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Four key-factors are now pushing the Bretton Woods II (2) system to collapse in the course of the year 2009:

LEAP/E2020 already extensively described factors 1 and 4 in previous editions of the GEAB. Therefore we will concentrate on factors 2 and 3 in the present edition (GEAB N°29).

The agitation that has seized global leaders since the end of September 2008 indicates that panic has struck at the highest level. Worldwide political leaders have now understood that the house is on fire. But they have not yet perceived something obvious: that the very structure of the building is involved. Improving fire-regulations or reorganizing emergency services will not be sufficient. To use a strong symbolic image, the World Trade Center’s twin towers did not collapse because firemen were late or because water was missing in the automatic fire-system, they collapsed because their structure was not meant to support the shock of two airliners hitting them in just a few minutes.

Today’s global monetary system is in a similar situation: the twin-towers are the Bretton Woods system, and the airliners are called « subprime crisis », « banking failures », « economic recession », « Very Great US Depression », « US deficits », … a whole squadron.

According to LEAP/E2020, if global leaders fail to realize that in the next three months and to take actions in the next six months, as explained in GEAB N°28, the US debt will « implode » by summer 2009 under the shape of the country’s defaulting or the Dollar’s dramatic devaluation. This implosion will follow closely a number of similar episodes affecting less central countries (see GEAB N°28), including the United Kingdom whose already huge debt is ballooning at the same pace as Washington’s (7). In the same way as the US Federal Reserve saw, month after month, its « Primary Dealers » (8) being swept away by the crisis before it was itself confronted to a real problem of capitalization and therefore survival, the United States in the coming year will witness the implosion of all countries too-closely integrated to their economy and finance, and of their allies financially too-dependent on them (9).

Sign of the times, the Financial Times has started to list the US federal state’s tangible assets: military bases, national parks, public buildings, museums, etc… everything has been evaluated for a total amount of approximately 1,500-billion USD, i.e. more or less the probable amount of the budget deficit in 2009 (see the detail of these assets in the chart below). No wonder why Taiwan, despite its dependence on the security provided by Washington, decided to stop buying one of the three great components of the US public deficit, the Fannie Mae and Freddy Mac securities (despite the fact that they were « rescued » by the government (14)); or why Japan is now a net-seller of US T-Bonds.

All those who, despite our advice in the past two years, invested in Fannie and Freddy securities or in stock markets or in large US private equity banks or in the banking sector in general, have no reason to worry: it will not happen because « they » will prevent it! A problem remains however: “they” are now panic stricken and “they” understand nothing to this situation “they” were never prepared to face. Like we explained in the GEAB N°28, 2008 was only the detonator of the global systemic crisis. Now comes Phase IV, phase of the aftermath!

Notes:

(3) The future president of the United States seems to have for sole aim the implementation of his campaign program (social security, infrastructure, middle-class tax reduction,…), listed before the crisis, and requiring major expenses, when the US federal state is already over-indebted. It was a perfect program… for an America that no longer exists except in electoral speeches.

(4) On this subject, read our anticipations in GEAB N°17 and N°18.

(5) This goes for the USD-reserves of many countries such as China, Japan and the Gulf oil-monarchies. Today’s leaders are not able to imagine that the hundreds of billions of USD piled up in their reserves are only worth 50 or 30 percent of their face value. It will belong to their successors to make rational conclusions and invent a different global system.

(6) That is to say conceptually relevant and efficiently implemented.

(7) As a matter of fact, because of its strong recession, the United Kingdom is already accounting for a large part of the EU’s slowdown in 2009. Great-Britain will be the « sickman » of the EU in the years to come.

(9) Talking about dependent allies, Pakistan and Ukraine are already under IMF perfusion, and Turkey’s credit rating is about to be downgraded. Egypt, Israel and Colombia should soon join the list.

(11) Our team is far from believing that the Eurozone is not confronted to severe difficulties as well (on the economic outlook, see GEAB N°28 in particular), but in a historic crisis such as the one currently unfolding, these problems are minor compared to those the US, the UK or even Asia will face in the next year.

(12) For instance Latvia has just nationalized as a matter of urgency the country’s second largest bank, Hungary is under ECB and IMF perfusion, Polish growth is collapsing, Denmark and Sweden will join the Eurozone in the couple of years, UK is in distress…

Can your cash flow catch up with receivables?

A late payment worth hundreds of thousands of dollars isn’t something Jim Colson is keen on. But after a number of related lumberyards started to slow in payments, something had to be done.

“Our credit department contacted them, one of their senior managers came out and we worked out a plan for monitoring total balance and amount past due. We had flexibility in what we required from them and weekly communication. That process took about 75 days, but that account has recently become current,” says Colson, chief financial officer of Galt-based Building Material Distributors Inc., or BMD.

As the CFO for a company with 10 distribution centers in five states, Colson has his collections work cut out for him. And he’s not the only one. Across California business owners and their collections teams are trying to find bottom-line balance in an unstable economy. As Colson will point out, money tied up in working capital is money not available to invest in the business, fund an acquisition or pay a dividend.

“These are businesses with a lot of long-term management, and the downturn has taken them by surprise,” Colson says. “They’re not deadbeats who don’t want to pay their bills. These are businesses who take pride in themselves and want to work it out.”

In today’s volatile economy, businesses are weakening, and it’s more important than ever for CFOs and accounting departments to have their eyes on the health of their customers and collections practices. And they should — as of June, troubled companies made up 13.2 percent of the “global public company universe,” according to a report by Kamakura Corp., the Honolulu-based risk management information provider. While such statistics aren’t available for private companies, one cannot assume they’re doing much better.

Process and consistency are first and foremost for business owners looking for an efficient and professional collections process, according to Charles Eason, director of the Solano College Small Business Development Center. The center offers training, counseling and mentoring to small-business owners who need assistance in areas such as recordkeeping, financial projections and development strategies.

It’s important to have a credit policy in place, he says. Get invoices out on time, and have incentives for customers to pay on time. “Build incentives into the cost of products, and make sure there is enough to cover gross profit margins,” Eason says.

Most small businesses don’t have a collections department, so owners need to keep on top of invoice aging. “I think a lot of times they assume the company has written it off or that it’s not an impending thing. That’s why we’ve got to catch it early, so we have leverage,” says Kim Thayer, controller for Levin’s Automotive Supply, a $16 million distribution business in Sacramento.

By effectively managing receivables, a struggling business can bring in a significant amount of needed capital. By putting $20,000 in for an accounts receivable administrator, the initial cost would more than pay for itself over time, according to Mark Beil of Beil Accountancy Corp. If, on the other hand, a company sees reason not to implement an internal collections department, another option could be to pay for the services of a third-party accounts receivable company.

“You would better know your customers, but sometimes people are limited on time and money, and if you have a third party administrator who is good and gets to know your customers, they could just as easily represent you as your company could,” Beil says.

At Levin’s, collections are handled internally and discounts are offered to customers who pay by the 10th when invoices are typically due by the 25th. Service charges are applied to any outstanding debts, which Thayer says should be standard practice at just about every business.

“In general, we start talking to customers about things before they get to be past due. We do that with our special needs accounts,” says Tina Trahan, the company’s collections manager. “Usually, if you sit down and discuss it with somebody, you can feel it out. Right now it’s really hard for some companies. We have a couple companies just paying $100 a week or $250. And one of them is a big company that’s been with us for a long time, and we’re not just going to cut them off.”

If the truant customer is a large account, there is often plenty of value in offering them maximum assistance. Assisting a financially distressed customer can build stronger business relationships, says Earl Clark, manager of corporate treasury services for Pacific Coast Companies Inc. in Rancho Cordova.

“That said, a company selling only to gilt-edged customers is cutting out a very profitable business sector — those marginal accounts that, although they may be a higher credit risk, have the potential to provide nice profit margins,” says Clark. “A business should clearly understand that its survival is dependent upon its customer base, its ability to generate a profit and its ability to collect its account receivable in a timely manner.”

The impact of the housing downturn has had particular implications for businesses tied to the construction industry. Until recently, business owners were reporting an ability to adapt to the changing economy, but as the gas crunch has continued, more dramatic financial impacts have surfaced.

“In the past 90 days, we’ve spent a lot more time interacting with customers. We’ve kept things about the same as far as the total amount of credit we grant, but with customers who are a little bit more strapped, we’ve brought down the credit, whether it be through collections or slowing down shipments,” says Colson.

Colson says BMD is trying to lengthen payables and shorten receivables, but the main implication for the company, is that the business lets up on previous goals.

“We’ve had to settle for more of a flattening of [days sales outstanding]. We haven’t lengthened payments to suppliers substantially or shortened payment terms. We know our suppliers are struggling, but we’ve held firm on our current position.”

With a weakening dollar and opportunities in expanded markets, more business is going overseas. But international sales present a whole slew of new issues.

“Overseas sales are more difficult than local sales because you may not be able to determine the reputation of the payer,” says Doug Tow, chief credit officer for American River Bank. “If they don’t pay you, the option is to institute a lawsuit in a foreign country, which is complicated and expensive. Many exporters will require buyers to write a bank letter of credit or have the receivable guaranteed by an import-export bank.”

International companies don’t have to worry as much about foreign companies because they often have the resources to bring collection action, says Tow. “But if you’re a small business in California exporting machine tools, you wouldn’t have much ability to really chase down something. You’re putting your tools in a crate and sending it out with the hope that you’ll get paid. That is why a businessperson needs a good professional group.”

Even the best customers, domestic and international, can fall behind, so it’s important for businesses to hedge exposure, says Clark, who manages risk at Pacific Coast through mechanic leans and surety bonds. “It’s not insurance, but it’s a guarantee,” he says.

At BMD, guarantees come in the form of personal guarantees. “Especially if it’s an organization that isn’t large or doesn’t have a lengthy track record, a lot of times the owner or major shareholders will have to step up,” Colson says.

But while a credit department’s staff can perform credit negotiations and manage risk, personal relationships between supplier and buyer remain a critical component in the health of a company’s bottom line.

“It’s a two-way deal,” Thayer says. “If someone owes you money and they actually know you, they’re going to be more apt to take care of you over someone they have never seen face to face.”

On top of consistent supplier-buyer meetings, keeping up with counterparty risk has proven beneficial to BMD, says Colson. His electronic systems generate information about trends from invoices and payments. “We’ll look on that customer-by-customer to measure changes in activity, and any dramatic changes will raise a flag.”

At Pacific Coast, each of the company’s subsidiaries has its own corporate credit department. Biweekly, the businesses have a teleconference to discuss credit matters among other topics. “The reason we do that is because one subsidiary might be doing business with an account who is also doing business elsewhere in our family. It might be having credit problems with one subsidiary and not the other, and we need to know that. There is direct effort by upper management to stay in tune, and the presidents are also very actively involved in their larger accounts.”

Startups are also particularly vulnerable to the pains of delinquent payments, especially in the current economic environment. So it is imperative that businesses first decide whether to offer lines of credit at all. Depending on the business, cash-only deals might be of greatest benefit to start.

“Cash flow is critical when you are starting off a business. You can be profitable and still go bankrupt if you’re not getting your money on time. It’s difficult, and you need to collect your money as soon as possible,” says Eason.

Virtually 100 percent of new businesses lose money for a period of time, and owners need to understand that it’s going to take real money to pull through, says Tow. A major mistake is underestimating the losses it would take to build a business to a profitable state, he says.

“They end up with a cash flow situation, which gets them into a Catch-22. They don’t have cash flow, and they don’t have money to hire the resources in order to better manage and collect the monies that are outstanding,” Beil says. “They begin to look for additional capital to remedy the problem, or they look at last resort financing: factoring.”

Factoring — selling invoices to a third party for immediate upfront payment — is an option for select businesses (generally those lacking capital) but should be approached judiciously by all.

“It’s a comparatively expensive option compared to open-line financing and is not appropriate for business with small profit margins. You might pay 1 to 5 percent to pay back an invoice, and if your profit margin is only 6 percent, it’s not suitable,” says Tow.

Factoring companies typically shy away from contractors, schools and other business that has receivable payments that are not assured. Most experts concur that factoring should not be used as a long-term option for securing capital. However, if a company is growing quickly and has large, stable customers that will end up providing sustainable revenue, factoring might be a great one-time option.

“It’s better than turning down the job,” Eason says. “You can get the money upfront; you just have to have enough profit to pay it back. And [factorers] don’t care about your credit; they care about your customer’s credit.”

For businesses established on a failing home equity line, access to working capital might be dwindling, or worse — severed. Eason says try going cash-only.

“If you can take a look at collecting money upfront, it will certainly help. And you might have to cut your inventory to just what you need because you finance all that as well,” he says. “The smaller your day’s inventory, the less credit you need. Another thing is to look at the type of inventory. You might want to liquidate old inventory to get some cash, and again that’s also less you need to finance.”

This option could be particularly helpful for businesses fed with capital from a home equity line that’s been cut. Businesses have to be smart about their inventory, and there are always certain inventory items that a business simply must carry and cannot run out of, but there are also slow-selling and discontinued items that can go on sale.

“If you’re operating a nursery with $200,000 worth of plants, your supplier is granting you $100,000 on open credit, and you’re borrowing to pay for the remainder, your only interest is on the bank loan. So if you are able to lower your inventory by $50,000 and still serve your customers, then you can lower your borrowing costs, Tow says.

“Talking to an experienced community business banker is probably the best thing a new business can do,” he says. “You have great allies in your attorney, your CPA and your bank. Every business has needs that are vital. That is why a businessperson needs a good professional group.”

*This story was first published in the August issue of Comstock’s magazine. http://comstocksbusiness.com/

When a hedge fund blocks withdrawals by its customers it’s known as “closing the gates”. Hence we love this story that Fortress is closing the gates on its Drawbridge fund.

Dec. 3 (Bloomberg) – Fortress Investment Group LLC fell 25 percent to a record low after the private-equity and hedge-fund manager halted redemptions from its Drawbridge Global Macro fund, which had lost value this year.

I’ve been a little worried about this store on Dekalb and the lack of glass up front for window shoppers so it’s nice to see it get some good press.  That being said, one of the founders,  Rand Niederhoffer, is the daughter of Victor Niederhoffer (a somewhat famous hedge fund manager) so I think Dad can help out with any cash flow problems for the foreseeable future.  I love my parents but sometimes I really wish I had been born with a silver spoon…  Oh well.  At least I share Dad’s appreciation for Ayn Rand (The Fountainhead was a biggie for me in high school).  And the daughter, Rand, seems to have an eye for fashion.  When are we going to see some stuff for men?  I’m not talking about $70 white t-shirts either we’re in a recession here.

Atlas Sports Genetics is playing into the obsessions of parents by offering a $149 test that aims to predict a child’s natural athletic strengths. The process is simple. Swab inside the child’s cheek and along the gums to collect DNA and return it to a lab for analysis of ACTN3, one gene among more than 20,000 in the human genome.

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In the runup to this week’s appearance by auto industry executives and the president of the United Auto Workers union before the US Congress, the real issues in the official debate over a bridge loan for the auto makers have become clear.

Following the Democratic congressional leadership’s initial rejection of the bailout on November 20, intensive talks were held between Congress, the auto companies, the UAW and officials from the Obama transition team over the best way to use the crisis to extract massive concessions from auto workers.

It is no accident that the UAW has scheduled an emergency meeting of local union presidents and bargaining officials for Wednesday in Detroit to discuss reopening labor agreements covering 150,000 workers at General Motors, Ford and Chrysler. The UAW intends to have an agreement in hand to impose further concessions on their members when auto executives return to testify before Congress on Thursday.

Acknowledging that the union had been in talks with the auto companies, UAW President Ron Gettelfinger told a local radio station “we recognize that there may be additional sacrifices required.”

The UAW is reportedly offering to eliminate what remains of the Jobs Bank program, which subsidizes the income of laid off workers during the life of the four-year agreement. The program has already been largely gutted and its elimination is chiefly symbolic and a down payment for far more sweeping concessions.

The union is also considering allowing the deferral or reduction in the $45 billion the companies owe for retiree health care benefits. Last summer, the UAW allowed GM to delay a $1.7 billion payment into newly established union-controlled trust fund and any further reductions could threaten the entire scheme and medical care for more than a million retirees and their dependents.

On Tuesday, the auto makers submitted plans to Congress outlining how they intended to return to profitability. After their commitments for “equal sacrifice” through largely worthless promises to limit executive pay, the companies spelled out plans to accelerate downsizing and the reduction of labor costs to the level of non-union factories operated in the US by their Asian and European competitors.

According to the Detroit News, General Motors will ask Congress for as much as $18 billion in emergency financial aid, pledging in return to ax 30,000 jobs, shut down nine plants and reopen the UAW contract. In a public statement, the company promised a “reduction in brands, nameplates and retail outlets,” full “labor cost competitiveness with foreign manufacturers in the U.S.” and “further manufacturing and structural cost reductions through increased productivity and employment reductions.” While the company said it remained “committed to fulfilling its obligations to its employees and retirees related to pension and healthcare,” it ominously warned that, “the specifics of these obligations change over time due to competitive realities.”

In its plan Ford wrote, “We are acutely aware that our supply base, our labor structure, and our dealer network, among other factors, are sized for an industry and a market share that the domestic companies can no longer support.” The company, which has closed 17 plants since 2003 and wiped out 45,000 hourly and 12,000 salaried workers in North America over the last three years, promised to shrink its operations further, sell off divisions like Volvo and push through other cost-cutting measures.

The companies praised the UAW for signing a “transformational agreement” in 2007, which reduced the wages for new hires and so-called non-core workers by half and excluded them from the traditional retiree health care and defined benefit pension plans. In addition, setting up the union-controlled trust fund had reduced their liabilities for retiree health care by 50 percent.

The concessions have largely been discounted as inadequate by the financial and political establishment. Over the past few weeks, there has been a non-stop media campaign demanding that auto workers be stripped of the gains they have won over generations of struggle either by using the bankruptcy courts to tear up the existing agreements or through a government bailout, which would make any loan contingent on sweeping concessions.

Typical was a column in the Wall Street Journal Tuesday by William McGurn, a former speechwriter for President Bush, who called on GM CEO Richard Wagoner to exploit the potential collapse of the company to slash the “overly generous health-care” benefits, not only of retirees but, current workers. “[W]hatever the old-health care plans might say on paper,” he said, “you know the reality is a future where the Big Three’s auto workers will be renegotiating givebacks with a gun pointed at their heads (the threat of their company going bankrupt).”

In a repeat—albeit in a much larger scale—of the 1979-80 Chrysler bailout the threat of mass unemployment and financial ruin is being used to blackmail workers into accepting massive concessions. That government bailout did nothing to secure the long-term health of the industry, let alone the jobs and living standards of Chrysler workers. Instead it marked the beginning of a decades-long attack on the working class, which produced a massive transfer of wealth from working people into the pockets of corporate executives and hedge fund managers.

In the same way, the current assault on auto workers will be used as a benchmark for a wave of attacks on jobs and living standards as the corporate and financial elite, with the full support of the Obama administration, seeks to impose the breakdown of American capitalism on the backs of working people.

The collaboration of the UAW in this conspiracy will be cited by the Democratic Party and the media to claim that there is overwhelming support for auto workers to sacrifice. This is a lie. The UAW does not speak in the name or in the interests of ordinary working people. On the contrary, it is a corrupt apparatus whose income and privileges are derived from the services it provides to corporate management.

Workers bear no responsibility for the decisions made by the auto bosses, let alone the avarice and recklessness of Wall Street, which has brought the entire economy to the brink of collapse.

Auto workers must reject the whole framework of the debate over the bailout and intervene independently to defend their interests and those of the entire working class. This includes the preparation to reject any concessions brought back by the UAW and the launching of a national strike to defend jobs and living standards.

The most fundamental question, however, is how are the vast industrial resources, built up by generations of workers, going to be preserved and used? The auto industry, upon which millions of working people depend, can not be left in the hands of corporate executives and big investors who have driven it into the ground in order to amass huge personal fortunes.

State intervention and public planning are needed, but this will not be done by the Democrats and Republicans who are only interested in returning the companies to profitability to benefit the financial and corporate interests they represent.

The working class must assert its own interests. This means the fight for the nationalization of the auto industry and its transformation into a public utility under the democratic control of working people. To achieve this, workers must break with the Democratic Party and build a mass political party of the working class that will fight for a workers’ government to nationalize the banks and reorganize the entire economy based on the principle of production for human need, not private profit.

Auto workers in the US cannot succeed, however, outside of developing an international strategy. Automotive manufacturing is the most globally integrated industry in the world, coordinating vast human, natural and technological resources. In recent weeks auto workers in Canada, Japan and Europe have faced layoffs, and the demands for concessions in the US will be followed by similar demands throughout the world.

American workers must reject economic nationalism—long the stock in trade of the UAW and the Democratic Party to divide the international working class—and fight to unite with workers in every country based on the perspective of the socialist transformation of the global auto industry.

id="blog-title">Slow Painting

id="tagline">Gleaning for meaning in art and life

Great book that I read back in 2004. Given what we are currently experiencing in the stock market, I pulled it out of the archives, dusted it off, and began going through it again.

It validates a lot of what I do as it relates to running money for my clients. If your advisor is not utilizing dynamic asset allocation, long-short strategies, and market neutral strategies…FIND A NEW ADVISOR.

Every hunter knows that you don’t shoot where the duck is, but where the duck is going to be. You’ve got to “lead the duck.” If you aim where the duck is at the moment you shoot, you will miss your target (unless the duck is flying very slowly or is very close!).

Bull’s Eye Investing simply attempts to apply that same principle to investing. In this book, I hope to give you an idea of the broad trends that will be evident for the remainder of the decade and help you target your investments to take advantage of these trends. Successful investing for the period 2004 through 2010 will require you to do things differently than you did in the 1980s and 1990s. We started the last bull market with high interest rates, very high inflation, and low stock market valuations. All the elements were in place to launch the greatest bull market in history.

Now we’re in the opposite environment. The stock market has high valuations, interest rates have nowhere to go but up, the dollar is dropping, and the twin deficits of trade imbalance and government debt stare us in the face.

Which way is the stock market going? Which way are bonds going? Gold? Real estate? Where should I invest?

Wall Street and the mutual fund industry say, “The market is going up; you should buy stocks and now is the time to buy. You can’t time the markets, so you should buy and hold for the long term. Don’t worry about the short-term drops. And my best advice is to buy my fund.”

The folks on Wall Street are in the business of selling stocks because that is how they make their real money. Whether the shares are sold directly or are packaged in mutual funds or as initial public offerings (IPOs) or in wrap accounts or in variable annuities or in derivatives, these folks primarily want to sell you some type of equity (stock), preferably today. Unfortunately, the vast majority of investors believe these pitches and don’t know there are better investment alternatives.

Their advice–buy what they sell–has been the same every year for a century. And it has been wrong about half the time. There are long periods of time when stock markets go up or sideways and long periods of time when markets go down or sideways.

These cycles are called secular bull and bear markets. (”Secular” as used in this sense is from the Latin word saeculum, which means a long period of time.) Each cycle has different types of good investment opportunities. We are currently in just the first few innings of a secular bear market. The problem for Wall Street is that the products brokers primarily sell do not do well in secular bear markets. So they have to tell you that things will get better so you should buy now. Or they advise you to “have patience, and please give us more of your money.”

In secular bull markets investors should focus on investments that offer relative returns. By that I mean we should look for stocks and funds that will perform better than the market averages. The benchmark by which you measure your investment strategy is the broad stock market. If you “beat the market,” you are doing well. Even though there will be losing years, staying invested in quality stocks will be a long-term winner.

In secular bear markets, that strategy is a prescription for disaster. If the market goes down 20 percent and you go down only 15 percent, Wall Street proclaims your performance to be “winning.” But you are still down 15 percent.

In markets like those we face today, the essence of Bull’s Eye Investing is to focus on absolute returns. Your benchmark is a money market fund. Success is measured in terms of how much you make above Treasury bills. In secular bear markets, success is all about controlling risk and carefully and methodically compounding your assets.

Some will say, as they say each year, that the bear market is over: that this book is writing about ancient history. But history teaches us that is not the case. Secular bear markets can have drops much bigger than we have already seen, and last for up to 17 years. The shortest has been eight years. They have never been over when valuations have been as high as they are today.

Investors who continue to listen to the siren song of Wall Street will be frustrated at best, in my opinion, as the research I present clearly shows we have a long way to go in this bear market cycle. For those who plan to depend on their stock market investments for retirement within a decade, the results could be particularly devastating.

Bull’s Eye Investing is not, however, some gloom and doom book. Despite what Wall Street wants you to believe, there is no connection between how the economy will do and how the stock market will perform. As we will see, the economy should be fine, with just the usual corrections sandwiched between periods of growth. The world as we know it is not coming to an end. It is merely changing, as it always has. There are numerous possibilities for investment growth in a secular bear market. They just don’t happen to be in the standard Wall Street fare.

What I hope to do is give you a road map to the future by looking at how and why markets have behaved in the past. We will debunk many of the myths and “scientific studies” used by Wall Street to entice investors into putting their money into buy-and-hold, relative return investments. The Wall Street insiders, not surprisingly, use theories, statistics, and so-called facts that are blatantly biased and in many cases just plain wrong. When the market goes down, they just shrug their shoulders like Chicago Cubs (or my own Texas Rangers) fans and say, “Wait till next year. And buy some more, please.”

Basically, in the first half of the book I am going to teach you how to fish, and in the second half I am going to tell you where the fish are. I would politely suggest that you not skip the first half of the book–do not turn to the last part simply looking for the quick investment fix. If you don’t understand what is happening in the economy and world markets, you will not have confidence in your investment strategy and you’ll end up chasing the latest hot investment, which is usually a prescription for pain in any type of market.

Here’s how this book is organized:

First, we look at what history teaches us about the potential for stock market returns over the rest of this decade. We examine six major (and very different) ways to look at the stock market. As a quick preview, the evidence is heavily weighted to suggest that at the end of this cycle the stock market will not be too far from where it is today. The historical and mathematical analysis of bubbles also suggests that we could see the stock market drop much further before beginning the next bull market. We examine several of Wall Street’s favorite sales tools, the famous Ibbotson study (Roger G. Ibbotson and Rex A. Singuefield, “Stocks, Bonds, Bills, and Inflation: Simulations of the Future (1976-2000),” Journal of Business, Vol. 49, Issue 3 (1976), pp. 313-338.), Jeremy Siegel’s Stocks for the Long Run, and Modern Portfolio Theory (MPT), and see why you should exercise extreme caution when they are used in a sales presentation.

We then look at why the economy can do just fine and stock markets still can fall: It all has to do with the expectation for earnings and the value investors put on those future earnings.

Most analysts track a simple bear market from peak to trough (top to bottom). Bear markets (or 20 percent plus corrections) can happen in secular bull periods (think 1987 or 1998), just as bull markets (20 percent plus up reversals) can happen in secular bear markets (think 2000, 2001, 2002, 2003). Analysts also view a secular bear market as the lengthy period over which the market makes a top, enters into a decisive down phase, and then once again returns to the old high.

I suggest that we view a secular bear market a little differently, as the period in which the price-earnings (P/E) ratio goes from very high to quite low. It is in these periods of low valuation that we can once again begin to confidently put our money back into stocks, as the rubber band is getting ready to snap back. Of course, Wall Street folks will trot out all sorts of studies that show that stocks are always undervalued and you should buy today. They did so in 2000, 2001, and 2002, and 2003. They are doing so as this book is written and published. They are wrong, and we will examine why they’re wrong.

That means earnings are important, and thus a few chapters focus on earnings. We see why Wall Street analysts are so consistently wrong (by about 50 percent per year too much), what the prospects for real earnings growth are, and how to put it all into perspective.

Next, we look at risk. As I’ve said, investing in secular bear markets is all about controlling risk. I believe this chapter is one of the most important in the book, but it may also be the most fun.

We discuss the most common mistakes investors make and how to avoid them. Statistics show that investors do not do as well as the funds or stocks they invest in, and we look at the causes. We examine why today’s hot fund is likely to be tomorrow’s loser, and what types of funds you should be looking for in this market.

We look at the future, including the demographics of the baby boomer generation, and how it will impact our investment potential. We analyze the direction of interest rates, deflation, and inflation. Then we examine the world economy and the dollar and see if we can find a potential winning theme (we do!).

The consequences of these economic problems will require some painful adjustments from those who do not make the effort to protect themselves. I show you where and how to turn problems into opportunities by seeking absolute returns in turbulent markets.

After the first section, the book focuses on specific types of investments. After telling you why we are in a secular bear market for stocks, Chapters 16 through 18 explain precisely how to invest in stocks today. Ironically, in a secular bear market, the little guy has a big advantage over the larger institutions and funds. There are great opportunities in the stock market if you know where to look. During the last secular bear market, companies like Microsoft and Intel were launched. I show you a simple way to find the hidden gems sought after by the savviest investors.

Then we look at the world of fixed income investments. The rules are changing, and what worked in the 1980s and 1990s will in all likelihood be a losing proposition for the remainder of this decade.

We then analyze what are, in my opinion, some of the better potential sources of absolute returns: certain types of hedge fund styles. We look at how Wall Street has rigged the market against small investors getting the best deals. The richest investors and largest institutions with the best-paid advisors choose these high-fee, unregulated private investments because they deliver better risk-adjusted performance than one-way buy-and-hold mutual funds. We show you how to find and gain access to these private funds, and how to use some of their strategies in your own portfolios.

Finally, we take a more thorough look at the future, and why you should be optimistic. In 1974, only a few people saw the changes and opportunities that computers, telecommunications, and the Internet would bring. The world was bemoaning the losses of basic American industry as jobs were being lost to world competition.

Today, we find ourselves once again faced with serious competition for American jobs. Our core seems to be slipping away, as the market doesn’t respond. The world sees us in a much different light than just a few years ago. Few notice the new revolutions that are happening in small firms and research departments that will form the basis for the next wave of American prosperity because we haven’t even begun to imagine the ways in which the next waves of change will affect us.

Will there be winners and losers in this process? Of course. Anytime there are periods of upheaval and great change, there are always those who benefit from the change and those who suffer. I will try to show you how you can position yourself to be a winner.

There is a centuries-long, if not millennia-long, pattern to these cycles. Good markets are followed by bad markets, which are again followed by good markets. They are as predictable as winter and summer. These cycles have been happening since the Medes were trading with the Persians. While no one can predict the exact day winter weather will arrive, it is a pretty good bet that winter will come. You can prepare for winter just as you plan for summer. As investors, you can be successful if you understand the economic and investment seasons we are in and plan your investments accordingly.

So, let’s get you started on your way to successful Bull’s Eye Investing.

Euromoney Magazine - london, UK

Amid all the gloom in recent weeks about the apparent inability of hedge funds to cope with a collapsing world economy, there has been one subset of the industry that has stood out as a beacon - an eception, where returns have continued to be very positive, and of course non-correlated with plunging equity markets.  The exception has been those that apply trading strategies in futures markets - collectively known as managed futures traders or as commodity trading advisers (CTAs).

http://www.euromoney.com/Article/2059850/CurrentIssue/65745/Hedge-funds-Revenge-of-the-CTAs.html

Posted here is the text of Dr. Nouriel Roubini’s Financial Times article “How to Avoid the Horrors of ‘Stag-Deflation’” written for the December 2, 2008 edition….  Comments to follow in the next posting.

How to avoid the horrors of ‘stag-deflation’

By Nouriel Roubini

Published: December 2 2008 19:53 | Last updated: December 2 2008 19:53

The US and the global economy are at risk of a severe stag-deflation, a deadly combination of economic stagnation/recession and deflation.

A severe global recession will lead to deflationary pressures. Falling demand will lead to lower inflation as companies cut prices to reduce excess inventory. Slack in labour markets from rising unemployment will control labour costs and wage growth. Further slack in commodity markets as prices fall will lead to sharply lower inflation. Thus inflation in advanced economies will fall towards the 1 per cent level that leads to concerns about deflation.

Deflation is dangerous as it leads to a liquidity trap, a deflation trap and a debt deflation trap: nominal policy rates cannot fall below zero and thus monetary policy becomes ineffective. We are already in this liquidity trap since the Fed funds target rate is still 1 per cent but the effective one is close to zero as the Federal Reserve has flooded the financial system with liquidity; and by early 2009 the target Fed funds rate will formally hit 0 per cent. Also, in deflation the fall in prices means the real cost of capital is high – despite policy rates close to zero – leading to further falls in consumption and investment. This fall in demand and prices leads to a vicious circle: incomes and jobs are cut, leading to further falls in demand and prices (a deflation trap); and the real value of nominal debts rises (a debt deflation trap) making debtors’ problems more severe and leading to a rising risk of corporate and household defaults that will exacerbate credit losses of financial institutions.

As traditional monetary policy becomes ineffective, other unorthodox policies have been used: massive provision of liquidity to financial institutions to unclog the liquidity crunch and reduce the spread between short-term market rates and policy rates; quasi-fiscal policies to bail out investors, lenders and borrowers. And even more unorthodox “crazy” policy actions become necessary to reduce the rising spread between long-term interest rates on government bonds and policy rates and the high spread of short-term and long-term market rates (mortgage rates, commercial paper, consumer credit) relative to short-term and long-term government bonds.

To reduce the former spread the central bank needs to commit to maintain policy rates close to zero for a long time and/or start outright purchases of government bonds; to reduce the latter it needs to spread massive liquidity, such as by direct purchases of commercial paper, mortgages, mortgage-backed securities (MBS) and other asset-backed securities. The Fed has already crossed that bridge with facilities that are aimed at reducing short-term market rates, such as Libor spreads; it has now moved to influence long-term mortgage rates by buying MBSs.

Traditionally, central banks are the lenders of last resort but they are becoming the lenders of first and only resort, as banks are not lending. Central banks are becoming the only lenders in the land. With consumption by households and capital spending by corporations collapsing, governments will soon become the spenders of first and only resort as fiscal deficits surge.

The financial crisis has already become global as financial links transmitted US shocks globally. The overall credit losses are likely to be close to a staggering $2,000bn. Thus, unless financial institutions are rapidly recapitalised by governments the credit crunch will become even more severe as losses mount faster than recapitalisation.

But with governments and central banks bringing private sector losses on to their balance sheets, fiscal deficits will top $1,000bn for the US in the next two years. The Fed and the Treasury are taking a massive amount of credit risk, endangering the long-term solvency of the US government.

In the next few months, the flow of macroeconomic and earnings news will be much worse than expected. The credit crunch will get worse, with de­leveraging continuing as hedge funds and other leveraged players are forced to sell assets into illiquid and distressed markets, leading to further cascading falls in prices, other insolvent financial institutions going bust and a few emerging market economies entering a full-blown financial crisis.

The worst is not behind us: 2009 will be a painful year of a global recession, deflation and bankruptcies. Only very aggressive and co-ordinated policy actions will ensure the global economy recovers in 2010 rather than facing protracted stagnation and deflation.

The writer is professor of economics at the Stern School of Business, New York University, and chairman of RGE Monitor, an economic consultancy

Copyright The Financial Times Limited 2008

In early 2001, BoA released her first mini-album Jumping into the World. After its release, she took a hiatus from the Korean music industry to focus on the Japanese market. During this time she struggled to solidify her skills in Japanese.

After the release of Don’t Start Now and Jumping into the World. BoA released her seventh single “Valenti”. Valenti became a Top Five single for the artist, peaking at the number-two position on the Oricon. BoA released two more singles “Kiseki / No.1″ and “Jewel Song / Beside You -Boku wo Yobu Koe-”, both which also peaked at the number-three position. At the end of the year, BoA released her second Korean mini-album Miracle.

In 2006, BoA was mostly inactive in South Korea as she focused her attention on Japan; however, on September 21, 2006, she released her first digital single in Korea, a Korean version of “Key of Heart”. Her fourth Japanese studio album Outgrow was released on February 15, 2006. The limited CD+DVD edition of the album contained music videos of the album’s singles and a secret password to unlock a special version of the official website. The album reached the number-one spot on the Oricon chart for its first week of release, making it her fourth consecutive Japanese album to do so. It had low debut sales, however; with 220,000 copies sold, it became her lowest-selling first-week debut for a studio album at that point. “Do the Motion,” the first single from the album, reached the top spot on the Oricon, making her the fifth non-Japanese singer to have #1 single, the first in over twenty-one years. “Merry Christmas from BoA”, the last single from the album, was the singer’s first digital single. In support of Outgrow, BoA launched a special Zepp tour, B0A The Live, on September 29, 2006. The tour, which lasted until October 29, started from Nagoya and contained twelve shows, two in each of the following cities: Nagoya, Fukuoka, Osaka, Tokyo, Sendai, and Sapporo. She staged her first Christmas concert on December 7, 2006.

In the last 24 hours, these layoffs were announced:

These don’t include massive recent cuts at Citigroup, Bank of America/Merrill Lynch, Goldman Sachs, Morgan Stanley, and dozens of other smaller banks, hedge funds, and private equity groups.

Plus, another 509,000 new jobless claims last week. Highest level in 26 years.

Mike: Thursday is showing a wide range of jobless news, but unfortunately most of that news showing continuing deterioration in the job market. Let’s see what the big numbers show:

The number of workers on jobless benefits rolls hit a 26-year high last month, although initial claims dipped last week, data showed on Thursday, underscoring the rapid deterioration in the labor market.

http://finance.yahoo.com/news/Number-of-workers-on-jobless-rb-13745901.html

Pressured by the economic turmoil and the mounting loss of traditional phone customers, AT&T Inc. is cutting 12,000 jobs, about 4 percent of its work force.

http://biz.yahoo.com/ap/081204/at_t_jobs.html

Mike: Unfortunately, tech companies are going to layoff more as the dismal holiday selling season comes to a close:

Adobe Systems Inc. is not making the expected revenues for their fourth-quarter earnings, which has prompted the corporation to plan an 8 percent reduction in their workforce. That is the equivalent of 600 employees that will be losing their jobs.

http://www.bestsyndication.com/?q=20081203_adobe_and_other_companies_announce_more_job_cuts_employee_layoffs.htm

The Delaware-based industrial packager said it will close a 41-employee plant in Culloden, W.Va., and a 26-employee plant in Kansas City, Kan., by the end of January. 

http://www.bizjournals.com/columbus/stories/2008/12/01/daily20.html

One of Wytheville’s oldest manufacturing businesses is closing next year. The 170 employees of Acument Global Technologies were notified at a 7 a.m. meeting Wednesday.

http://www.swvatoday.com/comments/wytheville_plant_to_close/news/4131/

A company that manufactures automotive fastener parts plans to close its Wytheville plant next year, eliminating about 160 jobs.

A spokesman for Acument Global Technologies said Wednesday the closing is due to “very difficult automotive industry conditions.” Timothy Weir says sales and use of plant capacity are down, and employment has declined steadily from 200 jobs last year to 162.

http://www.wvec.com/sharedcontent/APStories/stories/D94RBE402.html

SHERMAN — The planned February closing of the Bauhaus USA Inc. upholstered furniture plant here will cost 139 jobs, the latest setback for the area’s troubled furniture industry.

http://www.clarionledger.com/article/20081203/BIZ/81203010

TERRE HAUTE — Tough economic times are forcing another Valley business to cut its workforce.

Hoosier Handpak, a contract packager since 1995, expects to layoff 55 of its 60 employees by the end of January.

http://www.tribstar.com/local/local_story_338233805.html

The Bakersfield Californian will layoff 25 staffers as it tries to balance its budget amid shrinking advertising revenue and an unstable economy, the newspaper announced Wednesday.

http://www.sfgate.com/cgi-bin/article.cgi?f=/n/a/2008/12/03/state/n180946S47.DTL

U.S. Steel Corporation (USS) has announced the layoff of approximately 3,500 employees at three facilities over the next several weeks.

http://chestertontribune.com/Business/12389%20us_steel_to_idle_three_facilitie.htm

A major layoff announcement from a New England jet-engine manufacturer. Pratt and Whitney will lay off 350 salaried employees, most of the cuts happening in Connecticut.

http://www.necn.com/Boston/Business/2008/12/03/Pratt-Whitney-to-layoff-350/1228349789.html

Mike: The following is from the The Docket - Massacheutts Lawyers Weekly’s news blog. You may want to put this in your favs to keep track of this layoff information:

Rumors are swirling as the clock ticks down to Jan. 1, the day many legal insiders expect law firms large and small in Massachusetts to announce layoffs.

http://blogs.masslawyersweekly.com/news/2008/12/03/law-firm-layoff-watch/

A new round of layoffs began Wednesday at the Arizona Republicas the newspaper’s parent company Gannett Inc. looks to trim 10 percent from its daily newspapers across the U.S.

Sources said 68 employees were laid off today, including 25 from the Republic’s newsroom. The cuts could continue tomorrow.

Hedge funds, which have long attracted Wall Street professionals with the promise of hefty salaries and bonuses, are now cutting staff in an effort to reduce expenses.

Much of the overhead a hedge fund has is related to salaries. So, if assets under management drop 50% due to a combination of redemptions and negative returns, these firms cannot support the same overhead

http://www.iddmagazine.com/issues/2008_46/187885-1.html?partner=fierce_finance

Mike: United really knows how to motivate employees to put out their best effort for the holiday rush:

Unhedged: Fortress, the Hedge Fund, Is Crumbling. D.E. Shaw and Farallon Also Block the Exits. Maybe the physicists and statisticians can go back to doing real work? 

Harvard Endowment Falls 22%, Poised for Worst Return. Credit Suisse to Eliminate 5300 Jobs After Losses This Quarter. Sticking one’s neck out: Miller Says Stock Market Has Bottomed (not buying it). Also, give Bill Gross a buzz to discuss Dow 5,000 call.

OH NO: Judge says Mattel rival can’t sell Bratz dolls. Damn you, Mr. Burns: Italy confronts puppy smugglers.

Hmm, gee, I wonder if this will be good for consumers: Insurers propose universal, centralized healthcare. I am sure its ’cause they care, just as they have all these years.

Maybe Citi needs some sleep: Capital One to Buy Chevy Chase Bank. Probably a good idea: Citigroup Top Execs Ready to Forego Bonuses.

Brave move: S.E.C. Issues Rules on Conflicts in Credit Rating. Only 17 years late.

More layoffs in more places called Layofsylversica: AT&T Plans to Cut 12000 Jobs, Citing Economic Slump. DuPont to cut 2500 jobs, trim 4000 contractors. Others follow suit. Viacom to cut 7% of workforce; MTV division takes biggest hit. I wasn’t even aware that MTV still exists. I bet the music videos still rock like they did in the 80’s.

No bailouts for you: Nissan to recall nearly 430,000 vehicles worldwide.

Good is bad:  The number of Americans filing new unemployment insurance claims decreased last week, but the number of people continuing to collect benefits hit a 26-year high.

Commies know best about capitalism. Capitalists know best about socialism (for banks): Chinese officials are now lecturing the United States about the need to stabilize the U.S. economy.

Fortress suspends Drawbridge redemptions

Fortress Investment Group, the listed private equity and hedge fund group, has ­suspended redemptions at its flagship Drawbridge Global Macro Fund after investors sought to withdraw more than $3.5bn in funds, ­according to a regulatory ­filing on Wednesday.

Fortress took the action, at least in part, because the fund - which had $8bn under management as recently as September - has to keep a minimum level of assets or risk having to unwind ­derivatives trades, a person familiar with the matter said.

There’s more - but this is enough today  What do you think?.

No comments yet — be the first.

Source : NEP (New Economics Papers) | RePEc

Here is an excerpt from BusinessWeek’s article titled “Meet Your New Recruits: They Want to Eat Your Lunch”:

…”We are followers of Warren Buffett,” explains Greene, who says he studies the famed Omaha investor’s letters to shareholders as if they were sacred texts.

High-revving students scoff at advice they sometimes hear about intellectually browsing before settling on a narrow employment path. “Many of my fellow classmates have been planning out their college choices since middle school, so to tell them not to plan for a future career during freshman year is illogical,” says Janet Xu, 22, a senior at Yale and editor of the undergraduate magazine Yale Entrepreneur. She is heading off soon to be an analyst for Sears Holdings (SHLD) in Chicago….

The article talks about a new group of elite college graduates emerging from top American universities who are aiming for the top jobs. At first, I got excited about this phenomenon. After reading the article, I have to tell you that I’m not as optimistic as I was about this new group. It seems like they all want to go to finance and consulting. In my opinion, for a healthy economy, we do need financiers and consultants, but they are one piece of the big picture and they are not the ones creating “value”. I believe “economic value” is created mostly by entrepreneurs, innovators, designers and manufacturers. Let me define what I mean by value (and this is my definition): true economic value is something for which people would pay voluntarily and with adequate relevant information. For example, when you pay $300 to buy a digital camera and you have done research on it before, you have read customer and analyst reviews and you know all the functions of the camera, that must have some true value to you. Value is not equivalent to cash. A pyramid scheme may generate cash for some people but doesn’t create any real value. A hedge fund may make some people richer, but it doesn’t necessarily create economic value. What an economy needs is a lot of value creators and some financiers.

Release here.

The world is currently facing an unprecedented financial and economic crisis that is spreading through every facet of the global economy. This crisis calls for increased consultation and collaboration amongst all nations and for immediate actions to be taken to reverse the decline and restore long-term economic and job growth.

The G-20 Communiqué, released at the conclusion of the Washington summit, recognized the gravity of the situation and the necessity for strong and decisive action. This summit represents a start in the world’s response to the unfolding turmoil but we consider there is much to do to complete this response and get back on a path to growth.

Through their national associations, business leaders have been providing advice to our governments on how to move on the need for quick action. We can now present a set of proposals aimed at reestablishing stability and confidence in financial markets, and ensuring future economic stability and growth. By following these plans and principles, policy makers will restore confidence and help companies create jobs and prosperity throughout the globe.

I. A CRISIS WHICH CALLS FOR OPEN ECONOMY POLICY, INNOVATIVE SOLUTIONS AND SOLIDARITY

.. Four core values for further actions:

The leaders of the G-20 nations recognized that the proposed reforms will only be successful if grounded in a commitment to free market principles: rule of law, respect for private property, freedom of trade and investment, and competitive markets. While we support the basic principles outlined in the G-20 Communiqué, we would respectfully recommend that further actions be galvanized around four core values: free market economy, transparency, responsibility and open trade and investment.

.. First, governments should ensure the effectiveness of economic recovery plans to enable a return to normal bank lending and capital market operations:

Despite the implementation of economic recovery and bank rescue plans, many companies throughout our different countries face difficult problems with access both to short term financing and medium term bonds market. Should such a situation continue, it would have a significant adverse effect on the economy at large. We ask governments and central banks to study all measures that could revive the financial markets and ensure appropriate credit is available for business, especially for SME’s.

.. Governments’ macro economic policies must be both daring and carefully tailored, with regard to the public deficit, and attention must be paid to cross-border spilllovers:

First of all, we support the need for monetary and fiscal stimulus measures to fend off major downturn forces. However, given the interdependences between economies and the global nature of the slowdown, there are certain essential conditions to shoring up the world economy effectively:

.. We are looking forward to a prompt, ambitious and balanced conclusion to the Doha Development Agenda

Business leaders welcome the statement forestalling protectionist policies for the next 12 months, in line with the WTO rules. Learning from the mistakes of the past, we know that part of the solution to today’s crisis must be a commitment to an open global economy and international cooperation. We believe that this commitment should be confirmed and implemented as a long term international policy.

The business community fully supports all of the efforts that will result in a prompt, ambitious and balanced conclusion to the Doha Development Agenda. This is necessary to ensure the world’s economic growth in the coming years. We do hope that agreement on modalities for achieving this will be reached at the forthcoming WTO ministerial meeting in Geneva. In this regard, we expect all WTO members to make a positive contribution to conclusion of the negotiations by recognizing their responsibilities to deliver binding commitments that reflect those of others.

.. We support a reform of financial markets based on coordination, a global approach and adequate regulation:

Getting back to well functioning financial markets is a priority to provide enterprises with the liquidity they need to face the economic crisis. Additionally, G-20 nations have all agreed that one of the major underlying factors contributing in the current crisis is inconsistent and insufficiently coordinated macroeconomic policies.

In this regard, we would like to reaffirm our strong support for the development of a more coherent and efficient system of financial sector cooperation and regulation. However we believe that over-regulation must be avoided.

Regarding the surveillance of economic and financial stability to be organised at the international level, we believe that the IMF is the right institution and should work in tighter collaboration with the FSF to reinforce early warning mechanisms.

.. Recovery will come from enterprises

The crisis will be severe but enterprises are fully aware that economies run in cycles, and that upturns follow downturns. Governments need to set up the appropriate market regulation, to help restart financial markets and to implement some general measures aimed at restoring companies’ financial capacities. But sustainable creation of jobs and wealth will come from companies’ investments and innovations. As soon as enterprises and entrepreneurs have access to both short term and medium/long term finance they need to face up to the financial and economic crisis, and as long as governments have put in place efficient plans for recovery, they will invest for the future.

.. Solidarity will be needed to overcome the crisis

Companies are aware that the more fragile a country, a population or a company is, the more it will suffer from the crisis. They are ready for solidarity, which will be needed anyway to avoid a “domino effect” which would worsen the situation.

II. OUR RECOMMENDATIONS FOR FINANCIAL MARKET REFORM

Resolution of this crisis starts with the need to reform the financial markets. This reform can only be meaningful, if it allows the financial markets to become, once again, the centres for capital formation needed to drive sustainable economic growth. Such an effort requires enhanced international coordination and cooperation, a balance between, reasonable regulation and innovation, sound evaluation of systemic risk, and appropriate investor and consumer protection.

1. CROSS-BORDER CONSULTATION AND COOPERATION IN THE REGULATION OF FINANCIAL MARKETS

Markets are intrinsically global, yet each national economy has differing forms of capital formation and delivery systems requiring differing forms of regulation. Many of the existing financial regulations have proved inadequate and are one reason for the current situation. Accordingly, adjustments to the regulatory framework are necessary. There is a need for cooperation and consultation so that the national regulators may consult and work together to ascertain systemic risk and ensure the international flows of capital necessary to provide for sustainable world wide growth.

.. Principles for reform

Cross-border consultation and cooperation must:

.. Adjustment of the regulatory framework

.. Organisation of Consultation and Collaboration:

2. THE STANDARDISATION OF INTERNATIONAL ACCOUNTING AND AUDITING PRACTICE

The current crisis demonstrates the true global nature of the world economy. Since accounting is the language of business, it is important that businesses and investors speak in the same language to provide a transparent exchange of information using the highest quality standards. A 21st century system of financial reporting policy must allow accounting and auditing rules to be centred around:

Conduct a comprehensive study of market valuations

The business community welcomes the IASB’s responses to the financial crisis and the mark to market accounting study launched by the SEC. When fair value accounting for financial instruments is applied it should allow for reasonable judgments and estimates in inactive markets.

Development of standards should allow for testing and intensive reviews both before and after the implementation of the new standards to minimize unintended consequences. It should also allow stress testing by regulators before implementation from a regulatory standpoint.

.. Scrutinize the existing standards to ensure that financial reporting policy reflects economic activity and does not drive it

The purpose of accounting and auditing is to provide management, investors and regulators with the information needed to determine the viability and wellness of a business. While accounting rules cannot cause the crisis, the implementation of some standards may have exacerbated it and delayed the stabilisation of financial markets. Therefore, standards must be scrutinized to ensure that they merely reflect activity and serve the common goal of transparency.

Inhibitors of sound financial reporting policy must be removed. Finally, accounting standard setters, bank regulators, central banks and appropriate financial regulators need to collaborate in studying the interconnection between accounting rules and capital adequacy requirements to understand their role in the current crisis.

.. The appropriate national authorities need to launch an international convergence of standards for auditing of accounts

While there has been the establishment and growing acceptance of a global accounting standard, this represents only one part of financial reporting policy. There is a similar need to ensure that a global standard for auditing of accounts in order to guarantee an appropriate level of scrutiny and thoroughness to ensure transparent high-quality information for investors and preparers alike. Such a system will also aid cross-border consultation and collaboration amongst appropriate regulators.

3. THE OVERSIGHT OF RATING AGENCY

The role of the ratings agencies in the development of the financial crisis has created a number of reactions and initiatives on the part of the regulatory authorities, internationally, in the United States and in Europe. Businesses wish to draw the attention of the G8 countries governments to the aspects which they consider to be a priority. When the governments take necessary steps to do the following, negative impacts on corporate finance and additional burdens on private companies may be avoided.

.. Create a distinction between the rating of issuer debt (known as a financial rating) and the rating of structured products

The quality of the information given by ratings agencies when assessing structured products is an important factor in the debate about the number of defaults and downgrades on these markets. The complexity of structured products, the opaqueness of the markets on which they are traded and the reliance on ratings by users/investors have each played a significant role in the current crisis.

Therefore, in order to address investors’ objectives of precisely identifying market risks, the G8 Business members approve the direction taken by the regulators internationally to demand from the rating agencies different ratings “grades” to be applied to structured credit transactions.

.. Separate financial rating and advisory activities

The link between advisory activities and ratings activities is currently being contested. Claims have been made that ratings agencies advise investment banks on the structuring/creation of complex products in order to optimise the credit rating. On this point, the G8 Business members therefore suggest that a code of conduct be adopted by the rating agencies that prevents them acting as a ratings agency and adviser for a single product.

.. Introduce a system of authorisation and supervision that reflects market realities

The major impact that the ratings agencies have on the operation of the financial markets calls for the introduction of a system for authorisation and supervision. This should be organized on a country or region basis with the appropriate level of cooperation between regulators. As the Financial Stability Forum noted, a globally consistent approach to registration and oversight, which reflects the global nature and use of ratings, is critical.

Particular attention should be paid to the harmonization of various systems in order to avoid distorting competition, as imposing an unwieldy form of regulation on a market almost inevitably increases the cost of the rating.

.. Support supervision of the IOSCO code of conduct

For some years now significant work has been carried out between the issuer associations and the ratings agencies resulting in the introduction of the IOSCO code of conduct.

This code sets out the rules of good conduct for ratings agencies in terms of the following: conflict of interest inherent to the activities and the economic model of a rating agency, transparency; assessment methods; and rigorous assessment of the risks relating to financial ratings.

As IOSCO intended, the supervisory bodies should endeavour to ensure that rating agencies implement the IOSCO code and adapt their business model and internal processes to comply with it, before trying to impose new rules. It is vital for the future system of authorisation to consider the performance of ratings over time in judging quality, credibility and independence in addition to historical reputation, in order to encourage newcomers in this highly concentrated market.

