Archives for June 2012

US Supreme Court Upholds Affordable Healthcare Act

US Supreme Court Upholds Affordable Healthcare Act

Courtesy of Jesse's Cafe Americain

The vote is out and it is 5-4 in favor of the constitutionality of the US Healthcare Reform Act.

Chief Justice Roberts provided the 'swing vote' in viewing the individual mandate as a 'tax' rather than accepting the Commerce Clause justification which Reich had thought would carry.  Justice Kennedy dissented, staying with the Republican appointees on the bench.  I am sure Antonin Scalia will provide an entertaining dissenting opinion.

The expansion of Medicaid was held to be unconstitutional 5-4, based on the argument that the government cannot withold funding for the entire program from states that do not comply with the expansion. In essense, the Medicaid expansion was fine, it was the penalty that was deemed to be an unconnected intrusion on the States since the Court saw the expansion as 'separate' and not part of the original program.

I remind the reader that 'Obamacare' with its private sector 'mandate' is in reality a long-standing Republican proposal, originally conceived in the conservative Heritage Foundation think tank, to use the private sector to try to manage healthcare costs, rather than the 'single payer' option.  Prior to Obama the largest implmentation of this approach was achieved and lauded in Massachusetts by guess who. 

As it evolved the law was considered a betrayal of Obama's base by the progressive voters who strongly favored the expansion of single payer.  This inhibits its acceptance by a broad swath of the public as it is a sort of awkward compromise, still containing some rather popular facets such as inclusion of older children, the striking down of predatory pricing, and the refunding for excess profits. In essence, the law seeks to turn the health care monopolies into managed utilities.

Robert Reich was very close in his prediction yesterday of how this would come out.  Roberts was concerned that another blatantly political ruling would undermine the credibility of his court and his legacy.

I should remind the read that this interaction between the Administration and a conservative Supreme Court is a remarkable replay of the 1930's, in which the Court, packed with the legacy of prior Republican administrations, repeatedly struck down elements of the New Deal.

I think the most reliable forecast is that rational discussion will continue to decrease, while polarized hysteria will dominate much of the commentary and most of the conversation.

All this is of most interest to us because of its significance on the inability to generate economic recovery.  

And in the short term it did not support the two day stocks rally and caused those gains to be sold off.  Since I agreed with Reich I had put on a big short hedge, and it has worked.   

This will passd quickly and Europe and the domestic economy will become the driving forces.  This being an election year most of the activity in the Congress for the rest of the year will be theater.
 

Why the Supreme Court Will Uphold the Constitutionality of Obamacare 
By Robert Reich
Wednesday, June 27, 2012

Predictions are always hazardous when it comes to the economy, the weather, and the Supreme Court. I won’t get near the first two right now, but I’ll hazard a guess on what the Court is likely to decide tomorrow: It will uphold the constitutionality of the Affordable Care Act (Obamacare) by a vote of 6 to 3. 

Three reasons for my confidence:

First, Chief Justice John Roberts is — or should be — concerned about the steadily-declining standing of the Court in the public’s mind, along with the growing perception that the justices decide according to partisan politics rather than according to legal principle. The 5-4 decision in Citizen’s United, for example, looked to all the world like a political rather than a legal outcome, with all five Republican appointees finding that restrictions on independent corporate expenditures violate the First Amendment, and all four Democratic appointees finding that such restrictions are reasonably necessary to avoid corruption or the appearance of corruption. Or consider the Court’s notorious decision in Bush v. Gore. 

The Supreme Court can’t afford to lose public trust. It has no ability to impose its will on the other two branches of government: As Alexander Hamilton once noted, the Court has neither the purse (it can’t threaten to withhold funding from the other branches) or the sword (it can’t threaten police or military action). It has only the public’s trust in the Court’s own integrity and the logic of its decisions — both of which the public is now doubting, according to polls. As Chief Justice, Roberts has a particular responsibility to regain the public’s trust. Another 5-4 decision overturning a piece of legislation as important as Obamacare would further erode that trust. 

It doesn’t matter that a significant portion of the public may not like Obamacare. The issue here is the role and institutional integrity of the Supreme Court, not the popularity of a particular piece of legislation. Indeed, what better way to show the Court’s impartiality than to affirm the constitutionality of legislation that may be unpopular but is within the authority of the other two branches to enact?

Second, Roberts can draw on a decision by a Republican-appointed and highly-respected conservative jurist, Judge Laurence Silberman, who found Obamacare to be constitutional when the issue came to the U.S. Court of Appeals for the D.C. Circuit. The judge’s logic was lucid and impeccable — so much so that Roberts will try to lure Justice Anthony Kennedy with it, to join Roberts and the four liberal justices, so that rather than another 5-4 split (this time on the side of the Democrats), the vote will be 6 to 3. 

Third and finally, Roberts (and Kennedy) can find adequate Supreme Court precedent for the view that the Commerce Clause of the Constitution gives Congress and the President the power to regulate health care — given that heath-care coverage (or lack of coverage) in one state so obviously affects other states; that the market for health insurance is already national in many respects; and that other national laws governing insurance (Social Security and Medicare, for example) require virtually everyone to pay (in these cases, through mandatory contributions to the Social Security and Medicare trust funds). 

Okay, so I’ve stuck my neck out. We’ll find out tomorrow how far.

Liebor – No, It Was NOT Just Barclays

Liebor – No, It Was NOT Just Barclays

No folks, it's not just one bank.

It appears it was basically all of them.

If you transacted in any loan that was tied to this rate at any time in the last several years, you probably got rooked, whether it was for pennies or thousands.

According to the WSJ:

Other banks that have disclosed they are under investigation include Citigroup Inc., C -2.77% HSBC Holdings HBC -3.88% PLC, J.P. Morgan Chase JPM -3.45% & Co., Lloyds Banking Group LLOY.LN -5.79% PLC and Royal Bank of Scotland Group PLC. None of these banks have been charged with any wrongdoing in the matter by U.S. or U.K. regulators.

Isn't that special?  Why yes, it is.

Now if we could just see something approaching accountability.

But we won't, you know, just as we didn't when JP Morgan was involved in the disastrous Jefferson County Alabama scheme that landed several local folks in Alabama in prison on various corrupted-related charges.

The people — who got screwed blind and sideways with permanently-larger sewer bills as a result of the corruption, got nothing back from the banksters — they are still paying for the screwing they had inflicted on them.

I'm not one for vigilante justice, but one does have to wonder — at what point do the people simply stop putting up with this crap?

Breaking News… European Leaders Agree to $120 Billion Pact To Promote Growth….

Courtesy of Jesse's Cafe Americain

Breaking News… European Leaders Agree to $120 Billion Pact To Promote Growth….

Do you think some word of this leaked out to the markets? Aren't some of those fellows Goldman alums? lol

The financiers and politicians do like to make a 'splash' especially when they have nothing real to say. And it does provide a nice excuse for the end of quarter stock market charade. 

To put the amount in context, the Spanish banks alone need that entire amount to remain solvent.

So far it looks like nothing of great significance and the stock futures are lackluster in their reception. It is more of a 'stimulus plan' and a collection of things already on the table. 

Kicking the can…

The equity futures are not impressed.

Dow Jones newswire

European Union leaders meeting Thursday were set to commit to a growth pact worth 120 billion euros ($149.8 billion), including a boost in the capital of the European Investment Bank of EUR10 billion, as well as finalizing a plan to strengthen the euro zone by year-end, according to a draft of their conclusions.

"It is crucial to boost the financing of the economy. EUR120 billion (equivalent to around 1% of EU [general Net Income]) are being mobilised for fast-acting growth measures," the draft said.

The agreement of a growth pact would represent a political victory for French President Francois Hollande who pushed the issue during his election campaign. He argued the growth pact was needed to offset a fiscal compact agreed in January which ratcheted up further austerity policies in Europe.

Still, despite the big headline numbers, the pact seems to provide little new real money and relies on ideas that have been circulating for some time about how to better deploy the EIB and EU budget funds. Many EU officials have said they don't expect the policies to produce a significant change in the economic outlook.

The draft also said that European Council President Herman Van Rompuy would be asked to report back in October and finalize by year-end his report, released Tuesday, on ideas for deepening integration within the euro zone.

Mr. Van Rompuy prepared the report with European Central Bank President Mario Draghi, European Commission President Jose Manuel Barroso and Luxembourg prime minister and head of the euro-zone finance ministers Jean Claude Juncker.

Congress Finds AG Holder in Contempt

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

In a day full of political news, here is the latest fixture to the soap opera to keep the electorate happy with water cooler talk.

  • HOUSE HAS ENOUGH VOTES FOR HOLDER CITATION; VOTE CONTINUES
  • House votes 255-67 to hold AG Eric Holder in criminal contempt of Congress for withholding documents in the Fast and Furious probe

Now, if only someone, somewhere can tell us the answer to the only question that matters in a world that just happens to have run out of money: who will pay for everything in this increasingly insane world, we would be very grateful. Or is everyone too distracted by meaningless flashing headlines, and ideological agenda to actually care?

From Reuters:

U.S. Attorney General Eric Holder was found in contempt of Congress on Thursday as the Republican-controlled House of Representatives sanctioned the nation's top law enforcement official for withholding some documents related to a failed gun-running probe.

The mostly partisan vote of 255-67 marked the first time a sitting attorney general and presidential Cabinet member was cited for contempt by the full House. No Senate vote is necessary in this House contempt citation.

Many Democrats refused to cast votes, and Democratic leader Nancy Pelosi led many of her colleagues in a walkout from the House floor in protest.

Later in the day, the House also was scheduled to vote on a resolution asking U.S. courts to force Holder to turn over documents being sought by the House Oversight and Government Reform Committee as part of its long-running investigation of the Fast and Furious. That could lead to a prolonged court fight with an uncertain outcome while a judge weighed the House demand against the Obama administration's claim of executive privilege to protect the documents.

The unprecedented House rebuke of Holder was overshadowed by the U.S. Supreme Court's upholding of Democratic President Barack Obama's controversial healthcare law – a ruling that was reverberating throughout the country.

