For 2010: Debt is Again Taking Center Stage

From Barry Ritholtz at the Big Picture http://www.ritholtz.com/blog/, another look at how debt will shape the economy going forward. We are nowhere near out of the woods. I am beginning to recognize that not only is the stock market not a discounting mechanism that alludes to the future fundamentals of the economy, but in fact, it has become an inverse measure of economic health. As the market rises, I am more convinced that its backing is to the detriment of the public interest via printed dollars for which the public will be held accountable in ways many of us are not able to imagine.

Here's the brief article. I will be adding debt based articles to this post in the days to come.

Fubsy

http://www.ritholtz.com/blog/2009/12/pomboy-a-looming-new-credit-bust

The Dollar, Interest Rates, and the Forces That Will Shape Them in 2010

Hey folks!

Been taking a hiatus for a few weeks as the babe arrived, and I've been focused on other aspects of life than maintaining a blog. But, I'm back, at a slower clip for awhile. I thought I'd share with you two articles that address the changing tides in the value of the dollar and interest rates in the US. Unfortunately for us, and the Bernanke/Geithner/Obama team, the forces that will dictate the direction of interest rates in the US, as well as the value of the dollar, are not under the control of US policy. Albeit, US polcy has got us to the scary precipous we stand on as a still barely viable economy, but decisions and policies by other nations will determine the rise or fall of interest rates in the near and lasting future, and will likely send the dollar sliding to nauseatingly low valuations. Read on, but be warned. This information is not pleasant. As I always, I welcome comments.

From Zero Hedge the following two articles.

http://www.zerohedge.com/article/brace-impact-2010-private-demand-us-fixed-income-has-increase-elevenfold-or-else

As everyone is engrossed by assorted groundless Christmas (and other ongoing bear market) rallies, and oblivious to the debt monsters hiding in both the closet and under the bed, Zero Hedge has decided it is about time to present the ugliest truth faced by our 'intellectual superiors' and their Wall Street henchman who succeeded in pulling off Goal #1 for 2009 - the biggest ever bonus season (forget record bonuses in 2010... in fact, scratch any bonuses next year if what is likely to transpire in the upcoming 12 months does in fact occur).

If someone asks you what happened in 2009, the answer is simple - two things. There was a huge credit and liquidity crunch, and then there was Quantitative Easing. The last is the Fed's equivalent of band-aiding a zombied and ponzied corpse, better known as the US economy. It worked for a while, but now the zombie is about to go back into critical, followed by comatose, and lastly, undead (and 401(k)-depleting) condition.

In 2009, total supply of all USD denominated fixed income, net of maturities, declined by $300 billion from $2.05 trillion to $1.75 trillion. This makes sense: the abovementioned crunches stopped the flow of credit from January until well into April, and generally firms were unwilling to demonstrate to the market how clothless they are by hitting the capital markets until well into Q2 if not Q3. What happened was a move so drastic by the Fed, that into November, the worst of the worst High Yield names were freely upsizing dividend recap deals (see CCU) - the very same greed and stupidity that brought us here. Luckily, so far securitization and CDOs have not made a dramatic entrance. They likely will, at which point it will be time to buy a one-way ticket for either our southern or northern neighbor, both of which, in the supremest of ironies, transact in a currency that will survive long after the dollar is dead and buried.

Back to the math... And here is the kicker. Accounting for securities purchased by the Fed, which effectively made the market in the Treasury, the agency and MBS arenas, but also served to "drain duration" from the broader US$ fixed income market, the stunning result is that net issuance in 2009 was only $200 billion. Take a second to digest that.

And while you are lamenting the death of private debt markets, here is precisely what the Fed, the Treasury, and all bank CEOs are doing all their best to keep hidden until they are safely on their private jets heading toward warmer climes: in 2010, the total estimated net issuance across all US$ denominated fixed income classes is expected to increase by 27%, from $1.75 trillion to $2.22 trillion. The culprit: Treasury issuance to keep funding an impossible budget. And, yes, we use the term impossible in its most technical sense. As everyone who has taken First Grade math knows, there is no way that the ludicrous deficit spending the US has embarked on makes any sense at all... none. But the administration can sure pretend it does, until everything falls apart and blaming everyone else for its fiscal imprudence is no longer an option.

Out of the $2.22 trillion in expected 2010 issuance, $200 billion will be absorbed by the Fed while QE continues through March. Then the US is on its own: $2.06 trillion will have to find non-Fed originating demand. To sum up: $200 billion in 2009; $2.1 trillion in 2010. Good luck.


http://www.zerohedge.com/article/whither-chinas-vassal-state

2010 will be a year of major transformations, punctuated by the following key escalating divergence: i) on one hand, the ongoing contraction of the US consumer will accelerate, because even as the stock market ramps ever higher (and on ever decreasing trade volume a 2,000 level on the S&P while completely incredulous, is attainable, but will benefit only a select few insiders who continue selling their stock at ridiculous valuations), household wealth will at best stagnate (as a reminder, an increase in interest rates "withdraws" much more household net worth, due to implied house price reduction, than any comparable boost to the S&P can offset), ii) on the other hand, China, which is faced with the ticking timebomb of continuing the status quo and hoping that US consumers can keep growing the global economy, or alternatively, looking inward at its own consumer class, and shifting away from its historical export-led model. The one unavoidable side effect of this prominent departure would be a renminbi appreciation, and a logical drop in the US currency, once the US-China peg if lifted (a theme opposed recently by SocGen's Albert Edwards, who sees the inverse as likely occurring). The main question for 2010 and beyond is whether this will be a gradual decline or a disorderly drop. And behind the scenes of all the bickering, jawboning and posturing, this is precisely what high level officials from both the US and China are currently negotiating. This will be one of the major themes that defines the next decade. Another phrase to describe this process is the gradual drift of US into a nation that is aware it is no longer the primary economic dynamo of global growth as China eagerly steps in to fill that spot.

Looking at the aftermath of the financial crisis, the two major consequences that will define US economic trends for an extended period of time, are the increasingly more frugal US consumer, whose savings rate is likely to increase gradually to the long-term low double digit average, and an ongoing outflow from equities into safer assets such as municipals, bonds and loans, as the maturing baby-boomers finds the volatility of the engineered equity market far too risky as they enter retirement age.


Thanks for reading!

Fubsy

Barack W. Obama

The latest piece by Matt Taibbi chronicling the Obama administration's economic policies of massive bailouts to Wall Street banks that simply continued the direction of economic policy under George W. Bush.



Here is an excerpt:

Barack Obama ran for president as a man of the people, standing up to Wall Street as the global economy melted down in that fateful fall of 2008. He pushed a tax plan to soak the rich, ripped NAFTA for hurting the middle class and tore into John McCain for supporting a bankruptcy bill that sided with wealthy bankers "at the expense of hardworking Americans." Obama may not have run to the left of Samuel Gompers or Cesar Chavez, but it's not like you saw him on the campaign trail flanked by bankers from Citigroup and Goldman Sachs. What inspired supporters who pushed him to his historic win was the sense that a genuine outsider was finally breaking into an exclusive club, that walls were being torn down, that things were, for lack of a better or more specific term, changing.

Then he got elected.

What's taken place in the year since Obama won the presidency has turned out to be one of the most dramatic political about-faces in our history. Elected in the midst of a crushing economic crisis brought on by a decade of orgiastic deregulation and unchecked greed, Obama had a clear mandate to rein in Wall Street and remake the entire structure of the American economy. What he did instead was ship even his most marginally progressive campaign advisers off to various bureaucratic Siberias, while packing the key economic positions in his White House with the very people who caused the crisis in the first place. This new team of bubble-fattened ex-bankers and laissez-faire intellectuals then proceeded to sell us all out, instituting a massive, trickle-up bailout and systematically gutting regulatory reform from the inside.

http://www.rollingstone.com/politics/story/31234647/obamas_big_sellout

Sorry, the link didn't work. please edit and paste the url into your address box.

Fubsy

Is America's Middle Class Dying?

America Without a Middle Class--It's Not Far Away As You Might Think
By Elizabeth Warren, AlterNet
Posted on December 5, 2009, Printed on December 7, 2009
http://www.alternet.org/story/144388/

Can you imagine an America without a strong middle class? If you can, would it still be America
as we know it?

Today, one in five Americans is unemployed, underemployed or just plain out of work. One in nine families can't make the minimum payment on their credit cards. One in eight mortgages is in default or foreclosure. One in eight Americans is on food stamps. More than 120,000 families are filing for bankruptcy every month. The economic crisis has wiped more than $5 trillion from pensions and savings, has left family balance sheets upside down, and threatens to put ten million homeowners
out on the street.

Families have survived the ups and downs of economic booms and busts for a long time, but the fall-behind during the busts has gotten worse while the surge-ahead during the booms has stalled
out. In the boom of the 1960s, for example, median family income jumped by 33% (adjusted for inflation). But the boom of the 2000s resulted in an almost-imperceptible 1.6% increase for the typical family. While Wall Street executives and others who owned lots of stock celebrated how good the recovery was for them, middle class families were left empty-handed.

The crisis facing the middle class started more than a generation ago. Even as productivity rose, the wages of the average fully-employed male have been flat since the 1970s.

