Wednesday, July 15, 2009

July 15 2009: Ain't life grand?

National Photo Company Co. Safe 1922
Security Savings & Commercial Bank, 9th and G. Washington, D.C.

Ilargi: The stock markets went up 3% today. What does that tell us? That the crisis is over and recovery is here? Or does it tell us that the link between the markets and real life is now, albeit temporarily, completely broken? For an honest answer, we should be asking the thousands of people who lost their homes or their jobs, or both, today. But they are busy with other issues.

So let the lucky among us combine this:
  • on the one hand, the fact that foreclosures are still increasing while home prices are decreasing, and that unemployment keeps rising while prices are falling,
  • with on the other hand, the fact that Goldman will likely pay out record bonuses, which causes a sentiment that leads markets up
What reality does that reflect? Everybody in the US pays taxes. Income taxes, property taxes, sales taxes etc. Parts of the revenues have been used to prop up Wall Street banks, amongst them Goldman Sachs. In other words, the taxes levied on the people who are now losing their homes and jobs are used in part to pay multi-million dollar bonuses at Goldman. That situation is so outta here and so sickening that I don't think any further comment is required.

So how healthy are the markets, the economy, the banks? A grain of truth emanates from a Bloomberg report on an apparent change of focus by Washington head honchos Barney Frank and Christopher Dodd. It's sort of a tale of chickens coming home to roost. The health of the banking industry, or at least the image of it, has been elevated by creative (read: phony) accounting. One of the main fields in which this has been done is real estate: mortgages and the securities written on them. But because "values" of loans have been kept artificially high in this way, there is a new problem looming: mortgage modification, meant to keep people in their homes.You can't modify a mortgage to represent a value X minus 1, while the bank that owns the loan has it on its books for X. And adapting the value to reflect the real world out there, while it may allow some owners to stay put, could reveal a picture far more ugly than any banker or politician wants to acknowledge. We’re talking real ugly. Loans marked down presently by 4% would sell only if marked down by 60%. Bank earnings would be 42% lower than reported.

Barney Frank, Chris Dodd Do Banking Back Flip
Congress can’t make up its mind. First, legislators pushed to let banks take a rosy view of the value of some hard-hit holdings. Now, two key committee chairmen claim banks aren’t being realistic enough about the values of some loans.

The allegation by House Financial Services Chairman Barney Frank and Senate Banking Chairman Christopher Dodd that banks are holding some loans at "potentially inflated values" should trouble investors, since it came just days before institutions like JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. are due to report second-quarter results. If some loan values are "inflated," that again calls into question the quality of banks’ results.

Why, after arguing for banks to have more leeway, is Congress now pushing back? Because many government responses to the financial crisis are more about manipulating prices -- and behavior -- than truly getting markets back on their feet. Dressing up bank balance sheets was a first-quarter political priority. Now there is a push to get banks to modify more troubled mortgages. That effort is being stymied by a rosy view taken by many banks of the value of home-equity loans and second-lien mortgages.

"Many banks have marked down these loans only by 3 percent to 4 percent, said Paul Miller, bank analyst at Friedman Billings Ramsey & Co. These loans in many cases would likely fetch about 40 cents on the dollar if sold in today’s market. The losses are "a big part of the toxic asset issues facing banks [..]"

A first mortgage on a house often can’t be restructured without the agreement of the holder of the second loan, which would entail writing it down in value. Banks have balked at doing that, due to the losses that would result. And why shouldn’t they? Congress, the Obama administration and regulators all told them earlier this year to hope for the best when it came to valuing their assets.

Let’s review. Congress this spring browbeat accounting rulemakers to make it easier for banks to ignore dour market prices for some holdings battered by the credit crisis. That was designed to help banks’ finances look better. Without subsequent rule changes by the Financial Accounting Standards Board, earnings at 45 banks and financial companies would have been 42 percent lower than reported [..]

Isn't it just great that people are thrown out of their homes only to allow banks to hide the fact that they're bankrupt? Isn't that the true American Dream?

PS: And now Tyler Durden reports that British ideas about securities may force US banks to write down the whole shebang anyway. Ain't life grand?

US consumer prices down 1.4% in past year, most since 1950
A key index of prices paid by consumers rose in June but showed the largest year-over-year decline since January 1950, the government said Wednesday. The Consumer Price Index, the Labor Department's key measure of inflation, has fallen 1.4% over the past year. That's the largest drop in more than 59 years, and is due largely to a 25.5% over-the-year decline in the energy index.

On a monthly basis, CPI rose 0.7% in June, after rising 0.1% the previous month. Economists surveyed by expected a 0.6% increase. The report attributed the month-to-month increase to the gasoline index, which rose 17.3% in June. But a decline of 1.9% in the electricity index helped offset the gas price jump, causing the overall energy index to settle up 7.4%.

Core CPI: The even more closely watched core CPI, which excludes volatile food and energy prices, increased 0.1% on an annual basis, after gaining the same amount in May. Core CPI increased 1.7% on an annual basis.

Index-by-index: Most sectors saw at least a small uptick. The indexes for shelter and medical care posted slight increases in June, and indexes for new vehicles, used cars and trucks, recreation and apparel increased at least 0.5%. The food index, which had fallen for the last four months, was unchanged in June. The index for airline fares bucked the trend, though, falling 0.6%.  

Washington’s Dilemma
by Gregor Macdonald

Washington is bluffing that it will not bail out California, and every other state suffering from collapsed revenues and massive job losses. If cuts in police and schools don’t force DC off from its current position, then the math will. Because in many states the aggregate revenue losses and looming cuts to state payrolls will largely render the intended effects of federal stimulus as moot.

Frankly, unless Washington prints money and bails out every state that needs capital, including California, federal power will decline amidst this severe economic recession, and the process of a soft American devolution will begin. If you think this idea is outrageous, then you’ve still not come to terms with a core reality of our current situation: the structure of this financial crisis is wholly different than any in our post-war era. This isn’t a recession. This is collapse.

In Recession vs. Collapse published in March, this blog explained that in a normal recession existing savings are used to support government debt issuance and that those who remain employed increase their savings to also support government debt issuance. Neither phenomenon is at work today. Yes, the savings rate has soared in the US.  But this has not resulted in any actual accrued savings. Because private sector debt came to define the internal structure of the US system, savings currently is little more than debt service.

Also, bank purchases of US Treasuries are really just a result of the circularity of monetization. It’s just money from the FED being recycled into Treasuries. There is no privately driven growth of bank deposits, in the aggregate. Americans as a class are broke. What the savings rate more accurately measures is a collapse of consumer spending. The internal composition of the US economic and financial system when it hit 2007/8 was very different than in previous recessions, even the severe recession of 1980/82. It’s this internal composition that’s now determinative, to the outcome. The sawdust of debt, and the monetization of assets rather than the production of goods, continually came to define the internal composition of the system. The economy cannot, therefore, express the same kind of resilience it has done so often, since WW2.

This is the core problem of this collapse and why the prospect for recovery is dim. Americans can’t actually rebuild the savings that the banking system needs to escape from the current mess. Individually, Americans are trapped by debt and cannot spend. In The Seigniorage Curse, I explain that one of the primary mechanisms for the hollowing out of the American economy over many years was the dollar advantage, which at first was earned.

And then, came to be un-earned. By the time the US reached the 21st century, our primary manufactured product was debt, and dollars. Is it any wonder that once that system collapsed, that we quickly gave up 100% of the phantom job growth that had been sitting on top of the debt bubble? The current level of employment in the United States has now returned to the levels of June 2000. Enough said.

Washington apparently has a fresh dilemma on its hands, just inside of 6 months after the new administration came to power. Clearly the economic team, even though they were given almost 18 months to study the nature of the current crisis (starting in the Summer of 2007), incorrectly judged this recession to be of the post-war variety. Is that any surprise? Nothing in the public record since the year 2000 indicates that Larry Summers, Ben Bernanke, or Tim Geithner understood that we had been building a skycraper of private sector debt in textbook blow-off style, since the deflation scare of 2001.

Now, two years after FED repair operations began on the broken credit system, and over 3 years since US real estate topped in price, major portions of the country are staring at further home price declines in most major markets. Indeed, it appears that the same macro cycle of the last two Autumns is about to repeat, with more waves of foreclosure, more withdrawals from savings and investment to pay for living expenses, and the attendant bailouts of financial institutions that comes around each time.

Washington can’t really take a pass on this situation. If the federal government decides it can wait while "the states rebuild their balance sheets and clean up their payrolls" (as in past recessions) they’ll be waiting forever. None of that is underway. It’s no surprise therefore that the country is already being prepped for a second stimulus. Sure, Washington would like to act tough and tell the States to clean up their act. This is the moral hectoring version of Ben Bernanke saying in 2006 he doubts US real estate will ever decline year over year, or Treasury Secty Paulson saying that the front-end of the crisis was just a problem contained to sub-prime. We’ve seen this script before. If California issuing IOUs in a state where banks refuse to accept them doesn’t get the message across, nothing will. We are on the front end, not the back end, of a crisis within the States.

Unless Washington prints up dollars and bails out the States, of what use is Washington? Exactly what services can Washington provide, if California is let go? Left on its own, there would no doubt come an initial hooray from rubber-neckers and I-Told-You-So-ers. A newly broken relationship between Washington and the states might also quicken the pulse of anti-federalists, who feel we are long overdue for a tip in the balance of power. Perhaps it would all work out well. For the best, even? In Washington today the annual budget deficit crossed the one trillion mark.

In Sacramento, there is a 26 billion dollar shotgun hole in their budget. (One hopes that CALPERS is marking to market, because if they’re not, that would be a new liability for Sacramento to deal with). Meanwhile, Autumn approaches and whole range of rather nasty choices looms over the school system. Imagine living in a prime area of California and watching your house decline by 40%, your houshold income knocked for an initial 30%, and the after-school programs and town services get cut. Now throw some fees and tax hikes on top that mess. For the coup de grace, imagine Calfornia voters sitting down each night to another wave of bailouts from Washington to financial corporations. Under those circumstances it seems quite unlikely Washington can say no, to the States.

Barney Frank, Chris Dodd Do Banking Back Flip
Congress can’t make up its mind. First, legislators pushed to let banks take a rosy view of the value of some hard-hit holdings. Now, two key committee chairmen claim banks aren’t being realistic enough about the values of some loans.

The allegation by House Financial Services Chairman Barney Frank and Senate Banking Chairman Christopher Dodd that banks are holding some loans at "potentially inflated values" should trouble investors, since it came just days before institutions like JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. are due to report second-quarter results. If some loan values are "inflated," that again calls into question the quality of banks’ results.

Why, after arguing for banks to have more leeway, is Congress now pushing back? Because many government responses to the financial crisis are more about manipulating prices -- and behavior -- than truly getting markets back on their feet. Dressing up bank balance sheets was a first-quarter political priority. Now there is a push to get banks to modify more troubled mortgages. That effort is being stymied by a rosy view taken by many banks of the value of home-equity loans and second-lien mortgages.

Many banks have marked down these loans only by 3 percent to 4 percent, said Paul Miller, bank analyst at Friedman Billings Ramsey & Co. These loans in many cases would likely fetch about 40 cents on the dollar if sold in today’s market. The losses are "a big part of the toxic asset issues facing banks," Miller added.

A first mortgage on a house often can’t be restructured without the agreement of the holder of the second loan, which would entail writing it down in value. Banks have balked at doing that, due to the losses that would result. And why shouldn’t they? Congress, the Obama administration and regulators all told them earlier this year to hope for the best when it came to valuing their assets.

Let’s review. Congress this spring browbeat accounting rulemakers to make it easier for banks to ignore dour market prices for some holdings battered by the credit crisis. That was designed to help banks’ finances look better. Without subsequent rule changes by the Financial Accounting Standards Board, earnings at 45 banks and financial companies would have been 42 percent lower than reported, according to a report last month by Jack Ciesielski, editor of The Analyst’s Accounting Observer.

The rule changes allowed companies to sidestep some impact of mark-to-market accounting on securities, many of them backed by mortgages, that have fallen in value for an extended period. The "maneuver saved eight of the firms -- Prudential Financial Inc., SI Financial Group Inc., First Commonwealth Financial Corp., National Penn Bancshares Inc., Bank of New York Mellon Corp., Zenith National Insurance Corp., Sun Bancorp Inc. and American Equity Investment Life Holding Co. -- from reporting first-quarter losses instead of net income," Ciesielski wrote.

Another rule change allowed companies in some cases to ignore market values and use their own estimates for troubled assets. That helped Wells Fargo & Co. avoid what may otherwise have been a $4.5 billion hit to its capital. This was all part of ongoing and often unsuccessful efforts to push prices in a particular direction.

Last fall, the Securities and Exchange Commission instituted a temporary ban on selling financial stocks short -- or betting they would decline in value -- to try and prop up the value of bank shares. Talk about reining in speculation in commodity markets, meanwhile, is designed to keep prices for oil and some foodstuffs from rising too high. And all arms of government have tried since the credit crunch began to keep home prices from falling.

Efforts to direct prices usually fail because buyers aren’t willing to play along. Financial stocks continued to fall despite the short ban. And the congressional flip-flop on how banks should value assets shows that such efforts can backfire. The logjam in the drive to modify troubled mortgages is vexing the Obama administration. It is in some ways a problem of the government’s own making. To try and undo it, the House’s Frank and the Senate’s Dodd wrote late last week to banking regulators complaining about valuations of home-equity loans.

The chairmen said, "We are concerned that the loss allowances associated with these subordinated liens may be insufficient to realistically and accurately reflect their value." Throughout the crisis, investors have worried that banks are fudging their numbers. Now congressional leaders are confirming those fears.

Underlining the political nature of their request, Dodd and Frank didn’t call for an investigation of the supposedly "inflated" values. That’s no reason for the SEC to stand pat. The agency needs to act, now that it has an allegation from top legislators that potential financial-reporting abuses are taking place at banks. Failure to follow up will send a message that it is all right for banks to cook their books, so long as the resulting values are seasoned to suit the current political taste.

Debt Deflation the Reason Why Government Economic Stimulus is Doomed to Fail
There is a reason I call this column Outside the Box. I try to get material that forces us to think outside our normal comfort zones and challenges our common assumptions. I have made the comment more than once that is it unusual for two major bubbles to burst and for the conversation to be all about rising inflation and not a serious problem with deflation. As Niels Jensen pointed out last week, the most important question that an investor can ask is whether we are in for deflation or inflation. And this week we read a well reasoned piece on deflation. This is one of the more important essays I have sent out. You need to set aside some time to absorb this one.

Van Hoisington and Dr. Lacy Hunt give us a few thoughts on why they think it is deflation that will ultimately be the problem and not inflation we are dealing with today. This week's letter requires you to think, but it will be worth the effort. And let me quote a few sentences in the middle of this letter about taxes which you need to think about.

"Thus Barro and Perotti are saying that each $1 increase in government spending reduces private spending by about $1, with no net benefit to GDP. All that is left is a higher level of government debt creating slower economic growth."

"The most extensive research on tax multipliers is found in a paper written at the University of California Berkeley entitled The Macroeconomic Effects of Tax Changes: Estimates Based on a new Measure of Fiscal Shocks, by Christina D. and David H. Romer (March 2007). (Christina Romer now chairs the president's Council of Economic Advisors). This study found that the tax multiplier is 3, meaning that each dollar rise in taxes will reduce private spending by $3."

Now, if you put all of the various inputs together, Hoisington and Hunt show that theory suggests we will soon be dealing with deflation. It's counter-intuitive to what we hear today, which is why the Bank for International Settlements used the stagflation word in a recent report. The transition that is coming will not be comfortable....

John Mauldin, Editor, Outside the Box

Debt and Deflation Quarterly Review and Outlook Second Quarter 2009
By Van Hoisington and Dr. Lacy Hunt


One of the more common beliefs about the operation of the U.S. economy is that a massive increase in the Fed's balance sheet will automatically lead to a quick and substantial rise in inflation. An inflationary surge of this type must work either through the banking system or through non-bank institutions that act like banks which are often called "shadow banks". The process toward inflation in both cases is a necessary increasing cycle of borrowing and lending. As of today, that private market mechanism has been acting as a brake on the normal functioning of the monetary engine.

For example, total commercial bank loans have declined over the past 1, 3, 6, and 9 month intervals. Also, recent readings on bank credit plus commercial paper have registered record rates of decline (Chart 1). The FDIC has closed a record 52 banks thus far this year, and numerous other banks are on life support. The "shadow banks" are in even worse shape. Over 300 mortgage entities have failed, and Fannie Mae and Freddie Mac are in federal receivership. Foreclosures and delinquencies on mortgages are continuing to rise, indicating that the banks and their non-bank competitors face additional pressures to re- trench, not expand. Thus far in this unusual business cycle, excessive debt and falling asset prices have conspired to render the best efforts of the Fed impotent. The 100% plus expansion in the Fed's balance sheet (monetary base) has done nothing to rekindle borrowing and lending or revive even the smallest spark of inflation. What is clear is that as long as private market factors in the monetary/credit 1creation process are shrinking, as they are now, the risk for the economy is deflation, not inflation.


The link between Fed actions and the economy is far more indirect and complex than the simple conclusion that Federal asset growth equals inflation. The price level and, in fact, real GDP are determined by the intersection of the aggregate demand (AD) and aggregate supply (AS) curves. Or, in economic parlance, for an increase in the Fed's balance sheet to boost the price level, the following conditions must be met:

  1. The money multiplier must be flat or rising;
  2. The velocity of money must be flat or rising; and
  3. The AS or supply curve must be upward sloping.

The economy and price changes are moving downward because none of these conditions are currently being met; nor, in our judgment, are they likely to be met in the foreseeable future.

Aggregate demand (AD) is planned expenditures for GDP. As defined by the equation of exchange, GDP equals M2 multiplied by the velocity of money (V). M2 equals the monetary base (MB) multiplied by the money multiplier (m). Professors Brunner and Meltzer proved that m is determined by the currency, time, and Treasury deposit ratios, as well as the excess reserve ratio. The money multiplier moves inversely with the currency, Treasury deposit ratios, and excess reserve ratios and positively with the time deposit ratio. For example, if those ratios rise on balance, then m will decline. By algebraic substitution AD(GDP) = MB*V*m. In our present case, the massive increase in the Fed's balance sheet has created a sharp surge in excess reserves, and thus m has fallen.

Obviously the preceding paragraph is as clear as mud. It is included to provide mathematical proof of the complex connection between monetary actions and real world results. The practical and straightforward fact is that GDP has declined in the face of a surge in M2 growth. The labor market equivalent of GDP (aggregate hours worked) has declined at a record rate over the last 18 months, the entire span of the recession (Chart 2). That is, the monetary surge was totally offset by other factors; thus, the recession deepened and inflation was nonexistent.

The conventional wisdom is that the massive increase in excess reserves might eventually be used to make loans and reverse the economic contraction now underway, or that the velocity of money might increase. First, there is a very good explanation for the surge in excess reserves. The Fed now pays interest on its deposits, so banks have been incentivized to shift transaction deposits from riskier alternatives to the safety and liquidity offered by the Fed. Historically transaction deposits at the banks have fluctuated around 3% to 7% of a bank's balance sheet. In the second quarter, excess reserves averaged $800 billion which is 4.4% of the $18 trillion of bank debt (including off balance sheet). If this is the amount needed for transaction purposes, then this "high powered" money is not available for making loans and investments.

Second, velocity (V), or the turnover of money in the economy, is far more likely to fall than to rise. This is because V tends to fall when financial innovation reverses downward. As this process continues excess leverage will eventually diminish and together they will lead V lower. This process has already begun in the household sector.

In addition, the Fed needs an upward sloping supply curve to get the economic ball rolling. Today we estimate that the AS curve is flat. The reason it is in this perfectly elastic shape, rather than upward sloping, is that we have substantial excess labor and other productive resources. For example, in June the work week was at a record low while the U6 unemployment rate was at an all time high of 16.5%. No wonder wages are deflating. Further, industry capacity utilization was at a four decade low at 68.3%, while manufacturing capacity was at a six decade low for the longer running series at 65.0%. Indeed, when excess resources are extreme, the AS curve is likely to be not only horizontal, but shifting outward, meaning that prices will be lower at any level of aggregate demand or GDP. Thus, even if Fed actions could shift the aggregate demand curve outward, which it cannot do under present circumstances, inflation would still be a long way down the road. Thus, theory and current evidence clearly point to deflation as the overwhelming economic risk.


Over the next four years, the ratio of U.S. government debt will rise to somewhere between 71% and 80% of GDP, up from 41% at the end of 2008. The 71% figure, which is from the CBO, is probably understated. The CBO figures do not include the debt of Fannie Mae and Freddie Mac (now owned by the U.S. government), and their economic forecasts are probably too optimistic. None of these projections have incorporated the proposed health care bill which would raise the debt ratio considerably. This substantial increase in government spending far exceeds projected rising revenue sources such as the large marginal tax increase that has been suggested by the reversal in 2010 of the 2001 and 2003 tax reductions.

While the federal deficit is expanding, state and local government spending is being reduced and taxes have increased. It is highly unusual that state and local expenditures have actually decreased in current dollars in the past two quarters and, in real terms, spending is lower than a year ago. This is because state and local governments generally do not have the flexibility to incur deficits, yet they face potential deficits of about $121 billion for fiscal 2010. The Center for Budget and Policy Priorities indicates that thus far this year 23 states have imposed tax increases, with another 13 considering them. This is in addition to the ten states that imposed higher taxes or other revenue boosters in late 2007 or 2008. Therefore, the apparent thrust of federal policy is stimulus, while state and local policy is contractionary.

Interestingly, the term "federal stimulus spending" is an oxymoron. Many assume that the act of sending checks from the federal government sector to the private sector helps the economy through so-called spending multipliers. Multipliers take into consideration the second, third, fourth, etc. round effects from an initial change. Thus, multipliers capture the unintended consequences of policy actions. Although the initial spending objectives may be well intended, the ultimate outcome becomes convoluted. Over the past several years, multipliers have been intensively examined by leading economic scholars. Robert Barro of Harvard University calculates in Macroeconomics a Modern Approach (Thomson/Southwestern, 2008, p. 307) that the government expenditure multiplier from 1955 to 2006 was negative .01, not statistically different from 0. The highly respected Italian econometrician Roberto Perotti of Universita' Bocconi and the Centre for Capital Economic Policy Research has also done extensive work on this subject while visiting the fiscal policy division of the ECB. In October 2004, in his Estimating the Effects of Fiscal Policy in OECD Countries, Perotti calculates that the U.S. expenditure multiplier is also close to 0. Thus Barro and Perotti are saying that each $1 increase in government spending reduces private spending by about $1, with no net benefit to GDP. All that is left is a higher level of government debt creating slower economic growth. There may be intermittent periods when government spending will lift the economy, but offsetting episodes will follow. The best available empirical research suggests that the current federal policy of expanding spending will retard, not improve, the performance of business conditions. In addition to spending multipliers, however, there are also tax multipliers.