.. Remind informed investors of their risk analysis responsibilities

While in an extremely volatile market rating agencies decisions have to be very careful and professional, and informed investors should be reminded that a rating does not exempt them from analysing the risk based on the models that they themselves have put in place and the knowledge they may have of the proposed products.

4. TRANSPARENCY REQUIREMENTS OF FUNDS

The growing importance of funds - sovereign funds, alternative management funds and hedge funds - on the financial markets - and, more recently, their role in the financial crisis, has led national and international authorities to consider the appropriate level of transparency required of these funds.

Accordingly, we would recommend a reasonable and appropriate form of transparency for these different funds to allow for appropriate levels of supervision and monitoring by financial regulators. Regulation should not prevent innovation in the marketplace.

As the financial markets play a major role in financing the corporate sector and the economy in general, their current malfunctioning is causing the members of G8 Business to formulate proposals aimed at improving the transparency of funds and re-establishing conditions which favour the efficient functioning of the financial markets.

.. Improve transparency of hedge funds and introduce an effective system to monitor the financing leverage

Excessive use of debt leverage for funds can accentuate risk and should be avoided. Regarding large pools of capital such as hedge funds, in order for society to assess systemic risks, transparency of the size of the leverage effect a fund employs is desirable and will allow for improved supervision of the credit allocated to them.

Studies should be undertaken by the proper bodies to examine leverage ratios, debt requirements and appropriate levels of supervision.

Consistent with our core principles, we advocate further transparency in markets, including non-market trading platforms and over the counter markets. Public and proprietary pools of liquidity aid the beneficial flow of capital and price discovery. However, proprietary or OTC markets should be called upon to deliver more transparency to regulators in order to prevent systemic risks.

We do not advocate a single global securities market or harmonization of trading platforms-investors and issuers should have the choice. However, increased transparency serves the public good. Therefore, whenever appropriate, postmarket infrastructures approved by regulators should be introduced.

.. Encourage continuation of transparency efforts for Sovereign Wealth Funds

Then it began forex First, Treasury said it ecn forex broker reviews would buy distressed assets. Taxpayers are “keeping the zombie alive,” said Aldrich Eisenbeis, chief monetary economist at hedge fund Cumberland Advisors and former director of the Monetary best money market account Affairs Division at the Fed Wood, said expansion of the AIG bailout shows that “no one knows the general principles” behind the Treasury’s trouble-assets program. The new accommodation represent a departure for Secretary Yehudi Paulson, finland currency forex signals who until now has said he only wants to invest Nurse funds in “healthy” firms. The Federal Reserve, which saved the insurer from banking and finance jobs collapse two months ago with an $85 billion loan, reduced that loan and offered lower rates, while the Treasury forex currency trading signals chipped in $40 billion from its bank-rescue fund to buy preferred shares. marks a new phase in the government’s banking res gestae to shore up financial markets: It’s the first time cash from the rescue fund Congress created last month has been committed to a failing company. By Benedetto Torres — money market returns The revised bailout of American International Group Inc.

This This lower forex account denomination allows traders with lower anderson finance capital more flexibility in exploring many more opportunities in trading Forex. This is in an effort to scale down forex software the risk. Owners of Forex mini accounts can trade in Pips as opposed to dollars. PipsOne pip equals to $1. If you pay the small margin of deposit currency trading ($50 per lot) your mini account forex broker can serve action forex as a very lucrative trading vehicle. In the Forex market due to the liquidity of currency a trader kemper money market can get up to 100:1 leverage. These banking are optimistic figures. In fact, it is recommended even by CNBC’s Jim Cramer that traders stay out of the daily forex forecast stock market if you own $1000 dollars lydon of share then you generally can get around $500 to $750 for leverage. Auto Forex Trading - How to Profit in a Bad Economy With Forex Autotrading There are only a few ways to profit in this bad economy with investments.

In Martin Wolf ’s Blog, there is an interesting guest post by Eric Lonergan, a hedge fund manager at M&G Investments. He says:

This sounds like a self help book everyone would/should buy.  But the truth is it should be in the fiction section.  We receive a lot of messages in our society that make us strive for “perfection”.  This unnattainable, unrealistic state of complete euphoria all the time.  Keep a smile on that face no matter what.  But guess what?  Life throws curveballs.

This week has been particularly challenging for me.  The crisis of our economy is finally sinking in.  While I tried to stay positive, I find the closure of so many beloved stores, the layoff reports and the idea that everything is on sale but nobody is buying incredibly sad.  So why have I been avoiding this sadness?  Because it is painful.  But then yesterday when helping my brother through some similar feelings, I was like wait…  This is a FEELING.  I am feeling sad and worried.  That is OKAY.

I told my brother a little analogy that is fitting for everyone.  Basically life is like swimming in the ocean, before the break.  So you are constantly challenging the waves and then the wave passes and you can just chill, until the next one comes.  If a wave comes and you freak out and start paddling, kicking, screaming (if you can) and essentially fighting it, it will suck.  But if you just use a method to float over the wave (or dive through it, like so many cool surfers do on the beach everyday), it is a lot easier.  So basically when you have a feeling, a challenge, something tough think of a wave.  You can freak out and practically drown yourself or you can find a boogie board, surf board or just your body to float over it.  So work through it.

I feel so sad and depressed because the economy is in shambles.  I keep having flashbacks of scary discussions I had a year ago.  A banker who told me this would happen.  A good friend who keeps saying, “the world is ending” and for me to get my cash and keep it at home (interestingly another banker- well hedge fund dude, who is doing really well while everyone is suffering….).  I can choose to fight this, kick myself for not doing something different, etc.  But why?

The clear answer is I do feel sad and scared and that is okay.  I actually feel really happy currently, as I am writing about feelings that occurred this week, many of which have already passed…  I embrace the feeling of calm right now.  Instead of worrying (a pointless waste of time), I am doing things to make myself more comfortable.  Today I have a lot of stuff to do that is not related to my finances for my business, but when I come home tonight at 4:00 I have a lot to do.  My quickbooks is in oder, I have checked some of the balances on my credit cards, bank accounts, stock portfolios, and the next step is to get it in shape so I am happy with it.  Note bookkeeping is my least favorite activity. 

So I challenge you to figure out a way to ride out the wave, whatever it may be, so when the wave passes you can chill in the calm waters and enjoy yourself.  If you fight too much, the wave just gets worse and calm waters are farther away (you know when the waves are non-stop…).  That beats you up, when instead you can take it a little bit at a time.

So please aim to be positive, but it is not realistic “all of the time”.  Remember this too shall pass.

xo

b

Big rise in monetary base, trillions in loans all over the world that will never be repaid, many nations very exposed in monetization crisis, all currencies to fall against gold, writers running naked, larger corporate failures to come, American condition to worsen, resentment already smoldering around the world, taxpayer money still being squandered on bankrupt Wall Street … The monetary base has again risen dramatically over the past few weeks up 38% yoy, the largest increase since 1939. You can expect all the major central banks to do the same thing, as this was a large part of what G-20 was all about. Consumer and bank lending has grown by an annualized rate of close to 50% in the last six months. As this unfolds we see demonstrations in Iceland where the currency has been crippled, inflation is 18% and no one trusts government, bankers and politicians anymore. European banks will take a $75 billion hit on this fiasco. Incidentally Danske Bank sees Iceland’s inflation hitting 75%. That could well cause the overthrow of the government. The Iceland experience could be the forerunner for America three years from now. It could be preceded by Pakistan, Argentina and a number of other countries. Just last week Argentina confiscated pension plans worth $26 billion. Our House of Representatives has discussed a similar plan.

Then there are the loans all over the world in trillions of dollars that will never be repaid. They’ll be monetized and American taxpayers will again pay the bill. The prime targets for trouble are not just the ones you notice among the major countries, but all over the world, especially in Eastern Europe and Latin America - things are going to be every bit as bad. Deficits in Eastern Europe are close to 10% of GDP whereas 3% is normal. Cross border lending by European and UK banks to emerging market countries accounts for 22-1/2% of respective GDPs compared to 4% for US banks and 5% for Japanese banks. Europe has $3.5 trillion of debt outstanding to these financially 3rd world countries whereas the US has only about $500 billion. Most exposed is Austria. Those loans make up 85% of their GDP, most of it in Eastern Europe. They are the largest holders of debt in the Ukraine and Hungary - two very weak banking systems. Italy’s public debt is now the third largest in the world behind the US and Japan. At 107% of GDP it is twice the Maastricht limit. When Italy joined the Eurozone they were hardly qualified to do so and we said so at that time. They lied about their finances and everyone looked the other way. Their problems are shown in their bond yields, which are 1.08% more than similar German bonds. This predicament probably will force Italy and perhaps Austria out of the euro.

British bank exposure is primarily in Asia and Latin America. Sweden is exposed in the Baltic. Spain is the largest lender in Latin America. That is indeed dire news when the domestic economy is in such trouble. They have lent $830 billion in Latin America. Today worldwide banks are very interconnected and in the current environment that is very bad news, because eventually problems in one sphere will affect other spheres, making all currencies fall against gold. Then there are the de-leveraging hedge funds of which over the next year could see 1,000 or 50% of their number, close down or go bankrupt. Hedge funds just sold about $600 billion in assets to meet redemptions and to reduce assets to conform to lower lending by lenders. For now that selling is over with. We could see a reoccurrence in February if credit lines are cut again, or if redemptions rise again. That $600 billion represents 30% of hedge fund assets. We expect the market to move lower earlier in the year so we could expect another $300 billion liquidation in February or March. We are assuming credit won’t be cut further. We see present leverage at 1.4 to 2 to 1. Hedge funds, banks, brokerage houses and insurance companies were and are big players in the writing of CDS, credit default swaps, some $50 trillion to $60 trillion worth. Most of this derivative commitment is not hedged. The writers are running naked. If we have a string of corporate failures such as GM and Ford, etc., which is very possible, the system will collapse. That is possible and probable. [...]

If it weren’t so pathetic,  yesterday’s Dog and Pony Show in Washington with the Big3’s grilling from the Senate, would have been hilarious to watch.  The idea of this group of morons sitting up there on their thrones lecturing the CEO’s about fiscal responsibility made me choke. These are the people who have repeadedly refused to govern from a postition of doing what’’s right in favor of doing what “buys votes” and garners favors for “contributors”. Then to top it off, Dodd, Schumer and the like, start asking the UAW hack, Gettlefinger about the economy, the auto companies balance sheets and general recession/depreciation prospects.  Let me tell you, this guy is NOT a rocket scientist. Faced with the possibility of total collapse and total loss of jobs of his members, he chose to basically not offer anything.  Oh, he said the UAW would make concessions.  His concessions of phasing out the “job bank” and such had already been done, long ago. The American public has very little sympathy for factory workers who make $75/hr and get paid 95% of their pay when they DON’T work.

The CEO’s and their companies bother me as well.  Here you have Chrysler, who has already gone under and was snatched up by a hedge fund, who has lots of money and really doesn’t need anything that they couldn’t finance themselves.  And their leader who just about put Home Depot under while their CEO, trying to do it all over again with Chrysler. Then you have Ford and GM, acting sober and contrite, then the Ford guy says, “we’re not sure we will be needing anything right now. Hey, if you don’t need it, why are you here asking for it? It is a very complex and important time for the car companies, but can you remember anything on the news about the “dire” straights of the auto industry going under in a matter of a couple of weeks until “bailout” became the new buzzword?  When the “money window in Washington” was opened, it was the start of a never ending line of people and companies with their hat-in-hand, begging Uncle Sugar for a fun filled week at the spa in Phoenix.

by Susan Adams, Forbes Magazine

The subject is nattily dressed in suit and spats, a little like Johnson himself, who is sporting a crisply pressed blue shirt and a shiny yellow tie.

“That painting represents pride and dignity,” says Johnson. “I identify personally with this work.”

Johnson may be known for the low-budget comedy routines and booty-shaking music videos that drove the success of BET, the cable channel he founded that turned him into America’s first black billionaire in 2001.

But in his private moments he is moved by art that documents the struggles and achievements of black people in America. Since the early 1980s Johnson, 62, has assembled some 250 pieces by 19th- and 20th-century African-American artists.

Though Johnson’s collection is probably worth only a couple of million dollars, it includes some of the most famous names of the genre: cubist-inspired collage artist Romare Bearden (1911-­88); modernist Harlem painter Jacob Lawrence (1917­-2000); and Henry Ossawa Tanner (1859­-1937), who studied under Thomas Eakins in the 1880s and was the first black painter to gain international acclaim.

Son of a Mississippi factory worker, Johnson started his channel in 1979 with a $500,000 investment from John Malone. He sold it to Viacom in 2001, receiving $1.5 billion in stock for his 63% share. Today he owns an NBA team, North Carolina¹s Charlotte Bobcats, and runs RLJ Investments in Bethesda, Md., which includes hotels, car and motorcycle dealerships, a bank and a nascent hedge fund and private equity arm. (Johnson’s current net worth: perhaps $700 million.)

Though mainstream museums and galleries have been slow to appreciate work by African-Americans, the black community has been collecting for decades.

Bill and Camille Cosby have built a collection of 400 works, including artists like Bearden, Lawrence, late-19th-century landscape painter Edward Mitchell Bannister, self-taught 20th-century artist Horace Pippin and 1960s abstract painter Alma Thomas.

Basketball star Grant Hill owns a collection of midcentury work. Entertainer Harry Belafonte has been collecting African-American art since the 1950s and Oprah Winfrey has been buying a mix of work, including pieces by contemporary artists like Whitfield Lovell. Spike Lee, Denzel Washington, Samuel L. Jackson, Richard Parsons and Kenneth Chenault also collect.

Now white collectors and institutions are discovering these long overlooked works.

“What’s happened in the last five years is a paradigm shift,” observes Steven L. Jones, 61, an African-American dealer in Philadelphia. “This means that the best work is going up exponentially in value.”

Last year Swann Auction Galleries in New York became the first auction house to create a department of African-American art and in February sold a 1944 modernist oil by Harlem Renaissance artist Aaron Douglas for $600,000.

Johnson bought most of his art in 1998, when he learned that a significant body of work, the Barnett-Aden collection, was for sale by the Florida Education Fund, along with the building where the art was housed, the National Museum of African American Art, in Tampa. Johnson acquired 222 pieces, including 68 drawings, paintings, prints and sculptures from the original gallery. The rest of the pieces, all by black artists, were added by the museum. Johnson says he doesn’t recall what he paid, but a dealer familiar with the sale pegs it at $400,000. Two dealers who know the collection say it’s tripled and possibly quadrupled in value in the last decade.

by Jesse Eisinger

Fund manager David Einhorn thought he was doing the right thing by speaking out against a shady finance company. The system fought back.

In May 2002, the financial markets were mired in a grinding downturn, which is to say it was a great time to be a hedge fund manager. After the insanity of the dotcom era, company profits and balance sheets finally mattered again. Skeptics felt confident in taking their cases public. It was in this environment that David Einhorn, a lanky and boyish 39-year-old who heads the $6 billion firm Greenlight Capital, spoke to a charity investing conference.

His topic that day was the Washington, D.C., finance company Allied Capital, a lender to and investor in midsize companies. Einhorn methodically went after Allied, claiming that it had inflated its assets and overstated its worth and profitability. While Einhorn has developed a reputation for witty and incisive speeches, they tend to read better than they sound. After the speech, he received a smattering of compliments and went home. He figured that reality would eventually catch up with the stock, and he would move on to other investments.

He was wrong. The next day, Allied stock tumbled nearly 20 percent as word of Einhorn’s critique spread, setting in motion one of the nastiest Wall Street wars in recent memory. Over the next several years, Einhorn would learn firsthand what happens to people who question the accepted rules of engagement on Wall Street. His saga is part detective story, part cautionary tale, part master class in investing, and a case study in what’s wrong with regulators, Wall Street, and the financial media (including me, as I play a small role). “The steep decline was nothing compared to the plunge I was about to take, spending years uncovering what I view as a fathomless fraud,” Einhorn writes in his new book about the battle, Fooling Some of the People All of the Time.

More important, Einhorn’s experience illuminates our current crisis. Throughout the subprime mess, critics who questioned runaway credit or the way Wall Street marketed credit derivatives were dismissed as overly pessimistic. Regulators who could have headed off the problem took too long to act. Six years on, some of Einhorn’s allegations against Allied have been proved right. Yet Allied’s managers have stayed in their jobs, reaping millions of dollars in compensation. And Einhorn has had to spend time and money deflecting accusations that he was a dirty short-seller with an ax to grind, smearing Allied for profit.

Einhorn’s initial claim in the speech will sound familiar to anyone who has watched Wall Street’s swoon during the past year. He argued that the company kept hard-to-price illiquid investments at inflated values on its books. He would subsequently discover that a major Allied portfolio company, a small-business lender called Business Loan Express, had made all sorts of bad loans to dodgy customers—to the tune of tens of millions of dollars in losses.

Einhorn and others brought Allied’s issues to the attention of regulators and law enforcement agencies, who either weren’t up to the task of taking on the company or whose sanctions came too late. So when Bear Stearns collapsed because of its own foolish risk-taking, blaming shadowy rumors for its demise, and the Securities and Exchange Commission started a witch hunt to investigate those “rumormongers,” who could have been surprised?

THE SIX YEARS’ WAR

After Einhorn’s speech that May, Allied mounted a counteroffensive. Company executives organized a conference call to refute his contentions. And they attacked Einhorn’s motives, since he was, by his own admission, shorting Allied stock.

The Wall Street machinery kicked in to defend Allied. Merrill Lynch, Allied’s main banker, backed up the company, even to the point of misstating an accounting rule to justify the company’s bookkeeping. (Merrill declined to comment.) When Mark Alpert, a Deutsche Bank analyst, issued a rare “sell” rating on Allied, the New York Stock Exchange investigated his report. A few months later, Alpert left the bank, and a few months after that, Deutsche Bank underwrote the first of at least five Allied stock offerings.

Einhorn was investigated by the S.E.C., and documents related to his Allied speech and positions were subpoenaed. (Then-New York attorney general Eliot Spitzer’s office also looked into Einhorn’s activities but took no action.) One of the S.E.C.’s lawyers eventually left and registered as an Allied lobbyist. Through pretexting—pretending to be someone else—an Allied investigator went on to snatch Einhorn’s phone records, a case that generated much less attention than a similar breach at ­Hewlett-Packard that involved pretext­ing journalists. (Allied eventually admitted to having the records but denied authorizing pretexting.)

For years, the financial media, if it covered the story at all, wrote only obligatory pieces, without delving into details. I’m no exception; Einhorn approached me early on with some material about the company. But it was complicated, and Allied aggressively refuted the allegations, so I backed off. Though I would later take critical looks at Allied, I wish I had initially persevered.

Eventually, the S.E.C. turned away from investigating Einhorn and started to look into the company. The agency ultimately sanctioned Allied for failing to preserve documents supporting its valuations between 2001 and 2003. Allied received no fines or penalties. The S.E.C. woefully, I think, pulled its punches. Other investigators, including the Department of Justice, found a pattern of fraudulent lending, indicting an employee of Business Loan Express. (He pleaded guilty.) The office of the inspector general of the Small Business Administration criticized the agency’s handling of BLX. Belatedly, the S.B.A. effectively put Allied out of the government-backed-loan business.

WAS IT WORTH IT?

Greenlight’s New York offices reflect Einhorn’s finance-geek personality. The conference rooms are named after accounting gimmicks: The Nonrecurring Room, for example, references some companies’ practice of taking gains that have nothing to do with their ongoing business.

In addition to managing money, Einhorn serves on a couple of prominent charity boards and has played in the World Series of Poker, grabbing a moment in the limelight in 2006 when he came in 18th out of 8,773 participants in the main event. He donated his winnings, $659,730, to the Michael J. Fox Foundation for Parkinson’s Research.

Einhorn lives for investing and, so far, has resisted the requisite lavish lifestyle. He has one house, outside New York City. He has no jet, no hockey rink with its own Zamboni, no Jeff Koons balloon sculptures hanging next to Ed Ruschas, and no Hamptons estate. I wondered if Einhorn thought that going public with his Allied fight was a mistake. “It shouldn’t be,” he says. “If it is, that’s a bad outcome. It’s a bad conclusion if people can’t talk critically about stocks.”

Einhorn picks his words carefully. “Allied is, in a sense, boring,” he says. “Boring isn’t the right word. I view it as a”—he pauses—“garden-variety fraud, not extraordinary. I have dealt with some extraordinary frauds, but they didn’t make for this story.”

What’s important about this story, he says, is that “the whole system failed”—and is in the process of failing again. “I’m really trying to make bigger points about free speech, free markets, the regulatory environment, and the way Wall Street works.”

Whenever a short-seller criticizes a company, the firm and the media go out of their way to disclose that the critic stands to gain financially. This is proper. Often, however, the disclosure serves to undermine the messenger and distract from the issues. In his book, Einhorn makes the crucial and often neglected point that short-sellers usually have far less incentive to fudge facts than management: “For Greenlight, Allied is one of many ways for us to make money…. For management, Allied is the whole ball of wax. If Allied is shown to be fraudulent, the consequences would be much more dire than losing a few dollars. Top management players could lose their jobs and possibly go to jail.”

Allied is still on the defensive. “The book appears to be nothing but a self-serving rehash of the same discredited charges that Mr. Einhorn has made for the past six years,” a spokesperson said. “The reality is that the third parties that have examined his charges against Allied and Allied’s responses to them—the courts, the S.E.C., leaders in the capital markets, and the investing public—have made it patently clear that his premise that he is right and the whole world is wrong is absurd.”

Honest companies tend to let business take care of itself. “Six years ago, I told the S.E.C. about Allied’s aggressive, inappropriate, and illegal accounting. Five years ago, I told multiple government agencies about the fraud. Four years ago, I told the F.B.I. that other Allied critics and I had our phone records stolen. Three years ago, I notified Allied’s board in detail about its management’s misconduct and made a detailed presentation to the U.S. Attorney in Washington outlining a variety of illegal activities,” Einhorn writes.

And Einhorn has the resources to keep talking about Allied. Typical whistleblowers don’t. He was a critic with time, money, and power on his side. And yet in many ways, he still lost.

Original Post

There is no other leveraged commodity market where short sellers increase their positions, materially, as the price rises, and increase them even more when prices are exploding, except gold and silver. The reason traders don’t normally do that is that it exposes short sellers to unlimited liability and risk. Yet, in both March and July 2008, and on countless occasions over the past 21 years, vast numbers of new gold and silver short positions were temporarily opened up, with the position holders seemingly unconcerned about the fact that precious metals had just risen exponentially, and that there was a very real potential they would bankrupt themselves with unlimited upside potential. Normal traders would not expose themselves to such unlimited risks.

I conclude, therefore, that over the last 21 years or so, “fake” precious metals supply in the form of promises of future delivery have habitually been increased when prices increase until increased “supply” managed to overwhelm increased demand, leading to a temporary price collapse. This is compounded by the fact that the futures prices on COMEX tend to dictate the “official” report price for the precious metals elsewhere.

After the market is broken, shell-shocked leveraged long market participants have always been thrown out of their positions by margin calls, and/or have been happy to sell contracts back to the short sellers at much lower prices. This process has always allowed short sellers to cover short positions at a profit. If for some reason naked shorts needed to deliver, they could always count on various European central banks (and some say the Fed basement repository) to backstop them, releasing tons of physical gold into the market. It seemed that there were always another 34 tons or so of gold dumped at strategic times to bring down fast rising prices. Meanwhile, huge physical market demand in Asia and severe shortages buffered the downside. Because of the physical demand, prices steadily increased but, perhaps, at a much slower pace than would have been the case in the absence of market manipulation.

Rarely was there ever a serious short-squeeze. Rarely, that is, until Friday of last week when the deliveries demanded by non-leveraged long buyers reached record levels. In spite of an avalanche of complaints from gold and silver investors, the CFTC (Commodity Futures Trading Commission) has never bothered to audit even one vault to see if the short sellers really have the alleged gold and silver they claim to have. There is a legal requirement that, in every futures contract that promises to deliver a physical commodity, the short seller must be 90% covered by either a stockpile of the commodity or appropriate forward contracts with primary producers (such as miners). Inaction by CFTC, in the face of obvious market manipulation, implies a historical government endorsed price management.

Things, however, are changing fast. As previously stated, the first major mini-panic among COMEX gold short sellers happened last Friday. As of Wednesday morning, about 11,500 delivery demands for 100 ounce ingots were made at COMEX, which represents about 5% of the previous open interest. Another 2,000 contracts are still open, and a large percentage of those will probably demand delivery. These demands compare to the usual ½ to 1% of all contracts.

The U.S. economy is in shambles. Both commercial and investment banks are insolvent. European central banks no longer want to sell gold. China wants to buy 360 tons of it as soon as humanly possible, and as soon as it can be done without sending the price into the stratosphere. A close look at the Federal Reserve balance sheet tells us that Ben Bernanke eventually intends to devalue the U.S. dollar against gold. There has been a vast expansion of Fed credit, which has risen from $932 billion to $2.25 trillion in the last two and a half months. The Fed has bought nearly all toxic bank assets that were supposed to be purchased pursuant by the $700 billion Congressional bank bailout.

Official bailout funds have been used to buy equity interests in the various banks instead. By avoiding the use of monitored Congressional funds, the Fed has embarked on a secretive campaign to buy toxic assets. They have refused to give any accounting of their activities, even though they are using taxpayer money to do this. The Fed has refused, for example, to comply with a “freedom of information act” request from Bloomberg News. That refusal is now the subject of a major lawsuit.

The Federal Reserve has embarked on the biggest money printing surge in history, though the world economy has yet to feel its effect. To prevent newly printed dollars from causing immediate hyperinflation, these newly printed dollars have been temporarily sequestered into the banking industry’s reserves, rather than being released for general use. This was done in a number of creative ways.

First, the number of “reverse repurchase agreements” has been increased to $97 billion. A “repurchase agreement” is a non-recourse method by which the Fed increases the money supply by paying dollars for collateral. The collateral, in this case, are toxic defaulting mortgage bonds that banks want to be rid of. The cash enters the system and theoretically stimulates the economy because it supplies banks with money to make loans with.

A “reverse repurchase agreement” is the exact opposite. It is a method of reducing the money supply by selling bonds to the banks, and taking the cash back out of the system. In this case, the Fed gave banks cash for toxic defaulting mortgage bonds. Then, it took the same cash back by selling the banks new treasury bills just received from the U.S. Treasury. The Fed, in turn, bought these T-bills with the newly printed dollars. The banks, having gotten rid of toxic assets, were allowed to transfer private risk to the taxpayers. This process bolsters bank balance sheets by privatizing bank profits, and socializing bank losses.

At the same time, the U.S. Treasury has been very busy selling newly printed Treasury bills to anyone foolish enough to buy them. To a large extent, the fools reside overseas, but some reside inside this country, and the sale of these U.S. bonds has resulted in a substantial inflow of foreign reserves to the Treasury. Banks have also been offered favorable interest rates on both reserve and non-reserve deposits held at the Fed.

This was combined with what is probably a tacit agreement by which the banks were given the money and led to redeposit most newly printed cash back into the Fed, in a category known as “Reserve balances with Federal Reserve Banks”. This category has ballooned from $8 billion in September to $578 billion on November 28th.

On October 9, 2008, the Federal Reserve began paying interest on deposits at Federal Reserve Banks. The overnight rate happens to have dropped way below the “official” federal funds rate. Meanwhile, rates paid by the Fed on required deposits are only .1% less than the federal funds rate, and on voluntary deposits only .35% less than the federal funds rate. Accordingly, U.S. banks can engage in a dollar based one-nation carry trade, which further sequesters the newly printed dollars.

Banks are borrowing from the Fed, then taking the same money, redepositing it, and earning a spread on the interest rate differential. Banks can also deposit newly printed dollars into a category known as “Deposits with Federal Reserve Banks, other than reserve balances.” This category also earns interest in a similar way, and has risen from $12 billion to $554 billion in the same time period. The funds will eventually be used for direct lending from the Fed to open market borrowers, at huge levels of risk that even the free-wheeling cowboys who run things at America’s private banks are not willing to accept.

That being said, most money center banks in America are certainly NOT risk averse, even now. People who are bailed out of foolish decisions never become risk averse. They are, however, very insolvent, and, aside from the non-recourse provisions of Fed repurchase agreements, they would prefer, for bad publicity reasons, not to default on their obligations to the Fed. Aside from the newly printed dollars given to them by the Fed and the recent transfer of all risk to the taxpayers, they have no liquidity of their own with which to make new loans. That is why they aren’t making any. The Fed will eventually make the loans itself and take all the risk, while using the private banking system as merely a means for delivery.

Right now, however, the Fed wants to sequester the new dollars, until the U.S. Treasury has finished the major part of its funding activities. That will allow the Treasury to borrow money at very low rates. The Fed intends to feed money into the system, but at the minimum rate needed to prevent the DOW index from staying under 8,000 for any significant period of time. Right now, most measures are designed simply to stop U.S. banking laws from automatically requiring the closure of most big banks.

The extent of manipulations engaged in by this Federal Reserve is mind numbing. The total number of sequestered dollars has now reached well in excess of $1.2 trillion dollars. That means that Fed credit, so far, has been effectively increased only by about 10%, over the last 2.5 months, rather than 150% that appears on the surface of the Fed balance sheet. The rest is temporarily sequestered.

Back in July, the U.S. Treasury, through the ESF (Exchange Stabilization Fund), sold billions of euros and, I believe, established a dollar sequestering “derivative” by paying interest, perhaps in Euros, to foreign money center banks. This was designed to keep dollars out of circulation, overseas. It was the beginning of the dollar bull back on July 15th.

I had thought, at the time, with good reason, that the U.S. would run out of foreign exchange and would be forced to close down the operation within a few months. I underestimated Ben Bernanke.

Instead, the Fed managed to establish currency swap lines with various foreign nations, under the guise of supplying them with dollars. This need for dollars arose partly as a result of the actions of the Fed, in sequestering Eurodollars in July, and partly as a result of the multiple credit default events which triggered over $2.5 trillion worth of selling in the stock and commodities markets, as 50 to 1 leveraged players were forced to cover about $50 billion worth of credit default insurance obligations.

In truth, the Fed needs the foreign currency more than the foreign central banks need dollars. The Fed is using its new foreign currency resources, in part, to control the value of the dollar, and to ensure that U.S. bailout bonds are sold for the highest possible prices at the lowest possible long term costs. Anyone who buys long term Treasury bills is going to lose a fortune of money in the long term.

The Fed has also taken a number of steps beyond those already discussed to restrict aspects of the normal money supply which most strongly affect exchange rates. For example, they only allowed “currency in circulation” to rise by $33 billion in aggregate, while at the same time increasing foreign reverse repurchase agreements to reduce foreign availability of dollars by $30 billion, and reducing the “other liabilities” category dollar availability by another $7 billion. Since it is likely that “other liabilities” involve foreign held dollars, this resulted in a net deficit of $4 billion on foreign exchange markets, as compared to September, 2008.

All these actions, taken together, have supported the dollar overseas, and led to a breakdown of the commodities markets. The adverse effect of a paradoxically rising dollar has been especially severe in dollar dependent commodity producing nations, such as Ukraine.

The net effect is that the U.S. dollar, in spite of terrible fundamentals, is now King of the Currencies once again, at least temporarily. The rising value of the dollar happens also to support naked short sellers of gold and silver, on COMEX, and these are old friends of the Federal Reserve. Supply and demand ultimately determine the price of gold but, in the shorter term, it is inversely tethered to the dollar. When the dollar is artificially high, gold prices will often plunge artificially low.

But, in short, the Fed currently has gained complete control over the value of the dollar. It can now adjust and micromange the dollar on a day-to-day basis. All it needs to do is open and close the “dollar spigot.” When they want the dollar to rise, the Fed can reduce the number of sequestered dollars. When they want it to fall, they simply ease up, releasing dollars into the financial markets. There is only one problem. Real investors are fleeing the stock market, and stock indexes are becoming more and more dependent upon government cash in order to avoid collapse.

People are liquidating holdings in mutual funds, and redeeming against hedge funds at a fantastic rate. This has created heavy downward pressure on stock prices. If the DOW falls below 8,000 for any significant amount of time, most big American insurance companies will be forced to recognize huge losses on their portfolios, and will become insolvent. Insolvent insurers, like insolvent banks, must be closed by their regulators as a matter of law. Obviously, mass insurer bankruptcies would be yet another major destabilizing slap in the face to an increasingly unstable economy.

The Fed now has only two ways to stop this. One is by brute force. It can buy securities directly, through its primary dealers, thereby supporting and pumping up stock prices. It has done a lot of that in the past few weeks, but this method is highly inefficient and costly. It is better to catalyze upward market movement rather than force it. Catalysis of markets involves opening up the money spigot a bit, allowing some of the sequestered funds to bleed back into the system. This allows the stock market to rise or stabilize naturally, as the equivalent of inflation is created mostly in the stock market without substantial bleed through. At the same time, however, opening the money spigot reduces the value of the dollar and causes gold prices to rise. Rising gold price adversely affects COMEX short sellers who are, as previously stated, old friends of the Federal Reserve.

Gold buying enthusiasm, everywhere but at the COMEX, is at record levels, whereas stock market investing appetite is low. For this reason, when the Fed tried to constrict the money supply on Monday, it caused more damage to the stock market than to the price of gold. Gold declined by over 5%, but the S&P 500 collapsed by over 9%. The next day, the Fed eased up on the money supply spigot, allowing the dollar to fall and the stock market to reflate. If the Fed repeats this performance over and over again, stock investor psychology will be seriously harmed. Withdrawals from mutual and hedge funds will accelerate. The stock market will sink at an uncontrollable rate, and the world will surge onward toward Great Depression II, much worse than the first. At some point, there will be nothing the Fed can do about it, no matter what manipulations it attempts. Hopefully Ben Bernanke is aware of the dangerous nature of the game he is playing.

The Federal Reserve must now make a tough choice. In the past, Federal Reserve Chairmen may have felt it necessary to support regular attacks on gold prices to dissuade conservative people from putting a majority of their capital into gold. Now, however, the world economy needs much higher gold prices in order to devalue paper money, not against other currencies in a “beggar thy neighbor” policy, but against itself. This can jump start the system. If the Fed continued to support gold price suppression, that would collapse the stock market far deeper than they can afford, most insurers will end up bankrupt, and there will be no hope of avoiding Great Depression II.

I think Ben Bernanke is aware of this. Gold shorts will be abandoned, to avoid financial catastrophe. In commenting, I take a practical view, accepting what appears to be so, without passing judgment on the acts and omissions of the last 21 years.

Anyone who reads the written works of our Fed Chairman knows that Bernanke’s long term plan involves devaluing the dollar against gold. This is the exact opposite of most prior Fed Chairmen. He has overtly stated his intentions toward gold, many times, in various articles, speeches and treatises written before he became Fed Chairman. He often extols the virtues of former President Franklin Roosevelt’s gold revaluation/dollar devaluation, back in 1934, and credits it with saving the nation from the Great Depression. According to Bernanke, devaluation of the dollar against gold was so effective in stimulating economic activity that the stock market rose sharply in 1934, immediately thereafter. That is something that the Fed wants to see happen again.

It is only a matter of time before gold is allowed to rise to its natural level. Assuming that about half of the current increase in Fed credit is eventually neutralized, the monetized value of gold should be allowed to rise to between $7,500 and $9,000 per ounce as the world goes back to some type of gold standard. In the nearer term, gold will rise to about $2,000 per ounce, as the Fed abandons a hopeless campaign to support COMEX short sellers, in favor of saving the other, more productive, functions of the various banks and insurers.

Revaluation of gold, and a return to the gold standard, is the only way that hyperinflation can be avoided while large numbers of paper currency units are released into the economy. This is because most of the rise in prices can be filtered into gold. As the asset value of gold rises, it will soak up excess dollars, euros, pounds, etc., while the appearance of an increased number of currency units will stimulate investor psychology, and lending and economic output will increase, all over the world. Ben Bernanke and the other members of the FOMC Committee must know this, because it is basic economics.

More important, however, than dwelling on the accuracy of conspiracy theories is the fact that huge international banking firms normally do not take metal deliveries from futures markets. They normally buy on the London spot market. The fact that they are demanding delivery from COMEX means one of two things. Either the London bullion exchanges have run out of gold, or these firms are finding it cheaper to buy gold as a “future” than as a spot exchange.

The fact that this backwardation is hidden from the public eye is not surprising. In spite of the ostensible existence of a so-called “London fix”, 96% of all OTC transactions are secret and unreported. The transactions happen solely between two parties, and are done opaquely, in complete darkness. The current London fix may well be just as fake as the bank interest rate reports that comprised LIBOR proved to be, just a few months ago.

It won’t matter much if you purchase gold at $750, $800, $850, $900 per ounce, or even much higher. All of these prices will be looking extraordinarily cheap in a few months. The price of our pretty yellow metal is about to explode, and it is probably going to soar, eventually, to levels that not even most gold bugs imagine. COMEX gold shorts will be playing the price a bit longer, in an attempt to shake out some remaining independent leveraged longs. Once that is finished, however, and it will be finished soon, the price will start to rise very quickly.

Disclosure: The author holds physical gold and is long positions in GLD and gold futures.

James Grant on the risk in riskless Treasuries.  (FT.com also Bloomberg on the Economy)

“Implausible as it may sound, right now equities and corporate bonds are a better long-term bet than cash.”  (Economist.com)

Cheap oil is great at the pump, but does it have risks for companies and countries?  (WSJ.com)

Has the junk bond market properly priced in the economic crisis?  (BusinessWeek.com also Bespoke)

Hedge funds needs to get smaller, more opportunistic and less levered.  (Humble Student, NakedShorts)

When it comes to buy-writes, “Deciding if the premium is ‘fat’ enough is the difficult decision.”  (Options for Rookies also Daily Options Report)

Harvard learned that outsourcing investment management sometimes doesn’t work.  (Big Picture also Clusterstock, Investor’s Consigliere)

The spread between earnings yields and Treasury yields put the Fed Model to the test.  (CXO Advisory Group also Trader’s Narrative)

A 200 day moving average strategy worked..until it stopped working.  (Barrons.com)

Prime brokers are having to take a closer look at their hedge fund clients.  (FT.com)

Neuberger Berman management knows how to buy low and sell high, at least when it comes to its own business.  (Deal Journal)

“The paradoxical truth may be that the less volatile business cycle (until recently) encouraged investors to take bigger risks with borrowed money, driving asset prices too high and ending in damaging busts.”  (Economist.com)

A prepackaged bankruptcy for General Motors (GM)?  (Clusterstock)

The unemployment rate is at a 15-year high.  (FT Alphaville)

Some historical perspective on today’s jobs number.  (Bespoke, EconLog)

How much worse can it get?  (Real Time Economics also Market Movers)

“College football has been conquered, in nearly every respect, by the Deep South.”  (WSJ.com)

The best books of 2008.  (Economist.com)

Have we missed an interesting post in the investment blogosphere? If so, feel free to drop Abnormal Returns a line.

 Tem momentos que é muito difícil ser economista, pois atuamos numa área popularmente conhecida como  ”ciência sinistra”. Mas tem horas que é preciso ter muita coragem para apostar em algumas sugestões de política econômica.  Uma destas é “navegar” nos domínios da dinâmica inflacionária.

Os brasileiros são PhDs nesta matéria! Sofreram muito, desde o início dos anos 1980s do século passado, com um dos períodos mais conturbados de sua história econômica  ao adentrar num contexto hiperinflacionário.  Mas, graças ao nosso talento, e disposição política, vencemos esta batalha.

Em países de inflação controlada, como é o caso dos EUA, é razoavelmente mais tranquilo se falar em “aceitar inflação”, como é a proposta que o Prof. Kenneth Rogoff, da Universidade de Harvard, abaixo reproduzida do jornal inglês The Guardian.  Gostaria de saber se um de nossos macroeconomistas teria coragem de fazer uma proposição destas a partir do Brasil!

====================

Embracing inflation

It is time for the world’s major central banks to acknowledge that a sudden burst of moderate inflation would be extremely helpful in unwinding today’s epic debt morass.

Yes, inflation is an unfair way of effectively writing down all non-indexed debts in the economy. Price inflation forces creditors to accept repayment in debased currency. Yes, in principle, there should be a way to fix the ills of the financial system without resorting to inflation. Unfortunately, the closer one examines the alternatives, including capital injections for banks and direct help for home mortgage holders, the clearer it becomes that inflation would be a help, not a hindrance.

Modern finance has succeeded in creating a default dynamic of such stupefying complexity that it defies standard approaches to debt workouts. Securitisation, structured finance and other innovations have so interwoven the financial system’s various players that it is essentially impossible to restructure one financial institution at a time. System-wide solutions are needed.

Moderate inflation in the short run – say, 6% for two years – would not clear the books. But it would significantly ameliorate the problems, making other steps less costly and more effective.

Steps must also be taken to recapitalise and re-regulate the financial system. Huge risks will remain as long as the financial system remains on government respirators, as is effectively the case in the US, UK, the euro zone and many other countries today.

Most of the world’s largest banks are essentially insolvent, and depend on continuing government aid and loans to keep them afloat. Many banks have already acknowledged their open-ended losses in residential mortgages. As the recession deepens, however, bank balance sheets will be hammered further by a wave of defaults in commercial real estate, credit cards, private equity and hedge funds. As governments try to avoid outright nationalisation of banks, they will find themselves being forced to carry out second and third recapitalisations.

Even the extravagant bail-out of financial giant Citigroup, in which the US government has poured in $45bn of capital and backstopped losses on over $300bn in bad loans, may ultimately prove inadequate. When one looks across the landscape of remaining problems, including the multi-trillion-dollar credit default swap market, it is clear that the hole in the financial system is too big to be filled entirely by taxpayer dollars.

Certainly, a key part of the solution is to allow more banks to fail, ensuring that depositors are paid off in full, but not necessarily debt holders. But this route is going to be costly and painful.

That brings us back to the inflation option. In addition to tempering debt problems, a short burst of moderate inflation would reduce the real (inflation-adjusted) value of residential real estate, making it easier for that market to stabilise. Absent significant inflation, nominal house prices probably need to fall another 15% in the US, and more in Spain, the UK and many other countries. If inflation rises, nominal house prices don’t need to fall as much.

Of course, given the ongoing recession, it may not be so easy for central banks to achieve any inflation at all right now. Indeed, it seems like avoiding sustained deflation, or falling prices, is all they can manage.

Fortunately, creating inflation is not rocket science. All central banks need to do is to keep printing money to buy up government debt. The main risk is that inflation could overshoot, landing at 20% or 30% instead of 5-6%. Indeed, fear of overshooting paralysed the Bank of Japan for a decade. But this problem is easily negotiated. With good communication policy, inflation expectations can be contained, and inflation can be brought down as quickly as necessary.

It will take every tool in the box to fix today’s once-in-a-century financial crisis. Fear of inflation, when viewed in the context of a possible global depression, is like worrying about getting the measles when one is in danger of getting the plague.

So here we have it, a grim Friday in December, which truthfully feels more like February.   The jobs report came in and it wasn’t pretty - we lost 533,000 jobs in November.  As I sit here writing, the car companies are begging for money on Capitol Hill.  They say they need government money to continue operations.  Late Mortgage payments are surging as people are being thrown out of their jobs and their ARM mortgages come due with rate increases.  Credit card default rates are up.  And in a refreshing twist, OJ Simpson got 9 to 33 years in prison.

Are we at the bottom yet?  It’s hard to imagine that we are.  Leaving aside for the moment whether taxpayers should bailout out the automakers or financial services companies, where are we going to get this money?  We as a society, Americans, are operating on the false assumption that we can absorb these massive costs.  But the reality is, we no longer can afford it, and what we must do at this time is to let the markets and bankruptcy laws process these failed enterprises.  We simply do not have the money, as we’re now running a trillion dollar deficit  and getting lectured on monetary policy by China. 

It’s clear what is needed now by our government is to show some fiscal restraint.  Any bailouts should be directed towards individual citizens and in a limited manner, as the corporate feeding trough is running low and must not be refilled.  We need to start creating new manufacturing jobs to rebuild the middle class, but in reality we are sliding into a service economy.  Soon most people will be working in a Starbuck’s or JC Penney’s.  Now we are pouring billions into failed businesses, shouldn’t we be putting money into the successful ones, if at all?

The American car companies, for example, have failed the American public.  Remember Michael Moore’s film “Roger and Me“?  GM has been closing plants, laying off American workers, building plants overseas all the while blaming the American worker.  Now, they are draping themselves in the patriotic fervor of saving the pitiful jobs that remain stateside to get handouts from the government.  The truth, as Moore pointed out, is that they sold out the American worker a long time ago.  Toyota and other car companies  are building more plants and creating more jobs  here than  the so called “Big 3″.  Clearly, the American people have made their decision, and they like the cars of Toyota and other carmakers better than the Big 3.  Why should then our tax dollars be used to keep them afloat?  I say let the markets dictate.  I would guess the actual result of not bailing them out would have far less impact than the fear mongering going on now.  Since when is declaring bankruptcy impermissible in our country?

Then of course, there’s OJ Simpson.  Fourteen years ago we all watched while he beat a murder rap and he incredulously went free.  Now, well into the next decade, he’s being sentenced not for the murder, but another crime.  OJ never changed his ways in the intervening years but rather, as the current judge noticed,  behaved in a reckless and arrogant manner .  But life (call it justice or karma) has a way of catching up with the wicked.  Sooner or later, poor decisions and reckless behavior lead to disastrous consequences.  For OJ, that day of reckoning was today, but it was really 15 years in the making.  This is what we used to call common sense in this country. 

The Big 3 are no different.  They have failed to adapt to the marketplace while arrogantly working overtun state laws to reduce emissions and increase fuel efficiency - the very characteristics which their competitors embraced to much success.  So they snubbed their noses up at the state and federal governement.  They rode in on their private jets.  They exported jobs to the rest of the world.  They fought tighter efficiency standards.  They made disastrous decisions that caused even more workers to lose their jobs.  They built shoddy products that no one wanted to buy.  Now we the people, the taxpayers are supposed to wash their pain away with a huge bailout comprised of taxpayer money? 

Like the judge in the OJ trial in Nevada, it’s time for Congress to be tough and fair.  It’s time for the automakers to feel the pinch for their reckless ways, arrogant derailing of state laws and exporting of jobs.  We have no reason to fear that these companies will cease to exist.  Delta recently emerged from bankruptcy as have many other companies over the years.  Perhaps Ford, GM or Chrylser would operate more efficiently and serve the public better, if they were taken over by Toyota.  Chrysler failed in its merger with Daimler Benz and was purchased by a hedge fund.  Do we really need to bail these people out?  Aren’t these the people that got us into this mess?

It’s time pull out the pacifier from the greedy mouths of the automakers.  Let’s not be afraid to let these babies cry through the night.  We cannot bailout everyone and the line should be drawn here.  Even if we do bail these car companies out, they could come back and ask for more in three years.  Then what?

The same people who control the monopolies in this country are the same people who have manipulated the Gold and Silver market.  Oddly enough, the same people who control this monopoly are the same people who control the monopoly called the BCS.

I called your attention yesterday to the “Bailout” recipients we all know as AIG and Citibank.  Citibank is a major sponsor of the BCS, and a feature sponsor of the Rose Bowl, along with JP Morgan, Ford, General Motors, Bank of America, Merrill Lynch…all the open hands people who have been bailed out for shoddy market manipulations.

I thought you would enjoy an email I received from a good friend of mine who is also my Gold and Silver broker over at Goldworthfinancial.com

As the Chairman of Opera Research, I thought I’d make a few comments about the state of the private equity industry and my two cents on the global capital markets. 

For those of you who are familiar with Opera Research, you are already aware of our focus on global alternative investments, research, advisory consulting and advanced technology applications that support financial institutions.  For those of you not familiar with Opera Research or it’s six subsidiaries - Bel Canto Alpha Management, Tessitura Global Research, Ambitus Credit Research, Conductor Advisory Consulting, Verismo Advanced Technology and DKS - then you should know that we are a player in the global capital markets, active owners in both private and public companies and a manager of both capital and assets.                 

Here’s my latest conclusion regarding private equity (PE) firms and their role in the world financial markets.  

Private equity firms are here to stay.  Hedge funds are here to stay.  Money is here to stay. 

\dk

My first inclination was to approach last night’s talks by Doug Henwood and Anwar Shaikh as a kind of debate between a Marxist bull and bear. But after Doug began to speak, I was reminded of how serious the situation was. In just about every downturn in the American economy since the early 1990s, Doug has quite rightly identified them as temporary dislocations. With recent events, however, there was little to distinguish him from Anwar Shaikh, a New School economist who has virtually made the falling rate of profit and similarly gloomy topics his own.

Referring to his studies of past Wall Street past, Doug likened the capitalist economy to the Timex wristwatch advertising slogan of the 1960s-”It takes a licking and keeps on ticking”-that was typically spoken after watching a Timex working just fine after being sat upon by an elephant. In the world of capitalist economics, the 1987 stock market crash was one such elephant. After a huge drop, the market picked itself up, dusted itself off, and began to scale new heights.

Doug focused on the role of the collapse of the housing bubble in today’s financial crisis, citing Robert Schiller’s findings that housing prices have been quite stable historically. Until 1995, they remained about the same as they had been in the 1890s using adjusted prices. But from that point on, they began to skyrocket in the range of 100-200 percent. You can look at a graph of Schiller’s housing prices here. Clearly they were not sustainable.

Exacerbating the bubble were exotic instruments crafted by hedge funds and other financial institutions that packaged together and hawked shaky home mortgage not worth the paper upon which the securities were written.

Although I am obviously not in Doug’s league when it comes to explaining the capitalist economy, he made a point that I tried to make myself in a blog article about UAW concessions and Trotsky’s transitional program. Doug was at a loss to identify new engines of economic growth in the U.S. After the smokestack industries died out in the 1970s, they were replaced by high technology which no longer has the dynamic it once had. The lack of profitable areas of investment reminded him of what someone once said about growth areas in Great Britain in the 1980s and 90s: real estate and finance. That obviously is not a very good sign.

Here, by the way, is what I wrote along the same lines:

Doug also alluded to the differences he had with some leftists who opposed bailouts for AIG et al. He felt that there was no alternative. If the credit markets could not function properly, the economy would grind to a halt and cause immense suffering to those who could least afford it. Clearly, he has been thinking through these issues since he now formulates the task facing the left in terms of transforming financial institutions into a kind of public utility. Speaking only for myself, I feel that this kind of approach must be distinguished from being understood as creating the financial equivalent of Con Edison, a local public utility that has a long record of greed and indifference to the public interest.

This was the first chance I have had to hear Anwar Shaikh in person. I know him mostly through his very fine website that I referenced when I was preparing some comments on crisis theory for the Introduction to Marxism reading group.

Anwar started out by saying that the term Great Depression does not apply solely to the one that began in 1929. In his view, there were other Great Depressions in American history, including the 1840s, the 1870s, the 1930s and even the 1970s. He defines such events as having either a relatively short and very painful character or extending over a longer period with a bit less misery. In his view the “lost decade” of Japan in the 1990s falls into the latter category. When the government is committed to full employment and a social safety net, as was the case in Japan, you don’t have people selling apples on the street but it takes much longer for capitalism to enter a new expansionary period. In the U.S., since there is much less concern for workers, economic collapses tend to go about the task of “creative destruction” much more intensively and throw caution to the wind. With the goal being survival of the fittest firms, the American approach seems to make more sense from the standpoint of capitalist rationality using the term rational quite liberally given the specter of 10 percent or more unemployment that we are facing.

Although Anwar initially referred to the 1970s as an example of a Great Depression, he subsequently clarified that the period in question began in 1965 and lasted until 1982. Using equalized prices, the stock market took a 65 percent hit-comparable to the 1930s. Japan’s depression was also devastating. At its peak, their stock market was at 39,000. For the longest time it failed to go over 9,000 and is hovering around 16,000 of late. If the American stock markets are destined to suffer the same fate, the prospects for capitalist recovery are guarded at best.

Anwar identified the 1965 to 1982 period as one in which corporate profits suffered dramatically lower growth rates. It was only after an all out assault on American labor symbolized (in my view) by the airline controller’s strike that profit rates began to increase somewhat. But even more critical for the expansion up until the most recent period has been the availability of low interest rates. For corporations, this has meant increased profits because the price of capital has decreased. For workers, who were still in the neoliberal straightjacket placed on them in the 1970s, the only way to participate in the faux boom was through home equity loans on inflated house prices (although Anwar did not mention it, it is likely that he would have included cheap commodities from China and elsewhere for sale at Walmart, et al.)

During the discussion period I asked Anwar what accounts for the falling rate of profit. I have read Henryk Grossman on the subject but found his treatment at a very high level of abstraction. Have there been any attempts to bridge the gap between such abstract treatments and the actual case studies of American corporations? He referred me to his critique of Robert Brenner that appeared in Historical Materialism, Number 5.  Here is an excerpt I got a real chuckle out of, wondering if the comparison to Adam Smith was a subtle dig prompted by Brenner’s famous 1977 polemic against Paul Sweezy in which the Monthly Review editor was also likened to Adam Smith:

Thanks for this, the links will be very useful. Do you know if these talks are available for reading or listening anywhere?

I’ve been a subscriber to LBO for many years and you are right that Doug is sounding much more pessimistic this time. I heard him give a little promo for his talk on his radio show Thursday on WBAI.

Comment by belgish — December 6, 2008 @ 3:25 am

If I learn anything about the talks being made available online, I will post a link.

The Consumer Electronics Association reduces its forecast for Q4. Most retailers report a dismal November. Retailers Report a Crisis in All Aisles.

The face of the today’s venture capitalist: S.E.C. Charges a Venture Capitalist With Fraud. Venture Capitalists Hunker Down. Could VC be a Casualty of the Recession?

Bob Nardelli does not come across as a credible witness (not surprising his pervious performance at Home Depot - cashing in with more than $100M when the stock and company performance was fucking pathetic): Chrysler Under a Harsh Light at Hearing. The end is nigh: Chrysler Hires Bankruptcy Firm.

No shit, sherlock: Hedge Funds Need a Makeover. How about 3,000 fewer hedge funds, for starters?

