Thursday, May 5, 2011

May 5 2011: The Perturbational Path of Human Civilization

Detroit Publishing Co. Two sheets to the wind 1900
"Sailing on the beach. Ormond, Florida"

Ashvin Pandurangi:

The Perturbational Path of Human Civilization

Can you sense that? It is a perturbation in the forces of human civilization.

It is the feeling you get when events around the world are unfolding in a certain direction, but you are uncertain exactly how they will unfold or exactly where they will finally leave us. That is the nature of complex, dynamic systems, and more systemic complexity usually means less certainty.

Perturbation theory is commonly used by physicists to describe the behavior of complex physical systems that involve equations which cannot be solved exactly. Take the movement of planets in our solar system and through our galaxy, for example, which, at first, may seem relatively simple to predict.

In reality, the existence of multiple planets and moons with inter-acting gravitational effects make the necessary calculations extremely complex and render exact predictions of planetary paths through space-time impossible. Instead, astronomers attempting to predict the path of planet Earth would first start with the gravitational effect of the Sun, as it is the body with the largest gravitational influence.

Then, they would "correct" the solution with the second, third...nth-order gravitational effects of the next most influential bodies of mass respectively. It was discovered, however, that even the last correction in a perturbation analysis can end up being larger than the first one, which means that a relatively small perturbation can disproportionately affect the dynamics of the entire system. This "butterfly effect" of perturbations also operates at the smallest scales of our Universe, and presents a major obstacle to other physical theories, such as those encompassing the quantum scale.

An example would be String Theory, commonly referred to as a potential "Theory of Everything", since it posits that the fundamental constituents of the Universe (strings) are way too small to be directly or indirectly observed (via experiments such as particle accelerators) because of technological (energetic) limitations.

A string universe. Image: R. Dijkgraaf

Therefore, it must provide precise predictions of their behavior and its correspondence with known properties of the Universe to verify their existence. But the strings, like all other constituents of matter, interact with each other through multiple spatial dimensions and make such specific predictions practically impossible.

If the specific behavior of massive planets or one-dimensional oscillating strings is too complex for prediction, then what are the chances for a global human society consisting of economic, social and political systems that are enormously specialized and inter-dependent?

What is string theory? Michael Blann/Lifesize/Getty Images

We spend a lot of our time thinking about how much prices for specific goods will rise or fall next week or next month, and telling others what we imagine will happen. What kind of return will gold provide by the end of the Summer, or how about some local real estate?

Perhaps we are wondering how U.S. and European stock market valuations will be affected by the ongoing disasters in Japan, or the worsening sovereign debt situation in Europe. We ask people to tell us where and when the next Middle Eastern revolution will break out, and exactly how the global community will respond. In the final analysis, the "predictors" just end up using the same speculative "value at-risk" models that global financial investors followed right off of an economic cliff in the first place.

Instead, we should content ourselves with knowing the generalized "solutions" derived from perturbation theory, and embracing its shortcomings. We start with the biggest influences on our global society and work our way down, until it becomes meaninglessly complex to continue. The size of the influence must be measured by its approximate timing and its systemic impact, which is largely rooted in the scope of the system which it affects (financial, industrial, environmental, etc.). We attempt to "calculate" the general pressures that will be exerted on civilization's path by each influence, adjusting the path's course as new influences are incorporated.

It is not a process that is nearly as simple as going from the Sun to the Moon, but it is still useful for calculating the general direction in which our global civilization is headed and the path we may all be on. These are the biggest influences that I perceive in general order of size (biggest to smallest), with an emphasis on the temporal contribution to influence, but there is certainly room for re-arranging the order or assigning equal weights to multiple influences:

(My personal calculations, with the exception of those relating to climate change and imperialist policies, are referenced by the relevant articles linked under each listed influence.)

  1. The peak of speculative private debt in the global financial system, including both on and off balance sheet liabilities of individuals and institutions (the shadow derivatives markets). "Speculative debt" means liabilities that are only supported by deceptive accounting methods and/or worthless government guarantees, rather than productive cash flows.
    The Debt-Dollar Discipline (Conservation & Release)

    The Math Is Different At The Top (Financial Threats To Power)

    Exporting Speculative Debt

  2. The fiscal and monetary policies of governments and central banks in regions with relatively large economies. Among these institutions, the biggest influences would include the Federal Reserve, the IMF, the European Central Bank, the Bank of China, the Bank of Japan and the governments of the U.S., several European states, China and Japan.
    Jumping The Treasury Shark

    Bailing Out The Thimble With The Titanic

  3. The peak of the total percentage of public debt and deficits relative to global GDP, including unfunded entitlement obligations in developed economies.
    Welcome To Slaughterhouse-Finance

  4. The peak in global oil production that most likely occurred sometime between 2000-2010, and its negative impact on economic growth for developed economies that mostly rely on imported oil, as well as major oil exporting countries.
    When The Lights Go Out

  5. Environmental degradation issues, such as water scarcity, and their contribution to widespread famine, disease, industrial instability and violent conflicts.
    Will Water Set The World On Fire?

  6. Accelerating trends in climate change and its contribution to the issues listed in #5.

  7. The imperialistic (militaristic) policies of developed countries and their contribution to economic disruption and violent conflict around the world.

  8. Deterioration of the psychosocial and political structures of developed economies that are struggling with all of the above factors, and its contribution to systemic fear and violent conflict around the world.
    Fear & Loathing In The Divided States Of America

    A Glimpse Into The Stubborn Psychology Of "Fish"

    The Short Story Of How We Lose

By now, it should be clear that, even though the above is an extremely general list of influences, the interaction between them makes for a very complex task of prediction. There is a lot of room to add detail to the listed influences, such as specifics about public debt held in the EU and the U.S. or the range of policy tools at the hands of powerful institutions, as well as new generalized influences that will develop over time. That is why we must sacrifice high levels of certainty for generalized accuracy and a somewhat reasonable sense of where we are headed.

I will not rehash my calculations here, because that is obviously not the point of this article. Everyone must evaluate the objective evidence on their own, and use their mind's "calculator" to determine humanity's most likely destination. We must accept that our margin of error will necessarily be large, and we must also pay strict attention to details, because even the slightest perturbations can lead to radically different outcomes. It is often an extremely tedious, frustrating and mind-numbing process, but, frankly, there is no other option.

The new Victorians: UK families face biggest cash crunch since 1870
by Daily Mail

Families face the greatest pressure on their finances for nearly 150 years, a report has warned. Workers face a combination of inflation and low pay rises or even freezes for a fourth year in a row, according to international financial consultants Deloitte. It will be the first time since the 1870s that ‘real’ wages, the sum you earn after inflation has been taken into account, have fallen for four successive years.

Step back in time: It will be the first time since the 1870s that 'real' wages, the sum you earn after inflation has been taken into account, have fallen for four successive years. The report said average earnings will rise by 2.4 per cent this year and inflation is expected to be 4.4 per cent. Deloitte economic adviser Roger Bootle said households’ disposable incomes will fall by £780 this year. He also predicted incomes will not return to their 2009 peak until 2015.

It's worse, actually: Governor of the Bank of England Mervyn King predicted things would get as bad as the 1920s The report also forecast economic growth of just 1.5 per cent this year and next year – well below the 1.7 per cent and 2.5 per cent expected by the Treasury.

The nightmare picture is even bleaker than the one painted by Bank of England Governor Mervyn King who has said households face the worse squeeze since the 1920s. Mr Bootle said: ‘Mervyn King has called it the biggest squeeze on real pay since the 1920s – but the worst may be yet to come.

‘I expect real earnings to fall this year. This will mark the fourth successive year of falling real earnings – the first time that this has occurred since the 1870s when the Franco-Prussian war was fought between France and Germany. ‘An additional reason to be pessimistic about the outlook for household incomes is the deepening fiscal squeeze.’

Average earnings have lagged behind inflation for the last three years as rocketing household bills and the soaring cost of everyday goods have more than wiped out any wage rises. In addition to those granted meagre, below-inflation pay rises, millions have had their wage levels frozen while some have had their pay cut. ‘By the end of 2012, real incomes should be rising again,’ said Mr Bootle.

‘Of course, not all households will be affected equally. Attention has focused on the "squeezed middle" but I am not convinced that middle income households will be any worse affected than the poorest or richest households. ‘The big picture is that pretty much all households face a further squeeze over the next year or two. ‘Consumers may therefore have little choice but to cut their spending.'

Deloitte also said the Government will need to borrow £12 billion more over the next two years than pencilled in by the Chancellor. The warning comes as employers’ group the CBI said Britain’s small and medium-sized manufacturers saw their orders from customers at home and overseas grow at the fastest rate in 16 years. The CBI’s latest quarterly survey found volumes of domestic and export orders among smaller firms rose at the fastest rate since April 1995. But it also warned smaller firms are being squeezed by intense cost pressures.

Bond Vigilantes Ignore Next Stage of Euro Crisis: France
by Matthew Lynn - Bloomberg

Greece? Been there. Ireland? Done that. Portugal? Got the T-shirt.

For the past year, countries sharing the euro have been going bust one by one. So where’s next? Plenty of people will point the finger at Spain. Some at Italy. A few single out Belgium, a country with high debts, and no government. But they should be looking somewhere else: France.

It is increasingly politically unstable, its debt position is getting worse all the time, it is losing competitiveness against Germany, and it shows little willingness to change. Those are all good reasons for the bond markets to make France the next battleground. But the yield on France’s 10-year bond is still hovering quietly at about 3.6 percent.

There isn’t, of course, a shortage of candidates for the next leg of the euro-area’s rolling crisis of confidence. Spain experienced a property bubble every bit as extreme as Ireland’s, and has one of the biggest budget deficits in the euro area. Italy has a legacy of government debt almost as bad as Greece’s, and has struggled to grow since joining the single currency.

The same is true of Portugal. Belgium has just marked a year without a government, a world record in peacetime: There isn’t much chance of it getting a grip on the budget deficit while the country can’t even agree on who is in charge. Amidst all that, France has managed to slip off the radar. It is Europe’s second-biggest economy and still a prosperous one, even if its gross domestic product has expanded only 1.6 percent on average over the past two decades.

‘Turn to France’
"It won’t be long before bond investors turn to France after they have finished with Portugal and Spain," Xavier Rolet, the chief executive officer of London Stock Exchange Group Plc, told the Independent newspaper in December.

There are four reasons to think France may be next in line.

First, it is entering politically dangerous territory. Next year’s presidential election promises to be dramatic. The polls suggest President Nicolas Sarkozy will struggle to make the second-round run-off, and may well be relegated to third place by the extremist National Front, led by Marine Le Pen. Only one poll in the last seven weeks has shown Sarkozy defeating Le Pen for the run-off.

The interesting point is this: Le Pen is a fierce critic of the euro. Spain and Italy don’t have popular politicians arguing the case for bringing back national currencies. France does. Her chances of winning power aren’t much better than they were for her father, Jean-Marie, who once led the party. But all it will take is a whiff of victory for the bond markets to take fright. After all, a Le Pen victory could easily lead to the restoration of the franc, followed by a devaluation. You wouldn’t want to own French bonds if there was any possibility of that happening.

Second, France’s debt position is getting worse all the time. In 2010, the nation ran the fifth-biggest budget deficit in the euro area, at 7 percent of GDP. It was beaten only by Greece, Portugal, Ireland and Spain -- hardly great company. Its stock of outstanding government debt hit 81 percent of GDP in 2010. That figure will reach 90 percent this year and 95 percent in 2012, according to London-based consulting firm Capital Economics. Italy has more outstanding debt -- 119 percent of GDP in 2010 -- but it isn’t adding to the pile the same way France is. What the markets really look at is the direction you are traveling in -- and in the case of France, it isn’t good.

Three, France is losing competitiveness. The core problem for all the countries struggling with the single currency is that they can’t stay competitive with Germany. That is certainly true of France. German labor costs shrank 0.7 percent in the fourth quarter, while in France they rose 1.1 percent. The difference was even wider in the previous two quarters. The gap isn’t massive in any single year, but enough to make France steadily less competitive against its neighbor to the east.

Four, it is reluctant to change. Sarkozy came to power promising to shake up the economy. He delivered little. At the next election, he will face a challenge from the extreme, anti- euro right. At the same time, the most likely Socialist Party candidate, International Monetary Fund Managing Director Dominique Strauss-Kahn, will be collecting the center voters. In that contest, no one will promise tough action to control the deficit, hold back wages or liberalize the economy.

Spain and Italy may have bigger debt problems, but the Spanish are working hard to improve their finances and the Italians are at least keeping their debts under control even if they aren’t doing much to become more competitive. France isn’t doing either.

There isn’t much sign of the bond markets turning on France yet. The country can still borrow on similar terms to Germany. And there is still time to turn things around. A reduction in the deficit this year or next would make things look better. But it is hard to believe that the euro crisis will end with the bailout of Portugal. Other countries are going to get caught in the crossfire. When you look around for the next candidate, France has what it takes to be the next blowup.

As Debt Ceiling Isn't Raised, 'Headache' For Cities, States Begins Friday
by William Alden - Huffington Post

As the federal government approaches its legal debt ceiling and scrambles to avoid default, the first losers will be cities and states.

Starting Friday, the U.S. Treasury will stop issuing special securities that help state and local governments pay for their debt, Treasury Secretary Tim Geithner announced in a letter to Congress this week. This freeze, the first in a series of "extraordinary measures" undertaken by the Treasury to avoid a federal default, could pose difficulties for local governments nationwide, making it more complicated for strapped localities to manage their already weak finances. "I could see it being a real problem for those guys, on top of all the headaches they have already," said David Johnson, a partner at the Chicago-based ACM Partners, a boutique financial firm that advises struggling municipalities.

Congress has been mired in a months-long gridlock, as lawmakers debate proposals to reduce the federal deficit. This stalemate in the highest echelons of American political power nearly shut down the federal government in April, when Republicans and Democrats clashed over a few billion dollars in spending cuts. Now, Republican lawmakers who advocate for budget austerity are saying they will not vote to raise the debt limit unless their demands are met.

The federal government continually issues new debt to pay for principal and interest on older debt, meaning that if it's legally barred from borrowing, it will eventually have to default on its obligations, an event that would likely spark a devastating financial crisis worldwide. Government officials and independent economists have sharply criticized the seeming game of chicken going on in Congress, as lawmakers are essentially threatening to lead the global economy into catastrophe, simply to advance a political agenda.

But it appears Congress will not raise the federal debt limit before that ceiling is reached on May 16, Geithner said in his letter. In anticipation of this inaction, the Treasury will begin shutting down certain types of debt issuance this week, a process that will kick into higher gear in mid-May if the limit isn't raised. A default, which would likely cause borrowing costs to skyrocket and credit markets to freeze, will come in early August if Congress doesn't vote to raise the limit, Geithner said in the letter.

When the "extraordinary measures" begin Friday, the first casualty will be a category of non-marketable bonds known as State and Local Government Series securities, or SLGS (pronounced "slugs"). These securities are tailor-made for state and local governments, designed to help them pay for their debt.

Local governments regularly issue bonds and then invest this borrowed money into U.S. Treasury securities. The process allows them to collect interest from the federal government, and use that yield to pay their own bondholders. By law, local governments can't earn arbitrage profits -- meaning, they can't make a profit by collecting more in Treasury yields than they pay to their own investors. So, the federal government issues SLGS, which are customized to match the specifics of a local government's need. Ideally, the process is a wash.

State and local governments have bought $23 billion in SLGS so far this year, and they have issued $62 billion in debt, according to Thomson data provided by Matt Fabian, managing director of the Concord, Mass.-based Municipal Market Advisors. These specialized securities are a handy tool for governments, Fabian said. "It's probably the most efficient way to do refinancings," said Howard Cure, director of municipal research at Evercore Wealth Management. Without SLGS, he said, governments face "a headache."

Losing SLGS temporarily is not a major hardship, but it is an annoyance, experts said. In the absence of SLGS, a local government will likely put its money in marketable Treasury debt, paying an outside advisor to craft a Treasury investment that allows it to comply with the law preventing arbitrage. When the federal government issues SLGS, it takes care of this customization. Without SLGS, a banker does that job. From the federal government's perspective, cutting SLGS does not actually lower the total debt burden. Rather, it makes debt issuance more predictable, and it helps reduce increases in debt. The Treasury issues most of its debt according to a pre-determined schedule; SLGS, though, are issued as local governments request them.

Geithner, who has persistently warned Congress of the dangers of not raising the debt ceiling, acknowledged the difficulty that comes from this first step in the process of preventing default. "It is not without costs," he said in the recent letter to Congress. "It will deprive state and local governments of an important tool to manage their outstanding debt expenses."

Already, local government officials are frustrated by the federal lawmaking process. Last week, during a conference in Chicago, Philadelphia mayor Michael Nutter struck a confrontational tone with the federal officials who sat with him on stage, saying, "Mayors could never get away with the kind of nonsense that goes on in Washington." Other mayors heartily agreed, as some stood up during the question and answer session to express their disappointment with the federal government. Local governments can efficiently create jobs, but they lack resources from Washington to help them do so, these mayors said.

Lawmakers on the Hill, meanwhile, are showing no sign of progress on the debt ceiling debate. "In a way, we are engaged in a political game," said Gary Burtless, a former Labor Department economist and a current fellow at the Brookings Institution, in Washington. "Will a miscalculation occur that leads to a real disaster?"

Meredith Whitney Defends Her Prediction of ‘Hundreds of Billions’ in Muni Defaults
by Christopher Palmeri - Bloomberg

Meredith Whitney, the analyst who correctly predicted Citigroup Inc.’s 2008 dividend cut, defended her prediction of "hundreds of billions of dollars’ worth" of municipal-bond defaults.