Doug Casey: A Eurocrash Is Baked in the Cake

Doug Casey: A Eurocrash Is Baked in the Cake

In an interview with Louis James, world traveler and legendary speculator Doug Casey makes a compelling case for becoming a "permanent tourist" to be best able to survive the coming economic crash.

Louis James: So Doug, you're off to FreedomFest 2012 shortly, where people will be able to hear your latest thoughts on many subjects. Maybe you can give us a sneak preview on whatever is uppermost on your mind today.

Doug: FreedomFest should be especially outrageous, since I'll be tag-teaming with my friend Jeff Berwick of the Dollar Vigilante for a featured lunch. I'm not sure exactly what topics we're going to discuss, but I hope we aren't prosecuted for breaking too many federal, state, and local statutes at one sitting.

Anyway, lately I've been thinking about the EU's rising tide of troubles. We talked about this last January, when I said it was coming, but it seems to me that at this point it's rapidly coming to a head. A major financial and economic catastrophe in Europe is unavoidable. From there, it's likely to spread out to the whole world.

L: I fear you're right, but the latest headlines have it that the EU bigwigs are taking measures to make it easier for Greece's new pro-bailout government to honor its austerity obligations. Doesn't that mean the EU has dodged the bullet for now?

Doug: As far as I can tell, they're doing absolutely nothing except print up more currency, in hope that will move the problem further into the future, when a deus ex machina device will magically appear.

I haven't seen any hard numbers published as to exactly what Greece has to cut to meet its EU-imposed austerity obligations, nor how that fits into Greek budgetary realities. But, as usual with popular reporting, the terms used are inaccurate, which makes clear thinking impossible. These idiots aren't even capable of framing the problem, much less solving it.

First of all, it's not "Greece" we're talking about, but the Greek government. It's the Greek government that's made the laws that got people used to pensions for retirement at age 55. It's the Greek government that's built up a giant and highly paid bureaucracy that just sits around when it's not actively gumming up the economy. It's the Greek government that's saddled the country with onerous taxes and regulations that make most business more trouble than it's worth. It's the Greek government that borrowed billions that the citizens are arguably responsible for. It's the Greek government that's set the legal and moral tone for the pickle the place is in.

Second, the term "austerity" is used very loosely by the talking heads on TV. It sounds bad, even though it just means living within one's means… or, for Europeans, not too insanely above them. But who knows what's actually included or excluded from what the EU leaders think of as austerity? Take the Greek pension funds, for example: exactly how are they funded? I'd expect that private companies make payments to a state fund, as Americans do via the Social Security program. I suspect there's no money in the coffers; it's all been frittered on high living and socialist boondoggles. Tough luck for pensioners. Maybe they can convince the Chinese to give them money to keep living high off the hog…

L: Social Security. Now there's a misnomer. No one I know my age or younger actually expects to ever get a penny of that money back.

Doug: Yes, my generation, the Boomers, will have totally looted what little viability is left in it by the time you never get your check. Sorry, Lobo. It was our supposed "Greatest Generation," however – who are mostly gone now – who really got a cushy ride. But the point at the moment is that just because the Greeks voted – basically to stay in the EU in hopes of economic benefits outweighing the pain of whatever the austerity requirements are – that doesn't mean they'll actually be able to deliver. Once the new half-measures begin to bite, I expect to see more angry mobs back out on the streets. These people have become so corrupt that they think the government is some kind of a magic cornucopia, when first and foremost it's really just a vehicle for institutionalized theft.

And it's not just austerity, and it's not just Greece, nor even Spain, which has formally asked for a bailout. All of these European economies are rigidly regulated: first, by their national governments; and then, even worse, by this extra layer of unbelievably oppressive regulation from Brussels. I understand there are some 30,000 people working for the EU, making new rules and regulations like an army of spiders, spinning their webs, sucking the life out of their victims. None of these rules are constructive. They're a waste of time at best, and most are actively destructive – like for instance, the EU rules telling the French how to make cheese.

I was reading in David Galland's report from Portugal last Friday that the EU forced the Portuguese to destroy half of their fishing fleet. Not because there was anything bad, dangerous, or wrong with the boats, but because they were too good and the Portuguese were too successful as competitors; it's life imitating Atlas Shrugged. He also said that most of the oranges grown in Portugal are either thrown in the trash or trucked to Spain, where they can't be eaten but must be made into marmalade, which is then sent back to be sold to the Portuguese. Apparently about half of the chickens in Portugal are about to be executed – just killed, not eaten – because they were raised in conditions the EU doesn't consider appropriate. The list goes on and on, and the madness is happening all over Europe.

The proposed austerity measures will change absolutely nothing important; at best they'll just lengthen the economic agony. Instead of austerity programs, cutting back marginally on the salaries of public employees and national pensions, all these hordes of Eurocrats should be summarily fired, and their agencies totally abolished. The markets should be liberated.

And individuals should plan for their own retirements. They should behave like adults, not children who spend today with no thought for tomorrow, as state-sponsored retirement benefits encourage them to do.

L: Excessive regulation and disincentives to production created by government intervention in the economy. Can you give us some examples of this happening and what the consequences are?

Doug: The classic example is the Roman Empire after it passed through its time of troubles in the third century. After 50 years of utter chaos, constant crisis, and recurring civil wars, Diocletian gripped it in a stranglehold, regulating everything from top to bottom. I suppose, given a choice between chaotic violence and a police state, people will opt for the latter – as if there are no other alternatives. He instituted all manner of price controls and "people controls," including forcing sons to take up their father's occupations. The ultimate collapse of Rome and the success of the barbarian invasions wasn't due to superior barbarian military technology or tactics, but Roman economic collapse. Romans were actually deserting the empire to live among the so-called "barbarians," where they could both be free and prosperous. History is repeating itself.

L: That's pretty dramatic, Doug. You think Europe is in a similar death spiral now?

Doug: Yes. Those governments are all bankrupt. But much more serious than financial bankruptcy is their total moral and intellectual bankruptcy. At this point the Europeans are so craven and degraded they deserve to be indentured servants of the Chinese, which they will be. The debt they are using to finance their bulging bureaucracies, bloated welfare rolls, giant pensions, and so forth is largely coming from the banks. But the banks are all bankrupt too, partly because they've lent so much capital to bankrupt governments. So you've got two sets of bankrupt institutions trading debt back and forth between themselves. It doesn't help to say that it's the PIIGS that are in the worst shape, because it's the banks in the supposedly wealthier countries that own the PIIGS's debt. They are all tied together.

It's much worse, on a global scale, because Europe is China's largest trading partner. When the EU really goes into reverse and suffers a major economic collapse, the Chinese are going to lose their main customers – and end up owning a lot of chateaux. That also means the Chinese will stop buying the raw materials – commodities – they use to make what they sell to the Europeans. That will hammer the Australian, Brazilian, Canadian, and other resource-driven economies.

And the problems with Japan are even worse, though somewhat different, than the ones in Europe. Chronically corrupt and now depopulating Russia is headed for a fall; its economy produces nothing but raw materials and weapons. The problem is truly global. The headlines keep pointing at Europe right now, but the EU is just the tip of the iceberg the global economy is aimed at.

L: In this context, it's not encouraging that the French have not only elected a socialist president, but a socialist parliament. I'd be fighting severe nausea right now if I were a French taxpayer.

Doug: And France is not one of the PIIGS on the periphery, but one of the two big countries at the core of the EU. I don't understand how anyone can conduct a profitable business in France today. It seems heroic to me, if anyone can do it, but it's getting just about impossible. And now France is going to slide a couple standard deviations further to the left. If I were a Frenchman with any money, I would get my money and myself out of France – tomorrow morning.

L: I read somewhere that Cameron in the UK announced that French people with money were welcome in the UK.

Doug: I heard that too. But if I were a Brit, I'd also liquidate my assets and get out; there's no reason to believe the situation is any better in Britain. It's just not currently in the news. These governments are completely out of control, forces unto themselves, and they view their populations as milk cows. Governments all over the world are following Diocletian's example.

L: If it's happening all over the world, what's the point of packing up and leaving?

Doug: Well, there really is almost no place you can run, no one place where it's reasonably safe to be a citizen these days. We're heading toward a time like in the book, Atlas Shrugged, when the productive people in society are just going to stop producing. Why should anyone work hard to create value when a substantial portion of that value will get diverted into fighting off regulators and other government goons, only to have half of what you do make seized to pay for those very same thugs?

L: Are you telling all the Atlases out there that it's time to shrug?

Doug: I think so, on a moral basis. I'm sick and tired of supporting my oppressors. It makes me feel like dissipating my capital on high living, simply because that will deny it to the state. It's perverse, how they've structured society with incentives to be a consumer, not a producer. Why save, when it's likely your savings will be stolen?

L: Well… I guess that explains why you're building a house in a beautiful but rural corner of Argentina. You're on strike, no longer wanting to be your brother's financial keeper. But Argentina's government is just as scary as any other.

Doug: Yes, but that's why I'm an Uruguayan resident, have my bank accounts in various jurisdictions other than Argentina – or the US, for that matter – and I'm also working on becoming a Paraguayan taxpayer.

L: But Paraguay doesn't have a personal income tax…

Doug: Exactly. And this is my message to the Hank Reardens of the world: become a "permanent tourist." There's no such thing as a real tax haven anymore – even Swiss bank accounts, if you can get one, are not what they used to be. You ask what the point is of leaving when all governments look at their subjects as milk cows? Well, a tourist is an honored guest who spends money in the local economy; he's welcome and largely left alone. No one place is perfect – certainly not Argentina – but if you distribute your life across various jurisdictions, none of them consider you to be their cow. I simply prefer Argentina as a place to spend most of my time. Other countries are to be used for different things for different reasons.

L: So where's the least-bad place to have your corporate office these days?

Doug: I think you've got to look at Singapore. Hong Kong is still very good. Dubai offers some advantages in that part of the world. Other than that, you've got to go to a place where the government is small and incompetent.

L: Hence your interest in Paraguay.