Doug Kass seems reasonable, but I don’t quiet see this: Seabreeze’s Kass Calls the Bottom for Stocks. Consider it my Billy Ray Valentine pork-belly call.

Paging Rupert and Sam: Rocky Mountain News Is Put Up for Sale After Loss. World’s biggest loser: Bankrupt Bally In Sale Talks.

34 year high: Nonfarm payroll employment fell sharply (-533,000) in November and the unemployment rate rose from 6.5 to 6.7 percent. Stay strong people and get involved. Congress and free market won’t bail you out. You need to be active and hit the streets and make yourself heard to get you and this country back on our collective feet: 

Unemployment ticks up to 6.7%. 422,00 people left the labor force — had that not happened, we would have seen an even bigger unemployment rate.

Revisions downward are also big — September and October increased job losses by 199,000. We are now at nearly 2 million job losses for the year.

There’s a battle brewing between the NY Times and the Wall Street Journal. 35 years: Retail Sales Are Weakest in 35 Years. 39 years: Retail Sales Notch Biggest Drop in 39 Years.

What says the authoritative New York Post? With all this talk of 35 and 39 years, I swear if I see even one story about bell bottoms coming back, I will shoot my computer. 

Not much better elsewhere: German manufacturing orders die.

Why not: San Jose makes bid for $1 billion in economic stimulus dollars.

Sen. Shelby (R-AL) gets TKO’d by Compuware CEO. Wonder how much Shelby made from that deal. 

Kids, stop applying to MBA school. We need engineers, teachers, physicists, chemists … not more people dreaming about multi-million dollar signing bonuses from nationalized financial institutions.

By James Grant

US Treasuries are the investment asset of the year. The less they yield, the more their fans adore them. Then, again, these fearful days, yield seems to have nothing to do with investment calculation. Purported safety is all.

“Super-safe Treasuries”, the papers call these emissions of a government that, this year, will take in $2,500bn but spend $3,500bn. “Toxic assets” is how the same papers characterise orphaned mortgage-backed securities—or, for that matter, secured bank loans, convertible bonds, junk bonds or almost any other kind of debt obligation not bearing the US imprimatur.

“There are no bad bonds, only bad prices,” the traders used to say. They should say it again, only louder. In the spring of 1984, long-dated Treasuries went begging at yields of nearly 14 per cent in the context of an inflation rate of just 4 per cent. Those, too, were fearful times, the recollected horror being the great inflation of the 1970s. Inflation was ineradicable, the bondphobes said. Now a new generation of creditors espouses the opposite proposition. Deflation is baked in the cake, they say.

The truth is that no investment asset is inherently safe. Risk or safety is an attribute of price. At the right price, a lowly convertible bond is a safer proposition than an exalted Treasury. Watching the government securities market zoom, many mistake price action for price.

Yes, Treasuries might conceivably redeem the hopes of their besotted admirers. Maybe a deflationary chasm is about to swallow us all. Never before has the US been so leveraged. And—just possibly—never before were lending standards so reckless as the ones that brought joy to so many astonished mortgage applicants in 2005 and 2006.

In their magnum opus Security Analysis Benjamin Graham and David L. Dodd advise that “bonds should be bought on their ability to withstand depression”. They wrote that in 1934. So far is that rule from being honoured by today’s financiers that not a few bonds—and boxcars full of mortgages – could hardly withstand prosperity. Two urgent questions present themselves. One: does something far worse than recession loom? Two: does that certain something definitely spell much lower interest rates?

We can’t know, but we can at least observe. What I observe is a monumental push to reflate. The Federal Reserve is creating more credit in less time than it has ever done before – in the past three months the sum of its earning assets, known in the trade as Reserve Bank credit, has grown at the astounding annual rate of 2,922 per cent. Are the bond bulls quite sure that these exertions will raise no inflationary sweat?

Evidently, they are—at least, forward swap rates betray no such concern. The market’s best guess as to what the 10-year Treasury will yield in 10 years’ time is 2.78 per cent, never mind the famous (and now, as it seems, prophetic) remark of Fed Chairman Ben Bernanke that the Fed could drop dollars out of a helicopter in a deflationary pinch.

The non-Treasury departments of the credit markets have crashed. No surprise then that prices and values are deranged. Market makers have closed up shop for the year, while hedge funds cower in fear of redemptions. You’d suppose that professional investors – doughty seekers of value – would be combing through the debris for bargains. Alas, no. Most seem content to lend money to Henry Paulson (subsequently to Timothy Geithner) at 2 per cent or 3 per cent.

In corporate debt and mortgages, anomalies and non sequiturs abound. They are especially prevalent in convertible bonds. More so than even the average stressed-out fund manager, convertible arbitrageurs have been through the mill. It was they—and almost they alone—who owned convertibles. Now many of these folk must sell them.

Few buyers are presenting themselves, however, though extraordinary bargains keep popping up. Thus, at the end of October, a Medtronic convertible bond with a 1.5 per cent coupon with the debt maturing in April 2011 briefly traded at 80.75. This was a price to yield 10.6 per cent, an adjusted spread of 1,600 basis points over the Treasury curve (adjusted, that is, for the value of the options embedded in the convert, notably the option to exchange it for common stock at the stipulated rate). Contrary to what such a yield might imply, A1/AA minus rated Medtronic, the world’s top manufacturer of medical devices for the treatment of heart disease, spinal injuries and diabetes, is no early candidate for insolvency. Almost every day brings comparable examples of risks not borne by people who, in this time of crisis, have come to define risk as “anything not guaranteed by Uncle Sam”.

“Risk-free return” is the standard tag attached to the government’s solemn obligations. An investor I know, repulsed by prevailing government yields, has a timelier description – “return-free risk”.

Das fordern immer mehr Fachleute, und es ist schon in vollem Gange: “Das größte Wirtschaftsexperiment aller Zeiten” nennt die Münchner Finanzwoche in ihrer neusten Ausgabe die gegenwärtigen  “gigantischen Re-Inflationierungsbemühungen” der Notenbanken. Die Finanzwoche ist einer der wenigen Wirtschafts- und Börsenbriefe, die seit Jahren vor den dramatischen Folgen einer überbordenden Verschuldung, vorwiegend infolge der langanhaltenden Politik des leichten Geldes (Greenspan), gewarnt haben.

Der bitische Guardian veröffentlichte am 2. Dezember 2008 einen Kommentar des Harvard-Ökonomen Kenneth Rogoff, in dem auch dieser sich für eine bewusst herbeigeführte Inflation ausspricht: “This once-in-a-lifetime global economic recession requires a unique response. Inflation is needed to combat the crisis.”

Hier die wichtigsten Ausschnitte:

“It is time for the world’s major central banks to acknowledge that a sudden burst of moderate inflation would be extremely helpful in unwinding today’s epic debt morass. (…)

Modern finance has succeeded in creating a default dynamic of such stupefying complexity that it defies standard approaches to debt workouts. Securitisation, structured finance and other innovations have so interwoven the financial system’s various players that it is essentially impossible to restructure one financial institution at a time. System-wide solutions are needed.

Moderate inflation in the short run – say, 6% for two years – would not clear the books. But it would significantly ameliorate the problems, making other steps less costly and more effective.

True, once the inflation genie is let out of the bottle, it could take several years to put it back in. No one wants to relive the anti-inflation fights of the 1980s and 1990s. But right now, the global economy is teetering on the precipice of disaster. We already have a full-blown global recession. Unless governments get ahead of the problem, we risk a severe worldwide downturn unlike anything we have seen since the 1930s.

The necessary policy actions involve aggressive macroeconomic stimulus. Fiscal policy should ideally focus on tax cuts and infrastructure spending. Central banks are already cutting interest rates left and right. Policy interest rates around the world are likely to head toward zero; the United States and Japan are already there. The United Kingdom and the euro zone will eventually decide to go most of the way.

Steps must also be taken to recapitalise and re-regulate the financial system. Huge risks will remain as long as the financial system remains on government respirators, as is effectively the case in the US, UK, the euro zone and many other countries today.

Most of the world’s largest banks are essentially insolvent, and depend on continuing government aid and loans to keep them afloat. Many banks have already acknowledged their open-ended losses in residential mortgages. As the recession deepens, however, bank balance sheets will be hammered further by a wave of defaults in commercial real estate, credit cards, private equity and hedge funds. As governments try to avoid outright nationalisation of banks, they will find themselves being forced to carry out second and third recapitalisations. (…)

When one looks across the landscape of remaining problems, including the multi-trillion-dollar credit default swap market, it is clear that the hole in the financial system is too big to be filled entirely by taxpayer dollars.

Certainly, a key part of the solution is to allow more banks to fail, ensuring that depositors are paid off in full, but not necessarily debt holders. But this route is going to be costly and painful.

That brings us back to the inflation option. In addition to tempering debt problems, a short burst of moderate inflation would reduce the real (inflation-adjusted) value of residential real estate, making it easier for that market to stabilise. Absent significant inflation, nominal house prices probably need to fall another 15% in the US, and more in Spain, the UK and many other countries. If inflation rises, nominal house prices don’t need to fall as much.

Of course, given the ongoing recession, it may not be so easy for central banks to achieve any inflation at all right now. Indeed, it seems like avoiding sustained deflation, or falling prices, is all they can manage.

Fortunately, creating inflation is not rocket science. All central banks need to do is to keep printing money to buy up government debt. The main risk is that inflation could overshoot, landing at 20% or 30% instead of 5-6%. Indeed, fear of overshooting paralysed the Bank of Japan for a decade. But this problem is easily negotiated. With good communication policy, inflation expectations can be contained, and inflation can be brought down as quickly as necessary.

It will take every tool in the box to fix today’s once-in-a-century financial crisis. Fear of inflation, when viewed in the context of a possible global depression, is like worrying about getting the measles when one is in danger of getting the plague.

About 650 guests attended the event late Wednesday, a third more than organizers expected.

Yet with hedge funds in freefall, this was more funeral wake than celebration.

“The industry is down 20 percent. It’s by far the worst environment we’ve ever seen and we’ll see a lot of funds going out of business,” said Evan Rapoport, co-founder of HedgeCo Networks, which services hedge funds and organized the party. Full : http://tinyurl.com/5ty695

Chinese property hunters to raid US

Chinese bargain hunters are preparing to descend on American cities such as Los Angeles and San Francisco, where homeowners have suffered some of the steepest price falls in the US.

SouFun, the biggest real estate website in China, is organising a trip next month to look at properties in California and possibly Nevada. Liu Jian, the company’s chief operating officer, said about 300 people had expressed interest in the idea in the three days since it was advertised, though the company would take only a small group on the first trip. Full : http://tinyurl.com/5tynm7

The Reserve Bank of India on Saturday slashed its key short-term interest rates by 1 percentage point to boost growth and shore up investor confidence amid signs of economic slowdown and in the wake of deadly attacks in Mumbai.

The RBI reduced its key lending rate, or repo rate, by 100 basis points to 6.5 percent, its lowest rate in 2-½ years, with effect from Monday.

The reverse repo rate, the rate at which the RBI absorbs excess cash from the system, falls to 5.0 percent from 6.0 percent, its lowest in more than three years.

”Industrial activity, particularly in the manufacturing and infrastructure sectors, is decelerating,” RBI Governor Duvvuri Subbarao told a news conference.

Subbarao said the central bank would closely monitor developments in global and domestic financial markets and would take swift and effective action as appropriate. Full : http://tinyurl.com/684umh

Nanjing Iron & Steel United Co., the Chinese steelmaker part-owned by billionaire Guo Guangchang, said steel prices in the world’s biggest user of the alloy have bottomed and output may recover on the state’s stimulus package.

Lower raw-material prices will allow producers to raise output, Chairman Yang Siming said today in an interview in Shanghai, where he’s attending an industry conference. “Next year, our construction-steel sales will benefit from the government’s plan to boost infrastructure investment.”

China last month announced a 4 trillion yuan ($584 billion) stimulus package to revive growth in the world’s fourth-largest economy. All Chinese steelmakers were unprofitable in October after demand from manufacturers plunged, according to the China Iron & Steel Association.Full : http://tinyurl.com/5pxe47

Prepackaged bankruptcy could trigger GM CDS

Around $4 billion in payments on credit default swaps protecting General Motors Corp may need to be made if the automaker enters into a prepackaged bankruptcy, though any payments are unlikely to cause widespread losses, Bank of America said on Friday.

U.S. lawmakers are considering several options to help General Motors, Ford Motor Co and Chrysler LLC, which have collectively asked for $34 billion in federal aid.

At a Senate Banking Committee hearing on Thursday, committee members discussed options including a prepackaged bankruptcy, assistance to automakers from the Treasury Department’s $700 billion Troubled Asset Relief Program (TARP) or giving short-term funding help.

“For autos credit default swaps (CDS), perhaps what matters most is not what happens to autos, but how it happens,” Bank of America analyst Glen Taksler wrote in a report.

“An autos bailout without a bankruptcy filing could cause CDS to rally substantially, even if bondholders voluntarily exchange into new bonds with a lower par amount,” he said. Full : http://tinyurl.com/5z2q22

Steven Cohen has a passion for collecting art. He has shelled out countless millions on priceless pieces to add to his collection.

He purchased a Pollack “drip” painting for $52 million dollars. He purchased “The Physical Impossibility of Death in the Mind of Someone Living” for $8 million dollars. He forked out $25 million for a Warhol and a Picasso.

However his biggest art purchase, a purchase that would have been by far the most money ever spent on a piece of art, never came to be.

Steve Wynn is another very rich and well-known guy. His is a casino mogul (owner of the Wynn casino in Vegas, amongst others.) Like Cohen, he also appreciates art and is an avid collector.

Wynn’s most prized possession was Picasso’s “Le Reve.” The painting had previously hung inside of the Bellagio in Las Vegas, and was now hanging in Wynn’s office, waiting to be transported to Steven Cohen. The agreed upon price was $139 million dollars.

It should be noted that Steve Wynn suffers from Retinitis Pigmentosa, an eye disease that damages peripheral vision. Wynn had invited some people into his office to show them the painting before it was sold to Steven Cohen.

He was about to point out something on the painting when:

Crash!

His elbow went straight through the priceless piece of art, punching a hole right through the middle of the painting. There was a slight ripping sound as the priceless piece of art was forever altered and probably ruined.

“Oh shit,” Mr. Wynn was rumored to have said, “Oh man. Well, I’m glad I did it and not you.”

The most expensive painting purchase in history was called off. All because of a $130 million dollar elbow.

http://www.davemanuel.com/2007/08/31/the-curious-story-of-the-most-expensive-art-purchase-in-history-that-never-happened-le-reve/

Yahoo is sporting this bizarre segment front and centre today:

It’s a surprise to us that the new image of wealth appears to be a twenty year care salesman from the photo - but what the hell do we know.

Dating a loaded guy has long been a fantasy for some single women. In fact, your own mother may have even quipped that it’s just as easy to fall for a wealthy man as it is a poor one. And high-income, single men (those earning $104,000 and up, as defined by the Tax Foundation Group in Washington, DC) are on our radar even more thanks to such shows as “The Hills”, “Gossip Girl,” and “The Millionaire Matchmaker.”

Plus, statistically, affluent men are on the rise. According to the 2007 Wealth Report, there are more richies in the world than ever: 

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Or, why this economic crisis is worse than you think. Author Nassim Taleb explains about the current mess we’re in. Check out the video below of his interview with Charlie Rose:

Some highlights:

Says here that hedge funders were drowning their sorrows at a party Wednesday. I was under the impression that as long as there is volatility a trader can make money - was I wrong or is something new happening here?

One party attendee shares my own attitude toward the Street’s disaster:

Khandelwal …  had no sympathy for those in the mayhem. “You come to a hedge fund to make excessive money, so you know the risks.”

Update: August 2006: “Hedge funds are back - were they ever gone?”

Of course this cannot work and it never has. Neo-classical economic theory is fatally flawed from its very first basic premises. They are:

This entire theory and all the economic policy that is born of it hinges on these three basic premises. The first one is completely ridiculous and obvious to anybody that isn’t a socially inept, ivory tower, academic, economic nerd. (Clearly these guys have never interacted with the female species in person before. Hahaha.) The assumption is that individuals choose the best action according to stable preference functions and constraints facing them. Simply put, if you prefer beer over liquor you’ll consistently drink beer at parties. No flip flopping allowed. No randomizations allowed. No ‘living in the moment’ allowed. This brings me to premise number two. Individuals maximize utility and firms maximize profits. Basically you drink your beer to the point of being pleasantly buzzed and then you stop. You never get smashed because a massive hangover clearly does not maximize utility. The third premise states that you will act independently and have all the relevant information to make the best choices. This means that you happily drink your beer and won’t get persuaded to do a round of shots with your friends. You clearly know that one round leads to two and you’ve got to work tomorrow. When your drunken friend gives you a stock tip you act independently and only after you’ve figured out everything humanly possible about the company and the industry. You aren’t at all persuaded by the fact that all your friends jumped on the stock and are making a killing. You stay completely level headed all the time.

The truly successful traders and investors of course know all this already. They thrive in a chaotic, irrational and uncertain environment.

Well, part of the reason is that economists still try to understand markets by using ideas from traditional economics, especially so-called equilibrium theory. This theory views markets as reflecting a balance of forces, and says that market values change only in response to new information — the sudden revelation of problems about a company, for example, or a real change in the housing supply. Markets are otherwise supposed to have no real internal dynamics of their own. Too bad for the theory, things don’t seem to work that way.

Nearly two decades ago, a classic economic study found that of the 50 largest single-day price movements since World War II, most happened on days when there was no significant news, and that news in general seemed to account for only about a third of the overall variance in stock returns. A recent study by some physicists found much the same thing — financial news lacked any clear link with the larger movements of stock values.

Certainly, markets have internal dynamics. They’re self-propelling systems driven in large part by what investors believe other investors believe; participants trade on rumors and gossip, on fears and expectations, and traders speak for good reason of the market’s optimism or pessimism. It’s these internal dynamics that make it possible for billions to evaporate from portfolios in a few short months just because people suddenly begin remembering that housing values do not always go up.

Really understanding what’s going on means going beyond equilibrium thinking and getting some insight into the underlying ecology of beliefs and expectations, perceptions and misperceptions, that drive market swings.

For example, an agent model being developed by the Yale economist John Geanakoplos, along with two physicists, Doyne Farmer and Stephan Thurner, looks at how the level of credit in a market can influence its overall stability.

Obviously, credit can be a good thing as it aids all kinds of creative economic activity, from building houses to starting businesses. But too much easy credit can be dangerous.

In the model, market participants, especially hedge funds, do what they do in real life — seeking profits by aiming for ever higher leverage, borrowing money to amplify the potential gains from their investments. More leverage tends to tie market actors into tight chains of financial interdependence, and the simulations show how this effect can push the market toward instability by making it more likely that trouble in one place — the failure of one investor to cover a position — will spread more easily elsewhere.

That’s not really surprising, of course. But the model also shows something that is not at all obvious. The instability doesn’t grow in the market gradually, but arrives suddenly. Beyond a certain threshold the virtual market abruptly loses its stability in a “phase transition” akin to the way ice abruptly melts into liquid water. Beyond this point, collective financial meltdown becomes effectively certain. This is the kind of possibility that equilibrium thinking cannot even entertain.

It’s important to stress that this work remains speculative. Yet it is not meant to be realistic in full detail, only to illustrate in a simple setting the kinds of things that may indeed affect real markets. It suggests that the narrative stories we tell in the aftermath of every crisis, about how it started and spread, and about who’s to blame, may lead us to miss the deeper cause entirely.

Financial crises may emerge naturally from the very makeup of markets, as competition between investment enterprises sets up a race for higher leverage, driving markets toward a precipice that we cannot recognize even as we approach it. The model offers a potential explanation of why we have another crisis narrative every few years, with only the names and details changed. And why we’re not likely to avoid future crises with a little fiddling of the regulations, but only by exerting broader control over the leverage that we allow to develop.

Another example is a model explored by the German economist Frank Westerhoff. A contentious idea in economics is that levying very small taxes on transactions in foreign exchange markets, might help to reduce market volatility. (Such volatility has proved disastrous to countries dependent on foreign investment, as huge volumes of outside investment can flow out almost overnight.) A tax of 0.1 percent of the transaction volume, for example, would deter rapid-fire speculation, while preserving currency exchange linked more directly to productive economic purposes.

Economists have argued over this idea for decades, the debate usually driven by ideology. In contrast, Professor Westerhoff and colleagues have used agent models to build realistic markets on which they impose taxes of various kinds to see what happens.

So far they’ve found tentative evidence that a transaction tax may stabilize currency markets, but also that the outcome has a surprising sensitivity to seemingly small details of market mechanics — on precisely how, for example, the market matches buyers and sellers. The model is helping to bring some solid evidence to a debate of extreme importance.

A third example is a model developed by Charles Macal and colleagues at Argonne National Laboratory in Illinois and aimed at providing a realistic simulation of the interacting entities in that state’s electricity market, as well as the electrical power grid. They were hired by Illinois several years ago to use the model in helping the state plan electricity deregulation, and the model simulations were instrumental in exposing several loopholes in early market designs that companies could have exploited to manipulate prices.

Similar models of deregulated electricity markets are being developed by a handful of researchers around the world, who see them as the only way of reckoning intelligently with the design of extremely complex deregulated electricity markets, where faith in the reliability of equilibrium reasoning has already led to several disasters, in California, notoriously, and more recently in Texas.

Sadly, the academic economics profession remains reluctant to embrace this new computational approach (and stubbornly wedded to the traditional equilibrium picture). This seems decidedly peculiar given that every other branch of science from physics to molecular biology has embraced computational modeling as an invaluable tool for gaining insight into complex systems of many interacting parts, where the links between causes and effect can be tortuously convoluted.

Something of the attitude of economic traditionalists spilled out a number of years ago at a conference where economists and physicists met to discuss new approaches to economics. As one physicist who was there tells me, a prominent economist objected that the use of computational models amounted to “cheating” or “peeping behind the curtain,” and that respectable economics, by contrast, had to be pursued through the proof of infallible mathematical theorems.

If we’re really going to avoid crises, we’re going to need something more imaginative, starting with a more open-minded attitude to how science can help us understand how markets really work. Done properly, computer simulation represents a kind of “telescope for the mind,” multiplying human powers of analysis and insight just as a telescope does our powers of vision. With simulations, we can discover relationships that the unaided human mind, or even the human mind aided with the best mathematical analysis, would never grasp.

“Fascism should rightly be called corporatism, as it is the merger of state and corporate power.” - Benito Mussolini

Who would have thought that era of Mussolini in Italy would end up feeling so palpable in the United States as 2008 drew to a close? Since George Washington was inaugurated though the times of William Jennings Bryant, whether the United States had a National Bank was like the abortion issue of today day, argued in every national election. The Fed seems to me to be that National Bank. Over the last 12 months news about the Fed and the Treasury Department has been front and center on page one. From the New York Times this week:

“It is clear that regulators still lack a comprehensive plan to address problems in our financial markets,” Senator Richard Shelby of Alabama, the ranking Republican on the Senate Banking Committee, said through his spokesman Jonathan Graffeo. “It is unclear whether they have carefully considered the implications of their continued ad-hoc approach.”

Eric Hovde wrote in the Washington Post: “Looking for someone to blame for the shambles in U.S. financial markets? As someone who owns both an investment bank and commercial banks, and also runs a hedge fund, I have sat front and center and watched as this mess unfolded. And in my view, there’s no need to look beyond Wall Street — and the halls of power in Washington. The former has created the nightmare by chasing obscene profits, and the latter have allowed it to spread by not practicing the oversight that is the federal government’s responsibility. Without Wall Street, the housing bubble would have ended shortly after the Fed started to raise interest rates in 2004, because no lenders would have originated these toxic mortgages if they had to keep the loans on their own balance sheets.”

From the New York Times: “The Fed’s balance sheet expanded $1.3 trillion in the past year as the Fed auctioned $415 billion of cash to banks and purchased $272 billion of commercial paper.

“’The model is that there is no model,’ said V. Gerald Comizio, senior partner in the banking practice at the Paul, Hastings, Janofsky & Walker law firm in Washington. ‘It is an improvisation battle plan.’”

“Fed officials have pushed to keep the risks involved in future bailouts at the Treasury, which would be forced to negotiate with Congress about the use of taxpayer funds. Now, the Fed is stepping outside the liquidity boundary once again. The central bank took a step toward risk sharing earlier this month when it opened two new facilities with up to $52.5 billion in loans to help American International Group wind down its portfolio.”  

“‘The Treasury and the Fed are doing what they can do to hold the pieces together, and it hasn’t been easy,’ said Martin Regalia, chief economist at the U.S. Chamber of Commerce, which lobbies on behalf of 3 million businesses. ‘If we don’t keep the financial system going that is going to impose costs on the American public that will be real and palpable.’”

As noted on the blog of Fred Norris of the N Y Times: Bob Prince of Bridgewater Associates, on downward spirals:

“The pressure on corporate margins is now passing through to employment cuts. Employment cuts will reduce incomes which will raise defaults. Rising defaults will hinder bank capital adequacy, which will constrain credit growth, which will slow spending, which will hurt profit margins, then employment. This chain of events was virtually sealed when demand dropped off the table in October, although it was highly probable earlier this year when credit conditions deteriorated rapidly. We are now in the middle of it and there really isn’t much that anyone can do besides hang on.”

For the time being, Americans are in denial. Listening to GM ask for help came my own realization that all cars were luxuries. What happened when you were in a luxury position? When your employer was involved in products that were luxuries. We are going all going to learn that the only necessities are food, clothing and shelter. In Minnesota there was discussion by the retired Minnesota House of Representative leader, Dee Long, about a sales tax for the first time on clothes here.

It is difficult to see how the political parties are going to line up on issues of bailouts. The quote above from the U.S. Chamber of Commerce, traditionally a Republican Party supporter, seems to favor of bailouts. Nancy Pelosi and Barney Frank are supporters of bailouts, as Democrats. A sales tax on clothes does not seem to be a populist position.

The “merger of state and corporate power” sounds an awful lot like what is coming from Republican and Democrats. There has been a silent revolution that occurred in America, perhaps because of a government formed by lobbyists and what it takes in the way of capital to acquire a seat in Congress. One of those seats cost a lot more now than one on the Chicago Mercantil Exchange.

Bill White said, “But in the end, if the fundamental position is that there is too much credit in the system, something has to give.”

“Audio Panton, Cogito Singularis, Listen to everything, think for yourself.”

“Constant revolutionizing of production, uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation distinguish the bourgeois epoch from all earlier ones … All that is solid melts into air, all that is holy is profaned, and man is at last compelled to face with sober senses, his real conditions of life, and his relations with his kind.” — Karl Marx, The Communist Manifesto

However, in a world where there is now global over-production and increasingly impoverished working classes unable to afford the products of their own labours, is it possible that this distinguishing feature has reached a dead-end? And if so, what are the implications? Will general war, as it has in the past, be the only ‘solution’ to this, the greatest crisis of the over-accumulation of capital in history?

Or has the capitalist system finally ran out of road? And if so, are we in a position to replace it with something else?

But it didn’t take too long to burst an awful lot of bubbles as the outpouring of articles, well finally from the left anyway, attests to. But what can we learn from this historic, and no doubt history will bear me out on this, infamous deception.

“Hence, it is easy to understand the role and position of the 44th US president in history: he is designed exclusively for domestic use by an ordinary US citizen. And that’s his supreme political function. Americans believe Obama, therefore someone needs to know this for some reason.” — Aleksei YEGOROV: ‘Hillary Clinton’s Appointment Complete the Pre-Election Project Called ‘Obama’

Yes indeed, however the collapse of ‘finance capitalism’ has thrown a spanner in the works, in fact it threatens to undermine the entire ‘Project Obama’ given that under the cover of president elect Obama, it is already clear that an identical trajectory is to be pursued by the incoming presidential team, replete with the same suspects who were the architects of the current crisis in the first place.

And herein lies the danger, the real danger of the US ruling class pursuing an even more dangerous and adventurist line if it is to try and maintain its position of ‘world policeman’ and the world’s leading economy.

But it’s worth noting here that Obama’s ‘New, New Deal’ is taking place in a very different world than the one that gave rise to Roosevelt’s rescue of capitalism in the 1930s (that in any case took around six years to have any effect on the economy and in reality it was the outbreak of war that saved US capitalism’s bacon).

The causes of the current crash may be similar to those that precipitated the Crash of ‘29 but the economic context is entirely different. The US economy is no longer the world’s factory having in the first place, exported most of its domestic production to the cheap labour markets of the world and secondly, what was the main engine of domestic production, the auto industry is outdated and unable to compete in the global market with the ‘upstarts’ (and in any case, the global market is already saturated with unsaleable products, which in turn is a major cause of the current crisis, namely over-production). The US auto industry’s products are inferior, gas-guzzling dinosaurs that even the domestic market is rejecting in favour of superior, efficient and infinitely more technologically advanced competitors from Asia and even Europe.

Is it realistic therefore to envisage a re-capitalization/recreation of the US manufacturing economy? Where will the capital come from, especially given the (former) centrality of the financial sector and the vast sums of public money ($8.5 trillion-plus) being used to bailout the financial sector, money that could have been better used to finance the ‘New, New Deal’? With the banks effectively nationalized and with the state as guarantor, they could have continued to function. The only losers would be the investors to which I say, ‘well screw you! You took your chances and lost, isn’t that what the ‘market’ is all about?’

Team Obama are talking of investing billions in infrastructure renewal, roads, bridges, schools and so forth and whilst this might, in the short term, ameliorate a small percentage of the growing unemployment, currently running at (officially) nearly 7% of the workforce and likely to triple over the next twelve months, it doesn’t address the fundamental contradictions of an economy which on the one hand is pouring trillions into the military complex, all of it socially useless, and on the other is reliant on the tribute extracted from the rest of the world’s economies’ reliance on the dollar as the medium of exchange, the so-called fiat dollar.

And given precipitous fall in the price of oil (now running at around $40 a barrel), the tribute is likely slow to a trickle as the world’s economy grinds to a halt.

It’s important to understand here that the $8.5 trillion ‘bailout’ of the major US financial institutions is in actuality the destruction of over-valued assets. Over-valued because this wealth was ‘created’ through financial speculation in invented ‘assets’, derivatives, futures and hedge funds. When these were finally revealed as being worthless, the wheels came off and the entire scam collapsed.

“So Goldman Sachs votes for socialist, state-directed lending [through the creation of a state bank]. The symbolic power of this thought is mind-numbing, for those of us who immersed ourselves in the liberalised, winner-takes-all financial markets of the past 25 years.” — ‘How much will taxpayers finance economy?’ Robert Peston, BBC News

Poor old Peston, his illusions shattered as his much-vaunted ‘free market’ bites the dust. The BBC by the way, through its so-called expert commentators, still insists on separating the collapse of the financial services sector from the recession (see ‘A capital problem’ by Paul Mason, BBC Newsnight 5 November, 2008).

No real wealth was created, it existed only on spreadsheets. All well and good for those corporations that made the profits and then walked away from the disaster they had created, but they left behind a real debt in the sense that the self-same financial institutions ultimately rely on the real economy to survive after the ‘assets’ they invested our money in vaporized.

And because the financial sector is driven by the need to make a profit, under the current circumstances, they see no profit to be made from lending it, either to each other or to the public and thus the ‘market’ freezes up solid.

Making money cheaper by lowering the interest rate doesn’t help either as the principal source of profit for the banks is the interest charged on loans (hence the ongoing ‘struggle’ here in the UK between the government and the banks over passing on the lower interest rate to their customers).

It’s difficult to see exactly what the incoming Obama administration can actually do about this crisis except attempt to ride it out and let the people pay the cost, which in any case, they are already doing. However, given the enormous ‘goodwill’ he has accumulated through his promises of change, unless he can actually deliver, ‘goodwill’ can just as easily vaporize as quickly as it was engineered in the first place. Under such circumstances it is more than likely the ruling elite will use Obama as a ‘sacrificial lamb’ who has been led to the (economic) slaughter.

Not that this will solve the crisis, removing Obama may serve a public relations role but would not bring a resolution of the crisis. Increasingly, it looks like history repeating itself as tragedy as the state, the instrument of last resort for the likes of Robert Peston et al, is forced to step in.

But this is a far cry from socialism, it is as it was in the past, the state’s, eg yours and my money, rescuing capitalism from itself but this time without getting any of the benefits. No universal health care, no public housing and so forth.

Note

see

Climate Change: World War III by another name? by William Bowles

The Obama Dilemma: A Mission Impossible? by William Bowles

“Oops, We Meant $7 TRILLION!” by Ellen Brown

The Economy Sucks and or Collapse 2

Obama-Barack

AMY ADONIZ, general manager at the Best Buy flagship store, knows what her staff wants for Christmas: a case of Red Bull.

Two weeks before Black Friday, Ms. Adoniz gave in to employees’ requests and had a Red Bull vending machine installed at the store, at 62nd Street and Broadway in Manhattan. Many in the sales staff of 140 are drama students, opera singers and actors who may run themselves ragged selling electronics by day and performing at night. To keep them from getting hungry and cranky over the long Thanksgiving weekend, Ms. Adoniz let them wear slippers and Uggs boots to work, and had food delivered three times a day.

Employees aren’t the only ones being tended to this shopping season. To lure customers, Ms. Adoniz waits for — and on — their dogs. “We have a doggie water bowl with filtered water, and treats for them as well,” she says.

With unemployment rising sharply, and consumer spending plummeting, Best Buy managers are bending over backward to attract shoppers and are encouraged to put their personal stamp on the stores. For Ms. Adoniz, that means stoking employees with caffeine and carbohydrates and catering to customers’ pets.

It’s an extraordinarily tough time for retailers. “November is shaping up to be the worst month in retail since I’ve been here 30 years,” says Edward Schmults, C.E.O. of FAO Schwarz, the toy chain. “Now I know how that little kid felt who misbehaved all year and then wondered if Santa was going to show up in December.”

Next year could be even worse. Fitch Ratings forecasts that the United States economy will contract 1.2 percent in 2009, with consumer spending falling 1.6 percent. “The impact on retailers is almost tragic as the economy adjusts,” Mr. Schmults says.

And Best Buy, to limit the damage, is not just cutting prices. It is trimming inventory and advertising, promoting higher-margin, private-label lines and pushing exclusive products, like the Blue Label series of notebook computers made for Best Buy by Hewlett-Packard and Toshiba. It’s also adding new services and products that specifically aim at women.

If the stock market and consumer spending hadn’t plunged so precipitously, Best Buy, the nation’s biggest electronics retailer, with $44 billion in annual revenue, might not have had to bother stocking up on delectables for dogs. The chain’s chief rival, Circuit City, recently filed for bankruptcy protection and is closing 155 stores. Tweeter, a high-end rival, shut down this week, and Sharper Image’s stores, which sold more exotic electronics, are liquidating. CompUSA closed most of its stores last year.

But no retailer is immune from the drop in consumer confidence and spending, especially one that specializes in gadgets, not groceries. Sales at Best Buy stores open more than a year were down 7.8 percent in October, compared with the same month last year. The company will not release November figures until Dec. 16, but it’s already clear that November was a brutal month for electronics retailers. According to a report MasterCard Advisors released last week, sales of electronics and appliances nationwide sank 25.2 percent in November, versus the same month last year.

Best Buy’s stock price, which reached almost $54 in November 2007, closed Friday at $23.05, and its market capitalization has shrunk to $9.5 billion. Because of slumping sales, Fitch Ratings in mid-November downgraded the outlook on Best Buy’s $2.7 billion in debt to negative, from stable.

Nevertheless, Karen Ghaffari, a managing director at Fitch, says she thinks Best Buy will weather the storm. Its longstanding reputation for high-quality service helped it grab market share this year when Circuit City laid off many of its highest-paid — and most experienced — sales workers, and shuttered stores.

“Best Buy is a very strong operator,” Ms. Ghaffari says, “and long-term they should benefit from the difficulties being experienced by the weaker competitors.”

That may well be so. But consumers’ reluctance to spend is making Best Buy’s investors skittish. Though analysts expect revenue to grow slightly next year as the company expands overseas, profit margins will come under pressure from price-cutting, especially on televisions. “Given the circumstances and uncertainty in what’s coming here in this market, we decline to comment,” said a press officer at Gardner Lewis Asset Management, which owned almost four million shares of Best Buy in June.

In an interview, Best Buy’s president, Brian Dunn, discussed the challenges the company faced. “The depth and speed with which the economy stumbled was extraordinary,” said Mr. Dunn, who started as a salesman at the chain 23 years ago. “I’ve never seen anything like it. Our business was growing really nicely and then, all of a sudden, boom!”

BEST BUY’S winter holiday shopping season is crucial, as it is for every retailer. A good Christmas can make the difference between a mediocre year and a fantastic one. Ten percent of a retailer’s sales can come on Black Friday alone, and typically, almost 60 percent of Best Buy’s profit comes from fourth-quarter sales.

Now that it’s clear that fourth-quarter sales and profits will be down substantially from last year, the chain is scrambling to cut costs. There will be fewer national TV commercials and more targeted e-mail crowing about low prices.

Best Buy stores are stocked with thousands of boxes of the hit video games Rock Band 2, Guitar Hero and Wii Fit, along with myriad camcorders, digital cameras, flat-screen TVs and GPS devices. Nevertheless, to make sure that the company isn’t stuck with mountains of unsold merchandise after Christmas, Best Buy is cutting inventory levels to match reduced demand, Mr. Dunn says. But the company will not say by how much.

“Suppliers are being flexible,” Mr. Dunn says. “Apple, HP, Samsung and Sony have answered the bell nicely and worked with us on inventory levels.”

To accommodate shoppers, Best Buy is offering more lenient financing. Customers who charge at least $499 worth of merchandise on a store credit card don’t have to pay interest for 18 months. “We don’t push it,” Mr. Dunn says, “but customers are grabbing the 18-month financing options.” Last year, shoppers had to spend at least $499 on one item to receive such financing. “Now you can put whatever you want into your cart to get it up to $499,” he says.

That strategy worked for Nadia Lora and her husband, Carlos, both 21. The couple work at Nunzio’s Grill, a restaurant in Vauxhall, N.J., where she is the manager and he is a cook. They were shopping at a Best Buy near the restaurant on the Friday after Thanksgiving, and they bought a JVC camcorder and a Garmin Nuvi GPS system, purposely spending enough to hit the $499 financing threshold. Ms. Lora said the Best Buy incentives allowed her to justify her purchases: “I like that they don’t charge interest for stuff for months.”

IN this stressed-out holiday season, Best Buy is trying to be hip and friendly. The chain is the only retailer to have exclusive rights to sell the new Guns N’ Roses album, “Chinese Democracy,” in its stores and has hired Magic Johnson to open stores in urban areas. Free limousine rides and mini-camcorders were offered to 25 customers in New York, Los Angeles, Boston, Miami and other major markets who wrote compelling, 250-word essays about why shopping at Best Buy on the day after Thanksgiving was a meaningful ritual for their families.

Claudia Di Folco, 35, an actress and former television news reporter, was shopping at Best Buy two days before Thanksgiving. She bought a $299 Slingbox, which transfers whatever is playing on your home television onto a laptop, cellphone or PC, so her husband could watch the New York Jets game during a trip to Rome. Ms. Di Folco lives a few blocks from the Best Buy store at 86th Street and Lexington Avenue on the Upper East Side and shops there often. “They always have special sales, or at least the big yellow signs make you think they do,” she says.

On the day after Thanksgiving back at 62nd and Broadway, hundreds of electronics fans lined up. “We had a fabulous day,” says Ms. Adoniz, 41, that store’s manager, though she says she was less confident earlier in the week. “With everything happening with the economy, we didn’t know if that was going to scare customers away.”

But when she arrived at 1:30 a.m. on Friday, 500 people were waiting. Customers had been outside since Thanksgiving morning: they sat huddled in sleeping bags; the line went around the block to Central Park West and back. Ms. Adoniz gave out coffee and sales fliers.

Samsung employees played trivia contests with shoppers, doling out T-shirts, tote bags and other prizes. Ms. Adoniz’s fliers detailed the store’s so-called doorbuster sales — 50-inch plasma televisions for $799, laptops starting at $329, GPS devices for $99, digital cameras for $50. Prices have inched up since then, but, Ms. Adoniz says, “there is still a lot of holiday traffic and a lot more online ordering.” Laptops are particularly popular.

Among televisions, the best seller at her store was the 42-inch Dynex, the chain’s private label; it sold for $499. Margins on private-label items are much higher than margins on name-brand electronics, so Best Buy is pushing Dynex as well as its Insignia line of digital cameras, televisions and GPS devices.

“The TVs were flying out the door; they were huge,” Ms. Adoniz says.

The company hasn’t released official figures for Black Friday, but analysts say sales were better than expected. In an effort to keep customers buying, Best Buy aggressively promoted low prices on its Web site every day last week.

In a down economy, the biggest challenge for Best Buy may be from discounters that are chasing its core base of gadget-happy consumers.

“Wal-Mart, Costco and Target have expanded their assortments,” says Steven L. Martin, who manages Slater Capital Management, a retail hedge fund. “Five years ago if you said Wal-Mart would sell plasma TVs, no one would have believed you.”

Best Buy also faces stiff competition from retailers like Amazon that do business exclusively online. The company is fighting back by allowing shoppers to make purchases online and then pick them up at Best Buy stores, which eliminates shipping costs. “Out of this storm comes new operating models,” Mr. Dunn says. “The ecosystem is going to change. We see storefronts closing.”

For now, though, Best Buy has a potent weapon in its battle with the discounters and online sellers: its staff. Members of Best Buy’s sales staff, a k a “Blue Shirts,” go through a 20-hour training program, then spend two weeks shadowing an experienced sales staff member around the floor. Historically, the Best Buy training program has been so strong, some people in the industry say, that competitors often waited for Best Buy to let staff go after Christmas, and then snap them up.

Ms. Di Folco, the actress, says: “Most of the time, I find really informed people who can actually answer my questions. It’s like they seem to be electronic junkies versus kids wasting time at a part-time job they don’t enjoy.”

Its sales force may give Best Buy a competitive advantage even in a holiday season when many customers are interested in rock-bottom prices.

“The importance of the salesperson is directly related to the price of the product being sold,” says Chris Denove, vice president at J. D. Power & Associates, the consumer research firm. “If you’re talking about toothpaste or pencils, the salesperson is immaterial, but when you’re talking about high-end electronics such as flat screen TVs, the salesperson can be critical.”

Target, meanwhile, is going after the technical support business — a big profit center for Best Buy — and has hired Zip Express, a company started by Chris Mauzy, a former Best Buy employee, to challenge the “Geek Squad” for which Best Buy is known. For a fee, members of the Geek Squad will install your purchase and provide technical support, even on products not bought at Best Buy. It’s a huge profit center for the company.

Mr. Mauzy, who left Best Buy to start Zip Express in October 2007, is introducing an electronics-installation service for 200 Target stores.

To further protect itself against inroads from the discounters, Best Buy is trying to make shopping more appealing to women. Its Omega Wolves program, a focus group made up of 3,500 working women in the United States and London, has a page on Facebook; Omegas socialize and give the chain feedback. Thanks to the Omegas, Ms. Adoniz’s store has what she calls “nicer fixtures,” like wood-trimmed displays and lighter backdrops.

Ms. Adoniz’s store also aims to stock accessories with women in mind: fake leopard skin and red crocodile cases for BlackBerrys and other gadgets from Liz Claiborne, Betsey Johnson, Dooney & Bourke, Tumi and Steve Madden. Crystal Stroupe, a personal shopper and an aspiring opera singer, spends much of her time at Best Buy keeping the accessories table neat and pretty.

Ms. Adoniz says the accessories table brings a lot of astonished looks, “but we know the female shopper was an underserved market.” Best Buy says women are now spending more money at its stores than men, which has led Ms. Adoniz and managers of other stores to expand accessories aimed at women. Many Best Buy stores now carry items like blow-dryers, curling irons and hair straighteners, as well as pink cameras and phones. “We have a whole personal care section and it does very well,” Ms. Adoniz says.

The effort to appeal to women may ultimately help Best Buy distinguish itself from traditional electronics retailers, which tend to market electronics to men.

“You can’t assume that every expensive TV is going to be bought by a male,” says Matthew J. Fassler, a retail analyst at Goldman Sachs. “Women need to be served as intently as men.”

THAT said, Best Buy’s business is hard-core electronics, not blow-dryers; the company is betting that if a family buys just one gift this December, it will involve electronic entertainment. “When the customer gets into difficulty, they tend to cocoon,” Mr. Dunn says. “After 9/11, they invested in their homes and loved ones and experiences.”

Mr. Dunn says he usually wins his office pool for predicting December results; this year, he’s betting that cocooning drives sales, but he acknowledges that “it’s too soon to tell” how the holiday season will play out.

“As the economy becomes tougher, people think more carefully about whether they really need to buy an item,” he says. “The threshold for a considered purchase has moved down. Last year, it might have been $500. This year, it might be $300, $200 or even $100 for some families.”

Enough for an iPod case and a Slingbox cable, but not much more.

The time to add to a stock position  would have been just as the FXY approached it’s high. I would think that hedge fund managers would back off buying YEN at that price reversing the trend. That trend, a small rally in stocks.

Patrice Ayme

Since the Bank of England reduced its base lending rate to an historically low 2% on Thursday UK media commentary has been dominated by a ‘will they, won’t they’ analysis of which banks are planning to pass on the full value of the 1% cut to their mortgage customers and which are not.  At the time of writing, those passing on the full rate reduction are in the minority but it is clear that this issue will be played out in the court of public opinion as much as behind the closed boardroom doors of our leading mortgage providers.  After all, public (and Government) pressure has already seen two of our leading lenders - Nationwide and Halifax - remove the ‘collars’ that were designed to prevent their bare-rate tracker products from dropping below a certain minimum level. 

With few outside friends it is a brave bank CEO that is prepared to stand up to the inevitable criticism that will follow any foot dragging on this issue, however solid arguments about protecting savings rates or the need to repair a broken balance sheet may be.  Regaining control of the economics of their business will be an uphill journey.

I have written in the past about how the banks - particularly those that have been part of recent Government bail-out measures - need to accept the new reality of their circumstances, and recently consolidated these thoughts into a contribution to a wider series of essays published by Edelman to coincide with the ‘Outlook 2009′ event referred to in my previous post.  The full text of my contribution is below, and the complete Edelman document, titled ‘Public Engagement in the Conversation Age’, can be accessed here.

———–

No industry has felt the cold blast of the credit crunch more than the Financial Services sector.  Whilst the turmoil and upheaval in the global Banking system has dominated recent newspaper headlines,the industry in general is experiencing a collective collapse in Trust and confidence which has also affected Insurance companies, Asset Managers and Hedge Funds in equal measure. Having gradually reduced to no more than a ‘hygiene factor’, suddenly Trust is once again a commodity to be cherished, protected and preserved.

To some extent the ’sudden’ collapse of Trust in the Banking system - and indeed in our established Financial Institutions generally - has been long coming. For the last decade, Edelman’s Trust Barometer has tracked the growth in credibility of peer-to-peer Communications at the expense of the top-down, CEO-led programme and, what we see today, is merely a practical application of that trend. What is beyond dispute is that Trust in the Banking industry has all but melted away - not just amongst consumers but most damagingly (and most tellingly) within the market itself.

This collapse in Trust has coincided with - indeed perhaps even been caused and/or exacerbated by - the new Digital Democracy we reference elsewhere. With the internet placing power in the hands of the Citizen as never before, this is the first recession of the true Digital Age. The challenge the industry now faces is to overcome the current negative perceptions and re-build Trust.

The first lesson that needs to be heeded is that life, as we have always known it for the banks, has changed forever. So far as the media is concerned, every pound the banks spend comes out of ‘our’ pockets - in the current climate the normal rules of Business no longer apply and the banks’ usual licence to operate has, effectively, been suspended.

Events which were fully justifiable in the past (and can arguably still be justified now) have to be considered in the light of a new reality - that ‘our’ money is paying for them.  HBoS saw this principle in action in early November when it was fiercely criticised in the media for hosting two staff events. The reality is that the banks do still need to motivate and reward their staff. But the perception of massed ranks of bankers indulging in lavish celebrations as we head into a recession, and as the taxpayer digs deep to bail them out, is one that the banks have to take great care not to foster.

What of the rest of the Financial Services industry? Sitting next to the banks on the naughty step, and finding itself cast in the unwelcome role of chief scapegoat for the collapse of the Financial world as we previously knew it, is the Hedge Fund industry. Now most informed observers recognise that Hedge Funds play an important role in the Financial Markets.  Furthermore, the leading participants in the industry are some of the UK’s most active philanthropists, contributing substantial sums to charities in both the UK and globally.

But with a few notable exceptions, the industry has on the whole been poor at engaging with a wider group of external stakeholders. This has allowed prejudice to become accepted fact, with the result that the industry now finds itself short of friends when they are most needed. There is a clear risk of an excessive regulatory response to recent issues, borne of the ’something must be done’ school of policymaking, that could curtail the activities of one of our most innovative financial industries.  Once again, negative perceptions lead reality.

Set alongside the Banking sector and the Hedge Fund industry, the insurers have - with the very notable exception of AIG in the US - largely managed to avoid the most visible impact, and consequently the high profile fallout, of the Credit Crunch. The impact of the collapse in equities will undoubtedly feed through into the pensions sector but, again, to date this industry has managed to remain largely - though not exclusively - on the periphery of the debate.

The Financial Services industry finds itself at a key point in its continuing development. There is little doubt that the next twelve months are going to present major challenges to Communicators in the sector but this is not the time to adopt a bunker mentality. It is clear that stakeholders will be asking searching questions of our banks, Insurers and those that manage the wealth of the nation.

The organisations that emerge strongest from the economic downturn will be those that are most able to reach out to, and empathise with, the man or woman in the street. They will recognise the role of the internet and social media and adapt their communications strategies to address these channels effectively. And they will embrace the changing nature of Communications and take advantage of the collapse in traditional hierarchies.

The restoration of Trust between Financial Institutions and their customers is not something that can be achieved overnight. Management must be prepared to invest not only financially but in particular in devoting time to repairing relationships. It is well known that ‘nature abhors a vacuum’ and, in the absence of any engagement from the industry or individual firms, our new breed of Citizen Consumers will draw their own conclusions.

Title from the Beatles

For years, banks Not unlike finance a stock broker, a forex broker what money market acct is a banking institution who may buy up considerable amounts of a certain currency. To trade on the forex market, the largest financial market on the planet, ipo money finance one must use a forex broker. Another hidden benefit of trading with a Forex forex trading Mini Account is for wachovia banking center a trader to become familiar with the procedures and the environment of the Forex trading process and how currencies are affected by different things that forex trading system are happening on a global scale. As traders advance and become finance more confident they can increase they?re lot size to 20,000 units. It is also ideal for foreign currency trading beginners who are not yet confident in their abilities and want to test the market with smaller trades. For those who are free forex risk-averse. It forex market has become an essential part for investor’s portfolio as you can gain thousands forex in minutes currency exce forex software by trading currencies.

Forex trading is well known as a lucrative way to make money online.

Hedge funds and other institutions, including those based outside of the US, took advantage of record-low interest rates While these capital one banking are certainly contributing factors, forex signals perhaps they should also look at the repatriation of Dollars that were initially sent abroad over the ashlock finance services last decade in search of loftier returns. In explaining the recent Dollar rally, analysts have tended to focus on the currency byrle of risk aversion that has descended upon global capital free course forex trading markets, coupled with the spread of the credit crisis from the US to the rest of the world. In this harv, however, it is the Dollar that is being driven by a shift away from the popular strategy of borrowing in one currency and investing the proceeds in assets dominated in another. average forex points reports End forex broker of the Dollar Nancee Trade One can usually assume that any talk of the georgena ecn forex broker banking reviews trade is in reference to the Japanese Yen.

Periodically, I comment at Seeking Alpha.  Many, many times, the comments on an article are superior to the article itself.  The above story is typical of such things: the writer thinks he is quite clever to ‘figure something out.’  Only he is talking about the most obvious things, stuff we can see as plain as day since it is now utterly obvious.

The Economic Unwind: Speed Kills - Seeking Alpha

Analyzing things to see why they are doing what they are doing is much, much trickier!  President Bush, for example, thinks he is being smart when he describes the obvious.  But talking about causes is utterly beyond his ken.  

The debate about what is causing this present, obvious car crash, is raging across the internet as well as in the boardrooms and central banks.  Why, even economics professors are trying to figure this out!  Imagine that.

This debate is of utmost importance.  The people at the top, for example, would dearly love to believe that this mess is a glitch, not caused by fundamental problems they created, themselves.  They hope that after a little bit of assistance in the form of trillions of dollars of risk are dumped on taxpayers across the planet, this problem will be fixed.

This is because they believe that we are in a liquidity crisis and need more lending.  There are many, many people who see the obvious: we had TOO MUCH credit and we are now in a ‘paying down the debt’ mode.  This is quite correct.  But the real battle now is, who created all this debt? How did they pass it on?  Who is responsible for this surge in debts?  And most important of all, how can we prevent this from happening yet again?

I have spent years trying to locate the ultimate wellsprings of this epic debt creation process.  Long-term readers know that I finally, in 2006, felt I had enough hard proof to openly accuse the Bank of Japan for flooding the planet with excess dollars created via the Japanese carry trade lending spree.

Further proof of this was the recent G7 and G20 meetings: they demanded that the liquidity well spring restart and even openly said, they wanted the yen to get weaker so lending could flourish again!  In a nutshell, the world leaders said they wanted the status quo to return.  And in addition, they made it totally clear, they also want the international trade status quo to continue or even worsen: the US must suck up all major debts and all major trade losses!

Back to Seeking Alpha: Here is my comment about the story as well as other comments following it.  But I do suggest clicking on the story to see the previous comments.  Some of them are quite good and I heartily endorse them, especially Bruce Pile’s summary of the debt crisis.

The Economic Unwind: Speed Kills - Seeking Alpha

The first time in history, a major, the #2 economic power on earth decided to create a 0% interest banking system. They clung to this despite inflation in Japan rising to nearly 3%. This is the ultimate source of much of the GLOBAL lending we saw this last decade.

The US used this fake, cheap lending to overspend. We allowed our government to go far over budget, doubling our national debt. We also personally and corporately went deep into debt because the payments of interest were ridiculously low.

Now, the entire manufacturing parts of the planet are going ZIRP. This is total insanity. People talk about how we are ’saving money’ now. But this is obviously FALSE.