Whitney, 41, speaking today at the Milken Global Conference in Beverly Hills, California, said local governments in states such as California, Nevada, Arizona and Florida that are dependent on the housing and construction industries for higher tax revenue would continue to struggle financially. "States have been spending at two-and-a-half times their tax receipts," she said. "The states then are cutting off aid to their local governments which rely on them for over a third of their monies. The local municipalities have nowhere to go and their bias is to save their constituents before they save their bondholders."

Whitney, who heads New York-based Meredith Whitney Advisory Group LLC, told CBS Corp. (CBS)’s "60 Minutes" on Dec. 19 that municipal-bond investors could "see 50 sizable defaults, 50 to 100 sizable defaults, more," that "will amount to hundreds of billions of dollars’ worth of defaults." Her prediction accelerated the flight of investors from municipal-bond funds and a decline in bond prices.

"There’s nothing controversial about that call, if you look at the numbers," she said today, later adding: "This municipal issue, you can criticize me for anything you want, I’m numb to it, because I have more conviction on this than I’ve had on any single thing in my career."

Solomon Disagrees
David Solomon, co-head of investment banking at Goldman Sachs Group Inc. (GS), speaking on the same panel as Whitney, said he disagreed. "I don’t think we’re doomed," he said. "I’d be more balanced on it. Ultimately tax receipts will have to go up and there’s only one way to do that and that’s increase taxes. The U.S. economy is going to perform better over the next year or two than the general consensus."

Farm Belt states such as Iowa that are benefiting from rising agricultural prices and their logistics and transportation industries will see stronger growth than the rest of the nation, Whitney said. "There’s myriad ways of playing every industry and each county," Whitney said, when asked where to invest. "There’s opportunity-rich scenarios in every state and every market."

Treasury borrowing full steam ahead
by Charles Riley - CNNMoney

The Treasury Department said Wednesday it will go ahead with plans to auction $72 billion in new debt next week as the federal government approaches its debt ceiling. In a statement, Treasury said the new funds -- essentially loans from the public to the government -- would give the department's debt managers "a significant amount of flexibility" to respond to different financing scenarios.

The debt ceiling is currently set at $14.294 trillion. As of May 2, the debt that is subject to that limit totaled $14.269 trillion -- just $25 billion shy of the cap. But the total fluctuates up or down daily. After the government hits the ceiling, it's not allowed to borrow, and could eventually default on its debt.

On Monday, Treasury Secretary Tim Geithner said the pace of borrowing is on track to hit the current debt ceiling by May 16. That's the same date next week's auctions will settle. As U.S. debt approaches its ceiling, Treasury will use a set of what it calls "extraordinary measures" to prevent a debt limit breach.

What happens if Congress blows the debt ceiling?
On Friday, Treasury will make its first move. The department will suspend issuance of special Treasury securities that help state and local governments fund, among other things, infrastructure improvements. But that will all stop on Aug. 2, 2011, the date Treasury says Congress must raise the debt ceiling by in order to prevent a default on U.S. obligations and a catastrophic economic calamity. And as the Aug. 2 deadline approaches, Treasury might be forced to alter its auction schedule, Mary Miller, assistant secretary for financial markets, said in a statement.

Still, Miller said Treasury "is confident that a timely increase will be enacted this year." Confidence aside, Congress still has to act, and that means politics will soon take center stage. In exchange for lifting the borrowing limit, Republicans are hoping to extract a promise of spending cuts, or put a cap on future spending in place. Democrats will push back hard.

What yields are doing: Treasury prices rose in early trading Wednesday, as investors reacted to disappointing economic data that pointed to slower-than-expected employment and manufacturing growth. The 30-year yield ticked down to 4.33%, the 2-year yield declined to 0.59%, and the 5-year yield slipped to 1.93%. The 10-year note's yield was at 3.22%. Bond prices and yields move in opposite directions. 

Treasury suggests $2 trillion U.S. debt ceiling raise
by Richard Cowan and Rachelle Younglai - Reuters

The Treasury has told lawmakers a roughly $2 trillion rise in the legal limit on federal debt would be needed to ensure the government can keep borrowing through the 2012 presidential election, sources with knowledge of the discussions said.

Obama administration officials have repeatedly said that it is up to Congress to decide by how much the $14.3 trillion debt limit should be raised. But when lawmakers asked how much of an increase would be needed to meet the government's obligations into early 2013, Treasury officials floated the $2 trillion working figure, Senate and administration sources told Reuters.

Former Treasury officials have said it is routine for Congress to ask the Treasury Department for guidance. Republican leaders have asked the White House to provide the size of any proposed increase before the two sides sit down on Thursday to discuss the debt limit face-to-face. "We have not specified an amount or a time frame. We think that should be left up to Congress," Mary Miller, Treasury's assistant secretary for financial markets, told reporters on Wednesday.

She also said it would be better to raise the debt ceiling enough so that the government does not bump up against it so frequently. "Obviously, a longer period of time between these activities would be beneficial in terms of the work that goes into preparing for a debt limit increase. But again, you know that's not the Treasury's call," she said.

A Reuters analysis of Treasury's borrowing needs forecast Congress would have to raise the debt ceiling by more than $2 trillion to get through next year's election without having to revisit the issue. According to the Treasury, the government borrows on average about $125 billion per month.

Treasury Will Act to Avoid Default
by Naftali Bendavid and Damian Paletta - Wall Street Journal

Treasury Department officials said Monday that they will begin to take extraordinary actions Friday to manage the government's finances so the U.S. won't default after hitting its borrowing limit on May 16. The moves come amid divisions among congressional leaders over how to raise the $14.29 trillion debt limit and avoid a default that Treasury officials say could cause another financial crisis.

Treasury Secretary Tim Geithner told lawmakers last month that the U.S. would hit the debt ceiling by May 16 and could default as soon as July 8. Officials now estimate that the actions announced Monday, combined with stronger-than-expected tax receipts, will enable the government to postpone a possible default until Aug. 2. But the longer Congress delays raising the debt ceiling, the greater the risk that markets will fall due to fears that the government won't meet its financial obligations.

In the first emergency step, Treasury on Friday will stop issuing state and local government series securities, commonly known as SLGS. That could make it harder for states and cities to issue debt, because they will have to seek issuers in the private market. If the debt limit hasn't been raised by May 16, the government will begin delaying payments into two government pension funds and redeeming Treasury securities in those funds. It also will suspend its daily investment of Treasury securities into another government employees' retirement plan.

In addition, Treasury officials are prepared to suspend their daily reinvestment of Treasury securities held as investments in the Exchange Stabilization Fund, a fund held by the government to guard against exchange-rate fluctuations. The government had $14.231 trillion in debt as of April 28, $63 billion under the ceiling. Mr. Geithner, in a letter to Congress, urged lawmakers to act "as soon as possible" to raise the cap.

"Default by the United States on its obligations would have a catastrophic economic impact that would be felt by every American," Mr. Geithner wrote. At that point, he said, the government would stop or delay in such payments as military salaries, Social Security checks and tax refunds.

Raising the debt limit is unpopular with many voters. Leaders of both parties have decided to soften the blow by attaching budgetary restraints to any vote to raise the debt ceiling, but they are battling over what sort of restraints. Democrats want to cap the deficits that the government can run up each year, which have now reached $1.5 trillion. Republicans fear a deficit cap would mean tax increases as Congress struggles to close its deficits, and they are pushing for a spending limit instead.

"You can count on House Republicans saying that if Congress is going to raise the debt ceiling, there has to be considerable spending reforms attached to that," said Rep. Peter Roskam (R., Ill.). Democrats attacked Republicans for threatening to block a debt-ceiling increase if they don't get the conditions they want. "The idea that in the name of fiscal responsibility people would say we're not going to raise the debt ceiling is a joke, to be honest with you," said Sen. Michael Bennet (D., Colo.).

Many GOP freshmen ran biting television ads last fall during the midterm election campaigns against Democratic incumbents for raising earlier debt limits, making it hard for the Republicans to support an increase this time. GOP leaders plan to canvass their members in coming days to learn what it would take for them to support an increase. House Speaker John Boehner (R., Ohio) recently told GOP House members he wants to tackle the debt limit as soon as possible, as long as there is a credible plan in place to curtail spending.

The debt-ceiling battle comes as a bipartisan group of senators, the so-called Gang of Six, is reaching a critical moment in its plans to release a deficit-cutting plan. The next few days will tell whether the six can unite behind a single package. Vice President Joseph Biden , at Mr. Obama's direction, is leading another group of lawmakers working on a debt plan. It isn't entirely clear how the two groups will interact, but some suggest the Gang of Six's plan could be a template for Mr. Biden's group.

Bank Stocks Too Fancy for Money Managers Turned Off by Use of Derivatives
by Charles Stein - Bloomberg

"Above all stick with what you know," Warren Buffett cautioned investors in a 1974 Forbes magazine interview. "Don’t get too fancy."

Banks, in the view of some of today’s best-performing money managers, are too fancy -- their businesses and finances too complicated to understand even as regulators have tried to make them more transparent. Investors owning few if any of the stocks in the group include Clyde McGregor, who runs Oakmark Equity and Income Fund, Delafield Fund’s John Delafield and Donald Yacktman of Yacktman Focused Fund.

The fund managers said they are frustrated by complex balance sheets stuffed with derivatives that make it hard to evaluate bank assets and how they will fare under different economic scenarios. They are also concerned that profits may be hurt by a slowdown in the economy, litigation over mortgage bonds and foreclosures, and new fee-crimping rules. "We find it hard to believe the banks have cured all their bad asset problems, and they aren’t transparent enough for us to understand the risks," McGregor, whose $20.5 billion fund beat 99 percent of peers over the past decade, said in a telephone interview from Chicago.

The 24-stock KBW Bank Index fell 8.6 percent in the past year, compared with the 13 percent increase by the Standard & Poor’s 500 Index, a benchmark for the broader market. The bank index is priced at roughly book value, or the value of total assets minus liabilities, which makes bank stocks cheap by historical standards, said Gerard Cassidy, an analyst at RBC Capital Markets in Portland, Maine. At the end of 2006, the index traded at two times book value, according to data compiled by Bloomberg.

Banks earnings in the first quarter provided few reasons for bearish investors to change their view. Net revenue at the six largest U.S. lenders -- Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc., Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley -- fell 13.3 percent from a year earlier, according to Bloomberg data. Profits excluding taxes, loan-loss provisions and one-time items slid 40.2 percent. Bank stocks, as measured by the KBW index, fell 50 percent in 2008 and then more than doubled from March 9, 2009, when stocks reached a 12-year low, to the end of the year. 2009. Bank shares gained another 22 percent in 2010, Bloomberg data show.

McGregor’s Oakmark Equity and Income held no bank stocks as of March 31, according to Bloomberg data. He and co-manager Edward Studzinski got out in 2006 on concern that mortgage lending had gotten too aggressive. The fund, which buys stocks and bonds and is part of part of Chicago-based Harris Associates LP, returned 8.7 percent annually in the past 10 years, almost twice the average gain by balanced mutual funds, data from Morningstar show.

Derivatives Problem
"Can you still make money in banks?" McGregor, 58, said. "Maybe. But we can build a portfolio that doesn’t demand owning them." The problem, he said, is the complexity of the banks, especially their use of derivatives. Derivatives are contracts whose value is based on stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or the weather. Options and futures are the most common types of derivatives. Unlike traditional loans, which can be studied and evaluated, derivatives are described by banks in general terms that makes it difficult to determine the quality of the underlying assets, McGregor said.

Rocket Science In its 10-K annual report filed in February, Bank of America listed its credit derivatives, securities that let buyers guard against a borrower’s missed debt payments. The filing doesn’t say which specific debts the bank is buying protection for, and it describes the counterparties to the trades as "large multinational financial institutions." "We don’t know what we are being exposed to," McGregor said.

It’s not a question of requiring more disclosure, which regulators have done in the past several years, according to George Shipp, manager of the $694 million Sterling Capital Special Opportunities Fund in Virginia Beach, Virginia. "You need to be a rocket scientist to understand it," Shipp, 52, said in a phone interview. He said he recently read through Goldman Sachs’s annual report and, even with pages of disclosure, "it is not something the layman is going to be able to figure out." His fund, which beat 97 percent of peers over the past five years, holds one bank, Boston-based State Street Corp.

Buffett’s Banks
Buffett, who once called derivatives "financial weapons of mass destruction," doesn’t consider all banks too fancy. Berkshire Hathaway Inc., the Omaha, Nebraska-based holding company he has run since 1970, is the largest shareholder of Wells Fargo, according to Bloomberg data. His $10.1 billion stake in the San Francisco-based bank is Berkshire’s second- largest, after Coca-Cola Co. Buffett is the third-largest shareholder in U.S. Bancorp of Minneapolis, with $2 billion of stock at year-end.

"U.S. banking profitability will be considerably less in my view in the period ahead than it was in the early part of this century," Buffett said April 30 at the annual meeting of Berkshire shareholders in Omaha. Buffett said profits would diminish as regulations forced banks to reduce leverage. At the same meeting he described Wells Fargo and U.S. Bancorp as "very good operations."

Delafield, who has been managing money since 1970, can’t remember the last time he owned a bank stock. "It’s impossible from the outside to know the value of what they hold," Delafield, 75, who runs the $1.4 billion Delafield Fund from New York for Tocqueville Asset Management LP, said in a phone interview. The fund had 30 percent of its money in industrial stocks, 28 percent in basic materials and none in financials as of March 31, according to Morningstar data. It has gained 12 percent a year for the past decade, ranking first among midcap value funds.

The $1.4 billion FPA Capital Fund, the best-performing diversified U.S. stock fund over the past 25 years, owned no bank stocks as of March 31, Bloomberg data show. The fund gained 15 percent annually over that stretch, according to Morningstar. "Back in 2007 many investors weren’t paying attention to the huge risks embedded on the balance sheets of financials," Dennis Bryan, 49, co-manager of the Los Angeles-based fund since 2007, wrote in an e-mail. "Today more investors are closely monitoring those risks."

Berkowitz the Bull
One of the biggest bulls on bank stocks is Bruce Berkowitz, manager of the $20 billion Fairholme Fund. He began buying lenders in the fourth quarter of 2009, convinced an improving U.S. economy would lift the banks along with it. Berkowitz, who in January 2010 was named Morningstar’s domestic stock manager of the decade, now has more than two-thirds of the fund’s equity in financial stocks, including Citigroup and Bank of America.

"The balance sheets look better than ever, the banks are making money and they are dealing with their issues," Berkowitz, 52, said in a telephone interview from Miami, where his firm, Fairholme Capital Management LLC, is based. Fairholme Fund fell 3.2 percent this year through May 2. In addition to Citigroup and Bank of America, its top 10 holdings as of Nov. 30 included New York-based banks Goldman Sachs and Morgan Stanley (MS), Bloomberg data show.

Goldman Sachs is a favorite holding of billionaire investor Michael Price, who said some large banks stocks are "great" values. "Some of the worst-performing things are big financials this year, which is kind of surprising," Price said yesterday in a Bloomberg Television interview on "Surveillance Midday" with Tom Keene. "We own Goldman, we buy Goldman on dips. I think Goldman’s a great large-cap financial value guy’s stock."

Mortgage Pain
In an April 15 interview with Bloomberg Television, Bank of America CEO Brian T. Moynihan said that while the bank was making progress in many areas, "the mortgage business continues to push us back." Like other banks, the Charlotte, North Carolina-based company has tangled with investors, state and federal regulators, and mortgage insurers over claims that it owes money for loans made during the housing boom and for its handling of foreclosures. State attorneys general negotiating a settlement of foreclosure practices have reached agreements with lenders on some terms while failing so far to reach an accord on payments by the banks, a person familiar with the talks said this month.

The battles will be resolved, possibly by the end of the year, Berkowitz said. "It is only a matter of time before everyone settles up." That’s not enough of a reason to buy for Yacktman, whose $2.9 billion Yacktman Focused Fund returned an average of 13 percent a year in the past decade, topping 99 percent of rivals. He held one large bank, U.S. Bancorp, as of March 31, Bloomberg data show. "With a bank you create assets with a stroke of a pen," Yacktman, 69, said in a telephone interview from Austin, Texas. "You’ve got a black box."

Paul Singer, founder of hedge fund Elliott Management Corp., held one bank stock as of Dec. 31, a $65 million stake in Flagstar Bancorp Inc. of Troy, Michigan, according to Bloomberg data. Singer, 66, whose New York-based firm oversees $17.1 billion, said in a March interview with the Wall Street Journal that the "opacity" of bank financial statements means he can’t assess their strength or sensitivity to changes in interest rates and asset prices.

Break Them Up
"You don’t know the financial condition of Citigroup, JPMorgan, Bank of America, any of them," said Singer, whose fund gained 14.3 percent a year since 1977 compared with the 11 percent increase for the S&P 500 Index (SPX), according to company data. Scott Tagliarino, a spokesman for the firm, said Singer wouldn’t comment beyond the interview.

Simon Johnson, a professor at Massachusetts Institute of Technology’s Sloan School of Management in Cambridge, Massachusetts, has pushed for breaking up the biggest banks as a way to make the financial system safer. It would also be a plus for investors, he said in a telephone interview from Washington. "Shareholder value has been destroyed by the opaqueness of the big banks," he said. "If you are a shareholder you want to see them split up. The added transparency would be a virtue."

Sterling Capital’s Shipp said that while splitting off businesses such as investment banking would make big banks easier to understand, the remaining traditional lending business wouldn’t be too appealing. "Garden variety banking, with all the competition and cheap money available, is not very attractive right now."

