Archives for August 2013

The US Economy- Does Money Grow On Trees- Video – CNBC Africa

Courtesy of Lee Adler of the Wall Street Examiner

What happens after the US Federal Reserve ends quantitative easing? How will it impact on the US economy and in turn, on markets around the world? Join CNBC Africa Anchor Lindsay Williams in his quest to find out where the US economy is headed, as he chats to leading US and local economists, authors as well as SA Reserve Bank Governor Gill Marcus.

– ABN Digital

The documentary was shot in June, with Lee Adler, Peter Schiff, Byron Wien, South African Central Bank Governor Gill Marcus, Nomura Securities Chief Economist Louis Alexander, Greg Smith,  and others. It is hosted by CNBC Africa’s Lindsay Williams, and written and produced by Lindsay Williams and Juliet Newell. My clips are in Parts 1, 3, and 4, with all 4 parts available here.

My thanks to Lindsay and Juliet for inviting me to participate.

Part 1


Watch the rest of the program at

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!

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.

Public Banking Institute Calls Largest Wall Street Banks “Unsafe,” and Backs It Up

Courtesy of Pam Martens.

Mike Krauss, Founding Director of the Public Banking Institute

The Public Banking Institute has released a new video making serious claims, backed by graphs and government documents, that the largest Wall Street banks are an unsafe choice for the savings of moms, pops and public payrolls. Citing a December 10, 2012 jointly approved plan between the U.S. Federal Deposit Insurance Corporation (FDIC) and the Bank of England, which resides on the FDIC’s federal web site, the organization says depositors in the U.S. could see portions of their deposits confiscated, similar to what happened in Cyprus, should there be another Wall Street collapse as occurred in 2008. 

The first question, of course, is why the U.S. government is negotiating its banking policy with the United Kingdom instead of the U.S. Congress. The obvious answer is that global banks, now allowed to troll the planet in search of the next high-flying derivatives trade, must harmonize their rules to pacify their foreign regulators. 

Under the Dodd-Frank financial reform legislation that Congress passed in 2010, taxpayer money is barred from being used to bail out collapsing banks. That leaves few options for the FDIC should one of the largest Wall Street banks face a liquidity squeeze or a run on its assets, or, worse yet, if the contagion spread to the other three largest Wall Street banks. 

The Cyprus situation is known as a bail-in, rather than a bail-out. The initial Cyprus plan was to give depositors a haircut of 6.75 to 9.9 percent on their deposits. The Parliament shot down that plan and eventually $132,000 of each depositor’s money was returned. In the largest bank, the Bank of Cyprus, depositors, including charities and small businesses, lost 47.5 percent of their savings over the $132,000 amount. Instead, they were given shares in the recapitalized bank and had their non-seized funds frozen in six, nine and 12-month time deposits with the high probability that the freeze would last longer. 

The Cyprus situation brought with it the stark realization that depositors are creditors of a bank and face risk along with other creditors. 

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Hank Paulson’s Recollections: Mile Wide, Inch Deep

Courtesy of Larry Doyle.

Might Hank Paulson have selective amnesia or whatever happened to real journalism?

My former question actually could be posed to most pols, bankers, and regulators over the last number of years.  The latter would apply even longer than that.

Well I guess posing tough questions and demanding answers in this day and age would likely leave journalists writing little more than monologues. What a pity.

I see another example of this shallow journalism on display in written reviews and interviews with former Treasury Secretary Hank Paulson. What brings Paulson back on stage? 

The fact that he recently released a 23-page commentary Five Years Later: On The Brink — The New Prologue.

Do you think Ol’ Hank might be trying to stay relevant and burnish that reputation a little? You think? Otherwise he may find himself relegated to the curbside with the likes of Alan Greenspan, Chris Cox, Chris Dodd, Phil Gramm, Franklin Raines, and so many others who had the feed-bag on at the Wall Street-Washington trough leading into — and for some during and through– the crisis.

I will make a point of finding the twenty odd minutes it might take to read Hank’s new 23-page release. But if the reviews provided by Dealb%k’s Andrew Ross Sorkin and CNNMoney are a guide as to what we might find in Hank’s work, we won’t have to spend much more time than that.  This said, I do owe it to Hank and readers here to properly review his work. I will do that.

Based on the aforementioned commentaries, I expect I will find in those 23-pages Hank’s opinion regarding the future of Fannie and Freddie, Dodd-Frank, “too-big-to-fail”, Wall Street bonuses, and more.

What am I not likely to find?

I do not expect that I will find Hank offering any opinions on his concerted efforts going back even to the late ’90s that led to the dramatic increase in regulatory capture and the tripling of leverage on Wall Street. No doubt the success of his work on both these fronts was instrumental in precipitating our crisis. But alas, I gather these topics might be too much to ask of the former secretary or of a journalist as well.

Yes, indeed, what a pity.

23-pages? This should be a very brief navigation.

You cannot make this stuff up, folks.

Larry Doyle

Please pre-order a copy of my book, In Bed with Wall Street: The Conspiracy Crippling Our Global Economy, that will be published by Palgrave Macmillan on January 7, 2014.

For those reading this via a syndicated outlet or receiving it via e-mail or another delivery, please visit the blog and comment on this piece of ‘sense on cents’.

Please subscribe to all my work via e-mail, an RSS feed, on Twitter, or Facebook.

I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved. 


Tired of Perpetual War? What Can You Do About It?

Courtesy of Mish.

The warmongers are flooding the airwaves, beating the drums of war, even though UN inspectors have not even had time to investigate whether Syria uses chemical weapons.

The Financial Times is at the head of the list.

Financial Times Case #1

Writer Gideon Rachman says Echoes of the Iraq war are eerie but misleading.

The probable lack of a UN resolution authorising the use of military force in Syria does carry an unfortunate echo of Iraq. Indeed, the UN basis for war in Syria could be even harder to establish than over Iraq. While Messrs Bush and Blair were unable to get a second UN resolution on Iraq – unequivocally establishing the right to use force – they were, at least, able to argue that an earlier UN resolution gave them a legal basis for war. On Syria, partly because of the experience of Iraq, it seems unlikely that the Russians and Chinese will even agree to a weak first resolution.

However, while the international legal context on Syria has echoes of Iraq, the international political context is very different. In 2003, the open split in the western camp was arguably even more disturbing than the lack of a proper UN resolution. The fact that President Jacques Chirac of France and Chancellor Gerhard Schröder of Germany stood shoulder-to-shoulder with President Vladimir Putin of Russia in opposition to the war with Iraq will stay long in the memory.

This time, the French, far from leading the opposition to military action, are in the forefront of those calling for the use of force. The Germans also seem to be supportive. Turkey, another important US ally that refused to co-operate on Iraq, is also onside on Syria. Russia, it is true, remains adamantly opposed to military action over Syria. But this time it has no overt supporters in the western camp.

What about the failure to think through the consequences of military action? In some respects, the risks may be even greater with Syria.

But the other big difference between Iraq then and Syria now is more reassuring. It is clear that the scale and ambitions of any military intervention will be far, far smaller this time around. The Iraq war involved a full-scale land invasion, with the express purpose of toppling the regime and then reconstructing the country. In Syria, by contrast, even the most gung-ho interventionists are insistent that they are not contemplating putting “boots on the ground”.

