Archives for April 2012

Ritholtz: America Is So Not In Decline

Barry Ritholz on with Henry Blodget and Aaron Task, discussing why America is not doomed. Barry's sounding very optimistic.

Ritholtz: America Is So Not In Decline


After five years of financial crisis followed by economic frustration, many Americans are starting to believe that the country's best years are behind it and that we're starting a long, slow decline.

Balderdash, says Barry Ritholtz, the writer of the Big Picture and a fund manager at Fusion IQ.

It's true that America's in the middle of a crappy economic decade, Ritholtz says, and the lousy growth will probably continue for the next 5 years. That's how long it takes countries to work through the aftermath of a debt-binge and financial crisis like the one we just had. And the U.S. isn't going to find a miracle cure, no matter what the politicians say.

Keep reading: America Is So Not In Decline: Ritholtz

Starbucks Removes Beetle-Based Coloring

Glad I wasn't a big fan of the strawberry frapps!

Starbucks said it would stop using cochineal beetles to color its strawberry Frappuccinos and switch to a tomato-based food coloring.

What do you think?


"It's a shame they can't just make a strawberry Frappuccino out of some kind of naturally red fruit."  Penny Emge, Systems Analyst

See what other people think, via the Onion: Starbucks Removes Beetle-Based Coloring | The Onion – America's Finest News Source | American Voices.

Getting Out, Part One: Americans Renouncing Citizenship

Courtesy of John Rubino.

Capital, like information, wants to be free. The idea that it should be limited to one country has always struck rich people as silly, which is why Swiss bank accounts, offshore trusts and Caribbean beachfront condos have been perennial big-sellers.

But lately, the legitimate reasons for investing overseas have been joined by a couple of new ones: disgust with a ridiculously intrusive US tax system and worry that the country is becoming something different and less predictable.

As the Wall Street Journal’s William McGurn reports below, a small but growing number of Americans aren’t just moving money offshore, but are renouncing citizenship altogether:

What’s U.S. Citizenship Worth?

America is no longer as attractive to highly successful people as we like to think.
People say the dollar isn’t what it used to be. Apparently neither is a United States passport. Last year, nearly 1,800 American expatriates renounced their citizenship, according to Treasury Department figures.
What gives?

The cheap answer is to blame Barack Obama. After all, during his tenure, the number of Americans renouncing citizenship has taken a sharp upward turn, from an average of 482 per year under George W. Bush to 742 in 2009, to 1,534 in 2010 and to 1,788 in 2011. At the least, his calls for hiking taxes on the wealthy can’t be doing anything to discourage this trend.

The other cheap answer is to blame the ever unpopular IRS—instead of the tax code itself. In the international section of its most recent annual report to Congress, the agency’s National Taxpayer Advocate notes that whether it’s Americans working abroad or foreigners residing here, “taxpayers who are trying their best to comply simply cannot.” The result is that some are “paying more tax than is legally required, while others may be subject to steep civil and criminal penalties.”

Here’s the real issue: When it comes to attracting highly successful people, America is just not as competitive as we like to think we are. What we need is a complete rethink.

That rethink begins with a hard look at what these 1,800 citizenship renunciations are telling us. True, 1,800 is a drop in the bucket compared with either the number of Americans working abroad or the number of foreigners who are seeking U.S. citizenship. Still, when it comes to the global inefficiencies of our tax code, these 1,800 ex-Americans are canaries in the coal mine.

Our tax code—and especially the onerous reporting requirements that come with it—is turning U.S. citizens into economic lepers. Many foreign banks refuse us as customers; some investment ventures no longer want us as partners; and some business opportunities that would have benefited Americans now benefit others.

For successful foreigners, our global tax regime tells them this: Avoid entanglements with America. Andrew Mitchel is a Connecticut-based international tax attorney who blogs on these issues. He says that for someone who has foreign assets abroad, the cost-benefit analysis doesn’t always come out in America’s favor.

“My advice to, say, a small-business man abroad would be to think twice about acquiring U.S. citizenship,” says Mr. Mitchel. “Many of these people do not realize what that means for their businesses until they start dealing with the IRS.”

All these disincentives flow from a single source: Uncle Sam’s insistence on taxing people and companies for what they earn outside U.S. borders.

Jackie Bugnion, a director with the Geneva-based American Citizens Abroad, says the U.S. approach makes no sense at either the individual or corporate level.

At the individual level, says Ms. Bugnion, the IRS imposes a “highly complex, costly double filing.” Even so, it produces little revenue because most Americans end up owing no taxes at all because of exemptions and what they pay where they live. Indeed, this is one area where free-marketeers think that America should be more like Europe, which does not tax its citizens overseas.

At the corporate level, taxing overseas earnings means higher capital costs for the U.S. Instead of taxing businesses only for what they earn in America, Ms. Bugnion says, Congress makes things even more complicated by trying to offset the negatives with occasional measures such as deferred taxation on profits earned and reinvested overseas.

In short, America is not facing up to the big question: If you are a dynamic individual with a good business, do you want to be an American—and open up all your world-wide activities to the IRS—or might you be happy living and raising your family in a part of the world that welcomes rather than discourages success? The aforementioned IRS report suggests other countries are busy answering that question, citing a World Bank study showing that, unlike ours, “40 economies made it easier to pay taxes last year.”

Now the whole notion that someone would give up U.S. citizenship to get out from the IRS will be taken by some folks as evidence that he or she isn’t worthy of American citizenship. Maybe not. Alas, a focus on the punitive only blinds us to the larger costs this approach is inflicting on the rest of society.

Indeed, the whole reason Treasury reports the numbers of Americans renouncing citizenship instead of the State Department is because Congress—Republicans as well as Democrats—set it up that way. The aim is to “name and shame.” That’s the Berlin Wall approach: The idea that the thrust of U.S. tax law should be to prevent any American from benefiting from a better deal somewhere else.

That a record 1,800 Americans gave up their citizenship last year suggests something else: Instead of building walls to keep talent and investment from getting out, Congress might start treating these as capital we ought to work to attract.

Some thoughts

This article focuses on our increasingly abusive tax system, and no doubt that’s a big part of the immediate problem. The fact that foreign banks won’t even accept Americans as customers should tell us that we’ve crossed some very important lines.

But the other motivation for get

ting out — fear that if we and our money stick around we’ll be trapped by capital controls and then impoverished by inflation and confiscation — will be the driver going forward. The list of “creeping fascist” laws that have been proposed and/or passed lately reads like something out of a bad dystopian novel. Combine this evolving police state with never-ending wars and ever-rising debt and you have the recipe for a financial collapse/state of emergency in which no one’s capital is safe.

So the escape strategy is evolving to fit the new reality. Where in the past it seemed reasonable to stick around but move a bit of money offshore, now the goal is “internationalization,” in which not just one’s assets but one’s identity is geographically diversified. That means a second passport to go with foreign real estate and bank accounts, to make a complete break possible should it be necessary.

Visit John’s Dollar Collapse blog here >

Why We've Never Left The Recession

Courtesy of Jim Quinn from The Burning Platform

We've Never Left The Recession

It is three and a half years since the Great Recession hit in 2008 with the collapse of our financial system caused by the Wall Street banks and their captured politician cronies in Washington D.C. Their mouthpieces in the mainstream media have been telling the American sheeple that we have been out of recession and in recovery since the 4th quarter of 2009. It truly has been a recovery for the Wall Street bankers and the mega-corporations that have laid off millions and opened new factories in the Far East while generating record profits and rewarding their executives with millions in bonuses. The stock market has doubled from its 2009 lows. All is well on Wall Street – not so much on Main Street.

The compliant non-questioning MSM reported that GDP in the 1st quarter rose 2.2%, less than expected. This pitiful government manipulated result confirms that we are back in recession. The first quarter had the huge benefit of fantastic weather, an extra day, and a supposed surge in jobs. And this is all we got? Take a good long hard look at this chart.

To factually assess the fake recovery reported by the Federal Government, Wall Street and the MSM, you need to check out the data on the BEA website regarding REAL GDP. The average schmuck still doesn’t understand how the government and Federal Reserve are screwing them through the insidious taxation of inflation. I urge you to look at this inflation adjusted data:

According to the BEA, REAL GDP was $13.3 trillion in the 2nd quarter of 2008 before the crisis. As of today, the BEA says REAL GDP is $13.5 trillion. These government drones have calculated these figures by having the balls to tell you that the CPI is only up 6% since the 2nd quarter of 2008. Gas prices are up 20% since the 2nd quarter of 2008. Even the BLS manipulated inflation figures show that Food has gone up 11% since the 2nd quarter of 2008.


The truth is that inflation is underreported by the Federal government by at least 5%. Therefore, if GDP was properly adjusted for real inflation, we have never left the recession.


Even if we use the REAL GDP figures provided by the BEA, the result is absolutely horrific when analyzed in comparison to what our “leaders” have done:

  • Real GDP has gone up by $200 billion since the 2nd quarter of 2008, a 1.4% increase.
  • The National Debt has gone from $9.5 trillion in the 2nd quarter of 2008 to $15.6 trillion today, a 64% increase. Not too much bang for our Keynesian buck.
  • There were 146 million Americans employed in the 2nd quarter of 2008. Today there are 142 million employed Americans. The working age population has risen by 10.5 million over this same time frame. According to the fine drones at the BLS, almost 8 million Americans willingly decided to leave the workforce during this time and do not count as unemployed.
  • Profits of the mega-corporations making up the S&P 500 are at all-time highs.
  • Wall Street Too Big To Fail banks have paid out average bonuses of $130,000 per employee from 2009 through 2011. The average compensation is $350,000.
  • Wall Street banks reaped $102 billion of profits between 2009 and 2011, as Ben Bernanke bought their toxic debt and continues to loan them hundreds of billions at 0% interest.
  • Five million Americans lost their homes to foreclosure since 2008.
  • There will be at least 6 million more foreclosures in the next three years.
  • Consumer expenditures accounted for 69.7% of GDP in the 2nd quarter of 2008. After three years of supposed austerity consumer expenditures account for 70.7% of GDP.
  • Senior citizen savers are earning $400 billion less of interest income today than they were in the 2nd quarter of 2008, but don’t worry – Paul Krugman says that has only affected a couple senior citizens. These seniors need to embrace their poverty and learn to love the taste of cat food.
  • Real GDP went up by $73 billion in the 1st quarter. A full 70% of this increase was due to durable goods purchases by consumers. This increase was solely due to ALLY FINANCIAL (85% owned by the Federal Government) and the rest of the Wall Street banks peddling auto loans to subprime (aka deadbeats) borrowers.

Our beloved leaders have done so much for so few while impoverishing so many. It makes me so proud to live in the corporate fascist states of America.

The reality is that we have never left recession and are sliding deeper into an ultimate Depression. Enjoy your slavery and keep believing the government and MSM propaganda. Docile sheep are so much easier being led to slaughter.

The New Drug of Choice In The White House, Federal Reserve and Treasury: Delusionol ™

Courtesy of Charles Hugh Smith from Of Two Minds

The New Drug of Choice in the White House, Federal Reserve and Treasury: Delusionol ™

If you just want to suppress the symptoms but leave the financial disease untouched, Delusionol ™ is the drug of choice.

Inside sources are reporting that there's a new drug of choice circulating in the hallways of power–the White House, Federal Reserve and the Treasury Department–and it's a perfectly legal prescription psychotropic: Delusionol ™. Delusionol works by activating the parts of the brain that replace cognition and reasoning with positive fantasies.

For example, a driver on Delusionol might run over a person in a wheelchair, bounce off a fire hydrant and send a baby carriage hurtling into a brick wall, and they would be happily convinced that they were an excellent driver.

Now you understand why Delusionol is being gulped in vast quantities in the halls of power: the guys (and yes, it's mostly guys) really want to believe the "economic recovery" they've been hyping, and since it's rationally preposterous, they need a drug to suppress recognition that their policies have only made the financial disease worse and stimulate a delusional belief in the fantasy of "recovery."


What can you say about someone who knows household incomes are falling, inflation and unemployment are much higher than officially reported, all the jobs created out of thin air by the birth-death model of small business employment are bogus, yet they "believe the recovery is self-sustaining"? They're obviously on Delusionol.

