Sunday, October 18, 2009

October 18 2009: The sound of one bank not banking

Esther Bubley Just playing October 1943
Boys watching the Woodrow Wilson high school cadets in Washington, D.C.

Ilargi: Dylan Ratigan has a few stats that you may find useful:
Goldman Sachs' Black Magic, Here's How They Did It
Here is the Goldman, Sachs & Co. revenue break down for the past 3 months:
  • Financial Advisory-M/A: $325 million.
  • Equity Underwriting: $363 million.
  • Debt Underwriting: $211 million.
  • Trading-Principal Investments: $10 billion.

Notice that 10 billion is much bigger than two or three hundred million made from the traditional Wall Street businesses.

That $10 billion is evidence of their magic trick. For we the taxpayer gave Goldman Sachs the following:
  1. $10 Billion in TARP
  2. $11 Billion from the Fed
  3. $30 Billion from the FDIC
  4. $13 Billion from AIG

For a grand total of almost $70 Billion (Goldman along with every other bank and AIG would have been defunct without this money).

Goldman at the apex of the crisis is delivered this money -- which they then use to borrow against at $20 or $30 for every $1. Which at 30x equals $2.1 trillion in available capital. As one of the only banks in the world with money at the time, Goldman Sachs was able to buy billions in distressed assets around the world at record low prices -- only to watch $23.7 trillion in US taxpayer money be deployed during the past year to re-inflate the asset's values that Goldman had purchased with our tax money.

Bill Bonner addresses the same topic from a slightly different angle:
A Retirement Society
Yesterday, Goldman announced its quarterly earnings. Goldman, you'll recall, is the firm that former Treasury Secretary Henry Paulson (a former Goldman chairman) called 13 times before breakfast during the financial crisis of last September. And Goldman is also the firm with its men in key posts in Washington, helping the feds figure out what to do with trillions of dollars in bailout funds (TARP, TALF, Fed's buying toxic assets, etc.)

Well, what a the firm says its latest profit is four times what it was a year ago. The firm's "activities have become more profitable after the crisis reduced competition and governments injected funds in the banking system," says The Financial Times.

Goldman can borrow the funds at almost no cost. Then, it can use the money in a variety of ways...such as lending it back to the government for guaranteed profits...or speculating on oil or gold, or whatever. Not for nothing gold is up 17% in the last six months. If you can borrow at zero cost you can do a lot of speculating. Many speculators are using the government's money to bet against the US dollar - and making a lot of money.

The US government has put $13 trillion of the nation's money and credit on the line. That's how much the feds have at risk on all their toxic asset purchases, loans and guarantees. Apparently, Goldman gets its share. What can the feds do? Everyone is telling Mr. Obama that he must do! So what does he do? Something stupid, of course.

Let’s do some dry facts, shall we?

On September 21, 2008, Goldman Sachs received Federal Reserve approval to transition from an investment bank to a bank holding company. That gave the firm specific advantages.

Wikipedia on the topic:
New or smaller banks often re-structure themselves into bank holding companies to take advantage of the greater financial flexibility this corporate and legal status permits. Becoming a bank holding company makes it easier for the firm to raise capital than as a traditional bank. The holding company can assume debt of shareholders on a tax free basis, borrow money, acquire other banks and non-bank entities more easily, and issue stock with greater regulatory ease. It also has a greater legal authority to conduct share repurchases of its own stock.

The downside includes responding to additional regulatory authorities, especially if there are more than 300 shareholders, at which point the bank holding company is forced to register with the Securities and Exchange Commission. There are also added expenses of operating with an extra layer of administration.

As a result of the Global financial crisis of 2008, many traditional investment banks and finance corporations such as Goldman Sachs, American Express, CIT Group and General Motors Acceptance Corporation[3] successfully converted to bank holding companies in order to gain access to liquidity and funding. This arrangement allows them access to the Federal Reserve's discount window and benefit from the Troubled Asset Relief Program, but the companies are now subject to more regulation and their ability to have exposure to risk will be limited.

In other words, in exchange for access to extremely cheap funding, Goldman agreed to more regulation, specifically that of the Securities and Exchange Commission, the SEC. What the meaning of that is precisely may have become a whole lot clearer only this week, as the SEC hired a 29-year old former Goldman employee to head its enforcement division as chief operating officer.

Does that sound like awe-inspiring scrutiny to you? Like a kid, no matter how smart, will stand up against and defeat the likes of Paulson, Geithner and Blankfein where entire divisions of smart regulators have gotten nowhere?

Wikipedia again:
In March 2009 it was reported that in 2008, Goldman Sachs, alongside other major US and international financial institutions, had received billions of dollars during the unwind of insurance arrangements purchased from AIG, including $12.9bn from funds provided by the US Federal Reserve to bail out AIG.

And although Goldman was among ten large financial institutions that the Treasury allowed to pay back their TARP emergency capital infusions, the firm still has benefits from $28 billion in subsidization from the government in form of cheap debt backed by the Federal Deposit Insurance Corporation.

In July 2009, New York Attorney General Andrew Cuomo revealed, as reported by the Wall Street Journal, that after having received its TARP bailout in late 2008, Goldman Sachs paid hundreds of millions of dollars in bonuses to 1556 of its employees. This included 212 employees each receiving $3 million in bonuses, 391 receiving $2 million bonuses, and 953 receiving $1 million in bonuses.

Now, as a bank, you would think your business is banking. As Elizabeth Warren reminds us, Hank Paulson last year said that the government put all that money into the financial system to increase lending. Goldman's business has nothing to do with that. Not before, and not after, when it morphed into a bank holding company. Goldman is still what it always was: a securities firm, an investment bank, nothing like a "normal bank". It has assumed all the privileges of the bank holding co. status, and none of its obligations.

The bank holding co. status, and the access to the Fed discount window it provides, is in place for a specific purpose. That is, to protect a bank's customers -depositors- and shareholders from what might happen if a bank temporarily needs access to credit and can't find it fast enough anywhere else.

However, and specifically for that reason, no corporation should receive the benefits of the status if it doesn't engage in banking to begin with. Because if it did, you would get a situation in which purely speculative firms can get their hands on enormous amounts of -dirt- cheap credit, for which in the end the taxpayer is liable, and use it to fund their gambling addictions. Without running the risk of losing a single penny.

That is simply not what, for instance, the discount window was intended for. And if it is used in that fashion regardless, it invites the recipient to engage in highly leveraged gambling, in which it gets to keep all the potential profits, while the taxpayer must cover all losses.

Of course this touches directly on why the Glass-Steagall act came into existence in the 1930's, separating the activities of commercial banks and investment banks, as well as on what happened after the act was repealed in 1999. That repeal, in simplified terms, enabled corporations to go out and place wagers covered by depositors' money. That repeal was also the signal that the WhIte House and Capitol Hill would from there on in serve as mere marionette theaters paid for and directed by their puppeteers hidden behind the one-way mirrors of Lower Manhattan's shiniest towers.

Again admittedly simplified, the newly fangled hybrid banks blew through the people's deposits in less than a decade. After which they were granted access to money the people didn't even have, in the shape of potential future federal tax revenues.

At a certain point, it becomes inevitable to ask yourself: "How long do you think it will take them to blow through that as well?"

To help you figure that out, start with these questions: Have you seen the federal deficit lately? Did you see TARP inspector general Neil Barofsky's estimate of a $23.7 trillion cost to the taxpayer of the combined bail-out plans? And, to widen your perspective, did you see the latest figures on unemployment and foreclosures?

I know, you're going to say that the deposits are almost all still there. Only 99 banks were closed so far, and all deposits were guaranteed by the FDIC. Sure, OK, but what if accounting standards could still face the light of day without growing noses like Pinokkio or shriveling like Count Transsylvania, what if the FDIC would actually close all broken banks instead of just talking about them, what if FDIC guarantees are nothing but taxpayer guarantees (after all, we know the FDIC has hardly any funds left).

What if your deposits are guaranteed by nothing but your own future taxes? How would that make you feel? There are anywhere from 15 to 30 million unemployed Americans today, depending on how you count, a number that grows by between 500,000 and 1 million each month, again depending on counting 'strategies'. These people are not paying the taxes that serve to guarantee the FDIC guaranteed bank deposits.

Those same taxes, (remember, we're talking about the ones you haven't even paid yet) will also need to fund the record deficit the government is somewhat proudly sporting. And we could add all the mortgages and mortgage backed-securities purchased today with a wager on your future wealth, through the GSE's and the Federal Reserve, with the sole purpose of keeping home price levels from falling any further, which would cause life-threatening trouble for the same banks that are this week playing 'pretty boy' announcing record profits and intending to pay out bonuses at or beyond record levels.

I started out saying that Dylan Ratigan had a few stats that you might find useful, the ones that sum up the funds Goldman Sachs has received from Washington, and which rightfully belong to the American taxpayer. Since, as Ratigan states, the funds were leveraged 20-30 fold, and the potential 20-30 fold losses incurred with taxpayer money will also be the taxpayer's liability, the numbers have at least a better than fair-odds chance at understating the total damage, and by a considerable margin at that. Here are Ratigan‘s numbers for what Goldman received from the government, and has used to reap record profits and pay its people billion of dollars in bonuses :
  1. $10 Billion in TARP
  2. $11 Billion from the Fed
  3. $30 Billion from the FDIC
  4. $13 Billion from AIG

Goldman Sachs has repaid -or so we are led to believe- the $10 billion they received through the TARP program. That leaves, according to Ratigan's math, $54 billion in other government and Federal Reserve funds that have not been repaid. And what is that $30 billion from the FDIC anyway? The FDIC doesn't even have $30 billion, while it has trillions of dollars in deposits to supposedly guarantee. It should be obvious to anyone with sufficient breath to fog a mirror that prior to announcing record profits, great dividends for shareholders and billions of bonuses for traders, Goldman Sachs should be forced to repay the taxpayer.

And then some. After all, they made their profits with those taxpayers funds, right? And they would have ceased to exist without those same funds, right? So shouldn't the taxpayer be first in line for a hefty part of those profits? And principal, and interest? Of course they should. It’s what anyone would expect, and demand, if they lend out money. And most of us would be willing to put some measure of pressure behind that too.

Your taxpayer money is lent out through the government you yourself voted into place, which then hired officials like Tim Geithner and Larry Summers to fill crucial posts, people with strong Wall Street connections, whom you never got a chance to vote for or against, to do with your money whatever they please. Which they do.

Mascara and lipstick, or so I’m told, can make most pigs look quite desirable, if they are applied in sufficient quantities.

Still, there comes a time when you should ask yourself: what if the pig is dead?

This is such a time.

Or is there still anyone out there willing to claim that what we are facing is a financial crisis, instead of a political one?

Ilargi: The Automatic Earth has started its Fall Fund Drive. It appears these days in the left hand column of the site.

Without your donations there can and will be no Automatic Earth. Though clicking the ads our pages display, excuse me: "visiting our gracious sponsors, on a regular basis", helps as well.

I remain confident that you, our readers, have a pretty good understanding of the value The Automatic Earth represents to you. Still you may have to be reminded from time to time of the role you yourself play in the continued existence of this site. I know I would.

We're not asking for large amounts of money. There are many thousands of people who read us every single day. It's easy to see that if every single one of them would donate a dime for every time they read us, and what's a dime these days, we'd be doing just fine, thank you. But obviously, 95% never will.

I would love to be able to expand on what we do, to involve more people, more opinions, a more diverse view from more places in the world. And that is unfortunately not possible right now. Along the same lines, we would like for Stoneleigh to be much more involved at TAE. Not happening. On a happy note, our brand-new Twitter presence is directed from Nairobi, Kenya, by VK, the first time we’ve been able -and willing- to expand and relinquish control at least a little.

The Automatic Earth, in order to do what we set out to do, will be busier than ever as the real economy deteriorates in the months to come. What we've done so far was just a dress rehearsal compared to what lies ahead. Inevitably that will take more from us, and we hope you will do more as well. I’ve always maintained that I don't believe in an operation like this where I am the one who pays all -or 90% of- the costs, but so far, that's nevertheless been the story.

As for those among you who have donated to us -and many have in the past 10 days-, and those who will do so in the days and weeks and months to come, please know we are deeply grateful -no, really!!- for, and humbled by, the confidence you have shown in what we do on a daily basis. And rest assured, you can have confidence in us too: we ain't done by a long shot. It’s just that we have all sorts of ideas of where this should go, which we can't afford right now to even contemplate.

Goldman Sachs' Black Magic, Here's How They Did It
How did Goldman, Sachs & Co. -- saved a year ago by the US taxpayer -- magically make $3 billion in 3 months a year later?

This as the US dollar collapses, unemployment soars and foreclosures hit a record?

Here is the Goldman, Sachs & Co. revenue break down for the past 3 months:
  • Financial Advisory-M/A: 325 million.

  • Equity Underwriting: 363 million.

  • Debt Underwriting: 211 million.

  • Trading-Principal Investments: 10 billion.

Notice that 10 billion is much bigger than two or three hundred million made from the traditional Wall Street businesses.

That $10 billion is evidence of their magic trick. For we the taxpayer gave Goldman Sachs the following:
  1. 10 Billion in TARP
  2. 11 Billion from the Fed
  3. 30 Billion from the FDIC
  4. 13 Billion from AIG

For a grand total of almost $70 Billion (Goldman along with every other bank and AIG would have been defunct without this money).

Goldman at the apex of the crisis is delivered this money -- which they then use to borrow against at $20 or $30 for every $1. Which at 30x equals $2.1 trillion in available capital.

As one of the only banks in the world with money at the time, Goldman Sachs was able to buy billions in distressed assets around the world at record low prices -- only to watch $23.7 trillion in US taxpayer money be deployed during the past year to re-inflate the asset's values that Goldman had purchased with our tax money.

The question is not why did we bail out the banks.

The question is why did we give the banks billions of our money so they could then buy assets by the trillions with our money and they keep the profits?

The answer is Henry Paulson, former Goldman Sachs CEO who ran the US Treasury, and Tim Geithner, current Treasury Secretary who at the time ran the New York Federal Reserve, willingly delivered Goldman Sachs the $70 Billion -- with no strings attached.

So what can we do?
  1. We must demand the return of those investment gains made with America's money - it was stolen from us and we can get it back. Demand Claw Backs - and not from the future but from the past - That is where our money is.

  2. We must have an exchange for all credit derivatives -- the current version is riddled with loopholes that let banks avoid transparency by mobbing offshore and prohibiting government regulators from being able to force the use of the exchange by the banks.

So how do you do it?

Heed the Call!!!! Click Here:

Bailout Helps Fuel a New Era of Wall Street Wealth
Even as the economy continues to struggle, much of Wall Street is minting money — and looking forward again to hefty bonuses. Many Americans wonder how this can possibly be. How can some banks be prospering so soon after a financial collapse, even as legions of people worry about losing their jobs and their homes?

It may come as a surprise that one of the most powerful forces driving the resurgence on Wall Street is not the banks but Washington. Many of the steps that policy makers took last year to stabilize the financial system — reducing interest rates to near zero, bolstering big banks with taxpayer money, guaranteeing billions of dollars of financial institutions’ debts — helped set the stage for this new era of Wall Street wealth.

Titans like Goldman Sachs and JPMorgan Chase are making fortunes in hot areas like trading stocks and bonds, rather than in the ho-hum business of lending people money. They also are profiting by taking risks that weaker rivals are unable or unwilling to shoulder — a benefit of less competition after the failure of some investment firms last year. So even as big banks fight efforts in Congress to subject their industry to greater regulation — and to impose some restrictions on executive pay — Wall Street has Washington to thank in part for its latest bonanza.

"All of this is facilitated by the Federal Reserve and the government, who really want financial institutions to get back to lending," said Gary Richardson, a research fellow at the National Bureau of Economic Research. "But we have just shown them that they can have the most frightening things happen to them, and we will throw trillions of dollars to protect them. I have big concerns about that."

Not all banks are doing so well. Giants like Citigroup and Bank of America, whose fortunes are tied to the ups-and-downs of ordinary consumers, are struggling to turn themselves around, as are many regional banks. But the decline of certain institutions, along with the outright collapse of once-vigorous competitors like Lehman Brothers, has consolidated the nation’s financial power in fewer hands. The strong are now able to wring more profits from the financial markets and charge higher fees for a wide range of banking services.

"They are able to charge more for all kinds of services because companies need banks and investment banks more now, and there are fewer strong ones to help them," said Douglas J. Elliott of the Brookings Institution. A year after the crisis struck, many of the industry’s behemoths — those institutions deemed too big to fail — are, in fact, getting bigger, not smaller. For many of them, it is business as usual. Over the last decade the financial sector was the fastest-growing part of the economy, with two-thirds of growth in gross domestic product attributable to incomes of workers in finance.

Now, the industry has new tools at its disposal, courtesy of the government. With interest rates so low, banks can borrow money cheaply and put those funds to work in lucrative ways, whether using the money to make loans to companies at higher rates, or to speculate in the markets. Fixed-income trading — an area that includes bonds and currencies — has been particularly profitable.

"Robust trading results led the way," said Howard Chen, a banking analyst at Credit Suisse, describing the latest profits. To prevent a catastrophic financial collapse that would have sent shock waves through the economy, the government injected billions of dollars into banks. Some large institutions, like Goldman and Morgan, have since repaid their bailout money. But most of the industry still enjoys other forms of government support, which is helping to stoke profits.

Goldman Sachs and its perennial rival Morgan Stanley were allowed to transform themselves into old-fashioned bank holding companies. That switch gave them access to cheap funding from the Federal Reserve, which had been unavailable to them. Those two banks and others like JPMorgan were also allowed to issue tens of billions of dollars of bonds that are guaranteed by the Federal Deposit Insurance Corporation, which insures bank deposits. With the F.D.I.C. standing behind them, the banks could borrow the money on highly advantageous terms. While some have since issued bonds on their own, they nonetheless enjoy the benefits of their cheap financing.

Granted, banks are also benefiting from a stabilizing economy. The fear that gripped the markets earlier this year, when doomsayers predicted a second Great Depression, has largely dissipated. Stocks, corporate bonds, even risky corporate i.o.u.’s — have all rallied from their bear market lows, some spectacularly so. The Dow Jones industrial average has soared 50 percent this year, and touched 10,000 this week for the first time since the crisis.

Banks that had marked down the value of the assets on their books during the dark days of the crisis are now enjoying a rebound in the value of many of those assets. "Confidence has returned," said Shubh Saumya, a financial services specialist at the Boston Consulting Group. "Some of the assets that bankers wrote down last year in the midst of the crisis, now they have got some of that back." As the number of banks has dwindled, the survivors are moving into the void left by rivals that are either dead or limping and unwilling to take risks.

A big reason for Goldman Sachs’s blowout profits this year has been the willingness of its traders to take big risks — they have put more money on the line while other banks that suffered last year have reined in such moves. Executives say there are big strategic gaps opening up between banks on Wall Street that are taking on more risks, and those that are treading a safer path.

Banks that have waded back into the markets have been able to exploit large gaps in the prices of various investments, a feature of the postcrisis financial markets. The so-called bid-ask spreads — the difference between the price at which banks are willing to buy things like bonds, and the price at which they are willing to sell — are roughly twice what they were two years ago. Still, the newfound success is largely limited to the big securities houses on Wall Street. This week, Citigroup and Bank of America reported losses from credit card delinquencies and mortgage defaults — a sign of the lingering pain on Main Street.

Wall St. Is Winning: Elizabeth Warren "Speechless" About Record Bonuses
Elizabeth Warren, chair of the Congressional Oversight Panel, is the rare public official who doesn't mince words. But Warren admits to being "speechless" at reports of record bonuses on Wall Street.

"I do not understand how financial institutions could think they could take taxpayer money and turn around and act like it's business as usual," Warren says. "I don't understand how they can't see that the world has changed in a fundamental way - it's not business as usual. All I can say right now is they seem to be winning this argument." In the accompanying video, taped at The Economist's Buttonwood Gathering at Pace University, I asked Warren about Treasury Secretary's claim at the same event that the government has been "remarkably effective" in combating the financial crisis.

"It is not the case people go to bed wondering if there will be an economy in the morning," she quips, but "we still have lot of serious problems." Comparing the situation today vs. a year ago, Warren observes:
  • Even Too Bigger to Fail: A year ago the big concern was systemic risk and how to deal with 'too big to fail' firms, she recalls. Now "the big are bigger, we wiped out a lot of small folks and there's more concentration" in the banking system.
  • Still Toxic: TARP was created explicitly to remove toxic assets from bank balance sheets. "They're still there by and large."
  • Stress Test Failure: Unemployment has "blown through" the worst-case scenario in the stress test from February, Warren notes. But "we haven't repeated the stress test, or revealed any more information about what's going on inside these financial institutions."

In sum, "all the things going on [a year ago] that were serious, serious problems for the financial institutions seem to me are still serious, serious problems," she says. Finally, Warren pulls no punches when it comes to her criticism of former Treasury Secretary Hank Paulson for his failure to put any restrictions on or monitoring of the initial TARP funds, and for using the money for something other than "toxic asset relief," as originally intended.

"I have a real problem when we describe to taxpayers their money will be taken and used one way and in fact it's used another way," she declares. So in the end, Warren did find her voice and spoke quite candidly, a very rare trait among public officials.

A Retirement Society
by Bill Bonner

Higher stock prices; fewer jobs... And don't forget the foreclosures. They're running 23% ahead of last year...even though they weren't as bad last month as last month.Associated Press:
"The number of households caught up in the foreclosure crisis rose more than 5 percent from summer to fall as a federal effort to assist struggling borrowers was overwhelmed by a flood of defaults among people who lost their jobs. "The foreclosure crisis affected nearly 938,000 properties in the July- September quarter, compared with about 890,000 in the prior three months, according to a report released Thursday by RealtyTrac Inc. That puts foreclosure-related filings on a pace to hit about 3.5 million this year, up from more than 2.3 million last year."

What an economy! The Dow is now back over the 10,000 mark...just where it was in March 1999 - 10 years ago. Is that progress...or what? During that time, the dollar has lost about a quarter of its purchasing power. That means stock market investors have lost only about 25% or their money over the decade. Not too bad, huh? And, oh yes...they've lost their jobs too... AP continues:
"Unemployment is the main reason homeowners are falling into trouble. While the economy is likely out of recession, the unemployment rate - now at a 26-year high of 9.8 percent - isn't expected to peak until the middle of next year."

But hey...we're not going to complain. We've got a job - trying to figure out what is going on. And that is a job that is recession-proof. Everyone wants to know what will happen next. When times turn tough they want to know even more. So, will someone please tell us what is going on...we want to know too!

"What do you think?" asked a friend at dinner last night. "The way I see it, Obama's goose is cooked. He's stuck. He can't go forward and he can't back up. He can't back away from all those promises - including his promise to rescue the US economy. If he does, the voters and his own party will revolt. On the other hand, he doesn't have the money to go forward. He has to borrow it. And if tries to borrow much more, the Chinese will revolt.

"His only hope is that the economy he doesn't have to do anything. And that's not going to happen." Why not? Wait a already know the answer to that question. Because it's a depression. It's the end of the road for the consumer credit economy. Consumers did their best. They borrowed as much as they could. They spent like there was no tomorrow.

But now, it IS tomorrow. And now, they've got to settle up. So, boo more wild parties. Daddy took the T-bird away. Get over it. What should Obama have done? Nothing. But the last chief of state to do that in a time of financial crisis was Warren G. Harding - one of America's best presidents. That's what he did in the panic of 1920. How come we don't hear much about the crisis of 1920?