Financial Times Case #2

Compromise? Who needs it? Let’s just go to war. Financial Times writers Jim Pickard and Elizabeth Rigby say Cameron’s volte-face robs Syria vote of purpose.

MPs who rushed back early from their holidays for a historic Commons vote on military action in Syria will instead be engaging in a little more than a grand parliamentary gesture after David Cameron was forced into a last-minute compromise by Labour.

The prime minister started the day with ambitions to put military action against Syria into motion with a decisive vote in the Commons. But he ended it with little more than a “dog’s motion” after Ed Miliband threatened to vote down his plans.

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Mortgages Plunge 42% from Year Ago in Spain, 38th Consecutive Drop; Signs of Recovery? Spain Need Another Bailout?

Courtesy of Mish.

Prime Minister Mariano Rajoy wants you to believe the Spanish economy is improving. One look at housing suggests any improvement is an illusion.

Here are some highlights from a translation of the La Vanguardia article Mortgages plummet 42.2% in June

  1. The number of mortgages for home purchase in June fell 42.2% compared to June of 2012
  2. Mortgages declined every month for 38 months. June signed just 14,053 home mortgages, the lowest monthly figure of the last ten years.
  3. The six-month total from January to June 2013 was 115,895 signed mortgages. That is less than the one-month total for May of 2007 which had 118,669 signed mortgages.
  4. The average value of mortgages dropped, down 9% from a year ago to 97,495 euros.
  5. This was the worst half-year since the data series for this indicator began, in 2003.

Signs of Recovery

The Telegraph says More pain in Spain but signs of recovery.

The latest government figures show that in June Spain’s exports surged 10.5pc from a year earlier, a boom that nearly wiped out the nation’s trade deficit. Spain’s trade deficit was €106m in June, a steep drop from the €2.7bn deficit registered a year earlier and a figure heralded by the conservative government of Mariano Rajoy as a long period of recession was finally coming to a close.

Last month Spain’s national statistics agency reported that GDP had decreased by only 0.1pc in the second quarter of 2013 compared to the first, which saw a bigger decline of 0.5pc. That and a drop in unemployment figures, largely considered to be a result of seasonal hiring in the tourism industry, are the first signs of the “light at the end of the tunnel” that the government has been promising since initiating a series of deeply unpopular austerity measures.

Ministers and officials have been keen to hammer home the message that the worst of the crisis has passed. “Our economy has turned the corner and we are at the start of a change in trends which will allow us, with effort, to create jobs again. The foundations have been laid,” Rajoy said at an event in July, shortly before leaving Madrid for his summer holidays. Luis de Guindos, Spain’s Economic Minister meanwhile was quick to point out that “the recession has come to an end”.

Foundations? What Foundations?

I would like to ask Rajoy “precisely what foundations have been laid?”

  1. Is the banking crisis over?
  2. Is Spain out of the Eurozone?
  3. Was there pension reform?
  4. Work rule reform?
  5. Have banks written off all bad property loans?
  6. Are Spanish banks recapitalized.

The answer to each of those question is “No”.

Spain Need Another Bailout?

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House Prices Are Rising Faster Than Case Shiller Says, Market Is Tight

Courtesy of Lee Adler of the Wall Street Examiner

Forget the severely lagged and smoothed Case Chiller Index which reported that the median US house sale price in June was up 11% year over year. That actually represents the 3 month average contract price with a time mid point of mid March. Are you interested in where the 3 month moving average of the Dow was in mid March? I didn’t think so. You want to know how the market is doing today.

Electronic real estate broker Redfin today released current contract data for July for the 19 US metro markets it covers. This includes all contracts reported to the regional MLS’s for those markets. The 19 markets are mostly in the Northeast and on the West Coast, with only four markets in the US interior hinterlands, but it’s broad enough to give us a reasonably good idea of where the market stood and was headed a month ago based on contracts signed in July.

It seems abundantly clear from that data that the US housing market is in a bubble and is a lot hotter than Case Shiller says. According to Redfin, home prices per square foot rose by 19.3% year over year in those markets.  Based on the typical US home with 3 bedrooms, 2 to 2 1/2 baths and 1,600 to 2,000 square feet prices rose 18.9% year to year. Annual gains ranged from a low of 3.9% in Philly to 39.1% in Vegas, and 38.8% in Sacramento. The total gain from the 2011 low is 31.9%.

Home Sales Prices from Click to enlarge

Home Sales Prices from Click to enlarge


Redfin reported that July sales volume rose by 3% from June and is up 17.6% versus July 2013. Redfin also collects and reports data on the number of offers it submits and the number of house showings it conducts. Showings were up 28% and offers were up 25% in July versus July 2012. So much for higher mortgage rates suppressing demand.  Rising rates pushed buyers sitting on the fence to jump now rather than wait. This is typical inflationary behavior that the Fed pretends not to see by ignoring housing inflation.

House Showings and Offers Submitted from Click to enlarge

House Showings and Offers Submitted from Click to enlarge

Another service that provides closed sale data on a real time basis shows similar gains. publishes closed sales for 98 of the 100 largest US metros from public record data, each week. It aggregates the data on a rolling 4 week basis. Typically, recorded sales in most locales lag the closing dates by about 3 weeks. The most recent data would therefore tend to represent sales closed in July, with contracts typically reached in May and June.

Dataquick US Home Sales and Prices - Click to enlarge

Dataquick US Home Sales and Prices – Click to enlarge

Dataquick’s data shows that as of August 22, the latest 4 weeks of reported closed sales rose 16.2% in price over the prior year period.  That compared with a gain of 14.1% as of July 18, so price gains were accelerating. The total gain since the cycle low in March 2012 was 35.9%.

Dataquick reported sales volume of 261,000 homes as of the 4 weeks ended August 22, for an annual increase in sales volume of 33.8%.  It was also 1.5% higher than the 257,365 sales reported in the 4 week period ended July 25.

Redfin reports that supply started shrinking again in July, as is seasonally normal, with active MLS listings in the 19 markets down 4.6%% from June and 30.6% from July 2012. which collects listings data from the 55 largest US metros shows real time listings still rising through July and August, with a month to month increase of 3.3%  as of August 26, but that was still 5.7% below August 2012′s extremely tight level. Normally listing inventories decline from August through January. This data includes a broader sampling of US heartland and Southern markets than does Redfin. Even with the August uptick, supply remains tight.

There’s no question that restricted supply is the primary driver of the house price bubble. At some point, higher prices should bring forth a torrent of supply.When that happens, we should see a return of downward price pressure. But we’re not there yet. Demand, while nowhere near the levels of the prior decade is still increasing and sufficient to continue to put upward pressure on prices at the current level of supply.  The first signs that the price rise is coming to an end will be a drop in sales volume or a material increase in supply, or both.

See Rick Santelli use one of my proprietary charts on CNBC to explain how the Fed impacts the stock market directly through its trades with the Primary Dealers. This is just one example of the dozens of proprietary charts that I build that will help you to clearly see and understand the market’s trend, and when that trend is beginning to change.

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!

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.

War of “Non-Intervention”

Courtesy of Mish.