Given all the problems facing banks, there are more compelling places to invest today, he said. "Who needs the aggravation when I can buy Pepsi or McDonald’s."

China risks credit-fuelled Minsky moment
by George Magnus - Financial Times

China is widely seen as a beacon of sustained economic expansion and financial stability, in contrast to a troubled western world. However it is worth asking whether China’s investment-intensive growth model, and developments in credit and inflation, are pushing it towards its own version of a "Minsky moment" – named after the US economist who warned that the process of leverage always culminates in instability.

As western countries discovered in 2008, this is the point at which policy or other endogenous shocks lead to financial instability and falls in asset prices, investment and economic growth. Could China be flirting with a similar outcome? China’s transition over the past decade from low to borderline-middle per capita income has been based on an investment-intensive growth model. This has seen the investment share of gross domestic product rise from about 35 per cent in the late 1980s to an unprecedented 47 per cent today. More than half this rise was related to property investment.

Yet investment’s share of GDP cannot keep rising, since chronic overcapacity would eventually cause investment returns to collapse. Although corporate profits have been robust, they are boosted by subsidies to energy prices, for example, and by a monetary system that diverts income away from households and underprices capital. A sharp rise since 2000 in the ratio of capital to output does not make China unique among emerging markets, but it is worrying when the investment share of GDP is so high and the quality of investment financing is deteriorating.

But a more immediate worry is the growing credit intensity of China’s economy. What China calls "total social financing" – conventional bank loans and most other external sources of finance – was still 38 per cent of GDP in the first quarter of 2011, almost as high as in 2009 when China implemented a credit-centric stimulus programme. The credit intensity of growth, or the amount of new credit generated for each unit of GDP growth, has risen from 1-1.3 before 2009 to 4.3 in 2011.

Despite a 500 basis points rise in bank reserve requirement ratios since January 2010, and four 25bp increases in interest rates since October, credit demand and supply seem barely affected. In real terms, interest rate levels are the lowest for 13 years: the three-month deposit rate stands at -3 per cent, and the one-year lending rate at 1 per cent. Companies are borrowing more as cash-flows weaken, with energy, utility and wage bills rising.

Although formal bank loan volumes are subject to restraint, they only comprise about half of TSF. Companies can also access plentiful liquidity in Hong Kong, where the renminbi deposit market has increased eightfold since mid-2010 to more than RMB400bn and where offshore renminbi financing is rising fast.

Minsky stressed the vulnerability of banking systems, but the integrity of China’s state banking system is not the key issue. Foreign exchange reserves of $3,000bn give ample ammunition for recapitalisation and the China Regulatory Banking Commission, which warns regularly about the risk of excessive lending and borrowing, has already set a minimum 11.5 per cent capital ratio.

But financial instability, arising from excessive credit, increasing inflation and weak investment returns, is always an important catalyst. That is why China’s current inflation rate of almost 5.5 per cent, and its policy response, should be monitored closely. Decisive, sustained measures to put China’s inflation and credit genies back in the bottle, including a significant rise in interest rates, would hit cyclical growth. But they would make growth more sustainable by taming investment and allowing time for other measures to boost household incomes and consumption.

A different scenario is all too plausible. In this, the leadership changeover in 2012, a reluctance to compromise growth or alienate workers, and political interests in rising property prices could lead to a premature call of victory over inflation. This might boost asset price and growth in the short term, but increase the likelihood the new leadership will have to deal with a credit-fuelled Minsky moment.

A Chinese Minsky moment would hit global growth and resource markets, and shock the consensus about steady appreciation of the renminbi. It would also undermine China’s aim of rebalancing its economy towards consumers; and raise the risk of political unrest.

Financial Overhaul Grows and Slows
by Jean Eaglesham - Wall Street Journal

What is 20 times taller than the Statue of Liberty, 15 times longer than "Moby Dick" and would take the average reader more than a month to read, even if you hunkered down with it for 40 hours a week?

The answer: The growing paper trail formed by the Dodd-Frank law, passed by Congress last year to give U.S. financial regulations their biggest overhaul since the Great Depression.

Getting the legislation through that political thicket was easy compared with the slog now under way to turn Dodd-Frank into regulations. The process has produced more than three million words in the Federal Register—or more than 3,500 11-inch-high pages that would stretch end-to-end more than a third of the way from the Capitol to the White House.

And about 62% of the 387 sets of rules required by the law haven't even been proposed, according to law firm Davis Polk & Wardwell. In April, not a single U.S. agency met any of the 26 Dodd-Frank-related deadlines set for April under the law. Just 21 rules are finished, including a new requirement for say-on-pay votes for shareholders and a permanent increase in bank-deposit insurance to $250,000.

The pace has snarled the creation of bounty payments by the Securities and Exchange Commission and Commodity Futures Trading Commission for whistleblowers who expose financial fraud. Banking regulators are lagging on completion of a rule that would force lenders to retain some of the credit risk on mortgages that are sold off and bundled into securities. "I count my blessings every day that I'm no longer a commissioner" at the SEC, says Joseph Grundfest, a Stanford University law professor who from 1985 to 1990 was one of the five commissioners who make decisions on behalf of the agency.

Regulators have warned for months about the daunting logistical pressures imposed by Dodd-Frank. Political and lobbying battles have further bogged down the process. Delays of a few months or so aren't expected to make much of a difference, but the Obama administration has repeatedly vowed to fight efforts by some Republicans to cause a longer freeze or attempt to undo some of the changes required under the law. "The reality is, we're not going to complete all the work in the timetable Congress set," Scott O'Malia, a commissioner at the CFTC, said in an interview. But the need to "get the rules right" is more important than rigidly meeting Congress's "unrealistic" deadlines, he said.

The Dodd-Frank law has 849 pages, compared with 66 pages in the Sarbanes-Oxley Act, a 2002 law that overhauled accounting rules following the Enron scandal. The landmark Glass-Steagall Act, which created the Federal Deposit Insurance Corp. and barriers between commercial and investment banking during the Depression, was a slim 34 pages. "Dodd-Frank is Sarbanes-Oxley on steroids. It's an exponentially greater volume of regulation," says Margaret Tahyar, a Davis Polk partner. The "sheer number of rules still in the pipeline makes it almost inevitable agencies will miss an increasing number of deadlines over the next year."

In addition to the 30 rule-making procedures that already have missed the deadline set by Congress, 145 are supposed to be completed by year end. A big chunk of the looming deadlines falls close to July 21, the one-year anniversary of President Barack Obama signing the bill into law. Officials at the SEC, on the hook for more Dodd-Frank-related regulations than any other U.S. agency, have finished six rules, proposed 28 additional rules, missed deadlines on 11—and still have 50 to go, on which they have yet to issue any proposals. The agency's rule-making responsibilities range from new controls on credit ratings to powers to claw back executive pay.

John Nester, an SEC spokesman, said the agency is "working hard to meet the deadlines, with an emphasis on getting the rules right." "We're stretched incredibly thin," SEC Chairman Mary Schapiro said last month.

Last week, the CFTC hit the brakes on many of its draft rules written to implement sections of the Dodd-Frank law, extending by 30 days the comment period on provisions that include a regulatory overhaul of the derivatives market. The move came after criticism from the financial industry and some Republican lawmakers that the process was moving too fast. A bill introduced by Republicans earlier this year would delay new derivatives rules by 18 months. Other rules also have been snagged by intense industry lobbying. Retailers and manufacturers have complained about the costs and practicality of implementing a requirement to disclose annually whether goods contain "conflict minerals" from war-torn central Africa.

Another rule that missed the April deadline sets new fee limits on debit-card transactions. The rule's wording has been the focus of an intense campaign by banks, which have billions of dollars in revenue riding on the outcome. "The problem is not just the number of rules, it's the complexity of them, and it's the political power of the various constituencies who are affected by those rules," says Mr. Grundfest, the former SEC commissioner.

Some Democratic lawmakers have accused Republicans of foot-dragging, saying the need to make sweeping regulatory changes is as urgent as it was during the worst of the crisis. Deputy Treasury Secretary Neal S. Wolin criticized "some on Wall Street, K Street and Capitol Hill" last month for trying to "slow down, roll back, or even repeal these crucial reforms."

U.S. Regulators Face Budget Pinch as Mandates Widen
by Ben Protess - New York Times

Government regulators on the Wall Street beat have long been outnumbered and outspent by the companies they are supposed to police. But even after receiving budget increases from Congress last month, regulators are still falling behind. The Securities and Exchange Commission and the Commodity Futures Trading Commission are struggling to fill crucial jobs, enforce new rules, upgrade market surveillance technology and pay for travel.

On a recent trip to New York to tour a trading floor, a group of employees from the commodities watchdog rode Mega Bus both ways, arriving late to their meeting despite a 5:30 a.m. departure. The bus, which cost $30 a person round trip, saved the agency roughly $1,000 over Amtrak. "We spent hundreds of billions of dollars on a hideous bailout, and now we’re not going to fund reforms to prevent another one," said Bart Chilton, a commissioner with the agency.

The money squeeze comes as Wall Street regulators take on added responsibilities in the wake of the financial crisis, including monitoring hedge funds, overseeing the $600 trillion derivatives market and other tasks mandated by the Dodd-Frank law. Their budgets may soon be even tighter, with Republicans looking to cut the regulators’ spending beginning Oct. 1, the start of the government’s fiscal year. Gary Gensler, the chairman of the commodities agency, and Mary L. Schapiro, the head of the S.E.C., will discuss their budgets for the 2012 fiscal year before a Senate committee on Wednesday.

Current and former regulators warn that budgets cuts would prevent the agencies from enforcing hundreds of new rules enacted under Dodd-Frank, or worse, catching the next Bernard Madoff. But critics contend that the agencies don’t deserve extra money, given that they missed warning signs and failed to catch serious wrongdoing in the years leading up to the crisis. The S.E.C., too, has been accused of mismanaging its finances. The Government Accountability Office has faulted the agency’s accounting almost every year since it began producing financial statements in 2004.

Some Republicans argue that the regulators’ cries of poverty are overblown. The S.E.C.’s budget this year is $1.18 billion, up 6 percent over 2010 — and nearly triple what it was a decade ago. "A dramatic spending increase to fund the S.E.C. and C.F.T.C., as envisioned by the authors of the Dodd-Frank legislation, would further the mindset that our nation’s problems can be solved with more spending, not more efficiency," Representative Scott Garrett, the New Jersey Republican who leads the House Financial Services Committee’s Capital Markets panel, said in a statement earlier this year.

While hiring bans and travel restrictions have been eased since the new budget, regulators say they are largely in a holding pattern as lawmakers debate the 2012 budget. Any further cuts, they say, could undermine their efforts to police Wall Street. The commodities agency says the uncertainty has forced it to delay some investigations and forgo other potential cases altogether. "We don’t have the sufficient number of bodies to pursue all relevant investigations and leads," said Mr. Gensler, adding that his agency was short nearly 70 people in its enforcement division.

Robert S. Khuzami, the S.E.C.’s enforcement chief, has similar worries, noting that some Wall Street investigations have faced mounting delays. Recent departures of lawyers will only magnify the problem, he added. Mr. Khuzami also said he faced a "significant backlog" of tips and referrals, including in the area of market manipulations and accounting irregularities. The tips, which come from whistle-blowers, law enforcement agencies and investors, often prompt S.E.C. investigations.

"The biggest concern is we’re not going to get to fraud and wrongdoing as early as we should," he said. And if the agency’s budget is not increased in 2012, the S.E.C.’s enforcement division "won’t cast as wide a net," he added. Already, the S.E.C.’s enforcement division has adopted cutbacks. The division, for instance, has curbed its use of expert witnesses in some securities fraud trials, Mr. Khuzami said.

The division also started sending only one lawyer — sometimes a junior staff member — to conduct depositions and interview witnesses, according to defense lawyers and people close to the agency. Senior S.E.C. lawyers monitor the depositions via videoconference. To avoid hotel costs, some S.E.C. investigators have shuttled between New York and Washington on Amtrak trains that leave around dawn and return the same day. The agency only recently started to again examine investment firms and public companies in some Southern states, after postponing reviews to avoid paying for plane fares.

Despite the recent budget increase, the S.E.C. "still must closely monitor expenses such as travel to make sure that each expense is truly mission-critical," according to an internal agency memo dated April 14 that was provided to The New York Times. "It is not at all clear what fiscal year 2012 funding level will be approved by Congress," said the memo, which was signed by Jeff Heslop, the S.E.C.’s chief operating officer.

While the S.E.C. offsets its budget with fees from Wall Street banks and other financial firms — and in recent years has even turned a profit for taxpayers — Congress sets the agency’s spending levels each year. Lawmakers in April raised the S.E.C.’s budget for the next few months by $74 million, to $1.18 billion. President Obama had requested $1.25 billion for the agency, and Dodd-Frank called for $1.3 billion.

The Commodity Futures Trading Commission received $202 million. Although that was a 20 percent increase over the previous year, the budget fell short of the $261 million the agency said it needed to enforce Dodd-Frank. The law requires the commission’s staff for the first time to oversee swaps, a type of derivative. The industry is seven times the size of the futures business now under its jurisdiction, Mr. Gensler said. "With $202 million, we can grow moderately," he said. But "we need more resources to protect the public and oversee the swaps market."

After the budget increases, regulators ended a yearlong hiring freeze. But both agencies say they are reluctant to significantly increase staffing for fear of having their budgets cut in October. "Please keep in mind that this round of hiring will focus on the agency’s very highest priorities, and many divisions/offices may receive approval for very few, if any, of their priorities at this time," the internal S.E.C. memo said. The memo further instructed officials to compile a list of the "top 10 priorities for hiring," which will then be reviewed on a "case-by-case basis."

The agency said it had not been able to fill nearly 200 positions this year owing to budget constraints. The S.E.C. had five open spots for experts in complex trading and received about 1,000 applicants for the roles; it could afford to hire just one person. The agency also lacks money to adequately train the enforcement lawyers already on staff, Mr. Khuzami said. Some lawyers who wanted to attain their brokerage licenses to better understand the industry had to put off prep classes.

"I don’t think people realize how serious the problem is and how serious the consequences are," said Harvey Pitt, who was chairman of the S.E.C. from 2001 to 2003. The regulators, for instance, have had to slow down the adoption of Dodd-Frank rules. The S.E.C. has put off creating several offices mandated by the law, including a bureau that will oversee the credit rating agencies and a special office of "women and minority inclusion."

The commodities agency, which planned to complete its 50 new rules by July, is now hoping to finish by early fall. Once the rules are complete, the agency will not have the funds to enforce them, Mr. Gensler said. Some 200 firms registering with the commission as swaps dealers may have to wait months for the agency to process their applications — unless it can hire several new employees in the department.

Regulators fear that Congress will soon slash their budgets, which could send the agencies scrambling to cut costs again — much as they did in recent months amid the threat of a government shutdown. Until recently, employees from the commission were instructed not to order certain office supplies — items like three-hole punches and heavy-duty staplers. The ban was lifted after the new budget was instituted.

Some regulators were also paying for their own travel. When Mr. Gensler, a former Goldman Sachs executive, headed to Brussels to help the European Parliament create new derivatives rules, he paid out of his own pocket. Another commissioner from the commodities agency who attended a conference in Boca Raton, Fla., paid for a night at the Sheraton using his family’s promotional points. Mr. Gensler attended via a videoconference.

Goldman Sachs lobbying hard to weaken Volcker rule
by Lauren Tara LaCapra - Reuters

Goldman on track to break its 2010 lobbying spending record

Goldman Sachs Group Inc. has just a few more months to put its stamp on the Volcker rule, and it is not wasting any time.

The rule, designed to limit banks from speculating with their own money, will cost Goldman at least $3.7 billion in annual revenue, by one estimate. And billions more could be at stake if regulations now being drawn up are extra-tough. The Volcker rule was one of the main topics on the agenda when Chief Executive Lloyd Blankfein met recently with U.S. Securities and Exchange Commission Chairman Mary Schapiro. Wall Street chiefs do not often lobby top regulators directly, but this issue is unusually important to Goldman.

"They're totally freaked out about Volcker," said a Goldman lobbyist who declined to speak on the record for fear of losing the contract. "People are working on that a lot, with agency staff, with lawmakers, you name it." Indeed, lobbying disclosures show Goldman representatives have been working both sides of the political aisle and meeting with top officials in the White House and regulatory agencies.

One big area of concern for Goldman is that regulators who are interpreting the Volcker rule will severely limit the amount of time a bank can hold a security or derivative. Positions held long term can be backstairs bets on markets. The Volcker rule is not the only element of financial reform that Goldman is resisting. Important issues on its lobbying docket also include derivatives reform, capital requirements and bonus restrictions. Other bank heads, including Morgan Stanley's James Gorman, have met Schapiro about the Volcker rule. But the provision is most important for Goldman, whose business is far more weighted towards trading, three lobbying sources said.

All Star Team
Goldman has hired an all-star team of lobbyists and former government officials, leveraging powerful connections to get its message across to regulatory and political leaders. "Before the crisis, Goldman was basically non-existent in Washington," said a former Congressional staffer who now works as a policy analyst at a Wall Street bank. "Post-crisis, Goldman is everywhere."

Under last year's Dodd-Frank law, regulators have until July to come up with specific rules for implementing the Volcker provision, meaning banks have limited time to try to shape the regulations. Adding to the complexity of lobbying efforts is the number of parties involved. The SEC and four other regulators are in the process of writing separate versions of the Volcker rule, which must then be reconciled and shaped into a single set of regulations. "Volcker is the subject of a very quiet, closed-door battle right now, not just between us and Wall Street, but among the agencies as well," said Bart Naylor, who has lobbied regulators for consumer-rights coalition Americans for Financial Reform.

