Tuesday, October 5, 2010

October 5 2010: An 800-Pound Gorilla On A Serious Diet

René Magritte Delusions of Grandeur II: Megalomania 1948

Ilargi: There has been a huge amount of interest in Stoneleigh's North American and European speaking of "A Century of Challenges".

Not everyone can make it to these events, so, by strong popular demand, we have recorded the talk for viewing online. To ensure the best possible audio and video quality, we hired a professional media company to record and edit it. This has resulted in an interactive presentation that we feel proud of.

At this point in time, "A Century of Challenges" will be available only as a streaming file. That means you will not be able to download it to your computer or other device, and you will not need a box to put it in. We do plan to produce a DVD of the presentation at some time in the future (Christmas ?!), provided there's enough interest.

The streaming file format we have opted for will cost you only $12,50. Purchasing it will give you unlimited access for as many repeated viewings as you desire. The process for ordering will be explained to you on the page you reach when you click RIGHT HERE or on the new button located in the right hand column of the TAE site, directly below the banner. We sincerely hope you enjoy the presentation, learn from it as well, and get back to us with your questions and remarks.

Ilargi: First, apologies to Rick Davis at Consumer Metrics Institute for stealing his line for today's title. What can I say? The mental image is just too good not to use.

And since I want to do another post on CMI and related data anyway today, it seemed kind of fitting. And if you think that The Automatic Earth posts on CMI data threaten to become a recurring feature, you just might be on to something. I still don’t think enough people realize just how powerful these data are when it comes to catching a glimpse beyond the veil of our future.
See also:

Last week, there was a temporary lull in the downfall of the CMI Growth Indices. Since, however, they have resumed plunging, and with an apparent vengeance. The least volatile (since comprised of more data) 365-day index has been in record low territory since September 10 2010 (record low meaning below the lows of the 2008 recession). The 91-day index slipped to a record low over the weekend: the 2008 low was -6.02, today's index has slipped to -6.11 and counting.

By comparison, the Q4 2008 official GDP number was even lower at close to -7%. The Bureau of Economic Analysis just corrected the Q2 2010 number last week to +1.7%. The CMI 91-day index was at around -2 for that period. Therein of course you also see the main problem with BEA government data: it’s October, and we just got a revision of April GDP.

The only CMI index that hasn't reached a record low vs 2008 is the 183-day one: it's at -4.27 vs a record of -4.61 on November 22, 2008. At the rate the CMI indices have been falling over the past week, that record could be broken within a week, maybe two.

In August, I started out with this (now updated) graph, which combines CMI's 91-day index, the S&P 500, BEA GDP, and the great work of Doug Short at dshort.com. The "twist" that I added to their work is the lining up of the peaks and troughs. This is not some haphazard notion: CMI provides leading indicators, as substantiated by the fact that, as we saw above, BEA GDP numbers are not available until many months after they actually occur; I have allowed for about one quarter. Likewise, the stock markets follow developments in GDP by another quarter. For those who do not believe or understand this, I suggest you simply look at the graphs and the data.

Here’s that first -updated for today- graph. (NOTE: Since I chose the BEA GDP data as the "anchor", the CMI 91-day reaches well into 2011; it’s what being a leading indicator means)

The second one adds the 183-day and 365-day data from CMI. The more data, the less volatility: the peaks and troughs have been dulled.

It’s a bit harder to conceive of the proper "time-shift" to apply to these indexes versus the other data: I’ve given them some shift, but not too much. This causes peaks and troughs to be somewhat out of whack, admittedly, but the fact that all three are updated on a daily basis by CMI makes me reluctant to shift them too much. Perhaps Rick Davis and I can strike up a conversation to see how CMI would interpret this.

A more "severe" (about one extra quarter) peak and trough lining up of the three CMI indexes would look something like this:

That said, I'm not overly worried about this, since the way I see it, the real value of CMI only gets greatly enhanced by combining and averaging their three indices. That is to say, I see the 91-day index as a sometimes possibly premature warning sign, and the 365-day index as one that may be getting too dulled to be entirely reliable when it comes to the "now", because its reliance on including 1 year old data risks hiding from view sudden but very real more recent data.

The reason I wanted to get back to the CMI data today is that I found a very interesting graph in the Wall Street Journal yesterday. It's in an opinion piece called The Trade and Tax Doomsday Clocks by Donald Luskin, chief investment officer at Trend Macrolytics LLC. Mr. Luskin holds an emotional plea for continuation of the Bush tax cuts, something I have a lot of questions about, but won't get into today.

Next time I'll address the problems with the "we can’t get back to normal if we don't do [insert preference]" theme. We're still having the wrong conversation, let's leave it at that for now.

But Mr. Luskin's graph is a gem. It compares the 1936-38 Dow Jones to the one we have today. The similarities look eery. And I know that many of you will say: why would history repeat itself, how can you know it will? And others would go a step further, like Mr. Luskin himself:

Thankfully, we're not repeating all the mistakes of 1937.

Ilargi: Followed by his hobby horse warning:
But Congress and the Obama administration are flirting dangerously with one of them by failing to extend the expiring low tax rates for all Americans.

Ilargi: However, when I sent Luskin's graph to CMI's Rick Davis yesterday, his response was:
References to 1937 are more than a little scary. That was the first time that Keynesians first uttered their battle cry: "The problem with the stimulus is that we haven't spent enough yet ..."

Ilargi: Mind you, I'm not sure Mr. Luskin would appreciate being labeled a Keynesian. Nor that Rick labels him as such, for that matter.

No, it's that graph:

NOTE: I corrected the lower X-axis timeline, which was incorrect, and added the future dates for clarity.

Now, if you can see my attraction to the CMI indexes, it should be obvious why this graph takes my fancy. It’s like: no, no-one has a crystal ball, but at the same time, if you spend all the money you have, today, without an income for the next month, I SO can have an idea where you’ll be 3 weeks from now. No certainty, you may win the lottery or get engaged to Paris Hilton or Donald Trump in that timeframe, but I can certainly have an idea. Like a 95-99% one.

And that's why I play around with these data and these graphs: to get myself and my readers as close to a preview of what’s to come as I can. Many, if not most, will discard it all offhand, certainly in the face of what today looks like relatively healthy stock markets. Well, they looked just great in August 1937, too, didn't they?. That is, until they didn't.

The data from the S&P and the DOW are so similar, for obvious reasons, that I’ll use two graphs to show you what's brewing. First, just GDP and S&P, still with the timeshift I applied. (Note: I’m running out of colors for the various graphs, and have to adapt them at times. Check my little color menu bottom left when confused)

And then with the data from the Luskin graph superimposed. As you can see, the over-(under?) lapping S&P blue line is hardly visible anymore. Not a surprise. Dow and S&P are two sides of a coin.

And last, the same but with the CMI 91-day index and the darker green bars that indicate my prediction for Q3 and Q4 GDP, derived from the average of the three CMI indexes.

Do we have conclusive evidence? No. Just like you, we won't know what tomorrow looks like till it's here: there may be a nuclear war, a meteor crater or a flu epidemic. But, that said, we're way beyond tea leaves and crystal balls by now.

And so the question presents itself: looking at these graphs, how confident do you feel about an economic recovery? How likely are you to go and buy stocks tomorrow morning, other than to trade them the same day?

And most of all, what do you think American consumers, who make up for over 70% of GDP, are most likely to do over the course of the next few months?? How about underwear for Christmas?

Here's one last graph, this one from CMI itself. It compares the 2008 recession and the 2010 "whatever it’s called don't call it a recession". And it doesn't take any prisoners, now, does it? Just look at the timelines. Their interpretation:

[..] looking ahead, should the 2010 event recover from its bottom exactly like the 2008 event did, it would still experience nearly another 490 percentage-days of contraction before ending -- resulting in a grand total of 1180 percentage-days of contraction for the 2010 event, fully 49% more severe than the "Great Recession of 2008."

CMI's comment:

Looking at the chart above, the striking difference between 2008 and 2010 is the implied longevity of the current event. Projecting forward, we will probably see another 30 days of political "Fear, Uncertainty and Doubt" ("FUD") pushing the blue line laterally to the right. And when the blue line eventually starts back up, we face the real possibility that the plateau visible in the left half of the chart's blue line is the new consumer "norm," reflecting the realities of a deleveraging U.S. consumer. If that is true, the economy's "800 pound gorilla" will have gone on a serious diet.

Told you I stole that one.

And talking about "would you buy stocks in the face of this data", for a preview of next time: we're fast on our way back to what "we" were 60-70 years ago, when there were 90%+ less "investors" relative to the total population than there are today. Talk about a dying breed. Banks are not the only zombies in our economies. We're all zombies. All our wealth has evaporated, and we're just not clueing in. Pension fund? Gimme a break. Value of your home? Get real. Indispensable at your job? Let's not go there. Look at the graphs for a while, and see you next time.

René Magritte - Delusions of grandeur I - 1948

The Trade and Tax Doomsday Clocks
by Donald L. Luskin - Wall Street Journal

The nearby chart is an update of one I showed on this page in early July. It depicts how the stock market over the last year and a half has followed a path eerily similar to that of 1937. This week corresponds on the chart to mid-August 1937, when the cumulative effects of massive hikes in personal and corporate tax rates, severe monetary tightening, and aggressive business-bashing by the Roosevelt administration tipped the economy into the "depression inside the Depression." From there, stocks were in for the longest and second-deepest bear market in history.

Thankfully, we're not repeating all the mistakes of 1937. But Congress and the Obama administration are flirting dangerously with one of them by failing to extend the expiring low tax rates for all Americans. What's worse, we're close to repeating the mother of all policy errors, the one made not in 1937 but in 1930—the one that started the Great Depression. We're on track to resurrect the 1930 Smoot-Hawley Tariff Act.

Let's start with taxes. If today's low rates expire at year-end per current law, that would at a stroke reduce after-tax income for every working American, the average reduction being 3.3% according to the Tax Policy Center. Do the math: 94% of income goes to consumption, and consumption is 70% of gross domestic product. All else being equal, if the Bush tax cuts don't get extended, that's a 2.3% hit to 2011 GDP. That means instant double-dip recession, starting at midnight, Dec. 31.

Why won't the Democrats who control both houses of Congress switch off this doomsday clock? It's because Democratic leaders and the Obama administration want to roll the dice for the sake of ideology, by giving tax relief only to the middle class while letting rates rise for higher earners. A growing number of Democratic dissidents have joined with Republicans in insisting that, in this weak economy, it's more prudent that relief be given to all Americans.

Some have even undergone a supply-side conversion. Forty-seven Democrats have sent a letter to House Speaker Nancy Pelosi citing the urgency of preserving low tax rates on dividends and capital gains for the sake of more job-creating capital formation. Democratic leaders blocked Congress from taking up the matter before the October recess, fearing a humiliating defeat. Last Wednesday a resolution permitting the House to adjourn without dealing with the doomsday clock passed by a single vote, over unanimous Republican opposition and nays from 39 Democrats.

When a bill comes before the House in the lame-duck session later this year, the games will really begin. House rules allow Mrs. Pelosi, as speaker, to offer legislation under what's known as "suspension of the rules," which limits time for debate but requires a two-thirds majority to pass, rather than a simple majority. If Mrs. Pelosi offers a bill under suspension that excludes the highest earners, there's little chance she'll get enough GOP votes for the supermajority she needs. That way she can blame Republicans for the defeat of an already doomed bill many Democrats oppose, shaming the GOP for "voting against middle-class tax cuts."

Meanwhile, as we await New Year's Day when today's low tax rates expire, American taxpayers, already beset by crippling uncertainty, have no choice but to keep listening as the ticking of the doomsday clock gets louder and louder.

Now to protectionism. Last week the House passed the Currency Reform for Fair Trade Act. It's an amendment that gives dangerous new protectionist powers to the notorious Smoot-Hawley Tariff Act, the proximate cause of the global Great Depression, which after all these years is still on the books. Democrats—all but five of whom voted in favor of the bill last week—would do well to remember that in 1932 Franklin Delano Roosevelt ran as a free-trader, pledging to lower Smoot-Hawley's tariff walls. The 99 Republicans who voted aye should know that Herbert Hoover's name lives in infamy for erecting them. Instead, Wednesday's vote was a bipartisan move to build those walls higher using currencies as the bricks and mortar.

The bill, if passed by the Senate and signed by the president, would mandate that the Department of Commerce take a foreign country's currency interventions into account in determining whether its trading practices are unfair. In the case of China—the target at which this bill is aimed—Commerce would determine that the amount by which the yuan is allegedly undervalued. The number being thrown around now by supporters of the bill, such as the AFL-CIO and the United Auto Workers, is as much as 40%.

The cost basis of Chinese-made goods exported to the U.S. would then be adjusted upward by that amount to determine whether they are being sold below cost, an unfair trade practice known as "dumping." Not a single Chinese export good could survive such a test—virtually the entire volume of China's exports to the U.S. suddenly would become subject to countervailing duties.

Surely China would retaliate. That makes the bill a nuclear threat of mutual assured economic destruction. If carried out, it would crush trade between China and the United States, which are huge export markets for each other. Suppose China blinks and revalues the yuan to avert the nuclear threat. Even if this creates some American jobs, which is doubtful, it would do so by making all Chinese goods more expensive in the U.S.—an immediate inflationary tax on American consumers.

At the same time, it would make goods priced in dollars cheaper for China to import, supposedly a boon to U.S. exports. But an unintended consequence is that it will make China an even more voracious competitor for oil. That's because oil is priced in dollars, so a revaluation would make it cheaper in yuan terms. Remember, during the period from 2005 to 2008 when the yuan was revalued under similar political pressures from the U.S., the price of oil rose, not coincidentally, to $147 per barrel from $60. That could happen again—and it would be another inflationary tax on U.S. consumers.

Both issues—extending today's low tax rates, and protectionism against China—are animated by the coming election. Once that has passed, presumably cooler heads on both sides of the aisle will prevail, and these twin threats to our fragile economic recovery will fade away. But sometimes such things can take on lives of their own. And sometimes in the heat of politics cooler heads do not prevail. If that happens now with issues as critical as these, then the economy and the stock market will be doomed to repeat the tragedies of the 1930s.

Economic Measures Continue to Slow
by John Hussman - Hussman Funds

The latest evidence from a variety of economic measures continues to suggest deterioration in U.S. economic activity. Probably the best way to characterize the latest round of data from the ISM and other surveys is that the data is coming in a bit less negative than we've anticipated, but continues to deteriorate in a manner that is consistent with stagnant economic activity.

To obtain a broad indication of economic performance, we averaged eight different measures reported by the ISM and the Federal Reserve. These included the ISM National, Chicago, Cincinnati and Milwaukee surveys, as well as the Federal Reserve's Empire Manufacturing, Philadelphia, Richmond and Dallas surveys. The chart below shows the average standardized value of the overall indices, as well as the new orders and backlogs components (a standardized value subtracts the mean and divides by the standard deviation of a given series, so all of the variables are essentially Z scores).

Closer inspection shows that all of these measures dropped below zero last month. That said, these measures are not as negative as what we observe from the ECRI Weekly Leading Index, for example, so at this point we can only conclude the likelihood of tepid economic growth, not outright contraction.

Still, with the S&P 500 at a Shiller P/E over 21, and our own measures indicating an estimated 10-year total return for the S&P 500 in the low 5% area, it is clear that investors have priced in a much more robust recovery than we are likely to observe. Our long-term total return estimates are consistent with what we observed based on Shiller P/E's here - since 1940, Shiller P/E values above 21 have been associated with annual total returns for the S&P 500 averaging 5.3% over the following 7 years and 4.9% annually over the following decade.

The activity indices presented above are closely correlated with GDP growth. On that note, second quarter GDP growth was revised last week to 1.7% annualized, which was up slightly from the first revision of 1.6% growth, but down from the initial estimate of 2.4%. Based on what we observe in other data, third quarter GDP is likely to reflect continued tepid growth, though the overall activity indices did not decline enough to suggest that the economy contracted in the third quarter.

As a side note on valuation, a number of observers have suggested that the low level of dividend payouts as a fraction of operating earnings is indicative of strong prospects for reinvestment, which is then extrapolated into assumptions for high rates of future earnings growth. Unfortunately, this argument is problematic on two counts.

First, forward operating earnings are not realized cash flows. As I've noted frequently over the years, forward operating earnings represent analyst estimates of the next year's earnings excluding a whole range of chargeoffs and "extraordinary expenses" as if they do not exist. While operating earnings provide a smoother measure of business performance, they don't provide a good measure of the cash flows that are actually deliverable to shareholders.

Losses that are booked as "extraordinary" are still losses, and represent the results of bad investments and a consumption of amounts that were previously reported as earnings. Similarly, the portion of earnings used for share buybacks is often expended simply to offset dilution from grants of stock to employees and corporate insiders, and again do to reflect cash that is deliverable to shareholders. In recent years, based on the widening gap between reported operating earnings on one hand, and the sum of dividends and increments to book value on the other, a great deal of what is reported as earnings ends up evaporating as extraordinary losses and share compensation.

The second problem with the low level of dividend payouts, relative to forward operating earnings, is that there is no historical evidence whatsoever that low payouts are accompanied by higher growth in future operating earnings. To the contrary, when dividends are low relative to forward operating earnings, it is a signal that operating earnings are temporarily elevated - typically because of transitory profit margins. As a result, subsequent growth in forward earnings is actually slower than normal over the following decade.

Dividend policy is set in a very forward-looking manner. Since dividend cuts generally result in very negative events for corporations, dividend payments are set to a level that management believes it can sustain. Relative to current forward operating earnings, indicated dividend payments are near the lowest level on record. If anything, investors should take this as a signal that managements do not expect present levels of earnings to be sustained at a level that is sufficient to justify higher payouts.

In contrast, high dividend payouts (as a ratio of forward operating earnings) typically reflect temporarily depressed operating earnings, and short-term margin compression. Accordingly, elevated payouts tend to be followed by above average growth in operating earnings over the following decade. The tendency for dividend payouts to lead operating earnings growth is depicted below (see Long Term Evidence on the Fed Model and Forward Operating P/E Ratios for details on forward operating earnings prior to 1979). Suffice it to say that the low level of payouts today most likely reflects elevated and unsustainable operating margins.