Because Harding didn't do anything; it went away. But that was a long time ago. Now, presidents are expected to do something. They have too many people around them who stand to make a buck out of it. Yesterday, Goldman announced its quarterly earnings. Goldman, you'll recall, is the firm that former Treasury Secretary Henry Paulson (a former Goldman chairman) called 13 times before breakfast during the financial crisis of last September. And Goldman is also the firm with its men in key posts in Washington, helping the feds figure out what to do with trillions of dollars in bailout funds (TARP, TALF, Fed's buying toxic assets, etc.)

Well, what a the firm says its latest profit is four times what it was a year ago. The firm's "activities have become more profitable after the crisis reduced competition and governments injected funds in the banking system," says The Financial Times.

Goldman can borrow the funds at almost no cost. Then, it can use the money in a variety of ways...such as lending it back to the government for guaranteed profits...or speculating on oil or gold, or whatever. Not for nothing gold is up 17% in the last six months. If you can borrow at zero cost you can do a lot of speculating. Many speculators are using the government's money to bet against the US dollar - and making a lot of money.

The US government has put $13 trillion of the nation's money and credit on the line. That's how much the feds have at risk on all their toxic asset purchases, loans and guarantees. Apparently, Goldman gets its share. What can the feds do? Everyone is telling Mr. Obama that he must do! So what does he do? Something stupid, of course.

Yesterday, poor Mr. Obama did something stupid. He said he wanted to send 78 million American seniors a check for $250 each. What a nice Christmas present. But wait. Even Santa doesn't have that kind of money. The feds are already running a deficit somewhere close to $15 billion PER DAY. But heck, who keeps track of these things? And who quibbles about a few billion more or less?

Not us. Not here at The Daily Reckoning. We've got other things to quibble about. In fact, we've got so many things to quibble about we hardly know where to start. So let's just pick a news item at random and we'll begin our quibbling there. Here's one: Social Security recipients are not going to get a COLA. A COLA is a "cost of living adjustment." It's what Social Security recipients get when prices go up. It adjusts their payments to inflation.

COLA seemed like a fair idea when it was put in place. That was when prices were going up. The old folks were getting a raw deal and people felt bad about it. We remember those years. There was a report in the press in the late '70s that old people were "forced to eat dog food" to survive. We suggested that the government allow people to use food stamps to get pet food. But that was greeted like so many of our attempts to be helpful.

The trouble with the COLA is that there is no UN-COLA. When prices fall, there's no way to get the money back. The adjustments only go in one direction. And prices ARE falling. US import prices roes only 0.1% last month...down 12% from a year ago. Take out energy and they're still down 4%. And that's with a dollar that is losing value at the same time. Imports should be going up in price. Instead, the downward tug of deflation is so strong that they are pulled down...even with the dollar buoying them up.

So, imagine that the United States slips into a Japan-like slump...a long slump with off-and-on falling prices. The government's budget projections call for a rapid return to growth. Even then, they expect trillion-dollar deficits until the end of the next decade. But if the economy does not return to rapid growth, the situation gets much worse - fast. Tax revenues don't go up...and spending continues to mount. There's no way to reduce payments to Social Security recipients. And imagine the poor sap who proposes it. Or who suggests that maybe government salaries don't have to be twice as high as private salaries. He wouldn't last long.

This leaves the feds in a tight spot. They won't have trillion-dollar deficits...they will have multi-trillion-dollar deficits. They won't have just a little trillion-dollar hole to fill; they will have a Grand Canyon. How to fill it? Ain't no way... Ain't no way... At a certain, but unknown, point the whole thing falls apart. The feds can't raise enough money. They go broke.

Now, hold on...the US federal government can't go broke, can it? Those fellows have a printing press. They can print their way out, no? A very, very good question. Why would a government with the power to create money at will ever go bust? And yet, they do. Why? Because it is cheaper. But this is far too large and important a subject for a Friday. This is a subject for a Tuesday. Maybe even a Wednesday. But Friday? Nope. God didn't make Fridays for this kind of thing. We'll have to come back to it next week.

Can anything stop the Chinese? "China consolidates its lead in world trade," was a headline in The New York Times earlier this week. China competes on price - and usually wins. America loses market share.

"We're finished," said our dinner companion last night. "We're fossils. We're yesterday's news. We're a nation of old people. The growth and innovation is taking place elsewhere - such as in China. You can feel the difference when you go there. New buildings. New roads. New cities. New shoppers. Here, everything is old. The buildings. The people. Everything. "I tell my children to move to the Far East. We're history here."

This morning comes news that the Chinese have bought another auto company - Britain's van maker, LDV. And over on page 11 of The Wall Street Journal is a photo of the head of China's big bank, CCB. Asked about whether the bank was looking at acquisitions in the West, Mr. Guo Shuquing said he wasn't interested. Western banks are on a "downhill path," he said.

"Of course, there's something nice about living in a society which has peaked out," our friend continued. "You have all the grace and style of an advanced civilization without the annoying hustle and bustle. It's perfect for retired people...We live in a retirement society."

Max Keiser - "Is the Crisis Over?"

Why The 10,000 Point Dow Doesn’t Matter
The Dow is at 10,000.  Reporters glow.  Retirees relax.  Investors sigh: "Whew, we’ve made it." They’re wrong.  This purported milestone isn’t a victory.  It’s nonsense.  The market is the wrong place to look when measuring the health of our economy.  The collective wisdom of mutual fund analysts was wrong in 1999, wrong in 2006, and it’s wrong right now. 

The best investor in the United States basically ignores Wall Street.  Warren Buffett has billions he could trade in and out of stocks.  Thousands of analysts would clamor to give him hot tips.  But Buffett ignores it all.  Serene, he sits in his office, reading annual reports, newspapers, and thinking about opportunities for growth.  He isn’t drinking champagne tonight.  And you shouldn’t be either. We are far from out of the woods.  Large companies are still laying off employees.  When we cross the 10% unemployment line, consumer spending (now down to 70% of GDP) may contract even further.  It probably should.  Consumer spending in the UK is 65% and in China it’s only 40%. 

Haven’t we learned something from this crisis??  Wall Street sold the world worthless securities, trillions of dollars of wealth evaporated, and now Wall Street is cheering this "new" bull market.  Now the bulls say it’s all okay again?!  What you’re watching now is a bull market on government spending.  What you should be watching is the real report card: 
  • Inflation: There is $50T in unfunded liabilities on the country’s balance sheet.  If the USA played by corporate America’s accounting rules, we’d be bankrupt.  The laws of gravity still apply.  We will experience significant inflation within 3 years.   
  • Job Growth: Since the start of the recession in December 2007, we’ve lost 7.6 million jobs.  Millions more have stopped looking for work.  The analysts keep saying this downward trend will stop.  But it hasn’t.
  • Innovation: The credit contraction makes it harder for entrepreneurs and small businesses to invest in growth.  This segment of the economy is where a rebound will start.  Don’t watch the Dow, watch small business credit (contracting) and patents filed (contracting).
  • Education:  The important word in "Gross Domestic Product" is product.  We must have highly skilled knowledge workers to compete against other economic innovators.  A third of high school students aren’t graduating.  This is the HR pipeline??

Yes, we have stepped back from the abyss.  But some very smart people thought the same thing in 1932.  Then 1933 happened.  Not so fast, Wall Street… This battle is far from over.  Let’s dig deep, focus on the long haul, and make the substantive policy and business improvements the economy needs to really rebuild.  Then, the Dow will take care of itself.  

Stocks, Gold Are Crowded Trades: Hugh Hendry

Stocks and gold are crowded markets and there is a risk that everybody will want to exit at the same time, Hugh Hendry, chief investment officer at Eclectica, told CNBC Friday. "I think it's all one way, all one trade, there's no diversification. You're either in the market or you're not," Hendry, who is the second-largest investor in his fund, told "Squawk Box" in London. "I won't jeopardize my capital even for a rally as big as it is today," he added.

Hendry, whose strategy has been to shun the stock market and invest in bonds, said his fund was flat. The remarkable thing about the stock market is "the absence of volume associated with it," Hendry said. Compared with previous rebounds in stocks from previous recessions, volume in this recovery from the March lows is 60 percent lower, according to Hendry. "I don't believe there's a wall of money," he said. "The bulls will tell you you'd better get in because there's lots of people sitting on the sidelines. But they said that in 2007… they didn't come in, and I don't think they'll come in this time."

It is too early to say whether companies' earnings point to a "real" recovery or to a short upwards cycle followed by a downwards one, he said. "Clearly we're having an inventory restocking." Gold is a very good safe haven but, like any other asset classes, only when it's a contentious area, Hendry said. "I made for my funds 50 percent investing in gold back in 2003" but gold is now a crowded trade, he added. "It doesn't provide any kind of safe harbour for me right now so I'm not there," Hendry said.

American companies' earnings are better than expected partially because of the weakness of the currency, according to Hendry. "The dollar is incredibly cheap. I think sterling is incredibly cheap. Therefore, as an American company your costs are down." But the belief, shared by some analysts, that we are witnessing the beginning of a bull market, is misplaced, Hendry said.

He evoked the consequences of the burden of debt on Germany after the First World War, when France and Britain wanted it to pay war damages, saying "that legacy of debt squashed the vitality of the German and European economy." Today, the various stimulus packages have also left behind a legacy of debt. "I think we're in a generation where returns disappoint until we deleverage the economy," Hendry said.

The rally in stocks may have adverse effects on the economy, because interest rates on American mortgages follow the 30-year Treasury and if investors sell it, the yields will go higher and may push rates on mortgages higher, according to Hendry.

China will continue to buy US Treasurys, as a way of ensuring their currency is stable, and the fact that the yuan is not freed from the dollar is creating strains on the European and Japanese economies, he said. "The Chinese are not diversifying the reserves. They cannot diversify, because were they not buying Treasurys…if they weren't buying dollars, their currency would rise."

Mark-to-Make-Believe Turns Junk Loans to Gold
Here’s the best tip I ever got on how to read a company’s financial statements: Read the footnotes first, because that’s usually where the bodies are buried. The main caveat is that the notes might not tell the whole truth either. That’s especially the case with banks. A big improvement to the accounting rules this year is that lenders now must disclose their loans’ fair-market values every quarter, rather than just once a year. When a bank says its loans are worth much less than their balance-sheet amount, that means a large portion of its capital cushion may be illusory.

Such gaps arise because loans don’t have to be carried on the balance sheet at fair value, giving lenders lots of wiggle room to play with. One irksome problem: Sometimes the numbers in the fair- value footnotes look more like mark-to-make-believe than mark- to-market, particularly when weak banks say their loan values are rock-hard. I’ll get to some of the big-name banks such as Citigroup Inc. shortly. First, consider an Illinois lender with $3.6 billion of assets on its books called Midwest Banc Holdings Inc.

Midwest said its loans had a fair value of $2.53 billion as of June 30, which was about $35 million more than their carrying amount on the bank’s balance sheet. There are reasons to be skeptical, though. Fair value is supposed to represent the price at which an asset would change hands in an orderly, arm’s-length transaction. Judging by Midwest’s stock price, it’s hard to believe those loans are worth quite so much.

Midwest’s shares trade for 62 cents, giving the company a $17 million stock-market value. That’s less than 20 percent of its reported book value, or common shareholder equity, which tells you the market doesn’t trust the bank’s asset values. The stock hasn’t traded for more than a buck since June 22. Meanwhile, Midwest missed its last two scheduled dividend payments under the Treasury Department’s Troubled Asset Relief Program. In August, it said it had not made a required $5 million principal payment to one of its lenders. If its assets are so valuable, management should buy the company for themselves.

Midwest is one of 33 banks that skipped paying TARP dividends to the U.S. bailout program in August, according to SNL Financial, a bank-research firm. It’s not the only one of them with funny-looking fair-value numbers. Seacoast Banking Corp., based in Stuart, Florida, for example, said its loans were worth slightly more than the $1.5 billion on its balance sheet, as of June 30. First Bancorp, based in Puerto Rico, said the fair value of its loans exceeded their $12.7 billion carrying value. Both stocks trade at steep discounts to book value.

One reason to care about these lenders is that their outside auditors also are responsible for checking the numbers at the country’s largest, too-big-to-fail banks. Midwest is audited by PricewaterhouseCoopers LLP, as is First Bancorp. Seacoast’s auditor is KPMG LLP. The accounting firms are required to conduct quarterly reviews of the companies’ financial statements, in addition to their full-blown yearly audits. Let’s hope they’re scrubbing the books carefully.

Citigroup, which is audited by KPMG, estimated its loans had a fair value of $601.3 billion as of June 30, just 0.2 percent less than their carrying amount. By comparison, the fair-value shortfall was 7.3 percent at Bank of America Corp., 4.3 percent at Wells Fargo & Co., and 2.5 percent at JPMorgan Chase & Co. PwC audits Bank of America and JPMorgan, while KPMG audits Wells. The banks all say their estimates were reasonable, of course. For a company that needed a government bailout, though, Citigroup’s loan values look amazingly solid, given the fair- value gaps at those other lenders.

Elsewhere, BB&T Corp., a PwC audit client based in Winston- Salem, North Carolina, said its loans were worth 1.5 percent more than their $94.3 billion carrying value as of June 30. Commerce Bancshares Inc., a KPMG client based in Kansas City, Missouri, said its loans’ fair value was 2.3 percent more than the $11.1 billion on its books. BB&T and Commerce showed the highest such percentages among companies in the KBW Bank Index. Were those values legit? Beats me. All but seven of the 24 banks in the index said their loans’ fair values were less than what their balance sheets showed. My guess is some banks may be interpreting the Financial Accounting Standards Board’s rules differently than others.

One chief executive who has made this same point is Dowd Ritter of Birmingham, Alabama-based Regions Financial Corp. To be sure, he has reason to be defensive. Regions, an audit client of Ernst & Young LLP, estimated the loans on its books as of June 30 were worth 25 percent less than their $90.9 billion carrying value. That was no surprise, though. Its shares trade for less than half the company’s book value. BB&T and Commerce, for instance, trade for more than book.

"We and our accountants interpreted that in the strictest manner," Ritter said at a Sept. 15 investor conference, referring to the FASB fair-value rules. "I don’t think we’ll hear anything probably from the SEC. But I’d be surprised if some other banks don’t, or else we and our accountants missed something." Memo to Securities and Exchange Commission Chairman Mary Schapiro: Did you catch that?

We are paying an enormous price for the myth that banks are too big to fail
What did we expect? Bankers are not Mother Theresa. Over the past year taxpayers have given them half a trillion pounds in cash, loans, shares, lucre, dosh, quantitative easing, whatever, with not a string or condition attached. We knew, or at least some of us did, what they would do next.

They would not give the money back. They would certainly not lend it to collapsing manufacturers or high street retailers, whom the government had refused to help. Instead they would pay off the gambling debts they had run up from money previously entrusted to them by the public as depositors. They would spend the rest on bonuses, houses, Porsches, yachts, brothels (says the Guardian), Cotswolds farms, commodity shares, bonuses, bonuses and yet more bonuses. After a while, you just cannot get rid of the bloody stuff.

So who is the bigger fool, the bankers or the rest of us? Over the past year we have doled out what the Economist estimates as "the biggest peacetime fiscal expansion in history". A little was taken off VAT, but every other brass farthing went to a banker, with not a jot of regulation to control how it was disbursed. Ministers certainly pleaded. Brown said last October that "the heart of the problem of averting recession" lay in ensuring that bank lending to the private sector was sustained. The objective was clear. Not a week passed without Alistair Darling insisting, cajoling, begging, threatening and stamping his foot.

Lending was the be all and end all of his subsidies. His officials phoned banks daily to plead for more lending. They refused. Lending to a crashing private sector is hardly wise, especially with interest rates plummeting. Shopping streets and centres became like bombsites. Unemployment soared. Money in circulation stuttered to a halt. As the economist Tim Congdon pointed out, Darling's action in October 2008 "did not protect against a recession. On the contrary, it accelerated and intensified its onset".

The requirement of both Keynesianism and monetarism, that demand somehow be stimulated in a recession, was denied by a chancellor who deflated as ruthlessly as had Thatcher in 1980-81. By the end of this summer, the Bank of England reported "net flow of lending to businesses" falling faster than ever since records began, indeed by £15bn in July alone. Taxpayers' money was being locked up in bank balance sheets. When Britain should have been spending, it was forced to save.

This explains the eccentric financial news. Indicators for output, trade and employment remain gloomy while those for shares, houses and commodity futures are booming. Banks suddenly have lots of money – our money – and nothing to do with it but speculate, this time under the cover of an implicit government. While personal incomes are relatively static, returns to gambling are soaring. That is why bankers are making such large bonuses, with no one to stop them. As if to reward them, the government is this week planning to give Lloyds another tranche of £5bn to underpin its balance sheet. None of this will leak into demand. It will be hoarded to cover bad losses. It is hard to think of a policy fashioned by so few that has cost so much to so many. It is plain daft.

Throughout the past year there has been not a whiff of remorse, let alone a change in policy. Downing Street has appeared baffled. Advisers are said to be at a loss to explain why pleas to banks from the chancellor and the governor of the Bank of England have fallen on deaf ears. They pondered the Vince Cable option of nationalising domestic deposits and leaving so-called investment banking to default – but could not think how to do it.

They pondered the "helicopter option", employed in China and Taiwan to good effect, of showering money not on banks but directly on consumer demand through vouchers, tax cuts or make-work schemes. To Britain it seemed populist and crude, except when directed at the car industry. Quite why cars were considered good demand but other forms of consumption bad was never explained. Nothing was explained.

It was merely asserted as axiomatic that banks should not fail. The lack was not of political courage but of ideology and intellect. The idea of nationalising and deconstructing a bank, though it was done de facto in the war and in other countries, seemed beyond the tolerance of a Labour government. Saving private deposits – guarding the cash machines – but letting the spiv side of a bank go bust, offended a prime minister who had spent much of his time in office courting spivs. Instead, a gigantic fudge was concocted, that rescuing a bankrupt bank was the way to rescue the entire economy. Subsidies would trickle down from the greedy to the needy.

The American financial guru, Pippa Malmgren, reflected on the Today programme yesterday that it was hard to imagine the financial world would really be a worse place today if a few dud banks had been left to fail. Their asset base would at least be unencumbered with bad debt, and public money would not be guaranteeing rubbish. Meanwhile the mind can only boggle at the debt burden now saddling taxpayers for the rest of their lives.

Why did the government not support demand when the economy entered recession? Why did it bail out banks and car firms but not Woolworths, white goods, the DIY sector, hair salons, hotels, restaurants – anywhere that kept people in work? Why did it not give money to pensioners and the poor, who for sure would not do what banks do and merely save? Students of the Watergate school of journalism were taught one lesson: "Just follow the money." It was Deep Throat's one message to the Washington Post reporters from the depths of his underground car park.

I have long followed this maxim, especially since first trying to understand the credit crunch last year. What motivated those in charge of Britain's financial policy? Why were they so obsessed with saving bankers and nobody else? The answer must lie in their personal circumstance. Those advising Brown and Darling in Downing Street, such as Lord Myners, Lady Vadera, Lord Turner and John Kingman, were all past or present bankers, or friends of bankers. When they leave public life they are likely to work for a bank. They are the castlist of David Hare's admonitory dialogue, The Power of Yes, at the National Theatre. To them, City banking is like the apostolic succession to the Vatican, or the Royal Navy to Churchill. It is the defining institution of the state.

Economic policy in the 1970s was directed at saving steel, coal, cars and ships. It is now directed at banks. Without a shred of evidence or justification, they are asserted to be too big to fail. For this indulgence, the British people are now to pay an enormous price. At the end of a year that has seen a prosperous economy brought to its knees, there has been no ministerial apology, no political resignation, no court case, not so much as an inquest. We have only spin doctors combing the landscape looking for green shoots. They are there, but only in a few well-padded back pockets.

House Panel Exempts Over 8,000 Banks From Oversight
Bowing to political pressure from community bankers, the House Financial Services Committee approved an exemption on Thursday for more than 98 percent of the nation’s banks from oversight by a new agency created to protect consumers from abusive or deceptive credit cards, mortgages and other loans. The carve-out in legislation overhauling the regulatory system would prevent the new consumer financial protection agency from conducting annual examinations of the lending practices at more than 8,000 of the nation’s 8,200 banks, leaving only the largest banks and other lenders subject to the agency’s examiners.

Earlier in the day, the committee completed its work on a different contentious provision of the legislation when, on a nearly straight party-line vote of 43 to 26, it approved tougher regulations over the derivatives market. That provision, too, contained exemptions for many businesses. The exemption for the banks was endorsed by the chairman, Representative Barney Frank of Massachusetts, who saw it as necessary to win support for the overall bill from the committee’s moderate and conservative Democrats. Their support is particularly important because the Republicans are unified against the legislation.

The committee approved the exemption for all but the largest banks in an amendment offered by two of those Democrats, Representative Brad Miller of North Carolina and Representative Dennis Moore of Kansas. "Community banks and credit unions were perhaps not without sin in the last couple of years but they were certainly not engaged in the worst abuses," Mr. Miller said. "They make the argument that for bigger banks, examiners are camping out. But for them, examiners come and it is very disruptive and adds compliance costs. The consumer financial protection agency will be able to do the job but it will not create a further burden on small banks and credit unions."

The measure creating the new agency has already been significantly pared back from the Obama administration’s proposal. While the exemption approved on Thursday would cover a vast sector of the banking industry, those institutions control only about 20 percent of the roughly $14 trillion in assets held by commercial banks. The 150 largest banks, which would face more regulatory scrutiny, hold the remaining four-fifths of the assets.

Under the Miller-Moore amendment, the new agency would have the authority to write rules for all banks and other lenders, including lenders that have never faced significant regulation. But the banks with assets of less than $10 billion and credit unions smaller than $1.5 billion would not face regular exams by the agency. Instead, the consumer regulations would continue to be enforced in most cases by the agencies that monitor the financial condition of the banks. Mr. Frank said that under the amendment, the new agency would still have the authority to investigate complaints raised at any bank.

Mr. Frank and senior administration officials have accused the bank agencies of failing to aggressively enforce rules protecting consumers from predatory loans. Mr. Frank said the change would not in any way diminish the oversight of the smaller banks, which would continue to face regular examinations by bank regulators for consumer problems. He also noted that the largest banks, which would face examinations by the new agency, had engaged in the worst abuses.

The amendment was warmly greeted by lobbyists for the smaller banks, "The Miller-Moore amendment addresses some of our key concerns," said Camden R. Fine, president of the Independent Community Bankers of America, which represents about 5,000 financial institutions. But the American Bankers Association said it was not enough. "We continue to have our fundamental concern that the bill will create a new agency with incredibly broad powers that will be in constant conflict" with other regulators, said Edward L. Yingling, president of the association.

In a briefing by telephone with reporters, the assistant Treasury secretary, Michael S. Barr, deflected questions about whether the administration had a view about the Miller-Moore amendment. The legislation’s chapter on derivatives would impose new regulations and capital requirements on dealers, and would force more trades onto exchanges or electronic platforms. But in a major concession to businesses, many trades intended to hedge risks by companies like airlines, manufacturers and energy interests would be exempt from trading through exchanges or clearinghouses.

While the administration quickly embraced the derivatives legislation, a top regulator appointed by President Obama indicated that compromises made to win the support of moderate Democrats led to problematic loopholes. The regulator, Gary G. Gensler, chairman of the Commodity Futures Trading Commission, vowed to try to strengthen the measure when it is considered by a second House committee next week.