The impending changes have already spurred Goldman to dismantle much of its "proprietary trading" operations, which trade for the bank's own account. These operations were some of the bank's most profitable, and their closure will erase about $3.7 billion in revenue and $1.5 billion in profit annually, according to an estimate by JPMorgan Cazenove analyst Kian Abouhossein. By Abouhossein's reckoning, the bank gets another $17 billion of revenue from "market making," or linking up buyers and sellers across global markets. That revenue could also be squeezed, depending how stringent the regulations are. Those figures represent about 65 percent of Goldman's annual revenue, according to Abouhossein's estimates.

Lawmakers say the Volcker rule will ensure that big banks are not gambling in markets, and that taxpayers will not be left on the hook when their bets backfire. Implementing the Volcker rule will be tricky, though. When a bank buys a security from a client, it is difficult for a regulator to determine whether the bank is serving the client or betting on the market itself. Limiting holding periods could be a simple way to ensure that banks are not making secret bets under the guise of helping clients.

Going Long
Goldman argues that holding on to securities for a long period of time can be a crucial part of trading on behalf of customers because assets trade infrequently in some markets. A substantial amount of the securities that Goldman trades seems to fall into the longer-term category. In a February presentation, Goldman said it held about a third of the securities and listed derivatives on its trading books for three months or more, and 8 percent for more than a year. The bank did not disclose how long it holds unlisted derivatives positions, where it also has significant exposure.

Goldman is also advocating that regulators exclude currency contracts from the Volcker rule, in addition to Treasury bills and interest-rate swaps, which were excluded in the law. "They definitely don't want their entire book to be micro-managed by the SEC," said a regulatory consultant who once worked at Goldman and is familiar with its lobbying efforts. "They want as much -- I wouldn't say self-policing -- but as much flexibility as possible."

In the years following the crisis, Washington has been reshaping the financial industry in an effort to prevent another collapse. Goldman has in turn been trying to shape the legislative and regulatory process. The intensity of its efforts is evident in at least one concrete way: the amount of money it is spending on lobbying. That figure totaled $1.32 million in the first quarter of 2011. That's 15 percent higher than the same period a year ago, putting the bank on course to break its annual record for lobbying expenditure of $4.61 million, set in 2010.

"They're a big and powerful company with a lot riding on financial reform," said Dave Levinthal, editor of, which tracks lobbying and campaign spending. "When monumental legislation like Wall Street reform gets passed, it's not only about the legislation when it's coursing through Congress, but how it's being implemented."

For Wall Street, where a bank can earn billions of dollars a year, a $5 million lobbying budget may seem paltry. But in Washington it's a lot of money. And relative to revenue, Goldman's spending is exponentially higher than that of its competitors. The bank has hired an all-star stable of Washington lobbying heavyweights. Michael Paese, former deputy staff director for the U.S. House Financial Services Committee, heads its internal lobbying group. His team includes former staffers from the U.S. Senate Banking Committee, the White House and regulatory agencies.

Outside of its own payroll, Goldman also has several high-profile legislative veterans working on its behalf in Washington, hailing from both sides of the political aisle. Among them are former Republican lawmakers Trent Lott and John Breaux and former Democratic House Majority Leader Dick Gephardt. It is common for large companies to seek influence in government, but old hands in Washington say Goldman stands out both in its wide network of high-level contacts and its ability to leverage those relationships to its advantage.

"The individuals at Goldman have been incredibly powerful over time," says Hillary Sale, a law professor at Washington University in St. Louis who specializes in Wall Street regulation. "When you're a consumer, it gives you the creeps thinking about that kind of influence over regulation. But from the bank's side, it's a perfectly smart strategy."

U.S. Agencies Probing Senate Goldman Sachs Findings After Formal Referral
by Phil Mattingly, Robert Schmidt and Justin Blum - Bloomberg

U.S. senators formally referred to the Justice Department and the Securities and Exchange Commission an investigative report that found Goldman Sachs Group Inc. misled clients about mortgage-linked securities.

Senators Carl Levin of Michigan, the Democratic chairman of the Permanent Subcommittee on Investigations, Tom Coburn of Oklahoma, the senior Republican, signed a letter asking the agencies to examine the panel’s report, Levin said in an interview yesterday. The results of the investigation, made public by the committee April 13, lay much of the blame for the credit crisis on Wall Street banks that earned billions by enticing clients to buy the risky bond deals. "If something comes up that needs to be reviewed by some agency, it gets referred," said Levin. "That’s the way we do it."

The scrutiny is a setback for Goldman Sachs, which hired lawyers, lobbyists and public relations specialists to monitor the two-year Senate probe and tamp down any controversy that arose from the subcommittee’s conclusions. Levin said in the interview that the referral sends the entire report, rather than specific facts, to the agencies. The Senate inquiry also examined the role of credit-rating firms in the meltdown, lax oversight by regulators and the decline in lending standards at banks including Washington Mutual Inc. that fueled the mortgage bubble.

Top of List
A formal referral from the Senate is "much more than a symbolic gesture" because it would prompt an agency to put the matter "at the top of its list," said Robert Hillman, a professor at the University of California, Davis, School of Law. For Goldman Sachs, "the question is how much pain they’re going to have to endure with the public spotlight for these revelations, and that depends in part how long the government’s willing to drag this out," said James Cox, a securities law professor at Duke University School of Law.

Still, Cox said he is "very skeptical" that the examinations by the agencies will ultimately lead to new claims against Goldman Sachs, which last year paid $550 million to settle SEC claims related to its marketing of the complex securities known as collateralized debt obligations. Attorney General Eric Holder, testifying before the House Judiciary Committee yesterday, confirmed that his department is scrutinizing the report. Two people briefed on the matter confirmed that the SEC enforcement division is also studying it.

Holder Comments
Holder, in his comments, didn’t offer any specifics though he did single out the New York-based bank in his remarks. "The department is looking right now at the report prepared by Senator Levin’s subcommittee that deals with Goldman Sachs," Holder said. When the report was released, Levin said he wanted the Justice Department and the SEC to examine whether Goldman Sachs violated the law by misleading clients who bought CDOs without knowing the firm would benefit if they fell in value.

Levin also said at the time that federal prosecutors should review whether to bring perjury charges against Goldman Sachs Chairman and Chief Executive Officer Lloyd Blankfein and other current and former employees who testified to Congress last year. Levin said they denied under oath that Goldman Sachs took a financial position against the mortgage market solely for its own profit, statements the senator said were untrue.

‘Truthful and Accurate’
When the report was released, Goldman Sachs said it never misled anyone about its activities. "The testimony we gave was truthful and accurate and this is confirmed by the subcommittee’s own report," Goldman Sachs spokesman Lucas van Praag said. David Wells, a spokesman for Goldman Sachs, declined to make any additional comment yesterday. The company’s shares advanced 57 cents to $151.87 at 4:01 p.m. in New York Stock Exchange composite trading.

While the panel levied its harshest criticism at Goldman Sachs, it also accused Deutsche Bank AG of selling collateralized debt obligations backed by risky loans that the bank’s own traders believed were likely to lose value. Deutsche Bank spokeswoman Michele Allison said at the time: "As the PSI report correctly states, there were divergent views within the bank about the U.S. housing market. Moreover, the bank’s views were fully communicated to the market through research reports, industry events, trading desk commentary and press coverage. Despite the bearish views held by some, Deutsche Bank was long the housing market and endured significant losses."

Separate Lawsuit
Separately yesterday, the Justice Department sued Deutsche Bank and one of its mortgage units for more than $1 billion for allegedly lying to qualify thousands of risky mortgages for insurance by the Federal Housing Administration. The bank said the claims were "unreasonable and unfair." Goldman Sachs’s settlement with the SEC last year resolved claims that it failed to disclose that hedge fund Paulson & Co was betting against, and influenced the selection of, CDOs the company was packaging and selling.

The Senate report reveals details of four Goldman Sachs CDOs. One was named Abacus, the CDO at the center of the SEC civil claim that led to the bank’s settlement last year. Others were Timberwolf, Anderson and Hudson.

E-mails and Documents
According to the people briefed on the SEC’s review of the Senate report, who spoke on condition of anonymity because the matter isn’t public, investigators at the agency will scrutinize interviews, e-mails and other confidential documents that surfaced in the inquiry. While much of that evidence was seen by the SEC before its 2010 settlement, some is new, the people said.

Hillman, the law professor, said that given Goldman Sachs’s earlier settlement, the SEC or Justice Department would likely have a high bar for bringing a case against the bank. In resolving that case, Goldman Sachs admitted no wrongdoing and said in a regulatory filing it "understands that the SEC staff also has completed a review of a number of other Goldman mortgage-related CDO transactions and does not anticipate recommending any claims against Goldman or any of its employees."

The SEC’s enforcement division is "certainly free to revisit that, but the odds are that it won’t unless something very new comes out in the way of facts," said Hillman. "The SEC has probably taken its major step with Goldman already."

U.S. May Pursue More Lenders After Suing Deutsche Bank on Loans
by Dawn Kopecki, Hugh Son and David Voreacos - Bloomberg

The U.S. Department of Justice may pursue claims against other lenders after suing Deutsche Bank AG for more than $1 billion, alleging the firm lied while arranging federal insurance on faulty mortgages.

The Housing and Urban Development Department is examining loans insured through the Federal Housing Administration and may refer additional cases to the Justice Department, HUD’s general counsel, Helen Kanovsky, said yesterday in an interview. "We go where the evidence takes us, and if it takes us to the larger players on Wall Street, so be it," Kanovsky said. U.S. Attorney Preet Bharara said it wouldn’t be a "fantastical stretch" for prosecutors to scrutinize other lenders.

Deutsche Bank’s MortgageIT unit falsely certified that it was examining default risks while qualifying loans for FHA insurance, according to the government’s complaint. HUD has already borne $386 million in claims and costs, and has yet to make payments on defaulted loans with principal balances of $888 million. Some mortgages stem from the housing boom, when the industry eased lending standards, fueling more than $2 trillion in credit losses and writedowns.

"Nobody was doing any mortgage due diligence whatsoever," said Christopher Thornberg, principal at Beacon Economics LLC in Los Angeles. He said the government may have brought the claim against Deutsche Bank as a "test case" before targeting other banks or seeking to force settlements. "The only question is, ‘Who’s next?’" Thornberg said. Kanovsky and Bharara declined to identify lenders that might face claims.

‘Big Negative’
"We could see another potential big negative for the industry out of this," said Paul Miller, a former examiner for the Federal Reserve Bank of Philadelphia and an analyst with FBR Capital Markets in Arlington, Virginia. "It’s going to be a continued earnings drag on the industry."

Deutsche Bank said it will "vigorously" fight the government’s allegations. "We believe the claims against MortgageIT and Deutsche Bank are unreasonable and unfair" Renee Calabro, a spokeswoman for the Frankfurt-based company, said by e-mail. "Close to 90 percent of the activity covered by the DOJ allegations happened prior to Deutsche Bank’s acquisition of MortgageIT."

Countrywide Financial Corp. was the biggest originator of FHA-insured loans during the agency’s fiscal year ending Sept. 30, 2008, as housing-market losses prompted the collapse of financial firms including Bear Stearns Cos. and Lehman Brothers Holdings Inc. The lender had $10.8 billion in endorsed mortgages, according to FHA data.

Wells Fargo & Co. was the second-largest, with $9.8 billion in loans, and National City Corp. was third with $3.6 billion. Bank of America Corp., which acquired Countrywide in 2008, was No. 4 with $3.2 billion. Jerry Dubrowski of Bank of America, Veronica Clemons of Wells Fargo and Fred Solomon of PNC Financial Services Group Inc., which acquired National City in 2009, declined to comment.

Deutsche Bank and MortgageIT concealed problem loans through "egregious" violations of HUD rules for analyzing the income and creditworthiness of borrowers, according to the Justice Department’s complaint filed yesterday in Manhattan federal court. MortgageIT endorsed more than 39,000 loans for FHA insurance after 1999, making them "highly marketable for resale," the U.S. said. Of those, 12,500 defaulted. Deutsche Bank paid $429 million in January 2007 to buy MortgageIT. Bharara said it was closed in 2009.

Default, Eviction
"While Deutsche Bank and MortgageIT profited from the resale of these government-insured mortgages, thousands of American homeowners have faced default and eviction, and the government has paid hundreds of millions of dollars in insurance claims, with hundreds of millions of dollars more expected to be paid in the future," according to the complaint. The Justice Department didn’t file criminal charges or identify employees. "Not every lie is a crime," Bharara said.

Deutsche Bank fell as much as 3.7 percent in Frankfurt trading yesterday. The shares for the day declined 2.1 percent to 43.25 euros. As of February, HUD had insurance claims and related costs arising from 3,100 loans, according to the complaint. Another 7,500 mortgages defaulted without HUD making any payments yet, according to the complaint. The FHA paid $15.3 billion in claims in the 12 months ended March 31, according to payout records.

Triple Damages
The U.S. sued under the False Claims Act, which means it can seek triple damages and penalties of more than $1 billion. It also claims breach of fiduciary duty, negligence, gross negligence and indemnification. It seeks compensatory damages for past and future payments, as well as punitive damages. "It’s good to have people cracking down," David H. Stevens, president of the Mortgage Bankers Association, said in an interview. Stevens, who headed the FHA from mid-2009 until March and fined "hundreds" of lenders for violations during his term, said he had no personal knowledge about the case.

Deutsche Bank Sued by L.A. for Evicting Low-Income Tenants
by Edvard Pettersson - Bloomberg

Deutsche Bank AG was sued by the City of Los Angeles for allegedly failing to maintain foreclosed properties and illegally evicting low-income tenants.

The lawsuit comes a day after the U.S. Department of Justice sued the German bank for more than $1 billion, claiming it lied while arranging federal insurance on faulty mortgages. Deutsche Bank’s MortgageIT unit falsely certified that it was examining default risks while qualifying loans for Federal Housing Administration insurance, according to the government.

Renee Calabro, a spokeswoman for the Frankfurt-based bank, said the complaint filed by the Los Angeles City Attorney is "against the wrong party," according to an e-mailed statement. "Loan servicers, and not Deutsche Bank as trustee, are contractually responsible for both the maintenance of foreclosed properties and any actions taken with respect to tenants of foreclosed properties." Calabro yesterday called the federal government’s lawsuit "unreasonable and unfair" and said the company would fight the litigation.

Deutsche Bank and MortgageIT concealed problem loans through "egregious" violations of federal rules for analyzing the income and creditworthiness of borrowers, the Justice Department said in a complaint filed yesterday in Manhattan federal court. MortgageIT endorsed more than 39,000 loans for FHA insurance after 1999, making them "highly marketable for resale," the U.S. said. Of those, 12,500 defaulted.

Portugal agrees asset sale in return for €78 billion bail-out
by Louise Armitstead - Telegraph

Portugal has agreed to sell off the government's stakes in some of its best-known companies in exchange for a €78bn (£70bn) bail-out provided by the European Union and International Monetary Fund.

Stakes in companies including TAP, the national airline; Galp, the oil giant; EDP, the utility firm; and REN, the electricity grid operator, will all be sold over the next two years. BPN, the failed Portuguese bank, will be sold with no minimum price set by the end of July. The conditions of the package, that were revealed on Wednesday following the agreement announced late on Tuesday night by José Sócrates, Portugal's caretaker prime minister, also focused on rescuing the banks.

About €12bn of the total €78bn must be pumped into the banking sector and to boost core tier one capital levels from 8pc to at least 10pc over the next 18 months. The EU and IMF will provide the funds in the form of loans which will run until 2013, after which Portugal is expected return to markets to finance itself. The interest rate on the loans will be set by European finance ministers at a meeting within the next couple of weeks.

Portugal also agreed to:
  • Cut the budget deficit faster than it had previously outlined – from 3pc to 4.5pc in 2012, and to from 2pc to 3pc in 2013.
  • Freeze public sector wages and pensions until the end of 2013 and reduce the number of civil servants by 1pc in both 2012 and 2013.
  • Freeze all existing tax benefits and incentives and cut some. Imposing a cap on health, education and housing allowances and on personal income tax is expected to raise about €150m in 2012 and €175m 2013.

Portuguese bond yields fell to their lowest level for five months amid general relief at the announcement of the bail-out. The cost of insuring Portuguese sovereign debt against default also fell. Five-year credit default swaps were down 25 basis points at 6.2pc , according to data monitor Markit. However, the yield on 10-year Portuguese bonds remaining above 10pc.

Traders and analysts were still concerned about the precise terms of the deal and the possibility of it being stalled by the political process. The bail-out has to win cross-party support in Portugal as well as approval by other European countries, and it has already run into opposition from Finland.

Marie Diron, an economic adviser at Ernst & Young said: "Overall, the package is unlikely to change market sentiment much. Debt restructuring still looks likely, especially if it is implemented in Greece." Michael Leister of WestLB told Reuters: "Even though we have clarity regarding the amount, the more interesting detail will be the interest rate that Portugal will have to pay on the loans so we are still waiting for this."

Ireland state pension fund sells off investments to help cover bailout costs
by Charlie Weston -

The National Pensions Reserve Fund (NPRF) was forced to sell some of its investments in the past few months to help cover the costs of the €85bn bailout, it emerged yesterday. The pension fund reported it held only €5.3bn in its so-called discretionary portfolio at the end of April. This was down from €9.8bn in assets a month earlier, as it liquidated investments to help cover the cost of bailing out the banks.

Up to €10bn is to be put up by the pension fund as part of the bailout deal agreed with the European Union and IMF last November. The NPRF also said the value of its so-called directed portfolio, which includes €7.9bn the Government has provided in aid to AIB and Bank of Ireland in return for shares in the lenders, was €13.4bn at the end of March. There was €5.5bn in cash, representing liquidated investments to help the State meet its contribution to the EU/IMF bailout. The total fund size at March 31 was €23.2bn.