But core expenses kept going up. By the early 2000s, families were spending twice as much (adjusted for inflation) on mortgages than they did a generation ago -- for a house that was, on average, only ten percent bigger and 25 years older. They also had to pay twice as much to hang on to their health insurance.

To cope, millions of families put a second parent into the workforce. But higher housing and medical costs combined with new expenses for child care, the costs of a second car to get to work and higher taxes combined to squeeze families even harder. Even with two incomes, they tightened their belts.

Families today spend less than they did a generation ago on food, clothing, furniture, appliances,
and other flexible purchases -- but it hasn't been enough to save them. Today's families have spent
all their income, have spent all their savings, and have gone into debt to pay for college, to cover serious medical problems, and just to stay afloat a little while longer.

Through it all, families never asked for a handout from anyone, especially Washington. They were left to go on their own, working harder, squeezing nickels, and taking care of themselves. But their economic boats have been taking on water for years, and now the crisis has swamped millions of middle class families.

The contrast with the big banks could not be sharper. While the middle class has been caught in an economic vise, the financial industry that was supposed to serve them has prospered at their expense. Consumer banking -- selling debt to middle class families -- has been a gold mine. Boring banking has given way to creative banking, and the industry has generated tens of billions of dollars annually in fees made possible by deceptive and dangerous terms buried in the fine print of opaque, incomprehensible, and largely unregulated contracts.

And when various forms of this creative banking triggered economic crisis, the banks went to Washington for a handout. All the while, top executives kept their jobs and retained their bonuses. Even though the tax dollars that supported the bailout came largely from middle class families -- from people already working hard to make ends meet -- the beneficiaries of those tax dollars are now lobbying Congress to preserve the rules that had let those huge banks feast off the middle class.
Pundits talk about "populist rage" as a way to trivialize the anger and fear coursing through the middle class. But they have it wrong. Families understand with crystalline clarity that the rules they have played by are not the same rules that govern Wall Street. They understand that no American family is "too big to fail." They recognize that business models have shifted and that big banks are pulling out all the stops to squeeze families and boost revenues. They understand that their economic security is under assault and that leaving consumer debt effectively unregulated does not work.

Families are ready for change. According to polls, large majorities of Americans have welcomed the Obama Administration's proposal for a new Consumer Financial Protection Agency (CFPA). The CFPA would be answerable to consumers -- not to banks and not to Wall Street. The agency would have the power to end tricks-and-traps pricing and to start leveling the playing field so that consumers have the tools they need to compare prices and manage their money. The response of the big banks has been to swing into action against the Agency, fighting with all their lobbying might to keep business-as-usual. They are pulling out all the stops to kill the agency before it is born. And if those practices crush millions more families, who cares -- so long as the profits stay high and the bonuses keep coming.

America today has plenty of rich and super-rich. But it has far more families who did all the right things, but who still have no real security. Going to college and finding a good job no longer guarantee economic safety. Paying for a child's education and setting aside enough for a decent retirement have become distant dreams. Tens of millions of once-secure middle class families now live paycheck to paycheck, watching as their debts pile up and worrying about whether a pink slip or a bad diagnosis will send them hurtling over an economic cliff.

America without a strong middle class? Unthinkable, but the once-solid foundation is shaking.

Elizabeth Warren is the Leo Gottlieb Professor of Law at Harvard Law School, where she teaches contract law, bankruptcy and commercial law. Her latest book is All Your Worth.

Where are we?

From John Hussman of Hussman Funds, who has been right about everything, thus far. A ten minute read that offers rational perspective in an irrational world. Enjoy!

Reckless Myopia

John P. Hussman, Ph.D.
All rights reserved and actively enforced.
Reprint Policy

I was wrong.

Not about the implosion of the credit markets, which I urgently warned about in 2007 and early 2008. Not about the recession, which we shifted to anticipating in November 2007. Not about the plunge in the stock market, which erased the entire 2002-2007 market gain, which was no surprise. Not about the “ebb and flow” of short-term data, which I frequently noted could produce a powerful (though perhaps abruptly terminated) market advance even in the face of dangerous longer-term cross-currents. I expect not even about the “surprising” second wave of credit distress that we can expect as we move into 2010.

From a long-term perspective, my record is very comfortable. But clearly, I was wrong about the extent to which Wall Street would respond to the ebb-and-flow in the economic data – particularly the obvious and temporary lull in the mortgage reset schedule between March and November 2009 – and drive stocks to the point where they are not only overvalued again, but strikingly dependent on a sustained economic recovery and the achievement and maintenance of record profit margins in the years ahead.

I should have assumed that Wall Street's tendency toward reckless myopia – ingrained over the past decade – would return at the first sign of even temporary stability. The eagerness of investors to chase prevailing trends, and their unwillingness to concern themselves with predictable longer-term risks, drove a successive series of speculative advances and crashes during the past decade – the dot-com bubble, the tech bubble, the mortgage bubble, the private-equity bubble, and the commodities bubble. And here we are again.

We face two possible states of the world. One is a world in which our economic problems are largely solved, profits are on the mend, and things will soon be back to normal, except for a lot of unemployed people whose fate is, let's face it, of no concern to Wall Street. The other is a world that has enjoyed a brief intermission prior to a terrific second act in which an even larger share of credit losses will be taken, and in which the range of policy choices will be more restricted because we've already issued more government liabilities than a banana republic, and will steeply debase our currency if we do it again. It is not at all clear that the recent data have removed any uncertainty as to which world we are in.

Taking the weighted average outcome for the two states of the world still produces a poor average return/risk tradeoff. Taking the weighted average investment position for the two states of the world is somewhat more constructive. As I noted several weeks ago, I have adapted our weightings accordingly. As a result, we have been trading around a modest positive net exposure, increasing it slightly on market weakness, and clipping it on strength, as is our discipline. Currently, the Strategic Growth Fund has a net exposure to market fluctuations of less than 10%, but enough “curvature” (through index options) that our exposure to market risk will automatically become more muted on market weakness and more positive on market advances, allowing us to buy weakness and sell strength without material concern about the (increasing) risk of a market collapse.

There is no chance, even in hindsight (“could have, would have, should have” stuff) that I would have responded to the existing evidence in recent months with more than a moderate exposure to market risk during some portion of the advance since March. But our year-to-date returns might now be into a second digit had I recognized that investors have learned utterly nothing from the bubbles and collapses of the past decade. That recognition might have encouraged a greater weight on trend-following measures versus fundamentals, valuations, price-volume sponsorship, and other factors.

Still, our stock selections continue to perform well relative to the market, our risks remain well-managed through a substantial (though not full) hedge, and our investment approach has nicely outperformed the S&P 500 over complete market cycles, with substantially less downside risk than a passive investment approach. We have implemented some modest changes to improve our potential to benefit from (even ill-advised) speculative runs, but we've done fine nonetheless, and we can sleep nights.

Whether or not I have focused too much on probable “second-wave” credit risks is something we will find out in the quarters ahead – my record of economic analysis is strong enough that a “miss” on that front would be an outlier. What I do think is that over the past decade, investors (including people who hold themselves out as investment professionals) have become far more susceptible to reckless myopia than I would have liked to believe. They have become speculators up to the point of disaster.

Frankly, I've come to believe that the markets are no longer reliable or sound discounting mechanisms. The repeated cycle of bubbles and predictable crashes over the recent decade makes that clear. Rather, investors appear to respond to emerging risks no more than about three months ahead of time. Worse, far too many analysts and strategists appear to discount the future only in the most pedestrian way, by taking year-ahead earnings estimates at face value, and mindlessly applying some arbitrary and historically inconsistent multiple to them.

This is utterly different from true discounting – which does not rely on multiples, but instead carefully traces out the likely path of future revenues, profit margins, cash flows and earnings over time, and explicitly discounts expected payouts and probable terminal values back at an appropriate rate of return. That's what we actually do here. Talking in terms of multiples can make the process easier to explain, and can be a reasonable approach to the market as a whole if earnings are normalized properly, but ultimately, an investment security is a claim to a long-term stream of cash flows. It is not simply a blind multiple to the latest analyst estimate.

Fortunately, the evidence suggests that the long-term returns to a careful discounting approach tend to be strong even if investors repeatedly behave in speculative and short-sighted ways. This is because long-term returns are fully determined by the stream of cash flows actually received by investors over time, and because inappropriate valuations ultimately tend to mean-revert. In the face of speculative noise, the long-term returns from a proper discounting approach may not capture as much speculative return as might be possible, but over time, many of those speculative swings tend to wash out anyway.

In part, the market's increasing propensity toward speculation reflects the increasing lack of fiscal and monetary discipline from our leaders. Policy makers who seek quick fixes and could care less about long-term consequences undoubtedly encourage investors to embrace the same value system. Paul Volcker was the last Fed Chairman to have any sense that discipline and the acceptance of temporary discomfort was good for the nation.

Our current Fed Chairman's voice literally quivers in response to the phrase “bank failure,” even though in the present context, a bank failure implies none of the disorganized outcomes that characterized the Great Depression. It simply means that the bondholders take a loss and the remaining part of the institution survives intact as a “whole bank” entity (and can be sold or re-issued back to public ownership, less the debt to bondholders, as such). The same outcome would have been possible with Lehman had the FDIC been granted authority from Congress to take conservatorship of a non-bank financial entity.

