Archives for February 2013

EU Doesn’t Like Its Forecasts, So It Removes Them From Its Site

Courtesy of Mish.

With thanks to Yogi Berra, making predictions is hard, especially about the future. And with constantly revised forecasts for the EU, the European Commission decides the safe safe thing to do is Eliminate Forecasts for 2015.

Via Google Translate from El Economista …

This morning you could see the data for 2012, 2103, 2014 and 2015, but now can only see the figures from 2011 to 2014 and there is no trace of the catastrophic 2015 numbers (see the screenshots attached below).

Although there is no official communication in one way or another, hypothetically could be a real blunder produced after being released by mistake, or any type of computer failure, a former forecasts for 2012 under the 2015 column.’s say, that would have mistakenly announced as 2015 forecast estimates released earlier this year to last year.

Forecasts of Discord

Those European Commission forecasts envisage a general improvement in economic scenario for 2014. However, estimates for 2015, this morning hidden behind an interactive graphic , pointed for a few hours, before being erased-a brutal relapse. In fact, Germany would grow 2% in 2014 to only 0.8% in 2015, would UK from 1.9% to 0.3%, France 1.2% and Spain 0.2% from 0.8% to -1.4%.

Sooner or Later

El Economista has some interesting snapshots of the removed estimates. To be completely fair, the original posting may have been a simple mistake.

Regardless, I suggest the EU forecast for 2014 is too optimistic.

Will the EU 2014 estimates be revised lower as well? If not soon, then expect revisions later, with France leading the way lower.

Mike “Mish” Shedlock

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Quadrocopter Pole Acrobatics

Courtesy of Mish.

Here is an interesting video that came my way via reader “Nino”. It’s a look at some rather amazing technology that is developing right now, and I suspect very few are aware of it.

Link if video does not play: Quadrocopter Pole Acrobatics

The video shows a quadrocopter capable of dynamically balancing an inverted pendulum (a stick weighted at the bottom), but also flipping the stick to another quadrocopter that determines the optimal position to catch it without losing balance.

Technology marches on whether anyone is aware or not. People do become aware as markets for technology develop.

Mike “Mish” Shedlock

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Not Done Rising, But Night Will Come

Read: MarketShadows February 24 2013 Newsletter: Not Done Rising, But Night Will Come 

This week:

Event Horizons: Not Done Rising

Market Forces: Lee Adler’s composite liquidity indicator keeps going higher: Cis Bam! Fed Drives Massive Liquidity Surge, Treasury Says Thank You Ma’am.
Screen-Shot-2013-02-21-at-2.56.48-AM (1)
Value Exploration: Paul Price’s Virtual Value Portfolio (stocks) is almost filled up, so we sold some PUTS in our Virtual Put Selling Portfolio.
Get regular updates the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market, in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Click this link to try WSE’s Professional Edition risk free for 30 days!

Creeping Fascism, Part 2: Great Fraudulent Beast

Courtesy of John Rubino.

In Charles Mann’s 1491, about the (surprisingly big and diverse) cultures that existed in the Americas before the arrival of smallpox, he offers this:

“The celebrated anthropologist Clifford Geertz has half-jokingly suggested that all states can be parceled into four types: pluralist, in which the state is seen by its people as having moral legitimacy; populist, in which government is viewed as an expression of the people’s will; “great beast,” in which the rulers’ power depends on using force to keep the populace cowed; and “great fraud,” in which the elite uses smoke and mirrors to convince the people of its inherent authority. Every state is a mix of all these elements…”

Which of course leads to speculation about where today’s US is on such a spectrum. Obviously, this is an eye-of-the-beholder kind of debate, but from the libertarian/gold-bug perspective it’s been clear for some time that we’re lurching from pluralist/populist to a toxic combination of “great fraud” and “great beast,” and that the process probably won’t end well.

The table below lists recent developments that seem to fit into each of the latter categories:

Great beastThese just scratch the surface; there are plenty of other compelling examples, with more apparently in the pipeline. Together they paint a picture of a system that’s trying hard to confuse its citizens while building an apparatus to coerce them into obedience when its lies are exposed. For more, here’s a recent Zero Hedge article on the rights we’ve already lost.

What does this mean? Again, from a perspective that values transparency and individual liberty over near-term efficiency, it means we’re not the same country that we once were. Americans are being secretly taxed via inflation, lied to about the economy, spied upon by no-longer-constitutionally-constrained authorities, and arrested/harassed/murdered without due process. “Great Fraudulent Beast” indeed.

Visit John’s Dollar Collapse blog here >

Quick Rise, Sharp Pullback – That’s LIFE

Quick Rise, Sharp Pullback- That’s LIFE

See also:  MarketShadows February 24 2013 Newsletter: Not Done Rising, But Night Will Come 

Courtesy of Paul Price 

Global biotechnology supplier Life Technologies (LIFE, $58.19) was formed in November 2008 when Applied Biosystems and Invitrogen merged. The company has prospered since. LIFE was reportedly being courted for a buyout by publicly traded Thermo Fisher Scientific (TMO) as well as some private equity outfits. 

It appeared a deal would be struck. LIFE shares surged to a new all-time high of $65.84 this year in anticipation of a bid. Last week the stock sunk back to the $58 range after terms could not be agreed upon.

LIFE Feb. 19 - 22 2013 

The company continues to do well. Adjusted earnings for 2012’s Q4 and full year were both records. Management gave 2013 guidance of $4.30 – $4.45 which compares favorably with non-GAAP EPS of $3.98 for the year just completed. 

LIFE’s strong business trends and international footprint would be attractive to many suitors. The 80% or so of total revenues that come from consumables/services mimic Gillette’s classic ‘Make money on recurring razor blades sales and don’t worry about the margins on the razors’ approach. 

LIFE   2009 - 2011 data 

LIFE was willing to sell but is holding out for a higher price than was being offered. Many times one or more of the interested parties will come back to the table. Research firm Morningstar saw fair value for LIFE at $64 as a stand-alone.

LIFE - Morningstar ratings (1) 

The company bought back 13.8 million shares during 2012 at an average cost of $46.01 per share. Directors indicated another 2 million shares had been retired just since January 1, 2013.

The stock has decent but unspectacular upside if no deal materializes. It could surge quickly again if takeover rumors resurface. I used last Wednesday’s price dip and increased volatility to sell some January 2014 $55 puts for a premium of $4.20 per share. Friday’s bid was slightly lower due to the shares’ late-week stability. The $50 strike would allow for a lower break-even point while offering less potential profit if the stock holds steady or rebounds. 

LIFE put details 

Note: These options are not actively traded. Be sure to use limit orders that fall between the bid/ask spreads.

Maximum gains on each put would come as long as LIFE closes at, or above, their respective strike prices ($50 or $55). Gains would be 100% of the premium received ($2.25 and $4.00, respectively). 

If LIFE closes below the strike price on the expiration date, the worst-case scenario would require purchase of 100 shares per put contract at a net outlay of the ‘if put’ prices shown in the chart above (strike price minus premium collected). $50 or $55 strike put sellers could sustain up to 17.9% or 12.3% drops, respectively, from the trade inception price without suffering a loss.

We will place an order to sell 1 contract on the LIFE Jan. 2014 $55 strike with a limit of $4.00 when the market opens on Monday February 25, 2013. 

LIFE put prices

Disclosure:  Short LIFE Jan. 2014 $55 puts

Click here for a screenshot of the full Virtual Put Selling Portfolio that our LIFE put will be joining.  


Special Offer from PSW: Click on this link to try Phil’s Stock World FREE! 

Italians Head to Voting Booths, Election Ends 9:00AM EST Monday; Surge for Grillo and “The Apathy Factor” Will Doom Bersani Coalition

Courtesy of Mish.

Voting booths are open in Italy though 3:00PM Monday (9:00AM EST). Exit polls will trickle in soon after but early exit polls could be misleading. If the result is close will may not know for over a day.

The Wall Street Journal offers this Italian Election Guide.

Italian voters can cast ballots Sunday and until 0900 ET  Monday, after which exit polls will provide quick but approximate insight into the probable result of the election.

The center-left coalition led by Democratic Left leader Pier Luigi Bersani was five percentage points ahead of Silvio Berlusconi’s center-right coalition according to the average of polls before a blackout on such surveys kicked in two weeks ago, giving it clear front-runner status.

Exit polls in 2006 and 2008 underestimated votes cast for Mr. Berlusconi, but unless Italy’s 51 million eligible voters shifted dramatically in recent days, Mr. Bersani should  – even with fewer than a third of the ballots cast – win a plurality, meaning his coalition will be awarded a majority of seats in the 630-seat lower legislative chamber.

Shift Has Taken Place

The Journal says “unless Italy’s 51 million eligible voters shifted dramatically in recent days, Mr. Bersani should  win a plurality.

I suggest such a shift has taken place. The open question regards turnout and apathy, not a shift, per se.

Loser’s Penalty

In the Chamber (the lower House of parliament) the party with the largest plurality in the national vote gets a majority (54%) of the seats. In the Senate (the upper chamber of parliament) each of 17 Italy’s regions operate independently and the winner of each region gets a majority (55%) of the region’s seats.

There are 315 seats in the Senate. Lombardy, Italy’s largest region gets 49 seats and the winner will take 27 seats (55%). The other parties will split the remaining 22. Second place may only get 10.

The Journal sums it up this way.

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Virtual Put Selling Portfolio

Market Shadows has created what we hope will be a very valuable new feature. It’s our Virtual Put Selling Portfolio.

Here’s a snapshot of our Virtual Put Selling Portfolio as of 2/24/13. We’re in the process of making it self-updating, but this one is not yet. Check back. 

Screen Shot 2013-02-24 at 12.26.54 PM


We have not added LIFE yet. That will be Monday, with a limit SELL price of $4.00. (Article here.)  

Selling (also called ‘writing’) a put means getting paid a specified price per share up front for agreeing to buy 100 shares of a designated stock through some future date (the option’s expiration date) if asked to by the option’s owner. 

The put’s strike price sets the price you must pay if the option gets exercised. If the underlying stock closes above the strike price on expiration day, our obligation to buy will be extinguished (unless the put was assigned earlier, which happens occasionally). 

Why would anybody want to sell a put?