A return of 0.3pc was earned by the discretionary portfolio in the first three months of the year, but the total fund had a return of minus 5.3pc over the quarter. On an annualised basis, the total fund return was 1.3pc. The pension fund was set up almost a decade ago to help fund part of the country's public sector pension liabilities from 2025. However, the crisis with the banks means the fund is now being used to cover some of the country's sovereign and banking debts.

Until the start of the crisis, it was financed by an annual payment provided by the Government that was equivalent to 1pc of the gross national product. The total cost to the Government of rescuing its banks may increase to over €70bn, the Central Bank stress test results in March showed.

Ireland slashes growth projections
by Ronald D. Orol - MarketWatch

Revision may impact Ireland’s ability to reduce deficit
Ireland cut its growth projections by more than half after reporting weaker than expected output in the first quarter, according to a report Saturday. The cut was expected, according to a report by the Financial Times, because the International Monetary Fund cut its growth forecasts in April. However, the revision also means that forecasts for Ireland’s ability to reduce its deficit will also have to be adjusted.

The projection adjustment comes after the country received a nearly 80 billion euro ($101.2 billion) bailout in November from the European Union and the IMF. According to the Financial Times, Ireland cut its projections for gross domestic product from 1.75% in December to 0.75 % for 2011 and from 3.25 % to 2.5 % for 2012.

The projections come after European Commission, the European Central Bank and the IMF said April 15 that Ireland’s efforts to shore up its crippled banking sector, fix its public finances and restore the economy to sustainable growth are "on track, but challenges remain and steadfast policy implementation will be key."

Banks accused of talking up Greek debt fears
by Erik Kirschbaum - Reuters

The head of Europe's rescue fund was quoted on Sunday as telling a German newspaper that he believes banks are encouraging talk of a possible Greek debt restructuring because they are hoping to earn large fees.

Klaus Regling, the head of the European Financial Stability Facility (EFSF), told the Handelsblatt business daily in an advance released on Sunday that he sensed banks were thinking of their own profits in fuelling a discussion about restructuring. "In the 1980s and 1990s banks cashed in very high fees for the restructuring of sovereign debt in Latin America and Asia," Regling was quoted saying. "They would like to do that again in Europe."

Regling said on the one hand a partial relief for Greece's debts would hit some banks' own balance sheets as lenders. But those losses would be "limited" while the fees involved with a restructuring would be "very promising." The Handelsblatt quoted sources as saying European Central Bank president Jean-Claude Trichet also believes banks are deliberately talking up the possibility of a Greek debt restructuring. The newspaper said Trichet had warned euro zone finance ministers explicitly against allowing the banks to influence them.

Mounting fears that Greece will have to restructure a debt mountain expected to reach 340 billion euros this year, roughly one and a half times its output, have pummelled Greek bonds, driving yield spreads over German bunds to new record highs. European Central Bank Executive Board members Juergen Stark and Lorenzo Bini-Smaghi have both warned against such a step, saying it would hammer the Greek banking system and damage Europe's credibility.

Spain’s Illegal Homes Overshadow Minister’s U.K. Sales Pitch
by Sharon Smyth - Bloomberg

Jose Blanco, Spain’s development minister, will try to persuade U.K. investors today to purchase unsold vacation homes in a country where more than 50,000 home buyers have lost the legal rights to their properties.

Blanco, 49, plans to promote the "strength" of Spain’s economy, the "transparency" of its housing market, and the "soundness" of its property legislation, according to an April 14 statement from the Ministry of Transport and Development. He will then deliver the same message during presentations in France, Germany, Switzerland, the Netherlands and Russia.

The campaign follows renewed calls from European Parliament members including Marta Andreasen, Roger Helmer and Michael Cashman to freeze some of the funds the European Union gives Spain until it resolves legal shortcomings that have stripped once-legal buyers of ownership rights. A non-binding 2009 report by the parliament’s petitions committee criticized the country for applying restrictions on coastal property retroactively and showing "judicial laxity" toward corruption and speculation.

"It’s inconceivable that anyone would want to invest in property in a country that has shown itself to be lawless when it comes to property rights," Andreasen, a member of the U.K. Independence Party, said in a telephone interview. "Andalusia has 300,000 illegal homes alone. If we extrapolate that to the rest of Spain, a million homes is a conservative number."

Andalusian Properties
Andalusia, a popular tourist destination in southern Spain, is one of the worst affected areas, according to the committee’s report. A spokesman for Andalusia’s regional government, who asked not to be cited by name, said an inventory of illegal properties in the region is being compiled. So far, 25,000 have been identified, he said. Marisa del Valle, a spokeswoman for the public prosecutor responsible for cases involving town planning and the environment, said there’s no way of knowing how many homes have been built illegally in Spain. Eva Santiago, a spokeswoman for the transport and development ministry, said her department doesn’t have an estimate.

About 50,000 owners of beachside properties have lost rights to their homes after Spain’s coastal law was amended and applied retroactively, according to PNALC, a group representing owners affected by the coastal law. As many as 500,000 could eventually be affected by the law, the organization said. Maria Jose Cejas, a spokeswoman for the Ministry for the Environment, said that fewer than 2,000 home owners have lost their property rights under the new coastal law.

British Buyers
British nationals account for about 31 percent of all foreign-owned homes in Spain, the transport and development ministry estimates. Each of Spain’s 8,116 town halls has the authority to make planning decisions and issue building permits with little oversight from the regional or national governments. At the peak of the housing market in 2007, municipal governments collected 40 billion euros ($59 billion) from real estate activities such as building permits and land sales in that year alone, according to Jose Antonio Perez, a professor who teaches about real estate at the Instituto de Practica Empresarial in Malaga.

As property prices more than doubled in the 12 years to 2007, some local officials found unlawful ways of profiting from home construction. There are now 340 cases under investigation of officials and politicians suspected of crimes, according to Jesus Sanchez Lambas, head of the Spanish office of Transparency International, an organization that documents corruption. In some cases, developers were given permission to build on unclassified land or were allowed to proceed without the appropriate permits, in return for cash or other incentives.

A spokesman for the Spanish Federation of Municipalities and Provinces, who declined to be named in line with policy, said "isolated cases of irregularities" don’t detract from the work carried out by local government officials. The federation has a good governance code that aims to improve transparency and fight corruption, he said. The national government set up a website in 2009 to enable buyers to see the development plans of more than 900 cities to check whether a property has been built within legally approved areas, Santiago said. It has also increased the number of investigators focusing on real estate corruption and imposed harsher penalties for civil servants who break the law.

Leo Levett-Smith, a 68-year-old retired traffic policeman from Cheshire, England, and his wife were told that the three- bedroom retirement home they bought in 2005 in Catral near Alicante for 220,000 euros was illegal three years after the transaction was completed. The couple made the purchase through a registered real estate broker, hired a Spanish notary to oversee the deal and got a 130,000-euro mortgage from a Spanish savings bank. They also paid 300 euros for an independent survey on the property.

‘Legal Limbo’
"We left no legal stone unturned and paid property tax to the local government to buy the place," Levett-Smith said. "Three years later, I was told it had been built without a sufficient permit. I’ve spent three years living in a legal limbo and the Spanish authorities have done nothing to address the issue."

Spain built 675,000 homes a year from 1997 to 2006, more than France, Germany and the U.K. combined, according to a report by a unit of Spanish savings bank Cajamar. Spanish residential property prices fell in real terms for the first time in more than a decade during the first quarter of 2008 and have dropped 15 percent since, according to data from the Transport and Development Ministry. Prices in Ireland fell 36 percent and U.S. prices 27 percent from their highs. In England and Wales, they fell 16.8 percent from the November 2007 peak to the trough in April 2009.

The collapse of the housing boom beginning in 2008 left Spanish banks with 320 billion euros worth of property assets and loans to the real estate and construction industries after they were forced to take on properties and land in return for canceling debt to bankrupt developers, according to the Bank of Spain. Over the past two years, more than 2,600 real estate and construction companies went out of business, according to credit insurer Credito y Caucion, pushing unemployment to 21.3 percent, the euro region’s highest.

The country has a surplus of more than 1 million empty homes, both new and existing, according to RR de Acuna & Asociados, a Madrid-based research company. The Development Ministry estimated in 2009 that there were 680,000 newly built and unsold homes on the market. More current statistics aren’t available, according to a ministry spokeswoman.

Building Restrictions
In 1988, the country increased restrictions on coastal development and applied the law retroactively to properties that were already built. Owners of those homes can apply to extend their stay in the property for as much as 60 years, though they can’t sell it or pass it on to children. The concession can be rescinded at anytime by the authorities if deemed to be in the public interest.

Cliff Carter, a 62-year-old former engineer from northern England and his Spanish wife, Maria, a retired teacher, say investors should steer clear of Spanish property, after they lost the rights to a 200 square-meter home on the coast of Valencia that has been owned by their family for 40 years. The Carters sold their home in the U.K. in 2003 to retire to Spain assuming they had equity in the Spanish house, which was built in 1970 and handed down by Maria’s late mother in 1998. In 2008, they were informed that it had been awarded to the public domain after amended coastal law shifted the boundaries of where development was banned.

"We’ve been awarded a concession to live here for 30 years and then they throw us out," Carter said in an interview. "I can’t sell the property and my children can’t inherit it." Diana Wallis, vice president of the European Parliament, said that no member state should be allowed to apply laws affecting property rights retroactively or arbitrarily. "I’d like to ask Mr. Blanco how he thinks that anyone can buy property in Spain and have peace of mind," Wallis said. "On the basis of what I have seen, it’s a minefield and frankly I would say ‘do not touch.’"

Japan's Auto Sales Fall 51% in April
by Yoshio Takahashi - Wall Street Journal

New auto sales in Japan posted their biggest-ever drop in April, as a parts shortage caused by the March 11 earthquake and tsunami cut into production of vehicles and reduced supplies of new vehicles to dealerships, the Japan Automobile Dealers Association said Monday. Sales of new cars, trucks and buses tanked 51% from a year earlier in April to 108,824 vehicles—the lowest-ever monthly volume, the association said. The figures don't include sales of mini vehicles with engine capacities of 660 cubic centimeters or less.

The April drop was the deepest since the association started compiling data in 1968, eclipsing the 45.1% fall in May 1974, when an oil supply crunch crimped sales. The fall was sharper than the 37% tumble in March, as a disruption in parts procurement after the disaster weighed on the whole month of April.

Sales of Toyota Motor Corp. vehicles dropped 68.7% to 35,557 vehicles in April, with those of the luxury Lexus brand down 44.7% at 1,656. Nissan Motor Co. vehicle sales tumbled 37.2% to 17,413, while Honda Motor Co.'s sales sagged 48.5% to 18,923.

The magnitude 9 quake and tsunami hit northeastern Japan where about 500 suppliers have factories, disrupting the auto parts supply chain. Japan's top three car makers resumed domestic production by mid-April, but they operated production lines at only half of initially planned volumes. Moreover, sales in the home market stumbled, with no sign of an immediate sharp rebound in domestic sales as makers plan to continue lowered production over the next several months.

The murky outlook makes it hard for car makers to draft earnings projections for the current fiscal year that started in April. Honda and some car makers reported earnings for the January-March quarter last week, but failed to release forecasts for this fiscal year through March as it is too early to gauge financial impact from the production disruptions, they said. Toyota and Nissan will report earnings Wednesday and Thursday next week.

Car makers are only beginning to assess their prospects for production for the rest of the year. Some makers recently outlined likely schedules for the restart of full output. "Our all production lines and all models will be back to normal in November to December," Toyota President Akio Toyoda said at a news conference late last month. Honda said last Thursday it expects to be back to production levels planned before the March 11 earthquake by the end of the year.

Among smaller Japanese car makers, the top executives of Mazda Motor Corp. and Mitsubishi Motors Corp. said when they released their earnings last week that domestic production will return to usual in the fiscal second half through March. Mazda's sales sank 38.8% to 6,598 vehicles in April. Mitsubishi Motors' sales were down 20.1% to 3,515, the association said.

Silver loses shine in 20% tumble
by Louise Armitstead - Telegraph

The price of silver futures tumbled again on Wednesday, taking total losses to more than 20pc in a week amid fears that the precious metal represented a bubble bursting.

Silver – which has suffered its biggest three-day fall in 28 years – plunged from a peak of almost $50 an ounce last Thursday to a low last night of below $40. In recent weeks, experts have warned that a dangerous bubble was forming in the silver markets. The price has soared nearly 175pc between August and the end of last week. Gold, which has also risen to record highs, is up 28pc over the same period.

Traders said a raft of hedge funds and other big speculators in the silver markets decided to take their profits and sold large positions last week. The spike in the trading volumes is thought to have caused a panic in the markets which was then exacerbated by the four-day royal wedding holiday in London. The prolonged closure of the world's biggest precious metal market caused liquidity problems at a bad moment. Also over the weekend, Comex, the American exchange for silver futures, ramped up margin requirements.

Super Rich love to bet on commodity inflation
by Paul B. Farrell - MarketWatch

Nobody wants to hear the truth. Not Big Oil. Not Big Ag. Not Wall Street. Not the Super Rich. Not China’s billionaires. Not Washington insiders on the take. They do not want to hear the relentless warnings of a Cassandra Chicken Little Crying Wolf about the "End of the World as We Know It." Forget the truth. In their minds all that matters is that they’re getting more powerful and richer and richer.

Nothing else matters in their upside-down world: Wealth increases at the top. Global poverty balloons everywhere else where living on $2 a day is it for a third of the world. Easy pickings. The rich only see more opportunities to make more money when they read in Foreign Policy Journal that "in the United States, when world wheat prices rise by 75%, as they have over the last year, it means the difference between a $2 loaf of bread and a loaf costing maybe $2.10," warns Lester Brown in "The New Geopolitics of Food … Inside a Hungry Planet."

But if "you live in New Delhi, those skyrocketing costs really matter: A doubling in the world price of wheat actually means that the wheat you carry home from the market to hand-grind into flour for chapatis costs twice as much. And the same is true with rice. If the world price of rice doubles, so does the price of rice in your neighborhood market in Jakarta. And so does the cost of the bowl of boiled rice on an Indonesian family’s dinner table.

New economics of commodity inflation and resource scarcity
Welcome to the new food economics of 2011: Prices are climbing, but the impact is not being felt equally at all. For Americans, who spend less than one-tenth of their income in the supermarket, the soaring food prices we’ve seen so far this year are an annoyance, not a calamity. But for the planet’s poorest 2 billion people, who spend 50% to 70% of their income on food, these soaring prices may mean going from two meals a day to one.

Those who are barely hanging on to the lower rungs of the global economic ladder risk losing their grip entirely. This can contribute — and it has — to revolutions and upheaval. Yes, it will get worse, far worse. Global population is sky-rocketing, tripling from 3 billion to 9 billion between 1950 and 2050, as the Super Rich at the top will get richer, as poverty spreads, as more and more go to bed hungry in emerging and developing economies. And revolutions and upheaval mean increased global wars over depleting hard assets.

In the upside-down world view the Super Rich will soon have to deal more than that extra dime for a loaf of Walmart bread. The cost of America’s denial will be trillions as the threat of WWIII grows exponentially. Remember the Pentagon forecast: Global population growth leads to "massive droughts, turning farmland into dust bowls and forests to ashes … By 2020 there is little doubt that something drastic is happening ... an old pattern could emerge; warfare defining human life." As this threat of WWIII increases, America is the major target for many emerging and developing economies.

Commodity Inflation Revolution ends America as a super power
Jeremy Grantham is a Cassandra, warning, crying wolf. Has been for many years. His firm manages $100 billion. He warned of the 2008 meltdown 18 months in advance. While Grantham’s latest Quarterly Letter offers faint signs of hope, the truth is, he’s predicting a no-win scenario for America in "Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever."

He opens with a warning, "The world is using up its natural resources at an alarming rate, and this has caused a permanent shift in their value. We all need to adjust our behavior to this new environment." But sadly, he’s already told us that our leaders are turning a blind’s eye, can’t hear, won’t listen, till too late. Here’s his short history of America’s final decades, warnings about near-term time-bombs and some predictions of the end game.

1. Dawn of Civilization to 1800, the Industrial Revolution
Before about 1800 "our species had no safety margin and lived, like other animals, up to the limit of the food supply, ebbing and flowing in population." Yes, for thousands of years population growth was constrained by the food supply.

2. New age of hydrocarbon energy created surplus wealth
Then "from about 1800 on the use of hydrocarbons allowed for an explosion in energy use, in food supply, and, through the creation of surpluses, a dramatic increase in wealth and scientific progress."

3. Explosion in global population, more bodies demanding more stuff
Thanks to new energy sources and surplus wealth, food supplies no longer limited our growth. By 1950 global population exploded four times from 800 million in 1800 to over 3 billion. And by 2007, just 50 years later, population shot past 6 billion. Then in just four short years, by 2011, another billion were added. The United Nations projects Earth’s population may stabilize in 2050, with perhaps as many as 10 billion.

4. New age of commodity destruction, scarce resources get scarcer
Grantham warns: "The rise in population, the ten-fold increase in wealth in developed countries, and the current explosive growth in developing countries have eaten rapidly into our finite resources of hydrocarbons and metals, fertilizer, available land, and water."

5. Commodities and food supply rapidly become global constraint
"Despite a massive increase in fertilizer use, the growth in crop yields per acre has declined from 3.5% in the 1960s to 1.2% today. There is little productive new land to bring on and, as people get richer, they eat more grain-intensive meat." Population grows over 1% annually: "There is little safety margin."