In my estimation, there is still close to an 80% probability (Bayes' Rule) that a second market plunge and economic downturn will unfold during the coming year. This is not certainty, but the evidence that we've observed in the equity market, labor market, and credit markets to-date is simply much more consistent with the recent advance being a component of a more drawn-out and painful deleveraging cycle. Meanwhile, valuations are clearly unfavorable here, and even under the “typical post-war recovery” scenario, we are observing an increasing number of internal divergences and non-confirmations in market action.

As Gluskin Sheff chief economist David Rosenberg noted last week, “Even if the recession is over, the historical record shows that downturns induced by asset deflation and credit contraction are different than a garden-variety recession induced by Fed tightening and excessive manufacturing inventories since the former typically induce a secular shift in behavior and attitudes towards debt, asset allocation, savings, discretionary spending and homeownership. The latter fades more quickly.

“This is why people didn't figure out that it was the Great Depression until two years after the worst point in the crisis in the 1930s; and why it took decades, not months, quarters or even years, for the complete transition to the next sustainable economic expansion and bull market.

“Mortgage applications for new home purchases hit a 12-year low in the middle of November (down 22% in the past month!), fully two weeks after the Administration said it was going to not only extend but expand the program to include higher-income trade-up buyers. Once again, there is minimal demand for autos and housing, and that is partly because the market is still saturated with both of these credit-sensitive big-ticket items after an unprecedented credit and consumer bubble that went absolutely parabolic in the seven years prior to the collapse in the financial markets an asset values. We are probably not even one-third of the way through this deleveraging cycle. Tread carefully.”

Andrew Smithers, one of the few other analysts who foresaw the credit implosion and remains a credible voice now, concurred last week in an interview with my friend Kate Welling (a former Barrons' editor now at Weeden & Company): “The good news so far is that the stock market got down to pretty much fair value or even, possibly, a tickle below it, at its March bottom. But now it has gone up… we probably have a market which is, roughly, 40% overpriced. In order to assess value, it is necessary either to calculate the level at which the EPS would be if profits were neither depressed nor elevated, or to use a metric of value which does not depend on profits. The cyclically adjusted P/E (CAPE) normalizes EPS by averaging them over 10 years. It thus follows the first of those two possible methods. Using even longer time periods has advantages, particularly as EPS have been exceptionally volatile in recent years - and using longer time periods raises the current measured degree of overvaluation. The other methodology we use measures stock market value without reference to profits: the q ratio. It compares the market capitalization of companies with their net worth, also adjusted to current prices. The validity of both of these approaches can be tested and is robust under testing - and they produce results that agree. Currently, both q and CAPE are saying that the U.S. stock market is about 40% overvalued.”

In the chart below, the current data point would be about 0.4, not as extreme as we observed in 1929, 2000, or 2007 of course, but equal to or beyond what we've observed at virtually every other market peak in history. This aligns well with our own analysis, where as I've noted in recent weeks, the S&P 500 is priced to deliver one of the weakest 10-year total returns in history except for the (ultimately disappointing) period since the mid-1990's.



One of the fascinating aspects of the past few months is the lack of equilibrium thinking with respect to what happened to the trillions of dollars in government money that has been spent to defend the bondholders of mismanaged financial companies. Almost by definition, money given to corporations will show up most quickly as improvements in corporate earnings, and then slightly later, as executive compensation. A few pieces came across my desk last week, hailing the ability of the corporate sector to bounce back from the recent economic downturn even though revenues have continued to suffer and employment has been steeply cut. Why is this a surprise? Where else could the money have gone? Labor compensation? It is truly mind-numbing that a moment after a temporary surge of trillions of dollars, borrowed and tossed out of a helicopter (though to specific corporations and private beneficiaries), analysts would hail a subsequent improvement in corporate results as evidence of “resilience.”

What matters is sustainability, and unfortunately, it is clear that credit continues to collapse. Banks are contracting their loan portfolios at a record rate, according to the latest FDIC Quarterly Banking Profile. Even so, new delinquencies continue to accelerate faster than loan loss reserves. Tier 1 capital looked quite good last quarter, as one would expect from the combination of a large new issuance of bank securities, combined with an easing of accounting rules to allow “substantial discretion” with respect to credit losses. The list of problem institutions is still rising exponentially. Overall, earnings and capital ratios have enjoyed a reprieve in the past couple of quarters, but delinquencies have not, and all evidence points to an acceleration as we move into 2010.

Urgent Policy Implications

From a policy standpoint, it is effectively too late to forestall further foreclosures absent explicit losses to creditors. The best policy option now is to make sure that the second wave does not result in a debasement of the U.S. dollar. The way to do that is to require three things:

First, the FDIC should be given regulatory authority to take non-bank financials into conservatorship the way they should have been able to do with Bear Stearns and Lehman. If this authority had existed in 2008, Bear's bondholders would not now stand to get 100% of their money back, with interest, as they presently do, and Lehman's disorganized liquidation would have been completely unnecessary. As I've noted before, the problem with Lehman was not that it went bankrupt, but that it went bankrupt in a disorganized way. If the FDIC had authority over insolvent non-bank financials and bank holding companies, it could wipe out equity and an appropriate amount of bondholder capital, and sell the fully-functioning residual to an acquirer, as is typically done with failing banks, without any loss to depositors or customers.

Second, bank capital requirements should be altered to require a substantial portion of bank debt to be of a form that automatically converts to equity in the event of capital inadequacy. This would force losses onto bondholders, rather than onto taxpayers. This policy adjustment is urgent – we have perhaps a few months to get this right.

Finally, Congress should be clear that government funds will be available only to protect the interests of depositors, not bondholders. Specifically, any funds provided by the government should be contingent on the ability to exert a senior claim to bondholders in the event of subsequent bankruptcy, even if a category is created to allow those funds to be counted as “capital” for purposes of satisfying capital requirements prior to such bankruptcy. Government-provided capital should be subordinate only to depositor claims, if equity and bondholder capital ultimately proves insufficient to meet those obligations.

Since early 2008, beginning with the provision of non-recourse funding in the Bear Stearns debacle, the Federal Reserve and the Treasury have repeatedly allocated or implicitly obligated public funds to defend the bondholders of mismanaged financial companies. This has included the outright and non-recourse purchase of nearly a trillion dollars in mortgage securities that have no explicit guarantee by the U.S. government. By purchasing these securities outright (rather than through a well-defined repurchase agreement), the Fed is effectively obligating the U.S. government to either guarantee them or to absorb any future losses.

Aside from the fraction of bailout funding that was specifically allocated by Congress through legislation, these actions represent an unconstitutional breach into enumerated spending powers that are the domain of the elected members of Congress alone. The issue here is not whether the Fed should be independent from political influence. The issue is the constitutionality of the Fed's actions. The discretion that it has exerted over the past two years crosses the line into prerogatives reserved for Congress. That line needs to be clarified sooner rather than later.

Emphatically, the trillions of dollars spent over the past year were not in the interest of protecting bank depositors or the general public. They went to protect bank bondholders. Instead of taking appropriate losses on those bonds (which financed reckless mortgage lending), those bonds are happily priced near their face value, for the benefit of private individuals, thanks to an equivalent issuance of U.S. Treasury debt. But that's not enough. Outside of a very narrow set of institutions that are subject to compensation limits, just watch how much of the public's money – which benefitted several major investment banks following a very direct route – gets allocated to Wall Street bonuses in the next few weeks.

Market Climate

As of last week, the Market Climate for stocks remained characterized by unfavorable valuations and mixed market action. The market remains significantly overbought on an intermediate-term basis, and we've seen increasing divergences from breadth, small and mid-cap stocks, trading volume, and other internals, which have lagged the most recent advance in the S&P 500 and other cap-weighted indices.

The prospect of a debt-repayment “standstill” from Dubai prompted some weakness in foreign markets that spilled over to the U.S. on Friday. This was interesting given that David Faber reported the issue on CNBC on Wednesday, to no reaction. Importantly, the payment difficulties do not stem from oil revenues, but largely from tourism and financial activity, as those are Dubai's chief industries (Dubai is home to the tallest building and the largest man-made islands in the world, for example). From that standpoint, it is difficult to imagine much in the way of contagion as a result of Dubai's difficulties.

Whatever shock the market will get from left field is likely to come from larger financial or geopolitical risks. The market for credit default swaps bears watching, but thus far we haven't observed spikes to indicate that something major is imminent. Unfortunately, as I noted earlier, investors have earned an “F” for vigilance in recent years, so our lead time on new difficulties may be shorter than we might like.

In any event, I'm pleased with the overall behavior of our stock holdings, and I expect that we'll have plenty of opportunity to increase our exposure to market fluctuations at more appropriate valuations. Presently, we've got a small amount of exposure to market fluctuations, but not enough to cause any material difficulties if the market experiences some trouble. The largest source of day-to-day fluctuations remains the difference in performance between the stocks we hold long and the indices we use to hedge. That source of risk has also been the primary contributor to returns over the life of the Fund.