The most extensive research on tax multipliers is found in a paper written at the University of California Berkeley entitled The Macroeconomic Effects of Tax Changes: Estimates Based on a new Measure of Fiscal Shocks, by Christina D. and David H. Romer (March 2007). (Christina Romer now chairs the president's Council of Economic Advisors). This study found that the tax multiplier is 3, meaning that each dollar rise in taxes will reduce private spending by $3.

Presently, the federal government is increasing spending that in the end may actually retard economic activity, and is also proposing tax increases that will further restrain private sector growth. This policy mix is the same approach that failed in the U.S. from 1929 to 1941 and also failed in Japan over the past two decades, a subject we addressed in our April letter. In other words, fiscal policy is executing a program that is 180 degrees opposite from what it should be to stimulate the economy. How is it possible to get an inflationary cocktail out of deflationary ingredients?


The preferred way to answer the business cycle question of expansion versus contraction is to examine the four variables most integral to the economy's performance: employment, production, personal income, and sales. For these variables to be consistent over time, the income and sales must be adjusted for inflation and personal income must exclude government transfer payments.

Recessions end when the National Bureau of Economic Research (NBER), the official arbiter of such matters, says they end. But sometimes economic conditions suggest that the NBER miscalculated. Economic recovery occurs when these four indicators turn higher at about the same time. If the NBER's cycle turning dates are aligned with these four indicators they have validity. Regardless of the NBER's opinion, if the four indicators are not rising, a normal recovery will not occur. This seemingly esoteric point has important implications for the stock market.

In all the recessions from 1967 to 1999, the NBER aligns its recession ending dates very well with the unified recovery in income, production, employment and sales (Charts 3 & 4). However, for the 2000-2001 recession the NBER call date for the recovery did not line up with these four coincident indicators. Although the recession officially ended in November 2001, employment and income had not turned higher. In fact, they did not trough until March and August 2003 recording lags of 16 and 21 months, respectively. Thus, the economy was only in a partial recovery, a situation that had huge stock market implications.

The S&P 500 Stock Price Index troughed prior to the end of all the NBER defined recessions from 1967 through 1999, in concert with the four key economic variables (Chart 3 & 4). However, in 2001 the S&P bottomed 15 months after the end of the NBER defined recession yet one and six months before the cyclical troughs in income and employment, respectively. In other words, stock prices anticipated the complete, not partial, recovery of these pillars of economic growth. Although all four of these indicators are still falling, the critical event for the financial markets will be when all four finally turn higher. If a complete recovery of these four variables is still far in the future, then the current gains in the stock market cannot be sustained, just as rallies were not sustained in 2001.


Total U.S. debt as a percent of GDP surged to 375% in the first quarter, a new post 1870 record, and well above the 360% average for 2008. Therefore, the economy became more leveraged even as the recession progressed. An over- leveraged economy is one prone to deflation and stagnant growth. This is evident in the path the Japanese took after their stock and real estate bubbles began to implode in 1989. At that time Japanese debt as a percent of GDP was 269% (Chart 5). This percentage actually continued to move higher until 1998 when it peaked at 345%, below the current level in the U.S. While the Japanese increased leverage for nine years after the bubble highs, neither highly inflated stock and real estate prices nor economic performance could be sustained as debt repayment became more burdensome.

Contrary to many evaluations of Japan's problems, traditional monetary policy was actually working. This is evidenced by the enlarged Japanese debt ratio in the early years after 1989 which was not merely due to increased government debt. Private debt as a percent of GDP also rose from 219% in 1989 to its peak of 274% in 1996. However, private debt as a percent of GDP turned down in 1997 as government debt absorbed a rising proportion of Japan's credit resources. The greater private debt load, from 1989 to 1996, as well as the massive increase in the government debt from 1989 to the present, coincided with two lost decades, not with prosperity. This template of increasing debt, combined with decreasing asset values, is a warning to investors of the efficacy of our current fiscal and monetary postures.

The combination of an extremely overleveraged economy, ineffectual monetary policy and misdirected fiscal policy initiatives suggests that the U.S. economy faces a long difficult struggle. While depleted inventories and the buildup of pent-up demand may produce intermittent spurts of growth, these brief episodes are not likely to be sustained. In several years, real GDP may be no higher than its current levels. However, since the population will continue to grow, per capita GDP will decline; thus, the standard of living will diminish as unemployment rises. These conditions will produce a deflationary environment similar to the Japanese condition.

Investments in long term Treasury securities are motivated by inflationary expectations. If fixed income investors believe inflation is headed lower, they will invest in long-dated securities, while they will invest in Treasury bills, or inflation protected securities if they believe inflation is headed higher. In the normal recessions since 1950, the low in inflation was, on average, 29 months after a complete economic recovery was underway, and bond yields moved in a similar fashion. If this recession were normal, then the low in inflation would be in late 2011, at which time investors would begin to consider shortening the maturity of their Treasury portfolios. However, because of our highly-indebted circumstances and the movement of private sector resources to the public sector, the trough in inflation will be moved out, meaning that the low in Treasury bond yields is a distant event. The path there will be bumpy, as it was in the U.S. from 1929 to 1941 and in Japan from 1989 to 2008. Presently the 10-year yield in Japan stands at 1.3%. Ultimately, our yield level may be similar to that of the Japanese.

Is A British Court About To Decide The Future Of Securitization?
by Tyler Durden

While momentum chasers in America quarrel over worthless data points and whether some trading desk bought an additional 20 PCs with Intel's brand spanking new i7 CPU to reduce latency by yet another 1 nanosecond, imagine hypothetical green shoots, and storm the futures in hopes of getting other momentum chasers to get behind them, a much more relevant development is currently unfolding which could potentially have a terminal effect on the future of securitization. Creditflux reported last week that the lawyers of bankrupt Lehman Brothers recently filed in English courts a request to overturn the concept of bankruptcy-remoteness for special purpose vehicles (SPVs). If granted, this request could spell the end of securitization as a once-upon-a-time multi-trillion credit product, regardless of how many PPIP or TALF revisions the administration throws into the CRE fire.

According to available reports, and an analysis by CreditSights, Australian investors in a synthetic CDO issued by the Dante Multi Issuer Secured Obligation Program (a Lehman SPV) are attempting to collect the SPV collateral following the bank's bankruptcy.Furthermore, the bank's US lawyers are now suggesting that principle of bankruptcy-remoteness goes against bankruptcy law, arguing that collateral should first pay off in the money swaps before paying off investors. To make things even more complicated, lawyers are now trying to move the case to New York claiming UK courts do not have jurisdiction, because since the swap counterparty is American (even though the documentation is based in England), it should be decided in an American venue. It is odd that the lawyers believe this issue will have i) not only a heightened standing domestically but ii) an increasing probability of success here despite what will likely be vocal opposition by such entities as the CMSA, and by implication, the administration.

Some background info from a recent report by Credit Sights:

The principle of bankruptcy-remoteness of SPVs forms the bedrock of securitization. It is vital to achieve a full separation between the assets and the originator of those assets. One key element of this separation is the so called “true” sale of assets, that ensures that no creditors of the originator have any claims against the sold assets, and those assets cannot be consolidated in the bankruptcy estate in case of insolvency proceedings against the originator. As a result, the transaction can be highly-rated (AAA or AA) even though the originator may have a much lower rating. In funded synthetic transactions, also known generally as credit linked notes (or CLNs), bankruptcy-remoteness of the SPV translates into a claim on the underlying collateral. According to industry standards, the swap counterparty’s claims are subordinated to those of the investors post the counterparty’s default, thus allowing rating agencies to ignore the (usually lower) ratings of the default swap counterparty when assigning a rating to the transaction.

The chart below shows a typical CLN transaction where the swap counterparty is generally a dealer. The issuance proceeds from the investor are used by the SPV to purchase pre-agreed collateral to fund the exposure of the default swap. The SPV simultaneously enters into a default swap with a swap counterparty whereby it sells credit protection in return for an ongoing premium. The collateral coupon and swap premium are then passed on to the investor. The SPV is usually a trust designed to enter into certain limited transactions to enable it to issue debt customized to a specific payout profile or suitable to investors. Each SPV issue is collateralized separately and has recourse only to a defined pool of assets. So while the same SPV can issue any number of notes, no two issues will impact each other. An appointed and independent trustee ensures the interests of all parties to the SPV (the investor and swap counterparty) are considered and maintained. The SPV can be situated in a number of jurisdictions, providing tax benefits. The issued CLN can also be rated and/or listed as required.

It is indeed not an exaggeration that a ruling in favor of the plaintiffs would have major ramifications on securitization. As Credit Sights concludes:

A ruling against the investors would be hugely negative for the credit markets as the concept of bankruptcy-remoteness will most likely not be valid for any transactions where the swap counterparty has a U.S. connection. The immediate outcome will be potential ratings downgrades of funded synthetic transactions, as rating agencies factor in the lower ratings of swap counterparties (provided they have a U.S. connection). In some instances, this could lead to forced unwinds by ratings-sensitive investors, resulting in significant upward pressure on spreads. In the medium to longer-term, this outcome could present a huge hurdle in restarting the securitization market especially as most traditional investors, who are also ratings-sensitive, are unable to participate in the market.

While the case has not generated much traction yet in the legal system, once investors realize the potential ramifications it is likely that this could become the most followed legal development whose adverse repercussions could throw a major wrench in the administration's wheels, which as everyone is aware, are fully focused on doing all that is necessary to not only restart securitization but to bring leverage to the same dizzying heights that brought the system to a grounding halt the first time around.

Data from: Credit Sights.

Barney Frank: Banks Unlikely to Face Conflicting Demands Under New Agency
House Financial Services Chairman Barney Frank (D., Mass.) promised to ensure banks won't face competing demands from their current regulator and a proposed Consumer Financial Protection Agency. "I can guarantee that any legislation that comes out of here will make it clear that no bank will face conflicting demands," Rep. Frank said Wednesday at a hearing before his panel to gather industry reaction to various regulatory overhaul proposals.

The industry is fiercely opposed to the proposed agency, which would have broad powers to write rules protecting consumers of financial products and services and to ban certain practices. The agency would sweep mortgage brokers and nonbank lenders, often cited as culprits in the subprime meltdown, under meaningful federal oversight for the first time. The industry warns that cleaving consumer protection from "prudential" regulation could pull firms in opposing directions. Lobbyists claim financial products are inextricably linked to the health of the institution.

American Bankers Association President and CEO Edward L. Yingling argued in prepared remarks that "the regulation of a company and its products cannot be separated without causing severe problems and conflicts."
Rep. Frank said he would ensure through legislation that there is some process to resolve competing demands from the agency and the prudential regulator. Under the administration's proposal, the CFPA would have to consult with prudential regulators before issuing any new rules.

Industry representatives attacked the agency at the hearing, arguing it would impose unacceptable costs on consumers, lenders and taxpayers. The costs could be "staggering," American Financial Services Association President and Chief Executive Chris Stinebert argued in prepared testimony.

"Congress should think carefully about setting up a new government agency that would cost taxpayers more money at a time when they are already struggling to stay afloat financially," Mr. Stinebert said. The administration says a mix of appropriated funds and assessments on regulated institutions should fund the new agency. Officials claim the industry wouldn't face higher costs because existing regulators would lose their consumer protection responsibilities to the new agency, enabling them to lower assessments on institution

Elizabeth Warren on Consumer Protection Agency

Angelides, Thomas to Lead Financial-Crisis Probe
Congressional lawmakers released the names Wednesday of 10 members of the Financial Crisis Commission, a body set up to investigate the events that led to the monumental collapse of the financial markets last year. Former California State Treasurer Phil Angelides is to chair the group. Joining him is former Democratic Sen. Bob Graham of Florida and the ex-chairman of the Commodity Futures Trading Commission, Brooksley Born.

Representing the business community are Heather Murren, a retired managing director at investment bank Merrill Lynch, and John W. Thompson, chairman of Symantec Corp., a business-software provider. The sixth member of the panel will be Byron Georgiou, a Las Vegas businessman and attorney. The Republican appointees to the commission are former chairman of the House Ways and Means Committee Bill Thomas, Douglas Holtz-Eakin, an economic adviser to Sen. John McCain (R., Ariz.) during last year's presidential campaign, former director of the Bush White House's National Economic Council Keith Hennessey, and Peter Wallison, a director at the American Enterprise Institute, a conservative think tank.

The panel was created by Congress earlier this year. Lawmakers demanded a full investigation into how one of the greatest collapse in the financial markets occurred. It is mandated with reporting back to Congress by Dec. 15, 2010, with a series of conclusions about what occurred, and recommendations as to how to avoid future market breakdowns. There have been some fears expressed that the committee's work will be outpaced by efforts already under way to completely overhaul the regulation of the financial sector.

The Obama administration has revealed details of its planned rewriting of the regulatory framework which would see the Federal Reserve given the authority to oversee firms deemed systemically risky, and the creation of a new consumer financial protection regulator. It is modeled on the Pecora Commission, a Senate panel that investigated causes of the Great Depression during the 1930s. The Pecora Commission led to major changes in federal law, including the creation of Securities Exchange Commission.

Mobius Says Derivatives, Stimulus Money to Spark New Financial Crisis
A new financial crisis will develop from the failure to effectively regulate derivatives and the extra global liquidity from stimulus spending, Templeton Asset Management Ltd.’s Mark Mobius said. "Political pressure from investment banks and all the people that make money in derivatives" will prevent adequate regulation, said Mobius, who oversees $25 billion as executive chairman of Templeton in Singapore. "Definitely we’re going to have another crisis coming down," he said in a phone interview from Istanbul on July 13.

Derivatives contributed to almost $1.5 trillion in writedowns and losses at the world’s biggest banks, brokers and insurers since the start of 2007, according to data compiled by Bloomberg. Global share markets lost almost half their value last year, shedding $28.7 trillion as investors became risk averse amid a global recession. The U.S. Justice Department is investigating the market for credit-default swaps, Markit Group Ltd., the data provider majority-owned by Wall Street’s largest banks, said July 13.

Mobius didn’t explain what he thought was needed for effective regulation of derivatives, which are contracts used to hedge against changes in stocks, bonds, currencies, commodities, interest rates and weather. The Bank for International Settlements estimates outstanding derivatives total $592 trillion, about 10 times global gross domestic product. "Banks make so much money with these things that they don’t want transparency because the spreads are so generous when there’s no transparency," he said.

A "very bad" crisis may emerge within five to seven years as stimulus money adds to financial volatility, Mobius said. Governments have pledged about $2 trillion in stimulus spending. The Justice Department’s antitrust division sent civil investigative notices this month to banks that own London-based Markit to determine if they have unfair access to price information, according to three people familiar with the matter.

Treasury Secretary Timothy Geithner last week urged Congress to rein in the derivatives market with new U.S. laws that are "difficult to evade." He said strong capital requirements were the key.
Geithner repeated President Barack Obama’s call to force "standardized" contracts onto exchanges or regulated trading platforms, and regulate all dealers. The plan to regulate the derivatives market is part of a wider overhaul of financial industry rules meant to prevent any possibility of a repeat of last year, when the collapse of Lehman Brothers Holdings Inc. and American International Group Inc. froze credit markets and worsened the global recession.

In the Senate, Agriculture Committee Chairman Tom Harkin, an Iowa Democrat, is pushing for legislation that would require all over-the-counter derivatives trades be traded on regulated exchanges, not just standardized ones as the Obama administration is seeking. U.K. banks will be forced to curb trading activity that helped cause the global financial crisis, Britain’s top financial regulator said last month, while stopping short of seeking to separate their lending and securities units.

"Banks have lobbied hard against any changes that would make them unable to take the kind of risks they took some time ago," said Venkatraman Anantha-Nageswaran, global chief investment officer at Bank Julius Baer & Co. in Singapore. "Regulators are not winning the battle yet and I’m not sure if they are making a strong case yet for such changes." Mobius also predicted a number of short, "dramatic" corrections in stock markets in the short term, saying that "a 15 to 20 percent correction is nothing when people are nervous."

Emerging-market stocks "aren’t expensive" and will continue to climb, Mobius said. He said he favors commodities and companies such as London-based Anglo American Plc, which has interests in platinum, gold, diamonds, coal and base metals. In China and India, Mobius sees value in consumer-oriented stocks and banks, he said.

Obama's Foreclosure Plan Du Jour: Own-to-Rent
Just when you thought the Obama administration was out of crazy ideas to solve the housing crisis they come up with another one. This one is cleverly labeled by Clusterstock as Own-to-Rent. As Reuters reports, the idea is to let owners facing eviction stay in their homes as renters: Under one idea being discussed, delinquent homeowners would surrender ownership of their homes but would continue to live in the property for several years, the sources told Reuters.

Officials are also considering whether the government should make mortgage payments on behalf of borrowers who cannot keep up with their home loans, tapping an unused portion of a $50 billion housing aid kitty. As part of this plan, jobless borrowers might receive a housing stipend along with regular unemployment benefits, the sources said. Let’s take a look at everything that’s wrong with this.

First off, I suspect that more than a few of the investors that own these mortgages might not be thrilled to see their contractual rights to foreclose on the property and dispose of it are going to be real happy to learn they’ve just been turned into long term investors in real property. They probably just want to get whatever is left over from a bad investment and lick their wounds for awhile. Instead, the government is going to make them stay in the game.

Next, who is going to manage all of this property. The banks and loan servicing companies are set up to deal with paper not houses. By all accounts they have been swamped just trying to repossess and dispose of the properties. Lord knows how they’ll cope with several million tenants calling about stopped up toilets let alone collecting the rents. What laws are going to govern these rental arrangements. Each state has its own landlord-tenant statutes and they tend to be relatively complex though definitely not uniform from state to state.

There is no comparable federal set of statutes. I suppose you could say facilely that the laws of the state in which the property is sited will prevail but that will get carved up in short order by the lawyers. The press will be shouting where’s the fairness as soon as they realize that an evicted family in Phoenix is on the streets in twenty days while it takes three months in Los Angeles.

Naturally, this is going to do nothing so much as freeze the housing market. Presumably, these sweetheart leases have some maturity which will represent a natural overhang on the market. Rather than clearing the market and getting foreclosed homes through the banks and back into private hands, buyers are going to have to factor in millions of homes that will at some point come flooding back into the resale pool.

Finally, how about some help for renters. Why is the guy or gal that had the good sense to stay out of the housing market when it was bubbling and loses his or her job being discriminated against. They need some place to live as well and if they find themselves in financial difficulty are certainly no less deserving of the same help that is extended to a former homeowner. The whole idea is one of those feel good attempts at policy that slosh around Washington these days. The problem is that there’s always the possibility that it goes somewhere before anyone sits down and analyzes the potential defects or that Congress gets it in their teeth and disregards any defects.

What Is Goldman Sachs?
by Jim Bianco

  • Office of the Comptroller of the Currency (OCC) - Quarterly Report on Bank Trading and Derivatives Activities First Quarter 2009. The OCC’s quarterly report on bank derivatives activities and trading revenues is based on Call Report information provided by all insured U.S. commercial banks and trust companies, as well as on other published financial data. Derivatives activity in the U.S. banking system is dominated by a small group of large financial institutions. Five large commercial banks represent 96% of the total industry notional amount and 83% of industry net current credit exposure.


Recall that in Q4 2008 brokerage firms (Goldman Sachs, Morgan Stanley) and finance companies (CIT, GMAC) were given permission to convert into commercial banks. They did this to get access to better sources of funding during the dark days last fall.

Now that Goldman Sachs is a commercial bank comes a new set of public reporting requirements. One of these public reports is linked above, and below is a series of charts and tables from this report.

The first chart shows total credit exposure to risk-based capital for the five largest commercial banks. Below the chart is a table showing the the underlying data. Goldman Sachs is among the five largest commercial banks. Regarding their credit exposure to capital relative to their peers, we believe the technical term is "wow!"

<Click on chart for larger image>

What is credit exposure? The two charts below detail bank ownership of credit instruments. 61% of all credit derivatives were written on investment grade credit. 64% of all credit derivatives have terms of 1 year to 5 years, meaning they most likely originated as a 5-year maturity. 27% have a maturity greater than 5 years, meaning they most likely originated as a 10-year maturity. Finally, 98.41% of credit exposure is structured as a credit default swap (CDS).

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The next chart shows quarterly trading revenue at the top five banks. Notice the blue bar under Goldman Sachs, it is their Q1 2009 results. Trading revenue accounted for 69% of gross revenue. No other large bank is even close to having trading be this large a part of their gross revenue. Combined with the charts above and we can see that Goldman’s revenues primarily come from credit trading. What happened to investment banking?

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The table below shows credit equivalent exposures for the 25 banks. This gives more detail to the first chart above. The second line is Goldman Sachs (click on the table for a readable image). Notice its credit exposure as a percentage of capital relative to the other 24 largest commercial banks. Again, they are in a league by themselves.

<Click on table for larger image>

Finally, from the OCC report, Goldman’s ability to make huge trading revenues in credit stands apart from other commercial banks. The charts below break down trading revenues by type for Q1 2009 (left) and Q4 2008 (right). Notice that commercial banks have lost money in credit the last two quarters, but not Goldman.

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This all suggests Goldman Sachs is a giant credit portfolio. Does the market know this? See the next two charts. They compare Goldman’s stock price (blue line, top chart) and an index of bank stocks without Goldman (blue line, bottom chart). Since 61% of all bank credit exposure is investment grade CDS, we compare Goldman’s stock price to the option-adjusted spread (OAS) of an investment grade index (red line, both charts)

<Click on chart for larger image>

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The charts note two different dates. The first is February 8, 2007, the date we believe the credit crisis began (the date HSBC, or "patient zero", restated 2006 earnings because of subprime losses). The second date is September 5, 2008. This was the day Fannie Mae and Freddie Mac were placed in conservatorship and a week before Lehman Brothers failed.

Since February 7, 2008 both Goldman’s stock and the bank index has been highly correlated to credit. Neither was highly correlated before this date. Since September 5, 2008 Goldman’s relationship to credit held, but the bank index’ relationship has begun to diverge. So, in answering the question, "do stock traders understand that Goldman is essentially a large credit protfolio", these charts suggest the answer is "yes."

Given all this, AIG’s bailout of its massive CDS portfolio was in Goldman’s interest more than any other "commercial bank."

Does Buffett understand he invested in a giant credit portfolio? His comments last week do not sound like someone that would want a massive bet on credit:

In a live interview on CNBC today, Warren Buffett said there has been little progress over the past few months in the "economic war" being fought by the country. "We haven’t got the economy moving yet." While the economy is a "shambles" and likely to stay that way for some time, he remains optimistic there will eventually be a recovery over a period of years.

Maybe Warren should ask Byron Trott for a refund, or at least a weekend in his house (Hint: no house in the Midwest pays more in property taxes).