On the latitude for a constructive investment stance

Based on the data that we've observed in recent months, my view remains that a fresh downturn in the economy remains a not only a possibility but a likelihood. Little of the economic improvement we've observed since 2009 appears intrinsic, but instead appears driven by enormous government interventions that are now trailing off. Still, while I believe that there is a second shoe that has not dropped, I recognize that the full force of government policy is to obscure, stimulate, intervene and borrow in every effort to kick that can down the road.

I believe that the unaddressed and unresolved problems relating to debt service, employment conditions and housing are too large for this to be successful, but as we move through the remainder of this year - as I've said throughout 2010 - we are gradually assigning greater probability to the "post-1940" dataset. Accordingly, there are developments that could potentially move us to a more constructive position. We don't observe those at present, but an improvement in economic evidence and a clearing of overbought conditions, leaving market internals intact, would be one configuration that might warrant less defensiveness.

How constructive is "constructive"? Without an improvement in valuation levels, a constructive investment exposure for us here would likely be limited to a removal of perhaps 20% of our hedges, because the improvement in expected return and reduction in expected risk will not be dramatic unless valuations retreat sharply. That said, we occasionally observe conditions that warrant placing about 1-2% of assets into call options, which would allow a subsequent market advance to soften our hedges without actually removing the put option side of our defenses.

A better configuration would include a significant retreat in valuations and a massive, if uncomfortable, amount of debt restructuring. Those two events would be the best way to put the recent (and probably ongoing) debt crisis behind us, and could easily allow us to completely lift our hedges for an extended period of time in anticipation of an unobstructed recovery.

To some extent, I view current market conditions as something of a "Ponzi game" in that valuations appear neither sustainable nor likely to produce acceptably high long-term returns, and speculators increasingly rely on finding a greater fool. As the mathematician John Allen Paulos has observed, "people generally worry only about what happens one or two steps ahead and anticipate being able to get out before a collapse... In countless situations people prepare exclusively for near-term outcomes and don't look very far ahead. They myopically discount the future at an absurdly steep rate."

Undoubtedly, we have periodically missed returns due to our aversion to risks that rely on the ability to find a "greater fool" in order to get out safely. But it is important to recognize that speculative risks are not a source of durable long-term returns. At a Shiller P/E of 21 and a historical peak-to-peak S&P 500 earnings growth rate of 6%, a simple reversion to the historical (non-bubble) Shiller norm of 14 would require seven years of earnings growth and yet zero growth in prices. Stocks are not cheap here.

Meanwhile, the U.S. financial system appears to be a nicely painted dam, behind which a massive pool of delinquent debt is obscured. A significant correction in valuations and resolution of the growing backlog of delinquent debt may finally restore strong "investment merit" to the U.S. stock market, but only after a greater amount of pain and adjustment than most investors seem to anticipate.

In general, we want to take risk in proportion to the improvement we observe in the return that we expect per unit of that risk, primarily based on long-term historical evidence about what has occurred in similar conditions. For now, we remain defensive.

Enough With the Low Interest Rates!
by Charles R. Schwab - Wall Street Journal

Fed policy punishes savers without making credit more readily available.

The Federal Reserve's experiment with near-zero interest rates, which began following the credit crisis of 2008, has now become counterproductive.

As a temporary fix it served its purpose. It was an emergency antibiotic appropriate for the illness. But continuing with the experiment is disfiguring the economy and fueling doubt. Healthy economies find their own equilibrium based on market forces of supply and demand. When people don't think market forces are driving the economy and believe instead that it is being driven by excessive government intervention, they don't take the risks an economy requires.

It's time to stop the experiment and return to monetary normalcy. The negative impact of current policy is clear. The near-zero interest rate experiment is weighing on consumer and investor confidence, and the Fed signals its lack of confidence with each "extended period" proclamation. It is providing banks with low-interest financing that can be used to create modest returns through a carry-trade in U.S. Treasurys but is adding nothing to the velocity of money, which is what actually generates economic growth.

The Fed's super-loose policy has driven down the security and spending power of savers, particularly those in retirement who played by the rules during their working years and now depend on the earnings from their savings for a decent quality of life. As a result, savers and investors are being forced to take more risk with their money as they hunt for higher yields. The extreme monetary policy is also having no positive impact on the availability of consumer or business credit, job growth or consumer and business spending.

Consumer spending accounts for two-thirds of the U.S. economy. Despite record low rates, consumer borrowing continues to retrench. As of August, we'd seen our fourth straight month of contraction to $9.1 billion. Revolving credit-card debt shrank to $7.4 billion, continuing a 20-month stretch of declines.

Small businesses that create jobs are unable to borrow in any meaningful amounts except via 100% collateralized loans. Banks continue to hold large capital bases, mostly because they have no definitive signal yet from the federal government or regulators about what their capital requirements will be. So they take the most conservative path available—they sit on their money. Today there is more than $7.5 trillion of deposits in FDIC-insured commercial banks and savings institutions, earning—and doing—essentially nothing.

It is time to let the inherent power of economic forces engage. The Fed can help by removing the "extended period of time" language at its next meeting. Elimination of this language would remove some of the glue that has lenders stuck. The Fed should then move quickly to help rates float and find a more natural level. Lenders would be less afraid of getting slammed by a sudden shift in government monetary policy, knowing instead that their pricing of credit is based on market conditions, which have historical precedent and some measure of long-term predictability.

What bank today wants to offer and then hold 30-year fixed loans at these artificial and temporary rates? Right now most of that lending ends up with Fannie Mae and Freddie Mac—a government-subsidized pool of loans bearing no relation to a natural market for credit. Savers, who today see no end in sight to the Fed's zero-interest policy, would be more careful to avoid the temptation of chasing riskier longer-term yields, knowing that rates could move up at any time.

Our economy is ready to heal. It just lacks broad-based confidence among consumers and business people. It would be a giant boost to confidence if the Fed stood aside and returned to its traditional role as defender of monetary stability.

Mr. Schwab is founder and chairman of The Charles Schwab Corporation.

It's Time For The Fed To Stop Screwing Savers And Bailing Out Banks And Borrowers With 0% Rates
by Henry Blodget - Business Insider

Charles Schwab has written an eloquent plea in the Wall Street Journal calling for the end of the Fed's zero-interest rate policy.

We second that plea.

The Fed's zero-interest-rate policy, now going into its fourth year, is hosing people who are responsible and live within their means to bail out people and companies who don't (or didn't).  Anyone who has saved money is being screwed by this policy. Anyone who borrows money is being rewarded.

The Fed's zero-interest-rate policy is also still giving a gigantic subsidy to banks by allowing them to borrow money from the government for nothing and then lend it back to the government at a ~3% interest rate.  The spread on this trade continues to produce massive Wall Street profits, and, with them, enormous bonuses--without any of the risk that is normally supposed to accompany such profitability. Once again, this policy rewards those who helped cause the crisis in the first place, at the expense of those who didn't. (If you don't understand how great it is to be a banker right now, read "How To Make The World's Easiest $1 Billion").

Why does the Fed have a "zero-interest rate" policy?  To stimulate borrowing.  If money is free, the theory goes, people and companies will borrow a boatload of it--and they'll use it to buy stuff, make investments, and create jobs.

In a garden-variety cyclical recession, this policy works.

But this time it's not working.

Why not?

Because this isn't a garden-variety recession.  This is a recession caused by too much debt. (A balance-sheet recession, as the economists say).

You can't borrow your way out of a debt problem. You have to get out of it by doing what American consumers are now doing despite the Fed's attempts to stimulate more borrowing: by spending less, saving more, and paying down (or restructuring) your debts.

American consumers are cutting back because they, if not the government, have realized that they have too much debt--and they're taking steps to reduce it. They're starting to save again--5%+ of disposable income and climbing--instead of spending every penny they earned. 

With consumers tightening their belts and the country awash in excess capacity, companies aren't borrowing money to make new investments. They're simply borrowing money to replace older, higher-priced debt--and, in the process, earning more profits for their shareholders (as a result of the artificially low interest rates).  This is another gift from taxpayers to borrowers, and it comes at the expense of companies and people with money in the bank.

How much is the Fed's zero-interest rate policy costing savers? As Charles Schwab notes, there is more than $7.5 trillion sitting in FDIC-insured savings accounts alone (this doesn't include the trillions more money-market accounts and other short-term savings vehicles).  At a normal 3% rate of interest, this money would be earning savers $225 billion a year.

Under the current zero-interest-rate policy, meanwhile, it's earning them nothing.

Not once since the start of this recession has the Fed acknowledged the real problem with the economy--that we borrowed way too much money and bought stuff we couldn't afford. It's time for the Fed to acknowledge that. It's also time for the Fed to reward behavior that will eventually get us out of the malaise: Debt reduction, savings, and a return to financial discipline. Lastly, it's time for the Fed to stop rewarding banks to doing nothing more than borrowing money for free from the government and lending it back to the government--and instead force them to earn their money the old-fashioned way, by making smart private-sector loans.

How can the Fed do this?

By simply raising short-term interest rates to a normal level, say 2%-3%.  Not suddenly, not overnight--over the period of, say, a year.  And not to a restrictive level. Just back to normal.  Just back to where rates would be if the Fed weren't doing everything in its power to get the country to borrow its way out of a debt problem.

How To Make The World's Easiest $1 Billion
by Henry Blodget - Business Insider

NOTE Ilargi: The following was originally published December 10, 2009

With all the banks paying back the TARP money, some folks are assuming that the great Wall Street bailout is finally coming to an end.

But of course it isn't! 

Taxpayers are still guaranteeing all big bank bonds (Too Big To Fail) and subsidizing huge bank earnings and bonuses with absurdly low interest rates.

But instead of bellyaching about it, you might as well just smile and cash in.  After all, that's what Wall Street's doing.

So here's how to make the world's easiest $1 billion:

STEP 1: Form a bank.

STEP 2: Round up a bunch of unemployed friends to be "bankers."

STEP 3: Raise $1 billion of equity.  (This is the only tricky step. And it's not that tricky.  See below.*)

STEP 4: Borrow $9 billion from the Fed at an annual cost of 0.25%.

STEP 5: Buy $10 billion of 30-year Treasuries paying 4.45%

STEP 6: Sit back and watch the cash flow in.

At this spread, you should be earning at least 4% per year on your $10 billion of capital, or $400 million.  Sure, there's some risk that the Fed will grow a backbone and raise short rates, but there's not much risk.  (They have an economy to fix and banks to secretly recapitalize).  And in any event, if the Fed raises short rates, making your $1 billion will just take a bit longer.  (And if they REALLY raise rates, causing you to actually lose money, it will be someone else's problem.)

You'll have made $400 million in a single year!  So pay yourself a fat salary for all your hard work.  And pay your "bankers" fat salaries for all their hard work (But don't worry--your bankers won't actually have to do anything.  You'll just need one of them to borrow the money from the Fed and buy the Treasuries, which he will be able to do part-time.)   At the end of the year, celebrate.  It's bonus time!

Don't be greedy.  Pay yourself and your bankers the industry-standard compensation ratio of 50% of revenue.  Your revenue was $400 million, so that creates a $200 million bonus pool.  Pay each of your unemployed friends bankers, say, $1 million.  And give yourself the rest for being such a smart entrepreneur and creating all the jobs and value.

Now, you've already made at least $150 million, so it doesn't really matter what happens next.  But you're in this for the world's easiest $1 billion, right?

So proceed to Step 7.

STEP 7: Go public.   After bonuses, your bank will be earning about $200 million a year, your capital ratio will be super-strong (10% equity-to-debt!), and your balance sheet will be clean as a whistle (all risk-free Treasuries!).  So you ought to be able to persuade investors to pay you at least 20-times earnings, or a valuation of $4 billion.  Sell 25% of the company for $1 billion.

STEP 8: Use your $1 billion of new equity to borrow another $9 billion at 0.25% from the Fed.  Buy another $9 billion of Treasuries.  Collect another $400 million a year.  Pay yourself and your team bonuses that are twice as large as last year's.  You deserve it!  And you're now about $500 million to the good.

STEP 9: Wait for your stock to double or triple, which won't take long given your amazing growth trajectory and clean balance sheet.  When your market cap hits $10 billion, sell another 10% of the company for $1 billion.  Now you're really ready to grow.

STEP 10: If you want to get fancy and get nice profiles written about you in business magazines, start buying branch networks from defunct banks (the FDIC will pay you to take them) and start making actual loans.  Also, start hiring trading desks to gamble on things more exotic than Treasuries.  Yes, all this sounds risky, but just remember--the risk isn't yours, and you're already $500 million to the good. 

STEP 11: Sell $500 million of your stock to a "strategic investor" and let the rest ride.  Don't worry, if your traders and loan officers turn out to be idiots or the Fed suddenly raises rates, the taxpayers will handle it.  And you've already made your $1 billion.

So, congratulations, you're now a billionaire!  Now all there is left to do is celebrate!



* If you've been paying attention, you will note that the only potentially tricky step in this process is the "raise $1 billion of equity."  Where, exactly, are you going to get $1 billion of equity?  Well, you will have to do some selling there.

Basically, you'll have to tell a few investors about your awesome new business plan (see above) that will earn them returns of at least 20% on their equity from Day 1.  A 20% return on equity is a lot, especially when the return is largely risk free. So you should have no problem raising that $1 billion of equity.

Given the government's desperate desire to get banks to start lending again, you might also want to try to hit up the government for some funds.  The pitch will be simple: Old banks aren't lending because they're hiding embedded losses and need to protect their balance sheets.  You don't have that problem.  You'll use the equity to LEND.  (And you will use it to lend!  You don't have to say that you're going to lend it to the US government.  None of the other banks are saying that.)

The Broken Global Banking System
by Ann Pettifor

Let's be honest: the banking system is now fully dysfunctional. It has failed in its primary purpose: to act as a machine for lending into the real economy. Instead the banking system has been turned on its head, and become a borrowing machine.

HuffPost readers, I know, are smart and on the button when it comes to bankers and their wicked ways. But how many Americans understand how broken and defective the banking system as a whole has become? For the crazy facts are these: bankers now borrow from their customers and from taxpayers. They are effectively draining funds from household bank accounts, small businesses, corporations, government Treasuries and from e.g. the Federal Reserve. They do so by charging high rates of interest and fees; by demanding early repayment of loans; by illegally foreclosing on homeowners, and by appropriating, and then speculating with trillions of dollars of taxpayer-backed resources.

A report out today, "Where did our money go?" from the London-based new economics foundation (declaration of interest: I am a Fellow of NEF) -- reveals that net lending to households and firms is negative. British banks are currently borrowing £12 billion ($18bn) a month to maintain existing levels of activity. According to the Bank of England, by 2011 they will have to borrow £25 billion ($39bn) a month -- and the Bank is sceptical they can continue to raise that level of funding.

According to the Bank of England UK banks are not alone in facing a significant refinancing challenge. Global banks are estimated to have around US$5 trillion of medium to long-term funding maturing over the next three years, and 'the scale of competition for funds in global markets' is intense.

By borrowing from the real economy, and then refusing to lend, except at high rates of interest, bankers are effectively performing a lobotomy on the real economy. They are cutting critical credit connections to and from the vital 'cortex' -- the region of the economy responsible for investment and the creation of jobs. Without a sound banking system and cheap, carefully regulated credit, the public and private sectors will not invest in e.g. green jobs or infrastructure. Output will continue to plummet, and unemployment and poverty to rise.

The banking system was invented in 14th century Florence, 16th Century London, and 17th century Amsterdam -- to create and disburse credit. We learned nearly five hundred years ago that a sound banking system could do just that, stimulating trade and other forms of economic activity. The effortless and almost costless creation of credit by both central and commercial banks creates deposits and savings -- and not the other way around.

This is contrary to the archaic ideas of the 'classical' economists (for which read: the Chicago School). Deposits and savings are not the result of economic activity; nor is Quantitative Easing. Instead they are the result of credit creation -- which can then be used to finance investment and jobs. Today, as NEF's report shows, thanks to the persistence of archaic, neo-liberal economic theories of finance, the banking system has frozen lending and been turned on its head.

Instead of lending into the economy, bankers are borrowing from the real economy.

Lunatic asylums are rightly discredited. Their treatment of patients was often barbaric and ultimately ineffective -- so they were consigned to the dustbin of history.

Like the asylums of yesteryear, banks are no longer fit for purpose. Their treatment of businesses and households is blunt and brutal. Built on monetary theory as outdated as Victorian lunatic asylums, the banking system is likely to implode again. That is why governments are cutting back on spending, and shoring up funds -- fully expecting another banking bailout. The governor of the European Central Bank declared as much in the FT on 5 September, this year.

What can Huff Post readers do? Get out of the 'veal pen' and refuse to cede the battleground to Tea Parties. In other words, organise, don't agonise.

Banks' $4 trillion debts are 'Achilles’ heel of the economic recovery', warns IMF
by Philip Aldrick - Telegraph

More taxpayer support is needed to ensure global financial stability despite the billions already pledged, the International Monetary Fund has warned, as banks remain the “achilles heel” of the economic recovery. Lenders across Europe and the US are facing a $4 trillion refinancing hurdle in the coming 24 months and many still need to recapitalise, the Washington-based organisation said in its Global Financial Stability Report. Governments will have to inject fresh equity into banks – particularly in Spain, Germany and the US – as well as prop up their funding structures by extending emergency support.

“Progress toward global financial stability has experienced a setback since April ... [due to] the recent turmoil in sovereign debt markets,” the IMF said. “The global financial system is still in a period of significant uncertainty and remains the Achilles’ heel of the economic recovery.”
Although banks have recognised all but $550bn of the $2.2 trillion of bad debts the IMF estimates needed to be written off between 2007 and 2010, they are still facing a looming funding shock that will need state support. “Nearly $4 trillion of bank debt will need to be rolled over in the next 24 months,” the report says. “Planned exit strategies from unconventional monetary and financial support may need to be delayed until the situation is more robust, especially in Europe... With the situation still fragile, some of the public support that has been given to banks in recent years will have to be continued.”