The ludicrous headline of the month goes to Financial Times writer Richard McGregor who claims Barack Obama marshals his forces for war of non-intervention in Syria.

All official US statements, be they on the record or in behind-the-scenes briefings, are peppered with words such as “limited”, “surgical”, and “intermediate”, to emphasise how any action will be quarantined to a few days.

The US-led attack on Syria, in other words, is not about intervening in the civil conflict. It is about not intervening.

The ghosts of Iraq still hover over every decision to go to war, no matter how limited and quarantined the US may want such action to be.

Congress is so wary of having its fingerprints on the issue that its leaders seem more than happy not to have to vote on a Syrian attack. In the House of Representatives, John Boehner, the Republican Speaker, and Nancy Pelosi, the Democratic leader, have asked only for consultation.

Perennial hawks such as John McCain in the Senate have long pressed for a more interventionist US role in Syria. “If this isn’t aimed at regime change, then what is it aimed at?” he said with visible frustration on Wednesday.

The US is readying the release of its evidence of the Assad’s regime’s complicity, probably on Thursday, in what Anthony Cordesman, of the Center for Strategic and International Studies in Washington, called “the US intelligence community’s most important single document in a decade”.

Memories of Colin Powell’s now discredited presentation to the UN before the Iraq invasion on Saddam Hussein’s weapons of mass destruction remain raw in the US system, no more so than in the intelligence community.

As Mr Cordesman says, the US has lost its credibility to assert that Mr Assad ordered the use of the chemical weapons and it will be difficult to regain it with a document that is necessarily constrained about revealing its sources.

“The US government may trust the US government,” he says. “That is not a trust the world shares, and recent polls indicate that it may not be a trust American people share as well.”

Ridiculous Thesis

You can either have a war or not have a war. You can intervene or not intervene. You cannot, in any way, have a war of non-intervention. War is intervention.

The entire article sounds like something from George Orwell’s ‘1984’….

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Financial Times: “World Is Doomed To An Endless Cycle Of Bubble, Financial Crisis And Currency Collapse”

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

It's funny: nearly five years ago, when we first started, and said that the world is doomed to an endless cycle of bubble, financial crisis and currency collapse as long as the Fed is around, most people laughed: after all they had very serious reputations aligned with a broken and terminally disintegrating economic lie. With time some came to agree with our viewpoint, but most of the very serious people continued to laugh. Fast forward to last night when we read, in that very bastion of very serious opinions, the Financial Times, the following sentence: "The world is doomed to an endless cycle of bubble, financial crisis and currency collapse." By the way, the last phrase can be written in a simpler way: hyperinflation.

So ok then: we are happy to take that as an indirect, partial apology by some very serious people. Partial, because the piece's author, Robin Harding, doesn't explicitly come out and state that this cycle of boom and bust is a direct function of ever encroaching central-planning being handed over to a few economists with zero real world experience, whose actions result in ever more devastating blow ups once the boom cycle shifts to bust. Instead, it is their admission that this is what the world has come to. But, being economists, they naturally fail to see that it is all due to them. Instead, just like pervasive market halt, flash crashes, and everything else that now dominates a broken New Normal, this cycle which eventually culminates with currency collapse, or said otherwise, hyperinflation.

The FT's read on the paradox of modern finance and central banking is surprisingly accurate: in fact, it is almost as if it comes not from the FT but from a textbook on Austrian economics, or a Zero Hedge article:

All [the central bankers’] discussion of the international financial system was marked by a fatalist acceptance of the status quo. Despite the success of unconventional monetary policy and recent big upgrades to financial regulation, we still have no way to tackle imbalances in the global economy, and that means new crises in the future.

Indeed, the problem is becoming worse. Since the collapse in 1971 of the old fixed exchange rate system of Bretton Woods, the world has become used to the “trilemma” of international finance: the impossibility of having free capital flows, fixed exchange rates and an independent monetary policy all at the same time. Most countries have plumped for control over their own monetary policy and a floating exchange rate.

The rest of the article is also like reading early Zero Hedge. Or middle. Or late: in a world of instantaneous fungibility and global capital flows, the Fed is in charge of hot money everywhere, which incidentally is why it is the Emerging Markets that are getting destroyed (first, for now) as the global Fed-funded carry trade slowly but surely unwinds.

Yet all the debate was about how individual countries can damp the impact of capital flowing in and out. Prof Rey’s own conclusion was that it is hopeless to expect the Fed to set policy with other countries in mind (which would be illegal). She recommended targeted capital controls, tough bank regulation, and domestic policy to cool off credit booms.

In practice, this will never work well. It requires every country in the world to react with discipline to constantly changing capital flows. It is like saying we can cure the common cold if only everyone in the world would wash their hands hourly and never leave the house. Even if it did work, the necessary volatility of policy would still impose painful economic costs on the countries acting this way.

The shocking lucidity continues:

The flaws in the international financial system are old and profound, and they defeat any effort to work around them. Chief among them is the lack of a mechanism to force any country with a current account surplus to reduce it. Huge imbalances – such as the Chinese surplus that sent a flood of capital into the US and helped create the financial crisis – can therefore develop and persist.

Even the conclusion is straight out of a Zero Hedge article:

The flaws in the international financial system are old and profound, and they defeat any effort to work around them. Chief among them is the lack of a mechanism to force any country with a current account surplus to reduce it. Huge imbalances – such as the Chinese surplus that sent a flood of capital into the US and helped create the financial crisis – can therefore develop and persist.

Indeed, running a surplus is wise because there is no international central bank to rely on if investors decide they want to pull capital out of your country. There is the International Monetary Fund – but Asian countries tried that in 1997, and the experience was so delightful they have been piling up foreign exchange reserves ever since to avoid a repeat.

A reliable backstop is impossible when the international system relies on a national currency – the US dollar – as its reserve asset. Only the Fed makes dollars. In a crisis, there are never enough of them – a shortage that will only get worse as the world economy grows relative to the US – even if the problem for emerging markets right now is too many of them.

The answer is what John Maynard Keynes proposed in the 1930s: an international reserve asset, rules for pricing national currencies against it, and penalties for countries that run a persistent surplus. After the financial crisis there was a flood of proposals along these lines from the UN, from the economist Joseph Stiglitz, and even from the governor of the People’s Bank of China. None has gone anywhere.

Oh it will go somewhere… as soon as Bernanke leads the US to its own final "currency collapse", resulting in an inevitable shift in the reserve currency status as we have shown many times before, and as has happened in history so many times. Because no reserve currency is forever.

And finally, on that other topic, gold and systemic stability, here is what the FT has to say:

A stable international financial system has eluded the world since the end of the gold standard.

What else is there to say.

No really: when the FT becomes ZH, maybe everything that should be said, has been said?

NAR Finally Admits Rising Rates Crippling Housing

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Pending home sales missed expectations for the first time in 3 months, falling 1.26% MoM (vs a 0.0% expectation). This forward-looking measure of housing based on actual contract signings suggests that all the anecdotal evidence of an artificial echo-boom in real estate coming to an end. With the West down 4.9% and Northeast down 6.5% MoM (the biggest 3-month drop in 3 years), even the much-vaunted fair-and-balanced National Association of Realtors are forced to admit that "higher mortgage interest rates and rising home prices are impacting monthly contract activity." Whocouldanode?



as the Northeast sees the biggest 3-month drop in three years!


and don't hold your breath…



Charts: Bloomberg

Federal Reserve Internal Survey: ‘Will Beatings Continue Until Morale Improves?’

