Friday, September 25, 2009

Just A Theory

The markets were down to end the week. RIMM hurt the NASDAQ Complex. Dell helped with their brainless buy of Perot Systems. Crude tumbled because everyone including your mother is storing it in their backyards. Durable goods orders also disappointed this morning. Housing...Well Housing still sucks.

Some good. Mostly bad. So why did the markets not trade down any further? Quite simply stated, many are still not convinced that the rally is for real. Many are shorting into this rally. Portfolio insurance is quite cheap as volatility has sunk to lows. So whats happening is all of the major Wall Street Dealers(JP, CSFB, GS, MS, BAC, C) are just pairing off trader/investor short bets, and then ripping stocks higher. Too many people are predicting the markets to collapse, thus the real players are contra moving the market.

The markets look great technically, overextended yes, but the trend is still up. I don't see the market collapsing unless we get even more bad macro data. We have September non farm payroll data next Friday which will give us a clue of what the next direction in the markets will be.

Currently there is some 450 stocks in the SPX trading above its 200 DMA. This is a ludicrously strong figure. The upward parabolic move in both this figure and the market in general is beyond belief.

My personal feeling is that we will see a significant correction before the end of the year. This correction will be in the 15-20% area. But that correction wont happen until we move nicely above 10K on the DJIA, and 1125-1175 on the SPX.

I think the market does nothing until next Friday, when we probably get a decent payroll print. After this, the market continues to go higher and eventually fills the September 2008 gap up to the high 1125-1175 area, but that is going to be on weakening overall strength and breadth because the market has shot up so insanely already and like I said some 450 of 500 SPX names are already above their 200 DMA. By this time the overall rally will be a breathtaking 75% off the lows and almost everyone will be sure and convinced that this is a new bull market. It will be like today, but with the SPX some 100-125 points higher. This rally precipitated by next Fridays payroll data announcement will be the public/retail investor coming back on board as the message that the economic recovery is here gets filtered into everyone's psyche. All of the professionals are already fully invested at the moment. As the market accelerates upwards the public/retail investor gets in just in time for the market to begin moving lower again. You can bet that Goldman Sachs and the forty thieves will be parking themselves on the offer side of the market, printing stocks and banking profits all the way higher.

Bag holders of the world will be reunited.

Just a theory of mine.

Housing Turning Down Once Again.

A few days ago, there was a negative 2.7% print for existing home sales for August. This caused stock index futures to drop some 12-13 points immediately.

The National Association of Realtors (NAR) said existing home sales fell 2.7% to an annual rate of 5.10 million units, from 5.24 million units in July. That compared to market expectations for a 5.35 million unit pace.

The Chief Housing Whore for the NAR, Lawrence Yun stated it was just temporary or a minor retreat. We will see. Is it not funny that the biggest lobbyists for extension of first time home buyer tax credits is the NAR? Is it not funny that that they are always in the ear of the Fed and its purchases of MBS in the open market?

The central bank has purchased $694 Billion of mortgage backed securities since January and plans to spend $556 Billion more by April 2010 to keep interest rates down. The debt buying is the biggest program in the Fed’s arsenal. These purchases were scheduled to stop at the end of December, but the FOMC decided on September 23 to continue the program through the first quarter of next year and slow the pace of buying to "promote a smooth transition in markets." They are basically telling you this program is ending. The training wheels are slowly coming off.

This debt buying spree pushed the average 30 year mortgage interest rate this week to 5.04 percent, its lowest since May. The debt is guaranteed by Freddie Mac, Fannie Mae, and Ginnie Mae. Plus some 80% of all new mortgages are being guaranteed by the FHA. This figure was only 20% at the height of the boom years. All in all Government is the Housing Market. This can't continue, and thus housing is headed for another serious drop.

On top of yesterdays housing news, today's new home sales were also a disappointment. The
Commerce Department said sales rose 0.7% to a 429,000 annual pace, this was below market expectations of 440,000 units. The July figure was also revised downwards.

Other sober data points:

Compared to August last year, total new homes sales fell 3.4%
The median home sales price in August fell percent 11.7% from a year earlier to $195,200, the lowest since October 2003. In July, the median home price was $215,600.

Although inventory was down, it doesn't take into account the massive shadow inventory that is on banks balance sheets nor does it take into account current foreclosure activity. Many banks are not even foreclosing on home owners because they cant keep up with the pace in many areas. Some are still allowed to stay in their homes up to 12 months of not making one payment.

The markets are clearly at inflection point.
The dreaded month of October is upon us.

$11.6 Trillion

The cost of the Financial Bailout or the Great Heist has been pegged at or around $11.6 Trillion. Please give or take a hundred billion here or there for accounting quirks and shenanigans.

To Put this into a greater perspective, lets take a look at other US expenditures adjusted for inflation:

The Marshall Plan ($115.3B)
Louisiana Purchase ($217B)
The Race to the Moon ($237B)
S&L Crisis ($256B)
Korean War ($454B)
FDR's New Deal ($500B)
The disastrous Invasion of Iraq ($597B)
Vietnam War $698B)
Total outlay to NASA ($851.2B)
WWII ($3.6T)

Add em all up you get to about $7.5Trillion or so. Roughly more then half of our current GDP.

Now that $11.6T figure is not all lost, most of it is loans backed by collateral to banks and investment firms.

It would be nice if the Fed actually had some accountability and let us know what type of collateral is being used and to whom the money is specifically going to.

At the moment, I have suspicions that a large amount of the collateral is garbage and will never be worth more than 30 to 40 cents on the dollar. The Fed counters this by stating that the quality is good and is backed by secured assets. To this I say: Prove it! Open your books!

In the end the Fed will be lucky to get 1/2 of the total outlay back.

Thursday, September 24, 2009

Equity Fund Outflows Continue.

The ICI released its most recent fund flow data.

Fund flows have been positive only because of flows into taxable and mini bond funds.
Equities are totally a different story. $2B flowed out of domestic equities last week. There has not been one positive inflow into domestic stock equity since the week of August 12. So far this past month, some $7B has flowed out of equity funds.

Shadow Inventory Rising

Existing Home Sales this morning hit the market hard at 10am.
Sales were down 2.7% in August.

Does this quote surprise you?

"I’m not alarmed by the softening in sales".
"The trend is still very strongly up."
-Celia Chen, A Housing Economist at Moody’s

Why would it? Coming from the guys who used to rate these crap Mortgages AAA.

"As of July, mortgage companies hadn’t begun the foreclosure process on 1.2 million loans that were at least 90 days past due, according to estimates prepared for The Wall Street Journal by LPS Applied Analytics, which collects and analyzes mortgage data. An additional 1.5 million seriously delinquent loans were somewhere in the foreclosure process, though the lender hadn’t yet acquired the property."

"Moreover, there were 217,000 loans in July where the borrower hadn’t made a payment in at least a year but the lender hadn’t begun the foreclosure process. In other words, 17% of home mortgages that are at least 12 months overdue aren’t in foreclosure, up from 8% a year earlier.”

I have written pretty extensively about the the shadow inventory in the housing market.

Monday, September 21, 2009

BOFA - Praying The Recession Is Over

Ken Lewis was spotted doing a recession rain dance in Central Park over the weekend. He must have read this article first.

I will stand by the statement that if the economy tanks from here, both BOFA and Wells will either be nationalized or file for bankruptcy.

Its mathematically impossible for these two banks to survive another serious market/credit correction.

Today's Market Candy

More POMO today.

Announced at 10:15am.
Funny the market started to rally right around that time.

Its institutionalized manipulation at its worst.

Liquidity is the driving force behind all of the gains since March.

Volcker Is All Talk

I am still astonished that many believe what Paul Volcker said last week will make any headway on Wall Street.

Let me be on the record that I believe 100% in what Mr. Volcker has to say. Its just all pipe dreams as I have previously stated. Its just not easily implemented.

Wall Street and the financials are just so big and complex that any type of deleveraging is not going to happen. It will be the forced deleveraging that will bring down the banks.

We have more and more people who are applauding Mr. Volcker, but its all talk at the moment. Financial reform is not happening anytime soon.

We will need another epic collapse to get the right reforms, but will it matter in the end? All will already be lost.

Sunday, September 20, 2009

Wells Fargo Just Keeps The Shenanigans Going

This is a great article on the complete fraud that Wells Fargo Bank currently is.

If Wells Fargo did not consider CDS counter party risk when doing the due diligence when buying Wachovia, its out right fraud.