Unfortunately, like many other prescription drugs passed out in the tens of millions, Delusionol is highly addictive. Once you experience the "high" of believing that suppressing symptoms is the same as actually solving problems, it's almost impossible to return to reality, where actions and policies still have consequences, often unintended and often horrendously destructive–for example ZIRP (zero interest rate policy).

Even worse, the most blatant lies (for example, the birth-death model fabrication of phantom jobs, the illusory "declining rate of unemployment," the fantasy that cutting 1% of the Federal budget will make a difference in a budget that is 40% borrowed money, and so on) are suddenly "real" to the person on Delusionol.

No sane person would believe that one corporation with $40 billion annual profit can juice a stock market worth $14 trillion, but folks on Delusionol will believe any absurdity if it's presented as "real." They have literally lost the ability to discern between fantasy and reality.

Sadly, White House staffers on Delusionol have been seen planning the re-election party in November 2012, as if the global economy isn't imploding and as if that won't take down the precarious, "all inventory stuffing plus Apple earnings" U.S. stock market and economy.

The debt-clogged financial arteries of the nation are about to burst, but the Delusionol-tripping "leaders" in the White GHouse, Fed and Treasury are confident the economy is ready for a sprint, or a 10K run, heck, even a marathon.

Anything's believable to a drug-addled sap on Delusionol.

Delusionol is a parody. It is not a real drug.

What the “Bernanke Hall of Mirrors Put” Looks Like in the Real Economy

Courtesy of Russ Winter of Winter Watch at Wall Street Examiner

The world over, governments and central banks are waging war on supply and demand- on the price mechanism.”  – James Grant, interview here starts at 4:30

On the real economy and the hopium hates details front, fuel demand is down, and aircraft, like autos,  is in a huge inventory stuffing mode. This is what a central bank/Ministry of Truth command and control maladjusted ‘conomy looks like.

US Jet Fuel Demand 4-wk avg= 1.4 mmbbl/d, DOWN 0.4% over yr ago

Gasoline demand 4-wk avg at 8.7 mmbbl/d; DOWN 4.2% from yr ago

The KC survey of Midwest manufacturing activity is showing the impact of the bloated inventory situation.  April expectations are rolling over hard. Production was 35 in February, falling to 26 in April. Backlog of orders in February was 24 to 6 in April. Finished inventories 6 in February, minus 4 in April with a long ways to go. Workweek 7 in February to minus 6 in April.

Price paid raw materials remain sky high at 54. Whirlpool states they are seeing a lot of inflationary pressure. That’s the other aspect of the hall of mirrors Bernanke put,  the players hoard or substitute for money.  China’s copper-hoarding tendencies might be funny if they didn’t threaten to “destroy the world as we know it,” FT‘s Izabella Kaminska writes. Visitors are said to be “astounded” by how much copper is stored in warehouses;  Standard Chartered estimates “total copper inventory in China, which includes inventory outside of the bonded areas, has reached about 1M tonnes (mt).”

Table- Click to enlarge

Table- Click to enlarge

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Copyright © 2012 The Wall Street Examiner. All Rights Reserved. The above may be reposted with attribution and a prominent link to The Wall Street Examiner.

Hopium Hates Details

Courtesy of Russ Winter of Winter Watch at Wall Street Examiner

"The world over, governments and central banks are waging war on supply and demand- on the price mechanism."  – James Grant, interview here starts at 4:30

On the real economy and the hopium hates details front:, fuel demand is down, and aircraft, like autos, is in a huge inventory stuffing mode. 

US Jet Fuel Demand 4-wk avg= 1.4 mmbbl/d, DOWN 0.4% over yr ago

Gasoline demand 4-wk avg at 8.7 mmbbl/d; DOWN 4.2% from yr ago


The KC survey of Midwest manufacturing activity is showing the impact of the bloated inventory situation.  April expectations are rolling over hard. Production was 35 in February, falling to 26 in April. Backlog of orders in February was 24 to 6 in April. Finished inventories 6 in February, minus 4 in April with a long ways to go. Workweek 7 in February to minus 6 in April.

Price paid raw materials remain sky high at 54. Whirlpool states they are seeing a lot of inflationary pressure. That's the other aspect of the hall of mirrors Bernanke put,  the players hoard or substitute for money.  China's copper-hoarding tendencies might be funny if they didn't threaten to "destroy the world as we know it," FT's Izabella Kaminska writes. Visitors are said to be "astounded" by how much copper is stored in warehouses;  Standard Chartered estimates "total copper inventory in China, which includes inventory outside of the bonded areas, has reached about 1M tonnes (mt)."

This is what a central bank/Ministry of Truth command and control maladjusted 'conomy looks like.



For additional analysis on many topics, including trading ideas, subscribe to Russ Winter’s Actionable – risk free for 30 days. Click here for more information.  

Copyright © 2012 The Wall Street Examiner. All Rights Reserved. The above may be reposted with attribution and a prominent link to the The Wall Street Examiner.



Posted by Paul Gallagher

Occupy History is videographer Paul McIsaac‘s short film on the importance of direct, collective and non-violent action – from the first occupy movement (the Bonus Army of World War One veterans, who marched and occupied Washington DC in 1932), to the Flint Sit-Down Strike in 1936, through the ideas of Gandhi and Martin Luther King, the civil rights movement, to the fall of the Berlin Wall, the Arab Spring, and on today’s Occupy Wall Street Movement. McIsaac’s film is a springboard into action, focussing on the potential of such collective action, rather than any critical examination of the disparate reasons behind each of the events documented. 

With thanks to Hans Echnaton Schano

The Koch Brothers Exposed

If the Koch brothers didn't exist, the left would have to invent them. They're the plutocrats from central casting – oil-and-gas billionaires ready to buy any congressman, fund any lie, fight any law, bust any union, despoil any landscape, or shirk any (tax) burden to push their free-market religion and pump up their profits.  
But no need to invent – Charles and David Koch are the real deal. Over the past 30-some years, they've poured more than 100 million dollars into a sprawling network of foundations, think tanks, front groups, advocacy organizations, lobbyists and GOP lawmakers, all to the glory of their hard-core libertarian agenda. They don't oppose big government so much as government – taxes, environmental protections, safety-net programs, public education: the whole bit. (By all accounts, the Kochs are true believers; they really buy that road-to-serfdom stuff about the the holiness of free markets. Still, you can't help but notice how neatly their philosophy lines up with their business interests.) They like to think of elected politicians as merely "actors playing out a script," and themselves as supplying "the themes and words for the scripts." Imagine Karl Rove’s strategic cunning, crossed with Ron Paul’s screw-the-poor ideology, and hooked up to Warren Buffett's checking account, and you’re halfway there.
For years, the brothers shunned the spotlight. David Koch used to joke that the family business, the Wichita, Kansas-based Koch Industries – with annual revenues* estimated at $100 billion, it's the second-biggest private firm in America – was "the largest company you’ve never heard of." But when Barack Obama became president, the Kochs, like a lot of right-wingers, flipped out. They threw their weight behind a stealth campaign to turn back the president’s "socialist" agenda: They were early backers, some say puppet masters, of the Tea Party movement, and when the tea-infused GOP retook the House in the famous midterm "shellacking" of 2010, it was with a big assist from Koch money. (They later blessed the brief, ill-fated presidential run of Tea Party-favorite Herman Cain. That's how crazy – or cynical – these guys are.) Progressive activists and the news media started paying attention – most notably ThinkProgress and Jane Mayer of The New Yorker – and pretty soon the Kochs had become the poster boys of "the 1 percent" and a surefire fundraising tool for the Democratic Party; at the mere mention of the Koch name, liberal wallets fall open.

Keep reading: The Koch Brothers Exposed | Julian Brookes | Politics News | Rolling Stone.

Picture credit: William Banzai7

Social Security Has A Real Problem

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Submitted by Lance Roberts of Street Talk Live,

The Social Security Administration made an alarming announcement recently that they will exhaust their funding capability by 2033 which was several years earlier than originally projected.   According to a recent article from Reuters"Unless Washington politicians, who have been at war with each other over government spending priorities and federal budget deficits, can decide how to put Social Security on a sound footing, retirees' pension checks would start running out in 2033, according to an annual report. 

The baby boomers – those 78 million Americans born between 1946 and 1964 – started retiring last year. With 10,000 of them expected to retire every day for the next 19 years, according to the Pew Research Center, they will increasingly strain Social Security." 

As millions of baby boomers approach retirement more strain is put on the fabric of the Social Security system.  The exact timing of this crunch is less important than its inevitability.  The problem that Social Security has is "real" employment.  I say "real" employment simply to sidestep the ongoing arguments about the validity of government employment survey's from the Bureau of Labor Statistics.  The question we want to know is if we are creating jobs and what types of jobs are we creating?  The answer to those questions tells us much about the strength of the underlying economy.

The Federal Government receives income from the Social Security "contribution" from employee's paychecks.  The chart above shows the annual levels of employment as reported by the BLS versus the receipts of social security contributions.  As you can see while there has been a negligible increase in the number of non-farm employees – social security "contributions" have decreased sharply by almost $70 billion from its peak.

This is due to two factors.  The first is that the number of "real" employees, while growing, is in lower income producing and temporary jobs. Since social security contributions are calculated as a percentage of income – lower income levels produce lower contributions.  We have written about this previously on the "real" employment situation.  However, in a recent interview Richard Yaramone spoke specifically to this issue stating "I'm fortunate enough to travel and speak to chambers of commerce with 300 to 500 people in the audience. They all tell me, 'Hey, listen, I am letting go of workers. I'm hiring them back at a fraction of what I used to pay them.  You hear from the other side, 'Hey, I finally got a job after two years of being unemployed. I used to make $100,000 (each year), now I'm making $45,000 or now I'm working part time.' Or (you hear), 'I used to make $500,000 and now I'm making $200,000 or making $125,000.'…."

Here is the key statement and something that we address often in regard to the NFIB survey's:  "So you are actually seeing this collapse, contracting on a real basis, of real disposable personal incomes. If you don't have the money, you can't facilitate expenditures. So that's the core of the problem. That's what's really going on in the US economy.  You don't listen to what all of these bigger numbers coming across the screen tell you. You talk to the people who are running the country. 99.7% of all employer firms in this country are small businesses. So when they speak, you have to listen."

The second factor is that a larger share of personal incomes is made up of government benefits which does not affect social security contributions. The chart tells the tale in this regard.  Since the financial collapse government support of personal incomes spiked from just over 25% of incomes to almost 35%.  This also does not include the 45 million plus Americans also collecting nutritional assistance, or "food stamps", from the government.  

The dependency upon government for financial support is a long term economic problem because it reduces economic prosperity.  However, the problem that Social Security faces is that the program's annual cash surplus continues to shrink due to lower receipts from working American's.  The problem for Social Security, and the U.S. in general, comes long before 2033.  In 2017 or 2018, just 5 to 7 short years from now, Social Security will begin paying out more in benefits than it receives in taxes.  It could come even sooner.   As the cash surplus is depleted, which is primarily government I.O.U.'s, Social Security will not be able to pay full benefits from its payroll and other tax revenues. It will then need to consume ever-growing amounts of general revenue dollars to meet its obligations–money that now pays for everything from environmental programs to highway construction to defense.  Eventually, either benefits will have to be slashed or the rest of the government will have to shrink to accommodate Social Security.

As millions of baby boomers begin to retire another problem emerges as well.  Demographic trends are fairly easy to forecast and predict.  (My friend Doug Short has done some excellent work in this area)  Each year from 2008, when those born in 1946 reach Social Security's early retirement age of 62, until 2025 we will see successive rounds of boomers reach the 62 year-old threshold.  There is a twofold problem caused by these successive crops of boomers heading into retirement.  The first is that each boomer has not produced enough children to replace themselves which leads to a decline in the number of taxpaying workers.  It takes about 25 years to grow a new taxpayer.  We can estimate, with surprising accuracy, how many people born in a particular year will live to reach retirement. The retirees of 2070 were all born in 2003, and we can see and count them today.