Doug: Exactly. But that's not a place I'd actually want to live; it's a backwater, with little more than farms and a capital that's like a small Midwestern city with colonial architecture in the center. The weather is unbearably hot during the summer. I also have to caution readers that the OECD is pressuring Paraguay to adopt a personal income tax – though none has yet been implemented, and it's currently a good place to be a taxpayer.

L: The US is still an economic powerhouse and a place where a lot of people make a lot of money…

Doug: Yes, it's shocking to me, though, how the US has gone downhill. In past decades, if anyone wanted to set up a business, the US would almost certainly have been the best place to do so. But it has become less and less so over the years. Now it's just asking for trouble. But everything is relative. I'd advise anyone with capital to deploy it elsewhere, not in the US, because it has just become too dangerous, financially and morally. But if I had nothing, if I were a landless serf struggling to live in Nigeria or Burma or Venezuela, sure, I'd try to make it to the US. Bad as it's getting, it's vastly better than where they come from – and will likely be for years.

The fact that there are some 50 million people relying on food stamps these days – about one in six US citizens gets money for food – just goes to show how bad things are getting. And worse, government agencies are trying to get more people on to these programs, instead of helping them to stand on their own two feet. According to a Wall Street Journal article I was reading the other day, Republicans and Democrats alike have blocked reform of the food stamp program, even minimal and sensible reforms like means testing. The program is projected to spend more than $700 billion over the next ten years.

L: Gee, Doug: doom and gloom and dark despair. But that's not a new tune for you. Let's suppose that your analysis is essentially correct; what makes you think that the pot's about to boil over? How can we know that this is not just more grumbling from a permabear?

Doug: Well, it's true: "inevitable" is not the same thing as "imminent." When people see that something is inevitable – and I'm guilty of this mistake myself – they tend to believe those things are also imminent, even when that's not so. But the inevitable is inevitable, and that means it must happen. We usually can't predict exactly when – and such things often take far longer to arrive than we imagine they possibly can – but once things to start unravel, they tend to accelerate quickly. The crisis seems far off for a long period of time, and then suddenly it's upon us.

It's much like the ground rush effect when you're sky diving. When you first exit the plane, typically at around 7,500 feet for a 30-second free-fall, it seems like you could fall forever. That's partly because it takes 5 or 10 seconds to reach terminal velocity and partly because of the way geometry plays with your visual perception. At around 2,500 feet, though, you can see the ride is coming to an end. By 2,000 feet, you don't need to look at your altimeter to figure when to pull, because you're feeling urgent ground rush. Europe is under 1,000 feet, and even if they do pull the ripcord, they'll find there's no chute… just a bunch of dirty laundry their economists packed as a joke. It's pointless to talk about anything but a very, very hard landing. Unfortunately, when we're talking about the economy, the analogy breaks down a bit. That's because you actually don't need a parachute to go sky diving. You only need one to go sky diving twice.

L: [Laughs]

Doug: Let me change the metaphor. Europe is in hot water. One of the things that has me thinking the water in the pot might hit its boiling point this summer is that people generally prefer to riot in the summer… for all kinds of reasons. Feeling ripped off by "the system" is a really big one. Take the bank runs in Greece – to the tune of a billion dollars a day. If I were a resident of any European country, I'd definitely run to the bank and get cash. Sure, it's just paper, but that's better than nothing if the bank fails and governments don't bail it out quickly enough.

Even the US has seen many bank failures since 2008, but the FDIC and the Fed always paper it over. And yet, more and more people are recognizing that the system rests on nothing more than confidence. More and more people are going to physical cash in their physical possession all over the world. Most people don't have a lot of financial sophistication, but they read enough and see enough, and have enough sense to be scared. When that's the case, they'd rather have more cash in their pockets or mattresses than they would normally. That's because money left in banks can become suddenly inaccessible if there's a problem with the banking system, or if the government declares a bank holiday, or if the government just takes it, alleging tax evasion or money "laundering"…

Note to those living in the US: this can happen to you, too. I'd definitely recommend building up a stash of twenties and hundreds, enough for several months' living expenses, in case banks suddenly don't have cash on hand. Better yet, put it in gold and silver, because you never know what the banks will give you when push comes to shove – or if anyone will accept what the banks give you in exchange for goods and services you need … especially if Bernanke dumps too many hundred-dollar bills from helicopters. All these paper currencies are rapidly headed for their intrinsic values. And when they reach them, billions of people all over the world are going to feel very, very pissed off – and basically at the same time.

During the last Argentine crisis, some people thought they were being smart, keeping their savings in dollars in banks. Well, the government declared a bank holiday, and when the banks opened, their dollars were converted to pesos – and devalued by about 75% to boot. Essentially the same thing happened in the US when Roosevelt devalued the dollar.

L: So… the short version would be that what's inevitable may or may not be that imminent, but on such matters, it's better to be a year early than a day late?

Doug: That's exactly right. And I really do think we're getting close to the edge of the precipice.

You know, people can read this and just view it as entertainment, or dismiss it as just another opinion. But it's like the old oak that was there for a hundred years and looked like it would last another hundred years, but fell suddenly in a storm. Only then did we see that it was hollow and had long been close to collapse. That's where the world's financial situation is: it's rotten to the core because of fractional reserve banking and fiat currencies, and totally corrupt because of state intervention in the marketplace.

L: I remember how we – people who understood market economics – all knew the Soviet Union had to collapse from its internal contradictions and economically self-destructive policies. But we didn't know how long it could last, and sometimes it seemed like it would be forever. But then when it came unglued, it fell apart with breathtaking speed.

Doug: Just so. But when the Soviet bloc collapsed, at least the West was there to help them out. Who's going to bail out the West? A giant reset button will get pushed, with unpredictable results. Personally, I am buying more gold every month. I anticipate a genuine world-class and world-spanning crisis. And it wouldn't just be financial and economic; everything will be in turmoil – society, the military, culture, education, art, science – everything. Really interesting times are coming up here. But on the bright side, I have a low threshold of boredom. I admit I'm something of both an adrenalin and an entertainment junkie.

L: Right. But for those of us still working to amass the kind of capital it takes to be able to regard a global calamity as an adrenalin rush, it should be noted that this crisis will bring loads of opportunities to those who see it coming and prepare.

Doug: Word to the wise. More on that in future conversations.

L: And our newsletters, of course.

Doug: Of course. The markets are going to be full of great speculations for the next few years. And, eventually, some great investments as well. I trust that by now our readers know the difference.

When an event becomes inevitable, the only thing left to do is prepare oneself for it. With the stock markets teetering recently and precious metals prices fluctuating, many investors have parked capital in CDs and other bank accounts, thinking that's the safest place for their money for now. That is a grave mistake. As the ancient saying –one Doug fully agrees with – goes, "Fortune favors the bold." These shifting trends can be played for outsized gains… and you can be in on it.

The Research in Downward Stock Motion Continues as RIMM Misses Everything

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

For any RIMM shareholders expecting a miraculous deus ex, somewhat like Europe's broker beggars who still are choosers, to come out of left field in today's earnings reports, there was nothing but epic disappointment.

  • Revenues came in at $2.81 billion on expectations of $3.1 billion, and down from $4.91 billion a year prior
  • EPS were $(0.37) on expectations of just a 7 cent miss.
  • The outlook is just as horrible, with RIMM announcing it expects a Q2 operating loss
  • It also see lower shipment volumes, and delayed the launch of Blackberry 10 to Q1 2013
  • Finally, the firm will cut 5,000 jobs

If the stock isn't moving much it is because it has been halted since pre announcement. It will reopen at 4:40pm, probably between 10 and 20% lower.

From the Outlook section in the press release:

The Company expects the next several quarters to continue to be very challenging for its business based on the increasing competitive environment, lower handset volumes, potential financial and other impacts from the delay of BlackBerry 10, pressure to reduce RIM's monthly infrastructure access fees, and the Company's plans to continue to aggressively drive sales of BlackBerry 7 handheld devices. The Company expects to report an operating loss in the second quarter of fiscal 2013, as RIM continues to invest in marketing programs and continues to work through the transition to BlackBerry 10, as well as the Company's fixed costs being allocated over a lower volume of shipments. This outlook excludes the impact of charges related to the CORE Program.

We do use the term outlook loosely: at this point we are not sure whose odds of being a viable going concern in 2013 are higher: Greece or the once proud Canadian corporate fixture.

We will post an after hours chart as soon as the stock is unhalted.

RIMM just opened at $7.5 from its $9 after-hours close before the halt – a mere 17% drop.

Eurozone Retail Sales Drop 8th Month; Italy, France are Down; Germany Retail Sales Up, Outlook Down

Courtesy of Mish.

German retail sales bounced back for the second month, but not enough to prevent the aggregate eurozone sales from falling for the eighth consecutive month.

Summary of June findings:

The Eurozone retail sector remained in contraction mid-way through 2012, according to PMI® data from Markit. Sales fell on a month-on-month basis for the eighth successive month – the third-longest sequence in the survey history – and purchases of new goods by retailers declined at the second-fastest pace on record. That said, the rate of decline in sales slowed sharply during the month.

Germany, France, Italy Sales

The key sentence is “purchases of new goods by retailers declined at the second-fastest pace on record.”

Will inventory liquidation continue or will retail sales rebound? Liquidation can only go so far, but that does not mean sales will rebound in a meaningful way. There is certainly no reason to expect a rebound in sales, but data seldom runs in a straight line.

Much depends on Germany. Yet, in spite of a two month rebound in sales, Germany alone could not pull aggregate sales up to even.

Italy Remains a Disaster Zone

Individually, Italy Retail Sales remain a disaster zone.

June sales were down sharply on levels seen in the corresponding month one year ago, which firms linked to lower consumer purchasing power and greater uncertainty over the economic outlook. The annual rate of contraction was, however, slower than May’s series record.

Targets set for June were missed by the majority of firms, with a lack of confidence among clients and unfavourable weather conditions among the reasons cited by those that registered lower-thanexpected sales. Although the narrowest for three months, the gap between actual and planned sales remained considerable.