Courtesy of Larry Doyle.

The Federal Reserve has to be one of the single most opaque institutions not only in our nation but in the world. I often think of the Fed as having a door in which those inside can see out, but those outside can never see in.

In light of this premise, I am exceptionally surprised to read of a recent survey of Federal Reserve employees that is highlighted by The Huffington Post

Regulators overseeing the nation’s largest financial institutions are distrustful of their bosses, afraid to speak out, and feeling isolated, according to a confidential survey this year of Federal Reserve employees.

The findings from the April survey of roughly 400 employees, presented to Fed staff during multiple meetings in June and July and obtained by The Huffington Post, show a workforce that is demoralized, and an institution where teamwork is nonexistent, innovation and creativity are discouraged and employees feel underutilized.

Obtained by The Huffington Post? That is far different than “provided” to The Huffington Post. Do you get the sense that perhaps a disgruntled employee leaked this survey?

The shaky morale is a legacy of Alan Greenspan’s 19-year term as Fed chairman. From 1987 to 2006, the Greenspan Fed pushed for a hands-off approach by regulators, who then found themselves blamed for the financial crisis that led to the most punishing economic downturn since the Great Depression.

Sounds like Alan was little more than a benevolent despot with an outsized ego. No doubt he was also deeply in bed with the industry.  And Larry Summers — also a charter member of the Outsized Ego Club — is going to change this culture? Really? NOT.

“Supervisors during the Greenspan years were beaten down pretty regularly,” Phil Angelides, former chairman of the congressionally appointed Financial Crisis Inquiry Commission, told HuffPost. “It doesn’t surprise me that you would still have some dysfunction, a lack of morale and something less than a highly energized and well-coordinated arm of the Federal Reserve, where for so long the regulators and bank supervisors were held back by the leadership of the Fed.”

This comment by Angelides answers the question posed most recently by regular reader Fred as to whether the Fed is the great facilitator of the Wall Street-Washington Incest. Indeed it is.

Can the blankets covering up our pols, bankers and regulators be pulled back so that the incest can be exorcised and our nation might recover? Don’t hold your breath.

About a third of workers surveyed in the policy unit agreed that it was “safe to speak up and constructively challenge things around here,” documents show.

“That tells me you don’t have the culture of debate and engagement that you need so that questions are asked,” said Angelides.

What do I take from this survey and especially this last component in which only a third of the workers feel it is safe to speak up? Power and money once entrenched are not easily dislodged and the truth takes a back seat to the corruptible status quo.

Navigate accordingly.

I thank the regular reader who brought this story to my attention.

Larry Doyle

Please pre-order a copy of my book, In Bed with Wall Street: The Conspiracy Crippling Our Global Economy, that will be published by Palgrave Macmillan on January 7, 2014.

For those reading this via a syndicated outlet or receiving it via e-mail or another delivery, please visit the blog and comment on this piece of ‘sense on cents’.

Please subscribe to all my work via e-mail, an RSS feed, on Twitter, or Facebook.

I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved. 


The “Grave Threat” Hearing You’ve Never Heard About

Courtesy of Pam Martens.

Patrick McHenry, Chair of the House Financial Services' Oversight and Investigation Subcommittee

One day after terrorists set off a bomb at the Boston Marathon leaving a tragic trail of senseless human suffering, the U.S. House of Representatives held a scheduled hearing to debate another form of terrorism – the kind of economic terrorism that gripped the United States from 2008 to 2010 and lingers today in the form of 46 million Americans living in poverty, mass underemployment, stagnating wages, a shaky housing market, tepid GDP growth and ballooning national debt. The House was debating the “grave threat” to the Nation posed by the too-big-to-fail banks. You likely didn’t hear about the hearing because the media was focused on the Boston Marathon and its more easily understood, visually shocking form of terrorism. 

On April 16, 2013, members of the House Oversight and Investigation Subcommittee of the Financial Services Committee wanted to learn more about two words, “grave threat,” that appear just twice in the Dodd-Frank financial reform legislation that was passed in 2010 but has yet to be fully enacted. 

Scott Alvarez, the General Counsel of the Federal Reserve Board of Governors, who was present at the hearing, explained the use of the phrase in Section 121 of the Dodd-Frank legislation: 

Scott Alvarez, General Counsel of the Federal Reserve Board

Alvarez said: “…Section 121 allows the Federal Reserve, in consultation with F-SOC [Financial Stability Oversight Council], not the FDIC, to require large firms to sell assets. However, it imposes a high hurdle on the requirement. We must find, and the F-SOC must agree – two-thirds of the F-SOC must agree – that the institution poses a ‘grave threat,’ not just any threat, a ‘grave threat,’ to financial stability. And, we are required by statute to consider a variety of alternatives first, including restrictions on growth, restrictions on activities, conditions on operations, many other things as precursors to the sale of assets. The sale of assets is the last on the list.” 

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CNBC Core Viewership Drops To Fresh 20 Year Low, Worst Nearly Since Inception

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

If last night the year 1993 was notable for India, as the Rupee had its largest plunge since March of that year two decades ago, today 1993 is just as memorable for CNBC. The reason: according to the latest Nielsen data, in July the financial network's prime (25-54 demographic) viewership just tumbled to a fresh 20 year low of just 37,000, the lowest since, you guessed it, March of 1993. Why is this a problem? Considering CNBC came on air in its current post-FNN incarnation in 1991, the core viewership is now about as low as it has ever been for the struggling broadcaster which as recently as 2007 was ranked as the 19th most valuable cable channel in the US.  Now: not so much.

Total viewership fared a little bit better: it too plunged last month dropping to just 128,000, the lowest in just under a decade, or since September 2004. At the current pace of viewership declines, however, the 2004 low of 118,000 will also likely be taken out quite soon.

Finally, CNBC's Fast Money (-32% Y/Y), Mad Money (-42% Y/Y) and Kudlow (-52% Y/Y) all had all time low ratings in the "all viewers" category in August 2013.

Is the exodus from CNBC an issue of content credibility, or just retail revulsion to manipulated, centrally-planned markets, or even simpler, just not enough disposable income to daytrade, we will leave the $64,000 answer to CNBC's proud new owners.

Source: Nielsen Media Research

Currency Lessons: Think a Sinking Currency is Always Good For Manufacturers?

Courtesy of Mish.

Currency Lessons

Brazil learned a currency lesson first, now India. Is Australia next? Japan?

The lesson I am talking about is the widely held misconception that a sinking currency will make manufacturers more competitive and thus help the economy.

A friend from Australia emailed such thoughts to me a few days ago regarding the sinking Australian dollar.

But recall what Brazil’s finance minister said on March 3, 2012 in a currency war declaration on the US: “When the real appreciates, it reduces our competitiveness. Exports are more expensive, imports are cheaper and it creates unfair competition for businesses in Brazil

In a flash forward to August 25, 2013 we see Brazil Plans $60 Billion Currency Intervention Scheme; Indonesia Abandons Intervention, Adopts Other Measures.