We are PAYING OFF DEBTS. Not saving any money. Most discretionary incomes as well as manufacturing profits and asset value rises are gone. There are none of these happening. We see dropping incomes, dropping profits and dropping assets all over the place. 

And the only debts that are now rising are GOVERNMENT. So the great unwinding has barely begun. All negative forces are now at work and will continue. Within my own family, people with good, high paying, productive jobs are now being laid off due to frantic businesses ditching everything overboard, hoping to stay afloat and pay off crushing debts that are not supported by profits anymore.

And as everyone ditches their workers, incomes fall, the ability to even pay mortgages and credit debts collapse and everything gets only worse and worse causing businesses to drop more workers. This is the vicious debt-reduction/depression cycle we saw in 1873, 1892, 1930, 1972 and today.

skopros

Americans are so addicted to spending, only an economic tragedy such as these DC and Wall Street fraudmeisters have visited upon the gutted taxpayers. As many keep saying, this isn’t the beginning of the end but the beginning of the beginning. 

L Moore: great idea! Thanks to both.

Not to be a nit-picker, but here is a nit: you left out 1907. 

John Lounsbury

And of course, it caused the creation of the Federal Reserve. Which was supposed to stop bank crashes. What a great track record that organization has! Every 20 years, off the economic cliff! And the complete devaluation of our currency, the end of our gold based reserves, everything.

FEEL FREE TO EMAIL ME AT emeinel@fairpoint.net

CLICK HERE TO DONATE TO THIS WEBSITE

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The Economic Unwind: Speed Kills - Seeking Alpha

Analyzing things to see why they are doing what they are doing is much, much trickier!  President Bush, for example, thinks he is being smart when he describes the obvious.  But talking about causes is utterly beyond his ken.  

The debate about what is causing this present, obvious car crash, is raging across the internet as well as in the boardrooms and central banks.  Why, even economics professors are trying to figure this out!  Imagine that.

This debate is of utmost importance.  The people at the top, for example, would dearly love to believe that this mess is a glitch, not caused by fundamental problems they created, themselves.  They hope that after a little bit of assistance in the form of trillions of dollars of risk are dumped on taxpayers across the planet, this problem will be fixed.

This is because they believe that we are in a liquidity crisis and need more lending.  There are many, many people who see the obvious: we had TOO MUCH credit and we are now in a ‘paying down the debt’ mode.  This is quite correct.  But the real battle now is, who created all this debt? How did they pass it on?  Who is responsible for this surge in debts?  And most important of all, how can we prevent this from happening yet again?

I have spent years trying to locate the ultimate wellsprings of this epic debt creation process.  Long-term readers know that I finally, in 2006, felt I had enough hard proof to openly accuse the Bank of Japan for flooding the planet with excess dollars created via the Japanese carry trade lending spree.

Further proof of this was the recent G7 and G20 meetings: they demanded that the liquidity well spring restart and even openly said, they wanted the yen to get weaker so lending could flourish again!  In a nutshell, the world leaders said they wanted the status quo to return.  And in addition, they made it totally clear, they also want the international trade status quo to continue or even worsen: the US must suck up all major debts and all major trade losses!

Back to Seeking Alpha: Here is my comment about the story as well as other comments following it.  But I do suggest clicking on the story to see the previous comments.  Some of them are quite good and I heartily endorse them, especially Bruce Pile’s summary of the debt crisis.

The Economic Unwind: Speed Kills - Seeking Alpha

The first time in history, a major, the #2 economic power on earth decided to create a 0% interest banking system. They clung to this despite inflation in Japan rising to nearly 3%. This is the ultimate source of much of the GLOBAL lending we saw this last decade.

The US used this fake, cheap lending to overspend. We allowed our government to go far over budget, doubling our national debt. We also personally and corporately went deep into debt because the payments of interest were ridiculously low.

Now, the entire manufacturing parts of the planet are going ZIRP. This is total insanity. People talk about how we are ’saving money’ now. But this is obviously FALSE.

We are PAYING OFF DEBTS. Not saving any money. Most discretionary incomes as well as manufacturing profits and asset value rises are gone. There are none of these happening. We see dropping incomes, dropping profits and dropping assets all over the place. 

And the only debts that are now rising are GOVERNMENT. So the great unwinding has barely begun. All negative forces are now at work and will continue. Within my own family, people with good, high paying, productive jobs are now being laid off due to frantic businesses ditching everything overboard, hoping to stay afloat and pay off crushing debts that are not supported by profits anymore.

And as everyone ditches their workers, incomes fall, the ability to even pay mortgages and credit debts collapse and everything gets only worse and worse causing businesses to drop more workers. This is the vicious debt-reduction/depression cycle we saw in 1873, 1892, 1930, 1972 and today.

skopros

Americans are so addicted to spending, only an economic tragedy such as these DC and Wall Street fraudmeisters have visited upon the gutted taxpayers. As many keep saying, this isn’t the beginning of the end but the beginning of the beginning. 

L Moore: great idea! Thanks to both.

Not to be a nit-picker, but here is a nit: you left out 1907. 

John Lounsbury

And of course, it caused the creation of the Federal Reserve. Which was supposed to stop bank crashes. What a great track record that organization has! Every 20 years, off the economic cliff! And the complete devaluation of our currency, the end of our gold based reserves, everything.

Great job of is, eh?

FEEL FREE TO EMAIL ME AT emeinel@fairpoint.net

CLICK HERE TO DONATE TO THIS WEBSITE

What the world needs right now is a rescue operation. The global credit system is in a state of paralysis, and a global slump is building momentum as I write this. Reform of the weaknesses that made this crisis possible is essential, but it can wait a little while. First, we need to deal with the clear and present danger. To do this, policymakers around the world need to do two things: get credit flowing again and prop up spending.

The first task is the harder of the two, but it must be done, and soon. Hardly a day goes by without news of some further disaster wreaked by the freezing up of credit. As I was writing this, for example, reports were coming in of the collapse of letters of credit, the key financing method for world trade. Suddenly, buyers of imports, especially in developing countries, can’t carry through on their deals, and ships are standing idle: the Baltic Dry Index, a widely used measure of shipping costs, has fallen 89 percent this year.

What lies behind the credit squeeze is the combination of reduced trust in and decimated capital at financial institutions. People and institutions, including the financial institutions, don’t want to deal with anyone unless they have substantial capital to back up their promises, yet the crisis has depleted capital across the board.

The obvious solution is to put in more capital. In fact, that’s a standard response in financial crises. In 1933 the Roosevelt administration used the Reconstruction Finance Corporation to recapitalize banks by buying preferred stock—stock that had priority over common stock in terms of its claims on profits. When Sweden experienced a financial crisis in the early 1990s, the government stepped in and provided the banks with additional capital equal to 4 percent of the country’s GDP—the equivalent of about $600 billion for the United States today—in return for a partial ownership. When Japan moved to rescue its banks in 1998, it purchased more than $500 billion in preferred stock, the equivalent relative to GDP of around a $2 trillion capital injection in the United States. In each case, the provision of capital helped restore the ability of banks to lend, and unfroze the credit markets.

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Though many have been watching the luxury market with anxious eyes in these recessionary times, recent events in London suggest a slightly different perspective. In May it was announced that Fabergé, the imperial Russian jeweller, is to be revived by a group of investors, with Mark Dunhill, formerly president of luxury goods firm Alfred Dunhill, as chief executive and former Tatler jewellery editor Katharina Flohr as creative director. Then, this week, the exhibition Magnificence of the Tsars opened at the Victoria and Albert Museum, displaying the coronation uniforms of seven successive emperors of the Romanov dynasty.

Cynics might suggest these are merely calculated nods towards the eastern money flooding into London, with oligarchs calling the shots in the salerooms, where Fabergé fever has been stoked by the desire to buy back their heritage. But together, they are a potent reminder that for more than two centuries Russia led the world in unimagined sumptuousness and display of wealth. The hedge fund tsars have nothing on the real tsars, and you need look no further than the V&A museum for proof.

The display consists of the coronation uniforms worn by seven successive tsars, the first time they have been seen outside the Kremlin, where each uniform had been preserved immediately after the ceremonies. Especially impressive is an ermine-trimmed mantle with a 23ft train, one of three made for the 1896 coronation of the last tsar, Nicholas II, who was executed with his family in the 1917 revolution.

The dramatic fall of the Romanov dynasty has often overshadowed its 300-year history of sartorial and decorative magnificence. The west has tended to focus on the desecration of the palaces or impoverished emigrés selling their last Cartier tiara in Paris, neglecting the fact that Russia’s collection of imperial jewels and ceremonial dress is older, finer and better preserved than many others, including Britain’s. 

“This collection has only recently begun to be studied,” says Elena Gagarina, general director of the Moscow Kremlin Museums. “The majority is kept in the museum’s stores and has been specifically conserved for this exhibition. By introducing costumes and accessories of the greatest historical and artistic significance, we have aimed to introduce the British public to the art of the finest dressmakers, tailors, embroiderers and jewellers working for the Russian imperial court.”

The wardrobe of the boy emperor Peter II forms the centrepiece of this historic show. “Half of the exhibition is dedicated to Peter’s perfectly preserved wardrobe,” says Dr Lesley Miller, senior fashion curator at the V&A. “It is a lucky survivor and a rare, precious story that can be told only because Peter died young of smallpox and his wardrobe was spirited away to storage at the Kremlin.”

The grandson of Peter the Great, Peter II ascended the throne aged 11 in 1727. Three years later he was dead. A large collection of his clothing, including 36 uniforms, 24 dress coats and 21 waistcoats, were packed into pine chests and deposited in the Kremlin, where they remained until now.

On view at the exhibition are scarlet, emerald and silver ceremonial coats that were worn over knee-length waistcoats cut from velvets, brocades and fine wool, and encrusted with baroque raised gold lace foliate and floral motifs. There are satin, taffeta and damask silk nightgowns lined with sable or ermine; shirts made from the finest linen; and stockings embellished with gold.

Every item to touch the emperors’ body was of the finest quality and craftsmanship; this also applied to the items worn by their servants. Coachmen’s and postilions’ tunics were encrusted with heraldic braid, hussar-style frogging, raised embroidered badges and buttons bearing the imperial eagle cipher.

All of this pales in comparison to a fancy dress costume that was worn by Nicholas II in 1903: cuffs, belt, fur-trimmed cap and bodice are embellished with pearls, diamonds, emeralds and rubies from the imperial collection. Even in their wildest dreams today’s oligarchs are unlikely to have imagined such opulence.

An outlet for my bloviating from the safety of my computer screen.

It is interesting how the boogie man of the econalypse keeps changing.  First it was subprime loans, then CDOs and SIVs, then CDSs and other derivatives.  These days Schiff, Taleb and others are warning that the worse is yet to come, in the form of a devalued currency and hyperinflation as the Fed and Treasury keep throwing money at the problem.  As much as I applaud them for forecasting the current storm, I think they’re wrong this time.

Now that the whole derivative legalized gambling scheme has unraveled we are going through a shocking de-leveraging process where every party is unwinding positions, returning to sensible reserve ratios and reassessing risk on every asset.  Hedge funds and SIVs that used to invest at reserves of 40 to 1 are borrowing much less (or closing altogether), either because of the higher risk, or because they can’t find anyone to lend them money.

The cummulative effect is that the multiplier ratio, and the money supply (M3), are dropping at a precipitous rate.  Unchecked, the lowered money flow will result in economic slowdown, or deflation, or both (and both are obviously undesired).

The government’s response has been clear: Pump more money into the system.  The Treasury has done this by injecting money directly into banks through TARP in exchange for equity.  The Fed relaxed their standards and has been buying inferior-quality paper from member banks.

So the argument goes, the Fed (therefore us taxpayers) is going to be saddled with all these toxic paper losses, and, the Treasury (again us) is going to print so many T-Bills we’ll end up owing our shirts to the Chinese.  All these losses and borrowing will erode confidence in the Dollar, which will no longer be used as reserve currency and eventually be dumped and lose its value.

I don’t believe this is the case.

First, let’s not forget that the Fed can print as much money as it wants.  Usually it creates only as much as needed and no more in order to control the money supply and therefore keep inflation in check while stimulating growth.  It’s a perennial tightrope and it is the basis of our monetary policy.  But given the current extraordinary de-leveraging and reduction in the velocity of money (since banks aren’t lending to each other) taking place, aggressively expanding the monetary base is exactly what is needed to keep the M3 supply stable.  The trick of course is to time this right, otherwise we’ll end up with a nasty case of inflation.

Secondly, a large chunk of the treasuries that will be issued will be bought by the Fed to create bank reserves, not so much by China since our imports (and the current account deficit) are slowing down.  This makes a big difference because the Fed, unlike all other creditors, returns all interest paid to the treasury.   When growth resumes they will slowly find their way back to the Treasury.   I wouldn’t be surprised if the Fed ends up with up to 4 trillion of treasuries in their balance sheet before the storm starts dying down.

Third, more treasuries give the Fed more room to grow reserves and expand the base without having to take in lower-grade paper and even toxic loans.

Lastly, because of the worldwide flight-to-safety these days yields are lower than ever, so there has never been a better time in our history to ‘take out a loan’.  We should be very very thankful for this.

“It would be nice if investment advice came with warnings like pharmaceuticals.”  (TraderFeed)

Barry Ritholtz gets a little bullish.  (Barrons.com)

Ken Heebner is making a big bet on financials.  (WSJ.com)

“We’re all hedge funds now.”  (Aleph Blog)

Fundamentals failed in this bear market.  What about technical analysis?  (Businessweek.com)

It doesn’t get much worse than this.  A graph.  (Mankiw Blog)

What happens after a decade of negative total returns on the S&P 500?  (Clusterstock)

Bottom callers are back out in force.  (WSJ.com)

“Investors are pricing in much higher risk than they have at any time in the last 18 years.”  (Value Expectations)

“‘Tis the season to dump last year’s folly.”  (WSJ.com)

Diversification worked, if you owned bonds.  (NYTimes.com also Random Roger)

Running a short-only hedge fund is no fun.  (Infectious Greed)

Orphan ETFs are rising in number in this bear market.  (WSJ.com)

“Traditional private equity is dead and has been for a year…”  (NYTimes.com)

Why do private firms stay private?  (Alea)

Expect more bad job loss news.  (Odd Numbers also Econbrowser)

Is this a crisis or just a globalized recession?  (Baseline Scenario)

The NBER recession call is pretty clear.  (macroblog)

Econobloggers in the spotlight.  (Boston.com)

Business school applications are on the rise.  (DealBook)

Microsoft (MSFT) just can’t compete with Google (GOOG).  (Fortune.com)

What if Steve Jobs ran one of the Big Three automakers.  (I, Cringley)

The best business books of 2008.  (BusinessWeek.com)

Are you curious what other bloggers are saying about Abnormal Returns? So are we. Feel free to check out a compilation of reviews.

There has been quite a bit of press given to the financial crisis and it seems clear to me that the solution being  proposed is… Flood the Markets with Cash!

The Federal Reserve has already reduced rates to 1% and there is plenty of talk and expectation that there will be further rate cuts. It is likely that we will see a Fed Funds Rate of .5% by January and it could even go as low as 0% by February or March. The pressure on the Fed to use rate cuts to stimulate the economy will be even greater in the 1st quarter of 2009 due to the worsening unemployment situation and the continuing weakness in the housing markets.

What happened in the 2000 to 2002 time frame will likely happen again. Remember how Greenspan dramatically hiked rates to curb the ‘irrational exuberance’ of the stock markets during the dot.com era? He overreacted and the result was that by 2000 the markets were in a full bear market downturn.  By the time 9-11 occurred we were already suffering dramatic declines in ‘wealth’ due to the downturn brought on by the hike in interest rates.

After 9-11 the Fed scrambled to reverse the market implosion and drastically lowered interest rates. The result was that 2003 through 2006 was saw the greatest growth in real estate speculation and prices ever experienced. This is a direct result of the Fed flooding the market with cheap rates and the U.S. Government encouraging the ‘A House For Everyone’ policy. Rates were low, credit easy to get, buyers flooded the market, and the bubble was in full swing.

Then in 2006 and 2007 the ARM adjustments began to kick in for loans generated in 2003 and 2004 and foreclosure rates began to soar. So many poor quality loans were made that without an ever increasing demand for homes and an ever increasing rise in home values many people were simply unable to keep up with their debt obligations and the house of cards began to collapse.

Now with the collapse of real estate prices causing a domino effect collapse of mortgage lenders, investment banks, and hedge funds there appears to be no end in sight. Consumer giants such as auto makers are suffering from the decline in consumer confidence and now they are hemoraging cash and on the verge of collapse. At a minimum the shock waves of the return to conservative lending practices will continue into early 2009 in the form of more layoffs and the failure of many retailers, auto dealerships, municipalities, etc.

OK… now for the good news… 2010 will be a BOOM YEAR!

Why? Because the continuing flood of cash and easy credit at the Fed level will take between 12 and 24 months to have the desired impact. The Fed began to take action in October of 2008 by the TARP program designed to buttress the major financial markets. That has succeeded but those markets will be slow to begin loosening credit. As we go into 2009 the Obama administration will pressure Congress for 1 - 2 Trillion in stimulus packages that will spread over a 4 - 10 year period with a front end load for quick impact. The stimulus packages will start having an impact in the summer of 2009 but the full impact will not be felt until 2010.

It takes time to gear up. There is talk of rebuilding the nations roads and bridges. Great. What does that mean? Building roads requires that engineering reports be performed. Same thing with Bridges. Engineers will have to be hired and plans prepared and reviewed and approved. That takes time. Then the Contractors will have to be hired after a Bid and Approval and Vetting process. More Time. Then equipment and materials ordered and people hired to run the equipment and manufacture the materials. More Time.

What does that mean? Well, lots of Engineering firms will be making money in 2009. Lots of orders for equipment will be placed in late 2009. Equipment manufacturing will halt layoffs and begin to hire in late 2009 or early 2010. When the equipment and construction materials are ready the contractors will begin to hire, probably in 2010.

As the cash starts to flow in late 2009 and 2010 the unemployment levels will begin to decline and this is when the magic will kick in. The Magic is that it will be late 2009 or early 2010 before the Media begins to report on an improving economy. It is only when the Media begins to report that things are improving that the consumer attitude will begin to change to become more positive. Consumer attitudes will not change overnight. Consumers will keep a tight rein on their purses through all of 2009 making the retail and consumer services segment of the economy the last to see improvement. Christmas of 2009 is likely to be as dismal for retailers as 2008 will likely be.

The foundation of the recovery this time, like in 2002 - 2005, will be the housing industry. As rates come down and as credit eases people will begin to purchase homes again. The mortgage industry will be more tightly monitored and the abuses of the past will not be possible. New abuses will crop up because the pressure to loan for home purchases will be increased since the housing market is the prime economic driver.  The attempts to control abuses will cause new and creative financing vehicles to be developed and gradually the knowledge about how to create such financing instruments will permeate the market.  I expect that the housing market will not figure out how to get easy credit until late 2009 or early 2010. Once the markets figure out how to channel the cash and credit being pumped into the economy by the stimulus packages the housting markets will enter another bubble period. 

I predict that 2010 will be the beginning of the NEXT GREAT BUBBLE in HOUSING!

With all of the above in mind I invite you to provide your comments. I would love to hear what you think.

An outlet for my bloviating from the safety of my computer screen.

Hedge Fund Asset Selling & Loss of Leverage. Here is a short video on hedge fund redemptions, performance and trends. It discusses the recession of 2008, how it is affecting hedge funds and how many new hedge funds are being setup to …

Today we continue our “Net Net vs Activist Legend” thought experiment, with Yahoo! Inc. (NASDAQ: YHOO).

YHOO is a stock that is not cheap on an asset basis but it does have a prominent activist investor with a 5.5% stake and two seats on the board. At its Friday close of $11.66, which is around two-thirds lower than Microsoft’s May 2008 $33 bid, YHOO still trades at a 70% premium to our $6.82 per share estimate of its asset value. Activist investor Carl Icahn’s presence on the register, however, indicates that he believes YHOO is worth more. Icahn has paid an average of $23.59 per share to accumulate his 5.5 percent stake. At $11.66, YHOO must more than double before Icahn will see a profit. He’s unlikely to sit idly by to see if that happens.

About YHOO

According to the Overview section of the company’s most recent 10Q*, YHOO “is a leading global Internet brand and one of the most trafficked Internet destinations worldwide.” Clear enough, but here is where the 10Q gets weird:

We are focused on powering our communities of users, advertisers, publishers, and developers by creating indispensable experiences built on trust.

We have no idea what “indispensable experiences built on trust” means. We’d be keen to hear your thoughts in the comments (but we digress):

We seek to provide Internet services that are essential and relevant to these communities of users, advertisers, publishers, and developers. Publishers, such as eBay Inc., WebMD, Cars.com, Forbes.com, and the Newspaper Consortium (our strategic partnership with a consortium of more than 20 leading United States (”U.S.”) newspaper publishing companies), are a subset of our distribution network of third-party entities (referred to as “Affiliates”) and are primarily Websites and search engines that attract users by providing content of interest, presented on Web pages that have space for advertisements. We manage and measure our business geographically. Our geographic segments are the U.S. and International.

According to Wikipedia, YHOO:

…provides Internet services worldwide. The company is perhaps best known for its web portal, search engine, Yahoo! Directory, Yahoo! Mail, news, and social media websites and services. Yahoo! was founded by Jerry Yang and David Filo in January 1994 and was incorporated on March 1, 1995.

According to Web traffic analysis companies (including Compete.com, comScore, Alexa Internet, Netcraft, and Nielsen Ratings), the domain yahoo.com attracted at least 1.575 billion visitors annually by 2008. The global network of Yahoo! websites receives 3.4 billion page views per day on average as of October 2007. It is the second most visited website in the U.S., and the most visited website in the world.

* We usually link to a company’s own description of its business on its website. We didn’t for YHOO because we couldn’t find on its website a concise description of the company or its business. While this may speak more to our own ineptitude, it might also be a telling sign for a “leading global Internet brand” that has struggled lately, no?

The value proposition

Before we launch into our analysis of YHOO, we have to state up front that Greenbackd’s focus is on undervalued asset situations, and preferably undervalued tangible assets. One would think that with YHOO, a “leading global Internet brand”, one would find a great deal of value in its intangible assets. Our bias for tangible over intangible assets will almost certainly lead us to a lower valuation for YHOO than another investor with a preference for intangible assets which generate earnings or cash flow.

Set out below is our summary analysis (the “Carrying” column shows the assets as they are carried in the financial statements, and the “Liquidating” column shows our estimate of the value of the assets in a liquidation):

Ordinarily, when we discount a company’s assets we get a much lower liquidating value than carrying value. In YHOO’s case, most of the tangible asset value is in the Cash and Short Term Investments which we don’t write down ($3.2B or $2.32 per share) and Long Term Investments (carried at $3.2B or $2.31 per share), which we’ve only written down to $3B or $2.19 per share for reasons we’ll explain below. We’ve written down the Property, Plant and Equipment by 85%, but it only represents a small proportion of the total tangible assets and so doesn’t have a meaningful impact on the valuation. Our usual liquidation valuation - the armageddon scenario - for YHOO is $5.4B or $3.91 per share.

We believe that the armageddon scenario substantially undervalues YHOO because it excludes the Goodwill in the Investments in Equity Interests (which is included in the Long Term Investments above). Including the Goodwill, YHOO’s Investments in Equity Interests amount to the following:

Including the Goodwill figures in the Investments in Equity Interests above (but deducting the Deferred Income Tax) gives us an asset valuation for YHOO closer to $9.5B or $6.82 per share.

Icahn said in an interview with CNBC last Wednesday that he believes YHOO is undervalued and that he “opposes breaking up the company in a piecemeal sale” (NY Times’ Dealbook has the transcript). While we can only speculate as to Icahn’s investment thesis for YHOO, that statement leads us to believe he is valuing it on an earnings or cash flow basis. YHOO’s Cash from Operating Activites is impressive at $1.9B in 2007 and $347M in the most recent quarter to September. Even more impressive is that it achieved that operating cash flow on only $9.5B of equity (up from $9.1B in the prior year), which means it returned around 21% on average equity. We’ve got no idea about the future economics of YHOO’s businesses or the industry as a whole, so we can’t predict whether YHOO can continue to generate these types of returns and we won’t be speculating as to its value on an earnings or cash flow basis.

The catalyst

Icahn, who currenly sits on the board and holds 5.5% of the company, will be the driving force in any deal involving YHOO. His decisions will likely be informed by the fact that he has paid an average of $23.59 per share to accumulate a 5.5 percent stake (according to this filing with the SEC). There are a number of suitors seeking to consumate a marriage with YHOO. This Wall Street Journal article (subscription required) suggests former AOL chief Jonathan Miller is talking to investors about raising money to purchase all or part of YHOO. Icahn has said that he would be opposed to a partial bid “even at a premium.” He also expressed doubts about Miller’s ability to raise the money but would be willing to listen if Miller made a “bid at a very high price”. Another possibility is Microsoft, which has recently engaged a former YHOO search and advertising executive, but Microsoft CEO Steve Ballmer told the Wall Street Journal Thursday (subscription required) that there were no talks to acquire YHOO’s search business.

Icahn has a long history of succesful activist investment, with recent high profile campaigns against  Blockbuster, Imclone, XO Communications, Mylan Laboratories and Time Warner. According to this 2007 Fortune profile, he is renowned for taking on the biggest targets while generating exceptional returns:

In its less-than-three-year existence, Icahn Partners has posted annualized gains of 40%, investors told Fortune. After fees, the investors pocketed 28%. That 40% gain trounces the S&P 500’s return of around 13%, as well as the 12% for all hedge funds calculated by research firm HedgeFund.net. Icahn Partners boasts a string of big wins in short periods. The acquisition of energy producer Kerr-McGee gave the fund a $300 million gain, or a 100% return in just nine months. Icahn Partners achieved gains of $100 million and $230 million, respectively, both in less than three months, on forcing the sales of Fairmont Hotels & Resorts and drugmaker MedImmune.

The same Fortune article suggests that Icahn’s biggest strength is his knack for picking targets:

His skill at prospecting is so well honed that in most cases he’s destined to make money from the day he buys the shares. Then it’s a matter of squeezing management to sweeten the inevitable gains.

This is high praise indeed. Given that has paid an average of $23.59 per share for YHOO, he clearly sees value well in excess of that number and will be agitating for it to be realised.

Conclusion

YHOO is not cheap on any theory of value we care to employ. It is trading at a substantial premium to its asset backing, which means the market is still generously valuing its future earnings. It is generating substantial operating cash flow and earnings, which in a better market might be worth more, but it’s not obviously cheap to us.

The best thing about YHOO from our perspective is the presence of Carl Icahn on the register. His holdings were purchased at much higher prices than are presently available and he is unlikely to sit idly by while the stock stagnates.

Buying YHOO at these prices is a bet that Icahn can engineer a deal for the company. Given his legendary status as an activist investor earned through canny acquisitions over many years, we think that’s a good bet. And a bet is what it is - it’s speculation and not investment. If speculation is your game, then we wish you the best of luck but know that the price might fall a long way if he sells out. If you’re an investor, the price is too high.

[Disclosure: We do not have a holding in YHOO. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.]

A very good friend of mine asked me last week. “If you know what everyone else knows, how do you beat the market?”

It’s a great question and more often than not, this is how most people lose money and believe that the stock market is a giant roulette wheel, sometimes falling in the green sometimes falling on red, and sometimes, sometimes, it hits the 1 in 37 chance of zero or double zero (huge rallies in either direction of the market causing investors to think they are geniuses or idiots for making or losing money that particular day).

There are several ways you can beat the market

Leveraging up is the easiest ways you can “outperform” the market.  If the markets have been going up 10%, borrowing 100% of the capital in your trading account should net you 20%.  You’ve just earned a return twice the market.  This seemed to have been the magic formula that a large percentage of the hedge fund industry had been implementing.  They found a strategy that generated 2-3% almost consistently from year to year. however nobody is impressed with a 2-3% return, so these hedge funds borrowed money from their prime broker of upwards of 8x (some hedge funds were able to borrow up to 100x their trading capital (think Long Term Capital Management). Viola, the hedge funds were trading gods that were generating double digit returns that “outperformed” the market.  This however is a double edged sword.  Lets say the hedge funds got the direction wrong with leverage, they stood to lose a massive amount of money (This is what happened in 2008 and sparked a massive sell-off in the markets through hedge fund selling and the ensuing redemptions from investors).

A 2nd way to generate returns

Accurate information is hard to come by since you have teams of investment professionals who do their due diligence on wagering in aggregate tens and hundreds of billions dollars a day.  Accurate information alone doesn’t help you make excess returns, accurate information that nobody expects is what will help you beat the market.

Microsoft, a widely followed stock that everyone in the world watches. It is often hard to know what the future earnings will be on this company.  “Analysts” expect it to earn between 2.08-2.43 earnings per share next year.  Having accurate information between that range will not help generate excess returns since these returns are “expected”.  Knowing that Microsoft will lose or earn a substantial amount above consensus is information that would be useful to generating excess returns.  This obviously is very hard without detailed knowledge and possible insider information.

Not only do you need accurate information, you need timely information, information that you know and realize before anyone else does. you have to be able to put in your bets before the market goes against you.

Being too early is the same as being wrong in the financial markets.  You may see the markets going down in the long run but if you are too early in shorting the market, you may get hurt on the huge rally before the crash.

This leaves the last choice for investors to generate returns that beat the market.  Having better understanding of the market.  A favorite quote of mine from the famous Warren Buffet:

” Be fearful when others are greedy, and be greedy when others are fearful”

This doesn’t mean you should go out and do opposite of what everyone else is doing. Like all good poker players know, you need to pick your spots on when you can take entire stacks from the table. (I wouldn’t be picking up any old company just because it’s trading below its book value)

There are numerous ways to generate excess returns but this is theoretically one of the safer ways.  This isn’t a surefire way to make money in all markets (I wouldn’t be posting this if I had the magic formula to the market).

Some people call it value investing, others call it , buying low, selling high, some people call it market timing, others call it luck, whatever it may be.

To me, its pouncing on opportunity when you see one.

What happened to the global economy and what we can do about it

This is the second in my new occasional series of reflections on some of the root causes of the global economic crisis. As is probably evident from the first one, I’m not going to try to identify the cause of the crisis, or even render particularly analytical judgments about the relative importance of various contributing factors. Instead, I’m more just presenting and thinking about some of the forces that were at work.

One of the singular features of the last decade was the U.S. housing bubble (replicated elsewhere, such as the U.K. and Spain, but nowhere on such a grand scale), which was accompanied by a broader though not quite as frothy bubble in asset prices overall, including the stock market. One of the standard explanations is that bubbles are created when greed takes over from fear: people see prices rising, and at first their fear of getting burned keeps them on the sidelines, but as the bubble continues and other people get rich their own greed increases until it wins out over fear, and they buy into the bubble as well. As a result, some say, we are bound to have bubbles periodically, especially when new investors (young people), who have never experienced a crash, come into the market.

There is psychological research that not only backs all of this up, but goes even further and says that bubbles are a virtual certainty. Virginia Postrel has an article in The Atlantic that centers on experimental economics research by people such as Vernon Smith and Charles Noussair. In one experiment, investors trade a security that pays a dividend in each of 15 periods and then vanishes; the dividend in each period will be 0, 8, 28, or 60 cents with equal probability, so the expected dividend is 24 cents, and there is no time value of money (the whole experiment takes an hour). Despite the fact that the fundamental value of the security is absolutely, completely, easily knowable, bubbles develop in these markets . . . 90% of the time. When the same people repeat the same experiment, the bubbles get gradually smaller; but simply change the spread of dividends and the scarcity of the asset, and the bubbles come back with full force (so much for experienced investors).

The implication is that if you put people in front of a market that is behaving a certain way, you are going to get a bubble. It’s not simply a question of not understanding the fundamentals, or getting suckered by real estate brokers, or trying to keep up with the Jones’s new McMansion (although all of these can help amplify the bubble); people are just wired to create asset price bubbles. The fact that we have so few of them is probably a reflection of the size of asset markets (it takes longer to get millions of investors bought into a bubble than a few dozen) more than anything else.

Certainly there are things that we (or policymakers, rather) can do about bubbles. If they see a bubble building, they can try to talk it down, or try to make money more expensive, or start selling lots of the thing that is appreciating quickly. But this hinges on two things: the ability to spot the bubble, and the will to do something about it. It’s not helpful to have a belief on principle that asset prices are always rational, because then you will never do anything about them. (As an aside, perhaps one solution would be to have some form of market intervention that is automatically triggered when some class of assets accelerates beyond a predetermined threshold - precisely to eliminate the ability of policymakers to convince themselves that “things are different this time.”)

But the broader point, I think, is that it’s not that useful to say the bubble happened because people were stupid, or greedy, or irresponsible. Yes, people can be stupid, greedy, and irresponsible, but you have to take people the way they are; mass psychological reeducation is not an option. And even if you could reeducate them to the point where they all fully understood the assets they were trading, there would still be bubbles.  The issue to focus on is what regulatory policies or systemic changes can limit the incidence and cost of bubbles. (There’s an argument to be made that individuals should not be managing their own investments, since on average they just destroy value. But in an individualist, free-market society like ours, that argument will never fly.)

Besides the greed of the common man, though, much more has been made of the greed of the Wall Street banker. One argument, heard often around the time of the voting on the initial bailout bill, was that the financial crisis was caused by greedy bankers (and mortgage brokers, and hedge fund managers, and anyone else involved in the securitization chain) who created exotic new financial instruments and took on excessive risks in order to make lots of money for themselves. This has never satisfied me as an explanation. As I read somewhere, greed is like gravity. (I tried to look that phrase up to see whom to attribute it to, but apparently it’s a commonplace with no known source.) Blaming a financial crisis on greed is like blaming an airplane crash on gravity. Sure, there may be some correlation between greediness and working in certain parts of the financial services industry. But take people randomly off of Main Street and put them in that position - where most of your compensation is in a year-end bonus, and your bonus depends on the volume of business you do that year, not on the long-term profitability of that business, or on the success and satisfaction of your customers, and no one can take that bonus away from you in the future - and I wouldn’t bet that they would behave any differently.

Henry Blodget - yes, that Henry Blodget - has a variant of this argument in an article also in The Atlantic (yes, I’m a subscriber, and I finally found a few minutes to look at the latest issue). After the usual explanation of bubbles, he looks at things from the Wall Street perspective.

This is similar to my earlier theory about why banks won’t lend. It’s also similar to Andrew Lo’s explanation of why chief risk officers didn’t clamp down during the bubble. Basically, the incentives are such that it is more valuable to you or your company to be doing roughly what everyone else is doing than to do what you think is right (not in the moral sense, but in the profit-maximizing sense). We thnk the capitalist system is wonderful because all firms act to maximize their profits (and I do think that capitalism is the best economic system around, if that phrase even means anything), but the fact is that firms are made up of people, and the connection between the interests of those people and the interests of their firms is indirect at best. OK, I’ll cut off the tangent there; the rest of that thought will have to wait for another post.

In any case, the question isn’t how to make bankers less greedy, but how to create incentives that better align their personal greed with the interests of their firms and their clients. And how to do it without doing things that are possibly unconstitutional - like simply banning certain forms of compensation - or that have all sorts of unanticipated consequences. Maybe strict limits on executive compensation would do the trick. I know the argument that this will deter talented people from entering the industry, but - and the business world is one place where I do have a lot of experience - the difference in “talent” between CEOs and people one or two levels down is minimal if not negative. (Rakesh Khurana has a book on the distorted market for CEOs, and either he or Jim Collins - can’t remember which - has evidence that companies would be better off promoting people (who have never been CEOs) from within than shopping on the CEO market.) Put another way, I think there are plenty of hardworking, bright, experienced people in banks today who would be happy to be senior executives for a mere $1 million per year.

In the end, this is all probably pretty obvious: don’t blame people for being the way they are, and instead try to create structures and incentives that will protect them (in general) from themselves (in particular). More on that another time.

December 7, 2008 at 11:47 pm

“Audio Panton, Cogito Singularis, Listen to everything, think for yourself.”

December 7, 2008

We Hold These Truths by Richard C. Cook

Even as preparations are underway for Barack Obama to assume office as the 44th president of the United States on January 20, the U.S. military juggernaut that is roaring toward global conquest hasn’t missed a beat. This is shown by the team of hawks—including holdover Robert Gates at Defense and Hillary Clinton as Secretary of State—that Obama has assembled to handle the levers of the war machine and its diplomatic front.

WESTERN DRIVE TOWARD WORLD DOMINATION

The horrors of the George W. Bush administration may only have been one chapter, though it was the actions of Bush and his cronies—starting with 9/11— which removed all doubt that the intent of the Western ruling class is to dominate the world by any means possible.

Behind this intent are the people David Rockefeller famously identified at a 1991 meeting of the Bilderberg Group, when he said: “The supra-national sovereignty of an intellectual elite and world bankers is surely preferable to the national auto-determination practiced in past centuries.” No one needs conspiracy theories when the perpetrators are this blatant.

Rockefeller and his internationalist associates have not just made untold fortunes. They have also immeasurably damaged the nation our forefathers created and which offered them the freedom to become rich and powerful. Ironically, it was John D. Rockefeller, Jr., who restored the Virginia colonial capital in Williamsburg where on May 15, 1776 the Virginia Convention instructed their delegates in Philadelphia to enter a motion for independence.

But 1776 was another era, when our ancestors really believed that “all men are created equal” and that “life, liberty, and the pursuit of happiness” were “inalienable rights.” Today, the globalist financiers are trying to shore up the world’s failing financial institutions. But they are doing nothing to stem the slide into a worldwide depression that is starting to destroy the livelihoods of huge numbers of people.

MIS-DEFINITION OF CREDIT A ROOT CAUSE OF THE CRISIS

What this really means is that the financial controllers are robbing the world of the peace and prosperity that could be in reach through economic democracy and the fair distribution of resources. It would not be that difficult for us to engage in mindful cultivation of the Earth’s bounty in order to provide a decent living for all.

It could be done by changing the way money is created–from the debt-based system where credit is introduced only through bank lending to grassroots systems of credit creation advocated by the monetary reform movement. This could be done if credit were treated as a public utility, like clean air, water, or electricity, not the private property of the financial elite. Two good examples of this movement are the ideas of Social Credit based on providing citizens’ dividends similar to the Alaska Permanent Fund and the American Monetary Act of the American Monetary Institute that advocates direct payment by government for public expenditures  as with the Civil War Greenbacks.

It is the mis-definition of credit that allowed the banks to create the massive speculative bubbles in housing, commercial real estate, equity and hedge funds, commodities, and derivatives that have exploded. These bubbles can never be re-inflated, no matter how many trillions of dollars the government injects into the failed trickle-down system. The bubbles cannot be re-inflated because the public cannot afford to repay the loans they are ultimately based on. Consumer purchasing power is spiraling downward practically by the day as jobs disappear.

The banking system and the military machine work hand-in-hand, because the financial system is so unbalanced and exploitative that it can only be maintained through brutal force, both within and among nations.

LESSONS OF HISTORY

The mailed fist of Western military might is the embodiment of the drive toward global dominance that goes back at least to the 15th century. It was then that the emerging nations along the Atlantic coast of Europe—Spain, Portugal, France, the Netherlands, and England—began to send armed soldiers abroad on sailing ships bristling with cannon. The purpose? To conquer the territory and secure the wealth of older cultures which lacked the military means to defend themselves.

These swashbucklers were bolstered by two ingredients essential to any such large-scale undertaking. One was a source of money to finance the enterprise, and the other was an ideology that could be used to assuage the nagging of conscience which naturally arises whilst taking the lives and stealing the property of fellow human beings.

The first requirement—money—was initially met by looting the indigenous cultures of the Americas of their gold and silver, then using it to capitalize the fledgling banking system. Similar looting has continued until today.

Stops along the way included the British takeover of the fabled wealth of India, the plantations of America being worked by slaves dragged from Africa, the Chinese Opium Wars, and the Anglo-American conquest of the Middle East and its oil. Facilitating the mayhem was creation of the fractional reserve banking system overseen by the Bank of England, founded in 1694, and the Federal Reserve, which dates to 1913.

The second need was for an ethnocentric religion–Christianity–that justified the killing and enslavement of non-believers who in most cases had never even heard of it before. This was satisfactorily met by the Christian churches which adopted the geopolitical exigency that white men who worshiped at their altars were entitled to rule the Earth.

The nations so fortunate as to find themselves in the forefront of progress acquired the wherewithal to add to their wealth through an ideology based on exclusive ownership of the fruits of science and technology. As the Industrial Revolution developed, the only choice seemed to be control of the means of production either by the capitalist elite or the totalitarian state.

The white man’s greed propelled them into countless wars of aggression around the globe along with two fratricidal wars—World Wars I and II. In these wars tens of millions of were slain. These calamities left standing the greatest white Western nation of all—the United States.

This was both just and natural, since it was the U.S. with its melting pot that blended denizens of all the warring European nations, including the Jews who arose from the Khazar region of Russia and, moving to the West, came to dominate high-finance.

The U.S. enjoyed the size, resource wealth, and geographic situation—North America being a natural fortress—to serve as headquarters for what is now the final assault on the regions still not entirely subdued—namely the giant mainland nations on the continent of Asia. Along the way, America’s minority races, most notably its African-Americans, demanded and were granted at least a semblance of equal rights under the law. To their credit, many Jewish-Americans were instrumental in securing the victories of the civil rights movement.

THE SCENARIO FACING BARACK OBAMA

So Barack Obama was elected. Now president-elect, he has stepped into a scenario where the actors in the drama—the generals, arms merchants, and spies who do the dirty work—are poised for the final step in the scenario. This could go so far as instigating a Third World War to be launched against Russia and China. The military planners are preparing for it.

A flanking movement is going on in space through NASA’s new manned lunar program aimed at setting up what could be a military base at the Moon’s south pole. Russia and China, along with the European Space Agency and India, are competitors in the race to colonize the Moon and use it for military advantage.

This culminating phase of world disorder began in earnest with the Reagan military build-up in the 1980s and the “Reagan Doctrine” of proxy-wars against supposedly left-leaning nations, including the funding of Osama bin Laden’s Islamic mujaheddin who fought against the Soviets in Afghanistan.

Reagan took the first steps toward weaponizing space through his Strategic Defense Initiative—“Star Wars”—program announced in 1983. This failed when the Air Force’s test platform—the space shuttle—was grounded after the Challenger disaster of January 28, 1986. (Richard C. Cook, Challenger Revealed: An Insider’s Account of How the Reagan Administration Caused the Greatest Tragedy of the Space Age)

In 1991 the Soviet Union broke apart, with George H. W. Bush taking advantage of the confusion by launching an attack on Iraq. But there was unfinished business in Europe. Yugoslavia was a Slavic nation with ties to Russia. Presto, during the Clinton administration the Serbs were identified as engaged in “ethnic-cleansing,” and through 38,000 bombing sorties by NATO over a 78-day period, the Balkans were re-Balkanized and the bankers who ran the European Union were able to move in for the takeover of that sorrow-filled region.

With the Balkan front secured, the military under George W. Bush next used the 9/11 attacks as an excuse to invade Afghanistan and—again—Iraq. Israel was along for the ride, though it is often difficult to tell which of the two—the U.S. or Israel—is the pilot and which the co-pilot.

By the end of the Bush administration, Obama, in his presidential campaign, was calling for escalation of the conflict in Afghanistan, possibly intended by the script writers as a flanking movement to cut off Russia from Iran. This appears to be the start of the final Western assault on South Asia. Pakistan in particular is now high on the list of U.S. targets, with Obama saying he will send in U.S. forces whenever warranted.

WILL THEY START WORLD WAR THREE?

The Muslims of Pakistan were once among the most highly cultured people on Earth. But the West never gave up on control of the Indian Subcontinent, even after independence. The British had adopted a divide-and-conquer strategy by supporting the 1946 partition between India and Pakistan, and Pakistan’s aspirations were destroyed in the 1970s when the Western intelligence agencies attacked the great nationalist modernizer, Zulfikar Ali Bhutto. They did this by instigating a fundamentalist revolt, followed by a military coup by Pakistan’s U.S.-backed generals.

Now, with the recent attacks on Mumbai by Islamic assailants and India refusing to relinquish Kashmir, Pakistan and India can be managed separately, even as India becomes more dependent on the U.S. for nuclear technology. Iran, which is being surrounded, will likely soon find that its number has finally come up.

It is unclear the extent to which South Asia can and will maintain its self-determination. But once the region is controlled,  the war against Russia and China can start in earnest. However, a parallel attempt is being made to absorb Russia through rapprochement between it and the E.U. If this feint succeeds, the wealth of Siberia may fall into the hands of the Western bankers without a shot ever being fired, though the European financiers will enjoy a clear advantage in reaping the spoils over the Americans. Such an attempt to bring Russia under Western financial control took place in the 1990s but failed when Putin took over.

Today, military planners likely assume that China, the West’s great bogeyman for the 21st century, will be backed into a corner. But the Chinese, who know that a strong economy sooner or later will translate into military power, grow stronger all the time. Of course the inscrutable Russians may have surprises up their sleeves. They may not be holding tight to all those nukes for nothing.

Some might object that the Western military planners, especially those within the U.S., are skating on thin ice due to the financial crisis. But the crisis has not stopped the war effort. It is funneling more of the wealth into the hands of the bankers than ever before, thereby enriching the ones who are in charge and providing them with increased material security from which to rule. U.S. military leaders have lobbied for budget increases, and Obama appears poised to accommodate them. Because investors are flocking to Treasury securities as a save haven from stock market losses, there is no shortage of borrowed money.

Granted, the financial crisis has reduced the income security of huge swaths of people both in the West and the developing nations and has put them ever deeper in debt. But the stressed population desperately needs jobs so will continue to provide cannon-fodder for the military and willing minds and hands to work in the defense factories and think tanks. Obama’s plan to pump money into infrastructure spending may help, but even a $600 billion stimulus is only $2,000 per capita and will take time to show results. This too is a deficit spending program based on money borrowed through the banking system.

OBAMA’S DILEMMA

Is there any way Barack Obama can do anything substantive to resolve the crisis?. As Australian author Omna Last recently wrote on his website (www.omnadeLight.com) and gave permission to reprint:

“In 2008 Barak Obama appeared from the wings, front-stage in the midst of the American melodramatic psycho-drama. He was also half-Negro and half-white. A majority of Americans were so fed up with the rule of the white-man-machine, they were willing to vote in a half-black man as president. The question was: would he have the integrity and strength of character not to compromise his principles? Would he be able to break through the ruling white-man paradigm and start an American dialogue with the rest of the world, and leave behind its incredible blind arrogance that permeates right through the culture, resulting in a subconscious belief that America’s manifest destiny is to be the arbiter of the world’s tastes, immorality and non-values?

“And would he be able to take advantage of the wisdom and strength provided by his black genes to bring a new ruling hybrid dispensation to the world? Would he be the symbol for a new type of Earth person – a true planetary representative? Would the ruling white secret brotherhood allow him to use his presidential power?

“Or would they need to worry? As a senator, Obama voted to renew the Patriot Act, supported the death penalty, affirmed Bush’s secret surveillance of the American people, and called for a cut in the corporate tax rate. He wanted to expand the war in Afghanistan, failed to call for a reduction in defense spending, and, as a tool of the Zionist lobby, was insisting that Iran even stop enriching uranium. Obama’s selection of Rahm Emanuel as White House chief of staff is a signal that Obama is either incredibly naive or has been forced by his minders to play ball with the devil.

“Obama is probably an idealistic, courageous man, who persuaded a majority of Americans to believe in their own better natures. Obama’s place at the pinnacle of official power lifts a veil that has obscured the world for a thousand years. It signifies the end of white supremacy, imperialism, racism. Every tribe and race of people, just as with each animal species, has something unique to add to the genetic and cultural brew of humanity. Although Obama was supported and promoted as a tool of the insider establishment, it may be that he will turn his back on the sleaze of his secret backers and try to institute a new paradigm. Perhaps Barack Obama is a symbol of a change in the wind, and the emergence of a new kind of man - an Earth man - one who encompasses many facets of the jeweled organism that is this planet.

“Zawahiri issued a tape declaring Obama to be a House Negro. Was Obama a naïve fool, who had been set up to sup with the devil? He is probably a good man, but naive and misguided, probably with more ambition than good sense. The chimera of power, of rubbing shoulders with the insiders of the money-power-tree had been the bait. Had the new brown fish been reeled in to shine as front-man for the men of the purveyors of an old wine in a new bottle? Was a bright new label to placed on the old bottle of American capitalism, a wine already turned sour in 1929 – but in 2008 turned quickly from unfettered free market capitalism to the secret cartel’s intervention in every pie?

“An incredibly clever game had been played. As Russia in 1917 had been secretly taken over by a Jewish financier-backed conspiracy, so in 2009 the wheels that had been set in motion by Greenspan in 1987 had been geared up. The Zionization of America was no longer a banker’s wet dream. It was now possible…people tracked by computer chip…the masses in permanent debt, desperate and afraid. Or would Obama prove to be a man of the quality of Jack Kennedy? Would he stand up to the amorphous establishment? Would he change their hearts and minds, just by the power of his convictions?”

WHAT THE CONTROLLERS LEAVE OUT

Good questions. Only time will tell. The only thing that seems to be left out in the conniving of the financial controllers and the plans they are calmly working out on their underground supercomputers is consideration of what really is the objectively conscionable way for us to behave as human beings on this planet.

Perhaps at the cellular level the controllers have the nagging suspicion that maybe there really is a God who is not entirely comfortable with a world civilization based on exploitation, pollution, and a mad compulsion to force society to engender enough “growth” to outrace the exponential increase of compound interest.

Perhaps the controllers fear that the billions of people on Earth who are not white Western males of Judeo-Christian extraction might also have a place in His/Her heart. Perhaps Obama, despite all the compromises he has made, makes them feel a little bit uncomfortable.

Copyright 2008 by Richard C. Cook

see

Cook-Richard C.

The Economy Sucks and or Collapse 2

Obama-Barack

Citizens’ Economic Stimulus Plan: Stop Paying Credit Card Debt by Richard C. Cook

War or Peace? By Richard C. Cook

The G20 Won’t Change This Financial Crime Scene by Richard C. Cook

How to Save the U.S. Economy by Richard C. Cook

Michael Hudson: We Let The Crooks Take Over (2007)

Apocalypse? by Omna Last

Mumbai India Terrorist Attacks November 26 2008

***

***

[...] Obama and the World Crisis by Richard C. Cook [...]

“Audio Panton, Cogito Singularis, Listen to everything, think for yourself.”

Dandelion Salad

Weakening the economy, leaving it even more debt-strapped.

I think that the Big Three U.S. automakers have made repeated strategic mistakes. They have not managed that industry the way they should have. … What we have to do is to provide them with assistance, but that assistance is conditioned on them making significant adjustments. They’re going to have to restructure, and all their stakeholders are going to have to restructure. Labor, management, shareholders, creditors - everybody’s going to recognize that they have-they do not have a sustainable business model right now. And if they expect taxpayers to help in that adjustment process, then they can’t keep on putting off the kinds of changes that they, frankly, should have made 20 or 30 years ago.

… if taxpayer money is at stake … we want to make sure that it is conditioned on a auto industry emerging at the end of the process that actually works, that actually functions. … But I’m also concerned that we don’t put 10 or 20 or 30 or whatever billion dollars into an industry, and then, six months to a year later, they come back hat in hand and say, “Give me more.” Taxpayers, I think, are fed up.

What is important to understand is that the bad-loan problem is concentrated at the top layer (the 15% or so wealthiest banks), the big Wall Street conglomerates created after the Clinton Administration embraced the Republican policy of repealing Glass-Steagall and letting banks form non-bank conglomerates. The bailouts do not end up with these banks or with A.I.G. itself, but with their counterparties on the winning side of bets made against the banks and A.I.G. who now want to collect from financial institutions that can’t pay. It’s like gamblers in a casino that’s gone broke, asking the government to bail them out or “the system” will collapse.

What is this system that Congress and Mr. Obama are rushing to strenuously to rescue? Essentially, bank officers and A.I.G. insurance salesmen behaved like casino dealers who did not mind losing as long as they got a paycheck enabling them to live very, very well.

Not all casinos go broke, and the vast majority of U.S. banks and insurance companies avoided making big gambles. The bailout has little to do with them. And it has little to do with “the economy.” It has to do with crooked mortgage brokers working for crooked banks who corrupted the political process with their campaign contributions, to make losing bets against clever financial gamblers who borrowed huge enough sums at interest from these banks to leverage their bets that the banks now hold to at least let investment bankers and commercial bankers become the highest paid individuals in human history. But should one say that this unique historical event really is “the economy”? Or is it an excrescence? Would the economy be better off WITHOUT these bank and A.I.G. debts being “made whole”?

Is it not hypocritical for Mr. Obama to criticize the auto companies for producing gas guzzlers that pollute the physical environment, without criticizing the big Wall Street campaign contributors for doing the same to the economic environment? “I’ve had my team have conversations with these folks to see how can you keep the automakers’ feet to the fire in making the changes that are necessary,” Mr. Obama explained to Tom Brokow, “some people have said let’s just send them through a bankruptcy process. Well, even as large a company as GM, in ordinary times, might be able to go through a Chapter 11 bankruptcy, restructure, and still keep their business operations going. When you are seeing this kind of collapse at the same time as you’ve got the financial system as shaky as, as it is, that means that we’re going to have to figure out ways to put the pressure on the way a bankruptcy court would, demand accountability, demand serious changes.”

Mr. Obama finished up by saying that “we have to put an end to is the head-in-the-sand approach … And what we still see are executive compensation packages for the auto industry that are out of line compared to their competitors,” adding that “it’s not unique to the auto industry. We have seen that across the board. Certainly, we saw it on Wall Street.”

But he seems not to understand what the problem is. Turning explicitly to the financial crisis, Mr. Obama said, “you, you had a huge amount of debt, a huge amount of other people’s money that was being lent, and speculation was taking place on-based on these home mortgages. And if we can strengthen those assets, then that will strengthen the financial system as a whole.”