Although the IMF does not mention individual countries, it is clear it has concerns about the UK. According to the Bank of England, British banks need to refinance £750bn-£800bn of funding by the end of 2012, £285bn of which is emergency support that expires in the same period. The IMF adds: “Without further bolstering of balance sheets, banking systems remain susceptible to funding shocks that could intensify deleveraging pressures and place a further drag on public finances and the recovery.”

The report welcomed banks efforts to recapitalise, noting that the average tier one ratio rose above 10pc in 2009, but cautioned that “despite these improvements, banking system risks are more elevated today”. Europe’s financial system, in particular, “remains vulnerable to downside risks and further funding strains if capital buffers are not strengthened”, the IMF said, naming the regional Cajas of Spain and Landesbanken in Germany.

Even US banks may need an extra $13bn of capital if “real estate prices fell significantly”. The research shows that the UK has been relatively prudent on bad debts and capital, having wirtten off all but $50bn of the bad debts identified by the IMF – just 10pc of the total. The IMF also called for urgent global co-ordination of banking reforms, chiding regulators for having failed to agree on the details: “The sooner reforms can be clarified, the sooner financial institutions can formulate their strategic priorities and business models.

In the absence of such progress, regulatory inadequacies will continue for some time, increasing the chances of renewed financial instability. “Policymakers cannot relax their efforts to reduce refinancing risks, strengthen balance sheets, and reform regulatory frameworks.”

Governments must also address their budget deficits and public debts to help resurrect confidence in the banks and “reduce the risk that sovereign debt concerns compromise financial stability”. “Fiscal risks remain high, particularly in advanced economies and significant structural weaknesses remain in sovereign balance sheets, which could spill over to the financial system, and have adverse consequences for growth over the medium-term,” the IMF said.

However, it added that governments now face a challenge in balancing “fiscal consolidation to reduce debt on the one hand while ensuring sufficient growth on the other”. The IMF estimates in its “baseline” scenario that Britain’s debts will reach 86.4pc of GDP in 2015. But should the austerity measures result in “growth of 1pc less than the baseline”, debts will rise to 99.2pc of GDP in the same period.

The bottomless bail-out
by Economist

Ireland counts the rising cost of rescuing its banks

Bill Hicks, a chain-smoking comedian, loved to ridicule the “eternal-life fantasy” of the non-smokers in his audience. “Non-smokers die every day,” he jeered. “And you know what doctors say: ‘If only you smoked we’d have the technology to help you. It’s you people dying from nothing that are screwed.’”

This twisted logic seems now to apply to one of Europe’s most troubled economies. Ireland looks like an abstemious jogger that has suffered a heart attack. The yield on its ten-year government bonds neared 7% on September 29th, a record spread of 4.7 percentage points above those of Germany. Ireland has tried hard to fix its problems. Public-sector wages have been slashed and new taxes raised. The economy is already flexible. As its troubled banks eat up ever more cash, it now seems short of options to return it to health.

Contrast that with Greece’s flabby economy. It acted belatedly to address its troubles, and only then as a condition of a €110 billion ($145 billion) bail-out by the European Union and the IMF. But at least it can now tell a story of how the country’s ambitious reforms will bring it redemption. Greece is on target to cut its deficit to 8% of GDP this year. Spain too can point to a shrinking budget deficit and less stressed banks. Portugal, however, is slipping back: its budget deficit is likely to be bigger than last year, when it was 9.3% of GDP. The opposition is refusing to back the minority government’s 2011 budget (it wants spending cuts, not more taxes), making bond markets nervous.

For now, though, Ireland holds their attention, thanks to growing clarity about the scale of banks’ property-related losses and the amount of public money needed to rescue them. In March Ireland’s central bank said that the country’s three biggest banks must raise €28.4 billion of equity to meet a new requirement of 8% core Tier-1 capital by the end of the year. It said Anglo Irish Bank, a hugely reckless property lender that had been nationalised in January 2009, would alone need €18.3 billion. The reckoning took account of the likely losses from transferring the banks’ worst loans at a discount to NAMA, Ireland’s “bad bank”.

The Irish government injected €8.3 billion of capital into Anglo in the form of a “promissory note”, essentially an IOU. In August the value of the promissory note was bumped up to €18.9 billion, only a bit more than had been indicated in March but enough to make markets fret that bank-rescue costs were still rising (see chart).

On September 30th the bill did indeed increase. The central bank determined that Anglo needed another €6.4 billion in capital, to take account of bigger losses on NAMA assets. It doubled the cost of recapitalising Irish Nationwide Building Society (INBS), a small but troubled state-owned lender, to €5.4 billion. Ireland’s finance ministry said Allied Irish Banks might find only half of the €10.4 billion extra capital it needs by selling assets abroad. The rest will be raised by a rights issue, underwritten by the National Pension Reserve Fund (NPRF), a pot of money set aside to fund future welfare costs. At least Bank of Ireland, the country’s biggest lender, has enough capital to meet its new requirement.

Ireland’s government had hoped to keep this year’s budget deficit to around 12% of GDP. But the extra cost of fresh capital for Anglo and INBS will raise that to 32% of GDP, increasing public debt to 98.6% of GDP. On plausible assumptions Ireland’s gross debt may exceed 115% of GDP before it stabilises. Even that relies on a sustained economic recovery which is far from assured. Figures published on September 23rd showed that Ireland’s GDP fell by 1.2% in the second quarter. Recent data are more encouraging, says Gillian Edgeworth at UniCredit. But there is no sign yet of a convincing pickup in tax revenues.

The government plans a further €3 billion of measures to cut the deficit when it announces its 2011 budget later this year. Some are calling for more drastic action, though that would stiffen the headwinds blowing against a fragile economy. An alternative would be to force some bank losses onto creditors. The blanket guarantee on all bank debt and deposits made by the Irish government in September 2008 has now expired (though a separate scheme for new debt issues is being extended until the end of the year). That creates some limited scope to share the banks’ losses.

Ireland’s finance minister, Brian Lenihan, ruled out imposing losses on senior creditors, but said he expected subordinated debtholders to take a hit. One option would be to buy back Anglo’s €2.4 billion of such debt at a heavy discount to its face value. Such a trick has been used to boost Anglo’s capital before.

Ireland hopes that ending the uncertainty about the cost of bank rescues will drive a wedge between itself and the euro zone’s other troubled countries. Being bracketed together does not just scare away risk-averse lenders. Investors seduced by Greece’s 11% yields may wish to hedge their bets by selling the bonds of other euro-zone countries with weak public finances and poor growth prospects.

There is speculation that, if bond yields rise further, Ireland and Portugal might soon be forced to borrow from the European Financial Stability Facility (EFSF), the €440 billion fund established in June for struggling euro-zone countries. That is unlikely. Ireland has already raised enough money to finance this year’s borrowing requirement (it will spread the cost of bank bail-outs over several years) and has a big cash buffer besides. Portugal, too, is not anything like as desperate for cash as Greece was in the spring. But if Ireland were eventually forced to borrow from the EFSF, the fund might find it hard to impose conditions harsher than the ones it has volunteered for already. You cannot ask a non-smoker to give up cigarettes.

Joseph Stiglitz: the euro may not survive
by Kamal Ahmed - Telegraph

Joseph Stiglitz, one of the world's leading economists, has warned that the future of the euro is "looking bleak" and the fragile European economic recovery could be irreparably damaged by a "wave of austerity" sweeping the continent.

The former chief economist of the World Bank and a Nobel prize winner also predicted that short-term speculators in the market could soon start putting pressure on Spain, which is struggling with a large deficit and high unemployment. Last week, Moody's cut the country's credit rating from AAA to Aa1. The former adviser to President Bill Clinton also says that the banking sector has gone back to "business as usual" too quickly and that there are still risks of another financial crisis despite some improvements in regulation.
Mr Stiglitz, now a professor at Columbia Business School, makes the arguments in an updated edition of his book, Freefall, on the credit crunch. In the new material, exclusively extracted in today's Sunday Telegraph, he reveals fears that governments around the world will attempt to cut their deficits too quickly and risk a double dip recession.

Tomorrow, George Osborne will outline the Government's latest plans for multi-billion pound public sector cuts to tackle the historically-high UK deficit. He has faced criticism that the Coalition is in danger of cutting too hard and too fast but the Chancellor has said that without a credible programme for getting the UK economy into balance, interest rates will rise and growth will be choked off.

"The worry is that there is a wave of austerity building throughout Europe and even hitting America's shores," Mr Stiglitz said. "As so many countries cut back on spending prematurely, global aggregate demand will be lowered and growth will slow – even perhaps leading to a double-dip recession. "America may have caused the global recession but Europe is now responding in kind."

Mr Stiglitz warned that Spain, similarly to Greece, was now in the speculators' sights. "Under the rules of the game, Spain must now cut its spending, which will almost surely increase its unemployment rate still further," he said. "As its economy slows, the improvement in its fiscal position may be minimal.Spain may be entering the kind of death spiral that afflicted Argentina just a decade ago. It was only when Argentina broke its currency peg with the dollar that it started to grow and its deficit came down. "At present, Spain has not been attacked by speculators, but it may be only a matter of time."

Turning to the euro, Mr Stiglitz said that the different needs of countries with high trade surpluses, particularly Germany, and those running deficits such as Ireland, Portugal and Greece, meant that the single currency was under intense pressure and may not survive. He suggests that one way to save the euro would be for Germany to leave the eurozone, so allowing the currency to devalue and help struggling countries with exports.

"Countries that share a currency have a fixed exchange rate with each other and thereby give up an important tool of adjustment," he said. "So long as there were no shocks, the euro would do fine. The test would come when one or more of the countries faced a downturn."

Why It's Foolish to Weaken the Dollar to Create Jobs
by Robert Reich

I keep hearing the only way we're going to get jobs back any time soon is with a weak dollar. Baloney.

Here's the theory. As the dollar falls relative to foreign currencies, everything we export becomes less expensive to foreign consumers. So they buy more of our stuff, creating more jobs in the U.S. At the same time, everything they make costs us more. So we buy less from them and more from each other. Again, more jobs here at home.

Washington is actively pursuing a weak dollar as a jobs policy. (The dollar just plunged to a six-month low against the euro.) How? The Fed is keeping long-term interest rates so low global investors are heading elsewhere for high returns, which bids the dollar down. Every time another Fed official hints the Fed will start printing even more money ("quantitative easing" in Fed speak) the dollar takes another dive.

Meanwhile, Congress is ginning up legislation to allow the President to slap tariffs on Chinese imports because China is "artificially" keeping its currency low relative to the dollar. But using a weak dollar to create American jobs is foolish, for two reasons. First, no other country wants to lose jobs because its currency becomes too high relative to the dollar. So a weak dollar policy invites currency wars. Everyone loses.

At least a half dozen other countries are now actively pushing down the value of their currencies. Japan recently sold some $20 billion of yen in order to keep the yen down, the biggest ever sell-off in single day. Last week, Brazil's Finance Minister lashed out at the US, Japan and other rich nations for letting their currencies weaken to spur jobs. Brazil's high interest rates are attracting global investors and pushing up the value of Brazil's currency. This is crippling Brazil's exports and fueling unemployment.

Here's the other problem. Even if we succeed, a weak dollar makes us poorer. Imports are around 18 percent of the US economy, so a dropping dollar is exactly like an extra tax on 18 percent of what we buy. It's no big accomplishment to create jobs by getting poorer.

You want to know how to cut unemployment by half tomorrow? Get rid of the minimum wage and unemployment insurance, and make everyone who needs a job work for a dollar a day.

The Commerce Department just reported that U.S. incomes rose half a percent in August, the biggest jump since last September. That's good news. But it's no trend. Incomes plunged into such a deep hole last year that a half percent rise is still in the hole. Since the start of the Great Recession, millions of working Americans have had to settle for lower wages in order to keep their jobs. (Here at the University of California, the wage cuts are called "furloughs.")

Or they've lost higher paying jobs and can only find work that pays less. Or they've lost their benefits. Or their co-pays, deductibles, and premiums have soared. And their employer no longer matches their 401(k) contributions. Two-tier wage contracts are the newest vogue in labor relations. Older workers stay at their previous wage; new hires get lower wages and smaller benefits. Even a wage freeze becomes a lower wage over time, as inflation eats into it. For three decades America's median wage has barely budged, adjusted for inflation.

Get it? The goal isn't just more jobs. It's more jobs that pay enough to improve our living standards. Using a weakening dollar to create more jobs doesn't get us where we want to be.

Police training halts as agencies face budget cuts
by Kevin Johnson - USA Today

Even as hundreds of police officers across the country are losing their jobs, law enforcement officials say there is another disturbing casualty of the financial downturn: basic training.Nearly 70% of police agencies cut back or eliminated training programs this year as part of local government budget reductions, according to a survey this fall of 608 agencies by the Police Executive Research Forum, a Washington-based think tank. The cuts include a wide range of programs, from ethics and basic legal training to instruction on the proper use of force.
Harvey Hedden, executive director of the International Law Enforcement Educators and Trainers Association, says the cuts are "alarming." "In a lot of cases, training determines whether someone survives or not in our business," Hedden says.

Tulsa Police Chief Chuck Jordan says his department's entire in-service training program was shuttered for a year, beginning in June 2009. The shutdown interrupted crucial crime-scene investigation training and weapons instruction. Yet, faced with the prospect of layoffs, Jordan says the training cut was a "no-brainer." "We needed to keep people on the street and saw the cuts to training as a bridge to better times," Jordan says.

Daytona Beach (Fla.) Police Chief Michael Chitwood says his department's entire $200,000 training budget was wiped out this year because of municipal service reductions. The chief says he is working with local universities that have volunteered to help restore the programs, including instruction on the proper use of stun guns and how to defuse potentially dangerous confrontations with the mentally ill.

The chief says city leaders were aware of the risk of lawsuits related to potential officer mistakes and misconduct but that the city decided to "pay on the back-end." "The private sector was appalled when they found out about this," Chitwood says.

In Philadelphia, Police Commissioner Charles Ramsey says he refuses to curtail training because there is too much at stake. "When you cut back on training, officers are sued and fired. I learned a hard lesson from that," Ramsey says, referring to incidents during his previous stint as chief in Washington, D.C. "We're doing everything we can to avoid that." In some cases, the fallout may not be felt right away, but analysts say the scope of the cuts could soon create serious problems.

"When you pull away the support beams of a building, it doesn't fall down immediately," says Chuck Wexler, executive director of the Police Executive Research Forum. "But eventually, it's going to have an impact."

Yuan Revaluation for China's Own Sake
by Peter Stein - Wall Street Journal

U.S. lawmakers have put China's currency policy high up on America's political agenda. Nouriel Roubini believes it ought to be even higher on China's economic agenda. The famously gloomy economist, known in part for his prescient views ahead of the global financial crisis, says China needs to revalue its currency, the yuan, not because failure to do so hurts the U.S. Rather, keeping the yuan artificially low will lead China's own economy to hit a dangerous "growth wall" in the next two to three years, he said in an interview on the sidelines of the World Capital Markets Symposium in Kuala Lumpur last week.

Mr. Roubini, a professor of economics at New York University's Stern School of Business, isn't the only one to assert that China needs to appreciate its currency for its own sake. But amid the election rhetoric flying around Capitol Hill, where the House last week voted overwhelmingly to penalize Beijing over its currency practices, Mr. Roubini is possibly the most economically articulate observer of China to argue the point.

The starting point of Mr. Roubini's reasoning is familiar, and not even contentious: China needs to boost domestic consumption and reduce its reliance on exports. In fact, China's official government policy already embraces that concept. The problem, Mr. Roubini says, is that China's efforts to promote consumer spending ring hollow while the yuan remains weak. Consumption as a share of gross domestic product, in fact, has fallen to 36% from 45% in the last decade, compared with U.S. levels of about 70%.

The key, he argues, is the exchange rate. A cheap yuan keeps many foreign goods unaffordable, protecting state-owned enterprises, which also benefit from cheap credit. That's because suppressing the yuan's value requires China to keep interest rates artificially low. Both of these effects allow "a massive transfer of income from the household sector to the corporate sector," Mr. Roubini says.

As a result, a quarter of China's GDP is the income or the retained earnings of companies, mostly state-owned. Those funds, rather than being distributed to the wider population through dividends, instead end up in assets such as real estate and new production facilities. China's stimulus package last year, which kept the country's growth from dipping below 8% even as most of the developed world was mired in recession, only exacerbated the problem. Capital expenditure as a share of its GDP jumped to 47% from 42% as state lenders financed spending on infrastructure, housing and new production.

All that spending is creating destabilizing gluts, particularly in production capacity. Mr. Roubini singles out the car industry as an example. This year, car sales jumped from eight to 12 million vehicles, a 50% increase. But production capacity went from 10 million to 20 million vehicles. "China now has 100 separate car makers," he says. "The U.S. has only three."

There's also a glut of commercial and residential real estate, he asserts, and even a glut of infrastructure, an area of Chinese investment usually singled out for praise. "You know, I go to China six or seven times a year, and you have brand-new airports three-quarters empty," he says. "Highways to nowhere all over the country." It's hard not to take issue with some of Mr. Roubini's arguments. China's infrastructure investments help it attract new investment from abroad, and new highways and high-speed trains are setting the stage for the development of China's less-advanced inland areas. Jonathan Anderson, an economist at UBS in Beijing, says a major chunk of China's fixed investment is in much-needed housing.

Mr. Roubini won't say how much he thinks the exchange rate has to change exactly. "Whether it's going to be 5% per year or 10% per year, it doesn't matter," he says. The faster, the better.
He dismisses the argument that China can't afford to let its currency rise. While exports will fall, "the real income of households is going to increase, and they're going to consume more. You export less and you consume more," he says. Growth shouldn't be affected, though apart from "some transitional effects," he figures. (Of course, that almost certainly understates the political challenge of going up against those parties with a vested interest in the old model.)