  • Sale of put premium generates immediate income
  • ‘If Put’ prices are lower than the market prices at trade inception (discount on shares)
  • Put writers have a built-in ‘margin of safety’ that outright purchase cannot provide


On the Global Numbers – CIA Edition

Courtesy of Bruce Krasting.


The CIA has some new 2011/2012 numbers for the world's economy. These numbers are as "good" as the countries who post the individual data, so it's safe to be suspect. That said, I found them interesting.

There's 7B of us. I love the CIA's precise estimate.


Only 47% of the population is in the workforce. 28% of the population is under 14 years of age, 8% is older than 65.



Of the 3.3 potential workers fully 9.2% are unemployed.


I was surprised to see that the global unemployment rate had risen in 2012 by .8%. That's a big change, It comes to an additional 26m people. Overall, some 300m people are looking for work. The numbers are big, the direction is bad. There is a case to be made about political stability with this many people not working.

The estimate for the USA is that 13m people are now unemployed. The US share of world unemployment is 4.3%, while US population is 4.4%. In other words, the US is right in the middle of the pack on unemployment. Not bad for the leading industrial economy……..

2012 was a so-so year for global growth, down YoY and down significantly from 2010.



The CIA measures total GDP, it came to a whopping $83T in 2012. The US share is 19%.



Global GDP rose $2.2T in 2012. How did that happen? Easy, more debt, money and inflation. The stock of money rose $6.1T, about 3Xs the increase in GDP. Given this, why is gold falling?




Where did all the new money come from? Debt, of course. Domestic and cross border debt marched ever higher:


external debt

Domestic debt rose by $5.1T, while cross bordered indebtedness rose $5.4T. Total debt is up by $10.5T while GDP rose only $2.2T. From this I conclude that it takes $1 of debt to produce a measly 20 cents of growth. Who was it that said that debt was an efficient stimulus for growth? There is no evidence of that in the CIA numbers.

The world is running a budget deficit. The government deficits increased by 3.8% (Vs. GDP of 3.3%) and by $2.7T (Vs. $2.2T of real growth). On balance, for each $1 increase in government debt, GDP rose by 80 cents.

budget surplus


Total government debt as a share of GDP is now at 65%.

publicdebt in percent

The large deficits are happening even though global tax rates are high. There is not much blood to be had from the taxpayer's stone:


Inflation was tame in 2012. With all that money sloshing around, one would think that the inflation numbers have to be headed higher.



The CIA data for 2012 is a mixed bag. There is no crisis at the moment, but there are troubling signs:

– Unemployment is dangerously high, social problems will be the result.

-Global growth is occurring as a result of every higher debt loads and a rapidly expanding money supply. Total debt is rising much faster than economic output. Every year we get more leveraged. The "efficiency" of debt is waning.

-Inflation is not a big issue today, but there is every reason to believe that this can't be sustained.

Spy versus Spy

Spy1 Spy2

Robots Don’t Commit Suicide (and Other Robot Advantages)

Courtesy of Mish.

Robots don’t eat, drink, demand coffee breaks, or protest working conditions. And they certainly don’t commit suicide.

Following a wave of suicides in China, one at Foxconn where a worker twice attempted to kill himself and succeeded the second time, Foxconn suspended hiring, deciding to use more robots.

Electronics manufacturer Foxconn has halted recruitment in China, which it claims is due to plans to further automate processes, amid speculation of a reduction in production demand by its key client Apple.

In fact, the recruitment freezes among Foxconn this time is due to its long pronounced plans to install million robots to replace human, Chinese newspaper Beijing News reported on Wednesday, citing unidentified employees.

Foxconn chairman Terry Gou had ordered all factories in China earlier this year to beef up automated manufacturing processes by using more robots. According to the report, if any factories plan to conduct large-scale recruitment, it will need his personal approval.

In June 2011, Gou announced the company would deploy one million robots across factory assembly lines within three years.

The move will improve production efficiency and combat rising labor costs, and is also believed to be in response to a spate of suicides and criticism over working conditions at the company.

Get rid of a million workers, replace them with a million robots, and you get rid of a million complaints about working conditions, as well as unwanted, high-profile, work-related suicides.

Mike “Mish” Shedlock

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Bloomberg Reports Biggest Story of All Backwards As Fed Blows Dangerous Deposit Bubble

Featured in: MarketShadows February 24 2013 Newsletter: Not Done Rising, But Night Will Come 

Lee Adler of the Wall Street Examiner on what’s next for the economy and the stock market. Main points and processes – and a question of timing:

1) The loan-to-deposit ratio for the top commercial banks has been falling – i.e. loans relative to deposits are down. This is because deposits are up. Banks are still lending. 

2) Deposits are growing too fast for the economy. With its quantitative easing (QE), the Fed is directly responsible. It’s blowing a deposit bubble that will result in capital misallocation. 

3) Bloomberg (accurately): “total deposits also reached a five-year peak of $5.04 trillion, according to the data, leaving hundreds of billions of dollars of potential fuel unused.”

4) The Fed has been buying $115-$120 billion of MBS and Treasuries from the Primary Dealers each month (QE). It buys those securities by crediting the dealers’ accounts at the Fed…. Abracadabra- $2 billion to the account of Goldman Sachs! 

5) The money encourages banks and those with access to easy credit to “invest” (speculate) in things that aren’t needed, such as commodities and low-yielding bonds. This spawns bubbles, which eventually crash.

6) The Fed wants inflation, higher stock prices, and lower long-term yields. It is trying to achieve that by buying Treasuries and MBS from Primary Dealers and funneling immense amounts of cash to their accounts, driving the loan-to-deposit ratio even lower. 

7) The Fed gets its way for extended periods, until something forces it to reverse policy. Reversing is usually due to some form of inflation.

8) Financial asset bubbles are a manifestation of inflation. Recently, the biggest asset bubble has been in bonds. The bubble in stocks is at an earlier stage. 

9) Bernanke is in denial about the costs of financial repression, or “ZIRP Bernankecide” (ZERO INTEREST RATES). Retirees have been driven to the poorhouse. Conservatively managed pension funds can’t generate adequate returns. Pensioner incomes will be cut. Insurers are being squeezed. ZIRP imposes real, painful, and immoral economic costs. Low interest rates are not a free lunch and do not benefit the whole economy. 

10) The transfer of the wealth of middle class retirees by suppressing their rate of return on savings in order to liquefy and make the banks profitable is terrible for the economy, and public morals and mores. 

11) The bull market will go on as long as the Fed ignores the hidden costs that its policies impose to the fabric of society. Eventually those costs will become too great to ignore. 

12) If commodity prices bubble up again before consumer prices and wages rise, the Fed will be in a Catch 22. Rising input costs will pinch business profits. Consumers facing rising food and energy costs will cut back spending. Rising food prices could trigger political instability. This could lead to a vicious downward spiral.

13) QE will continue to drive stock prices higher until it ends. By stopping it, the Fed will deprive the dealers and their hedge fund clients of the fuel needed to keep stock prices up. 

14) We will likely come to the brink again, have a market crash correcting some excesses, wash, rinse and repeat. If we do not take corrective action against those in power perpetrating massive financial frauds and making policy to benefit the powerful, we will slowly descend toward the dissolution of civil society.


Bloomberg Reports Biggest Story of All Backwards As Fed Blows Dangerous Deposit Bubble

Courtesy of Lee Adler of the Wall Street Examiner

This is how Bloomberg reported one of the biggest stories of the year, maybe the biggest, backwards.

The biggest U.S. banks including JPMorgan Chase & Co. and Citigroup Inc. are lending the smallest portion of their deposits in five years as cash floods in from savers and a slow economy damps demand from borrowers.

The average loan-to-deposit ratio for the top eight commercial banks fell to 84 percent in the fourth quarter from 87 percent a year earlier and 101 percent in 2007, according to data compiled by Credit Suisse Group AG. Lending as a proportion of deposits dropped at five of the banks and was unchanged at two, the data show.

Consumers and companies are reluctant to take on risk until they see more signs that business is improving, even as the Federal Reserve maintains near-record low interest rates designed to fuel growth. Putting more of the unused money to work could boost profit and help turn around the U.S. economy, whose 0.1 percent annualized drop in the fourth quarter was its worst showing since 2009.

via JPMorgan Leads U.S. Banks Lending Least Deposits in 5 Years – Bloomberg.

These deposits aren’t about people taking cash out of mattresses and depositing it in the banks. This story should not be about the banks not lending, because that’s not true. They are. They have been growing loans at a measured pace between 3.5% and 5% a year since 2011. That is absolutely consistent with the growth of the economy, and dare I say, the potential growth of the economy. The story is not that loan growth is not keeping up with deposit growth. It’s that deposits are growing too fast for the economy. That’s dangerous, and the Fed is directly responsible.

Bloomberg actually reported the real story it but buried it in a single line midway through the report.

At the same time, total deposits also reached a five-year peak of $5.04 trillion, according to the data, leaving hundreds of billions of dollars of potential fuel unused.

Needless to say they left out a lot, and misinformed readers that savers were flooding bank accounts. That seemed to imply that the source of deposit growth is either the nation’s mattresses or maybe thin air, when the truth is that there’s only one major source for the rapid growth: the Fed. That’s the big story. The Fed is blowing a deposit bubble. If history is any guide, that will inevitably result in more–and more dangerous– capital misallocation, in other words, more and bigger bubbles.  That’s always where too much, excessively easy, money leads.

The Fed has been buying $115-$120 billion of MBS and Treasuries from the Primary Dealers each month and will continue to do that until it ends or modifies this program. It buys those securities by crediting the dealers’ accounts at the Fed. That is the absolute genesis of central bank fiat money. Abracadabra- $2 billion to the account of Goldman Sachs! The dealers almost immediately move those funds into their deposit accounts at their affiliated bank under the same corporate umbrella or they transact business and trade with counterparties, whereupon the money gets deposited in the counterparty banks. That’s how the Fed creates deposits.

The Fed is growing deposits far faster than banks can deploy them. It is growing them far faster than the economy can use them. It is growing them far faster than anybody wants or needs. And so, as Bloomberg correctly points out, but buried where no one will see it, there are “hundreds of billions of dollars of potential fuel unused.” Therein lies the potential for big problems.