A Tale of Two Bailouts
Yesterday saw one TARP recipient, Goldman Sachs, report $3.44 billion in profits even as another, CIT, teeters on the edge of either bankruptcy or another taxpayer bailout. Which way CIT will tip remained unclear as we went to press, but its very plight shows how the government's approach to systemic risk has created groups of financial "haves" and "have nots."

What the Goldmans of the world have in addition to profits is the widespread belief that they are too big to fail. Both Goldman and CIT converted into bank holding companies at the height of the financial panic last fall, which made them eligible for TARP injections. Goldman also benefited at a crucial moment from the Federal Reserve takeover of AIG, and it received the additional filip of FDIC-guaranteed debt issuance through the Temporary Liquidity Guarantee Program. CIT was excluded from the latter program on grounds that it didn't pose a systemic risk, even as larger competitors like General Electric were allowed in.

CIT's asset quality has since fallen further, and it now faces $2.7 billion in maturing debt this year that investors fear it will not be able to roll over. So it is seeking another taxpayer rescue, and officials at Treasury and Fed are sympathetic. But if CIT -- a company one-tenth the size of Lehman Brothers -- can be bailed out long after the panic has passed, the word "systemic" has lost all meaning. CIT has long been a lender to subprime corporate borrowers, and this decade it took on even greater risks at precisely the wrong time. It has lost money for eight straight quarters. Its lending supports less than 1% of the total U.S. retail and manufacturing, and plenty of competitors could pick up its market share.

There's also a question of why the FDIC -- which is supposed to protect bank depositors -- should be the rescue agent. CIT's bank is only a small part of the company and is so far walled off from trouble. CIT executives want permission to stuff some of the company's assets into the bank so they can finance them with brokered deposits. But that would put the FDIC's deposit fund at greater risk just when it is stretched from other bank failures. The FDIC should also be winding down its debt guarantee program, not extending it to new and riskier companies. Taxpayers shouldn't be put at risk for further losses via the FDIC merely because Treasury and the Fed don't want to admit losses on their TARP investment.

Of course, if the feds do let CIT fail, this will only confirm that the only certain survivors in the current market are banks big enough that the government figures it must bail them out. Just ask the many small banks that have been rolled up by the FDIC at a rate of two a week since the beginning of the year, with eight so far in July alone. That can only strengthen the likes of Goldman, which apparently needs no help printing money anyway. Goldman's traders profited in the second quarter from taking advantage of spreads left wide by the disappearance of some competitors (Lehman, Bear Stearns) and the risk aversion of others (Morgan Stanley). Meantime, Goldman's own credit spreads over Treasurys have narrowed as the market has priced in the likelihood that the government stands behind the risks it is taking in its proprietary trading books.

Goldman will surely deny that its risk-taking is subsidized by the taxpayer -- but then so did Fannie Mae and Freddie Mac, right up to the bitter end. An implicit government guarantee is only free until it's not, and when the bill comes due it tends to be huge. So for the moment, Goldman Sachs -- or should we say Goldie Mac? -- enjoys the best of both worlds: outsize profits for its traders and shareholders and a taxpayer backstop should anything go wrong.
We like profits as much as the next capitalist.

But when those profits are supported by government guarantees or insured deposits, taxpayers have a special interest in how the companies conduct their business. Ideally we would shed those implicit guarantees altogether, along with the very notion of too big to fail. But that is all but impossible now and for the foreseeable future. Even if the Obama Administration and Fed were to declare with one voice that banks such as Goldman were on their own, no one would believe it.

If there is a lesson in this week's tale of two banks, it's that it won't be enough to give the Federal Reserve a mandate to "monitor" systemic risk. Last fall's bailouts are reverberating through the financial system in a way that is already distorting the competition for capital and financial market share. Banks that want to be successful will also want to be more like Goldman Sachs, creating an incentive for both larger size and more risk-taking on the taxpayer's dime.

One policy response to the incentives created by last fall's bailout is simply to restrict the proprietary trading done by the subsidiaries of bank holding companies that enjoy both FDIC deposit insurance and an implicit government subsidy on their cost of capital. This is what Paul Volcker proposed, only to be overruled by Tim Geithner and Larry Summers. Another answer would be an FDIC-style bailout tax, perhaps tied to leverage ratios, for those in the too-big-to-fail camp. Developing a template to facilitate the seizure and orderly winding down of failing financial giants is also an essential element of whatever reform Congress cooks up.
* * *
No one welcomes the pain and dislocation if CIT files for bankruptcy. But U.S. policy toward financial companies cannot avoid all hardship, or the result will be a de facto cartelization of finance, with a resulting loss of competition and dynamism that have long been an American strength. The divergent fortunes of CIT and Goldman Sachs show how much we changed when we stepped in to save certain banks in the name of saving the system.

Mortgages Are Now a Bank’s Best Friend
For the last two years, housing has been at the center of the banking industry’s troubles. But for at least one quarter, it will help lift its results. Even as banks remain cautious about lending and millions of borrowers still risk losing their homes, the mortgage business is returning as one of the most lucrative corners of the financial industry. The clearest evidence is emerging this week, as the nation’s biggest banks report their second-quarter numbers.

As independent mortgage companies and brokers shut their doors last fall, and major players like Bank of America, JPMorgan Chase and Wells Fargo swallowed up troubled rivals, lending profit margins widened, doubling at big banks amid a refinancing wave during the first half of the year, analysts said. Mortgage securities prices have rallied, allowing banks to book hefty gains on their investment portfolios. And accounting tactics — like new rules that let banks book lower losses on troubled assets and reductions in reserves for future losses because of mortgage modifications — may further burnish their results.

"It’s the mother of all mortgage quarters," said Meredith Whitney, a prominent banking analyst. But whether or not those profits are sustainable remains an open question. "You might believe that the environment has stabilized, but looks are sometimes misleading," she added. Over all, analysts say that second-quarter bank earnings are likely to be good, if not quite as strong as the first quarter’s. Bank stocks have rallied over the last four months in anticipation of brighter news. The KBW Bank Index, a popular measure of the financial sector, has nearly doubled from its low in early March.

Goldman Sachs reported strong profits from trading on Tuesday. But the resurgence of the mortgage business should help most of the big commercial banks, from small regional lenders to national players like Bank of America, Citigroup, JPMorgan Chase and Well Fargo, which report this week. Banks still face a number of threats. Credit card and commercial real estate loan losses continue to climb. And for many, the quarter will be rife with unusual accounting charges.

Even so, the refinancing rebound is providing a lift. As the Federal Reserve cut interest rates to record lows, hundreds of thousands of borrowers were able to take out cheaper loans. Lenders issued an estimated $1 trillion worth of mortgages during the first half of 2009, according to Inside Mortgage Finance. Meanwhile, mortgage lending margins are at least two to three times higher than a year ago, analysts said, making it an increasingly important force at the biggest banks. Since 2000, mortgage banking has represented about 3 percent of revenue for Bank of America, JPMorgan and Wells Fargo, Ms. Whitney says. In the first quarter, it more than doubled to about a 6.4 percent share.

Banks also stand to book large gains on mortgage bonds as well more obscure instruments called mortgage servicing rights, which rose late in the quarter in anticipation of more borrowers holding onto their existing loans. That extends the number of payments that lenders can collect. The values of those rights fell sharply in the first quarter and through most of the second quarter, when interest rates were low. But as interest rates climbed toward the end of June, banks got the best of both worlds: a several-week flurry of refinancings and an increase in the value of the servicing rights.

Frederick Cannon, a banking analyst at Keefe Bruyette Woods, estimated that the value of Wells Fargo’s servicing rights could rise by nearly $8 billion, or more than 60 percent, to as much as $20.2 billion. Other big banks could experience similarly large gains, although some might be reduced by interest-rate hedging. Aggressive accounting could also pump up the lenders’ results. Most of the big banks took advantage of an 11th-hour rule accounting rule change in the first quarter to book smaller losses on troubled securities. Jack T. Ciesielski of The Analyst’s Accounting Observer estimated that without the change, earnings for the biggest banks in the Standard & Poor’s financial index would have been almost cut in half. In the second quarter, the impact could be even greater.

In addition, the banks may book some early benefits from a subsidy the government gives them for modifying mortgages — gains that are likely to proliferate in coming quarters if the Obama administration’s Making Home Affordable program takes off. So far, the government has agreed to funnel $18 billion of taxpayer money to lenders, investors and borrowers to keep Americans in their homes. Under the program, Bank of America could receive as much as $6 billion to offset part of the losses it incurs from lowering monthly loan payments and to defray its costs, according Treasury Department data.

JPMorgan Chase is eligible for $3.5 billion. Wells Fargo could get as much as $2.9 billion. Citigroup and GMAC stand to collect more than $1 billion each. The first checks start arriving this month — although over the long term, industry insiders project that the banks will retain only around one-third of those funds, with the rest going to subsidize borrowers and investors. While banks are expected to make loan modifications because it is sound business, Treasury officials say they believe the subsidies will encourage lenders to make even more modifications than they otherwise would. So far, more than 270,000 borrowers have received offers since the program was introduced this spring. The administration hopes to see that number rise to around four million.

Investors Say 'Tarnished' Fed Shouldn't Oversee Firms Posing Systemic Risk
Investors led by two former U.S. securities regulators are urging that an independent board monitor firms that pose a risk to markets, breaking with the administration’s plan to give the job to the Federal Reserve. A committee led by former Securities and Exchange Commission Chairmen William Donaldson and Arthur Levitt also said the U.S. should consider limiting banks’ proprietary trading, merge some agencies and bring insurance companies under federal supervision. The group, in a report to be released today, says it’s offering a "bolder" overhaul of market rules than proposed by the Treasury Department last month.

The Fed’s "credibility has been tarnished by the easy credit policies it pursued and the lax regulatory oversight that let institutions ratchet higher their balance sheet leverage and amass huge concentrations of risky, complex securitized products," the report by the Investors’ Working Group said. Lawmakers are considering legislation that would enact President Barack Obama’s regulatory overhaul, the most sweeping change to financial oversight since the 1930s. Backed by a group of pension funds, the report might sway Democrats in Congress, especially those concerned that the central bank has too many conflicts and inadequate accountability.

Obama’s plan would make the Fed the main overseer of companies whose collapse could roil markets, and bring hedge and private equity funds under federal scrutiny. It would create an agency for monitoring consumer financial products. Treasury Secretary Timothy Geithner is urging quick action by Congress. The debate on overhauling the regulations is occurring after a year of shocks on Wall Street sparked by the collapse of the subprime mortgage market and the deepest recession in a half century.

Since September, the government has been forced to prop up such firms as Citigroup Inc., Bank of America Corp., American International Group Inc., General Motors Corp. and housing finance companies Fannie Mae and Freddie Mac. Congress passed the $700 billion Troubled Asset Relief Program last year to help unlock the credit markets and rescue the largest banks after millions of investors lost their savings in the global stock market plunge. Some of the blame, the report noted, should be pinned on the outdated U.S. regulatory regime that has, at times, been overly friendly to industry.

"The lack of sufficient authority, resources and will on the part of regulators helped fuel the financial meltdown," the report said. The report is sponsored by the Council of Institutional Investors and the CFA Institute Centre for Financial Market Integrity. The council represents public, union and corporate pension funds with combined assets of more than $3 trillion. The task force members include Brooksley Born, former chairman of the Commodity Futures Trading Commission; Bill Miller, chief investment officer of Legg Mason Capital Management Inc.; Harvey Goldschmid, former SEC commissioner, now professor at Columbia Law School.

Levitt, a Democrat who headed the SEC from 1993 until 2001, is a board member of Bloomberg LP, parent of Bloomberg News. He is a senior adviser to the Carlyle Group and a consultant to Goldman Sachs Group Inc. Donaldson, the Republican SEC chairman from 2003 through 2005, works at his own firm in New York. The recommendation for a systemic-risk oversight board is a short-term solution, the group said. Once the credit crisis has eased, a "full-fledged regulator" for companied deemed too- big-to-fail should be put in place, the report said.

The group is suggesting an independent oversight board, while some lawmakers propose a federal council comprised of the heads of the Fed, the Treasury and bank regulators to monitor for systemic risks. "A council of regulators would have blurred lines of authority -- ultimately no one would be in charge or accountable -- and could be hamstrung by the usual jurisdictional disputes," the report said.

The administration’s proposal to give the Fed such powers has "serious drawbacks," including the central bank’s "potentially competing responsibilities" of setting monetary policy and managing the U.S. payment system. "Other serious concerns stem from the Fed’s recent regulatory failures -- its refusal to police mortgage underwriting or to impose suitability standards on mortgage lenders -- and the heavy influence that banks have on the Fed’s governance," the report said.

On curbing proprietary trading at banks and their holding companies, the report said the activity "creates potentially hazardous exposures and conflicts of interest" at lenders. Obama’s regulatory plan doesn’t mandate limits. "Banks should focus on their primary purposes, taking deposits and making loans," the group said. Lehman Brothers Holdings Inc.’s collapse last September spurred Goldman Sachs Group Inc. and Morgan Stanley to convert into bank holding companies, overseen by the Fed, to gain access to the U.S. rescue fund. Though they are building deposit bases, their earnings still hinge on trading.

Goldman yesterday posted its highest quarterly profit, $3.44 billion, as revenue from trading reached an all-time high. The report goes further than the Treasury proposal and recommends stiffer rules for credit-rating companies, which have drawn fire from investors for maintaining top rankings on mortgage securities months after the U.S. housing market started collapsing in 2007. Fees from grading debt should "vest over a period time" so that ratings-companies aren’t compensated in full for assessments that turn out to be wrong, the report said.

The document said Congress should make it easier for investors to sue companies such as Standard & Poor’s, Moody’s Investors Service and Fitch Ratings when their ratings incorrectly rate the risk of a bond defaulting. The report recommended that in the longer term, the U.S. should subject insurance companies to federal oversight and merge the SEC and the Commodity Futures Trading Commission, a step the administration considered but abandoned amid political pressure.

The Bernanke Market
I remember once buying the stock of a small company and I couldn't believe my luck. Every time my fund bought more shares the stock would go up. So we bought even more and the stock kept climbing. When we finally built our full position and stopped buying the stock started dropping, ending up at a price below where we started buying it. We were the market. Just about every policy move to right the U.S. economy after the subprime sinking of the banking system has been a bust. We saved Bear Stearns. We let Lehman Brothers go. We forced Merrill Lynch, Wachovia and Washington Mutual into the hands of others. We took control of Fannie and Freddie and AIG and even own a few car companies, pumping them with high-test transfusions. None of this really helped.

We have a zero interest-rate policy. We guaranteed bank debt. We set up the Troubled Asset Relief Program (TARP) to buy toxic mortgage assets off bank balance sheets. But when banks refused to sell at fire sale prices, we just gave them the money instead. Dumb move. So we set up the Public-Private Investment Program to get private investors to buy these same toxic assets with government leverage, and still there are few sellers. Meanwhile, the $1 trillion federal deficit is crowding out private investment and the porky $787 billion stimulus hasn't translated into growth.

At the end of the day, only one thing has worked -- flooding the market with dollars. By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn't put money directly into the stock market but he didn't have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear. Stock and bond funds saw net inflows of close to $150 billion since January. The dollars he cranked out didn't go into the hard economy, but instead into tradable assets. In other words, Ben Bernanke has been the market.

The good news is that Mr. Bernanke got the major banks, except for Citigroup, recapitalized and with public money. June retail sales rose 0.6%. Housing starts jumped 17% month to month in May and will likely be flat for June. Second quarter GDP may be slightly up. And he was successful in spreading a "green shoots" psychology throughout the media. But the real question is, now what? Government interventions are only meant to light a fire under the real economy and unleash what John Maynard Keynes called our "animal spirits." But government dollars can't sustain growth.

Like it or not, the stock market is bigger than the Federal Reserve and the U.S. Treasury. The stock market anticipates only future profits and prosperity, not government-funded starter fluid. You can only fool it for so long. Unless there are real corporate profits from sustainable economic growth, the stock market is not going to play along. It's the ultimate Enforcer. In mid-May, Mr. Bernanke's outlook seemed to change. Maybe he didn't approve of the sharp housing rebound -- like we need more houses! Maybe he saw inflation in commodity prices -- oil popping to $72 from $35.

Or, more likely, he finally realized that he was the market and took his foot off the money accelerator, as evidenced in the contracting monetary base (see nearby chart). Sure enough, things rolled over -- the market dropped 7.5% from its peak, oil prices dropped almost 17%, and even gold has lost some of its luster. But in July, the Fed started buying again and the market rallied. Can the U.S. economy stand on its own two feet without Mr. Bernanke's magic dollar dust? Eventually, but apparently not yet. Unemployment stubbornly hit 9.5% in June, according to the Bureau of Labor Statistics. Housing prices are still dropping, albeit at a slower pace, and foreclosures are still rampant.

But I think what really bothers the market is that the structural problems that got us into trouble in the first place still exist. We took the easy way out and, with the help of Treasury Secretary Tim Geithner's loose "stress tests," swept banking problems under the carpet. We waved off mark-to-market accounting and juiced bank stock prices to help them recapitalize, but all those toxic mortgage assets on bank balance sheets are still there as anchors on lending. All the pump priming and stock market flows didn't get rid of them.

Hats off to Mr. Bernanke for getting the worst behind us. He'll be pressured politically to keep pumping out dollars, but he should resist the urge. The stock market will ignore his dollars if it doesn't believe they'll turn into real profits. Green jobs and government health-care clerks do not make a productive, sustainable economy. That can only come from innovative companies with access to growth capital. The stock market won't turn bullish until it sees that type of economy.

Again, when it's clear that you are the market you have to stop buying and begin tackling the hard stuff. By not restructuring banks, by not getting bad loans off bank balance sheets, by not standing up to the massive increases in government debt crowding out private capital, the Fed and Treasury are holding back real economic growth.

Bair, Bernanke Want Tougher Curbs on Biggest Banks
Federal Deposit Insurance Corp. Chairman Sheila Bair, with support from Federal Reserve officials, is pushing for tougher measures to curb the size and risk-taking of the nation’s largest financial firms. The FDIC will propose slapping fees on the biggest bank holding companies to the extent that they carry on activities, such as proprietary trading, outside of traditional lending. The idea goes beyond the Obama administration’s regulation-overhaul plan, which would have the Fed adjust capital and liquidity standards for the biggest firms, without any pre-set fees.

"What we have suggested is financial disincentives for size and complexity," Bair said in a July 9 interview. Fed Chairman Ben S. Bernanke told lawmakers last month that restricting size is a "legitimate" option. Size limits would overturn decades of regulatory tradition that promoted the view that large, diversified institutions were more immune to risks when specific industries or regions slumped. Bair’s proposal is another chapter in the clashes she’s had with Treasury Secretary Timothy Geithner and his department over dealing with banks and the financial crisis. Special fees could hit firms such as Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc. that expanded beyond traditional lending and deposit-taking.

The fees would go to a reserve fund for rescues of bank holding companies, modeled on the FDIC’s deposit-insurance fund. They would target risky assets, such as structured products, over-the-counter derivatives and assets kept off of balance sheets. "This is a sharp about-face in how the supervisors are looking at risks in these banks," said Dino Kos, a managing director at Portales Partners LLC and former markets director at the Federal Reserve Bank of New York. Limiting size "is a valid debate."

Minneapolis Fed President Gary Stern has also favored expanded FDIC powers to levy premiums on large, complex financial firms and tougher merger reviews where risks posed to the banking system are an "explicit consideration." The Treasury’s plan would tax financial firms only after bailouts occurred, reflecting concern that a pre-funded bailout reserve would worsen moral hazard, making the firms confident of a rescue in case their bets go wrong.

The crisis has made some firms even bigger, as regulators endorsed or encouraged mergers of weaker lenders with firms perceived to be better able to weather the turmoil. Bank of America, the Charlotte, North Carolina-based firm that is the biggest U.S. bank by assets and deposits, absorbed Merrill Lynch & Co. last year. "The benefits to society of economies of scale and economies of scope can’t possibly pay for the costs that we pay when they fail," said Fed historian and Carnegie Mellon University Professor Allan Meltzer in an interview.

The FDIC suggestion follows quarrels between Bair and Geithner, who’s leading the administration’s financial- regulation overhaul initiative, and his predecessor, Henry Paulson. Bair pushed the Treasury to use more of its $700 billion financial-rescue fund to help prevent mortgage foreclosures, and dropped support for a Treasury-led plan to merge Citigroup and Wachovia Corp. last year. Geithner sought to push Bair out after the November presidential election, people familiar with the matter said last year, before lawmaker support encouraged President Barack Obama to let her remain in office.

Size hasn’t always defined systemic risk. Bear Stearns Cos. had $399 billion in total assets at the end of February last year before it had to be rescued by JPMorgan -- a larger firm with about $2 trillion in assets that had the management capability and financial strength to absorb the investment bank. Even so, regulators, lawmakers and economists are rethinking the benefits of letting large financial companies merge, acquire or borrow their way to greater size after what may become the costliest bank-rescue campaign in history. The FDIC has lost more than $39 billion from its deposit-insurance fund since the start of last year as it wound down failed banks.

House Financial Services Committee Chairman Barney Frank plans a hearing on the so-called too-big-to-fail issue July 21. "What we want to come out of this with is a substantial diminution at the very least of that problem," said Frank, a Massachusetts Democrat. The Obama administration’s proposal would allow financial institutions to continue to expand so long as they meet capital and liquidity requirements set with discretion by the Fed after discussions with other agencies.

The Obama plan has come under attack in Congress, where legislators have expressed skepticism about giving the central bank more powers in the aftermath of the Fed’s failure to avert the mortgage crisis. Stern, the outgoing Minneapolis Fed chief, said this month the Obama proposal "leaves the financial system considerably more vulnerable" and inadequately addresses the too-big-to-fail issue. "There is nothing in the Treasury proposal designed to put creditors of large, systemically important financial institutions at risk of loss," Stern said in a July 9 speech in Helena, Montana.

Bair also favors making explicit the losses for shareholders and creditors of firms that seek federal aid. "A financial system characterized by a handful of giant institutions with global reach and a single regulator is making a huge bet that those few banks and their regulator over a long period of time will always make the right decisions," Bair told the Senate Banking Committee in May.

China’s Foreign-Exchange Reserves Surge, Exceeding $2 Trillion
China’s foreign-exchange reserves, the world’s biggest, topped $2 trillion for the first time as the nation’s economic recovery prompted overseas investors to pump money into stocks and property. The reserves rose a record $178 billion in the second quarter to $2.132 trillion, the People’s Bank of China said today on its Web site. That dwarfs a $7.7 billion gain in the previous three months.

The Shanghai Composite Index, the world’s second-best performer, surged 75 percent this year as Premier Wen Jiabao’s stimulus package triggered unprecedented lending and surging investment. The increase in the reserves means China may buy more U.S. Treasuries as the Obama administration expands debt sales to fund a plan to revive growth. "Hot money is flowing back," said Sherman Chan, an economist with Moody’s in Sydney. "China has the strongest prospects out of all major economies."