As was the case in each of the previous two survey periods, retailers were downbeat with regards to the prospects of achieving July targets. In fact, the overall degree of sentiment in June was one of the most negative in the series history, matching that recorded last December.

Markets turn on extreme sentiment, yet sentiment can remain extreme for long periods of time. Here is an accurate assessment by Markit economist Phil Smith….

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SCOTUS Tortures Constitution: PPACA

SCOTUS Tortures Constitution: PPACA

Now I've seen it all.

The USSC upheld Obamacare by, basically, twisting the Constitution into a pretzel, crapping on it, whizzing on that and then eating it.

Finding first that the Commerce Clause bars the government from compelling one to enter into commerce, the analysis then turned to whether there was any way to save the constitutionality of the act.

The justices found one.

They re-interpreted the penalty clause as a tax.

And of course, Congress can levy taxes.

That's the path taken by this tortured process — a path that could only be dreamed up if someone had already determined the outcome they sought instead of being an independent jurist.

The real surprise, however, is that Chief Justice Roberts, believed to be a strict constructionist on the court, managed to not only agree with this piece of tortured logic he found and constructed it as the opinion is his!

So much for judicial restraint and strict construction!

You really ought to read the dissent that starts on page 127 of the opinion.  Justice Scalia, Thomas, Kennedy and Alito eviscertate the majority, saying in part:

Here, however, Congress has impressed into servicethird parties, healthy individuals who could be but are not customers of the relevant industry, to offset the undesirable consequences of the regulation. Congress’ desire to force these individuals to purchase insurance is motivatedby the fact that they are further removed from the marketthan unhealthy individuals with pre-existing conditions, because they are less likely to need extensive care in the near future. If Congress can reach out and command even those furthest removed from an interstate market to participate in the market, then the Commerce Clause becomes a font of unlimited power, or in Hamilton’s words, "the hideous monster whose devouring jaws . . . spare neither sex nor age, nor high nor low, nor sacred nor profane." The Federalist No. 33, p. 202 (C. Rossiter ed. 1961).

What little was left of The Constitution died today, June 28th, 2012.

And incidentally, the math on federal health spending coupled with this decision means that by the time a 55 year old man reaches 85 (his life expectancy, roughly) the Federal government will be attempting to spend roughly $15 trillion a year on health care.

(No it won't, no we won't get that far, and the detonation of our government on the fiscal side is now assured — or your health care will be sacrificed.  This is mathematics, not politics.)

Obamacare Upheld; What Should Romney, Republicans Do?

Courtesy of Mish.

Today the Supreme Court ruled in favor of Obamacare by a 5-4 margin. Here is the Full Text of the Supreme Court Ruling.

Romney has promised to overturn the ruling, saying “ObamaCare was bad policy yesterday, it’s bad policy today.

That statement makes Romney a hypocrite as the Financial Times notes.

“Obamacare places the government between you and your doctor,” said Mr Romney, who championed a similar plan while governor of Massachusetts but says he opposes its expansion at a federal level.

Why wasn’t it bad policy in Massachusetts?

Obama Chimes In

Here are some quotes from a press conference of President Obama as reported by The Guardian.

  • “Whatever the politics, today’s decision was a victory for people all over this country”
  • “It should be pretty clear by now that I didn’t do this because it would be good politics.”
  • “Today I am as confidence as ever, that when we look back five years from now, or 10 years from now, or 20 years from now, we will be better off because we had the courage to pass this law and keep moving forward.”

Clearly, Obamacare was not good politics.

The president took no questions to which the Guardian commented “What was interesting is that Obama – for the first time in a while – offered an unapologetic defense of the healthcare reforms. That’s going to make for a different approach in the presidential campaign.

Small Likelihood of Overturning Obamacare

Even if Romney were to win, he would be extremely challenged to overturn Obamacare outright. …

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Fans cheer, critics jeer Supreme Court on health care

Fans cheer, critics jeer Supreme Court on health care (via AFP)

Supporters of President Barack Obama's health care reforms cheered Thursday on the steps the Supreme Court after its justices upheld the hotly contested law, as opponents vowed to fight on. More than 1,000 protesters — many fiercely in favor of Obama's signature reforms, others just as passionately…

[Read more…]

Health-care law: How Supreme Court ruling could affect US budget

Health-care law: How Supreme Court ruling could affect US budget (via The Christian Science Monitor)

When the US Supreme Court hands down its ruling on the health-care reform law Thursday, the action will carry some big-money import for the federal budget. A decision that strikes down President Obama's 2010 reforms in their entirety would increase federal deficits over the next 10 years. By contrast…

[Read more…]

Forget QE3, America Needs a Real Road and Job Stimulus

Courtesy of www.econmatters.com.

By EconMatters

How is the condition of roads that you drive On? Well, the roads that I drive on are so bad that they require a large truck or SUV to navigate at anything close to normal speeds. The potholes are alignment killers, and the horrible patches were slapped on so poorly that they become uneven speed bumps. And I reside in one of the top 5 largest cities in the U.S. with a lot of petro money that has done much better than most of other cities (e.g., the newly bankrupt Stockton, CA) during the financial downturn in the economy. It gets better yet; I'm talking about the better part of town instead of the lower revenue districts. So the question is how did we get to this state? And what are the likely solutions?

I think a lot of City, County and State revenue which ought to be going towards upkeep and proper maintenance of the roads is being diverted to other areas of government, i.e., administrative and higher than market salaries of government employees (Include benefit calculations into this equation). In short, big government spending is out of control, and it is so bad, that revenue which is supposed to go towards basic services like quality roads to drive on is being circumvented by other factions of big government which should be further down the line on the need food chain.

This fact really points out what a disaster the first $900 Billion stimulus was, and how if we cannot get these roads fixed when that money was on the table, when will we ever be able to drive on quality roads again like in the 1950 and 1960`s? It literally has been that long since some of this infrastructure was originally built, and is long overdue for a full replacement cycle of CAP EX spend, and not more ad-hoc patch jobs.

One solution is to do another round of stimulus, this one dedicated strictly to mainstream road and infrastructure projects like bridges and basic utilities. This means 100% infrastructure spend, not 5% like the last stimulus with the majority of the rest going to either special interest or pork barrel projects. This will be expensive, in the Trillion dollar range, but yes the roads are that bad. However, with the economy lacking any true growth prospects, and the ad-on effects of true job creation, which a legitimate infrastructure package brings, this expense can in part be paid for with increased tax revenue reaped from a healthier economy.

But there is a caveat, and a large one, these jobs need to be for existing American citizens. These jobs cannot be offshored or outsourced. As the current projects are outsourced to private firms, who then maximize profits, and sacrifice quality of product by hiring illegal immigrants to do the bulk of the physical labor. The country doesn`t reap the entire benefits if the existing model of road construction outsourcing of these jobs ultimately just sends a substantial sum of this money out of the country via Western Union (the figures over the last decade have been staggering to say the least).

The other solution is for governments to slim down and cut the wasted bureaucracy, so that funds which should be going towards maintaining quality roads are actually used for this purpose. This probably would only occur if the voting public starts demanding better roads, to the point where it actually becomes a campaign issue that politicians have to make public stances on, and be voted out of office for not delivering upon said objective.

Unfortunately, I don`t think voters really care about this issue, and would rather have their local pork barrel spending projects, and just drive heavy duty SUV`s to traverse the roads. Compare our roads with German roads and you can visualize the quality of product produced, and commitment to infrastructural needs in this country.

By the look of our roads you would never guess we are a first rate Super-Power in terms of Capitalistic revenue generation. Again traversing roads that seem like roads in some third world countries, I have to ask where is all the money going? And whoever decided this wasn`t a high priority for the last stimulus package needs to be voted out of office for dereliction of duty.

Please click here to read more articles at EconMatters.

Using Standard Deviation & Probability to Trade Options

Using Standard Deviation & Probability to Trade Options

Courtesy of 

I recently discussed the ability to use implied volatility to calculate the probability of a successful outcome for any given option trade. To review briefly, the essential concepts a trader must understand in order to make use of this helpful metric include:

  1. The prices of any given underlying can be considered to be distributed in a Gaussian distribution- the classic bell shaped curve.
  2. The width of the spread of these prices is reflected in the standard deviation of the individual underlying’s distribution curve.
  3. Plus / minus one standard deviation from the mean will include 68% of the individual price points, two standard deviations will include 95%, and three standard deviations will include 99.7%
  4. A specific numerical value for the annual standard deviation can be calculated using the implied volatility of the options  using the formula: underlying price X implied volatility
  5. This standard deviation can be adjusted for the specific time period under consideration bymultiplying the value derived above by the square root of the number of days divided by 365

These derived values are immensely important for the options trader because they give definitive metrics against which the probability of a successful trade can be gauged. An essential point of understanding is that the derived standard deviation gives no information whatsoever on the direction of a potential move.  It merely determines the probability of the occurrence of a move of a specific magnitude.

It is important to note that no trade can be established with 100% probability of success; even boundaries of profitability allowing for a three standard deviation move have a small but finite probability of moving outside the predicted range. A corollary of this observation is that the trader must NEVER “bet the farm” on any single trade regardless of the calculated probability of success. Black swans do exist and have a nasty habit of appearing at the most inopportune times.

Let us consider a specific example of a “bread and butter” high probability option trade in order to see how these relationships can be applied in a practical manner.

The example I want to use is that of an Iron Condor position on AAPL. For those not familiar with this strategy, it is constructed by selling both a call and put credit spread. The short strikes of the individual credit spreads are typically selected far out of the money to reduce the chance they will be in-the-money as expiration approaches.

I want to build an iron condor on AAPL in order to illustrate the thought process.  As I type, AAPL is trading at $575.60.  August expiration is 52 days from today; this is within the optimal 30-55 day window to establish this position. Consider the high probability call credit spread illustrated below:

Best Option Trading Strategies

This trade has an 88% probability of profit at expiration with a yield of around 16% on cash encumbered in a regulation T margin account.

Now let us consider the other leg of our trade structure, the put credit spread.  Illustrated below is the other leg of our iron condor, the put spread:

Best Option Trading Strategy

This trade has a 90% probability of profit at expiration with a yield of around 16% on cash encumbered in a regulation T margin account. As the astute reader can readily see, this put credit spread is essentially the mirror image of the call credit spread.