Loans have been growing at 3.5-5% per year since 2011. That’s consistent with what the economy demands and needs. Since US population is only growing at less than 1% per year, why should the economy grow any faster than 2-3%?  Why would the Fed want to push deposit growth up at the rate of 9-10%, which is what the growth rate has been since the Fed began settling its QE3 purchases. That forces and encourages banks and those with access to easy credit like the Primary Dealers, other broker-dealers, and especially their hedge fund clients, to “invest” (speculate) in things that aren’t needed or are counterproductive. That includes buying commodities, or bonds yielding next to nothing, or higher yielding junk with substantially greater credit risk. That spawns bubbles, and bubbles eventually beget crashes.

Bank Deposits to Loans

Bank Deposits to Loans – Click to enlarge

Source: Federal Reserve H.8 and H.4.1 Data Download Programs

As this chart shows, since the Fed began QE in 2009 the growth of the bank deposit to loan ratio has correlated directly with the growth of the Fed’s System Open Market Account. There’s no mystery here. This is a direct result of the mechanics of the Fed’s policy. The problem since 2009 has been that there’s not enough loan demand in this economy to absorb all those deposits. Loan growth was negative until 2011, when it finally turned the corner, but at nowhere near the growth rate of deposits. So the banks need to scrounge around for other investments. Meanwhile since early 2009 around the time the Fed began QE, the deposit to loan ratio has risen from a low of 0.94 to a peak of 1.29 in early January, backing off only to 1.27 currently.

There is absolutely no mystery where the deposits came from that drove the ratio to these levels. They came from the Fed. Since 2009 the Fed has added $2 trillion to its assets. Since 2009, bank deposits have grown by $2 trillion. It doesn’t get any simpler.

A brief exception to the direct correlation was in the third quarter last year when the Fed’s balance sheet was flat but deposits surged. That came from foreign inflows, but that flow stabilized in the October- January period. The Fed began settlement of its QE3 MBS purchases in November. The surge in the deposit/loan ratio from November to January was a direct result of the Fed pumping those deposits into commercial banks, just as it was in the previous 3 years. The correlation has been 1:1. It doesn’t get any more direct.

I am not an economist and, unlike Ben Bernanke, other FOMC members, and mainstream economic forecasters, I am certainly no fortune teller.  I’m just a technical analyst who applies the principles of technical analysis to economic and financial indicators. In doing so, I am often guided by the insights of the great technician Yogi Berra, who said, “You can observe a lot by watching,” and “In theory there’s no difference between theory and practice, but in practice there is.”

I have tried for years to watch monetary and market data closely and observe where there are correlations and what they typically mean. I try to discern trends and discern when they are changing. I try to remember a little history.

One of the old ideas that I have verified to my satisfaction along the way is something I first heard from the old men trading in the galleries of the brokerage houses  back in the 1960s when I began “watching” the market. That is, “Don’t fight the Fed.” The Fed wants inflation. It wants higher stock prices. It wants long term yields to stay low. It is trying to achieve all that by buying Treasuries and MBS from Primary Dealers, funneling immense amounts of cash into their accounts month in and month out.

Why would I fight that? The Fed can and does get its way for extended periods, until something forces it to stop and then reverse policy. The Fed rarely adjusts policy because it is successful. It adjusts when forced to by an unanticipated problem. That problem is virtually always in some form or other, inflation.

Financial asset bubbles are one manifestation of inflation. They are more insidious because so many people are profiting from them, investors get giddy and overconfident, and the Fed goes to sleep. Consumer prices are another story. They’re another manifestation of inflation. They exact pain. Bubbles and CPI inflation can occur together, but are often independent of one another, as is the case now. Over the past couple of years, the biggest asset bubble has been in bonds, and I believe also in stocks, although that one is at an earlier stage.

From listening to Bernanke, I gather that the theory is that this money pumping will drive stock prices higher and thereby trickle into economic growth, from the “wealth effect.”  He also thinks that the Fed’s actions will stimulate housing by keeping mortgage rates low. To some extent those policies have worked, or didn’t work but appeared to. Mortgage rates, while historically low, have actually risen since the Fed began its QE3 MBS purchases, both from when the purchases started in September, and when they began to settle in November.  Bernanke has also historically been in denial that Fed’s money printing results in massive malinvestment and may drive commodity prices higher, which is what happened in the last round of QE. Ultimately I believe that’s what forced him to pause between QE2 and QE 3/4.

He is also in denial (or simply disingenuous) about the costs of financial repression, or as I call it, ZIRP Bernankecide. Retirees have been driven to the poorhouse and can no longer spend. Conservatively managed pension funds can’t generate adequate returns. Pensioner incomes will be cut. Insurers are being squeezed, driving up insurance costs. The Fed acts likes ZIRP is a win win. But the fact is that it imposes real, painful, and I would say immoral, economic costs, that are at least equal to, if not greater than the benefits that accrue to the Fed’s commercial bank clients.

Over the long run, the transfer of the wealth of middle class retirees by suppressing their rate of return on savings in order to liquefy and make the banks profitable cannot be considered a good thing. It’s bad for the economy, and it’s terrible for public morals and mores. Under the circumstances and in view of the fact that financial fraud is never punished, cheating becomes an excusable, even acceptable mode of behavior not just at the top, but at all levels of society.  It’s called Getmineistan, and that’s where we’re headed, and maybe where we already are.

The Fed pretends that low interest rates are a free lunch, that somehow the whole economy benefits on balance. That’s insanity. I have personally seen the lives of seniors destroyed because they can’t earn a decent return on their savings. Fed policy does not increase economic income, it merely displaces it to less productive uses. Is that how we want to encourage growth, by penalizing prudent savings and punishing the elderly who have saved all their lives and avoided risk? What kind of message does that send people? The wrong one.
Meanwhile the bull market will go on for as long as the Fed can ignore the hidden costs that its policies impose both on the economy, and to the fabric of society. Eventually those costs will become too great to ignore.

While I don’t know what will happen, if history repeats and commodity prices start to bubble up again before consumer prices and wages rise, the Fed will be in a Catch 22. So far, the Fed has had success in jawboning speculators into not buying commodities and driving commodity prices higher. It did it again today (Feb. 20) in its minutes propaganda. I’m sure the Fed was patting itself on the back this evening for getting the market to sell off as it did, and especially for the break in commodity prices, particularly oil, gold, and silver.

Eventually, the Fed crying wolf about ending QE sooner rather than later will no longer impress traders, who will return to buying oil, and agricultural and industrial commodities. Rising input costs would then pinch business profits. Consumers facing rising food and energy costs would cut back spending, hurting business sales. Rising food prices could also again trigger political instability around the world in places where food is the largest share of people’s spending. In fact, that’s already happening. Rising costs and pinched consumer spending would cause companies to need to cut back employment. That could lead to a vicious downward spiral.

What would the Fed then do? Could it afford to stop QE? QE is what is driving stock prices higher and will probably continue to drive stock prices higher until it ends. By stopping it, the Fed would deprive the dealers and their hedge fund clients of the fuel they need to continue pushing their bids up. Stock prices would fall. There would be a firestorm of problems in the markets and economy leading to a massive decline in stock prices and economic activity.

On the other hand, could the Fed continue or even increase QE in the hopes of giving a boost to consumer prices, increasing corporate pricing power so that they could continue hiring and even increase wages? That would probably stoke even greater commodity speculation, tightening the squeeze on companies and consumers. It would run the risk of a massive inflationary spiral with rising bond yields. How would the US government then pay the interest on its debt? Would foreign creditors still have the ability and will to continue supporting the Treasury Ponzi? Or would the Fed be left as the sole buyer? What would the implications of that be?

I don’t have the answers. Those would be a couple of worst case scenarios. Of course maybe the Fed can manage through all of this so skillfully that the economy will grow out of these problems before any of the bad outcomes happens. History says otherwise, but it often takes a generation before we bear the fruits of the Fed’s blunders. Maybe the process will devolve quickly, or maybe it would take years and years to play out. Humans have a tough time with perspective on things like this in terms of the great sweep of history. If we watch the minute hand of a clock, we can’t see it move. But night time comes. Economically, I think it’s dusk. Night is coming.

I have not a clue what will happen. History says that we come to the brink again, have a market crash correcting some of the excesses, wash, rinse and repeat. I just suspect that the excesses that corrupt Fed and government policy have created will be far more difficult to correct and recover from in this cycle than in the past.

I see the bigger issue as a moral question, not a policy question. If we do not take corrective action against those in power perpetrating massive financial frauds and making policy to benefit the powerful at the expense of the powerless, if we do not turn away from the idea that easy money is the cure all, that those at the pinnacle of economic power know what’s best for us, if the only answer is repeatedly to go through the wringer and transfer the savings of the middle class to the banking and corporate executive class, then we simply slowly descend toward the dissolution of civil society.

Meanwhile deposits grow at a breakneck pace, the speculative and inflationary fuel stockpile builds. How will that work out?

I am not optimistic.


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


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Real Estate Mania Makes a Comeback

Real Estate Mania Makes a Comeback

Home bidding wars in Washington D.C.

By Elliott Wave International

Home-bidding wars have erupted in Washington D.C., a reminder of the days of the real estate frenzy.

While much of the nation is still struggling to emerge from a historic housing-market meltdown, the District is reliving its boom days. High rents, low interest rates, low inventory, and a flood of new residents in their 20s and 30s are making parts of the city feel like it's 2005 again.

Washington Post, Dec. 20

The article mentions a run-down home within walking distance of Union Station. The list price was $337,000 –but 168 bids later it sold for $760,951.

Prospective home buyers have bid up other Washington D.C. homes; a resurgence of the old real estate mania is also evident in Seattle, Boston and Palo Alto, Calif.

Will these new, highest-bidder home buyers have the price rug pulled out from under them in the same way buyers did in the mid-2000s?

In March 2005, The Elliott Wave Financial Forecast plainly said the real estate market was a bubble about to burst. That issue presented a special section titled "The Real Estate Bust Begins." With the accompanying two charts below, the issue noted:

As shown in Figure 1, the transference of focus from stocks to property began four days after the NASDAQ's March 10, 2000 peak, when the S&P 500 Homebuilding Index bottomed. Since then, the index has soared to more than a 700% gain, which resembles the NASDAQ's October 1998-March 2000 ascent. … The five-wave pattern from 1990 in Figure 2 says that the January drop in home sales is the beginning of a much steeper long-term decline.

Remember, this analysis was published before the historic crash in real estate values.