Let’s now turn our attention to the Indian Rupee.

50% Decline in Rupee in Two Years

Conventional Wisdom vs. Reality

My Gosh! With a 50% selloff, conventional wisdom suggests India ought to be in heaven.

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Images From ‘Surgical’ Damascus Explosions

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

At least 50 people have been killed in two strong explosions that ripped through the Syrian capital, Damascus, in the deadliest attack on the capital since the country's uprising began 14 months ago. The explosions heavily damaged a military intelligence building. The blasts happened at about 7:50 am, when employees are usually arriving at work.

Syrian inspectors investigate the crater in front of a damaged military intelligence building where two bombs exploded

Cars burn at the scene of the blasts

Smoke rises from the site of twin blasts in Damascus

Two Syrian soldiers and civilian citizens carry a dead body

An aerial view of the site of twin blasts in Damascus

A member of the Syrian security forces walks past destroyed vehicles at the site of twin blasts in Damascus

Residents and security personnel gather at the site of the explosion in Damascus

Source: The Telegraph



By Russ Winter of Winter Actionables

When I try to hazard a guess about what US policy is about,  the word “duplicity” comes to mind.   The Syrian crisis should be no exception. Although WWIII is not out of the question, it far more likely that the US has signaled to Russia that it’s client, Syria needs to be taken out for a good caning.

Thus we will likely get a video game shock and awe cruise missile attack on some command centers and military installations, hysterics and saber rattling, followed by a few days of “show” and stoogery on MSM. Afterwords, conditions will remain tense and unresolved.

With that in mind, take a look at the extreme bullish speculator positioning in oil. As I have been reporting, the spec longs in oil are at absolutely nosebleed levels.  And this chart was before this week’s spike.  If ever a market was ripe for a fall, it is oil, and I have a strong hunch that once the caning is administered, that market will be liquidated “on the news”.

Source: Bar Charts

As I have been saying, mining shares will not be spared an oil spike. And Tuesday as the GDXJ bumped up against the 52-53 overhead resistance, the juniors reversed and had a nasty day.

The larger question is what happens when the GDXJ drops to 43-46 support, simultaneous with the duplicity caning, Syria action and oil price reversal?  I think that’s when the GDXJ gets the mojo to power to get through the resistance and heads towards 70.

Paradoxically when the caning occurs and oil reverses down, physical gold and silver might correct some as well.  This is tricky because it will stymie precious metal equity traders, and leave many at the gate on the equities.  

My strategy has been laid out beforehand and discussed. We shouldn’t just have to react unprepared. Use the reserves accumulated of late to reload and hit your spots in stages at GDJX 43-47 as this unfolds.

The Immense (And Needless) Human Misery Caused By Speculative Credit Bubbles

Courtesy of Charles Hugh-Smith of OfTwoMinds blog,

Financialization and the Neocolonial Model of credit-based exploitation leave immense human suffering in their wake when speculative credit bubbles inevitably implode.

Discussions of the global financial crisis tend to be bloodless accounts of policy and "growth." This detachment masks the immense and totally needless human misery created by financial engineering. A correspondent with first-hand knowledge of the situation in Cyprus filed this account:

"RE: the Cyprus economic crisis, the politicians are unbowed by the chaos they caused, still behaving as they have always done, preaching populist platitudes, corrupt as ever, unapologetic. A poll showed that 99% of Cypriots believe their government is corrupt. 

Yesterday, the former president, Demetris Christofias, appeared before a tribunal investigating the causes of the economic collapse. He tried to force the tribunal to do what he told them, saying, "I am not just any witness, I was the President of the Republic for 5 years". They told him where to get off and he stormed out. 

Little hope for this country. Money leaving. Best talent leaving. Foreign investment in a planned energy hub has been hijacked by the politicians. Cyprus is returning back to what it always was: a tourist destination run by shopkeepers and farmers.Sad days. Most people feel betrayed by the politicians and big powers."

This report highlights a key dynamic of speculative credit/banking bubbles: they require the complicity of central banks and the state. Speculative bubbles based solely on cash have very short lifespans, as the bubble bursts violently as soon as the gamblers' cash has been sucked into the vortex.
Truly devastating speculative bubbles require a vast expansion of credit and the corruption of the political class that feeds off the state. As Credit is ultimately managed by the state, central banks and the banking cartel, no speculative credit bubble can arise without the complicity and collaboration of all three.
Speculative credit bubbles are the hallmark of parasitic financial systems and what I term the Neofeudal-Neocolonial Model of Financialization: In the neofeudal, neocolonial model, speculation by the parasitic Aristocracy is backstopped by the taxpayers–the perfection of moral hazard. The E.U., Neofeudalism and the Neocolonial-Financialization Model (May 24, 2012).
Future taxpayers are burdened with crushing mountains of debt taken on to fund corrupt state fiefdoms and politically sacrosanct cartels and constituencies.
Debt (that profits the parasitic financial Aristocracy) is heavily incentivized while saving capital (cash) is punished with negative yields.The incentives to accumulate cash capital and invest it productively rather than speculatively are systematically destroyed.
This is the essence of the neocolonial model: make money cheap, reward consumption and speculation in asset bubbles and draw once-prudent citizens into debt-serfdom. Those not ready for big-mortgage serfdom are snared with $100,000 student loans.
This is the same mechanism used to stripmine colonies with financialization: no coercion necessary. "They did it to themselves."
This neocolonial model leads to neofeudalism: Once the asset bubble burst, your (phantom) wealth has vanished, but you still owe us the debt. In an economy based on debt, servicing that debt absorbs much of the income. So you need to borrow more to get by.
The destructive incentives, corruption and erosion of productive investment are masked by the rapidly rising phantom wealth created by the bubble in real estate and stocks. Something else happens when speculative credit bubbles inflate housing: rents also rise as the cost of buying homes skyrockets.
As a result, even those who prudently avoided buying into bubbles see their incomes siphoned off.
This is what speculative credit bubbles look like in household terms:
Productivity per worker keeps increasing:
As do financial profits per worker:
Financial profits as a share of the economy have soared:
But the share of a financialized neofeudal economy that flows to workers declines:
Adjusted for inflation, real household incomes stagnate even as the credit bubble boosts the value of assets owned by the financial Aristocracy:
The Neofeudal-Neocolonial Model is playing out everywhere as the home economies are ruthlessly pillaged in the financialized version of the old colonial exploitation model:
The Eurozone's Three Fatal Flaws (September 21, 2011)

My definition of Neoliberal Capitalism differs significantly from the conventional view: markets are opened specifically to benefit the Central State and global corporations, and risk is masked by financialization and then ultimately passed onto the taxpayers. In this view, the essence of Neoliberal Capitalism is: profits are privatized but losses are socialized, i.e. passed on to the taxpayers via bailouts, sweetheart loans, State guarantees, the monetization of private losses as newly issued public debt, etc.

The consequences of this vast transfer of risk and the cleanup costs of the credit bubble to citizens and debt-serfs is human misery on an immense scale.

Is Obama Another Bush Clone? Another Nixon Clone?

Courtesy of Mish.

Case For Nixon

Guardian writer Jeff Jarvis says As a Democrat, I am disgusted with President Obama.