"The committee’s bill is a significant step toward lowering risk and promoting transparency," Mr. Gensler said. "Substantive challenges remain." He added that he hoped a final bill "covers the entire marketplace without exception." Mr. Gensler did not spell out the specific problems with the legislation on Thursday, but last week he listed a host of exemptions and loopholes, a few of which have since been addressed. The derivatives legislation was criticized by consumer groups as being too weak and by Wall Street interests as being too onerous.

Kenneth E. Bentsen Jr., an executive vice president at the Securities Industry and Financial Markets Association, said provisions requiring some types of now-private transactions to trade through clearinghouses or exchanges "could raise transaction costs while not necessarily reducing risk in a commensurate amount." Robert G. Pickel, the chief executive of the International Swaps and Derivatives Association, a trade group, said the legislation would "force people to trade a certain way, which ultimately means parties would have less flexibility to effectively manage their risks." But Ed Mierzwinski, consumer program director at the United States Public Interest Research Group, said the legislation had "broad exceptions that swallow any rule it creates."

FDIC Forecasts More Bad Loans and Bank Failures
The FDIC finally admits to C&D and CRE loan problems. I have been warning about overexposures to C&D and CRE loans posing the biggest threat to community and regional banks since April 2006. This week FDIC Chair Sheila Bair finally bought these risks to the public eye. What took so long? Even with the warnings, Ms Bair, in making a statement on Capital Hill, incorrectly stated that bank performance lags behind economic recovery. My proof against this thesis is the simple fact that as the FDIC ignored the regulatory guidelines for exposures to C&D and CRE loans while I [was] warning that the FDIC Quarterly Banking Profile was a leading economic indicator.

This data led me to forecast in March 2007 that a multi-year bear market would begin by the end of 2007. FDIC data led me to predict Recession in 2008 / 2009 in March 2007. Data from banks are a leading indicator not a lagging one. The FDIC expects its non-list of problem banks to increase and for bank failures to remain high for the next several quarters. The FDIC is projecting bank problems to occur at least into 2011. I have been predicting using FDIC data as a leading indicator. The ValuEngine List of Problem Banks exceeds 750 and we predict 500 to 800 by the time "The Great Credit Crunch" ends in 2011 / 2012 at the earliest.

According to the FDIC "household financial distress has been exacerbated by high unemployment. Employers have cut some 7.2 million jobs since the start of the recession, leaving over 15 million people unemployed and pushing even more people out of the official labor force. The unemployment rate now stands at a 26-year high of 9.8 percent, and may go higher, even in an expanding economy, while discouraged workers re-enter the labor force." Hard to sustain growth without job creation and the NBER, the arbiter of Recession calls, knows this.

CRE loans headlines problems for community and regional banks. As of the end of June, CRE loans backed by nonfarm, nonresidential properties totaled almost $1.1 trillion, or 14.2% of total loans and leases. Why is it that the regulatory guidelines put in place in December 2006 are never discussed? The FDIC says:
CRE loans and construction and development loans are a significant examination focus right now and have been for some time. Our examiners in the field have been sampling banks' CRE loan exposures during regular exams as well as special visitations and ensuring that credit grading systems, loan policies, and risk management processes have kept pace with market conditions. We have been scrutinizing for some time construction and development lending relationships that are supported by interest reserves to ensure that they are prudently administrated and accurately portray the borrower's repayment capacity. In 2008, we issued guidance and produced a journal article on the use of interest reserves,as well as internal review procedures for examiners.

Let me repeat – Why didn’t the US Treasury, Federal Reserve and FDIC follow their joint 2006 guidelines? Since 2006 guidelines were ignored, the problems escalated and now our illustrious banking regulators will soon issue guidance on CRE loan workouts, most likely at tax payer’s expense. The FDIC says, "The agencies recognize that lenders and borrowers face challenging credit conditions due to the economic downturn, and are frequently dealing with diminished cash flows and depreciating collateral values.

Prudent loan workouts are often in the best interest of financial institutions and borrowers, particularly during difficult economic circumstances and constrained credit availability. This guidance reflects that reality, and supports prudent and pragmatic credit and business decision-making within the framework of financial accuracy, transparency, and timely loss recognition." What a crock of FDIC bunk!

Art Cashin: How Today's Market Is Like Dot-Com Bubble

The stock rally could have legs after a line of better-than-expected third-quarter earnings reports, but Art Cashin, head of floor operations at UBS, said he isn't yet convinced. "The banquet looks stupendous, I hear the wine is great," he said. "You guys can party on, but some of us are going to sit on the sideline like wallflowers." Cashin said he doesn't think the economy is moving as much as data shows, and he's worried there are billions of dollars in excess reserves from people not borrowing.

He added that although it's difficult to compare today's environment with any other time in history, it reminds him of the dot-com bubble, when people refused to believe the markets would go anywhere but up. "I said, 'I've never heard of a tree growing straight to Heaven except in Jack in the Beanstalk and that was a fairy tale,'" he said. "And unfortunately [the bubble] turned out to be that way." Cashin said he is beginning to see a pattern of component makers such as Intel performing well, while end-use makers like Johnson & Johnson struggle.

Why the Dow Broke 10,000, and Why You Should Still Watch Your Wallet
How did the Dow break 10,000 when the rest of the economy is in the toilet?

  1. Corporate earnings are up -- mainly because companies have been cutting costs. Payrolls comprise 70 percent of most companies' costs, which means companies have been slashing jobs. In the end, this is a self-defeating strategy. If workers don't have jobs or are afraid of losing them, they won't buy, and company profits will disappear.

  2. Federal borrowing has filled the gap that consumers and businesses created when the latter began to reduce their debt. Federal debt, in other words, has kept the economy from tanking. Can't keep up forever, though.

  3. With such horrid employment numbers, Wall Street figures the Fed will keep interest rates low for some time, and continue to flood the economy with money. That's good news for the Street because it means money stays cheap -- and with cheap money the Street can make lots of bets on almost everything under the sun and moon. As a result, the Street's earnings are way up. But this, too, is temporary. At some point the Fed is going to worry about inflation and a falling dollar.

  4. Investors of all stripes want to get in early and ride the wave. Pension funds, mutual funds, and other institutional investors figure the bull market has more oomph in it because, well, other investors will jump in. Think Ponzi scheme. Nice for now, but watch out if you're one of the last in.

In other words, this is all temporary fluff, folks. Anyone who hasn't learned by now that there's almost no relationship between the Dow and the real economy deserves to lose his or her shirt in the Wall Street casino.

Weak Dollar Equals Strong Stocks, For Now
Obama may find it easier to bring about peace than to steady the greenback.

A prophet is not without honor, save in his own country, the Bible says. To which Barack Obama can respond, Amen. In what appears to have been an expression of hope over lack of experience, to paraphrase Dr. Johnson, the Nobel Peace Prize has been bestowed on President Obama. Yet the cheers are loudest from afar; at home, the American public is split down the middle about their chief executive. Growing negativity is extending to the financial sphere, with the dollar's decline being laid at the door of the White House. And it's now going past the steady drumbeat on the theme on the Drudge Report. "Obama Dollar Retreats Most Against Commodities in Wealth Shift," intoned Bloomberg News, now even more a part of the media establishment with its rescue of BusinessWeek.

But the President's fellow Nobel Laureate, Paul Krugman, blasts those who would favor policies to support the dollar, equating such notions with the backward thinking that produced the Great Depression. In his New York Times column Monday, Krugman attacks the "gold-standard mentality" that he says opposes not just a decline in the exchange rate, but also "obsessively" fears inflation in the face of deflation, easy credit even when its needed, and government job creation. What's needed, Krugman and wide range of economists say, is to let the dollar continue to fall. That will boost U.S. exports, thus providing stimulus to the weak economy, and help right the imbalances in the global economy.

At the same time, China, Russia and members of the Organization of Petroleum Exporting Countries are not only speaking out against the continual slide in the dollar, but also are calling for alternatives to the U.S. currency as the linchpin of the global monetary system and trade. Amid these conflicting cross-currents, only one thing is clear: just as President Obama hasn't been in office long enough to merit a Nobel Prize, neither has his policies been in effect long enough to alter the course of the dollar.

In case anybody checked, the dollar's path has been steadily downward since the early years of the administration of George W. Bush. And, notwithstanding the bleating you hear about the battered buck, that's just fine with Wall Street. According to Barclays Capital, "since 2003, dollar weakness has gone hand-in-hand with equity rallies." The bank's economists estimate currency depreciation helped to reduce the trade deficit, which added 1.1 percentage points to gross domestic product growth in the first half of 2009 from a year earlier.

From the stock market's perspective, Barclays Capital notes in its U.S. Portfolio Strategy weekly letter that more than 30% of revenues for Standard & Poor's 500 companies come from abroad. Thus, dollar weakness boosts earnings of large, U.S. multinational corporations through increased competitiveness and positive currency translation effects, as foreign revenues are converted into a greater number of shrunken dollars.

It's no surprise that technology, energy, materials and industrial sectors benefit the most from the dollar's decline. Barclays plotted the performance of those groups (inversely) against the Fed's trade-weighted dollar index, and the lines moved in lockstep. Barclays expects dollar weakness to persist in the months ahead, which would support the cyclical rally through year-end, it says. Bad news for the buck is good news for stocks. Booyah! That underscores why, for all the angst the dollar's decline has produced, it has failed to upset the stock market.

Yet that only demonstrates the stock market's well-deserved reputation for looking no farther ahead than next quarter's earnings. Moreover, it appears the stock market has its own version of "money illusion," in which equities are marked up in marked-down dollars. At the same time, notices of the dollar's demise seem premature. It's popular to compare the U.S. with post-war Britain in terms of the dollar being supplanted as the global reserve currency, as sterling was after World War II, when U.K. was all but bankrupt from fighting two world wars.

As long as there is no ready substitute for the dollar, Wall Street can celebrate the currency's steady decline. And U.S. GDP will be boosted by a cheap greenback's spur to exports and deterrent to imports. This cannot go on forever, however. The dollar's fall may not have started on President Obama's watch, but it may become his problem. And it will take more than high-minded gestures and diplomacy to solve it.

Inflation or Deflation? "It's Definitely Deflation," Mish Says

Ask an economist about their biggest concern about the U.S. economy and you're likely to get one of two starkly different answers: America is either about to be swamped by a major bout of inflation or decimated by deflation. Count Mike "Mish" Shedlock of Sitka Pacific Capital among the deflationistas. While some consumer prices are rising and the Fed is printing money like crazy, Shedlock says deflation is "definitely" a greater threat than inflation.

People looking at prices are completely missing the mark," says Shedlock. "Consumer credit is falling, banks aren't lending, and we've got bank failures at a massive rate. These are the same kind of conditions as in the Great Depression." Indeed, bank lending has tumbled and the Fed reports consumer credit has shrunk for seven consecutive months and was down 5.8% on an annualized basis in August, the most recent month available.

One reason Ben Bernanke has the Fed in such an ultra-easy state is he's trying to offset those deflationary force and generate some inflation, which is seen as a better alternative. Shedlock, who writes the popular Mish's Global Economic Trend Analysis blog, doesn't seem to have a lot of faith in Bernanke's ability to prevent a Japan-like deflationary cycle, especially given the mounting pressures on the central bank to reign in its accommodation.

"When credit is not expanding, businesses are not expanding, businesses aren't hiring [and] the unemployment rate starts soaring," Shedlock says. "That's the really important thing here. When you look at [consumer] prices, that's putting the cart before the horse." Or perhaps both camps will prove right and we'll end up with a stagflationary environment, i.e. weak economic growth, a stagnant jobs market and rising prices, otherwise known as "the worst of both worlds."

SEC Hires 29-Year-Old Ex-Goldman Employee as Chief Operating Officer
The U.S. Securities and Exchange Commission hired Adam Storch, a 29-year-old former employee in Goldman Sachs Group Inc.’s business intelligence unit, as the enforcement division’s first chief operating officer, according to people familiar with the decision.

The COO, who started Oct. 13, has "a great deal of background" in technology and managing processes and the pace of work, Robert Khuzami, head of enforcement, said yesterday in Washington. Storch, who worked since 2004 in a unit at Goldman Sachs that reviewed contracts and transactions for signs of fraud, will be charged with making the unit more efficient. Storch, reached by telephone at the SEC, declined to comment.

Khuzami announced the position in August as part of the unit’s biggest overhaul in three decades. He is taking steps to add front-line investigators, speed inquiries and create specialized units after the agency was faulted for missing Bernard Madoff’s $65 billion fraud.

Storch holds degrees in accounting and finance from the State University of New York at Buffalo and studied at New York University’s Leonard N. Stern School of Business. He has certifications in accounting, fraud examination and auditing. Prior to joining Goldman Sachs, Storch was a senior analyst at accounting firm Deloitte & Touche and an intern at Neuberger Berman LLC, a New York-based asset management firm.

No, You're Reading That Right
79.9 percent rate targets credit-challenged

Gordon Hageman couldn’t believe the credit card offer he got in the mail. "My first thought, it was a mistake," Hageman said. The wine distributor called the number on the offer, gave them the offer code and verified his information. Sure enough, it was right:  the pre-approved credit card came with a 79.9 percent APR. Yes, 79.9 percent.

The offer is for a Premier card from First Premier Bank, which is based in South Dakota. On its Web site, First Premier says it is the country's 10th largest issuer of Visa and MasterCard credit cards. The site also says it "focuses on individuals who have less than perfect credit but are actually still creditworthy." "I think they’re trying to take advantage of me," said Hageman. Ya think?

Hageman acknowleged that his credit isn't perfect, but he said it's about average. He said the pre-approved offer didn’t mention the actual interest rate on the card -- for that, he had to read the enclosed fine-print disclosure. "I think you’re beginning to border on deception there," San Diego State marketing professor Michael Belch said. Belch said the card is offering a bad deal to people who are desperate.  "They're just finding different ways to gouge the consumer," Belch said.

The California Attorney General's office said there's nothing it can do about the cards since they are issued out of state and out of its jurisdiction. A spokesman with the Federal Deposit Insurance Corporation (FDIC) said interest rate limits on bank cards are set by the individual state and not on a federal level. According to information on the South Dakota Legislative Web site, there is "no maximum or usury restriction." In other words, the individual bank can set its own interest rate limits. Several calls made to First Premier for a comment were not returned.

S&P 500 Index Due for 'Stiff Correction': Technical Analysis
The U.S. Standard & Poor’s 500 Index may be due for a "stiff" slump as it approaches a resistance level in coming weeks, according to Nader Naeimi, a strategist at AMP Capital Markets, which holds assets worth $75 billion. The U.S. index’s 62 percent rally from its March low has brought it close to 1,121.4, which Naeimi says represents the 50 percent level Fibonacci analysts identify as a key resistance point. The performance of the index, which closed at 1,096.56 yesterday, is also diverging from measures of price and breadth momentum, pointing to a deeper "correction" than those that have occurred since the rally began, the strategist said.

"The divergences have started to build up over the past few weeks," said Sydney-based Naeimi, whose firm went to "overweight" from "underweight" stocks in March. "The new highs the index is making aren’t being confirmed by the measures of momentum. The next push higher is likely to extend those divergences, which suggests we’ll see a deeper correction that lasts several weeks or longer, rather than just days." The S&P 500 slumped 38.5 percent last year as the financial crisis deepened, tipping nations into a global recession. The index has rebounded from a more than 12-year low on March 9, as government stimulus measures helped calm credit markets and shore up economic growth.

The S&P 500 may climb to the critical 50 percent Fibonacci level in the next few weeks, at which point a slide of between 10 percent and 15 percent is likely, said Naeimi. That’s deeper than three previous "corrections" that have occurred since the rally began in March, the strategist said. The first was a 5 percent drop between May 8 and May 15, followed by a 7.1 percent slump between June 12 and July 10, and a decline of 4.3 percent between Sept. 22 and Oct. 2.

"We will see multiple negative divergences as the S&P 500 hits a new cyclical high," said Naeimi "All the conditions for a stiff correction are in place. The cyclical bull market will continue once the correction has run its course." Naeimi applies Fibonacci analysis to the period between the index’s Oct. 9, 2007 high of 1,565.15 and this year’s March low to arrive at the 1,121.4 resistance level.

In technical analysis, a Fibonacci retracement is created by taking two extreme points on a stock chart and dividing the vertical distance by the key Fibonacci ratios of 23.6 percent, 38.2 percent, 50 percent, 61.8 percent and 100 percent, according to Once these levels are identified, horizontal lines are drawn and used to identify possible resistance and support levels. The AMP strategist also uses the relative-strength index, a momentum indicator, to gauge the level of "conviction" at various stages of the rally. For breadth momentum, Naeimi adopts the McClellan Oscillator, which measures how broad-based a rally is in terms of the number of companies involved.

US Federal deficit hits all-time high $1.42 trillion
The federal budget deficit has surged to an all-time high of $1.42 trillion as the recession caused tax revenues to plunge while the government was spending massive amounts to stabilize the financial system and jump-start the economy. The imbalance for the budget year ended Sept. 30, more than tripled last year's record. The Obama administration projects deficits will total $9.1 trillion over the next decade unless corrective action is taken.

As a portion of the economy, the budget deficit stood at 10 percent, the highest since World War II, according to government data released Friday. President Barack Obama has pledged to reduce the deficit once the Great Recession ends and the unemployment rate starts falling. But economists worry the government lacks the will to make the hard political choices to cut spending and raise taxes to get control of the imbalances. For 2009, the government collected $2.10 trillion in revenues, a 16.6 percent drop from 2008. That was the largest percentage decline on records going back nearly seven decades. The plunge reflected declining income tax collections as millions of Americans lost their jobs or saw their wages cut. Corporate taxes also plummeted as the recession squeezed companies' profit margins.

Government spending last year jumped to $3.52 trillion, up 18.2 percent over 2008, the biggest percentage increase since a 23.4 percent jump in 1975, another year in which the country was struggling with a painful recession. The $700 billion financial bailout fund and increased spending and tax relief from the $787 billion economic stimulus program that Obama pushed through Congress in February drove the 2009 increase. Republicans seized on the new figures as evidence of their contention that the Democrats in Congress and the White House are acting irresponsibly.

"Today's deficit numbers are yet another troubling reminder that our nation is on a dangerous and unsustainable fiscal path," House Republican Leader John Boehner said in a statement. For September, a month when the government usually records surpluses, the deficit totaled $46.6 billion. That's a sharp contrast to the $45.7 billion surplus in September 2008, the last time the government's books were in the black. In issuing the final budget figures, top administration officials said the president was determined to get control of the deficits in coming years.

"It was critical that we acted to bring the economy back from the brink earlier this year," White House budget director Peter Orszag said in a statement. "The president recognizes that we need to put the nation back on a fiscally sustainable path." Administration officials noted that as large as the $1.42 trillion deficit was, it had been projected to be even higher. The administration forecast a $1.75 trillion deficit when Obama sent his first budget proposal to Congress in February, a figure that had been trimmed to $1.58 trillion in an administration update issued in August. The lower figures reflected in large part the fact that spending from the $700 billion bailout package turned out to lower than originally anticipated.

Noting this fact, Treasury Secretary Timothy Geithner said, "This year's deficit is lower than we had projected earlier this year, in part because we are managing to repair the financial system at a lower cost to taxpayers." Failure to curb runaway deficits could trigger a financial train wreck that would push interest rates and inflation higher, and send the dollar crashing if foreigners suddenly started dumping their holdings of Treasury securities.

None of those problems are evident now as the worst recession since the 1930s has depressed borrowing by consumers and businesses, giving the government a break on the interest it paid this year on the record debt. Net interest payments actually fell by about $10 billion in 2009 from 2008. But economists worry investors will grow fearful of the nation's ability to repay all the debt unless the administration and Congress begin developing credible plans to deal with the deficit problem once the recession has ended and unemployment has begun to come down.

China Can't Trade Back to Normality
Are things getting back to normal for Chinese trade? Not quite. Import data, in particular, are a red herring. Down just 4% from a year ago, they're approaching precrisis levels. Given that about half of China's imports are intermediate goods destined for re-export, it might seem an export recovery is imminent. In truth, imports rose largely on commodity stockpiling. Trade figures were also inflated by September having four more working days this year.

Despite recovering from their immediate post-crisis nadir, exports totaled $116 billion, well below the monthly average of $134.1 billion notched up between July and September 2008. As long as demand in major developed economies is subdued, exports likely won't return to their mid-2008 peak. The U.S., Japan and Europe took 65% of China's exports from 2003 to 2008, Credit Suisse says. In coming months, easy comparisons will probably mask China's weakened export position. If exports stay at September's level, it won't be long before year-to-year growth rates return to 20% or more. A relative improvement won't mean Beijing has solved a critical problem: overcapacity.

In the absence of adequate domestic demand, China used to export excess production to hungry foreign markets. With those markets likely subdued awhile, it'll be hard for China's absolute export levels to recover fully. That means cutting back capacity, something Beijing concedes is necessary in areas as diverse as wind power and aluminum output. That bears undesirable side effects, however, like higher unemployment. Heavy government spending and extra bank lending have papered over the cracks in China's economy so far. With a true export recovery unlikely, more painful solutions may be needed.

The China Files (Special Project): Real Estate
by John Mauldin and Stratfor


The real estate market in China, particularly the residential side, is a burgeoning bubble that is growing bigger and more breakable by the day. Land and housing prices were already rising steadily when Beijing's stimulus package hit the sector in early 2009. Now prices are surging, with developers, bureaucrats and investors cashing in while urban Chinese - once encouraged to invest in home ownership by the central government - become less and less able to buy.


The China Files (Special Project)

PDF Version: Click here to download a PDF of this report

On Sept. 10, China Overseas Land and Investment, a Hong Kong-listed company and a subsidiary of state-owned China State Construction Engineering Corp., purchased a prime piece of real estate in the Putuo district in downtown Shanghai. The company paid 7.006 billion yuan ($1.026 billion) for the undeveloped property, which will amount to an average of 22,409.3 yuan ($3,283.9) per square meter of floor space (just in land costs) once the designed residential building is constructed.

The purchase created China's newest "land king," a term for the real estate developer who pays the highest price for a piece of real estate during a land auction. And 7.006 billion yuan was the highest price ever paid for a piece of Chinese real estate for any purpose - residential or commercial. The milestone is a result of an increasingly intense competition for land in major cities that began early in the year, when Beijing began distributing stimulus money to various industries - including the real estate sector - to sustain the economy. As a result, land prices have soared throughout China. And with increasing speculative investment in residential real estate, the market faces a surging bubble that jeopardizes the country's long-term economic development.

Since 1998, real estate investment in China has accounted for more than 10 percent of the country's gross domestic product (GDP), compared to only 3 percent to 5 percent in the United States. Such investment is also closely associated with many other industries, such as construction and finance, and it provides an abundance of jobs. Therefore, it is seen as a critical pillar of China's economy and enjoys favorable policies from the government and state-owned banks (more than 70 percent of real estate investment in China comes from bank loans). At the same time, real estate developers, local government officials and investors have escalated housing prices across the country by acquiring massive land holdings, limiting the supply and inflating prices, creating a real estate bubble that is not sustainable in the long run.

The bubble has grown mainly on the residential side of the market, where there is more demand and higher profits to be made. However, while fewer developers and investors have been chasing nonresidential projects, Beijing's 4 trillion yuan ($586 billion) stimulus package in early 2009 has generated more interest and activity in the commercial side. Indeed, there are signs that commercial real estate may also be headed for a bubble, and STRATFOR will be watching the situation closely.