Indeed, in most parts of the country, residential real estate prices remain well below their peak highs. Yet the resurgent bidding wars in some markets suggest that the lesson about bubbles remains unlearned.

Keep in mind what Robert Prechter wrote in the second edition of his book, Conquer the Crash:

"Real estate prices have always fallen hard when stock prices have fallen hard." (p. 152)

"At the bottom, buy the home…of your dreams for ten cents or less per dollar of its peak value." (p. 157)

Is it safe again to speculate in U.S. real estate? How should you handle loans and other debt? Should you rely on the government agencies to protect your finances? You can get answers to these and many more questions in Robert Prechter's Conquer the Crash. And you can get 8 chapters of this landmark book — free. See below for details.

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This article was syndicated by Elliott Wave International and was originally published under the headline Real Estate Mania Makes a Comeback. 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.

Insane Levels of Inequality – Which Hurt the Economy – Are Skyrocketing

Courtesy of ZeroHedge. View original post here.

Submitted by George Washington.

Preface: All capitalist systems have some inequality.  We don’t want to prevent all inequality … just economy-wrecking levels:

Lawrence Katz, a Harvard economist, adds that some inequality is necessary to create incentives in a capitalist economy but that “too much inequality can harm the efficient operation of the economy.”

And you might assume that conservatives don’t worry about rampant inequality … but that is a myth.

Inequality – Which Hurts the Economy – Is Skyrocketing

A who’s-who’s of prominent economists in government and academia have all said that runaway inequality can cause financial crises.

Extreme inequality helped cause the Great Depression, the current financial crisis … and the fall of the Roman Empire.

But inequality in America today is actually twice as bad as in ancient Rome , worse than it was in in Tsarist Russia, Gilded Age America, modern Egypt, Tunisia or Yemen, many banana republics in Latin America,  and worse than experienced by slaves in 1774 colonial America.

Inequality has grown steadily worse:

Aevrage Household income before taxes.

Gini ratio

It is worse under Obama than under Bush.

A  recent study shows that the richest Americans captured more than 100% of all recent income gains.  And see this.

There are 2 economies:  one for the rich, and the other for everyone else.

Alan Greenspan said:

Our problem basically is that we have a very distorted economy, in the sense that there has been a significant recovery in our limited area of the economy amongst high-income individuals…


They are fundamentally two separate types of economies.

Why is Inequality Going Through the Roof?

The world’s top economic leaders have said for years that inequality is spiraling out of control and needs to be reduced. Why is inequality soaring even though world economic leaders have talked for years about the urgent need to reduce it?

Because they're saying one thing but doing something very different.  And both mainstream Democrats and mainstream Republicans are using smoke and mirrors to hide what's really going on.

And it’s not surprising … Nobel prize winning economist Joseph Stiglitz says that inequality is caused by the use of money to shape government policies to benefit those with money.  As Wikipedia notes:

A better explainer of growing inequality, according to Stiglitz, is the use of political power generated by wealth by certain groups to shape government policies financially beneficial to them. This process, known to economists as rent-seeking, brings income not from creation of wealth but from "grabbing a larger share of the wealth that would otherwise have been produced without their effort"[59]

Rent seeking is often thought to be the province of societies with weak institutions and weak rule of law, but Stiglitz believes there is no shortage of it in developed societies such as the United States. Examples of rent seeking leading to inequality include

  • the obtaining of public resources by "rent-collectors" at below market prices (such as granting public land to railroads,[60] or selling mineral resources for a nominal price[61][62] in the US),
  • selling services and products to the public at above market prices[63] (medicare drug benefit in the US that prohibits government from negotiating prices of drugs with the drug companies, costing the US government an estimated $50 billion or more per year),
  • securing government tolerance of monopoly power (The richest person in the world in 2011, Carlos Slim, controlled Mexico's newly privatized telecommunication industry[64]).

(Background here, here and here.)

Stiglitz says:

One big part of the reason we have so much inequality is that the top 1 percent want it that way. The most obvious example involves tax policy …. Monopolies and near monopolies have always been a source of economic power—from John D. Rockefeller at the beginning of the last century to Bill Gates at the end. Lax enforcement of anti-trust laws, especially during Republican administrations, has been a godsend to the top 1 percent. Much of today’s inequality is due to manipulation of the financial system, enabled by changes in the rules that have been bought and paid for by the financial industry itself—one of its best investments ever. The government lent money to financial institutions at close to 0 percent interest and provided generous bailouts on favorable terms when all else failed. Regulators turned a blind eye to a lack of transparency and to conflicts of interest.


Wealth begets power, which begets more wealth …. Virtually all U.S. senators, and most of the representatives in the House, are members of the top 1 percent when they arrive, are kept in office by money from the top 1 percent, and know that if they serve the top 1 percent well they will be rewarded by the top 1 percent when they leave office. By and large, the key executive-branch policymakers on trade and economic policy also come from the top 1 percent. When pharmaceutical companies receive a trillion-dollar gift—through legislation prohibiting the government, the largest buyer of drugs, from bargaining over price—it should not come as cause for wonder. It should not make jaws drop that a tax bill cannot emerge from Congress unless big tax cuts are put in place for the wealthy. Given the power of the top 1 percent, this is the way you would expect the system to work.

Bloomberg reports:

The financial industry spends hundreds of millions of dollars every election cycle on campaign donations and lobbying, much of which is aimed at maintaining the subsidy [to the banks by the public]. The result is a bloated financial sector and recurring credit gluts.

Indeed, the big banks literally own the Federal Reserve.  And they own Washington D.C. politicians, lock stock and barrel. See this, this, this and this.

Two leading IMF officials, the former Vice President of the Dallas Federal Reserve, and the the head of the Federal Reserve Bank of Kansas City, Moody’s chief economist and many others have all said that the United States is controlled by an “oligarchy” or “oligopoly”, and the big banks and giant financial institutions are key players in that oligarchy.

Economics professor Randall Wray writes:

Thieves … took over the whole economy and the political system lock, stock, and barrel.

No wonder the government has saved the big banks at taxpayer expense, chosen the banks over the little guy, and

No wonder crony capitalism has gotten even worse under Obama.

No wonder Obama is prosecuting fewer financial crimes than Bush, or his father or Ronald Reagan.

No wonder:

All of the monetary and economic policy of the last 3 years has helped the wealthiest and penalized everyone else. See this, this and this.


Economist Steve Keen says:

“This is the biggest transfer of wealth in history”, as the giant banks have handed their toxic debts from fraudulent activities to the countries and their people.

Stiglitz said in 2009 that Geithner’s toxic asset plan “amounts to robbery of the American people”.

And economist Dean Baker said in 2009 that the true purpose of the bank rescue plans is “a massive redistribution of wealth to the bank shareholders and their top executives”.

Quantitative easing doesn’t help Main Street or the average American. It only helps big banks, giant corporations, and big investors. And by causing food and gas prices skyrocket, it takes a bigger bite out of the little guy’s paycheck, and thus makes the poor even poorer.

As I noted in March 2009:

The bailout money is just going to line the pockets of the wealthy, instead of helping to stabilize the economy or even the companies receiving the bailouts:

  • A lot of the bailout money is going to the failing companies’ shareholders
  • Indeed, a leading progressive economist says that the true purpose of the bank rescue plans is “a massive redistribution of wealth to the bank shareholders and their top executives”
  • The Treasury Department encouraged banks to use the bailout money to buy their competitors, and pushed through an amendment to the tax laws which rewards mergers in the banking industry (this has caused a lot of companies to bite off more than they can chew, destabilizing the acquiring companies)

As I wrote in 2008:

The game of capitalism only continues as long as everyone has some money to play with. If the government and corporations take everyone’s money, the game ends.The fed and Treasury are not giving more chips to those who need them: the American consumer. Instead, they are giving chips to the 800-pound gorillas at the poker table, such as Wall Street investment banks. Indeed, a good chunk of the money used by surviving mammoth players to buy the failing behemoths actually comes from the Fed.

Government Policy Is Increasing Inequality

Without the government’s creation of the too big to fail banks (they’ve gotten much bigger under Obama), the Fed’s intervention in interest rates and the markets (most of the quantitative easing has occurred under Obama), and government-created moral hazard emboldening casino-style speculation (there’s now more moral hazard than ever before) … things wouldn’t have gotten nearly as bad.

Goosing the Stock Market

Moreover, the Fed has more or less admitted that it is putting almost all of its efforts into boosting the stock market.

Robert Reich has noted:

Some cheerleaders say rising stock prices make consumers feel wealthier and therefore readier to spend. But to the extent most Americans have any assets at all their net worth is mostly in their homes, and those homes are still worth less than they were in 2007. The “wealth effect” is relevant mainly to the richest 10 percent of Americans, most of whose net worth is in stocks and bonds.

AP writes:

The recovery has been the weakest and most lopsided of any since the 1930s.After previous recessions, people in all income groups tended to benefit. This time, ordinary Americans are struggling with job insecurity, too much debt and pay raises that haven’t kept up with prices at the grocery store and gas station. The economy’s meager gains are going mostly to the wealthiest.

Workers’ wages and benefits make up 57.5 percent of the economy, an all-time low. Until the mid-2000s, that figure had been remarkably stable — about 64 percent through boom and bust alike.

David Rosenberg points out:

The “labor share of national income has fallen to its lower level in modern history … some recovery it has been – a recovery in which labor’s share of the spoils has declined to unprecedented levels.”

The above-quoted AP article further notes:

Stock market gains go disproportionately to the wealthiest 10 percent of Americans, who own more than 80 percent of outstanding stock, according to an analysis by Edward Wolff, an economist at Bard College.

Indeed, as I reported in 2010:

As of 2007, the bottom 50% of the U.S. population owned only one-half of one percent of all stocks, bonds and mutual funds in the U.S. On the other hand, the top 1% owned owned 50.9%.***

(Of course, the divergence between the wealthiest and the rest has only increased since 2007.)

Professor G. William Domhoff demonstrated that the richest 10% own 98.5% of all financial securities, and that:

The top 10% have 80% to 90% of stocks, bonds, trust funds, and business equity, and over 75% of non-home real estate. Since financial wealth is what counts as far as the control of income-producing assets, we can say that just 10% of the people own the United States of America.