The second problem is the employment problem.  The decline in economic prosperity, that we have discussed extensively, caused by excessive debt, reduction in savings, declining income growth due to productivity increases and the shift from a manufacturing to service based society will continue to lead to lower levels of taxable incomes in the future.  Furthermore, with unemployment in the U.S. remaining stubbornly high, the longer that all-important 25-35 year old person remains unemployed the related loss in relevant job skills leads them to becoming unemployable.

This employment conundrum is critical.  Back in 1950, as the baby boom was just beginning to start, each retiree's benefit was divided among 16 workers. Taxes could be kept low. Today, that number has dropped to 3.3 workers per retiree, and by 2025, it will reach–and remain at–about two workers per retiree. Each married couple will have to pay, along with their own family's expenses, Social Security retirement benefits for one retiree. In order to pay promised benefits, either taxes of some kind must rise or other government services must be cut.  The chart shows this relationship between social benefits paid out in total (including social security, Medicaid, Medicare, etc.,) and the burden upon each non-farm employee.   Back in 1966 each employee shoulders $555 dollars of social benefits.  Today, each employee has to support $17,387 of benefits.  The trend is obviously unsustainable unless wages or employment begins to increase dramatically and based on current trends that seems highly unlikely.

The entire social support framework faces an inevitable conclusion and no amount of wishful thinking will change that.  The question is whether our elected leaders will start making the changes necessary sooner, while they can be done by choice, or later when they are forced upon us.

Wall Street Tracks ‘Wolves’ as May 1 Protests Loom

The world’s biggest banks are working with one another and police to gather intelligence as protesters try to rejuvenate the Occupy Wall Street movement with May demonstrations, industry security consultants said.

Among 99 protest targets in midtown Manhattan on May 1 are JPMorgan Chase & Co. (JPM)and Bank of America Corp. (BAC) offices, said Marisa Holmes, a member of Occupy’s May Day planning committee. Events are scheduled for more than 115 cities, including an effort toshut down the Golden Gate Bridge in San Francisco, where Wells Fargo & Co. (WFC)investors relied on police to get past protests at their annual meeting this week.

“Our goal is to kick off the spring offensive and go directly to where the financial elite play and plan,” she said.

Keep reading: Wall Street Tracks ‘Wolves’ as May 1 Protests Loom – Bloomberg.

Mirabile Dictu! Goldman CEO Lloyd Blankfein Makes Case for Breaking Up Big Banks

Courtesy of Yves Smith at Naked Capitalism 

Goldman seems to be making a renewed effort at PR in the wake of the letter by derivatives staffer Greg Smith accusing the firm of caring only about profits and treating customers as stuffees (“muppets” was revealed to be the new term of art). That observation probably came as no surprise to anyone save Goldman staffers, most of whom probably thought they had conned their clients into believing otherwise, and a few like Smith who believed the party line.

The Goldman CEO, Lloyd Blankfein, had an interview today with a very friendly outlet, Bloomberg News. The chat served to remind viewers of how inward looking and self referential the financial services industry has become.

Video here >

We need to deal with the obvious misrepresentations before getting to the unintended revelations:

…..we’ll have to do a better job, getting out there and telling people how important this industry is, what it does when we advise companies on their growth plans and finance their growth plans and manage their assets for them and how important this is for the economy, the markets and obviously society at large.

Yves here. First, since your industry succeeded in holding up governments around the world and continues to do so (witness the backdoor bailout of German and French banks at the expense of ordinary citizens in the rolling Eurocrisis), you can spare us the false modesty. Second, you don’t advise companies on “growth plans”, you advise them on transactions. Third, you and your cohorts have done a crappy job at anything other than looting. Andrew Haldane of the Bank of England did a quick and dirty estimate of the cost of the last crisis, and his low figure was one times global GDP. If you try to make the big banks like Goldman repay the costs of the damage they didn’t, they can’t even begin to. If you try amortizing that low estimate of the losses over 20 years, the big banks can’t even afford the first year levy. It exceeds their market capitalization. So firms like Goldman don’t create value, they destroy it in a massive, profligate manner.

But Blankfein tries to pass off the idea that Goldman is misunderstood, as opposed to all together too well understood:

I think the average American probably had no contact and had never heard of Goldman Sachs before three years ago. Shame on us in a way for not anticipating how important that would be. We’re an institutional business with no consumers. It turns out, another name for consumers are citizens and taxpayers. They became important for reasons that are obvious. They always should have been important, but it wasn’t part of our audience as we thought about it. Now we will have to develop those muscles a little better than we have. Shame on us.

Translation: We should have been buying more retail advertising, like JP Morgan does, so all those financial section editors would have to think twice before dumping on us.

Later in the interview. in response to whether Goldman would have survived if it didn’t have access to the Fed’s discount window:

We did not have access to the Fed window as the bank leading up to the crisis because frankly we run ourselves very conservatively. One of the reasons why we came out of that crisis, that moment so well is because we went into so strong. Today, we carry over $170 billion of liquidity. We are very highly capitalized among the highest tier in our industry. We don’t borrow from the discount window.

This is such tripe. Goldman became a bank holding company in the crisis, remember? That was so the Fed could intervene if needed. Having access to the discount window plus all sorts of backdoor and direct bailouts, like the TARP, the Primary Dealer Credit Facility, guaranteeing money market funds, rescuing AIG, kept Goldman afloat. As derivatives trader and now venture capitalist Roger Ehrenberg wrote in 2009:

Goldman is a great firm with a stellar culture, and in most circumstances it’s risk management and funding practices have been second to none. Except when the crisis hit. It stood with the rest of Wall Street as a firm with longer-dated, less liquid assets funded with extremely short-dated liabilities….In exchange for giving the firm life (TARP, FDIC guarantees, synthetic bail-out via AIG, etc.), the US Treasury (and the US taxpayer by extension) got some warrants on $10 billion of TARP capital injected into the firm…

There is not a Wall Street derivatives trader on the planet that would have done the US Government deal on an arms-length basis. Nothing remotely close. Goldman’s equity could have done a digital, dis-continuous move towards zero if it couldn’t finance its balance sheet overnight. Remember Bear Stearns? Lehman Brothers? These things happened. Goldman, though clearly a stronger institution, was facing a crisis of confidence that pervaded the market. Lenders weren’t discriminating back in November 2008. If you didn’t have term credit, you certainly weren’t getting any new lines or getting any rolls, either. So what is the cost of an option to insure a $1 trillion balance sheet and hundreds of billions in off-balance sheet liabilities teetering on the brink? Let’s just say that it is a tad north of $1.1 billion in [option] premium. And the $10 billion TARP figure? It’s a joke. Take into account the AIG payments, the FDIC guarantees and the value of the markets knowing that the US Government won’t let you go down under any circumstances. $1.1 billion in option premium? How about 20x that, perhaps more. But no, this is not the way it went down….

Where we are left today, dear taxpayer, is a lot poorer. Unless you are a major shareholder and/or bonusable employee of Goldman Sachs. Brains, ingenuity and value creation should be rewarded in all fields, Wall Street included. But when value created is the direct result of the risks borne by others for your benefit, the sharing of benefits needs to be re-allocated. This has not and apparently will not be done, and we, dear taxpayer, are the worse for it.

Now let’s get to the juicy bit. While Blankfein tries to maintain that Goldman can manage its conflicts of interests, he paints the firm as so inherent conflict-ridden as to make the case that clients can’t be well served dealing with a firm that can’t have an undivided loyalty to you. That is tantamount to an admission that big corporate and institutional clients would be better served if there were more players, better yet, firms that were more specialized.

Let’s start with his basic premise:

I think no one who is going to be effective in this business can avoid conflicts of interest coming up. You can do that if you only represent one client in every industry, in which case you won’t really be able to be that effective, knowledgeable, or influential. You won’t be able to get anything done.

Ahem, that’s an investment banking side argument, and it isn’t remotely true. As debunked above, investment banks are not strategic advisors. And even then, he’s also wrong on his premise that “you wouldn’t be effective or knowledgeable” if you represent only one client in an industry. That has long been Bain’s business model, and Bain has long been one of the top three consulting firms.

The reason that banks have industry specialization on the banking side is a bad reason: CEO and CFOs feel more comfortable with a banker who knows the gossip and the deals in their industry. But guess what? That patter is irrelevant to getting deals done. A generalist banker (say at a boutique like Rothschild) can work up the industry comparisons in very short order. And the knowledge of how to price securities offering is held on the sales and trading side of the firm, not among the glad-handed investment bankers.

We have this bit:

If you advise a client today, you have to lend to that client. If you lend to that client, they have to pay back. Now you have a stake in the outcome of their business decisions. You give them advice, but since you are a lender to them, like every bank has to be today, you have conflicts of interest. They always have to be managed.

Again, for a Goldman, that takes place in the context of M&A, and the lending role is exaggerated. Takeover loans are put into collateralized loan obligations and are sold to investors. The lead banks retain a small slice (for credibility reasons, unlike mortgage backed securities, investors like to see the lead banks have some skin in the game) but most is sold off. And a bank like Goldman would likely hedge at least some of the credit risk with credit default swaps.

With prime brokerage clients, the conflicts are even more rife. Goldman lends to many of its hedge fund clients (that’s where the real juice is), yet hedgies are acutely aware that their broker can and will trade against them, and so go to great lengths to disguise their positions and intentions by trading through multiple firms. Consider how this conflict worked against dealers in the case of Long Term Capital Management: the firm was massively leveraged, and when traders realized it was hugely on the wrong side of certain trades, they began exploiting its distress, which only made matters worse for the firm and ultimately for the dealers, who had to bail out LTCM so it could be wound down in an orderly manner. But preying on smaller hedge funds that got it wrong has never bothered the big banks, and many feel they were treated badly in the crisis when their prime brokers squeezed them by raising haircuts far beyond what seemed to be warranted even given the terrible market conditions.

The problem, of course, is that clients see the roles differently that Goldman does. This is Blankfein’s account:

For example, in the market making business, we give prices to our client and a client decides whether to trade or not. We hope as a result of that exchange, we will make money and not lose money. If over time we lose money, we will be out of business. We have other businesses or we are an adviser and other businesses where we are a pure fiduciary. One of the things we set up to do when we wrote our business standards report is go out and carefully delineate for our audience what our roles and responsibilities are in each segment of our business. As an adviser, we work for the best interests of our clients. As a fiduciary, our clients to come first. As a market maker, we have to protect Goldman Sachs.

But remember the Greg Smith letter. As a salesman, he saw his role as advisory (and there is a tension in being a salesman of any sort for a bigger firm: the salesman is often more protective of his clients than the house is, since loyal clients might very well follow him if he leaves the firm). Yet it was very clear from Blankfein’s testimony before Congress in 2010 that he saw Goldman’s role in CDOs like Timberwolf as that of a market-maker (caveat emptor!) when some clients thought Goldman was acting in at least an advisory capacity. To pretend that firms like Goldman don’t prey on that gullibility is naive.

So the newer, friendlier Lloyd Blankfein isn’t that much more persuasive than the old version, save maybe to those who hold similar views. But until Blankfein and his ilk are subject to meaningful pressure, all he need to do is make occasional contrite gestures, like this Bloomberg chat, as he carries on as before.

U.S. Financial System: Is It Finally Stable?

U.S. Financial System: Is It Finally Stable? 

Bernanke comments raise questions about banks 

By Elliott Wave International

Four years after we brushed up against "financial Armageddon," did you think you'd be reading this?

Federal Reserve Chairman Ben Bernanke said…banks need to have more capital at hand in order to ensure the financial system is stable. Bernanke said regulators were taking steps to force financial institutions to hold higher capital buffers…

– Reuters, April 9

It appears our financial system is still not as stable as it needs to be. But guess who relaxed the banking system's "capital buffers" in the first place?

The Fed increased the credit in the system in the 1990s by the de facto removal of reserve requirements for banks.