In bonds, the Market Climate was characterized last week by moderately unfavorable yield levels and generally favorable yield pressures. We saw a good example of how the market is inclined to respond to fresh credit concerns last week, with upward pressure on the U.S. dollar and U.S. Treasuries, and downward pressure on foreign currencies and commodities. While I continue to believe that the dollar faces substantial risk of further erosion in its exchange value, as well as a near doubling of the CPI over the coming decade or so (both reflecting the massive increase in U.S. government liabilities in recent years), those prospects are not likely to emerge until risk-aversion about credit default materially abates. Credit concerns typically create a spike in demand for default-free assets such as U.S. government liabilities, so even though there is a much larger float than is likely to be sustained over time without inflation as the ultimate outcome, credit concerns tend to support the value of these liabilities and hence mutes immediate inflation pressures (essentially, monetary velocity declines as these liabilities are sought as a default-free store of value).

Happy Thanksgiving!!

Although there is much to keep me on my guard, I feel grateful for my wonderful family, good friends, the land we live on, my ancestors, and those who have not yet made themselves known to me. Wishing the best that life has to offer, to all.

Fubsy

Its Turkey Day...Don't be a...errr Ostrich

Here you go folks. A couple good head out of the sand articles for your Thanksgiving pleasure.

Fubsy


Mish Shedlock, Global Economic Analysis: Dubai Defaults, Deflation in Action –Watched Pot Theory Revisited.
http://globaleconomicanalysis.blogspot.com/2009/11/dubai-defaults-deflation-in-action.html

Mish gives a killer summary of the risks of debt defaults across the developed world. Things are not so rosy in the financial sector.

Barry Ritholtz, The Big {icture: Fed Reserve Endorses Crony Communism for Wealthy
http://www.ritholtz.com/blog/2009/11/federal-reserve-endorses-communism-for-the-wealthy/

Another review of the powers that control the flow of money, and their self-serving ways.

Mid Week Links

Hey Folks!

Here are a few stories to help you burn some calories as you gorge yourselves on the bounty of this Earth. If it pleases you, contact a congress person and support Auditting the Federal Reserve. Links to your reps on the right along with a handy dandy ready made letter for your empowerment and pleasure.

Fubsy

Randall Forsythe, The Wall Street journal via Barry Ritholtz at The Big Picture: The Galley Slaves Aren’t Feeling It
http://www.ritholtz.com/blog/2009/11/the-galley-slaves-arent-feeling-it/
Excellent piece on the world of economics. Highly readable.

Barry Ritholtz, The Big Picture: Treasury DKs Goldman/Fannie/BRK Tax Credit Scam.
http://www.ritholtz.com/blog/2009/11/treasury-dks-goldmanfanniebrk-tax-credit-scam

Barry always gets it down cold. In this piece he goes after Goldman, and particularly Warren Buffet, and calls him out as not so much the good American that we are lead to believe he is. Great read. There is so much deceit going on relative to big money protecting their own ass at the expense of the American public and the overall health of the economy that I believe it is imperative for the public to wake up and become informed lest we arise one morning to the lack of a middle class.


George Washington, Zero Hedge: Senator Drogan: Modern Day Bank Robbers
http://www.zerohedge.com/article/senator-dorgan-we-essentially-have-had-modern-day-bank-robbers-and-theres-been-no-accountabi
Self-explanatory: The main issue for the United States losing civil liberties, IMO.

George Washington, Zero Hedge: Instead of Fixing the Economy or Creating Jobs for Americans, Obama will Spend the Money on Iraq and Afghanistan
http://www.zerohedge.com/article/instead-fixing-us-economy-or-creating-jobs-americans-obama-will-spend-money-afghanistan-and-
What are the policies of the White House aimed at fixing? Interesting perspective.

Karl Deninger, The Market Ticker: Health Care Farce Voted Up Last Night.
http://market-ticker.org/archives/1599-Health-Care-FARCE-Voted-Up-Last-Night.html
Interesting perspective on health care reform. I don’t agree with all of it, but recognize the logic in many of Karl’s arguments, as uncomfortable as they may be.

Karl Deninger, The Market Ticker: More Extortion by the Banks
http://market-ticker.org/archives/1597-More-Extortion-By-The-Banks.html
It would do my heart good if the Too Big To Fail Banks were broken up and Glass Steagall was reinstated with Sarbannes Oxley accounting rules enforced. The big money center banks are bringing ruin to this country without conscience, IMO.

Bill Fleckensein, MSN Money Central: Obama team ignores Volcker at its peril.
http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/obama-team-ignores-volcker-at-its-peril.aspx?OCID=eml_msnnl_6004.14.2.14&REFCD=emmsnnl_6004.14.2.14
There are very few things I like about the Federal Reserve, but Paul Volcker is one of them. In the 80s he took a very unpopular route toward raising interest rates in the face of runaway inflation to curb America’s runaway spending binge, and bring the economy into balance. It paid off, and largely due to his unpopular frugality the U.S. had a solid foundation from which it was able to enter a twenty year cycle of prosperity. Read on.

Is America Finally Standing up To Wall Street?

This from Zero Hedge. A look into the democratic party's increasing unease with the President's economic team. All I can say is it's about f'n time.



Is America Finally Starting to Stand Up To Wall Street?
Submitted by George Washington on 11/21/2009 00:09 -0500

→ Washington's Blog.

Are the American people finally starting to stand up to Wall Street?

Shareholder Revolt

Some of Goldman Sach's biggest shareholders are demanding that executive compensation be reduced. As the Wall Street Journal notes:

Their complaints in private conversations with the company and at analyst meetings show how anger over its big-money culture is spilling into the ranks of investors who typically shy away from debates over Wall Street pay.
Protests

There were the protests outside of the Bankers Association meeting in Chicago. See this, this, this, this, this and this.

If you don't think that more - bigger - protests are coming, you haven't been paying attention.


Debtor's Revolt

Debtors are revolting against exorbitant interest rates and fees and other aggressive tactics by the too big to fail banks. See this, this, and this.

Congresswoman Kaptur advises her constituents facing foreclosure to demand that the original mortgage papers be produced. She says that - if the bank can't produce the mortgage papers - then the homeowner can stay in the house.

Portfolio manager and investment advisor Marshall Auerback argues that a debtor's revolt would be a good thing.

And even popular personal finance advisor Suze Orman is highlighting the debtors revolt phenomenon on her national tv show.

Congress Is Starting to Get the Message

The American people are shouting so loud at their congress members and Senators, that even some of the most pro-Wall Street congressman are starting to get it.

For example, the Congressional Black Caucus has been hearing so much about how congress is failing to address the crisis of unemployment from their constituents, that the CBC delayed Barney Frank's proposed financial reform.

The House Financial Services Committee received so many phone calls from constituents that it approved the Ron Paul/Alan Grayson bill to audit the Fed and defeated the trojan horse alternate bill written by Mel Watt. Indeed, I have heard from congressional sources that the only calls to support the Watt alternate bill were from the Fed itself. And see this.

The Committee also approved Congressman Grayson's bill to rein in foreign currency swaps.

Both Geithner and Summers are coming under increasing pressure to resign due to their being in bed with Wall Street.

Even Bernanke's re-appointment is no longer certain.

And Obama's approval ratings have now dipped below 50%, largely due to his mishandling of the economic crisis.

As Congressman Peter DeFazio notes:

There were a lot of Democrats who were "upset and nervous with" the handling of the economy by the administration.



"It is pretty embarrassing for a Democratic administration and a Democratic Congress to be identified with total attention to Wall Street and nothing for Main Street and jobs," he said. "There are a lot of Democrats who... want to see something more effective done to create employment."



DeFazio insisted that President Obama and, by extension, the Democratic Party were hampered by Geithner's policies for economic recovery. He pointed to the inability of the administration to spur small business lending and the lack of effective TARP oversight as particularly egregious examples of mismanagement. More than anything else, the Oregon Democrat deemed it untenable for the president to continue employing his current economic team given the taint of Wall Street that clings to many of those advisers.



"I have had a number of people say to me, 'I feel the same way you do but I'm not going to say it.' People are worried it will rub off on the president who still enjoys popularity," he said. "I tell them I still support the president. I just think he is being poorly served by his economic team."



"The truth of the matter," DeFazio added, "is that we have not changed the way the money is being used. It is not being used for the purpose it was supposed to be used for. We are not creating jobs and we have not aggressively taken on the culture of Wall Street"...



One of his chief concerns was that the president appeared enamored with the lords of finance. "The administration has, thus far, not threaded the needle here," he said. "They have taken care of Wall Street but not the rest of the country."

Are the American people are finally starting to awaken?

We've been down this road before
Shown worse devils to the door

Throw off our chains of slavery
Now is the time to set ourselves free
And reclaim our liberty ...

They bought the politicians and the news
They've got all the weapons (which they like to use)

But they are few and we're billions strong
We are the giant ... been sleeping for too long
Time to wake up and sing our victory song
- The Voice


The elites hate to acknowledge it, but when large numbers of ordinary people are moved to action, it changes the narrow political world where the elites call the shots. Inside accounts reveal the extent to which Johnson and Nixon’s conduct of the Vietnam War was constrained by the huge anti-war movement. It was the civil rights movement, not compelling arguments, that convinced members of Congress to end legal racial discrimination.
- PhD Economist Dean Baker

Anger is a great force. If you control it, it can be transmuted into a power which can move the whole world.
- Sivananda

The power of an aroused public is unbeatable.
- Dr. Helen Caldicott

The most powerful weapon on earth is the human soul on fire.
-Ferdinand Foch

In times of danger large groups rise to the highest pitch of enthusiasm, courage and sacrifice . . . Mankind will be refashioned and history rewritten when this law is understood and obeyed.
-Helen Keller

You let one ant stand up to us - then they all might stand up. Those puny little ants outnumber us a 100 to one. And if they ever figure that out, there goes our way of life.
- Hopper (a grasshopper who is the leader of the gang of thugs who are stealing from the other bugs, speaking to fellow grasshoppers in the Disney/Pixar movie A Bug's Life)

Shorting the Long Term US Treasury (TLT)

Hey Folks,

I've been watching TLT (long term US treasury)and TBT (double short long term treasury) for awhile. I bought a couple hundred shares of TBT today for a couple reasons.

