammered in this credit crisis. The only ones that are actually trading at the moment are the 40 Thieves.

Wednesday, March 10, 2010

Gensler on CDS and Regulation

Its refreshing to know that at least there is some intelligent people out there.
I have had my issues with CTFC head Gary Gensler, but he is right on the money with this piece about CDS and derivatives regulation. We have far to many people who just don't know much about them writing for major publications who are spreading half truths and outright lies about derivatives.

http://blogs.wsj.com/marketbeat/2010/03/09/cftc-chair-gary-gensler-address-to-markit-otc-derivatives-markets-conference/tab/print/

The truth of the matter is regulating just CDS is not going to cut it. The entire OTC derivatives market needs to be regulated better. This goes back to my point that dealers need to be properly capitalized. It's not a question about putting them on exchanges or making them more standardized. Its all about the counter party risk. The only way to fix this is to make banks/dealers accountable to their reserve levels. The only reason the banks held rotten toxic loans off balance sheet was because they would not have to account for them in the normal way. The banks created SIVS/OBS/SPF for the simple reason that these vehicles allowed them to load up on leverage without damaging their own balance sheets.

Once we get the dealers up to snuff on their capital levels we can look to gradually put these derivatives on exchanges. Once this happens, the liquidity will dry up because traders do not like transparency. I know this for a fact because I used to trade these derivatives personally. I loved the fact that they were complex and not many people knew about them. What you don't know can only help me.

The hope is that other market participants then can come in and take up the slack. This is similar to what happened on the NASDAQ markets after the Manning Rule was put in. Now all of the stocks traded on NASDAQ were already on an exchange, but many orders were simply not shown. This was a clear case of non-transparency that needed to be cleaned up. There needs to be more transparency in the OTC derivatives space. There is enough money to go around because there is so much debt outstanding that needs to be hedged. The big banks just don't want to share the pie. Once we get more participants, the bid/ask levels on CDS will be more indicative of the real credit risk that is out there. Spreads will naturally compress. This will lower the cost of execution and make the market more liquid and more competitive longer term. You don't need to ban CDS or get rid of naked CDS. This is absurd and its not realistic. The CDS market is holding/propping up trillions in synthetic CDO's at the moment. Housing currently is in a precarious situation. It's most probably going to take another vicious hit in the coming months. We don't need a total collapse in the S-CDO market to coincide with it.

The idea of a clearinghouse is also a decent proposal. But it doesn't take away the inherent risky nature of derivatives. Don't hand out blow torches to the arsonists. Make dealers/banks accountable with regards to their abilities to repay claims. What good is a clearinghouse when one party cant settle or pay out? The clearinghouse is then on the hook for the losses. Clearinghouses do a good job of reducing risk but that only comes from a more robust competitive trading environment.

Now...Lets get something straight.

Speculators are vultures. But they don't always cause a market crisis. In fact, speculators rarely cause crisis. Crisis usually start when investors overindulge, over leverage, and over stay their welcome in a given asset class. Speculators like vultures, swoop down to attack weak players. Lehman, Bear, AIG, Wamu, and a host of others were done in by reckless traders and careless risk managers who kept their foot on the peddles when they should have stepped on the brakes. Is it the speculators fault that these companies were trading so high relative to their fundamentals?

There are clearly things wrong with the CDS/Swaps market. Structural changes need to be made. We can fix them without banning them. Banning them only legitimizes the Joseph Casano's & Dick Fuld's of the world. It gives those people who ran their companies into the ground a reason to say it wasn't their fault.

Who Is Doing The Buying?

Excellent piece.



US Equity Markets have rallied some $7T since the lows on March 9, 2008, for this to happen some $500-$800B in net new money has to flow into the market. Where is this money coming from? Its not equity mutual funds as money continues to flow into bond funds from equity. The ETF's are not buying. Pension funds are not buying. Foreigners are not buying. Companies are not buying back stock.