"One senior member of Wells Fargo’s commercial loan group who deals directly with the quandary, who spoke on the condition of anonymity, said, “One third of this commercial portfolio we took on from Wachovia is impaired and needs to be completely rewritten. I’ve just hired five more guys and we can’t keep up with the volume of defaults. Southeast Florida and Tampa are serious trouble spots.”

Absurdly Alarming

"Wachovia’s third quarter 2008 filings, which reflect their assets three days before Wells Fargo agreed to the acquisition, shows the bank held a whopping $230 billion in its commercial loan portfolio. Current figures show Wells’ 90-day defaults on its commercial portfolio are rapidly growing. According to data from which tracks financial numbers that Wells files with its regulators, the bank’s Construction and Development portfolio, with $38.2 billion in loans, is defaulting at a level eight times greater than the rest of the nation’s banks, as of June 30th."

"Wachovia commercial loan officers who spoke to BankImplode say that the bank specialized in underwriting short-term loans up to five years during the credit boom of 2005-2007. The standard terms for such loans included interest-only payments on a floating rate with a huge balloon payment in the final year of the loan. If these loans cannot be refinanced, more waves of defaults are inevitable."

5 Years from 2005-2007 is 2010-2012. This bank is in serious trouble. If the economy tanks from here Wells will either be nationalized or file for bankrutpcy.

Furthermore, instead of outright selling these loans, they have modified the loan interest rate instead of the maturity, because if they do that, they would have to take impairment charges that hurts earnings, as well as bond ratings agencies would not downgrade tranches because of such impairments.

You just cant make this stuff up.

Clusterstock also points out that Wells Fargo is making the case that they are really AIG in disguise.

Well Fargo continues to lie about their derivative exposure to CDS counter party risk. Wells bought Wachovia, which effectively wrote CDS insurance on its own commercial real estate securitizations that they sold to investors. They continue to pull the rug over investors eyes with regards to off balance sheet risks and SIVS.

This is directly from their annual report:

In certain loan sales or securitizations, we provide recourse to the buyer whereby we are required to repurchase loans at par value plus accrued interest on the occurrence of certain credit-related events within a certain period of time. The maximum risk of loss represents the outstanding principal balance of the loans sold or securitized that are subject to recourse provisions, but the likelihood of the repurchase of the entire balance is remote and amounts paid can be recovered in whole or in part from the sale of collateral. In 2008 and in 2007, we did not repurchase a significant amount of loans associated with these agreements

Its AIG all over again, either Wells is oblivious to collateral call risk or they are just not disclosing it? What is it?

I am officially short Well Fargo.

I have posted many times the fraud that this bank is. Just do a search below for Wells Fargo.

Yen Carry Trade Over - USD Heavily Shorted

All is good.
Equities rallying furiously.
Recession is over.

We are all OK correct?
Not Quite.

Has anybody noticed that the Yen carry trade is over? A trade that stated in late 2003 and ended in mid 2007. This was a highly profitable trade that appreciated over 30% in capital and could have earned upwards of 7% a year on the interest rate spread alone. At the trade’s height from mid-2005 until the summer of 2007 the trajectory of yen crosses rose with barely a correction. What am I saying? These type of trades are long term strategic trades that are difficult to unwind and once they start to unwind are extremely painful on all market participants.

The USD is now the primary funding currency for almost all financial derivatives globally,because of its low financing rate. If the USD gets stronger, Houston - We have a problem!

The reason we have a USD carry trade is courtesy of Ben Bernanke and his printing press. Carry trades are, after all, bets that the funding currency will weaken further or stay down for an extended period of time. It’s also a wager that a central bank is trapped into keeping borrowing costs low indefinitely.

The reason global markets have a problem if (Big If) the USD appreciates from here is simply. Just think of the turbulence that would be unleashed by a sudden 5%-10% rise of USD across the board? Most traders have shorted the USD, then borrowed those shorted USD, and then used those shorted USD funds to finance other trades in other currencies. Interest rate swaps, over-night swaps, and many cross currency transactions that were leveraged using borrowed dollars can get crushed when the funding currency rate appreciates in value. With untold numbers of traders around the globe on the losing side of such a trade, it can make AIG and Lehman feel like a casual Sunday walk in the park. This is also a reason why global equities have been so strong. The risk trade (Long USD) has been unwinding, and unwinding for a reason. If global equities fall out of bed, many participants will head for safety (USD), totally blowing out the USD carry trade. This carry trade is financing all type of transactions around the globe, from gold bars, WTI Crude, and foreign government bonds. When global equities fall, there is going to be major carnage from commodities to debt instruments. Many foreigners have shorted the USD to buy US Equities like Apple, GE, GS, and Google just to name a few. I am trying to find out what the exact number of shorted USD is at the moment, but that type of data is just not available. This is why when a currency turns suddenly, the magnitude of the unwinding is often a surprise, and a surprise to the downside.

When the Yen was the primary source for world wide funding, it made the BOJ job of raising rates next to impossible. This is similar to what is happening in our country. Its not that the Fed wants rates at near zero. It has virtually no choice but to keep at near zero. In fact the Taylor rule is stating the a -7% is needed just to get inflation back. Japan has their lost decade in the 90's. We will have ours starting in 2010. Low rates never spurred Japans economy, why would it spur ours? Its just not going to happen with the massive credit contraction the US is going through.

Japan never made their banks accountable for all of the bad lending that had taken place, they just kept kicked the can down the road, twenty years later, they are still kicking. Banks were kept alive with government aid and falling companies were supported by bank loans and subsidies. Economic growth ground to a halt in Japan. Today its 100% Japan redux in the USA.

From 1995 onward the main Japanese interest rate set by the BOJ was never higher than 0.5%. But the extremely low rates did not spur economic growth. The zero rate policy which the bank began in 2001 to counter price deflation and foster economic activity accomplished neither goal. The only reason the export dominated Japanese economy got somewhat out of their doldrums was the growth of China/India. When those economies corrected, Japan was again trapped. In effect, fifteen years of massive government spending and little economic reform has only succeeded in raising the Japanese debt level to the highest in the industrial world without building a solid domestic base of consumption.

Obviously the US Economy is totally different then Japan's. We are an import economy. We don't have the yet demographic challenges that Japan has. But like Japan it all consumption based. Like Japan, US is highly leveraged to real estate. The Federal Reserve response to the sub prime housing problem began two years ago in September 2007 when it cut rates 0.5%. Since then the Fed has taken US rates effectively to zero and supplied enormous amounts of liquidity to the economy, initially to stave off economic collapse and subsequently to secure economic growth, but so far other then total out right government nationalization of all that is holy, how are we going to get normal organic growth back into the economy?

So far many are correct in shorting the USD. Deficits are widening faster than US officials can measure. Debt/Treasury issuance plans are increasing. The US economy still has headwinds. Most importantly the Federal Reserve is still shoveling liquidity into markets via Quantitative Easing and short rates will stay low for at least throughout 2010. The dollar will stay weak for the foreseeable future but too many people are in the same trade, and time to time there will be turbulence. The consequences of the weak dollar/ultra low rate policy is just setting us up for a much larger meltdown.

Friday, September 18, 2009

Furthermore On Recent Rally....

Markets are rallying at the moment because that's the path of least resistance. The market moves in the direction with the least trouble. That direction is up.

But its all smoke and mirrors from what I am hearing and reading, but yes, the path of least resistance.

But who actually is buying? There is no volume anywhere. When the markets sell off, the volume picks up, when it rallies, the volume simply is not there.

So it is the private clients or public investors buying? NO! Stock funds actually had net outflows of $1.33 billion last week, while bond funds enjoyed an $8.2 billion net inflow.

Corporate Insiders Buying? NO!

Corporate Buybacks? NO! SP 500 companies bought back a mere $24.4B on stock repurchases in 2Q, down 72% from a year ago and the lowest in recorded history.

Who is left?

Its all program trading and HFT systems who are doing some 70% of all volume. The rest is all short covering and portfolio managers painting the tape to make up for last years horrendous losses.

Everything tells me short, short, short. But the bears, reality, rational economic thought, and sensibility are fighting the US Government and its army of liquidity. Guess who wins this game? Right now the sentiment is bullish, not aggressively bullish, but still strong, mind you that sentiment was very strong in May 2008, where everyone was predicting a move to new highs. But then again at this moment sentiment has the US Government on its side. Being overbought is simply not good enough for me to start leaning on stocks on the short side.

What I think needs to happen is the following. We continue to print money. Watch Crude and Gold parabolically go higher. From this the USD gets totally crushed. People freak out and start to sell all US assets including equities. This is what will ultimately bring back rational thought back into the markets.