Origins of the Bubble

Since 1978, China's pace of urbanization has increased dramatically, with the number of middle-size and large cities (those having nonagricultural populations of more than 200,000) growing rapidly. Beginning in 1985, economic reforms implemented in urban areas to make China's planned economy more market-oriented added even more momentum to the real estate boom, with real estate investment increasing by 71 percent by 1987. The government's macroeconomic policy of monetary belt-tightening helped cool this overheated market, which was further tempered by the government's continuing to provide housing for state employees (fu li fen fang, or "welfare housing").

However, when the state significantly cut back on its welfare housing program in 1998, the Chinese perception of personal property changed, and this would have an important impact on the real estate sector. The government began this privatization process by making a private dwelling a "commodity" and granting the purchaser the right to own a newly built house for 70 years. (Likewise, the developer who buys the property on which residential or commercial buildings are to be constructed may own that property for 70 years.) Home ownership in China could now be a sound financial investment.

Thus, the residential real estate market would boom in almost every urban area in China - and particularly in the "first-tier" and "second-tier" cities (only Beijing, Shenzhen, Guangzhou and Shanghai are in the first tier, with more than 20 cities, and mostly provincial capitals or coastal ports are in the second tier). But rising land prices would eventually put housing prices out of reach for the general public. In Dongguan, a coastal second-tier city in Guangdong province, land prices averaged 4,957 yuan ($726.42) per square meter in 2007, a more than 500 percent increase from 2003, while personal disposable income increased 24 percent during the same period (from 20,526 yuan [$3,008] to 27,025 yuan [$3,960] per year).

A 2006 survey conducted by the National Development and Reform Commission showed that the average ratio between housing prices and income was approaching 12:1 in many large and middle-size cities in China (in Beijing it had reached 27:1). Twelve to one is significantly higher than the World Bank's suggested affordability ratio of 5:1 and the United Nations' 3:1. The problem was compounded by the fact that, of the more than 80 percent of Chinese who owned their own homes in urban areas (generally considered cities with populations of more than 20,000), 54.1 percent were making monthly mortgage payments that constituted 20 percent to 50 percent of their monthly incomes.

The Recovery Bubble

Following a temporary drop toward the end of 2007, land prices rose steadily, then began surging again with Beijing's stimulus package and a flood of easy credit in 2009. With much of this money flowing into the real estate sector, major beneficiaries included large state-owned enterprises (SOEs) involved in speculative real estate and housing investment, contributing to the inflating bubble. Among the 10 highest-priced land purchases in major cities in the first half of 2009, 60 percent went to SOEs.

Paradoxically, as the global financial crisis continues, China sees little choice but to loosen its monetary policy even further, fearing the opposite would curtail economic growth and result in massive unemployment, which could lead to social instability. Beijing knows that one of the country's underlying economic problems continues to be an overheated real estate market, but it also knows that the real long-term solution - limiting the flow of cash and credit - could have dire socio-economic ramifications. Meanwhile, real estate developers, government officials and investors continue to speculate on real estate, raising land and housing prices.

As housing prices continue to rise, a parallel trend is manifesting itself - rising vacancy rates in urban areas. A 2009 report by the Shanghai Yiju Real Estate Research Institute revealed that, by the end of 2008, the average vacancy rate for "commodity housing" (as opposed to welfare housing) in Beijing was 16.64 percent, and vacancies reached as high as 30 percent in some districts. Most of these vacant houses, however, are not unsold ones. They have been purchased by investors as speculative investments. While there are fewer and fewer ordinary people who can afford to buy houses, there is still excessive demand for investment housing - pressure that continues to drive up the prices.

This closed loop in the Chinese real estate market is facilitated by the country's political and bureaucratic system. In China, all land is initially owned by the state, and local governments have the sole authority to sell it. And income from property taxes and land sales are a primary source of revenue for local jurisdictions. According to estimates by the State Council's Development and Research Center, tax revenue from the land in some jurisdictions accounts for 40 percent of the local budget. Moreover, net income from land sales accounts for more than 60 percent of the local governments' extra-budgetary revenue. The soft budget and lack of accountability to the people reinforces the local governments' incentive to expand their real estate investments without much concern for cost or impact on public services.

Economic performance also is the prime prerequisite for bureaucratic advancement, which gives local officials the incentive to generate as much revenue as possible through land auctions. And this generally involves a level of collusion - and corruption - among government officials, real estate developers and investors.

One typical strategy is for a developer to buy a big chunk of urban land from the local government but leave the land undeveloped, or build on only a small portion of it, thereby keeping the housing supply limited. Despite various state policies to lower land prices in order to make homes more affordable, local government officials and real estate developers control the land auctions. When a lower sale price is dictated from above, it is easy enough for the local sponsors to officially deem the auction a failure. Even when the developer does build houses on the property, a speculative investor, working hand in hand with the developer and government officials, can bribe both parties to ensure that he can buy all the houses at a low volume price and keep them off the market, thereby maintaining a limited supply and high prices.

Another factor that enters the equation is a cultural one. The Chinese people generally prefer to buy new houses, as opposed to renting homes or buying secondary houses in which people have already lived. Indeed, in urban areas, marriage proposals often include a promise to buy a new commodity house. As a result, the secondary housing market remains very small in comparison (due also to fewer available bank loans for lived-in houses and the complicated process involved in transferring ownership).

All of these factors contribute to the burgeoning real estate bubble - and make it difficult to predict when that bubble will burst. With 70 percent of real estate investment in China coming from bank loans, a dramatic drop in land values could send shock waves throughout the economy. There are already signs of decline. In Shenzhen, one of China's first-tier cities, real estate prices have been dropping for the past two years (30 percent for housing), and many developers and speculators have suffered great losses. The threat looms in other large cities such as Beijing and Shanghai and may be emerging in many second-tier cities as well.

Given the current global economy and the economic balancing act it must maintain domestically, Beijing has few good choices. It must keep enough cash flowing to maintain economic growth and social stability in the short term while tightening credit to avoid a tsunami of bad loans and a market collapse over the long term. Certainly, Beijing does not want to face the kind of collapse in the housing market that Japan experienced in the 1990s, which triggered a financial crisis and more than a decade of economic malaise.

But in China's real estate, as in most sectors of this vast and complex land, implementing and enforcing prudent regulation has never been an easy task

Iran to drop dollar from forex reserves
The Trade Promotion Organization of Iran (TPOI) announced this week that it plans to exclude the U.S. dollar from Iran’s foreign exchange reserves. In line with this plan, Iran has informed Japan that it should use the yen instead of dollars to pay for the oil it buys from the Islamic Republic. In addition, Iran has decided to open a bourse for oil and gas transactions in currencies other than the U.S. dollar, especially the euro. Although the opening of the new bourse has been postponed several times, the plan shows the country’s determination to replace the dollar in its oil and gas transactions.

The TPOI has also announced that since October 2007 Iran has sold 85 percent of its oil exports in currencies other than the U.S. dollar and is determined to sell the remaining 15 percent in other currencies such as the UAE dirham. During his first term, Iranian President Mahmoud Ahmadinejad ordered that the dollar should be replaced by the euro in the transactions of Iran’s currency reserve fund.

Quarterly Review and Outlook - Third Quarter 2009
by Van R. Hoisington and Lacy H. Hunt

Ponzi Finance

The Federal Reserve reported that as of June 30, 2009 total U.S. debt was $52.8 trillion. Total U.S. debt includes government, corporate and consumer debt. Importantly, however, it does not include a few trillion in "off balance sheet" financing, contingent unfunded pension plans for corporate and state and local governments, or unfunded liabilities of the U.S. government for such items as Medicare, Social Security and other programs. Currently GDP stands at $14.2 trillion, so there is approximately $3.73 in debt for every dollar of output in the United States, a level unprecedented in our history (Chart 1).

Normally, debt levels as a percent of GDP would be uninteresting and immaterial; however, the current level of debt is unique in two ways. First, the asset side of the balance sheet purchased by the debt is falling in price. Second, the money that was borrowed to purchase those assets was often fraudulently expended. Neither the borrower nor the lender really expected the debt to be serviced. Rather, each party expected the asset price to rise extinguishing the debt.


This type of financial arrangement was correctly analyzed by the famous American economist Hyman Minsky in his paper, "Financial Instability Hypothesis", in which he described three phases of debt financing. The first is "hedge finance", where the lender expects a return on both principal and interest. The second is "speculative finance" where the lender expects to get interest on the loan but perhaps not the principal. The third case, where the lender expects neither the principal nor interest to be returned, is referred to as "ponzi finance". This was typified in the last business cycle by loans issued without documentation, no down payment home loans, extremely low cap rates on commercial real estate, and the high leverage borrowing ratio of private equity funds. Even ponzi finance works as long as asset prices are rising. But once the bubble is pricked, the debtor is left with declining asset values that preclude the rollover of their obligations.

Presently, in this worst of all post-war recessions we are witnessing the collapse of asset prices that were inflated by the speculation of earlier years. The aftermath of that speculation and its impact on the economy has been thoroughly studied prior to our present business cycle by the economists of yesteryear who marveled at the mania in the collective mindset of private citizens and their elected representatives who produced such bubbles.

The most famous of these economists was Irving Fisher (1867-1947), who in 1933 wrote about this problem of over-indebtedness (Irving Fisher, 1933, Econometrica, "The Debt-Deflation Theory of Great Depressions"). He stated flatly that over-indebtedness was the difference between normal business cycles (recessions), which occur frequently through "over-production, inventory misjudgment, or commodity price fluctuations" and extreme business cycle fluctuations (depressions). Based on his analysis of the great depressions of 1837, 1873, and 1929 he outlined a pattern of economic developments that will take place when the debt cycle is broken. Seemingly old news, but it is interesting to apply his sequence of events to today's economic developments as there are disturbing similarities.

A Downward Spiral

Fisher posited that debt liquidation leads to distress selling, contracting bank deposits and declining velocity of money, all of which contribute to the fall in price levels. This accurately describes today's circumstances. Distress selling is rampant, with home foreclosures reaching all-time highs. Additionally, rapidly rising foreclosures in commercial real estate are causing the closing of financial institutions and the liquidation of their portfolios. Money supply (M2), an imperfect measure of bank deposits, is essentially flat over the last six months even though the monetary base is 100% higher than it was a year ago (Chart 2). Further, the velocity of M2 has contracted at a 12.7% rate over the past two years. The Personal Consumption Expenditure Deflator (goods purchased by consumers) has fallen from a 2.7% growth rate 12 months ago to a yearly increase of only 1.3% presently, and appears to be heading for a zero reading in 2010. GDP has recorded its greatest contraction since the 1930's, and probably is not yet at its lowest level for this cycle.


Fisher then noticed that this distress selling would lead to a fall in the net worth of businesses, a decline in profits, and a reduction in employment. Fisher may have been talking about 1929 and the 1800's, but that is precisely our present situation. Despite a 19% gain in stock prices this year, the S&P 500 has declined about 30% from its peak and stands lower than it was a decade earlier. Corporate profits are down approximately 13% on a year over year basis, and in 2008 S&P 500 profits fell for the first time since 1933.

The net worth of hundreds of banks and other large corporations has fallen below zero, with some surviving only because of a massive rescue effort by the federal government. Despite these efforts, consumer net worth has fallen, price levels of homes are down about 30% from their peak levels, and business net worth has been impaired by an almost 39% decline in commercial real estate from its peak levels. Industrial production is down 13.3% since its peak, the largest 20 month decline in the post war period (Chart 3). Including potential revisions, the U.S. has lost eight million jobs in this recession, and currently 17% of the labor force is either underemployed, partially employed, or out of work seeking employment.


Fisher seems to be not so historical as prescient. He states that all the above problems create disturbances in the rate of interest, particularly the fall of nominal money rates and the rise of real interest rates. The federal funds rate is now effectively zero, and yet with the steady downward movement in price indices, real interest rates are rising. This, of course, is of concern to debtors.

The uncomfortable conclusion of Fisher's analysis is that major business cycle fluctuations are, in fact, caused by over-indebtedness and the fall in asset prices. Our present situation appears to mirror the exact sequence of events that have occurred in previous depressions. This suggests that our current "great recession" may morph into a more serious and elongated downward business cycle.

The Impossible Promise

The federal government's promise to extricate the U.S. economy from this recession involves more spending (increasing public debt) and more subsidies for consumers, such as car rebates and home buying incentives (more private debt). In other words, more debt is supposed to solve the problem of over-indebtedness. The truth is that this policy merely indentures its citizens further without providing any income for repayment of debt. In previous letters we have discussed the fact that the government spending multiplier is zero (read Professor Robert Barro's book, Macroeconomics - a Modern Approach, p. 370).

This means there is no long term income benefit from stimulus programs. According to the latest academic research, the most recent $800 billion stimulus plan will boost economic activity in the short run, but will surely depress economic activity over time. The government problem is complicated by the fact that the tax multiplier is 3, meaning that a 1% change in taxes will change GDP by about 3% over time. More recent research (Barro & Redlick, September 2009, "NBER Working Paper 15369") suggests that a 1% cut in the marginal tax rate would raise GDP in the ensuing year by 0.6%. With the deficit rising due to a zero spending multiplier, the tendency will be to try to raise taxes to pay for this higher level of expenditures, which will further depress aggregate spending and output.

From a fiscal policy perspective the outlook for economic growth appears to be one of stagnation for several years due to the size of the federal debt, which is expected to rise 35.7% from 2008 levels to 76.5% of GDP over the next ten years according to the Office of Management and Budget (Chart 4). This exercise in government spending is, of course, an exact replica of the Japanese experience from 1989 to the present. Their debt to GDP ratios have gone from about 50% in 1988 to about 178% today, and yet their nominal GDP is no higher than it was 17 years ago, and their employment stands at twenty year ago levels. It is somewhat unsettling that as of the last employment report the United States employed 131 million people, a level that was first reached in 2000, which means the United States has had no net job gains for almost ten years. Indeed, it appears that the fiscal chain around the free market neck is sufficiently onerous to restrain growth for several years. The promise of the government to revive growth through increased indebtedness is, indeed, an impossible promise.


The Hesitant Fed

As Fisher stated, the write-down of debt and distress selling tends to destroy money deposits and lower the velocity of money. Despite the historical evidence of that fact, our current Fed authorities appear to be oblivious to the lessons of the past. Their initial reaction to the liquidity crisis has to be applauded for their heavy work in insuring the liquidity of the financial system. Similarly, the expansion of their bank balance sheet to $2.1 trillion from $1 trillion was the precise reaction needed to counter the emerging deflation of asset prices. However, their actions increased inflationary expectations, and they have encountered a plethora of critics. In responding to this criticism the most recent statistics suggests they are beginning to lose the fight against the deflationary impulses. Consider that the monetary base rose 1000% in the three months ending December 2008, but has been held essentially flat since then (Chart 5).


The Fed's purchases of assets to increase this base automatically created deposits that positively charged the money supply growth to a 15.2% six-month growth rate (Chart 2). If the economy were operating near full capacity, a healthy banking system would take these deposits and multiply them roughly nine times; that circumstance could be inflationary. Unfortunately the banking system is not healthy, as evidenced by the fact that we have closed 95 banks this year, more than the cumulative total of the past 15 years, and another 416 banks are on a list destined to become extinct. With consumers' asset prices falling so rapidly and banks increasingly afraid of failure, banks are more interested in collecting loans than in lending. So with fewer consumers now credit worthy, loan volumes are collapsing. As loans are paid off, deposits are destroyed, and the money multiplier that should stand at nine has gone to zero. This is evidenced by the fact that the six-month change in M2 has fallen to a 1% growth rate, meaning that monetary stimulus is on hold. Get set for negative GDP in 2010.

Dollar Weakness

The inflation outlook from the monetary and fiscal standpoint looks truly deflationary, yet some believe that dollar weakness will reverse this circumstance and create inflation. This is unlikely. First, our imports are about 13% of GDP, and even if the dollar were to halve in value, the price of imported goods would not only have to compete with U.S. producers, but also their price adjustment would have to offset the other 87% of factors included in the pricing indices. Second, unlike the 1930's a 50% decline in the dollar would be difficult to engineer.

Fisher recommended to Roosevelt that the U.S. should exit the gold standard, which he did in April of 1933. That was a fixed exchange rate system, and within three months the dollar lost more than 30% against the gold block countries and fell to 60% of its former value within the next five months. This spurred our exports and provided some price inflation (2.9% per year, GDP deflator) for the next four years. Then, in 1937 the tax increases (the next policy mistake) reversed the positive growth rate of the economy and drove price levels and economic activity downward again. However, even with that small period of price increases the overall price level never recovered from the 25% decline that occurred from 1929 to 1933, and thus deflation reigned. Today the declining dollar is a good thing in terms of our trade balance, but the modest change will be insufficient to offset the negative forces of insufficient domestic demand.

Next year the core GDP deflator will fall to zero, with the possibility of negative levels. Likewise, long-term interest rates, which are highly sensitive to inflation, will continue to move toward lower levels. As stated in previous letters, we see no reason why longer dated Treasury interest rates will not mirror those of Japan, which provides a modern signpost for a deflationary environment. Currently the Japanese ten-year note stands at 1.3% with their thirty-year bond yielding 2.1%.

Words from the Wise?
by Michael Panzner

>I just got back from The Economist's "Buttonwood Gathering" in New York and thought I'd share a few of the more interesting (and, in some cases, quite enlightening) quotes (in no particular order) from the movers-and-shakers at the (well attended) conference:

Secretary Tim Geithner, United States Department of the Treasury:
"Generally, we did not do enough." (Referring to the failure to address growing concerns over excessive risk-taking in the period leading up to the financial crisis.) [Editor's note: understatement of the year?]

Stephen Roach, Chairman, Morgan Stanley Asia:
Those who are looking for a "V"-shaped recovery are in for "a rude awakening."

"The imbalances going into the crisis were large to begin with. Now, they are bigger than ever."

George Soros, Chairman, Soros Fund Management:
"Bankers have too much power." (Referring to the hold that Wall Street has over Washington.)

The "globalization of financial markets is built on false premises: namely, that markets can be left to their own devices."

Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation:
"Insured deposits are being used in ways that I don't like to see."

Wilbur L. Ross Jr., Chairman and Chief Executive Officer, WL Ross & Co.:
People were focused on "risk-ignoring rates of return." (Describing one of the things that went helped bring about the financial crisis.)

If regulators had taken the time to visit a Countrywide Lending office, they would have seen something akin to "a Wall Street boiler room," rather than a bank branch. (Referring to regulator's unwillingness to go out into the field and see what was really going on during the housing boom.)

"Government is its own systemic risk in the mortgage market."

Lawrence H. Summers, Director of the National Economic Council, The White House:
The root of most financial errors is "when you try to do today what you wished you had done yesterday."

"I can assure you that on Main Street, it is a very different conversation." (Referring to the contrast between the optimism on Wall Street and the more pessimistic mood of those struggling to get by in other parts of the country.)

"It is not the administrations's view to bribe those who have been part of the problems we have experienced to do what is in the national interest." (Referring to the suggestion that banks and other financial institutions need financial incentives to support proposed regulatory changes.)

Jeffrey D. Sachs, Director of The Earth Institute, Quetelet Professor of Sustainable Development, and Professor of Health Policy and Management, Columbia University:
"It was grotesque." (Referring to fact that, despite its extraordinary size, the $62 trillion credit default swap market was essentially unregulated.)

"This was a crisis made in the U.S." (Referring to the suggestion that China's export policies played a key role in creating the credit bubble.)

Niall Ferguson, Laurence A. Tisch Professor of History, Harvard University, William Ziegler Professor of Business Administration, Harvard Business School:
"We are living though a gradual shift away from a dollar-centric system."

"Is China the Germany of our time?" (Referring to the combination of economic dynamism and growing nationalism that stoked the aggressive ambitions of Nazi Germany.)

"The problem of being a declining empire doesn't have a solution." (Referring to the suggestion that a great many, if not all, of America's problems are fixable.)

Robert J. Shiller, Arthur M. Okun Professor of Economics, Yale University:
"Look up 'bubble' in an economic textbook and it's not there." (Referring to the shortcomings of the traditional economic curriculum.).

People "are living in a 'pretend-and-extend' environment, waiting  for the economy to recover." (Referring to the precarious state of the commercial real estate market and the wave of resets coming due between 2011 and 2013.)

Elizabeth Warren, Chair, TARP Congressional Oversight Panel:
"The reason banks lost confidence in each other is because they looked at their own books." (Referring to the loss of confidence that roiled markets during the darkest days of the crisis.)

Gold's Performance In Different Currencies
As I have previously pointed out, gold has done very well against the dollar, but not so well against other currencies.

Rhona O'Connell provides the following charts to help visualize gold's recent performance in terms of various currencies (charts courtesy of MineWeb):

(the red line is gold priced in Australian dollars, black is priced in Canadian dollars, and green is priced in South African Rand)

Ex-FSA chief Sir Howard Davies sees 'dramatic’ risks for Britain
The British people are living in a fool's paradise and have yet to understand the gravity of the economic crisis, according a former head of the Financial Services Authority. Sir Howard Davies, now Director of the London School of Economics, said Britain faces a dangerous rise in the levels of public debt – even taking into account tax increases planned for coming years. "The next six months are going to be extremely delicate in the UK", he told a gathering of HSBC clients in London. "It is very clear that something dramatic has to happen to control spending: but is the economy robust enough to survive fiscal tightening?"

The Government is already running out of weapons to fight the crisis. While the fall in the pound has helped boost exports and proved benign so far, Sir Howard said that past experience handling sterling crises had taught him that the matters can turn ugly fast once confidence is lost. "The pound never stops where you want it to," he said. What is disturbing is that the British people seem unwilling to face minimal belt-tightening. Even professors in higher education are balloting to strike, demanding a continuation of boom-time pay raises. "You have the best minds in the country planning to go on strike for 8pc. People are miles away from understanding what is needed."

Polling data shows that 48pc of the public are against any spending cuts and only 20pc see the need for retrenchment. Britons appear to assume that the "fantastic growth in public spending" over the last decade has become an entitlement. Sir Howard said the reality is that the Government has so far come clean on just half of the fiscal consolidation necessary over the next five years merely in order to stabilize debt. By 2014 we will be among the Big Four of global profligates. "It is not a great club to be in," he said.

Eurozone exports tumble sharply
Eurozone exports tumbled unexpectedly sharply in August, raising fresh doubts about the strength of the 16-country region’s economic recovery. Exports to countries outside the eurozone fell 5.8 per cent compared with July, reversing a 4.7 per cent increase seen in the previous month, according to Eurostat, the European Union’s statistical office. The latest decline is a blow to the eurozone’s economic prospects because a pick-up in global demand for its exports had appeared likely to drive a rebound in the second half of this year. But even before the latest data, economists had worried that a strengthening euro would act as a significant brake on growth.

The European Commission has warned that the unwinding of global economic imbalances could “significantly” affect the eurozone. Marco Valli, economist at Unicredit in Milan, said the euro’s rise would not have had an impact on the latest data because it typically takes about nine months before the effects of a rise in the euro feed through. He played down the significance of August’s fall, however, because eurozone manufacturing survey results still pointed to robust export growth in the third quarter. “There is nothing in today’s data that points to a sudden change in the outlook of improvement,” he said.