Somebody is buying futures. The logical explanation is that the Fed and Treasury have been doing the buying. Biderman makes a great point that most of the gains in the markets have come after hours and in the overnight markets. How many times have we stepped into the office to find out the markets have already rallied some 1% overnight? This has happened on many occasion's. The Treasury has also engaged the primary dealers in the market with Permanent Open Market Operations(POMO).

http://tradersutra.blogspot.com/2009/09/institutionalized-manipulation.html

http://tradersutra.blogspot.com/2009/10/shams-scams-schemes-one-big-clunker.html

Now you know why the Fed doesn't want to open their books to the public. Its not that the Fed doesn't want to let the public know their business. We know that their balance sheet has exploded to over $2T. They total net buying that is needed to mark up equities is probably in the $50B-$80B range, as that futures are usually levered 10-1. The Fed doesn't ant the public to know that they are the only ones buying. This is extremely dangerous to market participants. The Fed/Treasury has has a shady plan for almost every asset class except equities.

I have always stated that the primary dealers are being subsidized and guaranteed by the government for their futures buying. That is what POMO is for. The view here is that they will keep buying until employment, housing, and spending picks up. When that happens is anyone's guess.

Tuesday, March 9, 2010

Got Gold?

Structured finance and Derivatives Diva Janet Tavakoli has an extremely important and scary piece in the Huff Post.

http://www.huffingtonpost.com/janet-tavakoli/washington-must-ban-us-cr_b_489778.html

As if we needed any more further reasons to buy Gold. I agree with Tavakoli that not all credit derivatives be banned. They shouldn't and it would be a pain in the ass to do so. Where I have a problem with her is that sovereign CDS shouldn't be banned as well. This is because CDS is a real time credit risk monitoring system. This will keep governments in the future from running up debt like Greece did. Greece was not done in by CDS. AIG was not done in buy people buying CDS on AIG. Greece was done in because they spend and ran up huge deficits. The net notional amount of naked CDS against Greece sovereign debt is only some $9B. This is against some $300B in Greek outstanding debt. The simple reason we are talking about sovereign debt problems are because of the CDS market. The CDS market has put a flashlight and is holding accountable these government officials. The reason that many governmental officials want them banned is because they don't want to take any responsibility for their ludicrous fiscal/monetary actions. If there was no sovereign CDS market, Greece would be up to $500B in debt at the moment. Japan would likely go to 400% debt to GDP with out oversight and accountability. I have said that CDS results are 100% as designed. They work perfectly as long as the counter parties can pay. My thing is they should be regulated and traded on an exchange so that we know who the nitwits are. They should not be listed as swaps. These are insurance contracts pure and simple. There is nothing wrong with naked CDS as long as the counter parties and sellers have the funds to pay up when hit with claims.

The whole simple idea of buying CDS against US Treasury debt default is a mute point. If the USA ever defaults, settling the trades are the least of everyone's worries.

Tavokoli would have been better suited by just saying that CDS will never be banned unless the entire credit system goes into a death spiral. In this case we can just start all over, until then just by GOLD!

Principal Mortgage Writedowns Not Happening.....

...unless the economy goes into another downward spiral. You see only when put into a corner will the powers that be do anything.

http://www.huffingtonpost.com/2010/03/08/treasury-getting-more-com_n_491012.html

The Treasury is on Fantasy Island drinking it up with Tattoo. They still think the economy is recovering. This is the message they are trying to sell the country. That housing is getting better. That prices will gradually rise. Blah Blah Blah. Since a program of principal write downs would be incompatible with this distorted message and because the only way to stop foreclosures is to force principal write downs, it’s probably not going to happen. Why? Because the bankers run the show. Treasury just keeps the lunch warm for them when they come down to DC.