A rising yuan has other benefits, Mr. Roubini notes: It allows China to rein in domestic inflation and gain greater control over monetary policy, which can help stave off asset and credit bubbles of the sort that wreaked havoc on Japan's economy when they burst in the 1990s. "It's for their own sake they have to do it," he says. "Otherwise, they arrive at a growth collapse."

IMF admits that the West is stuck in near depression
by Ambrose Evans-Pritchard - Telegraph

If you strip away the political correctness, Chapter Three of the IMF's World Economic Outlook more or less condemns Southern Europe to death by slow suffocation and leaves little doubt that fiscal tightening will trap North Europe, Britain and America in slump for a long time. The IMF report – "Will It Hurt? Macroeconomic Effects of Fiscal Consolidation" – implicitly argues that austerity will do more damage than so far admitted.

Normally, tightening of 1pc of GDP in one country leads to a 0.5pc loss of growth after two years. It is another story when half the globe is in trouble and tightening in lockstep. Lost growth would be double if interest rates are already zero, and if everybody cuts spending at once. "Not all countries can reduce the value of their currency and increase net exports at the same time," it said. Nobel economist Joe Stiglitz goes further, warning that damn may break altogether in parts of Europe, setting off a "death spiral".

The Fund said damage also doubles for states that cannot cut rates or devalue – think Spain, Portugal, Ireland, Greece, and Italy, all trapped in EMU at overvalued exchange rates. "A fall in the value of the currency plays a key role in softening the impact. The result is consistent with standard Mundell-Fleming theory that fiscal multipliers are larger in economies with fixed exchange rate regimes." Exactly.

Let us avoid the crude claim that spending cuts in a slump are wicked or self-defeating. Britain did exactly that after leaving the Gold Standard in 1931, and the ERM in 1992, both times with success. A liberated Bank of England was able to cut interest rates. Sterling fell. The key point is whether you can offset the budget cuts.

But by the same token, it is fallacious to cite the austerity cures of Canada, and Scandinavia in the 1990s – as the European Central Bank does – as evidence that budget cuts pave the way for recovery. These countries were able export to a booming world. They could lower interest rates, and were small enough to carry out `beggar-thy-neighbour' devaluations without attracting much notice. We were not then in our New World Order of "currency wars".

Be that as it may, it is clear that Southern Europe will not recover for a long time. Portuguese premier Jose Socrates has just unveiled his latest austerity package. He has capitulated on wage cuts. There will be a rise in VAT from 21pc to 23pc, and a freeze in pensions and projects. The trade unions have called a general strike for next month. Mr Socrates has already lost his socialist majority, leaking part of his base to the hard-Left Bloco. He must rely on conservative acquiescence – not yet forthcoming. Citigroup said the fiscal squeeze will be 3pc of GDP next year. So under the IMF's schema, this implies a 3pc loss in growth. Since there wasn't any growth to speak off, this means contraction.

Spain had a general strike last week. Elena Salgado, the defiant finance minister, refused to blink. "Economic policy will be maintained," she said. There will be another bitter budget in 2011, cutting ministry spending by 16pc. Mrs Salgado has ruled out any risk of a double-dip. But the Bank of Spain fears the economy may contract in the third quarter. The lesson of the 1930s is that politics can turn ugly as slumps drag into a third year, and voters lose faith in the promised recovery. Unemployment is already 20pc in Spain. If Mrs Salgado is wrong, Spanish society will face a stress test.

We are seeing a pattern – first in Ireland, now in Greece and Portugal – where cuts are failing to close the deficit as fast as hoped. Austerity itself is eroding tax revenues. Countries are chasing their own tail. The rest of EMU is not going to help. France and Italy are cutting 1.6pc GDP next year. The German squeeze starts in earnest in 2011. Given the risks, you would expect the ECB to stand by with monetary stimulus. But no, while the central banks of the US, the UK, and Japan are worried enough to mull a fresh blast of money, Frankfurt is talking up its exit strategy. It risks repeating the error of July 2008 when it raised rates in the teeth of the crisis.

The ECB is winding down its lending facilities for eurozone banks, regardless of the danger for Spanish, Portuguese, Irish, and Greek banks that have borrowed €362bn, or the danger for their governments. These banks have used the money to buy state bonds, playing the internal "carry trade" for extra yield. In other words, the ECB is chipping at the prop that holds up Southern Europe.

One has to conclude that the ECB is washing its hands of the PIGS, dumping the problem onto the fiscal authorities through the EU's €440bn rescue fund. That is courting fate. Who believes that the EMU Alpinistas roped together on the North Face of the Eiger are strong enough to hold the rope if one after another loses its freezing grip on the ice?

A Mammoth One in Five US Borrowers Will Default
by Michael David White - Housingstory.net

A leading mortgage analyst predicts over 11 million homeowners will default and lose their home if the government fails to take more radical intervention.
Amherst Securities Group LP, one of the most respected names in mortgage research, has trumpeted an ambitious call-to-government arms in its October mortgage report.

“The death spiral of lower home prices, more borrowers underwater, higher transition rates (to default), more distressed sales and lower home prices must be arrested.” The authors dismiss recent talk of mortgage performance improvement as statistical sleight-of-hand magically conjured by modifications.

“This ‘improvement’ (in mortgage performance) simply reflects large scale modification activity having served to artificially lower the delinquency rate” (Please see the chart above of mortgage balances delinquent and re-performing. All charts in this post are from “Amherst Mortgage Insight” dated October 1, 2010.). The report offers an astounding forecast of the fate of severe negative-equity properties. Nineteen percent of properties with a loan-to-value (LTV) of 120% or greater are defaulting every year. A death-defying 75% of mortgages on 120% LTV properties will eventually go bad (19% + 19% + 19%, …).

The current crop of mortgages is already “impaired” at the one-of-five level. Nine of 100 are seriously delinquent. Six of 100 are “dirty current” (made current by modification). Five of 100 are seriously underwater (LTV greater than 120%) (Please see the chart above categorizing the forecast of 11 million defaults.). The authors, who describe current conditions as leading to “an impossible number” of defaults and one that is “politically unfeasible”, unveil a major arms race of measures to counteract the default tide.

The solutions include mandatory principal reductions, looser underwriting of new mortgage loans, leveraged capital pools for investors, and penalties for defaulting homeowners. Amherst reports that a family who defaults can live rent-free for 20 months on average. They propose that missed mortgage payments, including property taxes and insurance, be counted as W2 income.

They make note of recent new signs of distress including two record-low readings of existing home sales in the last two reports. Another block is that underwriting standards have grown much stricter at Fannie and Freddie. Only 2% of Freddie purchases are now bad-credit borrowers where they represented about 20% of borrowers in 2006. FHA purchase mortgages, however, which have by definition much more lenient lending guidelines, have exploded upwards from roughly 10% of their lending in 2006 to more than 50% today.

The buyer pool is also compromised by the fact that 17% of borrowers now have a seriously compromised credit history. After mortgage default a typical wait-time to qualify again is anywhere from 3 to 7 years. One of the more desperate measures suggested by the authors seeks a new mortgage for those who are now behind or in danger of failing. “This (default) can be fixed by re-qualifying borrowers who are in a home they can’t afford into one they can afford.”

Risk is so high in today’s real estate market that private money has largely left the mortgage category. The retreat is most easily seen in the jumbo mortgage market. Total jumbo mortgage origination has fallen from a high of $650 billion in 2003 to $92 billion in 2009 (see the chart above). Government loans account for 90% of current originations. “If government policy does not change, over 11.5 million borrowers are in danger of losing their homes (1 borrower out of every 5),”‘ the report said, which estimates the total of homes with a first mortgage at 55 million. “Politically, this cannot happen.”

Why we need to follow the Irish and restructure our 'zombie' banks
by Liam Halligan - Telegraph

In Dublin, early last Wednesday morning, a protester rammed a cement truck – with the words "TOXIC BANK" emblazoned on the side – into the ornate iron gates of the Irish Parliament.

The following day, Brian Cowen's government unveiled its plan to pump an additional €6.4bn into Anglo Irish Bank – the real-estate lender at the heart of the Republic's property meltdown. Having been nationalised in January 2009, the total cost of rescuing Anglo Irish could now be almost €30bn. An additional €3bn capital injection into the much bigger Allied Irish Bank was also announced last week, with the state becoming majority shareholder in Ireland's second-largest lender.

Finance Minister Brian Lenihan also admitted that even more rescue finance could be needed under a "severe hypothetical stress scenario" if Irish property prices fall further, and then fail to recover. In sum, Ireland's bank rescue, we now know, could cost this relatively small country an eye-watering €50bn – more than a quarter of total annual economic output. So huge are the immediate bail-out costs that the 2010 Irish budget deficit is now on course to hit an astonishing 32pc of GDP – 10-times bigger than eurozone member guidelines.

These are absolutely ghastly numbers, of course. But guess what? The fact that they're now in the public domain, that the government forced the banking sector to "fess up" its losses, meant that Irish sovereign debt rallied after ministers made their move. That's right – borrowing costs fell, a lot, as the all-important bond market signalled its approval at Dublin's determination to impose "full disclosure".

Back in 2009, Cowen and his team were widely praised as they took genuinely decisive action to get Ireland's fiscal house in order. The previous year, the Celtic Tiger had been severely wounded – after Ireland's runaway housing market and related construction boom went bang, the country enduring an economic implosion. This was made worse by the pound's fall against the euro, which meant Ireland lost competitiveness vis-a-vis the UK – still its biggest trading partner.

All this caused an unprecedented 7.5pc contraction in Irish economic output last year. Excluding profits made by the numerous multinational companies operating in Ireland, the drop was an even more shocking 11.3pc. As the economy went into a tailspin, borrowing costs surged, preventing the investment needed for recovery and turning bad debts even worse. As a result, Ireland's budget deficit soared to 14.3pc of GDP last year. Cowen responded by imposing a one-off fiscal squeeze equivalent to around 6pc of GDP – through a combination of pay restraints, tax rises and curtailed public spending. The Irish were implementing in 12 months cuts roughly equivalent to those which British ministers insisted would take four years.

Jean-Claude Trichet, European Central Bank President, called Ireland a "role model" urging other countries to "face up to their problems, as the Irish so clearly have done – something that's now widely recognized". Sure enough, by April this year, the "spread" the bond markets charge to hold Irish 10-year debt over the German "bund" equivalent was down to 139 basis points, less than half as wide as the year before.

Since then, this spread has widened once more, reaching 450bp prior to Cowen's announcement. Ireland is now being presented in a very different light. As anti-austerity protests raged across Europe last week, trade unionists argued that Dublin's predicament shows what happens if governments "fail to support the economy", by piling debt on ever more sovereign debt.

In the UK, senior Labour politicians, who earlier in their careers showed signs of economic literacy, are peddling the same economic snake oil. Ireland shows the "extreme dangers of austerity", they say. That's the message, of course, they must deliver to their public-sector union paymasters – manipulative, selfish men who represent less than a fifth of the British workforce. Senior Labour figures should know better – and they do! They've simply allowed their intellect to be trumped by their ambition.

A closer look at Ireland highlights the absurdity of what trade unionists are now saying. Ireland isn't Greece. Dublin hasn't tapped the European Union's €750bn rescue fund and last week's announcement makes it less likely it will do so – which is why 10-year sovereign bond yields fell more than a quarter percentage point, from 449bp to 422bp.

Yes, in recent months, Ireland's "bund spread" has widened – but so has that of all eurozone "peripheral" nations. This has been partly due to Germany's economic recovery – which has lowered yields on Berlin's sovereign debt – but also been because the eurozone has so far resisted printing money on the same grotesque scale as the US and UK. That's kept the euro relatively strong, making it even harder for small export-driven member states such as Ireland to recover.

A lot of the reason Ireland's new headline fiscal numbers look so bad is that they're far more honest than equivalent data being presented elsewhere – in the UK, for instance. Ireland's gross government debt is now expected to rise from 64pc to 98pc of GDP this year. That's not high by international standards, but the increase is obviously sharp. Having said that, because Ireland has large cash balances in its National Pension Reserve Fund – net government debt will actually be around 70pc of GDP, not much more than in the UK. Consider, also, that in contrast to Ireland, the vast majority of Britain's massive public sector pension liabilities are unfunded and off-balance sheet.

Ireland's annual deficit figure – projected to balloon to 32pc of GDP – also warrants examination. This number actually includes the cost of the bank bail-outs, unlike its UK equivalent. Labour buried the cost of the RBS and Lloyds capital injections, not including them in the published deficit figures, a convention the Tories look set to continue. If Ireland followed the same methodology, its 2010 deficit would be 11pc of GDP, similar to the UK.

British ministers argue that bail-outs are "financial transactions" from which the government may eventually reap a return. So they shouldn't be included in the deficit. Such a position not only undermines the UK Government's fiscal credibility – effectively "banking" a return before it has been made. It also means the UK Government is petrified of taking the necessary steps to force banks to disclose their smouldering off balance-sheet liabilities, write-off losses and engage in root-and-branch restructuring – as that would cause the public finances to collapse.

Yet, as Japan's experience shows, such restructuring needs to happen, lest Britain's new "zombie banks" drain the life-blood out of the economy for years to come. Such necessary events can now take place in Ireland, given that the losses are "out there" and already on the Government's books.

No-one is saying the Irish economy is out of the woods. The situation is fragile – and could deteriorate. But amidst the scary headline numbers last week, few commentators noticed that Ireland cancelled bond auctions planned for October and November. That's because after a lot of pain, and some very tough decisions, the Irish government already has the cash it needs to fully-finance its budget until the middle of next year. Very few Western countries are in a similar position.

Ireland has a lot more to do. The losses that will now soon be imposed on junior creditors of its bombed-out banks should eventually spread to senior creditors too – so lightening the taxpayers' load. But, by revealing the banking sectors' vast losses and outlining a credible plan to fund them, the Irish have taken a step that others have not yet taken. Ultimately, they'll have to.

Debtors jailed in Ohio despite laws against it
by Laura A. Bischoff - Dayton Daily News

Mayors’ courts and municipal courts in Ohio routinely jail poor people who don’t have the money to pay court fines and fees — despite laws and legal rulings against the practice, according to a 92-page report by the ACLU to be released Monday, Oct. 4.

Ohio has some of the strongest statutory language and case law against debtors prisons, the report says, but “Ohio judges and lawyers are often unaware of, or simply do not follow, the relevant law. As a result, countless Ohioans languish in prisons and jails, facing a growing mountain of debt,” the American Civil Liberties Union said.

Among the individual cases cited in the report involved a $7-an-hour dishwasher in Greene County. In 2006, Howard Webb owed $2,882.36 in fines and costs that had accumulated over a decade in various criminal and traffic cases. Xenia Municipal Court Judge Susan Goldie repeatedly issued arrest warrants for Webb because he had not made good on previous payment agreements.

Under Ohio law, a defendant may only be jailed for willful nonpayment of a punitive court fine and the defendant must get $50 credit toward his fine for each day he spends in jail, the report said. Defendants cannot be jailed for failure to pay civil expenses such as court costs, restitution or other related fees, it said. Nonetheless, Webb served 204 days in jail between 2000 and 2005 and another 126 days in 2006 but never received the $50 per day credit toward his fees, the report said.

Two years later, the Ohio Disciplinary Counsel reprimanded Goldie for “flagrant disregard for the law.” The report, titled ‘In for a Penny: The Rise of America’s New Debtors’ Prisons,’ detailed debtors prisons in five states and noted that the cost of arresting and incarcerating someone often exceeds the amount owed.


Tad said...


The correlation between CMI data and GDP and S&P doesn't look all that impressive.

You're focusing on the good correlation observed in 2008 and 2009, and neglecting the crappy correlation in 2006. CMI went quite negative in 4th quarter 2006 when GDP was 3%.

It's like Stoneleigh focusing on the times when Elliot Wave was correct and forgetting about the equal number of times when it was wrong.

susan said...

The various lagged trend charts (e.g., CMI vs GDP charts) would benefit from time series analysis. Calculate the n-month lag, then calculate the correlation coefficient. You can also smooth the data using moving averages. But like anything else, it takes time.

Ilargi said...

No, Tad.

That's the shallow observation version. I have explained this quite a few times, and can't repeat it all again in every single post on the data, much as I'd like to. Go to the CMI site and read the FAQ section, I suggest.


brett said...

Ilargi, seriously valuable contribution.

Ilargi said...

Hi Susan,

Yes, there are various different ways to interpret the data.

However, the added value would remain questionable vs simply going with what you see. After all, we're dealing with projections of future events, series analysis or not. Projections like this will never be exact science. But then again, neither are BEA data, far from it.

The CMi data become solid at Q1 2007, before that they were too busy working on their model. Remember, these are people who only recently decided to work on a model of their own out of frustration with existing ones.

If they want to do time series and/or moving averages, I'l be happy to work with them on that.

But that doesn't take away from the fact that I see what I see. And, again, any attempt to scientifically prove it will of necessity only go so far.

Sometimes you got to trust your nose. And the fact that so many people think we're sailing along smoothly right now doesn't fool mine.


Ilargi said...

" brett said...
Ilargi, seriously valuable contribution."

Thanks, Brett, that's what I'm hoping for.


rapier said...

It should be noted that Luskin was once branded the stupidest man alive.


Luskin's basic shtick is to scream lower taxes and the genuflect to Ronald Reagan. The same basic career choice as Art Laffer and Larry Kudlow chose but he is a poor third in that race. Still the WSJ will give him some space once in awhile. A sort of welfare arrangement.

I don't doubt for a moment the CMI stuff but the economy has nothing to do with the stock market. The market is all about liquidity and while that used to follow the business/credit cycle with the Fed now mainlining significant juice directly into the veins of the financial system and the promise of a lot more there is no telling how high asset prices could go. I would not rule out hyper inflation of stocks or other commodity or asset classes.

Six years ago, half tongue in cheek, I proposed a future with tribes of homeless wandering the land and DOW 36,000.

Virginia said...