Mr. Obama’s second part of his sentence recommending reform proposes to do just the opposite. He has thrown his support fully behind Treasury Secretary Henry Paulson, by pretending that the way to revive the economy and banks it to inflate a debt-fueled real estate boom once again. Prospective home buyers are supposed to go even further into debt in order to provide the banks with enough extra interest charges to earn the money to become solvent again. (They are as deep in Negative Equity as are the subprime mortgage debtors they and their affiliates have victimized.) When Mr. Obama speaks of “strengthen[ing] those assets,” namely, homes and office buildings, “then that will strengthen the financial system as a whole.”

But it will weaken the economy, leaving it even more debt-strapped.

© Copyright Michael Hudson, Global Research, 2008

The url address of this article is: www.globalresearch.ca/index.php?context=va&aid=11321

see

Automakers Return to Capitol Hill + Ralph Nader and Medea Benjamin on Obama’s Cabinet

Michael Hudson: We Let The Crooks Take Over (2007)

Obama and the World Crisis by Richard C. Cook

“Oops, We Meant $7 TRILLION!” by Ellen Brown

Hudson-Michael

The Economy Sucks and or Collapse 2

Obama-Barack

I am Canada’s WAR CRIMES coordinator and I deserve protection.

KABUL, Afghanistan — Taliban insurgents carried out a bold assault on a remote base near the border with Pakistan on Sunday, NATO reported, and a senior American military official said nine American soldiers were killed.

Although military investigators determined within days that the onetime NFL player was killed by his own troops in Afghanistan following an enemy ambush, five weeks passed before the circumstances of his death were made public. During that time, the Army claimed Tillman was killed by enemy fire.

The panel acknowledged Monday it had fallen short of this goal. The committee received a flurry of White House e-mails sent as the Bush administration responded to Tillman’s death, but no documents about friendly fire. The committee interviewed several top White House officials about the case, but “not a single one could recall when he learned about the fratricide or what he did in response,” it said in its 48-page report.

“As the committee investigated the Tillman and Lynch cases, it encountered a striking lack of recollection,” the report said.

The panel concluded that the lack of information “makes it impossible for the committee to assign responsibility for the misinformation in Corporal Tillman’s and Private Lynch’s cases.”

Jim Wilkinson, a onetime White House official who was communications director for U.S. Central Command, told the committee he did not know where the false information on Lynch originated, or who disseminated it.

In the case of Tillman’s April 22, 2004, death, White House officials generated nearly 200 e-mails on the matter the day after, the committee found. Politics seemed to fuel the administration’s interest: Several of the e-mails came from the staff of President Bush’s re-election campaign, urging Bush to respond publicly.

The White House “rushed” to release a public statement of condolence at about noon on April 23.

But in doing so, the White House violated a military policy enacted into law by Bush himself in 2003, the committee found. The Military Family Peace of Mind Act bars the announcement of a casualty until 24 hours after a family is notified.

The Defense Department, adhering to the policy, had not yet publicly confirmed Tillman’s death when the White House released Bush’s statement of condolence.

Realizing this belatedly, White House spokewoman Claire Buchan warned her colleagues in an e-mail: “alert — do not use Tillman statement.” But news services were already running the White House statement.

The White House also failed to determine whether information about Tillman’s death was classified, the committee found. Tillman’s Ranger unit was routinely involved in sensitive operations along the Afghanistan-Pakistan border.

In a chain under the subject line “H-E-R-O,” Rove replied to an e-mail from Fournier by saying, “How does our country continue to produce men and women like this?”

Fournier replied, “The Lord creates men and women like this all over the world. But only the great and free countries allow them to flourish. Keep up the fight.”

Fournier, now the AP’s acting Washington bureau chief, said Monday: “I was an AP political reporter at the time of the 2004 e-mail exchange, and was interacting with a source, a top aide to the president, in the course of following an important and compelling story. I regret the breezy nature of the correspondence.”

The story of Tillman, a man who gave up a lucrative career in professional sports to serve in the Army, “made the American people feel good about our country … and our military,” Bartlett told the committee. But he acknowledged the statement might “set a precedent.”

While Bush and other presidents have often delivered humorous remarks to the gathering, Bush had “got singed pretty bad” the previous year for making what some critics perceived as inappropriate joking remarks during wartime, Bartlett said. So the White House made a deliberate decision to “pay tribute to the troops,” and made Tillman’s death the week before the centerpiece, he said.

“The report contains no evidence that the White House said anything incorrect or misleading regarding the death of Corporal Tillman,” Bohn said. “Our thoughts and prayers remain with the Tillman family.”

The authors of the new report carefully avoided assigning blame or intent in either the Tillman or Lynch cases. But, they concluded: “In both cases, affirmative acts created new facts that were significantly different than what the soldiers in the field knew to be true. And in both cases, the fictional accounts proved to be compelling public narratives at difficult times in the war.”

Buryj’s parents accepted an invitation to meet Bush at a July 2004 campaign rally. They told investigators they had pressed Bush to help them find answers about their son’s death, and said Bush agreed to help.

“A few months later, a Bush-Cheney campaign official contacted the family,” the congressional investigators found. “Rather than offer assistance, the official asked Specialist Buryj’s mother to appear in a campaign commercial for the president. Mrs. Buryj refused.”

___

On the Net:

By Randall Mikkelsen

(Editing by David Wiessler)

The representatives of the French people, organized as a National Assembly, believing that the ignorance, neglect, or contempt of the rights of man are the sole cause of public calamities and of the corruption of governments, have determined to set forth in a solemn declaration the natural, unalienable, and sacred rights of man, in order that this declaration, being constantly before all the members of the Social body, shall remind them continually of their rights and duties; in order that the acts of the legislative power, as well as those of the executive power, may be compared at any moment with the objects and purposes of all political institutions and may thus be more respected, and, lastly, in order that the grievances of the citizens, based hereafter upon simple and incontestable principles, shall tend to the maintenance of the constitution and redound to the happiness of all. Therefore the National Assembly recognizes and proclaims, in the presence and under the auspices of the Supreme Being, the following rights of man and of the citizen:

Articles:

Enlarge Image

Darius the Great: In the late sixth century BC, much of the country was absorbed into the Persian empire of Darius the Great. However, plagued by constant uprisings, the Persians never established effective control.

Alexander the Great: In the third century BC, Alexander the Great invaded. The harsh, mountainous terrain and brutal weather were only part of the challenge. The Afghans themselves were no less formidable. Constant revolts undermined whatever glory he could claim.

Genghis Khan: In 1220, the Islamic lands of Central Asia were overrun by the armies of this Mongol invader. But even Genghis Khan failed to destroy the strength of Islam there. By the end of the 13th century, his descendants were themselves Muslims.

Britain: There were three major interventions by the British Army between 1838 and 1919. Each one ultimately failed.

Soviet Union: In 1979, the Soviets rolled in about 115,000 troops. The Afghans responded with an extended guerrilla war, and in 1989 the Soviets withdrew.

Sources: The Claremont Institute, encyclopedia.com, CNN, espritdecorps.ca, channel4.com, BBC, NYT

Recent

– “Engaging and enfranchising local populations and power centres is of critical importance.”

– “Building Afghan security forces is vital.”

From the comments

ITEM: The survey, conducted between July 12-16 for CTV and The Globe and Mail, suggests the level of intensity for Canadians strongly opposed to the mission is far greater than those who are in firm support: (percentage point change from a July 12-15, 2006 poll in brackets):

Funny how there are no more recnt poll results than from 2007…

Last updated at 4:00 PM on 11th July 2008

Google Earth is a fascinating addition to anyone’s browsing pleasure, so good on you Google for making it even better.

Do you think Canada will be out of Afghanistan by 2011?

Yes

No

NEW YORK (MarketWatch) The U.S. Securities and Exchange Commission said Sunday that it and other regulators are firing up new examinations to prevent stock-price maniplation by short sellers and others.The agencies’ goal is the “prevention of the intentional spread of false information intended to manipulate securities prices.”

http://www.faulkingtruth.com/Articles/Investing101/1062.html

NOT SHORT SELLING

How about investigating pump and dump? How about BSC CEO assuring the public everything is fine and it went belly up the next couple of days?

And what do you call that? Naked pumping as opposed to naked shorting?

This is totally pathetic.

Now doesn’t this sound like manipulation?

“WASHINGTON (Reuters) - U.S. Treasury Department officials are trying to make sure that Freddie Mac, one of two troubled U.S. giant mortgage firms, will be able sell $3 billion in securities this week at a previously scheduled sale, the Washington Post reported on Sunday.

The Post said Treasury Department officials on Saturday spoke by telephone with major banks that normally purchase such securities to ensure that these firms still plan to place bids, and they were optimistic the sale would be a success.”

He was referring, of course, to the Palestinians trapped there - but that’s the most tacit apology for terrorism that I’ve ever heard. And it got worse. One person in the room was adamant that bin Laden didn’t exist, that he had been invented by the Americans as an excuse to attack Afghanistan. Three of them recounted, with straight faces, that old chestnut about 9/11 being an American conspiracy.

It’s the same cultural evolution that has allowed Harold and Kumar’s Escape From Guantanamo Bay to shoot to the top of box-office hits. The surprise success of the R-rated stoner flick that features the arrest of two hapless Americans carrying a bong on an airplane – not a bomb. There’s a pot-smoking and insecure U.S. President George W. Bush, sodomizing prison guards and a selection of xenophobic American stereotypes – all of which draw plenty of giggles.

But the growing popularity of post-9/11 satire is about more than laughs.

Political pop culture is also playing an important role in creating the legacy of the Bush administration’s Guantanamo Bay war-crimes trials. And that’s shaping up to be a far different picture than history paints of the World War II Nuremberg trials.

Guantanamo is largely being portrayed as a bad joke – especially on shows like The Daily Show with Jon Stewart and Stephen Colbert’s The Colbert Report.

“I think we’re in a period now because of people like Colbert and Jon Stewart, where comedy is really an important part of the civic equation,” said Bob Thompson, a professor and director of the Bleier Center for Television and Popular Culture at Syracuse University.

“What’s going on in those comedy shows is a pretty good treatment of some of these stories,”

Take for instance Stewart’s waterboarding last month of the supposedly long-forgotten Sesame Street character called “Gitmo,” who looks startlingly like Elmo, the red, fuzzy puppet known for his high-pitched giggle on the children’s TV program.

The Daily Show segment titled “Guantanamo Baywatch” also featured a captured photo of Gitmo made to look like the famous shot of a dishevelled Khalid Sheikh Mohammed, an alleged mastermind of the 9/11 attacks captured in Pakistan in 2003.

The clip was quickly passed around the Internet and mocked what the Pentagon had hoped would be a flawless start to the trial of the prized captive.

(The CIA has admitted Mohammed was subjected to waterboarding, a process whereby suspects are made to believe they’re drowning, which many argue amounts to torture.)

“Humour can be used to point out the absurdity of something. It has a very definitive purpose in our culture and The Daily Show does that on various levels. That’s the purpose of satire,” American comedian, writer and actor Aasif Mandvi said in an interview.

“We live in a democracy, and often humour is a way to deal with incredible, really macabre, grotesque violations and behaviour.”

Mandvi is best known as The Daily Show’s fake news “Middle Eastern affairs correspondent” and made headlines when he joined Stewart’s team in 2006.

His first segment was a mock stand-up report from Beirut during which he said people were buzzing with excitement about America’s plans for the Middle East.

When Stewart questioned him about the violence, Mandvi brushed it off: “You can’t get hummus without smashing some chickpeas.”

Though Mandvi is known best for his comedy, he’s also a playwright and serious stage actor.

Much of his recent work has been political, including the 2004 off-Broadway production of Guantanamo: Honor Bound to Defend Freedom, in which Mandvi played British Guantanamo detainee Moazzam Begg, who was freed in 2005 after the British government intervened on his behalf.

The point of the play was to highlight the illegality of holding terrorism suspects indefinitely without trial, Mandvi said. Just last month, four years later, the U.S. Supreme Court agreed in a landmark decision granting detainees access to U.S. federal courts.

“We were there to agitate the audience and make them do something,” explained Mandvi. “I think there’s a sense of, ‘Well that’s happening over there in Cuba and I guess eventually we’ll get around to doing the right thing.’

“I think most people sort of feel that the Supreme Court is on the right track, it’s going through the process of doing the right thing but that seems absurd to me – that there’s this kind of patience about it.

“When you make the argument that it’s okay for us to do something illegal because we are under attack, then you throw the entire book out. Then, everything is up for grabs and you’re in a very dangerous situation, which is where America is right now.”

Mandvi is also a Muslim American and 9/11 ushered in a sense of urgency and responsibility that he said he didn’t feel before the attacks.

Born in India as Aasif Mandviwala, he moved with his family to England as a baby, and then on to the United States when he was a teenager.

“Listen, I’m not even a devout Muslim,” he said. “I don’t always go to the mosque. I have my own issues with my religion just as Jews and Christians do.

“But I think 9/11 changed everything, obviously, and suddenly artists like myself, who were raised Muslim . . . suddenly you find yourself in this position where you’re defending and speaking up for this thing that is part of your culture and your heritage. You find yourself in the position where you’re politicized as an artist.”

Actor Kalpen Suresh Modi – better known by his stage name Kal Penn or his movie character’s moniker, Kumar – also has an intellectual and political life that couldn’t be more different from his movie persona’s.

While he said he recognizes the importance of satire in shaping public opinion, he is quick to downplay any importance of his Harold and Kumar film.

“The only real intention or motivation behind the film was to make people laugh,” Modi said in an interview.

“With that said, we each obviously have a personal opinion on this type of subject matter.

“I remember Jon Hurwitz (one of the writer-directors) saying something to the effect of, `Sometimes the greatest sources of comedy come from the greatest tragedy.’ … If that humour gets people talking about the reality of Guantanamo, wiretapping or the war, then I think that’s great – no matter what the result.”

Modi said he’s registered as an Independent voter but has campaigned for Democratic presidential hopeful Barack Obama, his first venture into political campaigning.

He also became a guest instructor this spring at the University of Pennsylvania’s Asian American Studies Program.

“Out of a class of 125, we had 20 drop the course after the first lecture because they realized that I wasn’t ‘Kumar’ and the course was actually challenging,” Modi said. “The remaining 105 students were driven, motivated and passionate about the subject material.”

Guantanamo Bay’s days are now numbered following the U.S. Supreme Court ruling last month that granted detainees the right to challenge their incarceration in civil courts, and with both Obama and Republican presidential hopeful John McCain vowing to shut down the detention centre if elected.

“The question is how much credit do you give the comedians for all that has happened” to discredit Guantanamo and other Bush post 9/11 policies, said Thompson.

“One has to acknowledge, they are certainly part of the recipe. Comedy’s popular, it goes down smoothly and a lot of comedians have been really hammering a lot of these issues in ways that people can understand because they’re not framed in complex political arguments, they’re framed in funny little bits.

“There isn’t a sense now that if comedy deals with these important issues that it’s somehow being disrespectful or trivializing it. These days, in fact, comedy, in more and more people’s eyes, is not that trivial.”

http://afp.google.com/article/ALeqM5hSlhjwupypkLwC1iOm2cCElJK7KQ

That startling allegation is in court documents released this week which show that former Qwest CEO Joseph Nacchio — the head of the only company known to have turned down the NSA’s requests for Americans’ phone records — tried, unsuccessfully, to argue just that in his defense against insider trading charges.

Nacchio was sentenced to 6 years in prison in 2007 after being found guilty of illegally selling shares based on insider information that the company’s fortunes were declining. Nacchio unsuccessfully attempted to defend himself by arguing that he actually expected Qwest’s 2001 earnings to be higher because of secret NSA contracts, which, he contends, were denied by the NSA after he declined in a February 27, 2001 meeting to give the NSA customer calling records, court documents released this week show.

AT&T, Verizon and Bellsouth all agreed to turn over call records to an NSA database, according to reporting in the USA Today in 2006. At that time, Nacchio’s lawyer publicly stated that Nacchio declined to participate until served with a proper legal order.

The government has never confirmed or denied the existence of the program, but is trying to win legal immunity for telecoms being sued for their alleged participation in the call records program and the government’s warrantless wiretapping of Americans. Turning over customer records to anyone, including the government, without proper legal orders violates federal privacy laws.

Nacchio’s attempt to depose witnesses and present the classified defense was declined by Colorado federal district court judge Edward Nottingham, a decision that is playing a role in Nacchio’s pending appeal to the 10th Circuit Appeals court.

The allegation is peppered throughout the highly redacted documents released by the lower court today, but are most clear in the introduction to this filing (.pdf) from April 2007.

Defendant Joseph P. Nacchio … respectfully renews his objection to the Court’s rulings excluding testimony surrounding his February 27, 2001 meeting at Ft. Meade with representatives from the National Security Agency (NSA) as violative of his constitutional right to mount a defense. Although Mr. Nacchio is allowed to tell the jury that he and James Payne went into that meeting expecting to talk about the “Groundbreaker” project and came out of the meeting with optimism about the prospect for 2001 revenue from NSA, the Court has prohibited Mr. Nacchio from eliciting testimony regarding what also occurred at that meeting. [REDACTED] The Court has also refused to allow Mr. Nacchio to demonstrate that the agency retaliated for this refusal by denying the Groundbreaker and perhaps other work to Qwest.

By being prevented from telling his full story to the jury or from fully and properly cross-examining any rebuttal witnesses, Mr. Nacchio has been deprived of the ability to explaoin why - after he came out of the February meeting with a reasonable, good faith, expectation that Qwest would be receiving significant contracts from NSA in 2001 … Qwest was denied significant work.

[ed note. James Payne, Qwest's government liason who was also at February 27, 2001 meeting, later spoke with government agents in 2006].

In the interview, Mr. Payne confirmed that, at the February 27, 2001 meeting, “[t]here was some discussion about [redacted]. Mr. Payne also stated: Subsequent to the meeting the customer came back and expressed disappointment at Qwest’s decision. Payne realized at this time that “no” was not going to be enough fro them. Payne said they never actually said no and it went on for years. In meetings after meetings, they would bring it up. At one point, he suggested they just them, “no.” Nacchio said it was a legal issue and that they could not do something their general counsel told them not to do. … Nacchio projected that he might do it if they could find a way to do it legally.

There was a feeling also, that the NSA acted as agents for other government agencies and if Qwest frustrated the NSA, they would also frustrate other agencies.

The Groundbreaker contract, reportedly worth $2 - $5 billion dollars, outsources the NSA’s IT management, but at least one lawsuit charges the project was cover for a domestic spying program.

Notably, after the USA Today story ran , Nacchio’s lawyer Herbert Stern, who argued his case before trial, released this statement:

In light of pending litigation, I have been reluctant to issue any public statements. However, because of apparent confusion concerning Joe Nacchio and his role in refusing to make private telephone records of Qwest customers available to the NSA immediately following the Patriot Act, and in order to negate misguided attempts to relate Mr. Nacchio’s conduct to present litigation, the following are the facts.

In the Fall of 2001, at a time when there was no investigation of Qwest or Mr. Nacchio by the Department of Justice or the Securities and Exchange Commission, and while Mr. Nacchio was Chairman and CEO of Qwest and was serving pursuant to the President’s appointment as the Chairman of the National Security Telecommunications Advisory Committee, Qwest was approached to permit the Government access to the private telephone records of Qwest customers.

Mr. Nacchio made inquiry as to whether a warrant or other legal process had been secured in support of that request. When he learned that no such authority had been granted and that there was a disinclination on the part of the authorities to use any legal process, including the Special Court which had been established to handle such matters, Mr. Nacchio concluded that these requests violated the privacy requirements of the Telecommunications Act.

Accordingly, Mr. Nacchio issued instructions to refuse to comply with these requests. These requests continued throughout Mr. Nacchio’s tenure and until his departure in June of 2002.

Note that Stern says a request was made in the Fall of 2001. Stern does not say “first approached” in the statement, though that clearly seems to be the implication. But it’s not what the four corners of Stern’s statement says. And finally, the redactions in the documents make it impossible to say what the February 21, 2001 requests from the NSA were. It could have been a request from NSA to do some other eavesdropping thing that Nacchio felt uncomfortable with, but I’m very doubtful.

See Also:

P & T; BS! - B1G BR0THER

Penn and Teller, two US comedians, lay it out.

The other lie held by those at State is that the Oligarchy and its paramilitary and military forces never kidnap or murder anyone, particularly anyone who expresses dissent within territory under their control, in the cities and the countryside. FARC opposes these activities, because unlike most Americans, they’re capable of courage and sacrifice. They aren’t perfect, and they have needless blood on their hands too. This is how a civil war works. The regime’s crimes are far-and-away greater.

But that story doesn’t fit when you’re trying to extend your influence in the South American nation, especially when American “drug interdiction” troops and advisers are being misused for counterinsurgency purposes. You need a pretext. The State Department has had to make-due with the line that “FARC is to blame for everything bad happening in Colombia.”

The former hostages are right to be angry, and wrong to point their fingers in one direction at FARC, implying that the power structure to the North is blameless. For a number of them, it’s nothing new. Recent years have amply illustrated through the atrocities of right-wing paramilitary employed by the regime that this is a lie. It’s a lie that the former hostages are willingly perpetuating, but hey, don’t they look svelte? Name one that looks fat.

There are two things that I agree on with the traditional financial planning community.

1. You should have reserves to help you through the tough times, because there will be tough times; and

2. Whatever strategy you choose (or allow someone else to choose for you), there is no reason to allow your fear/nervousness to get the best of you and change or eliminate that strategy based on fear.

Now, here is the Shafer Financial Way:

1. Create reserves first.  Save money inside a liquid fixed rate investment like a mutual fund until you have 6 months worth of expenses.  But this is a short term strategy to get started with.  Develop a long term strategy.  Perhaps start funding an Equity Indexed Universal Life Insurance policy, or use the money market account as both a reserve account and a pool in which to periodically buy Berkshire Hathaway stock.  In short, long term create reserve accounts that also will hedge against inflation for you;

2. Build a wealth creation plan.  This plan must be specific to where you are currently, where you want to be, and when you want to be there.  For example. your current working net worth is $40,000 and you want to have a working net worth of $3m in 25 years.  Then you need to create the investment(s), which will give you the best chance of getting to your goal with the least amount of inherent risk.  For example, if you need to get a 15% rate of return to reach your goal, then you need to build inside the plan the right investments that can accomplish that for you, using historical rate of return data as your guide.  You simply can’t build a reasonable plan based on beating the market, or based on financial instruments that have historically underperformed your needed rate of return;

3.  You need to fully understand the risk of failure to reach your financial goals; 

4.  You need to put all your resources to work for you.  If you have over 50% of home equity in your home, and you can take out equity to get you to the 80% mark, do it and put those dollars to work for yourself.  Don’t waste precious cash flow on luxury items until you can do so and still remain on goal.  That means buy cars that are over two years old, and don’t buy gas guzzlers.  Put off buying that entertainment center/50 inch flat screen, etc. until you can do so without having to put it on your credit card (unless it is only for payment convenience).  Concentrate on how you can increase your cash flow by starting a business, changing your job, etc.;

5. Make sure you take into consideration taxation.  It is most peoples #1 expense;

6. Don’t be afraid to take reasonable risks in order to invest in projects you are sure about, change your life to a wealth building life, and create the life you want to live.  It won’t happen if you don’t assume some risk;

7.  Find a mentor who has made his/her wealth or preferably pay for a wealth coach.  A wealth coach can make you hundreds of thousands of dollars (or millions if you have enough time) by just keeping your eyes on your goals.  Yes, this is self serving, but it is also true.  Think that Warren Buffett, Tiger Woods, Michael Phelps, etc. didn’t have coaches/mentors?   Of course they did.  Financial services sales people are not necessarily wealth coaches (usually they aren’t).  Wealth coaches might also offer financial products for sale, but they must not mix the two roles at the same time.  Look for a wealth coach that will refer you out to purchase financial products, therefore maintaining the integrity of the wealth coaching role ;and

8.  Now is the time to start.  Build your plan before the end of the year.  Implement it as soon as you can.  Change your life for the better! 

Think back to those initial estimates of the Iraq War’s likely cost–No more than $50 billion! It will practically pay for itself!–and you will be in the right frame of mind to assess current governmental expectations. 10/16/08

In early November the Fed Balance Sheet Surpassed $2 trillion, and Dallas Fed President predicted it could surpass $3 trillion by January 2009.

Lee Hoskins, a former president of the Cleveland Federal Reserve Bank, sums up why Bernanke will win no plaudits in the Central Bank Hall of Fame: “The Fed has violated two principal tenets of central banking. First, don’t lend to insolvent institutions, and second, don’t lend on anything but the most pristine collateral — and at a penalty rate.”

“What we are seeing at present is not a reduction of the debt structure of the economy, but a shift from [private to public] hands. That can lead to four results, when the debt of the US Treasury is so large that it cannot be serviced:

“Mr. Paulson said the Treasury would make $250 billion available to banks to help recapitalize those banks and to get them lending again, among themselves and to businesses and consumers.

In addition to injecting money into the banks, according to the plan, the United States would also guarantee new debt issued by banks for three years — a measure meant to encourage the banks to resume lending to one another and to customers.

The F.D.I.C. would also offer an unlimited guarantee on bank deposits in accounts that do not bear interest — typically those of businesses — bringing the United States in line with several European countries, which have adopted such blanket guarantees.

Another $125 billion is allocated for thousands of small and midsize banks. They will be eligible for government investments reflecting a similar proportion of their assets.” (NYT, 10/14/08)

Update, 10/19/08:

The intellectual failure to offer rebuttals to competing plans or to give them serious consideration is a pathetic commentary on the quality of US economic leadership. Scare-mongering and threats of economic terrorism just about exhaust their arsenal of argumentation.

Congress ought not to have given Paulson what is essentially a blank check. It is their failure, too.

As compared with the Paulson plan, Zingales’s proposal is a much better deal for the public, more respectful of basic principles of free enterprise, and more efficient in returning to a more normal credit environment.

The essence of the Zingales approach is to facilitate a process whereby insolvent firms are recapitalized in a two step process: existing shareholders are wiped out, as is the basic rule in treating with insolvent firms, and bondholder claims are converted from debt to equity. That constitutes an immediate recapitalization, addresses the fundamental problem of the debt overhang, and would allow a faster return to credit market stability than the approach the US government has favored. It is also far more consistent with elementary principles of justice and law. It is only a sort of “money grows on trees” attitude, and the ability of policymakers to confuse the public with a shell game in which true costs are minimized, that allows this to proceed. It has enormous opportunity costs.

“The core idea is to have Congress pass a law that sets up a new form of prepackaged bankruptcy that would allow banks to restructure their debt and restart lending. Prepackaged means that all the terms are pre-specified and banks could come out of it overnight. All that would be required is a signature from a federal judge. In the private sector the terms are generally agreed among the parties involved, the innovation here would be to have all the terms pre-set by the government, thereby speeding up the process. Firms who enter into this special bankruptcy would have their old equity-holders wiped out and their existing debt (commercial paper and bonds) transformed into equity. This would immediately make banks solid, by providing a large equity buffer. As it stands now, banks have lost so much in junk mortgages that the value of their equity has tumbled nearly to zero. In other words, they are close to being insolvent. By transforming all banks’ debt into equity this special Chapter 11 would make banks solvent and ready to lend again to their customers.

Certainly, some current shareholders might disagree that their bank is insolvent and would feel expropriated by a proceeding that wipes them out. This is where the Bebchuk mechanism comes in handy. After the filing of the special bankruptcy, we give these shareholders one week to buy out the old debtholders by paying them the face value of the debt. Each shareholder can decide individually. If he thinks that the company is solvent, he pays his share of debt and regains his share of equity. Otherwise, he lets it go.

My plan would exempt individual depositors, which are federally ensured. I would also exempt credit default swaps and repo contracts to avoid potential ripple effect through the system (what happened by not directing Lehman Brothers through a similar procedure). It would suffice to write in this special bankruptcy code that banks who enter it would not be considered in default as far as their contracts are concerned.

How would the government induce insolvent banks (and only those) to voluntarily initiate these special bankruptcy proceedings? One way is to harness the power of short-term debt. By involving the short-term debt in the restructuring, this special bankruptcy will engender fear in short-term creditors. If they think the institution might be insolvent, they will pull their money out as soon as they can for fear of being involved in this restructuring. In so doing, they will generate a liquidity crisis that will force these institutions into this special bankruptcy.

An alternative mechanism is to have the Fed limit access to liquidity. Both banks and investment banks currently can go to the Federal Reserve’s discount window, meaning that they can, by posting collateral, receive cash at a reasonable rate of interest. Under my plan, for the next two years only banks that underwent this special form of bankruptcy would get access to the discount window. In this way, solid financial institutions that do not need liquidity are not forced to undergo through this restructuring, while insolvent ones would rush into it to avoid a government takeover.

Another problem could be that the institutions owning the debt, which will end up owning the equity after the restructuring, might be restricted by regulation or contract to holding equity. To prevent a dumping of shares that would have a negative effect on market prices, it is enough to include a norm that allows these institutions two years to comply with the norm. This was the standard practice in the old days when banks, who could not own equity, were forced to take some in a restructuring.

The beauty of this approach is threefold. First, it recapitalizes the banking sector at no cost to taxpayers. Second, it keeps the government out of the difficult business of establishing the price of distressed assets. If debt is converted into equity, its total value would not change, only the legal nature of the claim would. Third, this plan removes the possibility of the government playing God, deciding which banks are allowed to live and which should die; the market will make those decisions.”

That’s actually the second part of the Zingales plan. The first part addresses how to deal with the housing bust, which finds so many homeowners “underwater,” that is, owing more on their homes than they are worth. In the old days, renegotiation could take place between a bank and a mortgage holder, but that is not possible today because of “securitization.”

Here’s the key element in the plan: “Congress should pass a law that makes a re-contracting option available to all homeowners living in a zip code where house prices dropped by more than 20% since the time they bought their property.”

Utilizing the Case-Shiller index measuring house price changes at the zip code level, “the re-contracting option will reduce the face value of the mortgage (and the corresponding interest payments) by the same percentage by which house prices have declined since the homeowner bought (or refinanced) his property.”

In exchange, “the mortgage holder will receive some of the equity value of the house at the time it is sold. Until then, the homeowners will behave as if they own 100% of it. It is only at the time of sale that 50% of the difference between the selling price and the new value of the mortgage will be paid back to the mortgage holder.”

“The reason for this sharing of the benefits is twofold. On the one hand, it makes the renegotiation less appealing to the homeowners, making it unattractive to those not in need of it. For example, homeowners with a very large equity in their house (who do not need any restructuring because they are not at risk of default) will find it very costly to use this option because they will have to give up 50% of the value of their equity. Second, it reduces the cost of renegotiation for the lending institutions, which minimizes the problems in the financial system.

Since the option to renegotiate (offered by the American Housing Rescue & Foreclosure Prevention Act) does not seem to have been stimulus enough, this re­contracting will be forced on lenders, but it will be given as an option to homeowners, who will have to announce their intention in a relatively brief period of time.

The great benefit of this program is that provides relief to distressed homeowners at no cost to the Federal government and at the minimum possible cost for the mortgage holders. The other great benefit is that it will stop defaults on mortgages, eliminating the flood of houses on the market and thus reducing the downside pressure on real estate prices. By stabilizing the real estate market, this plan can help prevent further deterioration of financial institutions’ balance sheets.”

My comment: I have a child-like enthusiasm for Zingales’ plan to recapitalize the banks. About his plan to re-negotiate mortgages I am not so sure. I am thinking it could probably be improved, but am sure I am not the fellow to improve it.

11/01/08

Buiter argues that the US taxpayer is getting a “terrible return” from Paulson’s promise to supply $250 billion to the banks, “bound to rise to probably around twice that amount.” It is basically a “free gift.” In Paulson’s program, “the injection of capital is through non-voting preference shares yielding a ridiculously low interest rate (5 percent as opposed to the 10 percent obtained by Warren Buffett for his capital injection into Goldman Sachs).” There are also no attractively valued warrants; the shares “can be repurchased after three years, at the banks’ discretion, on terms that are highly attractive to the banks.” Unlike in Belgium, the government gets no vote even as it ponies up the funds. Unlike in Britain, whose preference shares get a 12 percent yield and board members, the US taxpayer gets a 5 percent yield and no say in the running of the firm.

The major scandal, as Buiter notes, is that neither in the latest iteration of the Paulson Plan nor in the bailouts of AIG and Freddie and Fannie did unsecured senior creditors have “to take an up-front haircut. Worse than that, even holders of junior debt and subordinated debt could come out” of each bailout whole. “There were no up-front haircuts, charges or mandatory debt-to-equity conversions.”

Buiter emphasizes the “moral hazard” objection to proceeding in this vein, arguing that “we are laying the foundations of the next systemic crisis” by this conduct. That may be—it is indeed a horrible precedent–but the far larger point is simply that the whole proceeding upends and makes a total mockery of basic principles of bankruptcy law. It’s as if the shareholders of an insolvent firm decided that they were going to simply make off with all the excess cash and potted plants, stiff their creditors, and waltz away unimpaired. You can’t do that. There is an order to these things. There are several laws on the books against it. That shareholders must suffer first from insolvency, with the creditors picking up the scraps, is like some sort of first principle, is it not? Yet the US government’s policy violates this principle and allows both shareholders and creditors to gain unfair advantages at the expense of the public.

The shareholders are the principes, the creditors and bondholders the hastati, and the government’s lender of last resort function is the triarii. The idea is to let the first two lines bear the brunt of the fighting in the first and second instances, carefully husbanding one’s strategic reserve.

It is interesting to think about the “last resort” function across a variety of fields. It is important not only in central banking but also (as with Bolingbroke) in military strategy. The concept plays an important role in theories of the just war. Someone could do a dissertation comparing the last resort function across these various domains. That would make a good book. Good luck finding a job!

11/01/08

In a world of uncertain values, we need a new standard of value. So to hell with the gold standard and the Dow:gold ratio favored by bears. Gold is a barbarous relic. Until January 20, 2009, at least, the coin of the realm is the Goldman standard.

10/26/08

“Rather than spending a trillion dollars on buying toxic derivatives, or on a war, these funds would be better spent in helping private enterprise jump-start the above referenced conservation techniques and alternate energy research and implementation. The use of our hard-earned tax dollars to help accelerate these initiatives would create jobs and new businesses. The bottom-line is that solving the energy problem - which must be dealt with anyway, and soon - is the perfect solution to solving the consumption- and credit-induced economic dislocation we are now beginning to experience. There would be a third, important benefit. Energy conservation, increased natural gas use and alternate energy implementation all help lower CO2 emissions.”

One of these days I will track down that link, but this passage gets to the core of the issue. 1 or 2$ trillion here cannot be $1 or $2 trillion there. There has been little discussion of opportunity costs in discussion of the financial bailout, but it pretty obviously forecloses just about every other policy initiative one might fancy.

“If the core problem leading to the current seizure of the credit markets is the misallocation of credit into unproductive works during the boom years, then no amount of new credit will solve the problem unless the distortions promoting misallocation are redressed through fiscal and regulatory policy changes. Bailouts and recapitalisation of failed policies of the past are only digging a deeper hole, betraying more capital of younger generations into the unproductive works financed by the current generation.”

10/27/08

Note also that the public has an insatiable appetite for short term Treasury bills, whose yields have practically disappeared in the “flight to safety.”

Note in the chart above, finally, that investors have also rushed to the apparent safety of long term government bonds, which offer interest rates from 3.5 to 4.0 percent.

The bond conundrum, circa 2008, is simply this: How can the government take on all this bad debt without fatally impairing its own credit rating?

As investors have fled from all else besides government debt, the government has taken on the “all else.” Its guarantee makes its own debt equivalent in value to the debt it has taken on, does it not? That strongly suggests that long term government borrowing rates are going up. Every other asset class has crashed; why not government bonds?

Important as the crisis is in its own right, it is the response of the government—its way of molding into stone in ten days measures that will have consequences for ten years—to which I draw attention. After 9/11/01, the mind of the Bush administration was made up quickly. They were going to war, first with Afghanistan, then with Iraq. Public discussion of alternatives, and criticism of the administration, was virtually non-existent in the mainstream media. Most Americans have reconsidered the Iraq War and think it was a big mistake. But we’re still there.

The mood now is different, but there is the same essential dynamic, in which great crisis produces the demand that something be done immediately, foreclosing the opportunity for deliberation. It follows inexorably that the executive must be entrusted with the details, because circumstances change and confidentialities must be preserved. Voila! There you have your ill-considered, secret, untransparent decisions, made in a rush, entailed upon the subsequent generation. The collective response is something like: We Need to Act! No Time to Think!

This is hardly the model of republican deliberation for which American political institutions were once renowned. It is very unbecoming to a polity that purports to respect constitutional values.

The phenomenon is probably best seen as a rather grotesque form of “path-dependency,” that is, the idea that where you end up depends on where you start. Paul Krugman got a Nobel Prize for his variations on that proposition, demonstrating that for some industries small initial advantages can make a big difference. But Krugman was thinking about how industries achieved a competitive edge. The concept of path-dependency is equally relevant to how polities reach dysfunctional decisions. The September/October 2008 decisions of the US Treasury and Federal Reserve will cast a very long shadow.

Chalk up another cause for depression.

smartgcmf has been asking important questions about the U.S. Dollar and how its value might affect other asset classes.

Jim (James) Grant of Grant’s Interest Rate Observer foresees long-term problems for the Dollar, due to the Fed doing unprecedented things, like issuing more credit (Dollars) against almost any financial security or instrument, than at any time in its history. Money is piling into U.S. government bonds, Treasuries of all maturities, a reflection of current Dollar strength.

Could Treasuries be in a bubble that’s about to burst? (Right click to Save  mp3)  Bloomberg On the Air interview December 3rd 2008) If yes, the question becomes When?, usually the toughest question in investing.

Deflation discussion first 10 minutes

history is instructive

Dollar surprisingly stronger now, and gov bond yields much lower during crisis.

Word wants more dollars, “FOR NOW”

BUY INFLATION?

TREASURY YIELDS ARE DOWN (Around 6:00)

——–

“SUPERSAFE TREASURIES” As opposed to “Toxic Mortgages” WSJ

now similar instrument yields around 3%

No one knows the future

Bernanke and Greenspan mistook productivity for deflation when looking at falling prices

10:15 John Singleton ex Teledyne

10:45 introduced share buybacks!

grant’s interest rate observer

14:35

detroit bailout– “alternative plans” are the victim

issuing dollars against almost any security, instrument, paper has not dettered debt destruction

sounds like today’s situation

23:15

boston building

Some 14 paragraphs into the story, Establishment water-carrier Jeffrey Gettleman finally gets down to the heart of the matter, and, to his credit, delivers an admirably succinct précis of the latest imperial flameout:

Now, as anyone not completely blinded by imperial hubris could have predicted, the entire misbegotten exercise has collapsed into the worst-case scenario. A relatively stable, relatively moderate government which held out a promise of better future for the long-ravaged land was overthrown– ostensibly to prevent it from becoming a hotbed of radical extremism. The resulting violence, chaos and brutal occupation by foreign forces led directly and inevitably to — what else? — a rise in radical extremism. Thousands of innocent people have been killed, hundreds of thousands have been driven from their homes, millions have been plunged into the direst poverty and the imminent threat of starvation and disease, unspeakable atrocities and unbearable suffering are arising, as they always do in any situation, anywhere, when a human community is destroyed.

Yet none of this penetrates the glossy shell of imperial hubris — not even now, when the disaster is so glaring that even eager water-carriers of empire like Gettleman are forced to acknowledge reality (albeit in the closing paragraphs). For the real thrust of the Times story is not outrage at the living hell engendered by the Terror War’s third “regime change” operation. No, the Times’ “analysis” is clearly aimed at one goal: continuing the brutal occupation of the Ethiopian invaders.

The Ethiopians are making serious noises about withdrawing all or most of their troops in January. Perhaps Ethiopian strongman Meles Zenawi realizes he has been played by the great gamesters on the Potomac, expending massive amounts of blood and treasure only to end up in a face-losing retreat, and with a far more virulent, dangerous mess on his borders than before the invasion. Or perhaps he is playing games of his own. In any case, the Ethiopian threat has suddenly panicked the Lords of the West, who realize that, as in Iraq, the only thing holding up their local clients is the armed might of a foreign invader. Suddenly, the Western powers that backed the invasion are shocked — shocked! — to find that the warlords they installed in power (some of them openly in the pay of the CIA) have no popular support in the country, and, as Gettleman notes, now “controls only a few city blocks of the entire country.” The only preventing the complete collapse of Washington’s clients, he warns, is presence of the Ethiopians.

Thus the emphasis in the article on the dire consequences of Ethiopia ending its participation in the American-sponsored war crime in Somalia. Gettleman trots out some heavy Establishment lumber for the requisite fearmongering: The International Crisis Group, which he tells us is “a research institute that tracks conflicts worldwide.” No doubt it does; for the group is chock-a-block with the great and good of the bipartisan foreign policy establishment, whose raison d’etre is “conflicts worldwide.”

The ICG board is packed with such luminaries as Thomas Pickering, who served as the Reagan-Bush man in El Salvador when the US-backed government there was slaughtering civilians by the thousands to maintain its elitist-militarist rule. Pickering was a simpering apologist for the blood-letting, declaring that the dead civilians were all sympathizers with the insurgency, and thus “somewhat more than innocent civilian bystanders.” Later, as US ambassador to Moscow, he went on to applaud Boris Yeltsin’s violent suppression of democracy in Russia in 1993 — an incident that seems largely forgotten these days in all the fulminations about Vladimir Putin “introducing” authoritarian rule in Russia.

ICG Co-Chair Pickering is joined by other such worthies as hardcore neocon Ken Adelman (who presciently — and no doubt profitably — jumped ship to endorse Barack Obama before the election); Zbigniew Brzezinski, who helped create the armed global jihad movement in order to hotfoot the Soviets in Afghanistan; Wesley Clark, brave bombardier of civilians in Serbia; Prince Turki al-Faisal, who directed the sinister, extremist-promoting Saudi intelligence apparat for decades; Richard Armitage, a PNAC vet and one of the key players in the operation of the imperial war-and-domination machine for years, who, like his former boss Colin Powell, has acquired a wholly unearned reputation as a “moderate”; Yegor Gaidar, who as Yeltsin’s prime minister rammed through the “shock doctrine” economic extremism that gutted Russian society and ruined the lives of millions; and Lawrence Summers, one of the architects of the global economic meltdown, now serving as a top adviser to Barack Obama.

This group sent out analyst Rashid Abdi to use the NY Times as a megaphone to warn against the risks of ending savage, bloody foreign interventions into other countries:

Militarism — either in its overt, unashamed form as espoused by the neo-cons and their outriders, or in the more subtly packaged, sugar-coated (and often self-deluding) version of the “humanitarian interventionists” — is the ruling ideology of the American state. Like all ideologies, it comes in different shadings, different emphases, different factions, and so on, but the national power structure is firmly committed across the board to the use of violence — and the ever-present threat of violence — to advance a bipartisan agenda of American hegemony on the world scene. Some factions take great pains to present this hegemony as benevolent and altruistic; other factions don’t care how it comes across (”Let them hate us as long as they fear us,” was a sentiment frequently voiced in high circles at the beginning of the Terror War). But all factions are willing to kill people — either directly or by proxy — to maintain that hegemony.

And that’s why, for the militarist mindset, situations such as the hell in Somalia — or in Iraq — or in Afghanistan — are always win-win scenarios. If the application of brute force in Somalia had “worked” — i.e, if the “regime change” invasion and subsequent repression had produced a quiescent client state willing to open up its resources to foreign exploitation and to jail, torture and kill any of its own citizens who threatened the profitable status quo — then the militarists would have claimed it as a template that could and should be applied over and over around the world. It would have “justified” the militarist path.

But the collapse of Somalia into a sinkhole of chaos and extremism that could “threaten the whole region,” perhaps the whole world, can equally be used to “justify” a militarist response; after all, how else can we protect ourselves from this heightened danger of terrorism, except with bigger military forces, more aggressive responses to potential threats, more power and scope for our security services, more authority for the “Commander-in-Chief” to help keep us safe, etc., etc.?

What we have long said here about Iraq and Afghanistan applies to Somalia: the imperial warmongers have won, no matter what the ultimate outcome. More than a million innocent people now lie dead across the three Terror War fronts, but the perpetrators of these crimes — not only the officials in government who order and carry out particular operations, but also the systems that sustain the militarist order (the Pentagon, the arms dealers, the military servicers, the security agencies and their shadow networks, the mercenaries, the innumerable corporations, think tanks, businesses large and small plugged into the profits of the war machine) — go on from strength to strength. The officials either stay on in government, like Pentagon warlord Robert Gates, or go off to honorable, untroubled, and remunerative retirements, like Bush and Cheney, or else park themselves on corporate boards or in their own lucrative “consulting firms” until their particular faction takes power again. Meanwhile, the systems and institutions of militarism grow ever more entrenched and unquestioned and unchallenged.

So in the coming months, as Somalia continues to descend to even deeper levels of hell than the canonical nine circles, we will doubtless hear much consternation in the imperial courts (and their media outlets) about how terrible it all is — along with many calls for even higher military budgets (and more overt and covert military operations) to deal with the “growing danger” spawned in Somalia…by the militarists themselves.

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Warsaw Stock Exchange

Whether this or any other amendment to the present system is adopted, one thing is clear: the present system is neither democratic, nor does it deliver.

In Frontline, May 12 2000.

There is a fascinating article in the Dec. 8, 2008 edition of the Financial Times, entitled “Bystanders to this Financial Crime were many.”  (For an electronic copy of this article click here.)  After describing a rape and murder that occurred in Queens in the late sixties, the writers describe the forty people who observed this crime and watched it happen, but did nothing to intervene and stop it.  The parallel here is to the financial crisis we have on our hands, and how easy it was for the risk managers to make collectively stupid choices in investments simply by comparing notes with other ill-advised choices.  The fable of “diffusion of responsibility” led them to assess and hide risk in diversified buckets,  helping them cover their nakedness.  This is not the only place this happened.

If you have ever worked in a corporate environment where no one is accountable, you understand how annoying this thinking is.  People go to meetings, and require that others be at meetings, in order to make sure there is ample justification for the decision.  They bow to the collective “wisdom” of the group, even though these collective decisions have been proven to be short-sighted in the past, because this provides the decision makers the cover to keep their jobs and ride out any political fallout from bad decisions.  This type of thinking caters to our fear of exposure, rather than our desire to succeed, and panders to our worst and most base instincts, rather than the courage required to do the right thing.  It is a growing cancer in the American culture that needs to be eradicated.

Did you and I help create the financial crisis?  Probably.  It was our ongoing investment in pension funds, 401k’s, insurance premiums, and stock purchases that fueled the continued need to reinvest capital, which helped prop up the stock market despite price-to-earnings ratios that were worse than during the Great Depression.  Our funds also caused REIT’s to continue making bad investments in major portfolios, and encouraged firms like Lehman to continue ratcheting up their leveraged positions in bad investments.  Our demand for higher returns prompted fund managers to take on riskier positions, and enabled the risk managers to “diffuse risk” in these investments and hide these problems from the public.  The bandwagon effect of overseas capital only threw more fuel on the fire.

I think the issue is deeper than this, though.  I think that we have contributed to it by not speaking out against the thinking that gets us in these messes.  My first job out of graduate school was at the RTC, helping resolve Savings and Loan failures, and liquidating their assets.  While there were not enough people doing the “perp walk” for my satisfaction, that crisis was about many of the same things that we are struggling with again.  Fraud, greed, and a complete lack of personal accountability on the part of the decision makers are ultimately what brought the whole crisis to a head.

That was almost twenty years ago. 

Where were the leaders?  Where were the people that saw what was really going on, and called it out?  Where were the prophets to decry the folly of this and call us back to our roots?  That was almost twenty years ago.  We have seen five presidential terms (three presidents), thousands of Congressmen and Senators, and thousands of governmental regulators.  We have heard testimony from Secretaries of Treasury, from Chairmen of the Federal Reserve, and from Nobel Laureate economists.  Where were the watchdogs?

We have taught our children that it is better to be tolerant than to be argumentative.  We embrace plurality rather than truth–after all, my truth has the same value as your truth does.  We have decided it’s better to be nice than to be right.  This is not reality–this is fantasy.

Here is what we have learned since the heady days of the RTC and the Savings and Loan scandals.  We have learned that the role of government is to protect us from our foolish choices and even from criminal acts, and to serve as a downside hedge when we want to make unsupportable investments and unrealistic demands on our national financial systems.  We have learned that Republicans are as good at taxing and spending as Democrats are. 

And if there is anything that we learned from the Arthur Anderson/Enron scandal in the early 21st century it is that the watchdogs can be bought out if we shelter them, feed them, and punish them for barking in the middle of the night while we are trying to sleep.  Sooner or later they find something else to do than to bark.

It is, therefore, naive to act surprised when the burglar breaks into our homes in the middle of the night and catches us unawares.  It is even more foolish to blame the boomerang we threw for circling around the hitting us in the head.  The Mote Corrolary to Newton’s Third Law: “For every government action there is an unpleasant reaction, typically accompanied by other reactions that are of equal or greater unpleasantness.”  Cynical it might be, but sooner or later we have to acknowledge that government is really bad at fixing the messes they helped create, perpetuate, and hide from the citizens.  We can’t blame anyone except us–we allowed the problem, we encouraged the government to fix it, and we are now standing by and watching our leaders obligate our grandchildren to a culture of financial slavery.

If you want to change a culture that lacks personal responsibility, the first thing you need to do is look in the mirror.  The American culture is not some arbitrary way of life, or some caricature created by our well-intentioned yet feckless friends overseas.  It is not even what our media and education system say it is.

Our culture is the combined personal choices of millions of people made every minute, based on the things they value most.  We don’t decide based on what we say we believe, but based on what we really do believe.  Belief drives values, values drive actions, and actions create cultures.

What you are doing right now has the ability to shape the character of our nation–literally.  It is not just “something you do.”  It is who you are.  And you are the series of choices you make, just like your neighbor is.  We can change the world around us just by behaving like adults.  And the next time you go to a meeting where someone is trying to cover themselves on an important decision, stand up and speak the truth, and demand that your statement go in the minutes.  Be prepared to take some people by surprise, but do it graciously.  It will change the way you walk, and the way you carry yourself.  And more importantly, it will inspire someone else to speak out.

When someone dies, we conduct a post-mortem (and sometimes an autopsy).  The point of the investigation is to find the truth of how the person died, and determine if there was something to learn to keep others from dying the same way.  We start with the premise that we care, and then we pursue the truth in as dispassionate a way as possible so we can learn from it.  The conclusion is often that a variety of factors contributed to death, but there is usually a single primary cause.

At the risk of sounding alarmist, I do not see the American way of life able to survive outside of a radical change in our way of thinking and our behavior.  John Adams said in 1815: ”Democracy never lasts long.  It soon wastes, exhausts and murders itself.  There was never a democracy that did not commit suicide. “  Another famous statesman (an Englishman) named Edmund Burke said: “All that is necessary for the triumph of evil is that good men do nothing.”

After the post-mortem, and after a long period of introspection, we need to stop talking and start walking.  We need to lead by deed, and not by concepts if we expect to have any influence on the future.  It’s fine to be a person of ideals–what I care about are how those ideals affect your real-life decisions.  That is what you were put on this planet to do.  That means starting with our families, our children, and our places of work, and choosing every day to get up and to do the right thing, and expect and require that from everyone else as well.  Let’s argue from the standpoint that there is a right thing, and be humble enough to admit when we miss it.

And after we have made that commitment, you and I had better start learning to bark again.

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Stocks are finally pricing in some ugly news.  (The Balance Sheet)

Ten contrarian reasons for a bottom.  (Humble Student also TheStreet.com)

November brought continued trouble for hedge funds.  (WSJ.com also market folly)

Some excellent buy-write rules.  (Daily Options Report)

Dedicated short-seller Jim Chanos is up 50% for the year.  (NYMag.com)

Contango is rampant in the oil market.  (FT Alphaville)

Does John Thain deserve a bonus?  (Market Movers)

Limited partners are reneging on their commitments to venture capital funds.  (WSJ.com also naked capitalism)

The Friday jobs report was worse than you think.  (Big Picture)

If bubbles are inevitable, what should we do about them?  (Baseline Scenario)

How much can the Feds do to support the credit markets?  (MarketBeat)

Implications of the ‘quarterback problem’.  In short, “There are certain jobs where almost nothing you can learn about candidates before they start predicts how they’ll do once they’re hired.  (NewYorker.com)

Is the basis for speed-reading?  (Alea)

Horse breeders are not immune to the economic crisis.  (FT Alphaville)

The sale of the Chicago Cubs is going as well as expected for a team with a futility-filled history. (Dealbreaker, SportsBiz. Deadspin)

Thanks again to every one who has donated to Abnormal Returns. You can always do so by hitting our tip jar.

This historical out performance brings up some important questions. Will these well known factors outperform over the next 100 years now that everyone knows about this tendency? Are basic, unadjusted value ratios still as useful a predictor of excess returns in the era of computer data bases and hedge funds that have brought increased liquidity to the small-cap space? With more and more firm assets based on intellectual property as opposed to hard assets, I would suspect that the book value measure has become less meaningful for some firms, while increased activity in small-caps and better information technology may correct these pricing anomalies.

This is not to say that searching for value is futile, it just requires more skill, creativity, and know-how, going beyond the P/E ratio and other oversimplified valuation metrics and slowly waiting for the few outstanding opportunities that present themselves. Understanding the context of a particular situation will be more important than ever, and preferably these opportunities will join both value and growth at the hip, without the need to pay a premium for future expectations, getting the upside potential (future reinvestments in new projects or the expansion of current projects at the firm) for little to nothing.

So what metrics can be used as a starting point in idea generation? Joel Greenblatt’s book Magic Formula Investing starts to get at what I think I’m talking about, and his metrics weigh cheapness (high pre-tax earnings yield) against quality (high ROIC). Greenblatt’s metrics are also more rigorous and meaningful than P/E and ROE type metrics, adjusting for firms with different tax rates and capital structures. However, even this should just be a starting point in a good analysis. The screen doesn’t look for sustainable competitive advantage or earnings quality, so you get some duds that come up from time to time like Crox (CROX).

Buffett similarly looks for great companies selling at reasonable prices, but goes beyond this by incorporating competitive advantage and a deep understanding of the business. I believe Buffett is on to something when he says he tries to think like the owner of an entire business. Buffett’s philosophy has also incorporated Phil Fisher’s methods, and deep understanding of a company through scuttlebutt is invaluable as well to both take advantage of situations as well as to help avoid disaster.

