NOVEMBER 19, 2009
Americans Deserve a Transparent Fed
Wall St. Journal
Opinion
By RON PAUL AND JIM DEMINT
For nearly a century the Federal Reserve has operated in the shadows, away from the prying eyes of Congress, journalists and the American people. Created in 1913, the Fed was given enormous responsibility to protect the value of our currency. Yet in the last 96 years the U.S. dollar has lost more than 95% of its purchasing power. The Fed's unprecedented actions over the past year in attempting to stabilize the financial system have now forced it into the spotlight, and caused millions of people around the country to question the opacity of the Fed's financial transactions.
While the Fed is more transparent now than it was 20 or 30 years ago, there is still a long way to go. If the Fed were fully transparent, organizations such as Bloomberg and Fox News wouldn't have to sue its board of governors to receive materials that should be available through Freedom of Information Act requests. These include information on which banks and companies received loans and for what amounts after the 2008 financial meltdown.
One puzzling assertion made by the Fed and its supporters is that the Federal Reserve has some sort of independence from the government and independence in undertaking monetary policy. Nothing could be further from the truth. The Federal Reserve is a government-created banking monopoly, and its top decision makers are appointed by the president and confirmed by the Senate. If they do not perform satisfactorily in the eyes of politicians, they will not be renominated.
The Fed has also, for the past three decades, been required to engage in monetary policy with the goal of maintaining stable prices and full employment. Since the natural trend over time is for prices to decrease, a mandate to maintain stable prices is a mandate to pursue an expansionary monetary policy and inflate the money supply to counteract the lower prices we would expect from increased productivity.
The Fed chairman is required to appear twice a year before Congress to explain the Fed's actions, and how the Fed is complying with its mandates of stable prices and full employment. However, the idea that this constitutes any sort of oversight is laughable.
Each congressman who questions the chairman receives only a few minutes in which to ask questions and receive answers. Having been on the receiving end of Alan Greenspan's notoriously obtuse "Greenspan-Speak" answers and Ben Bernanke's similarly convoluted statements, we can assure you that the process is completely ineffective at getting any real answers.
No matter how direct the questions are, Fed chairmen answer with a vagueness common to bureaucrats. The whole process is window dressing for public consumption, not any sort of attempt to exercise oversight or gain any real insight into the Fed's actions.
What is needed is a full audit of the Fed, something that has never happened. We need to know who the Fed is giving money to, what types of securities are being purchased and what backs those securities, how much money is being paid for those securities, etc.
While Rep. Mel Watt's (D., N.C.) efforts to audit the new lending facilities authorized to bail out private firms such as AIG is a step in the right direction, it is still just a first step. These facilities have the same effect on the money supply as securities purchased through open market operations. Why should securities placed on one line of the Fed's balance sheet be subject to audit while the exact same securities placed elsewhere on the balance sheet are not subject to audit? The loopholes need to be closed.
In coming weeks we plan to offer companion amendments to legislation already before the House and Senate that will open the Fed up to a complete audit. The amendments set a six-month time lag on the publication of previously unreleased audit data to address the Fed's concerns that actions undertaken in support of monetary policy would immediately be politicized. The transcripts and minutes of the Federal Open Market Committee meetings would continue to be made public at the Fed's discretion, with unpublicized details of meetings not subject to any additional scrutiny. Finally, the amendments make clear that the purpose of the audits is not to interfere with or dictate monetary policy.
As strong opponents of government intervention into the economy, we do not want to see Congress directly dictate monetary policy. But while the Fed is involved so heavily in monetary policy and its actions so heavily influence the future of our economy, it is necessary that it be fully transparent. Interventions into the economy on the order of trillions of dollars cannot continue to escape public scrutiny. American taxpayers deserve better.
—Mr. Paul is a Republican congressman from Texas. Mr. DeMint is a Republican senator from South Carolina.
Instead of listening to politicians speak about what’s best for us – let’s learn a few things from someone who understands our healthcare system and the finances involved.
jg – November 18, 2009
NOVEMBER 18, 2009
Health 'Debate' Deserves a Failing Grade
Wall St. Journal
Opinion
By JEFFREY S. FLIER
As the dean of Harvard Medical School I am frequently asked to comment on the health-reform debate. I'd give it a failing grade.
Instead of forthrightly dealing with the fundamental problems, discussion is dominated by rival factions struggling to enact or defeat President Barack Obama's agenda. The rhetoric on both sides is exaggerated and often deceptive. Those of us for whom the central issue is health—not politics—have been left in the lurch. And as controversy heads toward a conclusion in Washington, it appears that the people who favor the legislation are engaged in collective denial.
Our health-care system suffers from problems of cost, access and quality, and needs major reform. Tax policy drives employment-based insurance; this begets overinsurance and drives costs upward while creating inequities for the unemployed and self-employed. A regulatory morass limits innovation. And deep flaws in Medicare and Medicaid drive spending without optimizing care.
Speeches and news reports can lead you to believe that proposed congressional legislation would tackle the problems of cost, access and quality. But that's not true. The various bills do deal with access by expanding Medicaid and mandating subsidized insurance at substantial cost—and thus addresses an important social goal. However, there are no provisions to substantively control the growth of costs or raise the quality of care. So the overall effort will fail to qualify as reform.
In discussions with dozens of health-care leaders and economists, I find near unanimity of opinion that, whatever its shape, the final legislation that will emerge from Congress will markedly accelerate national health-care spending rather than restrain it. Likewise, nearly all agree that the legislation would do little or nothing to improve quality or change health-care's dysfunctional delivery system. The system we have now promotes fragmented care and makes it more difficult than it should be to assess outcomes and patient satisfaction. The true costs of health care are disguised, competition based on price and quality are almost impossible, and patients lose their ability to be the ultimate judges of value.
Worse, currently proposed federal legislation would undermine any potential for real innovation in insurance and the provision of care. It would do so by overregulating the health-care system in the service of special interests such as insurance companies, hospitals, professional organizations and pharmaceutical companies, rather than the patients who should be our primary concern.
In effect, while the legislation would enhance access to insurance, the trade-off would be an accelerated crisis of health-care costs and perpetuation of the current dysfunctional system—now with many more participants. This will make an eventual solution even more difficult. Ultimately, our capacity to innovate and develop new therapies would suffer most of all.
There are important lessons to be learned from recent experience with reform in Massachusetts. Here, insurance mandates similar to those proposed in the federal legislation succeeded in expanding coverage but—despite initial predictions—increased total spending.
A "Special Commission on the Health Care Payment System" recently declared that the Massachusetts health-care payment system must be changed over the next five years, most likely to one involving "capitated" payments instead of the traditional fee-for-service system. Capitation means that newly created organizations of physicians and other health-care providers will be given limited dollars per patient for all of their care, allowing for shared savings if spending is below the targets. Unfortunately, the details of this massive change—necessitated by skyrocketing costs and a desire to improve quality—are completely unspecified by the commission, although a new Massachusetts state bureaucracy clearly will be required.
Yet it's entirely unclear how such unspecified changes would impact physician practices and compensation, hospital organizations and their capacity to invest, and the ability of patients to receive the kind and quality of care they desire. Similar challenges would eventually confront the entire country on a more explosive scale if the current legislation becomes law.