The latest fall in eurozone exports was the largest since the 12.5 per cent month-on-month plunge seen in January this year. Monthly export data are often volatile, and August’s figures may have been distorted by companies shutting down production for longer than normal over the summer because of the economic crisis. Nevertheless, the data were a setback to hopes that exports were on a strongly rising trend. Italy reported a particularly sharp 19.1 per cent month-on-month fall in exports beyond the 27-country EU while Germany and France reported falls of about 3 per cent. Spain, however, reported a 0.7 per cent rise.

Eurozone economies were badly hit by the global loss of confidence that followed the collapse of Lehman Brothers late last year. After the latest fall, eurozone exports were still almost 25 per cent lower in August than a year before. Earlier this week, Jean-Claude Trichet, European Central Bank president, indicated that he remained wary about the strength of the recovery. “We have halted the freefall in economic activity that we witnessed around the turn of the year. There are reasons to believe that a gradual recovery lies ahead. But the uncertainty surrounding this outlook remains high,” he told a banking conference in Frankfurt. The ECB’s caution explains why financial markets do not expect a rise in official interest rates until late next year at the earliest.

German 'Wise Men' fear credit crunch in 2010
Germany's leading institutes have warned that the pace of economic recovery is "unsustainable" and that the country's banks may face a fresh crisis over the next year as bad debts surface in earnest. 'There is still a significant risk of further shocks to the international financial system,' said a joint report by the five 'Wise Men', a panel that advises the government. Emergency action by the European Central Bank and authorities worldwide "averted a looming collapse" of Germany's banks over the Winter but lenders are still too frail to renew normal lending. "Credit to non-financial firms has clearly been declining. Financial conditions are likely to worsen further. Banks are facing large write-offs on toxic debt and a rising toll of company insolvencies," it said.

The report said it was a serious error to pressure banks to raise capital ratios in the middle of a downturn, causing them to tighten lending standards. "There is a major danger that already tight financing conditions could lead to a credit crunch next year," it said. The first round of the financial crisis hit the big banks and state Landesbanken, which had portfolios on US sub-prime debt and other traded assets,. The next wave of victims may be the country's savings banks faced with the 'slow-burn' losses of loan defaults. Large companies can raise money on the bond markets but smaller Mittelstand family firms are facing serious problems rolling over debt. Germany's industrial lobby VDMA this week called for a change in policy to prevent savings banks from choking off credit to its members, the backbone of the export machine.

The Wise Men said Germany's economy would contract by 5pc this year. They have upgraded their growth forecast for 2010 from minus 0.5pc to plus 1.2pc, but cautioned that unemployment will rise by another 300,000 as firms pull back from costly work-support schemes, known as Kurzarbeit. The pace of the current rebound - driven by restocking and short-term stimulus - is "not likely to be sustainable". The report said Berlin had botched its bank rescue programme by allowing lenders to choose whether to take part. Banks opted to cut lending rather than dilute their share base or accept onerous conditions from the state. They were reluctant to send a "negative signal" to the markets by admitting to distress.

Separately, the rating agency Moody's said this week that Spanish banks face "severe asset quality deterioration" and have yet to make provisions for over half of the €108bn (£99bn) of likely losses over the next five years. The figure could prove much higher if pessimists are right about the gravity of the Spanish slump. Under Moody's "stress scenario" losses could reach €225bn. "Spanish banks have so far demonstrated remarkable resilience, but Moody's remains concerned that many entities appear to be avoiding recognition of the true scale of asset quality deterioration on their books," said analyst Maria Cabanyes. The Bank of Spain has been praised for trying to restrain credit by tightening lending standards as the boom gathered pace over the last year. This has bought the country some protection. However, the effects of ultra-low interest rates in the eurozone washed over their best efforts. The Bank has since admitted that monetary policy set in Frankfurt was too loose for Spain's needs over an extended period.

Canada Consumer Prices Fall for Fourth Straight Month
Canada’s consumer prices fell for the fourth straight month in September, the longest stretch since 1953, on lower energy prices. The consumer price index fell 0.9 percent in September from a year earlier, following August’s 0.8 percent decline and matching July’s 0.9 percent drop that was the biggest in more than half a century, Statistics Canada said today in Ottawa. Economists surveyed by Bloomberg expected a 0.9 percent decline in the annual rate, based on the median of 22 estimates. The index was unchanged on a monthly basis in September, instead of the 0.1 percent gain economists predicted, after also being flat in August.

The Bank of Canada has said it will keep its key interest rate at a record low 0.25 percent through June 2010 unless the inflation outlook shifts. Today’s report is the last on prices before policy makers’ next decision Oct. 20. The central bank predicted in July that prices would decline 0.7 percent in the third quarter and remain below policy makers’ 2 percent target until the second quarter of 2011. Policy makers have also said that a stronger Canadian dollar, known as the loonie, is a risk to inflation. The currency’s 17 percent rise this year makes imports cheaper.

"Inflation is trending down because of slack in the economy and the leaping loonie, as a result the Bank of Canada will probably stick to its conditional pledge" on interest rates, said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. The Canadian currency slid 0.5 percent to C$1.0392 per U.S. dollar at 7:14 a.m. in Toronto, from C$1.0338 yesterday. The annual inflation rate excluding gasoline and seven other volatile items -- the so-called core rate that the central bank uses to discern future price trends -- decelerated to 1.5 percent from 1.6 percent in August. The core rate advanced 0.3 percent on the month.

The annual core rate was faster than the 1.4 percent median estimate of economists, and a 0.2 percent gain was forecast for the monthly core rate. Canada’s stronger dollar is a risk to the central bank’s inflation outlook, Governor Mark Carney and his deputies have said in recent speeches. "All else being equal, a persistently strong Canadian dollar would also reduce real growth and delay the return of inflation to target," Senior Deputy Governor Paul Jenkins said Oct. 8 in Vancouver.

Gasoline prices fell 23 percent in September from a year earlier, Statistics Canada said. Car prices dropped 5.9 percent, and clothing and footwear costs fell 1.2 percent. Canadian inflation has fallen during the deepest global recession since World War II; in September 2008, the country’s annual inflation rate was 3.4 percent. Canada’s recession began in the October-December quarter of last year, and the economy probably started growing again in the third quarter, the Bank of Canada has said.

The annual inflation rate was below zero in the 10 months from October 1952 to July 1953, according to data compiled by Bloomberg. Prices are also falling in other countries. The U.S. Labor Department reported yesterday that consumer prices fell 1.3 percent in September from a year earlier. In the 16-nation euro region, prices declined 0.3 percent over the same period, according to the European Union statistics office.

Ilargi: I don't like this sort of comparison (I even changed the title from Nazi- to Weimar Germany), but I hope you’ll watch the video, In my eyes, Chomsky makes a truckload of sense.

Noam Chomsky Compares US Right-Wing Media to Weimar Germany

For complete video go here

Darkness on the Edge of Monotown
Viewed from the outside, things have been going quite well for Russia recently. The United States has scrapped, at least for now, the plan to base missile defense sites in Poland and the Czech Republic. Germany and Russia seem to have overcome opposition in Europe to their Nord Stream pipeline, despite fears that it will solidify Russia’s dominance of the European natural gas supplies. Oil prices have recovered from the disastrously low — for Russia — levels of last winter. And, far from buckling under pressure from the United States over sanctions against Iran, Russian leaders felt confident enough to concede almost nothing to Secretary of State Hillary Clinton during her visit to Moscow this week.

Yet on the inside the country remains dangerously close to a serious breakdown of authority. In addition to the Muslim North Caucasus, which is already barely governable, the most vulnerable places are the company towns, which could catalyze a nationwide explosion of political turmoil.

Products of Stalinist industrialization, an estimated 460 company towns grew around a single plant or factory. Hence their Russian designation: "monotowns" (monogoroda). Most were erected, often by prison labor, in the middle of nowhere and in complete disregard for long-term urban viability, not to mention the needs and conveniences of the workers and their families. In addition to being the single employer, these "town-forming enterprises" are responsible for providing all social services and amenities, from clinics and schools to heat, water and electricity, for populations of 5,000 to 700,000. (There are also more than 1,000 similar but smaller "workers’ settlements.")

These crumbling monotowns seem frozen in the 1930s or ’50s; the fat years of 2000 to 2008 have passed them by. Worse yet, many of these places were among the first victims of the plunge in industrial output last year, when production fell by almost 20 percent — a rate of decrease unseen since 1941 and 1942, the years of the Nazi onslaught. As a result, the "town-forming enterprises" have begun laying off or furloughing workers, and salaries have been cut, delayed or unpaid for months.

For most Russian workers, there are unemployment benefits from 850 rubles to 4,900 rubles ($29 to $167) per month. (For those in the severe climate zones of the Far East, Far North and some regions of Siberia, the payments are as much as twice these amounts.) As many as two-thirds of the unemployed seem to be unaware they are even eligible for these payments, so of the estimated 6.5 million unemployed in Russia (nearly 10 percent of the work force) in July, only 2.194 million registered for benefits. And not one of the many reports about or from the monotowns that I have read so much has mentioned unemployment benefits as a source of sustenance.

At the same time, the local administrations in many regions have been of little help, having been bled dry by recentralization efforts during the presidency of Vladimir Putin that redirected 70 percent of local revenues to Moscow. As a result, some grocery stores have been forced to stop offering credit to customers who have not been paid for months. In particularly hard-hit monotowns, people are reported to be eating potato peels and spending their days foraging in forests for roots and berries to consume or sell for a pittance.

In Pikalevo, a monotown of 22,000 near St. Petersburg, citizens grew desperate after the shuttering of their plant, which produced cement, aluminum and potash. There were no prospects for work; people were without assistance of any kind. A resident told a reporter over the summer: "We are eating — excuse me — grass. It’s shameful." But when the town’s heat and hot water were shut off in May — the cement company had stopped paying the bills — it was the last straw. After an occupation of the mayor’s office brought no relief, angry Pikalevians blocked a major highway.

A few days later, Prime Minister Putin traveled by helicopter to Pikalevo. Russian crisis management techniques haven’t changed much since the days when czars threw boyars off the Kremlin walls to be torn, limb from limb, by rebellious hoi polloi below. With national television cameras rolling, Mr. Putin berated the local administration, plant managers and the plant’s owner, Oleg Deripaska, formerly Russia’s richest man, whose BaselCement conglomerate is now almost $30 billion in debt. He then ordered them to sign a pledge to reopen the plant. "I did not see you sign!" Mr. Putin barked at Mr. Deripaska. "Come here and sign!" ("And return the pen!" Mr. Putin snapped afterward.)

Of course, neither Mr. Deripaska nor the local government will be able to keep an all-but-bankrupt enterprise open for long. And while the Kremlin’s iron grip on the national news media has helped keep the monotowns out of the spotlight, Mr. Putin’s very public intervention in Pikalevo is likely to encourage more protests across the country.

This could be catastrophic: after all, a quarter of the urban population — 25 million people — live in monotowns and produce up to 40 percent of Russia’s G.D.P. And these struggling workers embody Russia’s work force: largely immobile, because the lack of affordable housing makes it impossible to seek employment elsewhere, and sadly inflexible, thanks to their overdependence on these paternalistic, enterprise-based social services, part of what President Medvedev has denounced as the "Soviet-style social sphere." Indeed, the monotowns seem more and more a bellwether of the national trend toward deepening impoverishment and further job losses.

According to the World Bank, this year the number of Russians below the poverty level has grown by 7.5 million to 24.6 million, or 17 percent of the population. An additional 21 percent, or almost 30 million, have incomes less than 50 percent over the poverty level. Together, that’s 4 out of 10 Russians. The Federation of Independent Trade Unions predicts that up to 400,000 more Russians may become unemployed in the next three months, while the World Bank projects that the unemployment rate there will reach as high as 13 percent by the end of the year.

Moscow has only one obvious option: increase its financial assistance to the monotowns many times over. But there are numerous impediments to making this happen. First, with the memories of the hyperinflationary 1990s still fresh in everyone’s mind, the Kremlin is wisely reluctant to print money and will instead try to stretch its remaining hard currency reserves to plug the growing budget deficit.

Second, though Russia already plans to raise $17 billion by issuing Eurobonds and to borrow billions more from the World Bank, the money will not materialize until next summer at the earliest. The other Group of 20 nations are themselves too strapped for cash — and too politically skittish — to produce an emergency assistance package.

Finally, even if the needed money was miraculously available today, it would take some time to disperse such enormous amounts among the hundreds of monotowns. Which is why the government’s mid-August decision to appropriate 10 billion rubles, or $340 million, for assistance to just half of the communities was not only too little but is too late.

There may, in fact, be nothing that can be done to prevent these ticking time bombs from exploding. And as the Iranian protests recently proved, in an age of cellphone cameras and the Internet, one demonstration in one monotown could ignite a wave of nationwide protests that Russia’s news media could not cover up, its riot police could not properly contain and its government may not be able to survive.

Certainly, this crisis sends a message of utmost urgency to a country still groggy from the oil-boom intoxication of the past eight years: go back to the decentralization and democratization reforms of the 1990s and early 2000s — or face the political, economic and social calamity of the monotowns on a national scale. In fact, President Medvedev recently outlined a strategic reform agenda to break Russia of its "humiliating dependence" on oil and gas exports and transform an economy incapable of invention and innovation into a world leader in "new technologies."

Just as helpful for the country’s stability and progress would be the next item on Mr. Medvedev’s agenda: developing a political system that is "open, flexible and internally complex." This would be a Russia far different from the one that Vladimir Putin bequeathed to Mr. Medvedev — a nation stripped of the much-needed shock absorbers of democracy, including an uncensored news media, a responsible and viable political opposition in the national Parliament and genuine local self-governance. Mr. Medvedev should act on these plans decisively, now, or else no foreign policy advances or new gas pipelines will prevent the disaster of the monotowns from consuming all of Russia.

Modern man a wimp says anthropologist
Many prehistoric Australian aboriginals could have outrun world 100 and 200 metres record holder Usain Bolt in modern conditions. Some Tutsi men in Rwanda exceeded the current world high jump record of 2.45 metres during initiation ceremonies in which they had to jump at least their own height to progress to manhood. Any Neanderthal woman could have beaten former bodybuilder and current California governor Arnold Schwarzenegger in an arm wrestle.

 These and other eye-catching claims are detailed in a book by Australian anthropologist Peter McAllister entitled ‘Manthropology’ and provocatively sub-titled ‘The Science of the Inadequate Modern Male.’ McAllister sets out his stall in the opening sentence of the prologue. ‘If you’re reading this then you — or the male you have bought it for — are the worst man in history.
‘No ifs, no buts — the worst man, period...As a class we are in fact the sorriest cohort of masculine Homo sapiens to ever walk the planet.’ Delving into a wide range of source material McAllister finds evidence he believes proves that modern man is inferior to his predecessors in, among other fields, the basic Olympic athletics disciplines of running and jumping. His conclusions about the speed of Australian aboriginals 20,000 years ago are based on a set of footprints, preserved in a fossilised claypan lake bed, of six men chasing prey.

An analysis of the footsteps of one of the men, dubbed T8, shows he reached speeds of 37 kph on a soft, muddy lake edge. Bolt, by comparison, reached a top speed of 42 kph during his then world 100 metres record of 9.69 seconds at last year’s Beijing Olympics. In an interview in the English university town of Cambridge where he was temporarily resident, McAllister said that, with modern training, spiked shoes and rubberised tracks, aboriginal hunters might have reached speeds of 45 kph.
‘We can assume they are running close to their maximum if they are chasing an animal,’ he said. ‘But if they can do that speed of 37 kph on very soft ground I suspect there is a strong chance they would have outdone Usain Bolt if they had all the advantages that he does. ‘We can tell that T8 is accelerating towards the end of his tracks.’ McAllister said it was probable that any number of T8’s contemporaries could have run as fast.
‘We have to remember too how incredibly rare these fossilisations are,’ he said. ‘What are the odds that you would get the fastest runner in Australia at that particular time in that particular place in such a way that was going to be preserved?’ Turning to the high jump, McAllister said photographs taken by a German anthropologist showed young men jumping heights of up to 2.52 metres in the early years of last century.

‘It was an initiation ritual, everybody had to do it. They had to be able to jump their own height to progress to manhood,’ he said. ‘It was something they did all the time and they lived very active lives from a very early age. They developed very phenomenal abilities in jumping. They were jumping from boyhood onwards to prove themselves.’
McAllister said a Neanderthal woman had 10 per cent more muscle bulk than modern European man. Trained to capacity she would have reached 90 per cent of Schwarzenegger’s bulk at his peak in the 1970s. ‘But because of the quirk of her physiology, with a much shorter lower arm, she would slam him to the table without a problem,’ he said.
Manthropology abounds with other examples:
  • Roman legions completed more than one-and-a-half marathons a day (more than 60 kms) carrying more than half their body weight in equipment.
  • Athens employed 30,000 rowers who could all exceed the achievements of modern oarsmen.
  • Australian aboriginals threw a hardwood spear 110 metres or more (the current world javelin record is 98.48).

 McAllister said it was difficult to equate the ancient spear with the modern javelin but added: ‘Given other evidence of Aboriginal man’s superb athleticism you’d have to wonder whether they couldn’t have taken out every modern javelin event they entered.’

‘We are so inactive these days and have been since the industrial revolution really kicked into gear,’ McAllister replied. ‘These people were much more robust than we were. ‘We don’t see that because we convert to what things were like about 30 years ago. There’s been such a stark improvement in times, technique has improved out of sight, times and heights have all improved vastly since then but if you go back further it’s a different story.
‘At the start of the industrial revolution there are statistics about how much harder people worked then. ‘The human body is very plastic and it responds to stress. We have lost 40 per cent of the shafts of our long bones because we have much less of a muscular load placed upon them these days. ‘We are simply not exposed to the same loads or challenges that people were in the ancient past and even in recent times.— Reuters


Slumlord said...

I don't understand the last article. Are you saying that I am becoming a wimp because I spend all my time reading TAE?

Anonymous said...


Great films on vacuum tubes. Even the music suggested a calm person, sure and steady, out to do a good job.

@ M
I second Stoneleigh. The two fall paintings are wonderful. I have no idea where Red Ricks may be, but it looks like where I live.

@ Carpe Diem
I am willing to discuss with you, if you can make a sincere effort to avoid hyperbole and exaggeration, as in "EVOLVE or be eaten" or more recently "Why don't we just kill off all other forms of life once and for all!". That sort of comment generates heat, but not much light.
If you are so inclined, go through El Galli.

@ The board
Does anyone else here wonder about our friend Gravity? Some of his stuff is great, e.g. yesterday at 18.30. As for the rest, I am at a loss even to comment.

@ El Galli
The most important part of the whole book is page 19, lines 6 to 21.
Have fun in Costa Rica.


bluebird said...

Ilargi - The Elizabeth Warren video is double-posted. She did have 3 video clips on the TechTicker, per NakedCapitalism

(2 videos there, plus a link to the 3rd)

Bukko Boomeranger said...

The historic photo you chose to illustrate this certainly reminds me of that other infamous one from 50 years later...

Ilargi said...


That wasn't even 30 years later.


I has already solved that. Thanks.

Stoneleigh said...

FB and M,

The fall paintings are my favourite too. I have tremendous respect for the talent it takes to paint like that (a talent I entirely lack).

Wolf at the Door said...

hmmmm....a lot of "what if's" in your post today Ilargi....

We all know that if the accounting was honest and the bailouts did not happen that the major banks would be toast and housing would be down 70-90%....

but the accounting is NOT honest and the bailouts DID what is the point discussing sets of alternate realities....let's deal with the one we got.

We know that banks will be allowed to bleed the treasury to maintain the illusion until they can' which point we have a crack up boom.

I just think that point is farther in the future than what is expected generally around here given that everybody seems perfectly comfortable with living in bizarro world in the meantime.

Erin Winthrope said...

I know of only two credible websites that have argued strongly for a market crash this fall. Those websites include TAE and The Daily Reckoning.

Other bears will acknowledge that the market seems overbought. But in the same breath, they'll add that they don't really have any idea how much longer the market rally can last.

Many bears are quite emphatically bearish in the 6 month - 2year time frame. From now to 6 months from now, however, they don't seem too inclined to weigh-in on what will happen. The long term trajectory is clearly down, the short term is decidedly grey.

TAE on the other hand has repeatedly argued that the moment for the downward momentum is very nearly at hand. At any moment in the next 8 weeks, the descent will commence.

From what I can gather, this statement is based simply on your gut impression. The arguments that you provide don't offer a clear justification for a belief that the market decline will begin soon rather than 6 months from now.

If I'm mistaken, could you reiterate your justification.

Ilargi said...

Good to see more bullishness here. I'm waiting for El G. to turn. And VK. Come on guys, can't you see them great numbers? What are you waiting for?

Erin Winthrope said...

I agree the numbers are horrible. The numbers have been continuously horrible ever since the market rally began in March.

Losses, losses, and still more losses -- all of them covered by the FASB accounting blanket. And yes, after 7 months, and a steadily growing pile of rotting assets, the stench of decay is getting hard to hide. But it seems to me, the authorities may or may not have enough cologne to dump on the pile to keep up appearances.

The key phrase here is "May or May not have enough cologne."

I really don't know.

I don't understand how TAE knows with such certainty that the perfume will wear-off within the next 8 weeks.

Could you explain how you know this with such certainty?

Greenpa said...

Snuffy- "Do your Arcturian friends pick up hitchhikers?I could go for a lift to the next quadrant..."

You're in good company. :-) I'm not usually a fan of posting one's own taste in poetry here- but what the hey; consider this revenge.

This is e.e.cummings; a Lost Generation genius formed in the First World War.
pity this busy monster, manunkind,

not. Progress is a comfortable disease:
your victim (death and life safely beyond)

plays with the bigness of his littleness
--- electrons deify one razorblade
into a mountainrange; lenses extend
unwish through curving wherewhen till unwish
returns on its unself.
A world of made
is not a world of born --- pity poor flesh

and trees, poor stars and stones, but never this
fine specimen of hypermagical

ultraomnipotence. We doctors know

a hopeless case if --- listen: there's a hell
of a good universe next door; let's go

Greenpa said...

" Sure enough, it was right: the pre-approved credit card came with a 79.9 percent APR. "

ok. now THERE- I'd have to say it may be morally justifiable to accept the card- and max the card out with the full intent of defaulting immediately.

Any other way these sub-slime will every see justice?

Hombre said...

I don't see that the exact date of the coming crash matters much, whether it is within weeks, or months (or if you must, at most a couple of years).

We could just increasingly slide into economic oblivion rather at a 45 deg angle as opposed to a precipitous 90 deg crash. So what?

It is coming, in some ways it has started with the 2008 big bank panic, and there is only one way for us to go. Whether S and I predictions are spot on matters little, the point as I see it is that they offer salient and abundant daily evidence of their position and it makes good sense. If you don't agree with their basic timing--fine? You know it's going to happen, and soon!

Screw the managed "MARKET" and the crooks on Wall Street--unless you are a moneychanger yourself and are looking for a profit!.

What should matter to us is making efforts to prepare ourselves and help the others around us prepare for this complex predicament as best we and they can.

Hombre said...

Ilargi - El Galileo and VK (and Snuffy, etc.) are a helliva lot smarter than that. ;-)

Greenpa said...

"Modern man a wimp says anthropologist "

I find these periodic outbursts by "anthropologists" among the most amusing examples of "humor" available.

They are able to talk themselves, and the National Geographic, into believing absolutely anything.