As Tyler Durden notes:

In today’s edition of Bloomberg Brief, the firm’s economist Richard Yamarone looks at one of the more unpleasant consequences of Federal monetary policy: the increasing schism in wealth distribution between the wealthiest percentile and everyone else. … “To the extent that Federal Reserve policy is driving equity prices higher, it is also likely widening the gap between the haves and the have-nots….The disparity between the net worth of those on the top rung of the income ladder and those on lower rungs has been growing. According to the latest data from the Federal Reserve’s Survey of Consumer Finances, the total wealth of the top 10 percent income bracket is larger in 2009 than it was in 1995. Those further down have on average barely made any gains. It is likely that data for 2010 and 2011 will reveal an even higher percentage going to the top earners, given recent increases in stocks.” Alas, this is nothing new, and merely confirms speculation that the Fed is arguably the most efficient wealth redistibution, or rather focusing, mechanism available to the status quo. This is best summarized in the chart below comparing net worth by income distribution for various percentiles among the population, based on the Fed’s own data. In short: the richest 20% have gotten richer in the past 14 years, entirely at the expense of everyone else.


Lastly, nowhere is the schism more evident, at least in market terms, than in the performance of retail stocks:

Saks chairman Steve Sadove recently remarked, “I’ve been saying for several years now the single biggest determinant of our business overall, is how’s the stock market doing.” Privately-owned Neiman- Marcus reported “In New York City, business at Bergdorf Goodman continues to be extremely strong.”

In contrast, retail giant Wal-Mart talks of its “busiest hours” coming at midnight when food stamps are activated and consumers proceed through the check-outs lines with baby formula, diapers, and other groceries. Wal-Mart has posted a decline in same-store sales for eight consecutive quarters.

CNN Money pointed out in 2011, “Wal-Mart’s core shoppers are running out of money much faster than a year ago …”  This trend has only gotten worse:  The wealthy are doing great … but common folks can no longer afford to shop even at Wal-Mart, Sears, JC Penney or other low-price stores.

Durden also notes:

Another indication of the increasing polarity of US society is the disparity among consumer confidence cohorts by income as shown below, and summarized as follows: “The increase in equity prices has raised consumer spirits, particularly among higher-income consumers. The Conference Board’s Consumer Confidence index for all income levels bottomed in February/March of 2009. The recovery since then has been notable across the board, but nowhere as much as for those making $50,000 or more.”


When a country's finance sector becomes too large finance, inequality rises. As Wikipedia notes:

[Economics professor] Jamie Galbraith argues that countries with larger financial sectors have greater inequality, and the link is not an accident.[66][67]

Government policy has been encouraging the growth of the financial sector for decades:

(Economist Steve Keen has also shown that “a sustainable level of bank profits appears to be about 1% of GDP”, and that higher bank profits leads to a ponzi economy and a depression).

Unemployment and Underemployment

A major source if inequality is unemployment, underemployment and low wages.

Government policy has created these conditions.  And the pretend populist Obama – who talks non-stop about the importance of job-creation – actually doesn't mind such conditions at all.

The“jobless recovery” that the Bush and Obama governments have engineered is a redistribution of wealth from the little guy to the big boys.

The New York Times notes:

Economists at Northeastern University have found that the current economic recovery in the United States has been unusually skewed in favor of corporate profits and against increased wages for workers.

In their newly released study, the Northeastern economists found that since the recovery began in June 2009 following a deep 18-month recession, “corporate profits captured 88 percent of the growth in real national income while aggregate wages and salaries accounted for only slightly more than 1 percent” of that growth.

The study, “The ‘Jobless and Wageless Recovery’ From the Great Recession of 2007-2009,” said it was “unprecedented” for American workers to receive such a tiny share of national income growth during a recovery.


The share of income growth going to employee compensation was far lower than in the four other economic recoveries that have occurred over the last three decades, the study found.

Obama apologists say Obama has created jobs.  But the number of people who have given up and dropped out of the labor force has skyrocketed under Obama (and see this).

And the jobs that have been created have been low-wage jobs.

For example, the New York Times noted in 2011:

The median pay for top executives at 200 big companies last year was $10.8 million. That works out to a 23 percent gain from 2009.


Most ordinary Americans aren’t getting raises anywhere close to those of these chief executives. Many aren’t getting raises at all — or even regular paychecks. Unemployment is still stuck at more than 9 percent.


“What is of more concern to shareholders is that it looks like C.E.O. pay is recovering faster than company fortunes,” says Paul Hodgson, chief communications officer for GovernanceMetrics International, a ratings and research firm.

According to a report released by GovernanceMetrics in June, the good times for chief executives just keep getting better. Many executives received stock options that were granted in 2008 and 2009, when the stock market was sinking.

Now that the market has recovered from its lows of the financial crisis, many executives are sitting on windfall profits, at least on paper. In addition, cash bonuses for the highest-paid C.E.O.’s are at three times prerecession levels, the report said.


The average American worker was taking home $752 a week in late 2010, up a mere 0.5 percent from a year earlier. After inflation, workers were actually making less.

AP pointed out that the average worker is not doing so well:

Unemployment has never been so high — 9.1 percent — this long after any recession since World War II.  At the same point after the previous three recessions, unemployment averaged just 6.8 percent.

– The average worker’s hourly wages, after accounting for inflation, were 1.6 percent lower in May than a year earlier. Rising gasoline and food prices have devoured any pay raises for most Americans.

– The jobs that are being created pay less than the ones that vanished in the recession. Higher-paying jobs in the private sector, the ones that pay roughly $19 to $31 an hour, made up 40 percent of the jobs lost from January 2008 to February 2010 but only 27 percent of the jobs created since then.

Alan Greenspan noted:

Large banks, who are doing much better and large corporations, whom you point out and everyone is pointing out, are in excellent shape. The rest of the economy, small business, small banks, and a very significant amount of the labour force, which is in tragic unemployment, long-term unemployment – that is pulling the economy apart.

Money Being Sucked Out of the U.S. Economy … But Big Bucks Are Being Made Abroad

Part of the widening gap is due to the fact that most American companies’ profits are driven by foreign sales and foreign workers. As AP noted in 2010:


Corporate profits are up. Stock prices are up. So why isn’t anyone hiring?

Actually, many American companies are — just maybe not in your town. They’re hiring overseas, where sales are surging and the pipeline of orders is fat.


The trend helps explain why unemployment remains high in the United States, edging up to 9.8% last month, even though companies are performing well: All but 4% of the top 500 U.S. corporations reported profits this year, and the stock market is close to its highest point since the 2008 financial meltdown.

But the jobs are going elsewhere. The Economic Policy Institute, a Washington think tank, says American companies have created 1.4 million jobs overseas this year, compared with less than 1 million in the U.S. The additional 1.4 million jobs would have lowered the U.S. unemployment rate to 8.9%, says Robert Scott, the institute’s senior international economist.

“There’s a huge difference between what is good for American companies versus what is good for the American economy,” says Scott.


Many of the products being made overseas aren’t coming back to the United States. Demand has grown dramatically this year in emerging markets like India, China and Brazil.

Government policy has accelerated the growing inequality. It has encouraged American companies to move their facilities, resources and paychecks abroad. And some of the biggest companies in America have a negative tax rate … that is, not only do they pay no taxes, but they actually get tax refunds.

And  a large percentage of the bailouts went to foreign banks (and see this). And so did a huge portion of the money from quantitative easing. More here and here.

Capital Gains and Dividends

According to a study published last month by a researcher at the U.S. Congressional Research Service:

The largest contributor to increasing income inequality…was changes in income from capital gains and dividends.

Business Insider explains:

Drastic income inequality growth in the United States is largely derived from changes in the way the U.S. government taxes income from capital gains and dividends, according to a new study by Thomas Hungerford of the non-partisan Congressional Research Service.

Essentially, what Democrats have been saying about income inequality — that it's in a large part due to favorable taxation and deduction policies for high income Americans — is largely right


The study … conclusively found that the wealthy benefitted from low tax rates on investment income, which in turn caused their wealth to grow faster.

Essentially, taxing capital gains as ordinary income would make the playing field more fair, and reduce over time income inequality.

Joseph Stiglitz noted in 2011:

Lowering tax rates on capital gains, which is how the rich receive a large portion of their income, has given the wealthiest Americans close to a free ride.

Indeed, the Tax Policy center reports that the top 1% took home 71% of all capital gains in 2012.

Ronald Reagan's budget director, assistant secretary of treasury, and domestic policy director all say that the Bush tax cuts were a huge mistake. See this and this.

Fred Mishkin’s “Outside Compensation” List Revealed

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Perhaps the most memorable outcome of the 2010 movie "Inside Job" by Charles Ferguson, was the historic humiliation of former Fed governor and current Columbia University professor, Fred "Napoleon Dynamite" Mishkin. For those who are unaware why, we urge you to watch the following clip which explains it all.

Well, as a result of Inside Job's epic embarrassment of Mishkin, we were amused and delighted to see that a recent development which is now prominently featured on Mishkin's Columbia university portal site, is a new disclosure page named simply enough: "Disclousure of Outside Compensated Activities" (sic) and yes, it is misspelled.

So for all those curious whom Fred Mishkin has received money from in the past 8 years, here is a partial list:

Federal Reserve Bank of New York, Lexington Partners; Tudor Investment, Brevan Howard, Goldman Sachs, UBS, Bank of Korea; BNP Paribas, Fidelity Investments, Deutsche Bank,, Freeman and Co., Bank America, National Bureau of Economic Research, FDIC, Interamerican Development Bank; 4 hedge funds, BTG Pactual, Gavea Investimentos; Reserve Bank of Australia, Federal Reserve Bank of San Francisco, Einaudi Institute, Bank of Italy; Swiss National Bank; Pension Real Estate Association; Goodwin Proctor, Penn State University, Villanova University, Shroeder’s Investment Management, Premiere, Inc, Muira Global, Bidvest, NRUCF, BTG Asset Management, Futures Industry Association, ACLI, Handelsbanken, National Business Travel Association, Urban Land Institute, Deloitte, CME Group; Barclays Capiital, Treasury Mangement Association, International Monetary Fund; Kairos Investments, Deloitte and Touche, Instituto para el Desarrollo Empreserial de lat Argentina, Handelsbanken, Danske Capital, WIPRO, University of Calgary, Pictet & Cie, Zurich Insurance Company, Central Bank of Chile, and many, many more.