Selling an uncertain and potentially unwelcome outcome such as this to the public would be a challenging task. It is easier to assert, confidently but disingenuously, that decreased costs and enhanced quality would result from the current legislation.
So the majority of our representatives may congratulate themselves on reducing the number of uninsured, while quietly understanding this can only be the first step of a multiyear process to more drastically change the organization and funding of health care in America. I have met many people for whom this strategy is conscious and explicit.
We should not be making public policy in such a crucial area by keeping the electorate ignorant of the actual road ahead.
—Dr. Flier is dean of the Harvard Medical School.
I mentioned in an earlier post that there will be a battle for control of our monetary system (money). The blog post below by Karl Denninger is what I’m referring to – there will be some of our leaders who are honorable (Ron Paul) and will try to rest control from this international cartel of bankers. There will also be leaders who are not at all honorable – who will only look at what they can gain from the current system – and will fight for the bankers (Watt). It doesn’t matter to them if this destroys the United States. They can only see wealth, power and glory for themselves. They are most likely aware of the coming global government – and are attempting to solidify their place within it.
This is only the beginning. As our economy continues to decline – this will change from a battle over an audit of the Federal Reserve – to a battle for the system itself.
jg – November 18, 2009
Wednesday, November 18. 2009
As I noted on Blogtalk a couple of weeks ago, Representative Watt is doing his level best to derail the "Audit the Fed" bill and amendments introduced by Representatives Grayson and Paul.
Representative Watt's "alternative", however, doesn't open The Fed's books - it further snaps them shut! It not only leaves all the existing restrictions against an audit in place and refuses to mandate audits it also places four new restrictions on any such audit activity.
The most outrageous new restriction is that an audit, under Watt's proposal, may not examine the loans or liquidity arrangements that The Fed enters into or the impact of those deals on the reserves, balance sheet or financial condition of either a Fed-regulated bank or The Federal Reserve itself.
It isn't hard to figure out why Watt would want such blanket secrecy. One need only look at his heavily-gerrymandered district, which happens to contain the corporate headquarters of Bank of America.
This gives new meaning to "kneel before Zod."
The Dishonorable Representative Watt must resign - there have been ridiculous and outrageous claims made in the past, but any representation that his amendment would somehow "open the books of The Fed" is an outrageous lie, and further, it appears to be intentionally designed to protect one of the very "too big to fail" banks that likely has caused The Fed to get in trouble in the first place - Bank of America.
What do you do if you’re the Fed chairman and your actions are destroying the value of the dollar? If you wanted to disguise your actions – you might lie to the American people and tell them that economic growth will continue next year. You might also lie and tell the American people that this ‘growth’ coupled with the Fed’s actions will stabilize the dollar – in an attempt to momentarily stabilize our falling currency.
What is the truth? To find the truth (as I’ve said before) – we must look at actions and the results of those actions. We cannot depend merely on what we’re told – because we’re being told many lies on a daily basis.
Let’s disregard what Bernanke is saying since he’s only trying to prop up the dollar with meaningless talk – and look at what he’s actually doing. As you’ve seen – the Federal Reserve is propping up Treasury auctions, the Stock Market, the Banking system and Housing. Due to all of the recent Fed ‘actions’ over the past 1 ½ years – the Fed has basically become our economy. How do they do this? They do it by printing trillions of new dollars to buy assets. What affect does this have on our fiat currency? It erodes the value of the U.S. dollar. Anyone who is paying attention (China is certainly paying attention) can see that the Fed is directly monetizing our debt – on a massive scale. There’s only one way for the dollar to go – down - and it’s now heading in that direction at a quickening pace.
Is the real economy (jobs, housing, corporate sales/revenues, tax receipts – things we can actually measure) really growing? No – it’s not. Is there anyway under current conditions that the dollar will ‘stay firm’? Of course not.
You can see how ridiculous Bernanke’s statements are – they are nothing more than well concealed lies - lies that give us a false sense of security.
Remember Bernanke’s comments when things begin to head south – and then compare his new lies with the old ones.
Also notice the media spin on this article. What is causing the current decline of the dollar according to the article?
In a rare move, the Fed chief made several remarks on the U.S. dollar, which has fallen in value recently as global economic activity picked up and investors no longer sought the safety of dollar assets.
The reason we’re given for the dollar’s decline is that investors no longer seek the ‘safety of dollar assets’. I’m sure there are investors fleeing the dollar – but this isn’t the underlying cause of the dollar’s decline. You’re not going to see a mainstream media article telling us the truth. There is a coordinated deception playing out here.
The Federal Reserve is causing the decline of the dollar – plain and simple. Remember this.
jg – November 16, 2009
NOVEMBER 16, 2009, 1:07 P.M. ET
Moderate Economic Growth to Continue in 2010, Bernanke Says
Wall St. Journal
By LUCA DI LEO
WASHINGTON -- The U.S. economy will continue to grow in 2010 and this expected strength will help ensure the dollar stays firm, Federal Reserve Chairman Ben Bernanke said Monday.
In a rare move, the Fed chief made several remarks on the U.S. dollar, which has fallen in value recently as global economic activity picked up and investors no longer sought the safety of dollar assets.
"Our commitment to our dual objectives [of maximum employment and price stability], together with the underlying strengths of the U.S. economy, will help ensure that the dollar is strong and a source of global financial stability," Mr. Bernanke told the Economic Club of New York.
The Fed chief stressed the central bank will keep a close eye on the dollar's recent slide, but at the same time reiterated that the key federal funds target rate is expected to remain at record lows for some time due to a fragile recovery.
To lift the dollar's value, the central bank would need to raise rates, thereby increasing the return investors get on U.S. dollar assets.
However, that could hurt the economy's recovery, which Mr. Bernanke cautioned was threatened by weakness in the labor market and tight bank lending.
"I expect moderate economic growth to continue next year. Final demand shows signs of strengthening, supported by the broad improvement in financial conditions," Mr. Bernanke said.
Holding his first official speech since the Fed voted to hold its key interest rate at a record low earlier this month, Mr. Bernanke said jobs are likely to remain scarce and inflation low for some time.
The Fed kept its benchmark interest rate at a record low Nov. 4, citing a sluggish recovery. The central bank said it expects to keep its federal funds target rate close to zero for an "extended period" in the face of high unemployment and low inflation.
For the first time, the Fed's rate-setting committee earlier this month spelled out the three key indicators it will be looking at to set rates: unemployment, core inflation and inflation expectations.
"Both the decline in jobs and the increase in the unemployment rate have been more severe than in any other recession since World War II," Mr. Bernanke warned.
The U.S. economy is slowly recovering from its worst recession since The Great Depression. Although the economy expanded in the third quarter for the first time in more than a year, the recovery remains fragile, with unemployment at a 26-year high of 10.2% in October.
Later Monday, Fed Vice Chairman Donald L. Kohn will talk about the central bank's policy challenges.
Write to Luca Di Leo at luca.dileo@dowjones.com
This is ridiculous.
Where did we get the $700 billion dollars for TARP? We borrowed it.
What would be the impact on our deficit if we paid back all $700 billion dollars today? The impact on our finances would be negative. Since we borrowed all of this money – even if we paid all of it back today – we would still have paid interest on this money - for months.
So – the comments below are simply ridiculous. I can’t believe they are even printed. I wonder if these people are laughing at us behind closed doors.