All of this is all conjecture as long as government is unchallenged

Short & Negative Strategies Blown Out Of Market

Boy...The Mr. Market is strong. Strong Like Bull!

Every day to the really and clearly informed, the macro gets worse, but stock index futures are higher. Now you may say the economy is getting better, housing is getting better, retail sales are getting better, and so on. There is always truth in any vast conspiracy to keep people uninformed and stupid. Yes, there is evidence that proves some of these illusions, but the fact remains, without government support, the economy, housing, retail sales, and the consumer would be in the morgue, with its toe already tagged. The only evidence needed to support this claim I have is this:

The only part of the economy where the government cant interfere is employment. They cant make employers stop laying off workers. They cant make them hire workers. They cant themselves find jobs for all of the unemployed. So its not surprising to anyone that this is the only thing that is not getting better. Employment is the biggest piece in the economy, you cant get GDP going again in the positive direction without real positive trends in employment. We have yet to see a sliver of this as of yet.

Bernanke says the recession is over. To this I say - Who Cares!

Bernanke and the Federal Reserve have a mandate to promote and foster maximum sustainable employment and price stability. There is no such mandate for housing, retail sales, construction spending, and the like. Where is Employment headed? This is what I wanted to hear. He had nothing good to say about jobs. If you can say anything positive about whats important - shut up! Any talk of recession ending is completely useless if a subsequent job recovery is not apparent.

The Three Headed Bernanke-Geithner-Obama Hydra have succeeded in getting sentiment turned around big time. That and the endless printing of liquidity is whats driving equities higher.

Their theory that sentiment leads the economy is so ass backwards that its numbing even to discuss. But they have succeeded here in the short term.

What I am seeing at the moment is many many market participants, traders, and investors have just become resolute to the fact that we are just grinding higher for no reason at all. Let me get in on it. I keep reading many well though out, well researched, and well written bearish articles about the market. Let me say most of what I read is negative, not because I am negative, its just the only stuff out there. Except for CNBC of course, which thinks we are in a new multi-generational bull market. The market is theory/opinion agnostic. It will always zig when everyone is zagging, and this is the fuel that is pushing prices higher. The market doesn't want to here anything negative, after all its completely liquidity driven.

Most serious traders I speak to, tell me the following:

"I know what you are saying, but there is too much liquidity out there. Its not going in the bank at 0% interest. It has to go somewhere, and equities is that place."

I agree, even though I am negative on 90% of the economy, I believe that equities are in the 7Th inning of its current rally. Its getting late, but a push to 10200 on the DOW or 1120 on the SPX is almost a given from what I see is going on. What I see is indiscriminate destruction of all negative strategies. Short players have been forced to cover their bets across the board in all asset classes. Take a look at Natural Gas, there is no reason for Nat Gas to rise some 60% in 2 weeks! There is simply no fundamental reason other then short covering. Natural Gas for very good reasons was a heavily shorted market coming into Labor Day, with massive positive sentiment, you see the result.

Wall Street has gotten away with the biggest scam in the history of mankind. Market participants have figured this out and the only way for them to participate as well is to take prices higher. Join in on the action. The ultimate casino mentality is back.

Most participants have become resolute to the fact that the Banks and Wall Street totally looted America and that government will continue to print money and pump liquidity so that more taxpayer money can be used to socialize losses. In this current environment, investors have stopped thinking and acting rationally and are just hitting the buy bottom, totally oblivious to the facts.

We may be in the 7Th inning, 8Th inning, 9Th inning, or maybe in extra innings, but it looks to me that investors have their rally caps on sideways at the moment.

Its the ultimate heard mentality. These types of markets always end badly, but when is the question to ask, not if.

Thursday, September 17, 2009

Dollar Slide Is Just Embarrassing...

....But that's all it is. Embarrassing.

The worlds reserve currency is so easy to short because of the carry trade.

The en vogue trade right now in currency circles is the US Dollar Carry Trade. Simply stated, investors can borrow dollars and purchase assets in other countries and earn a much higher yield. They make the difference in yields. Currently the 3 Month USD LIBOR is 0.299%. The 3 Month YEN Libor is at .366%. Easy trade that will continue unless either short rates rise or market collapses. Either way, dollar bulls need massive pain to be inflicted for them to be right.

There is no immediate Geo-Political problem with a continued dollar slide, after all we have 9600 nuclear weapons in the event some joker wants to change the landscape.

Now, I believe there is massive long term damage to our economy and spending power if we continue to print money, but that is the only way these cats know how to keep a corrupt rotten to the core system up and running.

Volcker Doesnt Get The Point.

Paul Volcker is one smart good man...but he just doesn't understand the extent of whats happened on Wall Street and the financial system since he left the helm of the Fed. The credit system is so far beyond complex that not even Nobel Laurette's can figure it out. Wall Street has created the time bomb that is called derivative finance and that has morphed into into the perfect mouse trap. For the rest of time and well into infinity we are going to have systemic risk.

Mr. Volcker is so idealistic that just reading these two articles makes me feel like I am 15 years old. To that I say thank you sir! But the 40 year old that is me says its not happening.

How is Wall Street going to take on less risk? They have to take more risk, more leverage, and create fancier more complex derivative products.

How else are they going to finance and manage all of their off balance sheet exposure?
How are they going to keep the shadow banking system alive?
What happens to all of those Interest Rate Swaps?

All of these things need massive leverage and risk just to keep things in line. This is the system they created. A system that was created on Greenspan's/Bernanke's watch. A system that had to be created because America is a $14.4 Trillion credit driven economy. An economy that is so leveraged to housing that government suckered everyone into thinking that its the American Dream.

Banks cant go back to just lending. What is this? Lets all go back to what things were in 1950? 1960? 1970? Ridiculous! You allowed the commercial/deposit banks to merge with investment banks and investment firms. Deal with the consequences. You cant legislate greed just like you cant legislate morality. You can try to regulate it, but good luck in the current lobbying environment.

This is where the bulk of regulation is needed. In Washington DC!
The lobbyists have got to be neutered. They need to be shown the door. They cant stick their heads in every time we talk about serious financial reform. Fix the lobbyists problem first then things will fall in line slowly.

Rick Santelli Lets Loose

I understand what Rick Santelli is saying and conveying to the masses, but............

.....he clearly is not living in reality. We live in a capitalist system where for hundreds of years the wealthy/affluent have looted the rest of society for their benefit. Recent history is no different. This is how American/Western style capitalism is all about. This is how the game is played. How it really works.

You don't like it? Move somewhere else.

They are not going to allow the wealthy in this country to go down the drain. They will allow everything else but the big business and rich dudes. The bailout was all about getting the wealthy back in gear. The wealth gap had corrected, thus a new bubble had to be formed to bridge that gap.

Is it that hard for anyone to understand?

Higher Crude = Perpetual Recessions

A fine article:

"The US has experienced six recessions since 1972. At least five of these were associated with oil prices. In every case, when oil consumption in the US reached 4% percent of GDP, the U.S. went into recession. Right now, 4% of GDP is US$80 a barrel oil. So my current view is that if the oil price exceeds US$80, then expect the U.S. to fall back into recession."

Wednesday, September 16, 2009

Uncle Sam Is The Housing Market

If it wasn't for Government, housing would be completely destroyed.

I have posted before about FHA:

When does it become apparent that housing was a Wall Street created problem and government is just delaying the inevitable crash in Wall Street?

Bernanke Speaks - Who Cares!

Do we need Uncle Ben to make us feel better about the economy?

Can we really take anything this guy says seriously anymore?
Why should we even care what his recession forecasts are? Based on his track record with bubbles and his rigid acumen regarding the economy, his views on the economic landscape are irrelevant.

Sub prime is not a problem. Sub prime is contained. Housing won't spill over to the rest of the economy. Bear Stearns was a one time event. Wall Street can do a better job of regulations then we can.

I cant get on Ben too much, the rest of his meat head profession got it wrong as well, and he has to somehow justify his salary, but the strange thing is economics as a profession failed to forecast what was actually happening, so why would we care to waste time on what he says about the future?

Also this piece from Bloomberg:

This goes back to my issue of an inevitable death spiral in the lending/banking sector. On one hand you say lend, but on the other you are telling the banks to raise capital requirements. The banks are not lending because they lied about the toxic debt on their books. Once capital was injected into the banking sector, the banks used the money not to lend but to rebuilt there bad balance sheets. Now you are telling them to raise even more the requirements. This is not good.

I also have been reading and listening to Bernanke on consumer spending. He seems to be under the assumption that government doesn't exist.