When considered together, we have given birth to an Iron Condor Spread:

Best Option Trading Iron Condor Spread Strategy

The resulting trade consists of four individual option positions. It has a probability of success of 79% and a return on capital of 38% based on regulation T margin requirements. It has an absolute defined maximum risk.

Note that the probability of success, 79%, is the multiplication product of the individual probabilities of success for each of the individual legs.

This trade is readily adjustable to be reflective of an individual trader’s viewpoint on future price direction; it can be skewed to give more room on either the downside or the upside.

Another characteristic and reproducible feature of this trade structure is the inverse relation of probability of success and maximum percentage return. As in virtually all trades, more risk equals more profit.

I think this discussion illustrates clearly the immense value of understanding and using defined probabilities of price move magnitude for option traders. Understanding these principles allows experienced option traders to structure option trades with a maximum level of defined risk with a relatively high probability of success.

Happy Option Trading!

JP Morgan Trading Loss Balloons to $9 Billion

Courtesy of Benzinga

JP Morgan Chase’s (NYSE: JPM) trading loss on credit derivatives may have swelled to $9 billion, according to reports by the New York Times. CEO Jamie Dimon said that the company would update investors in its second-quarter earnings release on July 13 with specifics on the size of the loss and the extent to which the position has been unwound.

The bank’s Chief Investment Office (CIO) is responsible for the losses, having invested excess deposits into credit derivatives as a hedge. The derivatives were linked to corporate debt, and the recent deterioration in credit markets has forced the bank to mark losses on these positions.

Unwinding the trade has progressed faster than expected. JP Morgan initially said it would take about a year to unwind the entire position, but the bank has already unwound approximately half of the position in only a few months. The trading loss only furthers calls from politicians to curb bank practices and shrink the biggest banks. If JP Morgan can unwind a losing trade quickly, it may signal that banks have gotten better at quickly exiting from bad trades.

To put the loss in perspective, consider that JP Morgan made $5.4 billion in profit in the first quarter. Thus, the loss would have wiped out all profits. However, the bank will benefit from the widening of spreads on its debt and most likely see a gain due to its debt valuation adjustment (DVA). Companies can book an accounting gain from widening of its credit spread as the cost of paying off the debt falls.

The size of the loss is hard to estimate because it changes on a daily basis. Improvements in corporate credit markets could help to recoup some of the losses on still open positions. Therefore, it may have been wise for Dimon to have avoided giving exact dollar figures in his testimonies and rather to wait for the position to be closed to report precise amounts.

The fallout of this trading loss is bad for all financials — Financial Select Sector SPDR (NYSE: XLF) — as it has raised calls for politicians to do more to curb risk-taking by the biggest Wall Street banks. Politicians fear that the biggest banks will take too much risk knowing that the government will bail them out, an implicit guarantee known as moral hazard. One of the biggest sticking points is the Volcker Rule, which prevents proprietary trading. More important is which operations become classified as hedging and market making, and which are purely proprietary trading operations. If politicians act too strictly in restricting market making activities, it could make markets less liquid and cause more market volatility.

Mid-day Thursday, JP Morgan shares were down almost 4%, as well as down more than 20% from the 52-week high.

Americans Are Being Prepared For Full Spectrum Tyranny

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Submitted by Brandon Smith from Alt-Market

Americans Are Being Prepared For Full Spectrum Tyranny

Totalitarian governments, like persistent forms of cancer, have latched onto the long history of man, falling and then reemerging from the deep recesses of our cultural biology to wreak havoc upon one unlucky generation to the next.  The assumption by most is that these unfortunate empires are the product of bureaucracies gone awry; overtaken by the chaotic maddening hunger for wealth and power, and usually manipulated by the singular ambitions of a mesmerizing dictator.  For those of us in the Liberty Movement who are actually educated on the less acknowledged details of history, oligarchy and globalized centralism is much less random than this, and a far more deliberate and devious process than the general unaware public is willing consider.  

Unfortunately, the final truth is very complex, even for us… 

One cannot place the blame of despotism entirely on the shoulders of globalists.  Sadly, the crimes of elites are only possible with a certain amount of complicity from subsections of the populace.  Without our penchant for apathy and fear, there can be no control.  That is to say, there is no power over us but that which we give away.  We pave the road to our own catastrophes.

In the end, a tyrant’s primary job is not to crush the masses and rule out of malevolence, but to obtain the voluntary consent of the citizenry, usually through trickery and deceit.  Without the permission of the people, subconscious or otherwise, no tyranny can survive.

As with the oppressive regimes of the past, America has undergone a dramatic transformation, heavy with fear and ignorance.  Our tradition of elections has been corrupted and negated by the false left/right paradigm, and the leaderships of both defunct parties now seek only to elevate a select minority of men bent on globalization.  Our Constitutional liberties have been dismantled by legal chicanery.  Our principles have been diluted by intellectual games of rationalism and moral relativism.  Our country is ripe for conquest. 

Americans battle over whose side is most to blame; Democrat or Republican, while ironically being disenchanted with both entities.  For some people, the thought of holding each party equally accountable, or accepting that they are essentially the same animal, never crosses their minds. 

While this irrelevant farce of a debate rages on, the true culprits plotting the demise of our Republic gain momentum, and implement policy initiatives that the public should and must take note of.  In the past year alone, many blatant steps towards the Orwellian gulag have been openly administered.  A carnival of peddlers and freaks and greasy popcorn overwhelms our senses, but the stench of this cheap circus still tickles our noses, and if we use our eyes for even a moment, certain dangerous trends reveal themselves.  Here are just a few recent events that bear a dire warning; the ultimate assault on freedom in this nation grows near…

Acclimation To Subservience

Every totalitarian state worth its salt has its own goon squad.  The Nazi’s had the “Brownshirts”, the Soviets had the “Militsiya” and the “Voluntary People’s Brigade”, the Communist Chinese have the “Chengguan”, etc.  In America, however, all tyrannical measures are given innocuous bureaucratic labels to mislead and distract the masses.  In this country, we have the Transportation Security Administration…

The TSA has become the most hated alphabet agency in the U.S. in perhaps the fastest time on record.  It has violated the personal rights of more people on a daily basis in my view than the IRS, DEA, and the ATF combined.  Clearly, this slobbering demon child of the Department of Homeland Security is being molded for something quite terrible and grand. 

When confronted by the public on the use of irradiating and intrusive naked body scanner technology, the agency responded by allowing their blue handed ghoul army with to molest our nether-regions.  When confronted by state and local governments on their absurd tactics, the TSA threatened economic blockades and airport shutdowns.  The organization then began expanding its jurisdiction to bus and train stations and even our highways when it introduced the VIPR program and implemented random roadside checkpoints in Tennessee last year.  But, this behavior is nothing compared to what is next on the horizon: a compromise…

Beware of government agencies bearing gifts.  The TSA along with the International Air Transport Association has announced a new methodology of “less intrusive” passenger screening measures, in order to address the concerns of the public over pat downs and irradiating naked body scanners.  This SOUNDS like a step in the right direction, and a proper response to the grievances of the citizenry.  Instead, it turns out to be a refined example of totalitarianism in motion, and a perfect lesson in how the masses can be duped into handing over their inherent freedoms.

Revamped security protocols call for biometric data collection, including fingerprint and retina scans, and a tunnel which combines multiple detection systems into one area (who knows how radioactive this will end up being):

http://travel.usatoday.com/flights/story/2012-06-19/Faster-better-airport-security-checkpoints-not-that-far-off/55693916/1

The mainstream article above makes this development sound like a win/win scenario for everyone, painting biometric data collection as a matter of convenience, but it also reveals the true design of the system; to illicit voluntary subservience:

“The key to speeding up checkpoints and making security less intrusive will be to identify and assess travelers according to the risks they pose to safety in the skies. The so-called riskiest or unknown passengers would face the toughest scrutiny, including questioning and more sensitive electronic screening. Those who voluntarily provide more information about themselves to the government would be rewarded with faster passage…”

They enforce destructive anti-personal rights policies then pretend to acquiesce by replacing them with a technocratic nightmare grid which requires the cataloging of our very genetic essence in order to function.  The only remaining injustice left would be to apply this grid to the rest of the country outside of the airports and train stations, which I assure you, they plan to do. 

Militarization

Last week, I covered the disturbing use of armored vehicles (APC’s or urban tanks) in open training regiments on the streets of St. Louis by the U.S Army, despite the fact that all of their exercises could have easily been accomplished on any number of military bases across the country.  The action is an obvious attempt to condition the American populace to the sight of military units operating in a policing capacity:

http://www.alt-market.com/articles/866-military-tanks-on-st-louis-streetsbut-why

I received multiple letters from current serving military who stated that in all their years in the armed forces they had never seen such a brash mishandling of public relations or an overstepping of bounds when it came to the restrictions of Posse Comitatus.  It was encouraging to hear from military men and women who did not agree with or condone this kind of psyop activity on the part of our government. 

Though the St. Louis event is not isolated, I believe it does represent an escalation.  

Remember the controversy over the Mayor of Toledo and his refusal to allow 200 Marines to conduct urban combat drills on the public streets of his city in 2008?  The media clamored to crucify this public official; one of the few who had any sense whatsoever in his head:

http://voices.yahoo.com/toledo-mayor-faces-backlash-ousting-marines-896105.html

Or the tactical exercises using helicopters and combat troops over LA and Chicago early this year?

http://www.lapdonline.org/newsroom/news_view/50045

http://chicago.cbslocal.com/2012/04/17/city-black-hawk-helicopter-flights-were-just-a-training-exercise/

During each one of these events, city officials and local media attempted to inoculate the public with claims that they were “simply exercises”.  This argument misses the point entirely.  Whether or not these are “exercises” is not the issue.  The issue is that this training could be done ON BASE.  Using public streets and running drills within cities is absolutely unnecessary given the vast resources already available to the military, unless, of course, the goal is to BE SEEN by the public and to influence them to view the sight of armed troops around them as “normal”.