Another area to consider in conjunction with Greenblatt’s metrics and Buffet’s general philosophy are hidden assets and misalignments between management and shareholders that erode the value of control, neither of which can be simply captured with basic financial ratios, but rather need to be examined carefully in order to capitalize on these types of opportunities. Hidden assets consist of the usual suspects: real estate, raw materials, and business units. I would add to this earnings quality, another area which requires intelligent consideration to adjust earnings to economic reality- not rocket science but something which requires considerable accounting knowledge. Finally, complex situations (such as special situations and complex companies that are financial puzzles) that other market participants are slow to fully understand will continue to be profitable.

Which ever way you look at things, it has never been tougher to be an active manager. Mechanical methods of finding value become less useful once they are well known. Looking ahead, the managers who will tend to outperform will likely look for value where others will not or are not sophisticated enough to do so.

ILOILO CITY – Thrust into international fame four years ago, Nestor Sulpico then said: “I could not ask for more. And even if I die, I feel that I have become a role model for the younger generations.”The Filipino migrant, who was hailed as “New York’s most honest taxi driver,” was laid to rest on Saturday at the Iloilo Memorial Park in Jaro District with tributes coming from family and friends both here and in the Big Apple.

In July 2004, the unassuming cabbie made headlines and was even featured on the widely popular “Oprah” television show after he returned $75,000 worth of black pearls left by a passenger in his taxi.

Sulpico, 51, died of cancer of the colon on April 24, four months after returning quietly to the Philippines and four months away from finishing his studies at the Phillips Beth Israel School of Nursing in New York.

Elder sister Eva Sulpico-Navarro said her brother remained “an inspiring example” of the values taught them by their parents. She recalled that Nestor had always explained his noble deed in NYC by simply saying: “I was raised to be honest.”

Eva said she hoped that her brother’s “guiding words” would somehow touch many others, “especially [those] in public service.”

Sulpico’s friends and classmates at Phillips Beth sent flowers and words of comfort to the grieving family.

In an e-mail to the Philippine Daily Inquirer (parent company of INQUIRER.net), Luanne Kwon, one of Sulpico’s closest friends at the school, said:

“We are in a highly competitive nursing program, and tensions always run high. But Nestor was one of the few who could lighten up any situation. He could make you laugh at a drop of a hat, and he was wise when you least expected it.”

Humble hero

His fame never went to his head, Kwon noted. “Nestor was so humble about being a hero. He didn’t broadcast it for everyone to know.

“He was given a special certificate by [New York City] Mayor Michael Bloomberg and even guest-starred on Oprah-that doesn’t happen to just anyone! But Nestor was so low-key about it. I think he thought of himself as just an ordinary guy who did the right thing.”

For another classmate, Mario Alvarado, “[Nestor] may not have been the youngest in school but he had a young-at-heart way of living his life.”

“Nestor in my eyes was a young man with the experiences, ethics and caring of an adult we can all look up to. He will be missed and will be remembered for a lifetime,” Alvarado said.

Sulpico enrolled in the nursing school shortly after gaining fame for his honesty. He received a scholarship but continued to drive a taxi courtesy of a franchise given to him by Mayor Bloomberg.

Known for being quite secretive, Sulpico apparently kept his affliction from most of his family, friends and classmates. Eva said only their 88-year-old mother Elena was aware of the gravity of his condition.

“He always kept silent about his problems because he didn’t want to be a bother to anyone,” Eva said.

Childhood friend Larry Ang said Sulpico had always given him a call from the United States to announce his homecoming. But this time around, Ang said, he and their other friends were unaware that Nestor arrived in December last year and were therefore shocked to learn about his death.

Another close buddy, Jing Espinosa, said he later found out that Sulpico had asked his family not to tell his friends about his return.

Separated from his wife, Sulpico had plans to take his 20-year-old daughter Angel with him to the United States once he became a nurse, the Inquirer learned.

“He knew the seriousness of his condition and he came home to die beside his family and especially his daughter,” Ang said.

“He always talked and worried about his daughter and wanted a bright future for her.”

Kwon said that just before Sulpico went home, the latter was behaving differently but those close to him could not figure out why.

“To know that he was burdened by the knowledge that he had cancer, and that he kept it to himself, telling no one, deeply saddens me to the core,” Kwon further wrote, adding:

“I don’t care what anyone says, he was not ready to go. It wasn’t his time to go, period.

“We studied a lot together, and I know how damn hard he worked. Being a nurse was his dream. So, I can’t be consoled by telling myself he’s in a better place, because he will never see the achievement of all his hard work.”

Leganes native

Sulpico’s family originally hailed from Cagamutan village in Leganes town, 11 kilometers north of Iloilo City. His late father Loreto Sr. was a former municipal councilor.

The sixth of seven siblings, Nestor finished his elementary education at the Cagamutan Elementary School in Leganes and his high school at the Central Philippine University.

He took up Islamic Studies at the University of the Philippines in Diliman, Quezon City, and later transferred to the Western Institute of Technology in Iloilo City where he earned a degree in business administration.

He left for the United States in 1990, and initially took on various contractual jobs from installing computer networks to hauling boxes at United Parcel Service.

Sulpico had barely logged in a month driving an NYC taxicab when fate took him on an unexpected ride: On July 15, 2004, he found a backpack containing black pearls left in the vehicle by hedge-fund manager Lawrence Policastro.

Integrity award

The driver was able to contact Policastro on the mobile phone that was also found in the backpack.

In deep gratitude, the business executive raised at least $5,000 to help the Filipino driver finish his nursing studies. Mayor Bloomberg also gave Sulpico an “integrity award” and a symbolic key to the city.

In August 2004, Sulpico returned to a hero’s welcome in Iloilo. The Senate passed a resolution commending his honesty, while Malacañang awarded him P100,000 in cash and a citation from President Macapagal-Arroyo.

In an interview then, Sulpico said returning the pearls was one of the easiest decisions he had ever made in his life. “I believe that honesty is the most important virtue which serves as a foundation of all other virtues.”

Sulpico admitted, though, that he entertained thoughts of how his life could easily change had he kept the precious find to himself, considering that he started out in New York “roaming [the city], shivering in the snow, desperately looking for a job.”

In seeing her beloved son buried on Saturday, Elena was certain Nestor had no regrets whatsoever.

“He lived and died with the virtues that I taught them since they were children. Nothing changed him even after he became famous,” Elena said.

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I’m never too sure what irony is anymore.

I blame Alanis bleeding MorrisMinor and that dismal song.

However, what I do know is that it’s not a black fly in your Chardonnay - or any sort of flying insect.

That’s one for a swift complaint to the winebar manager and if no satisfaction can be had from that avenue, then a quick trip down to the Trading Standards Office at your local council building.

It’s also definitely not a traffic jam when you’re late - that’s just bad planning combined with some cock overturning a lorry on the northbound slip road at Junction 15 of the M1.

Ed Byrne manages to say it all better than I can though:

Hey, maybe this is ironic!

Allison Peason - Daily Mail hack - manages to burble on and use up a lot of column inches when it comes to taking a swipe at ‘benefit mums’.

So, it tickled me no end when I found that she’d written a sub-’Bridget Jones’-a-like book about a stressed mother.

Here’s a random synopsis taken from somewhere on the interweb:

‘Meet Kate Reddy, hedge-fund manager and mother of two. She can juggle nine different currencies in five different time zones and get herself and two children washed and dressed and out of the house in half an hour. In Kate’s life, Everything Goes Perfectly as long as Everything Goes Perfectly. She lies to her own mother about how much time she spends with her kids; practices pelvic floor squeezes in the boardroom..’

Laugh?

I almost wet myself!

Hedge-fund manager?

Pelvic floor squeezes?

Still, managing a hedge fund isn’t a job I’d want in the current economic climate.

Maybe Ms Pearson will bring out a sequel in which Kate takes in laundry to make ends meet.

We can only hope after that that real life mirrors art.

Now, that would be ironic.

And if it wasn’t, what a result anyway!

Congress sent the White House a $15billion auto aid proposal. As per the AP, the measure would rush bridge loans to Detroit’s struggling Big Three but would also demand that the auto industry restructure itself in order to survive and would put an overseer chosen by President George W. Bush in charge of monitoring that effort

No word on what the UAW is willing to do.

My take on the bailout and all news related to it…meh. I’m still waiting for someone to bail me out of my credit card debt. If I don’t get a bailout today, I’m going to cease all operations tomorrow.

And I’m waiting for the inveitable media bailout. That’ll be fun.

All the evidence the CFTC needs is already known to them. Specifically, the evidence is in their August Bank Participation Report which indicated that one or two U.S. banks held a concentrated net short position equal to 25% of the annual world mine production of silver. Such a degree of concentration, on either the long or short side of any market, is manipulative, in and of itself. If not, then the CFTC should simply explain why such a large concentrated position should not be considered manipulative and put the matter to rest. No taxpayer funded, long drawn-out investigation, just an explanation.

In addition, I have provided the Commission with additional specific evidence, in the form of proof that there was intentional forced liquidation of almost 15,000 long silver/short gold spread contracts on the COMEX over the past six weeks. The proof also is known to the CFTC, as it is contained in their weekly Commitment of Traders Reports (COT). That should be enough evidence for anyone. But wait, there’s more.

The just released December Bank Participation Report (BP), as well as the most recent COT, both as of the close of business December 2, provide more evidence of manipulation in COMEX silver. While the number of contracts held by the one or two U.S. banks is lower than the peak in August, the percentage of concentration of the total futures market has grown to the highest level in history. Whereas the one or two U.S. banks held 25.4% of the entire market in August, the big U.S. bank(s) holds 29.9% now. And when all spreads are removed (as they should be), the concentrated short position of the big U.S. bank(s) rises to almost 40% of the entire COMEX futures market.

You must apply a little common sense here. With silver prices far below the cost of production, there is little economic justification for legitimate short hedging. After all, who would choose to lock in a loss? Therefore, there is little evidence that the big concentrated short position is legitimate. That’s why fewer and fewer traders are interested in shorting silver at current price levels. Just the few manipulators remain short.

Tell the CFTC to stop looking to you for specific evidence of manipulation and to start analyzing their own data. Tell them to stop stalling and to start doing their jobs.

[Editor’s note: We would also tell them to talk to Ted Butler. Any investigation that bypasses him is truly bogus.]

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Tagged: Goose Island

from the RUDE PUNDIT:

Imagine that. The mostly Hispanic workers telling the rest of the country, “You mean some fuckin’ douchebag in a suit can squat his waxed ass in a comfy leather chair in a hearing room in DC and get a few hundred billion dollars for his other douchebags in suits, no strings attached, and no one’s gonna give a fuck if our bosses don’t even follow the fuckin’ law?” Auto workers, you need any more inspiration?

This is a shot across the bow to Congress, a way of saying, “Hello, you sons and daughters of bitches, this is the way corporate America has been treating your constituents for years. While you’re giving AIG enough to fund a small nation, how about tilting our way for a little while?” And if they don’t listen, let’s hope the next protests and the ones after that are bigger and more widespread. Shit needs to be shut down in order to wipe away all the bullshit lies of the free market (that’s not really free).

from WORKERS ACTION, LEAGUE FOR THE FOURTH INTERNATIONAL:

This struggle is of exceptional importance because of its boldness in responding to the economic crisis and how it is affecting working people. This boldness could set an example for future confrontations and therefore deserves the attention and support of all workers.

The chain of events leading to this crisis started when Republic Window’s creditor, Bank of America, refused to extend credit to the company. According to Crain’s Chicago Business, Republic Window’s sales had fallen from $4 million to $2.9 million in the last month. However, Bank of America is flush with $25 billion from the bi-partisan bail out. At a solidarity demonstration outside the plant on Saturday, protesters expressed the situation concisely with stickers and signs reading, “You got bailed out, we got sold out.”

Workers are demanding $1.5 million in severance and vacation pay owed them by management. Federal law mandates that workers get paid for unused vacation time and are either given 60 days notice of a mass layoff or pay for that time. The UE workers were only given three days notice of the closing. Republic Window and Door’s officials are claiming that Bank of America is not allowing them to make these required payments and benefit adjustments. Bank of America has responded by stating that they have no “…right to control whether a company complies with applicable laws or honors its commitment to its employees.” While this bickering between thieves continues, the workers’ intolerable situation and justified anger remains. “We aren’t animals,” Apolinar Cabrera, a 17-year Republic Windows employee, told Chicago Town Daily News. “We’re human beings and deserve to be treated like human beings.”

Workers have also expressed their suspicion that Republic Windows and Doors intends to move out of state and restructure their finances, leaving debt and misery in the wake. Some have reported that as early as two weeks ago the company started moving equipment out of the plant.

In this economic crisis, given what the capitalists are trying to get away with by making working people pay for the recession, the stakes are high. A 14-year machine operator at the company, Ron Bender, observed, “We’re doing this for the other working people in the country. What’s happened to us can happen to anyone — they could just close up and put you out and give you no severance pay.”

The AFL-CIO and Change to Win, as well as all other organizations concerned with the rights of working people should line up in solidarity with these UE members by educating and mobilizing their ranks in support. A victory could embolden workers across the country to resist the results of Wall Street’s greed and the bailout, which will be all the more needed as times grow harder. It could serve as a stepping stone for greater victories in the future where workers will not simply demand vacation and severance pay from a bankrupt company, but demand that such a company be nationalized under workers’ control. Furthermore, such a working class movement could go beyond addressing the problems at a given company and win victories for all workers in the areas of health care, ending the current wars, ensuring adequate funding for education, creating jobs for all, and so on.

The news has been brutal and frightening for workers over the last few months. A worldwide recession of unknown depth and duration is unfolding. In this country, the number of home foreclosures is expected to hit seven million by the end of the year. Last month alone 533,000 workers lost their jobs, contributing to the highest unemployment rate in 15 years. And while this decline accelerates, workers have been stung with a Democratic Party-led bi-partisan bailout of the financial institutions whose reckless greed is responsible for this mess. The New York Times estimates that this rescue package for the wealthy will cost seven trillion American taxpayer dollars (see “The Bail Out Intensifies” on this site). While this arrangement helps to ease the capitalists’ anxiety, they place a dark cloud over working people’s future. Rather than promoting economic growth, the bailout measures are more likely to result in hoarding on the part of the bailout’s beneficiaries as well as produce inflation. Meanwhile, unemployment will continue to climb, and there will be further slicing of our already cut-to-the-bone social safety net by the capitalists’ politicians.

The inevitable consequence of such developments is that people are left with no choice but to fight against the conditions they are forced to endure. They begin to see that there are opposed interests at play between those who control the economy and political system, and those who are expected to do all the sacrificing. Workers will be compelled to act and, as a result, begin to become aware of themselves as a class where, if they are to defend themselves and their rights, must unite against those who are accustomed to ruling them without question. Under such circumstances, the workers’ demands are always modest and partial to begin with, but, to the degree that their actions rely on their independent strength as a class, they plot a course towards growing confrontation with the capitalist status quo and thereby raise the question of who shall control society, working people or the rich minority. Nationwide, such a course initially starts with an accumulation of small skirmishes, unavoidably leading to a social explosion that can place the working class’ interests on the historical stage in a way that would have been seen as impossible just a short time ago. The worker’s occupation of Republic Windows and Doors could prove to be a skirmish that sets the example for a working class upsurge that will bring more change and hope into our lives than any capitalist politician ever could.

There is no telling how long this occupation and the struggle behind it will continue. Workers, Republic Windows and Doors, and Bank of America are supposed to meet at 4:00pm on Monday. Nevertheless, these workers’ actions have already made a mark in labor history. Food has been coming for them from all over in solidarity. You can donate by going to www.ueunion.org and clicking on “anger in Chicago,” or by writing a check payable to the “UE Local 110 Solidarity Fund” and sending it to UE Local 1110 Solidarity Fund, 37 S. Ashland, Chicago, IL 60607. Messages of support can be sent to organizer Leah Fried <mailto:leahfried@gmail.com>. At the Jobs with Justice Web site, you can send a message of protest to Bank of America. http://nyc.indymedia.org/en/2008/12/101949.html. You can also call UE at 312-829-8300.

Even President-elect, Barak Obama, because of massive public support for the UE workers, has felt compelled to offer support to the workers at Republic Windows and Doors in the form of lip service, without promising any specific action.

Organized labor should call on the government to take over Republic Windows and Doors and let the workers run the plant themselves. This demand could be part of a government emergency public works project that would make all public buildings, beginning with public housing, more energy efficient by installing new windows and doors. Such a program could then be the first step in establishing a broad-based coalition that would advocate a public works program that would put people back to work while maintaining their standard of living. This program could instill confidence among working people and their allies and inspire them to proceed onwards to fundamentally change the economic system so that it would serve the needs of people, not the pursuit of profits for the rich.

from COUNTERPUNCH:

To help out, please log on to www.ueunion.org for details on how to provide financial and moral support to the strikers today. Next, I imagine if victory is not achieved quickly, the union may call on supporters to take peaceful yet assertive actions at Bank of America branches across the country. Local groups and coalitions might want to start researching and planning actions should the UE strikers call on us to escalate pressure. Finally, it looks like the workers are now contesting the very closing of the plant and maybe they’ll even seek to run the plant themselves without bosses, both moves which will require a long-term and steady commitment of solidarity from supporters.

Daniel Gross is an organizer with the Industrial Workers of the World and the author with Staughton Lynd of the recently released, “Labor Law for the Rank and Filer: Building Solidarity While Staying Clear of the Law” (PM Press 2008). He can be reached at dgross (at) iww.org.

A contingent of 15 Chicago aldermen said today they will introduce an ordinance to require the city to stop doing any business with the Bank of America.

Bank of America cut off its line of credit to Republic Windows and Doors, causing the Chicago company to halt operations on Friday, December 5 and terminate its 250 workers with only three days notice, and without receiving their earned vacation pay, as well as compensation they are entitled to under the WARN Act. The workers’ situation attracted world-wide attention begining Friday evening, when they began occupying the plant, refusing to leave until Bank of America, the company and other creditors honor their obligations to employees.

“It is outrageous for Bank of America to cut off credit, a company’s lifeblood, after receiving $15 billion of taxpayers’ money as part of the federal government’s Troubled Asset Relief Program (TARP),” said Alderman Joe Moore (49th Ward). Bank of America also has raised $9 billion in taxpayer guaranteed loans and is expected to receive another $10 billion in TARP funds in the next two weeks.

“It’s not only unfair to the workers, but also Bank of America is thumbing its nose at Congress by taking federal recovery funds while refusing to extend credit to a small manufacturing company with a long history of profitability,” said Thomas Balanoff, president of SEIU Illinois Council. “Bank of America’s withdrawal of credit also contradicts and undercuts President-elect Barack Obama’s plan to stimulate the depressed economy by investing in weatherization of existing homes and buildings and in other infrastructure and energy-saving construction,” Balanoff added.

“The workers want Bank of America to keep the plant open and the workers employed,” said Carl Rosen, president of UE, the union that represents the Republic workers. “There is always a demand for windows and doors. But with Barack Obama’s stimulus proposal, there will be even greater demand for the products made by Republic’s workers. It doesn’t make sense to close this plant when the need is so obvious,” he added.

The ordinance requires that any City of Chicago funds deposited at Bank of America, or any of its subsidiaries, be removed and placed with another suitable bank. It also states that Bank of America shall not be selected to underwrite, sell, market or re-market any City of Chicago bonds without the explicit approval of City Council.

The ordinance also contains a provision requiring that any proposed change in zoning of a property owned by Bank of America, or any of its subsidiaries, be brought individually before the full City Council for evaluation and approval.

“Under the law, the City Council has the authority and responsibility to take into account the interests of Chicago and its residents when deciding which banks to do business with,” said Alderman Ricardo Munoz (22nd Ward). “Bank of America profits handsomely from the business it gets from the City and other governments. We have a right to demand that workers are treated fairly.”

UE Local 1110 members in Chicago, employees at Republic Windows and Doors have occupied their workplace since Friday night in a courageous bid to win what they are owed and to save their jobs.

Only a couple days earlier, they had learned the plant would be closing Friday as Bank of America, flush with U.S. government bailout cash, had refused to extend Republic’s line of credit. They found out the bank had also refused to allow Republic to pay them what they were owed.

They realized their only real chance at winning a measure of fairness would be to guard, and guarantee the safety, of the only asset at their disposal — their workplace.

Since then, worldwide support has poured in as the news of a plant sitdown — rarely seen in the U.S. since the 1930s — spread like wildfire. By early Monday morning, a Google news search found nearly 1,500 story references. One Facebook group grew from 800 to 2,400 members between noon and midnight Sunday.

Working people, caught in the turmoil of the current economic crisis have found new hope in the actions of these UE members. And, that’s not gone unnoticed.

Politicians, including president-elect Barack Obama, members of Congress, members of the Illinois legislature, Chicago city officials and civil rights leaders including the Rev. Jesse Jackson have all voiced their support for this fight. We hope you will, too.

From stopping by the plant (if you’re in or near Chicago) to sending a message of solidarity to making a much-needed donation to telling Bank of America to be honorable in its actions … these are just some of the ways you can help … and they are all listed at right.

“The financial markets generally are unpredictable. So one has to have different scenarios… The idea that you can actually predict what’s going to happen contradicts my way of looking at the market.” - George Soros

First of all, I noticed a few comments made - I’ve been away for a while and they got put into my spam filter for the last month. Apologies to anyone whose comment was cut off - I’m new to blogging so not too familiar with how this all works. I appreciate your input and I’ve approved them now. 

Back to trading - in my opinion, there are certain key elements of trading that need to be taken care of. Here they are:

1. Strategy - you need some kind of system or decision-making process that governs how and what you are going to trade. It could be deep value investing, trend-following, playing news or whatever - there are almost countless variations. Without a profitable, tested strategy, you are unlikely to succeed without a huge dose of luck.

2. Market observation - you need to know what the market is doing, you need to scan regularly for opportunities to apply your strategies, and you learn much faster if you watch the market a lot. Putting in screen time, or research time (depending on your trading style) and seeing how the market reacts to various inputs (newsflow, fundamentals, technicals, sentiment, valuation etc) is critical in learning how to trade. Being up to date and aware of the current market action is important to avoid missing trades, to monitor your positions and risk, and capitalize on opportunity.

3. Idea generation - whilst some trading strategies are quantitative and just require monitoring of price, many trades have a discretionary input e.g. analysis of fundamentals, management, politics, valuation, market tone, sentiment etc. You need to do research, and follow the thoughts of other market players and commentators, in order to generate many of your ideas. For example, many analysts and speculators were aware of the sub-prime potential for disaster since 2005, 2006 (some earlier). Having that knowledge would have been a huge advantage for trading in 2007 and 2008, compared to people who never investigated it. As a real-world example, n 2007 I purchased some long-dated puts on a few financial and real estate stocks. I got the idea by reading the website of an informed Florida real-estate broker, who put out some devastating factual data on the health of the Miami and Fla. condo market, and then named some developers and bank lenders with the most exposure to it and other hot/dangerous markets like Nevada and California. The majority of the companies involved are now bankrupt or trading at <$1 per share, and the trades were home runs for me, albeit I wish I had put on more size (examples were WCI, CORS, CFC). Without researching and looking for ideas in the financial press and online, I would not have had the knowledge or conviction to make those trades. Generating ideas is one of the critical skills for any trader or investor, and with the internet it is now easier than ever - however it requires a lot of grunt work and filtering noise.

4. Trading vehicle - this refers to how you play the trade. For example, in the above case where I was bearish on these stocks, I used puts, rather than shorting. I also used long-dated puts, expiring in 2009 and 2010, rather than in 1 or 6 months. If I had used short-dated puts I could have easily lost all my money, because it took over a year for some of these companies to collapse (some are still surviving, albeit probably not for long). If I had gone short, I would have been sweating during some of the major counter-trend rallies they had (Fannie Mae at one point rose more than 200% from its lows). Using long-term puts allowed me to express my view - that they would be crushed within a year or so; without forcing me to take risks based on things I didn’t know - such as how big the sucker rallies might be; or when exactly the stocks would collapse. Choice of trade vehicle can make the difference between holding a big position for a huge winner, and getting squeezed out by noise or counter-trend moves, or losing money because of poor timing.

5. How much risk to take - this is another critical element of good trading. Too little risk, and when you are right it is hardly worth the effort. Too much risk, and you will find it very hard to withstand pullbacks in your positions, and run a very real risk of going broke or suffering huge losses if you get a few trades wrong and run into a long losing streak. Generally I risk between 0.25% and 5% of equity on a given trade, with most in the 0.5-2% range. 3-5% risk requires major conviction, and a high probability of being right - I might do 2 or 3 trades that big in one year. If you risk 1% per trade, then you really need to have a horrendous losing streak to have a big drawdown. I aim to keep drawdowns below 20%, and ideally below 10%, and generally succeed at doing so. My worst career drawdown is in the high teens, and I have had a few in the 10% region. A year like 2008 shows that most traders, even professional hedge fund managers and value investors, take a much more cavalier attitude to risk. They are now paying for that with their careers. I prefer to make survival my main priority, with excess returns coming second. I agree with Andy Grove - only the paranoid survive. How often have you heard a trader or investor look back at their yearly results and say “Boy, I was too conservative - I really wish I had taken a lot more risk”? Not too often, I would wager.

6. Risk Control & Contingency Planning - this should be self explanatory. In critical endeavours like flying, the military, or hospital emergency rooms, people do not trundle along, and then deal with emergencies or the unexpected by reacting and trying to solve the problem at the time it crops up. The reason is that failing to plan leads to avoidable errors, and in these fields planes crash, battles are lost, and people die if you get things wrong. Thus almost all critical endeavours stress the importance of pre-emptive risk control, and planning for all potential contingencies. Trading is the financial equivalent - failure to plan can result in major loss, even bankruptcy, homelessness, and sometimes suicide. I have seen people lose their entire account in the space of a few hours or even minutes, and heard stories of people with 7 or 8 figure net worths going bust on one trade over a few weeks. The risk of blowup is very real in this profession, and without capital, a trader is toast. So it’s important to plan in advance on every single trade, for the various extreme/surprise scenarios such as major bad news, takeovers, resignations, government intervention, terrorist attacks, market crashes etc. Periods like the 2000-2002 tech crash, the 9/11 attacks, and the 2008 market crash and credit crunch should reinforce this defensive, pre-emptive attitude of hardline risk control and planning. Early in my career I read numerous interviews with successful traders, and they all stressed this one aspect the most. Whether by nature (I am pretty risk-averse) or by my reading, I acquired a healthy respect for risk, and have never really come close to taking a career-threatening loss. However, almost all other traders I know or know of have had at least one encounter with blowup or near-blowup. I recommend reading as many trading “horror stories” as you can, before risking real money. This is especially important for people over the age of 30, or who have limited market experience, or who have had a nice initial run and think ‘this is easy’, or who earned their money another way outside the markets. The markets can and will take everything you have if you get in over your head. 

7. Entry timing - this is another issue, probably one of my weakest points in trading. Once you have an idea that fits one of your strategies, and you’ve covered the risk, chosen your trading vehicle, and considered the various scenarios, how do you decide when to enter? Through experience I have found that if you don’t have a clear entry plan, often you will hesitate and either miss the trade, or enter on small size, or wait for a pullback and watch the market run away from you. My current thoughts are that, unless you can identify some clear catalyst to help you time the trade more precisely, the best option is simply to enter immediately as soon as you verify the idea is valid, and the risk/reward is acceptable. If you think there is the potential for a huge move from $10 to $50, it doesn’t matter much if you buy at $10, $11, or $12 - what matters is that you hold on until $45-50. There’s a colourful London trader saying for this  - “don’t be a prick for a tick”. 

8. Holding on (Position Management) - one of the biggest misconceptions I see in the media and online, is that trading is just a case of have your idea, put on the position, and that’s it. Nothing could be further from the truth. For me, the most important part of a trade is position management - i.e. how you react to various market developments while you have the position on. You don’t make money by buying at X, you don’t make money by selling at Y - you make money by *holding on* while the price goes from X to Y (assuming the latter is higher!). While you’re in the trade, many things will happen that can persuade you to prematurely exit - bad news, your favourite pundit slams the stock or market, the price has a quick pullback, or you have a nice profit and are tempted to take it, or the price goes nowhere for a while, or you fear a reversal. You need experience and a plan of action for how to hold on as long as the trade is conforming to expectations, and how to handle the various developments that occur during the lifetime of the trade.

9. Exit timing - the flip side of entry, and just as important. Generally, you want to exit under these conditions: i) the market action (news, price, etc) has proven you wrong. For example, if you bought a stock because you expected its new product to do really well, and the sales figures suck and the product gets recalled, your thesis has been disproven and you should exit. Or if you thought the market was going to bounce back from a huge decline within the next 3-4 days, but instead it went nowhere, then you need to get out. ii) the trade went as expected, and the profit potential has been realised. These are the nice exits - but you still *do* have to exit even a big winning trade at some point. Every move eventually comes to an end, and once the odds decline to 50/50, there’s no rationale for continuing to take risk. iii) the reasons you got in to the trade no longer apply. Markets and events change, and sometimes a position that looked good will change into one that looks neutral, unclear, or bad. You need to respond accordingly.

10. Re-entry failsafes - this is an overlooked area IMO. Whenever you exit a trade, there is always the possibility you were wrong. So, when you exit, you need a way to check if the exit was good or not. If you got out prematurely, and new events transpire which show the trade was a good one after all, then you ought to get back in - even if it means re-entering at a worse price. Overlooking re-entry can result in *huge* opportunity costs as a sound idea drives a stock or market higher for weeks, months, or even years. I still remember a trade I had on the Brazilian stock market in 2003 - my investment increased 80% in about 6 months, then the market got a bit weak and I happily took my profit. But the weakness was short-lived, and the market showed surprising strength, rebounding quickly to new highs. Because I had no re-entry failsafes then, I didn’t get back in - and spent the next few years watching from the sidelines as the market rose a further 600% from where I had exited. Needless to say, I try hard not to make that mistake anymore.

11. Post-mortems - another neglected area. Every time you complete a trade, as soon as you have a spare few hours, you should do a post-mortem. Examine every aspect of your decision-making process - did you make any mistakes, if so why, and what can you do to avoid repeating them in future? What did you do right, and how can you ensure you repeat that in future trades? Did the market act as expected or not, and what you can learn from it? Did you get any new insight or lessons from this trade? You won’t believe how much you can learn from doing proper post-mortems. One other tip - I recommend doing this as soon as you exit a trade. It takes some discipline, especially with losers where you just want to forget the loss, but your memory is freshest right after you exit a position. Most times if I do my post-mortem even a few days later, I have forgotten some aspects of the trade, and my analysis is not as good as a result. 

12. Psychology - trading “vendors” (authors, seminar speakers etc who mostly make money marketing, not trading profitably) love to promote this as the key aspect of trading. But psychology will not make a bad system profitable. However, there is no doubt that some elements of psychology have critical impact on trading. The most important is to maintain emotional stability in the face of market losses - especially big losses. The biggest dangers are things like revenge trading and doubling down - just like in a casino, where people up their bet size to try to “make it all back”. In the markets as in a casino, this can end in total disaster. Even normally rational people can go “on tilt” from time to time. With the leverage and size available in the markets, and the sums involved, any trader is only 24 hours from losing their entire life savings. So emotional discipline is absolutely critical. A less talked-about subject is the destabilising effects of a big winning streak - this can produce arrogance and lack of attention to risk. Some of my bigger losses have come after lengthy winnings streaks - any time I start to think “this is easy”, I consider whether maybe it’s time to exit some if not all of my position. Finally, it’s important to remain passionate and upbeat about your trading. That’s what gives you the drive to put in the hours necessary to prepare and succeed. If the game becomes a grind, the first seeds of defeat are sown.

This yearly exhibition of contemporary art is considered the most important show in the US and it definitely brings out all the big guns: collectors, hedge fund guys, and loads of celebrities posing as art connoisseurs to get an invite to some of the hottest parties in South Beach. 

Mrs. Carter and her hubby put on their Sunday best to browse the galleries and I must say that B totally turned it out… I love the her cobalt sheath dress and the look is perfectly suited for the occasion.  It’s exactly what I’d wear if I were shopping for $5 million art for one of my many many homes…  

PS:  I have to point out that she’s sporting my new favorite accessory, a collar necklace to add some bling to her simple dress!

Style Links: Cobalt Mod Dress $24.99, Cluster Necklace $89.00, Leather Blazer $79.99, Snake Pumps $150

As if a huge millions-big pool with reasonable required coverage isn’t a good enough idea (you know, spread the cost around, scale, etc.).

This is only gonna work for another couple of weeks, though, while Our Leaders still rule or are in charge or whatever….

1. Set up a large, well capitalized hedge fund. About $5B should do it.

2. The prospectus of the fund should note its purpose is to “Seek out profit opportunities via arbitraging inefficiencies in the markets and health care system of the United States.”  Include standard “Socially Conscious” fund language in clauses such as Do well by doing good.

3. Launch the fund — and promptly max out your leverage. Today’s environment makes it difficult to go 50 to 1, but getting 10 or 20 to 1 should not be much problem.

4. Use the money to write Credit Default Swaps with a notational value of $3 trillion dollars. The premia on these CDS should be about 10-15% or so.

5. Rollover the cash premiums — about $350 billion dollars worth — into a national fund. Use it to buy health care insurance for all US citizens.

6. Declare that due to current credit conditions, your unfortunately must announce to your counter-parties that you will be defaulting on these CDS. Note that significant amounts of this paper are held by JP Morgan and Citi. Another trillion is held by China and Japan, with Sovereign Wealth Funds owning the rest.

7. Send out a press release announcing “systemic risk.” Tell the Treasury Secretary and the Federal Reserve Chief that your imminent collapse will wreak global havoc. Apply for bailout. [more]

“Audio Panton, Cogito Singularis, Listen to everything, think for yourself.”

Dandelion Salad

Even though the Federal Reserve is now the biggest single participant in the financial system, the myth of a “free market” still lingers on. Go figure? The Fed has expanded its balance sheet by $2 trillion, guaranteed $8.3 trillion of dodgy mortgage-backed paper, provided a backstop for bank deposits, money markets, commercial paper, and created 8 separate lending facilities to ensure that underwater financial institutions can still appear to be solvent. The whole system is a state subsidized operation buoyed on a taxpayer-provided flotation device which bears no resemblance to an invisible hand. More astonishing, is the massive power grab engineered by the Fed which has taken place without the slightest protest from 535 shell-shocked congressmen and senators. Elected officials have either kept their finger in the air to see which way the political wind is blowing or timidly caved in to Treasury’s every multi-billion dollar demand. It’s flagrant blackmail and everyone knows it. Congressional oversight is an oxymoron.

Anyone who has followed the financial crisis knows that the Fed’s bloody fingerprints are all over the crime scene. Still, that hasn’t stopped well-meaning liberal economists (Krugman, Stiglitz, Reich) from supporting Bernanke’s increasingly unorthodox attempts to flood the financial system with liquidity (”quantitative easing”) and invoke whatever radical strategy pops into his head. In fact, many of the experts believe that Bernanke should do even more given the sheer size of the meltdown. There’s growing support for a gigantic stimulus package ($700 billion) which will focus on road construction, infrastructure, state aid, extensions to unemployment benefits and green technologies. The Obama camp hopes that government programs and deficit spending will make up for the huge losses in aggregate demand which threaten to drag prices down even further in a self-reinforcing deflationary cycle. Even so, its natural to wonder at the wisdom of giving even more power to the very people who created the mess and who seem more interested in proving their depression-fighting theories than throwing a lifeline to struggling homeowners, consumers or auto workers. Maybe its time to try something different.

So far, Bernanke’s monetarist approach has amounted to nothing. The stock indexes are off 45 percent and housing prices continue to plunge. The Fed’s low interest rates and lending facilities have helped to keep the banking system from collapsing, but they’ve failed to get consumers or businesses spending again. The economy is tanking fast. Paul L. Kasriel, the Director of Economic Research at The Northern Trust Company summed up Bernanke’s dilemma like this:

“In a sustained housing bust that causes banks to take a big hit to their capital (low interest rates) simply will not matter. This is essentially what happened recently in Japan and also in the US during the Great Depression. Most people are not aware of actions the Fed took during the Great Depression. Bernanke claims that the Fed did not act strong enough during the great depression. This is simply not true. The Fed slashed interest rates and injected huge sums of base money but it did no good. More recently, Japan did the same thing. It also did no good. If default rates get high enough, banks will simply be unwilling to lend which will severely limit money and credit creation.” (Interview with Paul Kasriel; Mish’s Global Economic Trend Analysis)

In fact, the banks are just one part of the problem. Another part is the shortage of creditworthy borrowers now that home equity is drying up and the standards for loans have gotten tougher. Most people have seen their personal wealth vanish and their 401-Ks shrivel to the size of a chickpea. The Fed chairman faces huge obstacles in trying to restart the credit engine and get maxed out consumers spending again.

Bernanke has expanded the money supply at record pace, but to little effect. The money is stagnating in pools because the financial plumbing is still gunked up from troubles in the banking system. The credit-transmission system has broken down causing a generalized contraction throughout the economy. Business activity has dropped off a cliff. Former Treasury Department economist, Bruce Bartlett, explains the phenomenon like this in his article “What Would Keynes Do?” in Forbes:

“Another problem that policymakers back then didn’t grasp is that the money supply’s effectiveness depends on how quickly people spend it; something economists call velocity. If velocity falls because people are hoarding cash, it may require a great deal more money to keep the economy operating.

Think of it this way: Velocity is the ratio of the money supply to the gross domestic product. If GDP is $10 trillion and money turns over 10 times per year, then $1 trillion in money supply will be sufficient. But if velocity falls to 9, a $1 trillion money supply will only support a $9 trillion GDP. If the Fed doesn’t want GDP to shrink by 10%, it will have to increase the money supply by 10%.

This is essentially the problem we have today. Unlike in the 1930s, the Fed is not allowing the money supply to diminish. Also, we have programs like federal deposit insurance to prevent bank deposits from shrinking. But velocity is collapsing. Banks, businesses and households are all hoarding cash, not spending except for essentials. This is bringing on the deflation that is crippling the economy.”

This is why Bernanke has launched his radical intervention; buying bonds, stocks and anything else that will keep asset-prices from crashing. It’s an attempt to reignite spending by goosing the market. When businesses and consumers can’t sustain demand, the government has to step in and take their place. Otherwise, businesses have to cut costs even more dramatically, sending unemployment soaring while prices continue to nosedive.

The real worry is that Bernanke’s pet theory is merely an academic pipe-dream which is doing more harm than good. After all, his strategy is based on a controversial interpretation of history that is only accepted by disciples of Milton Friedman. The idea that a normal recession morphed into the Great Depression because the money supply decreased by one-third between 1929 to 1932, is likely an oversimplification of a very complex situation. If Bernanke’s calculations are correct, then where’s the proof? Why haven’t the zero-percent interest rates and the trillion dollar lending facilities stimulated spending? Instead, the equities markets continue to tumble, corporate profits are down, foreclosures are on the rise, commodities are in freefall, and unemployment made its biggest leap in 30 years. (Unemployment during the Great Depression didn’t reach 25 percent for three years. It is actually accelerating faster in 2008 than it did in 1929) So, where’s the progress, Ben?

The present list of remedies fail to address the underlying rot in the system itself. That’s the problem. There’s no doubt that Timothy Geithner and Larry Summers will have better luck mitigating the effects of the slumping economy, but to what end? To stitch together a system which diverts a larger and larger portion of the national wealth to a smaller and smaller group of corporatist and bankers? Is that the measure of success?

No thanks. Besides, the financial crisis is not an accident of nature, like a tornado or an avalanche. It’s a self-inflicted wound that can be traced back to particular policies that were put in place to shift wealth from one class to another. The low interest rates, the massive leveraging, the undercapitalized institutions, the off-balance sheets operations were all concocted with the same objective in mind. The Fed’s repertoire may change, but the results are always the same, reflecting the deeply-held class bias which orders the economy according to the interests of rich and powerful.

Besides, there’s reason to believe that Bernanke doesn’t fully grasp the fundamental problem, that economic growth in recent years was predicated on a flawed model that can’t be restored. Consumers were able to spend beyond their means because their personal assets were greatly inflated by the availability of easy credit and lax lending standards. Now that risk is being repriced, debt deflation has set in and prices are plummeting across the spectrum. Homeowners are feeling the pinch because they can’t tap into their home equity which amounted to $800 billion in 2006. The process of lowering interest rates by spreading risk throughout the system (securitization) has bogged down, sending investors fleeing from the markets to the safety of US Treasurys and cold hard cash. Bernanke’s attempts to reflate the bubble by buying up Fannie and Freddie’s mortgage-backed securities (MBS) and bundled credit card debt from finance companies is a sign of utter desperation. He’s like a man pumping air into a punctured tire, pushing up and down furiously while the air hisses out the other side.

The economy is contracting because the excessive spending was based on artificially low interest rates and debt leveraging. In The End of Prosperity Fred Magdoff and Paul Sweezy wrote:

“In the absence of a severe depression during which debts are forcefully wiped out or drastically reduced, government rescue measures to prevent collapse of the financial system merely lay the groundwork for still more layers of debt and additional strains during the next economic advance.” As Minsky put it, “Without a crisis and a debt-deflation process to offset beliefs in the success of speculative ventures, both an upward bias to prices and ever-higher financial layering are induced.” (John Bellamy and Fred Magdoff, “Financial Implosion and Stagnation”, Monthly Review)

This is the market model that Bernanke and Paulson are trying to resuscitate, but without much success. The credit that once gushed from the hedge funds and investment banks has slowed to a trickle. It’s no longer possible to take complex debt-instruments and amplify their value 30 or 40 times over. Investors have seen through the swindle and boycotted the market for pools of debt packaged as securities. As foreclosures rise, the banks balance sheets will continue to hemorrhage, forcing them to make margin calls that will push more and more financial institutions into bankruptcy. This is what happens when the underlying economy can no longer support a oversized financial system because wages have stagnated and workers are unable to make the interest payments of their loans. The whole system begins to buckle. John Bellamy and Fred Magdoff explain the origins of “financialization” in their article “Financial Implosion and Stagnation”:

“It was the reality of economic stagnation beginning in the 1970s, as heterodox economists Riccardo Bellofiore and Joseph Halevi have recently emphasized, that led to the emergence of “the new financialized capitalist regime,” a kind of “paradoxical financial Keynesianism” whereby demand in the economy was stimulated primarily “thanks to asset-bubbles.” Moreover, it was the leading role of the United States in generating such bubbles—despite (and also because of) the weakening of capital accumulation proper—together with the dollar’s reserve currency status, that made U.S. monopoly-finance capital the “catalyst of world effective demand.”

Magdoff and Bellamy’s theory confirms that there was a coherent plan to expand financial markets into riskier areas to compensate for the stagnation which unavoidably occurs in capitalist economies. The real problem is rooted in the hostility of corporate bosses towards workers which translates into wages that don’t keep pace with production. When wages languish, in an economy that is 70 percent consumer spending, the only way to increase GDP is by expanding credit. And that, in fact, is exactly how it has played out. Trickle down ideologues, like Henry Paulson, make every effort to extend credit to anyone with a pulse and a body temperature of 98.2 degrees, but they fight tooth and nail to crush the unions or any attempt to raise salaries. And Paulson, of course, is not alone in waging class warfare; he is just an extreme example.

The bottom line, is that financialization, which rests on the twin pillars of easy credit and ballooning debt, creates an inherently unstable system which is prone to wild swings and frequent busts. Bernanke is trying to restore this system ignoring the fact that workers–whose personal balance sheets are already bleeding red–can no longer support it. No amount of tinkering in the credit markets will reduce the overcapacity bulging throughout the system or add one farthing a poor man’s bank account. There is a historic mismatch between supply and demand that cannot be reconciled by Bernanke’s market meddling. Workers need a raise; that’s how demand is created.

The same message goes out to Obama’s economic team, too. The stimulus package might get the economy through the short-term crisis, but if wages don’t rise, the economy will continue to underperform. That’s why the new Prez would be well advised to quickly pass The Employee Free Choice Act (also known as the “card check”) which would end secret ballots in union elections. It may be the most important piece of legislation in a decade. Its passage would ease union organizing and help to grow union membership which has dwindled to about 10 percent of the work force.

Forget about the fake differences between the two political parties. There aren’t any. The only hope for deep structural change is to strengthen the unions and give workers a place at the policy table. That’s the only peaceful way to dismantle this parasitic financial regime and bring about a more equitable distribution of wealth.

see

Chamber of Commerce hopes to avoid Employee Free Choice Act

Fight For Workers’ Rights by Ralph Nader

Countdown: Anthrax Attacks Inside Job? + The Long Road + Wal-Mart

The Economy Sucks and or Collapse 2

Robert Weissman* | Foreign Policy in Focus, December 1, 2008

The G-20’s “Summit on Financial Markets and the World Economy,” held in Washington on November 15, gave world powers a chance to coordinate their responses to the burgeoning international financial crisis and accompanying ills in real economies around the globe but produced a long, vague, and telling declaration, devoid of meaningful commitments to change business as usual.

The Group of 20 includes large developing countries like China, India, Indonesia, Mexico, Brazil, Argentina, and South Africa, so the meeting did at least expand participation beyond the limited scope of typical G-8 meetings, which include only the world’s richest countries plus Russia. At the same time, most countries of the world (including all of Africa, except South Africa), were excluded. Civil society groups criticized it for bypassing the more inclusive United Nations.

The declaration, released after the summit, got short shrift in a busy news cycle that’s lurching from one massive bailout maneuver to the next. But it’s a significant — and contradictory — document. On the one hand, it identifies regulatory and financial institution failures, and calls for new regulatory measures. On the other hand, it includes various odes to the free market, and urges forward some of the institutions and processes that helped create the financial and economic crisis. Unfortunately, while the declaration identifies important regulatory failures, almost all its action items are at a level of generality that make them impossible to measure and potentially of little or no consequence.

Absent altogether from the declaration are big ideas and proposals for structural shifts. Also notably absent is a commitment to shrink the financial sector, so that it serves rather than engrosses the real economy. Here’s a detailed analysis of many of its key passages.

Regulators must ensure that their actions support market discipline, avoid potentially adverse impacts on other countries, including regulatory arbitrage, and support competition, dynamism and innovation in the marketplace.

The first half of the sentence is a welcome, if somewhat innocuous, characterization of financial regulators’ job: They should help financial markets check risky behavior by making sure risks are fully disclosed, and they should avoid a race to the bottom in regulatory standards (”regulatory arbitrage”), in which big financial institutions drive down standards in one country by complaining that they are too tough as compared to another country.

But the second half of the sentence commits financial regulators to perpetuating existing problems. In general, innovation is crucial to economic development, but not “innovation” in the financial markets. The current financial crisis stems in part from too much innovation — too many complicated and exotic financial instruments growing too fast, with too little supervision, too little understanding by market participants of what they are doing, and too little comprehension by anyone of the systemic threats posed by new instruments. In general, we need less dynamism and innovation in financial markets. The evidence of the last decade strongly suggests the need to prohibit certain financial instruments altogether, and to require that new financial instruments pass regulatory review before being permitted to be introduced on the market.

We will exercise strong oversight over credit rating agencies, consistent with the agreed and strengthened international code of conduct.

Credit ratings agencies — the leading agencies are Moody’s, Standard & Poor’s, and Fitch — played a central role in the financial crisis. As banks and investment banks packaged home mortgages and other loans, investors looked to ratings agencies to assess the level of risk in these combination investments. The ratings agencies gave the highest rating, AAA, to debt obligations that quickly proved to be of low quality. Credit ratings agencies have additional power because regulatory rules say that banks investing with borrowed money need to set aside less collateral to buy higher-rated instruments.

Internal documents from ratings agencies show what a shoddy job they did. The U.S. House of Representatives Committee on Oversight and Government Reform procured a 2007 document in which the head of Moody’s stated, “analysts and MDs [managing directors] are continually ‘pitched’ by bankers, issuers, [and] investors” and sometimes “we ‘drink the Kool-Aid.’” An S&P employee wrote, “It could be structured by cows and we would rate it.” Another S&P employee stated: “Rating agencies continue to create [an] even bigger monster — the CDO market. Let’s hope we are all wealthy and retired by the time this house of cards falters.”

The ratings agency failure wasn’t a matter of incompetence. Ratings agencies are paid by the entities floating a bond. They have an incentive to please the entity, to make sure they get repeat business.

Stronger regulation can help reduce this problem. In the United States, amazingly, the Securities and Exchange Commission must give passing grades to credit rating agencies that apply their principles correctly, even if the underlying rating principles are flawed. But even stronger regulation cannot overcome the structural bias by credit ratings. The problem could be solved by making credit rating a public function, with government or nonprofit entities assigned to do particular ratings jobs, without the ability of a bond issuer to choose who will rate its bond.

In consultation with other economies and existing bodies, drawing upon the recommendations of such eminent independent experts as they may appoint, we request our Finance Ministers to formulate additional recommendations, including…reviewing compensation practices as they relate to incentives for risk taking and innovation

Compensation practices in the financial sector are a key problem. Excessive pay has helped drive a culture of inequality, encouraging other CEOs and executives to demand lavish salaries. It’s outrageous for public bailout monies to be spent on massive compensation packages; on principle, the leaders of failed institutions should be penalized, especially if their vast pay packages are theoretically tied to performance and shareholder value during boom times.

More important, however, is the issue the declaration does directly raise: financial sector compensation systems reward risky, short-term behavior and even provide incentives for management recklessness.

Wall Street bonuses are paid on a yearly basis. If your firm does well, and you did well for the firm, you get an extravagant bonus. This is not a few thousand dollars to buy fancy Christmas gifts. Wall Street bonuses can be 10 or 20 times base salary, and commonly total as much as four-fifths of employees’ pay. In this context, it makes sense to take huge risks, whatever the risk of failure — and especially if the failure is likely to occur sometime in the future (meaning any time after this year). The payoffs from benefiting from a bubble are dramatic, and there’s no reward for staying out.

However, to do something about excessive compensation, you have to be serious about it. The $700 billion U.S. bank bailout required measures to deal with excessive compensation. The Treasury Department’s executive compensation guidelines for banks participating in the bailout are laughable. The most important rule prohibits incentive compensation arrangements that “encourage unnecessary and excessive risks that threaten the value of the financial institution.” Do banks need to be bribed with hundreds of billions of dollars to persuade executives not to adopt incentive schemes that threaten their own institutions with unnecessary and excessive risk?

A meaningful standard must be much tougher. One desirable approach would not only cap top pay levels, but insist that large bonuses must be tied to company performance over a long period (say, seven years).

We recognize that these reforms will only be successful if grounded in a commitment to free market principles, including the rule of law, respect for private property, open trade and investment, competitive markets, and efficient, effectively regulated financial systems. These principles are essential to economic growth and prosperity and have lifted millions out of poverty, and have significantly raised the global standard of living. Recognizing the necessity to improve financial sector regulation, we must avoid over-regulation that would hamper economic growth and exacerbate the contraction of capital flows, including to developing countries.

Perhaps the Bush administration required this invocation of “free market principles” as a condition of signing on to the overall document.

It’s hard to imagine how anyone could avoid breaking out with disbelieving laughter upon reading this. As of late November, Bloomberg calculates, the U.S. government will have committed $7.76 trillion — more than half of GDP — in a bewildering array of bailout monies, swaps, guarantees, discounted loans, insurance programs, share purchases and more. Where, oh where, is the “free market” in this? And doesn’t the public have a right to demand control commensurate with the support the government is offering financial and nonfinancial firms?

We underscore the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty. In this regard, within the next 12 months, we will refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organization (WTO) inconsistent measures to stimulate exports. Further, we shall strive to reach agreement this year on modalities that leads to a successful conclusion to the WTO’s Doha Development Agenda with an ambitious and balanced outcome. We instruct our Trade Ministers to achieve this objective and stand ready to assist directly, as necessary. We also agree that our countries have the largest stake in the global trading system and therefore each must make the positive contributions necessary to achieve such an outcome.

Existing World Trade Organization rules (in the General Agreement on Trade in Services, or GATS) already impede countries’ ability to maintain appropriate financial sector regulations, and new GATS proposals would further restrict countries’ ability to maintain or adopt sound financial regulations.

As a “development” matter, the WTO’s Doha Round of trade talks promises developing countries benefits in the form of improved market access to rich countries, including the United States. But the inherent shortcomings of this model are now apparent, as the poor countries that depend on the revenue they get from exporting to rich countries are experiencing deep trouble due to their integration with shrinking economies. Even worse, in the last quarter century, the export-oriented development model has really been based on sending products to the United States. Even apart from the global recession, the United States will be a shrinking market, because the country’s trade and current account deficits are not sustainable. Thus the development potential of an export-oriented economic model is poor.

We are mindful of the impact of the current crisis on developing countries, particularly the most vulnerable. We reaffirm the importance of the Millennium Development Goals, the development assistance commitments we have made, and urge both developed and emerging economies to undertake commitments consistent with their capacities and roles in the global economy. In this regard, we reaffirm the development principles agreed at the 2002 United Nations Conference on Financing for Development in Monterrey, Mexico, which emphasized country ownership and mobilizing all sources of financing for development.

The Financing for Development (FfD) initiative has evolved into something more than call for money for development aid. At the end of November, country representatives will gather in Doha, Qatar to review a proposed document, following up on the original Monterrey FfD meeting, calling for a review of the “international financial and monetary architecture, and global governance structures.” In the eyes of many critics, the G-20 process aims to head off developing countries’ demands for a more fundamental review and reform of global financial structures, as well as to preempt a more genuinely multilateral approach. The fact that the heads of the International Monetary Fund and World Bank declined to attend the Doha conference may undercut it as well.

We remain committed to addressing other critical challenges such as energy security and climate change, food security, the rule of law, and the fight against terrorism, poverty and disease.

The G-20 may be committed to these other challenges, but they aren’t putting commensurate money on the table. Using a very conservative assessment of U.S. government outlays on the financial crisis, a recent study from the Institute of Policy Studies (IPS) finds that rich countries are spending 40 times more on the financial crisis than on development aid and climate change finance combined. The actual ratio is arguably much greater — IPS fixes U.S. expenditures on the financial crisis at $1.4 trillion, far below the $7.76 trillion figure from Bloomberg. (Bloomberg includes financial supports not included in the IPS calculation.)