How can anybody say that the consumer is back? NO MORON! The government subsidy machine is back and here to stay. We now have a Corporate Welfare State in America.

I am so glad to have someone like Ben Bernanke at the helm.

Full Speed Captain Smith.

Just shut up and continue to print.

More Fuel For The Fire

Any reason why the market keeps ramping up day after day?
Where is the liquidity coming from? Because the volume is just not there to support it.

I posted earlier about the FRBNY's use of institutionalized manipulation.

Yesterdays treat was $2Billion. Today's treat is $1.8Billion.

Where do you think this money is going?

Remember markets go up only because of liquidity. Its not earnings, sentiment, PE Ratios, and analyst upgrades, those are all derivatives of liquidity.

Bank Credit & M3 Money Supply Keeps Contracting

Great write up in the UK Telegraph.

We are headed for another major recession sometime next year. Bank credit keeps falling at a stunning 9% annual print. M3 is falling at 5%. Where is the beef?

I posted earlier that using the Taylor Rule as measuring stick, the Fed rate would have to go to -7% FFR to get asset prices reflated. Why not? Everything else is Ass Backwards. Why not pay people to borrow. Wall Street would love that as well.

The deflation in both credit, lending, and the continued destruction in wages is lethal to the economy and country.

Almost all of the money that was created/printed and given to the banks never made it into the hands of the average person on the street. It was all concentrated into the hands of the ultra/super rich. They have bled the system dry, zapped every last drop of blood from the stone, that there simply is not enough money out there to service the debt that has been accumulated.

It all sets up for serious revolution.

The current government plan of raising capital levels for institutions is having terrible repercussions to the lending environment. The money is being printed, given to the banks, who use it to prop up their finances. Its not going into the economy. Why? Because the government just gave the money to the banks with no checks and no questions asked. There should have been some sort of forced mandate for the banks to lend.

"The current drive to make banks less leveraged and safer is having the perverse consequence of destroying money balances."

Anybody who thinks that the economy is looking better is just kidding themselves. Anybody who thinks the steps taken so far have brought us back from the brink are delusional.

We created a credit bonfire that cant be sustained forever, when the consumer couldn't throw more kindle into the bonfire, a bigger fire was started by Treasury/Fed throwing more credit on it.

The eventual Death Spiral is inevitable.

The New Obama Math

No wonder Wall Street loves this guy.

This is the kind of math that got us in this mess in the first place.

Lets Get Over Lehman Already

As the one year implosion of Lehman is now past us, can we all just move on? I mean who cares? Nothing really was accomplished other than to make bankers more wealthy then they ever were. Bankers and traders today are as reckless, as greedy, as arrogant then ever before.

If you look at the credit and equity markets, nothing has changed, like Lehman never existed. But in fact a worse bubble is forming, a bubble that will pop maybe not this year, or next but eventually it will make 2008 seem like a walk in the park.

I have been reading and listening to the various media on Lehman's demise. Its the same stupid questions and comments over and over again.

What went wrong?
Have the right lessons been learned?
Could it happen again?
Should Lehman been saved?
Why was it not rescued like the others?

All of these questions and subsequent comments don't change the fact that fundamentally nothing has changed in the financial zeitgeist. Doe's it matter what went wrong? Who cares about the lessons learned? Who cares if it happens again? We all know that the government has no other option then to bail out insolvent institutions, because the financial institution have made that landscape inevitable. This is what happens when you enable banks to get bigger and fatter by getting rid of Glass-Steagall. The banks loaded and levered up on mortgages and other debt securities, not because they wanted to, they had to just to keep up with other banks. It wasn't just Lehman, although Lehman was the biggest player here.

Most amateur Wall Streeter's and 22 year old journalists would like us to believe that if only the Federal Reserve and the Treasury had leaped to the rescue of Lehman all would have been fine, this is total nonsense and outright preposterous bending of the truth. The real truth is that Lehman was not a cause but a consequence. A consequence of flawed lending practices, absurd risk management, and most importantly inadequate oversight by regulators.

Financial markets and Wall Street had lent on the basis of a bubble, a bubble in large part of their own making, although it was also a creation of consumer lust over anything credit related. Consumers were told to become homeowners because that is the "American Dream." The government made it very easy to get a home, tax credits, GSE's, and lax federal oversight all contributed to consumers lust over home ownership.It was all Hogwash! The American Dream is to get a job and work. After we buy a home, we need plasma's in every room. We need to start families, buy bigger bulkier gas guzzling cars, all completely ludicrous behavior to keep the credit flowing. From this Wall Street needed to create much more complex financial derivatives so they can balance the risks away from their own balance sheets. But the thing is this, one mans asset on his balance sheet is a liability on the other mans ledger. This is where its all connected.

Wall Street does what scorpions do. They had incentive structures that encouraged excessive risk taking and shortsighted behavior. Its really no accident that all of this was done via rigorous lobbying, which looked equally hard to prevent regulation of changes in the financial structure, new products like credit default swaps, which, while supposedly designed to manage risk, actually created it, the complex instruments that they created was used to exploit the masses who only wanted bigger houses and more credit.

The financial sector may not have made good economic or financial investments, but its political investments paid off big time.

Lehman was allowed to fail on many levels because of many reasons that are far too complex even for the most well informed investors and citizens. I have read hundreds perhaps thousands of articles about Lehman in the last year, I have worked in Wall Street for 2 decades and know the ins and outs very well, but I am still trying to figure out what it was all about. Too many people over analyze things because it makes them seem smart. At the end of the day I have come to the conclusion that Lehman was allowed to fail because the Treasury, Government, and Fed needed an excuse to bailout the entire insolvent financial system. They needed to create the mushroom cloud that Bush had lied about 7 years earlier. Lehman was the ultimate "Yellow Cake". They knew that Lehman posed systemic risk, because of its broker dealer arm and massive leverage. They knew it would create a ground swell of emotions and gut reactions that would make it easier to push socialist style bailouts on the American people. Congress would have never approved TARP and back stopping of losses for banks if Lehman was saved.

Everyone knew how the market melted down that Monday when Lehman filed. It was the perfect excuse to get the bankers out of their mess. Create a disaster so that the masses can bailout out the wealthy. Thus the Lehman example became at best a scare tactic, at worst it became an excuse, a tool, to extract as much as possible for the banks and the bankers that brought the world to the brink of economic ruin.

It was the beginning of "Creative Destruction". In the end, The painful truth is that the incomes of taxpayers were put at the disposal of the financial sectors creditors.

This is the easiest way for me to explain and reconcile what happened in reality. In actuality its far beyond complex, and I like Dick Fuld, will go to my grave trying to piece it all together.

The more you know the more cynical you get. This is the ultimate trade off.

Many very smart economists and public policy scholars have made comments that the Lehman debacle should have been handled differently. Yes they are true, there are many ways to look at it, but when capitalism and the general way of life is at stake, the powers that be make brutal decisions.

The idea that "Too Big To Fail" and "Systemic Risk" are new concepts is beyond stupid. It was Wall Streets dirty little secret for 2 decades. They paid a lot of money to lobbyists to protect these concepts. The bailouts we have seen just further protects it. On top of that, the Obama Administration has created a new concept, institutions too big to be resolved, too big for capital markets to provide the necessary discipline for. The perverse incentives for excessive risk taking at taxpayers expense are even worse with the "Too Big To Be Resolved" banks than they are at "The Too Big To Fail" banks. Government has signed over a blank check over to Wall Street. We have not curbed their gambling, told them to deleverage, because the system doesn't work that way. Indeed Wall Street has access to funds from the Fed at close to zero interest rates, not to lend but to re lever back up to catastrophic levels all for trading profits.

I am willing to give Obama the benefit of the doubt here about serious financial reform. He has a lot on his plate from the general economy to health care. He talks a good game, lays out the plan but the devil is in the details.

Too many institutions have started the casino once again. There is no justification other then greed and the implicit guarantee that comes from the government for these actions. It looks like the only counterbalance to all of this is their own incompetence.

After Bear had been sold to JP, the Fed should have figured out how to deal with failing insolvent institutions. How to orderly unwind financial instruments.

Instead they told us that Bear was just a one off problem, in fact they knew that the problems were systemic in nature, after all they the Fed helped create it. They just used a band aid approach, calm the masses, keep the peace.

Lehman was a symptom of a terribly dysfunctional financial system that cares only about profits and bonus money. Sprinkle in massive regulatory failure and what do you get?