Add to this the fact that many of these military training exercises are being conducted in tandem with local police department, and you have a recipe for the utter militarization of our society, turning peace officers into combat soldiers, and combat soldiers into law enforcement mechanisms; a juxtaposition that will soon lead to unmitigated disaster.

Arms Race Against the People?

When a country is quietly preparing for war, the first signs are usually revealed by a disclosure of armaments.  If stockpiling is taking place without a warranted threat present from a legitimate enemy, there is a considerable likelihood of aggression on the part of that nation.  America has gone well beyond the psychological process of militarization and has begun the extensive arming of particular agencies whose primary purpose revolves around the domestic. 

The DHS, for instance, placed an order for over 450 million rounds of hollowpoint .40 cal ammunition in April of this year:

http://rt.com/usa/news/dhs-million-point-government-179/

And it placed an order for over 7000 new semi-automatic combat rifles chambered in .223 (5.56 by 45mm NATO) immediately after:

https://www.fbo.gov/index?s=opportunity&mode=form&id=d791b6aa0fd9d3d8833b2efa08300033&tab=core&tabmode=list&=

While local police through federal programs (like the 1033 Program) are being given millions of dollars in free military equipment, including body armor, night vision equipment, APC's, aircraft, first aid supplies, weapons, surveillance equipment, Kevlar helmets, gas masks and filters, vehicles, etc.:

http://www.ogs.state.sc.us/surplus/SP-1033-index.phtm

http://www.wired.com/dangerroom/2012/06/cops-military-gear/all/

All of this equipment, though issued to state agencies, is still heavily tracked and regulated by the federal government, making it clear that these “gifts” come with strings attached:

http://www.newsherald.com/articles/program-103291-state-law.html

And finally, new FAA regulations will soon allow the dispersion of tens of thousands of predator drones with armament capability in the skies of the U.S. over the course of the next few years:

http://www.washingtontimes.com/news/2012/feb/7/coming-to-a-sky-near-you/

http://articles.latimes.com/2011/dec/10/nation/la-na-drone-arrest-20111211

Now, anyone with any logic would ask who it is that the government is arming itself and local police to fight against?  Al Qaeda?  Let’s not be naïve…

The passage of the NDAA and its provisions for the indefinite detainment of ANY person, even an American citizen, under the laws of war has ended the debate over government intent in terms of domestic action.  FBI Director Robert Mueller’s admission that he “did not know” if assassination programs would be used against American citizens also heaped evidence on the matter.  The bottom line?  Our government wishes to label and treat citizens as enemy combatants.  Of course they would then organize armaments to follow through on their policy.

Pulling The Trigger

All despotic systems have another distinct similarity; they each began with a series of trigger events which opened the door to tighter controls over the population.  The most immediate trigger event for the U.S. is the looming peril of a collapsing economy followed by inevitable civil unrest.  With the EU currently in debt shambles, global markets are on the verge of a considerable breakdown.  The Federal Reserve response will be predictable; QE3 and massive stimulus all around to mitigate the crisis.  This time, though, the go-to Keynesian quick fix will not work in the slightest.  In fact, it will make matters more untenable by placing the world reserve status of the dollar at risk.

Everything that has happened so far in the markets this year has been easy to foresee.  Alt-Market predicted the economic slowdown around the world and the collapse of overall demand using the Baltic Dry Index as a gauge back in January:

http://www.alt-market.com/articles/540-baltic-dry-index-signals-renewed-market-collapse

We also predicted the accelerated turmoil in the EU in light of the recent election results in France and Greece:

http://www.alt-market.com/articles/765-economic-alert-if-youre-not-worried-yetyou-should-be

If alternative economic analysts can predict these developments despite the manipulated statistics spewed out by the government every month, then I think the government and our central bank has a tremendously transparent view of what is coming down the road in terms of financial distress.  I believe the establishment is very well aware of a potential crisis event, economic or otherwise, that is barreling down upon the U.S.  I believe the evidence shows that they are preparing for this eventuality in a command and control fashion, without alerting the public to the coming implosion.  I believe they will use the despair that flows forth from the fiscal wreckage as an excuse to institute martial law. 

Call it "crazy".  Call it “conspiracy theory”.  Call it “coincidence”.  Call it "fear mongering".  Whatever you like.  I find it far more insane to shrug off the strange and twisted behavior of our power structure, and simply hope that it’s all irrelevant to the future.  Whenever I run into starry eyed historical romanticists who look back in astonishment at the tyrannies of the past and wonder out loud, “How could those people have not known where their country was headed?!!”, I think of where we are today…

Bankia Valued at EUR -13.635 Billion; Spain Becomes Sole Owner, Shareholders Totally Wiped Out; Entire Bankia Board Resigns

Courtesy of Mish.

Five days ago we heard from the Bank of Spain that Spanish banks only need between €16bn and €62bn in new capital.

For details, see Laugh of the Day: Stress Tests Show Spanish Banks Only Need Between €16bn and €62bn in New Capital; ECB to Accept BBB- Rated Debt (One Step Above Junk) as Collateral

In the same report we also heard that the three largest bank groups do not need any capital at all. Bear in mind that was allegedly in a "stress" scenario.

Today we learned that Bankia is Valued at EUR -13.635 Billion

The seven banks that founded Bankia be left out of the shareholders of the entity and the State will be made with one hundred percent of the group's parent, Bank Savings Financial (BFA), the latter having a negative value of 13.635 million euros According to the assessment commissioned by the state.

After the assessment, the FROB becomes the sole owner of BFA.

Thus, the seven savings banks that created the group, Caja Madrid, Bancaja, La Caja de Canarias, Caja de Avila, Laietana Caixa, Caja Segovia and Caja Rioja, stay out of the shareholders.

Finally, BFA proceed to recapitalize its subsidiary, Bankia, with an injection of 12,000 million euros. He will do through a capital increase in which existing shareholders will have preferential subscription rights. It is expected that the capital increase in Bankia be completed during October.

The European Commission today gave its approval temporary nationalization and recapitalization of the matrix BFA waiting for Spain to send to Brussels a restructuring plan of the institution in the next six months.

I strongly suspect that a valuation of -13.635 billion euros is on the wildly optimistic side.

Entire Bankia Board Resigns

Here is an amusing picture from the El Pais article The assessment shows a group of Bankia 13.635 billion hole

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*****

Merle Hazard Song – US Racing Towards Fiscal Cliff; Submit Lyrics For Merle's Next Song For Fame (Certainly Not Fortune)

Courtesy of Mish.

I received an email this morning from “Merle Hazard” about his latest song. It’s one of his best.

US Racing Towards Fiscal Cliff

If the video does not play, or if you wish to submit lyrics or ideas for his next song, please click on A Q-and-A, Plus a Ditty and Contest as U.S. Races Toward the ‘Fiscal Cliff’

Merle Explains …

Though I’m a country singer, I also love surf-style music. The only thing wrong with the genre is that these songs are always — of course — about surfing, as well as teenage romance and drag races. There should be more on macro-economic topics and political economy. So I’d like to do another one like ‘Fiscal Cliff,’ but I’m out of ideas. I’m hoping NewsHour audience might help. I have in mind a song contest. Submit a topic, a key phrase, or a whole lyric. Whatever you like. The Making Sen$e team and I will jointly select the winner. Assuming we get a good idea or two, I will turn it into an original song. There is no money involved, as the market for econ surf songs is somewhere between inactive and inconceivable. But the winner will garner Internet fame on Making Sen$e, perhaps even go viral, and will in any case earn a heart-felt thank-you from me. At the very least, you should have fun and a story to tell.

This is clearly a way to get free publicity for Making Sen$se as well as free ideas for a new song, but hey, I don’t mind as long as a good song comes out of it.

I asked for a song about the pension crisis, pointing Merle to my post Stockton CA Bankrupt; Unions (Not Housing Bust) Primarily to Blame; Pension Death Trap for Cities; What’s the Solution?

I did not provide any lyrics or a background melody, so have at it, if you like my topic.

There is a form on the above link to submit ideas. May the best pension song win!

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Merle Hazard Song – US Racing Towards Fiscal Cliff; Submit Lyrics For Merle’s Next Song For Fame (Certainly Not Fortune)

Courtesy of Mish.

I received an email this morning from “Merle Hazard” about his latest song. It’s one of his best.

US Racing Towards Fiscal Cliff

If the video does not play, or if you wish to submit lyrics or ideas for his next song, please click on A Q-and-A, Plus a Ditty and Contest as U.S. Races Toward the ‘Fiscal Cliff’

Merle Explains …

Though I’m a country singer, I also love surf-style music. The only thing wrong with the genre is that these songs are always — of course — about surfing, as well as teenage romance and drag races. There should be more on macro-economic topics and political economy. So I’d like to do another one like ‘Fiscal Cliff,’ but I’m out of ideas. I’m hoping NewsHour audience might help. I have in mind a song contest. Submit a topic, a key phrase, or a whole lyric. Whatever you like. The Making Sen$e team and I will jointly select the winner. Assuming we get a good idea or two, I will turn it into an original song. There is no money involved, as the market for econ surf songs is somewhere between inactive and inconceivable. But the winner will garner Internet fame on Making Sen$e, perhaps even go viral, and will in any case earn a heart-felt thank-you from me. At the very least, you should have fun and a story to tell.

This is clearly a way to get free publicity for Making Sen$se as well as free ideas for a new song, but hey, I don’t mind as long as a good song comes out of it.

I asked for a song about the pension crisis, pointing Merle to my post Stockton CA Bankrupt; Unions (Not Housing Bust) Primarily to Blame; Pension Death Trap for Cities; What’s the Solution?

I did not provide any lyrics or a background melody, so have at it, if you like my topic.

There is a form on the above link to submit ideas. May the best pension song win!

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Continue Here

How to Build Consistent Trading Success

How to Build Consistent Trading Success 

EWI's senior analyst Jeffrey Kennedy shares with you practical advice on what it takes to improve the quality of your trades. 