M2, the broadest measure of money supply, rose a record 28.5 percent in June from a year earlier, the central bank said. The yuan traded at 6.8316 against the dollar as of 4:47 p.m. in Shanghai, from 6.8329 yesterday. The central bank has used bill sales to push up money- market rates for three weeks, seeking to tighten monetary policy without choking off a recovery as the surge in money supply increases the risk of asset bubbles, bad loans and resurgent inflation. China’s reserves are double those of Japan, the country with the second-biggest foreign currency holdings.

"The pace of foreign-exchange inflows will accelerate in coming months as China’s recovery attracts investors, and that will pose great challenges for monetary policy," said Lu Zhengwei, an economist at Industrial Bank Co. in Shanghai. The trade surplus was $34.8 billion in the second quarter and foreign direct investment was $21.2 billion, leaving the bulk of the increase in the reserves unaccounted for. Investment returns and currency movements also affect their size.

Dariusz Kowalczyk, chief investment strategist at SJS Markets Ltd. in Hong Kong, saw speculative capital and higher valuations for non-dollar assets as the biggest factors. Ben Simpfendorfer, an economist with Royal Bank of Scotland in Hong Kong, said speculative capital may have accounted for $50 billion of the increase and gains by the euro for $35 billion. "The capital inflows have driven up stock and property prices," said Yang Shengkun, a currency analyst in Beijing at China Citic Bank Co. "Speculators are favoring China because the government’s stimulus package is working quite well, which will help the country to be the first to recover globally."

China’s foreign currency regulator said today it will ease curbs on outflows of capital. The State Administration of Foreign Exchange will expand the sources of capital Chinese can use to fund outbound spending and let companies send investment funds overseas without prior approval, it said in a statement on its Web site today. "The rules are intended to give companies more room to develop overseas and reduce their pain" in adjusting growth models, Liu Guangxi, an inspector at SAFE’s capital-account department, said at a press briefing in Beijing. "The changes will help China to realize a more balanced management of both capital inflows and outflows."

China should "moderately" increase its holdings of U.S. Treasuries and purchases this year should not be lower than the total for 2008, a People’s Bank of China economist wrote in the China Securities Journal today. The holdings can be trimmed and purchases of other types of U.S. assets stepped up once the American economy recovers from a recession, Wang Yong, a professor at the central bank’s Zhengzhou-based training school, wrote in an article in the Xinhua News Agency-affiliated newspaper.

Central bank Governor Zhou Xiaochuan ruled out any sudden change in the management of the reserves last month after proposing that governments investigate setting up a supranational currency. Premier Wen Jiabao said in March that he was "worried" about the safety of the nation’s U.S. assets. China holds $763.5 billion of Treasuries. "It’s inevitable that China will continue investing in Treasuries because of the sheer scale of its reserves," said Ken Peng, an economist with Citigroup Inc. in Beijing. "Diversification will happen at a slow pace, with commodities the favored alternative."

About 65 percent of China’s reserves are in dollar assets, with the rest mostly in euros, yen and sterling, estimates Wang Tao, an economist with UBS AG in Beijing. It is "difficult to stop buying U.S. Treasuries when markets for most other assets are too small and too illiquid," she said in a report last month. China’s economic growth rebounded to 7.8 percent in the second quarter, according to a Bloomberg News survey of economists. That number will be released tomorrow.

How long will China finance America?
by Robert Peston

China's foreign exchange reserves have soared. In the second quarter of the current year, they rose by $178bn to $2.132 trillion to exceed $2 trillion for the first time. According to Bloomberg this is a record increase. On this occasion, the primary cause is not the great surplus of China's exports over its imports. It's the result of overseas investors identifying China as the strongest of the world's major economies and pouring money into property and into shares: the Shanghai Composite Index has jumped 74% this year.

To put it another way, if international investors want to take an equity risk in these recessionary conditions, they go to China - because its economic stimulus package seems to be working (the annual growth rate in China in the three months to the end of June is said by forecasters to have been not far off 8%; we'll have the official stats, for what they're worth, tomorrow). Now, the really interesting question is how much of that increment has been reinvested by the Chinese authorities into US government debt, or holdings of Treasury bonds and bills.

China is the largest foreign lender to the US government. At the end of April, China's holding of Treasury securities was $763.5bn (Japan was the second biggest holder, with $686bn). However, between March and April there was actually a slight fall in the dollar value of Chinese lending to the American government - though that fall was trivial compared with the $261.5bn increase over just a year in the amount of US government bonds held by China.

A recent speech by Zhou Xiaochuan, the governor of the Chinese central bank, conceded - in a slightly elliptical way - that China would have to lend more to the US, to see it through the current economic and financial crisis. He said: "in the short run, the US may need more capital inflows to deal with the financial crisis". So China will continue to fund the growing gap between America's public expenditure and its tax revenues, by recycling to the US the cash of overseas investors who prefer to invest in China's real assets.

Mr Zhou is clear that allowing America to live beyond its means is profoundly unhealthy for the global economy in the long term. As he said: "over the long run, large capital inflows are not in its best interest of making adjustments to its economic growth model". Or to put it another way, the US public, private and financial sectors all have to reduce their indebtedness: Americans have to save more. But there is huge self-interest on the part of the Chinese in not forcing America to go cold turkey - in breaking its borrowing addiction - too quickly. China's exporters, squeezed savagely over the past year by the global recession, would hardly relish another lurch downward in US demand for their stuff.

The interdependence of China's great production machine and America's army of consumers remains the great fact of the global economy. So although the Chinese authorities would love to hold their reserves somewhere other than in dollars (and Mr Zhou is a great proponent of enhancing "the status of the SDR" - the IMF's virtual currency - as an alternative to the dollar), it won't be quick or easy for China and America to reform their uncomfortable relationship of dealer and user.

Geithner: Arab Gulf Confident US Steps Will Keep Dollar Strong
U.S. Treasury Secretary Timothy Geithner said Wednesday he believes key leaders in the Arab Gulf are confident that U.S. measures to restore growth and address deficits will keep the dollar strong. He also said officials in Saudi Arabia and the United Arab Emirates don't see the dollar's status in world currency markets weakening. "It is the policy of the United States and it will remain the policy of the United States to remain committed to a strong dollar," Geithner said in a television interview with Al Arabiya to be aired on Thursday. "My view, and this is the view I heard expressed here, is the dollar ... will remain the principle reserve currency."

The comments, provided in a transcript, come after Geithner held two days of meetings with business, trade and central bank officials in Saudi Arabia and the U.A.E. The two Arab Gulf nations are key oil exporters and, while Geithner didn't comment on current oil prices, he noted that the issue of commodity markets was addressed in meetings. He added that greater transparency and less volatility in commodity markets would be a benefit to both oil-producing nations and consumers such as the U.S.

"We discussed oil as we always do in these kinds of conversations. I don't want to talk about, comment specifically on current prices," the secretary said. "But let me just underscore two things. I think we all have an interest today in trying to make sure that we're reinforcing these tentative signs of recovery we're seeing across the world economy. "We need to make sure we pull the world economy out of this crisis and put it on a path of sustainable growth," he added. "It's also very important to us ... that we explore ways to bring better transparency to energy and commodity markets (and) ways to reduce volatility in these markets. I think that would be of interest to all of us."

Wells quietly sells $600 million in troubled subprime loans for 35 cents on the dollar
Wells Fargo sold $600 million in mostly non-performing subprime loans to Irvine, Calif.-based Arch Bay Capital, National Mortgage News reported, citing sources familiar with the sale.
The industry publication said the loans sold for 35 cents on the dollar, about double what most hedge funds were offering.

Most of the subprime loans San Francisco-based Wells Fargo (NYSE: WFC) sold were originated by once-high flying Accredited Home Loans and NovaStar Financial, both of which originated subprime loans in the Milwaukee area. No one involved in the recent sale is talking on the record, which may be a key reason lenders will look to private transactions to unload bad assets rather than turn to a government-sponsored program, National Mortgage News said.

Eurozone confirms negative inflation
Prices across the eurozone were lower in June than a year earlier, Eurostat, the EU’s statistical office confirmed on Wednesday, reflecting lower oil and petrol prices rather than a sustained move to deflation. Across the eurozone, prices were 0.1 per cent lower in June than a year earlier, with the fastest drop in prices recorded in Ireland, Portugal, Spain, Belgium and Luxembourg, confirming an earlier "flash estimate" from Eurostat.

Although the European Central Bank will be concerned to see inflation falling so rapidly below its target of "below but close to 2 per cent", it will be reassured that persistent deflation is not yet a likelihood because of a one-off fall in petrol prices affecting the overall inflation rate. The fall in oil prices from a high of $147 a barrel last summer to around $60 a barrel in July and the knock-on effect of lower petrol prices contributed 1 percentage point to the fall in annual inflation in June.

The inflation rate excluding energy stood at 1.2 per cent in June and prices across the eurozone were 0.2 per cent higher in June than in May. The figures were in line with economists’ expectations. The flash estimate of inflation released at the end of June had caused a stir since it showed inflation going negative for the first time since the euro was established a decade ago, but the detailed breakdown reassured economists yesterday that deflation was not stalking the European economy.

Nick Kounis of Fortis Bank said: "Our sense is that euro zone inflation is not going to be in negative territory for too long. The volatile items which drove it into negative territory - food and energy - are likely to turn around quite sharply in the coming months."

Obama on burden of fixing economy: 'Give it to me'
Conceding unemployment will get worse before it shrinks, President Barack Obama on Tuesday unveiled a $12 billion plan to help community colleges prepare millions of people for a new generation of jobs. Challenging critics, he said he welcomed the task of turning around the economy. "I love the folks who helped get us in this mess and then suddenly say, 'Well, this is Obama's economy,'" the president told an outdoor crowd at Macomb Community College, veering off his scripted words. "That's fine. Give it to me. My job is to solve problems, not to stand on the sidelines and harp and gripe."

Obama did not identify his target for those comments, but he has been under increasing fire from Republicans over the pace of the economic recovery and the soaring deficit. He brought his message to a state reeling from the loss of auto jobs. Michigan's unemployment rate is 14.1 percent, the nation's worst. "The hard truth is that some of the jobs that have been lost in the auto industry and elsewhere won't be coming back," Obama said. "They are the casualties of a changing economy."

To that end, he proposed an "American Graduation Initiative" to bolster the two-year community college field that serves millions of students as a launching point for careers or a step toward expanded higher education. The idea is to train people for jobs, such as those expected in the clean energy industry, when the economy turns around and begins to create jobs again instead of shedding them. Under the plan, competitive grants would be offered to schools to try new programs or expand training and counseling.

High dropout rates would be addressed by designing programs to track students and help them earn an associate's degree or finish their education at a four-year institution. Money would also be spent to renovate and rebuild facilities, and online courses would be developed to help colleges offer more classes. The White House says the cost would be $12 billion over 10 years; Obama says it would be paid for by ending wasteful subsidies to banks and private lenders of student loans. "Time and again, when we have placed our bet for the future on education, we have prospered as a result," Obama said.

Republican Sen. Lamar Alexander of Tennessee, a former education secretary, said Obama's plan is a "typical proposal" that sounds better than it is. "When our biggest problem as a country is too much debt, he's taking the entitlement spending he claims to be saving from the student loan program and adding it to the debt," Alexander said. Obama's speech came a day after the White House issued an upbeat report predicting that health care and environment-focused jobs would help drive a jobs recovery but that education and training would have to keep up with a demand for higher-skilled workers.

Earlier on Tuesday at the White House, Obama said he expected the nation's unemployment rate would continue to "tick up for several months." It is now at 9.5 percent, the highest in 26 years. Obama said renewed hiring tends to lag behind other signs of economic recovery. In Michigan, Obama called the $12 billion in spending over the next decade "the most significant down payment" yet toward achieving his goal of having the highest college graduation rate of any nation. Speaking in rolled-up sleeves, Obama said jobs requiring at least an associate's degree are expected to grow twice as fast as those where college education is not required.

"We will not fill those jobs, or keep those jobs on our shores, without the training offered by community colleges," Obama said. Community colleges have been feeling pinched lately. Enrollments have been increasing for several reasons, including rising college costs at public and private institutions and the needs of people who have lost jobs and are eager to learn new skills. About 6 million students attend community college, administration officials said. Obama is setting a goal of 5 million additional college graduates.

Meanwhile, former Federal Reserve Chairman Alan Greenspan told Republican senators on Tuesday at their private weekly luncheon at the Capitol that the government's $1 trillion deficit was the single biggest hurdle to economic recovery. In his speech, Obama acknowledged the problem of debt but said again that the only way to start reducing deficits is to reform the health care system, his dominant legislative priority. Obama's trip wasn't all about policy, however. Before returning to the White House, he changed into jeans and the jacket of his beloved Chicago White Sox to throw out the ceremonial first pitch at Major League Baseball's annual All-Star game at Busch Stadium in St. Louis. It was his first pitch as president.

Moody's drops state's bond rating below 'A,' may cut more
Two out of three major bond-rating firms now agree: California's credit grade should begin with a "B" -- a dismal comment on the state's finances. Moody’s Investors Service today cut the state’s debt rating two notches, to "Baa1" from "A2," warning that the risk is rising that California could have trouble paying its bondholders if the budget stalemate in Sacramento doesn’t end soon.
The firm said the state remained on its "watchlist" for further downgrades.

Moody’s "Baa1" rating is just three notches above the level at which California’s $59 billion in general obligation bonds would be considered "junk," or no longer investment-grade in quality. Next would be "Baa2," then "Baa3," then the junk rating of "Ba." The state has never had a junk rating before, and it may not come to that this time around. It’s highly unlikely that the rating firms want to cut California to junk because of the potential firestorm that could set off in the municipal bond market.

But the firms also don’t want to take the chance of failing to foresee a worsening crisis in the state’s finances. Moody’s rival Fitch Ratings on July 6 cut its rating on the state's debt to "BBB" from "A-minus." Standard & Poor’s, the other member of the Big Three, still has California at "A." Most states are rated either "AAA" or "AA." California has since early this year had the lowest credit grade of any state. From Moody’s today:
"The downgrade reflects the increased risk to the legally or constitutionally required payments ('priority payments') as the state deadlock continues and the controller has begun to make certain payments that are not legally or constitutionally required to be paid on time with IOUs.

"Moody's believes that as the days and weeks go by without enacted solutions to the current cash crisis and the $26-billion budget gap, the risk to priority payments, and eventually debt service payments, is increasing. The downgrade incorporates the risk we believe exists at the current time, as well as the state's inability to solve the current difficulties in a timely fashion."

The firm said that a continued delay in balancing the budget "could result in a further downgrade in coming months." What’s more, Moody’s indicated that a budget resolution wouldn’t necessarily mean a rating upgrade from the current dismal level. "If the state does take action, we will assess the likely impact of those actions: whether they improve liquidity, whether they improve budgetary balance [and] whether they provide long-term solutions or quick fixes," the firm said.

State Treasurer Bill Lockyer has insisted that California would never default on its bond debt. The state Constitution mandates debt payments, which must come before all other state spending except funding for education. Despite the budget mess some investors have been lured back to the state's bonds this month, pushing down market yields on the securities.

Calpers sues Moody's, S&P, Fitch over SIV ratings
Calpers, the biggest U.S. public pension fund, has sued the three largest credit rating agencies for giving perfect grades to securities that later suffered huge subprime mortgage losses.
The California Public Employees' Retirement System said in a lawsuit filed last week in California Superior Court in San Francisco that it might lose more than $1 billion from structured investment vehicles, or SIVs, that received top grades from Moody's Investors Service Inc, Standard & Poor's and Fitch Inc.

SIVs are complex packages of loans and debt, including subprime mortgages and collateralized debt obligations, pooled by investment banks and which then issue debt to investors. By giving these securities their highest ratings, the agencies "made negligent misrepresentations" to the pension fund, Calpers said. Such ratings, which typically accompany investments with almost no risk of loss, "proved to be wildly inaccurate and unreasonably high." Calpers seeks unspecified damages.

S&P is a unit of McGraw-Hill Cos Inc, and Fitch is part of France's Fimalac SA. Moody's Corp is the parent of Moody's. "The claim is without legal or factual merit, and we will take action to have it dismissed," McGraw-Hill spokesman Steven Weiss said. The lawsuit from the powerful pension investor is the latest assault on the ratings agencies, which are under fire for their role in assigning top grades to investments that ultimately proved reckless.

Triple-A ratings are also blamed for fueling the explosion of the mortgage-backed securities and other structured debt investments that have wreaked havoc on Wall Street for nearly three years.
Issuers pay ratings agencies to grade their securities. Lawmakers and some investors say this model serves the interest of bank underwriters at the expense of those who buy the securities. Calpers said it bought in 2006 $1.3 billion of medium and short-term debt issued by three SIVs: Cheyne Finance LLC, Stanfield Victoria Funding LLC and Sigma Finance Inc. At the time, senior debt issued by these entities were rated AAA by S&P and Aaa by Moody's. Fitch gave Sigma, formed by London-based Gordian Knot in 1995, a AAA rating.

But the credit crunch that seized capital markets in 2007 led plunging prices for mortgages and other debt. SIVs led to massive write-downs to banks and funds that held them. Sigma "collapsed" over the next two years, Calpers said, resulting in "hundreds of millions, and perhaps more than $1 billion, of investment losses." Calpers, which manages about $173 billion in pensions, noted the agencies had received "huge fees" from the issuers of the SIV.

The "methods used to rate the SIVs and their underlying assets were seriously flawed in conception and incompetently applied," the lawsuit said. According to the lawsuit, a hearing has been scheduled for Dec. 11. Moody's shares were up 4 percent at $29.08 in morning New York Stock Exchange trade, while McGraw-Hill rose 2.7 percent to $31.69. In Paris, Fimalac was up about 1 percent.

New home appraisal rules stir industry backlash
Less than three months after new rules for home appraisers kicked in, the real estate industry is in uproar. Realtors, homebuilders, mortgage brokers and the appraisal industry itself all agree the rules are causing problems. Some are backing a bill in Congress to kill them. The new guidelines bar mortgage brokers from ordering appraisals themselves, forcing them to do so through a mortgage lender. Lenders may order appraisals through in-house staff or appraisers hired by outside firms known as appraisal-management companies. But neither may talk to the appraisers about the value of the property they're evaluating.

Since they went into effect May 1, the rules have created a slew of unintended consequences that critics say are causing delays in closing sales, or undermining sales because botched appraisals are coming in too low. "This thing is not only preventing the housing market from recovering, it's destroying the housing market," said Marc Savitt, president of the National Association of Mortgage Brokers. "We're eliminating competition, and we all know what happens when you eliminate competition: Prices go up."

After a homebuyer and seller agree on a price, the buyer applies for a mortgage. The lender then orders an appraisal to ensure the value of the property, because if the borrower defaults the property will be sold to satisfy the debt. The appraisal fee, which can run between $250 and $500, is usually paid by the buyer. To determine what a home is worth, the appraiser compares prices of similar homes that were recently sold in the area and makes adjustments for different features, such as a swimming pool or extra bathroom. If the property appraisal comes in below the agreed upon price, the buyer usually has to make up the difference and may instead walk away.

Suzanne Wilhelm, who has been trying to sell her home in Henderson, Nev., for six months, blames an appraisal done under the new rules for scuttling what had been a done deal with a buyer several weeks ago. The appraisal valued her four-bedroom, 2,000 square-foot house at $190,000 — $45,000 less than the price the buyer agreed to pay. Wilhelm, who paid $187,000 for the house in 2001, believes the appraiser based his estimate on the sale of several foreclosed homes in the area but ignored sales of regular homes that would have reflected a higher price.

"It's very unfair that we're put into the same bracket as those people who were so irresponsible in buying their homes," said Wilhelm, a teacher. The rules, dubbed the Home Valuation Code of Conduct, are meant to eliminate conflicts of interest that created pressure on real estate appraisers to inflate the value of a property. Lenders, agents and brokers have been known to pressure appraisers to "hit the number" that the homebuyer and seller agreed on so the deal would close and everyone could collect their fees. Inflated appraisals were partly blamed for fueling the housing bubble.

But under a settlement last year with New York Attorney General Andrew Cuomo, Fannie Mae and Freddie Mac agreed only to buy loans from lenders that don't directly hire appraisers. The move sent shock waves through the industry because Fannie Mae and Freddie Mac own or guarantee about half of all U.S. home loans. So lenders started giving more business to appraisal management companies, which critics say draw appraisers from a pool of candidates willing to do the job for less money and who, in some cases, may be unfamiliar with a neighborhood.

Paul Conforti, a broker with Prudential Douglas Elliman in Merrick, N.Y., said he's seen appraisers based as far as Maryland, about 200 miles away, come into New York's Nassau County to evaluate homes there. "If you're appraising a house, all you really have to go on is the" recent sale of similar properties, Conforti said. "If the person doesn't know the area ... they end up using comparables from another town. It doesn't make sense."

Almost 60% of builders are reporting that inadequate appraisals are causing serious problems in the market, often comparing newly built homes to foreclosures without considering the money needed for property repairs. Of those reporting appraisal problems, more than half said the appraisal amount was actually less than the cost of building the home, according to a survey released this week by the National Association of Home Builders. Cuomo's office maintains the rules are necessary, and that critics are using the appraisal rules as a scapegoat for a declining housing market made worse by the recession.

"With homes prices falling and foreclosures rising, this complaint is simply wrong and risks returning us to a corrupt system filled with conflicts of interest that promoted artificially inflated values," said Emily Browne, a spokeswoman for Cuomo. Browne added that there's no evidence of a spike in appraisal delays in the two months that the rules took effect. "Even if there are some delays, there is no reason to think the (rules are) the cause, as opposed to the unrelated, nationwide drop in home values which has made the appraisal process more complicated," she said.

But the real estate industry is coming out against the rules in force. The National Association of Mortgage Brokers went to court in February to block the changes, which it claims limit competition. Since then, other key industry groups, including the Appraisal Institute, have voiced their opposition to all or elements of the home appraisal guidelines. Last week, the National Association of Realtors urged members of Congress to support a bill that would impose an 18-month moratorium on the new appraisal guidelines. The measure is still working its way through Congress.

The Realtors said the new appraisal guidelines are hurting the real estate industry. It contends that appraisers hired by appraisal management companies are not hired "for their competency and qualifications, but for their turnaround time and price." Freddie Mac tried to address some of those concerns last week when it issued new home appraisal "best practices" guidelines for lenders. Among its recommendations, the mortgage finance company said appraisers must be certified or licensed in the state where the property being appraised is located and be familiar with the local market.

Fannie Mae issued similar guidelines in April. "We're optimistic that the push to quality will in fact solve some of the problems," said Ken Chitester, spokesman for the Appraisal Institute. "If consumers are demanding that qualified appraisers perform the valuation on the properties, then that's a big step in the right direction."