Housing as well as consumer credit were already in the midst of correcting when Lehman died. Two bubbles since have been deflated, but another credit bubble is already forming, one that will make 2008 look like child's play when it plays out. Maybe we need that as well, maybe the public says no more socialist backstopping of losses, not unless the public gets a bailout this time.

Tuesday, September 15, 2009

USA Still A World Power

Don't believe the hype.

All of these so called "Think Tanks" can say what ever they want.


America and its roughly 9600 nuclear weapons will say something totally different.

I find it really stupid to think that what ever has been done so far by the USA isn't taken into proper context. America is a power because of its nuclear capabilities. The reason we keep printing money and making people buy it is because we are the only game in town. We subtly let people know that they need to tow the party line. That's what the 9600 figure means.

Does anybody think for a moment that the powers that be in this country is going to let the dollar lose reserve currency status? Keep Talking...That's all it is. It only makes for good conversation.

The only reason there is a global economy is because of America's very existence.

I am not a love it or leave it American, quite the opposite, but I am realistic.
Its about time the rest of the world realizes that as well.

Monday, September 14, 2009

SEC & BAC - Back To The Drawing Board

Judge Rakoff throws the book at the SEC & BAC.

Some of the priceless moments:

*Judge says proposed settlement is neither fair, reasonable or adequate.

*Judge says settlement "does not comport with the most elementary notions of justice and morality"

*Judge says Bank of America never actually provided the information the court requested.

The Best Part:

*Judge calls the proposed settlement a "contrivance" designed to provide SEC with "the facade of enforcement" and Bank of America a quick resolution of an embarrassing inquiry" at shareholder expense.

*Rakoff directed the parties to prepare for a possible trial that would begin no later than Feb. 1, 2010.

Someone is going to jail at BAC.

Bank On That!

More W Risk

London Retail Sales Sink-

UK was a Mecca for foreign shoppers as the Pound was weaker, the pound has since rallied telling us that domestic demand is in the toilet.

Retreat in corporate bind underwriting and issuance.

Friday, September 11, 2009

How To Deal

The Federal Reserve dealt with the recession that began in 1990 by driving short term interest rates from 9% to 3%.

It dealt with the recession that began in 2001 by driving rates from 6.5% to 1%

At this moment it has dealt with the current recession by driving rates from 5.25% to effectively Zero.

But ZERO, it turns out isn't low enough to end this deflationary spiral. And the Fed ant push rates below zero.

The Taylor Rule, which the Fed uses to set short term rates is stating that a rate of -6.8% is needed to reflate asset prices and the broader economy.

This basically means that monetary policy and Quantitative Easing has not and will not work to inflate asset prices. There just is not enough traction in these policies.

We are in a deflationary environment for the foreseeable future.

This is also where the Keynesian Model takes off. This observation that lower bound interest rates don't work led Keynes to advocate higher government spending.
When monetary policy is ineffective and the private sector can’t be persuaded to spend more, the public sector must take its place in supporting the economy. We are currently in full blown Keynesian mode.

Milton Friedman indeed is rolling over in his grave.

Thursday, September 10, 2009

More Chinese Take Out

I have posted before how incredibly corrupt Chinese companies accounting practices are.

This is a real eye opener:

When you have Trillions in USD doing a Micheal Phelps in their economy, you can afford to pay people more money not to work. The more money in the pockets of Chinese citizens makes then consume more. The more efficient and streamlined Chinese companies are the more competitive they are in the global economy.

Bottom line: China needs GDP growth to "Save Face & Keep The Peace" So the only way to get GDP growth is to help companies cook their books.

Its a known fact that there is almost 100% correlation historically between electricity use and positive GDP growth in China. But look at this most recent statistic:

China's economy grew at an annualized 6.1% in the first quarter, and 7.9% in the second. Yet electricity usage, a key indicator in industrial growth and a harder metric to manipulate, declined 2.2% in the first six months of the year.

How could an economy largely dependent on manufacturing grow while its industrial sector shrank?

Anyone for take out?

Let Me Count The Ways

Paul Krugman has an opinion piece about the Economic profession.

Its a long and winding read about how smart intelligent economists acted so stupidly. It really is a great piece on why the Nobel Prize for Economics should be retired, even though that is not the intent of the author who is a Nobel prize winner himself.

Economists generally got it wrong because they never thought there was a problem in the first place. Almost every leading economist and financier in the world was so deeply embedded in hero worship of Alan Greenspan, that these economists believed that the policies that had been enacted by the central bank over the preceding 25 years was the correct policy. We have seen over the past few years that Milton Friedman and Greenspan are not hero's. They were free market/Wall Street cheerleaders. They were flawed just like the rest of us.

Greenspan and others had seen this crisis coming for years, they just didn't act on it because Wall Street wanted that way. Wall Street had created a system that was not regulated or overlooked by anyone except Wall Street. From this alone "Too Big Too Fail" was created.

Central Bank Officials models missed the crisis not because the conditions were so unusual, as Greenspan and Bernanke have repeatedly have stated, they missed it by design. It is impossible to warn against a debt deflation recession in a model world where debt does not exist. This is the world our policymakers have been living in. They urgently need to change the very environment that they currently live in. These models were as flawed as the worst models that AIG was using. AIG CDS models never accounted for a decrease in housing prices, that is why AIG blew up. The Fed models basically had the idea that debt was a nonexistent form of policy, from this the economy and financial system blew up.

There were many economists that so this coming, but their timing was off. The classical economist living in reality knew in the late 90's that America's obsession with debt would lead to ruin, only some 10 years later did that come to fruition. But when bad policy is headed by the powers, and its that same policy that is making the powers incredibly wealthy, dissension has no place, it is muted and silenced. The dissenters were considered quacks.

Here are some dissenting opinions of economists that got in right as far back as 2001.

"the new housing bubble,together with the bond and stock bubbles,will inevitably implode in the foreseeable future, plunging the US economy into a protracted, deep recession".

-Kurt Richeb├Ącher - Investment Newsletter Writer,2001

"all remaining questions pertain solely to [the] speed, depth and duration of the economy's downturn".
"the small slowdown in the rate at which US household debt levels are rising resulting from the house price decline, will immediately lead to a sustained growth recession before 2010".

Wynne Godley - Levy Economics Institute, 2006

"debt deflation will shrink the 'real' economy, drive down real wages, and push our debt ridden economy into Japan style stagnation or worse".

-Michael Hudson - University of Missouri, 2006

I an thinking these guys had the same thesis for years but the market kept on humming along, so they were marginalized and forgotten.

Most of the economists that got it right used a model called "Flow Of Funds", which states that liquidity generated in the financial sector flows to companies, households and the government as they borrow. This may facilitate capital investment, production and consumption, but also asset price inflation and debt growth. Liquidity returns to the financial sector as a result of more debt and investment fees. But there is a trade off in the use of credit and debt. The economies assets and liabilities must balance, growing financial assets must be counter balanced by debt. As credit expands so does the debt burden. Flow of funds models quantify the sustainability of the debt burden and the financial sector's drain on the real economy, and when a breaking point will be reached.

The turnover in credit and debt in the financial sector is many times larger then the actual GDP. This has been the case here as well as in the UK.

Even the OECD had this terribly wrong as late as 2007:

"the current economic situation is in many ways better then what we have experienced in years. Our central forecast remains indeed quite benign: a soft landing in the United States and a strong and sustained recovery in Europe."

Most central bankers, financiers, and policy makers say that using a Flow Of Funds model is difficult because you cant identify a bubble. This is ludicrous. Bubbles are easy to spot if you are living in realty. We just had a credit/debt/housing bubble. We are in a debt bubble at the moment, soon to go back into a debt/housing bubble once again. Its only difficult to realize your in a bubble when you fail to take into account balance sheets and the very existence of debt. When everyone is making vulgar amounts of money, bubbles are just fallacy.

Wednesday, September 9, 2009

What Planet Are You From?

This is the question that needs to be asked of every person who is positive on the stock market and broader economy.

Look at this one chart.

Consumer credit dropped $21.6B in July. This is following a drop of $15.5B in June.

Economists had forecast consumer credit would drop $4 billion in July, according to the median of 31 estimates in a Bloomberg News survey. Projections ranged from declines of $12 billion to no change from the previous month. The Fed initially said consumer credit decreased by $10.3 billion in June.

If quite honestly 70% of the GDP is consumer spending, and that spending is dependant on expansion of credit, if credit is evaporating, where is the continued upside bias to GDP Growth?

The consumer is deleveraging at a rate unheard of in modern times. Coupled with job losses, the bulls are living in fantasy island.

No Jobs
No Credit
No Nookie

Get ready for a double dip recession.