I voted for Obama reluctantly, but never did I imagine he would become another Richard Nixon.
What are you thinking, Mr President?

Is this really the legacy you want for yourself: the chief executive who trampled rights, destroyed privacy, heightened secrecy, ruined trust, and worst of all, did not defend but instead detoured around so many of the fundamental principles on which this country is founded?

Never did I imagine that you would instead become another Richard Nixon: imperial, secretive, vindictive, untrustworthy, inexplicable.

As a journalist, I am frightened by your vengeful attacks on whistleblowers – Manning, Assange, Snowden, and the rest – and the impact in turn on journalism and its tasks of keeping a watchful eye on you and helping to assure an informed citizenry.

As a citizen, I am disgusted by the systematic evasion of oversight you have supported through the Foreign Intelligence Surveillance Act (FISA) courts; by the use of ports as lawless zones where your agents can harass anyone; by your failure on your promise to close Guantánamo, and this list could go on.

As an internet user, I am most fearful of the impact of your wanton destruction of privacy and the resulting collapse of trust in the net and what that will do to the freedom we have enjoyed in it as well as the business and jobs that are being built atop it.

You can’t argue that Armageddon is on the way and that al-Qaida is on the run at the same time.

No, I think it is this: secrecy corrupts. Absolute secrecy corrupts absolutely. You have been seduced by the idea that your authority rests in your secrets and your power to hold them.

Transparency is another principle you promised to uphold but have trammeled instead. …

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China Warns US About Cutting Tapering Too Soon, Proposes BRIC Foreign Currency Fund

Courtesy of Mish.

The focus for the entirely useless upcoming G20 meeting is fear over US tapering, capital flight, and liquidity.

Reuters reports Ahead of G20, China urges caution in Fed policy tapering.

The U.S. Federal Reserve must consider when and how fast it unwinds its economic stimulus to avoid harming emerging market economies, senior Chinese officials said on Tuesday.

The warning by China’s Vice Finance Minister Zhu Guangyao and central bank Vice Governor Yi Gang came as economies from Brazil to Indonesia struggle to cope with capital flight as U.S. interest rates rise ahead of an expected tapering off in the Federal Reserve’s bond buying program that unleashed liquidity across the world.

The United States – the main currency issuing country – must consider the spill-over effect of its monetary policy, especially the opportunity and rhythm of its exit from the ultra-loose monetary policy,” Zhu said.

China will refrain from providing stimulus to the world’s second-largest economy, which he said was on track to grow around 7.5 percent this year – in line with the government’s target.

“On monetary policy, the focal point (of G20) will be on how to minimize the external impact when major developed countries exit or gradually exit quantitative easing, especially causing volatile capital flows in emerging markets and putting pressures on emerging-market currencies,” Yi said.

Yi said a $100 billion foreign-currency fund being discussed by countries that make up the BRICS grouping of Brazil, Russia, India, China and South Africa will be set up in the foreseeable future. He said China would provide “a big share” of the funds but he did not give details.

“It will not exceed 50 percent,” he said.

The BRICS’ leaders have agreed to set up the fund to help ward off currency crises.

Useless G-20 Meeting

The G-20 meeting will be useless. After praising growth, motherhood, and apple pie, every country will do whatever it wants and there will be no agreements on agricultural tariffs, or anything else of substance.

Useless $100 Billion Currency Fund Proposal

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Stocks Rocked, Bonds Flopped

By Paul Price of Market Shadows

Total return numbers tell the story.

Over the latest three years the more equities you owned, the better you did. Hiding in bonds (from poor macro-economic conditions) backfired as fixed income suffered lackluster, or even negative returns.

The generational low interest rates set in the spring of 2012 may never be seen again. Rising rates have already devastated long maturity bonds even though coupons remain well below historically average  levels.

The already painful damage to bondholders may be just getting started.

1,3,5 year total returns as of Aug. 26, 2013

It is not too late to dump fixed income. Why hold on to 1% – 4% paper when a continued rise in rates could wipe out 15% or more of your principal? 30-year T-bonds gave back more than four years of interest payments (in mark-to-market value) over the past twelve months.


Get Ready for Larry Summers as Next Fed Chair

Courtesy of Larry Doyle.

Has there ever really been a doubt that Larry Summers would be the next chairman of the Federal Reserve?

Not in these parts.

Remember, President Obama — just like his predecessors — will announce who the chairman of the Federal Reserve will be, but that does not mean that he actually makes the selection.

Who do I believe really makes the selection or has veto power over the president’s choice?

Those running the large banks whom the Fed chair oversees. So who would be in this camp, aka, The Club? Certainly Jamie Dimon, Lloyd Blankfein, John Stumpf (Wells Fargo CEO), and former Treasury Secretary Tim Geithner. Junior members Brian Moynihan (Bank America CEO), Mike Corbat (Citigroup CEO), and James Gorman (Morgan Stanley CEO) probably get half votes given their lack of experience in The Club.

And who is the real power broker that delivers the message to Washington as to who Wall Street wants as the next Fed chair? Most assuredly, Robert Rubin.

With this backdrop, get ready for the sleep-deprived, bored, and/or arrogant Larry Summers — a longstanding member of the Wall Street-Washington Club — to be our next Fed chair. Why do I say this with stronger conviction now than I projected a few weeks back? The proverbial leak conveniently provided to Obama’s friends at CNBC.

A source from Team Obama told CNBC that Larry Summers will likely be named chairman of the Federal Reserve in a few weeks though he is “still being vetted” so it might take a little longer.

Repeat after me: Wall Street owns Washington. The pols from both sides of the aisle and regulators are in bed with the industry. There is little doubt of this.

Actually, a Summers appointment only adds further confirmation of this reality that I address in detail in my book, In Bed with Wall Street, being released in January.

As was then, is now, and likely forever shall be, hence we should all . . . navigate accordingly.

Larry Doyle

Please pre-order a copy of my book, In Bed with Wall Street: The Conspiracy Crippling Our Global Economy, that will be published by Palgrave Macmillan on January 7, 2014.

For those reading this via a syndicated outlet or receiving it via e-mail or another delivery, please visit the blog and comment on this piece of ‘sense on cents’.

Please subscribe to all my work via e-mail, an RSS feed, on Twitter, or Facebook.

I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved. 

The Global Economy Suffers From Hypothermia

Courtesy of The Automatic Earth.

We've used the analogy before, in particular to describe what happened to the Roman Empire during the latter days of its existence. Looking around various economies in the world today, the same analogy once again comes to mind. One might say that what we see these days is analogous to the more advanced stages of hypothermia.

Early hypothermia may show in nothing more than cold feet, in itself an amusing analogy perhaps. But a body that is exposed to extreme cold over longer periods of time will at some point start to exhibit symptoms such as frostbite, which are the result of the core of the body trying to save itself at the cost of the periphery, the extremities. Typically, a human body, for instance, will lose its toes first because the heart can no longer pump enough blood (heat) to them and at the same time keep the body's core above a minimum temperature.

In our economies we see the same pattern. It is not generally looked at or even recognized, however, since 99% of us live in denial of the possibility that such a thing would even be an option. This is a direct consequence of the fact that, first, all major news makers and decision makers reside in the core, and second, that saving that core while letting the extremities die off is somehow seen as a good thing. Post-crisis policies around the globe are directed at saving the financial system, not the people the crisis has pushed into poverty. Since these people are not seen as crucial to the survival of the core, and the system as a whole, they are – almost ritually – sacrificed on the system's economic altar.