Derivatives Are Focus of Antitrust Investigators
The Justice Department is investigating the role of several major companies in the credit markets, in another indication that the government is intensifying its scrutiny of derivatives,
Markit Group Holdings, a data warehouse controlled by several big banks, said Tuesday that it had been notified by antitrust officials at the Justice Department of an inquiry into the "credit derivatives markets and related markets" and that it would "provide any information requested." The department is conducting a similar inquiry at several banks to determine if they had unfair access to pricing information, according to a person briefed on the situation.

The investigation is a sign of the increased attention the derivatives business is getting in Washington. Derivatives are sophisticated and profitable instruments that were intended to limit risk but instead were at the center of the financial crisis last year. The derivatives market now represents transactions with a face value of $600 trillion. They were blamed for the near collapse of the American International Group, the insurance company that was a crucial trading partner with Wall Street firms in one widely used form of derivatives.

Over the last several months, lawmakers and regulators have stepped up their efforts to get a handle on these complex instruments. Some watchdog groups say the regulatory proposals do not go far enough. At the same time, the financial industry is waging an aggressive campaign against more stringent regulation of derivatives. The Justice Department inquiry, however, may reflect an effort to rein in the products without legislation.

It is unclear exactly what the investigators are looking for, but it appears they are examining whether Markit’s bank shareholders received an advantage as owners and providers of trading data for one type of derivatives known as credit-default swaps. Some market participants also believe that federal officials may also be requesting information from Markit to gather evidence of possible dealer involvement in manipulating prices.

Markit is the dominant provider of pricing information in the derivatives industry, providing the data to more than 300 financial firms that use it to determine the prices of similar contracts on their own books. The data provider is majority-owned by several Wall Street firms, including JPMorgan Chase, Bank of America and the Royal Bank of Scotland. Representatives of JPMorgan and Bank of America declined to comment.

In a statement released Tuesday, Markit said that it was working "to enhance transparency and efficiency in the credit derivatives market." The investigation may also fit into the changing political environment in Washington. The Obama administration has made bolstering oversight of derivatives a central part of its plan to reform the financial industry and rein in excessive risk-taking, and has called for requiring certain kinds of credit-default swaps to be traded through a central clearinghouse and possibly one or more exchanges.

Wall Street banks are extremely worried about the impact of additional government scrutiny, and have proposed their own set of voluntary rules. Even so, most Wall Street executives expect that regulators will more aggressively police the market in the future.

Pimco's McCulley Says Fed Needs To Be 'Irresponsible' If Deflation Looms
Pacific Investment Management Co.’s Paul McCulley said the Federal Reserve should push inflation above its long-term target to coax consumers to spend money if the U.S. economy stays mired in recession. "The way to make monetary policy effective is for the central bank to promise to be irresponsible," McCulley wrote in a July commentary posted to Pimco’s Web site, citing a 1998 paper written by Princeton University economist Paul Krugman.

"Radically" different central-bank policy may be needed to change inflation expectations if the U.S. economy starts to resemble Japan’s era of deflation, McCulley wrote. He said the U.S. economy is not currently suffering from deflation. In addition to Krugman’s paper, McCulley cited a May 2003 speech by Fed Chairman Ben S. Bernanke as a blueprint for policy. McCulley and his colleagues at Newport Beach, California- based Pimco, the world’s largest bond fund manager, have forecast a "new normal" in the global economy that will include heightened government regulation, lower consumption and slower growth.

The U.S. government may need to enact a second stimulus plan to spur growth in the coming months, McCulley said July 7 in an interview with Bloomberg Radio. If consumers and businesses continue to hoard cash, monetary policy makers may need to boost inflation until prices are as high as they would have been without deflation, McCulley wrote.

"The inflation rate would exceed the long-term desired inflation rate, as the price-level gap was eliminated and the effects of previous deflation undone," McCulley wrote. Only then should policy makers return to focusing on a long-term inflation target, he said. Fed officials project inflation as measured by personal consumption expenditure to be in a range of 1.5 percent to 2 percent "over the longer-term" in the years after 2011, according to the projections released April 29.

Prices paid to U.S. producers rose in June by twice as much as anticipated, led by surging gasoline costs, a Labor Department report showed yesterday. The 1.8 percent increase in prices paid to factories, farmers and other producers followed a 0.2 percent gain in May, the department said. Excluding food and fuel, so-called core prices rose 0.5 percent. Tepid consumer spending and business investment are forcing companies to boost incentives or keep a lid on prices in order to move merchandise.

McCulley, 52, heads Pimco’s short-term bond desk. He joined Pimco in 1999 from UBS Warburg, where he was the chief economist for the Americas. Between 1996 and 1998, McCulley was named six times as a member of the Institutional Investor All-America Fixed Income Research Team. He has an undergraduate degree from Grinnell College in Iowa and an MBA from Columbia University in New York.

Student must repay $350,000, court says
If the bad economy has you thinking of taking on debt to go to grad school, consider the case of Mark Jesperson. The federal case. The Eighth U.S. Circuit Court of Appeals has ruled that the 45-year-old Grand Marais man cannot escape more than $350,000 of student debt he piled up over more than a decade. Jesperson had hoped to discharge the debt in bankruptcy and won the first couple rounds in court. But last week a three-judge panel reversed the lower courts' decision and said he must pay the money back.

While the dollar amount involved is unusual, experts say the latest ruling is not. It's extremely difficult to get rid of student loan debt, even through bankruptcy. "The system's set up as such that most people -- people like myself -- cannot complete a professional degree without the help of student loans," Jesperson said. "Then, even if that profession doesn't work, even if things go wrong, there's no way out."

Jesperson has a law degree, but he's not putting it to much use these days -- except for representing himself early in his case. He works as a painter, and lives in a camper. Struggles with alcohol brought him in and out of college; it took 11 years to complete his undergraduate degree. He began law school at Hamline University School of Law in 1995, transferred to Lewis and Clark Law School in Portland, Ore., in 1997 and got his degree in 2000, according to court documents. Sober for several years, he passed the Minnesota bar on his first attempt in February 2002.

Jesperson "borrowed heavily from government and private lenders" to finance his degrees, court documents state. Since passing the bar exam, he's never made more than $48,000 per year. In 2006, Jesperson went to bankruptcy court to rid himself of the debt. To succeed, a borrower must show "undue hardship" -- a step beyond what it takes to discharge most other kinds of debt. The high standard is meant to encourage lenders to extend students credit and to prevent abuse.

Ontario $10,000 electric car rebate sparks criticism
The Ontario government's plan to offer rebates of up to $10,000 to purchasers of electric vehicles ran into immediate criticism Wednesday from one of the largest auto makers in the province and a leading industry analyst. "We don't want government deciding winners and losers," Jerry Chenkin, executive vice-president of Honda Canada Inc. said after Ontario Premier Dalton McGuinty announced the rebate program and goal of remaking the vehicle fleet in the province so that one of every 20 vehicles on the road is a plug-in hybrid or battery-powered car or truck.

"This announcement of a $10,000 rebate is creating winners and losers on products that aren't available yet and [on which] nobody knows the real time line," Mr. Chenkin said. His words were echoed by industry analyst Dennis DesRosiers, president of DesRosiers Automotive Consultants Inc. "Electric vehicle technologies are an incredibly exciting development in the automotive sector and could be a very significant part of the future of this sector," Mr. DesRosiers wrote in a note to clients Wednesday. "But if it takes a bribe of $10,000 to get a consumer into these products then the technology will never succeed."

Even Toyota Canada Inc., which plans to bring a plug-in hybrid to this country this year for testing, questioned whether the Ontario program makes sense. "Ultimately, technologies have to succeed on the basis of consumers using their own dollars to vote in favour of the technology," said Stephen Beatty, Toyota Canada's managing director. "I'm not sure they've thought through who that customer is and how those technologies can best be applied." Mr. McGuinty unveiled the program, which will offer rebates starting at $4,000 as of July 1, 2010, at a Chevrolet dealership in Toronto. He stood beside a silver-green Chevrolet Volt, the extended-range electric car that General Motors Co. will begin selling to consumers in Canada during the second quarter of next year.

"We're at the doorstep of a brave new world," Mr. McGuinty told reporters at the dealership. "This will be the most attractive rebate certainly in North America. It may be the most attractive rebate in the world." The government has not earmarked a specific amount of funding for the rebates, he said, but Mr. DesRosiers said it could amount to $3.5-billion if 5 per cent of the 7 million vehicles now on Ontario's roads are replaced by subsidized electric vehicles. The length of time the rebates are offered will depend on how the market for these vehicles evolves, Mr. McGuinty said.

Ultimately, he added, Ontario would like auto makers to manufacture electric cars in the province. If residents purchase enough of these vehicles, that will give the province bargaining clout with the auto makers, he added.
"We've just sent up a big, bright, red flare to the auto production industry saying, ‘You know what? In Ontario they are really committed and determined to make this a reality.'" Ontario and the federal government share ownership in a 12 per cent stake of General Motors Co.

Neil Macdonald, vice-president of corporate affairs of General Motors of Canada Ltd., said at the news conference that production of the Volt will begin late next year. "The question for the next 100 years, is who is going to reinvent the automobile," Mr. Macdonald said. "GM is reinventing the automobile." Ford Motor Co. of Canada Ltd., which will begin offering a battery-electric commercial van for sale next year, applauded the program and said it will help spark sales of such vehicles.

UK unemployment jumps by record 281,000
Unemployment shot up by a record 281,000 in the three months to May, official data showed today. The rise took the jobless total to 2.38 million, the highest level since 1995, on the broadest measure of unemployment, the ILO (International Labour Organisation). Youth unemployment jumped to a 16-year high of 726,000 after a quarterly rise of 95,000, while the number of people out of work for longer than a year rose by 46,000 to 528,000, the highest for 11 years.

Brendan Barber, general secretary of the TUC, said today's figures were "truly horrendous". "It's particularly worrying that over half a million unemployed people have been out of work for at least a year, including 133,000 young unemployed people. With a new generation of school and college leavers soon starting to look for work, our unemployment crisis will get even bigger," Barber warned. Alan Tomlinson, a partner at UK insolvency practitioners Tomlinsons, said: "This disturbing rise in the number of unemployed reflects the rise in the number of companies going under or struggling to survive."

There was one bright spot as the number of people claiming jobseeker's allowance increased by a relatively small 23,800 in June to 1.56 million, although that was the worst total since Labour came to power in 1997. Howard Archer, economist at IHS Global Insight, said this suggested the rise in unemployment might be tailing off. "Overall, it is hard at the moment to be anything else than pessimistic about the labour market," he said.

The so-called claimant count has now increased for 16 months in a row and is more than 700,000 higher than a year ago. Shortly after the figures were released, Jaguar LandRover delivered another blow to the economy, announcing it would stop producing its X-Type car at its Halewood plant on Merseyside with the loss of up to 300 jobs. City economists generally saw little cheer in today's data, with Ross Walker of Royal Bank of Scotland predicting the bad news would continue for many months.

"Maybe the pace of layoffs could begin to moderate towards the end of this year but I think we're still going to be seeing job losses well into next year," he said. David Kern, the chief economist at the British Chambers of Commerce, predicted unemployment would peak at about 3.2 million next year. The number of people in work fell by 269,000 in the latest quarter to 29 million, after a record fall of 0.9% in the employment rate to 72.9%.

More than 300,000 people were made redundant in the three months to May, the second highest figure on record, and a rise of 31,000 on the previous quarter. Other data from the Office for National Statistics showed that vacancies fell to a record low of 429,000 in the three months to June, down by 35,000 from the previous quarter. Manufacturing jobs continued to fall, down by 201,000 over the past year to a record low of 2.6 million.

Average earnings increased by 2.3% in the year to May, up by 1.4% on the previous month, as the effect of bonuses paid earlier in the year fell out of the latest figures. The number of people classed as economically inactive, including those on long-term sick leave or who have given up looking for a job, increased by 64,000 in the latest quarter to 7.92 million, 20% of the workforce.

Cut population by a third, say crowded Britons
One in four Britons would like to see the population reduced by up to a third to ease overcrowding. A survey has revealed deep anxiety about pressure on the environment and the impact of migrants on public services and social cohesion. Nearly seven out of ten adults believe the best way to curb population growth is to cut immigration, the poll showed. More than half of Britons believe rising immigration is having a dramatic effect on life in the UK.

The findings, gathered in a YouGov survey for the environmental pressure group Optimum Population Trust, suggest there is widespread unhappiness over official projections that the population will rise to 70million in the next 20 years. The number of British citizens has grown by around two million in the past decade. The exact figure is unknown because of the difficulties in precisely measuring immigration. This has brought the population to around 61million. Immigration minister Phil Woolas has promised that the Government will not allow numbers to reach 70million, a pledge that has provoked mockery from political opponents.

Yesterday’s poll showed that the greatest support for cutting population levels was found in regions where immigration has been the highest. In London, where one in three of the population was born abroad, 54 per cent think there should be fewer people. In the East of England, 49 per cent support a lower population and 48 per cent support it in the South. The survey, which questioned 2,000 people, found that 24 per cent want the population to be between 40million and 50million, and 51 per cent would like numbers brought below 60 million.

In Scotland, where recent levels of immigration have been minimal, only 22 per cent want the population reduced. According to the poll, three quarters thought over-population was responsible for transport congestion and two thirds blamed it for lack of affordable housing or environmental degradation. A total of 53 per cent thought that too many people meant a lower quality of life. Reducing immigration was the most popular method of lowering numbers, and was supported by 69 per cent. Many of those questioned believed that people should take the environment into account when deciding family size.

Some 34 per cent said couples should think about having no more than two children. Eight per cent favoured having only one child and 7 per cent said couples should consider having no children. A total of 49 per cent supported two children or fewer. A three-child maximum was favoured by 13 per cent, but 14 per cent said couples should have as many children as they liked.

Roger Martin, of the Optimum Population Trust, said: ‘The poll clearly demonstrates widespread concern about the environmental damage caused by population growth and widespread support for measures to limit it. ‘The unequivocal nature of these findings makes the silence on population policy on the part of politicians and environmental groups even more astonishing. ‘The political parties and the green movement need to realise that the public can sustain a mature debate on population.’

Sir Andrew Green, of the MigrationWatch UK think-tank, said neither Labour nor the Conservatives would prevent the population increasing to 70million by 2029 with their present policies. ‘The main parties talk tough on immigration, but they are trying to con the British public,’ he added. ‘According to Government figures, we can expect almost another ten million people in England in 20 years’ time of which seven million will be due to immigration – equivalent to seven cities the size of Birmingham.’


Anonymous said...


When have markets and real life ever been linked?

Where you been man?

Malcolm Martin said...

Goldman Sachs has set aside $18 billion for employee bonus payments. About $600,000 per traitor, er, I mean trader.

Fired workers in France have set gasoline bombs at the factory where they used to work. They will blow it up unless they receive a $42,267 severance package.

The two ends of a fuse that has been lit.

Choose your side or get out of the way, the big bang is coming.

CHATELLERAULT, France (AP) — Laid-off auto-parts workers huddled Thursday around gas canisters tied to an electrical cable, threatening to blow up a factory in the latest example of extreme French resistance to cost-cutting in the economic downturn.

Other French workerss have kidnapped their bosses, blocked ports and barricaded factories to try to save jobs in France's worst recession since the 1940s.

Some 200 workers at the New Fabris factory outside the southwest city of Chatellerault, are each demanding euro30,000 ($42,267) from Renault and PSA Peugeot-Citroen, accusing the carmakers of killing their livelihoods.

Persephone said...

You must really like the Banking Back Flip article ;)

Just to point out, that though you (and one of the articles) quote banks being forced to mark down 40% with the mortgage mods, this article states ,"These loans in many cases would likely fetch about 40 cents on the dollar if sold in today’s market." -- that would be 60%. So if M2M were enforced, the loss would likely be 40% and upward.

Please keep up posted on the Britain's method of culling the herd.

Persephone said...

Please keep us posted on the Britain's method of culling the herd.


Hombre said...

Generally over the decades, the markets have been up in "good" times and down in "bad" times as a comparative reflection of manufacturing and consumption, etc.

But today, as I look around me in this town of 65,000, with vacant houses, yards growing over with weeds, almost no manufacturing left (once a booming town of 80,000 with scores of shops and businesses) I am absolutely sure that the market reflects nothing of the daily lives of these folks.

Without the university and hospital we would go bust!
(On second thought, we are anyway, cuts in all services, fire, police, teachers, etc.)

Anonymous said...

I e-mailed Dave Reilley over at Bloomburg when I read that artical on Frank and Dodd last night.

"These two whores are going to mess around and piss off their pimps."

His reply was:

"great analogy. not one though i think i could get into print on a "family" wire service ;-)"

I sent him this back.

Securities & Investment: Top Contributors to Federal Candidates and Parties

el gallinazo said...

A 6:55

"Re: Predictions. Yah, it looks like the Elliot Wave people completely blew it with their call that was posted a few days ago. They were saying that we're at the downward leg of Wave 3 now. It looks like that started a few weeks ago."

"Your birdbrain is showing. :) It was on the FP of TAE a few days ago. "

If you knew anything about the late Alex Pepperberg, you would know that "birdbrain" is no longer a pejorative.

I don't always have time to read all the articles, but I did in fact read the one in your link. Some people on this blog actually read stuff outside of what Ilargi spoon feeds us, so to ask what the link was, was not necessarily mammal brained.

Finally, WTF are you writing about. They came out two days ago saying that the wave three crash is "right around the corner," so it didn't happen in two days and they are wrong? Besides, Stoneleigh, who is also into Elliott waves predicts that the wave 3 crash will happen at the peak of a steep run-up which we **may** be entering. But as I said earlier, I wouldn't be surprised to see a few weeks of fall back into the mid or even low 800's first.

Re Amy Goodman and the SCOTUS Kabuki. That's why I download the mp3 - so I can cut the crap and cut to the chase muy pronto. Nothing world shaking in the interview though. Informative though for people who hadn't read the actual article.

"El G, do you mind relating how long you intend to hang on before cashing out?"

I don't know. In general, before we have a total meltdown. SDS should remain very liquid though to the end (whatever that means). The SEC will ban short buys at some point, except for DA Boyz, who will be naked shorting, of course. The effect of Mr Cox (sucker) short ban in Sept was an instant panic in the shorts, particularly for SKF, but the original positions didn't evaporate like spit on a hot stove, and they came back before the 30 day ban was over. I am going to have to go back and review SKF and SDS during the short ban last Sep very carefully when I have the time and energy. I was chasing Northern Pike up in SASK at the time and working with a Windoze on dial-up.

This is going to be my last shot in the market. When I sell the shorts, I'm finished for this incarnation.

Anonymous said...

CIT Group’s ‘Capital’ Was All Talk, No Trousers

Commentary by Jonathan Weil

July 16 (Bloomberg) -- Even as CIT Group Inc. teetered near collapse this week, neither the company nor its overlords at the Federal Reserve Board ever backed off their official position that the struggling lender was “well capitalized.”

Coming from the world’s most powerful central bank, that designation used to mean something about a company’s financial strength and ability to absorb losses. Not anymore.

Some of the guys over at Bloomburg are starting to play hardball.

Anonymous said...

I'm having problems connnecting anything to real life. Banks have hundreds of billions in toxic loans but we're ignoring that and pretending the banks are sound. Credit card companies are settling for a lot less than owed. Billions are being spent to keep people in homes they couldn't afford in the first place. The Fed is,desparately, trying to re-ignite the insane economics of the recent past. The government is pouring borrowed money out every seam and nationalizing companies at every turn. The market is up for god knows what reason.

In the meantime, massive numbers of Americans amble on like nothing is wrong and listening to the mindless ramblings we now call news.

Reality? Where?

VK said...

"British ideas about securities may force US banks to write down the whole shebang anyway. Ain't life grand?"

We'll see about that, the banks are going to have a hissy fit if something like that happens. I expect it will be battled all the way through.

Anonymous said...

“We gave $12-14 trillion to the big banks. Now we are giving nada to state and local government and everyone else. They have it. We don’t. They are now going to have a party. We are the food.” – Catherine Austin Fitts

Anonymous said...

"The market is up for god knows what reason."

The Market (Casino) is up because the House always wins.

The Market is being blatantly manipulated by Goldfingerman. The top executives need to dump their GS stocks and the only way to dump them on 'greater fools' is to rig the market to look like it is going up, to bring the sucker Proles into the bear trap.

It being done in broad daylight.

Anyone who loses on this is not paying attention to the obvious.

'The Market' is nothing more now than a hologram of 'capitalism', a desert mirage, for the simple minded and brainwashed who fancy themselves as 'investors'.

The banks are parasites who are using the tapeworm of Wall St to hollow out the guts of Main St.

Ilargi said...

Persephone, thanks.

A mistake as predictable as it is silly. Corrected.

jal said...

I made the following comment at Seeking Alpha.

Corrections: (An other point of view)
His first point … the investors are Fannie and Freddie.
His second point … nobody is going to be calling Freddie and Fannie to fix a toilet. Just make sure that they understand their “rent-to-own” contract.
His third point … there will not be a flooding of houses coming on the market. A “rent-to-own” contract can easily be written so that the “renter” gets first refusal or match a purchase offer.
There would not be a “sweet rent deal”. It would be at market value. Can’t pay that rent, then get out, rent something cheaper, because someone else can pay that rent.
The present rental market will not be destroyed. Prices are going down to meet the financial capabilities of the flood of would be renters to pay.

The alternative, doing nothing, means setting up a lot soup kitchens and shelters which will cost society and the gov. a lot more money.

Anonymous said...

Under the heading of "Ain't Life Grand?", Steven L. Taylor over at Poliblog has an hilarious (but kinda scary) account about a New Hampshire man who went out for a pack of smokes and came back to find the entire bill for the economy placed on his Visa.

Ilargi said...


I said long ago that the only hope would be a country somewhere that forces its financials to come clean. The rest would then necessarily have to follow.

I didn't expect Britain to be that country, and still have a hard time believing it will be.

Taizui said...

El G June 30, 2009 12:33 PM

Thanks for your ETF advice two weeks ago and additional comments yesterday (also to Farmerod, Ed Gorey, thirdcoast & brunswickian). I've been so busy with homestead construction and gardening, there's barely time to skim TAE!

You have mentioned SDS (S&P500) and SKF (financial). Farmerod also mentioned UYG (financial), noting the long term risks. You say there are no margin calls - good news - 100% is the most you can lose!

What strategy will you use to allocate between these and other ETFs, and do you expect financials to crater before general S&P?

You say you hope to cash out before a total meltdown, presumably somehow monitoring the health of ProShares and the risk of a short ban.

How would a short ban impact existing ETF holdings? Could that wipe out ProShares Ultras?

You mention TD Ameritrade, which I assume can be linked to a bank account for online transactions - correct?