Interest Only Loans About To Hit The Wall - Cry Me A River

Don't believe the National Realtors Association that Housing has turned a corner. Don't believe what you continually hear about housing from all of the talking heads on TV and in the media.

Housing has very temporarily turned slightly up because of the governments incessant need to just spend their way out of a bubble. Its classic bubble economics. First time home buyers tax credits and general propaganda has led many people to believe that housing has bottomed.

For all those cool aid drinkers: Here is to you:

Just the FACTS MAN! For arguments sake say $1 Trillion problem.

An analysis for The New York Times by the real estate information company First American CoreLogic shows there are 2.8 million active interest-only home loans worth a combined total of $908 billion.

In the next 12 months, $71 billion of interest-only loans will reset. The year after, another $100 billion will reset. After mid-2011, another $400 billion will reset.

"Nationally about 18 percent of prime interest-only loans are at least 60 days delinquent. In California, the level is even higher: 21 percent, a rate exceeded only in the other bubble states of Florida and Nevada."

The government knows these figures. The banks know these figures. But investors have been hood winked to believe that housing has bottomed and that all of this is baked into the system.

The government and banks are just kicking the can down the line a few years, because they really have no idea or clue how to fix this problem. They know the risks and end game, but are not ready for it and have no plan other then lying to the general public about a pending housing recovery.

Interest only, negative amortization, Pick-A-Pay mortgages, & ARM mortgages were the biggest origination's in Florida, California, and Nevada, which today are still the worst markets. As of today many of those mortgages are either in total default or going to be in total default. Even homeowners who are current with their payments will see their payments jump 75% when the rates reset. Going back to yesterdays chart of flat wages, you get the idea. Who cares even if you have a job, can one even afford a home with where wages are at currently?

This sums up the whole article for me. This is what the country has become about:

“I’m praying for another boom,” said Mr. Moller, 34. “Otherwise, we’ll have to walk.”

Yes, folks we need another bubble so that ridiculous behavior can be subsidized by government so that Banks can kick the can down the road until the next crisis hits us in the grill. By that time, Mr. Moller would have refinanced, re leveraged, and bought another home that was in foreclosure, because that is what people do when they are not punished for ludicrous behavior.

The only thing I have for Mr. Moller is empathy, other then that good luck my way ward son.

Another mind numbing part of this article is:

Mark Goldman, a San Diego mortgage broker, who himself was put into a interest only loan, is a lecturer in real estate finance at San Diego State University. God Bless the American Educational System!

Another wonderful quote:

“I understand I took a risk,” Mr. Janis said. “But I did not anticipate that the real estate market would go down 30 percent."

"The bailout is not trickling through to help many of us who have worked hard, under very difficult circumstances, to keep paying our bills,” Mr. Janis said. “I am stuck with nowhere to go — absent trashing my credit and defaulting.”

Cry me a river!

Alan Blinder Continues Drinking Bernanke Green Shoots Cool Aid

This article appeared a few months back in the NY Times.

I only reference it because it was again reference yesterday by the author in this article:

Alan Blinder is a smart guy, but he has to get over the fact that the FED is capable of acting in a non political way. It can't. The Fed is the root cause of the mess, not solution.

The FRB is one the biggest reasons why we had a credit crisis in the first place. These guys totally dropped the ball and looked the other way for 25 years while Wall Street looted the country. Greenspan and Bernanke are so deeply rooted and interwoven into the fabric of Wall Street and DC, that it can not be objective to the needs of the Tax Payer. You cant properly weight Wall Streets needs with the general needs of citizens. This is how US style capitalism works. Its not perfect, it may not even be the best system anymore, but its what we have at the moment, so get used to it. But it also doesn't mean we should give more power and responsibility to the ones who have failed us on such grand scale.

I have written that the Fed shouldn't be given the role of Systemic Risk Regulator.

Going back to the original July 26Th piece from Blinder. It just seems that Blinder thinks of the Fed as some larger then life all knowing, all good, all benevolent entity. What planet has he been living in the last 30 years?

Just reading some of his thoughts have me scratching my head:

"Suppose such a regulator had been in place in 2005. Because the market for residential mortgages and the mountain of securities built on them constituted the largest financial market in the world, that regulator probably would have kept a watchful eye on it. If so, it would have seen what the banking agencies apparently missed: lots of dodgy mortgages being granted by non bank lenders with no federal supervision".

This is another fallacy:

"Under one model, the regulator would be like the family doctor, taking a holistic view of the patient, making a general diagnosis and then referring the patient to appropriate specialists for treatment: to the Securities and Exchange Commission for securities problems, to the banking agencies for safety and soundness issues, and to someone for problems with derivatives — once we figure out whom that someone is".

Mr. Blinder obviously doesn't understand that the SEC totally missed the Madoff debacle. The SEC doesn't have any specialists other then lawyers. This is how and why Madoff was able to hogwash the agency.

More ludicrous suggestions:

"An alternative model would work more like a full-service H.M.O., where an internist refers patients to in-house specialists as necessary. To make that work, the systemic-risk regulator would need more power — not just to diagnose problems, but also to fix them. And it would need a huge range of in-house expertise".

"Crucially, when truly systemic problems arise, a lender of last resort is almost certain to be part of the solution — and that means the central bank. So if there is to be a systemic-risk regulator in the United States, it should be the Fed".

Again, these guys are part of the problem, not solution.

A little blind faith here with this statement?

"Furthermore, unlike any other agency, the Fed would not be starting from scratch in performing these expanded regulatory duties. At least in theory, every central bank is its nation’s principal guardian of financial stability. The Fed already has the eyes and ears (though not enough of them) to do this job, and has the broad view (though, again, not broad enough) over the entire financial landscape. It must have such a view to handle monetary policy properly".

There is always an alternative plan. Look for it. Its usually the one where the greatest pain is inflicted for the common good.

Anybody who says there is no alternative plan only wants to delay such action so that their constituency doesn't get hurt.

The Fed, Treasury, and SEC's biggest constituency is Wall Street and the Banking Sector. That is why there is never an alternative plan. That is why Business As Usual and Status Quo has been fossilized for ages to come.

World Economy Is A Perennial Boom/Bust System

This will surely raise executive blood pressure at US Integrated Oil Companies.

China knows where its bread is buttered, so they will continue with investments in commodities until over investment is an issue. They will also diversify away from US Assets just a little. Not a lot mind you, just enough to avoid having nuclear weapons pointed at Beijing.

Its classic "boom/bust" economics in every sense of the word.

This article shows more about how the Chinese Banking/Lending system works rather then about commodities. That in itself is very telling.

The entire Asia recovery was predicated around Chinese Bank Lending that has just exploded since the start of the year. This led to a global commodities rally, which led to risk assets being judged less harshly.

Now, just imagine if Exxon got $30 Billion in very low interest loans to go out and buy up everything in sight? What would the response be here?

Tuesday, September 8, 2009

JP Morgan Upgrades GE....

.....For no good fundamental reason other then Sentiment.

That's right folks!

Don't buy the stock because Immelt knows what he is doing. Buy it because everyone else is.

This is one of those I was sleeping when the stock was $7 so I am throwing in the towel at $14. The analyst makes my point with the following:

"It was one of the last stocks for which a little good news could still go a long way".

You cant make it up.

Gold Passes 1000 Only Means The Dollar Is Toast

When investors load up on Gold, one would say its time to hunker down. Inflation is coming. Not anymore, we are in a deflationary environment, we should see Gold collapse, but as Gold keeps rising, we can only say its a Macro play on continued US Dollar destruction.

I give you these articles on such Macro Plays

It looks like the Chinese are big buyers of Gold.,0,6581001.story

I can just see it now. Bernanke, Geithner, Blankfein, and Bill Gross all smoking cigars when the USD losses its reserve status. We finally did it! Congrats!

Sooner or later it all has to mean something doesn't it?
If so the FRBNY will just do another $10B in POMO.

FHA Bailout Next On Tap

This is a very informative yet troubling piece about the FHA.

I spoke about more government housing shenanigans last week.

This just proves my point that the housing bulls are just plain ignoring the impact of Uncle Sam's impact on the longer term fundamentals of housing. Yes, they have done a nice job of catching a falling knife. But the blood that has been shed from such an activity has yet to be seen in the broader context. You just cant have government propping up every single sector in the economy. The country is already losing hundreds of billions in lost tax receipts yet they want to stimulate artificial demand for housing with first time credits. Totally ass backwards as usual.

Whats Wrong With This Picture?