The Obama administration, under pressure to show it is serious about tackling the budget deficit, is seizing on an unusual target to showcase fiscal responsibility: the $700 billion financial rescue.
If the Obama administration was serious about tackling the budget deficit – they would not spend money we don’t have. They would not have created a budget with a deficit of over $1 trillion dollars. They would not be borrowing billions of dollars to throw away on our failing banking system.
A $210 billion surplus in TARP funding could be used to reduce the U.S.'s towering national deficit.
As I stated above – this is a misleading statement. Yes – the deficit could be reduced with the TARP surplus – but it would only be paying back borrowed money. This little piece of information is somehow forgotten.
The idea is still a matter of debate within the administration and it is unclear how much impact it would have on the nation's mounting deficit levels.
I hope this ‘debate’ didn’t last very long. If it’s still being ‘debated’ – I’ll give you the correct answer now. Paying back $200 billion of borrowed money will have almost no effect on a deficit of $12 trillion dollars. Besides – we’ll need that money to throw away when commercial real estate collapses.
This is simply a political game – to give the appearance that the administration is concerned about our nation’s finances. This is our leadership in a nutshell – no substance – reality takes a backseat to politics. People wonder why the American people are angry?
The sound you hear is our nation falling off a very large cliff.
jg – November 12, 2009
NOVEMBER 12, 2009
White House Aims to Cut Deficit With TARP Cash
By DEBORAH SOLOMON and JONATHAN WEISMAN
WASHINGTON -- The Obama administration, under pressure to show it is serious about tackling the budget deficit, is seizing on an unusual target to showcase fiscal responsibility: the $700 billion financial rescue.
The administration wants to keep some of the unspent funds available for emergencies, but is considering setting aside a chunk for debt reduction, according to people familiar with the matter. It is also expected to lower the projected long-term cost of the program -- the amount it expects to lose -- to as little as $200 billion from $341 billion estimated in August.
A $210 billion surplus in TARP funding could be used to reduced the U.S.'s towering national deficit. WSJ's Deborah Solomon says the move follows criticism of the Obama administration's approach to debt.
The idea is still a matter of debate within the administration and it is unclear how much impact it would have on the nation's mounting deficit levels. Still, the potential move illustrates how the Obama administration is trying to find any way it can to bring down the deficit, which is turning into a political as well as an economic liability.
The White House is in the early stages of considering what bigger moves it might make for next year's budget. The Office of Management and Budget has asked all cabinet agencies, except defense and veterans affairs, to prepare two budget proposals for fiscal 2011, which begins Oct 1, 2010. One would freeze spending at current levels. The other would cut spending by 5%.
OMB is also reviewing a host of tax changes. The President's Economic Recovery Advisory Board will submit tax-policy options by Dec. 5, including simplifying the tax code and revamping the corporate tax code.
White House Chief of Staff Rahm Emanuel is pressing for substantial spending cuts to go with any tax increases to try to avoid the "tax and spend" label that has bedeviled Democrats, according to administration and congressional officials.
The administration is constrained in tackling the mounting deficit, since raising taxes or slashing spending could stunt economic growth. Administration officials say the Obama economic team is especially concerned that rapid deficit reduction could hurt the economy.
On the $700 billion Troubled Asset Relief Program, the administration is considering a change that may appear to improve the fiscal situation. Agreeing not to spend a certain amount of TARP money will enable the White House, in its budget projections, to assume less money out the door and, therefore, less debt issued. The move would also reduce the deficit by an unknown amount since a certain level of spending and borrowing is already factored into estimated future deficits.
The Treasury Department said about $210 billion in TARP funds remains unspent, including about $70 billion returned from financial institutions. A further $50 billion is expected to be repaid in the next 12 to 18 months.
Budget experts said committing some TARP funds toward debt reduction could help calm concerns about the size and intent of the program. "I don't necessarily want them to pull back in a huge way, because there's a lot of uncertainty, but right now what we've got could turn into a $700 billion slush fund" for Congress, said Douglas Elliott, a fellow with the Brookings Institution, a liberal think tank.
The move could buy the Treasury Department time before it hits the so-called debt ceiling, which limits the amount of money the U.S. can borrow. Already, some members of Congress have said they won't approve an increase in the $12.1 trillion debt cap unless efforts to reduce the deficit are included.
Senate Budget Committee Chairman Kent Conrad, the North Dakota Democrat who is proposing a bipartisan commission, along with Sen. Judd Gregg (R., N.H.), to examine taxes, said he won't vote for raising the debt limit unless Congress and the administration start talking about cutting spending and increasing taxes.
We are fools.
The trap is set and we’re walking straight into it.
Watch us fall.
Overcoming their growing concerns that the broad financial-market rally could end badly, investors plowed more money into U.S. and foreign stocks
The huge gains have left investors surprisingly unsatisfied. Enormous though it is, the investment boom since March has been a skeptics' rally -- fed by money managers who feel they must make risky bets in order to keep up with the market, but who don't like what they see.
..he detects a "let the good times roll" attitude in the market.
"I think eventually it does end badly, but the good times could go on for a while," he says.
Yet many investors are uneasy. For these people, the market is taking on a "greater fool" feel, meaning that many don't really believe in the investments they are making. They are banking on being able to sell to a "greater fool" later.
Investment strategist Ed Yardeni of Yardeni Research in Brookville, N.Y., says he has visited managers of pension funds, mutual funds and hedge funds in Boston, Chicago and London in the past two weeks and found most uncomfortable with their investments. He calls them "fully invested bears."
"There still is a lot of trepidation that this thing could reverse itself fairly quickly," Mr. Yardeni says, adding that he shares the concerns. So why are they taking the risk? "They can't afford to miss the bull market."
Someday, somebody is going to be left holding some pretty expensive tulips.
jg – November 10, 2009
NOVEMBER 10, 2009
Dow Leaps in Skeptics' Rally
Cheap Money Sends Shares to 2009 High, Gold Over $1,100; Dollar's Dive Continues
By E.S. BROWNING
Overcoming their growing concerns that the broad financial-market rally could end badly, investors plowed more money into U.S. and foreign stocks, gold, oil, copper and junk bonds.
The Dow Jones Industrial Average surged 203.52 points, or 2.03%, to 10226.94, its highest finish in 13 months and its second 200-point gain in three trading days.
Gold futures finished above $1,100 for the first time, reaching a record $1,100.80 in late New York trading. The dollar, hurt by low U.S. interest rates and concerns about possible inflation, resumed its slump against the euro, breaking briefly through $1.50 per euro and closing in New York at $1.4988. Stocks around the world also recorded fresh gains.
Part of the fuel for the broad-based investment rally is the trillions of dollars in debt-financed stimulus that the world's governments and central banks have been pouring into economies, in their effort to end the deep recession. The money enhances corporate profits, making stocks appear more attractive. Since businesses can't put it all to productive use, some finds its way into asset markets.
The huge gains have left investors surprisingly unsatisfied. Enormous though it is, the investment boom since March has been a skeptics' rally -- fed by money managers who feel they must make risky bets in order to keep up with the market, but who don't like what they see.
Gordon Fowler, who helps oversee $17 billion as chief investment officer at Philadelphia money-management firm Glenmede Trust, says he detects a "let the good times roll" attitude in the market.