1) The 200, 50 and 20 day averages are all now sloping downward signifying a strong case for a bear market in this asset class.

2) TLT has bounced for a few days and is coming up against the 20 day average, which has rebuffed it twice since the averages bgan their unified downward slope. I think there are good odds it will continue to do that for the time being.

3) If I'm wrong, my stop loss is less than 1% away on TLT (94.80) which would be 2% loss on TBT (or appx 1/4% to my account). On the reward side TLT could easily drop 5% from here, which allows me a 5 to 1 reqard to risk ratio. A lovely set up.

I will add to the position if TLT forms a swing day high, which it could be setting up for. Notice how it went higher today than it has in it's current up swing. If it were to close right now, the low would be 93.48. If it closed lower than that in the next couple days without breaking today's high, it tells me that demand is drying up, and supply is increasing. A good time to short, with an easy stop above the 20 day average.

Here's the chart.



Shorting the above (TLT) buying TBT (double short TLT)
Fubsy

Gold...the King

I love that most of the people I speak to who are involved in the investment world think Gold is too expensive. That tells me there is a ways to go before we have our first intermediate top of this pulse upward. Looking at the chart below, you can see that gold has repeated the same cycle four times in its almost ten year old secular bull market. A break above it's previous high, followed by an appx 15% move upward, followed by a brief 4 to 8 week consolidation period, followed by another equal pulse upward (appx 15%) before having a more significant correction, only to repeat all over again. With this pattern in mind, I'm guessing we have a few months left before gold begins it's significant consolidation phase, which would be the end of the intermediate rally, but not the end of the bull. As I've said before, secular bulls end one way...with the public becoming euphoric, and thus, irrational about the prospects of riches to be had by the asset in question. This drives the price to ridiculous levels, and convinces the masses that it will never again go down.

How many of you own gold? How many of you have dumped everything you own to buy gold? I bet no one is nodding yes at this point. My guess is that when your friends and family are all starting businesses buying jewelry, and there are multi-level marketing positions open for you to join businesses to do just that, the top will be near, and you should be selling everything you own that is gold to buy land. That is at least a oouple of these rinse repeat cycles away in my opinion.

Anyway, here is the chart.



I continue to add to positons in GLD, SLV and GDX. Do not do this because I am. Speak to a financial professional if you are considering investing in gold, and speak to them about your goals, and risk tolerance.

I reserve the right to be wrong 50% of the time. Prioritizing risk management makes that level of accuracy profitable.

Fubsy

Another Awesome Story by Matt Taibbi

Ok. For the past couple weeks I've been thinking I need to give more focus to the infuriating goings on at Goldman Sachs, the investment bank that basically staffs the federal reserve, and consequently, takes a significant slice of the trillion dollar pie per year. What does GS doe with all this generosity by the taxpayer via the Fed? Do they payt their taxes? Nah, not really. Do they contribute to charities, non profits, or many of the other pssible means of giving back to common man? Nope. They pretty much take every liberty they can to profit off the loss of public wealth, and continue to push the envelope for more. Goldman is the poster child of greed, and avarice, and they act as though they can get away with murder. Hmmm, can they Check out Matt's latest piece.

Fubsy

http://www.rollingstone.com/politics/story/30481512/wall_streets_naked_swindle

Weekly Links

As usual, there are some juicy articles to read this weekened. The theme this week doesn;t stray too far from the banking industry and current monetary policy. I don't know about you, but it gets my blood boiling. I have written and phoned congressional reps twice this week. How about you. The letter is in the right hand column, and contact info for your reps is right above it. If you're so inclined.
Fubsy

Bill Fleckensein, MSN Money Central: Obama team ignores Volcker at its peril.
http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/obama-team-ignores-volcker-at-its-peril.aspx?OCID=eml_msnnl_6004.14.2.14&REFCD=emmsnnl_6004.14.2.14
There are very few things I like about the Federal Reserve, but Paul Volcker is one of them. In the 80s he took a very unpopular route toward raising interest rates in the face of runaway inflation to curb America’s runaway spending binge, and bring the economy into balance. It paid off, and largely due to his unpopular frugality the U.S. had a solid foundation from which it was able to enter a twenty year cycle of prosperity. Read on.

Mish Shedlock, Global Economic Trend Analysis: Janet Tavakoli on Financial Meth Labs
http://globaleconomicanalysis.blogspot.com/2009/11/janet-tavakoli-on-financial-meth-labs.html
Astute, straight shooting commentary on government and federal reserve response to the credit crisis.

Steve Seville, 321Gold: Bank Reserves and Inflation
http://www.321gold.com/editorials/saville/saville110309.html
Interesting chart and sensible article. I posted it because the numbers are staggering.

Yves Smith, Naked Capitalism: Trouble Ahead: Can the Right Seize the Banking Reform Issue in 2010?
http://www.nakedcapitalism.com/2009/11/trouble-ahead-can-the-right-seize-the-banking-reform-issue-in-2010.html
This captures the importance of the issue of financial reform and projects some outcomes of the misguided attempts to avoid the hard, but effective solutions.

Ron Paul, Forbes.com: Be Prepared for the Worst
http://www.forbes.com/forbes/2009/1116/opinions-great-depression-economy-on-my-mind.html
I wish Ron Paul presented less like a whack job, because I think he was the best presidential candidate to actually reform the financial system, which in my opinion is the cornerstone to the health of our future. Unlike Obama who touts change and supports the status quo, Paul actually walks the walk. He’s just so damn kooky.

John Browne, 321Gold: Boeasting of Glory
http://www.321gold.com/editorials/browne/browne110509.html
commentary on the government and media glee over the end of the recession. What are the drivers behind our economies tepid, and fragile growth? And why should we be skeptical?

Floyd Norris, The Big Picture: The Worst Idea of 2009
http://www.321gold.com/editorials/browne/browne110509.html
Not sure I agree with the title as there have been so many bad ideas in 2009, but I would likely put this one in top 20 if I had them all before me. This is one of many infuriating instances of disregard of duty to taxpayers by a bank (In this case Goldman Sachs, the king of the bullies) who would not exist if not for taxpayer bailouts. I’m tempted to drop an F-Bomb Here.

Mark Dowie, Whiskey and Gunpowder:Urban Farming In Detroit and Big Cities….
http://whiskeyandgunpowder.com/urban-farming-in-detroit-and-big-cities-back-to-small-towns-and-agriculture
Perhaps a positive paradigm shift in the making toward more localized economies. Any Mo-Town entrepreneurial green thumbs out there? Kid Rock...Kid Rock, anyone, Kid Rock, anyone?

The Federal Reserve/Goldman Sachs and the Taxpayer

The one on your left is the Fed/GS, the one on your right is the taxpayer.



Stop it, stop it, oh, this hurts.....ahahahahhhahahahahaha

Why are we asking the banks to increase lending?

In response to....

http://www.ritholtz.com/blog/2009/11/stiglitz-u-s-paying-for-not-nationalizing-banks/

I wrote....

Barry et al,

I for one, am relieved the banks aren't increasing lending. Our public and private sectors are carrying overwhelming debt loads. When the banks increase lending, not only will our debt loads swell further, but we will feel the pain of real inflation as the excess money supply created by Federal Reserve actually hits the economy instead of sitting in the vaults of the banks. I believe the banks refusal to lend is one of the few things they have done to benefit this nation (albeit selfishly).

It is a symptom of the ignorance of government representatives that is fueling Obama and congress to insist that banks increase lending. We are a consumption addicted society and are in the process of cleansing that addiction. Unfortunately, the political powers that be (who are largely influenced by private concerns) are not willing to tolerate the pain that will come with rehabilitation from addictive spending. Consequently, it is my belief that unless this paradigm shifts, we as a nation are destined for further destruction of the freedoms we have taken for granted as we become further enslaved to debt.

IMO, nationalization of the banks would have been a critical error, which would have put too much control in the hands of a bumbling federal government and devious federal reserve. Rather, banks should have been allowed to fail, with well managed and well capitalized financial institutions allowed to bid for their assets, and those assets going to the highest bidder with no government assitance. We would likely have had several years of contracting economic production, but we would have had an opportunity to come out on the other end as a more cautious, ethical, and strong nation with reasonable fiscal practices.

People seem to be willing to do anything to avoid recession, and god forbid, depression. In my mind, stimulus aimed at avoiding a contracting economy is the elixir that will drive us to the devastating consequences of holding debt that we cannot pay off without monetizing it (printing enough money to pay our obligations) which will destroy the value of the dollar, and the middle class along with it. A nation's people cannot live the life of excess without having to feel the pain of contraction at some point. The longer we delay contraction in our economy, the greater will be the eventual financial reckoning.

Fubsy

Why Keep Geithner?