One of my favorites is the long held and widely disseminated concept that the genus Homo had to evolve "long legs" along with the upright stance, before it was able to "migrate out of Africa".

The mind boggles- if you've ever studied paleontology or evolution. Trees- and grasses- with no legs whatsoever, have been "migrating" around the globe forever; leaping across seas and mountain ranges. And yet not no one spoke up, for decades, and said... "um.. this is really stupid, guys..."

Until, of course, they found a short-legged hominin way outside- and could run the "Scientists Astounded By New Fossil!!!" headlines for a couple years.

This bit is no different. The actual headline should be: "Hunter-Gatherer Body Type Different From Urban Homo."

Scientist completely unsurprised.

Jim R said...

"The bear market will begin when the last bear has thrown in the towel"

-- not sure where I heard that one.

Is it time to dump the ultrashorts? El G, you still in?

Edward Lowe said...

Hi Greenpa:

As an "anthropologist," I think the "anthropologists bites men" story falls in a long line of such stories dating back to the coverage of "lightning stones" in the 18th century. The media love the speculative claims by the few "anthropologists" who make them ... there is a nice sordid history of a few individuals becoming famous on the legs of almost no paleontological evidence. As you know, the heavy lifters of science are never famous, they are too busy collecting, analyzing, and weighing evidence and making the relatively careful claims that such evidence allows. BTW - it's happens among other evolutionary "scientists" as well like Richard Dawkins, an unabashed fame whore and media darling. But, not a scientist.

Apropos of that, the same could be said of financial and environmental prognostication, fame whores make outlandish claims trying to attract the media and the public to their names and, usually, their financial interests (generally books & speeches or 'financial services' for sale), but it is the hard work of collecting, analyzing, and carefully interpreting data to illuminate theory that will prove most productive in the end.

Of course, sometimes I wonder if anyone is actually doing the latter anymore...

Erin Winthrope said...

If one writes a finance blog, you'd be foolish to assume that anything but a small fraction of the readers are interested in matters apart from issues of market direction and timing over the short-term. Subtract those factors and you aren't left with much that can't be found elsewhere. Discerning the general direction over the longterm is plain to see, and one doesn't need a daily update for that.

Within a year or so, we're all going to hell in a hand-basket. There you have it.

Why on earth do you need to read that 365 days a year?

Read it 3, 4, 5, 20 times and you should get the gist of things.

Accurate predictions about the short-term are what the grand old blogosphere lacks.

EconomicDisconnect said...


I think I have reached the absolute limit on patience. This story from Clusterstock shows the FHA (backed by you and me of course) extending crazy loans to a 20 year old with dreams of flipping houses just like the old days:

I give up, I really do.

CT-Hilltopper said...

If you're waiting for people to turn bullish, you'll be turning blue in the face and be carried out in an ambulance before you'll get to me.

I've been warning people in my family about this sinking ship long before the Dow went to 14,000.
Why? Because of the debt. We can't go on the way we are with so much debt. It has to be dealt with before the economy can be considered robust, no matter what number is posted on the Dow.

Now, Connecticut has started tapping the Unemploment Trust Fund to cover it's payout of unemployment benefits. This is the first time CT has had to dip it's pen into the federal well since the early 1990's.

The comments at the end of the article are the most telling. This comes from Todd Martin, from Todd P.Martin Economic Services of Fairfield CT. :

"It means we're borrowing from the future to pay for right now and the rate of borrowing is going up exponentially," he said. If economists' predictions are right, in the near future, "40 percent of your tax dollars will just pay for the interest of the debt. It's not a very constructive use of your tax revenues."

In Connecticut, federal money is helping prop up state spending for social and other programs, he said, but that's going to hurt this state and others down the road.

"The problem for the states is it is going to be worse in a year or two years from now," he said. "They haven't addressed the spending side of things and revenues keep dropping."

Spice said...

Okay Greenpa now you're getting personal. Ripping on anthropologists when you're married to one. Oh shoot I forgot... I rip on them too! Never mind.

As to those who expressed a desire to hear about the trials of H1N1...
Here's my last post on the subject. Sorry for the delay getting back to you, it's just been super busy with harvesting while doubled over with pneumonia coughs.

All the flu symptoms are gone now, but I'm still fighting the pneumonia. I have a terrible cough and persistent low grade fever. I'm on a second round of antibiotics (oh joy of joys) and hope to have it totally knocked out soon.
Luckily I managed to avoid hospitalization, and have been able to do light harvest work for the past few weeks.
Moral of the story. There is light at the end of the tunnel. (If you can gasp your way through it ;-) )

Back on topic...

I find myself of two minds regarding the collapse. I want it not to happen (or to happen in another year so I can be better prepared). So I can understand the emotion behind Wolf's and others more bullish postings.
At the same time, I know from personal experience that the world is a big, mean, nasty place that will grind you up and use your bones for soup. (And that was before the whole Bailout) So I can't see our bankers and economists and many of our world leaders giving a rat's *ss about the little guys. The crash will happen, so the other half of my person wants it to happen now so we can begin to rebuild. (Yes I am painfully aware how terrible the rebuilding process will be)

Hope is good, it's keeps us human, so too does pessimism.

Anonymous said...

Within the last several days there have been a sudden uptick in the number of bets for crude oil above $100 per barrel. This has had people scratching their heads for bit. There is zero economic reason for such a bet.

Now we have word that 5 of the top Iranian Revolutionary Guard senior commanders were executed by a lone suicide bomber. Iran alleges US involvement.

Meanwhile, last month we had the US Congress quietly increase its order of the new 15 ton bunker buster (non-nuclear) weapon from 4 to 10 weapons and to demand delivery in December, not next spring. This happened just days before the public announcement that Iran has a second reactor facility. Which US command wants these bombs? Yes, the same command that overseas the Middle East.

We live, ladies and gentlemen, in a fascist state, a manipulated economy. There is evidence, not conclusive but suggestive, that this economy is about to be manipulated again, this time via war, for the benefit of... Goldman Sachs.

If oil spikes because of this, Goldman will make a killing, the stock market will crater, and the flight to dollar safety will be on. Bernanke will have "saved the dollar", at the expense of the market, of course. But the market run up was always an illusion designed to part suckers from their cash anyway.

Ilargi has always said this is a political crisis, people. If war erupts now with Iran, if those weapons are used, if oil spikes to $100 in this lousy economy, then that's as plain of evidence as you will ever get that we live in a fascist state.

Wolf at the Door said...

@ Ed Gorey

"Could you explain how you know this with such certainty?"

They don't. That is what makes it so silly and somewhat tragic at the same time. To have genius minds such as our hosts provded and to present all of the information and data in such a clear and logical way as our hosts do and then to slap a market crash timing prediction on top of all that good stuff is ridiculous.

It is like squirting a big blob of catsup on a top of the line filet mignon. It kind of contaminates the whole meal. Even if it turns out to be a prescient call it is a folly at best IMO. Like a cheap parlor game.

And I am amused to be called "bullish".....try selling that idea to my family and friends....I guess one man's bull is another man's doom and gloom. Its all relative.

Jim R said...

Thanks for the revenge, Greenpa. It resembles gravitas.

Ilargi, another fine collection of articles. The Chomsky clip was, I must say, disturbing. He has long been dismissed as a flake due to his failure to cheer-lead for the MIC, but we did study his grammars in CompSci you know.

Oh, and for any newcomers to this discussion, I & S have consistently said (for the last couple of years at least) not to play with ultrashorts or any other silly leveraged "investment vehicles" but to keep your money in the form of money. A house isn't an investment any more, but it can be a place to live.
Keep enough currency for a few months close at hand, and treasury bills recorded at your local bank; with Treasury Direct, the money can be in your name not the bank's. We are due for a spell of deflation, and it's hard to say how long your bank will be there.
Longer term, get in touch with someone who has a bit of land -- and learn some skills such as beekeeping or smithing. (I'm still working on taking this advice)

... check is in the mail ...

VK said...

@ El G

Good to see more bullishness here. I'm waiting for El G. to turn. And VK. Come on guys, can't you see them great numbers? What are you waiting for?

*Chuckle* :)

Ilargi said...

Brilliant. Google identifies with economic terminology to such an extent that this is one of the headlines in its finance section.

Bear invades Hayward grocers; chills out in beer cooler


Ilargi said...


Regarding the $30b from the FDIC to Goldman Sachs, I think that's debt guarantees, not capital."

I did note that (the number is quite high compared to other sources I've seen) but left it in, since
1) it's MSNBC reporting
2) it's Ratigan's responsibility
3) I didn't want to throw out the entire piece because of doubts that might or might not exist
4) it's not so much the shape the aid has, but what Goldman does with it

Hombre said...

Ed G - "If one writes a finance blog, you'd be foolish to assume that anything but a small fraction of the readers are interested in matters apart from issues of market direction and timing over the short-term."

I agree, but I also find this blog to be far more than just a finance blog. It covers much that is political, crisis preparatory, eco-related, energy, and even touches on various other related subjects (some dampened by the hosts).

Ilargi said...

Wolf, Ed

How much of what a you express would you say has been shaped directly by a 10,000 Dow and the intense media pressure on green shoots and the like?

Isn't that what makes you claim we cannot know what we say, while you know very well you have zero proof for that?

It's obvious that you have grave doubts about the whole situation and that you would apparently feel better if we did too, but I think it would be much more useful to you if you try to identify the process that leads to the (non-) conclusions you draw.

Stoneleigh said...

Wolf at the Door and Ed Gorey,

It is like squirting a big blob of catsup on a top of the line filet mignon. It kind of contaminates the whole meal. Even if it turns out to be a prescient call it is a folly at best IMO. Like a cheap parlor game.

Prescient calls are never folly, but they always look ridiculous at the time because they always conflict diametrically with received wisdom. Contrarianians are fated to look like fools at major turns, but the alternative is to step on the gas while looking only in the rear-view mirror. Folly is to jump on the same bandwagon as the rest of the herd at a sentiment extreme (greater fool territory).

For instance with dollar bear sentiment in excess of 95%, who is left to drive the trend further in the bearish direction? There is essentially nowhere to go but up, whether it happens immediately or in a couple of weeks.

The upside potential in the markets is very limited right now IMO, but the risk of betting on greater upside is increasing by the day. You are far better off in cash on the sidelines at this point, unless perhaps you are a very aggressive speculator with a very short term time horizon. For almost everyone the risk isn't worth it.

This is more than a gut feeling. Although counter-trend moves are difficult to call (because they are choppy, over-lapping, and can take many different forms and combinations of forms), there are still limits. Market moves are fractals, and as such are probabilistically predictable. IMO the rally is topping. Watch this space.

Bigelow said...

"If you apply the findings of the monetarists to the present situation, here's what you get. The peak growth rate in the money supply occurred last December ‘08, so based on the general monetarist schedule:
• Some of the effect on stocks and bonds should already have been felt.
• The peak effect on economic activity should come between the middle of 2010 and the middle of 2011.
• The peak effect on consumer price inflation should come between the middle of 2011 and the end of 2012.
• When you hear would-be opinion leaders cite the current absence of rising prices at the supermarket as proof that all the new money isn't a source of inflation, don't believe them. It is much too early for the inflation bomb to be going off, even though the powder has been packed and the fuse has been lit.
• If the large and growing federal deficits and the Federal Reserve's unprecedentedly easy policies tempt you to leverage up on inflation-sensitive assets, such as gold, give the idea a second thought. It likely will be a year or more until price inflation becomes obvious and undeniable (which is what it would take to bring the general public into the gold market). In the meantime, your inflation-sensitive assets could get paddled rudely as the deleveraging that began last year continues." -Casey Research Sept '09

Greenpa said...

Edward Lowe- :-) I appreciate your response. Indeed, no field is without its whores. I've written my own diatribe about the fame whores, whom I collectively call Dr. Billy -

"Of course, sometimes I wonder if anyone is actually doing the latter anymore..."

:-) I'm always delighted to see such evidence of intelligent life.

Greenpa said...

getyersefconnected- "I give up, I really do."

Good to hear! Now, I assume you realize that it's gasoline, not diesel; cotton cloth, not polyester, and glass, not plastic bottles?


And may many more join you soon.

bosuncookie said...

From "The Nation"

Meet the Hazzards
NOMI PRINS & CHRISTOPHER HAYES : If banks were people, here's what the full $17.5 trillion bailout would look like.

z said...

here is a comment I made on March 5, 2009 @ 3:42 PM on this site: "there is a TA support level of 666 today for SPX, it is only 11 points away now. back a while ago, BDI hit 666 and marked the low (and had since rebound about 2X). could there be an interesting coincidence?"

we all know what happened since.

are we at another turning point? my "long term" TA indicates that the weeks of Oct. 25-Nov. 1 and the SPX level of 1111 are the ones to watch.

Nestorian said...

@ Ed_Gorey and other doubters,

We need to keep in mind that Stoneleigh's prediction from the spring for a market top this fall is still right on target. She predicted Dow 10000 in the late summer or early fall. That is right where we are now.

I recommend that you read some of Prechter's books, and maybe subscribe to some of his services at elliotwave. I have done so myself over the course of the past two months, and it has been very illuminating.

From my standpoint, having read those things, you are being pressed by the prevailing social psychology into becoming the very last members of the herd that has pressed the market upward, thus signaling its imminent top. (And don't get me wrong: I feel that pressure to become part of the herd too, personally. But reading Prechter's stuff has helped me gain a bit of the kind of perspective and emotional distance that Stoneleigh has in an abiding way.)

Also, what Stoneleigh says about the generally messy and complex character of countertrend moves - as opposed to the generally straightforward and simple-to-predict moves with the trend - is very true, based on my reading of Prechter. Prechter himself called an end to this rally as having happened on Sept. 23, but he has been proven wrong. While this is emotionally unsettling to me, these kinds of relatively small scale errors are par for the course when dealing with the messiness of large countertrend rallies using elliot wave theory.

Bigelow said...

The 100 day exponential moving average looks about to rise thru the 300 day ema on the S&P500 index, last time it did that there was four years of Bull market; time before that was most of a decade (’91-’01) on the upswing. Nothing guarantees a repeat.

If there isn’t a stock market crash by early March 2010 then the Boyz pulled of another master con for a few more years anyway.

Syn said...

Elizabeth Warren Video

The Coming Collapse of the Middle Class ~ March 8, 2007

Excellent lecture, almost 1 hour in length.

VK said...

In another sign of how deep the global recession has become, the ports of Los Angeles and Long Beach on Friday reported their worst combined import statistics for September in nine years.

September is often the busiest month at the nation’s biggest port complex, making it one of the best barometers of the health of the economy and international trade.

The port of Los Angeles received 309,078 containers packed with imported goods in September, representing a decline of 16% from the same month last year and 27% from September 2006, L.A.’s best month ever for imports. Long Beach received 224,924 import containers in September, a drop of 19% from a year earlier and 32% from September 2007, the port’s best September ever.


I'm really feeling bullish now :)
Go team yaay!! :p

Wolf at the Door said...

"How much of what a you express would you say has been shaped directly by a 10,000 Dow and the intense media pressure on green shoots and the like?"

None of it....I could care less about the quote on the Dow and I don't much expose myself to the more bullish contingent on what passes for mainstream media these days.

"Isn't that what makes you claim we cannot know what we say, while you know very well you have zero proof for that?"

I am not sure what you are saying here.....are you trying to say that you KNOW that the market will crash before year end? I don't need proof that somebody does not know that which is unknowable....a crash may be may make sense.....but don't tell me that you KNOW it's going to happen in the next couple of months because you don't....and neither do I.

"It's obvious that you have grave doubts about the whole situation and that you would apparently feel better if we did too, but I think it would be much more useful to you if you try to identify the process that leads to the (non-) conclusions you draw."

Yes....I have grave doubts about your call predicting the timing of a market crash....that is really the only thing that I have expressed any doubt over.
While I agree that a crash makes sense, that does not mean it is going to happen anytime soon.

Ilargi you have expressed before that you were taken off guard and were suprised at how depraved the gov't "response" to this crisis would be. We both agree (i think) that those actions have delayed the inevitable and simultaneously made the coming bust that much worse, in a highly unjust and impractical fashion....

All I am saying is that while I know there are definite and finite limits to Fed and Gov't power I don't yet think that they have exhausted thier box of B.S. especiallly given how gullible the markets have been to date in positively responding to all of the silly little programs and guarentees offered up by our essentially bankrupt gov't.

In any con game the duration of the game is dependent on the skill and resources of the con artist and the ease of gullibility (or lack thereof) and resources of the mark.

It is not that I think that the skill and resources of our gov't are all that abundant but that the markets are dumber and more easily manipulated than in any scenario I had imagined and I see no end to the willingness of the herd to cling together and engage in willful suspensions of belief regarding the truth and lies about our day to day reality....the collective is not ready to deal with what we have got coming and so we (as a group) won't....Yet. It's as simple as that.

Ilargi said...

Wolf, you're the one expressing "certainties", not us, and you seem to miss that completely:

"There will be no crash.....the real economy is stabilizing and there is simply no reason for another panic at this point in time."

We on the other hand talk about trends, and yes, gut feelings play a part in that, and yes, we think the risk of major turmoil in the stock markets this fall is huge . To judge how off we will be, you might want to look at how off we've been so far.

NZSanctuary said...

Good Noam Chomsky video in the articles section, but as much as I love Noam, I think he underestimates the urgency of the crises we face (overpopulation, ecological, peak oil, etc.).

He raises the notion of women's education to reduce fertility rates, for example. That's fine if (a) you believe everyone can be educated to a high level, and (b) we have time to make this a global movement.

It seems to me that the confluence of crises we face needed to be addressed during decades past, not some time soon. Just because we haven't yet felt the full effects of our actions, doesn't mean the situation now isn't urgent on many levels (population, energy, economic/political, environment, etc.).

Anonymous said...

"NELP: Thousands Losing Unemployment Benefits Daily"

"According to an analysis from the National Employment Law Project, 400,000 workers exhausted their federally-funded jobless benefits in September and another 200,000 will do so by the end of this month, resulting in an average of 7,000 workers a day seeing their benefits end. By year’s end, 1.3 million workers will exhaust their jobless benefits, reflecting today’s record rates of long-term unemployment."

Erasmus said...

Stoneleigh what do you see happening to commodity economies like Canada, Russia and Australia who can be largely self-sufficient on natural resources and agriculture.

thethirdcoast said...

I've been out collecting various items I'll need for the interview process, and the retail implosion shows no signs of slowing down.

Nearly everything in the department stores is on sale or clearance. Of course, my opinion is that most items for sale are so shoddy that the sale prices are a better reflection of their true value.

The local Office Depot is closing its doors. This in a metro area of over 1 million people that has been less affected by the recession than most. Whatever shall we do with only a Staples and OfficeMax?

@ el gall:

I managed to pick up an HSM suit at a massive discount. I am told this is the brand our erstwhile President wears. Thus, I am eagerly awaiting my invitation to the next Bilderberger gathering.

el gallinazo said...

As I go to sleep on the edge of one of the more active volcanos in this hemisphere, I am feeling rather volcanic myself.

Yes I am still long on my shorts, and I don't intend to take them to the laundry.

I predict DOW 14,000 and intend to ride a tachyon back in time to reach it.

Nobody can predict the future with absolute certainty, anymore than one can predict the outcome of a quantum event. But one can predict the probability of a quantum event occurring to incredible precision.

Submit your advice said...

I would also mention Michael Panzner as someone who, like Stoneleigh, has been calling it right all along, for years, and we are right where they said we would be, right up to this very moment.

Disclaimer: short oil svcs. Long dollar.

Slumlord said...

Previously, Ilargi and Greyzone have both argued that the financial crisis is a symptom of a crisis in government legitimacy. This seemed a stretch. In my mind, for a government to be illegitimate, it must have cheated to stay in power. The recent fraudulent elections in Afghanistan are an example of this. Suspicions regarding George W. Bush’s elections notwithstanding, I have a hard time believing that a high percentage of governments are in office today due to outright cheating. Manipulation, yes, but cheating, no.

Now I am coming to realize that the reason I disagreed was likely due to a difference in how one defines legitimacy. Some lecture notes from a class I am taking to illustrate the alternate definition. To work up to my point, I will provide quotes and my interpretation/reaction:

“Contemporary political economy is concerned with the foreign policy of the welfare state.” In other words, the role of contemporary government is to provide for the economic wellbeing of the population. In the past, defending territory was the main purpose.

“Interdependence [between countries] became more important and, according to classical liberal economics, inevitable.” This is saying that countries are more peaceful now than in the past because they need to cooperate on economic issues. This cooperation is how they provide for economic wellbeing. Moreover, the dominant economic theory views this as inevitable.

“State legitimacy came to rest, in part, on providing economic as well as physical security.” Another way of putting this is that people view their governments as legitimate because the governments make sure the people are well fed and safe.

“Furthermore the modern citizenries are extremely demanding; they have asked the state to provide more and more services to them. Some services…require increasing levels of cooperation among states.” Here the professor is asserting that citizen expectations are increasing, and that in order to meet those expectations, countries will find it necessary to cooperate more than in the past.

My question is this: Suppose that it is true that states must keep their citizens well-fed and safe in order to be seen as legitimate by those citizens. What implications are there for international cooperation if liberal economics (as per Bernanke and Geithner) prove wrong? What happens when states cannot provide economic wellbeing and security for citizens? Is this inability because the state made the choice to provide security for banks instead? Does this imply that the future will bring more wars because there is less economic reason for states to cooperate? Can we avoid this future? If so: how?

snuffy said...

A note before bed...Thank you greyzone,you just gave me a needed chill.Little bits of info like that are the only data that we can trust to project coming events.It looks like O-man has decided to shuffle the cards he has with a hot,nasty knockdown-dragout with Iran.Oh joy.

I have been working out all the little bugs in this old truck I converted to propane.It may have been a wise move.....

Interesting thought about O-man.If he really goes after Iran,the economic consequence for the whole world is such that it could work to distract the public from the could also cover his ass for doing all kinds of extra-legal things well as be used for a excuse why things have gone to complete and utter hell,instead of the gang rape of our monetary system by the banks and gold-in-sacks ...he could come out smelling like a rose......

If we see a "Ka-boom" soon in the mid-east...

This makes way to much depressing sense...



snuffy said...

Thanks greyzone Those bits of info have got me convinced we will see a war soon.

Most of the bugs are out of the propane truck now..

O-man might see this as a good method of killing a whole bunch of birds with on[stone] war.

He can blame the collapse on it...

He can seize a whole lot of power with it...

He can stifle a whole lot of dissent with it...

He can demand a whole lot of change from it...after all "there is a war on"...Bush did this in spades.

My conjecture is they will use any reasonably good excuse to turn off the lights in Tehran at first opportunity


on that happy note



Bukko Boomeranger said...

I was just reading Paul Krugman's latest column, in which he quite sensibly bashes Gollum Sucks, and something struck me as he was going on about "banks that LEND to people."

What struck me is how the word "lend" is a euphemism. "Lend" substitutes for "make money up out of thin air." I knew this before, having taken ECON 101 in university, when I learned what fractional reserve lending was. But seeing the Guignon video about "Money as Debt" drove it home more clearly.

If people like Krugman, and all business writers would reinforce the point that even nice, normal consumer-oriented banks don't "lend," they "make money up from thin air" (yes, I know it's based on a 10% reserve) then the average punter would know what's at the heart of the economic system. And hopefully they'd be scared witless.

I know it will never be written that way, but from now on, whenever I see the word "lend," I'm going to mentally substitute "make money up..."