"I think eventually it does end badly, but the good times could go on for a while," he says. Though heavy government spending will help corporate profits in the short run, Mr. Fowler worries that the government eventually will have to mop up its debt. "I don't think we will grow peacefully out of what is an unsustainably large debt level," he says.
Even so, he says, his portfolios currently lean toward riskier parts of the market, such as stocks, junk bonds and commodities, because that is where he thinks the gains will be for the immediate future.
Barron's Bob O'Brien and MarketWatch's Laura Mandaro look behind today's big market rally; WSJ's Kim Strassel dissects the health bill and Jessica Vascellaro previews a partnership between Verizon Wireless and Google, in the News Hub.
While it's possible that new bubbles are being inflated in financial markets, history suggests there often is a lag between the moment experts identify bubbles and the time they pop. Former Federal Reserve Chairman Alan Greenspan warned in 1996 of "irrational exuberance" in the stock market, but stocks didn't collapse until 2000. While many experts warned of a housing bubble by 2005, the bubble didn't start deflating until the next year.
Yet many investors are uneasy. For these people, the market is taking on a "greater fool" feel, meaning that many don't really believe in the investments they are making. They are banking on being able to sell to a "greater fool" later.
Investment strategist Ed Yardeni of Yardeni Research in Brookville, N.Y., says he has visited managers of pension funds, mutual funds and hedge funds in Boston, Chicago and London in the past two weeks and found most uncomfortable with their investments. He calls them "fully invested bears."
"There still is a lot of trepidation that this thing could reverse itself fairly quickly," Mr. Yardeni says, adding that he shares the concerns. So why are they taking the risk? "They can't afford to miss the bull market."
The dollar, meantime, was hurt by an International Monetary Fund report suggesting that it is still strong in value -- implying it might have further to fall. The report added that, because of low U.S. interest rates, the dollar has become a currency investors borrow and then sell to invest in foreign securities. That practice, known as the "carry trade," contributes to dollar weakness but helps offshore investments.
Some believe all the hand-wringing about the stock rally is overdone. They point out that stocks had fallen to panic-driven 12-year lows in March, before recovering. If stimulus produces real economic recovery, they say, the stock gains make sense.
Although the Dow still is down 28% from its 2007 record, it is up 56% since hitting its 12-year low in March.
— David Lawrence
Other analysts, however, see signs that at least a short-term pullback could be coming. On the past three trading days, as stocks rose, the total trading volume in New York Stock Exchange stocks was well below the year's average of 5.78 billion shares. On Monday it was 4.66 billion. Volume was higher during recent stock declines, suggesting that underlying support for stocks may be weakening.
In addition, although the Dow hit a 13-month high on Monday, broader market measures including the S&P 500 haven't returned to their recent highs.
On an inflation-adjusted basis, gold would have to hit $2,291.55 to equal its 1980 record, which makes gold bulls think it has higher to go. But it has quadrupled since 2001, when it traded below $260. In theory a defensive play, gold's big gains have made it a speculative bet for some investors, which has led some longer-term gold bulls to lighten their holdings, at least temporarily, fearing a short-term slump.
The weak dollar has contributed to demand for alternatives such as gold, oil and copper, and some investors worry that if the dollar bottoms out, even briefly, it could roil those markets.
One result is what investors call a barbell pattern, in which both defensive and risky investments benefit. That could help explain the strength of both stocks and gold, and the fact that Treasury bonds are holding ground even as junk bonds rise.
Flows of money into exchange-traded funds recently have "seemed to mark a barbell approach to risk," Credit Suisse strategist Victor Lin wrote in a report Monday. Investors are putting money into riskier investments such as foreign markets, and also safer investments such as funds holding defensive stocks and those that benefit from stock declines, Mr. Lin said.
Write to E.S. Browning at jim.browning@wsj.com
Here’s another well written, thought provoking article by Chris Martenson. I agree with Chris – the only explanation for the recent stock run is that the market is being manipulated. How else can we explain huge stock gains around the world when unemployment (and other economic indicators) should be negatively impacting stocks?
Unemployment trends that we see today should not be driving 30-50% stock gains.
Take a look at our current unemployment situation compared to previous recessions. We’re looking at the worst unemployment situation since WWII – and we’re still heading in the wrong direction. We have lost over 5% of total U.S. jobs since peak employment at the beginning of the recession – and we continue to lose hundreds of thousands of jobs each month.
The next chart is simply staggering. In the current recession, almost 6 million people have been out of work for over 27 weeks. This number is more than double the number of people out of work (over 27 weeks) during the recessions in the early 80’s and early 90’s – and as you’ve seen in the chart above – this situation is not improving.
So – for those who study the markets and are trying to determine what is going on – there really is only one answer. Our government and the Fed are manipulating markets. My personal belief is that this is happening around the world.
There are many concerned people in the world today who cannot understand the Fed’s actions – and the actions of our government. The problem is that most people believe that governments and central banks around the world are trying to do the right thing – that there are no ulterior motives behind these actions. Many people believe that everyone is trying to fix the problem – albeit in the wrong ways. The focus is on what is being done – not why it is being done.
We assume that the reason for all of these actions is to fix what is broken. Why is the Fed pumping trillions of dollars into the system? Why is our government providing trillions of dollars of ‘stimulus’ money? We wrongly assume they are trying to fix our broken economy.
It’s a show to mask true intentions.
As you’ve seen me say many times – there are ulterior motives at play. We don’t want to believe it – but the truth is that the world has been setup for a catastrophic economic failure. If we don’t finally acknowledge this – we will never understand our enemy – we won’t even know who our enemy is.
Every one of us needs to acknowledge the truth – and stop listening to the lies. I don’t like what is happening either – but denying the truth and ignoring the truth – doesn’t stop it from being the truth.
For us to begin to fight our enemy, we must acknowledge the truth:
1. A very evil, very deceptive organization has infiltrated us from within.
2. They are succeeding where others have failed.
3. They are destroying the United States of America as we know it.
4. We don’t have to accept it. We can choose another way.
The Lord has warned humanity for 2,000 years about what is coming – and we have ignored His warnings. Nothing is truer than this.
You may have wondered – if the Bible tells us that the people behind the coming global government are successful at some point in the future – does it do us any good to stand against them? Is our fate inevitable? Very good question. The answer is – we are asked to stand against evil – in every situation. Our fate is not inevitable. If we humble ourselves and seek God – He will show us the way to stand against our enemy.
We choose our fate.
jg – November 8, 2009
Accepting the Obvious
Friday, November 6, 2009, 4:40 pm, by cmartenson
What if we were to just accept the fact that the government and the Federal Reserve are interfering in the stock market to engineer higher prices?
While I have long maintained that this is indeed the simplest explanation for the market behavior we've been seeing, it remains speculation because we have no audit of the Fed to either confirm or refute the idea.
But what if we could just accept that it was true. How would that change anything in our lives? Would we invest differently? Would we have a darker or brighter view of the future? Would we calculate that risk had been improved or worsened?
Here's one of the writers I respect the most out there: "Mr. Practical" from Minyanville, who has deep professional experience as an investor and trader, opining on this subject.
Many are marveled at the boom in stocks, given really rotten fundamentals. Of course, so far it's been a function of a lower dollar and there's a way to "reflate" with those printed dollars that normal conduits won't allow.