Accounting standard setters should significantly advance their work to address weaknesses in accounting and disclosure standards for off-balance sheet vehicles.

Holding assets off the balance sheet generally allows companies to exclude “toxic” or money-losing assets, including debt, from financial disclosures to investors in order to make the company appear more valuable than it is. This was central to the Enron scandal. Since 2003, however, the Financial Accounting Standards Board (FASB) requires companies to disclose special purpose entity (SPE), or special purpose vehicle (SPV) financial data on balance sheets. In addition, Section 401(a) of the Sarbanes-Oxley Act requires public disclosure of all material off-balance sheet transactions, arrangements, and obligations. Disclosure systems mechanisms remain problematic, however, and even now no one is sure of banks’ ongoing and overall liabilities, in part because they are parked in off-balance sheet entities. To that extent, enhanced disclosure would be an improvement.

But the bigger question is why off-balance sheet operations should be permitted at all. The whole idea of balance sheets is to honestly report assets and liabilities. Use of off-balance sheet vehicles has directly and significantly worsened the current economic crisis. Banks used off-balance sheet operations — SPEs and SPVs — to hold securitized mortgages. Although derivative instruments related to these mortgages were sold off to other entities, the SPVs themselves often maintained the actual mortgage liability. And thus the ultimate liability remained with the banks. Because the securitized mortgages were held by an off-balance sheet entity, however, the banks did not have to hold capital reserves as against the risk of default — thus leaving them vulnerable and undercapitalized.

Supervisors and regulators, building on the imminent launch of central counterparty services for credit default swaps (CDS) in some countries, should: speed efforts to reduce the systemic risks of CDS and over-the-counter (OTC) derivatives transactions; insist that market participants support exchange traded or electronic trading platforms for CDS contracts; expand OTC derivatives market transparency; and ensure that the infrastructure for OTC derivatives can support growing volumes.

Credit default swaps are effectively a kind of insurance policy — or, less generously, a bet — on debt securities. An investor or company contracts with another party (the “counterparty”) to provide insurance on any of a wide range of debt instruments, and if the bond doesn’t pay, the counterparty must make up the loss.

There were about $62 trillion in outstanding credit default swaps as of October 2008. There is a theoretical benefit to credit default swaps — to the extent they provide insurance, they help parties cushion potential losses, just like home insurance would. But any insurance system runs the risk of enabling excessively risky behavior — and in the case of the current financial crisis, it is clear that credit default swaps did exactly this.

The G-20 proposes to standardize credit default swaps, so they are tradeable, more transparent, and easier to value. These steps would all be improvements over the current situation. But doesn’t a financial meltdown that is, by consensus, the worst since the Great Depression signal the need to think differently? The hypothetical benefits of credit default swaps can’t begin to offset the damage they have created. The G-20 would have performed a much greater service if it signaled an intention to consider phasing out credit default swaps altogether or at least prohibiting parties with no stake in the underlying transaction from taking them out.

Firms should reassess their risk management models to guard against stress and report to supervisors on their efforts.

The declaration is peppered throughout with this kind of meaningless and empty hortatory language. The financial crisis has demonstrated beyond doubt that financial firms’ internal risk control measures are inherently flawed. Even diligent firms — apparently in very short supply — seem unable to incorporate the risk of systemic problems, where individual problems compound each other rather than being isolated.

In that context, systemic risk management is vital. But the G-20 show little readiness to adopt sufficiently robust measures to address the problem. One measure of their failure is the reliance on the International Monetary Fund to sound early alarms about systemic risks.

The IMF, with its focus on surveillance, and the expanded FSF [Financial Stability Forum], with its focus on standard setting, should strengthen their collaboration, enhancing efforts to better integrate regulatory and supervisory responses into the macro-prudential policy framework and conduct early warning exercises.

There’s a lot of talk about the IMF getting an enhanced “surveillance” role, meaning a greater responsibility for identifying problems before they emerge. But this is already an IMF responsibility, one at which the Fund has failed miserably.

In the IMF’s April 2007 Global Financial Stability Report, issued just before the financial crisis first spun out of control, Fund economists reported that:

Not exactly the kind of predictive record that offers hope for the future.

The IMF, given its universal membership and core macro-financial expertise, should, in close coordination with the FSF and others, take a leading role in drawing lessons from the current crisis, consistent with its mandate.

One among many lessons the IMF should draw from this crisis — as it should have drawn from earlier crises — is that countries must be free to impose strong restraints on the financial sector and financial flows.

More important, perhaps, is the ability to impose capital controls limiting the ability of funds to flow into and out of the country. Capital controls limit the vulnerability of national currency to speculative attack. They can also give developing countries policy space to undertake expansionary economic policies (more spending and lower interest rates), as their local currency becomes somewhat decoupled from developments in international financial markets.

IMF studies have shown that capital controls were helpful for countries employing them during the late 1990s Asian financial crisis, but the IMF generally remains hostile to such measures.

We should review the adequacy of the resources of the IMF, the World Bank Group and other multilateral development banks and stand ready to increase them where necessary. (International financial institutions) should also continue to review and adapt their lending instruments to adequately meet their members’ needs and revise their lending role in the light of the ongoing financial crisis.

The IMF has made some tentative steps in recent months that suggest it’ll issue some loans without the harmful conditions it traditionally attaches. But no-condition loans — if there are any — appear to be available only to favored countries. Poorer countries, most in need of expansionary policies, continue to be instructed to pursue contradictory policies as a condition of loans. Even Iceland wasforced to raise its interest rates to an extraordinary 18%.

If the IMF is to receive additional resources to make emergency loans, then these new resources should come as part of a package that focuses IMF operations and moves it away from harmful past practices. A network of civil society organizations has urged that these include:

*Robert Weissman, a Foreign Policy In Focus contributor, is editor of the Washington, D.C.-based Multinational Monitor, and director of Essential Action, a corporate accountability group.

As the Derivatives Beast eats all wealth, all the big shots who run hedge funds and investment organizations are shutting down rapidly.  This is releasing, into the pools of the unemployed, a host of high-living workers accustomed to high incomes and fun times.  There are literally hundreds of thousands of these people hitting the streets all at once.

Since they are all part of the top 2% of income earners and tax payers of Europe, Asia and North America, this flood of ‘new poor’ are going to have a far greater effect on the solvency of governments as well as the income flows in consumer markets.  The only reasons President Clinton had a budget surplus in 1999 was due to the Dot Com bubble.  And Republicans refusing to spend money.

And the collapse of that bubble alarmed Greenspan and President Bush so badly, they conspired to flood the US with lots and lots of funny money as well as allowing a flood of cheap Chinese imports to pour into the country, making inflation seem lower than it actually was.  And despite all this, and despite the hiring of hundreds of thousands of high-income money managers, computer experts and bankers, despite all this, the government spent far over its budget.

So now that this government income is collapsing, we are overspending with a manic vengeance.  Bush’s tax cuts meant that the new hires from 2003-2007 didn’t add much to the government revenues.  Now, they are adding NOTHING.  And so we are now going off a far more dangerous cliff than in 2001.

Law Firm Head Dreier Arrested on Fraud Charge Related to Hedge-Fund Scheme

Marc Dreier, managing partner of the 250-lawyer New York firm Dreier LLP, was arrested and charged by federal prosecutors with fraud relating to a scheme to cheat hedge funds.

To paraphrase Shakespeare: ‘Arrest all gnome lawyers!’  HAHAHA.  The pirates and gnomes are being cheated by their own lawyers?  There is justice in this world!  It is hilarious, watching cheaters who cheat on taxes, etc, being cheated by their own lawyers who help them cheat on everything in sight.  As I like to say, ‘Arrest them all!’  

And thank you, Canada, for allowing him to be arrested after he fled.  His ‘criminal impersonation’ was him trying to exit North America using fake ID.  I suppose his destination was some pirate island or some such.  Probably, Dubai.

Majority of Modified U.S. Mortgages Fail Within Six Months, Regulator Says

The reason people couldn’t pay these mortgages was simple: either they were flipping houses or they used the rising value of a house to spend money playing as if they were rich—going on vacations, gambling, buying prostitutes, etc.  Yesterday, a ‘rich’ guy in England was caught cooking the books. It turned out that this big supporter of the Tories, a big shot for the Olympics, was a total fraud.

He was NOT a multi-millionaire, he was a multi-million debtor!  This is identical to Mr. Trump and Mr. Zell and all the other deadbeat beasts.  The confusion over what is wealth and what is debt should finally be explained to the general public.  You are NOT rich if you are in debt.  Only after you get rid of ALL your debt, are you ‘rich’.  And then, you can sit pretty during downturns!

Real wealth means, when things go bad, you don’t worry too much since you have little overhead due to debt.  Going into a slight cyclic debt due to crops, for example, makes sense.  But ONLY if the temporary debt is much smaller than the value of your ‘wealth’ holdings!  This is the same with buying a car: due to them being very expensive now, most people get a loan.  But this should be very short term and paid off while still using the car for another 4 years, free of charges.

But running up vast debts to play games in real estate, stock speculation, etc, is stupid.  I used to argue at mainstream media outlets about this.  The common belief was, people in debt should NOT pay off their mortgage but stay in debt and use the money for playing with stocks.  I denounced this because, ‘If you are suddenly unemployed, usually stocks are down and housing is down and you are stuck with a mortgage you can’t pay off and you go bankrupt!’

And this process is just beginning: the hundreds of thousands of monetary workers being laid off, the vast majority of them owe huge sums on very expensive housing!  And now, can’t pay!  We will see trillions of dollars of mortgages going belly-up.  And the value of all the other housing in the high-rent districts collapsing due to job losses at the top 2% of the income scale.

The remaining gnomes who still have some money to play with are all betting that we will go through the exact same waves of commodity price surges as we did in the stagflation seventies.  So long as helicopter drops are used to goose economies.  I got an email from Australia about how the government is now going to give 10 million Aussies a free $1,000 goodie gum helicopter drops.  This is adding to the deficit, of course.

Yesterday, I took a young man at Seeking Alpha to task for suggesting the way out of this maze is for the US to give all of us a ‘free’ $10,000 goodie gum helicopter drop.  This is pure, utter madness.  And since Roubini and other economists are bellowing that we must do this, we get all the speculators figuring that there will be lots and lots of inflation.  So iPath is suggesting that its speculators who are working with them, take a peek at how much oil futures they plan to buy: LOTS of it.

Note how, in the screenshot above, they casually admit that the majority of their futures stakes will be in oil.  Oil is a dangerous commodity.  For example, during nearly all of  President Bush’s reign, he would talk about or actually go to war deep inside of OPEC regions.  This caused oil prices to shoot upwards!  Duh!  Whenever prices seemed ready to fall, he would threaten Iran.  I noted this over the years and made many cartoons about it.

Notice that when oil prices suddenly shot to the moon last summer and all commerce collapsed, he and his oil buddies ceased threatening Iran.  The oil pumping OPEC nations run by Sunnis are pissed at the lower prices.  They know that if they ask the US to again, threaten Iran, their dire enemy, they will get richer.  But the US has a new President coming in.  

One of Obama’s supporters even suggested the US cut Israel’s money feed that has many billions of taxpayer dollars flowing to one of the countries on earth with a high standard of living.  Higher than ours.  So we don’t know yet if Obama will cut aid to Israel or threaten Iran.  We will see in two months if he will follow Bush’s lead in this matter.

The US economy desperately needs cheap oil.  But the big investment houses are betting on higher oil prices in the future.

Crude Contango Pays Most Since 1998 as Shell, Koch Supertankers Store Oil

See?  They are storing it in ships!  Which is insane since ships can sink or even be blown up by terrorists, etc.  All sorts of mischief can happen since most of these ships are lightly guarded.  Ecch.  Indeed, simple violent storms can sink these things!  Even while in port!  Tsunamis can do this, too.  This is a wretched way to store oil.  But this is what the gnomes do: messy garbage that backfires but they do it in the hope of getting rich.

The point is, they are fully expecting oil prices to shoot upwards.  But the problem here is, many governments don’t want this to happen.  OPEC and Russia hope this happens.  But this makes Iran stronger so everyone who wants high oil prices want Iran to be locked out of the markets.  So it goes: the bets are, higher prices.  This means, in conjunction with all the free funny money being created via taxpayer’s future debts, will cause more global inflation of the worst sort.

This will NOT cause housing values to soar again.  This will NOT create more jobs in industry.  This will NOT fix global trade of reduce government spending.  This is the WORST sort of inflation of them all!

Kremlin Rules - In Hard Times, Russia Moves In to Reclaim Private Industries - Series - NYTimes.com

Startled, the oligarch, Dmitri E. Rybolovlev, pointed out that the government had already examined the incident thoroughly and had cleared the company of responsibility.

He further sought to fend off the inquiry by saying he would pay for some of the damage to infrastructure from the accident, a mine collapse that injured no one but left a gaping sinkhole.

His offer was rebuffed, and it seemed clear why: the Kremlin was maneuvering to seize Uralkali outright.

Mr. Putin, the former president and current prime minister, has long maintained that Russia made a colossal error in the 1990s by allowing its enormous reserves of oil, gas and other natural resources to fall into private hands….

Mr. Sechin’s role in the Uralkali inquiry immediately caused analysts and investors to presume that the company was in peril. Uralkali’s stock, once highly prized by fund managers, has plunged more than 60 percent since the inquiry began, far more than the broader Russian stock market.

That has caused steep losses for Mr. Rybolovlev, 42, a former medical student who is known as Russia’s fertilizer king because of his dominance of the business of mining potash, a principal fertilizer component. Last June, when Uralkali was soaring, the otherwise low-key Mr. Rybolovlev attracted attention by buying Donald J. Trump’s mansion in Palm Beach, Fla., for $95 million.

Putin isn’t stupid.  He is one of the smarter despotic leaders around, next to Hu, of course, who is the genius of despotism.  The US likes incompetent despots who bungle things and let the speculators, pirates and gnomes run things into the ground.  Note that Putin is anti-gnome.  Pro-KGB statism.  

And he is correct in seizing these systems!  But the state usually runs things lousy if it is corrupt.  This is one of life’s many riddles we can’t seem to solve.  Now, on to Japan’s Nikkei News:

Now, all major powers are heading into the Japanese ZIRP system and have zapped Japan’s economy as the yen rises and the Japanese carry trade violently unwinds.  Today, the yen is now 92 to the dollar.  This is suicide for Fortress Japan!  They want a weak yen and a strong dollar and euro!  So Japan is sliding off the economic cliff.  The only way they can weaken the yen is to have their own economy die at home.  So they will crush the workers even worse than before.

At this rate, Japan might end up totally depopulated and thus, prime real estate for some conquerer.

Amsterdam’s brothels and cannabis cafés furious over mayor’s ‘clean-up’ | World news | The Observer

HAHAHA.  I like the honesty here: Amsterdam needs sin, sex, booze and drugs to stay alive.  This is true in many cities and countries.  Thailand, Sri Lanka, etc all need this for tourists.  Child sex, naked beaches, various drugs: all of this is the sort of pirate holidays everyone adores so much.  We all want to be like the banking gnomes in the end.  

This will collapse if oil goes up again.  Flying to pirate coves or traveling to sin cities will be hard to do if there is no free funny money or cheap oil enabling this sort of holiday.  Rats!  We will have to sin at home where we piously pass laws forbidding doing what we want to do so badly, we will travel across the entire planet to do it in someone else’s front yard!  Totally naked!  Wahooo!!!!

Looking at the riots in Athens and across Greece should warn us about rampant youth.  I remember being a rampant youth.  Sex, drugs, etc.  We were  called ‘hippies’ but we called ourselves, ‘freaks’.  Well, most tourism is all about being freaks.

Argentina to give car loans to boost industry - Dec. 6, 2008

Yet another example of governments seizing whatever they need to keep things afloat.  Argentina [name comes from *correction here!* 'silver'] can’t print money like the US.  They can’t openly talk about giving everyone in Argentina $10,000 so they can spend money on whatever they want [see the talk about about freak vacations].  No, Argentina has to take something that is ’savings’ of some sort and then redirect it into buying things like cars.  This works ONLY if the government nationalizes the auto industry in Argentina.

HAHAHA.  Like Putin!  HAHAHA.  And off the economic cliff we fall into the jaws of the crocodile in the sign at the top here.

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As the Derivatives Beast eats all wealth, all the big shots who run hedge funds and investment organizations are shutting down rapidly.  This is releasing, into the pools of the unemployed, a host of high-living workers accustomed to high incomes and fun times.  There are literally hundreds of thousands of these people hitting the streets all at once.

Since they are all part of the top 2% of income earners and tax payers of Europe, Asia and North America, this flood of ‘new poor’ are going to have a far greater effect on the solvency of governments as well as the income flows in consumer markets.  The only reasons President Clinton had a budget surplus in 1999 was due to the Dot Com bubble.  And Republicans refusing to spend money.

And the collapse of that bubble alarmed Greenspan and President Bush so badly, they conspired to flood the US with lots and lots of funny money as well as allowing a flood of cheap Chinese imports to pour into the country, making inflation seem lower than it actually was.  And despite all this, and despite the hiring of hundreds of thousands of high-income money managers, computer experts and bankers, despite all this, the government spent far over its budget.

So now that this government income is collapsing, we are overspending with a manic vengeance.  Bush’s tax cuts meant that the new hires from 2003-2007 didn’t add much to the government revenues.  Now, they are adding NOTHING.  And so we are now going off a far more dangerous cliff than in 2001.

Law Firm Head Dreier Arrested on Fraud Charge Related to Hedge-Fund Scheme

Marc Dreier, managing partner of the 250-lawyer New York firm Dreier LLP, was arrested and charged by federal prosecutors with fraud relating to a scheme to cheat hedge funds.

To paraphrase Shakespeare: ‘Arrest all gnome lawyers!’  HAHAHA.  The pirates and gnomes are being cheated by their own lawyers?  There is justice in this world!  It is hilarious, watching cheaters who cheat on taxes, etc, being cheated by their own lawyers who help them cheat on everything in sight.  As I like to say, ‘Arrest them all!’  

And thank you, Canada, for allowing him to be arrested after he fled.  His ‘criminal impersonation’ was him trying to exit North America using fake ID.  I suppose his destination was some pirate island or some such.  Probably, Dubai.

Majority of Modified U.S. Mortgages Fail Within Six Months, Regulator Says

The reason people couldn’t pay these mortgages was simple: either they were flipping houses or they used the rising value of a house to spend money playing as if they were rich—going on vacations, gambling, buying prostitutes, etc.  Yesterday, a ‘rich’ guy in England was caught cooking the books. It turned out that this big supporter of the Tories, a big shot for the Olympics, was a total fraud.

He was NOT a multi-millionaire, he was a multi-million debtor!  This is identical to Mr. Trump and Mr. Zell and all the other deadbeat beasts.  The confusion over what is wealth and what is debt should finally be explained to the general public.  You are NOT rich if you are in debt.  Only after you get rid of ALL your debt, are you ‘rich’.  And then, you can sit pretty during downturns!

Real wealth means, when things go bad, you don’t worry too much since you have little overhead due to debt.  Going into a slight cyclic debt due to crops, for example, makes sense.  But ONLY if the temporary debt is much smaller than the value of your ‘wealth’ holdings!  This is the same with buying a car: due to them being very expensive now, most people get a loan.  But this should be very short term and paid off while still using the car for another 4 years, free of charges.

But running up vast debts to play games in real estate, stock speculation, etc, is stupid.  I used to argue at mainstream media outlets about this.  The common belief was, people in debt should NOT pay off their mortgage but stay in debt and use the money for playing with stocks.  I denounced this because, ‘If you are suddenly unemployed, usually stocks are down and housing is down and you are stuck with a mortgage you can’t pay off and you go bankrupt!’

And this process is just beginning: the hundreds of thousands of monetary workers being laid off, the vast majority of them owe huge sums on very expensive housing!  And now, can’t pay!  We will see trillions of dollars of mortgages going belly-up.  And the value of all the other housing in the high-rent districts collapsing due to job losses at the top 2% of the income scale.

The remaining gnomes who still have some money to play with are all betting that we will go through the exact same waves of commodity price surges as we did in the stagflation seventies.  So long as helicopter drops are used to goose economies.  I got an email from Australia about how the government is now going to give 10 million Aussies a free $1,000 goodie gum helicopter drops.  This is adding to the deficit, of course.

Yesterday, I took a young man at Seeking Alpha to task for suggesting the way out of this maze is for the US to give all of us a ‘free’ $10,000 goodie gum helicopter drop.  This is pure, utter madness.  And since Roubini and other economists are bellowing that we must do this, we get all the speculators figuring that there will be lots and lots of inflation.  So iPath is suggesting that its speculators who are working with them, take a peek at how much oil futures they plan to buy: LOTS of it.

Note how, in the screenshot above, they casually admit that the majority of their futures stakes will be in oil.  Oil is a dangerous commodity.  For example, during nearly all of  President Bush’s reign, he would talk about or actually go to war deep inside of OPEC regions.  This caused oil prices to shoot upwards!  Duh!  Whenever prices seemed ready to fall, he would threaten Iran.  I noted this over the years and made many cartoons about it.

Notice that when oil prices suddenly shot to the moon last summer and all commerce collapsed, he and his oil buddies ceased threatening Iran.  The oil pumping OPEC nations run by Sunnis are pissed at the lower prices.  They know that if they ask the US to again, threaten Iran, their dire enemy, they will get richer.  But the US has a new President coming in.  

One of Obama’s supporters even suggested the US cut Israel’s money feed that has many billions of taxpayer dollars flowing to one of the countries on earth with a high standard of living.  Higher than ours.  So we don’t know yet if Obama will cut aid to Israel or threaten Iran.  We will see in two months if he will follow Bush’s lead in this matter.

The US economy desperately needs cheap oil.  But the big investment houses are betting on higher oil prices in the future.

Crude Contango Pays Most Since 1998 as Shell, Koch Supertankers Store Oil

See?  They are storing it in ships!  Which is insane since ships can sink or even be blown up by terrorists, etc.  All sorts of mischief can happen since most of these ships are lightly guarded.  Ecch.  Indeed, simple violent storms can sink these things!  Even while in port!  Tsunamis can do this, too.  This is a wretched way to store oil.  But this is what the gnomes do: messy garbage that backfires but they do it in the hope of getting rich.

The point is, they are fully expecting oil prices to shoot upwards.  But the problem here is, many governments don’t want this to happen.  OPEC and Russia hope this happens.  But this makes Iran stronger so everyone who wants high oil prices want Iran to be locked out of the markets.  So it goes: the bets are, higher prices.  This means, in conjunction with all the free funny money being created via taxpayer’s future debts, will cause more global inflation of the worst sort.

This will NOT cause housing values to soar again.  This will NOT create more jobs in industry.  This will NOT fix global trade of reduce government spending.  This is the WORST sort of inflation of them all!

Kremlin Rules - In Hard Times, Russia Moves In to Reclaim Private Industries - Series - NYTimes.com

Startled, the oligarch, Dmitri E. Rybolovlev, pointed out that the government had already examined the incident thoroughly and had cleared the company of responsibility.

He further sought to fend off the inquiry by saying he would pay for some of the damage to infrastructure from the accident, a mine collapse that injured no one but left a gaping sinkhole.

His offer was rebuffed, and it seemed clear why: the Kremlin was maneuvering to seize Uralkali outright.

Mr. Putin, the former president and current prime minister, has long maintained that Russia made a colossal error in the 1990s by allowing its enormous reserves of oil, gas and other natural resources to fall into private hands….

Mr. Sechin’s role in the Uralkali inquiry immediately caused analysts and investors to presume that the company was in peril. Uralkali’s stock, once highly prized by fund managers, has plunged more than 60 percent since the inquiry began, far more than the broader Russian stock market.

That has caused steep losses for Mr. Rybolovlev, 42, a former medical student who is known as Russia’s fertilizer king because of his dominance of the business of mining potash, a principal fertilizer component. Last June, when Uralkali was soaring, the otherwise low-key Mr. Rybolovlev attracted attention by buying Donald J. Trump’s mansion in Palm Beach, Fla., for $95 million.

Putin isn’t stupid.  He is one of the smarter despotic leaders around, next to Hu, of course, who is the genius of despotism.  The US likes incompetent despots who bungle things and let the speculators, pirates and gnomes run things into the ground.  Note that Putin is anti-gnome.  Pro-KGB statism.  

And he is correct in seizing these systems!  But the state usually runs things lousy if it is corrupt.  This is one of life’s many riddles we can’t seem to solve.  Now, on to Japan’s Nikkei News:

Japan refused outright to share the wealth with its own workers.  Even as inflation ravaged wages, workers got little or no pay hikes.  The government enforced a deflation system on workers ONLY.  The upper 2% got to buy golden bathtubs, lots of jewelry and the major industrial giants expanded their global grip on all top value-added industrial output like cars, jet parts for Boeing, etc.  But since the LDP and the top manufacturers all wanted to keep everything for themselves, they ended up with an economy totally dependent upon a cheap yen and 0% interest rates.

Now, all major powers are heading into the Japanese ZIRP system and have zapped Japan’s economy as the yen rises and the Japanese carry trade violently unwinds.  Today, the yen is now 92 to the dollar.  This is suicide for Fortress Japan!  They want a weak yen and a strong dollar and euro!  So Japan is sliding off the economic cliff.  The only way they can weaken the yen is to have their own economy die at home.  So they will crush the workers even worse than before.

At this rate, Japan might end up totally depopulated and thus, prime real estate for some conquerer.

Amsterdam’s brothels and cannabis cafés furious over mayor’s ‘clean-up’ | World news | The Observer

HAHAHA.  I like the honesty here: Amsterdam needs sin, sex, booze and drugs to stay alive.  This is true in many cities and countries.  Thailand, Sri Lanka, etc all need this for tourists.  Child sex, naked beaches, various drugs: all of this is the sort of pirate holidays everyone adores so much.  We all want to be like the banking gnomes in the end.  

This will collapse if oil goes up again.  Flying to pirate coves or traveling to sin cities will be hard to do if there is no free funny money or cheap oil enabling this sort of holiday.  Rats!  We will have to sin at home where we piously pass laws forbidding doing what we want to do so badly, we will travel across the entire planet to do it in someone else’s front yard!  Totally naked!  Wahooo!!!!

Looking at the riots in Athens and across Greece should warn us about rampant youth.  I remember being a rampant youth.  Sex, drugs, etc.  We were  called ‘hippies’ but we called ourselves, ‘freaks’.  Well, most tourism is all about being freaks.

Argentina to give car loans to boost industry - Dec. 6, 2008

Yet another example of governments seizing whatever they need to keep things afloat.  Argentina [name comes from 'gold'] can’t print money like the US.  They can’t openly talk about giving everyone in Argentina $10,000 so they can spend money on whatever they want [see the talk about about freak vacations].  No, Argentina has to take something that is ’savings’ of some sort and then redirect it into buying things like cars.  This works ONLY if the government nationalizes the auto industry in Argentina.

HAHAHA.  Like Putin!  HAHAHA.  And off the economic cliff we fall into the jaws of the crocodile in the sign at the top here.

Did you know we were in a new bull market?  (MarketBeat, Clusterstock)

Did you know we were in the third worst bear market in history?  (Bespoke)

The market has moved a long way, pretty quickly.  (Trader’s Narrative)

Are corporate bonds and bank loans a better bet at this point?  (Aleph Blog)

T-bill rates down to 1929 levels.  (Crossing Wall Street)

Are Treasuries in a bubble?  (Morningstar.com)

Is volatility in a bubble?  (Bespoke)

Leveraged ETFs are becoming the de facto choice of many traders.  (Daily Options Report)

Testing the RSI(2) as a market indicator.  (MarketSci Blog)

More detailed November hedge fund performance data.  (market folly)

Is shipping the most leveraged infrastructure play?  (Clusterstock)

AlphaClone launches.  (World Beta)

Mack, Thain (and Abnormal Returns) all get zero bonuses this year.  (WSJ.com)

Is there something like real estate “bubble memory“?  (Odd Numbers)

A new mortgage term to remember:  re-defaults.  (Calculated Risk)

Every recession is different.  (Econbrowser, Mankiw Blog)

Goodbye petrodollars.  (Follow the Money)

Speak not the word, nationalization.  (naked capitalism)

“Breathtaking corruption” (and stupidity). (Pajamas Media, ChicagoTribune.com, Dealbreaker)

The “transaction from hell” inevitably ends in bankruptcy.  In addition, the Cubs and Wrigley Field are excluded from Tribune’s bankruptcy filing.  (NYTimes.com, ChicagoTribune.com, Credit Slips via Mick)

Ugh.  Jay Leno is sticking around in primetime.  (NYTimes.com also Mixed Media)

The latest SNL digital short every one is talking about.  (Hulu.com)

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Vanity Fair has posted a piece, from their January 2009 issue, recounting the plight of the (former) hedge fund managers and other super-wealthy in the wake of the recent market downturn. These poor folks have had to cut back on trips to the carribean and buy less antiques from Christie’s and Sotheby’s. I sure feel sorry for these people.

Most interesting to me is the conversation with a former Lehman Bros. employee, who explains the lifestyle of many bankers. The unnamed man tells of a $5 million yearly salary, half of which is in Lehman stock. After an employee discount, the banker would get $3.25 million in stock, plus $2.5 million in cash, which, after taxes, would amount to $1.25 million. Because this enormous sum is not enough to live on, they would borrow against the speculated appreciated value of the stock, with a $5 million loan. Now that the stock is worth nothing these poor souls owe lots of money. The banker says ,

“For five years, he made two and a half million dollars a year in cash. So that’s twelve and a half million dollars. But of course he’s had to pay more or less 50 percent in taxes, so divide that and he’s got six and a quarter million. He’s probably spent that money over those five years—$1 million a year, it’s not so hard to do, right? So he has nothing—and he has to repay that $5 million loan.”

I’m going to requote part of that,

“He’s probably spent that money over those five years—$1 million a year, it’s not so hard to do, right?”

If someone gave me $1 million right now, I could live for the rest of my life (with modest interest) with no additional income. And that life would be at a level that I have never previously been able to afford.

Another quote from the article:

Philip K. Howard, a New York lawyer and social critic whose new book is Life Without Lawyers, sees a sea change which was overdue. Every 30 years or so, he notes, the country has to redefine its social values. We’ve just reached the next time. “So this end of the new gilded era—it’s like a bucket that spilled, and finally the money spilled out, and we were left with a culture whose sense of purpose and responsibility were lacking. And now there’s a real need for people, and society as a whole, to rethink and re-structure their values.”

I hope Mr. Howard is right, and we are going to reevaluate our culture, its excesses and who we look up to. I would like to see a future where our political and commercial leaders put the good of the country and all its inhabitants over their short-term monetary gains, a future where we exalt the actions of good samaritans rather than leer at the stupidity of Paris Hilton and the like, a future where we don’t reward stupidity in business or politics.

Gold (H)edges Gold Stocks - Features and Interviews - Hard Assets Investor

By: Brad Zigler of Hard Assets Investor

This is an excellent teaching article- jschulmansr

I suppose I shouldn’t have been surprised by the number of visitors to the San Francisco Hard Assets Conference who wanted to talk about wrestling the risk of their gold stock investments. After all, 2008 has turned out brutal for gold miners. Witness the AMEX Gold Miners Index off by 46% for the year.

Some of the conferees have been puzzling over their hedging options. And there are plenty of them: options, futures and exchange-traded notes, to name a few. This array leaves many wondering which hedge is optimal.

If you’re pondering that question yourself, you first have to ask yourself just what risk you want to hedge. In a so-called “perfect” hedge, price risk is completely checked, effectively locking in the present value of an asset until the hedge is lifted.

Is that what you really want, though?

A less-than-perfect hedge neutralizes only a portion of the risk subsumed within an investment. Gold stocks, for example, provide exposure to both the gold and equity markets. Hedging a gold stock with an instrument that derives its value solely from gold may dampen the volatility impact of the metal market upon your portfolio, but leaves you with equity risk. This may be perfectly acceptable if you feel stocks in general - and your issues in particular - are likely to appreciate. Hedge out the gold exposure and you’re more likely to see the value that the company’s management adds. If any.

We touched on this subject in recent Desktop columns (see “Gold Hedging: Up Close And Personal” and “More On Hedging Gold Stocks“).

More than one Desktop reader asked why the articles proposed a hedge strategy employing inverse gold exchange-traded notes - namely, the PowerShares DB Gold Double Short ETN (NYSE Arca: DZZ) - instead of stock-based derivatives such as options on the Market Vectors Gold Miners ETF (NYSE Arca: GDX).

Well, we’ve mentioned one of the advantages of a gold-based hedge already, but the question deserves a more detailed answer. Let’s suppose, for illustrative purposes, you hold 1,000 shares of a gold mining issue now trading at $50 and are concerned about future downside volatility. [Note: The prices shown in the illustrations below are derived from actual market values.]

AMEX Gold Miners Index And ETF

The AMEX Gold Miners Index is a modified market-capitalization-weighted benchmark comprised of 33 publicly traded gold and silver mining companies.

While price movements in the index are generally correlated with the fluctuations of its components and other mining issues, the relationship isn’t perfect. Close, but not perfect. The Gold Miners Index represents the market risk, or beta, specific to gold equities. Any hedge that employs an index-based derivative will need to be beta-adjusted to compensate for any differences in the securities’ volatilities.

You have to consider the proper index-based derivative to be used in the hedge. The GDX exchange-traded fund could be shorted, but that would require the use of margin, something that some investors might abhor.

If you’re not put off by margin, you’ll first need to size your hedge. And for that, you’ll need a beta coefficient for your stock. A quick-and-dirty beta can be approximated by taking the quotient of the securities’ volatilities or standard deviations (you can get a stock’s standard deviation through Web sites such as Morningstar and SmartMoney, or you can derive a beta more formally through a spreadsheet program such as Excel).

Gold Stock Volatility ÷ ETF Volatility = 94.8% ÷ 81.8% = 1.16

Once hedged, you’ll still carry residual risk. The volatility correlation could shift over the life of the trade, leaving you over- or underhedged. So you’ll need to monitor the position for possible adds or subtractions. Hedging is not a “get it and forget it” proposition.

You’ll also need fresh capital to place and maintain the hedge. There’s the initial cash requirement of $29,000 (50% of $58,000) and possibly more if you hold your hedge through significant rises in GDX’s price.

GDX Options

You can avoid margin altogether by using certain GDX options instead of a short sale. Purchasing puts on GDX, for example, gives you open-ended hedge protection against declines in gold equities like a GDX short sale but with a clearly defined and limited risk. There’s no margin required, but you’ll have to pay a cash premium to buy the insurance protection. And, like an insurance contract, the coverage is time-limited.

Let’s say you can purchase a one-month option that permits you to sell 100 GDX shares, at $22 a copy, for a premium of $245. Keep in mind that the put conveys a right, not an obligation. You’re not required to sell GDX shares. At any time before expiration, you can instead sell your put to realize its current value, or you can allow the option to expire if it’s not worth selling.

Just how does the put protect you? Let’s imagine that, just before expiration, GDX shares have fallen to $10. Your put guarantees you the right to sell GDX shares at a price that’s now $12 better than the current market. That’s what your option should be worth: $12 a share, or $1,200. If you sell it now, you’d realize a $955 gain that can be used to offset any concomitant losses on your gold stock.

To figure out how many puts are necessary to fully hedge your stock position, you’ll need to extend the ratio math used previously.

Option prices only move in lockstep with their underlying stocks when they’re “in the money” like the put illustrated above. The expected change in an option premium is expressed in the delta coefficient. If the delta of the $22 put, when GDX is $23, is .40, the option premium is expected to appreciate by 40 cents for every $1 GDX loses.

The arithmetic used to construct the full hedge is:

Here’s where the efficacy of the GDX options hedge really breaks down. GDX’s high price volatility has inflated the cost of hedge protection to impractical levels. The hedge would cost $245 x 1,450, or $355,250; much more than the potential loss that would be incurred if you remained unprotected. Clearly, the cost of hedging gold equity market risk, like the cost of insurance after a catastrophe, has been puffed up to protect the insurer.

Of course, you can elect to hedge only a portion of your stock position, but the high premium necessitates a large “deductible” on your market risk.

Wrapping Up

You’ll note that some gold mining issues have options themselves. Using these as hedges in the current market presents another set of problems.

Given that the volatilities for individual issues are higher than that of GDX, the stock contracts are even more expensive than index options. Using stock options, too, would hedge away management alpha. Individual options, as well, are inefficient if you hold multiple mining issues in portfolio.

Now, consider the contrasting benefits attached to using the DZZ double inverse gold notes in your hedge: 1) no overpriced insurance cover, 2) you get to keep your stock’s equity and management risk; you’re only hedging out gold’s volatility, 3) a single purchase can hedge any number of mining issues in portfolio, and 4) your insurance doesn’t expire.

Seems to me that DZZ has the edge.

===============================================

Today’s Grab Bag- Brad Ziegler Hard Assets Investor

Cheaper Oil and Silver + Gold Options 

Real-time Inflation Indicator (per annum): 7.9%

A couple of quick items for your consideration this morning.

Merry New Year from the EIA

The U.S. Energy Information Administration (EIA) has issued its monthly short-term forecasts for oil prices. In the words of this little corner of sunshine in the Department of Energy:

The EIA has set an average price forecast for West Texas Intermediate (WTI) crude oil at $100 per barrel. That’s the average for all of 2008. Keep in mind that, year-to-date, WTI has traded at an average barrel price of about $104. Now, we’ve only got 15 trading days left in 2008. To bring the current average price down $4 in that time, the sell-off pace has to quicken some.

In essence, the EIA - if you put any faith in its forecasts - is telling you to short oil. And this while the quarterly NYMEX oil contango has ballooned to a record $7.21 a barrel (need background on contango? See “Oil Demand Perking Or Peaking?”).

Back in November, the EIA eyed a $112 average price for 2008. Do I need to tell you that they missed the mark on that one?

Looking ahead, the EIA thinks WTI crude will average $51 a barrel in 2009.

Never let it be said that your stingy government didn’t give you something for the holidays.

Frustrated that you haven’t been able to play your favorite option trades in the silver market? Be vexed no longer. The Chicago Board Options Exchange (CBOE) has come to your rescue. Yesterday, CBOE launched option trading on two metals grantor trusts, the iShares COMEX Gold Trust (NYSE Arca: IAU) and the iShares Silver Trust (NYSE Arca: SLV). Both trusts hold physical metals.

This is both a first and a “two-fer” for the options bourse. Back in June, CBOE inaugurated trading in the SPDR Gold Shares Trust (NYSE Arca: GLD); options on a silver grantor trust haven’t been traded on an organized exchange before.

The American-style options will trade on the January expiration cycle, initially with contracts maturing in December, January, April and July.

Here comes a lawyer to the rescue. Prominant lawyer arrested for massive hedge fund swindle.

We earned our title as lowest of the low through centuries of hard work and no slimy Wall Street denizen is going to wrest that from us!

In brazen and carefully choreographed scams here and in Canada, Mr. Dreier, who in 1996 founded a 250-lawyer firm that bears his name, is said to have tried to take advantage of the current financial crisis by selling phony debt to hungry hedge funds looking for deals.

But in an era when high-tech frauds and inside information seem to dominate the world of white-collar crime, the square-jawed lawyer, known for his forceful personality and his penchant for high living, apparently did it the old-fashioned way.

Using little more than his position, poise and a kind of reckless bravado, he cajoled his way into accounting, real estate and pension fund offices where he had no real business, according to a criminal complaint unsealed on Monday.

Once there, seated in conference rooms that lent credibility to his charade, he peddled forged promissory notes — utterly worthless paper — linked in some way to his unwitting hosts, the complaint said. He backed up his claims with phony financial statements and bogus audit opinions from a reputable accounting firm, correspondence on the stationery of the New York real estate developer who supposedly issued the debt, and the help of a few confederates, the government said in court papers.

With these tools and little more, he allegedly took hedge fund executives for $100 million in one instance alone, money that the authorities say remains unaccounted for.

Mr. Dreier, 58, is charged with stealing $113 million since October, according to the complaint, although the case is continuing and a spokesman for the acting United States attorney in Manhattan, Lev. L. Dassin, whose office investigated the matter, would not say whether other alleged frauds are under scrutiny.

It probably goes without saying that the Governor of Illinois is also a lawyer.

THE WAY WE WERE THE WAY WE ARE NOW

Burberry Prorsum’s feather dress Daryl K’s Recession Dress

Sunday brunch at the Wolseley DIY kippers with dijon butter, served on a tray with a napkin

A splurge at vintage boutique Relik Clearing out your granny’s attic

A spa date at your local Cowshed Perfect your pedicure technique on a mate – then get her to do you

The morning Starbucks runCoffee from a cafetière, with hot milk microwaved in a jam jar (half-full, lid off), then shaken until frothy

An all-nighter at Boujis Overnighter in Paris on Eurostar’s £42 Night Clubber trip

Afternoon tea at the Ritz A slug of rum in your Green & Black’s hot chocolate

New shoes New heels and soles for your old Jimmy Choos

Redecorating your bedroom Rearranging your bookshelves

A romantic mini-break A weekend’s worth of DVD box sets and takeaways

A hot tub for the garden An hour-long bath, while sipping a vodka tonic

Buying into the military look Changing the buttons on your winter coat

A Friday blow-dry A set of heated rollers stashed in your desk drawer

Dressing up and eating out Doing the housework in Myla lingerie

Vintage Dom Pérignon Sipping Magners cider from a champagne flute

An afternoon of shopping in the Harrods food hall Making the “homemade presents” in Nigella Christmas, then eating them all

YSL Flash Radiance Skincare Brush Boots No7 Skin Illuminator Brush

A full head of highlights DIY streaks à la Alice Dellal

Paying for therapy A chinwag with your mates

Laurent-Perrier rosé Sparkling Ribena

A weekly flower delivery from the florist Jane Packer A trip to the country to pick your own

Dry cleaning your statement blouse Airing it in the garden

Pan-Asian at XO DIY Pan-Asian with XO to Go

The 7/8 trouser length Chopping the bottoms off last season’s skinnies

Buying lots of purple clothes Dyeing everything purple

Upgrading to the new BlackBerry Bold Going blackberry picking

Eyelash extensions Big, fat trannie-style falsies

Shopping on Oxford Street Shopping in the charity shops of Oxford

Pre-Christmas personal-training sessions Letting rip on the dance floor at every opportunity

An extensive, expensive cheeseboard A super-strong stilton, served in mouse-sized rations

New hairdo New parting

New furniture An upholstery evening class

A weekly manicure Nails Inc’s long-lasting manicure

eBay.com freecycle.org

Having it all Having to choose the one, utterly perfect thing you just have to have this month

Investing in a new-season Gucci folk dress Wearing a skinny jumper under a summer smock

A new cashmere scarf Joining a knitting group

Splurging on the new super-cream Swotting up on department-store special offers

Sunday in Selfridges A Sunday set aside for self-reflection

Fashion Victims: The Catty Catalogue of Stylish Casualties, from A-Z by Michael Roberts The Wonderful Weekend Book: Reclaiming Life’s Simple Pleasures by Elspeth Thompson

Big statement jewellery Scouring a flea market for old costume jewellery

Member’s clubs Starting a book club

An afternoon flotation session An afternoon trip to the cinema on your own, complete with butterscotch ice cream

Going away with friends Having friends to stay

Lambda olive oil at £99 a bottle Adopting an olive tree through Nudo

Tickets to the new Cirque du Soleil show Throwing a circus-themed fancy-dress party

Using your hedge fund to buy a new wardrobe Setting up your own “crowd-funding” site to buy a new winter coat

Dressing the kids in Marie-Chantal knits Shrinking last year’s knits in the tumble dryer

Pretending you’re allergic to wheat Baking your own bread

Botox Detox

In the current economic climate there is little-to-no credit to be found. The absence of credit need not be the end of the world if a business focuses on improving what it already has in hand.

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December 9, 2008 at 9:45 pm

Even as preparations are underway for Barack Obama to assume office as the 44th president of the United States on January 20, the U.S. military juggernaut that is roaring toward global conquest hasn’t missed a beat. This is shown by the team of hawks—including holdover Robert Gates at Defense and Hillary Clinton as Secretary of State—that Obama has assembled to handle the levers of the war machine and its diplomatic front.

WESTERN DRIVE TOWARD WORLD DOMINATION

The horrors of the George W. Bush administration may only have been one chapter, though it was the actions of Bush and his cronies—starting with 9/11— which removed all doubt that the intent of the Western ruling class is to dominate the world by any means possible.

Behind this intent are the people David Rockefeller famously identified at a 1991 meeting of the Bilderberg Group, when he said: “The supra-national sovereignty of an intellectual elite and world bankers is surely preferable to the national auto-determination practiced in past centuries.” No one needs conspiracy theories when the perpetrators are this blatant.

Rockefeller and his internationalist associates have not just made untold fortunes. They have also immeasurably damaged the nation our forefathers created and which offered them the freedom to become rich and powerful. Ironically, it was John D. Rockefeller, Jr., who restored the Virginia colonial capital in Williamsburg where on May 15, 1776 the Virginia Convention instructed their delegates in Philadelphia to enter a motion for independence.

But 1776 was another era, when our ancestors really believed that “all men are created equal” and that “life, liberty, and the pursuit of happiness” were “inalienable rights.” Today, the globalist financiers are trying to shore up the world’s failing financial institutions. But they are doing nothing to stem the slide into a worldwide depression that is starting to destroy the livelihoods of huge numbers of people.

MIS-DEFINITION OF CREDIT A ROOT CAUSE OF THE CRISIS

What this really means is that the financial controllers are robbing the world of the peace and prosperity that could be in reach through economic democracy and the fair distribution of resources. It would not be that difficult for us to engage in mindful cultivation of the Earth’s bounty in order to provide a decent living for all.

It could be done by changing the way money is created–from the debt-based system where credit is introduced only through bank lending to grassroots systems of credit creation advocated by the monetary reform movement. This could be done if credit were treated as a public utility, like clean air, water, or electricity, not the private property of the financial elite. Two good examples of this movement are the ideas of Social Credit based on providing citizens’ dividends similar to the Alaska Permanent Fund and the American Monetary Act of the American Monetary Institute that advocates direct payment by government for public expenditures as with the Civil War Greenbacks. .

It is the mis-definition of credit that allowed the banks to create the massive speculative bubbles in housing, commercial real estate, equity and hedge funds, commodities, and derivatives that have exploded. These bubbles can never be re-inflated, no matter how many trillions of dollars the government injects into the failed trickle-down system. The bubbles cannot be re-inflated because the public cannot afford to repay the loans they are ultimately based on. Consumer purchasing power is spiraling downward practically by the day as jobs disappear.

The banking system and the military machine work hand-in-hand, because the financial system is so unbalanced and exploitative that it can only be maintained through brutal force, both within and among nations.

LESSONS OF HISTORY

The mailed fist of Western military might is the embodiment of the drive toward global dominance that goes back at least to the 15th century. It was then that the emerging nations along the Atlantic coast of Europe—Spain, Portugal, France, the Netherlands, and England—began to send armed soldiers abroad on sailing ships bristling with cannon. The purpose? To conquer the territory and secure the wealth of older cultures which lacked the military means to defend themselves.

These swashbucklers were bolstered by two ingredients essential to any such large-scale undertaking. One was a source of money to finance the enterprise, and the other was an ideology that could be used to assuage the nagging of conscience which naturally arises whilst taking the lives and stealing the property of fellow human beings.

The first requirement—money—was initially met by looting the indigenous cultures of the Americas of their gold and silver, then using it to capitalize the fledgling banking system. Similar looting has continued until today.

Stops along the way included the British takeover of the fabled wealth of India, the plantations of America being worked by slaves dragged from Africa, the Chinese Opium Wars, and the Anglo-American conquest of the Middle East and its oil. Facilitating the mayhem was creation of the fractional reserve banking system overseen by the Bank of England, founded in 1694, and the Federal Reserve, which dates to 1913.

The second need was for an ethnocentric religion–Christianity–that justified the killing and enslavement of non-believers who in most cases had never even heard of it before. This was satisfactorily met by the Christian churches which adopted the geopolitical exigency that white men who worshiped at their altars were entitled to rule the Earth.

The nations so fortunate as to find themselves in the forefront of progress acquired the wherewithal to add to their wealth through an ideology based on exclusive ownership of the fruits of science and technology. As the Industrial Revolution developed, the only choice seemed to be control of the means of production either by the capitalist elite or the totalitarian state.

The white man’s greed propelled them into countless wars of aggression around the globe along with two fratricidal wars—World Wars I and II. In these wars tens of millions of were slain. These calamities left standing the greatest white Western nation of all—the United States.

This was both just and natural, since it was the U.S. with its melting pot that blended denizens of all the warring European nations, including the Jews who arose from the Khazar region of Russia and, moving to the West, came to dominate high-finance.

The U.S. enjoyed the size, resource wealth, and geographic situation—North America being a natural fortress—to serve as headquarters for what is now the final assault on the regions still not entirely subdued—namely the giant mainland nations on the continent of Asia. Along the way, America’s minority races, most notably its African-Americans, demanded and were granted at least a semblance of equal rights under the law. To their credit, many Jewish-Americans were instrumental in securing the victories of the civil rights movement.

THE SCENARIO FACING BARACK OBAMA

So Barack Obama was elected. Now president-elect, he has stepped into a scenario where the actors in the drama—the generals, arms merchants, and spies who do the dirty work—are poised for the final step in the scenario. This could go so far as instigating a Third World War to be launched against Russia and China. The military planners are preparing for it.

A flanking movement is going on in space through NASA’s new manned lunar program aimed at setting up what could be a military base at the Moon’s south pole. Russia and China, along with the European Space Agency and India, are competitors in the race to colonize the Moon and use it for military advantage.

This culminating phase of world disorder began in earnest with the Reagan military build-up in the 1980s and the “Reagan Doctrine” of proxy-wars against supposedly left-leaning nations, including the funding of Osama bin Laden’s Islamic mujaheddin who fought against the Soviets in Afghanistan.

Reagan took the first steps toward weaponizing space through his Strategic Defense Initiative—“Star Wars”—program announced in 1983. This failed when the Air Force’s test platform—the space shuttle—was grounded after the Challenger disaster of January 28, 1986. (Richard C. Cook, Challenger Revealed: An Insider’s Account of How the Reagan Administration Caused the Greatest Tragedy of the Space Age)

In 1991 the Soviet Union broke apart, with George H. W. Bush taking advantage of the confusion by launching an attack on Iraq. But there was unfinished business in Europe. Yugoslavia was a Slavic nation with ties to Russia. Presto, during the Clinton administration the Serbs were identified as engaged in “ethnic-cleansing,” and through 38,000 bombing sorties by NATO over a 78-day period, the Balkans were re-Balkanized and the bankers who ran the European Union were able to move in for the takeover of that sorrow-filled region.

With the Balkan front secured, the military under George W. Bush next used the 9/11 attacks as an excuse to invade Afghanistan and—again—Iraq. Israel was along for the ride, though it is often difficult to tell which of the two—the U.S. or Israel—is the pilot and which the co-pilot.

By the end of the Bush administration, Obama, in his presidential campaign, was calling for escalation of the conflict in Afghanistan, possibly intended by the script writers as a flanking movement to cut off Russia from Iran. This appears to be the start of the final Western assault on South Asia. Pakistan in particular is now high on the list of U.S. targets, with Obama saying he will send in U.S. forces whenever warranted.

WILL THEY START WORLD WAR THREE?

The Muslims of Pakistan were once among the most highly cultured people on Earth. But the West never gave up on control of the Indian Subcontinent, even after independence. The British had adopted a divide-and-conquer strategy by supporting the 1946 partition between India and Pakistan, and Pakistan’s aspirations were destroyed in the 1970s when the Western intelligence agencies attacked the great nationalist modernizer, Zulfikar Ali Bhutto. They did this by instigating a fundamentalist revolt, followed by a military coup by Pakistan’s U.S.-backed generals.

Now, with the recent attacks on Mumbai by Islamic assailants and India refusing to relinquish Kashmir, Pakistan and India can be managed separately, even as India becomes more dependent on the U.S. for nuclear technology. Iran, which is being surrounded, will likely soon find that its number has finally come up.

It is unclear the extent to which South Asia can and will maintain its self-determination. But once the region is controlled, the war against Russia and China can start in earnest. However, a parallel attempt is being made to absorb Russia through rapprochement between it and the E.U. If this feint succeeds, the wealth of Siberia may fall into the hands of the Western bankers without a shot ever being fired, though the European financiers will enjoy a clear advantage in reaping the spoils over the Americans. Such an attempt to bring Russia under Western financial control took place in the 1990s but failed when Putin took over.

Today, military planners likely assume that China, the West’s great bogeyman for the 21st century, will be backed into a corner. But the Chinese, who know that a strong economy sooner or later will translate into military power, grow stronger all the time. Of course the inscrutable Russians may have surprises up their sleeves. They may not be holding tight to all those nukes for nothing.

Some might object that the Western military planners, especially those within the U.S., are skating on thin ice due to the financial crisis. But the crisis has not stopped the war effort. It is funneling more of the wealth into the hands of the bankers than ever before, thereby enriching the ones who are in charge and providing them with increased material security from which to rule. U.S. military leaders have lobbied for budget increases, and Obama appears poised to accommodate them. Because investors are flocking to Treasury securities as a save haven from stock market losses, there is no shortage of borrowed money.

Granted, the financial crisis has reduced the income security of huge swaths of people both in the West and the developing nations and has put them ever deeper in debt. But the stressed population desperately needs jobs so will continue to provide cannon-fodder for the military and willing minds and hands to work in the defense factories and think tanks. Obama’s plan to pump money into infrastructure spending may help, but even a $600 billion stimulus is only $2,000 per capita and will take time to show results. This too is a deficit spending program based on money borrowed through the banking system.

OBAMA’S DILEMMA

Is there any way Barack Obama can do anything substantive to resolve the crisis?. As Australian author Omna Last recently wrote on his website (www.omnadeLight.com) and gave permission to reprint:

“In 2008 Barak Obama appeared from the wings, front-stage in the midst of the American melodramatic psycho-drama. He was also half-Negro and half-white. A majority of Americans were so fed up with the rule of the white-man-machine, they were willing to vote in a half-black man as president. The question was: would he have the integrity and strength of character not to compromise his principles? Would he be able to break through the ruling white-man paradigm and start an American dialogue with the rest of the world, and leave behind its incredible blind arrogance that permeates right through the culture, resulting in a subconscious belief that America’s manifest destiny is to be the arbiter of the world’s tastes, immorality and non-values?