Do you notice that the states with the most FHA backed loans are also the worst real estate markets in the country? California, Florida, Georgia, and Ohio are still nuclear real estate markets, yet FHA wants to increase home ownership in these areas.

Truly nothing changes.

I Love The Smell Of Revolution In The Air

Not A Good Implication Here.
Something Is Very Very Wrong In America.

Why do revolutions happen? Why do societies fall?
When the commoners revolt against the state.

As a society we have green lighted looting. Today its only confined to the Banks and financial system, but for how long?

There will come a time when it will be open season across the board for looters.

This is a systemic problem that goes beyond all that divides us.

Just Another Pretty Face

This is so par for the course at CNBC.

Someone should let the "Money Honey" know that Medicare is for people 65 and older.

After being torched by Weiner, she just goes along like nothing happened. What's worse is the possible follow up question she should have asked. Why are people who are not 65 or older ineligible for medicare?

Is not this the point of the public option?

Further On Crude Oil & Leveraged ETFS

I told you there were a scam.

Well Deutsche Bank is the first bank to halt marketing and sale of its own fraudulent Crude Oil ETF.

First shoe to drop. Wont be the last.

Whats very interesting here is this:

"Limitations imposed by the exchange on which Deutsche Bank manages the exposure of the notes have resulted in a 'regulatory event' as defined in the terms of the notes."

Hmmm...Do they know something that we don't?

The Difference Between Right And Left

I will try not to dilute you into thinking that there are two separate parties in DC. There is only party, the party in power, the party that caters to the wealthy. I find many people who seem to think that this is all hogwash and balderdash. Realistically I am correct, but in theory there is two separate parties who's basic job is to confuse and divide the electorate. There is an ideological difference between Red & Blue. You see the Democrats before this past general election had no clue how to win an election. The Republicans know how to win elections, they are just clueless in knowing how to govern. This is what we have in this country. Republicans are all about liberty, efficiency, and effectiveness. Liberty in its simplest form means inequality, which the liberal democrats decry all the way to your bank. More liberty, efficiency, and effectiveness means greater inequality, which is just fine with the GOP wing of government and their constituency. This is why we have in Theory a two party system. A steel cage death match between these two factions. You see it today with the Health Care debate. The liberal democrats want a public option so that everyone gets insurance coverage, while the GOP wants nothing of the sort. The right wants total liberty for Insurance Companies to run up costs, but the Democrats will not figure out a way to make the public option fiscally possible. How can they when Obama Health Care is the same as Obama Banking!

Bottom line. I don't trust Obama with any type of Health Care reform. The type of reform we dearly need is not going to happen with the Obama plan. Its unbelievably disingenuous of government to tell the public that health care is a fiscal and monetary disaster, that it needs radical reform. No it doesn't! The Banking and Financial Sector is 50X worse off then Health Care is at its worst. What did Obama do? Print money to fix banks and Wall Street correct? Why doesn't he just do the same with Health Care? Do not give me this crap that we cant afford it. Its all Bullshit. We cant afford anything in this country, has it actually stopped government before? This is the problem with subsidizing bank losses. This is the problem with socializing risk. I just cant take Obama seriously when he talks about the black hole that is health care. He had a chance to truly make a difference and he laid an egg. Let him lay another one with health care.

Republicans are known to have more discipline then the idea generating Democrats. Really? What discipline did they have with W for 8 years? You see its all one big joke. One big scam to transfer wealth from from public sector to the private, while offloading risk back unto the public sector. Both Democrats and Republicans are good at this type of Socialism.

The Boys Are Back

Its the day after Labor Day, and I am not wearing white, even though that was what I had originally planned. I usually make the decision what to wear two minutes before I leave the house in the morning, but knowing that you are not supposed to wear white after Labor Day, I begrudgingly followed the trend by wearing a black shirt. While I was driving to the train station, I was thinking - I should have worn white. I shouldn't do what the masses want me to do or what they are doing at the moment. You see I should be zagging while everyone is zigging. This still bothers me three hours later. I might just go out and buy a white shirt at the Gap, do my duty to add to retail sales when no one else is. A little Cash for Old Shirts action this morning?

Anyway, I was just following the trend, the herd mentality this morning. I was just scared to be noticed wearing white after Labor Day. What would people say? How would they react? In the grand scheme of things just like Chazz Palminteri says in A Bronx Tale "Nobody Cares Kid".

Yes...Its true nobody cares anymore.

Nobody cares that the economy is in the crapper.
Nobody cares about unemployment as its headed towards 10 maybe 11%.
Nobody seems to care about the Shadow Inventory market in housing.
Nobody cares about credit contraction.
Nobody cares that Retail Sales ex-Cash For Clunkers is dog meat.
Nobody cares about the Trillions in Government Spending.
Nobody cares that The Treasury and Fed are just basic printing presses for the Wealthy.
Nobody cares about the expansion of Governments Balance Sheet to epic bloated levels.
Nobody cares that Crude is back above $71, which will kill any future consumer led comeback
Nobody cares that the Dollar is being systematically destroyed just to get Wall Street back on its feet.
Nobody cares about the absurd levels of Bank Failures.
Nobody cares about the fossilization of Business As Usual and the Status Quo.

They do care about following the trend, the heard mentality. The same mentality that got most investors smoked like a salmon at this time last year. I foresee no change in investor behavior this time around as well. They will continue to take stocks up as long as the government keeps printing money. This is how shell games, ponzy schemes, and pyramid scams work, with CNBC, and the WSJ leading the chorus. Step right up and hit the buy button.

Why wouldn't doing the same thing over and over again not constitute insanity?

I came in this morning with the futures flying 10 points higher. Crude was also up $3 bucks. Yields were up in the early morning as the Dollar was getting smoked. Gold had surged over 1000. In fact I was reading that the Chinese are big buyers of the Yellow Stuff, that 2/3 of all Chinese Economists favor Gold over Bonds.

But nobody seems to care about all of this.

I still cant believe that as the dollar gets shredded up, people actually think this is good for our country.

Its so painfully obvious that the biggest threat to our country is not shoe bombers or terrorists. Its Wall Street, CNBC, and government, that keeps telling us that a lower dollar is the way to play an economic recovery. That its OK to run up Chernobyl like deficits. Its OK for Wall Street, because they never payed for the sub prime crisis, why would they pay for any future crisis. American Tax Payers will take it the ass again like they always do.

The boys are back in town, and they do what the herd tells then to do. Keep Buying!
No Thanks! Not me...I am sitting this one out, holding unto my cash,

I will be playing my fiddle while Rome Burns.

Monday, September 7, 2009

Institutionalized Manipulation

There has been much speculation about the rally that began on March 6, 2009. All type of theories that suggested that most of the gains was the result of massive manipulation. These theories range from HFT Program Trading Systems to institutionalized manipulation by both the Fed and Treasury. Many traders I have spoken to have stated that the traditional indicators and metrics they have used for over 20 years have stopped working, and that there is simply no correlation among markets and participants. There is much speculation in the markets that there is a coordinated effort by Government along with chosen financial institutions to keep the peace. Meaning keep stock prices higher at any cost.

Record program trading by Goldman Sachs as reported by the NYSE itself, only heightens the focus on HFT systems. The Fed & Treasuries incessant participation in open market activities only fuels the manipulation/conspiracy speculation.

I can only make an educated guess to explain all of this, piecing together my own 20 plus years of experience. I know 20 years of experience and 2 bucks gets me on the subway.

After doing my research, which basically is "Google Search", I was able to put one major manipulation theory on its feet. The greatest evidence I have for a grand institutionalized manipulation is the simple fact that the FRBNY or NY Fed has been conducting something called POMO or Permanent Open Market Operations since March 25Th 2009. The FRBNY has conducted over 50 of these actions since. These are just auctions that are conducted by the FRBNY with certain dealers on Wall Street. The FRBNY announces that they will be buying back anywhere from $1.5B to $7B in Treasury securities from these Wall Street institutions. So Treasuries go from Wall Street to FRBNY, FRBNY sends cash to Wall Street, Cash goes straight into equity markets. When you look at the actual days the POMO takes effect, they are highly correlated with paint the tape closings in the equity markets, with the theory that these large institutions that receive cash from FRBNY use the cash to run up equities. If you follow the days that POMO takes place, you will notice that the markets ramp up huge into the close. Every time the market corrects or goes down a little, you can guarantee that the FRBNY is doing some sort of Treasury buyback. The Wall Street dealers get to lighten up on Risk Averse Assets, and get to leverage back up Risk Assets like equities and commodities. So as long as the FRBNY keeps pumping money into Wall Street, equities will continue to ramp. It has nothing to do with the economy. Nothing to do with the state of housing. Nothing to do with non farm payrolls.