The full list is below:

Finally, anyone who has still not seen Inside Job can do so below:

Half of Detroit Properties Have Not Paid Taxes; Update on Detroit Bankruptcy

Courtesy of Mish.

The hollowing out of Detroit is nearly complete. All that’s left is a bankrupt shell of a city with no services and scattered citizens that do not pay taxes.

The Detroit News reports Half of Detroit Property Owners Don’t Pay Taxes

Nearly half of the owners of Detroit’s 305,000 properties failed to pay their tax bills last year, exacerbating a punishing cycle of declining revenues and diminished services for a city in a financial crisis, according to a Detroit News analysis of government records.

The News reviewed more than 200,000 pages of tax documents and found that 47 percent of the city’s taxable parcels are delinquent on their 2011 bills. Some $246.5 million in taxes and fees went uncollected, about half of which was due Detroit and the rest to other entities, including Wayne County, Detroit Public Schools and the library.

Delinquency is so pervasive that 77 blocks had only one owner who paid taxes last year, The News found. Many of those who don’t pay question why they should in a city that struggles to light its streets or keep police on them.

“Why pay taxes?” asked Fred Phillips, who owes more than $2,600 on his home on an east-side block where five owners paid 2011 taxes. “Why should I send them taxes when they aren’t supplying services? It is sickening. … Every time I see the tax bill come, I think about the times we called and nobody came.”

Update on Detroit Bankruptcy

Detroit is financially and morally bankrupt yet the governor refuses to make that declaration. A Review team says Detroit faces financial crisis, has no plan to fix it so why won’t the governor act?

For the second time in a year, a state review team has found Detroit is in a financial emergency that requires Gov. Rick Snyder to intervene in City Hall.

But this time, if Snyder agrees that a financial emergency exists, the governor’s choices are more limited. He could appoint an emergency manager to keep Michigan’s largest city from plunging into bankruptcy, experts say, or he could continue state financial supervision through a new consent agreement, which seems a faint possibility.

State Treasurer Andy Dillon ruled out a bankruptcy filing at this time.

The six-member review team unanimously concluded in a report released Tuesday that the city failed to restructure its debt-laden bureaucracy under the financial consent agreement signed in April and that Detroit’s financial crisis requires Snyder’s intervention “because no satisfactory plan exists to resolve a serious financial problem.”

Chapter 9 bankruptcy is “always a possibility but I don’t think the city should go through (Chapter) 9 to cure its ailments,” he added.

Continue Here

6 tanks at Hanford nuclear site in Wash. leaking


Source: via Casey on Pinterest

6 tanks at Hanford nuclear site in Wash. leaking

Six underground tanks that hold a brew of radioactive and toxic waste at the nation's most contaminated nuclear site are leaking, federal and state officials said Friday, prompting calls for an investigation from a key senator.

Washington Gov. Jay Inslee said the leaking material poses no immediate risk to public safety or the environment because it would take a while — perhaps years — to reach groundwater.

But the leaking tanks raise new concerns about delays for emptying them and strike another blow to federal efforts to clean up south-central Washington's Hanford nuclear reservation, where successes often are overshadowed by delays, budget overruns and technological challenges.

Department of Energy spokeswoman Lindsey Geisler said there was no immediate health risk and said federal officials would work with Washington state to address the matter.

Regardless, Tom Towslee, a spokesman for Sen. Ron Wyden, D-Ore., said the senator will be asking the Government Accountability Office to investigate Hanford's tank monitoring and maintenance program.

Wyden is the new chairman of the Senate Energy and Natural Resources Committee.

via 6 tanks at Hanford nuclear site in Wash. leaking – CBS News.

Part III – Compound Interest and Consumer Debt

Part III – Compound Interest and Consumer Debt

By The Banker 

hPart III – Compound interest and Consumer Debt

Please see earlier posts Part I – Why don’t they teach this in school.  And Part II – Compound interest and Wealth

In the last post I wrote about the the incredible power of compound interest, and the possibility it suggests about wealth creation over time.

Unfortunately, there’s also bad news.

On the debt side of things, how much does your credit card company earn if you carry just an average of a $5,000 credit card balance, paying, say, 22% annual interest rate (compounding monthly) for the next 10 years?

In your mind you owe a balance of only $5,000, which is not a huge amount, especially for someone gainfully employed. After all, $5,000 is just a quick Disney trip, or a moderately priced ski-trip, or that week in Hawaii. You think to yourself, “how bad could it be?”

The answer, including the cost of monthly compounding[1], is $44,235, or about 9 times what it appears to cost you at face value.[2]

I hate to be the Scrooge, but the power of compound interest transformed that moderate credit card balance of $5,000 into an extraordinarily expensive purchase.[3]

Compound interest: Why the poor stay poor and the rich stay rich

To take another example, let’s think of compound interest on credit cards for the average American household.

Let’s say you are an average American household, and you carry an average balance of $15,956 in credit card debt.

Also, as an average American household, let’s assume you pay an average current rate of 12.83%.[4]

Finally, let’s assume you carry this average balance for 40 years, between ages 25 and 65.  How much did your credit card company make off of you and your extreme averageness?

Answer: $2,629,618.64[5]

So, in sum, your credit card company will earn from the average American household carrying a credit card balance for 40 years, $2.6 million. [6]

If you’re wondering why rich people tend to stay rich, and poor people tend to stay poor, may I offer you Exhibit A:

Compound Interest.

Now, your math teacher might not have done this demonstration for you in junior high, because he didn’t know about it.  Mostly, I forgive him.  Although not completely.

You can be damned sure, however, that credit cards companies know how to do this math.  THIS MATH IS THEIR ENTIRE BUSINESS MODEL.

Which same business model would work a lot less well if everyone knew how to figure this stuff out on his own.

Hence, my theory about the Financial Infotainment Industrial Complex suppressing the teaching of compound interest.  They don’t want you to learn how to figure out this math on your own.[7]


[1] But importantly, excluding all late fees, overbalance fees or penalty rates of interest.

[2] We get this result using the same formula, although Yield is divided by 12 to account for monthly compounding, and the N reflects the number of compounding periods, which is 120 months.  So the math is: $5,000 * (1+.22/12)120

[3] Have you ever wanted to take a $45K vacation to Hawaii and pretend you’re a high roller?  Congratulations!  By carrying that $5K balance for 10 years, you did it!  You took a $45,000 Hawaiian vacation. You’re a high roller! Yay!

[4] All of these stats taken from this great site on credit card statistics, which cites all of its sources.

[5] We express this again dividing yield by 12 to account for monthly compounding, and raising it to the power of 480 months, the number of compounding periods.  Hence the math is $15,956 * (1+.1283/12)480

[6] I’m assuming for the purposes of this calculation that the debt balance stays constant for 40 years, but your household pays interest on the balance.  In calculating this result, please note I have framed the question in terms of “How much does the credit card company earn” off of your household carrying this average balance for 40 years.  Which is not the same question as “How much do you pay as a household?”  Embedded in my assumptions, and the compound interest formula, is the idea that the credit card company can continue to earn a fixed 12.83% on money you pay them.  Which I think is a fair way of analyzing how much money they can earn off your balance.  Since there are no shortages of other household credit card balances for the credit card company to fund at 12.83%, I believe this to be the most accurate way of calculating the credit card company’s earnings on your balance.

[7] Here’s where, for the sake of clarifying sarcasm on the internet – which sometimes doesn’t translate well on the electronic page – I should point out that I’m (mostly) kidding about the suppression of the compound interest formula.  Among the main reasons I started Bankers Anonymous was that the dim dialogue we have about finance as a society allows conspiracy theories to grown in darkness.  Just as pre-scientific societies depend on magic to explain mysterious phenomena, I think financially uninformed societies gravitate toward conspiracies to explain complex financial events.  As a former Wall Streeter who does not actually ascribe to conspiracy theories, I feel some obligation ‘to amuse and inform’ and thereby reduce the amount of conspiracy-mongering.  So, I don’t really think there’s a conspiracy here.  As far as you know.  Or maybe, that’s just what I want you to think.


Not Done Rising

Not Done Rising

Featured in: MarketShadows February 24 2013 Newsletter: Not Done Rising, But Night Will Come 

By Ilene

Over the last four months, we’ve been buying (virtual) stocks and selling (virtual) puts, without hedging our bullish bets. We explained our reasoning earlier in the year: 

“We are starting 2013 long stocks in Paul’s Virtual Value Portfolio with no covered call writing hedges for one reason – the Federal Reserve’s and other central banks’ plans to continue printing money into existence while debasing their currencies. This does not solve any problems such as too much wasteful spending, a perverse tax code, and a rushed-through fiscal deal that does not reduce the growing debt burden.” (Comfortably Bullish)

But stocks are one vehicle to help protect wealth during a time of money printing, zero rates, and devaluation of currency.

In early January, Lee Adler of the Wall Street Examiner had asked ‘Has orgiastic market shot its cash wad?‘ No…

“The Fed will be pumping every other day now, and another huge slug of MBS [mortgage backed securities] purchase cash will be coming around mid month. That should outweigh any questions that might arise about the technical analysis, the biggest of which right now is how big this rally might be.” In this issue, Lee wrote, “as long as the Fed keeps pumping, the tide of systemic liquidity should continue to rise exponentially in the US and stocks should continue to oscillate along that upward wave.” (Comfortably Bullish)

 also asserted that the world’s central banks are racing to drive down their currencies, and that will increase asset prices. He warned, “Bears beware. A monetary revolution is underway:” 

The side-effects of this currency warfare — or ‘beggar-thy-neighbour’ policy as it was known in the 1930s — is an escalating leakage of monetary stimulus into the global system.

So don’t fight the Fed, and never fight the world’s central banks on multiple fronts…

The New Year ritual of predictions is a time for bravado, so let me hazzard that the S&P 500 index of stocks will break through its all time high of 1565 in early 2013 — mindful though I am of flagging volume and a wicked 12-year triple top… (Stocks to soar as world money catches fire, Calvinst Europe left behind – Telegraph)

In Lights, Camera, Rally?, Paul Price argued,

With the backdrop of very low interest rates, the overall ‘should-be’ P/E of the stock market increases because the alternative ‘safe’ investments are paying such low yields. Stocks become more desirable. This dynamic makes higher risk assets, such stocks, look even more attractive. And that’s exactly what the Federal Reserve wants.