In a reason-driven society one would expect a discussion on the viability and the intrinsic value of the system itself, but our global economic system, as I've said many times before, exhibits far more symptoms of a religion than a rational scheme. Our "analysis" of the system and the crises it goes through takes place in the part of our brain that deals with belief rather than rational thought. Therefore, we are bound, nay, certain, to get this wrong. You might think that a body can survive minus a few digits, but that is questionable, not in the least, to stick with the hypothermia analogy, because additional problems and afflictions such as gangrene are a major threat to the body's ultimate survival.

In our economic systems, we see this in Europe, where a few weeks ago it was claimed that the recession was over. And while that may be sort of true according to some specific dataset, and some specific timeframe, recessions don't of course happen in spreadsheets and datasets, they happen to real people in real streets. And if you would ask the people in the countryside in Greece or Portugal whether they feel the recession is over, we all know what the answer would be.

The core part of their nations may be suffering a bit less, but that's only because the peripheries suffer more. This is a general pattern. Money today can only be made by taking it away from other people, who – paradoxically or not – don't have any to begin with. Our economies only managed to "grow" in recent decades, since about the late 1970's, because we borrowed from ourselves to buy products produced by people working for wages only a fraction of our own, and when borrowing from ourselves was no longer a viable option, arguably 10 years ago, though 30 years might ultimately prove a better estimate, we started borrowing from our own futures and those of our children. While the core, the financial and political system, which had accumulated by far the biggest part of the debt, escaped the blame and often even fortified itself by taking more and more away from the periphery.

Which is why it's nonsense to claim Europe's recession is over. Granted, it's a timely claim, given that in Germany, Angela Merkel faces federal elections on September 22, and we never should have expected anything but rosy numbers to come out and support her bid, but it makes no rational sense. Germany's numbers may look sort of alright, even if you have to wonder how much that has to do with that same election, but we've already seen acknowledged pre-election – in a clear sign of how confident Merkel is – that Greece needs another bailout, and there's no way Portugal will not need one; Merkel and the ECB are just waiting for the politically least damaging timing to announce the next phases. And the Italian and Spanish populations have been forced through the austerity wringer so tightly any meaningful definition of the term "growth" won't be applicable for a long time, if ever, to their societies.

We will see advanced stages of the hypothermia analogy play out globally in the remainder of this year and into the next. In Europe, it will initially reach center stage in the usual suspects around the Mediterranean. What's more, a new member of the club, one with – coincidentally or not – a long strip of Mediterranean coastline will come to the fore. France. Ironically, the Eurostat report that tried to make us believe the recession is over also claimed – as a crucial part of the overall claim – that France is recovering, and even showed a positive growth number of 0.5%. We're moving into theater of the absurd territory here again.

What's really going on in France was described quite accurately by John Mauldin over the weekend in an article aptly named – in our hypothermia analogy -: France: On the Edge of the Periphery, so I don't have to do the details on that anymore. The crux is that if and when the Eurozone loses France as a net creditor, and that point is now as close as it is inevitable, the entire picture changes in a radical manner. Germany may look good pre-election, but if France goes under, that doesn't mean a thing.

Here's what going to happen in Europe: the Cyprus bail-in model will be extended first to Greece, then Portugal, and after that to all other countries that elect to stay inside the monetary torture dungeon model. The too big to fail banks – I think Europe prefers the moniker "systemically important", will be spared (they're what the system sees as its core), and any other investor, bondholder, and "normal" client will be made to pay. French banks Société Générale, BNP and Crédit Agricole will survive a first round, but since their debts are still gigantic, albeit hidden behind accounting standards and free ECB and Federal Reserve funds, their survival chances through subsequent rounds will diminish. This is just as true for other banks in peripheral countries, but that should be obvious.

Countries will fight to maintain control of their own largest banks, but they will find that they can't when the pressure keeps increasing. One price the banks have been made to pay for their TBTF status is increasing their stock of the various sovereign bonds of the countries they reside in. Bonds that will now start dragging them down.

In hypothermia terminology, the core of the global financial system is located in the US. It will therefore be the last to be hit by the ongoing deterioration of the "body" as a whole. And that will lead to lots of mistaken assumptions. We see this happening as we speak in the dynamics of the emerging markets. Most stories about rapid growth and increasing political power for them have been based largely on the amount of money invested by the West in their economies. That money is already being withdrawn in substantial quantities, and that process is due to accelerate.

Sovereign bonds all over the globe are plummeting in value, and as a consequence their yields are rising fast. Over the past half year or so, yields on US Treasuries have almost doubled. And since investors – rightly – see Treasuries as much less risky than most other bonds, which they only moved into because Treasury yields fell through a bottom, they are moving back from India, Brazil, Turkey, Indonesia etc., into the US. This provides a noteworthy sideshow to the Bernanke tapering story: if and when the Fed gets its timing right, the disadvantages of slowing down its $85 billion per month purchasing scheme may well be offset to a large extent by money flowing back into US markets. Which would, again, save the core at the cost of the periphery.

But it will not save the US economy; just the core part of it. Inside the US, the hypothermia model is evident in unemployment stats: the official U3 number stands at 7.4% right now, better than a few years ago, while U6 is still at 14%. But those are arguably no longer the main statistics anymore. You need to look at the very definition of a "job". And then find that many things once taken for granted, let's call them benefits, have been gutted to the bone, if not completely vanished. While the difference between U3 and U6 numbers already represents millions of "potential" American workers, even many more Americans have seen the quality of their jobs, and the compensation below the bottom line, shrink like a handful of frostbitten fingers. And since 70% of US GDP consists of consumer spending, this means that any growth will have to come from increased borrowing instead of from increasing wages.

Still, for the next little while, the American media, and the political and financial system they serve, will manage to convince people in the US that things are looking up. In hypothermia there's a phase this can perhaps best be compared to, one we all know and recognize: shivering. A body that gets cold involuntarily starts to shiver because that increases heat production: it is an attempt to maintain a certain temperature level (it's basically a muscle contraction just like most forms of physical exercise).

Be that as it may, the trend is clear: like Germany is the core of the European "body", and New York the core of the American one, Wall Street, the London City, Tokyo and Frankfurt form the core of the global economy. And in order to save themselves, they will all increasingly bleed their respective peripheries to – near – death. In practical terms, what this means for Brazil, Turkey, Indonesia and a whole string of countries like them outside of the core is that their sovereign bonds will plunge in value, and they will need to pay a whole lot more interest to borrow in international markets, while ever fewer potential buyers will be available. Interest on the bonds will rise, interest in the bonds will plummet.

An interesting – outlier – case study comes from India, the world's largest democracy, which just, hot off the press, voted in a proposal it had been talking about for a while, to – heavily – subsidize food for an additional 400 million of its people, bringing the total to 800 million, or 2/3 of its population. While this is really nothing else than the US foodstamp program writ large, you can bet the IMF-World Bank-Shock Doctrine (screw the periphery, hail the core) model already has measures in place to punish the country for deviating from the party line this way.