6. Compound economic growth policies prove totally unsustainable
Warning: Grantham’s equation has deadly saboteurs: All global economies are driven by the principle of economic growth: Population grows, prosperity grows, wealth grows, everybody happy. Bad economics: "If we maintain our desperate focus on growth, we will run out of everything and crash. We must substitute qualitative growth for quantitative growth." Quality growth? Yes, but it will not slow quantity growth. Why? As developing economies add more people, they all want their version of the "American dream." Just look at China in the past decade. The drive for "more" is unstoppable

7. Survivability of world handicapped by short-term thinking leaders
Warning: The "problems of compounding growth in the face of finite resources are not easily understood by optimistic, short-term-oriented, and relatively innumerate humans." Grantham’s talking about political, financial and business leaders whose brains cannot see the long term. They make decisions based on quarterly earnings, annual bonuses, the next election, or the next billion they can stash in a Swiss bank. It’s never enough.

8. Commodity price inflation signals a historic paradigm shift
Warning: The market "is sending us the Mother of all price signals. The prices of all important commodities except oil declined for 100 years until 2002, by an average of 70%. From 2002 until now, this entire decline was erased by a bigger price surge than occurred during World War II."

9. You’re in the 21st Century Commodities Inflation Revolution
Grantham’s research staff look at the statistics and conclude that "most commodities are now so far away from their former downward trend that it makes it very probable that the old trend has changed — that there is in fact a paradigm shift — perhaps the most important economic event since the Industrial Revolution." But our leaders are missing the signal.

10. Commodity investments risky: climate, demand, volatility, inflation
The Pentagon’s already warned us of the end game, WWIII. Grantham explains that commodity prices are tied to climate and "climate change is associated with weather instability," which may improve in the short term, but long term will keep driving commodity inflation with huge risks: "Excellent long-term investment opportunities in resources and resource efficiency are compromised by the high chance of an improvement in weather next year … and by the possibility that China may stumble." And so will the whole world.

11. Commodity investors gambling in radically new global casino
Grantham warns: "From now on, price pressure and shortages of resources will be a permanent feature of our lives. This will increasingly slow down the growth rate of the developed and developing world and put a severe burden on poor countries." Get it? Behind all the latest warnings to "sell bonds, sell domestic stocks, buy emerging markets" is a frantic inability to see this "paradigm shift," a permanent "New Normal" of commodity scarcity and inflation that’s inexorably linked to the world’s relentless population explosion, adding another three billion in the next brief generation.

12. Myopic leaders cannot see … will not lead … till too late
Grantham is once again "the voice of one crying in the wilderness," a Don Quixote pleading: America and the rest of the world need "to develop serious resource plans, particularly energy policies. There is little time to waste." Little time. But we know he won’t be heard, till too late … just as his 2007 early warnings of a global real estate crash were ignored. Tragically, the world didn’t listen to Grantham back then. And the odds are they won’t this time.

Prediction for 2011-2020: Price inflation in commodities will not only skyrocket higher than Sock Puppets in the 1990s dot-com era … not only soar higher than Countrywide’s 2008 subprime portfolio … the world’s insatiable growth will keep driving demand for nonrenewable resources, relentlessly pushing commodity inflation into the stratosphere.

Warning: the Global Super Rich not only have known this principle of "new normal" economics for a long time, they’re already spending trillions on deals to lock up and hoard long-term commodity futures. So ask yourself, can you really get rich off what’s left of the commodity crumbs falling off the Super Rich dinner table? Or is it too late?

Where is all that Fukushima radiation going, and why does it matter?
by Fairewinds Associates


Anonymous said...

Here's a calculation.

The headline yesterday on the news stands for USA Today said something to the affect that Public confidence in the War on Terror boosted by OBL raid, but the 'Public' was 'worried' about retaliation.

Hmm, I don't think Orwell himself could have written a better piece.

It hit all the high notes. The fabricated 'war on terror' boondoggle is working, praisethelord. It's effective, even if it took ten years, trillions of dollars, and millions of lives to 'get' one Master Mind.

Even that useless douche of an Attorney General Eric Holder was trotted out into the limelight for a bow, taking precious time out from his massive campaign of arresting and indicting Wall St sociopaths and assorted financial terrorists to blow a kiss to the studio audience and tell them the Justice Department has their backs covered.

God bless Duhmerica.

And here I thought on the previous thread that all the talk about getting a cold tractor engine started was a cleverly disguised metaphor for carefully unthawing OBL from deep freeze with a propane torch to get the War on Terra started again.

The official scripted packaged mediawhore story line for the OBL 'take down' reads like the Dead Parrot skit from the Pythons.

We were sold a 'live' Bin Laden parrot for the last tens years but he was really just nailed to the perch and pining for The Hajj.

cjinvt said...

@A Walk in the Woods said...

And here I thought on the previous thread that all the talk about getting a cold tractor engine started was a cleverly disguised metaphor for carefully unthawing OBL from deep freeze with a propane torch to get the War on Terra started again.

That's some heavy linguistic gymnastics, but really, it was just about the tractor.

I will continue to move hay by hand & show up in public with hay in my hair.

Ilargi said...

"And here I thought on the previous thread that all the talk about getting a cold tractor engine started was a cleverly disguised metaphor for carefully unthawing OBL from deep freeze with a propane torch to get the War on Terra started again.

Will Ferrell has a sort of metaphor. Not his best and brightest, certainly no clever disguises here, but I do have a thing for just dumb-assing it, especially when that's all the whole thing deserves.

Will Ferrell As George W. Bush Responds To Osama Bin Laden's Death, Sort Of


Phlogiston Água de Beber said...

Responses to previous thread

@ cjinvt

I had wondered if perhaps your bales were being wound smaller than ours. IMHO, doomsteaders that do not already own a tractor should probably try to plan so as to avoid ever needing one. I do wonder if steam powered tractors might make a comeback in the twilight years of industrial society. Ultimately, it will almost certainly be stationary machines powered by animals, just like the good old days.

@ snuffy

I gather you thought my "wait for the Reaper" remark was directed at you. Certainly not the case. Your survival attitude is well known here. Your directive to me with regard to mission is moot. Even if I do manage to survive meltdown for a little while, I will certainly be even more useless than I am at present. I am doing what I can right here, right now.

I can only offer my hope that the future jealous husband's gun hand will shake as badly as mine does. :)

jal said...

Most theoretical plans work good on paper. Its when the imperfect humans gets involved that the worst divergence from the plan happens.

It's one of those variables that idealists, thinkers and philosophers cannot put into their formulas.

Even our primate brothers have learned to take more than their brothers and ruin the best laid plans.

I found the following statement and would like to know if it is true.

“Then along came the Depression, and Hoover cut and cut - but he couldn't cut fast enough as revenue just fell and fell. Then Keynes argued for counter-cyclical policies. He argued for surpluses during good times and deficit spending during bad times aimed at the unemployed (to cushion the blow).”

Did Keynes argue that deficit spending should only be done to cushion the blow for the worst off of our society?

If that was his philosophy, then this would indicate that the lawmakers are just as smart as monkeys.


jal said...

Bernakie must be feeling omnipotent.
He said that high oil prices are temporary and lo and behold prices are crashing from their high.

Hummm! Maybe he thinks that he has overcome the dynamics of scarcity and growth.

Naw! That can’t be the answer.

I got it!

He’s setting a trap and will hit the printing button even harder.

D. Benton Smith said...

Meredith Whitney makes an important observation ( I wonder if she fully appreciates the ramifications ) , “ … local municipalities have nowhere to go and their bias is to save their constituents before they save their bondholders. " [ underlining is mine ]

Governments of all types and sizes are biased in favor of the needs of their REAL constituents ( their power base ) and unfavorable to their opponents ( which would be us . )

Thus we see that fair treatment of ordinary citizens is more common at the local level where constituents are their neighbors , and disappears ( or even reverses ) at higher levels where common people are about as common as homo sapiens neanderthalensis.

It's the basic nature of contests.

Differences in perceived self-interest lead to contests. All concerned parties strive for victory, and the more powerful of them wins. The advantages gained through success are then used to press for further advantages in further contests, and so on, until total victory is achieved.

Ascending the hierarchy, therefore , the REAL 'constituency' of the government consists of smaller and smaller numbers of increasingly 'victorious' winners who are naturally opposed to the interests of the 'defeated' , (otherwise there never would have been a contest in the first place.) Eventually they come to view citizens not as constituents to be served, but as losers ...adversaries of incurably inferior value to be exploited.

Good governance would maintain a balance between opposed interests, but victory intrinsically creates bad governance by consistently favoring the interests of winners over those of losers at an accelerating rate until the prevailing team wins every contest every time, at will.

Call it victory but enclose the word in HEAVY ironic quotes because Pyrrhic victory destroys the winner ... the penultimate lesson of history, known to everyone and believed by none.

Nevertheless it does provide a means of measurement.

When one side starts winning ALL the time, then “victory” is near.


The other lesson of history is that the final suicidal paroxysm of delusional hubris leaves an open field for the battered losers... that would be us, by my calculations.

So, don't get suckered in to some stupid fight over useless crap. It's just a bunch of “winners” looking to use you for cannon fodder.

Take Nature's advice instead; stay out of harms way and continue living until further notice.

Greenpa said...

One of the highly predictable unpredictables - disasters.

I'm not aware of any academic economist, past or present, who puts them into their equations.

But it's completely certain; droughts, floods, tsunamis, earthquakes WILL happen. And we can now add nuclear power plant meltdowns. They will happen.

France has troubles? Yeah, and one of them is 56 functioning, 12 "decommissioned" and 4 or 5 research reactors. So what are the chances one of them will suddenly be under the care of persons who are depressed by economic conditions- and either careless, drunk, or actively destructive?

And how would a Fukushima in the middle of France affect the Euro?

Folks, there is NO IF to this. Only the WHEN. Really, no kidding; totally predictable; all but the date.

And yet- all economic planning, theorizing, etc; blithely assumes- no, no disasters, not ever, they never happen.

jal said...

Economist, forecasters, and all crystal ball readers must have a large repertoire of beseeching phrases that can move their gods to make their wishes, (plans), come true.

“... no, no disasters, not ever....”

Good advise ...

“... stay out of harms way and continue living until further notice....”

You cannot be judged a loser if you do not enter a pissing contest.


I'm Not POTUS said...

If anyone is interested, I modeled China's path in a computer simulation.

I have run it several times and the results are consistent. You can try it yourself.

Here are the instructions,

Torrent Simcity 4 or look in the cheap bin at Best Buy for a copy.

Install it, run the cheat code to print as much money as you want. Build stuff like crazy. When you run out of space on the map to build stuff, blow shite up and repeat. Just don't stop building, If you let the simulation try to run without constant building and spending it all decays and residents flee.

I have a sneaking suspicion that one of those fake Chinese NASDAQ listed software companies may have re-badged SimCity 4 as Central Planning Software and sold it to the the BOC.

p01 said...

For people asking:
Are we there yet?
The answer is yes

el gallinazo said...

DancesWithStapler said...
I'm a big fan of this blog, but it seems some of the comments regarding the OBL thing are hyperparanoid. Can't we even allow for the possibility that the gov got some good intel and sent in the SEAL's for a successful mission? Something like that NEVER happens?


I was originally going to let this ride. But then again, changing one's mind is the prerogative of women and the hyperparanoid (no relationship intended).

Let's see - where should we start.

1) Anyone with an open mind and who achieved a 3.0 GPA in physics, chemistry, or engineering knows that the three WTC towers were brought down by cutting the girders and beams by radio controlled detonation (almost surely with the difficult to find (if you are not USA military) nanothermite. That raises the question of exactly what role our box cutter Arabs played along with their glorious leader, Emmanuel Goldstein nee OBL.

2) OBL was a known asset of the CIA. Just two months before 9/11 he checked into the American Hospital in Dubai for a kidney pie and carburetor tune-up, and was visited by the local and friendly head of the CIA while in the hospital.

3) The smart money is **reasonably** sure that OBL died of renal failure in December 2001 in Tora Bora. If this is the case, it makes the current government story a tad unlikely.

3) Navy Seals are reputedly the fiercest killers and martial arts experts on the planet. OBL was in his 50's, known to be poor in martial arts, and if not dead for ten years, then certainly in near dead condition last week. Why not just slap a pair of handcuffs on him and throw his live body in the helicopter (maybe take an extra ten seconds beyond executing him with two head shoots)? Then put him in a cell in Washington, give him a dime and his one phone call to call a lawyer, and conduct an open and fair criminal trial? Why not indeed?

But DanceswithStapler,

I am sympathetic to your plight. I still remember vividly at the age of six when I sneaked out of my room to see **my father** and not Santa Claus putting those gifts under the tree, and I have never recovered. I view with envy those adults who still believe in Santa Claus.

Very truly yours,


Greenpa said...

p01-" the answer is yes"

eeh. personally, I think they've got LOTS of "pimp and dump" left in them, sorry to say...

wake me up when commodities are off 30%, and still falling fast.

Ashvin said...

El G said "Why not just slap a pair of handcuffs on him and throw his live body in the helicopter (maybe take an extra ten seconds beyond executing him with two head shoots)? Then put him in a cell in Washington, give him a dime and his one phone call to call a lawyer, and conduct an open and fair criminal trial? Why not indeed?"

Better yet, why not put the "terrorist mastermind" in GITMO and interrogate/torture him until he gives up everything he knows about the AlQ network? After all, they keep telling us the terrorists won't just disappear now that their beloved leader is dead...

If he talks, great, if not, then you have a trial for show and string him up like Saddam.

el gallinazo said...

Ash said...

Better yet, why not put the "terrorist mastermind" in GITMO and interrogate/torture him until he gives up everything he knows about the AlQ network? After all, they keep telling us the terrorists won't just disappear now that their beloved leader is dead...


Well, I wrote that posting as if I still believed in Santa Claus, truth, justice, and the American way. But then again, Superman died a while ago from a riding accident.

Ashvin said...

El G,

Yeah, I was just continuing off of your point re: logical inconsistencies with the official story.

APC said...

Wow huh? Amateur night at the Gunderson home. That last bit was painful. I found myself wishing Fukushima radiation had already killed me... or her.

Anonymous said...

@ Hyperparanoid

Well said!


Como te va en Argentina?

NZSanctuary said...

Greenpa said...
Folks, there is NO IF to this. Only the WHEN. Really, no kidding; totally predictable; all but the date.

Precisely. It is one of the main reasons I have not and never will move my family to the Northern Hemisphere. And unlike the next large meteor strike to wipe out much of life on earth that is almost certain at some point, the nuclear problem has a high probability of spiralling out of control within the next couple of decades.

Anyone taking a long view should keep that in mind.

I'm Not POTUS said...

@NZ last time I checked the fish, krill, and other such things were bi polar.

No schengen on the ocean, so you get glowing seafood in the south also.

lautturi said...

ECB had its meeting in Helsinki today, posing/trying to push Portugal deal under the table. However, True Finns stand firm - and 4th biggest party also stepped out of bail-out negotiations. Some news agency went through the pre-election internet interviews about Portugal issue and 108 out of 200 said no. So far Portugal bail-out isn't flying very well here.

The pro-bail-out troopers are obviously getting nervous as now we see many, many bureaucrats in TV, too, talking "throwing money into the deepest imaginable well is an excellent idea" -slosh... Just today one of pro-bail-outer-bureaucrap said that he didn't think Roubini can be trusted about finance predictions. I sat staring the screen for a few seconds wondering "uh-huh, here we go..."

Ashvin said...

"In my initial communication to you of these events I described what unfolded as a temporary Coup initiated by high ranking intelligence and military officials. I stand by that term."

The CIA and DOD plainly defied Obama to launch the ground assault in Pakistan"

el gallinazo said...

Be sure not to miss the ongoing courts marshal coverage of the rogue predator drone indicted for killing 300 Afghans at a wedding, presented by our nation's finest news source.,20316/,20317/

NZSanctuary said...


I think there is a fairly simple reason why most people cannot fathom the true enormity of the pickle we have got ourselves into, and the scale of the coming decline: movies.

In a movie you cannot have a disaster stretch over many years and easily keep an audience entertained, nor can you do without some sort of climactic finale under standard script formulae. Plus, more often than not, movies portray some permanent technical fix. But that is not how the real world works. That is not how most real disasters unfold.

Most people simply do not recognize a disaster when they see it, because they have a warped sense of reality, thanks largely to Hollywood/TV. Unless it is a sudden event like the Japanese tsunami of 11 March, real disasters are not glamorous enough to catch most people's attention.

There will not be a super bug that will wipe out great swathes of the population (unless the hero finds the antidote/invents the vaccine in time). Instead, as more people slip into poverty, lack of sanitation and good quality, non-populated food will slowly enable more outbreaks of standard diseases, and higher mortality rates. Less access to medicine will see people begin to die earlier. Pollution from industrial processes, nuclear accidents, farm run-off, etc., will slowly but inexorably raise cancer rates beyond what they would otherwise be, as well as myriad other diseases that orthodox medicine will scratch its collective head over (pharmaceuticals will rub their hands in anticipation of potential sales).

Likewise the financial collapse has not been a sudden Lehman collapse resulting in world-wide bank runs and total economic chaos, so it does not fit with the Hollywood model, and therefore cannot really be much of a disaster.

GOM oil spill did not immediate result in large percentages of the population getting sick and dying along the coastline, and isn't very visible - again, not a disaster.

Fukushima has not led to the death of hundreds of workers yet, nor some catastrophic super-critical event, and the true fallout will not be known for decades (if ever) - again, in most people's mind it cannot be that bad, because it doesn't fit the Hollywood formula of disaster.