The only way to get the economy back to a healthy state is to get housing stabilized the right way. The right way is the mortgage cramdown. Everything that has been done so far is to allow the banks to delay their day of reckoning. From accounting fraud, like relaxing Mark-To-Market accounting rules to taxpayer bailouts, the singular theme is extend and pretend. How do we delay the inevitable bank balance sheet implosion? The reason that Treasury doesn't support principal write downs is that they are scared shit less of the ramifications to bank balance sheets. Its a classic not on my watch strategy. The Obama Government is artificially propping up housing prices by basically being the only viable lender left. With the hopes that an impending economic recovery will bolster housing prices, so that we can all go back to enjoying blowing bubbles. If the government for one instance ever even considered this idea which is the only realistic idea that is left, they are basically stating what ever we have done so far has failed. Mortgage cramdown would just ratify the idea that housing is not coming back and prices are still too high. Government wants to white wash and bamboozle the electorate into drinking the cool aid that the economy, employment, and indeed housing has bottomed and soon will recover.

When the inevitable housing foreclosure waves hit the market the economy will follow. If and only when the race to the bottom of the barrel is completed, when the US Financial System is in its final death spiral will we see any type of real program to fix what truly ails America. It might be too late by then.

Two People Who Need To Get Fired Now!

I never demand people get fired, but both Tim Geithner and Larry Summers need to be fired immediately by Obama.

Geithner has the absolute gall to say the following in the New Yorker.

"We Saved the Economy, But We Kind of Lost the Public Doing It"

I have two problems with this. Firstly they saved "Fat Cat" Bakers on Wall Street not the general economy. The real economy is still getting raped by the financial economy. Secondly, he is still leaving in Fantasy Island by saying "Kind of Lost." They have completely lost the center of the country with their bailout shenanigans. Calling this differently is like calling the Pacific Ocean - Kind of Deep.

http://www.newyorker.com/reporting/2010/03/15/100315fa_fact_cassidy

Simon Johnson has written a more clear response:

http://baselinescenario.com/2010/03/08/they-saved-the-big-banks-but-kind-of-lost-the-economy-doing-it/

My take is even more straightforward. The economy can only win if we lose Geithner and Summers. These two nitwits have completely betrayed the public in doing the bidding for Wall Street. These two economic charlatans are the worst thing that can ever happen to our country. When will Obama face this truth? What reality is he living in? The President needs to start focusing on Main Street and the real economy, unfortunately he listens to much to Geithner and Summers, who incredibly want to use TARP money to continue to bailout Wall Street and to pay down the deficit. This is completely uncalled for and absurd. Obama is failing America by continuing to listen to these two magpies. Heckle and Jeckle are leading him to ruin.

NY Governor David Patterson is in hot water over $6K in Yankee tickets and about $20K in conflicted horse racing fees, but Tim Geithner and his billions in tax payer giveaways still has a job? What planet does this make sense? The Obama Administration is much more concerned about good PR then actually fixing the problems. That is why we still keep reading puff pieces about Geithner and Summers.

We need only to sacrifice two more jobs to save our Union.

One Year Ago...... Diablo & Serendipity!

666 - The Number Of The Beast

It was one year ago this week that the markets finally stopped going down. The SPX low point was 666.79, which was achieved on Friday March 6Th. General Electric also closed at 6.66 on March 5Th and stopped going down at that moment as well.

The SPX made this devilish bottom which ended the 57.7% down draft. The SPX had hit all time highs of 1576.09 on October 11, 2007. Which was incredible considering that the credit crisis was already in the infant stages. The Dow Jones also peaked on that day at 14198.10. The NASDAQ peaked a few weeks later on Halloween at 2861.51

So what we have are these ugly losses from October 2007 to March 2009.

SP 500 - Down 57.8%
DJ 30 - Down 54.4%
NASDAQ - Down 55.8%

But the markets have rallied smartly from March 2009 until today.

SP 500 - Up 70.8%
DJ 30 - Up 63.3%
NASDAQ - Up 83.8%

We shouldn't dilute ourselves. We are in a secular bear market. This bear market started in 2000 when the dot come bubble popped. We are just in a cyclical bull market within a secular bear market. I am hearing that many believe we are in a bull cycle like the ones from 1982-2000 or 1946-1966. This is false. This rally that the market has been enjoying is directly due to the kindness of the Fed. Of course it was the kindness of the Fed that got us in this mess in the first place, but the ZIRP and QE policies have re-liquefied old bubbles. If the Fed keeps the gravy going the markets should still be in rally mode, absence of any catastrophic events in the economy. Housing is still a mess and the banks are still in fantasy land with regards to their bad loans. I am looking for the markets to top out between 10750-11000. I am then looking for a 20% correction that extends through the summer.