The media in turn takes all of the so called good economic data and parlays that onto main stream America, so they can be ponzied into thinking its all fundamentally driven action. The Financial media(CNBC)is just a marketing arm for Wall Street's distribution network. Its Wall Street's job to distribute wealth from the many to just a few, most importantly itself. Its the media's job to transmit the sales pitch. Its the Financial Infomercial Media that is providing a platform for Wall Street to screw over the masses. Its the greatest shill that there is. Why do you think strategists from BOFA, GS, MS, Citi all come on CNBC and Bloomberg all day long? Its one big secret handshake society.

The Media is Wall Street's and Governments biggest co conspirators in a massive criminal scheme to separate people from their money. And they have done a great job of doing it. The Fed/Treasury wants to let the masses know that there is still money left to scam from. So what we have is real wealth going from public to private while all of the risk going from private to public. All along telling everyone that all is going to be all right.

There is a big fight at the moment between The NYFRB and the Fed in general. What the NYFRB is doing is making the safety trade disappear. Which means sell Treasuries and USD assets to buy equities. The Fed is in a position where they need to keep long term interest rates low enough to keep the ponzy scheme of ever lasting Treasury Auctions going, which means there has to be a healthy bid for Risk less assets. So simply speaking high yields is the biggest threat to the Pyramid Hoax. With record funding still on tape for the foreseeable future, how does Bernanke keep demand for Treasuries high when the FRBNY is doing the opposite?

It seems to me that the only way to keep long term interest really low is to kill the stock and commodity markets. The only way is to bring back the safety trade via a flight to quality. This is precisely what the ECB did last year to kill the commodity trade, they hiked rates to kill the crude trade. Unfortunately it killed everything else in the process.

So what we have at the moment is a rain dance between Bernanke and FRBNY. Clash of the Titans, equities vs. bonds, a very dangerous game that so far has gone well.

I know that I am painting a binary picture here. I apologize for that. Life is more then black and white, in fact its all shades of gray.

If the stock market crashes, its all over the media and Obama's poll numbers go into the toilet. It would create a flight to quality to keep rates low, making Bernanke's job of auctioning Treasuries easier, but all of the shenanigans done by Treasury and the FRBNY goes into the toilet as well.

So what we are going to have with regards to the markets is periods of up activity with no volume then a sudden 2% drop in the markets. This push pull period I believe will be the new norm, absence of any type of bad news in the macro economy. As I am sure that the Government is going to spin every single housing and employment report that comes out to their benefit.

Shell Games Of The Rich, Wealthy & Affluent

I just cant believe all of the green shoots hype that I am hearing and witnessing. Its everywhere. In the print media, television, and worst of all from our elected officials.

I have vowed to throw every edition of BusineesWeek in the garbage.

But I had to just peruse the table of contents for my own amusement. I wasn't disappointed. Completely ludicrous as usual. They should just change Businessweek to "Momentum Weekly", or "Green Shoots Hype", or even "The Shell Game Continuation weekly Monitor".

Talking about Shell Games, I was in lower lower Manhattan a few days ago, and I saw some rather shady people ripping other people off. It was the typical shell game of pick where the ball is. We see these shadowy people with their tables and shells and think they are lowlifes just sucking the blood out of good citizens. Because they were wearing baggy jeans and head their caps on sideways only perpetuated the belief that they were criminals.

So what am I coming to? What is the punchline? Well the biggest shell game is not in Alphabet City my friends, but in Washington DC, and at the Federal Reserve. The guys wearing Zegna Suits, Hermes ties, and Ferragamo shoes are currently pulling the biggest scam in the history of all shell games. But the simple fact that they look good doing it is lost on the ones who look just like them. You see, people who wear baggy jeans don't judge the ones who do sidewalk shell games. So to the ones who work in Wall Street don't judge the Ponzy Scheme that is currently happening.

It all business as usual. The fossilization of the status quo. We have two sides of the equation. Obama who has fossilized Wall Street, and the GOP/Right that has fossilized everything else including the Health Care debate.

But the current shell game of monetizing debt is simply mind boggling. Its the biggest wealth transfer in the history of mankind.

We all know that credit is being frozen for millions of Americans, the Fed has to plug the gap somehow. There is negative demand for US assets so far in 2009. This is a fact! Check the dollar wiseguy! The demand for treasuries is lukewarm at best. The secondary mortgage market is still not in great shape as their is so much bad agency debt floating around in the US and abroad. The Fed is in a position where they need to finance this train wreck we call the economy.

How to do it?

Very simply, Bernanke, Geithner, and the Hermes Bunch start to dust off the Jenko's and Kangol's to convene the shell game of the century.

What the Federal Reserve has been effectively doing is monetizing US Government debt by cleverly enabling foreign central banks to swap out their crap worthless agency securities in exchange for newly issued Treasury Debt. This is one of the ways the Government has been creating artificial demand for US Treasuries. This is how you keep the peace. The other way of creating a bubble Treasury Market is by enabling Wall Street institutions to create Interest Rate Swaps that use Treasuries as hedges.

More swaps means more hedges means more Treasuries.

The shell game that is being played by Bernanke obscures the fact that money is just being printed out thin air and then used to buy US Government debt. What happens to then the crap worthless agency securities? They go into other ponzy scheme investment vehicles like Maidon Lane LLC.


The actions of the Hermes bunch would make the Alphabet City Street Hustler blush. These "cats" are something. The Fed is so openly and overtly playing this game of replacing private debt with public credit.

One must understand that our economy much like capitalism is a ponzy scheme system. I am not a socialist or worse a communist, just a realist. Meaning that the system only works when credit is expanding. Credit expansion in the time of credit contraction only works if the wool is being pulled over the ones at the lower end of the totem pole. Even a slight regression in the expansion like the one we had last September triggers massive panics and earthquakes. Bottom line, what ever happens to the patient doesn't matter in the grand scheme. Credit contraction is inconsistent with our type of capitalism and economy. This is why we see cash for clunkers. Without consumption and expansion, the system destroys wealth at the top first.

What fuels the expansion in our system then? Very easy - MORE DEBT or NEW DEBT! So what we have at this moment is private credit has collapsed, and it has to be propped up with public debt. This is the scheme as we know it. The attempt and intent here is to keep debt growing fast enough tp prevent the system from completely freezing. Watch the money ICE AGE to find out what happens when there is no monetary expansion of debt.

Give the Fed credit, they are quite honest about what they are doing. Just go to their website, its all there.

As Non-Financial Commercial Paper and Consumer credit has floundered, we see an exponential rise in Domestic Non-Financial Debt to take up the slack.

But, we all here that demand for US Treasuries is not that great. The dollar is weak, yields are low historically but still problematic. So the question is: Who is lending us the money to finance the borrowing?

From 1990 to 2007 foreigners bought aggressively more US assets. But over the last year or so this has clearly reversed itself.

Also from the start of 2009, private investors sold $365B worth of US Assets, while foreign central banks purchased $50B. Add it all up, and we have $315B leaving the country, that and the credit contraction that is going on is making the Fed and Treasury do what ever is necessary to keep the ponzy scheme going. Its House Of Cards time.

Normally this is disastrous for a country that is looking at $9 Trillion Budget deficit 10 years out. How do you find buyers for US Assets when the dollar is toast?

Well...Sell Treasury Debt to the ones who are actually buying, namely foreign central banks. So far this year some 40% of all government auctions are going in this route.

But something is not adding up here. If 40% of all borrowing is going to foreign central banks and they have only bought in $50B in US Assets this year, where is the cheese? Where is the Beef?

There is a big gap here in what Foreigners are holding and what they are actually buying.

Here is where the actual shell game is established.

1-The US Government has an enormous amount of Treasuries to sell

2-Foreign central banks have close to worthless pile of Agency bonds in their vaults

3-These central banks need to keep these crap securities under wraps as not to scare the debt markets.

4-The US Government is not permitted to buy its own debt at auctions for obvious reasons. The Treasury and Fed cant keep sitting their buying all of the Treasury paper.

So what happens is Foreign central banks sell their agency bonds to the Federal Reserve, who then prints money out of thin air to buy those agency bonds, then the foreign central banks use the money that was previously printed to buy US Treasuries.

Yes...There you have it.

BTW..This is precisely what Zimbabwe has done previously. What happened there was the Zimbabwe Dollar just ceased to be a unit of currency. The only difference is the complexity of the scam being played.