– Robert Prechter, Elliott Wave Theorist, November 2011

Prechter's September 2011 Theorist provides this additional insight:

In the late 1990s and mid 2000s, the loan-to-deposit ratio for U.S. banks was nearly 1.00, meaning that almost all deposits were lent out. That shortfall alone was a serious problem, because if even 5% of depositors had decided to withdraw their money, banks would have been unable to pay. Some of the banks' loans were quickly callable, but by 2006, the credit-fueled real estate boom had claimed a large percentage of outstanding loans, both inside and outside the banking system. These loans are not quickly callable. The problem was serious in 2002 and enormous in 2006. Now it has become acute, because many loans are becoming fossilized, as the market for mortgage investing has dried up while foreclosures on the "collateral" have been slowed by court actions and politics.

The specter of a banking panic has become far darker since the collateral for bank deposits — land and buildings — has fallen globally in value at the steepest rate since the Great Depression. One day this shortfall in collateral value will impress itself on people's minds, and there will be an unprecedented run on banks around the globe as panicked depositors try to become the first ones out the door. Banks are designed so that the first depositors to withdraw get 100%; the losers wait in a long, slow line to split the proceeds that come from selling the deeds. Yes, I know about the FDIC, but I don't believe it will be able to fulfill its promises when most banks go bust.

We believe that you should plan ahead for a run on bank deposits. Let me share with you another excerpt from that Reuters article. These are direct quotes from Bernanke (emphasis added):

Additional steps to increase the resiliency of money market funds are important for the overall stability of our financial system and warrant serious consideration…

The risk of runs … remains a concern, particularly since some of the tools that policymakers employed to stem the runs during the crisis are no longer available…

Now is the time for you to get the names of the 100 "strongest banks" in the United States. This free list gives you the 2 "strongest banks" in each of the 50 states, based on data effective January 31, 2012.

Read our free 10-page report, Discover the Top 100 Safest U.S. Banks, to learn:

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This article was syndicated by Elliott Wave International and was originally published under the headline U.S. Financial System: Is It Finally Stable?. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Bernanke Calls Krugman "Reckless"; Krugman and Bernanke Both in Academic Wonderland Somewhere Deep in Outer Space

Courtesy of Mish 

Paul Krugman is now so far into outer space with ridiculous economic proposals that even Helicopter Ben Bernanke recognizes Krugman's proposals as "reckless".

Bloomberg reports Bernanke Takes On Krugman’s Criticism Ignoring Own Advice

 Federal Reserve Chairman Ben S. Bernanke took on Nobel prize-winning economist Paul Krugman yesterday and called his advice to reduce unemployment by boosting inflation “reckless.”

“The question is, does it make sense to actively seek a higher inflation rate in order to achieve” a slightly faster reduction in the unemployment rate, Bernanke said yesterday to reporters after a Federal Open Market Committee meeting. “The view of the committee is that that would be very reckless.” 

Krugman, whom Bernanke hired at Princeton University in 2000 when he was chairman of the economics department, said in a New York Times Magazine article that the Fed should raise its 2 percent inflation target to cut unemployment. Such a policy shift would align with Bernanke’s comment in 2000 that the Bank of Japan (8301) should pursue faster inflation to escape deflation, he said. Japan’s consumer prices fell 0.2 percent that year.

“While the Fed went to great lengths to rescue the financial system, it has done far less to rescue workers,” Krugman wrote. “Higher expected inflation would aid an economy” because it would persuade investors and businesses “that sitting on cash is a bad idea,” Krugman said. 

The chairman spoke in response to a reporter’s question referring to Krugman’s story, titled “Earth to Ben Bernanke,” published April 24. The article cited “the divergence between what Professor Bernanke advocated and what Chairman Bernanke has actually done.”

Bernanke said pushing the increase in prices above the Fed’s 2 percent goal would risk undermining inflation expectations and erode the central bank’s credibility as a force for stable prices.”

“We, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable in that we’ve been able to take strong accommodative actions in the last four, five years,” Bernanke told reporters. “To risk that asset for what I think would be quite tentative and perhaps doubtful gains on the real side would be, I think, an unwise thing to do.”

Krugman and Bernanke Both in Outer Space

The irony in this bickering is that both Krugman and Bernanke are economic failures. The idea that more inflation will help those mired in debt is preposterous. Japan attempted to halt deflation for 20 years and has nothing to show for it but a mountain of debt.

On the other hand, Bernanke brags about "30 years building up credibility" that the Fed simply does not have. The US has seen bubble after bubble, each with increasing amplitude and troughs, so Bernanke has to be on some sort of mind-altering drugs to talk of either credibility or price stability.

Perhaps his mind was altered by gamma rays from being in "deep academic space" for so long.

Price-wise, Bernanke is correct the US is in a state of inflation, and Japan not. I expect Krugman to counter with housing. 

If one takes housing into consideration, inflation is well under the Fed's target as I pointed out in How Far Have Home Prices "Really" Fallen? HPI Upcoming Changes; HPI and the CPI

 CPI Adjusted for Home Price Index (HPI)

The Fed kept interest rates at historic lows between 2002 and mid-2004. The last two rate cuts by Alan Greenspan were not justified at all, by any measure, and downright absurd considering the bubble brewing in housing prices vs. rent.

Allegedly the Fed held interest rates low to prevent "deflation". Instead it exacerbated "price deflation".

Clearly the Fed had no idea what it was doing, and still doesn't, (unless of course you believe this is a Fed conspiracy to deliberately screw the middle class). The result is bubbles and crashes of ever-increasing amplitude as the Fed chases its own tail. New bubbles have formed in the stock market and commodities right now.

Outer Space Policies

Bernanke is trying like a madman to get banks to increase lending but Bernanke and Krugman both do not understand economic reality.

  1. Banks cannot lend because they are still capital impaired, hiding losses yet to come, and holding assets that are marked-to-fantasy instead of marked-to-market
  2. Consumers are busted and holding interest rates at 0% when prices of food and gasoline are soaring exacerbates the problem
  3. There are few credit-worthy businesses that want to borrow in this environment 
  4. The businesses that do want to borrow are not credit-worthy and banks would be foolish to lend to them
  5. Boomers are headed into retirement with too much debt, too little income, too few assets and they need to save not spend. 
  6. Real wages (discounting the decline in housing), are hugely negative, and forcing more inflation would be downright idiotic
  7. The Fed can inject liquidity but it cannot determine where it goes. 
  8. The Fed desperately wants home prices to rise and businesses to borrow, but instead food and energy prices have risen, and there is little hiring. Krugman wants Bernanke to do more of the same even though the same has already proven to be the problem.

Academic Wonderland, Somewhere Beyond Pluto

Quite frankly all eight points above are common sense ideas. However, neither Bernanke nor Krugman have real world experience. Both come from academic wonderland, well beyond the orbit of Pluto.

Clearly neither Krugman nor Bernanke have any solid grasp of the concept of debt-deflation. Neither understands boomer demographics. Neither understands why businesses are not hiring. Neither understands that debt eventually has to be dealt with, and it is the debt itself is the problem. Neither understands that inflation will destroy those without a job. Neither understands (but especially Krugman) that increased inflation will not guarantee more jobs.

That my friends is the sad state of affairs.

Mike "Mish" Shedlock

Ultimate Irony- Major Life Insurance Firms Settle with State AG’s

Ultimate Irony- Major Life Insurance Firms Settle with State AG’s 

Courtesy of Dr. Paul Price (at Real Money)

MetLife, Prudential and John Hancock agreed to pay $40 MM, $17 MM and $12 MM respectively to make a multi-state probe go away. These companies were routinely cross-checking Social Security death records to prevent recurring annuity benefit payments going out to deceased policy holders. That seems fair and logical. In fact, SS itself has been criticized for wasting huge sums sending out checks to dead people.

What was the focus of the probe then? These companies did not voluntarily use this same data to offer death benefits to heirs of life insurance policies. Benefits were paid only if a claim was filed. That was standard operating procedure and perfectly legal, if not a really savory business practice. Do you pay your personal bills if they are never presented to you? 

Florida’s insurance commissioner said it was a landmark settlement in terms of the amount of money ($400 MM) being paid out to consumers. Now that the largest firms have settled, many smaller companies are being targeted for the same practice. 

Here’s where the irony comes in. 

The Wall Street Journal said the probes started when an ambitious, minor league auditing firm approached several cash-strapped states with the idea that they could seize these unclaimed life policies as ‘abandoned property’. 35 states signed up for this cash grab, contracting with Verus Financial LLC and promising them a cut of their eventual take. 

The states, now calling out the insurance companies for failing to seek out rightful beneficiaries, were looking to take these unpaid death benefits for themselves- not consumers. 

It is unclear when the decision to switch up to the more altruistic purpose was made. Perhaps someone involved finally grew a conscience. 


Government agencies looking to confiscate other people’s money apparently are not at all unusual in today’s world. I was surprised to find clauses in the fine print of every on-line bank account telling depositors that if they didn’t access their accounts for just 12 consecutive months that the entire balance would be turned over to their home state under that same abandoned property clause. It’s easy to think that savers, especially those with multi-year CDs would have no reason to keep checking on their accounts. Heirs of account holders that died might not even know these accounts existed.

Poof, all your money could be taken away without notice by either your bank or your home state. 

Similarly, many states are now confiscating unused gift or prepaid card balances as soon as two years after purchase. AMEX and some other firms are rebelling against New Jersey’s requirement to have buyers of their prepaid cards give zip codes- allowing NJ to lay claim to any dollar amounts not used promptly.

It appears that governments can take consumer value without hesitation even as they accuse private industry, and extort fines from them, for doing exactly the same thing.


For a while, Netflix seemed like the smartest tech company around. Searching for movies online was easy; mailing them back off-line was cathartic. The company constantly tweaked its red envelopes, trying to create one that you could open while tipsy and seal one-handed while late for work. Customers were treated with respect. If you sent two discs back in the same envelope, Netflix didn’t care. Employees were treated like adults. Anyone could take vacation whenever he or she wanted. The company’s attention to detail was brilliant: the company charged everyone the same monthly fee, but subscribers who watched movies obsessively had new films sent a little more slowly.

Netflix also created a pretty darn good algorithm for figuring out what movies we’d like: what titles would make us happier and less likely to switch to a competitor. When innovation on the algorithm stalled, the company created the Netflix Prize and offered a million dollars to the first team of mathematicians who could improve the recommendation engine by ten per cent. Three years later, they had a winner. Netflix was the master of all the buzzwords of the old world (customer service; supply-chain management) and all the buzzwords of the new world (crowdsourcing, the long tail), too.

Keep reading: Netflix Earnings Report: Bad News : The New Yorker.

UK Back in Recession, Did it Really Ever Leave? Disappointing Details; Five Reasons the UK Recession Will Get Much Worse

Courtesy of Mish

It is amusing to watch economists toss around ridiculous terms like "technical recession" to justify their poor forecasts. The entire eurozone is now in recession and the UK was sure to follow because so much of its trade is with the eurozone. This was easy to predict, yet few did.

The Mail Online reports We ARE back in recession: Economy suffers double dip as GDP figures fall for second quarter in a row

  • Official figures today showed the economy shrank by 0.2 per cent in the first quarter of 2012
  • It follows a fall of 0.3 per cent in the final quarter of 2011
  • Cameron: 'I do not seek to explain away the figures'

Britain has suffered its first double-dip recession since the 1970s after a surprise contraction in the first three months of the year.

Official figures today showed the economy shrank by 0.2 per cent in the first quarter of 2012 having declined by 0.3 per cent in the final quarter of 2011.

It marked the first double-dip since 1975 and was a bitter blow to Chancellor George Osborne in the wake of last month’s 'omnishambles' Budget.

The decline in gross domestic product (GDP) was driven by the biggest fall in construction output for three years, while the manufacturing sector failed to return to growth, the Office for National Statistics (ONS) said.

Andrew Smith, chief economist at KPMG, said: 'It's official, we're in a double-dip.

'But worse, output remains broadly unchanged from its level in the third quarter of 2010 and, four years on from its pre-recession peak is still some 4 per cent down – making this slump longer than the 1930s Depression.

UK GDP In Perspective

The UK had five consecutive quarters of growth so I suppose one can make a claim the recession ended. However, look at how feeble that growth has been. Only one quarter exceeded 1% and then just barely.

Moreover, for the last six consecutive quarters, there has not been two consecutive quarters of growth.