What if the government/Fed realized the most efficient way right now to "print" dollars and "reflate" the economy was to get stock prices up? What better way to do that than print dollars to buy stocks?
There's ancillary evidence that stocks are acting "artificial". Stocks aren't only climbing a wall of worry, they're scaling the Mt. Everest of bad fundamentals. Tick data is extreme, especially when the stock market is down. We constantly see 1000+ tick prints when stocks are down; this is very strange indeed. Volumes are down at least 20% from normal levels (and much more if you discount for high-frequency trading), making it easier to get stocks up.
Under TARP, the fine print allows dealers to REPO stocks to the Fed as collateral (holy cow is right).
What if there were an arrangement where large dealers buy stocks and stock futures through the day and REPO them to the Fed at the high closing prices? The dealer would book the profits derived from the difference at no risk.
If you look at the trading patterns of the largest dealers, one in particular lost money trading in only one day last quarter. Statistically that's like finding a needle at the bottom of the ocean.
Of course no one knows for sure because no one is allowed to see what's on the Fed's balance sheet. But more and more of us are suspecting it's not just the normal junk people talk about.
For those who don't know, Minyanville is quite well respected and is staffed by people with immense direct experience in markets. For this sort of 'chatter' about the bizarre behavior of the markets to begin to appear on such sites means we are only a hop and a skip away from it appearing in the mainstream press itself.
Note what he said: A llittle-talked-about provision in TARP allows dealers to hand stocks over to the Fed in exchange for cash. The question isn't whether or not they are doing this, but how much have they already done?
Today the stock market started to sell off hard, in response to the news that unemployment was worse than expected and had climbed to 10.2% and is flirting with breaking a 60-year record.
Worse, the under/unemployed measure now stands at a frightening 17.5%. How can stocks be consistently rallying on this news? The consumer is more than 70% of the economy, or at least was, and corporate revenues, debt defaults, and bankruptcies moving in the right directions all depend on consumers working.
This was an ugly report.
To make matters worse, consumer credit came out this afternoon and again surprised by a huge amount to the downside. Where -9.9 billion was expected, -14.8 billion was reported.
3:00 U.S. Sept. consumer credit falls $14.8 billion
3:00 U.S. consumer credit falls for record 8th month
3:00 U.S. Sept. consumer credit falls 7.2% annual rate
3:00 U.S. consumer credit down 4.7% in past year
3:00 U.S. 3Q credit-card debt falls record 10% annual
So it's clear that the consumer is pretty much out of the picture and receding.
Yet this is what today's stock market looked like:
We had an immediate and appropriate reaction to the unemployment report that was stopped dead in its tracks and immediately whipsawed the other direction to close the day in positive territory. Either millions of investors independently decided that the unmployment report was not all that bad in the same ten-minute period of time (those two big green candles), or something else happened.
I can whip up a lot more supporting evidence, but you get the idea.
So we are back to our starting questions.
But what if we could just accept that the Federal Reserve is printing money to buy stocks. How would that change anything in our lives?
Would we invest differently?
First of all, let's be clear - this is not investing. Buying stocks on the hopes that the Fed will continue with its policies long enough for you to sell them at a higher price is speculating. Worse, it's speculating without the insider information that better-placed firms like Goldman clearly enjoy.
But we might invest differently. I would entirely abandon the notion of shorting stocks while this policy is in effect. If I were to play the game, I would see which sectors they were preferentially propping and place my chips on those sectors.
However, I fundamentally reject that the game is fair or right, and I think that its long-term prospects were not good. Certainly, one could not simply place money into a diversified index fund and go to sleep for 5 years, expecting to wake up wealthy. "Investing" in such an environment requires daily vigilance. Heck, it's a poker game and the cards are marked. You'd better be alert.
Would we have a darker or brighter view of the future?
The idea that prices for all productive assets across an entire and large economy can be centrally managed is a bad one. I cannot find many ways to be positive about such efforts. They are certain to fail, because they will cause the further misallocation of resources into wasted enterprises. That's what false price signals do.
Instead, we should be using this time to aggressively shed our past mistakes and take a clear-eyed view of the future. We should be investing in ways to use our remaining energy more wisely and to work towards energy independence. I could think of a hundred ways to invest in our future. Goosing the stock price of Wal-Mart a little higher seems entirely counterproductive to me.
Would we calculate that risk had been improved or worsened? This is a no-brainer - risk is increased. A friend of mine who works on the bond side of Wall Street says that his measures of risk right now are redlined. Corporate bonds are priced for a fully healthy economy, not the one we have.
Why are corporate bonds being bid up so high?
That's simple. Because the Federal Reserve has pegged the short end of the bond curve at zero (0%) and printed money through its QE program to buy long-dated Treasuries, thereby depressing their yields, pension and MMF managers are forced to buy something, anything, that can offer them the yield they need.
If you plug the current Treasury yields into the actuarial table of the average pension, it will catch on fire and vanish in a puff of smoke. There is simply no way to meet the needs of pensions and savers using zero percent money.
Sure, zero percent helps out the big banks and the overly-indebted, but it is positively punishing for everybody else.
As a quite strongly worded article in Fortune recently put it:
(Fortune Magazine) -- This is a quiz. What do the record-high Wall Street bonuses have in common with the record-low yields for savers?
Answer: They show yet another way that prudent people, especially those living on fixed incomes, are being screwed by the government's bailout of the imprudent.
Here's the deal. The government is spending trillions to keep interest rates down in order to support the economy and prop up housing prices, and those low rates have inflicted collateral damage on savers' incomes.
"It's a direct wealth transfer from savers and retirees to overly indebted borrowers," says Greg McBride, senior financial analyst at Bankrate.com.
The risk that is being run here is that the manipulation of all facets of all markets is fine so long as it lasts. But when people figure out they’ve been living in a world of illusion? Then there will be a very high chance that everything will go out with the tide. The dollar, stocks, bonds…all paper assets in essence. All washed away.
I wish I could believe that the current people in charge appreciate this risk, but I think they cannot see past the next few months.
That is the risk as I see it today. I wish them all the best with their program of trying to run everything, but I truly think their chances of success are not nearly as large as they presume.
So I have accepted the obvious, concluded that the Fed is throwing freshly-printed money at anything that moves in a semi-desperate bid to create an appearance of health, and decided that the only way to win is not to play the game.
I’ve seen many financial experts talking about the dollar’s demise – so hearing Damon Vickers say that the U.S. dollar will become ‘virtually worthless’ is nothing new. You’ve learned why this is inevitable. People that are paying attention – understand that it’s only a matter of time before the dollar falls.
What caught my eye is the following quote:
"If the global currency crisis unfolds, then inevitably you get an alignment of a global world government. A new global currency and a new world order, so we may be moving towards that," he said.
Where did that come from? He went from talking about the dollar’s devaluation – to a global currency, world government and the New World Order – in the blink of an eye. You don’t connect these dots that quickly unless you’ve done a whole lot of research and analysis.
Does Damon know what’s coming – or has he done his homework and can see where this is heading? I’m not sure – but I do know this – if you believe that the U.S. dollar is going to become worthless (along with all of the world’s fiat currencies) – and this will lead to a global currency and world government – ‘making money’ from these ‘trends’ should be the least of your worries.