By Elliott Wave International

You've heard it all before:

  • If you want to trade using Elliott wave analysis, to succeed you first need to understand its rules and guidelines.
  • You need a clearly defined trading strategy (what? when? how? etc.) and the discipline to follow it.
  • Additionally, your long-term success depends on adequate capitalization, money management skills and emotional self-control.

Do you meet these qualifications, yet still struggle in the markets? If so, you may find some helpful advice in this quick trading lesson from Elliott Wave Junctures editor Jeffrey Kennedy:

We all know that the Elliott Wave Principle categorizes 3-wave moves as corrections and, as such, countertrend moves. We also know that corrective moves demonstrate a stronger tendency to stay within parallel lines, and that within A-B-C corrections the most common relationship between waves C and A is equality. Furthermore, we know that the .618 retracement of wave 1 is the most common retracement for 2nd waves, and that the .382 retracement of wave 3 is the most common retracement for 4th waves.

Knowing that all of these are traits of countertrend moves, why do traders take positions when a pattern demonstrates only one or two of these traits? We do itbecause we lack patience. We lack the patience to wait for opportunities that meet all of our criteria, be it from an Elliott wave or another technical perspective.

What is the source of this impatience? It could be from not having a clearly defined trading methodology, or not being able to control emotions. However, I think impatience stems more from a sense of not wanting to miss anything. And because we're afraid of missing the next big move, or perhaps because we want to pick up some lost ground, we act on less-than-ideal trade setups.

Another reason traders lack patience is boredom. That's because — and this may sound odd at first — "textbook" Elliott wave patterns and ideal, high-probability trade setups don't occur all that often. In fact, I have always gone by the rule of thumb that for any given market there are only 2-3 tradable moves in your chosen time frame. For example, during a normal trading day, there are typically only two or three trades that warrant attention from day traders. In a given week, short-term traders will usually find only two or three good opportunities worth participating in, while long-term traders will most likely find only two or three viable trade setups in a given month, or even a year.

So as traders wait for these "textbook" Elliott wave patterns and ideal, high-probability trade setups to occur, boredom sets in. Too often, we get itchy fingers andwant to trade any chart pattern that comes along that looks even remotely like a high-probability trade setup.

The big question then is, "How do you overcome the tendency to be impatient?" Understand the triggers that cause it: fear of missing out, and boredom.

The first step in overcoming impatience is to consciously define the minimum requirements of an acceptable trade setup and vow to accept nothing less. Next, feel comfortable in knowing that the markets will be around tomorrow, next week, next year and beyond, so there is plenty of time to wait for the ideal opportunity. Remember, trading is not a race, and over-trading does little to improve your bottom line.

If there is one piece of advice I can offer that will improve your trading skills, it is simply to be patient. Be patient and wait for only those textbook wave patterns and ideal, high-probability trade setups to act. Because when it comes to being a consistently successful trader, it's all about the quality of your trades, not the quantity.

Developing patience isn't easy — yet, if you are serious about improving the quality of your trades, it is vital.

How much more successful would you be if you could develop the patience to act only on high-probability trade setups?

Jeffrey Kennedy shares his 20 years of wisdom in analysis and trading — to help you decide when to act — in a new FREE report, 6 Lessons to Help You Find Trading Opportunities in Any Market. This report includes 6 different lessons that you can apply to your charts immediately. Learn how to spot and act on trading opportunities in the markets you follow. Get Your Free Trading Lessons Now >>

This article was syndicated by Elliott Wave International and was originally published under the headline How to Build Consistent Trading Success. 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.

Labour group criticises Apple on China suppliers

Labour group criticises Apple on China suppliers (via AFP)

A labour rights group said Thursday it had found "deplorable" conditions at Apple suppliers in China, following a probe of several firms that supply the US technology giant. New York-based China Labor Watch said a four-month investigation of suppliers to Apple in southern and eastern China uncovered…

[Read more…]

Why Are We Certain that Gold Producers Will Soar?

Why Are We Certain that Gold Producers Will Soar?

By Jeff Clark, Casey Research

For the past eighteen months, gold stocks have been pummeled.

They showed some life from mid-May to mid-June – GDX, the gold miner's index, was up 21%, while gold rose 5.5%. That bounce was exciting, but they've still got a lot of lost ground to make up. Since January 1, 2011, GDX is down 28%, while gold is up 10%.

So what's going to move these darn stocks? Will their day ever come? Could our research – gulp – be wrong? Jokes have even started circulating…

  • What's the difference between a seagull and a gold stock investor? The seagull can still make a deposit on a Mercedes.
  • Gold equities may be bad, but I slept like a baby last night. I woke up every hour and cried.

Laugh or cry, underneath this heap of stock-certificate debris is the contrarian opportunity of a lifetime.

That's a strong statement, I know, but there are numerous well-researched reasons why I'm convinced gold stocks are one spark away from igniting the portfolios of those with the cash to buy, courage to act, and patience to hold. And it's not just because they're undervalued, something that's been the case for at least eight months.

Let's review the core reasons why gold stocks are the place to invest right now, and why I'm convinced much higher prices will be had before this bull market is over…

Reason #1: Gold stocks have leverage to gold bullion prices. In spite of what's occurred recently, history is on our side here, as the track record of precious metals equities demonstrates they can reward patient investors tremendously. They rose:

  • 950% from January 2001 to January 2008.
  • 700+% from 1970 to January 1980, including 289.5% in the last thirteen months of that period.
  • 211% in less than 24 months in the mid 1990s.
  • Even during the Great Depression, the two largest producers at the time – Homestake Mining and Dome Mines – rose 474% and 558% respectively.

It's normal for gold stocks to demonstrate this kind of leverage to gold. It would completely contradict the historical pattern – and common sense – for gold stocks remain where they are until this bull market ends.

(And sometimes, even when the price of gold bullion falls, gold stocks can still offer big upside. Case in point: in the 24 months from January 1, 1981 to January 1, 1983, while the price of gold bullion fell by 25% – from $597 to $446 – gold stocks rose 72%. A series of giant gold discoveries in Canada set off a mini-mania in the equities.)

Check out the historical record, which includes some mind-boggling performances by juniors.

Reason #2: Gold stocks are grossly undervalued. Gold stocks aren't just inexpensive, they're stupid cheap. Their current undervaluation is more than just compelling… it's fire-sale attractive. It should have your full attention.

Just look at the data and you'll see what I mean:

  • Relative to gold, the equities have not been this cheap since the waterfall selloff in 2008. The HUI/gold ratio is roughly 0.27, close to its bottom of 0.24 in October 2008. It hovered between 0.50 and 0.60 for most of a five-year period from 2003 to 2007, and exceeded 0.60 several times.
  • On average, and in spite of weak gold prices at present, industrywide margins are roughly $1,000 per ounce. The price of gold wasn't even $1,000 30 months ago.
  • As a group, gold stocks are selling for less than their net asset value… by 20%. They traded 60% above their NAV in 2007, a common level for precious metals equities.
  • Average P/E ratios of the 10 largest gold producers are less than half what they were just two years ago.
  • As we mentioned a few weeks ago, for a $1,000 investment right now, you can get about 0.6 ounces of gold. For the same $1,000, however, you'd get four ounces of gold by buying shares of Goldcorp or more than five ounces by buying Eldorado Gold.

This undervaluation cannot and will not last. Even the trader who knows nothing about Newmont or Barrick or Goldcorp will sooner or later want to jump on this – and if he doesn't, his boss will want to know why. Read what one Sprott fund manager thinks about gold stocks.

Reason #3: Gold stocks are universally under-owned. There are plenty of reports about how little gold and silver the average mainstream investor owns – which likely means they own even less of gold equities. But the disconnect is bigger than you realize…

In the institutional world, pension funds sit at the head of the table. However, the typical fund devotes only 3% to commodities, and of that 3%, only 5% is committed to gold and gold stocks. In other words, only 0.15% of assets are in gold and another 0.15% in gold mining stocks, a pathetic total of less than one-third of one percent. Ditto other institutional investors.

Given the gamut of sovereign risks in virtually the entire world, even the developed world, the lack of gold and gold stock ownership is appalling. That will change as the growing fiat currency risks around the world impact investors more deeply.

Reason #4: All that cash has gotta go somewhere. It's one thing to say gold stocks are under-owned, but is the money available to buy them? One could make an argument that any rush into gold equities would be muted if no one has any savings or if demographics dictate that a fifth of the developed world will soon be retired.

At the end of Q1, S&P 500 corporations had $1.7 trillion in cash and another $4 trillion in short-term investments. The M1 money supply is currently $2.2 trillion. Pension assets exceed $31 trillion, more than twice the size of last year's GDP in the US.

Contrast those figures with the market cap of all primary gold producers trading in North America: about $800 billion. Or the market cap of all primary silver producers: a measly $32 billion.

  • If corporations moved 5% of their "short-term investments" into gold stocks, the market cap of the industry would increase by 20%.
  • If they chose silver stocks, it'd grow by a factor of six.
  • Five percent of M1 would increase the market cap of gold producers by 14%; it would be 3.4 times bigger than the entire current value of all primary silver producers.
  • If pension funds doubled their allocation to gold stocks (making it a puny 0.6% of total assets), it would amount to $93 billion in new purchases. If they went to 5%, $1.5 trillion would flood the industry.

Check out the chart of these data. And by the way, don't forget other corporations in the US and around the world, insurance companies, hedge funds, sovereign wealth funds, mutual funds, private equity funds, private wealth funds, ETFs, and millions of global retail investors. There are, quite literally, tons of cash available for investment in whatever sector the mainstream targets.

What if they all enter the gold market at or near the same time?

Reason #5: Physical gold may become hard to get. The gap between supply and demand isn't letting up. Since 2001, worldwide production is flat, despite a sixfold increase in the gold price – and demand has grown from $3 billion to $80 billion.

I'm in touch with bullion dealers on a regular basis, and they're all saying the same things. Andy Schectman of Miles Franklin insisted that the bullion market "will ultimately be defined by complete lack of available supply." Border Gold's Michael Levy cautioned, "If an overwhelming loss of confidence in the US unfolds, the demand for physical gold and silver will far outweigh all known inventories." And Mike Maloney of GoldSilver.com warned that if shortages develop, "physical bullion coins and bars might become unobtainable regardless of price."