Goodbye Head-And-Shoulders Pattern

The technicals have spoken and their saying goodbye to that doom-centric head-and-shoulders pattern. We're definitely going to test the 1220 high on the S&P 500.

Anybody who is short this market is going to need to put wax in their ears for the next few months. We're headed higher through Christmas.

Check back after the new year.

Ilargi said...

Cheryl, Gretchen, Virginia.....

Could we at least have some level of creativeness in this litany of dull?


Virginia said...


Ilargi said...

"...the economy has nothing to do with the stock market. "

Well, it does. Not on a weekly scale, perhaps, but don't forget Wall Street's still 26-27% below its peak. That be a lot of dough.

"The market is all about liquidity and while that used to follow the business/credit cycle with the Fed now mainlining significant juice directly into the veins of the financial system and the promise of a lot more there is no telling how high asset prices could go."

Nor how low.

So that doesn't tell us much of anything. We can all of us make up seemingly intelligent reasoning like this, and towards any side and direction we choose. I could do both simultaneously, and have a stiff drink on the side while I'm doing it.

We're looking for a tad more than one dimension around here.


Gravity said...

Such are the passions of He who walks behind the Markets, none shall withstand His mighty wrathflation. Now we must make sacrifice unto Him, lest the correlated terror of His accountenance strike us insolvent.

Gravity said...

There's a pattern there, for sure, as to predictive qualities, many things could interfere with the forces behind such a pattern, but probably not nearly enough to alter or realign the general trajectory.

Ruben said...



Stoneleigh said...


I disagree, but time will tell obviously. I think we're looking at a trend reversal on a number of fronts - stocks, gold, oil, dollar vs euro etc.

rcg1950 said...

From my highly personal, micro-economic standpoint the macro CMI view makes perfect sense. Falling income (no more bonuses, falling commissions, forget about raises), higher prices for necessities and 'fixed' costs (utilities, insurance of all kinds, property taxes, commuting expenses), friends and collegues out of work, tight or non-existent credit… Money is just plain hard to come by and seems to disappear faster than one can count it. If me and my little circle of struggling middle income friends and relatives are typical (and I know many would be glad to trade places with me even in my financially stressed out position) then it's inconceivable that the real economy could be doing well. Discretionary income for vast numbers of the so called middle class is gone.

The markets can only be insulated from these realities for a while. Sooner or later companies must be able to skim off a share of some kind of cash stream to have earnings and profits and all the admittedly anecdotal evidence in my corner of the world is screaming that these flows are drying up! My assumption is that the CMI is detecting this at the macro scale. When company earnings and profits inevitably and irrefutably reflect these realities all the spinning and hyping and hoping and denying won't keep the markets from tumbling down.

What I really hate is that the state of the markets rather than the overall state of peoples' economic well being has become the benchmark and validator for the general state of the economy, if not the worth of western civilization.

rapier said...

I think the liquidity argument is a serious one. Now be honest, did you see the power of the dollar recycling mechanism, where our dollars used to import stuff, came back here to buy Treasuries and later agencies to help liquefy the system and help bring the markets out of the bear market in 03?

Did you guys catch that QEI was not just the words uttered in March 09 but a mechanism which was buying Treasuries and agencies at a rate of $100 billion a month that only decelerated this spring? I kept wincing last summer when you were leaning so heavily to a bear market come fall of 09. Such was possible because in markets and economics there is always something on the other hand but those billions a week going into the maw of the financial system were a yellow light on the bear case.

With the Fed now buying near $30 billion a month, and today they said they might buy more or less, to keep their balance sheet level, and the hints that hundreds of billions more might be on the way with full QEII another yellow flag is out on stocks and asset prices.

With central banks around world really getting serious about this competitive devaluation game, using the money presses, the fuel is going to be there for some things to fly.

There are plenty of on the other hands which could freeze and batter the markets but the well worn mechanisms that translate monetary expansion into stocks is well practiced. Some day it may end but it has to be respected.

I am with you guys 100% and if I had two nickles to rub together you would get one. I don't even want to play the devils advocate. I want to advance ideas and ideals AE represents yet I see market bearishness with any hints of short term timing quite destructive of the overall message.

The Anonymous said...

"It's like Stoneleigh focusing on the times when Elliot Wave was correct and forgetting about the equal number of times when it was wrong."

Yep - anytime anyone brings up the elliot wave, all I have to do is pull out this article:


Back in 1989, the leading elliot wavers were debating if the dow would hit 3,000 (GASP) before the great depression II kicked in sometime around 1991 or 1992.

I look at old predictions like this and just laugh and laugh and laugh!!!

Ilargi said...

So, Virginia (sorry if I mistook you for a hat) and Rapier, you are buying stocks to have and to hold till Christmas and beyond?!

It won't overly surprise you when I say that in the face of the data I wrote about today, I consider that akin to Russian roulette, and something I would never recommend my readers do. Sure, you might just win, but what are the odds? You feel that sure the CMI numbers are lying? That long-standing consumer behavior developed in a time of 0% interest money will be reversed by more of such cheap money? They can't even make it cheaper anymore, just more.I don't follow the logic implied.

And T'Anon, whoever has nothing better to do with their time than to laugh laugh laugh at something someone said 21 years ago who was not a member of Monty Python has my deepest sympathy. But not my vote.


Coy Ote said...

About the Reich article - interesting. Is that really the reason they are trying to devalue the dollar? Job creation? Seems like an offhand way to get something started, let alone accomplished?

I. M. Nobody said...

rcg1950 said...

What I really hate is that the state of the markets rather than the overall state of peoples' economic well being has become the benchmark and validator for the general state of the economy, if not the worth of western civilization.

IMHO, the best one sentence indictment of a thoroughly corrupt and sociopathic civilization that I believe I have ever seen. Whenever markets levitate while the people suffer, you should know you have discovered a civilization not worth preserving.

Virginia's assertion that S&P will hit 1220 might very well happen, given how the dollar is being plowed under, but it doesn't seem that it's worth will have actually increased in any significant way. You pays yer money and you takes yer chances. One thing is sure. The ship has a big hole below the waterline, the pumps are starting to make funny noises, and so are much of the crew. These are not Happy Days on the Good Ship Lollipop.

logout said...

ilargi, it is not that you are wrong, it is that your timing that beggars your readers. Stick to the big picture of 'the end is nigh' and you shouldn't damage too many.

Coy Ote said...

Buy stocks! Feed the corporate wolves who, along with the banksters, have taken over our culture, our representation, our jobs, and our way of life. Make yourself a few bucks, what's the diff?

Steve From Virginia said...

The most interesting graph for me is the CMI Contraction Watch. Divvying the current deflationary episodes into two is clarifying.

When does 'Contraction Number Three' begin?

If Planet Bernanke has anything to do with current events the answer will be next month, after Brent crude breaks $89 a barrel.

I think it's iffy at this stage - Stiglitz' article on the euro could be the rain on the QE parade. Nonetheless, a flood of Fed cash into crude would lead a bunch of hedge fund cash into crude as well.

A retest of the 2008 highs would not be out of the question, followed by ... (offscreen) CRASH!

Bubbles deflate and the economy would follow. Hundred dollar oil would put all four of the economy's legs in the air before the end of the year.

Say what you like about money, it isn't the oil that lubricates the economy. Oil is the oil that lubricates - and propels - the economies. All of them, across the entire globe.

Does anyone have any questions about 'Contraction Number Four'??


Stoneleigh said...

High stocks, high oil, high gold and a low dollar/high euro are trends reflecting the medium-sized rally that has been in force since July. IMO that rally is topping, and we should see trend reversals on all those parameters as a result. What we are seeing now is the psychology of a top - everyone buying into the up-trend just as it's ending (IMO).

rapier said...

I am not buying anything. That has nothing to do with it. I seem incapable of making a clear point. I try to choose words carefully to no effect.

xbrennan said...

I find the analysis very interesting and it seems to line up well the the Gallup poll of consumer spending which recently came out.

"Gallup's consumer spending measure averaged $56 per day in the two weeks ending Sept. 26. This is down from $64 and $61 during the prior two weeks of September. The most recent two weeks are not only among the lowest spending weeks of 2010 but also below spending levels of the same weeks in 2009."

In 2008 consumers were spending $99 per week.


One small observation- the chart of the sp500 has the peak showing up in about January, whereas the actual peak this year was late April. Seems to be shifted by about a quarter, I don't know if that was intentional or not.

All the same an excellent analysis.

john patrick said...

I.M. Nobody said:

"Whenever markets levitate while the people suffer, you should know you have discovered a civilization not worth preserving."

Well said. Thank you.

Charmel said...

The "Century of Challenges" talk was very informative and valuable to me, as is all the great work done here on TAE. I do have a quibble though. Stoneleigh, you mention the danger of government confiscation of gold without compensation, but I have read that not only was gold exchanged for $20.67/troy ounce (it's value at the time), citizens were able to hold on to 5oz($100 face value). Not that the government has to play by the same rules in the future, of course. I do agree however, that PM's are a long time horizon strategy to be implemented only if other preparations are in place.

I hate it that my first post comes with a correction, as I really want my appreciation to be in the forefront. It was just last week that I even knew there was a comment section! I recommend the work that you two do to everyone I know that's interested, and will continue to do so

Mr. Kowalski said...

Ben will be unleashed, to the roars and hearty congratulations of Krugman and Blankfein, on 11/3. But this has already been baked into the pie (note the recent decline in the USD). As we go forward, housing prices will fall, but commodities.. and thus prices for us serfs.. will go up nicely. I look for $110/bbl next year, or about $3.50/gal. Food prices will also go up. But for us on Main Street, deflation and the inability to get credit will be the norm, as will stagnating unemployment. Gold will hit $1,500 next year as well.

TAE Summary said...

* Luskin is the stupidest man alive; Trust you nose; Smooth sailing is misleading; A tongue in the cheek is worth two in the groove; Time will tell, especially if you grease his tongue with a few beers first

* The economy and the stock market operate in parallel universes; Fed is mainlining speed into the body economic; The market can only be insulated from reality for so long; No man putting his money in the market and looking back is fit for kingdom

* Head-and-shoulders pattern is passe'; Technical analysis now reveals nascent Quasimodo pattern which is more reliable

* Shorters will need wax in ears to resist the siren song of S&P profits; Short term gains are still possible; Feed the beast while the sun shines; Virginia recommends buying stocks; Yes, Ilargi, there is a profit clause

* CMI didn't have their act together until 2007; The S&P may reach 1220 but not in 2008 dollars; The oil of America is oil; $100 oil will put all 4 legs of the economy in the air

* Back in 1947 meteorologists predicted rain for three consecutive days for the first week of April in Muncie, Indiana, but it only rained for two hours, and that was at night! Sometimes I spend my weekends looking at old weather forecasts and just laugh and laugh and laugh

* The DOW, not public well being is now the benchmark for societal success; When markets ascend while people descend civilization is not worth saving

* Carefully choosing your stocks doesn't mean you'll get rich
Carefully graphing trends doesn't mean you can predict the future
Carefully choosing your words doesn't mean you'll be understood

* Thunder and lightning.
Enter three WITCHES.

When shall we three bid again?
On stocks and bonds, on oil and grain?
When the markets doing well,
When they're shouting "buy", not "sell",
That will be ere the closing bell.
Where the place?
Upon the street.
There Kerkorian to meet.
I come, Mike Milken.
Buffet calls.
Bear is bull, and bull is bear:
Hover through the ticker tape filled air.


jal said...

You better read the following.

Action Alert – Please tell President Obama NOT to sign the Interstate Recognition of Notarizations Act
Posted by Foreclosure Fraud on October 5, 2010 ·

On Monday, September 27, 2010, U.S. Senator Bob Casey (D-PA), on the Senate floor, asked that the Judiciary Committee be discharged from further consideration of a bill that would hurt consumers.

H.R. 3808 requires federal and state courts to recognize notarized documents from other states, including ones that contain electronic notarizations that are not subject to the same consumer safeguards of documents notarized in person. Some financial institutions are using electronic notarizations to process home foreclosure documents.

Sen. Casey asked that the Senate move forward with immediate consideration of the bill with unanimous consent that the bill pass with no other action or debate. The Senate passed the bill without amendment by unanimous consent. It now sits on the President’s desk. I’m asking you to email or call the President at 202-456-1111 to ask him not to sign the bill.

H.R. 3808 is known as the “Interstate Recognition of Notarizations Act.” It passed the House under a suspension of the rules in April 2010. It requires federal and state courts to recognize any notarization that is lawful in the state where the notary is licensed. Now, in one day, it passed in the Senate.

Mortgages are now being used as backing for securities traded all over the world by financial institutions. When a mortgage goes into default, a “chain of title” (list of its owners) must be created. It’s being discovered that many financial institutions have taken shortcuts in creating lawful chains of title that allow them to foreclose and take homes when they would not otherwise have the right under the law.

Fuser said...

Great analysis on the intro. Love the Monty Python quote as well. I wonder if this bit of history makes one laugh laugh laugh:

September 1929
"There is no cause to worry. The high tide of prosperity will continue." — Andrew W. Mellon, Secretary of the Treasury.

October 14, 1929
"Secretary Lamont and officials of the Commerce Department today denied rumors that a severe depression in business and industrial activity was impending, which had been based on a mistaken interpretation of a review of industrial and credit conditions issued earlier in the day by the Federal Reserve Board." — New York Times

December 5, 1929
"The Government's business is in sound condition." — Andrew W. Mellon, Secretary of the Treasury

December 28, 1929
"Maintenance of a general high level of business in the United States during December was reviewed today by Robert P. Lamont, Secretary of Commerce, as an indication that American industry had reached a point where a break in New York stock prices does not necessarily mean a national depression." — Associated Press dispatch.

January 13, 1930
"Reports to the Department of Commerce indicate that business is in a satisfactory condition, Secretary Lamont said today." - News item.

January 21, 1930
"Definite signs that business and industry have turned the corner from the temporary period of emergency that followed deflation of the speculative market were seen today by President Hoover. The President said the reports to the Cabinet showed the tide of employment had changed in the right direction." - News dispatch from Washington.

January 24, 1930
"Trade recovery now complete President told. Business survey conference reports industry has progressed by own power. No Stimulants Needed! Progress in all lines by the early spring forecast." - New York Herald Tribune.

March 8, 1930
"President Hoover predicted today that the worst effect of the crash upon unemployment will have been passed during the next sixty days." - Washington Dispatch.

May 1, 1930
"While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover. There is one certainty of the future of a people of the resources, intelligence and character of the people of the United States - that is, prosperity." - President Hoover

June 29, 1930
"The worst is over without a doubt." - James J. Davis, Secretary of Labor.

Fuser said...
This comment has been removed by the author.
anon10 said...

"Iceland’s police sealed off the country’s parliament with a five-foot steel fence to protect lawmakers as protestors gathered in their thousands, beating makeshift drums and hurling red paint at the legislature.

As many as 8,000 people protested outside the Reykjavik- based Althingi last night, according to a police estimate, as Prime Minister Johanna Sigurdardottir presented her key policy objectives to lawmakers.

Protestors lit a bonfire and threw firecrackers at police while others threw eggs, tomatoes and paint at the parliament as they tried to break through the steel fence protecting the building."

“The government has failed the average person in Iceland,” said Baldur Jonsson, a protestor who said the crisis cost him his job. “It protects the interests of financial institutions while it couldn’t care less about normal people who have no job, no income and have lost the ability to feed their family.”

Icelanders Hurl Eggs at Parliament in Mass Protests

logout said...

And, Stoneleigh, you might add to that money market funds are nearly depleted so there will be not much push to this market from that venue.

I am glad that you make it clear that your statement is your opinion, just like my addition is as well 'IMO'. As who knows what the Bernankes and Geithners have up their dark sleeves? Maybe a near boundless stock investing, out of thin air, fund of their own?

Carefully carefully we go.

Greyzone said...

I privately mentioned this to Stoneleigh but the extreme levels of corruption, coupled with the extreme levels of collusion between supposed regulatory authorities and the major players in this corrupt market have me now wondering if we might see something totally unexpected.

Nominally, I expect a hard deflation yet to come. But the degree of corruption now has me wondering about something else Ilargi has long noted - this is a political crisis, not a financial one. I am not trying to diminish the financial impacts, but the political crisis is larger and more deeply embedded than many people ever suspected.

I am still developing theories on what might transpire other than a classic deflationary collapse. I haven't felt comfortable discussing these concepts yet, but I may. There are forces at play here, coupled with speed of execution that was never possible in the past that make me wonder these things.

There's an old adage that the market will do the thing that hurts the most people. There is a large contingent expecting high inflation or even hyperinflation. And there is a deflationary contingent. What if an event happened that clobbered both of these groups?

How? I am not yet sure but it's pretty clear that the markets are no longer behaving like markets so using market based analysis may be the wrong way to focus.

Which brings us all the way back around to that old statement from Ilargi - this is a political crisis. And it is there that I am left wondering what might come out of the sphere of politics unexpectedly that could take us in a wholly unanticipated (and possibly even worse) direction than a financial collapse.

Coco said...

Over here in Spain, everyone, left, right and union seems simply relieved the attempted general strike is over. People I spoke too feel it was too little and way too late to do any good. Oh, and those ¨anti-establishment¨rioters in Barcelona managed to rob a boutique while smashing windows and burning and made off with thousands of euros worth of designer jeans. Not quite the profile, is it?

On a personal note, we think we´ve found our rural property. A ruined stone farmhouse on a half acre with fruit trees and a well, 2 miles outside a medieval town and 30 minutes from 2 major regional cities. The problem is that it´s really a ruin - the roof has fallen in. I´m crossing my fingers we can get major construction done before the great seize-up. I´ve been following the greenbuilding.co.uk forum, but if anyone else has some sites to recommend, I´d be grateful.

I´m so glad we´ll finally have a back yard to bury the cash in.

Ilargi said...

"rapier said...
I am not buying anything."

I know, sorry to drag you in; it's more the indirect implication of the liquidity argument, which might tempt people to buy stocks. The CMI data point strongly to the notion that this is not a good idea.