We need new types of narrative. New ways of expressing the long term consequences of our actions.

NZSanctuary said...

I'm Not POTUS said...
@NZ last time I checked the fish, krill, and other such things were bi polar.

No, but distance is the best one can do on a rock of limited size.

el gallinazo said...

I'm Not POTUS said...
@NZ last time I checked the fish, krill, and other such things were bi polar.

No schengen on the ocean, so you get glowing seafood in the south also


Man does not live on calamari alone. NZS made no mention of seafood. For all we know, his family may be strict Vegans (or even from the Pleiades). That said, the equator acts as a formidable, though not total, barrier to wind born dust and sea species. The Coriolis effect takes air near the equator and pushes it toward the respective poles. Thus the hated doldrums in the days of sailing ships.

From a cursory study, krill species tend to stay in a specific geographic area and do not migrate much. Few temperate aquatic species cross the equator with the exception of whales. Most whales are eaten by the Japanese, and they already glow in the dark. I am sure Greenpa could weigh in more authoritatively than I in this area, but the equator does appear to offer substantial protection against radiation released in the north.

I'm Not POTUS said...

@gally... I understand that my comment is overly vague and lacking in merit but you know how ship ballast works, well that's why you can never hide from this muck up in Sendai.

If anyone was wondering how spectacularly disastrous this will be for Japan's export economy, ask how will they literally SHIP the hackable play stations and Priusesessss if you have to decontaminate the ship.

They can't muzzle everyone who operates every Geiger counter on the planet.

The Aussies went apeshiat a while ago when the US wanted to have a CVN carrier call to port in Sydney. That ship was the safest kind of nuclear visitor you can have and the went apoplectic, imagine when this fact goes viral or god forbid when a non-conspiratorial port authority announces a detection of radiation from a cargo ship.

Anyone going to take a Japanese Corporate Ship Operator at his word that the ship is clean?

Anyone else going to insure a RO-RO with cobalt 60 in the baffles.

They already ship cars with "SAFE" levels of radiation to South Africa.

The solution to pollution is dilution but fear and kneejerk reactions trump all things that make sense.

scandia said...

@Lautturi, That is good news from Finland! Lots of us cheering on the anti-bailout team.

jal said...

Lot's of pictures from inside bin laden's compound.

Has anyone identified the dialysis machine?


jal said...

CNN has just reported that there was no medical equipment and no dialysis machine.

Hummm must follow the money trail. Did he have a kidney problem? If yes ...
Who, doctor, gave him a new kidney?


scandia said...

I have been looking at a photo and not knowing why there was something odd about it. It is the photo of the downed helicopter.The bingo question just woke me up from sleep. Why is there only part of the wreckage? Where is the rest of the helicopter? Didn't any neighbours hear the crash? Nothing mentioned in the reports?
Did they leave people behind because they didn't have room to take everybody? Was the passenger space limited because they flew out some of the helicopter wreckage? Seem to be silly questions but there you are...Why leave witnesses at all to a covert,illegal operation?
Is this an intention to stir up emotions in Pakistan? Gets stranger by the minute...
Nor do I believe that bin Laden had a trove of data in his bedroom without security. What an opportunity to say absolutely anything about data on a hard drive. I'm not computer literate so find it surprising that it will " take years " to read the data. Those smart CIA/Petagon types can't do it in less time than " years "? Perhaps I have been misled as to their competence? That's if such data exists at all?

scandia said...

The deputy leader of the new opposition party in Canada taking some heat for saying aloud what many are saying here. Thomas Mulcair doesn't believe there are any photos either. Can't be in government in Canada and suggest the president of the US is a liar:)

el gallinazo said...


I left Argentina on St. Paddy's day and am now living in the state of Sonora Mexico. My departure was not related to the country itself but rather personal and relationship reasons. Things are going well for me in Mexico. Lots of good luck.

Phlogiston Água de Beber said...


The rest of the helicopter was melted down by fire. Presumably it was equipped with thermite charges to make sure no secret technology could be recovered from a crash. The tail section broke off and ended up on the other side of a wall.

@ jal

You unnecessarily insulted our simian cousins earlier today by suggesting they are not smarter than lawmakers. Now you commit crimethink by claiming that Emmanuel Goldstein owned a dialysis machine. Big Brother has always said his kidneys were remarkably healthy.

If those freaks at minitrue weren't spending all their workday watching the materials being produced by Pornosec, they would have made sure you knew that. They will be unpersons soon enough. All hail Big Brother!

Anonymous said...

loved the Will Ferrell comic relief

Here's is one called You're Welcome America that reminds me of a t-shirt I saw on a store clerk that said:

I used to be schizophrenic but now we're better

scandia said...

@IMN...thermite charges make sense. Any thoughts as to what brought that helicopter down in a quiet neighbourhood with all the kiddies tucked into their beds?
Do those charges make a noise? If so maybe that is what woke up the
Pakistani generals asleep in their beds up the road?

Archie said...

FWIW, of all the changing reports of OBL's demise, I found this version to be the most plausible. That is if you believe OBL was even alive last weekend. And if he was, then it is the least you would expect from a charasmatic leader of a notorious terrorist group. I think OBL always said he would never be taken alive.

More importantly though, the multiple changing, and conflicting, accounts of the supposed raid has served to focus attention on the consistency and credibility of the reports of taking out OBL. Just like the long form Birth Certificate, it is loaded with enough abnormalities to feed the "conspiracy theorists" while still presenting enough "factually" that the doubters are relegated to "whacko" status.

Cass Sunstein, Samantha Powers and Valerie Jarrett must be very proud of themselves. At this point, I think our best hope is that the reported divisions in the admin. between Hillary/Daley/Panetta and Obama's inner political circle are as wide as reported. Airing the WH dirty laundry would be almost as useful as looking at Bennie's private diary.

DancesWithStapler said...

Ash said...
"In my initial communication to you of these events I described what unfolded as a temporary Coup initiated by high ranking intelligence and military officials. I stand by that term."

The CIA and DOD plainly defied Obama to launch the ground assault in Pakistan"
May 5, 2011 5:40 PM

I thought OBL died of renal failure in 2001? According to this link, he was indeed killed this week, but buy a Panetta-led temporary coup. Then why didn’t Panetta’s troops arrest OBL for interrogation as is the proposed only logical thing to do? Oh wait, I know, OBL had dirt on Panetta’s embarrassing action figure collection and had to be eliminated…

Phlogiston Água de Beber said...


I'm inclined to think that maybe the pilot misjudged his landing spot and sheared the tail off by dropping down on top of that high wall.

Explosives and pyrotechnics are well outside my experience. There certainly must have been a fair amount of noise when they arrived. As for the Pak Generals, there are claims that Pakistani troops were onsite almost as soon as the SEALS pulled out.

Let's just say the Ministry of Truth is having one of a hell time with this fiasco.

DancesWithStapler said...

Hmm...The goldbugs are awfully quiet today...but I'm sure they'll be back the next time there's a momentum swing. It's all about "timing", right?

el gallinazo said...

DancesWithStapler said...

I thought OBL died of renal failure in 2001?


If you have to put a question mark after what you thought you thought, don't expect us to help you with your cognition.

Robert Wilson said...

Navy Seal story from 2009/2010.

Robert 2 SO CA

Ashvin said...


I don't want to tell you what to think, but...

there is the slight possibility that Panetta insisted on taking complete control over the operation without any oversight/approval from Obama or his staff because it was, in fact, based on fabricated intelligence and designed for purposes other than capturing or killing OBL.

If that was the case, he wouldn't really want a highly valuable operation to be held up by the pesky and "indecisive" POTUS, would he? That would also mesh well with the fact that there are so many glaring technical/logical inconsistencies and contradictions within the official storyline of what actually happened in this daring Navy SEAL raid against an unarmed, half-dead terrorist mastermind...

Or, perhaps the conspiracy theorists have just become so extreme and large in # that they are actually projecting and manifesting their crazy ideas into the fabric of reality, forcing the executive officials to modify the story every single day. You never know... these wars get pretty foggy sometimes.

NZSanctuary said...

If you need a really good laugh: financial terrorists caused the 08 crash

Legendary Armor Rōnin said...

jtd365 said...

I find it amusing AE finally posts an anti-silver article. Thanks for warning us. ... Everybody wants to call a top in silver and so far everybody has been wrong. Welcome to the crowd AE.

MAY 2, 2011

Way to top-tick it, dude.

Since the day before TAE posted that article, silver's down 29%.

But feel free to continue to believe that "if you don't participate in this gold and silver bull market, you will regret it sometime down the line."

D. Benton Smith said...

So let me get this straight.

Osama Bin Laden spent the last half decade seperated from the world by 10 foot tall, 3 foot thick masonry walls topped with barbed wire.

His days were filled with the excitement of raising vegetable and forbidding his young wife from speaking to anyone, least of all him.

Every month or so the one and only (and last ! ) person he trusted would bring in the latest outdated news and take out a thumb drive of jihadist drivel that no one bothered to listen to any more because it was at best several weeks out of date.

In other words, self imposed house arrest in an air-tight tin can.

For the price of a sign at the gate reading " Super Max Prison - Authorized Personnel Only " we had the guy in Solitary lock down for life.

So naturally our President sends in the better part of a battalion of ninja to off the guy.


My best guess : re-election.

Somebody calculated that just enough rednecks would be favorably impressed by this useless, self-defeating and ultimately deadly (to U.S. soldiers) act of bloody vengance to make it politically advantageous to Obama's run for a second shot at keeping the world safe for oligarchs.

Total waste, by the way. Gross overestimation of American voters' attention span.

There are two morals to today's story.

The first is for geese : Don't lay golden eggs before swine.

The second is for Obama: you can't cook your goose and have it, too.

p01 said...

I stand humbly corrected.
30% + will be the start by the looks of it...maybe within hours...
I mean, they will not just let it go down hard, they will make sure it goes down in flames and black-hole-like implosions, right?
Oh well...

p01 said...

I totally like related news Al Qaeda wows revenge and asks for tougher fines for seatbelt offences.

el gallinazo said...


My best guess : re-election.


Nah! Much too early and his poll numbers aren't low enough yet. As to motivation for the hit, it is really irrelevant whether it was actual or a complete fabrication. In any event, for partisan political effect, it should have been pushed back at least another year. What we need now is to scare the hell out the sheeple and make them hysterically vengeful in order to draw attention from the accelerating collapse. And we need a big war with Iran.

I see it as kicking up the hornets nest. And that a really big false flag operation will be pulled off in either North America or "old" Europe in the next two months, probably nuclear. The sheeple need a "follow-the dots" plausibility for the timing. The fact that Iran is Shia and hates the fundamentalist Sunni al Queda will not raise questions in the Fatherland. Time to stock up on Depends.

el gallinazo said...

jal said...
CNN has just reported that there was no medical equipment and no dialysis machine.

Hummm must follow the money trail. Did he have a kidney problem? If yes ...
Who, doctor, gave him a new kidney?


How many times a week does a person with no kidney function need dialysis?

They find an underground tunnel yet to the doctors office with a dialysis machine? Or was he delivered by limo? Wouldn't want a 6'5" bearded Arab walking with his cane down the street in a land of 5'4" men.

p01 said...

And that a really big false flag operation will be pulled off in either North America or "old" Europe in the next two months, probably nuclear

This is THE thought that keeps me up at night. I don't think it will happen on US soil, but rather up North, so that a bit of liberation and some military relief ops. bases can be established in the new annexed territories. Maybe those pesky frenchies with their large muslim population are expendable? Terrifying thought.

el gallinazo said...

Notice that the S&P500 is up 1.2% as of 11 AM, probably due to the really terrible employment numbers put out by the Bureau of Lying Statistics this morning. This is based on the Wall Street presumption that the Bernank will have to keep the digital presses rolling after the end of QE2 at the end of June - that an immediate segue into QE3 will take place. OTOH, if the employment statistics were wonderful, the market would have melted up on sheer optimism. Isn't crony capitalism (aka fascism) wonderful? The top 1% just can't lose. Or as Ilargi puts it, heads you lose; tails you die.

The Anonymous said...

"NZSanctuary said...Likewise the financial collapse has not been a sudden Lehman collapse resulting in world-wide bank runs and total economic chaos, so it does not fit with the Hollywood model, and therefore cannot really be much of a disaster."

Problem is, if true, this undercuts one of the central narratives of TAE.

Namely, you should not be invested in the market because when "it" comes, it WILL be WILL be will NOT see it coming and CANNOT react in time. Remember Stoneleigh's call, DJIA will likely be at 1,000 by the end of 2010? Sounds like the makings of a hollywood blockbuster to me.

Incidentally, thats why, while I largely agree with I&S on the end destination, I very much disagree on when we get there. I happen to believe, and the last 2+ years has shown, there can be counter trend rallies, lasting not months, but years. I do not subscribe to the straight line down thesis (at least not one starting in 2007), and I find it disheartening that so little importance is placed on the timing of this thing.

Ashvin said...

Equity markets can be manipulated much more easily than the private credit markets IMO, esp when the Fed is only buying up T-notes rather than MBS. So we already got the housing double dip... unemployment lags a good amount, but it will follow...if it hasn't already, then soon enough.

But the headline #s, sure to be revised downwards, are what matter for stocks short-term, as insiders can front run the "beat" on their own "expectations", especially when data is leaked before hand. However, the deteriorating credit situation means that big traders have to hold onto equity positions in shorter intervals and take profits to meet their margins, so I expect we will see a large drop in share values before the Fed starts generating a lot of chatter about more QE.

Phlogiston Água de Beber said...

Mike Whitney weighs in with a little essay on bubblenomics.

For the benefit of those who may not be working their way through Fred's archive of commentaries. He pretty well nailed why nothing will be done about it in this column.

Plumbing the Depths

Bigelow said...

el gallinazo said...

I agree with Stoneleigh's prediction that the collapse in the equities markets will be sudden. Reasons are as follows: the markets are highly overpriced (and more importantly over leveraged) against the fundamentals even if you take the fraudulent corporate profit statements at face value. I see the over leveraging as the most important factor as a moderate "correction" could turn into an out of control positive feedback loop on margin calls. The only things that has been holding them up are ZIRP, QE, fraudulent accounting, green shoots bullshit, and the Don't Fight the Fed meme. The only bullet that the Fed has left is to continue QE or increase it. But of course this would take time in relation to a sudden crash, so really the only bullet the Fed would have left would be the **announcement** of running the presses on hyperspace drive which seemed to work in Jackson Hole. But things have deteriorated since then. Time will tell.

Ashvin said...

@ The Anonymous

"Namely, you should not be invested in the market because when "it" comes, it WILL be WILL be will NOT see it coming and CANNOT react in time. Remember Stoneleigh's call, DJIA will likely be at 1,000 by the end of 2010? Sounds like the makings of a hollywood blockbuster to me."

I would refer you to the article currently posted. I can't say if I&S completely agree with my take, but I do know that their predictions/advice have been entirely consistent with it. Adjectives such as "likely" or "most likely" are absolutely critical in this discussion, even though (because) they are not exacting estimations. They indicate a degree of necessary uncertainty, and wisely leave room for the "counter-trend" movements you referenced.

To my knowledge, no one has ever said you CANNOT react in time, just that it is unlikely, given the inherent unpredictability and speed of broad sell offs.

Anonymous said...

El G,

Good to read your insightful comments once again and hear that things are going well. Peace!

jal said...

EG said ...
“I agree with Stoneleigh's prediction that the collapse in the equities markets will be sudden.”

The implications are that the players are going to be taken off guard and realize losses.

It also implies that there will be a delays before “corrective actions” take effect.

The end result would be a lower trading range.

if you are not gambling in the market then you cannot lose.
The effects on the daily life of the ordinary serf will eventually trickle down. Probably at the rate of the story of the frog vs boiling water.

I’m prepared ... I’ve got an asbestos suit ...
which means that I’ll be able to survive long enough to watch the shooting stars as they burn up.

el gallinazo said...

jal said

The implications are that the players are going to be taken off guard and realize losses.


That may be your inference, but it was not my intended implication. It really depends on whom you define as the "players." I think the TBTF banks and the larger hedgies like Blackrock and Paulson will be tipped off, and will be naked shorting the market like crazy. I think the main victims will be the pension funds and 401-k's, which will be virtually wiped clean, and the dumb money, many of whom shoot their mouths off on Zero Hedge.

The Anonymous said...

"Ash said...Adjectives such as "likely" or "most likely" are absolutely critical in this discussion, even though (because) they are not exacting estimations. They indicate a degree of necessary uncertainty, and wisely leave room for the "counter-trend" movements you referenced."

I agree, and wish there was more of this. I remember a few years back, a few posters had the temerity to suggest this rally "could" go on for years. TAE snarled in response, first threatening to ban dissenters for tone, before finally dismissively responding "No, they can't" with no further meanful discussion. Thus if we can now discuss not only the "likely", but the "unlikely" outcomes, it represents a welcome seachange IMO.

"Ash said...To my knowledge, no one has ever said you CANNOT react in time, just that it is unlikely, given the inherent unpredictability and speed of broad sell offs."

Im not sure "unlikely" is the correct adjective here. Again it depends upon timing. Take a look at the spectacular sell off taking place in silver right now. The carnage of the last few days has brought many a call of "I told you so" to the silverbugs who occasionally inhibit this site. Yet, if the objective is simply "holding on to what you have" that call is only warranted depending upon when they entered the market.

Suppose one ignored Stoneleigh's call to "sell everything that isnt nailed down" primer of Nov 2008, and kept his silver then valued at $14. If his objective is to simply hold on to what he has, is he really that concerned that SLV has taken this amazing rocketship ride from $50 to $35? Even if he was, he could exit that market today and still double his initial investment.