From The Big Picture, this from Dylan Ratigan on the sham that is Timothy Geithner, Barack Obama's appointed Secty of the Treasury. In my opinion, possibly the most hideous scoundrel in government today. He is Obama's Karl Rove. Except rather than create a war on terror, Geithner creates a war on the taxpayer through covert actions that reward bankers for heinous risk taking by rescuing them from failure via funds provided by the taxpayer w/o the taxpayer's consent. Read on....

Dylan Ratigan hosts the show Morning Meeting with Dylan Ratigan, which airs weekday mornings from 9 to 11 A.M. ET. Ratigan was most recently anchor and co-creator of CNBC’s Fast Money, co-anchor of CNBC’s Closing Bell, and has also been a regular contributor to MSNBC’s Morning Joe. Prior to joining CNBC, Ratigan served as a Global Managing Editor at Bloomberg News until March 2003.

~~~

A year ago it was revealed to the American people that our banking system was a legalized Ponzi scheme in which bank and insurance CEOs paid themselves billions of dollars in personal compensation to lend and insure assets with money they didn’t have to customers who couldn’t pay back the loans.

In those dark days between the fall of Lehman Brothers and before the presidential election, we were often carried through that time by the small glimmer of hope in that at least we would soon have a new leader who would hopefully fix this mess and punish those responsible.

Yet in the past 9 months, not only has the administration not fixed anything, they have made things much worse for anyone who isn’t a Wall Street banker. Therefore, we are past the point where anyone in power still gets the benefit of the doubt and the process of taking back our country for all citizens must begin now.

This is why I think we must ask if U.S. Treasury Secretary Timothy Geithner is still the right person for the job. It has become clear recently that back in his previous role as New York Federal Reserve Governor, he unnecessarily gave billions of dollars of US tax money to banks and insurance companies with few strings attached. And it is now becoming clear that his lack of meaningful action is helping many of these same banks steal more by legalizing their most economically dangerous, socially destructive and self-enriching practices.

Yesterday on NBC’s Meet the Press, Secretary Geithner again endorsed House bank reform legislation that would allow, by my calculations, as much as 80%, or $475 trillion, of the bank’s $600 trillion in crooked insurance schemes to still be held in secret. It was and is the secret risks held in this very market that led to our collapse in the first place and continue to pose massive future risk to the global economy.
He also continued to employ the bankers’ favorite, and most ludicrous, lie : that the taxpayer must somehow continue to pay executives at companies like AIG ungodly sums of money under the threat that if we don’t, somehow the taxpayer will never make their money back. Well let me tell you something, the taxpayer and our nation, will never get back the lost wealth taken under these false circumstances and this colossal breach of fiduciary duty. The idea that we must somehow perpetuate this system with our tax money and the future wealth of our children goes against the very American ideal of failure, adaptation and innovation, not to mention of our democracy.

Also last week, the Treasury Secretary endorsed a piece of legislation that instead of stopping a select few companies from profiting from the implicit taxpayer-guarantee of Too Big Too Fail seeks to officially condone it. If the most prized skill in our society economically is a competition to see who can lend and insure the most money without consequences, you have doomed our nation’s people to lose everything in the world’s largest ever betting parlor; and that is precisely the system this Treasury Secretary — Tim Geithner — is seeking to legalize in America today.

However, the smoking gun for Secretary Geithner comes from a recent Bloomberg FOIA disclosure regarding events from last November. It was then that New York Federal Reserve Governor Tim Geithner decided to deliver 100 cents on the dollar, in secret no less, to pay off the counter parties to the world’s largest (and still un-investigated) insurance fraud — AIG. This full payoff with taxpayer dollars was carried out by Geithner after AIG’s bank customers, such as Goldman Sachs, Deutsche Bank and Societe Generale, had already previously agreed to taking as little as 40 cents on the dollar. Even after the GM autoworkers, bondholders and vendors all received a government-enforced haircut on their contracts, he still had the audacity to claim the “sanctity of contracts” in the dealings with these companies like AIG.

None of us were in the rooms when these decisions were made, so I don’t pretend to know if Mr. Geithner was the one lone, sane voice of reason fighting against mysterious forces or the primary proponent. However, I fail to see the reasoning for why we continue to rely on those who were in the room when these horrendous decisions took place to be the same people that we choose to deal with their aftermath. There are just certain situations that are not suited for continuity. The best analogy I can think of is that it would be like asking Al Cowlings to spearhead the Nicole Brown Simpson murder investigation under the premise that he knows the layout and the “players” best.

The fact is that there are people who understand all of the intricacies of finance and policy as well as Secretary Geithner, but whose allegiances to the taxpayer are much clearer. People like Elizabeth Warren, Neil Barofsky, Rob Johnson, and Senator Maria Cantwell just to name a few.

To stop the theft from continuing, it requires that the most basic rules of capitalism be applied to our banks and that our future national wealth be safeguarded by the US Government. The current custodian of America’s wealth, Treasury Secretary Tim Geithner, is not doing a good job of either. The time for corrective action is now.

Follow Dylan Ratigan on Twitter: www.twitter.com/DylanRatigan

Read more at: http://www.huffingtonpost.com/dylan-ratigan/why-keep-geithner_b_341908.html

Weekly Links

*For some reason links are not working. Please copy and paste the url into your browser to link to the articles below. Thanks!!

Dan D, The Fundamental View: Audit the Federal Reserve-Update

http://thefundamentalview.blogspot.com/2009/11/audit-federal-reserve-update.html
I see this as the single most important issue in our country today. Yhe Federal Reserve controls the monetary policy of our nation, and has no regulatory body overseeing how the money is spent. This is a good intro into the issue, and its current status.

From The Big Picture, a video on Bloomberg with Josh Rosner who gives his perspective on the House Financial Appropriations Committee bill that would serve to put the moentary onus of responsibility on small and medium sized banks and hedge funds when "Too big to fail" financial institutions like Bank of America, Citigroup, Wells etc do fail. Please watch...link below.
http://www.ritholtz.com/blog/2009/10/josh-rosners-tv-rant-on-tbtf/


Peter Shiff, 321Gold: Hair of the Dog

http://www.321gold.com/editorials/schiff/schiff103009.html
Commentary on stimulus spending as it contributes to the repeating economic cycle of spend, contract, spend more, contract more, spend even more…..

Mish Shedlock, Global Economic Trend Analysis: Obama Creates 640,000 jobs at a cost of 324,000 per job.

http://globaleconomicanalysis.blogspot.com/2009/10/obama-creates-640329-jobs-at-cost-of.html
This seems like an efficient use of taxpayer funds. I'd laugh if I didn't find our current state of government to be pathetic and disturbing. But I must admit there is comedy in this downfall. And it is a downfall. Unfortunately, we have not seen the worst of the economic contraction.

Karl Deninger, The Market Ticker: Doing the Same THing Over and Over..War

http://market-ticker.org/archives/1563-Doing-The-Same-Thing-Over-And-Over-War.html
Another example of how our current administration more closely resembles the last one than not.

Tomgram: Matt Bivens, Pox Americana

Tomgram: Matt Bivens, Pox Americana

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Tomgram: Matt Bivens, Pox Americana

With up to 61% of Americans, according to a recent poll, convinced that things are going badly indeed in Afghanistan and an official 9.8% of Americans unemployed, Congress is set to respond. This week, it's slated to pass a $636 billion appropriations bill for the Pentagon that will include another $128 billion for our Afghan and Iraq Wars. Meanwhile, the president and his advisors are about to consider the latest plan by our Afghan War commander, General Stanley McChrystal, to gainfully employ up to 40,000 more Americans in Afghanistan.

By the way, as in the Bush years, all dollar figures associated with the Pentagon budget and our wars should be considered underestimates. Various military expenses like the upkeep of our nuclear arsenal aren't even in that budget. Depending on who is doing the figuring, estimates of all U.S. defense-related expenditures -- and this first budget of the Obama era is already larger than the last monster one from the Bush era -- can run upwards of a trillion dollars. As for the war expenses, they invariably prove short of the mark and end up having to be supplemented.

When it comes to the Afghan War, this is practically guaranteed. Being prosecuted many thousands of miles from home over long, often embattled, supply lines, it is proving staggeringly expensive. According to one recent estimate, for instance, it costs more than $750,000 a year simply to keep a single U.S. soldier in the field, while the cost of delivering a single gallon of gas to the war zone is estimated at up to $100.

And then, don't forget the Afghan army. Its U.S.-NATO upgrade program is already costing an estimated $8 billion a year and is clearly about to be expanded by the Obama administration. As the Afghan government is essentially poverty-stricken, that means its army is going to be U.S. property for years to come.

Consider this a small introduction to TomDispatch newcomer Matt Bivens's striking analysis of American investment practices. Tom


Follow the Money
Cure Millions of Leprosy -- or Just Give Hank Paulson a Tax Break?
By Matt Bivens

There are many possible responses to the news that we have committed more than four trillion public dollars to Wall Street.

Mine is a roar of admiration.

Four trillion dollars! Holy hell! I didn't even know that was possible!

U.S.A.! U.S.A.!

After all, the cost of World War II in inflation-adjusted dollars was $4 trillion. This bailout thing is just getting started, and already we've burned through that.

Without even noticing.

Certainly without rationing sugar or collecting scrap rubber or any of that nonsense.

Who's the Greatest Generation now, baby?