BOE, Deflation and Ebay Bids

I just purchased the $100B Dollar Zimbabwe Note.

http://cgi.ebay.com/2008-Zimbabwe-One-Hundred-Billion-Dollar-Note_W0QQitemZ270490630121QQcmdZViewItemQQptZPaper_Money?hash=item3efa7f77e9

The way I look at it, for the price of about $15 Bucks I can be a very rich man in Zimbabwe. I might even put up a $100 USD Bill for $90 bucks on Ebay as a joke. I wonder if anyone would bid? In all seriousness, Zimbabwe is a joke country because they foolishly thought they can just print up money to soak up all of their debts. The world was on to their game and quickly murdered their currency. This of course is the same thing we are doing in the US with ZIRP and QE. We just did it by wearing better suits, but unlike Zimbabwe we have a real economy and the general trust of our creditors. Well for the time being anyway, as soon as this changes we will also see USD on Ebay at drastic discounts. Inflation is not a big worry at the moment as housing is still too expensive and their is no credit expansion anywhere. Deflation is still the big worry and that will be the next big move for prices in general.

On the subject of deflation the Times Online has this very interesting piece.

http://www.timesonline.co.uk/tol/money/article7052019.ece

When people are worried about inflation they demand larger and larger bills to compensate lost purchasing power. When citizens start to demand smaller denominations its an indication of deflationary forces at work.

Monday, March 8, 2010

Shameless

I thought free market capitalism was dead? Evidently the right leaning Chicago School Of Economics apologists WSJ Editorial Board doesn't think so.

http://online.wsj.com/article/SB10001424052748703411304575093572032665414.html?mod=WSJ_hps_sections_opinion

Its strange but maybe intellectually provocative to cite Milton Friedman's doctrines as an argument that Chile was much better off then Haiti. But where does building codes fit into the WSJ's argument? Milton Friedman actually hated building inspectors and codes, he thought of them as a waste of government finances.

The Chilean Earthquake disaster is just a circus side show for the Opinion Page of the WSJ.

Lets not forget the cozy relationship that Friedman had with Pinochet. Its the same Pinochet that was directly responsible for murdering thousands of people during his 17 year tenure. The Friedman acolytes have conveniently forgiven me for his complicity to this dark period.

What needs to be addressed here is the question of how much credit really is due Chicago School Economics for Chile's current relative prosperity? I say not much. Mining accounts for some 20% of Chile's GDP, and its main business is copper which is dominated by one state owned company. So, lets take a look. Latin America's poster child for free market capitalism is a state run organization of its most prized commodity?

Where free markets have led us is here. The US currently has gone back to the 1920's in terms of income equality.

http://tradersutra.blogspot.com/2010/02/inequality-at-1920-levels.html

Chile also has one of the worst income equality distributions in the world.

http://countrystudies.us/chile/80.htm

They are trying to fix this by? You guessed it raising taxes and social spending. The true lesson here is that when 99% of the wealth is concentrated in the upper 1% of society disenfranchised citizens tend to get riled up. Sprinkle in a natural disaster and what do you get?

I wonder why the Opinion section of the WSJ doesn't talk about Brazil? Brazil's current economic boom began when the left leaning Lulu moved in and raised taxes in 2002. This astonishingly led to a declining budget deficit and faster economic growth, while pulling in foreign investment and increased government spending.

I can't of course forget the commodities boom that ignited most of South America, but the price of copper is directly tied to free market capitalism lest I forget.

Its beyond any sense to say that after 15 years of Friedman style economics, Chile has been helped better to deal with their tragedy. These are the same guys (WSJ) who are so quick to condemn Obama after 13 months.