I suggest the UK slid back into recession during the 4th quarter of 2010.

Disappointing Details

It's not just the headline numbers that are anemic, the details are also very poor. Via Email from Barclays …

 As expected, construction output declined over the quarter. However, the ONS has made some revisions to the weak January and February data, and assumed some further revisions and a strong March outturn in arriving at the Q1 estimate, so that the estimated 3.0% q/q decline in construction output was less than half the fall we had expected. As a result, construction's -0.2pp contribution to GDP growth was a lot less significant than we had anticipated. 

Rather, much of the downside news came on the services side, where February's Index of Services, published alongside the GDP data, disappointed to the downside, and January's estimate was also revised down. Much of the weakness was concentrated in business services and finance, which accounts for almost 40% of total services output, and where activity declined by 0.1% q/q. As a result, overall services output grew by just 0.1% q/q in Q1, and the downside news on services more than offset the upside surprise on construction. 

Like the MPC, we had thought that the weakness in the official construction data looked somewhat overdone, and had been prepared to look through downside news from this source. However, the disappointing outturn in services suggests that the economy's underlying growth momentum may be somewhat weaker than previously thought.

The weak GDP outturn, combined with more persistent than expected inflation, highlights the MPC's ongoing policy headache. April's minutes showed the committee increasingly focused on inflation and minded to look through weak official activity data, which it expected to be driven mainly by somewhat dubious construction data. Further QE in May seemed unlikely. The configuration of today's outturn, more than the headline number, may give the committee reason to reassess. We still expect no further QE in May, but this is now a less certain call; and even if QE is not extended then a continued stagnation in demand could yet lead the MPC to act later in the year.

Wishful Thinking

Barclays thinks the UK will "narrowly avoid  further GDP contraction in Q2".

I don't. Why should it?

Five Reasons the UK Recession Will Get Much Worse

  1. The eurozone is now an economic disaster, credit stress has returned to Spain and Italy
  2. The ECB abandoned the LTRO and is in the midst of huge infighting
  3. UK services took a huge hit and that trend will strengthen
  4. The Eurozone is the UK's largest trading partner and there is no reason for UK exports to the eurozone to rise. In fact, UK exports to the Eurozone, just may collapse.
  5. The better than expected (but still feeble construction numbers) will likely disappoint to the downside soon enough, if not immediately.

If you thought the euro would help Europe, you thought wrong. The Euro made a disaster in Spain, Portugal, Ireland, Greece, and Italy. It's time to abandon that failed idea.

Mike "Mish" Shedlock

84% of All Stock Trades Are By High-Frequency Computers…Only 16% Are By Human Traders

Courtesy of ZeroHedge. View original post here.

Submitted by George Washington.

As of 2010, 50-70% of all stock trades were done by high frequency trading computer algorithms.

And many other asset classes are dominated by high frequency trading as well.

High-frequency trading distorts the markets.  And see this and this. And it lets the big banks peak at what the real traders are buying and selling, and then trade on the insider information. See this, this, this, and this.

Morgan Stanley has just shown (via the Financial Times) that the percentage of high frequency trading in the stock market has skyrocketed to 84%:

Trading by “real” investors is taking up the smallest share of US stock market volumes [since Morgan Stanley  started keeping track 10 years ago.]

The findings highlight how US trading activity is increasingly being fuelled by fast turnover of shares by independent firms and the market-making desks of brokerages, many using high-frequency trading engines. [actually all of the market-making desks are using it.]


The proportion of US trading activity represented by buy and sell orders from mutual funds, hedge funds, pensions and brokerages, referred to as “real money” or institutional investors, accounted for just 16 per cent of total market volume in the form of buying, and 13 per cent via selling in the final quarter of last year, according to analysis by Morgan Stanley’s Quantitative and Derivative Strategies group.

It’s not just the U.S. High frequency trading dominates in the U.K. as well.

Given the dominance of the machines, do flesh-and-blood traders have a chance?

H.L. Mencken Was Right

Courtesy of Jim Quinn from The Burning Platform

H.L. Mencken Was Right

“I believe that it is better to tell the truth than a lie. I believe it is better to be free than to be a slave. And I believe it is better to know than to be ignorant.” – H.L. Mencken


H.L. Mencken was a renowned newspaper columnist for the Baltimore Sun from 1906 until 1948. His biting sarcasm seems to fit perfectly in today’s world. His acerbic satirical writings on government, democracy, politicians and the ignorant masses are as true today as they were then. I believe the reason his words hit home is because he was writing during the last Unraveling and Crisis periods in America. The similarities cannot be denied. There are no journalists of his stature working in the mainstream media today. His acerbic wit is nowhere to be found among the lightweight shills that parrot their corporate masters’ propaganda on a daily basis and unquestioningly report the fabrications spewed by our government. Mencken’s skepticism of all institutions is an unknown quality in the vapid world of present day journalism.

The Roaring Twenties of decadence, financial crisis caused by loose Fed monetary policies, stock market crash, Depression, colossal government redistribution of wealth, and ultimately a World War, all occurred during his prime writing years. I know people want to believe that the world only progresses, but they are wrong. The cycles of history reveal that people do not change, just the circumstances change. How Americans react to the undulations of history depends upon their age and generational position. We are currently in a Crisis period when practical, truth telling realists like Mencken are most useful and necessary.

Mencken captured the essence of American politics and a disconnected populace 80 years ago. Even though many people today feel the average American is less intelligent, more materialistic, and less informed than ever before, it was just as true in 1930 based on Mencken’s assessment:

“The Presidency tends, year by year, to go to such men. As democracy is perfected, the office represents, more and more closely, the inner soul of the people. We move toward a lofty ideal. On some great and glorious day the plain folks of the land will reach their heart’s desire at last, and the White House will be adorned by a downright moron.”

You can make your own judgment on the accuracy of his statement considering the last two gentlemen to occupy the White House. His appraisal of U.S. Senators and citizens in our so-called Democracy captures the spirit of the travesty that passes for leadership and civic responsibility in this country today.

“Democracy gives the beatification of mediocrity a certain appearance of objective and demonstrable truth. The mob man, functioning as citizen, gets a feeling that he is really important to the world—that he is genuinely running things. Out of his maudlin herding after rogues and mountebacks there comes to him a sense of vast and mysterious power—which is what makes archbishops, police sergeants, the grand goblins of the Ku Klux and other such magnificoes happy. And out of it there comes, too, a conviction that he is somehow wise, that his views are taken seriously by his betters — which is what makes United States Senators, fortune tellers and Young Intellectuals happy. Finally, there comes out of it a glowing consciousness of a high duty triumphantly done which is what makes hangmen and husbands happy.”

People still read newspapers in the 1930s to acquire credible information about the economy, politics and economy. Today’s corporate owned rags aren’t fit to line a bird cage. The mainstream media is a platform for the lies of their corporate sponsors. Each TV network or newspaper spouts propaganda that supports the financial interests and ideology they are beholden to. Does anyone think they are obtaining the truth from Paul Krugman, Chris Matthews, Sean Hannity or Rush Limbaugh? Evidently the answer is yes. The upcoming presidential campaign will be a nightmare of endless negative advertisements created by Madison Avenue maggots and paid for by rich powerful men attempting to herd the mindless sheeple towards their ultimate slaughter. Whichever corporate controlled party can more successfully scare the masses into pulling their lever in the voting booth on November 6th will get the opportunity push the country closer to its ultimate collapse. This collapse was destined from the time of Mencken when the Federal Reserve was created by a small group of powerful bankers and their cronies in Congress. Fear has worked for 100 years in controlling the masses, as Mencken noted during his time:

“The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.”

In the 1930s you needed to count on newspapers for the truth. The purpose of those who wield power is to keep the masses dumbed down and paranoid regarding terrorist threats and artificial enemies. By convincing the dense public that acquiring material goods on credit was a smart thing to do, they have trapped them in a web of debt. By making life an inexhaustible bureaucratic nightmare or rules, regulations, forms, ID cards, registrations, and red tape, those in power maintain control and accumulate power. H.L. Mencken would be proud:

“Democracy is a pathetic belief in the collective wisdom of individual ignorance. No one in this world has ever lost money by underestimating the intelligence of the great masses of the plain people. Nor has anyone ever lost public office thereby.”

Let’s See How Far We’ve Come

“The worst government is often the most moral. One composed of cynics is often very tolerant and humane. But when fanatics are on top there is no limit to oppression.” – H.L. Mencken


The corporate / government / banking oligarchy started the fire. The world is burning to the ground and politicians have thrown gasoline onto the fire with passage of debt financed stimulus programs, Obamacare, bank bailouts, the Patriot Act, NDAA, and a myriad of other government “solutions”. To anyone willing to think for just a few minutes, the picture is unambiguous. This requires the ability to think critically – a missing gene among the majority of Americans.

Critical thinking is the careful, deliberate determination of whether one should accept, reject, or suspend judgment about a claim and the degree of confidence with which one accepts or rejects it. Critical thinking employs not only logic but broad intellectual criteria such as clarity, credibility, accuracy, precision, relevance, depth, breadth, significance and fairness. Critical thinking requires extensive experience in identifying the extent of one’s own ignorance in a wide variety of subjects (“I thought I knew, but I merely believed.”)

One becomes less biased and more broad-minded when one becomes more intellectually empathetic and intellectually humble. I have observed little or no critical thinking skills in the pompous asses that write daily columns in today’s newspapers and zero critical thinking skills among the vacuous pundits and big breasted brainless fashion models that yap all day long on CNBC, MSNBC, CNN, Fox and the Big 3 dying networks.

Any thinking would be a shocking change of pace from the corrupt corporate owned politicians in Washington DC. Other than Ron Paul and a few other truth tellers, critical thinking from a politician or a government bureaucrat is about as likely as Obama not using a teleprompter. Everything being spewed at the public from the MSM, Wall Street, and Washington DC is intellectually dishonest, manipulated and packaged by pollsters and PR firms. I’ve come to the conclusion that those in power desire that public school systems of the United States churn out ignorant, non-questioning morons. A populace that is incapable or uninterested in critically thinking about the important issues of the day is a politician’s best friend. Half the population doesn’t vote and the other half unquestioningly obeys what they are told by their parties.

Ignorance is the state of being uninformed about issues and unaware about the implications of those issues. It is not about intelligence. A huge swath of America is ignorant due to lack of education and a low class upbringing. But, I know many college educated people who haven’t read a book in 20 years or could care less about economic issues. They made a choice to be ignorant. They prefer being distracted by their latest technological toy to dealing with reality.

Most Americans are incapable of looking beyond a 2 to 3 year time horizon. That is why the median 401k balance in the US is $13,000. That is why the average credit card debt per household is $16,000. That is why 25% of all homeowners are underwater on their mortgage. Politicians, banks, and marketers take advantage of this witlessness to enslave the average American. We’ve come to love our slavery. Appearing successful because you drive the right car, wear the right clothes or live in the right house is more important than actually doing the hard work to actually become successful, like spending less than you make and saving the difference.

An informed, interested, questioning public would be a danger to the government as described by H.L. Mencken:

“The most dangerous man to any government is the man who is able to think things out … without regard to the prevailing superstitions and taboos. Almost inevitably he comes to the conclusion that the government he lives under is dishonest, insane, intolerable.”

There were already two fiscal hurricanes of unfunded liabilities and current deficits churning towards our shores before Obama and his non-critical thinking Democratic minions launched a third storm called Obamacare. No matter how many intellectually deceitful mouthpieces like Paul Krugman and Rush Limbaugh misrepresent the facts, the fiscal foundation of the country is crumbling under the weight of unfunded entitlement promises, out of control government spending and far flung military misadventures. Only someone who is intellectually bankrupt, like Krugman, would declare the National Debt at $8 trillion as a looming disaster when George Bush was President, but declare that a $15.6 trillion National Debt headed towards $20 trillion by 2015 isn’t a danger now that Barack Obama is President. The intellectual and moral credentials required to write for a major newspaper have fallen markedly since the days of Mencken.