Admit it. You feel it too. Just imagine someone snatching your laptop off a table and throwing it, Olympic-discus style, hundreds... and hundreds... and hundreds of feet. Sure, you'd be upset (and stuck with the bill). But however briefly, you'd feel admiration for the physical feat: Look at that thing fly!

So it goes with our bailouts, wild tax cuts, and war budgets. The money in play is staggering, but everyone acts like that's something to mope about. Where's the excitement?

Often, after reading an incomprehensible dollar figure, I'll Google "What does a trillion dollars look like?" to get myself fired up. One example of where this takes you shows a million dollars (pathetic, wouldn't fill a grocery bag), a billion (interesting, I could fit it in a truck), and then a trillion. (Wow, it spreads for acres! Look at that tiny human included for scale!)

It turns out that the United States can pick up that sort of weight and just smash it down on whatever the hell we want. Like Optimus Prime with giant square green paper fists. Slam! Slam!

Yet we've committed not one trillion dollars to the incompetent and/or corrupt, but more than four trillion dollars. That's according to a report to Congress from special inspector general Neil Barofsky, the overseer of the bank bailout program.

Technically, Barofsky adds, Wall Street's IOU to you and me is at about three trillion dollars these days, since some of it's been paid back. Relieved? Don't be. As these tsunamis of public wealth pour out, ignore the slosh and focus on the order of magnitude. The entire Gross Domestic Product -- the number reflecting all wealth generated in this nation for this year -- is only $14.1 trillion. So whether the sum of our money that's now their money is $3 trillion (1/5th of all wealth generated in America in a year) or $4.7 trillion (1/3rd of all wealth generated in America in a year), it still means that, for a big chunk of the year, every single one of us was working for Goldman Sachs et al.

Barofsky's report also suggests that Wall Street's tab might ultimately work out to $24 trillion, which would be $80,000 per American, or $320,000 for a family of four. But that's, like, totally the worst-case scenario. (Still, wouldn't it be impressive? I envision huge, five-foot-cubed, shrink-wrapped pallets of dollars dropping from the sky onto my neighborhood, smashing houses, crushing cars, killing beloved pets, blasting craters into asphalt streets. Yeah!)

Smallpox and Bikinis

And yet could we employ this financial muscle in a more constructive way?

For an illuminating example, consider how we dealt with smallpox. That airborne virus, with its fevers reaching 106 F and signature pus-filled skin eruptions, was the greatest killer of man ever known.

In the 20th century, smallpox killed more people than all of that bloody century's wars combined.

In fact, if you tally the worldwide death tolls for World Wars I and II, the Korean and Vietnam wars, the Iran-Iraq war and the Mexican Revolution, the civil wars in China and Russia and Spain, and all the other wars of the last century, from Afghanistan to Zaire, the total is less than one-third of the smallpox death toll.

And that's just a single 100-year period, for a disease that disfigured Egyptian pharaohs, allied with Hernando Cortes to rout the Aztecs, left a young George Washington scarred, later stalked his Continental Army, and left Abraham Lincoln pale, weak, and dizzy as he delivered his Gettysburg Address.

And yet, in the 1960s, smallpox was targeted by visionary public health experts -- and in just 10 years it was gone. An excellent new book by D.A. Henderson, the doctor who led the effort, tells the story: Smallpox: The Death of a Disease.

This was a signature achievement, up there with defeating the Nazis or walking on the moon. To track down a virus in every corner of the planet, encircle it with vaccinations and kill it… I began to wonder how many five-foot-cubed pallets of Benjamins the world had brought to bear. After all, this was mankind's greatest killer -- the Joker to our Batman, Lex Luthor to our Superman. The amounts of cash flung about must have been awe-inspiring.

Chasing down the cost of the 10-year eradication campaign was not easy. Eventually, Dr. Henderson himself steered me to a 1,450-page official history of smallpox maintained as a PDF in a sleepy corner of the website of the World Health Organization (WHO). The answer, hidden away on page 1,366: $300 million.

Three hundred million?

Not trillion? Not even billion?

Such a tiny sum of money for such a tremendous feat? It's like hitting a home run at Fenway Park using a chopstick for a bat.

The price paid to defeat humanity's greatest foe wouldn't cover a 24-hour day of Iraqi combat operations. In Wall Street bailout terms, there's no way to even talk about sums this tiny. To do that, we have to go the level of overcompensated individuals. So, sure, $300 million could eradicate history's greatest killer of humans -- yet the same sum wouldn't cover the bonus pool for the executives of the insurance company AIG after its great meltdown. It's less than what just one man, Lehman Brothers CEO Richard Fuld, pulled down over the past 5 years.

It's even more striking if you remember that this was a price tag for a worldwide program whose cost was shared by multiple governments; and also a total cost over a 10-year period. To think about it in annual budgeting terms, it works out to $30 million a year. Which is approaching the ridiculous. Hell, the Sports Illustrated Swimsuit issue for 2006 featured a blond in a bikini of diamonds worth $30 million.

We Fight Over There So We Don't Have to Fight Here

These are sad economic times, sadder still when you consider the tsunamis of wealth going to waste: four trillion dollars for Wall Street welfare queens; somewhere from one to three trillion for anyone affluent enough to own a top hat and a monocle; another trillion or so (and counting) for our current military escapades abroad.

But it's also just damned exciting. Because, frankly, it's a helluva lot of money we have to play with! Even now, at one of our darkest economic hours, we could be performing miracles with the spare change left behind the national couch cushions.

If you're an engineering type, you might prefer that those miracles involve shoring up our creaking national infrastructure. Good! Go write your own article.

I'm a doctor so I'll stick with medical possibilities. Since the smallpox triumph, public health experts have been inspired to target other diseases for eradication. One is polio, a virus known for paralyzing a minority of its unluckiest victims, among them former president Franklin D. Roosevelt; two others are Guinea worm and leprosy, plagues dating back to the Bible.

The World Health Organization and the volunteer service organization Rotary International have spent two decades tracking down and vaccinating billions of people against polio. They calculate that they've prevented the paralysis of five million children worldwide.

Just this May, a 10-day frenzy saw the immunization of more than 222 million children in Africa and Asia. It was possible to watch the campaigners' march through Africa on Google Maps. Among the foot soldiers in that vaccine war: Ali Mao Moallim, who more than three decades ago became the last person on Earth to contract wild smallpox. (Others have caught smallpox in the laboratory since.)

Think about that: inoculating 222 million children in 10 days. For comparison, there are only about 80 million children in the entire United States.

Imagine inoculating every child in America in 10 days. In 10 days, we couldn't even get every voter in Florida to figure out whom they chose for president.

Not so long ago, polio roamed the globe, and each day would paralyze 1,000 children. Today, there are only some hundreds of cases each year, mostly in underdeveloped areas of Africa and Asia.

The entire 21-year slog has so far cost five billion dollars. By comparison, Wall Street executive bonuses last year -- not salaries, but bonuses, for a single year that saw the whole mess collapse and the taxpayers handed the broom -- came to $18 billion.

If you look at the polio campaign costs on an annual basis, it's about $240 million a year, or less per year than it has cost to occupy Iraq per day.

The United States has been polio-free since 1994. But if the polio campaign falters, the virus could return. This, unlike Iraqi military operations, truly is a case of having to fight them overseas so as not to face them at home.

And why would the polio campaign falter? Because there are huge demands on the public purse and we must spend judiciously; otherwise, Wall Street CEOs would have to pay for their own $87,000 area rugs and $68,000 credenzas. (What's a credenza? I had to look it up. Turns out it's that sideboard thing you only see in the movies, where Wall Street villains keep their decanters of fine whiskey for toasting the paralysis of small children.)

Casting Out the Fiery Serpent

Consider another life-saving success-for-pennies program that's evolving right now, in fact racing against polio to be the next public health triumph. We are on verge of eradicating Guinea worm, a parasite believed to be the "fiery serpent" that torments the Hebrews during the Exodus. Go read your Bible, it's in there.

A female Guinea worm matures in its victim's gut, growing two feet long. Then, over a year marked by cramping, nausea, and fevers, it burrows out of the intestines, down through a leg, and to the skin surface. A blister forms accompanied by a burning sensation -- hence the "fiery serpent." The agonized victim immerses the leg in water for relief; on cue, the worm releases a cloud of larvae. Others drink downstream, and the cycle repeats itself.

Treatment involves digging into a blister to seize the worm's head, then extracting it over days to weeks by wrapping it around a stick -- a therapeutic image that some argue may have inspired the Rod of Asclepius, the physician's symbol of a snake coiled around a staff.

Guinea worm still plagued millions when former President Jimmy Carter organized a charitable foundation and challenged his advisers to suggest a disease to stamp out. They nominated Guinea worm: Humans are its only host, so if the cycle is broken in people, the parasite will be gone.

Thanks to larvicides, nylon water filters, and education, we are almost there. Today, there are fewer than 5,000 recorded Guinea worm cases in six African countries. The total cost of this 23-year campaign to date has been $225 million. Or less than $10 million a year.

This sort of chump change is so small, you can't even talk outsize salaries; you have to focus on the tax breaks on those outsize salaries. So, consider that the following celebrities have saved the following estimated sums each year on their taxes, courtesy of Bush-era tax cuts: movie producer Jerry Bruckheimer, $5.8 million; L.A. Laker Kobe Bryant, $1.6 million; rapper 50 Cent, $6 million; real estate mogul Donald Trump, $1.2 million.