" xbrennan said...
One small observation- the chart of the sp500 has the peak showing up in about January, whereas the actual peak this year was late April. Seems to be shifted by about a quarter, I don't know if that was intentional or not."

Yes, that is intentional. I use GDP "as is", just a choice, mind you, which means CMI and S&P have to shift to get lagging and leading indicators in line.

zander said...

@ Greyzone.

I Know. I have had these wonderings for a while now, I know not what may transpire and am stuggling to get my head around a different outcome to deflationary collapse, but maybes something engineered by political/financial/corporate cabal, and with a worse outcome, if thats possible. I for one would be intrigued by any notions you have on this going forward, I'm stumped.
Keep me posted.


bill h said...

I agree with Stoneleigh that we are seeing the "psychology of the top" in the markets, with the "little people" bundling into the market. Zero Hedge points out that those in the know are meanwhile getting out at a phenomenal rate: the ration of insider selling to insider buying is now over 2000:1 ! One hell of a sucker punch here.


Bigelow said...

I agree with you QE liquidity collecting in stocks is pretty standard stuff. Equities won’t move in a straight lines though. There are bound to be down periods in the midst of relentless ramping. As a guess, anyone wanting to short may have their chance in November for a few months before increasing valuations resume at least temporarily.

Like perhaps Capital Controls on hot money?

Markets as the supreme arbiter of human well being is the core faith and pinnacle of the Cult of Markets, begun with deregulation propaganda in the U.S. 30 years ago.

I cite the following Phillips quote occasionally because it just nails it for me:

“We can begin with a simple premise: Democracy and market economics are not the same thing. Worse, the attempts to confuse and conflate them in pretended equivalence stood out at the millennium as a destructive aspect of U.S. politics. As noted, the rollbacks of democracy sketched in these chapters have accompanied the elevation of markets—-the fulfillment of the North American Free Trade Agreement, the European Union (launched as a common market) and the World Trade Organization, and the ascent of the Federal Reserve Board as the protector and liquidity provider of financial and securities markets.

Washington, Jefferson, Lincoln and the two Roosevelts would probably have been appalled. Politics and government down through the ages, while often brutal or grossly deficient, have been the subject matter of Plato and Aristotle, Aquinas and Machiavelli, Locke, and a few of America’s own great names. Markets, by contrast, descend from fairs of late medieval Europe, church-permitted safety valves for gambling, money-lending, and other forms of license. The idea that they have turned into a vehicle for human governance lacks any base beyond the occasional financial publication.”
-Kevin Phillips, Wealth and Democracy (New York, 2002), p 417-418.

zander said...

Get on this


Great interview - 27.54 mins in.


scandia said...

@Fuser...thanks for the " Book of Lies ". Particularly appreciated the 1930's Schwab comment that science will cure unemployment. It echos to-day in the belief that technology will cure unemployment.

Stoneleigh said...

The idea of 'relentless ramping' suggests that there are 'powers that be' who are in control of the situation. I disagree completely. I do think there are people who are trying to be in control for their own purposes, and it suits them (at least for now) if others believe they are in control. I think this is an illusion spawned by the long rally of March 2009 to April 2010, and it's smaller mirror from July to now. rallies are kind to central authorities. declines are not, and I firmly believe we are headed right into the teeth of one.

No one has the power to drive major market trends. Those are determined by the power of the collective. Where the herd is going will determine whether or not attempted interventions appear to be successful. The causation runs the opposite way to what most people suppose.

Rallies can take many forms, some of which are complex and extended. Calling the end of one can be tricky, because all such calls are probabilistic. A rally can end after a simple form has been satisfied, or can continue to a more complex structure. It is right to inform people when a potential top has been reached (ie when a top is the highest probability outcome at that time), whether or not that proves to be the final top.

The fundamentals (including injections of stimulus funds) do not drive markets. Markets have their own internal dynamics, which can be charted without any reference to the fundamentals at all. Makets are a complex interaction between the observer and the system in swings of positive feedback. This is what elliottwaves track, at all degrees of trend simultaneously.

Linda said...

I'd like to buy some silver coins, but have no idea how to go about it. Advice?

Stoneleigh said...

Someone said on the last thread that JMG had said the Transition Towns movement could morph into an anger-driven phenomenon, like I perceive the Tea Party to be. I wanted to say that I agree. The potential is there for all mass movements to be so co-opted, as the upwelling of anger will be so powerful.

If that happened, I would not hesitate to oppose it. I do not oppose movements on the basis of left versus right, but on the basis of constructive versus destructive. IMO anger is unconsructive right now, especially as it is very likely to become something much more virulent. Anger, however understandable, is the fuel for the fire we are headed into. The more people can maintain a constructive mindset going forward, the better off all of us will be.

Alexander Ac said...

Greetings from Washington!

Looking forward for tomorrows ASPO conference and Stoneleigh especially.


Coy Ote said...

Some facets of the worldwide political/financial/energy crisis" I wonder about is...

U.S. ...what are the activities going on behind the scenes, by both major parties, to keep the impending crash from happening on their watch! We know they are! Bush barely was able to pass the hot potato onward to Obama. Will O's team manage to prop up things until Nov. of 2012? And then what?

...beyond the U.S., to what extent are the political structures of the various countries (properly so)working to salvage something of their own economy/resources at the expense of a concerted effort for the whole.

...are the major economic forces, international bankers, financial P's TB, moneymasters, all truly a cadre of sinister moguls or are they mostly sincere and merely trying to take the path of least (human) collateral damage.

The human mind sorts, senses, and categorizes reality in order to deal with it effectively. We see in this current mix three major elements, political, economic, and energy-resource but isn't it in reality just a massive evolved whole, made up of complex interactive and interwoven elements too complicated to predict?

Virginia said...

Stoneleigh and Ilargi:

What were you predicting would happen after the tech crash in 2000 and 2001?

Did you really think the markets would recover after the bear market decline of 2002?

There is no record of your thoughts from that period so we're all left to guess.

However, given that Stoneleigh took the dramatic step of uprooting her family and career from Britain to return to Canada, I surmise that she was predicting a fairly imminent collapse, just like she is now.

I'm further guessing that neither of you expected or predicted there to be a huge bull market from 2003 - 2008 and also a housing bubble. Here at the Automatic earth, we only have a record of your opinions since fall 2007. Based on that time frame, your predictions are fairly decent....although your estimate for the recovery rally has been off by a mile.

What I want to know is:

What were you two predicting would happen back in 2002 ?

Ventriloquist said...

Greyzone said:

There is a large contingent expecting high inflation or even hyperinflation. And there is a deflationary contingent. What if an event happened that clobbered both of these groups?

Oh, I can think of several, actually.

But for sheer catastrophic impact (second only to a major asteroid hit) - - -

How about if the Greenland ice sheet slides off into the North Atlantic and raises ocean levels by 23 feet?

That would take out a fair number of hyperinflationists and deflationists together, no?



Kurt said...

I guess I must not be paying enough attention, but I found this shocking -

From Zero Hedge:

Which means that if today's POMO operation, which launches imminently, is larger than $2 billion, the Fed will become the second largest holder of US paper in the world. And it won't stop there: China is merely $25 billion away. At a run rate of $10 billion in POMO purchases per week, the Fed will be the largest holder of US Treasuries in the world before the midterm elections.

DIYer said...

This article was in today's paper about a shuttered suburban development project:

When we drove Paula's car out to Hamilton Pool in the hills west of Austin, we drove past that development. Ten years ago they would have piped in water from Lake Travis and bulldozed most of the remaining trees (shrubs really) and slapped together some houses, which would go for ½ or ¾ of a million dollars.

DIYer said...

I'd like to buy some silver coins, but have no idea how to go about it. Advice?

I have done business with this broker, and find him to be a reasonable honest guy (a bit to the right in his political sentiments, though).
(also assuming you live in the US)
I just sent most of my stash back to him for $'s, however. Seemed like a good time to do it and I can use the normal money right now.

Wallace said...

Markets are a Ham sandwich.

There is no model which reliably describes or predicts market dynamics. Therefore, we can define markets any way we want, and that description adds nothing to understanding.

Stoneleigh says:
"Makets are a complex interaction between the observer and the system in swings of positive feedback. This is what elliottwaves track, at all degrees of trend simultaneously."

Stoneleigh, to make this claim, you need some kind of model that has superior explanatory power and predictive capacity. No model like that exists in the public domain. Certainly elliotwaves don't have a better track record than anything else currently available. Elliotwaves have, arguably, a worse track record than many other technical analysis methodologies.

Thus, you might as well say that Markets are a ham sandwich with just as much justification as the definition you chose.

Ventriloquist said...

Interesting snip from a posting today on ZH under the title "What's next for gold?" --

Although not many have noticed, the re-emergence of inflation has already started. Anyone who looks at the blistering price rises of wheat, corn, soybeans, sugar, iron ore, coal, and other key raw materials can’t look me straight in the eye and say there’s no inflation. Of course the last place you will find it is in government statistics, a deep lagging indicator.

The fall is always the peak demand time of year for the yellow metal, and the Fed’s recent move towards QEII is likely to give the barbarous relic a shot of steroids. The only question here is whether a $100 pull back starts here, at $1,350, $1,400, or even $1,500. When it does, you can expect a ton of buying waiting for it below from central banks, institutional investors, ETF’s, and individuals alike.

This assessment strikes me as pretty much on the money. As has been mentioned before by Jim Sinclair and others who have tracked and traded gold over the last half-century -- the price of gold is NOT about inflation or deflation. The price of gold is about the people losing confidence in their countries' currencies, and the their lack of confidence in their governments.

As Dylan Grice, the senior commodities analyst for Society Generale stated this past March --

The reason I own gold is because I'm worried about the long-term solvency of developed market governments.

The stock, bond, and commodities markets can go up, down, or twist themselves into pretzels. But until the people of this world regain confidence in the ability of their governments to effectively and honestly manage their economies (and THAT is to be seen nowhere on this side of the event horizon) then the decade-long uptrend in gold will only continue.


jal said...

The best line of this article

“... very vicious, painful, and extended litigation with the servicers. Lots of litigation.”



OCTOBER 6, 2010
Mortgage Investors Are Set for More Pain

In the past two weeks, three major loan-servicing companies put thousands of foreclosure sales and evictions on hold in the 23 U.S. states where foreclosures are handled by the courts.

On Tuesday, House Speaker Nancy Pelosi called for a federal investigation into the issue.

"We urge you and your respective agencies to investigate possible violations of law or regulations by financial institutions in their handling of delinquent mortgages, mortgage modifications, and foreclosures," Ms. Pelosi and 30 other California House Democrats said in a letter sent to Federal Reserve Chairman Ben Bernanke, Attorney General Eric Holder and John Walsh, the acting comptroller general of the Treasury.

The stoppage is but the latest frustration for bond investors, who have wrestled for more than three years with a market in disarray.

"It's symptomatic of sloppy servicing and a lack of adherence to contract and property law, which we've seen examples of over and over again in the last two years," said Scott Simon, a managing director at Pacific Investment Management Co., or Pimco, a unit of Allianz SE.

The Association of Mortgage Investors, a trade association, has called on trustees, who oversee loan pools on behalf of investors, to demand that loans be repurchased by their originators if required documents are missing.

Typically, sellers have 90 days to fix such problems or buy back the loan. The group has also asked trustees to audit and hold servicers accountable for any losses due to improper servicer practices.

Nimrod said...


First off, in my opinion, this is not the time to buy precious metals, because I believe you are buying into a bubble.

That being said, (all of what follows is MHFO) the best and easiest place to buy silver coins is a local dealer, where you don't have to worry about shipping and etc. This could be a coin shop, jewelry shop or pawn shop. You will have better luck in a big city than elsewhere. Go into several of these places and ask the what they would charge you for a common date silver eagle. This is a one ounce pure silver coin currently issued by the US Mint. If they want more than 115% of the bullion value (which will be most of them), move on. Also, the dealer should be willing to deal on a cash basis without recording your name.

Once you find someone who will not rip you off, ask them to start saving "junk" silver coins for you. These are coins that are worn out and have no value to collectors. For US coins, they would be pre-1964 dimes, quarters, and halves. You need to learn what all these look like (Mercury dimes, etc.) You also need to know the amount of silver in each type (google it). Again, you don't want to pay too much more than the bullion value (maybe 120% for these because of the small transaction price). Some dealers sell these in bulk bags. If the time comes that you need to "spend" these, the small size means you won't have to worry about "change". You can also mix in a few of the Eagles because they are common and cheap, but big.

Stay away from numismatic coins (collector grade) because the risk of losing value in deflation is even higher on these than on plain silver bullion.

Bigelow said...

Dear Stoneleigh,

No single cause other than fear, greed or an exchange power outage can be sole determinant of stock market direction. Although these days there could also be no bids – no market for many stocks- if the big banks turn off the high frequency trading computers which are supposed to be substituting for the liquidity of greater market trading volume which has declined.

Writing “relentless ramping” as I did was a poor choice of words. Ramping is generally means late afternoon manipulation of stock prices via stock futures, as opposed to the manipulation I was thinking because of QE liquidity siphoning into and moving the stock market higher over weeks/months. QE has had a longer term swamping effect on stocks, but nothing is impervious to panics. And even though the privileged few own most market equities and QE moves their stocks higher, nothing guarantees that will continue to work indefinitely.

I was initially enthused with the Elliot Wave book back in 1978 and then disappointed to discover the often multiple numbers of equally valid wave counts or interpretations the system provided, it is not something I have confidence in, or rather I have little affinity with it. Moving Average Convergence-Divergences and Wilder's DMI technical analysis provide more reliable answers using my puny skill set. But something I would be excited about would be Martian Armstrong’s cycle analysis method, should he provide lucid explanation of it in the book he is writing.

zander said...

@ linda.

As recommended in CTC updated version.

They buy the physical for you, so it's not hallucination paper silver.
Better with a cashstash though IMHO.

good luck


Greyzone said...


I'm not thinking of natural catastrophes. I am thinking of political events that could overwhelm the market.

For example, one that I don't think likely but purely as an example would be the establishment of a de facto global government by the US, China, and the Eurozone, coupled with the establishment of a new global currency and extreme population controls. In essence, a global fascist state where the truth of the market is never allowed to be visible. In such an environment the market factors, from bonds to stocks to commodities, might never be allowed to play out to conclusion.

The results would be catastrophically bad but would not fit the classic deflationary or inflationary view.

Now having used the above example I don't think it's even remotely possible at this time because there simply is not enough agreement and willingness amongst the major powers to share the top seat like that.

But that brings me back to the political question raised by Ilargi long ago - if this is a political crisis what events are possible? The above hypothetical scenario does not fall in the realm of the "possible" as far as I am concerned and was just used for illustrative purposes. Thus I am trying to envision a political scenario that preempts the markets to a degree that classic expectations get distorted into irrelevance.

So far I have been unable to postulate such a scenario that looks even remotely plausible. This lends further credence to my deflationary expectations. But I will try to continue thinking "outside the box", because even if I don't find such a scenario, it gives me further support for my current expectations. We should always question our assumptions and beliefs to avoid dogmatic responses. Questioning can only lead to two things - better support for your current beliefs based on reality itself or into new beliefs that are more closely aligned with reality than the old beliefs.

Bigelow said...

Quantitative Easing or government buying of paper assets is also crushing the exchange value of the dollar. Trade wars anyone?

Lukas said...

I am not so convinced that the CMI is the leading index for the stock market. I think that both are heading essentialy in the same direction. Of course it is not perfect, the CMI shows the YoY change, while the stock market shows the day to day change, which makes the comparison even more complicated. But both are reflecting the mood in the society. The stock market tells more about the rich while the CMI seems to be more about the middle class. Anyway, when the stock market declined in May, the consumer metrics index declined as well. Now as the stock market recovers (not completelly, for sure), the CMI also bounced a little bit (I am not talking about the 90-day moving average).

But I agree that the CMI and the stock market are leading for the GDP data.

Ventriloquist said...

Greyzone said --

if this is a political crisis what events are possible?

Well then, how about the ultimate political crisis -- War?

If the currency crisis and resource crisis follow through to their logical ends, war is the default for power/control resolution.

What would a 21st century war look like? No one knows, except that it would be ugly indeed. Certainly one of the results would be a massive distortion of the world's financial underpinnings as we know it today. The interconnectedness of the global economy would collapse, and the impact on the regional/national/local economies would be myriad and diverse.

At which point the terms of inflation and deflation would have meaning only in reference to specific localities, if there were any relative meaning to those terms at that point at all.

Presumably something would arise from the ashes, but it would likely resemble nothing like what we have experienced over the last 100 years.


snerfling said...

@Coy Ote said "Are the major economic forces, international bankers, financial P's TB, moneymasters, all truly a cadre of sinister moguls?

Thank you for the money quote. Your question nicely summarizes why people who place faith in any powerful institutions, whether they be secular, ecclesiastical, left, right or center, lack a certain understanding of how the world actually operates.

I note also that Greyzone & Zander are just beginning to recognize with dawning awareness that perhaps there is more to our current situation that meets the eye, and that it happens to differ from the confident pronouncements made by Stoneleigh that markets (herds) guide movements.

Let me summarize for you what is going down: the markets are moving in the direction that maximizes the returns of those who control the system. They will continue to reflate asset values via their dollar debasement mechanism as long as profits can be realized from that flow.

When the opportunity (and ease of execution) for downside profits ie shorting, begins to exceed those of the upside, the deflationary crash will be unleashed at a time/place of their choosing.


snerfling said...

I have led a fairly comfortable life with this knowledge serving as my primary guiding principle. Even so, for some reason the POV special on Ellsberg brought this understanding into sharper focus with even more power that I initially realized:

Pentagon Papers

The bottom line is that every powerful institution acts in its own self-interest, regardless of human cost. The quotes from Nixon ridiculing Kissinger for being a wimp by shying away from the concept of using nukes as a viable alternative should clue people in to how the PTB generally view the world.

And no, Nixon is only one of a continuous string of bad actors, including Truman, Ike, Kennedy & Johnson and so on up through today. The Quakers have it right - you would be a fool to play any game that assumes underlying good faith but lacks blood connections.