The combination of educationally uninformed, ignorant by choice, and intellectually dishonest will be fatal for the country. Total US credit market debt as a percentage of GDP is just below an all-time high, exceeding 350% of GDP. It is 25% higher than it was at the depths of the Great Depression. Consumer debt fell in 2010 – 2011 because banks wrote off about a trillion dollars of bad debt, while government debt has skyrocketed to unprecedented levels. Now consumers are back racking up more debt, with government encouragement and subsidies responsible for the surge in student loan and auto debt. With GDP stalling out, government debt accumulating at $1.4 trillion per year and consumers back to their delusional selves again, this ratio will pass 400% by 2014.

The financial crisis was caused by excessive utilization of debt. In order to correct these imbalances, the country needed to undergo a deleveraging and reversion back to a country of savers. Savings equals investment. Instead, our “leaders” have reduced interest rates to 0% and have gone on an unprecedented government borrowing and spending spree. Savers and senior citizens are punished, while gamblers and speculators are rewarded. Anyone who thinks about this strategy for a few minutes will realize it is asinine and hopeless. It enriches the few and impoverishes the many.

Based upon a realistic assessment of our current spending trajectory, The National Debt of the U.S. will exceed $25 trillion by 2019. That is more than double the figure when Bush left office. George Bush almost doubled the National Debt from $5.6 trillion to $11 trillion during his reign of error. It seems one thing Republicans and Democrats can agree on is that spending money they don’t have will have no negative consequences (“deficits don’t matter” – Cheney). When you have a Federal Reserve willing to print to infinity there is no limit to how much you can spend. Only a fool would believe there won’t be consequences. That fool writes and opinion column for the NYT and has a Nobel Prize on his bookshelf.

We add $3.8 billion of debt to this figure each and every day. We add $158 million to this figure each and every hour. The interest on the National Debt reached an all-time high of $454 billion in 2011 with an effective interest rate of about 3%. Much of this interest is paid to foreign governments like China, Japan and OPEC nations. This is $1.2 billion per day of interest paid mostly to foreigners. With just the slightest bit of critical thinking one could easily perceive that with a National Debt of $25 trillion and a likely increase in interest rates to at least 6%, our annual interest costs would increase to $1.5 trillion per year. The United States needed to implement a long-term plan ten years ago to address the impossible to fulfill promises made by its corrupt, mentally bankrupt politicians. Americans’ inability to deal with reality and fondness for not thinking beyond tomorrow has shown them to be an inferior species, as Mencken noted:

“The one permanent emotion of the inferior man is fear – fear of the unknown, the complex, the inexplicable. What he wants above everything else is safety.”

The entire revenue of the US government totaled $2.3 trillion in 2011, with $800 billion of those funds earmarked for Social Security outlays in the future. Does this appear sustainable? President Obama submits budgets of never ending trillion dollar deficits and then gives stump speeches declaring that we must get our deficits under control. He appears on the MSM declaring his dedication to fiscal responsibility and what passes for a journalist these days nods their head like a lapdog and lobs the next softball to the President. You have to be delusional to believe this claptrap. Luckily for the politicians, most Americans are delusional and apathetic. They just got another text message from their BFF. They are consumed by who will get booted this week from American Idol or Dancing With the Stars. The NFL draft is tonight and did your hear that Kim Kardashian is doing Kanye West?

H.L. Mencken understood the false promises of democracy 80 years ago:

“Democracy is also a form of worship. It is the worship of Jackals by Jackasses. It is the theory that the common people know what they want, and deserve to get it good and hard.”

We deserve to get it good and hard, and we will.


Bailout of the US Postal Service Begins: Cost to Taxpayers – $110,000 Per Union Vote "Saved Or Gained"

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

A week ago, when reading between the lines of what had heretofore been considered an inevitable USPS episode of austerity in which hundreds of thousands of labor union workers would lose their jobs but in the process would streamline a thoroughly outdated and inefficient US Postal Office bureaucracy, we asked if a US Postal Service bailout was imminent, focusing on the following: "Enter Ron Bloom, Lazard, and the very same crew that ended up getting a taxpayer funded bailout for GM. From the WSJ: "The Postal Service's proposal to close thousands of post offices and cut back on the number of days that mail is delivered "won't work" and would accelerate the agency's decline, according to the six-page report by Ron Bloom, President Barack Obama's former auto czar, and investment bank Lazard Ltd., LAZ who were hired by the union in October." That's right: after all the huffing and puffing about "sacrifice" and austerity, the labor union took one long look at the only option… and asked what other option is there." The other option, it turns out courtesy of news from AP, is the first of many incremental bail outs of the US Postal Office, better known in pre-election circles as hundreds of thousands of unionized votes up for the taking, and which could be bought for the low low price of $11 billion in taxpayer money, or $110,000 per vote! And so the latest bailout of yet another terminally inefficient and outdated government entity begins.

 From AP:

The Senate offered a lifeline to the nearly bankrupt U.S. Postal Service on Wednesday, voting to give the struggling agency an $11 billion cash infusion while delaying controversial decisions on closing post offices and ending Saturday delivery.

By a 62-37 vote, senators approved a measure which had divided mostly along rural-urban lines. Over the past several weeks, the bill was modified more than a dozen times, adding new restrictions on closings and cuts to service that rural-state senators said would hurt their communities the most.

The issue now goes to the House, which has yet to consider a separate version of the bill.

"The Postal Service is an iconic American institution that still delivers 500 million pieces of mail a day and sustains 8 million jobs," said Sen. Joe Lieberman, I-Conn., a bill co-sponsor. "This legislation will change the USPS so it can stay alive throughout the 21st century."

One would think that the USPS workers would be delighted as a result… One would be wrong. This is merely the beginning:

The mail agency, however, criticized the measure, saying it fell far short in stemming financial losses. Postmaster General Patrick Donahoe said if the bill became law, he would have to return to Congress in a few years to get emergency help.

"It is totally inappropriate in these economic times to keep unneeded facilities open. There is simply not enough mail in our system today," the Postal Service's board of governors said in a statement. "It is also inappropriate to delay the implementation of five-day delivery."

In the meantime, we can now add another zombie to the endless list of insolvent organizations on the government's dole, whose only saving grace is it has nearly half a million votes that can be bought by the highest bidder.

The Senate bill would halt the immediate closing of up to 252 mail-processing centers and 3,700 post offices, part of a postal cost-cutting plan to save some $6.5 billion a year. Donahoe previously said he would begin making cuts after May 15 if Congress didn't act, warning that the agency could run out of money this fall.

The measure would save about half the mail processing centers the Postal Service wants to close, from 252 to 125, allowing more areas to maintain overnight first-class mail delivery for at least three more years. It also would bar any shutdowns before the November elections, protect rural post offices for at least a year, give affected communities new avenues to appeal closing decisions and forbid cuts to Saturday delivery for two years.

At the same time, the Postal Service would get an infusion of roughly $11 billion, basically a refund of overpayments made in previous years to a federal retirement fund. That would give it immediate liquidity to pay down debt to forestall bankruptcy and finance buyouts to 100,000 postal employees.

The agency could make smaller annual payments into a future retiree health benefits account, gain flexibility in trimming worker compensation benefits and find additional ways to raise postal revenue under a new chief innovation officer.

And some more details on the bailout:

—Place a one-year moratorium on closing rural post offices and then require the mail agency to take rural issues into special consideration. Post offices generally would be protected from closure if the closest mail facility was more than 10 miles away. The exception would be cases in which there was no significant community opposition.

—Shut five of the seven post offices on the Capitol grounds.

—Take into account the impact on small businesses before closing mail facilities.

—Cap postal executive pay through 2015 at $199,000, the same level as a Cabinet secretary, and create a system under which the top people at the Postal Service are paid based on performance.

The Senate bill faces an uncertain future. The House version, approved in committee last year, would create a national commission with the power to scrap no-layoff clauses in employee contracts and make other wide-ranging cuts.

"This of course kicks the can down the road," complained Sen. John McCain, R-Ariz., who unsuccessfully pushed for a commission in the Senate bill. He said the current proposal failed to address longer-term fixes and delayed major decisions. "We'll be on the floor in two years addressing this issue again, because it is not a solution."

Noting that more people every year are switching to the Internet to send letters and pay bills, Donahoe called the Postal Service's business model "broken." The agency has estimated that the Senate bill would only provide it enough liquidity to continue operating for two years or three years.

At stake are more than 100,000 jobs, The agency, $12 billion in debt, says it could run out of money for day-to-day operations as soon as this fall, forcing it to shut down some of its services. The mail agency forecasts a record $14.1 billion loss by the end of this year; without changes, it says annual losses will exceed $21 billion by 2016.

Yeah, yeah. In the meantime all that matters is that about 100,000 votes have been secured for the incumbent candidate. The cost? Only $11 billion, or $110,000 per vote. To all taxpayers.

Mad Cow: the Costs of Trying to Keep Costs Down

Courtesy of ZeroHedge. View original post here.

Submitted by testosteronepit.

Wolf Richter

“The US is one of two major beef-exporting countries with no comprehensive traceability system,” said Erin Borror, an economist at the US Meat Export Federation, which had commissioned a study to assess the implications of traceability for international markets. The other country, by the way, is India. The issue was Bovine Spongiform Encephalopathy, or BSE, more descriptively called Mad Cow Disease. Humans can contract it by eating contaminated beef. And the disease is always fatal.

BSE was the scourge of the 90s, particularly in the UK, but also in France and elsewhere. In 1992, the peak year, 37,311 cases were identified. It triggered drastic changes in the beef industry and ultimately led to comprehensive traceability programs among major exporters: Argentina, Australia, Brazil, Canada, New Zealand, and Uruguay all have them, and use them as a strategic advantage. Top import markets, such as the EU, Japan, and South Korea, also have them. But not the US. Which “places the US at risk if an animal-disease outbreak occurs in this country, or if import customers impose traceability requirements,” Borror said. That was last November.

On April 18, a truckload of cows that had died arrived at a transfer facility in Hanford, CA, on their way to a rendering plant where they would be turned into bath soap or whatever, rather than pink slime and other delectable products for human consumption. Samples were taken from a dairy cow in that batch under the USDA’s BSE surveillance system that tests annually about 40,000 high-risk cows—they have to be over 30 months old and dead.

Amazingly, none of the 30 millions cows slaughtered every year for human consumption are tested for BSE. Not only does the USDA refuse to test them, it also inexplicably prohibits companies from testing them—a handicap for exporters.

The samples were forwarded to the food safety lab at the University of California, Davis. On April 19, after the results indicated that the cow could have BSE, the samples were sent to a USDA lab in Iowa for additional tests. On April 24, the world finally learned that the US had its fourth mad cow.

Federal and state government PR machines went into overdrive. It was "atypical” BSE, result of a natural mutation, rather than the calamitous “classical” BSE associated with infected feed—which would put every cow in that herd at risk. But the USDA wasn’t sure, actually, and would send samples to labs in the UK and Canada for further testing. And of course, it never presented “a risk to the food supply or human health,” the USDA confirmed. And it remained “confident in the health of the national herd and the safety of beef and dairy products.”

Problem solved. No testing of cows destined for human consumption. No comprehensive traceability program. It saves money. But at least, the US bans the primary source of BSE: feed made from ruminants. Um, a cow can be turned into feed for chickens or pigs, and they can end up in feed for cows, which “could allow for the spread of mad cow disease,” the Consumers Union warned.

When the first BSE case in the US was discovered in December 2003, Japan, one of the largest markets for US beef, immediately blocked allimports of US beef. December 2005, under intense pressure, Japan reopened its market, but with a slew of safeguards, including a requirement that cows must be no older than 20 months (the age it considered BSE free). When an exporter violated a rule a month later by shipping a forbidden vertebral column, Japan closed its market to all US beef for seven months. When a US packer couldn’t document that the intestines in a shipment were from cattle no older than 20 months, the packer was banned for over a year. Beef jerky and other processed beef products are still banned. For how public health is intertwined with protectionism in the insular society of Japan, and for the impact that cracking open the Japanese market has had, read…. The Real Reason for Deflation in Japan.