“Vickers added that this is the time where investors should be making money when the trend is developing.”
We’re beginning to see many people talking about the ‘new world order’. Glenn Beck (Fox News) regularly talks about it. Anderson Cooper (CNN) has discussed it. Articles are now appearing in mainstream media magazines (Time Magazine and others). I’ve seen many people in the financial world talking about the ‘new world order’ and how the current financial crisis could lead to a global currency and global government. People who once thought that global government was a fantasy – are now – not so sure.
We’re seeing many people in the world become aware of a push for global governance. We’re also seeing many people here in America pushing for an audit of the Federal Reserve. People are waking up and are trying to find the truth. Do you think the people behind the Federal Reserve will allow an audit? No – they will not. This is why we see many of our political leaders trying to stop (or remove any teeth) from Ron Paul’s legislation calling for a Fed audit. This is why you see Bernanke refusing to tell us what the Fed is really doing and why he opposes an audit. This is why Greenspan isn’t going away – he continues to give us his words of wisdom through media outlets.
I assure you – preventing a Fed audit has nothing to do with the stability of the financial system – and everything to do with secrecy. What do you think would happen if the world learned that Central Banks were propping up stock/bond/Treasury markets? I’ll tell you – chaos. One way or another – the world’s monetary system is going to change. The global elite are attempting to change it – on their terms. Before the world learns too much about what is really happening and before an audit of the Fed can be enacted by Congress – you’re going to see the next phase of this economic crisis – most likely a stock market crash – leading to all kinds of unpleasant things. This will – once again – shift the world’s focus from the real cause of all of this. They create a problem – that shifts our focus – then they solve the problem in a way that moves their agenda forward.
Standard Operating Procedure. There’s probably a play-book somewhere.
They are causing the dollar’s decline and are causing the system to collapse – in order to usher in a global currency and global economic system. Global government will then follow.
Let’s not lose sight of the most important part of all of this – the spiritual component. We have shifted our focus from God – to the world. We have allowed our spiritual enemy to deceive us on a grand scale. As is always the case when you do a deal with the devil – there is a hidden agenda. We’re about to have the rug pulled out from under us. This is the world – short term gain that leads to long tern consequences.
For many years now, our nation has worshipped wealth. Now – it is our very money – that is causing our downfall. Do you think Someone is sending us a very loud message?
Think about it.
The question isn’t whether God will help us out of this mess. He will always respond to a humble heart asking for forgiveness. The question is – will we ask?
jg – November 8, 2009
Dollar Will be "Utterly Destroyed": Strategist
Published: Friday, 6 Nov 2009 | 3:09 AM ET
By: CNBC.com
The dollar will get "utterly destroyed" and become "virtually worthless", said Damon Vickers, chief investment officer of Nine Points Capital Partners.
"We don't have resources. Neither does a lot of Asia to be quite frank," Vickers said on CNBC's Asia Squawk Box. "Countries that have resources -- the Brazils, the Canadas, Australia -- their currencies are doing well."
Vickers noted that their stock markets have done the best year-to-date.
"They have stuff. They've got resources. They export real things. The United States exports 'promises' and 'pretty paper'," he added.
Australia's S&P/ASX 200 has risen 23% this year alone compared to a 14% gain in the Dow Jones Industrial Average.
Due to the huge wage disparities between the United States and emerging markets like China, Vickers said that may resolve itself in some type of a global currency crisis.
"If the global currency crisis unfolds, then inevitably you get an alignment of a global world government. A new global currency and a new world order, so we may be moving towards that," he said.
Vickers added that this is the time where investors should be making money when the trend is developing.
"Oil looks higher, gold looks higher, currencies look weaker."
© 2009 CNBC.com
[email to friends & family]
It’s time to take your money off the table and go ultra-conservative. By ultra-conservative – I mean gold/silver and cash. At this point – leaving your money in anything else is tantamount to ‘letting it ride’, betting it all on black and rolling that little white ball – one more time.
Let me explain.
As you know, I’ve been watching financial markets closely over the past year. You also know that I believe we’re heading toward a significant economic decline based on the fact that our monetary system is unsustainable and what I see happening in the economy/markets today. Since I believe that we are very near some type of stock market ‘correction’, I have been closely watching markets for hints of anything out of the ordinary that could signal the next phase of this crisis.
I’m sending an email to you today because strange things have started happening. I have attached a couple of articles below from Chris Martenson that explains some of the market shifts we’re seeing – but he is certainly not the only one noticing. Many people are beginning to understand that markets are not behaving in a normal manner.
Before we get to Dr. Martenson’s blog posts – let me give you a few good reasons to get out of the market at this time.
1. Unemployment. For most of us, employment is the economy. Depending on how you measure unemployment – real unemployment in America is somewhere in the neighborhood of 16-22% if you count everyone who would work full-time if they could. Based on unemployment data released this morning for October – it appears that our economy lost another 200,000 jobs last month. Regardless of what economists & politicians tell us – no job recovery = no economic recovery. No economic recovery = no sales/revenue recovery for private/public companies.
2. Housing. Based on many mainstream media articles – it would appear that housing is rebounding somewhat. I believe that whatever positive news exists in the housing market is a direct result of the government’s $8K tax credit and artificially low mortgage rates (due to Federal Reserve actions). What happens when the tax credits expire and the Fed raises rates? The Federal Funds Rate will not hover near 0% forever. Based on our current Federal fiscal policies (massive budget deficits) – interest rates will rise dramatically at some point. What affect will this have on the stock market? Not good. We also should consider that many ‘option arm’ mortgages ($ billions) will reset in 2010 & 2011. I’ve read where the defaults on these exotic mortgages will be even worse than the sub-prime mortgage mess.
3. Commercial Real Estate. Two of the largest commercial real estate & small business lenders filed for bankruptcy last week (Capmark & CIT). This alone is very bad news for commercial real estate. With retail stores closing and retail/office vacancy rates increasing significantly – this isn’t going to turnaround quickly. When a billionaire real estate investor (Wilbur Ross) says that a ‘huge commercial real estate crash is beginning in the U.S.’ – it’s time to pay attention. With housing and commercial real estate in distress – bank failures will continue to accelerate. To date – 115 U.S. banks have failed since the beginning of the crisis. I’ve seen estimates that say anywhere from ‘hundreds’ to ‘thousands’ of banks are going to fail before this is over. Add in the fact that the FDIC insurance fund is effectively out of funds – and you have the beginning of a serious banking problem.
4. Dollar down – Gold up. We are watching the world’s confidence in fiat currencies slip considerably – and the U.S. dollar is leading this trend. Gold is no longer simply a hedge against inflation – it’s a hedge against the world’s fiat currency/monetary system. Gold hit its all time high this week and is approaching $1,100 an ounce. This is one of the recent market shifts – Gold has continued its march upward regardless of what is happening in other markets (currencies, stock/bond markets, etc.). This is the biggest indication that the world is losing confidence in our current monetary/economic system. If you’re worried about buying gold at a high – don’t be. $1,000 is going to look cheap – very soon.