Full disclosure. I am not a metal bug, and generally abhor the fanatical loyalty the metals seem to attract. That said, I am simply pointing out that its only the people who bought SLV in the last 6 months who should be worried about holding on to what they have.

el gallinazo said...

I have said it many times before, but I will say it once more. IMO the reason that Stoneleigh was early in her predictions of the second equity collapse is that she underestimated the influence of the Fed as well as the degree of criminal activities they were willing to commit this early in the game. Also, the degree that they would go toward propping up equities (in contradistinction to say bonds and real estate) was not obvious before the fact.

I would also guess that she was looking at historical precedents regarding dead cat bounces, such as 1929-30. While the Fed was not inactive regarding re-inflation at this point, their activities were minuscule compared to their current activities.

But this is not a site for traders, and timing is everything for traders. You want to complain about timing, go to Zero Hedge.

Anonymous said...


It would seem that Greece is contemplating leaving the euro. See Der Spiegel.


Ashvin said...

@The Anon

"The carnage of the last few days has brought many a call of "I told you so" to the silverbugs who occasionally inhibit this site."

Personally, I would never say that "I told you so" as a result of short-term (daily, weekly or perhaps even monthly) market movements, because I didn't tell you so. Even if I had been saying equities and silver were drastically overvalued (true) and would most likely experience a sell off soon (also true) over the last month or so, that doesn't mean I was validated by this week's price movement. And next week, if all the losses are made back in one day, I wouldn't be proven wrong either.

I call that being "results oriented". The initial statements are accurate independent of what actually ends up happening (to a certain degree based on available information), and so the event does not retroactively change the statements' accuracy at the time they were made, one way or the other. That is the case in your garden variety game of dice, which is much less complex and much more certain than the game of "timing price movements in the market".

As you keep rolling the dice and building the sample size, however, the absence of results conforming to your initial prediction makes the latter more unlikely to be accurate. But honestly, a couple of years in the market is not much of a sample size for such a vast financial system.

Phlogiston Água de Beber said...

I'm feeling a need to riff on Mike Whitney's article on Bubblenomics. My qualification to do so consists primarily of having lived through it from the beginning. It has clearly been the operative economic system of Usanistan and much of the globe for nigh onto 40 years now.

Lord Keynes' ghostly chin has been taking a lot of punches these past few decades. Unfairly so I would say as I don't believe he ever proposed anything like Bubblenomics. I believe his basic idea was that capitalist society can only work when some threshold percentage of the society is relatively prosperous. The problem with the Bubblenomic System is that every bubble collapse throws a chunk of the society under the bus, never to know prosperity again. Keynes proposed a way that prosperity could be restored to some of the losers and keep the system afloat. It worked pretty well for awhile, but naturally the parties dumber than monkeys failed to follow the recipe correctly and the inveterate Bubbleblowers eventually shed their ignominy. It's been Bubblicious ever since.

The government surrendered its power to boost the losers back to prosperity. The winners certainly show no sign of taking on the task. Bubbles continue to inflate and pop leading at some point to death of the system. Since we are plowing new ground here, we have no basis for predicting exactly when.

Commodity bubbles are most dangerous because of the efficiency with which they create losers. Losers, especially young losers can develop an affinity for Comrade Molotov's cocktails. That kind of constrains the sustainable lifespan of commodity bubbles to a fairly short duration.

Real estate bubbles can as we have seen go on for quite a long time. But, they also take a long time to collapse and they can't be reblown until they reach affordability again. With so much of the population broke, that will take a long time.

I contend that Bubblenomics itself is a long-wave bubble that will pop when no asset class is left that can hold any hot air. After that I think humankind finds itself in a system we constantly struggle here to try and make some predictions about. It might happen soon, or it may be later. The banksters will undoubtedly try to blow another bubble. I'm stumped as to whether or not they could succeed. A starting hypothesis might be that it's definitely over when they have noone left to plunder except each other.

jal said...

"... it's definitely over when they have noone left to plunder except each other...."

In polite circles that is referred to as M&A


Ashvin said...

Well, that didn't take long:

Bill Gross may change mind shorting US Treasuries"

He qualifies by saying only if there is "potential for weak economic growth or a future recession", which isn't much of a qualification at all...

Robert Wilson said...

I have followed the silver market since the 60's. Culling silver coins and silver certificates became a fad during the mid 60's. One could essentially invest in silver at $1.29 per ounce - with deflation protection as the coins and paper were also legal money. Some people sold too early. They were so excited to cash in a dollars worth of coins for $1.20. After the US government dissipated its massive silver hoard and was no longer able to suppress the price, silver shot up to almost $3.00. I recall at the time hearing that it could be unwise to chase that particular silver bubble. The government froze the coin dates at 1964 and stopped printing silver certificates. For a time these hoarded paper dollars could be turned in for about double.
--The Hunt fiasco played havoc with certain industrial users and excited the recycling industry. It is not well known that as certain (not all) companies reduced the amount of silver in 14 x 17 inch double coated x-ray films, increases in radiation exposure were required. Quality (signal-noise ratios or DQE ) was also degraded. I have been retired on social security for 13 years and have had to sell assets for living expenses. I was and remain concerned that they might not last our lifetimes.. My IRA's have been diversified but mining stocks and eagles sold over the decade have been far and away the most rewarding. TIPS have been second best but may also be too dear.
---It is a cliche that one should always buy low and sell high. We all know that picking tops is difficult if not impossible. . Picking bottoms is no easier. The T bill fund in my IRA is now paying 0.01% interest. The mutual fund company has maintained this fund but is undoubtedly losing money. It can be amusing to see interest payments in pennies.

Robert 2.

jal said...

@ po1
Thanks for the laugh.
Here's one back at you.

NZSanctuary said...

The Anonymous said...

Problem is, if true, this undercuts one of the central narratives of TAE.

Not really. Don't get caught out because the bulk of the financial decline is relatively slow moving - that doesn't exclude infrequent but violent periods of change. We saw one in 2008 and we will see more in the coming years - relatively, some changes may make 2008 look like a gentle nudge. The problem is most people go back to sleep in between times.

deflationista said...


the 'facts' we are being fed dont add up by any means, and the rush to cover and even destroy the evidence feeds the conspiratorial fire...

i submit that whether or not OBL died last week or ten years ago doesnt matter... what matters is that they are choosing to declare him dead now--- why?

my guess is they pulled this OBL spectacle now because they really will be pulling the majority of troops from the region... hell- just today gates said that this whole thing is a game changer...

it provides a (desperately needed) reason to leave... probably the best reason- the most easily understood reason for joe america... we kill evil doer = we declare 'victory' = we go out on a 'high note'...

we cant afford to be playing war games in afghanistan building roads and schools over and over again... we all know it-- and they know it--- and this is the best chance they have to get the f@# out...

can anyone think of any better reason than this that they could use to declare 'victory'?

then we avoid going down in the history books the same way all the other empires did, at least in regards to afghanistan... although our place at empire junkyard still awaits us...

we could even thumb our noses at those russians who had to leave with their tails between their legs...

we americans just get to hold our heads high and declare victory... and await the next redneck anthem from lee greenwood that commemorates the brave men and dog who killed that 'evil muslum'... just in time for july 4th- god blesses us...

or maybe everything they tell us is the truth.... but please tell me why i should believe anything they say...

DancesWithStapler said...

el gallinazo said...

But this is not a site for traders, and timing is everything for traders. You want to complain about timing, go to Zero Hedge.
Well said. I get annoyed with commenters blaming TAE that they missed rallies in precious metals. This is a big picture blog, not a web version of Fast Money. Illargi and Stoneleigh do not charge any fees for their advice and aren’t promising ways to make a quick buck. They’ve put together a great website that offers big picture insight that you don’t get anywhere else. I happen to donate, but it’s not mandatory. I stiil get the same great information either way.

DancesWithStapler said...

Ash's post this time reminds of a book I read called "The End of Science". The author took a look at all these different fields where we seem to be running into limits, whether it's the limitation in our ability to understand increasingly complex and abstract ideas, or limitations in our physical ability to observe, such as with the String Theory example.

Noone can know exactly what is going to happen and when. It's just not possible.

DancesWithStapler said...

Deflationista said
"or maybe everything they tell us is the truth.... but please tell me why i should believe anything they say.
I would argue that one should not, as a rule, believe everything the government says nor should they believe nothing it says. Keeping an open mind means allowing for either possibility or some combination of both in any given case. If the killing of OBL went down more or less how the government claims, they would have every reason to tell the truth, since it makes them look good. That doesn’t mean the government is not corrupt. It just means in this case, maybe they had no reason to lie. Maybe some of the details were fudged, such as how much OBL did or did not fight back. It looks better if it wasn’t an execution.

One thing I bet the government would never admit to but must be true, is that they made sure not to do the raid on the day of the Royal Wedding. No way were they going to steal their major ally’s thunder.

Nassim said...

Prescription drugs overdoses have overtaken car crashes as the biggest cause of death in a US town.

Pills deaths spike in US town

Maybe the economy is not as good as they say.

Hugh said...

If you are going to talk about lies, delusions and things that most people have no idea about at all then that illustration of the solar system takes the cake. It doesn't look anything like that. If the sun had a diameter of 60mm, as that one does on my monitor then Mercury would be nearly two and a half meters away and about .2mm across. You would need a W-I-D-E screen with good resolution to see it. The Earth is another 4 meters away. We hardly need mention Neptune now, at 193 meters distant or the non-planet Pluto 60 meters beyond that. But that illustration would conform with most peoples' idea of the scale of the solar system (if they have one at all).

bosuncookie said...

DancesWithStapler said:

"I would argue that one should not, as a rule, believe everything the government says nor should they believe nothing it says."

This made me wonder, “How do I behave around people who act this way?” It’s a trust issue, isn’t it? What I generally do is to avoid contact with them. If forced into discourse by circumstances, I am generally guarded and noncommittal. If it’s a power relationship—meaning they have power over me—I try to be as authentic as possible while still maintaining that guard and limiting commitments to the extent I can.

It’s very difficult to do.

scandia said...

@Ash. " Perturbational Theory" My of my but the things one learns on TAE! Thanks.

@Hugh," most people's idea of the scale of the solar system ( if they have one at all) " fingers me. Recently I lay in a desert,scanning the night sky, feeling very small and insignificant. To me it was immeasurable.

bluebird said...

deflationista said "i submit that whether or not OBL died last week or ten years ago doesnt matter... what matters is that they are choosing to declare him dead now--- why?"

It is said that timing is everything. Since OBL has been under surveillance for appx 6 months, why wasn't he declared dead 2 months ago? Why didn't they wait until July 4th when everyone is in a celebratory mood on Independence Day?

Why now? What do they know?

D. Benton Smith said...

@ El G

Hey there, oh feathered one,

Your estimate, being an order of magnitude more cynical, is probably closer to reality than mine.

I keep lowering my opinion of America's government... and it keeps delving greater depths of depravity faster than I can adjust my contempt and disdain.

The upside to this downside is that it has led me to finally confront my long sublimated RACISM in regard to our President.

He is clearly a member of the HUMAN RACE ... and we all know what that means.

Anonymous said...

The comedian Kathleen Madigan, who tours with Lewis Back, was doing a special and said that she was in Afghanistan entertaining the troops. As she traveled about the country she said it was the most desolate place she had ever seen in her life. The officer in charge of escorting them was telling them how the U.S. was going to fix it up (with school, pools, hospitals, etc).

She said her immediate reaction was that would be like saying you were going to 'fix up' the Moon.

The Afgan Megaclusterphuck is untenable on so many levels it's hard to begin ticking off the web of lies and deceit underpinning the whole operation.

General Petraeus, or as I think of him General Betray-us, has just been tapped by Obummer to be head of CIA. Hmmm, I knew he was being groomed to run for president, that whole 'Eisenhower moderate Rethuglican thing', but as CIA head, it would be more like the whole Bush Daddy corrupt incompetent dynasty thing. The Ministry of Propaganda must be lazy bastards just to keep using old retread cliches like 'war hero as commander in chief' because the Sheeplepeople are so thick, nothing but boiled wool between their ears. It will work like a lucky charm though.

Off to some other godforsakenhellhole to rape and pillage and plunder resources for the Mighty USA Legions of the Military Industrial Oedipus Complex.

Shake Your Booty should be sewn on every uniform, just below the American Flag shoulder patch.

Anonymous said...

Financial Terrorism Suspected in 2008 Economic Crash

"Evidence outlined in a Pentagon contractor report suggests that financial subversion carried out by unknown parties, such as terrorists or hostile nations, contributed to the 2008 economic crash by covertly using vulnerabilities in the U.S. financial system."

How rich, yum.

You can't make this crap up, excuse you, yes you can.

The rats are lining up their ducks. (what a horrifying visual)

Floating a trial balloon story that terra-ists were somehow responsible for the Great Financial Meltdown is a great segue for the Criminal Class to channel Duhsheeple into appropriate levels of apoplexy after they realize their pensions (and their children and grandchildren's pensions) have left the planet.

"The unclassified 2009 report “Economic Warfare: Risks and Responses” by financial analyst Kevin D. Freeman.. states that “a three-phased attack was planned and is in the process against the United States economy.”

Who woulda thunk it?

"“There is sufficient justification to question whether outside forces triggered, capitalized upon or magnified the economic difficulties of 2008,” the report says, explaining that those domestic economic factors would have caused a “normal downturn” but not the “near collapse” of the global economic system that took place.

This is so earth shattering, it could change the whole storyline here at The Automatic Earth.

A Huge New Fly in the Ointment.

Phlogiston Água de Beber said...


Max Keiser shouts the financial terrorist meme every week. So, the Ministry of Truth is just "fixing" the story.

Minitrue has been very busy lately. Especially the boys and girls at Ficdep (Department of Fiction). Mike Ruppert published this regarding Emmanuel Goldstein's DNA test.

Let’s start with what I consider the most-obvious proof that the Obama administration is lying. It comes from a world-class microbiologist who allowed me to use this quote on condition of anonymity. The simple proof of his accuracy is to just ask any microbiologist experienced in DNA sequencing about his statement. There are tens of thousands of them around the world.

Here is what he wrote me:

I am a molecular biologist and I've built a lucrative career in human genetics. I have run one of the world's largest and most productive DNA genotyping facilities and now I am helping to build the global market for clinical whole human genome sequencing for the world's largest human genome sequencing facility. I have worked with the absolute best genome scientists from the military, academia, medicine, and industry from around the world. I know DNA. And, one thing I know about DNA is that you cannot, repeat CANNOT: take a tissue sample from a shot-in-the-noggin-dead-guy in a north central Pakistan special forces op, extract the DNA, prepare the DNA for assay, test the DNA, curate the raw DNA sequence data, assemble the reads or QC the genotype, compare the tested DNA to a reference, and make a positive identity determination…. all in 12 hours- let alone transport the tissue samples all the places they'd need to have gone in order to get this done.

Some might try to argue that ruggedized, field ready kits could test a DNA sample- which is true if one is attempting to determine the CLASS of a bacteria. It is not true if one is trying to determine the specific identity of an individual. Any way you slice it, the real work would require days, and I find it unlikely (although not impossible) that an aircraft carrier would have a laboratory outfitted for this kind of work… it is not the Starship Enterprise out there.

So, maybe they did get Osama. But there is no fucking way they had any genetic proof of it by the time they dumped the body over the side. What is it that we are not supposed to see with all this distraction? I think the French call it "legerdemain".

Osama and the Ghosts of September 11: "Proof that Obama is Lying"

Chas said...

Off topic, but what are the best places to live in the US when the sh*t hits the fan?

I'm a recent resident of Central WI. I don't care much for the mentality of the people, but they are generally helpful and would probably pull together in a crisis. It's a hunting community, so residents are heavily armed. Robbery and looting would probably be minimal. Water and firewood are plentiful and there is hydrolectric power.

I'm thinking I'm probably in a good spot. The downside is the harsh winter and short growing season.

jal said...

Chas said...
"Off topic, but what are the best places to live in the US when the sh*t hits the fan?"

Wellll ... In case you have not noticed, The shit is already hitting the fan.

What happens will depend on your the local "warlords" and your relationship within the "new clan" structures.

Look at what is happening in Tunisia, Egypt, Libya, Syria, etc.

Those that have are losing their doomsteads to those that don't have and those that want what they have been denied.

Chaos could go on for a very long time. It would stop by the imposition of "laws" by the new "warlords".

Watch and learn from the evolution of the changes happening around the world.


NZSanctuary said...

NZSanctuary said...
If you need a really good laugh: financial terrorists caused the 08 crash

A Walk in the Woods said...
Financial Terrorism Suspected in 2008 Economic Crash

I'm surprised more people haven't picked up on this hilarity . . . let's see if it has any traction.

Chas said...

On yet another topic, I have friends that moved from the US to Germany. They found an English speaking school for their 16 yr old son but had to send him back to the US because he couldn’t handle the academics.

I told a colleague from India about this and he said that are can’t go back to India because his two middle school children would never be able to catch up with the Indian students.

Both families are highly educated, fully support education, and have their kids in “good” US schools.

My 14 yr old son is interested in programming. He's taken web design and Visual Basic in high school and both were way too easy for him. He finished his programming assignments quickly and then either surfed the web or helped the other kids.

He’s taking the most difficult classes the school offers, does little if any homework and still has a 3.7 GPA. Not to mention that he skipped grades and is 2 yrs younger than his classmates.

Anyway, how can we be competitive in the future with a substandard educational system? We’ve relied on attracting the best talent from around the world, but can that continue?

Is there any immigration data that tracks our ability to attract and retain top technical talent from outside the US?

If it’s declining, that would be very, very bad.

Ilargi said...

New post up.

Trojan Lies