Ahimsa said...

Chris Hedges is right on once again:

March to Nowhere



“We need jobs,” the Rev. Al Sharpton said at the march. “We’ve bailed out the banks. We bailed out the insurance companies. Now it’s time to bail out the American people.”

But Sharpton and the other speakers, too close to the power elite in the Democratic Party, did not call for rebellion. There was no war cry against Wall Street and the purveyors of death in the defense and health industry. There was no acknowledgement that unfettered capitalism and globalization are killing our ecosystem and creating a worldwide system of neo-feudalism. There was no acceptance that the corporate state must be dismantled if we are to save ourselves. Any effective resistance must begin with a condemnation of our political elite and liberal institutions, including the press, the universities, labor, the arts, religious institutions and the Democratic Party, for selling us out. But the speakers on the mall in Washington would not go there. And I suspect, for this reason, the Americans who are hurting most found nothing they said of interest...

Hannah Arendt in “The Origins of Totalitarianism” cites the collapse of traditional political mechanisms, which now plagues us, as the opening needed for all totalitarian movements:

“The fall of protecting class walls transformed the slumbering majorities behind all parties into one great unorganized, structureless mass of furious individuals who had nothing in common except their vague apprehension that the hopes of party members were doomed, that, consequently, the most respected, articulate and representative members of the community were fools and that all the powers that be were not so much evil as they were equally stupid and fraudulent.”

The One Nation March... refused to confront the real, corporate structures of power. It refused to disown Barack Obama and the Democrats. And in the end it only confirmed what those who hate us think of liberals.

Sailor man said...

The headed for a fall graph predicts that the share market is headed for fall in January 2011.

I think it looks like that the bank industry is waiting for their last fat bonuses to reach their bank accounts, before they will unleash hell themselves.

New_Kid_On_The_Block said...

How about it Automatic Earth?

What were your views back in 2002?

Sailor man said...

Greyzone said:
There is a large contingent expecting high inflation or even hyperinflation. And there is a deflationary contingent. What if an event happened that clobbered both of these groups?

IMO you can have both, in the sense that you can have deflation followed by periods of high inflation. Or you have deflation of house prices and inflation of commodities and food prices at the same time.

Ilargi said...


It's unclear what you mean by "the CMI".

Lukas said...

ilargi: CMI - Consumer Metrics Index.

Rob said...

No one seems to be willing to stick their neck out on a timeline so I will: Depression, August 2011.

Why? Massive foreclosure fraud, Option ARMs and a Congress unable to pass meaningful laws.

Remember this so you can laugh at me in August (or not).

Ilargi said...


You trying to make me feel like an old gypsy lady? You think what we do here is about predictions?

My interest in finance is didn't start 4-5 years ago, which is when I first realized what was going to happen, that it has nothing to do with a tech or dotcom bubble, that that's just stuff that goes on several times a decade, and that there is no way we're going to come out of this one and touch the ground running. We'll find instead that what we thought was the ground has disappeared below a mile of water. We're Wile. E. on a broken reel.

To focus on the US: the banking system is completely bankrupt, a fact hidden from view by ongoing help, aiding and abetting from the US government. US citizens are bankrupt as well, there's no way present home prices can be maintained, so most mortgagees will end up owing more than they have in equity. And that in turn means a wholly bankrupt society, and I'm not even taking about morals.

As for predicting when exactly what will happen, that's not a priority at all. It's the fact that it will and must. Yes, it's been a surprise that Washington has gone along with the stunning transfer of public funds to private pockets. And yes, it has delayed things a bit, but by the same token, it will of course make everything that much worse when the drowning man can no longer hold on to the raft.

Is there anyone left who seriously believes that US home prices will hold up? Based on what? Without your kids' tax revenues added to the accounting trickery, there wouldn't have been a housing market left. Guess the question is: how many kids are y'all planning to have. Then again, 25-50% of them are already out of a job today, and that's with the multi-trillion injections of their future labor into today''s economy. There's no way put of this that will come close to what they all still seem to think there will be. Economics today is a full-fledged religion, and everyone partakes.

I still don't care much for finance. That is to say, my interest in this is the hunger, the disease, the violence and the dying that lies around the corner.


Bigelow said...


Chris Hedges

jal said...

If the money trail does not follow the paper trail then it is a fraud, a scam, and just plain illegal.


Rule of Law Versus Bank Profits: Mortgage Fraud Edition

While commentators so far have focused on the implications for borrowers, the real bagholders are mortgage securities investors.

... if a foreclosure is delayed, the servicer must typically keep advancing payments that will go to all bondholders, including the junior debt holders, even though the home loan itself is producing no revenue stream.

... potential servicer liability:
These agreements provide that the servicers be reimbursed by funds in the trust for all costs related to litigation and extra processing of foreclosures, provided they follow standard industry practices….
But the problems could be magnified if the reviews uncover a lack of proper documentation or other substantive problems rather than simple procedural errors.

Banks that were quick to defend unjustifiable pay deals by invoking “sanctity of contract” have no inhibition about ignoring their own contracts to pad their bottom line, and ultimately, the wallets of top executives.

H.R. 3808, the Interstate Recognition of Notarizations Act is not an international agreement and will not prevent foreigners from taking legal action to get their money back for being misled into buying MBS when there was no mortgage to back up the prospectus.
Every loan that went into MBS, even yours, even if you’re up to date on your mortgage, will find it difficult to sell your house if the money trail is not following the paper trail.

Virginia said...
This comment has been removed by the author.
mjd said...


You shouldn't only rely on CMI's moving average calculations.

If you look at the raw 'composite' column you'll see that the numbers have significantly improved since mid August.

In fact we've been around -3 for almost a month.

Instead do your own 90 day average on the 'Composite' column (45 before/45 after)

using the and you'll see that since mid August

jal said...

Bernard Lawrence "Bernie" Madoff told his investors that they would get great returns from his method of investing in the market. HE DID NOT INVEST IN THE MARKET.


Salesmen at the banks etc. said that they would get great returns if they invested in mortgaged back securities. THEY DID NOT HAVE MORTGAGES IN THOSES SECURITIES.


Charles said...

Jal @ 11:38 pm Oct 5th

You can forget about sending the pres. an e-mail, I just tried 3 times to get through that dog mad security code at the bottom and it would not take it. To late for snail mail, it takes a week to get a letter back there with the kind of mail service we have.

Wolf at the Door said...

@ Greyzone

FWIW I share your feelings. I realized (in a flash of particularly vivid intuition) what you are now coming to understand a few months back and as a result have basically abandoned the financial blogs because of it. Not just this one (which I always felt to be a cut above the rest)...ALL of them. They have become little more than a rather large and amusingly irrelevant circle jerk once you have attained a certain degree of familiarity and comfort with the underlying dynamics of our increasingly dire situation.

I (again, FWIW) urge you to look inward and explore those very valid suspicions that your nervous system is keying you into as I think that you are on the right track. I fail to see how we avoid a massive deflationary bust as real Production (no matter how you measure it) is going to be able to meet only a fraction of the Claims Against It. And printing up units of dollars or whatever does nothing to solve this most basic underlying dilemma....BUT... what comes after (or occurs simultaneously) in the political realm, given the state of our modern world will NOT follow the expected historical narrative. It will be a new world. And not a very nice one.

Ahimsa said...

Ilargi said:

I still don't care much for finance. That is to say, my interest in this is the hunger, the disease, the violence and the dying that lies around the corner.

Thank you kindly, Ilargi. This is why I'm here! :)

Ilargi said...

"Lukas said...
ilargi: CMI - Consumer Metrics Index."

What is that?


Ilargi said...

" New_Kid_On_The_Block said...
How about it Automatic Earth?

What were your views back in 2002?"

Anaheim in 7.

AlphaBeta Soup said...

Linda mentioned buying silver, and Zander commented that cash is their preferred method. So I would like to understand why either, and even gold, would be preferred. I have been slowly stashing cash (about 2 months worth) just in case there is a run at the banks, but I abandoned the idea of buying gold once it hit $1000 USD.

HOW MUCH do people feel one needs, of what, and why?

Thanks in advance!


DIYer said...

In this comment on the previous post, you remarked that the story didn't seem to have legs...

From here, it looks like it's growing more legs than a centipede. Maybe it's just that google promotes these stories because I searched for them yesterday, but it seems we have more AGs, Senators, and HuffPo articles chiming in on this; it has a sort of SHTF quality to it. I have a feeling it will even be on TV, if I watched TV.

Oh, and I just read your "Harvard School of Sociopathy" epiphany. Yeah, that sounds about right. Maybe they should change the name.

Virginia said...

@ alphabetsoup

Here's how much you need....

Who says you can't take it with you?

Coy Ote said...

Snerfling - Thanks back, and I agree with your quote below. I often use the term "fixed positions" as well as institutions. A fixed position is a closed mind. BTW I don't think the StoneLady has a fixed position.
"people who place faith in any powerful institutions, whether they be secular, ecclesiastical, left, right or center, lack a certain understanding of how the world actually operates."

Ventriloquist said...


Please allow me to give you a little heads up here.

If you would like to know what Illargi and Stoneleigh were predicting about the state of the world prior to their appearance here in 2007,

May I suggest you peruse The Oil Drum (Canada) history for those previous years, where they were running the site and posting for a rather extensive period of time.

You may or may not find answers to your questions.



Coy Ote said...

Linda, alphabeta, etc. I claim no expertise here, but...
I bought some 90% silver junk coins back when the spot was about $11-$12 just for the outside chance that we had to go through a short period of financial chaos with a destroyed currency. Folks during the WW's in Europe and other desparate situations have bartered with silver.
I also keep a small stash of cash in case of some kind of electronic cyber failure occurs, blackout, etc. where the banks and ATM's are not available to people.
Right now though I think the PM's are quite high in real terms, and may certainly go higher. Bottom line, no one knows for sure.
Just MHO

Lynne said...

We sold our gold today. We got a wonderful return on it, but it was extremely difficult to do with John Paulson saying it could go to $4000 per ounce, headlines about gold every day, and even the (well-meaning) tellers at the bank saying "don't you think it's going to go up?" I almost changed my mind multiple times and am still having second thoughts. But, it just seems like when the ladies at the bank tell you to keep your gold, maybe that's the time to sell it.

Very much enjoyed the Century of Challenges presentation. Will probably also buy the DVD for a family member.

Ventriloquist said...

Blogger AlphaBeta Soup said...
I have been slowly stashing cash (about 2 months worth) just in case there is a run at the banks, but I abandoned the idea of buying gold once it hit $1000 USD.

I have a suggestion for you. And Please, do not take this the wrong way.

I purchased gold at $250./ounce and people told me I was crazy for paying such a high price.

I purchased gold at $400./ounce and people told me I was crazy for paying such a high price.

I purchased gold at $600./ounce and people told me I was crazy for paying such a high price.

I purchased gold at $850./ounce and people told me I was crazy for paying such a high price.

I purchased gold at $1050./ounce and people told me I was crazy for paying such a high price.

I purchased gold at $1250./ounce and people told me I was crazy for paying such a high price.

So, I have a perfectly straight recommendation for you --


It is Far, Far, Far, too expensive to purchase. Please be rational and keep your money in US Dollars, which, as everybody on this forum knows, is just the most ducky way to protect your wealth, because it can go nowhere but up for the foreseeable future.

Thanks very much, have a great evening, and sleep well knowing that your money is invested in . . .



Ric said...

That is to say, my interest in this is the hunger, the disease, the violence and the dying that lies around the corner.

I expect my family's future centers around suffering. McMahon at Stages of Peak Oil Awareness quotes someone's attitude about the future, being:

“I like the American Indian greeting to the day “a good day to die.” Once you have that clear, the rest of the day is a pure gift.”

We do everything we can with the skills and resources we have--and then we make of our suffering what we will. The Buddhists have it right with the First Noble Truth: Life is dukkha (suffering).

jal said...

Oct 06, 2010
Feds to investigate foreclosures

The Justice Department will investigate foreclosure procedures after reports of incomplete or inaccurate paperwork, Attorney General Eric Holder says.

His announcement, comes a day after House Speaker Nancy Pelosi and other California Democrats sent a letter calling for such a probe.

Holder said the investigation will be handled by the Financial Fraud Enforcement Task Force, which includes officials from more than 20 federal agencies plus state and local authorities.

Several states have launched their own investigations, with North Carolina joining in today.

zander said...

Here's one of those teeth grinding "twelve things you didn't know....." that's still worth a look all the same.
Check slide 4 and the dollar revenue drop of this recession compared to previous recessions '90 and '01.....and still falling.



Nassim said...

Mexico seems to have raised $1 Billion for 100 years. The coupon/interest is 6.1% per annum - below their 30-year bonds.

The lenders are pension funds who wish to match their assets and liabilities.

Some deal. Goldman Sachs fixed it. I guess none of them have heard that Cantarell is being sucked dry.

It is good to know that your pensions are well taken care of. :)

Coy Ote said...

Ventriloquist 8:46pm
You make a persuasive point!
The history of PM's bears out that gold/silver do provide a stable way to protect genuine assets, especially during times of currency devaluation.
My earlier point on silver was for those who (like me) do not have huge assets but do want to take some survival measures.
Whether one buys or sells one thing is for sure, what an ounce of a PM bought in 1800, or 1900, or 2000 it will still buy in 2010 and beyond. So I see it not as an investment, but a safety net.

ogardener said...

Re: Feds to investigate foreclosures

That's good news but will any moneychangers end up in der cooler?

mistah charley, ph.d. said...

Ric quoted “I like the American Indian greeting to the day 'a good day to die.' Once you have that clear, the rest of the day is a pure gift.”

On another blog, someone said they thought I'd like Black Elk Speaks. I've already read it, decades ago, but I see there's now an annotated edition. The catastrophic collapse that the Oglala Sioux went through has some analogies to our own anticipated tough times, and yet Black Elk was able to "keep the faith." I'm going to read the book again.

My renewed interest in spiritual things also has me revisiting books by and about G. I. Gurdjieff (1866?-1949), and I came across this story about one of his visits to the U.S.:

The rather young son of a former member of the Orage group asked me [Edwin Wolfe] to get permission for him to speak with Mr. Gurdjieff about something personal. When I told Mr. Gurdjieff about this he nodded, yes, bring him.

The next evening I took the youth up to Mr. Gurdjieff's suite in the Hotel Wellington. After greetings, the young man said, "Mr. Gurdjieff, my grandmother gave me some money not long ago. I'm going to buy a small piece of land in the country with it. I'll build a log cabin and I'll put in a vegetable garden so I can grow all my own food. I'll live there like that. So I wanted to ask you, would that be a good thing for me to do? Is that a good life?"

"Yes," Mr. Gurdjieff answered, "that good life. For dog. For man, no. You eat, you sleep, live in dream. How could this ever be life for man?"

Greyzone said...

One of those political events I was speaking of that at least buys more time, if nothing else:

Bank foreclosure cover seen in bill at Obama's desk | Reuters

Things like that make it possible to continue the game a bit longer. How much longer? There's no way to tell. This is what makes investing in this market so very dangerous. You can't time when things will go south because it's all herd psychology at work and most of us are already not members of the herd else we'd be doing the same things as them.

As Denninger noted, depending on where you invest in this market you may suddenly lose all your gains in less than a few seconds.

jal said...

ogardener said...
Re: Feds to investigate foreclosures

That's good news but will any moneychangers end up in der cooler?
Yes. All the investigator needs to do is to verify that the paper trail and the money trail are the same as per the laws governing "title".

If the two trails are not the same then it is proof that there was massif fraud.

However, by the time the courts have made their decisions it will be financially impossible to finance the operations of the jails.


alex_uk said...

Ventriloquist - I think you just rang the top!

umaperegrina said...

Mistah Charley, PhD,
There is, indeed, an annotated version of Black Elk Speaks by Ray DeMallie, a wonderful scholar and human being.

However, if you're looking to submerge yourself in the spiritual essence of the story, you might want to stick with the earlier version, at least for the first read (I guess that would be second, in your case).

As for "keeping the faith," Black Elk actually kept two faiths. When John Neihardt interviewed him in 1931, he had been a practicing Catholic catechist for almost three decades. His son, Ben, who served as interpreter, had never heard many of his father's stories. It raises interesting questions about choices made by those living among their conquerors.

Whether he assumed the invaders' religion for practical reasons, converted to Christianity, or combined his native spiritual vision with Christianity (all have been claimed), the Lakota Holy Man's chronicle of his life and vision for his people is a beautiful story - no less so because of the passage of time.

jal said...

From Zero hedge

Bill H.R. 3808, the Interstate Recognition of Notarizations Act of 2010, which was discussed yesterday, and which according to both Reuters and the NYT may have a material impact on mitigating the impact of the High Freq Signing scandal, at least on the servicers, is now open for public comments at the white house.
Those wishing to tell the president how they feel, may do so at the following link:

If I could I would say the following. Will you do it for me?

" Do not sign it before you receive the report from "Financial Fraud Enforcement Task Force".

All the investigator needs to do is to verify that the paper trail and the money trail are the same as per the laws governing "title".
If the two trails are not the same then it is proof that there was massif fraud.
Holder said the investigation will be handled by the Financial Fraud Enforcement Task Force, which includes officials from more than 20 federal agencies plus state and local authorities. "

Phil said...

UK house prices fell 3.6% in September

House prices fell by 3.6% in September from the previous month, according to the Halifax the largest fall on record.

However, the bank, now part of the Lloyds Banking Group, said it was too early to conclude that this was the start of a sustained fall in prices.

The three-month on three-month comparison, seen as a smoother measure of prices showed a 0.9% drop in September.

The average UK home is now valued at £162,096, the survey found.

Prices remained 2.6% higher than a year ago, the figures show, although this was down from a 4.6% rise reported in August.

It also brings it close to the 3.1% annual change reported recently in the house price index from the Nationwide Building Society.

The 3.6% drop was the biggest fall in month-on-month prices since the figures were first compiled in 1983.