Bukko Boomeranger said...

Snuffy said:

O-man might see this as a good method of killing a whole bunch of birds with on[stone] war.

He can blame the collapse on it...

He can seize a whole lot of power with it...

He can stifle a whole lot of dissent with it...

He can demand a whole lot of change from it...after all "there is a war on"...Bush did this in spades.

Funny, Snuffy, I used to think all that about Bush. That was a big part of why we left the country.

And if someone had told me as I was packing my bags in 2005 that America would elect a black Democrat as president, and HE MIGHT DO THE SAME DESPOTIC THINGS THAT I FEARED BUSH WOULD, I would have said that person was crazy on several levels.

Sad thing is, I now have to agree with what you said. And that's why we're not coming back.

Hombre said...

Greyzone - I thought through some of your same notions and wondered which ones were "for public consumption" and which ones genuine indicators.
But indeed someone did kill those Rev. Guard leaders!

A quote from the link in Greyzone's interesting post (above) -

"Fascism is to be distinguished from interventionism, or the mixed economy. Interventionism seeks to guide the market process, not eliminate it, as fascism did. Minimum-wage and antitrust laws, though they regulate the free market, are a far cry from multiyear plans from the Ministry of Economics.
Under fascism, the state, through official cartels, controlled all aspects of manufacturing, commerce, finance, and agriculture.

Hombre said...

Snuffy - "O-man might see this as a good method of killing a whole bunch of birds with one [stone] war."

That cataclysmic event, if it happens, would surely seal the box on his character... would be all anyone needed to know about the man.

I abhor his capitulation to the forces of big finance, but cut him a little slack (very little) for his youth and inexperience. This though, another worldwide act of aggression, would take things to another and very tragic and consequential level.

Bigelow said...

“The dollar may drop to 50 yen next year and eventually lose its role as the global reserve currency, Sumitomo Mitsui Banking Corp.’s chief strategist said, citing trading patterns and a likely double dip in the U.S. economy.

“The U.S. economy will deteriorate into 2011 as the effects of excess consumption and the financial bubble linger,” said Daisuke Uno at Sumitomo Mitsui, a unit of Japan’s third- biggest bank. “The dollar’s fall won’t stop until there’s a change to the global currency system.””
Dollar to Hit 50 Yen, Cease as Reserve, Sumitomo Says

jewishfarmer said...

You know, in about 2 1/2 months, instead of hypothetical (and kind of silly) debates about whether Stoneleigh and Ilargi got it right, we can have concrete, factual debates about whether they got it right. Is that really so long to wait? ;-).

Sharon Astyk

Bigelow said...

Previously I noted a pending 100 & 300 day moving average cross could mean a bull U.S. stock market. Though its not news to most people, the US$ and stock market often move in opposite directions. Adjust the market returns for inflation or perhaps a declining dollar and you get a different story:

"Dow Nominal and Inflation-Adjusted"
43 Years Of No Real Gains

Ilargi said...

"You know, in about 2 1/2 months, instead of hypothetical (and kind of silly) debates about whether Stoneleigh and Ilargi got it right, we can have concrete, factual debates about whether they got it right. Is that really so long to wait? ;-)."

Now, now. What fun would that be?

Tristram said...

I appreciate that I&S have the nerve to make timed predictions. It's too easy to just say collapse, someday. With more detailed predictions, I&S feel the heat to review and deliver the evidence every day, which makes TAE a good read.

As I recall, the original prediction for end of sucker rally was late summer, which gradually morphed to late summer / early fall, to early fall, to fall. There it stayed. Fall technically ends about Dec. 20, but nothing happens at Christmas so January. If no collapse by one week after the December retail sales, it was officially premature.

The part that puzzles me is: the evidence for a fall collapse seems to be always the same: stock market divorced from real economy again; foreclosures up again; employment down again; state tax revenues down again; banksters clean up again, etc. It's been the same story for six months, and I wonder how I&S know this time it's for real. How do they know when Ben and Timmy will run out of tricks? I sympathize with the impatient crowd. But a little drama is a good thing, better than complacency.

Hombre said...

Sharon - What do you expect? Patience?! ;-)
Of course they, I&S, make no precise predictions anyway, just some very well educated economic and political trend analyses.

Denninger on fire..."There is no legitimacy remaining in the US Government when it comes to accounting matters, banking or financial regulation. The sad fact of the matter is that the United States Government has declared itself to be illegitimate just as the British Government did in the 1700s, and we know how that ended. In today's world the more likely outcome is an internal collapse as currency debasement gets out of hand is foreign capital flight provokes wild commodity price spikes that destroy the American Middle Class, instantly rendering 100 million people destitute, homeless and angry should our policymakers not arrest the idiocy before it reaches that stage."

team10tim said...

Hey hey Bukko,
RE: lending vs making money out of thin air

I thought you might like this explanation as to why we call it lending

Henry Ford:
It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.

We have to call it lending, if we used a more descriptive word it would cease to occur.

Weaseldog said...

Slumlord said..., "Previously, Ilargi and Greyzone have both argued that the financial crisis is a symptom of a crisis in government legitimacy. This seemed a stretch. In my mind, for a government to be illegitimate, it must have cheated to stay in power."

In the United States of America, legitimacy is documented and defined by the Constitution of the United States of America.

The various government's adherence or lack thereof to the amendments in this document can be used as a measure for determining how legitimate the government is.

A strong case can be made that the government has abandoned this document in principle.

If we look undeclared wars, wiretapping, torture, indefinite detention of suspects without charges, illegal searches and seizures, the abandonment of habeus corpus, the legalization of bank fraud, legalization of birbery of public officials, etc... etc... etc...

Our government appears to have made an intentional decision to become complete illegitimate.

The US Constitution was designed as a way to codify the rights of citizens and the limits of government, to minimizes government abuses.

Before the French Revolution, the French government's job was to fatten up rich people while oppressing the starving populace. The people decide that the government was not legitimate and they replaced it. the government that followed, did a better job of sticking to it's codified limitations.

Some governments maintain power by going around and dragging people out of bed, shooting them down in the streets and leaving their bodies to rot, as an example of what dissent will get you. One might say that these governments, though often lauded by the international community for their cheap labor, might be considered illegitimate.

Our government has become a habitual law breaker and has rewritten laws to make it legal for the biggest banks to commit fraud on a massive scale. It has stolen public funds and created massive debt without due process. It has become an entity that is no longer bound by constitutional restraints or the rule of law, while, continuing to impose these laws upon us. And it has done so, to create massive profits for international corporations at the expense of our rights, prosperity and security.

The purpose of the US government now is to make wealthy people fatter. It serves no other mandate, except as lip service.

Is it legitimate?

Greenpa said...

Was Kurt Vonnegut a wise man? Besides being a curmudgeon?


You may want to consider the possibility that The Big Bammer read The Sirens Of Titan as a kid- and took this bit seriously:

"Any man who would change the World in a significant way must have showmanship, a genial willingness to shed other people's blood, and a plausible new religion to introduce during the brief period of repentance and horror that usually follows bloodshed".

Historically, the evidence is in favor of that being correct.

Next question: does the world need to be changed?

Will either logic, or the truth, change it?

Mike said...

Are "they" willing to let the dollar go for the sake of the markets?

Likely not.

Right now the Dollar has been getting hammered with some urgency in the past week or so, helping sustain the last drops in this bull dead cat market.

Once "they" are ready to prop up the dollar and abandon their tacert support of the market we will begin to see that action to the downside.

"They" cannot have it both ways, strong dollar with horrendous fundamentals and a strong market with horrendous fundamentals.

The dollar is scaring people into the market, and the market will scare people back into the dollar.. at least for a short time anyway.

Tick tock..

Syn said...

Hey, Our Ministry of Propaganda has a name!

Operation Mockingbird

"Operation Mockingbird was a secret Central Intelligence Agency campaign to influence domestic and foreign media beginning in the 1950s."

Do not adjust your television...

Bigelow said...

“They call it a jobless recovery. That’s like being almost pregnant, it doesn’t happen.”
Gerald Celente on Goldseek radio 17 Oct 2009

Part 2/3

Part 3/3

Bigelow said...

Gerald Celente is 80% invested in gold.

Tristram said...

Bloomberg has an article today about a projected rebound in consumer spending for the Christmas season. They mention "frugal fatigue." It reads in part:

"The steepest rally in the stock market since the Great Depression may have convinced households they don’t need to save as much as they thought, says John Ryding, chief economist at RDQ Economics LLC in New York, leaving more money for spending."

Even if you believe it's all destined to fall apart, the Fed's policy has generated some momentum skyward which might take longer than expected to peter out.

Meanwhile, it's another day of stocks up, gold up, oil up, everything up up up, except you guessed it -- the US$ down.

Tristram said...

Mike asks,

Are "they" willing to let the dollar go for the sake of the markets?

Seems like "they" (who don't read TAE) have piled into oil, gold, commodity stocks, and the US$ carry trade. "They" would be screwed if the dollar doesn't fall some more.

The one who suffers when the dollar goes is "me." Bleep.

There is a lot of talk about dollar devaluation being a deliberate if tacit government policy. Always has been a lot of talk like that -- how else does a hopelessly indebted society escape or even try to escape? Denninger thinks they will go to far, and destroy the middle class who will no longer be able to afford gasoline. (Stoneleigh's end state, but not at all the same pathway.)

The Fed, of course, thinks they can get it just right because they are brilliant at this sort of thing.

Hombre said...

Bigelow - Thanks for the Celente link, listening to it now.
I think 80% on gold is a bit much (as in way too...)for the PM's in one's plans, but to each his/her own.

I see today that oil, gold, and the "virtual" DOW are all heading up! What a crazy mix of signals and trends with a near future full of world-crunching peaks.

TAE Summary said...

* Anthropoligists claim TAE breeds wimps; Anthropologist are funny; Spice is an anthropologist and knows a lot about fossilized men and archaic cultures

* Never use "if", "and" or "but" when you write; If you do you are weak and stupid but won't admit it

* Only TAE and Daily Reckoning have predicted a market crash this fall; Others say it will be another 6 months to 2 years; Please stick to trends and leave certainties to the professionals

* Patient: Doctor, what's the prognosis?
Doctor: In 2 1/2 months we will know if you are dead or not ... Is that really so long to wait?

* The whole thing stinks; Only question is how much cologne do TPTB have on hand

* Those doubting the Crash this fall are bullisht; Crash date doesn't matter unless you're a dummy and own SDS; We will know the turning point has come when VultureKind become bearish

* A prediction is like Bernaise sauce on Spam; It offends the delicate palate

* The market is mananged so screw it; Instead prepare; Stoneleigh's recommendations are more important than her predictions; If you are prepared you shall not fear

* Hope and despair keep us going; House flipping again replaces burger flipping as entry level job; Economy is not robust no matter what the DOW is at

* News stories point to an attack on Iran; War will be used to manipulate the economy for the benefit of Goldman, Sachs, et. al; Wars always have their intended consequences

* S&P at 666 was low; S&P at 1111 will be high; Within a year we are all going to hell in a handbasket

* Imports are down in LA; Educating women reduces fertility rates; All fields have whores

* The US Government has intentionally chosen illegitimacy; Those bastards

VK said...

Apple is clearly depression proof! :D
iLove the iMac, iPod and iPhone, iSing a song, iMoney for iJobs!

Anonymous said...

Coy Ote,

Minimum wage laws are a long time ago. Look where we are today - GS controls the Treasury. Wall Street dictates policy. And the government protects Wall Street, not the citizen.

We may not yet be all the way into the full fascist state, but we are falling there very fast. From the Patriot Act of GWB to the market intervention of Paulson, to the smiling charismatic Obama-business-as-usual regime, things are getting worse, not better.

One interesting point is the Chinese ship appears to have turned. In June China bought $100 billion of US T-bills. In July that fell to $31 billion. In August it fell to $23 billion. And data now indicates that Chinese holdings of US denominated assets have actually shrunk for the first time in years. It was only an overall decline of $3 billion but there it is.

Detailed Look At TIC Flows: August Treasury Purchases By China, Japan And UK Drop To Lowest Total Year To Date

Competing forces are at work here - deflation and deliberate monetization (inflation) by Bernanke. Bernanke thinks he can control this. I think he is wrong. The only question is when? Anyone expecting precise timing in matters concerning the insane species known as homo sapiens have absurd ideals or a deliberate agenda. My guess is on the deliberate agenda.

Gravity said...

When something is experiencing gravitational acceleration in free-fall the chance of reaching ground level and assuming the lowest possible gravitational potential approaches 100% with exponential speed, if there were no drag.

In this case, the actual speed of terminal velocity might be slowed slightly by densifying the medium of ether, but there is no upwards force known to physics or econometrics to reverse the current trajectory, leaving an eventual 100% chance of catastrophe, as decreed by nature's most compounded forces.

"By christmas, you won't recognize your local continuum."

That's vague enough to encompass anything that could disrupt the normally timed gravity of things, though I was referring to the collapsing economy.
If desperate poverty, rampant lawlessness and jobless starvation are traditional parts of your local continuum, you might not notice any immediate changes, perhaps the local santa will be more inebriated than usual.

Gravity said...

One semi-positive yet misleading sign is that boutiques and clothing outlets around here have scaled down or ceased with the massive discounts recently, as soon as the fall-collections came in. Since last october, there have been around eight to nine weeks without hysterical discounting.

Different elasticities from summer clothing, obviously, as its a coldish country, though the panic has also subsided slightly. Nontheless christmas season will be a merciless disaster for retailers again, as people just don't seem to have enough spending potential left.

Gravity said...

We need some clear definitions of any system which isn't democracy, and then we need a definition of democracy.

The economic ideologies of socialism, corporatism, consumerism and centralised monetarism are completely incompatible with the broader democratic process as applied to the negotiable forms of economic production and distribution.

These ideologies may be partially compatible with the narrowest definition of democracy, which only deals with electoral mechanisms in the process of governance.
Many features of our current system are authoritarian or totalitarian, but not all such features are also corporatist or socialist by current definitions.

The political spectrum in which these nuances may be expressed must of necessity contain at least two spatial axes, possibly three if centralised monetarism or eco-fascism is to be incorporated, otherwise it would be difficult to see any differences in orientation between general corporatism and inverted totalitarianism, recent conceptions of which have been demonstrated, yet few seem able to protest these machinations on an ideological basis, being unfamilliar with the values
of any legitimate system.

Greenpa said...

VK - there are plenty of useful and profitable i-ppliances out there:

VK said...

@ Gravity

Maybe what we need is a higgs bossonian free quark dark neutrino ideology? :)

Stoneleigh said...


Stoneleigh what do you see happening to commodity economies like Canada, Russia and Australia who can be largely self-sufficient on natural resources and agriculture.

I think they will suffer for quite a while as demand for their products dries up with the collapse of purchasing power. Eventually the demand collapse will lead to supply collapse across a wide range of commodities, due to persistent lack of investment. What supplies remain would then be far more valuable, but would also then be far more likely to be fought over.

Stoneleigh said...

I would like to point out that market timing is probabilistic. No one will ever get the exact timing right every time. On balance of probabilities, I think we are very close to the top of this rally. Sentiment is quite extreme, and the more extreme it is, the closer we are to a trend reversal.

Fuser said...


I got that human powered generator you recommended, along with the storage battery. Thanks ... it's fascinating.

bluebird said...

VK - Thanks for all the Twitter Tweets!

NZSanctuary said...

Great for entertainment value, and (if real) for realising how truly scary some people's vision of the world is:

Chris Kresser said...

Ilgari or anyone else,

I may have asked this before, so apologies for the repeat question.

What's the deal with the RSS feed for this TAE? It doesn't update properly in Google Reader or my desktop RSS reader. For example, the latest entry in Google Reader for the feed is October 10, 2009. Obviously not correct.

I tried validating the feed with several online feed validation services, but it didn't validate.

I rely on RSS feeds at this point to stay current with all of the blogs I follow. I simply can't remember to visit them all each day. I'd be so happy if this could be addressed, and I imagined other RSS fans would be do.

With gratitude,

VK said...

Hi Stoneleigh

Dates I hear floating around the interwebs speak of October 26th as being the day. The rally has been truly remarkable but as Barry Ritholtz pointed out today in historical context there have been numerous such powerful rallies over 32 week periods. Infact the most powerful one caused the market to soar about 94% in the same time frame as this rally! So there could be a large upside still remaining.

@ Ilargi, is that bullish enough for you? :D

Ilargi said...

"@ Ilargi, is that bullish enough for you? :D"

Excuse me? Of course not. All you do is make people, including yourself, doubt. You're supposed to convince them. We want answers, not questions.

Ilargi said...


As far as I know it's the length of the posts that causes the problems. I think it's a little meager as a reason to change the entire format, but it's also not something I'm not thinking about.

Stoneleigh said...


My question is this: Suppose that it is true that states must keep their citizens well-fed and safe in order to be seen as legitimate by those citizens. What implications are there for international cooperation if liberal economics (as per Bernanke and Geithner) prove wrong?

Widespread political unrest, general strikes, disruption of the global JIT economy, very unpleasant consequences for those who are dependent on the state, a breakdown of international cooperation on many fronts....

What happens when states cannot provide economic wellbeing and security for citizens? Is this inability because the state made the choice to provide security for banks instead?

Yes, bailouts for the banks threw huge amounts of taxpayer money down a giant black hole of credit destruction instead of using it to provide for the welfare of the citizenry (an option that was sadly not on the table). Bailouts only ever benefit elites at everyone else's expense.

People will have to look after themselves and their loved ones without the help of the state, as they already do in most of the world. They will need to build cooperative structures at a very local level in order to do so, and this is where people's energies are best focused. They may be tempted to waste energy and resources trying to lynch bankers in a couple of years, but their own interests will suffer most if they do. As hard as it will be to concentrate on the positive, that is what will make the greatest difference in any given locality.

Does this imply that the future will bring more wars because there is less economic reason for states to cooperate? Can we avoid this future? If so: how?

Yes, IMO there will be far more wars, and no this cannot be avoided. Trust will be an early casualty and this has a wide range of very unpleasant consequences. People need to resist falling into the xenophobia trap that those who will seek to manipulate the anger of the masses will be actively encouraging (tragically). Imagine the mind-control tactic of Orwell's Two-Minute Hate of the traitor-figure Goldstein in 1984.

Stoneleigh said...


You're welcome :)

Chris Kresser said...


Yes, I think you're right. One of the feed validators said something about post length. I like the format and I agree that it wouldn't be desirable to change it. I wonder if someone with more tech savvy than me could figure out a reasonable solution?

Of course I'll live either way. :)

Ruben said...

re: RSS

Maybe if you ask Ilargi very nicely, and I mean with large amounts of Fall Fund Drive dollars, he could post a dummy page, say with only the picture. You could RSS feed that page, which would serve to remind you to go to the main page when it is updated.

TAE is also the only page I read daily that I do not have in RSS.

Ruben said...

re RSS

or, of course, if you are enjoying the more civilized Mac experience, you could use safari to take a web clip and visit the page when the clip updates.

VK said...

@ Switters

I use an external desktop app for my RSS feed aggregator called SharpReader, TAE comes perfectly on it and on time!

@ Ilargi

That's about as bullish as I can be without barfing :) Answers I do not have, that is why I seek them here from ye and Stoneleigh good sir.

@ Board

Interesting thoughts on the new normal economy at TED Talks by John Gerzema about the frugal consumer, though he is far more optimistic and that less is really more (which it might be?!) and that consumers have embraced new identities - pooling together resources, better managing money, organic gardening, bulk buying etc etc.

Chris Kresser said...

or, of course, if you are enjoying the more civilized Mac experience, you could use safari to take a web clip and visit the page when the clip updates.


Could you explain how I would do this? I am a Mac guy, and I've tried every desktop RSS client I know of and none of them work. I've also tried Google Reader in a browser with no luck.

How do I "take a web clip" and once I have it, how would I be notified when it updates?


Nelson said...

Phil Knight appears to believe that the market's topping:

"Knight sells off $93M in Nike stock

Phil Knight is selling Nike shares again, at an opportune time for his estate and Oregon's budget.

The sales -- worth an estimated $93 million -- began Oct. 14, the day the Dow Jones Industrial Average returned above the 10,000 benchmark. The two events might be unrelated, but it shows again Knight's good timing unloading shares of the company he chairs and co-founded.

From Wednesday to Friday, Knight sold 1.4 million shares in 245 transactions at $64.23 to $65.24 apiece, according to documents filed with the U.S. Securities and Exchange Commission. The filings suggest he might sell another 3.5 million shares in coming days or weeks.

Knight, 71, last sold Nike stock in April 2008 when the sporting-goods company's shares hovered around its all-time high. His sales reaped an estimated $500 million."

Cyndy said...

I use bloglines and have had no problem getting the feed. Sometimes it takes a couple hours to update, but certainly not days.

Chris Kresser said...


Did a little research on the web clip thing and it doesn't really solve my problem because I would still have to remember to open the dashboard, which I don't use that often.

Guess I'm back to your first solution!


I'm very attached to my desktop and mobile RSS client, so Bloglines isn't a viable option at this point. Thanks for the tip, though.

Chris Kresser said...

Well, I donated $20 - all my poor graduate student status allows at the moment. It wasn't meant as a bribe. I am grateful for your efforts, Stoneleigh & Ilgari, and want to support your continuing work.

And that said, I would love it if you could make it possible to follow your blog via a functioning RSS feed or email subscription. Maybe adding a Feedburner email sign-up form?

gylangirl said...

@ switters

make Tae your homepage?

re the gerald celente interviews. any guy -who can successfully teach a capitalist that they've mislabeled, as socialism, the mussolini definition of fascism- is very cool.

altho Celente's comments about dollar destruction and gold $2000, it's not so clear in the short run: per stoneleigh, the inflationary printing won't catch up to the larger credit collapse deflation? otoh, lately her timelines seem to be collapsing re anticipating the bond market dislocation?

let alone possible BO admin war plans for pakistan and iran: so many factors in play!

Anonymous said...


Greenpa asks:
Next question: does the world need to be changed? Will either logic, or the truth, change it?

I drove down to the city of G yesterday for meetings and then had dinner with a group of friends. We meet once a year in October, always the same group. Very diverse, all highly trained (architect, choreographer, research-lab director, technical translator, inventor/entrepreneur, etc.) and we talk over a good meal at someone's house. This was the third year that I tried to alert people that major changes are coming. More than just financial discomfort.

The entrepreneur pretty much understands that we have a debt problem, but has no idea of where we are headed. The others look puzzled. They see an apparently rational and knowledgeable person telling them that we are sleepwalking our way into major problems. No one contests my point of view because they understand they do not have enough information to judge what I am saying. But they will not make the (significant) effort to gain that information. So they listen a bit, but simply cannot make a meaningful connection between what they are hearing and what they think they know. I never push if there is not at least some interest, so after a short while, the discussion turns to something else.

So, ideas are planted, but is that enough to change the world? Not in the near future.

Many intelligent people simply do not have the information and will not acquire it until it is too late, if even then. In my opinion, the world and people will change only when disruptions force them.


Cassandra said...

Yeah I agree, most people are like dogs being shown card tricks. Some seeds fall on stony ground. Pushing at doors half open for now is what we do - the rest will wake up when their kids go hungry, probably not before, best not make a fuss eh. There there.
Kids and people without vested interests, or with Plan B [subsection iv, paragraph ii(a)] potential, will listen open eared. Everyone else will at best be bemused, at worst hate you for upsetting them. It's a funny one. If someone had told me ten years ago, I'd have been grateful.