The Fed is artificially holding interest rates down with its successive quantitative easing programs (QE1, QE2, QE3, QEternity….) and its Zero Interest Rate Policy (ZIRP). Part of Ben Bernanke’s plan (or plot, some might say) is to compel investors to buy “risk-on” assets, such as equities and commodities – while interest rates are hovering near zero and the dollar is continually losing value.”

The Fed’s Zero Interest Rate Policy should support higher multiples going forward. It may be cliche to say ‘Don’t fight the Fed.’ But essentially, we are not going to fight the Fed. 

This week, in “Dow 20,000 Only a Matter of Time,” Econmatters argued that we need to be invested due to the growing money supply and currency in circulation, and the printing press phenomenon. Money is being created to chase assets, and that will inflate prices. It’s no accident. 

The Dow will blow past 15,000, 16,000, 17,000 and so on based upon the currency creation effects alone. The fact is that markets are liquid, capital will flow in and out, and  there will be occasional major pullbacks. “Those who fail to time the market will suffer losses at times. Make no mistake, though, Dow 20,000 is a foregone conclusion.”

m2 the money supply 25 years
 monetary base 25 years big chart
25 year money in circulation
Econmatters argues that if the economy cooperates even modestly over the next three years, the Dow will hit 20,000. “Watch how the market performs once we break through the 14,200 level, and start putting in new highs in the other indexes. The pace can really take off once markets are in unchartered territory, and we can start taking 1000 point monthly clips that will leave you speechless… We are on the verge of taking that next leg up in the Dow, in fact, we should set a new high pretty soon; enjoy the ride as this breakout has been a long time coming.” (Dow 20,000 Only a Matter of Time)
In The Pullback MemoEconMatters predicted the timing for the market’s near-term upswing. March and April. (Yes, according to EconMatters, that’s it for the first half of the year. If you’ve missed a few months of this run, too bad, it’s over.)

We are in the midst of the strongest four months of the investing cycle for each of the last four years. Basically, everyone and their uncle go long assets until late April before the annual summer selloff. Don’t expect this year to be any different. 

The way I look at it new money comes into the market March 1st which is next Friday, so any window for a pullback has 5 days to occur, and less than that because everybody front runs the monthly 401k money that comes into the market the first of every month, and is usually good for a major Risk On day. 

So investors have 4 days for a pullback, you get the idea, Thursday’s mid-day selloff was the pullback. There isn’t going to be any ideal 7% pullback so all those who missed the rally can conveniently get right in with the rally that they missed for the first two months of the year.

You think this stuff just happens randomly?

There are no do-overs in markets! What were you thinking, haven’t you been paying attention the last four years? You start going long in November of the previous year and you stay long until option’s expiration in April, then you sell, wait for the summer sell-off when some crisis in Europe or Downgrade is the end of the world, and after the sell-off, then everybody buys back for the “Money Manager Make Their Numbers Yearly Close”!… 

Nothing stops the rally, we don’t go backward, we just keep going higher till mid-April, Got it? Good, now quit your hoping, praying for the 7% pullback.  

Have we set new highs yet? I didn’t think so…

We will give you your damn pullback at the end of April after we have set new highs in all the market indexes. So don’t ask “Are we going to pullback yet”? No we are not going to pullback, you will know when it is time for the pullback by checking the damn calendar!  

Here is the memo….. (The Pullback Memo)


Source: via Knick of Time Interiors on Pinterest

Beppe Grillo Surges in Last Minute Rush; Is That a Good Thing?

Courtesy of Mish.

Reader “AC” who is from Italy but now lives in France informs me that the Italian elections this weekend are getting even more interesting.

Specifically, “AC” writes “Grillo claims 800,000 assisted at his closure meeting in Rome with another 150,000 via streaming. My feeling is that there will be a huge turnout for Grillo in the election“.

Joe Weisenthal on the Business Insider writes “I Have Seen The Scariest Chart In Europe“.

The chart Weisenthal refers to is from Google Trends. It shows a surge in searches on Beppe Grillo. Weisenthal says …

Grillo is a comedian-turned-politician who is doing shockingly well the Italian elections (coming up this Sunday and Monday) by running on an aggressive anti-bank, euro-skeptic platform.

He’s capitalizing on the deep frustration that exists in Italy due to the weak economy, and the perception that the current government is too corrupt and cozy with banks. Were he to gain a sizable block in the upcoming parliament, he represents a pretty serious threat.

A threat? A Threat to What?

Grillo wants Italy to vote on whether or not to stay in the Eurozone. On that score I happen to agree. The sooner the eurozone splinters the better. Greece would be better off it it left four years ago and Spain would be better off if it left now.

That does not mean I endorse all the policies of Grillo, and indeed I don’t. My point is that huge change is desperately needed.

As I have stated on many occasions “Eventually, there will come a time when a populist office-seeker will stand before the voters, hold up a copy of the EU treaty and (correctly) declare all the “bail out” debt foisted on their country to be null and void. That person will be elected.”

The scare should not be that a breakup happens, but rather that the inevitable is delayed with grave consequences.

Scariest Chart Ever?

Continue Here

GOLD should be completing a cyclical low in February

GOLD should be completing a cyclical low in February

Courtesy of David A. Banister

Over the past 5 calendar years we have seen GOLD either complete an intermediate cyclical top or bottom in each February.  My forecast was for February of 2013 to be no different and for Gold and Silver to make trough lows this month.  With that said, I did not expect the drop in GOLD to go much below $1,620 per ounce at worst, but in fact it has. Where does that leave us now on the technical patterns and crowd behavioral views?

First let’s examine the last 5 years and you can see how I noted tops and bottoms in the chart below:



That brings us forward to todays $1,573 spot pricing and trying to determine where the next move will go. To help with that end, some of our work centers on Elliott Wave Theory, along with fundamentals and traditional technical patterns of course.  In this case, the recent action around Gold has been very difficult to ascertain, and I will be the first to admit as much. With that said, one pattern we can surmise is a rare pattern Elliott termed the “Double Three” pattern. Essentially you have two ABC type moves, and in the middle what is dubbed an “X” wave, which breaks up the ABC’s on each end of the pattern. For sure, if we add in traditional technical indicators along with sentiment, we can see very oversold levels coupled with the potential Double Three pattern and probably start getting long here for a trade back to the 1650’s as possible:



This chart shows oversold readings in the lower right corner using the CCI indicator. That said we would like to see 1550 hold on a weekly closing basis to remain optimistic for a strong rebound.

Try our Real-Time Market Forecasts with a 33% discount by clicking here. 

Inequality Is Much Worse Than You Think

Inequality Is Much Worse Than You Think

By , Huffington Post

• In 2010, the top hedge fund manager earned as much in one HOUR as the average (median) family earned in 47 YEARS.

• The top 25 hedge fund managers in 2010 earned as much as 658,000 entry level teachers.

• In 1970 the top 100 CEOs made $40 for every dollar earned by the average worker. By 2006, the CEOs received $1,723 for every worker dollar.

As the administration and Congress argue over cuts in social programs, inequality in America grows more extreme each day. Even the great financial crash didn't derail this trend. The richest 400 Americans, for example, increased their wealth by 54 percent between 2005 and 2010, while the median middle-class family saw its wealth decline by 35 percent.

None of this is accidental. 

It's not the result of mysterious global forces, or technology, or China, or structural problems concerning the skills and education of our workforce. Rather, it is the direct result of policy choices made by Democrats and Republicans alike. Together, they swallowed the Kool-Aid of unregulated market mania, and now we are paying the price.

In exploring this story for my new book, How to Make a Million Dollars an Hour: Why Hedge Funds Get Away with Siphoning Off America's Wealth , it became clear that New Deal policy makers shared a deep fear that democratic capitalism could not function unless Wall Street was tightly controlled. After all, Europe was sinking into the fascist camp while the new Soviet Union seemed invulnerable to the global depression. As a result, to put it crudely, the New Dealers quickly regulated the hell out of high finance through a myriad of programs including the formation of the S.E.C and Glass-Steagall. The goal was to turn Wall Street into a sleepy place to work, rather than an adrenalin-fueled arena of stock manipulation and fraud. At the same time income tax rates on the wealthy sky-rocketed with top marginal rates reaching over 90 percent. The results were nothing short of stupendous.

Keep reading: Les Leopold: Inequality Is Much Worse Than You Think.



Part II – Compound Interest and Wealth

Part II – Compound Interest and Wealth

By The Banker 

Time is money

Compound Interest Math Formula – The Most Powerful Math in the Universe

Please see my earlier post, Part I – Why don’t they teach this math in school?

For the sake of blowing the lid off this vast cone of silence, here’s the compound interest formula:

Future Value = Present Value * (1+Yield)N

This is the formula you use if you want to see how money grows over time, to become “Future Value.” Present Value is the amount of money you start with.  That could be $100, such as in my examples below, or likewise a series of $5,000 IRA investments each year.  Present Value is whatever you’re starting amount of money is today.

Yield is the interest rate, or rate of return, you get per year.  Usually expressed as something like 5.25% or 0.0525.[1]

N is the number of times you ‘compound’ the yield.  In its simplest form as written above, if you compound annually, N is the number of years your money compounds.

Example of the power of compound interest: Early investment for retirement

When do you use this formula?  You use it when you want to know how much your $100 invested today, or this year, will grow over time.

To offer you an extreme example, using the compound interest formula:

What if you invested $100 today, left it invested for the next 75 years, and you were able to achieve an 18% annual compound return?  How big an investment does your $100 become?

The answer is $24,612,206.

Can I interest you in $24 million?  Without working?

As I say that out loud, I feel like a late-night infomercial guy.  And that feeling makes me want to take a shower.  But the money and the pitch is nothing more than compound interest math.

I happen to believe there’s quite a few 20 year-olds who:

a) Could put their hands on $100 today for the purpose of investing in a retirement account, and

b) Would like, at the end their life, to boast a net worth of $24.6 million[2]

I know all you realists out there will say that 18% annual compound return for 75 years is a fairy tale, and of course I can’t disagree with you.

But I’m doing a magic trick here for the sake of making a point, so would you please suspend disbelief for just a moment and revel in the magic?  The point is not to argue about what reasonable assumptions may be, rather the point is to show why knowing how to do compound interest math could be a life-changing piece of information.