I too may be willing to risk a portion of cash savings on a gamble to which even "Spockleigh" doesn't seem to object!

Anonymous said...

I doubt the french methods would play well here...the first move would be to send in the swat teams...
{I think we have discussed this before]

I grow so weary of hearing tales of the wealth being looted from the dieing body of the economy....what has GS ever "produced" besides a lot of overpaid lowlifes that will bring nothing to any community they well as making very damn sure they get a cut of whatever is carved out of the future of this countries tax base..I an so mad about the powers that be deciding the winners and losers in the bailout lottery I could scream...

I wonder how long it can last.I hope you are right about the .fedgov "having"to bail out calf.I can see o-man doing somthing like a 5% fed surtax on all calf res. to pay for the bailout.That might change the political landscape in ways we could not imagine...It would be fair too...the payback for putting ideologues in control of the levers of loss of the control of the purse...

Interesting thought that...

just some California dreaming

I think who ever is the judge in that "securitization" case may feel a little heat from "see it a certain way or wake up dead".Way way way too much riding on that case...

I can see a place like the island Britain and the rest of the UK is will feel the sting of overpopulation sooner that a place like the us....although most cities give me the "get your elboe out of my eye"feeling now...
Some of the peak oil folks had some real grim ideas about how to deal with that...

time to sleep


Anonymous said...

And we thought the Bad Guy was sitting in Baghdad, surrounded by weapons of mass destruction....

Taizui said...


I always pay attention to your comments when I see them, but sometimes breeze by your "Anonymous" heading, especially with all the anonymous "fluff" traffic lately on TAE.

Would you consider using the Name/URL option for your posts so "Snuffy" is bold at the top?

You state well my own reaction to this slow motion train wreck where the "engineers" are texting and partying right to the end. Unfortunately, they appear to be moving to the rear of the train these days, leaving the up-front seats to We the Sheeple.

I've been a TAE follower for about a year, but it has taken most of that time for the scope of the I&S message to sink in. The layoff has helped to focus my attention, but I still struggle to comprehend the level of greed and arrogance that brought us here and the breadth and impact of debt and complexity destruction that looms.

el gallinazo said...


Good questions and shows careful reading and thought. I wish my answers were as good.

I am not going to go with SKF because in Sept the SEC banned short selling only in the financials, though somehow drugstore chains like CVS got included :>) Since is throwing everything but the mega banks under the bus, that may be repeated, and going with the broad index would dilute the short ban. Going with a financial index is almost guaranteeing that government death spasms will play a controlling part in your outcome.

I think going ultrashort (-2x) on the S&P500 makes the most sense. I may try to diversify beyond Proshares, such as iShares. WIll look into this.

Evaluating the financial health of either your discount broker or the ETF company will be difficult. I guess the best rule of thumb is not to get to greedy, keep your ear low to the ground, and bail at the slightest hint of trouble to either. Another strategy is to bail successively. If the collapse is as huge as we suspect, one may have the original investment back in 13 week and still have substantial play in the ETF's. Because I doubled my mad money last fall/winter, I was actually able to do this already.

Even though St. Spockleigh :-) doesn't disapprove of this for those who are not gambling more than they can afford to lose, I would point out that whatever profits that we "lice" might make would be at the ultimate expense of T rex and not the sheeple.

Re Snuffy

The one drawback to Snuffy registering with blogspot would be the following:

It's kind of fun to start reading an anon and maybe expecting something boring or dumb (especially during the last couple of days), and as you go along you discover that it's interesting and intelligent and thinking, hmmm, it must be a snuffy at the end of this.

redcatbiker said...

The one drawback to Snuffy registering with blogspot would be the following:

You do NOT have to register to give yourself a name. You need only click the "Name/URL" circle, this allows your comment to appear with a name (in black, not in the blue-link as it is for registered folks)--that is it. The "Name/URL" is an at the moment name, and you cannot delete your comment once you send it to be published (just as it is when one comments anonymously). Also, you do not "own" it, so any one else can call him/herself that name, too.

Erin Winthrope said...

I just hit the tip jar. Who can resist that snazzy new page header?

Thanks for all that you do I&S!

Arnold said...

Ilargi and Stoneleigh can you explain why Denninger is incorrect on his call. A 30% decline in GDP does NOT portend a collapse and fatal decline in the United States.

Anonymous said...

Dan W,

I have read your posts the last two days with interest. You seem to be pointing to a wait and see approach, that ‘reality’ always wins out in the end, so why bother with the commentary. To be frank, I found that suggestion to be a bit strange. Perhaps your very fiery writing style has drawn a bit of the temper out of the tool, leaving your own edge a bit dull and brittle.

Men sharpen men, so please, take no offense to my twenty grit comments. You’re very bright and extremely articulate, but your post left me with the feeling you were projecting your own yearning for a hiatus on the rest of us. At the end of the day observers are going to articulate their observations and sense of things-- one way or another.

Unless of course, your the legendary Emil Gruppe. This great painter could not be bothered with the puny considerations of human folly. Not when the glorious white birches of Vermont were craving some aesthetic love.,-Vermont/widescr/12562/


Ilargi said...


I neither read nor watch Denninger, so can't help you there.Also, I don't understand what you mean from what you write. Stoneleigh is traveling Wednesday/Thursday.

Arnold said...

His math is flawless. He is calling for a forced 30% decline in GDP. Yes, this will cause unemployment to rise to between 20-30%. This country has faced this before. It survived and prospered afterward. After the economy and the debt has contracted to a sustainable level, why is a recovery still off the table. Serious questsion.

Arnold said...


Denninger has made a *few* bad calls. However, why do you not read him? He provides a good perspective. Take me for example. I disagree with much of what you say, but I still read your blog and very much appreciate your perspective. Only by analyzing *everything* can I make sense of anything.

Arnold said...

Ilargi - Karl is calling for a 30% decline in GDP/living standards/income. However, he unlike you and Stoneleigh is not seeing the end of the world. That is to say, he is not a doomer.

Starcade said...

Arnold: Because that kind of contraction will require a similar contraction in the population, lest all social order be, else, lost.

Anonymous said...

Hopping hamster is related to Carpe Diem and Bluemermaid - always room for another hamster especially if it hops :)

Now would anyone like to venture to tell me what they think is happening with the gold market?

Dumb question - but asking anyway.

VK said...

Hey Arnold!

You must've not been reading KD for long.

May 22nd 2009 -

"When the "entitlement" checks stop going to those who think they have a right to pop out eight kids and bill the state for the medical, I'll make book on riots and other forms of general civil nastiness."

Feb 20th 2009 -

"My personal confidence is shaken and on the verge of being destroyed, at which point I may as well take my wealth and depart the system entirely with it, buying a piece of arable land, some chickens and goats, a passel of firearms with many cases of ammo and, just in case, some horses so I can still get around if we suffer a catastrophic economic collapse."

March 29 -

"I will repeat what I said months ago - Barack Obama is our first Black President, and if he does not get his act together and stop this stupidity he is going to be our last President."

Summary: Riots, Civil unrest, Obama is the last POTUS, catastophic economic collapse to the point where he is considering exactly the same preparations as doomers and I absolutely agree with you his math is flawless and hence his predictions.


Earnest Lux said...

Woke up this morning Oz time, NYSE up 3%, "absolute disclocation between reality and perception" said the inner voice in a tone of displeasure. (6% for the week so far)

I know v little about finance but this has to be a setup, a chess gambit thingy, the pump before the dump.

One thing leads to another Illargi, like the crop circle link a couple of weeks ago that has re-invigorated our families spiritual life.

Through following that link my wife has discovered that she can totally eliminate her chronic myofascial pain with meditation and I have discovered new ways of processing innternal "promptings" through remote viewing .

Once again Illargi you have cheered me up when I was feeling a little down, this time it was the change of main page graphic in lieu of "Summer Fund Drive".

Fuck it, I'll risk using the debit card over the net................ Done, food for a week, best I can do right now, sorry.

From working on antique cars: You just gotta keep squirting that rusty bolt with oil and banging at it, banging at it, banging at it, if you want to get the bastard roadworthy. Keep up the good work.

Magicians trick: With Will and Visualisation you can literally move mountains.

May Life be kind to you.

VK said...

I particularly like this Market Ticker post for KD's predictions.

March 19th -

"The "death spiral" ends in the destruction of our monetary base - not due to hyperinflation but due to the inability to borrow any more funds, the reduction of the currency's base to a giant circle jerk, asset fire sales in a mad liquidation dash and ultimately, the collapse of both the monetary and political systems in the United States as tax revenues collapse to very close to zero.

This is a national security emergency that quite literally can take down our government and way of life within months or even days, and I'm willing to bet that not one person in Congress understands the seriousness of the matter."

He goes on to say,

"I have been singing this song - raise cash now - for quite some time. Let me be succinct - it has been my considered belief that you need enough in liquid cash - not credit access in the form of credit card available balances or anything similar - for at least six to twelve months. I'm upping that here and now to twelve to twenty-four months - that's right - one to two full years of "minimum necessary to make it" expenses. Figure out right here and now what your minimum "monthly nut" is, and raise 12-24 months of that much in safe, liquid funds.

That's a minimum; if you can in fact have enough available to be able to execute a "bug out" plan where you are able to become effectively self-sufficient on short notice (a couple of months maximum) if necessary, that's even better. Yes, we're talking chickens, goats, enough arable land to grow what you need to survive (bartering for what you don't have with what you do) and the means to defend it. If you live in a big city consider carefully what you intend to do if unemployment goes north of 20% and the city effectively goes feral - if you're interested in "how bad can it get" go drive through major parts of Detroit - bring an armored vehicle for your tour and/or at least semi-automatic weapons."

Nassim said...

Why was it abandoned? I don't know. The EROEI seems very promising though but it just seems strange that a technology that's been known for so long and is apparently so good and has been atleast 6 years in the making by kitegen has received only a few million or less in funding.

I expect the money went towards housing, SUV's, iPods, Hedge Funds, Special Purpose Entities, Wars, etc :=)

Also, I think a lot of people relate the energy produced to the size of the kite - even technical types have a blind spot here. The kite is actually extracting a small fraction of the total energy from the huge chunk of sky that it traverses.

This boat has been clocked doing 100km/hr - 2.3 times the prevailing wind speed. Because the boat was moving, the local wind speed would have appeared to the boat as higher than its speed through the water. A kite is not constrained by dragging a hull through water and so its speed might have been 200+km/hr on that same day.

Anonymous said...

Ain't life grand?

Sounds sarcastic nay?

Did anybody know that the word sarcasm comes from the latin word for 'tearing flesh'?

Lesson for the day.

cd :)

CS said...

Although his politics are deeply suspect, KD does sometimes come out with surprising statements, that could well have sprung, if we didn't know otherwise, from left field.
Did you catch his cosmic hippy phase - (paraphrasing)
"unless we start growing, mining and manufacturing again, we'll never generate real wealth - all of these activities do or have relied on the one and only free lunch.. the sun."

Brunswickian said...

el g

Interesting comments re SDS.

Do you have an opinion on SRS? Real estate values have been forecast to plummet here.

redcatbiker said...

Industrial Society Destroys Mind and Environment

Just a taste, of the above, below:
The link between Mind and Social / Environmental-Issues.

The fast-paced, consumerist lifestyle of Industrial Society is causing exponential rise in psychological problems besides destroying the environment. All issues are interlinked. Our Minds cannot be peaceful when attention-spans are down to nanoseconds, microseconds and milliseconds. Our Minds cannot be peaceful if we destroy Nature.

Industrial Society Destroys Mind and Environment.

Subject : In a fast society slow emotions become extinct.
Subject : A thinking mind cannot feel.
Subject : Scientific/ Industrial/ Financial thinking destroys the planet.
Subject : Environment can never be saved as long as cities exist.

Emotion is what we experience during gaps in our thinking.

If there are no gaps there is no emotion.

Today people are thinking all the time and are mistaking thought (words/ language) for emotion.

When society switches-over from physical work (agriculture) to mental work (scientific/ industrial/ financial/ fast visuals/ fast words ) the speed of thinking keeps on accelerating and the gaps between thinking go on decreasing.

There comes a time when there are almost no gaps.

People become incapable of experiencing/ tolerating gaps.

Emotion ends.

Man becomes machine.

A society that speeds up mentally experiences every mental slowing-down as Depression / Anxiety.

A ( travelling )society that speeds up physically experiences every physical slowing-down as Depression / Anxiety.

A society that entertains itself daily experiences every non-entertaining moment as Depression / Anxiety.

Fast visuals/ words make slow emotions extinct.

Scientific/ Industrial/ Financial thinking destroys emotional circuits.

A fast (large) society cannot feel pain / remorse / empathy.

A fast (large) society will always be cruel to Animals/ Trees/ Air/ Water/ Land and to Itself.


Infinite growth and development on a tiny planet that is just 40,000 km in circumference? - Industrial Society is insane.

Man can repair and restore things that have been made by man himself. Car, Computer, Aeroplane, Rocket - if anything goes wrong with these things man can repair and restore.

Man cannot repair and restore Nature/ Environment - because man did not make Nature/ Environment. Once a Forest is destroyed - it is gone for millions of years. One cannot create a Forest in 5 or 50 years - it takes millions of years to make a forest - containing millions of species of animals, insects, birds, plants and trees. Man can create a plantation in 5 or 50 years - not a forest.

The only way to save Environment is by not destroying it - leave it alone - leave it undisturbed. If you destroy Environment you cannot repair and restore it.

No Multi National Company can manufacture the Amazon Rainforests.
No MNC can manufacture Rivers and Oceans.
No MNC can manufacture Mountains and Deserts.
No MNC can manufacture milions of species and fertile soil.
No MNC can manufacture the Sun.

The glaciers have melted. Arctic Ice has melted. Man can use all his Technology - all the Refrigeration and AirConditioning Technology but he will not be able to recreate the glaciers and Arctic Ice.

Many species of wild animals used to have hundreds of thousands/ millions of members. Now it is down to a few hundred/ a few thousand. Which MNC is going to restore the animal population to its original level?

The Oceans have almost been emptied of all large Fish. Which MNC is going to bring the Fish back in the Ocean?

Man has hunted down several species to extinction after Industrial Revolution. Which MNC is going to make them reappear?

redcatbiker said...

Please note: I am not the author of the excerpts that I posted in my comment [above].

Greenpa said...

DIYer, yesterday: "As El Gaz said the other day:
Stoneleigh is oceanic, Ilargi is volcanic. Both are awesome. "

Um. Excuse me? Humph.

bluebird said...

New banner, bright and summery.
P.S. I donated a couple days ago.
Thanks for this site, really appreciate all that Ilargi and Stoneleigh do here.

thethirdcoast said...

@ el gall:

The SCOTUS kabuki is rather remarkable, isn't it?


I would be surprised if it was still safe AND legal 5-10 years from now.

Gun control?

Yes, right-thinking people in dangerous areas will need to control a firearm to defend themselves from those driven over the edge by the pain of contraction.

On a related note, I'd like to mention I've been having good success using the "bank-owned sock puppets" meme on people who have yet to realize the gravity of the current crisis.

@ others:

Re: Denninger:

I don't like the guy's politics, but his recent explanation of our current pickle was dead on. It approached the level of a TAE primer.

Re: Investment advice:

Don't listen to me, at 31 I am a young un' in these matters! My main concern is extricating 60% of my 401k that is currently parked in the only stable short-term investments offered by my plan.

Man this place is getting busy!

el gallinazo said...


"Do you have an opinion on SRS? Real estate values have been forecast to plummet here."

First, I really don't have much knowledge in these markets. I have no expertise. Zero Hedge is practically like Sanskrit to me.

This is my crude thinking process.

• Fantasy cannot last forever. The economy is in a downward death spiral most accurately gauged by Shadow Stat's U6.

• Stoneleigh sees an imminent stock market collapse within the next 5 months and probably sooner.

• Even though ultrashort ETF's are not an efficient way to short the market, they are pretty good and accurate over a few months.

• Don't get too greedy. Be cautious.

• The markets are rigged by the vampire squid and the government. However, I&S say when everything is guaranteed, nothing is guaranteed. The more broad based your index, the harder it is for TPTB to rig the market outcomes of fundamentals over the long run. I, like Stoneleigh, am a generalist, though a couple of octaves below her. I don't have tremendous expertise in the sub-markets, so it is easier for me to get blind sided.

• The more narrow the index, the more subject it is to "unexpected" invents. I was seriously considering shorting as narrow an index as you can get - crude oil, on the basis that the price is rigged up even more than the S&P and when TSHTF it will crash even harder - much harder. But if the USA/Israel attacks Iran, then oil shorts will be wiped out. So keeping it general is a viable cautious strategy.

So I am going to stick with an -2X S&P500 ETF

Regarding the last observation, KD is going on how Morgan Chase and others are actually getting their hands greasy storing crude in anchored tankers. These guys know the green shoots are total BS, and what would happen to crude with a devastating market crash. I suspect the Iranian attack is a done deal and that it will happen within the next 6 months. Oil at $200-300 a barrel. This will accelerate the market crash. So Da Boyz will make a ton naked shorting the S&P and leveraged long on crude.

Anonymous said...

@ Carpe Diem

Thought of you lately while reading the just published book "The Face on Your Plate: The Truth about Food" by Jeffrey Moussaieff Masson. I can hardly put it down. Masson is the author of "When Elephants Weep."

@ Greenpa

I caught that! :)

Unknown said...

Interested TAEers may want to check out a daily financial news drive-by here, mostly for the pithy commentary. I found it about a week ago and have been enjoying it with my morning caffeine infusion. It's nothing like our beloved TAE; it's just a little shot of sarcasm for your day.

Bigelow said...

Several quotes from Jim Willie’s July letter (

“Harry Schultz reports that the US State Dept has warned major US Embassies around the world of a planned September banking system shutdown. One can only speculate what activities (criminal, federal strongarm) behind the scenes would take place. It would surely be a perfect setting for a major USDollar devaluation and forced bank mergers with zombie major money center bankrupted firms, setting the stage later for a USTreasury default.”

“My hypothesis is that the USFed is handing money in US$ denomination to foreign central banks for the specified purpose of purchasing USTreasury Bonds. The process begins and ends with USDollars, thus no currency shifts in the midst of staggering auction volume. The USFed is accumulating large accounts managed by foreign central bankers. This hidden monetization through the back door will eventually infuriate the Chinese, who have openly warned the US fraud kings running the financial sector.”

Ilargi said...


Ckm3 is in the link vault under the name of the guy who runs it, Jim Fitch.

Unknown said...

Aw, what the deuce.

I'm a moron. :|

Ilargi said...

Nah, you're not.

I mail with Jim on a semi-regular basis.

Toddman said...

This country has faced this before. It survived and prospered afterward. ...why is a recovery still off the table? Serious questsion.

Only by analyzing *everything* can I make sense of anything.

Arnold, do you understand limits to growth, the exponential function, the current state of resource depletion, oil as the master resource, the Export Land Model, EROEI, the failure of networked systems, substitutability of biological fuels for fossil fuels, and the dependence of a debt based economy of growth?

Serious question.

Although the focus of this site is on financial/economic/political collapse, and the connections to resource depletion are seldom made explicitly (in fact Ilargi is semi-hostile to the view that the oil price spike has anything at all to do with the current disaster), those connections are what lead one to the "doomer" perspective that you're incessantly tilting against. I don't think you get there just by reading libertarian market guys like K.D.

Stoneleigh makes these connections quite well in Energy, Finance, and Hegemonic Power and Entropy and Empire

Also highly recommended would be the writings of William Catton, Richard Heinberg, and John Michael Greer.

IMO a failure to understand the last 40 years of US economic history in the light of limits to growth and resource depletion is what leads one to ask, as you do repeatedly, "why can't we just recover from this mess and move on?"

p.s. I also hit the tip jar the other day when I suggested a tidying the primers section. I would suggest other do the same, especially those demanding clarification of things they don't understand.

Anonymous said...

“A U.S. Army Reserve major from Florida scheduled to report for deployment to Afghanistan within days has had his military orders revoked after he argued that he should not be required to serve under a president who has not proven his legitimacy for office.

His attorney, Orly Taitz, confirmed to WND the military has rescinded his impending deployment orders.

“We won! We won before we even arrived,” she said with excitement. “It means that the military has nothing to show for Obama. It means that the military has directly responded by saying Obama is illegitimate – and they cannot fight it. Therefore, they are revoking the order!””

Ilargi said...

Toddman, Arnold,

I would recommend going through dieoff-org from page one through 224(?!). It may be a bit dated, and not involve finance, but it's still the best guide to understanding where we're at it, and by a long margin.

As for the shorter primers section, I'm not going to be the one to do it, but suggestions are very welcome at theautomaticearth chez gmail.

EBrown said...

So not much discussion of CIT around here. There was a lot on Gollum $uck$ profit$, but not much on another big bank failure.

Guess which big bank is one of CIT's primary lenders? Wells Fargo is another. Why a financial company of such size needs to go to other banks for credit is beyond me (actually it's not, it just amazes me to no end).

I checked out some of CIT's financial releases on its website. It recently converted to a bank holding company based in Utah and was attempting to shift most of its business lines under that umbrella. At the end of 2008 the company had over $60 billion in assets. I suppose by assets they actually mean credit extended since the vast majority of CIT's business has to do with loans provided to small and medium businesses.

Toddman said...


I agree is an excellent, comprehensive resource, if a little overwhelming.

If I can free up some weekend time in the near future, I'll email you privately to see if there's anything I could contribute to a re-org of the primers section.

Anonymous said...

#El G:

You said yesterday that we're on an upward leg. The Elliot Wave people said the market's going to tank hard on a downward leg of a wave 3.

Try to get your little bird brain around the fact that you can't have both at the same time. One of you is wrong, and it looks like the Elliot Wave people completely blew it.

They were also crowing about calling last Feb's bottom within 2 days. So they are making like they are accurate to within a few days.

Sorry to gore your idols. But if you had listened to Stoneleigh, you would've lost out on at least a 20% rise last March.

I didn't, and I made out like a bandit. I also didn't listen to the Elliot Wave people now, and managed to preserve it.

Go cluck to the contrary. Me, I'm out making money off of this market.

Hombre said...


thanls for that link above. I read it with interest and agreement on most of the points.

We are in a comprehensively destructive era that for the most part was a matter of social evolution.

A lot of the price we pay for "modern comforts" is virtually beneath our consciousness as it happens.

Anonymous said...

Question about the article:

Debt and Deflation Quarterly Review and Outlook Second Quarter 2009

What is are long dated securities and how do they differ from, for instance, a 30 year treasury bill? Am I missing a large something here or is there a typo?

If fixed income investors believe inflation is headed lower, they will invest in long-dated securities, while they will invest in Treasury bills, or inflation protected securities if they believe inflation is headed higher.


Anonymous said...

CIT and Wells Fargo will go the way of Bear Stearns and Lehman, they will allow Gollum Sucks to draw oxygen for a while longer.