Bigelow said...

“"It doesn't matter what the exact number is," says Mark Zoback, a professor of geophysics at Stanford University. "The numbers are all so big it means we have an extremely large domestic resource that is going to play a significant role in the country's energy future." Natural gas is not a complete solution, he cautions. Still, he says, "it's not unreasonable that over the next decade or two we could completely get off coal, using gas as the principal fuel for electricity generation. I don't think natural gas is an alternative to renewables, but I do think it is by far the best fuel to use as we transition away from fossil fuels."”

“A "reasonable price" of around $6 to $8 per MCF, Ventura says, would enable drilling companies to more fully exploit shale gas. Getting back to that price will require not only an economic recovery but also policies that increase demand by influencing power generators to shift to natural gas. "That is something that could happen immediately," he says. "More power generation from natural gas would have an immediate impact."”

“The worry, of course, is that much less gas than experts have estimated will turn out to be recoverable from shale at an acceptable environmental and economic cost. Jay Apt, executive director of the Carnegie Mellon Electricity Industry Center in Pittsburgh, is blunt: "We're in an early stage of a shale boom. Every practitioner in a boom thinks it will last forever and is surprised, in five or seven years, that it isn't going to last forever." Apt predicts "an inevitable downgrading of the number of cubic feet that these deposits can supply." After all, he says, "there is a difference between what Mother Nature gave you and what the town will allow you to extract." The gas producers' extensive land and water use is already creating a backlash in Pennsylvania, he says. And the danger of rapidly converting more electricity plants to natural gas is that once shale-gas supplies "top off," power producers will be reliant on imports and vulnerable to volatility in their prices.”
Natural Gas Changes the Energy Map

Bukko Boomeranger said...

I second that on people lacking the info to even BEGIN talking about crookedness in the money system, FB.

Last night at a dinner with two well-educated couples, Mrs. Bukko was explaining "dead peasants' insurance" to the women in the context of Michael Moore's new film. They were shocked that such a sick thing could exist, and somewhat disbelieving, but they didn't contest it, because we have a track record with these people of knowing what we're talking about. Nobody dwelt upon it, though, and the conversation wandered onto other things.

I would have thought they'd be waaaaay interested in financial chatter, because one couple had to declare bankruptcy years ago when their business failed, and the other had to un-retire, make a forced sale of their longtime home and move to a rental this year after some investment setbacks. But even people who have a history of getting their lives turned upside down by the finance world can't be bothered to study the subject.

I don't wonder what it will take to make some people pay attention, because many NEVER will.

Syn said...


What are your thoughts about the impending mandates of the Codex Alimentarius?

In addition to scarcity of food, the quality of our food will decline and the availability of natural supplements will be greatly curtailed or eliminated by the passage of this global mandate. Codex would override our own consumer protection laws and benefits only the multinational corporations.

Is this yet another reason to seek local sources of food and cultivate our own gardens?

This is a subject that is rarely discussed anywhere, and yet, it will impact our lives on so many levels.

bluebird said...

FB @ 6:52am - What you say is exactly what I see with my family and friends. No one challenges, yet none go researching for additional info. Until something BIG occurs to affect them personally, then that major disruption will force them to wake up and change.

ok, so how did we connect the dots earlier? Nothing major has occurred to me personally to force me to change. Well, I was retired about 5 years ago, giving me lots more time to read and become more aware. Other family have also retired, yet I build my Lifeboat, and they just go boating.

I am forever grateful to I&S for this website, Thanks for all you do.

Taizui said...

News Flash: TAE guys are mere hackers, preparing for trivia

AP-10/20 - Associate of balloon boy's father questioned

Lee said Richard Heene was "obsessed" with trying to land a TV show and become famous.

"Heene believes the world is going to end in 2012," she said. "Because of that, he wanted to make money quickly, become rich enough to build a bunker or something underground, where he can be safe from the sun exploding."

Top Hat Cat said...

The financial sociopath class has prepped the public perfectly for collapse.

(1) The illusion of 'recovery' and being 'saved' by the Tim and Ben show has been established in the public media. The Dow 10,000 etc.

(2) Establishing this point in the short term public memory is key to blaming the real next leg down financial collapse on Iran and Pakistan.

Just from the testimonials of posters here on how other wise intelligent friends and family they know are in clueless denial about the massive global clusterf*ck about to commence proves how totally effect the PR propaganda campaign has been.

People will truly want to believe it was some outside force that brought their dreamland fantasy world to ashes. It's so much more believable to them that way than to contemplate the notion of mobster parasites having taken over their country and done this to them intentionally.

One of the cardinal principles of hustle is that most marks don't want to admit they were hustled in the first place and don't even report the crime.

Con men know this very salient point of human psychology and use it to their best advantage. A lot of scams just never get reported at all because people are embarrassed by their own stupidity and thus allow the same scams to happen over and over again.

Many Sheepletons don't even want to admit they were hustled on the 'weapons of mass deception' scam so they will eagerly buy into the same old tired repackaging of the lie for Iran (and Pakistan)

(3) A faux war and flu plague can easily explain why our 'recovering' economy was run into the ditch by evil terrorists and 'germ warfare'.

(4) The majority of the Sleepingsheeple will buy this hook, line and sinker.

Because they already do, right now, as we speak.

There is no widespread awareness, never has been, never will be.

Ignorance is Bliss. It's a very positive message for the masses to embrace and they do so, willingly and with relish to boot.

"“Seen on the bathroom walls of Concordia University: 'Ignorance is bliss.' and right underneath it... 'I don't know what this means but I'm happy.'”

Wyote said...


A word on Ngas from some pals in Wyoming. Sure, there is a lot of methane to be had out there, they estimate we won't have to import from the Middle Eastern fields for maybe a generation. But there is a growing concern that the waste and leakage of this very potent greenhouse gas at wellheads, pipelines, compressors and storage facilities is at least and possibly more than the equivalent of the CO2 discharge of the coal fired power plants.

So swell, not really much of a trade-off is it?

All the best, Wyote

Syn said...

Re: the presentation by Elizabeth Warren from 2007

One of the most important (and disconcerting) conclusions from her copious research was:

* Since at least the 1970’s, the prices for large, fixed expenses such as, housing/mortgage, Insurance and taxes has risen sharply (all in inflation adjusted dollars). Households (with 2 adults and 2 children) must spend an increasing percentage of their income on these expenses:

Housing up 76%
Insurance up 74%
Taxes up 25%
Child care 100%

She also discussed the economic and social issues about the perceived necessity of getting a college education (which requires increased personal expenditures).

While these went up, the smaller, more flexible purchases actually went down! For example:

Clothes down 34%
Food and eating out down (but I didn’t write down the number)
Appliances down 52%
Cars down 24%

Taken in aggregate she concluded that these flexible expenses were either a wash or negative.

Can one say that the conclusion is that the FIRE industry has steadily overtaken the real productive economy (businesses that produce goods and create jobs) for decades now.

In addition the income of males has remained flat since that time.

One can rightly conclude that businesses (that produce real products) have basically been forced to lower their costs and quality in order to compete with the rising cost of the fixed, larger purchases that most see as necessary.

This has lead to tremendous and continuing job destruction, outsourcing, hiring of illegals and lower quality as (especially small) businesses attempt to stay in the game.
By the early 2000’s, household were spending ¾ of their income on the fixed expenses.

Government, financial institutions and businesses all keep careful statistical tabs on every sector of the economy. Those who had this information were fully aware that this imbalance would lead to were we currently stand.

Steady (predictable) job destruction, wages that do not keep up with inflation and rising fixed costs… now what could possibly go wrong?

Greenpa said...

a bit of the Polka Dot Gallows- just a list of headlines from the Minneapolis Star Tribune- in order, as they come:

Police unclear on why dad shot at son, his friends

UnitedHealth Group beats expectations

Revised formula puts 1 in 6 Americans in poverty

Public urination alleged against Ex-Gopher Matt Spaeth


All I can say; than god we're catching those public urinators.

Iconoclast421 said...

Bigelow, the 100/300 ema cross is very similar to the 20W/50W cross on the weekly chart. It is a very powerful indicator, and I am far more inclined to trust it, than even the most intelligent fundamental analysts. Ignore this long term timing signal at your own peril! No offense Stoneleigh, but the market simply does not care about the problems in the real world, the market is simply a "wealth transfer indicator", ie a measure of how rich wall street is getting at the expense of everyone else. And you may perceive that we're near some kind of top because of sentiment, but that is merely perception. That perception could be even more accurate 6 months from now, whilst your trading account is empty. I called the crash on 9-19-2008, and the march bottom. But after making a mistake back in may, I am following my rules very strictly and I am not able to call a top here. My best estimate is still january 2010 and even that is highly speculative.

Anyway, the key to remember about long term timing signals, like the 20W/50W cross, and similar such indicators, is that the crossover becomes imminent long before the actual crossing occurs. And THAT is when you buy or sell, when the crossover becomes imminent, rather than when it actually shows up on the chart. Remember, the 20W and 50W simple moving averages are like freight trains, they have a lot of momentum and it takes a lot to change their course. It is merely a matter of simple math (and novice excel skills) to project these moving averages out onto a spreadsheet and chart them to see if a crossover event is likely to occur in the following months. I did this back in june and determined that a 20W/50W cross was imminent in mid august. I made several charts showing what kind of downward moves the market could make and still generate the long term timing signal. For more information, you can google my name and '20W' and 'cross' to find my charts and more analysis.

Bob (Your Uncle) said...

Taizui - I don't think a bunker is going to help him much if the sun explodes :-)

Top - that's been my thinking - the government wants/needs to get people believing that all is well and that the recession is over so that when it eventually collapses they can blame whatever external event/force/group and claim "we had it fixed...they/it caused the crash".

Anonymous said...


Thank you for the Noam Chomsky video. He rightly compares right-wing media to Nazi Germany.

Chomsky's works have been banned at Guantanamo's "concentration" camp:

"Anti-war activist's works banned at prison camps"

Professor Noam Chomsky may be among America's most enduring anti-war activists. But the leftist intellectual's anthology of post 9/11 commentary is taboo at Guantánamo's prison camp library, which offers books and videos on Harry Potter, World Cup soccer and Islam.

U.S. military censors recently rejected a Pentagon lawyer's donation of an Arabic-language copy of the political activist and linguistic professor's 2007 anthology Interventions for the library, which has more than 16,000 items.

Chomsky, 80, who has been voicing disgust with U.S. foreign policy since the Vietnam War, reacted with irritation and derision. "This happens sometimes in totalitarian regimes,'' he told The Miami Herald by e-mail after learning of the decision.

Top Hat Cat said...

Max the K quotes Jim the K's latest rant called "Marching Toward Zombieland".

Jim thinks the Sleepertons are waking up because the bonus issue is so in your face.

I don't agree.

Besides, does anyone seriously think that if faced with an angry sea of hate filled lynch mob 'citizens' (fat chance), that the upper management (Made Men) at the Goldman Sacks Fortress in Manhattan wouldn't hesitate a heart beat to tell security guards to throw the lower ranking 'little people' of Goldman to the mob to be torn apart?

I personally think the Goldman itself is just a shell entity being groomed to be ritually sacrificed to the blood lust of the public at the appropriate moment while the Alpha parasites infesting the organization ready their own private escape pod out the back door. GS is just a vehicle for looting, it's disposable in the end. It will really become a very handy tool to focus hate on in The End.

Picture the US helicopters launching off the last time from the top of the embassy in Saigon.

Then picture private Blackwater choppers launching off the last time from the top of the GS building in Manhattan.

The Real players behind GS and Morgan are not the top executives but the major share holders.

Lloyd Blankstein is a very well compensated Buttboy for the major share holders of GS, he's not the power behind the throne. He will gladly slit the throat of all GS employees if it would save his sorry ass. No honor among thieves and all that.

Greenpa said...

"wouldn't hesitate a heart beat to tell security guards to throw the lower ranking 'little people' of Goldman to the mob to be torn apart?"

Now that is certainly true, and a tactic to be anticipated.

I've seen it, first hand. First time I flew to China, I had a ticket in my hand purchased a month prior, on a standard flight. At boarding time, North Worst announced that they were actually going to fly our plane to LAX, instead of Tokyo Narita. Because they wanted to.

The plane was full- mostly of muckety CEO types. Hell hath no fury like a muckety CEO.

The announcement was made by, and all further wrath (impressive) rained upon- a young woman with no visible rank, nor support. I pitied her then, and wonder if she ever recovered from the trauma.

The better tactic for our mob- don't tear the first victims apart- be nice to them. Point out their bosses just sent them out as a sacrifice. And ask them how to reach the big mucketies, the back way.

Bigelow said...

“So swell, not really much of a trade-off is it?”

I don’t have a good answer for that as you might guess …personal conservation --despite what Dick Cheney said about it and virtue. I think what will limit shale gas is lack of available water, it’s what ultimately prevented more methanol plants. I favor thermal solar electric and geothermal.

The small town I live in had passenger rail service up to the mid 1950s. sigh.


The VIX is very low, which means complacency and danger to me. According to some cycle studies the high before the plunge could have been yesterday or might wait till 11/16 or 12/16. How low did your projections allow for without altering a crossing?

Stoneleigh said...


What are your thoughts about the impending mandates of the Codex Alimentarius?

I share your concern. Corporate control is becoming more blatant in many spheres. If one could describe anything about our coming crisis as positive it is that such initiatives will fail as globalization goes into reverse.

I fully expect many things that would be helpful to be banned on spurious grounds, as they threaten powerful interests (small-scale local food initiatives, local currencies, multiple dwellings on one property etc). However, I also expect such bans to become completely unenforceable at some point. When people have to survive they will do what they have to, whether it is legal or not.

Unfortunately they will leave themselves open to enforcement actions, depending on how well connected they are and to what extent enforcement is overwhelmed by reality. Early movers without connections would be most vulnerable.

When many things that are essential are also illegal, enforcement takes on an unhealthy discretionary element, such that it opens the door for endemic corruption and the politics of the personal. It's all part of waving good-bye to the rule of law, and we have long since started down that path.

Stoneleigh said...


Top - that's been my thinking - the government wants/needs to get people believing that all is well and that the recession is over so that when it eventually collapses they can blame whatever external event/force/group and claim "we had it fixed...they/it caused the crash".

Indeed. It's all too easy to misdirect blame towards hapless scapegoats when people become collectively angry, as angry/fearful people are very manipulable. We need to be very wary about this dynamic in order to resist falling for it or allowing loved ones to fall for it.

Greenpa said...

Stoneleigh: "It's all part of waving good-bye to the rule of law, and we have long since started down that path."

Alas, yes.

I've just been reading a compendium of legends from multiple cultures (vast wisdom there, disguised as children's tales) and was struck by how very many stories start: "In the old times, the world was peaceful; tribes did not fight, and women and children traveled alone in perfect safety."

Then the story goes on about people and heroes fighting to survive in the present world- which is never safe, anywhere.

A pattern across cultures and times.

Erasmus said...

Stoneleigh - My father receives a military pension from the US government. I am fearful that when government is forced to reduce expenditures, military pensions (and pensions in general) will be an easy target, since pensions do not ultimately contribute to the propagation of the power of the state. Yes, they keep the restless quiet, but given the choice between self-preservation and having some people become restless (some of these people, I might add, are of working age) then I fear the government may cut pensions as low hanging fruit. Your thoughts?

scandia said...

Re the Pakistan invasion of Afganistan there seems to be a lockdown on news...toal lockdown world -wide. Has anyone picked up any reports on how things are going. I did read that there was an explosion at a university in Islamabad but noone has claimed the event as their own as yet. I can't see that the Taliban resistance would be lined up against invading forces. And I think the US is delaying the decision to send more troops until they see what the Pakistanis have accomplished.

Anonymous said...

Denninger had a good observation this morning: "In short, despite the collapse in the dollar this year PPI continues to decline. This is a particularly ominous development, as one would expect (given our import-dependence on balance) that we would see significant increases in both core and headline PPI given the relative decline in our currency.

It is not happening, which belies the extreme underlying weakness in our economy at the producer level."

Indeed, with the decline of the dollar from March to now you would expect PPI to rise (in normal times). KD notes this is a big wake up call on deflation. It is also further confirmation of the thesis of I&S.

P.S. I am sure you all have noted the declines in oceanic and rail shipping. Today Caterpillar "beat expectations" but when you read the details you see TOTAL sales volume down 44% and profits down 57%. Yet the talking heads on CNBC cheer this news on as if it were "good". Oh, this is the third quarter running that I've seen Caterpillar say they think this last quarter was "the bottom" for them. They don't have a terribly good track record lately.

Syn said...


Thank you for comments about Codex and for your thorough analysis that ties in with the impending collapse. As always, you provide great insight that will help us prepare for what is coming.

Mike said...

I think we've moved well past the Political Crisis and into the Human Being Crisis. Asleep at the switch, most folks just don't seem to care if they are gutted from the inside out. There will be a rude awakening at some point, the frog is nearly boiled ...

The Flaming Lips: Yeah Yeah Yeah Song

Yeah yeah yeah yeah, yeah yeah yeah yeah [x9]

If you could blow up the world
With the flick of a switch
Would you do it?
(Yeah yeah yeah yeah, yeah yeah yeah yeah)
If you could make everybody poor
Just so you could be rich
Would you do it?
(Yeah yeah yeah yeah, yeah yeah yeah yeah)

If you could watch everybody work
While you just lay on your back
Would you do it?
(Yeah yeah yeah yeah, yeah yeah yeah yeah)
If you could take all the love
Without giving any back
Would you do it?
(Yeah yeah yeah yeah, yeah yeah yeah yeah)

And so we cannot know ourselves
Or what we'd really do

With all your power
With all your power
With all your power
What would you do?

With all your power
With all your power
With all your power
What would you do?

(No no no no, no no no no)

If you could make your own money
And then give it to everybody
Would you do it?
(No no no no, no no no no)
If you knew all the answers
And could give to the masses
Would you do it?
(No no no no, no no no no)

Are you crazy?
It's a very dangerous thing to do
Exactly what you want
Because you cannot know yourself,
Or what you'd really do

With all your power
With all your power
With all your power
What would you
Do do do do, do do do do [x2]
(Yeah yeah yeah yeah, yeah yeah yeah yeah) [x10]
ahhhhhhhhhh...... (from third yeah yeah line to the last one)

With all your power
With all your power
With all your power
What would you do?

With all your power
With all your power
With all your power
What would you do?

With all your power
With all your power
With all your power
What would you do?

wah wah wah wah wah wah wah wah

bluebird said...

scandia - Look thru Juan Cole's blog for info about Pakistan, Iran, Iraq and Afghanistan

Dr J said...

Ilargi - long time between new posts. Did I buy you too many Cuba Libre's?

snuffy said...

Its getting to the point where I,while being aware of whats coming,only speak to those whom already know my position on collapse. The reason?I want few as possible to associate me with "foreknowledge"of whats coming down the pike.The logical progression from that point is that if I was aware...I made preparations and plans....Like the good catholic man whose preparation for hard times was a list of Mormon houses....

I have become very concerned about how the police will respond to this sea-change in the political arena...when they start the next war,I expect every sort of nastiness from the .gov folks to maintain control.All of my liberal friends do not see that the most egregious violations of citizens rights occur under the shadow of war. This next dustup in the middle east will destroy more than a few cities and a culture.I think it will begin the final destruction of the "global"economy that was began when the planned collapse of the debt pyramid was initiated.There is part of me that screams that when they have all the numbers,[as has been pointed out]they know what they are doing to Joe and Mary sixpac.Our "leaders"are a bunch of sociopathic creatures who,if removed from their current environment of wealth and privilege,would most likely end up in a prison for the criminally insane.I am referring to one of our posters identification of the holders of gold-in-sacks stock as the true "movers and shakers"of our society.I imagine the most of them are part of the "they"crew..

And,like cockroaches,be the only thing left after the decent begins.Although,it was pointed out in J.Diamonds book,on the subject,they are just the last to starve in a general collapse.They are still part of the system,and after the destruction begins,only the last to feel the fire.

Start to gather all you need to grow when the stores are empty.It could begin the day the bombing of Tehran begins...


Unknown said...

The Agonist notes that the WSJ, of all outlets, is suggesting a windfall profit tax on Goldman Sachs.

Stoneleigh said...


You are right to be concerned. I think all pension obligations are at high risk of not being honoured. The private ones are under-funded and invested in things that will tank, and the public sector ones generally depend on continuing tax revenues that will fall off a cliff. Retirement as a concept will shortly be obsolete.

People will need to look after their own extended family members, and elderly people will have to find a way to contribute to the extended family as they already do in much of the rest of the world. Extended families are quite a stable arrangement. For people who don't have one, I suggest you make one if at all possible.

Anonymous said...


@ Bukko, who wrote:
"I second that on people lacking the info to even BEGIN talking about crookedness in the money system, FB."

I do not even attempt to address the issue of corruption. People need first to look at the factual data on debt, unemployment, foreclosures, etc. in order to understand the depth of the crisis and the potential consequences. Once that knowledge is in place, we can start looking at causes and even then, I would not start with the most controversial.

Teaching on this subject is similar to any complex topic, it takes a great deal of thought to plot out and prepare the intellectual progression of the learning person. Not easy, particularly when most people are not receptive. We must anticipate objections and ensure that the information required to obviate an objection has been delivered well before the objection can even arise in the person's mind, i.e. before we make an objectionable statement. This is much more effective than having to bring out new information to counter a standing objection. Part of the difficulty lies in imagining what people will find objectionable.

Anyway, all the above is simply to explain why I would not start with a comment (e.g. on corruption) that I personally cannot support with factual data and that risks providing the other person with an easy excuse to question any and all subsequent statements.

As you know, "Anything you say can and will be used against you…"


Dr J said...


"Extended families are quite a stable arrangement. For people who don't have one, I suggest you make one if at all possible."

I'm working on it!!!

Wyote said...


Are you sure your not talking about shale oil production? Yes that does take immense amounts of water and energy to extract the oil from the kerogen. Coal bed methane, on the other hand, often produces water (albeit often contaminated) as it is extracted.

But yeah, conservation is very key. Here,we are looking to wind and personal/community solar to provide. - Wyote

Gravity said...

2: Al-Baqarah
Section: 38

Those who spend their wealth in charity by night and day, secretly and openly, they will have their reward from their Lord. They shall have nothing to fear or to regret.
Those who live on usury will not rise up before Alan except like those who are driven to madness by the touch of beelzebubble. That is because they claim: "Trading is no different than usury", but Alan has made trading lawful and usury unlawful.
He who has received the admonition from his Lord and has mended his way may keep his previous gains; Alan will be his judge. Those who turn back (repeat this crime), they shall be the inmates of hellfire wherein they will live and be audited forever. Alan has laid His curse on usury and blessed charity to prosper. Alan does not love any ungrateful sinner.

Those who establish regular accounting and recieve regular auditings will have their reward
with their Lord. They will have nothing to fear or to regret. O you who believe! Fear Alan and waive what is still due to you from usury if you are indeed believers; or war shall be declared against you by Alan and His messenger. If you repent, you may retain your principal, causing no loss to debtor and suffering no loss. If the debtor is in a difficulty, grant him time till it is easy for him to repay; but if you waive the sum by way of charity it will be better for you, if you understand it. Fear the Day when you shall all return to Alan; when every one shall be paid in full what they have earned and none shall be dealt with unjustly.

Ilargi said...

New post up.