Imagine a sort of a Congressional reverse earmark -- one that canceled the Bush tax cuts only for Bruckheimer, out of punishment for Armageddon and Pearl Harbor -- and steered the resulting millions to disease control efforts. Really, would any of these men notice the slightest changes in their lives if they returned to paying Clinton-era tax rates?

When Curing Millions of Leprosy is "Failure"

But wait. Aren't some of these public health campaigns wasteful failures? Sure they are. Let's look at one public health failure: The drive to eliminate leprosy.

Caught early enough, leprosy can be cured today with the antibiotics dapsone, rifampicin, and clofazimine. Over 25 years -- courtesy of Novartis pharmaceuticals and the Japanese Nippon Foundation -- these medicines have been handed out for free, and have cured more than 14 million people of the disease. They work so well that the WHO now recommends integrating the world's 250,000 known leprosy patients into primary-care settings, just like those with any other illness.

Treatment is so effective, in fact, that several years ago the WHO launched a campaign to eliminate leprosy entirely. Ultimately it sank 15 years and about $200 million into the project. (I cannot find a link for the $200 million figure, provided to me by WHO officials in e-mail correspondence.)

But there's a logistical nightmare when trying to eliminate leprosy. Other targets such as smallpox, polio, and Guinea worm exist in one reservoir only: sick humans.

Not so with Mycobacterium leprae, a bacterium that attacks skin and nerve cells. Even today, we don't know everywhere this bug lives. It has been found in the oddest places: in armadillos in Louisiana and Texas, in the noses of healthy people in some parts of the world, and even in some soil samples.

Such a bug was never an easy target. Even so, in 1991, the World Health Organization vowed its "elimination" -- and then defined "elimination" to mean less than 1 case per 10,000 people. At such a low background level, it was hoped, the disease might dwindle into irrelevance. It hasn't worked. That 1-in-10,000 target was arrived at via politics and hopeful thinking. It was achieved worldwide in 2000, putting the WHO in the risible position of claiming "elimination!" and then seeking more money to, like, eliminate it some more.

The organization was bitterly criticized. Earnest, indignant treatises have been written noting that there is too little money to go around, and accusing the WHO of risking the credit of the more promising drives against polio and Guinea worm.

So, the anti-leprosy push was a $200 million failure.

Because it didn't eradicate leprosy.

It only cured 14 million people.

Of leprosy.

For half the price of an Alaskan bridge to nowhere.

Oddly enough, $200 million is reportedly the tax deferral enjoyed by former Goldman Sachs CEO Henry Paulson -- he of bailout infamy -- when he joined the Bush cabinet as treasury secretary.

So there you have it, finally: For $200 million of public money we can take a walk in the footsteps of Jesus Christ himself, curing millions of leprosy. A truly inspiring future is, as always, easily within reach, if we choose it.

Or we can just give Hank Paulson a tax break. Maybe throw in a credenza by way of thanks.

Matt Bivens is in his intern year at a Harvard-affiliated emergency medicine residency at Beth Israel Deaconess Medical Center. He is a former editor of the Moscow Times who lived for years in Russia, and who covered the war in Chechnya for the Los Angeles Times. His journalism has appeared in Harper's, Playboy, the Nation, and many other publications.


Copyright 2009 Matt Bivens

A Government For The People By The People

The dollar says inflation is coming as its value diminishes with the passing months. US Treasuries say deflation is our main concern as they continue to garner historically low interest rates. How can these markets broadcast polar opposite views? It’s simple: The federal reserve currently controls both markets. The federal reserve, a private bank, which could be argued is actually a private banking cartel, is printing dollars by the hundreds of billions (over two trillion in the last 18 months last time I checked) to buy US Treasuries, support insolvent corporations, and prop up asset prices like stocks and bonds. Why? Because that is the only way for our government to support its current policies of runaway spending on stimulus, bailouts, the war on terror, and to pay the interest on its rising debt. It also serves to devalue the dollar while artificially keeping interest rates low.

Essentially, the US government is borrowing money from the federal reserve, who prints the money and charges interest, which the taxpayer will be held accountable for, and also receives interest from the government for buying the T-bills, which the U.S. taxpayer will be held accountable for. Everyone with me so far?

These are but a couple of examples of how current monetary policy serves to transfer wealth from the public to private interests. Yet, you may argue that the auctioning of Treasury Bills supports our government’s ability to provide infrastructure as a foundation for the economy to function. True, but due to the inability of our government to work within its means (our current budget deficit is well over one trillion dollars for the year...and under the Bush administration we increased our national debt by over six trillion dollars), it must borrow massive amounts of money in order to function. The problem is that there are not enough borrowers to feed our insatiable need to spend. So, instead of tightening the purse strings, and allowing interest rates to rise until borrowers would be willing to take on the risk of owning U.S. Treasuries which, by the way, would contract the economy; the federal reserve and US treasury work together (again the federal reserve is not a government entity, but a private bank!!) and come up with a plan. Let’s print the money we need to buy our own debt, and also funnel money into our banks who can then buy more treasuries, as well as the stocks and bonds of the banks, and retail, and real estate companies. This way, interest rates will stay low, and stocks will go up, and it will look like everything is getting better. Meanwhile, these same corporations we're supporting who own the media, can keep pumping the American public with the message that we are recovering and everything is going to be fine. We’ve Avoided a Disaster, Hurray!

WAKE UP AMERIKA!!!

The US Government is not a government by the people for the people. It is an entity that is controlled by and supporting the interests of private corporations. The US government is currently a government of the corporation for the corporation. And as such it is printing money, which we and our kids, and our grandkids and their grandkids will pay interest on. That is if the U.S. doesn’t go bankrupt first, in which case we will be sending our kids off to wars to fight for who gets a slice of the American pie. Personally, I’d rather not go there.

Well, what can we do about that?

As far as I can tell, our representatives are still elected officials who fear losing power by being voted out of office.

1: Make noise!! Barrage your representatives in the senate and congress with phone calls, emails and letters to AUDIT THE FED!!! See the column to the right for contact information and a form letter to send to your representatives. Do it now. Do it tomorrow. Do it the next day, and the next and so on and so on. Tell your friends and family. Tell them to tell their friends. Just ask yourself, Do I value freedom? Does my society feel free? Do I believe that our freedoms are slipping away? If so, lose the complacency, and take action.

2: Transfer your money from large financial center banks. Put your money in local credit unions. Pay off credit card balances in full each month or better yet use a debit card from your local credit union. This strips power from the large banks, and redistributes it to local entities.

3: Buy from small businesses. Stop feeding money to Wallmart, Target, Costco, Best Buy etc…. and support local businesses, farmers, and food coops. Use their accessibility to talk to the owners/managers about where the business does their banking, and encourage them to also support local businesses by depositing their money at credit unions/local banks. Get viral with this shit, or my belief is that our children will be inheriting a much different set of rules than those that we have been fortunate enough to take for granted.

Fubsy

Joe Mo Fo

I love this guy! He's awake.
Beware: An F-Bomb for every dollar in circulation.

Weekly Links

Again, some tasty tidbits to digest.

Dan D, The Fundamental View: Democrats Spring to Action
http://thefundamentalview.blogspot.com/2009/10/democrats-spring-to-action.html
A brief commentary on the impetus behind Obama’s announced move to put tighter regulations on Wall Street and banks. Oh well, it’s a step in the right direction, although I agree with Dan, the motives are painfully transparent, even if the government is not. Politics are an incredible study in human avarice, greed and deception, IMO.

Dan D, The Fundamental View: Barack Obama-Worst Poll Rating Drop in 50 Years
http://thefundamentalview.blogspot.com/2009/10/barack-obama-worst-poll-rating-drop-in.html
And this prior post providing one explanation of the moves that follow a drop in popularity. Change, my ass. This should have been well in the works. Agenda item #1. Instead, Obama waits until the public’s frustration with his administration’s support of Wall Street via Geithner, Sommers, and Bernanke shows up in the polls. Yuck.

Tyler Durden, Zero Hedge: AG Goes Postal on Caruso Cabrera
http://www.zerohedge.com/article/california-ag-goes-postal-caruso-cabrera
This Rocks!! CNBS is nothing but a wall street cheerleading squad, and here they get called out by AG Brown. I love it.

Barry Ritholtz, The Big Picture: Existing Home Sales Fall in September.
http://www.ritholtz.com/blog/2009/10/existing-home-sales-fall-in-september-09/
Well folks, more bogus data by the mainstream data sources, in this case the NAR who claimed that home sales were up 9.4% in September. How do these idiots get away with their spins? Easy, Americans are still lolled into complacency, or confused into paralysis.

The Naked Capitalist: How Well has the Federal Reserve Performed for America?
http://www.nakedcapitalism.com/2009/09/5324.html

Paul B Farrell, CBS Marketwatch: The Death of the Soul of Capitalism
http://www.marketwatch.com/story/americas-soul-is-lost-and-collapse-is-inevitable-2009-10-20?pagenumber=2
A scary and all too familiar tome on how America now finds itself past its prime, and on the downhill slope to the collapse of our capitalist society. It is hard to read this type of commentary, but I believe it is prudent to do so.