“And would he be able to take advantage of the wisdom and strength provided by his black genes to bring a new ruling hybrid dispensation to the world? Would he be the symbol for a new type of Earth person – a true planetary representative? Would the ruling white secret brotherhood allow him to use his presidential power?

“Or would they need to worry? As a senator, Obama voted to renew the Patriot Act, supported the death penalty, affirmed Bush’s secret surveillance of the American people, and called for a cut in the corporate tax rate. He wanted to expand the war in Afghanistan, failed to call for a reduction in defense spending, and, as a tool of the Zionist lobby, was insisting that Iran even stop enriching uranium. Obama’s selection of Rahm Emanuel as White House chief of staff is a signal that Obama is either incredibly naive or has been forced by his minders to play ball with the devil.

“Obama is probably an idealistic, courageous man, who persuaded a majority of Americans to believe in their own better natures. Obama’s place at the pinnacle of official power lifts a veil that has obscured the world for a thousand years. It signifies the end of white supremacy, imperialism, racism. Every tribe and race of people, just as with each animal species, has something unique to add to the genetic and cultural brew of humanity. Although Obama was supported and promoted as a tool of the insider establishment, it may be that he will turn his back on the sleaze of his secret backers and try to institute a new paradigm. Perhaps Barack Obama is a symbol of a change in the wind, and the emergence of a new kind of man - an Earth man - one who encompasses many facets of the jeweled organism that is this planet.

“Zawahiri issued a tape declaring Obama to be a House Negro. Was Obama a naïve fool, who had been set up to sup with the devil? He is probably a good man, but naive and misguided, probably with more ambition than good sense. The chimera of power, of rubbing shoulders with the insiders of the money-power-tree had been the bait. Had the new brown fish been reeled in to shine as front-man for the men of the purveyors of an old wine in a new bottle? Was a bright new label to placed on the old bottle of American capitalism, a wine already turned sour in 1929 – but in 2008 turned quickly from unfettered free market capitalism to the secret cartel’s intervention in every pie?

“An incredibly clever game had been played. As Russia in 1917 had been secretly taken over by a Jewish financier-backed conspiracy, so in 2009 the wheels that had been set in motion by Greenspan in 1987 had been geared up. The Zionization of America was no longer a banker’s wet dream. It was now possible…people tracked by computer chip…the masses in permanent debt, desperate and afraid. Or would Obama prove to be a man of the quality of Jack Kennedy? Would he stand up to the amorphous establishment? Would he change their hearts and minds, just by the power of his convictions?”

WHAT THE CONTROLLERS LEAVE OUT

Good questions. Only time will tell. The only thing that seems to be left out in the conniving of the financial controllers and the plans they are calmly working out on their underground supercomputers is consideration of what really is the objectively conscionable way for us to behave as human beings on this planet.

Perhaps at the cellular level the controllers have the nagging suspicion that maybe there really is a God who is not entirely comfortable with a world civilization based on exploitation, pollution, and a mad compulsion to force society to engender enough “growth” to outrace the exponential increase of compound interest.

Perhaps the controllers fear that the billions of people on Earth who are not white Western males of Judeo-Christian extraction might also have a place in His/Her heart. Perhaps Obama, despite all the compromises he has made, makes them feel a little bit uncomfortable.

Just found this link to a PDF which has a pretty darn good list of all the hedge funds that are restructuring/going down. An interesting list.

If there is a silver lining to the Treasury market’s gyrations, it is that the United States can borrow money more cheaply from investors, whether they be the governments of China or Japan, or big fund managers. That could help Washington finance various programs intended to revive the ailing economy.

MARKET REVIEW

MEDIA HIGHLIGHTS

MEDIA HIGHLIGHTS

ECONOMY HIGHLIGHTS

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Welcome to SOUGHT CONTENT’s Blog.

[New York]  December 09, 2008.  Bel Canto Alpha Management has formed a hedge fund targeting sub-microcap public equities.  The fund, Bel Canto Capital Investors I, LLP, will be open for 120 days.

[Editor's note: members of the Trilateral Commission and companies with Commission representation appear in bold type.]

Since 1973, this writer has made inquiry as to the location and ownership of the vast stores of monetary gold (400 oz., .999 pure bars) in the world. There has not been a formal audit on Fort Knox, for instance, since the Eisenhower administration. Official statistics on gold holdings are often contradictory. Getting plain answers from any Central Bank in the world, including the Fed, is virtually impossible.

This paper points out a pattern of manipulation that has been clearly observed by many people. However, patterns do not exist in a vacuum, but rather they are evidence of the existence of a stable and consistent methodology. Clearly, more study needs to be done in identifying the finer parts of the methodology and its designers, but this is a good start!

When Richard Nixon canceled the Bretton Woods system in 1971, exchangeability of paper dollars for gold was terminated. In 1970 alone, available gold vs. dollars outstanding had shrunk from 55 to 22 percent, thus exerting pressure for investors to switch to gold to avoid further dilution of dollar assets.

Although the economic and financial experts swore that gold was an outmoded, ineffective and useless financial asset, cooler heads knew better. In recent years, these same experts have reversed field and are now proclaiming that gold is still, and always has been, a consistent monetary asset. Why the flip-flop?

The economic chaos in the world today is a direct result of policies set in motion to foster a New International Economic Order (NIEO). The NIEO was the explicit creation of the Trilateral Commission, founded by David Rockefeller and Zbigniew Brzezinski in 1973, and their early papers and task force reports clearly asserted their NIEO plans.

Members of the Trilateral Commission were instrumental in creating the European Union as well. The EU is the prototype of global governance that will soon exert its influence to reshuffle world relationships.

Since 1973, Trilateralists have dominated the Executive Branch of the U.S. government with politicians like Jimmy Carter, George H. W. Bush, Bill Clinton, Al Gore and Dick Cheney. This has led to domination of the world trade mechanisms like the World Bank and negotiation of free trade agreements.

Six out of eight presidents of the World Bank have been members of the Commission. Eight out of ten of the U.S. Trade Representatives (USTR) have been Commissioners.

Indeed, the Trilateral Commission has had undue influence and control over the development of globalization, and it was self-interested at best.

With today’s total meltdown in economic and global financial markets, one must ask, “Are these people just plain stupid?”

The answer has to be “No”, considering their great success at consistently dominating political and economic processes over a span of thirty-five years.

There is mounting evidence that there has been a larger plan underway to corner the global supply of gold, thus laying the groundwork for a global currency exclusively controlled by Trilaterals and their friends. By extension, economic and political mechanisms would be controlled to the same extent.

From a Trilateral perspective, the Bretton Woods system had two flaws:

The breakup of Bretton Woods and the resulting opportunities may have been the principal rationale for the creation of the Trilateral Commission in the first place.

Since 1973, there has been an overarching plan to quietly centralize gold into private hands, using incrementally created wealth made possible by rapidly inflating paper currencies.

This theory must be explored and tested, because if true, it represents not just the hijacking of America (already thoroughly demonstrated elsewhere in this writer’s papers), but the hijacking of an entire planet!

In 1976, Antony Sutton wrote,

“The assault on gold today is an integral part of a planned move into a new economic order under the dominance of a single country. It was Nazi Germany in the 1940’s; it is the United States in the 1970’s. In brief, the war on gold that we observe today, and discuss below, is dollar imperialism, designed to maintain the U.S. dollar as the only world currency without competitors. The purpose is the formation of a world totalitarian state under Wall Street dominance.” (The War on Gold, Antony C. Sutton, 1976, p. 63)

Sutton’s view was limited because he had not yet discovered the Trilateral framework just created three years earlier in 1973. We can see now that the totalitarian state is still clearly in view, but the self-proposed rulers of this new arrangement will be members of the Trilateral Commission, and their monetary “enforcer” will be gold.

Bill Murphy is the chairman of the Gold Anti-Trust Action Committee (GATA), which has asserted for almost 10 years that a concentrated gold cartel has been manipulating the price of gold. Murphy and GATA are highly regarded around the world on their work to expose this cartel.

On September 10, 2008, Murphy made an opening statement at the 2008 Las Vegas Hard Assets Investment Conference, reprinted in full below. Murphy’s perspective and argument does not include the Trilateral Commission, but the players in his narrative are largely members or former members of the Commission.

This leads this writer to connect some dots between 1973-1976 and 1998-2008.

In Murphy’s comments, note that the famous bullion banks of 2008 include Goldman Sachs, JP Morgan Chase, Citigroup and Deutsche Bank, all of which have at least one director or senior official sitting on the Trilateral Commission. In addition, the players Murphy names are members of the Commission.

As Sutton did in 1976, to imply a “war on gold” necessitates an eventual victory, a victor and a loser. It is already painfully obvious that the citizens of America are the losers: The middle class is being wiped out and we all hold a debased paper currency that is headed toward destruction.

The Gold Anti-Trust Action Committee’s basic assertion for the past 9 ½ years is that there is a Gold Cartel out there suppressing the price of gold. It consists of the US Government, including the Fed and Treasury, various other central banks, and bullion banks like Goldman Sachs and JP Morgan Chase.

The motives of “the cabal” are to give support to the dollar, keep US interest rates lower than they should be, and to tone down the widely watched US barometer of US financial market health, that being the gold price. After all, whenever the price of gold soars, it congers up talk of too much inflation, a sinking dollar, or a crisis of some sort … all negative for Wall Street and the incumbent administration.

Therefore, “Shoot the Messenger” is The Gold Cartel’s key mission.

The suppression of the price of gold was the essence of Robert Rubin’s Strong Dollar Policy. What else did the US do to effect that policy? Talk? Jawbone?

It seems to have all started with Robert Rubin…

Before he was CEO of Goldman Sachs and then US Treasury Secretary, Robert Rubin worked in London for Goldman Sachs. One of his duties was to oversee their gold trading operations. We know this because the CEO of Kirkland Lake Gold, Brian Hinchcliffe, a staunch GATA supporter, worked in London back then for Goldman Sachs and reported directly to Robert Rubin.

This was many years ago and interest rates in the US were very high, say from 6 to 12%. Rubin had Goldman Sachs borrow gold from the central banks to fund their basic operations. They could do so at about a 1 % interest rate. This was like FREE money, as long as the price of gold did not rise to any sustained degree for any length of time.

Soon other major financial institutions realized what GS was doing and copied them. Rubin continued these operations as the Goldman Sachs CEO and then took it to a new level as US Secretary Treasurer. That is how the gold price suppression became the lynchpin of his widely acclaimed “Strong Dollar Policy.” GATA’s Reg Howe caught on to this notion in a paper titled, “Gibson’s Paradox and The Gold Standard,” co-authored by Lawrence Summers in 1988. Summers, a professor at Harvard at the time, succeeded Rubin as US Treasury Secretary. The bottom line of Summer’s analysis is that “gold prices in a free market should move inversely to real interest rates.” Control gold and it will help to control interest rates.

Bullion banks such as Goldman and Morgan became The Gold Cartel’s hit men, trading the gold market from the short side and bombing the market in coordinated anti-trust fashion at the beck and call of our government, making a great deal of money in the process … as you have all witnessed the past couple of months.

In a brilliant piece a few weeks ago Ted Butler reported 3 U.S. banks held a short position of 7,787 contracts (778,700 ounces) of gold in July, and, astonishingly the same 3 U.S. banks held a short position of 86,398 contracts (8,639,800 ounces) in August, an eleven-fold increase. Gold then declined more than $150 per ounce once Secretary Paulson (note: Paulson is ex-CEO of Goldman Sachs) gave the order, just as he did in May 2006 when a similar order was given, according to a US Senator from the state of Washington. Both times, various bullion banks made vast amounts of money quickly as the US government facilitated their short positions by feeding considerable clandestine central bank gold into the physical market.

It was the concerted, concentrated action of certain BULLION BANKS, which tipped off GATA what was going on nearly a decade ago now.

It was this clandestine feeding of central bank gold into the marketplace which clued GATA into the gold price suppression scheme. Three GATA consultants, Reg Howe, Frank Veneroso and James Turk, using independent, sophisticated methodologies, came to the same conclusion years ago … that the central banks have far less gold than the 30,000 tonnes of gold they say they have. The GATA camp research shows they have less than half that amount in their vaults, the difference being the amount that has been fed into the physical market to suppress the price. Since demand for physical gold exceeds mine and scrap supply by well over than 1,000 tonnes per year, this central bank gold is vital to prevent the price from exploding.

GATA is not alone in recognizing the central banks are not accounting for their gold properly. GATA revealed an IMF paper which corroborates GATA’s claims that much of the central bank gold has been double counted and that the central banks are not properly accounting for the gold no longer in their possession.

“14. Regarding the statistical treatment of gold swaps, its treatment should be consistent with that of other reverse transactions, as presented in paragraph 7 above. Thus, swapped gold should be excluded from both reserve assets and IIP (demonetization). This is a logical consequence, and overstating of reserve assets can be avoided. On the other hand, this results in a decrease in the financial assets of the monetary authorities.”

Gold swaps and gold leasing are at the heart of the gold price suppression scheme. For example, the US cannot sell its 8,133.5 tonnes of gold without an Act of Congress, but they could lease or swap it. In 2006 the President of the Bundesbank made an astonishing statement for a central banker: “We have been asked to negotiate with other central banks’ about potential swap deals involving gold.”

Is this stuff hush hush? I guess so. in January 1995, the Federal Reserve’s general counsel, J. Virgil Mattingly, told the Federal Open Market Committee, according to the committee’s minutes, that the U.S. Treasury Department’s Exchange Stabilization Fund had undertaken “gold swaps.” When the GATA camp had Kentucky Senator Jim Bunning inquire Alan Greenspan what that was all about, Mattingly came back and said the Fed testimony was GARBLED … Right…

Recently GATA filed Freedom of Information Act requests to the Fed and Treasury about US gold swaps. The Fed redacted 300 pages of information and refused to send another 400 pages. Now, think about it … if the US gold is, and has been, just sitting in our vaults, without a true independent audit since the Eisenhower Administration, what is their to withhold?

As for GATA’s request to the Treasury about any Exchange Stabilization Fund activity into the gold market, they answered in the negative by referring to the Exchange STABILITY Fund. Can they be that lame?

Is the gold price manipulated? You don’t need to read through GATA’s countless evidence to appreciate what is going on. It is on the public record…

beginning with Alan Greenspan’s testimony before Congress in 1998:

“Central banks stand ready to lease gold in increasing quantities should the price rise” … which is just what they have done!

The Reserve Bank of Australia confessed to the gold price suppression scheme in its annual report for 2003. “Foreign currency reserve assets and gold,” the RBA’s report said, “are held primarily to support intervention in the foreign exchange market.

Maybe the most brazen admission of the Western central bank scheme to suppress the gold price was made by the head of the monetary and economic department of the Bank for International Settlements, William S. White, in a speech to a BIS conference in Basel, Switzerland, in June 2005. There are five main purposes of central bank cooperation, White announced, and one of them is “the provision of international credits and joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful.”

Barrick Gold, then the largest gold-mining company in the world, confessed to the gold price suppression scheme in U.S. District Court in New Orleans on February 28, 2003. On that date Barrick filed a motion to dismiss Blanchard & Co.’s anti-trust lawsuit against Barrick and its bullion banker, JP Morgan Chase, for rigging the gold market.

Barrick’s motion said that in borrowing gold from central banks and selling it, the company had become the agent of the central banks in the gold market, and, as the agent of the central banks, Barrick should share their sovereign immunity and be exempt from suit.

Is the gold price manipulated today? Former Federal Reserve Chairman Paul Volcker wrote the following in his memoirs:

“Joint intervention in gold sales to prevent a steep rise in the price of gold (in the 1970s), however, was not undertaken. That was a mistake.” …

Robert Rubin and gang took heed … as are more and more in the mainstream financial world. Just last week, the highly regarded Don Coxe of the Bank of Montreal stated the following in an audio presentation last about recent market action to the bank’s clients:

“The Most Massive Intervention Of Government Into The Capital Markets, Or The Financial Markets, Since President Roosevelt Closed The Banks Back In 1933,”

Recently, there has been talk about the Working Group on Financial Markets (more commonly known as The Plunge Protection Team), which consists of the President, Treasury Secretary, and heads of the CFTC and SEC. Think about it … why are bureaucrats included in meetings about the markets except to look the other way regarding government intervention?

To give you an idea just how pervasive and insidious our markets have become, I bring your attention to the Counterparty Risk Management Group. Ever hear of it?

It consists of major players in the investment banking/hedge fund community in New York, including Goldman Sachs. Citigroup, JPMorgan Chase, and Deutsche Bank (all defendants in GATA’s Reg Howe’s suit against The Gold Cartel in 2001). There are a number of other participants such as the famed hedge fund of Paul Tudor Jones.

On July 27, 2005, E. Gerald Corrigan, former President and CEO of the Federal Reserve Bank of New York, and now a Managing Director of Goldman Sachs, wrote:

Addressing it to:

(all roads always lead back to Goldman Sachs)

He stated; “since we know that financial disturbances and even financial shocks will occur in the future, and we know that no approaches to risk management or official supervision are fail-safe, we also know that we must preserve and strengthen the institutional arrangements whereby, at the point of crisis, industry groups and industry leaders, as well as supervisors, are prepared to work together in order to serve the larger and shared goal of financial stability.”

This Orwellian shared goal of financial stability, which began with the serious rigging of the gold price under Robert Rubin, has led us to the financial market mess we have today. It is wrong and must be stopped!

In the 2007 May/June issue of Foreign Affairs, Benn Steil presented his paper, The End of National Currency. Steil is Director of International Economics at the Council on Foreign Relations. In his report, Steil stated,

“So what about gold? A revived gold standard is out of the question. In the nineteenth century, governments spent less than ten percent of national income in a given year. Today, they routinely spend half or more, and so they would never subordinate spending to the stringent requirements of sustaining a commodity-based monetary system. But private gold banks already exist, allowing account holders to make international payments in the form of shares in actual gold bars. Although clearly a niche business at present, gold banking has grown dramatically in recent years, in tandem with the dollar’s decline. A new gold-based international monetary system surely sounds far-fetched. But so, in 1900, did a monetary system without gold. Modern technology makes a revival of gold money, through private gold banks, possible even without government support.”

This is hardly far-fetched. Zbigniew Brzezinski noted in 1972 that “the nation-state as a fundamental unit of man’s organized life has ceased to be the principal creative force: International banks and multinational corporations are acting and planning in terms that are far in advance of the political concepts of the nation-state.”

For the first time in history, gold futures sold below spot price and creates a potential crisis in gold delivery at the end of December. Fekete states,

“According to the December 3rd Comex delivery report, there are 11,759 notices to take delivery. This represents 1.1759 million ounces of gold, while the Comex-approved warehouses hold 2.9 million ounces. Thus 40% of the total amount will have to be delivered by December 31st. Since not all the gold in the warehouses is available for delivery, Comex supply of gold falls far short of the demand at present rates. Futures markets in gold are breaking down. Paper gold is progressively being discredited…”

If Fekete is correct, and he has seldom been wrong, then the trap is snapping shut on who will own the gold in 2009. Free-market supplies of gold are drying up, but the price is being kept low as global institutions sop up whatever crumbs are left.

Several very serious implications can be drawn:

Indeed, a global totalitarian state may be closer than we think; as the globalist’s golden rule states, “He who has the gold, makes the rules.”

December 2, 2008, was a landmark in the saga of the collapsing international monetary system, yet it did not deserve to be reported in the press: gold went to backwardation for the first time ever in history. The facts are as follows: on December 2, at the Comex in New York, December gold futures (last delivery: December 31) were quoted at 1.98% discount to spot, while February gold futures (last delivery: February 27, 2009) were quoted at 0.14% discount to spot. (All percentages annualized.)

The condition got worse on December 3, when the corresponding figures were 2% and 0.29%. This means that the gold basis has turned negative, and the condition of backwardation persisted for at least 48 hours. I am writing this in the wee hours of December 4, when trading of gold futures has not yet started in New York.

According to the December 3 Comex delivery report, there are 11,759 notices to take delivery. This represents 1.1759 million ounces of gold, while the Comex-approved warehouses hold 2.9 million ounces. Thus 40% of the total amount will have to be delivered by December 31.

Since not all the gold in the warehouses is available for delivery, Comex supply of gold falls far short of the demand at present rates. Futures markets in gold are breaking down. Paper gold is progressively being discredited.

Already there was a slight backwardation in gold at the expiry of a previous active contract month, but it never spilled over to the next active contract month, as it does now: backwardation in the December contract is spilling over to the February contract which at last reading was 0.36%. Silver is also in backwardation, with the discount on silver futures being about twice that on gold futures.

As those who attended my seminar on the gold basis in Canberra last month know, the gold basis is a pristine, incorruptible measure of trust, or the lack of it in case it turns negative, in paper money. Of course, it is too early to say whether gold has gone to permanent backwardation, or whether the condition will rectify itself (it probably will). Be that as it may, it does not matter.

The fact that it has happened is the coup de grâce for the regime of irredeemable currency. It will bleed to death, maybe rather slowly, even if no other hits, blows, or shocks are dealt to the system. Very few people realize what is going on and, of course, official sources and the news media won’t be helpful to them to explain the significance of all this. I am trying to be helpful to the discriminating reader.

Gold going to permanent backwardation means that gold is no longer for sale at any price, whether it is quoted in dollars, yens, euros, or Swiss francs. The situation is exactly the same as it has been for years: gold is not for sale at any price quoted in Zimbabwe currency, however high the quote is. To put it differently, all offers to sell gold are being withdrawn, whether it concerns newly mined gold, scrap gold, bullion gold or coined gold. I dubbed this event that has cast its long shadow forward for many a year, the last contango in Washington ― contango being the name for the condition opposite to backwardation (namely, that of a positive basis), and Washington being the city where the Paper-mill of the Potomac, the Federal Reserve Board, is located.

This is a tongue-in-cheek way of saying that the jig in Washington is up. The music has stopped on the players of ‘musical chairs’. Those who have no gold in hand are out of luck. They won’t get it now through the regular channels. If they want it, they will have to go to the black market.

I founded Gold Standard University Live (GSUL) two years ago and dedicated it to research of monetary issues that are pointedly ignored by universities, government think-tanks, and the financial press, centered around the question of long-term viability of the regime of irredeemable currency.

Historical experiments with that type of currency were many but all of them, without exception, have ended in ignominious failure accompanied with great economic pain, unless the experiment was called off in good time and the authorities returned to monetary rectitude, that is, to a metallic monetary standard. It is also worth pointing out that the present experiment is unique in that all countries of the world indulge in it.

Not one country is on a metallic monetary standard, under which the Treasury and the Central Bank are subject to the same contract law as ordinary citizens. They cannot issue irredeemable promises to pay and keep them in monetary circulation through a conspiracy known as check-kiting. Not one country will be spared from the fire and brimstone that once rained on the cities of Sodom and Gomorrah as a punishment of God for immoral behavior.

In all previous episodes there were some countries around that did not listen to the siren song and stayed on the gold standard. They could give a helping hand to the deviant ones, thus limiting economic pain. Today there are no such countries. If you want to be saved, you must be prepared to save yourself.

You cannot understand the process whereby a fiat money system self-destructs without understanding the gold and silver basis. The Quantity Theory of Money does not provide an explanation, because deflation may well precede hyperinflation, as it appears to be the case right now.

For these reasons I placed the study of the gold and silver basis on the top of the list of research topics for GSUL. These can serve as an early warning system that will signal the beginning of the end. The end is approaching with the inevitability of the climax in a Greek tragedy, as the heroes and heroines are drawn to their own destruction.

The present reactionary experiment with paper money is entering its death-throes. GSUL has had five sessions and could have established itself as an important, and even the only, source of information about this cataclysmic event: the confrontation of the Titanic (representing the international monetary system) with the iceberg (representing gold and its vanishing basis) as the latter is emerging from the fog too late to avoid collision.

Unfortunately, this was not meant to be: GSUL has to terminate its operations due to a decision made by Mr. Eric Sprott, of Sprott Asset Management, to terminate sponsoring GSUL, saying that “results do not justify the expense.”

I sincerely regret that our activities did not live up to the expectations of Mr. Sprott, but I am very proud of the fact that our research is still the only source of information on the vanishing gold basis and its corollary, the seizing up of the paper money system that threatens the world, as it does, with a Great Depression eclipsing that of the 1930’s.

Let me summarize the salient points of discussion during the last two sessions of GSUL for the benefit of those who wanted to attend but couldn’t. The gold basis is the difference between the futures and the cash price of gold. More precisely it is the price of the nearby active futures contract in the gold futures market minus the cash price of physical gold in the spot market.

Historically it has been positive ever since gold futures trading started at the Winnipeg Commodity Exchange in 1972 (except for some rare hiccups at the triple-witching hour. Such deviations have been called ‘logistical’ in nature, having to do with the simultaneous expiry of gold futures and the put and call option contracts on them. In all these instances the anomaly of a negative basis resolved itself in a matter of a few hours.)

In the commodity futures markets the terminus technicus for a positive basis is contango; that for a negative one, backwardation. Contango implies the existence of a healthy supply of the commodity in the warehouses available for immediate delivery, while backwardation implies shortages and conjures up the scraping of the bottom of the barrel. The basis is limited on the upside by the carrying charges; but there is no limit on the downside as it can fall to any negative value (meaning that the cash price may exceed the futures price by any amount, however large).

Contango whereby the futures price of gold is quoted at a premium to the spot price is the normal condition for the gold market, and for a very good reason, too. The supply of monetary gold in the world is very large relatively speaking. Babbling about the ‘scarcity of gold’ reflects the opinion of uninformed or badly informed people. In terms of the ratio of stocks to flows the supply of gold is far and away greater than that of any commodity. Silver is second only to gold.

It is this fact that makes the two of them the only monetary metals. The impact on the gold price of a discovery of an extremely rich gold field, or the coming on stream of an extremely rich gold mine, is minimal ― in view of the large existing stocks. Paradoxically, what makes gold valuable is not its scarcity but its relative abundance, which evokes that superb confidence in the steadiness of the value of gold that will not be decreased by a banner production year, nor can it be increased by withdrawing gold coins from circulation.

For this reason there is no better fly-wheel regulator for the value of currency than gold. The same goes, albeit to a lesser degree, for silver.

Here is the fundamental difference between the monetary metal, gold, and other commodities. Backwardation will pull in stocks from the moon as it were, if need be. The cure for the backwardation of any commodity is more backwardation.

For gold, there is no cure. Backwardation in gold is always and everywhere a monetary phenomenon: it is a reminder of the incurable pathology of paper money. It dramatizes the decay of the regime of irredeemable currency. It can only get worse. As confidence in the value of fiat money is a fragile thing, it will not get better. It depicts the paper dollar as Humpty Dumpty who sat on a wall and had a great fall and, now, “all the king’s horses and all the king’s men could not put Humpty Dumpty together again.” To paraphrase a proverb, give paper currency a bad name, you might as well scrap it.

Once entrenched, backwardation in gold means that the cancer of the dollar has reached its terminal stages. The progressively evaporating trust in the value of the irredeemable dollar can no longer be stopped.

Negative basis (backwardation) means that people controlling the supply of monetary gold cannot be persuaded to part with it, regardless of the bait. These people are no speculators. They are neither Scrooges nor Shylocks. They are highly capable businessmen with a conservative frame of mind. They are determined to preserve their capital come hell or high water, for saner times, so they can re-deploy it under a saner government and a saner monetary system. Their instrument is the ownership of monetary gold. They blithely ignore the siren song promising risk-free profits.

Indeed, they could sell their physical gold in the spot market and buy it back at a discount in the futures market for delivery in 30 days. In any other commodity, traders controlling supply would jump at the opportunity. The lure of risk-free profits would be irresistible. Not so in the case of gold. Owners refuse to be coaxed out of their gold holdings, however large the bait may be. Why?

Well, they don’t believe that the physical gold will be there and available for delivery in 30 days’ time. They don’t want to be stuck with paper gold, which is useless for their purposes of capital preservation.

December 2 is a landmark, because before that date the monetary system could have been saved by opening the U.S. Mint to gold. Now, given the fact of gold backwardation, it is too late. The last chance to avoid disaster has been missed. The proverbial last straw has broken the back of the camel.

I have often been told that the U.S. Mint is already open to gold, witness the Eagle and Buffalo gold coins. But these issues were neither unlimited, nor were they coined free of seigniorage. They were sold at a premium over bullion content. They were a red herring, dropped to make people believe that gold coins can always be obtained from the U.S. Mint, and from other government mints of the world.

However, as the experience of the past two or three months shows, one mint after another stopped taking orders for gold coins and suspended their gold operations. The reason is that the flow of gold to the mints has become erratic. It may dry up altogether. This shows that the foreboding has been evoked by the looming gold backwardation, way ahead of the event. Now the truth is out: you can no longer coax gold out of hiding with paper profits.

If the governments of the great trading nations had really wanted to save the world from a catastrophic collapse of world trade, then they should have opened their mints to gold. Now gold backwardation has caught up with us and shut down the free flow of gold in the system. This will have catastrophic consequences. Few people realize that the shutting down of the gold trade, which is what is happening, means the shutting down of world trade.

This is a financial earthquake measuring ten on the Greenspan scale, with epicenter at the Comex in New York, where the Twin Towers of the World Trade Center once stood. It is no exaggeration to say that this event will trigger a tsunami wiping out the prosperity of the world.

I dont know how ‘real’ commodity prices are now, as much as they were engineered low by Paulson/Bernanke targeting commodity price and liquidating the hedge funds long commodities and short financial. With mine cut backs and strong growth in the BRICS, we might see next year a real explosion of commodity prices upwards. We know the paper price for silver is 3-4dollars below the physical price.

The BIS did a study that showed that Commodity price increases dontlead to inflation recently so maybe these guys will quit ‘targeting’ commodity prices although no doubt gold remains FRB public enemy number one . Monetary inflation leads to inflation, so perhaps these central banks will stop targeting commodity price management algorithms, which were implemented by the FRB to pay commodity producers with greatly exaggerated dollars.

The bubble is in UST. I don’t buy this ‘deflation’ argument, and that the FRB has ’sterilized its monetary operations. The Total USA aggregate monetary supply  has doubled and the FRB is printing ‘good’ money for bad. Right now the game is being played who has the T Bills and who has the cash. Currently Paulson sitting on the cash, but that money will be spent although hes parked it in Short Term UST notes. Plus who knows what they are doing offshore and illegally we know that there is massive counterfeiting in the USTmarket as there were too many failed to settle trades. When your strong dollar policies is based on ‘liquidating’ people and forcing trade settlements in dollars and have the FRB/UST blow up the credit by 8.5 trillion to the banks, not long before some of that money finds its way out of dollar and back into real assets.

What was nationalizing FHN, FRE but taking in 5 trillion of bad loans onto the balance sheet of the USA. What is AIG, but a money pit. Who thinks the FRB will ever break even on AIG and Paulson and Geithner will be happy to print more treasury bills to sell the FRB so they can hide Geithners big ‘mistake’ which in reality was not a ‘mistake’ if you understand he was ingratiating himself to Lord Rothschilds and the London gang of bankers at our expense.

Greece had good growth the eastern european countries are reporting good growth, i imagine even where oil is the Arabs have good growth. A lot of people are predicting 25 dollar oil as that is what the zionsit world order wants to destroy Russia as that is close to it total cost. That is the cost to explore, develop, lift and pipe, then replace the barrel of oil. Saudi Arabias total cost has increased drastically and in most of the world 20  dollars is the new floor for the TOTAL cost of production for oil. Granted countries dependent on oil can continue to pump for cash flow, but we see with Rio, what happens when the CB engineer these liquidations in commodities, you get prices below the cost to produce. The worlds low volume copper producer has a 1.25 lb cost.

You will see record commodity prices by this time next year, plus the dollar will have to fall to balance the trade deficit with Asia, or their currencies will have to rise. A lot of politcal games are being played with oil right now. There were hardly any new mines built this cycle especially in gold.

Hey where are the peak oil shills…lol.

Your talking about needing 60 to 100 dollar oil prices to bring new supply on line and alternative energy. Obama might hit everyone with a 1 dollar a gallon federal gasoline tax, as he considers it too low. He might give a rebate to the poorest, but he will punish the middle class, he is that type of guy.

He will be a much worse President than Bush and is even more mentally unstable. Reports are that Bush is now just drunk from noon to when he goes to bed. So hes fallen back off the wagon. Good way for that queer to end his presidency, although for a guy with only a networth of 5 million he bought Laura her 8.5 million dollar divorce settlement home in Dallas shes always wanted. I will bet there is not a black or a hispanic in that neighborhood. The Bush only like illegal immigrants when they are cleaning the pool, or BBQ pit. LOL.

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Dec. 10 (Bloomberg) — Rio Tinto Group, the world’s third- largest mining company, will eliminate 14,000 jobs and slash $5 billion in spending next year to reduce debt as the global financial crisis curbs demand for metals.

Since the company’s third-quarter operations review on Oct. 15, “demand conditions have worsened further and as a result, the group’s priorities have reoriented around conserving cash flow and reducing near-term borrowings,” London-based Rio said in a statement to the Australian stock exchange today. The job cuts account for about 14 percent of the 97,000 workforce.

Chief Executive Officer Tom Albanese has pushed back a plan to sell $10 billion in assets this year as the global economy slows and commodity prices decline. Rio plans to cut its debt by another $10 billion by the end of 2009, after reducing it by $3.2 billion in the third quarter of this year to $38.9 billion.

“We will minimize our operating and capital costs to appropriately low levels until we see credible and meaningful signs of recovery in our markets,” Albanese said in the statement. “We will expand further the scope of assets we are targeting for divestment.”

The company may delay $32 billion of new projects and expansions next year as the financial crisis curbs demand for metals, Credit Suisse Group AG said Dec. 2.

BHP Billiton Ltd. abandoned its hostile $66 billion takeover bid for Rio on Nov. 25 because of Rio’s $42.1 billion of debt, turmoil in global markets and slumping demand for commodities. Rio cut iron ore output last month by 10 percent this year because of reduced demand from steelmakers in China.

http://stockcharts.com/h-sc/ui?s=%24usd

http://stockcharts.com/h-sc/ui?s=$VIX&p=D&b=5&g=0&id=0

Looks like Paulsons having a hard time keeping VIX aloft and the USD. He sold 29 billion in bonds today at a negative interest rate. The first time ever. You wonder how much of that auction was rigged by aggressive bidding by CB. Once VIX breaks down, hes going to have a hard time selling all those UST.

I think Jim Willie and Murphy and the Zionist Gold advisor will be hard pressed reputation wise if there is not a physical delivery demand in December. Hard to know what is going on, oil with a hugh Contango, China finally started to buy to store. Gold in Backtwardation to try and get dumps to supply the physical market. The silver market is just one short. Yet no hedge funds are buying gold and silver or investors. There are only 12, 449 delivery notices. That is a start but is not much of a ‘run’ on Comex. Where is JS and all his ‘contacts’. Looks like hot air. Looks like the chinese are going down with the dollar ship. Paulson must have promised them GM cheap to get them to stay away from gold. Okay so there is demand for 1 million oz of gold to be delivered in December considering Paulsons going to sell 700 billion in UST notes, that is nothing.

The GLD/SLV ETF is I am sure hurting gold. I just dont believe they have it.

a good neighbor, the one on your side, good hands people - the relationship between policy holders and their insurer is one of trust. - beginning with trust in the local agent that sells the policy; reflected in trust of the company that follows.

Yet behind the clever slogans and familiar faces lies a culture that views every claim as a potential case of insurance fraud - and trust is replaced with betrayal.  Premium dollars have made fraud detection a separate industry - one with its future riding on the continued public perception of widespread insurance fraud.

Fraud, to be certain, is a serious problem; however, the resulting problem-focused solutions have created far greater problems.

From an IT management perspective, Enterprise Management essentially means enterprise-wide network administration, which is becoming increasingly complex. The corporate network environment is no longer tied to a single vendor, let alone a single platform. More and more, corporate intranets are multidomain, multiprotocol, multiplatform systems. They contain hardware and operating systems from a number of different, competing vendors…

End-to-end,  EMS has shaped the claims handling system into a massive fraud prevention system capable of fraud so subtle it would have gone undetected had all of its functions been fully developed.

Innovative software, pioneering use of technology, and a highly touted management program - the laudable tools of success when used as intended.  Otherwise, none were more than what they became together, the newest version of the tricks of the trade fashioned by the most advanced information management system ever made - the human brain - into the scheme, a needle hidden in a haystack of needles.

A few regrets, too few to mention? Maybe a few reminders will help

A few regrets - the human cost is an incalculable loss of life, of home, of opportunity and emotional and economic security.

A few regrets - premiums that policyholders paid on a contract intended to provide protection were instead spent on media campaigns, lobbying and lawyers that made them more vulnerable.

As it became evident return on investment of premium payments was insufficient, the industry shifted focus to reducing loss to increasing profits and  Six Sigma. management strategies.

It’s the CEO and only the CEO who can make Six Sigma successful in an organization.

Each Six Sigma project carried out within an organization follows a defined sequence of steps and has quantified financial targets (cost reduction or profit increase).

A number of software products have the capacity to integrate Six Sigma into the functionality of the EMS for any of the Six Sigma companies.  One of the companies on the list is Computer Sciencies Corporation (CSC); and, interestingly, none on the list are insurers.

There’s nothing inherently wrong with that structure or with the intranet that builds community among the users.  In fact, there is much to be said for the efficiency of a system that includes all functional components of an insurance industry with the capacity to meet the needs of both an individual insurance/ reinsurance companies as well as the industry as a whole.

In a perfect world, it would be the perfect approach.

First, there was the word game - windstorm - although  hurricanes are formed from thunderstorms.

The word game was central to the mind game of concurrent causation - a distinction possible only when science is ignored and a hurricane is considered a windstorm. The twisted words fuel a blame game in and out of court - blame the policyholders who didn’t buy the coverage needed, blame the lawyers for taking their cases, blame everyone and everything but the insurers’ choice to make policy language a profit center.

All of the games converge at the center of the power game explained by Lawrence Lessig, Professor of Law at Stanford Law School and founder of the school’s Center for Internet and Society.

…non-obvious corruption–instances where a decision is improperly and/or subtly influenced by a government actor’s anticipation of some sort of indirect economic gain or loss. Where a person in power is motivated more by, e.g., money to their campaign, support for favored research, etc., than the interests they claim to or otherwise should be advancing.

What was it, then, that influenced David Maustaud’s decision on the Expedited Claim Handling Process?

Until the Rigsby sisters pulled the covers back and filed their qui tam claim, the Maustaud covered the scheme in progress.

What accounts for the Senate’s failure to pass HR3121?

Chris Dodd has supported every bailout save the one that would have stimulated the economy and recovery of hurricane damaged Mississippi, Louisiana and Texas.

A recent Tom Friedman column on the financial crisis illustrates an undeniable comparison and provides insight.

This financial meltdown involved a broad national breakdown in personal responsibility, government regulation and financial ethics.

So many people were in on it: People who had no business buying a home, with nothing down and nothing to pay for two years; people who had no business pushing such mortgages, but made fortunes doing so; people who had no business bundling those loans into securities and selling them to third parties, as if they were AAA bonds, but made fortunes doing so; people who had no business rating those loans as AAA, but made fortunes doing so; and people who had no business buying those bonds and putting them on their balance sheets so they could earn a little better yield, but made fortunes doing so.

Citigroup was involved in, and made money from, almost every link in that chain. And the bank’s executives, including, sad to see, the former Treasury Secretary Robert Rubin, were clueless about the reckless financial instruments they were creating, or were so ensnared by the cronyism between the bank’s risk managers and risk takers (and so bought off by their bonuses) that they had no interest in stopping it.

…check out Michael Lewis’s superb essay, “The End of Wall Street’s Boom,” on Portfolio.com. Lewis, who first chronicled Wall Street’s excesses in “Liar’s Poker,” profiles some of the decent people on Wall Street who tried to expose the credit binge…Lewis also tracked down Steve Eisman, the hedge fund investor…

‘We always asked the same question,’ says Eisman. ‘Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.’ He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S.& P. couldn’t say; its model for home prices had no ability to accept a negative number. ‘They were just assuming home prices would keep going up.

Friedman said that’s how we got here - a near total breakdown of responsibility at every link in our financial chain.

The Scheme, likewise, represents a near total breakdown of responsibility in the insurance industry at every link  - a breakdown from the language of the policy to the decisions that made NFIP reinsurance by default following Katrina when only Kamp Re was triggered by the disaster.

Who done it?

Who had the motive?  the means? the opportunity?  Who in the insurance industry did not?

Who done it?

We’ll find out in ex rel Rigsby v State Farm.

Crude oil rose as traders bought contracts to close out bets that prices will fall and on signs that OPEC will cut production twice in as many months.

OPEC, which pumps 40 percent of the world’s oil, may reduce output limit by as much as 2.5 million barrels a day to reverse recent declines, billionaire hedge-fund manager Boone Pickens said yesterday. Traders who held short positions, or bets prices would fall, are purchasing futures after oil dropped more than 20 percent in the past two weeks.

“For short-term traders, for scalpers, that kind of drop is definitely a buy signal,” said Jonathan Kornafel, director for Asia at options trader Hudson Capital Energy in Singapore. “Everyone is waiting to see what OPEC does. There are enough things to support the market but nothing to propel it higher.”

Crude oil futures for January delivery rose as much as $1.33, or 3.2 percent, to $43.40 a barrel in after-hours electronic trading on the New York Mercantile Exchange. It was at $43.25 a barrel at 12 p.m. Singapore time. Yesterday, futures fell $1.64, or 3.8 percent, to $42.07 a barrel, capping a 23 percent drop since Nov. 26.

OPEC should make a “substantial” output cut when it meets on Dec. 17 in Algeria, Shokri Ghanem, Libya’s top oil official, said Dec. 8. OPEC agreed on Oct. 24 to cut daily output by 1.5 million barrels.

Obama’s Plan

OPEC will “work it back up to $100,” Pickens said in an interview in New York. “It will all be determined by the global economy. If you get a recovery in the global economy, you will get it back up.”

U.S. President-elect Barack Obama proposed on Dec. 7 an economic stimulus plan based on infrastructure development to help lift the country out of its worst recession since World War II. Australia will start making one-time payments to families and pensioners under a A$10.4 billion grant program and China may cut personal income tax.

OPEC’s agreed 1.5 million barrel-a-day cut would be larger than a forecast drop in demand by the U.S. Energy Department. Global oil consumption will average 85.75 million barrels a day in 2008, down 50,000 barrels from 2007, the department said in its Short-Term Energy Outlook yesterday.

Global demand fell every year from 1980 to 1983, according to the department. Demand will decline an additional 450,000 barrels a day next year to 85.3 million barrels a day, the department said.

2009 Forecasts

The International Energy Agency and OPEC have lowered demand forecasts in the past month because of the economic contraction.

The IEA reduced its 2009 estimate by 670,000 barrels a day, or 0.8 percent, to 86.5 million barrels a day in a Nov. 13 report. The Organization of Petroleum Exporting Countries cut its forecast for next year by 530,000 barrels a day, or 0.6 percent, to 86.68 million barrels a day, in its monthly oil market report on Nov. 17.

Traders are betting that oil for January delivery may fall below $42 a barrel, according to data on put options contract volume from the New York Mercantile Exchange. Crude may decline to $25 a barrel next year as demand drops on the economic contraction, Merrill Lynch & Co. said last week.

A government report today is forecast to show that U.S. crude-oil inventories rose 1.3 million barrels last week, according to the median of 14 responses in a Bloomberg News survey. The report will probably show a drop in U.S. supplies of gasoline and distillate fuel, a category that includes diesel and heating oil.

The Energy Department is scheduled to release its weekly report at 10:35 a.m. today in Washington.

Brent crude oil for January settlement rose as much as $1.05, or 2.5 percent, to $42.58 a barrel on London’s ICE Futures Europe exchange at 12 p.m. Singapore time. The contract yesterday declined $1.89, or 4.4 percent, to settle at $41.53 a barrel.

” The United States is the country with the highest inequality level and poverty rates across the Organization for Economic Cooperation and Development, OECD http://tinyurl.com/ypkzaf , Mexico and Turkey excepted.

Since 2000, income inequality has increased rapidly, continuing a long-term trend that goes back to the 1970s.

The income inequality and poverty rates are calculated based on median incomes, so obviously the US is not doing as bad as other countries that have a lower median income. So I believe, it should be looked at relative to each country rather than globally (for example, a poor US citizen is still quite a bit better off than a poor citizen in some other countries)…

However, based on this report the United States is only compensating about 9% of the median household income whereas other countries in the study spend about 22% of their median incomes…and that the true problem is that the rich have gotten so rich that they are dramatically skewing all of the numbers, while the middle-class and lower income-class have stayed the same or decreased in income.”

Source:   http://tinyurl.com/54rorx

Ah the rich, they were so rich. 

 They were careless people, Tom and Daisy — they smashed up things and creatures and then retreated back into their money or their vast carelessness or whatever it was that kept them together, and let other people clean up the mess they had made.  The Great Gatsby, F. Scott Fitzgerald.

“With Wall Street hemorrhaging jobs and assets, even many of the wealthiest players are retrenching.

Others, like the Lehman Brothers bankers who borrowed against their millions in stock, have lost everything.

Hedge-fund managers try to sell their luxury homes, while trophy wives are hocking their jewelry.

The pain is being felt on St. Barth’s and at Sotheby’s, on benefit-gala committees and at the East Hampton Airport, as the world of the Big Rich collapses, its culture in shock and its values in question.

A  snapshot: East Hampton, late summer, a lawn party at a house on the ocean overlooking the dunes.The host is a prince of private equity known for dressing well. One of his guests is Steven Cohen, the publicity-shy billionaire whose SAC Capital, with $16 billion under management, is perhaps the most revered of the 10,000 or so hedge funds spawned by this giddily rich time. Nearby is Daniel Loeb, of Third Point, one of the better-known “activist” hedge funds, who hopes to move soon into a 10,700-square-foot, $45 million penthouse at l5 Central Park West, a Manhattan monument to the new gilded age. Gliding easily between them is art dealer Larry Gagosian, so successful at selling Bacons and Serras to Wall Street’s new titans—including to Cohen—that he now travels in his own private jet and has his own helicopter to take him to it.

But here’s the odd thing: despite the beauty of the ocean view, nearly all the guests have their backs to it. Cohen is deep in conversation with a colleague who seems to be pitching him a deal. Loeb hovers close to his wife, a former yoga teacher. Gagosian is near his stunning young girlfriend. No one notices the clouds that are, quite literally, on the horizon. Snap.

Six weeks later, the photograph is cracked and sepia-toned, curling at the edges, a historic print. In just that short time, the storm has hit and nothing looks the same.

What’s definitely gone—along with Lehman Brothers and Bear Stearns—is leverage, at least to the dizzying degree it was recently used by Wall Street’s investment banks, hedge funds, and private-equity firms to parlay each dollar of their assets into $10, $20, even $30 or more of credit to make gargantuan deals and profits. The credit crunch has made such leverage as quaint as the market in Dutch tulips. Without it, Wall Street salaries have already started drifting gently back to earth like so many limp balloons.

Gone, too, are jobs—lots and lots of them. Along with a sizable portion of Lehman’s 26,000 worldwide, and Bear Stearns’s 14,000, Wall Street firms across the board—even Goldman Sachs—are cutting back, and that pain radiates out to the limousine drivers and caterers and lawyers and personal trainers and restaurant owners and real-estate brokers who rely on Wall Street clients, not to mention to the many nonprofits and charities that have grown accustomed to Wall Street money.

 The latest estimate of jobs New York will lose, both on and off Wall Street, is l60,000. Governor David Paterson says the state’s budget deficit has already reached $12.5 billion. In New York City, where Wall Street accounts for more than a quarter of the tax revenues, Mayor Michael Bloomberg thinks the financial-sector crisis will leave a $2 billion hole in the next fiscal year’s budget.

Almost everyone has lost something—if not their jobs, then 25 to 50 percent of their retirement savings—and nearly everyone is glum, anxious, hung over.

Prudence is the watchword now: sackcloth after the brilliant silks and brocades of the gilded age. The day after Lehman Brothers went down, a high-end Manhattan department store reportedly had the biggest day of returns in its history. “Because the wives didn’t want the husbands to get the credit-card bills,” says a fashion-world insider. A prominent designer says ruefully, “People really aren’t shopping at all unless there’s a deal or sale. It’s pretty dramatic—they have the stores at their mercy…

Only months ago, ordering that $1,950 bottle of 2003 Screaming Eagle Cabernet Sauvignon at Craft restaurant or the $26-per-ounce Wagyu beef at Nobu, or sliding into Masa for the $600 prix fixe dinner (not including tax, tip, or drinks), was a way of life for many Wall Street investment bankers.

“The culture was that if you didn’t spend extravagantly you’d be ridiculed at work,” says a former Lehmanite. But that was when there were investment banks.

Now many bankers, along with discovering $15 bottles of wine, are finding other ways to cut back—if not out of necessity, then from collective guilt and fear: the fitness trainer from three times a week to once a week; the haircut and highlights every eight weeks instead of every five. One prominent “hedgie” recently flew to China for business—but not on a private plane, as before. “Why should I pay $250,000 for a private plane,” he said to a friend, “when I can pay $20,000 to fly commercial first class?”

The new thriftiness takes a bit of getting used to. “I was at the Food Emporium in Bedford [in Westchester County] yesterday, using my Food Emporium discount card,” recounts one Greenwich woman. “The well-dressed wife of a Wall Street guy was standing behind me. She asked me how to get one. Then she said, ‘Have you ever used coupons?’ I said, ‘Sure, maybe not lately, but sure.’ She said, ‘It’s all the rage now—where do you get them?’”

One former Lehman executive in her 40s stood in her vast clothes closet not long ago, talking to her personal stylist. On shelves around her were at least 10 designer handbags that had cost her anywhere from $6,000 to $10,000 each.

“I don’t know what to do,” she said. “I guess I’ll have to get rid of the maid.”

Why not sell a few of those bags?, the stylist thought, but didn’t say so.

“Well,” the executive said after a moment, “I guess I’ll cut her from five days a week to four…”  http://tinyurl.com/6qm5vt

Four Financial Horsewomen who warned of the Apocalypse.[From the www.wowowow.com blog]

“Readers, stop sharpening your pitchforks for a moment because here, just in time for your year-end 401K reports to arrive, is a little story about four women who not so very long ago caused eyeballs to roll and brows to knit among the Wall Street and Washington Testosterone Teams, but who, if they had been listened to by the reigning Masters of the Universe, might have either prevented the economic Armageddon we are in … or at least caught it in time to prevent some its more pernicious collateral damage.

Who are these women?  Two accomplished regulators and two prescient financial industry employees who saw that the toxic brew of sub-prime mortgages, derivatives and lack of government oversight was bubbling up the greatest destruction of wealth in the history of the world. That they were ignored and in some cases ridiculed by the very perpetrators of this global White Shoe Financial Ponzi Scheme makes this a tediously familiar tale to many women who have worked in proximity of the polyglass ceiling, especially on Wall Street.

And here’s the remarkable news: some of the Big Boyz who ignored these women? They’re part of the new Obama financial team.

What she said:   Ten years before the collapse in the derivatives market became front-page news, and five years before Warren Buffett famously called them “weapons of financial mass destruction,” Brooksley Born warned in Congressional testimony that these complex, opaque and unregulated financial instruments could “threaten our regulated markets or, indeed, our economy, without any federal agency knowing about it.” She wanted her commission to provide governmental oversight of the derivatives market.

Who tried to screw her:  Claiming that she did not understand the markets, a triumvirate made up of former Federal Reserve Chairman Alan Greenspan, then-Treasury Secretary (and current controversial Citibank Director) Robert Rubin and his deputy and new Obama appointee Lawrence Summers (he late of the Harvard University dust-up where he claimed that women were intrinsically deficient in math) prevailed upon all who would listen to prevent Born’s agency from regulating the derivatives market. In their recent story on the Alan Greenspan legacy, The New York Times recounts the measures these three went to circumvent a woman who, if she had been listened to, could have prevented much of the current financial collapse.

The result:  Derivatives remained unregulated, and Born left the CFTC in 1999. In the fall of 2007, the worst financial tsunami since the 1930s began to roil both Wall Street and Main Street, with derivatives based on now-failed sub-prime mortgages at its very core.

Horsewoman #2: Sheila Bair, chairman of the FDIC…

What she said:   Back in 2007, seeing that the escalating number of home foreclosures threatened the entire banking system, Bair called for Ben Bernanke’s Fed to require banks to tighten lending standards and to convert their adjustable-rate sub-prime mortgages into traditional fixed-rate mortgages. This fall, Bair criticized Treasury Secretary Henry Paulson’s $700 billion bailout plan in a Wall Street Journal interview, suggesting that more of the money be earmarked for struggling homeowners rather than banks. “Why there’s been such a political focus on making sure we’re not unduly helping borrowers but then we’re providing all this massive assistance at the institutional level, I don’t understand it. It’s been a frustration for me.”

Who is trying to screw her:   Her tendency to speak truth to power has provoked the New York Fed Chair Timothy Geithner, Obama’s nominee for Treasury Secretary, who according to a story on Bloomberg.com last week, is maneuvering to force her to resign before her 2011 term is over.

 What she said:  On Halloween 2007, she became the first analyst to call out Citibank on their toxic mortgage derivatives, claiming that the bank was under-capitalized and would be forced to cut its dividend. She downgraded its stock to “marketunder perform,” setting off a firestorm.

Who tried to screw her: She received death threats in the days after her Citibank call, and thousands of hate e-mails.

Quote to set your teeth on edge: Thomas Brown, blogger, BankStocks.com, called Whitney “incredibly arrogant” and in his August 2008 post states: “Every cycle there’s one analyst who races to be the most bearish, and this time it’s her. Honestly, I think we’ll look back and see that Meredith Whitney’s credibility peaked on July 15 (2008),” a date he believed “financials had made their bottom.” Two months later, Lehman Brothers collapsed, and the current financial emergency was on.

“This year we have lived through something more than a financial crisis.  We have witnessed the death of a planet . . .  In 1990 there were 610 hedge funds.  At the end of 2006 there were 9,462.”