Low transaction levels in the housing market meant that there was volatility in the month-on-month measure of house prices, Halifax's housing economist Martin Ellis said.

However, he said that an increased number of properties available for sale in recent months had pushed down prices.

bluebird said...

Obama Will Not Sign Bill Seen As Cover For Bank Foreclosures

The Anonymous said...

"Virginia said...What were you predicting would happen after the tech crash in 2000 and 2001?

However, given that Stoneleigh took the dramatic step of uprooting her family and career from Britain to return to Canada, I surmise that she was predicting a fairly imminent collapse, just like she is now."

Thankfully, this wont be a problem much longer due to the internet. Take Robert Prechter who has been calling for "imminent collapse" since 1991:


Anyone with half a brain can see how utterly and terribly wrong he has been for 20 years and counting, and decide "this guys just a permabear" and choose to listen to those with a better track record.

Likely it will be the same thing with I&S over time. However, I doubt they will care much that they lose moderate readers as the years go by.

As Prechter has shown, there is a cottage industry that thrives by spewing doom and nothing but, 24/7 - pessimism porn if you will. There is always a segment of our society that is convinced we are on the verge of "imminent collapse" and seeks out these prophets of doom to reinforce their pre-conceived ideas.

It matters not that these gurus have been wrong for 20+ years - the doomish audience still laps it up with reckless abandon. Remember, permabears are never "wrong" just "early". Its the only reason Prechter can make a living peddling doom for 20 years now. Stoneleigh seems to have tapped into it too and likely commands quite a fee traveling the country preaching the gospel of the book of doom.

So the only difference between Prechter and I&S is time. I&S may well have been as doomish as Prechter has been for the last 20 years, its just their public track record isnt as long.

Thus, by the time the next big KABOOM comes around in say 2015-2023, and I&S are still here saying "imminent collapse", new moderate readers will look back at their 2007-2010 calls and decide they are "just a bunch of permabears like Prechter" and move on.

Robert said...

tweets by Sharon Astwk, Jim Baldauf, KrisCan and others can be found at #peakoil2010


Ilargi said...


You're on probation, that's not the first twisted slur out of you. No wonder you wish to be anonymous. If you want to tell us why we're wrong, by all means do so, but next time use your brain, not your knee.

NZSanctuary said...

It's Time For The Fed To Stop Screwing Savers And Bailing Out Banks And Borrowers With 0% Rates
by Henry Blodget - Business Insider

The Fed's zero-interest-rate policy, now going into its fourth year, is hosing people who are responsible and live within their means to bail out people and companies who don't (or didn't). Anyone who has saved money is being screwed by this policy. Anyone who borrows money is being rewarded.

How long will it take for the realisation to sink into the masses' heads that this is deliberate – force the savings out, try to get every last peon into debt, transfer wealth to the few, keep the game going just a little longer!?!

Ilargi said...


That Twitter address is wrong. Please correct it.


The Anonymous said...

Illargi -- yes, its just a jab, but a correct one nonetheless. Its a legitimate question... how many times can you say "imminent collapse" before moderate readers decide you are no longer relevant, and move on?

BTW -- it takes guts to allow my post since all I am really doing is taking a swipe at your track record. Most other sites that traffic in doom would simply delete me as I am questioning their narrative. Props to you for allowing it.

Robert said...


Works for me?? Perhaps it only works if one is a member of twitter. I just joined yesterday for this very purpose.

Ilargi said...

" The Anonymous said...
Illargi -- yes, its just a jab, but a correct one nonetheless. Its a legitimate question... how many times can you say "imminent collapse" before moderate readers decide you are no longer relevant, and move on?"

There's only one "L" in Ilargi. I can't tell you what is correct in what you said before. Nor did it seem to matter much to you.

"BTW -- it takes guts to allow my post since all I am really doing is taking a swipe at your track record."

I must have missed that, I thought you were talking about Prechter. Who, obviously, would have been in an entirely different position if he had been consistently wrong for 20 years as you claim. Still, even that doesn't make me Prechter.

"Most other sites that traffic in doom would simply delete me as I am questioning their narrative. Props to you for allowing it."

Most would be right since you don't have much of substance. So far.

Look, there are people here on an almost daily basis who wish to loudly claim that I am either a sarcastic bully for not wanting to admit that I am wrong and they are right, or a brute who deletes their every word.

People like that come with the territory. If you look at the comments at some other major finance sites, I'd say that whatever I've done wrong through the years, I have managed to maintain a civilized discourse here, up to a point of course.


Ilargi said...


This is the correct address:



Jim said...

I purchased gold at $650./ounce and people told me I was smart for buying at such a low price.

I purchased gold at $500./ounce and people told me I was smart for buying at such a low price.

I purchased gold at $450./ounce and people told me I was smart for buying at such a low price.

Of course, this was the early 1980's and if turned out I wasn't so smart after all.....

AlphaBeta Soup said...

@ Virginia

Thanks, I actually all ready have several of those. It must be that we shop at the same store? They are a tad heavy, but refreshingly cooling when you have hot flashes, don't you agree?

@ Ventriloquist

I am not quite sure I follow you. Are you saying it is still okay to buy gold (although people will say I am crazy for paying that high price, but it will still go up), or are you saying I am now better off holding onto a wad of cash (because the bubble is bursting)? Or am I completely missing the boat?

@ Coy Ote

I agree, junk silver will be good for barter. Gold will be tough to make change with though. :D

Wouldn't it be nice if my crystal ball worked? I wouldn't have to bug you guys with my newbie questions.

Coy Ote said...

Hickory, dickory, dock,
The 'mouse ran up the clock.
The clock struck one,
The mouse ran down,
Hickory, dickory, dock

Bluebird - Thanks for link. I consider this just another particular example of the complexity of our economic predicament, and, the futility of Obama's nor any other person to make fixes on same!
"White House press secretary Robert Gibbs said Thursday that Obama is sending a newly passed bill back to Congress to be fixed because the current version has "unintended consequences on consumer protections."

BTW, Where are Snuffy and El Buzzard these days? ;-)

Coy Ote said...

Not a financial piece, but... Another view of teachers!

Mike Hogan said...

I have been thinking that the US could print whatever it takes to offset collapsing credit. But another article got me thinking. What about the unintended consequences like rising oil prices. If the Feds issue $2T what happens to the price of oil. If oil goes above $100 then our economy falters anyway. So we may soon hit a Keynesian endpoint where we are damned if we do (print) and damned if we don't. Just something I thought I would throw out there.

brett said...


"The chiefs, and I personally, feel that we have not passed the point of no return. Not yet, but we¹re approaching it. And the day when we do pass that point, there will be no boom, no sonic sound. It will be just like any other day."

Twenty-Fourth Annual E. F. Schumacher Lectures, October 2004


Gravity said...

Stoneleigh writes: "No one has the power to drive major market trends. Those are determined by the power of the collective."

I agree that these trend drivers are too powerful and overarching to fully control, but some groups have surely attained minor influence over the intensity of expression within the interplay of collective drivers. Maybe by skillfully modulating the dominant carrier wave of cultural induction with specific emotive resonances the collective can be predictively startled or sedated in small measures, allowing some control over timing, but not much over direction.
Its far easier to startle the herd than to calm them, so when some could stand to profit from an aggravated plunge on their terms, they might have ways to intensify such a move and allow it build sufficient potential.

pineappleCoward said...

Yet another Zero Hedge guest post, but a timely one I think.


I. M. Nobody said...

So, one of the gaggle of new commentators, rather immoderately I think, claims that so called moderate people have no time for permabears. I would be hurt to the quick except that I can attest that even immoderate people usually have no time for permabears. I've been one for better than 40 years.

So, I was a little early. As has been said many times on this blog, better too early than too late. BTW, it might be worth remembering that it actually is true that "Rome wasn't built in a day." It's rather a shame that the complimentary phrase never got any traction. It didn't fall apart in day either.

DIYer said...

BTW, Where are Snuffy and El Buzzard these days? ;-)

I think they're busy doing the ant thing, and putting up nuts and honey for the winter, while us grasshoppers lollygag around on the interwebs.

Ventriloquist said...

Jim said...

. . .

I purchased gold at $450./ounce and people told me I was smart for buying at such a low price.

Of course, this was the early 1980's and if turned out I wasn't so smart after all.....

Well Jim,

You know the old saying --

Timing is Everything.

And I guess that's the difference between one persons timing and anothers.

I could discuss here the rationale for my timing the gold market over the past 12 years, but that story is for another time. Suffice it to say that I am not a speculator, but a cold, hard, realist when it comes to the precious metals market. And that comes from many years and much work following it. I'm not some Johnny-come-lately who jumped on the bandwagon 6 months ago.

Better luck next time.



Ventriloquist said...

Blogger AlphaBeta Soup said...

@ Ventriloquist

I am not quite sure I follow you. Are you saying it is still okay to buy gold (although people will say I am crazy for paying that high price, but it will still go up), or are you saying I am now better off holding onto a wad of cash (because the bubble is bursting)? Or am I completely missing the boat?

All I am saying is that investing in precious metals requires a mental attitude that can deal with the volatile nature of those markets. There are often significant daily moves, UP AND DOWN, that can wreak emotional havoc on the unprepared.

Far better for you to invest your funds in cash (or cash-equivalents) and sleep well at night, than suffer the stresses of riding a emotional roller-coaster that you may not be prepared to handle.

If you feel you can deal with the PM markets' volatility, and have funds that you are prepared to sequester and watch for an extended timeframe, then my recommendation is to first do your own diligent research, and pay little attention to the advice of others.



AndoLaw said...

@ The Anonymous
...there is a cottage industry that thrives by spewing doom and nothing but, 24/7 - pessimism porn if you will.

You are right of course, but that cottage industry is nothing compared to the vastly larger industry devoted to convincing one and all that there's nothing much to worry about. All is well. The best and the brightest have things well in hand.

There is always a segment of our society that is convinced we are on the verge of "imminent collapse" and seeks out these prophets of doom to reinforce their pre-conceived ideas.

True again. And there are always the cornucopians who -- no matter how bad things get; no matter how alarming the trend line -- always assure us not to worry our pretty heads about it. Peak oil? Posh!

So, when we're done calling each other names (doomers, permabears, cornucopians), we're left with the information shared and the argument made. Ilargi and/or Stoneleigh make a well researched, well reasoned argument here every few days. Care to offer a substantive critique? I haven't heard it yet.

Stoneleigh...likely commands quite a fee traveling the country preaching the gospel of the book of doom.

Here, friend, you have stumbled into a small, small world in which I am well informed and you are flat out wrong. I made the arrangements for her to come to my town and she had no set "fee" at all. She said it would be nice if she could cover her travel expenses. There was a recommended donation of $10 at the door, and some 50 or 60 people showed up. She walked away with maybe $250, which is to say, folks were not very generous with her. If she does end up commanding a hefty fee it will be because (1) she's tired of getting stiffed and (2) she's worth it. I'm just glad (and grateful)we got her when we did.

Ahimsa said...

Coy Ote,

El G is in Argentina building his crashstead and Snuffy is busy driving around the country earning some money.

Good to see you're back!


ogardener said...

Blogger Mike Hogan said...

"If the Feds issue $2T what happens to the price of oil. If oil goes above $100 then our economy falters anyway. So we may soon hit a Keynesian endpoint where we are damned if we do (print) and damned if we don't."

I think you're on to something there Mike. As Ahnold would say,
"stick around".

soundOfSilence said...

The Anonymous said...

...all I am really doing is taking a swipe...

Which takes little or no guts at all eh?

DrabMatter said...

Gold vs. Silver. It depends on how bad you think things will get. If the internet is still functioning you will probably be able to sell your gold to someone somewhere and buy stuff with the money while most stores won't accept your silver at anything but its denominated value. If OTOH the internet is gone then most likely so is modern life and heaven help us all. At that point common caliber ammo would probably trade better than silver. If you want to hedge your bets get a few ounces of gold and a few pounds of 9mm bullets.

anon10 said...

Gallup Finds U.S. Unemployment at 10.1% in September

Underemployment, at 18.8%, is up from 18.6% at the end of August

PRINCETON, NJ -- Unemployment, as measured by Gallup without seasonal adjustment, increased to 10.1% in September -- up sharply from 9.3% in August and 8.9% in July. Much of this increase came during the second half of the month -- the unemployment rate was 9.4% in mid-September -- and therefore is unlikely to be picked up in the government's unemployment report on Friday.


Starcade, back on Leviathan said...

I disagree. It's one of the reasons I could not be a "gold bug" even if I had the money.

They're going to confiscate anything that has universal tangible value. May not be just precious metals, either.


California budget agreement passed by the Assembly -- hung up in the Senate.

Social services appear to have been spared the axe through accounting tricks and a $5.2 B bailout expectation.

Coy Ote said...

@Mike Hogan "...What about the unintended consequences..."
"So we may soon hit a Keynesian endpoint where we are damned if we do (print) and damned if we don't."

voila! A doomsbear moment!Yep, as in complexity! And as in Congress passing bills to try to counteract the unintended consequences of previous bills!
"Simplify, simplify..."--H.D. Thoreau

Coy Ote said...

Ahimsa - Thank you, and thanks too for your C.Hedges and other fine posts!

Steven Faraday said...

Is there some set schedule for when articles are posted by either Ilargi or Stoneleigh?

I have come daily to this website for almost a full year- and I still can't determine if there is any regularity to their publishing articles.

At the very least- it would help if a person was able to tell when an article would be published.

Steven Faraday said...

I have been coming to this site daily- for well over a year and I still cannot determine what, if any, schedule there is for publication of articles.

Is it simply "whenever you feel like it, or when you have the time?"

If that is indeed the case, then I'm not sure if I get the point of having a website...

I could just lean on Dollar Collapse or some other streaming site for publication of your intermittent articles.

They are brilliant, but spotty.

Ilargi said...

Stephen Faraday,

You touch on an important point, which I'm sure costs us lots of readers. It's like the price you pay for getting too big.

But I promise you and all other readers that I'll sort this out soon. The premise is to go back to publishing every day.


lautturi said...

DanEric follows many, many markets - just a few days ago he posted a very interesting pic. Looks like gold is working itself out, just like oil did in 2008. I saved the pic on my forum for reference, you can check it here.

I certainly does look like there's a turning point approaching.

lautturi said...

Also DanEric's latest comment has - mmm, pretty familar taste. Check here.

zander said...

@ AB soup.
"HOW MUCH do people feel one needs,........."

Hoard what you can afford :)
There is no one size fits all in this instance, I simply pay my dues then stash away an amount I'm comfortable with,.....still mindful of living for the day in case a bus gives me a good kicking before the 2nd great depression does :):).


scandia said...

RE posting schedule...in " the early days" Ilargi posted daily. I was impressed and wondered if he ever slept. Surely deep comment every day is a recipe for burnout?
Personally I need some time to digest the intro. I suggest some schedule less that 7 days a week. Week-ends off or?

D. Benton Smith said...

Foreclosuregate, as I previously observed, is a systemic threat to the the rule of law, in America at the very least and possibly the world. It is so unthinkably big, indeed, that I was at first amazed when Obama did not railroad a temporary fix into law with his signature to make it all go away for a while.

On further consideration I realized why he chose to send the bill back to Congress for review rather than take the fast and easy escape route that was presented to him.

I now see (and Obama's legal advisers must have seen) that enacting the bill would have INSTANTLY driven the issue into the courts in the form of tens of thousands of law suits... and “in the courts” is PRECISELY where this roadside nuclear bomb must NOT go.

Why must it be kept it out of the courts?

Because it would expand and destroy the judicial system like the Computer Worm from Hell! Under a virtual mountain of statutes, case law and precedent the courts would have no choice but to rule that the mortgage documents (and all subsequent trades based on them) are fraudulent... and the unwinding of the financial systems of the world would proceed in explosively geometric progression.

Any puny little one-shot new law trying to change centuries of legal precedent would be challenged in every case... and LOSE. The only way to allow fraud to become legal would be to cancel all relevant previous laws. In other words, rescind the rule of law itself.

Ain't gonna happen, but that don't mean they won't try. Hell, they have to try. No choice.

As it now stands, Obama and his banker buddies have bought a little time, maybe 90 days, to jerry rig some sort of bullshit legislation to cap this thing before it goes completely out of control.

They are crafty. They are crooked. And they are desperate. (Hell, the whole thing is a dark comedy of desperate stupidity) and so they will come up with something... and whatever it is will be both absurd and really really bad for us.

D. Benton Smith said...

Hi, Ilargi,

Regarding what you and Stephen Faraday spoke of it occurred to me that reading, understanding and moderating the Comments of TAE... while simultaneously putting together a well conceived next Posting... must be very taxing.

I couldn't do it even if I could do it. The back-and-forth shifting of concentration would whipsaw my brain into saw dust.

Is it possible you could hire a trusted friend to do the moderating, under your occasional supervision?

I for one would cough up 10 bucks a month to defray the expense, and I reckon a few others would, too.

AndoLaw said...

Re: Frequency of Postings at TAE

Like, say, Dmitry Orlov's site, or JM Greer's, I think of TAE as offering a particular perspective on the big picture, the larger trends. How often does the big picture have to be updated? Daily? Really?

Even now, you (I&S) are consistently having to resist regular requests/challenges to call tomorrow's market. Why encourage that sort of short-term focus? There's enough of that to be had elsewhere.

I, for one, need to be taking more deep breaths between...well, everything.

zander said...


I second Scandia's take on the posts.
If there is a post every other day, that, at least, gives the board time to develop post-post discussion and relative matters, there may be a danger of fast tracking and skirting over the more important posts and issues, also, there is a danger of posts losing quality if a strict daily routine is adhered to, the posting lately has been fabulous and, no offence, but you wouldn't be able to keep it up when pushed.

My 2 cents worth.


zander said...


Another good article.

And now I'm off to watch my team get a leathering from the Czech republic.


Starcade, back on Leviathan said...

B of A halting all foreclosures for review in all 50 states.

Several commodities lock-limit up in trading.

Have we hit a black swan moment?

Ilargi said...

New post up.

Wile E.'s Suspended Reality