I imagine the rumor about Israel attacking Iran in the fall will provide the 'shock doctrine' cover disaster for Gollum to crash the stock market and blame it on the war.

Absorbing the little banks into the blood funnel of the bigs ones is just a bonus and will help divert/delay attention from the rest of the thievery.

The Sheeple will be glued body and soul to the Boob Tube, awaiting guidance and instruction from the Maximum Leader and his Quislings.

Good luck Comrade Citizen

~~Resistance is Feudal~~

Mike said...


Those of us who have been monitoring Stoneligh's comments have been nothing short of utterly impressed by her Market Forecasts since August of last year at least.

Here's you sampler from March 2, 2009 the week before the "latest" bottom of 666, she was clearly prescient that a major rally was forthcoming.

She also has consistenly stated another summer rally should be in the works before the whole damn thing begins to fall to pieces in the fall.

We are getting closer to a bottom for this leg of the decline. My guess is that we could see a temporary bottom this month, somewhere in the neighbourhood of the low 6000s or high 5000s. The announcement of a major bankruptcy would be typical for a low of this magnitude. That should be the kick off for a significant rally lasting perhaps as long as several months. Such a rally could retrace a relatively large percentage of the preceding decline (from October 2007). Counter-trend rallies are best used to position oneself for the next phase of the decline. This autumn we should see another market cascade - a longer and stronger move (still interspersed with rallies) than we have seen from October 2007-March 2009. Autumn 2009 and all of 2010 should be an unparalleled disaster. Sitting on the sidelines in cash is by far the safest option. Unfortunately people will become less receptive by the day once a serious rally gets underway. When things appear to be back on track, dire predictions suddenly look much less credible. When I first started talking abut these events online in October 2005, people thought I was a raving lunatic, as it was the height of the housing bubble. People really need to read for long enough to see the underlying situation. The fundamentals will still be awful despite the rally, although some surface measures may become a little less awful for a while. Even housing could see a temporary rebound as some liquidity returns to the market. By summer, people could be really optimistic and complacent again, just in time to have the rug pulled out from under their feet again."

Anonymous said...

Thanks for the heads up about the Israeli attack on Iran el gallinazo. When I read your comment a bunch of stories clicked and I just know you are right about this. I thought the oil hoarding was an attempt to push up the USD and I figured it was doomed to fail so I got into ETF to short it. I'm now out with a modest profit. It seems some are preparing for a big price spike. So many interests are going to benefit it seems inevitable: Oil producers will get a big payday, Israel will get successful military victory, China will benefit from the demand for petro$s buoying up USD so they can do more hoarding, the USA will get a market panic and a flight to safety so they can sell a more treasuries and the Iranian authorities will find the attack very useful for quelling the nascent uprising and rekindling Iranian nationalism. Unfortunately we prols will get stuck with the bill, but hey, you can't make an omelet without breaking a few eggs.

Anonymous said...

@ Resistance is Feudal 10:44

Well said!

Adios? :)

Bigelow said...

@John 10:30

You suppose correctly. "long dated" and 30 year bonds mean the same thing. There are Treasury bills, note and bonds. 'Bills' are the short term end of the scale.

Anonymous said...


You mean the unthinking one's who have been following Stoneleigh, Which is most of this blog. But not all. Some of us prefer to make money.

Stoneleigh's just repeating what's coming out of Prechter. Big whoop.

The difference is that they called the market bottom better. If you were on the sidelines waiting for her to call an upward trend, you would've lost out on a 20% rise.

I'm glad you're impressed. I'm not. Losing out on a 20% return is pretty bad,

Try to cover it up as much as you can. Me, I'm off making money.

Bigelow said...

A borrowed opinion I agree with: CIT Group is cut loose because it is not vital to the Wall Street boyz. Citi mostly loaned to small and medium business not big corporations. When CIT goes, a whole lot of real world small business will follow.

Ilargi said...

"Me, I'm off making money."

We got that part the first time, and were hoping you'd make good on that promise.

Watch that rug under your feet on your way out.

Ilargi said...


CIT is worth more dead than alive to Goldman and JPM.

Anonymous said...

"Clinton: US Won't Hesitate to Use Military Against Iran"

Dept. of Transportation Photo said...

Hombre said...

Part of the problem, and I do mean the worldwide comprehensive dilemma we are in, is because too many people were...

" making money..."

Arlen Prechter said...

Anon 10:17 & 11:17:

Good call. They are going to claim that Stoneleigh is not here to provide investment advice. That she is here to give broad strategy, not specifics. They say these things about her but condemn other people who in fact do the same thing and claim that these others cannot be trusted like Stoneleigh.

Regurgitated Prechter is exactly what we see here.

Hombre said...


An interesting note from the article, which is, after all, the cornerstone of our threat, is it not?

"America’s own National Intelligence Estimate says they don’t believe Iran has an active weapons program either..."

Mike said...

I am puzzled here, what part of calling a bottom was not clear in her comments from 3/2/2008, a week before the bottom?

This is not a Market Forum, those of us who've been here for awhile know this. You want market timing and "fast money" specifics, go elsewhere.

But that being said, I'll take and save a Stoneleigh comment on just about anything she says, but when it comes to the Market, I take particular note. In the year I've been reading her comments, she has been pretty much dead on with everything.

I am indeed a fan. She is terrific.

Anonymous said...

Thanks Biglow

Now my only problem is what to make of that statement:

If fixed income investors believe inflation is headed lower, they will invest in long-dated securities, while they will invest in Treasury bills, or inflation protected securities if they believe inflation is headed higher.

He seems to be saying the solution to investing for inflation or deflation is the same thing, that is to buy long securities. Is it a typo or maybe he is too subtle for the human mind and should be avoided ? :)


D. Benton Smith said...

To believe that the current bad guys are going to retire to an undisclosed luxury location to enjoy their loot in epicurean splendor when all this is over...... is a dangerously unwarranted assumption.

Historically, such mass abdication has never happened, and the observable fact is that meaningful reform is conspicuous in its absence.

The desire to earn enough to retire, or to actually fix what's broke is not the mind set that leads to great wealth and power. It is the mind set of ordinary blokes like thee and me.

Those guys are not in this for the money or the dream of being served for eternity by voluptuous virgins in some blissful heaven.

What they ARE DOING, is what they are in it for. Being in charge, having things their way, and getting paid for it. That's what they do for a living... and I believe they intend to never willingly do anything else.

Their method is an OLD old drill.

The victims' gradual awakening and violent objection are fully anticipated, along with plans for what to do when that happens. That's what the burgeoning ranks of cops, computer records, SWAT Teams, Special Forces and draconian laws are about.

WE would like to think that when 'the people' get mad as hell and won't take it anymore that our leaders will see the light and implement reforms to get things working again.

We are assuming that our leaders are thinking like we do.

Personally, I don't believe they are.

I believe they are thinking like a top dog intent upon keeping what he's got. Not like a wannabe, working his way up the ladder.

The same anti-social goals that drive such people to seek authority over their fellows, will drive them to keeping that authority... and eventually that will involve actual blood and actual murder.

All for the sake of freedom, justice and social stability, of course.

The first wave of serious threat to your personal safety is not going to come from the mobs. It is going to come from your friendly neighborhood police officer, SWAT Team, National Guard and Army.

It will all be perfectly rational and legal... at least from the perspective of those whose stuff is being protected. Just like Special Renditions, torture, or a cop beating some perp half to death seems justifiable under the extreme circumstances existing in high crime areas..

Like the man said, the rich can always hire half of the poor to kill the other half.

When the time comes you will have to choose which side of that equation you're going to be.

Arlen Prechter said...

For those that think Stoneleigh is some sort of a prophet, I suggest you read anything Bob Prechter has ever written. Try his book 'Conquer The Crash'. Stoneleigh recommends it in her book list.

She regurgitates his material. There is nothing wrong with that, but sometimes I think the hosts and the guests to this blog ascribe originality and prescience to themselves.

Lets keep things in perspective here.

Anonymous said...

LMAO at the Arnold comment on KD the 'optimist'. Come on Arnie boy waiting for your response.

First you write this sort of trash,

Arnold: "Ilargi and Stoneleigh can you explain why Denninger is incorrect on his call. A 30% decline in GDP does NOT portend a collapse and fatal decline in the United States."

Arnold: "His math is flawless. He is calling for a forced 30% decline in GDP. Yes, this will cause unemployment to rise to between 20-30%. This country has faced this before"

Karl Denninger: "I will repeat what I said months ago - Barack Obama is our first Black President, and if he does not get his act together and stop this stupidity he is going to be our last President."

HAHAHA! ROFL! And KD the man with the flawless mathematics thinks that the US is going to collapse even worse then I&S.

Come on Arnie Duhmerican boy lets see you get of KD's flawless doom predictions.

Hombre said...


some very thoughtful comments there

A Prechter...
She regurgitates his material"

I have no idea to what extent Stoneleigh has read and absorbed material from B Prechter, and do not care.

To a certain extent we all "regurgitate" things we have learned during our life of seeking and experiencing. What is an original thought? And from whom?

Whose ideas has Bob P absorbed during his lifetime, and then those thoughts become a part of his total output?

I bring little to this table (TAE) and learn much. I don't care who is the author of each tidbit or perspective. I just appreciate them.

Anonymous said...

Hi Again Bigelow, looks like I am too obtuse to be a human mind, reread your reply and all makes sense now.


Arnold said...

Unemployment is out and one of the calls made here, that we would see exponential growth in unemployment has been proved wrong. Ilargi and Stoneleigh are human after all.

Nassim said...

Arlen Prechter,

Some people seem to think that they are prophets or whatever. I think the the web does not quite work like that.

People are attracted to sites and blogs that reflect their own beliefs and values. I am here because what our hosts offer chimes with my particular way of thinking. In fact, unwittingly, I was looking for this site for a long time and it is only after I found it (on at that time) that I realized that I had been searching for it.

I have looked at some of the sites that offer the Elliot Wave and they all seem to be saying different things. In any case, it all seemed like mumbo jumbo to me. I am sure lots of people prefer that approach, but I am not one of them. Some people prefer astrology and that is also fine by me.

In view of this, I really would be very pleased if you were to not to present the other Prechter as some sort of Notradamus of macro economics or whatever. No one has some sort of intellectual property in this area so pretending that this is the case merely encourages derision.

VK said...

I was watching this movie, Troy, yesterday and this quote struck me as being full of truth.

"I'll tell you a secret.

Something they don't teach you in your temple.

The Gods envy us. They envy us because we're mortal, because any moment might be our last.

Everything is more beautiful because we're doomed.

You will never be lovelier than you are now.

We will never be here again."

Achilles (Played by Brad Pitt)

Death is the thing we humans fear the most yet it is the one thing that makes life beautiful. We will never be here again.

Ilargi said...

Arnold, let's see the prediction you claim, which I take to be of continuing exponental unemployment growth, and then we can talk.

Malcolm Martin said...

My world view is guided mostly by what I know of Karl Marx. So I expected this was going to happen to capitalism.

But The Beatles "Fool On The Hill" crosses my mind these days.

Day after day, alone on the hill,
The man with the foolish grin is keeping perfectly still.
But nobody wants to know him,
They can see that he's just a fool.
And he never gives an answer .....

But the fool on the hill,
Sees the sun going down.
And the eyes in his head,
See the world spinning around.

Well on his way, his head in a cloud,
The man of a thousand voices, talking perfectly loud.
But nobody ever hears him,
Or the sound he appears to make.
And he never seems to notice .....

But the fool on the hill,
Sees the sun going down.
And the eyes in his head,
See the world spinning around.

And nobody seems to like him,
They can tell what he wants to do.
And he never shows his feelings,

But the fool on the hill,
Sees the sun going down.
And the eyes in his head,
See the world spinning around.

From the hill I'm watching the world spin around through Bloomberg TV so I wish to comment on the view. If I have to be told that I'm terminally ill, thank you Jesus that the news is delivered through Betty Liu, Carol Massar, Zahra Burton, Chris Vallerio...

Please banish Pimm Fox to radio though.

el gallinazo said...


Trading electrons with this scum is like trading spit with a Komodo dragon.

centiare said...

@ D. Benton Smith

Of course the PTB have plans to remain in power. Hitler never anticipated defeat, nor did the leaders of the USSR or any other failed states.

The problem with your scenario is that the left are the ones currently in power. But they are dependent on the right who control the actual force threat: the military and police.

Methinks the greatest dangers posed to the current PTB will come from the very forces they believe can be deployed against the prols.

The French aristocracy were doomed once the military sided with the revolutionaries.

Persephone said...

Who let all the heel-nipping chihuahuas out?

VK said...

Was this posted on TAE, if it was I must've missed it.

"It is a startling sign of the pain that the Great Recession is inflicting, and it is largely missed by the official, oft-repeated statistics on unemployment. The national unemployment rate has risen to 9.5 percent, the highest level in more than a quarter-century. Yet it still excludes all those who have given up looking for a job and those part-time workers who want to be working full time.

Include them — as the Labor Department does when calculating its broadest measure of the job market — and the rate reached 23.5 percent in Oregon this spring, according to a New York Times analysis of state-by-state data. It was 21.5 percent in both Michigan and Rhode Island and 20.3 percent in California. In Tennessee, Nevada and several other states that have relied heavily on manufacturing or housing, the rate was just under 20 percent this spring and may have since surpassed it."

Check out the nifty interactive graph,

Persephone said...

CIT - going, going gone. I bet we see employees with boxes on the morning news.

Anonymous said...


Yes, she got the month right. When you jumped back in during the month made a big difference. The market was up by 20 some percent by the time she "confirmed" it.

@Ilargi: If it makes you feel any better, I'll be making money when the rug gets pulled as well.

Anonymous said...

Anon 1:34 sounds like Gordon Gekko.

Bigelow said...


If you are a “fixed income” investor your choices are confined to kinds of debt. The “fixed” part is the fixed interest rate your debt instrument pays. You could buy debt to cope with seemingly contradictory situations. Dogma goes whether you buy 30 year treasuries with the expectation they will become more valuable as inflation declines OR 13 week bills because your money is returned to you quickly and each successive new interest rate has a chance to ratchet higher to “keep up” with inflation. If you wish to sell your 5% bond and new bonds pay 17%, the price you get will be less than you paid at 5% to pad your lower interest rate and make it equal what the new interest rate yields. Clear as mud right?

Unfortunately the whole Casino is rigged. Including your tax amounts with the interest often shows you actually lost money. Other times a 0% interest rate may actually be a positive rate of return because of the general deflationary conditions –like now.

Good luck.

Bigelow said...

50 Ways To Beat Deflation
“The problem is all inside your head, Ben said to me
The answer is easy if you wreck the currency
I'd like to reinflate your weak economy
There must be fifty ways to beat deflation

He said it really is my habit to intrude
Furthermore, I hope my actions won't be historically misconstrued
I'm sick of all these pundits yelling "OMG We're Screwed"
There must be fifty ways to beat deflation
Fifty ways to beat deflation

Just bail out a bank, Hank
Mail out some checks, Rex
You dont need to be coy, Roy
Just give 'em for free
Stamp up the moss, Ross
You don't need no Congress
Just shell out the bread, Fred
And do it for free

Just buy up some bonds, Ron
Quantitative ease, Louise
You dont need to be coy, roy
Just give it for free
Lower the rates, Nate
You dont need a Senate debate
Just drop it from planes, Jane
And do it for free

He said that hoarding cash won't do to ease our pain
I know there's something that will make you lend again
I said I appreciate that and would you please explain
About the fifty ways

He said I gave a speech on this way back in 2002
And it'll work if we all just see it through
But that guy Mish thinks my head is full of poo
There must be fifty ways to beat deflation
Fifty ways to beat deflation

From Stonewall to Mish”

EBrown said...

Ilargi and Bigelow,
Exactly. The following is mostly speculation on my part - The big players on Wall street (Goldman and Wells at least) can make money off CIT's carcass when it falls into bankruptcy. I'd bet they've secured themselves senior positions in any loans they extended to CIT over the last 9 months so in BK they get paid back first and can pick over the choice assests and discard all the rest.

The Reuter's article says CIT has about $75 billion in assets (versus 60 at year end 2008). Who here thinks all $75 billion of credit are picked up by other banks? Not I.

EBrown said...

And that means a lot of payrolls at small and medium businesses across the US and around the world are going to be MIA. yikes.

VK said...

@ Ebrown

Regarding, " I'd bet they've secured themselves senior positions in any loans they extended to CIT over the last 9 months so in BK they get paid back first and can pick over the choice assests and discard all the rest."

Via Barry Ritholtz,

One year ago, Goldman Sachs gave CIT a $3 billion line of credit.

Goldman responded today saying that it had hedged it's CIT bet -

This is a case where they might be paid twice. Once on their bet and the other when liquidating the choice assets of CIT.

Oh the joys of gambling in a rigged casino favoring you :)

Brunswickian said...

el g

Thanks for all the advice - much appreciated.

My last question in this vein is the likely effect of stimulus package #2, if it occurs? - Anyone?

VK said...

I'm guessing the best green shoots of weed are now found in the Bank of Canada. This via Mish,

"Economist Sheryl King said the latest Bank of Canada report suggests the economy could bounce back with several quarters of 10 per cent growth in the next year. Her report is titled: “Are markets ready for 10 per cent GDP?”"

What does she think Canada is? A totalitarian state like China that can simply report any growth number it chooses to placate the masses while at the same time reporting a massive drop in the PPI and CPI? Huh!?

VK said...

First Meredith and now Roubini :(

July 16 (Bloomberg) -- U.S. stocks rose for a fourth day as economist Nouriel Roubini said the worst of the financial crisis is over and the recession will end this year, while takeover speculation lifted commodity shares.


“The optimism that people are starting to embrace is that the recession may be months away from ending,” said David Goerz, who oversees $17 billion as chief investment officer at Highmark Capital Management in San Francisco. “Even the most bearish forecasters starting to capitulate.”

Optimism is the opium of the masses!

Now has Dr Doom Lite turned, to the light side he has, young doomer. Wary we must be of the brightness.

Ilargi said...


I have that lined up for today. We must be downwind of some mighty fumes here in Canada, or perhaps it's the drinking water.

I can't seem to understand what she bases her views on, other than perhaps a few more railway cars going south than recently.

Jim R said...

Brunswickian & El g,

I have been watching the ultrashorts for a while as well. I don't fully understand how they work, but they are derivatives, essentially side bets, rather than shares in any productive enterprise.

Well actually SDS has paid a small dividend from time to time, so they have some sort of stake in the underlying equities. Last December they apparently needed to divest themselves of some stuff they had in the attic, so a largeish cash distribution was credited to my brokerage account (and the SDS shares lost an approximately corresponding amount).

Early this year I tried branching out, putting some chips on SRS and got burned (my own fault). But more importantly, if you look at some of the more narrowly-focused derivatives and compare the +2x with the -2x over six months or more, you will see a 'mirror' effect in the day to day movements but both funds steadily declining over time. I suspect the ±3x derivatives are worse. My guess is that fees and whatnot take a bigger slice out of the more narrowly focused funds. (the casino has to make some money to keep the lights on and the server farm going)

Like El G, I'm going to try not to be too greedy, because these derivative thingys are almost certain to be demonized at some point and banned/confiscated. (Stoneleigh said so)

Ilargi said...

Roubini flipflopped months ago. Whitney did not, though. She only predicted Goldman etc. to do well in the near future. Which it will. If anything, she is a "bit" late. If our hungry investor had just bought Goldman or JPM in March, he would have made well over a 100% return, not just that measly 20%.

But I do think that Whitney's main message was the 15% unemployment rate, and I don't understand why that is neglected by just about everyone. As I wrote a few days ago, 15% U3 means close to 30% U6, and those are not numbers the US economy can withstand.

Anonymous said...

Anon 1:34 - remember, those who brag the largest usually have the smallest, um, wad

Arnold - yes, the headline unemployment number might look like a (mild) green shoot....but now go read the details behind it and you'll see it's actually bad news.....

**Bob (your uncle)**

VK said...

Hello Ilargi!

I'm betting it's a case of mark to imagination induced by some good Colombian stuff or a really bad case of Chinese fudge flu (side effects include excessive optimism and hallucination).

Hombre said...

M Martin

Thanks for "regurgitating" the Beatles MAN ON THE HILL.

During my local performance days I sang it many times, along with Norwegian Wood, In My Life, etc.

In the late 60's when Lennon (not Lenin) wrote that "things are accelerating" it took me a while to figure out what he meant.

Now, I would say things are in hyper mode!

brendan said...

I love how all of the stories regarding GS in MSM are pretty much like, "It is unclear whether it is too soon for Goldman to resume the compensation practices that were typical in 2006, when Wall Street was booming."

Are they f-cking serious? I hope they do resume them. If they do, and we go to 15% unemployment, 85 Broad will be a pile of rubble by the end of 2010.

Anonymous said...

Agora’s 5 Minute Forecast
“Judging by one of our favorite data points, the recession is still alive and kicking. Industrial capacity utilization fell again last month, says the Fed today. June capacity utilization fell to 68%, another record low and down 13% from this time last year. As we’ve noted previously, a bottom in capacity utilization has marked the bottom of every recession since 1970.”

Jim Jones said...

Cult checklist:

1. The group displays excessively zealous and unquestioning commitment to its leader and regards his belief system, ideology, and practices as the Truth, as law.

‪2. Questioning, doubt, and dissent are discouraged or even punished.

‪3. The leadership dictates, sometimes in great detail, how members should think, act, and feel.

‪4. The group is elitist, claiming a special, exalted status for itself, its leader(s) and members (for example, the leader is considered the Messiah, a special being, an avatar or the group and/or the leader is on a special mission to save humanity).

‪5. The group has a polarized us-versus-them mentality, which may cause conflict with the wider society.

‪6. The leadership induces feelings of shame and/or guilt in order to influence and/or control members. Often, this is done through peer pressure and subtle forms of persuasion.

‪7. Subservience to the leader or group requires members to cut ties with family and friends, and radically alter the personal goals and activities they had before joining the group.

‪8. The group is preoccupied with bringing in new members.

‪9. The most loyal members (the true believers) feel there can be no life outside the context of the group. They believe there is no other way to be, and often fear reprisals to themselves or others if they leave (or even consider leaving) the group.

Gravity said...

"This study found that the tax multiplier is 3, meaning that each dollar rise in taxes will reduce private spending by $3."

That is not very encouraging.
Evidently, it would be easy for misplaced fiscal policy to collapse velocity of money and aggregate demand.

But it seems that war-like Romer
was partly responsible for this calculation, so perhaps its wrong,
as in even worse.

brendan said...

Jim Jones:

Ahhhhh. Really?

Arnold said...


HUGE apologies. I ascribed a view of Dan W to you. I got my bloggers mixed up. Many apologies.


Jim R said...
This comment has been removed by the author.
el gallinazo said...