At the very least, its a tool that every citizen should be armed with.  Thank you.

To be slightly more realistic, but equally precise, with a series of other assumptions:

If you’re 20 years old now and you let your money grow for the next 50 years, at 12% yield, your $100 invested today becomes $28,900.  That’s also an amazing result.

Try it and find the Future Value for yourself, by inputting into the formula

Future Value = Present value * (1+Yield)N

PV = $100

Yield = 12%

N = 50

Heck, having your money grow like this sure beats working for a living.

These facts are so amazing, I think, that they might induce a 20-year-old to forgo his XBox purchase this year, and invest the money instead in stocks, in a retirement account.

What about putting your money away in your IRA, $5,000 per year from age 40 to age 65, earning 6% return on your money every year?  Would you like to know what kind of retirement you will have at age 65?  Compound interest can tell you precisely the number.[3]

You’ll have $290,781.91[4]

And all of that becomes possible if we have some insight into the inexorable growth, the most powerful force in the universe, the one math formula to rule them all, compound interest.[5]




Please see Part I – Why don’t they teach this in school?


[1] I fear many of us learned how to convert a percent into a decimal in sixth grade, but not how to do anything useful with it.

[2] Yes, I hear you cynics, that this is in nominal dollars, and $24 million won’t buy them then what it buys today.  But would you just stop being cynical for a moment, and appreciate the magic of compound interest?  Thank you.

[3] If your assumptions are correct, of course.

[4] To achieve this calculation, you’ll have to add up 25 separate amounts, in a spreadsheet.  The first amount, invested at age 40, compounds the most times and is expressed as $5,000 * (1+.06)25.  The second amount, invested at age 41, compounds as follows: $5,000 * (1+.06)24.  The third amount is $5,000 * (1+.06)23, all the way until the 25th amount, which is simply $5,000 * (1+.06).

[5] Thank goodness Sauron didn’t get his hands on the formula FV = PV*(1+Y)N, or else the hobbits would have been so screwed.  Ancient legend has it in the Silmarillionthat Sauron actually did acquire the compound interest formula, but he interpreted the mysterious algebraic symbols as high Elvish, a language he could not read at the time.  Speaking of which, does anybody else want to use compound interest to become a Silmarillionaire?  Um, not so funny?  Ok, you’re right, but don’t worry, I’ll be here all night folks.  Don’t forget to tip your waitress.  And try the fish.

Bitter Pill: Why Medical Bills Are Killing Us


1. Routine Care, Unforgettable Bills

When Sean Recchi, a 42-year-old from Lancaster, Ohio, was told last March that he had non-Hodgkin’s lymphoma, his wife Stephanie knew she had to get him to MD Anderson Cancer Center in Houston. Stephanie’s father had been treated there 10 years earlier, and she and her family credited the doctors and nurses at MD Anderson with extending his life by at least eight years.

Because Stephanie and her husband had recently started their own small technology business, they were unable to buy comprehensive health insurance. For $469 a month, or about 20% of their income, they had been able to get only a policy that covered just $2,000 per day of any hospital costs. “We don’t take that kind of discount insurance,” said the woman at MD Anderson when Stephanie called to make an appointment for Sean.

Stephanie was then told by a billing clerk that the estimated cost of Sean’s visit — just to be examined for six days so a treatment plan could be devised — would be $48,900, due in advance. Stephanie got her mother to write her a check. “You do anything you can in a situation like that,” she says. The Recchis flew to Houston, leaving Stephanie’s mother to care for their two teenage children.

About a week later, Stephanie had to ask her mother for $35,000 more so Sean could begin the treatment the doctors had decided was urgent. His condition had worsened rapidly since he had arrived in Houston. He was “sweating and shaking with chills and pains,” Stephanie recalls. “He had a large mass in his chest that was … growing. He was panicked.”

Keep reading: Bitter Pill: Why Medical Bills Are Killing Us |

The New York Fed’s Primary Dealers, Liquidity, Monetary Policy, Excess Reserves and Financial Dreadnoughts in Times of Currency War

The New York Fed's Primary Dealers, Liquidity, Monetary Policy, Excess Reserves and Financial Dreadnoughts in Times of Currency War

Courtesy of Jesse's Cafe Americain

Someone asked me about Primary Dealers today.  I think it was in regard to liquidity concerns. 

Cutting to the punchline, however one wishes to characterize and attribute it, the financial system is once again over-leveraged, over-concentrated, fraught with interconnected with counterparty risk, and fragile.

This is because of the policy failure of the Treasury and the Fed which could be characterized as extend and pretend without engaging in significant reforms and law enforcement in the aftermath of what might be best described as a control fraud.  

I also postulated years ago that when push came to shove, the Fed would gather around itself a few 'friendly banks' which would act on its behalf in private to enforce certain policy decisions in markets in which the Fed and Treasury do not wish to openly operate.   

It is hard to think of any other somewhat moral reason for the government to babysit and subsidize these very expensive and dangerous TBTF monstrosities, except as instruments of policy to provide some degree of freedom to shape events and responses.  

If you want to wage a currency war, you need to have some dreadnoughts packing serious financial throw-weight, and economic muscle.  Think of economic hitmen on steroids.   It may be Machiavellian,  counter-democratic, and expensive, but that is the dictate of strategy if you want to control things and wield power to do what you will, both at home and abroad. 

Is a corollary to the currency war a financial arms race and the construction of institutional behemoths?  I think it might be.  Or it could just be widespread ignorance and corruption amongst the ruling class which certainly is conceivable.  Or some of both.  Why do governments sometimes engage in corporatism?  Take your pick.

So putting that bit of editorial fuss and postulating out of the way, let's talk about some loosely related details of what Primary Dealers are all about.

The Fed uses Primary Dealers to manage monetary policy and its market in Treasury transactions,  first and foremost.    

These operations are both 'temporary' and 'permanent' transactions involving Treasuries, involving repos/reverse repos and purchases/sales respectively.  

I cannot stress enough that in a period of ZIRP, some things are not quite the same and do not carry the same significance as they might imply in 'normal times.'   I think the last chart show the Fed's Adjusted Monetary Base and Excess Reserves helps to illustrate this.

Although the analogy is a bit strained and far from perfect, I think what Bernanke has been doing with the Fed's monetary base and the excess reserves is roughly comparable to what had been done in 1933 with the removal from gold from private hands, and it revaluation afterwards in order to re-capitalize the banks with what was essentially seignorage.

They used gold instead of a platinum coin.  There is no need to confiscate gold when you are not on an external standard, the only constraint being the Fed's willingness to expand its balance sheet, and of course, the value at market of the bond and the dollar, which some conveniently forget when it suits them. 

And the 'platinum coin' was a political rather than a monetary play. It is important to keep the two separate, although both are dysfunctional these days. Corruption ranges far and wide.

Certainly Bernanke and Paulsen/Geithner have been much less selective in spreading the wealth to banks, and never engaged in the sort of reforms and bank holiday that the FDR Administration had done.

The management of liquidity in the banking system with particular member banks, non-banks, and foreign entities is not relevant to the Primary Dealers list per se.

I am not sure why they wanted to know this, but since it has been some time I have written about them,  here is a current list of the Primary Dealers from the NY Fed.

"Primary dealers serve as trading counterparties of the New York Fed in its implementation of monetary policy. 

This role includes the obligations to: 

(i) participate consistently in open market operations to carry out U.S. monetary policy pursuant to the direction of the Federal Open Market Committee (FOMC); and 

(ii) provide the New York Fed's trading desk with market information and analysis helpful in the formulation and implementation of monetary policy.

Primary dealers are also required to participate in all auctions of U.S. government debt and to make reasonable markets for the New York Fed when it transacts on behalf of its foreign official account holders."

Here is some additional information about the nature of the Primary Dealer relationship with the NY Fed.

As one can easily see not all banks, including member banks of the Federal Reserve, and not only banks, are primary dealers.  For example, MF Global was removed from this list in October, 2011.

An institution is not required to be a Primary Dealer to borrow funds from the Fed's various lending facilities including the Discount Window.  

And being a Primary Dealer, or a member bank of the Federal Reserve for that matter, does not oblige a Bank to engage in money laundering or rigging LIBOR, or any other markets. That sort of activity is largely engaged at the discretion of the Bank.

There is a distinction therefore, between the management of monetary policy and the Treasury sales, and the Fed's other operations with banks including reserves, excess reserves, and discount lending among other things.  So one has to have some care about drawing broader conclusion from their activities.

With the advent of ZIRP, the role of excess reserves held at the Fed, and the payment of interest by the Fed to the banks on those reserves, has taken on an added importance in the management of monetary policy and system liquidity.  

In regard to foreign dollar transactions, the Fed typically arranges swap lines with foreign central banks,  as they did in the case of the dollar short squeeze we had seen in Europe for example.

At one time I kept detailed spreadsheets of most of the Fed's weekly operations.  I gave that up around the time of the financial crisis, when the Fed's activities became much more convoluted and even less transparent than they already had been.

Current List of Primary Dealers

Bank of Nova Scotia, New York Agency
BMO Capital Markets Corp.
BNP Paribas Securities Corp.
Barclays Capital Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Daiwa Capital Markets America Inc.
Deutsche Bank Securities Inc.
Goldman, Sachs & Co.
HSBC Securities (USA) Inc.
Jefferies & Company, Inc.
J.P. Morgan Securities LLC
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Mizuho Securities USA Inc.
Morgan Stanley & Co. LLC
Nomura Securities International, Inc.
RBC Capital Markets, LLC
RBS Securities Inc.
SG Americas Securities, LLC
UBS Securities LLC.


“Remembering I’ll be dead soon…”


Source: via Search Engine Land on Pinterest

“Remembering I’ll be dead soon…”

Courtesy of 

I just slept for 12 hours overnight and woke up in the pitch black thinking about too many things. Things I have to do, things I want to do and things I'm afraid of.

This usually helps me…

“Remembering that I'll be dead soon is the most important tool I've ever encountered to help me make the big choices in life.

Almost everything–all external expectations, all pride, all fear of embarrassment or failure–these things just fall away in the face of death, leaving only what is truly important.

Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose. You are already naked. There is no reason not to follow your heart."

Steve Jobs
Stanford University Commencement Speech, June 12, 2005

I'm up now. Good morning.