Japan had 29 BSE cows by October 2006. But now all Japanese beef can be traced from the store to the calf, thanks to a comprehensive traceability program. Japan also tests every cow older than 20 months that is slaughtered for human consumption. If a cow is found to be infected, all cows in the herd can be immediately identified, and the meat can be traced to grocery stores around the country.

The laborious negotiations to get Japan to change its 20-month requirement to the internationally accepted 30-month limit—a big issue for US beef exporters—had been near a successful conclusion when the BSE announcement poured cold water on it.

South Korea, the fourth largest market for US beef, also banned beef imports from the US in 2003—along with China and some other countries. When Korea finally lifted the ban in 2008, street protests erupted that went on for months as people feared for their health. And now Home Plus and Lotte Mart, the second and third largest supermarket chains, pulled their US beef off the shelves to calm their worried customers. The Ministry of Food, Agriculture, Forestry and Fisheries said it would take emergency measures, including a possible halt to customs clearance—a euphemism for blocking imports from the US.

And Indonesia just banned imports from the US "until the US can assure us that its beef industry is free of any mad-cow disease,” said Vice Agriculture Minister Rusman Heriawan. “It could be one month or one year; it depends entirely on the US." And so the litany of bad news for US beef exporters has commenced, once again.

In 2011, US beef exports amounted to $5.42 billion. Losing access to some of those markets along with a BSE-inspired drop in domestic demand would be tough for the industry. But that's the cost of trying to cut costs by eschewing comprehensive traceability and large-scale testing. It's astounding that the industry and government can't trace 30 million cows in a high-tech manner though they’re eagerly tracing the minutest aspects of our behavior, movements, actions, and communications. And there are over 300 million of us. Read…. Big Brother Everywhere.

U.S. Home Values Post Largest Monthly Gain Since 2006; Majority of Markets Forecasted To Hit Bottom by Late 2012

U.S. Home Values Post Largest Monthly Gain Since 2006; Majority of Markets Forecasted To Hit Bottom by Late 2012 – Zillow Real Estate Research

By Stan Humphries

Zillow’s first quarter Real Estate Market Reports, released today, show home values decreased 0.5 percent from the fourth quarter of 2011 to the first quarter of 2012 to $146,200 (Figure 1). On an annual basis, home values are down 3.1 percent from March 2011 levels (Figure 2). Despite showing quarterly and annual depreciation, the quarter ended positively with home values rising significantly in March (up 0.5 percent from February). While we are encouraged by strong data in March, it is too early to call rising home values a trend as we still expect some modest declines in national home values this year with a definitive national bottom later this year or early 2013.

Keep reading: U.S. Home Values Post Largest Monthly Gain Since 2006; Majority of Markets Forecasted To Hit Bottom by Late 2012 | Zillow Real Estate Research.

Omaha & Bubbles

Courtesy of Vitaliy Katsenelson

I have to confess, I am tired of writing “structured” articles, the ones where I have to limit my thoughts to 800 words.  So with this email I am taking a break. This is an unstructured stream of thought, in no particular sequence.

China bubble today vs. Japan bubble in 80s

I am back from San Francisco, where I had the great pleasure of attending and speaking at FAME Symposium, diligently put together by students at San Francisco University.  One of the other speakers was a famous international investor, Charles De Vaulx.  During a break Charles and I were discussing the Chinese bubble today vs. the Japanese bubble of the  late ’80s.  This conversation got me thinking.  In Japan the bubble was the most prominent in commercial real estate and to a lesser degree in residential real estate.  The house-price-to-income ratio (just take the average house price and divide by average income) in Tokyo at the height of the bubble was 9, while in China in 2010, in the big cities this number was much greater (Beijing 15, Shanghai 13), and in fact the ratio for the whole of China was over 8.  The commercial real estate bubble might have been greater in Japan; it is hard to tell.  I remember reading that at the peak of the Japanese bubble the Imperial Palace was worth more than a state of California.  But from different reports I’ve seen, China has plenty of empty skyscrapers.

But China also has a couple more bubbles, in industrial overcapacity and overinvestment in infrastructure.  Japan did not have an infrastructure bubble, for several reasons: first, it was a more developed country than China.  Second, the government played a much smaller role in the economy – Japan did not have a command-control economy, and it did not try to build for social/political stability reasons.  Japan had your garden variety real estate bubble: easy credit, inadequate banking laws, etc…

Also, and this point is hard to quantify, but the quality of Japanese construction is better than in China.  There are many reasons for that: less corruption, no five-year plans (i.e., output-per-capita targets), and the Japanese put a higher value on human life.  I remember reading an interview, just a few years ago (before the high-speed-train crash in China) with a Japanese high-speed-train executive.  At the time the Chinese were showcasing their high-speed-train system and rubbing in Japanese faces the fact that their trains traveled at higher speeds.  The Japanese executive said something along these lines: “Our systems are very similar, since the Chinese stole our high-speed railroad designs.  We could run our trains at faster speeds, but we just don’t think it’s safe.”  Japan has a population of 130 million people, which is shrinking.  China has over a billion people and its population is growing.

The quality of Chinese construction is horrible; you read stories of glass and masonry falling off of buildings, and the latest story was of a girl swallowed by capsized pavement.   So they’ll have to do a lot more rebuilding in the future, and thus their return on capital, which was already very low, will actually be even lower.

Japanese economy, despite Government debt to GDP doubling, has been stuck in a rut for over two decades.   Just saying…

Dot-Social and dot-cloud bubbles

At the FAME Symposium I was asked if we are in the midst of another bubble – the social and cloud bubble.  I said that if one really wants to make some money quick he should start a company and call it “SocialCloud”.  I read a lot of articles defending Facebook paying one billion dollars for a company with less than a dozen employees, with an app that has terrific photo filters and 30 million users, but with no revenue and no network.  Once you take a picture, Instagram gives you the ability to post it to a half a dozen places, including Facebook and Twitter.  But Facebook will be paying for this acquisition with funny money – it has a $100 billion market cap on three or four billion of revenues.

The Instagram acquisition by Facebook has likely injected a lot of fertilizer into the angel investing bubble. I am sure there are a lot of startups out there that will be raising money from angel investors dreaming of selling themselves to the Facebooks and Googles of the world for billions of dollars.

I looked at recent IPOs, and their valuations appear bubbly.   Yelp – a terrific company (more on it in a bit) – has a market capitalization of $1.3 billion, and analysts expect its revenues in 2012 to hit $180 million.  Angie’s list – a website I recently used, since we were remodeling the house – has a valuation that is as silly as Yelp’s, except that its website is a slight improvement over Craig’s List.

I know the enormous appeal Facebook has to advertisers. Never before could advertisers target their customers with such precision.  Facebook knows your address, your age, where you went to school, the music you like, whether you are married or recently engaged, where you travel, etc… All this information we volunteer when we fill out our user profile. I get it, it is incredible.  I’ve yet to meet a person who doesn’t think Facebook will do well on its IPO.  But what if Facebook struggles to monetize its enormous user base?  There are only so many ads it can put up on a page before they start impacting the user experience.  The counterargument here is that since these ads are so finely targeted, they are more expensive and thus Facebook will not need as many.

What if people will simply get tired of the social thing?  Social networking may turn out to be a fad, or at least the amount of time we spend it on it may decline a lot.  I know large employers are blocking access to Facebook left and right; it is a huge productivity drain.

Zynga is another stock that looks bubbly (though less bubbly then when I looked at it a few weeks ago, the stock is down 40% or so).  Social games could be another passing fad.  At the conference I described a company that we recently purchased that may benefit tremendously from social games, but for them it is an added bonus (an option), while for Zynga social games are everything.  I don’t know if I am right on these stocks or not – maybe their businesses will go at a much faster rate than I expect.  But I can definitely sense that the second we mention the words social or cloud our objectivity in judging businesses dissipates.  This doesn’t just apply to dot-clouds or dot-socials, it applies to boring, real companies feeling the pressure to be in the space, who are paying insane valuations for dot-social and dot-cloud businesses (Centurylink buying Savvis at 10x EBITDA comes to mind).  Since we own plenty of real companies, my concern is that they’ll overpay for their dot-stuff.


The last time I was in San Francisco, a portable GPS was a very expensive novelty.  That was early 2006.  My best friend and I were on a road trip, driving from Denver to San Francisco and back.  We had a GPS attachment connected through a USB port to a laptop and used Microsoft mapping software.  All phones were dumb (even Blackberry, the smartest phone at the time, was dumber than a brick compared to today’s iPhone).

This time around armed with iPhone, I was surprised how good the Yelp app was.  Though they are trying to expand beyond it, Yelp is a social app where users review and rate restaurants.  It is crowd sourcing at its best.  All I had to do was type “sushi,” select the distance from my current location that I was willing to travel, and Yelp showed me all sushi restaurants around me and their ratings.  In the absence of any other data points, you start heavily relying on Yelp’s ratings, especially since many restaurants have several hundred reviews.  The feature in the app that I found astonishingly innovative was the “monocle.”  You click on the “monocle” button, point your iPhone in any direction, as if you were taking a picture, and it shows you the restaurants and their ratings in that direction.

Apps like Yelp’s will have a significant impact on restaurants.  They facilitate the word-of-mouth restaurant recommendations between friends and extend them to strangers. They’ll also likely expedite the failure rate of restaurants.  Restaurants with high reviews will get more customers, and the ones with poor reviews will die a quicker death. 


Deadline to register for VALUEx Vail is May 1st

I am very excited about one of our “dessert speakers,” Jon Markman, who’ll speak about Jessie Livermore, one of the most successful (until he failed) and interesting traders ever, who lived in the first half of the last century.  No one knows more about Jessie Livermore than Jon, as he annotated one of my favorite books,Reminiscences of a Stock Operator.  Here is what I wrote about it a few years ago: “Jon’s skillful annotation takes you behind the scenes of Livermore story and provides important insights into characters and the backdrop of that very interesting time period.  Jon’s annotations are almost like a book within a book.”


It is Omaha time again!  This year Value Investor Congress, which I’ll be attending, has been moved to Omaha.  Congress is Sunday (May 6th) through Monday.
May 4th – Friday

12:30pm – 3pm – Cheap Talk  – Billy Blue’s Alumni Grill – We’ll have a 4th annual informal gathering where value investors get together and share ideas. Everyone is welcome to come. (Creighton University, Harper Center, 20th and Cass) 3pm – 4:30pm – Value Investing Panel IV – Creighton University (located in the same building with Billy Blue’s, see above) – it is the third time I have a privilege to participate on this panel.  For an hour and a half we answer questions from students.  This year we’ll be joined again by Bruce Greenwald, an insanely smart and articulate professor from Columbia.   This free event is followed by free refreshments – value investor’s paradise.

6pm – 8 pm – Author Reception 2012 – this is a fun gathering.  You get a chance to buy paper books (they still have those), authors sign them and you get a free DQ ice cream.  University of Nebraska at Omaha Mammel Hall Atrium (67th St. and Pine).

8:30 – midnight – my under-taxed friend Whitney Tilson is hosting his annual cocktail party (Omaha is value investor party central!).  They are usually a lot of fun and you get to meet a lot of interesting folks.  We’ll probably go there after dinner.  To RSVP for them, please email Jennifer at and include which event(s) you plan to attend as well as your name, firm (if any) and city you’re from for your nametag.

May 5th – Saturday

Immediately following the annual meeting on Saturday, May 5th, Whitney is also hosting a casual get-together in the Blackstone A Ballroom on the 2ndfloor of the Omaha Hilton, which is adjacent (and connected) to the Qwest Center.4pm – 7:30pm – Young Presidents Organization & World Presidents Organization & Entrepreneur Organization are putting together an investing panel.  I’ll be in terrific company of Tom Gayner – CIO Of Markel Corporation, Tom Russo – famed value investor, and Tim Vick author of How To Pick Stocks Like Warren Buffett.   If you are a member of above organizations you can RSVP by email . (Holland Performing Arts Center, 1200 Douglas Street)

May 6th – Sunday

10am – Markel annual gathering.  Markel is a very well run insurance company.  I’ve been attending its meetings for the last couple of years – they are very educational.  (Hilton Omaha Hotel, 1001 Cass Street).  RSVP:


Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo.  He is the author of The Little Book of Sideways Markets (Wiley, December 2010).  To receive Vitaliy’s future articles by email, click here or read his articles here.