As increasing numbers of people view gold as a must-own asset, and as supply is not keeping up with demand, where is the next logical place for investors to turn to get exposure? Gold stocks.

Imagine the plight of the mainstream investor who calls a bullion dealer and is told they have no inventory and don't know when they'll get any. Picture those with wealth finally becoming convinced they must own precious metals and being informed they'll have to put their name on a waiting list. Imagine a pension fund or other institutional investor scrambling to get more metal for its fund and being advised the amount it wants is "currently unavailable."

Mining equities would be the fastest way to meet that demand. It'll be the next logical step to take – maybe the only sensible step available if the supply of physical metal remains constrained. It will feel like the most natural thing in the world for them to do. It is indeed the overlooked reason gold stocks will soar.

Reason #6: Gold has a lot further to climb. This is why I'm convinced gold stocks will soar again: a rising gold price. Many investors have focused on gold's lackluster movement for the past eight months, forgetting that it rose a total of 2,333% in the 1970s – with much less currency dilution than we have today. For gold to match the same percentage rise from its 2001 low, the price would hit $6,227 per ounce. Nothing says it has to match that price – but neither does it have to stop there. Given the ongoing caustic actions of politicians, we see much more upside risk in gold than downside.

And here's the key for gold stocks: once the gold price resumes its uptrend and begins making new records again, all sorts of investors – from large market-moving institutions to small retail buyers – will return to gold equities. I suggest beating them to it.

Reason #7: "The boat" has a leak. The dilution of our currency is on a nonstop – and scary – trajectory. Just since January 1, 2000, US dollars have lost a whopping 26% in purchasing power. The Canadian dollar has lost 23%. This is a serious and gross devaluation of what we use for money. Meanwhile, gold has gained 325% in purchasing power (after accounting for inflation as measured by the CPI, which understates the amount of inflation by a considerable amount). And this is while the gold price has gone nowhere since last September.

The problem is, the leak in our economy is only going to get bigger. The monetary base now exceeds $2.6 trillion, up 215% since January 2008; the national debt is over $15.7 trillion and will conservatively reach $20 trillion in just three years; the $1.3-trillion US budget deficit, which is more than the entire US budget was just 20 years ago; the approximate $4 trillion in US Treasuries held in foreign central banks, many of which continue making arrangements to bypass the dollar; the vulnerable and propped-up economies around the globe; the still-unresolved European debt crisis; the many negative real interest rates that show no sign of reversing course anytime soon.

These are massive megatrends that won't be reconciled without further, serious dilution of the currency – it's the only politically acceptable way to decrease the debt burden. This is why we're convinced more money-printing in the US and around the world is highly likely – whether they call it "quantitative easing" or try to hide it under some other guise – especially if we get another deflationary scare. With the only logical choice being to print, gold will be forced higher by an order of magnitude.

I say all this about gold because I think that is the key to gold stocks. If gold and silver are destined for higher levels, gold stocks will follow. I know they haven't demonstrated that for a while now, but slumps don't last forever.

The bottom line is this: Gold stocks do respond when gold goes higher – and gold is going higher because of completely unsustainable fiscal and monetary actions of governments all around the world.

So, will gold stocks really soar again someday? The historical record of gold stock manias… the extreme undervaluation of gold equities… the lack of mainstream participation in our market… the abundance of available cash… dwindling supply and rising demand… the massive disconnect between gold and gold stocks… the likely trajectory of the gold price… and last but not least, the political compulsion to dilute the currency further… all these factors point to an incredible opportunity to buy gold stocks at extremely low levels and someday realize potentially life-changing rewards.

Hang in there, my friends. Our time will come. In fact, I predict that someday we'll wonder why anyone doubted it in the first place.

Being a successful investor in this sector requires much more than simply buying some companies – one must sift through company data and filter the hype to uncover those with the best chance of producing outsized gains. That's exactly what Jeff Clark and his team do to bring the best gold majors to light each month in BIG GOLD. Right now, for a limited time, when you subscribe risk-free to BIG GOLD, you'll receive a bonus special report highlighting the most promising and least risky gold stocks to buy. Get the details now.

Spain recession deepens in Q2, says Bank

Spain recession deepens in Q2, says Bank (via AFP)

Spain's recession is deepening in the second quarter as the economy takes a battering from the financial markets, the nation's central bank said Wednesday. Economic output was shrinking at a faster pace, after contracting by 0.3 percent in the first three months of the year, the Bank of Spain said…

[Read more…]

Passing The Trash – Again

Passing The Trash – Again

Courtesy of Bruce Krasting

I participated in a slow motion disaster back in the early 80’s. I was working for the global powerhouse, Citibank. Walter Wriston was running the show at the time. He “famously” said “Countries don’t go bankrupt.” His thinking resulted in an enormous increase in the bank’s exposure to global sovereign lending.

All of the big global banks followed Citi’s direction. It was one big party. All the bankers were headed to Brazil, Mexico and Argentina. They all had checks ready to sign. Of course, the countries were more than willing to take on more debt.

It was in 1980 that the thinking was forced to change inside Citi. The sovereign loan portfolio  was getting too big too fast. The bank had internal country limits and those limits were filling up fast. The worst thing that can happen to a banker is to reach a lending ceiling. The real return for lending to these countries was not the Libor+1 pricing, it was the front end fees from new loans that fed the bonus pools.

The solution was simple. Sell the loans that were already on the books to make room for the new ones (and the related origination fees). Who did we sell the loans to? Anyone we could, but we created demand from smaller, US regional banks.We sold them sub-participations in sovereign loans.

In August of 1982 the lights went out. All the big sovereign customers of Citi went bust in the course of a few months. The losses at Citi damn near shuttered the bank (many of the big banks were in the same condition). There were no more big fees coming in, and the losses were mounting. What was once a great place to work, became a terrible place, so I left and joined Drexel in 1985.

I spent the next five years buying back the loans that I had sold to the regional banks. At Citi, I had sold the loans at par to regional banks, at Drexel I bought them back from those same banks at 20 cents on the dollar.

Note: During this period I was not a “decider”. A “cog in a wheel”, is a better description of my role in this story. There were thousands of “cogs”, together we produced a crisis that cost hundreds of billions, wrecked a good number of banks and produced what is now called, “The Lost Decade”.

This story is important because it is happening again today. Money Center banks are reducing their holdings of risky loans. The regional banks are increasing exposure.

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It’s not just the big US money center banks that are selling. The EU banks are having a fire sale:

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Once again, the trash is headed downhill. It won't end any differently this time. I looked at my old Rolodex of banks that I both sold and bought bad loans from. Very few of them are alive today. Nothing has changed. Surprised?

.

A Little Bedtime Reading

A Little Bedtime Reading

Courtesy of Michael Panzner, Financial Armageddon

…for those who like nightmares:

"America Is No Longer a Land of Opportunity" (Joseph Stiglitz, Financial Times op-ed)

US inequality is at its highest point for nearly a century. Those at the top – no matter how you slice it – are enjoying a larger share of the national pie; the number below the poverty level is growing. The gap between those with the median income and those at the top is growing, too. The US used to think of itself as a middle-class country – but this is no longer true.

"We Are Living in a ‘Modern-Day Depression’: David Rosenberg" (Yahoo! Finance)

While some, notably the cycle watchers at ECRI, believe the U.S. economy is definitely heading for another recession (or already there), Gluskin Sheff's chief economist and strategist David Rosenberg goes a big step further.

"We are living in a modern-day depression," he declares.

This dramatic statement is based on several factors, including the record number of Americans living on Food Stamps — 46 million or 1-in-7 in 2011. Because these benefits are now given in the form of electronic debit cards, we don't have bread lines like in the 1930s, but they are there in virtual form. And that's just the most obvious form of government support for its struggling citizenry.

"Government transfers to the personal sector now makes up nearly one-fifth of total household income," Rosenberg writes. "Even Lyndon Johnson, architect of the 'Great Society', would blush at that."

"SURVEY: The World's Top Executives Are Losing Faith In The Economy" (Business Insider)

McKinsey has just published the finding of its global survey of executives, and it shows a startling downturn in sentiment about the direction of the economy.

Back in March, 45 percent of respondents expected the economy to improve moderately over 6 months. Now, that number is down to 19 percent.  The number that expect it to do moderately worse is up to 42 percent.

"Enter, the Blindside Recession" (Hussman Funds Weekly Market Comment)

In recent months, our measures of leading economic pressures have indicated the likelihood of an oncoming U.S. recession. Our view is based on the analysis of leading/coincident/lagging indicators (see Leading Indicators and the Risk of a Blindside Recession) as well as more statistical signal processing methods that extract "unobserved components" from noisy data (see the note on extracting economic signals in Do I Feel Lucky?). As Lakshman Achuthan at the ECRI has noted on the basis of different but related evidence, the verdict has been in for a while. The interim has been little more than waiting for the coincident data to catch up to the leading evidence that is already in place.

This wait is by no means over. As Achuthan has observed, economic data such as GDP and employment data are heavily revised over time. Very often, the first real-time negative GDP print occurs about two quarters after the recession actually begins. It is only later that the data are revised to show an earlier downturn. For that reason, it's important to pay attention to the joint action of numerous economic data points, rather than selecting any specific indicator as an "acid test." The joint evidence suggests that the U.S. economy has entered a recession that will later be marked as having started here and now.

"A Nation Too Scared to Quit" (New York Post)

More than 1 million fewer Americans a month are quitting their jobs than before the recession.

Quits aren’t supposed to be falling during a recovery. During a recession, sure: With poor prospects of landing a good new job quickly, people hesitate to voluntarily leave.

But the opposite is supposed to happen in a recovery: People sense opportunity, and they chase it. (The rebound is especially strong after longer recessions, as people who’ve been putting off quitting finally decide it’s safe to bite the bullet.)

Yet now we have a “recovery” where Americans have grown even more fearful about quitting their jobs.

Nighty night…

Freddy

(Image: source)