5. Over the past 7 months, we have watched the largest bear market rally in our history. After the crash of 1929 – there were many bear market rallies followed by significant declines. The DJIA did not recover to pre-1929 crash levels until the 1950’s. The current stock market rally dwarfs all of those rallies. Does a 30-50% stock market increase (depending on the index) really make sense - long term? Do corporate earnings support the increase in prices? Current Price to Earnings ratios are at all time highs. If you leave your money in the stock market – then you are betting that corporate earnings are going to increase significantly – and soon. History tells us one of two things will happen – prices are going to fall or earnings are going to rise. Based on the current state of our economy – you know what I believe is going to happen. I believe you’re looking at a bubble about to pop.
6. Corporate Insider Stock Selling is at all time highs. Corporate officers of publicly traded companies are selling their own stock (vs buying) at ratios of 30-40 to 1. This is an all-time record and it gives you good insight into what corporate officers believe is going to happen. Would they be selling at this magnitude if they believed their stock price was going to increase? Absolutely not. Do you think that you, your broker or your financial advisor has better information than the people running the largest companies in the world?
7. Large companies are hoarding cash. If everyone is confident in an economic rebound – why are so many companies increasing cash on their balance sheets? What does this say about their views regarding future sales/revenue and earnings?
From the Wall St. Journal (yesterday):
Jittery Companies Stash Cash
After Crisis, Big Businesses Hoard Most Bucks in 40 Years; Google's $22 Billion Cache
In the second quarter, the 500 largest nonfinancial U.S. firms, by total assets, held about $994 billion in cash and short-term investments, or 9.8% of their assets, according a Wall Street Journal analysis of corporate filings. That is up from $846 billion, or 7.9% of assets, a year earlier.
8. If you are monitoring 3rd quarter earnings reports – then you’ve noticed that sales/revenue declines continue for most large companies. While many companies have beaten their ‘expected’ earnings – we see that sales/revenue declines of 5-30% (YOY) continue. Many companies continue to reduce expenses to meet earnings expectations – but I see no top line sales/revenue rebound. Can earnings increase significantly over time without top line growth? What does this say about current stock price to earnings ratios? What does this say about future stock prices? Couple this with corporate insider trading (selling at all-time highs) and that companies are hoarding cash – and we begin to see what people who know are thinking.
9. Our monetary system will continue to crush our economy until we have nothing. Honestly – a couple of very simple charts tell us all we need to know (below). Our monetary system requires our debt to grow – forever. If our debt stops growing – and our money supply begins to decline – all kinds of bad things start happening (loan defaults, foreclosures, bankruptcies, etc.). This is what you are watching today. Everything that is collapsing around us is happening because of our current monetary system (Federal Reserve - Fractional Reserve Banking System).
The U.S. needs to create approximately $4 trillion dollars in debt this year – just to keep the music playing. We simply can’t do it anymore. Our incomes have not kept pace with our debt and inflation is destroying the purchasing power of the dollar. The game is over. Most of us haven’t realized this because there are much more important things going on – like fantasy football and American Idol. I wonder what Paris Hilton is up to today?
We’re playing our fiddles while Rome burns.
(Source: chrismartenson.com)
10. You might ask - will our political & financial leaders do something before markets collapse? Let me ask you - do you see anything changing in Washington D.C.? We’re already borrowing over $1 trillion dollars this fiscal year to meet our current budget obligations – and our political leaders are trying to push through a new healthcare bill that will cost an additional $1 trillion dollars – as if the rules of finance do not apply to the Federal Government.
If you think that our political leaders have the knowledge and wisdom to prevent something catastrophic from happening – I think a quote from Joe Biden from earlier this year should sum up our expectations – ‘We must spend more money to prevent bankruptcy’. Enough said.
How about financial leaders? The Federal Reserve is promoting government stimulus programs while flooding the financial system with new money. Can we borrow our way out of this mess? Of course not. The U.S. Government is currently insolvent (liabilities far exceed assets) and heading straight down a path to cash-flow bankruptcy (unable to pay our debts as they come due). Printing massive amounts of new money will eventually destroy the value of the dollar – and we’re already seeing this trend today.
Bottom line – if you would like to place a bet that our current leaders will somehow solve this crisis before something catastrophic happens – I’ll take the bet and give you great odds.
If your 401(k) or IRA does not have a cash/precious metal investment option – you may be wondering about taking a penalty if you remove your cash.
Let me put it this way. Let’s say you got lucky in Vegas and doubled your money over a short period of time. The house then gave you two options. You can take 70% of your money (initial money plus winnings) off the table and give them 30% or you can put it all in play and let it ride again. What would you do? What do you think the house wants you to do? Our current situation is obviously not a game and there is much more at risk. Whether you realize it or not – you would have better odds in Vegas. The deck is stacked against us.
Don’t let pride and/or greed blind you from logic and reason. Don’t ignore the warning signs because you are trying to get all of your money back from last year’s market decline. It’s time to cash in our chips and go home.
My guess is that there are lots of brokers and financial advisors out there touting the recent market gains and telling people to continue to invest in stocks/bonds. If you have a broker/financial advisor saying these things – then you need to ask yourself a few questions. Does past performance have any bearing on tomorrow? The correct answer is no. How is your broker and/or financial advisor paid? Do they make money by selling more stocks and bonds? Do they lose money if you cash out stocks and bonds? Are they doing what’s best for you or only trying to make more money?
If you feel confident that your advisor passes these tests – then you have one final question to answer. Do you and your advisor understand our monetary system? Does your advisor know that our system requires exponential debt growth – forever? The quick way to know if someone understands the system is a very simple question – do you know how money is created in our system? If your advisor gives you a strange look and scratches his/her head – you have your answer. I say this because most people have no idea how the system really works – and even fewer have the analytical ability (or take the time) to understand the consequences of the system.
Well – that’s it. This is the last email you’ll receive from me on the financial system/crisis. I would really like to believe that markets will not decline significantly – but math doesn’t lie. Apples will always fall to the earth when dropped and exponential systems in a finite world will always fail when given enough time.
In theory, exponential systems continue on into infinity. In the real world exponential systems follow an exponential growth curve and then eventually suffer a catastrophic collapse. Theory has a funny way of failing when it bumps up against this thing called reality.
Chris Martenson used this example to explain the dangers of exponential growth:
Bacteria grow by doubling. One bacterium divides to become two, the two divide to become 4, become 8, 16 and so on. Suppose we had bacteria that doubled in number this way every minute. Suppose we put one of these bacterium into an empty bottle at eleven in the morning, and then observe that the bottle is full at twelve noon. There's our case of just ordinary steady growth, it has a doubling time of one minute, and it's in the finite environment of one bottle. I want to ask you three questions.
Number one; at which time was the bottle half full? Well, would you believe 11:59, one minute before 12, because they double in number every minute?
Second Question; if you were an average bacterium in that bottle at what time would you first realize that you were running out of space? Well, let's just look at the last minute in the bottle. At 12 noon it’s full, one minute before its half full, 2 minutes before its ¼ full, then 1/8th, then a 1/16th. Let me ask you, at 5 minutes before 12 when the bottle is only 3% full and is 97% open space just yearning for development, how many of you would realize there's a problem?
Exponential growth is sneaky. It doesn’t matter if you’re talking about bacteria or debt. One minute – everything’s fine. The next minute your world is collapsing. This is our world today. It’s 11:59 and we’re acting like everything is A-OK. If you want something else to keep you up at night – take a look at a graph of the world’s population growth over time. It’s the most important exponential graph in the world – affecting everything on a planetary scale (in the example above we’re the bacteria and the world is the bottle). Once again, we see something today climbing the steep incline of an exponential curve - but that’s a subject for another time.