Personally, I would suggest India tell them to go screw themselves, like Italy and Greece should tell Brussels and Berlin to take a hike where the sun never shines, but in every country so far, the core is the core and it behaves that way. It'll be interesting to see where Delhi stands in a year, if the program hasn't been abandoned before then.

I've had this – admittedly fully irrational, so I never talked about it – idea for a while that if and when Italian and Spanish 10-year yields turn the same, things will start to take off. And sure enough, as I was writing this article, they are creeping eerily close together. But that's just sort of a fun idea. Economic hypothermia is not. That's closer to pattern recognition.

Photo top: National Photo Co. Snow Job February 2, 1923
"District of Columbia, City Refuse Division."


George Melloan: Pity the Big Banks – the Problem Is Populists

Courtesy of Pam Martens.

George Melloan has done a deep disservice to the ever-shrinking pool of ethical investigative writers covering Wall Street, civic-minded prosecutors, and to the underpaid but dedicated career regulators overseeing the financial markets. (No, the revolving door from Wall Street to Washington hasn’t quite killed off all that is good.) 

Yesterday, Melloan penned an opinion piece for the Wall Street Journal that was so Koch-esque, so preposterously skewed, and so utterly lacking in factual basis that it must be called out. Melloan makes the claim that the big banks aren’t doing anything more egregious than they have done in the past and the growing charges of fraud are the product of overly zealous regulators, “encouraged by the Obama administration” to blame the nation’s economic ills “on the rich, Wall Street, moneybags bankers, deal makers like Mitt Romney or almost anyone else who still wears a suit to work.”

One might forgive a young, naïve Tea Party recruit for publishing a rant such as this in a small town newspaper. But Melloan worked for the Wall Street Journal as both a writer and editor for 54 years, retiring in 2006. Surely, after more than half a century working for the Wall Street Journal, he is actually reading the investigative reporting in the paper and not just the right-wing editorials. 

Melloan’s evidentiary support for the premise that Wall Street simply can’t be any more corrupt than it was in the past is built around the Alan Greenspan theory (now debunked by everyone including Alan Greenspan) that bankers have a vested interest to self-regulate. (Wall Street bankers, both today and throughout history, have had an overriding interest to make as much money as they personally can.) 

Melloan writes: “Have bankers all gone rogue? Populists would have you think so, and apparently a sizable majority of Americans hold that view as well, judging from opinion polls. But this is not plausible. Bankers are more likely to exercise extreme discretion in an era when they are being constantly reviled by leftist politicians, writers and placard-carriers in the streets.” 

For Melloan’s first witness, he calls up Jamie Dimon, Chairman and CEO of JPMorgan Chase,  the poor mistreated figure who is “paying dearly” at the hands of those populist regulators for no greater crime than simply calling parts of the Dodd-Frank financial reform legislation “idiotic.” 

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Gold, France, a Currency Crisis, and Other Things

Courtesy of Mish.

Here is an interview I did with Fabrice Drouin Ristori at GoldBroker regarding gold, France, and other topics that I would like to share.

Fabrice Drouin Ristori: Mish, you write a lot of commentaries about the European economic crisis, going from bad to worse. For instance Portuguese Bond Yield Spiked to 8%, How do you see the European situation evolve in the coming months ? Do you expect more bail-ins in the Eurozone?

Mish: More bail-ins are 100% certain. On August 20, German Finance Minister Wolfgang Schäuble officially admitted “Greece Will Need More Aid”. Rest assured it will not stop with Greece. Spain and Portugal will need additional aid. Don’t rule out Italy. The Italian economy is crumbling in a nightmare of regulatory nonsense and work rules.

FDR: Real estate already collapsed in Greece, Spain, Ireland but remains near all-time high in France and Sweden. You wrote “French real estate was massively overvalued: by 50% based on the price-to-rent ratio, and by 35%, based on disposable income. It makes France the most overvalued real estate market in the world based on disposable income, and the fourth most overvalued one based on rents.” With an overvalued real estate market, bails-in an banking risks, how can investors protect themselves in this uncertain economic environment?  

Mish: The easiest way is to stay liquid, shun leverage, hold some gold and wait for better opportunities. The stock market bubble certainly got much bigger than I expected over the past two years. The Fed (central bankers in general) also blew a huge bubble in bonds, especially corporates. As proof of how silly thing have gotten,  covenant-lite loans (where debt is repaid not in cash but in debt) have made a comeback.

FDR: We have seen an important campaign against gold in the mainstream media, with Roubini’s predictions and with bearish arguments like “The U.S. Federal Reserve could cut stimulus sooner rather than later” or “The Dollar is strong” to name a few. Do you really think these arguments are accurate?

Mish: I have been in a very tiny minority who likes gold while simultaneously suggesting the US dollar would not collapse. It didn’t and it won’t (at least any time soon). China is printing more than the US, the crisis in Europe is far from over (I expect a disorderly breakup), Australia is tied to a Chinese economy that is rapidly slowing, and the Bank of England headed by Mark Carney promises more QE. On a relative basis, that makes it tough for the dollar to collapse relative to other major fiat currencies. However, fiat currencies in general can sink against gold. And sentiment against gold has been massive, with Bloomberg leading the parade. For further discussion, please see Losing Faith in Gold at the Wrong Time; Did Paulson’s Sale Mark the Bottom? Who’s Left to Sell?

FDR: What are the fundamentals that will drive the gold market in the future ? Have these Fundamentals changed since the last all-time high in summer 2011 when gold traded at $1900?

Mish: Most people do not really understand gold. On May 28, I discussed sentiment in Speculative Gold Bets at 5-Year Low; Metal Will Get “Crushed” Says Credit Suisse. As far as fundamentals go, please see my June 26 article Plague of Gold Bears Now Say “Gold Unsafe at Any Price”; What’s the Real Long-Term Driver for Gold?

FDR: In your June 13 article “Mish Buys a Basket of Miners” you said “gold is a far safer play than silver” can you tell us why ?

Mish: Silver is an industrial commodity that is used up. Gold has little industrial use. Silver can and does plunge more than gold in pullbacks. The latest plunge in silver was far greater than the corresponding plunge in gold. I do like silver at current prices, but one needs to be aware of high volatility in both directions.

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Japan Finance Minister Seeks Record Debt Servicing on Interest on National Debt; What’s Next?

Courtesy of Mish.

Be prepared for more stories like this because they are surely coming: Japan MOF to seek record debt-servicing costs in Fiscal Year 2014/15

Japan’s Finance Ministry will request a record 25.3 trillion yen ($257 billion) in debt-servicing costs under its fiscal 2014/15 budget, up 13.7 percent from the amount set aside for this year, a document obtained by Reuters showed on Tuesday.

The decision, aimed at guarding against any future rise in long-term interest rates, underscores the increasing cost Japan must pay to finance its massive public debt.

The country’s debt is double the size of its $5 trillion economy and is the biggest among major industrialized nations.

Watch What Happens Next

  1. If interest rates rise to a mere 3%, it will consume 100% of all revenues
  2. If Japan monetizes interest payments, the Yen will collapse

So, what’s it going to be? Both?

My best guess is #2 happens whether or not #1 does any time soon.

Mike “Mish” Shedlock

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