Now I&S are Jim Jones and we'll all be drinking strychnine laced Kool-Aide soon with a smile. They'll send it out as an attachment. Arnold is sufferng from some serious cognitive dissonance, but beneath the surface I detect a certain vague honesty to try to put the pieces together. But what is the motivation of our Jim Jones baiters? Why don't they just stick to their right wing libertarian or day-trader blogs? Maybe they have become immune to flaming each other? The thrill is gone and their nests are soiled. How are we nourishing them? Why do they stay here? I think it's the challenge of trying to bring us back into the pithed frog crowd. Lots of luck. I am feeling an "organizing principle" behind this crap. Time for another layer of tin foil.

Jim R said...

I & S,

I like the new summery theme. Maybe it'll inspire more summery summaries.

And I meant to end that last post with an emoticon ( Stoneleigh said so ;) for the unwashed anonymice.

And Greenpa,
My apologies; I looked it up, and you were the source of that comment...

Gravity said...

There was of course no way of knowing whether you were being watched at any given moment. How often, or on what system, the Thought Police plugged in on any individual wire was guesswork.
It was even conceivable that they watched everybody all the time.

But at any rate they could plug in your wire whenever they wanted to. You had to live--did live, from habit that became instinct--in the
assumption that every sound you made was overheard, and, except
in darkness, every movement scrutinized.

Anonymous said...

Hi all, this is my first post here.

I'd like to mention the UK optimum population trust people referenced in the articles today.

I've had some discourse with these people and I find them to be a confused bunch. They advocate a 'stop at two' policy, yet have no understanding of the economics of population decline, which IMO means they lack credibility.

I'm all for population reduction as long as the foundatation for dealing with the economic decline which would follow are in place and understood. They seem to be labouring under the misaprehension that you can continue with capitalist business as usual with a declining population which of course you cannot.

Anonymous said...

Blogger Ilargi said...
Roubini flipflopped months ago. Whitney did not, though. She only predicted Goldman etc. to do well in the near future

ilargi flip flopped this week. He first said Whitney rolled over but at the time I said, not so!

Flip flop ilargi flip flop we all do at times it is what makes for great honesty some times, of course some times not, but we are all are human and at times must flip flop or in lieu get really hammered and nailed to the floor:)

Anonymous said...


Recognized the Orwell just like a few notes from an old tune. But cite your quote, eh?

Ilargi said...

The only reasonable way, as in one that would actually work, to achieve population reduction through conscious human effort is for those who clamor loudest for such reduction to rid the planet of themselves. You want it, so you go first.

Nothing else even stands a ghost of a chance. It's no something we can do ourselves; the ecosystem will do it for us.

Then again, the Chinese did get a 50-100 million army of sex-starved young males out of their sordidly failed one child policy attempt. So if that's your goal, you may be on to something.

el gallinazo said...

Hot off the press and into my email box just now.

First three paragraphs here (for what it's worth):

The following is a statement from Dr. Nouriel Roubini, Chairman of RGE Monitor and Professor, New York University, Stern School of Business:

“It has been widely reported today that I have stated that the recession will be over “this year” and that I have “improved” my economic outlook. Despite those reports - however – my views expressed today are no different than the views I have expressed previously. If anything my views were taken out of context.

“I have said on numerous occasions that the recession would last roughly 24 months. Therefore, we are 19 months into that recession. If as I predicted the recession is over by year end, it will have lasted 24 months with a recovery only beginning in 2010. Simply put I am not forecasting economic growth before year’s end.

Starcade said...

VK Re: Denninger as a doomer:

He's got a lot of company over there. Frankly, I think he's a cheerleader for doom for those who are not "fit" to be like him.

What he forgets is that, when TSHTF, if he's not willing to kill those who are coming for him in the riots and social unrest, he'll be one of the first to go.

Malcolm Martin was right above: Choose sides or get out of the way -- but the latter will be impossible, as there will be no escape from this.

Earnest Lux: I am reminded, in your comments, about those who support Obama but oppose many basic rights for all saying that he is playing "political chess".

Chess, in most arenas, is a game of sacrifices. I sense America is about to ritually sacrifice a good number of people for the greater good of only a portion of the remainder.

Bigelow: The "planned September 'bank holiday'" has been in the loop for some time now, at least within the doomer community.

Of course, the problem being that we don't know if it's true -- but it would appear to be consistent with some present events, especially, say, if California does go under about the first of September.

Toddman: The problem with "the country has survived this before" is that we now have a paradigm shift away from what allowed us to survive previous situations of this ilk.

Bigelow: I really am getting the sense that my roommate is right when she says that we are headed to a situation where there will be only one grocery store, one department store chain, one hardware store, etc.

CIT being allowed to BK will kill thousands of small businesses -- all part of the plan...

Arnold 1302: Liar. Read some REAL unemployment statistics and see how the government fudges theirs.

D Benton Smith: Re: Wave I of the threat...

I disagree, for one fundamental reason. If the first wave of that actually came from authority, we'd be seeing it already, on a wide scale, over the course of the last several years.

It is no secret that anyone paying attention knows that the present population cannot be sustained -- and, in the opinion of TPTB, SHOULD NOT BE. What stops them (and I don't believe any "to maintain the illusion" situation applies here...) from starting the process themselves, unless they don't want to be the ones to start it?

Ilargi said...


Of course she rolled over. What are you talking about? Whitney knew very well what she was doing. Why do you think she made it a public bull call?

VK said...

@ El G

Jim Jones just gave us an accurate description of the following groups of people in his cult analysis.

1) Every major and minor religious movement on the planet including Christians, Muslims, Jews and Scientologists.

2) Every sports fan of every baseball, soccer, basketball team etc.

3) Every ardent political supporter eg Obamites and Reaganites.

4) Neo Classical Economists

5) Creationists

6) Drinkers of coke and pepsi.

7) Inflationistas

Anonymous said...

ilargi said:

Roubini flipflopped months ago. Whitney did not, though. She only predicted Goldman etc. to do well in the near future

When in a well don't do head stands:)

Anonymous said...

Troll Patrol Control thoughts

Both Mish's and Karl D's comment sections are a wankateria of spoiled soiled daytrading wannabe Gordon Gekkos.

The stink of their 'style' seems to be showing in recent posts here.

Selfish doesn't even begin to describe them. The self-centered, conceited core values of Liberterriblism fly there like freak flags.

The infestation of juvenile 'I am the Master of My Fate, I am the Captain of My Troll' has probably spooged over from these obnoxious comment sections in the last week or so. TAE is steadily gaining ground on the hit counter and this causes hissy fits in the uncouth young troll trollops of Liberterriblism.

I view their visits here as a victory over the forces of mental mediocrity and slacktavism. They wouldn't have expended the mental calories (too lazy) unless their knickers were truly in a knot because their ship is not only not coming in, it sank a year or so ago and is headed straight to Davey Jones Locker.

They ape the simian style of the rightwingnuts of MSM. Their 'erudite' comments are just pooh flung at the blackboard, their 'flames' are but the small flickering pencil dicks of intellect.

Anonymous said...

"You want it, so you go first.

Nothing else even stands a ghost of a chance. It's no something we can do ourselves; the ecosystem will do it for us. "

Eh? It's already happening. Intrinisic replacement rate is ~1.7 in US/UK, and down at 1.3/1.4 in japan and certain european countries. These populations including the US are only sustained by immigration.

Clearly someone wants a steady or preferably increasing population. Personally I think these attempts to sustain pop levels and hence prop up the debt-slave-sausage machine are doomed - local populations will not accept immigration when they can't themselves get work.

So the economics of population decline has to be the major macro trend of 21st century in developed nations, alongside deflation and peak oil.

Anonymous said...

I've been posting at mish for a while now and I have to agree with anon's troll thoughts above.

For a worryingly long time I was getting off on being mauled by rabid libertarians but I'm now tired of it. Consider me a refugee and in rehabilitation.

Anonymous said...

Hey ilargi if Whitney knew the numbers and didn't say them what would that make her, and how would it have changed things other than broadening the market? or would you like the friends of GS to be the only winners when those lotto numbers were announced?

Anonymous said...

To Ahimsa @9.17

Thanks for that. I did read one of his books called 'Dogs never lie about love' a wondeful book. I'll look out for the one your're reading. I read about it on the shhhhhh - peta websight. He is quite a profound thinker and has a true visionary gift.


Ilargi said...


Good to see you, brother. I was wondering about you.

timekeepr said...

Crude oil will collapse to $20 a barrel this year as the recession takes a deeper toll on fuel demand, according to academic and former U.S. government adviser Philip Verleger.


VK said...

@ Scepticus,

"Eh? It's already happening. Intrinisic replacement rate is ~1.7 in US/UK, and down at 1.3/1.4 in japan and certain european countries. These populations including the US are only sustained by immigration."

You must take into account the consumption factor as well!

32, 32, 32, 32, 32, 32.

Why 32?

The average British Citizen consumes 32 times as much as the bottom 3-4 billion of the world's population.

Consuming more of what?

Oil, minerals, metals, water, food etc.

So the effective British population is really 32 x 60 million which is 1.92 Billion people. As we want to compare apples to apples and oranges to oranges.

So a decline in consumption by half would equal an effective population decline of nearly 1 billion people!! Which this depression will end up doing anyway.

Population is one part of the puzzle but effective world population gives a much truer picture, one that factors in consumption.

ps - US population when taking into account consumption of resources stands at 9.8 Billion people.

Jim Jones said...


I actually had this blog in mind when I posted the cult checklist.


Starcade said...

Ilargi: Have had to help out roommate, who had surgery to repair some tendons in her finger. So Net time has been lessened. I've been reading all along, though.

And that one article is right: Fail to bail out California, and the end comes *then* nationally -- maybe in more of a wave coming from the West, but it comes nationally *then*.

Anon 1758: The fact is simple: For them to work and to basically force the leechfucks to do their job, they have to start the shooting themselves.

I sense them as nothing short of a bunch of cowards, else they'd already be using the ammo they've been claiming to have stockpiled.

(For the same reason I believe the government would similarly have to start something if they truly desired it.)

For everyone forgets one very important fact: Killing off quite a number of economic undesireables (in the eyes of the Denninger crowd) would not only immediately lessen the population, but whip the rest into shape with the proverbial Fear of God (reg tm).

Persephone said...

@Jim Jones

I think VK understood your intent.
He proved a point.
That was a smackdown.

Anonymous said...

"Crude oil will collapse to $20 a barrel this year as the recession takes a deeper toll on fuel demand.."

Not if we have a contrived disaster capitalism war in the ME.

How convenient, who woulda thought?

Que the attack on Iran.

Block the tanker traffic in the Dire Straits.

Many thought the recent hoarding of oil in anything hollow was a speculative commodity bubble contrived,again like last time, but what if it's insider trading for the knowledge of a supply 'disruption' caused by a war.

You'll make as much as if GS rigged a commodity bubble again, but differently.

What's in your pocket?

Got Oil? :)

Brought to you by the Wag the Dog Trade Council Research Arm.

VK said...

Jim Jones, why be sorry! LOL. Maybe this is a cult? But if I were to be in a cult, i'd want to be in the right one and being ahead of the curve ball.

Scepticism must be part and parcel of everyone's thought process on this blog and your post was an important reminder. That is why I don't read TAE alone but from a wide variety of sources such as KD, TOD, Mish, oftwominds, NY Times, The Telegraph, Steve Keen, Michael Pettis etc.

Carl Sagan had a great way to weed out the bad ideas from the good and every person should read his Baloney Detection Kit.

"Wherever possible there must be independent confirmation of the facts.

Encourage substantive debate on the evidence by knowledgeable proponents of all points of view.

Arguments from authority carry little weight (in science there are no "authorities").

Spin more than one hypothesis - don't simply run with the first idea that caught your fancy.

Try not to get overly attached to a hypothesis just because it's yours.

Quantify, wherever possible.

If there is a chain of argument every link in the chain must work.

Occam's razor - if there are two hypotheses that explain the data equally well choose the simpler.

Ask whether the hypothesis can, at least in principle, be falsified (shown to be false by some unambiguous test). In other words, it is testable? Can others duplicate the experiment and get the same result?"

Jim Jones said...

Boy, that was some smackdown.

Ilargi said...


When you read something, it doesn't always say what you would like it to.

Roubini early this year changed his entire message on the entire economy for no apparent reason other than the Obama stimulus. We now know where that went. So does he, but he won’t admit it.

All Meredith did was point out in public that Goldman is doing well. She's 4 months late, and she simultaneously gives of dire warnings that nobosy seems to notice, but in my mind she still sells her independence, for a buck.

She's not wrong, though, whereas Roubini is. And she didn't flip, whereas Nouriel can't seem to get enough of that stuff.

Whitney says that if you put trillions into the Wall Street banks, they'll (or some) temporarily show better results. Correct.

Roubini says that if you put trillions into the real economy, it'll recover. Wrong.

Jim Jones said...


I agree with most everything you said in that post.

I just wish that there was more of that going on here.


Ilargi said...

" Jim Jones said...

I actually had this blog in mind when I posted the cult checklist.


July 16, 2009 6:39 PM"

Imagine thinking you need to explain that one.

Persephone said...


The fact that he had to explain himself indicates he will not understand your response.

But I laughed like hell.

Jim Jones said...

Imagine thinking you need to explain that one.

Oh yes, Ilargi. Imagine that.

I have learned over time that humor and irony elude many members of your audience.

Anonymous said...

"but whip the rest into shape with the proverbial Fear of God®"

How true Starcade.

The Overlords need a Spectacle to scare the Sheeple speechless.

No repeats allowed, no planes flying into buildings, been there, done that.

No hurricanes, they're hard to que on to a tight schedule.

Anthrax, done that.

If people riot because they cut off their benefits just as a war drives the price of oil to $200+, and hence disrupts transport/food delivery, who's to tell the cause of the ensueing mayhem?

Was it losing benefits and jobs because GS drove the economy into a blackhole and being hungry or losing the food transport system to sky high priced oil caused by a fake war and being hungry?

Two completely different motivations, the rioting would look identical on TV.

I can see the MSM whores framing it like this:

"Those ungrateful, unpatriotic citizens, rioting during a time of war, they're giving aid and comfort to our enemies! Crush Them!" blahblahblah.

You known the drill.

They need a Spectacle one way or another.

Anonymous said...

Ah, JJ the concern troll serving koolaid on a hot summer day, it's like selling coal to Newcastle.

JimmyNashville said...

The dollar has to have tracked down with deflation. Otherwise how could you double the money supply without suffering huge inflation. Since the value of the dollar tracked down with the value of goods no one noticed; so we didn’t do the normal deflation game of perpetually waiting for a better buy and killing the economy in the process.

Winner? The US Government (and hopefully the taxpayers but I’m not holding my breath) assuming all that money they printed to buy interest in the banks ever shows a return. It was a necessary and, in retrospect, brilliant economic move that staved off an economy-wrecking deflation cycle.

The problem however is that the world is voting no-confidence in an undisciplined and business un-friendly US government now by not wanting to buy or hold US debt. These are not necessarily related incidents except that the promise of electing a hard-left populist pressured the US financial system to breakage as everyone started screaming ‘sell’ in the run-up to the election. Now that it’s evident our president wasn’t just buying votes with his populist rhetoric and intends to act on his ridiculous populist promises; plus our leftist congress is giving him a blank check; now we've got to brace for round two.

Why is there no recovery or inflation yet, even with all the spending? We're in hibernation waiting for the adults to be in charge again.

Anonymous said...

Jim jones said:

I have learned over time that humor and irony elude many members of your audience.

The audience?

Persephone said...

Have you read any of Ilargi's blogs, yet?

Ian said...

CIT threatens to be the fourth-biggest bankruptcy in US history. JPMorgan makes big profits. China is growing at breakneck speed. But what is really moving stocks is the war of heads and shoulders.

Hombre said...

jimmynashville... "We're in hibernation waiting for the adults to be in charge again."

I was just wondering... who are these adults? Again?

Chaos said...

I think Jimmynashville means the last administration, judging from his hilarious characterization of Obama as "hard left." Only a Faux News junkie would say that...

thethirdcoast said...

Mad Max Keiser en FEUGO courtesy of Tyler Durden @ Zero Hedge:

Max Keiser: "Goldman Sachs Are Scum"

Hombre said...

Ilargi... "...for those who clamor loudest for such reduction to rid the planet of themselves."

OK. I won't clamor for it! ;-)

And of course we are at the point now that population reduction is almost certain to take place in many violent ways.

But...(whispering now) But clearly, on a finite planet it is good policy to at least try in some way to find a balance between available resources and numbers of homo sapiens.

Anonymous said...

Its getting deep in here...Tempo para nueve post

The "Progression" is inevitable.As soon as the conversation /hits go to a certain level,like bloody clockwork,the trolls and clowns appear.T and old bird,thank you for your kind words,I will think of a easy on the eye way of announcing myself...

Anonymous said...

I have just gone back through reading some Bob Prechter, and I gotta say, this site is indeed a regurgitation of what he is and has been saying for years.

Starcade said...

Anon 1921: And the next big possibility appears about two weeks away. If someone doesn't compel the banks in California to take the IOUs issued to the welfare recipients, there's a good chance it could go up then.

(As for the moment, though: SSI is safe.)

Anonymous said...

"....Prechter has missed the latest portions of the rally in gold and oil. In July 2006 he asserted that gold had reached its peak and that oil, then around $70 bbl, also had peaked in price. His analysis was clearly flawed, as oil in late May 2008 reached $135 bbl and gold was at $925/ounce..."

~~You can call me anything accept late for dinner~

Ilargi said...

"I have just gone back through reading some Bob Prechter, and I gotta say, this site is indeed a regurgitation of what he is and has been saying for years."

I've never read more than a handful paragraphs by Prechter, and that's a while back. Since 95% of this site is me, you are obviously, let's say, misguided.

Anonymous said...

@Anon 9:03 & Ilargi:

Thats fine and dandy. Might want to tell Stoneleigh as she obviously has read and is preaching Prechter. She actually recommends his book on the main page.

Ilargi said...

"She actually recommends his book on the main page."

Thanks for telling me. I had no idea.

Women, I tell you.

Hombre said...

An interesting read-- Nature, Wealth, and Money... linked through energy bulletin

Anonymous said...

So Ilargi, you disagree with almost everyone- even you own co-host as we have just learned. You disagree with some more than others, but it seems like you are unwilling to come to a consensus of any kind, except your own, of course.

Why should we think that you are the right one, out of all of the voices out there? Just because?

Arnold said...

So in a video released today, Karl calls for either a 10 year malaise of stagnation or a shorter and sharper recession/depression. Nowhere is he calling for a collapse.

Please get your facts straights.

Thanks in advance.

Arnold said...

See the funny thing about making calls far off into the future is that if and when they come in wrong, everyone has forgotten that you made them. Of course, you lose all credibility still if you come in wrong.

Doomers have always been calling the end every time a recession pops up.

Bigelow said...

The Elliot Wave method seems obviously the way when looked at over a period of decades, but quickly becomes more art than science when examining periods of weeks or months. Just another opinion.

~J~ said...

maybe the time has come to disable the anon comments?

Starcade - always enjoy yours and glad to see you posting again

'hi' to Coy :)

-back to lurking-

Anonymous said...

Why were all the psyop workers supposed to come here again? Nobody tell me anything.

EconomicDisconnect said...

167 comments, wowza!

I have a piece up tonight you might like.

Arnold said...

There no anonymity. Happy? I stand by my call.

el gallinazo said...

It seems that the barbarians started storming the gates right after Stoneleigh dismantled what passes for Gary North's thinking. His crowd is one part Austrian economics and one part Dominionist, which is a fancy word for fascist Christian thug a la Pat Robertson. Check it out in Wikipedia but it might give you nightmares. Many and perhaps most of the generals and admirals in the US military are Dominionists.

Anonymous said...

Dominionists are the equivalent of the Christian Taliban.

Fanatic ideologues. The Inquisition was OK with them. It's their way or the highway. Just what Duhmerica needs.

The idea of destroying the whole system to cleanse it is also OK with them.

They're parasites but not like Gollum Sucks. They have god on their side, Goldman only has the U.S government in it's back pocket and a sh*tload of money.

We'll see who wins.

~Resistance is Feudal~~

Ilargi said...

" getyourselfconnected said...
167 comments, wowza!

I have a piece up tonight you might like."

Now there's a thought. Why don't y'all anonymanals go bother him over the weekend?

Brunswickian said...

Re second stimulus package: There isn't one....yet

Obama used his weekly address last Saturday to quell the calls for a second stimulus bill and said the Recovery Act “has worked as intended.”

“As I made clear at the time it was passed, the Recovery Act was not designed to work in four months – it was designed to work over two years,” he said in the address. “We must let it work the way it’s supposed to, with the understanding that in any recession, unemployment tends to recover more slowly than other measures of economic activity.”

In an interview in Moscow last week with ABC News, Obama did not rule out a second stimulus, but expressed concerns for the deficit.

rapier said...

On leveraged ETFs.

Leveraged ETF's have a built in shrinkage. They always trend towards zero. They are a wasting asset.

Therefor they should only be held for very short periods. 3 days is a long time in them and really any significant move longer than 3 days at the current time in them is extremely odd. Really on principal they shouldn't be used at all but everyone must make their own ethical judgments. They are purely a speculative instrument.

ETF's are derivatives and the big families of them like the financial and REIT ones are the playground of the Pigmen who have so many avenues to arb them between the indexes, the stocks themselves, the levered ETF's, being able to short the ETF's and yes options on them that probably any grade C quant can consistently do well.

In a more perfect world there will not be any ETF's.

Jim R said...

"In a more perfect world there will not be any ETF's."

Like Stoneleigh said: shorting will be demonized. The decline in the market will be all the fault of those ETF hippies.

D. Benton Smith said...

@ Starcade 12:24

I had said:
"The first wave of serious threat to your personal safety is not going to come from the mobs. It is going to come from your friendly neighborhood police officer, SWAT Team, National Guard and Army."

And you replied:
"I disagree, for one fundamental reason. If the first wave of that actually came from authority, we'd be seeing it already, on a wide scale, over the course of the last several years."

This particular train wreck is happening caboose first. The poor and newly poorer are, indeed and in fact, already being rousted by the cops... and I am not speaking figuratively. This past year's 6 % increase in laws criminalizing "homeless behavior" is one taste of it. Increased stringency of bankruptcy requirements (except for banks & auto companies) is another.

The phenomenon of stricter enforcement of a myriad of existing laws, regulations, fees and penalties for everything from speeding tickets to protest marches has been noticed and remarked by others before me... and it's been ramping up years.

If you haven't noticed then you're either looking in the wrong places, or have chosen to not look at all.

Don't worry, though, because you will notice, and soon. I advise practicing how to say "Yes, officer" with convincing sincerity.

Anonymous said...

If Goldman Sachs was financially able to purchase TXU Electric a few years ago (God help us all), why did they need a bail out?

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