Investment Management Associates Inc. is a value investing firm based in Denver, Colorado.  Its main focus is on growing and preserving wealth for private investors and institutions while adhering to a disciplined value investment process, as detailed in Vitaliy Katsenelson’s Active Value Investing (Wiley, 2007) book.

So Long, US Dollar

Courtesy of Marin Katusa, Casey Research

There's a major shift under way, one the US mainstream media has left largely untouched even though it will send the United States into an economic maelstrom and dramatically reduce the country's importance in the world: the demise of the US dollar as the world's reserve currency.

For decades the US dollar has been absolutely dominant in international trade, especially in the oil markets. This role has created immense demand for US dollars, and that international demand constitutes a huge part of the dollar's valuation. Not only did the global-currency role add massive value to the dollar, it also created an almost endless pool of demand for US Treasuries as countries around the world sought to maintain stores of petrodollars. The availability of all this credit, denominated in a dollar supported by nothing less than the entirety of global trade, enabled the American federal government to borrow without limit and spend with abandon.

The dominance of the dollar gave the United States incredible power and influence around the world… but the times they are a-changing. As the world's emerging economies gain ever more prominence, the US is losing hold of its position as the world's superpower. Many on the long list of nations that dislike America are pondering ways to reduce American influence in their affairs. Ditching the dollar is a very good start.

In fact, they are doing more than pondering. Over the past few years China and other emerging powers such as Russia have been quietly making agreements to move away from the US dollar in international trade. Several major oil-producing nations have begun selling oil in currencies other than the dollar, and both the United Nations and the International Monetary Fund (IMF) have issued reports arguing for the need to create a new global reserve currency independent of the dollar.

The supremacy of the dollar is not nearly as solid as most Americans believe it to be. More generally, the United States is not the global superpower it once was. These trends are very much connected, as demonstrated by the world's response to US sanctions against Iran.

US allies, including much of Europe and parts of Asia, fell into line quickly, reducing imports of Iranian oil. But a good number of Iran's clients do not feel the need to toe America's party line, and Iran certainly doesn't feel any need to take orders from the US. Some countries have objected to America's sanctions on Iran vocally, adamantly refusing to be ordered around. Others are being more discreet, choosing instead to simply trade with Iran through avenues that get around the sanctions.

It's ironic. The United States fashioned its Iranian sanctions assuming that oil trades occur in US dollars. That assumption – an echo of the more general assumption that the US dollar will continue to dominate international trade – has given countries unfriendly to the US a great reason to continue their moves away from the dollar: if they don't trade in dollars, America's dollar-centric policies carry no weight! It's a classic backfire: sanctions intended in part to illustrate the US's continued world supremacy are in fact encouraging countries disillusioned with that very notion to continue their moves away from the US currency, a slow but steady trend that will eat away at its economic power until there is little left.

Let's delve into both situations – the demise of the dollar's dominance and the Iranian sanction shortcuts – in more detail.

Signs the Dollar Is Going the Way of the Dodo

The biggest oil-trading partners in the world, China and Saudi Arabia, are still using the petrodollar in their transactions. How long this will persist is a very important question. China imported 1.4 million barrels of oil a day from Saudi Arabia in February, a 39% increase from a year earlier, and the two countries have teamed up to build a massive oil refinery in Saudi Arabia. As the nations continue to pursue increased bilateral trade, at some point they will decide that involving US dollars in every transaction is unnecessary and expensive, and they will ditch the dollar.

When that happens, the tide will have truly turned against the dollar, as it was an agreement between President Nixon and King Faisal of Saudi Arabia in 1973 that originally created the petrodollar system. Nixon asked Faisal to accept only US dollars as payment for oil and to invest any excess profits in US Treasury bonds, notes, and bills. In exchange, Nixon pledged to protect Saudi oilfields from the Soviet Union and other potential aggressors, such as Iran and Iraq.

That agreement created the foundation for an incredibly strong US dollar. All of the world's oil money started to flow through the US Federal Reserve, creating ever-growing demand for both US dollars and US debt. Every oil-importing nation in the world started converting its surplus funds into US dollars to be able to buy oil. Oil-exporting countries started spending their cash on Treasury securities. And slowly but surely the petrodollar system spread beyond oil to encompass almost every facet of global trade.

The value of the US dollar is based on this role as the conduit for global trade. If that role vanishes, much of the value in the dollar will evaporate. Massive inflation, high interest rates, and substantial increases in the cost of food, clothing, and gasoline will make the 2008 recession look like nothing more than a bump in the road. This will be a crater. The government will be unable to finance its debts. The house of cards, built on the assumption that the world would rely on US dollars forever, will come tumbling down.

It is a scary proposition, but don't bury your head in the sand because countries around the world are already starting to ditch the dollar.

Russia and China are leading the charge. More than a year ago, the two nations made good on talks to move away from the dollar and have been using rubles and renminbi to trade with each other since. A few months ago the second-largest economy on earth – China – and the third-largest economy on the planet – Japan – followed suit, striking a deal to promote the use of their own currencies when trading with each other. The deal will allow firms to convert Chinese and Japanese currencies into each other directly, instead of using US dollars as the intermediary as has been the requirement for years. China is now discussing a similar plan with South Korea.

Similarly, a new agreement among the BRICS nations (Brazil, Russia, India, China, and South Africa) promotes the use of their national currencies when trading, instead of using the US dollar. China is also pursuing bilateral trades with Malaysia using the renminbi and ringgit. And Russia and Iran have agreed to use rubles as a means of currency in their trades.

Then there's the entire continent of Africa. In 2009 China became Africa's largest trading partner, eclipsing the United States, and now China is working to expand the use of Chinese currency in Africa instead of US dollars. Standard Bank, Africa's largest financial institution, predicts that $100 billion worth of trade between China and Africa will be settled in renminbi by 2015. That's more than the total bilateral trade between China and Africa in 2010.

The idea of moving away from the dollar is also finding support from major international agencies. The United Nations Conference on Trade and Development has stated that "the current system of currencies and capital rules that binds the world economy is not working properly and was largely responsible for the financial and economic crises." The statement continued, saying "the dollar should be replaced with a global currency." The International Monetary Fund agrees, recently arguing that the dollar should cede its role as global reserve currency to an international currency, which is in effect a basket of national currencies.

There is also a host of countries that have started using their own currencies to complete oil trades, a move that strikes right at the heart of US-dollar dominance. China and the United Arab Emirates have agreed to ditch the dollar and use their own currencies in oil transactions. The Chinese National Bank says this agreement is worth roughly $5.5 billion annually. India is buying oil from Iran with gold and rupees. China and Iran are working on a barter system to exchange Iranian oil for Chinese imported products.

Speaking of Bartering for Oil… How about Those Iranian Sanctions?

The United States and the European Union based their Iran sanctions on the financial system behind Iran's oil trade. The country uses its central bank to run its oil business – the bank settles trades through the Belgium company Swift (Society for Worldwide Interbank Financial Telecommunication) and the trades are always in US dollars. Once they take full effect in July, US and EU sanctions against Iran will make transactions with the Iranian central bank illegal. When that occurs, this official avenue of trade will shut down. In fact, Iran was shut out of Swift a few weeks ago, so that road is already blockaded.

But the arrogance in the sanctions is the assumption that Iran can only use this one, dollar-based avenue. In reality, the Islamic Republic is considerably more agile than that; removing its ability to trade in the official manner is only encouraging the country to find imaginative new methods to sell its oil.

Since the sanctions were announced, Tehran's official oil sales have certainly declined. Iran actually preemptively halted oil shipments to Germany, Spain, Greece, Britain, and France, which together had bought some 18% of Iran's oil. But covert sales have curbed or perhaps even reversed the reduction in shipments. It is impossible to know the details, as buyers and sellers involved in skirting the sanctions are being very discreet, but the transactions are undoubtedly happening.

As mentioned above, Iran is selling oil to India for gold and rupees. China and Iran are working on a barter system to exchange Iranian oil for Chinese imported products. China and South Korea are also quietly buying Iranian oil with their own currencies.

The evidence? Millions of barrels of Iranian oil that were in storage in Iranian tankers a few weeks ago now seem to have disappeared. Officially, no one knows where the oil went. Was it rerouted? Has production been shut in? Is the oil being stored elsewhere?

Oil is fungible, which means one barrel of crude is interchangeable with another. Once it leaves its home country, it can be nearly impossible to know where a barrel of oil originated, if its handlers so desire. And it's not just barrels that are hard to track – even though oil is carried on ships so large they are dubbed "supertankers" it is surprisingly difficult to keep tabs on every tanker full of Iranian oil.

And the Iranians are using every trick in the book to move their oil undetected. In the last week it became apparent that Tehran has ordered the captains of its oil tankers to switch off the black-box transponders used in the shipping industry to monitor vessel movements and oil transactions. As such, most of Iran's 39-strong fleet of tankers is "off radar." According to Reuters, only seven of Iran's Very Large Crude Carriers (VLCCs) are still operating their onboard transponders, while only two of the country's nine smaller Suezmax tankers are trackable.

Under international law ships are required to have a satellite tracking device on board when travelling at sea, but a ship's master has the discretion to turn the device off on safety grounds, if he has permission from the ship's home state. Some tankers turned off their trackers to avoid detection last year during the Libyan civil war in order to trade with the Gaddafi government.

And Iran is about to gain even greater flexibility in disguising the locations of oil sales, as the National Iranian Tanker Company (NITC) is about to take delivery of the first of 12 new supertankers on order from China. The new tankers will add much-needed capacity to NITC's fleet at a time when the number of maritime firms willing to transport Iranian crude has dwindled significantly, forcing Iran's remaining buyers to rely on NITC tankers. Thankfully for NITC, the 12 new VLCCs – each capable of transporting two million barrels of crude – will significantly expand the company's current fleet of 39 ships.

Sanctions or no sanctions, Iran is moving its oil. But even having your own, off-radar ships to transport oil bought in renminbi or rupees or won doesn't mean all these tricks and maneuvers don't have a cost.

Freight costs for each voyage add up to nearly $5 million, a sizeable hit for Tehran. Iran is often also shelling out millions of dollars in insurance for each oil shipment, because the majority of international shipments are insured through a European insurance consortium that is backing away from Iranian vessels because the EU sanctions will make such transactions illegal.

And since business is business, buyers are also demanding much better credit terms from the National Iranian Oil Company (NIOC) than normal. Traders are reporting agreements giving the buyer as much as six months to pay for each two-million-barrel cargo, a grace period that would cost Tehran as much as $10 million per shipment.

For Tehran to cover freight costs, insurance, and the cost of generous credit terms wipes out as much as 10 percent of the value of each supertanker load. Beyond that, customers are also negotiating better prices. For example, the flow of Iranian oil to China did slow in the first quarter of the year, but not because China endorsed the sanctions. Rather, Chinese refiner Sinopec reduced purchases to negotiate better prices with the National Iranian Oil Company. The country's imports from Iran are expected to climb back to the 560,000 barrel-per-day level in April.

That trade, along with non-dollar-denominated deals with India, Turkey, Syria, and a long list of other friendly nations, will keep Iran's finances afloat for a long time. The sanctions may be preventing Tehran from banking full value for each tanker of oil, but there is still a lot of Iranian oil money flowing.

The mainstream media is avoiding all discussion of the demise of the US dollar as the world's reserve currency. Even fewer people are talking about how sanctions based on Iran's supposed need to use the US dollar to sell its oil leave loopholes wide enough for VLCCs to sail right through.

Without acknowledging the elephant in the room, articles about Iranian tankers turning off their transponders or India using gold to buy Iranian oil invariably sound like plot developments in a spy thriller. Much more useful would be to convey the real message: The world doesn't need to revolve around US dollars anymore and the longer the US tries to pretend that the dollar is still and will remain dominant, the more often its international actions will backfire.

[The end of dollar dominance is a very ominous sign for the US economy… especially since the federal government seems to be ignoring this enormous elephant. Ignore it at your peril – or get advice from over 30 financial experts that will help you thrive during the tumultuous times ahead.]