When things eventually fall over the edge economically – there will be lots of people who will find out where they placed their faith. The most important of all questions you need to ask yourself now is – where is my faith? Who do I serve? Does my well-being rise and fall with the stock market? Does the world toss me around – or do I have a firm foundation for my life?
Most of the world has no idea what is coming. You are not one of these people.
Be Prepared.
John
Market Shift - Something Is Coming
Sunday, November 1, 2009, 8:36 am, by cmartenson
Sunday, November 1, 2009
Executive Summary
· A break in past relationships between the stock market, the dollar, and gold, along with a breakout in the VIX, could be signaling the beginning of an important turning point
· Capmark declares bankruptcy (CIT is next).
· A commercial real estate emergency is upon us.
· Is gold signaling a continuation of the financial crisis, or something more?
As you know, I spend a great deal of time combing the available market information for clues about what is happening in the economy and where it may be leading us. This past week (October 24 - October 31, 2009) showed some amazing developments indicating that a major turning point is once again upon us.
This assessment is based on several key events, including the bankruptcy of Capmark Financial, which kicked off the week, the return of volatility to the stock market (reminiscent of past tops), and the bizarre strength in the price of gold on Friday, even as the Dow peeled off nearly 250 points.
Let's take a look at these events one at a time...
Capmark Goes Belly Up
On Sunday, Capmark, one of the largest commercial real-estate lenders in the US, declared bankruptcy.
Capmark Seeks Chapter 11 (Wall Street Journal)
Capmark Financial Group Inc. has been one of the biggest lenders to U.S. investors and developers of office towers, strip malls, hotels and other commercial properties. An independent company that used to be the commercial lending unit of GMAC LLC, a financing affiliate of General Motors Co., it has been in financial straits for months and warned in September that it might have to file for Chapter 11 reorganization.
The filing comes amid similar troubles in the commercial-property arena. Mall-giant General Growth Properties and hotel-chain Extended Stay Inc. filed for bankruptcy in the past year, and more commercial-company real-estate ventures could fail, amid an inability to refinance debts and reduced customer traffic as consumers continue to pull back.
The difficulties are a blow to Capmark's private-equity owners. In 2006, a group led by Kohlberg Kravis Roberts & Co., Goldman Sachs Capital Partners and Five Mile Capital Partners paid $1.5 billion in cash to acquire lender GMAC's commercial real-estate business, which they renamed Capmark.
While the hundreds of billions in CRE loans that Capmark either made or serviced are now in jeopardy, the real problem here is that Capmark was up to its eyeballs in complex CRE derivative products:
The world changed this week (and most people have no idea).
I believe that the “temporary structural I-beam” that has supported our financial system for the past 8 months CRACKED on Sunday night with the bankruptcy of Capmark Financial. Capmark was THE ring leader in the Commercial Real Estate derivatives markets. Two days later GMAC declared they needed many more billions from the government. CIT will likely go down this weekend.
But the key to all this is that the Commercial Real Estate Derivative market is now IMPLODING. Everyone talks about the imploding Credit Default Swaps at AIG…which were bad but they are dwarfed by the derivatives related to Commercial Real Estate.
The Commercial Real Estate derivatives are the largest and most structured of all the derivative products. Just look at this 2007 presentation at a Mortgage Bankers Conference and you can see the insanity of these structured products.
http://www.mortgagebankers.org/files/Conferences/2007/CREFFebruary/DarrenEsser.pdf
For the curious, the linked PDF document in the above snippet provides a crystal-clear description of the mud that is a CRE derivative. If you can make any sense of that document, please call Fed right away, because they badly need to find someone who can.
While we wait for those complicated derivative products to blow up, and for Goldman Sachs to somehow make money on this badly failed investment of theirs, the more immediate issue is the more than $7 billion owed to unsecured creditors:
Capmark Files for Bankruptcy With $21 Billion in Debt
Capmark and its units owe $7.1 billion to the 30 largest creditors without collateral backing their claims, according to court documents.
The three biggest are Citibank NA, as administrative agent under the $5.5 billion credit agreement, with a claim of $4.6 billion; Deutsche Bank Trust Co. Americas, with claims of $1.2 billion and $637.5 million, respectively; and Wilmington Trust FSB with a claim of $500 million, according to court papers.
The bank with the largest exposure is Citi, possibly explaining their recent desperate move to jack up consumer credit card interest rates to 29.99%. Let's see...how has the stock of Citi been doing lately?
Not too well, as it turns out.
Also possibly connected to this is the news that GMAC is reportedly seeking an additional $5.6 billion from the US government.
GMAC seeks $5.6 billion more from government
The money that will probably go to GMAC raises another critical issue: what happens if financial institutions that have already received government funds need more money to continue operating or lending money to consumers and businesses? It is currently assumed that the largest banks like Citigroup and Bank of America are now on the mend and will be able to pay the government back the money that they have taken under TARP.
The driving forces behind this blow-up are not all that complicated to understand:
U.S. office vacancies are at a five-year high, apartment vacancies have hit a 23-year record, and retail centers are showing the greatest share of empty storefronts since 1992, according to real estate research firm Reis, Inc.
The US overbuilt commercial and retail space, and much of it is now sitting idle and burning cash at horrific rates. A recent trip to a mall in Holyoke, MA revealed a few empty storefronts and so few mall shoppers with bags of purchased goods that I actually felt out of place carrying mine.
One of the bigger and better investors in this arena recently said this about CRE:
Wilbur Ross Sees 'Huge' Commercial Real Estate Crash
Oct. 30 (Bloomberg) -- Billionaire investor Wilbur L. Ross Jr., said today the U.S. is in the beginning of a “huge crash in commercial real estate.”
“All of the components of real estate value are going in the wrong direction simultaneously,” said Ross, one of nine money managers participating in a government program to remove toxic assets from bank balance sheets. “Occupancy rates are going down. Rent rates are going down and the capitalization rate -- the return that investors are demanding to buy a property -- are going up.”
U.S. commercial property sales are forecast to fall to the lowest in almost two decades as the industry endures its worst slump since the savings and loan crisis of the early 1990s, according to property research firm Real Capital Analytics Inc. The Moody’s/REAL Commercial Property Price Indices already have fallen almost 41 percent since October 2007, Moody’s Investors Service said Oct. 19.
Ouch.
Given the size and complexity of the CRE market, the Federal Reserve, Treasury, and regulatory agencies will need to do some serious mopping up of this mess.
The problem is, the Fed is looking for ways to lighten its bloated balance sheet, not get in deeper right now. But I suspect that they will get in deeper. Not because they want to, but because they have to.
At any rate, I think that the Capmark situation was a key trigger event this week and that the ripples are just now lapping through the financial markets. One might think that we must be in a better position to handle such an event because we've been cleaning up the system for more than a year now. However, the reality is that there are more outstanding derivatives now than when we started. Even as the Fed and the Treasury were busy mopping things up over here, Wall Street was busy adding new risks over there.
Next up on my radar screen is CIT Group, which provides funding for small and medium-sized businesses. A freeze-up there would be catastrophic for tens of thousands of such businesses.
This company looks to be all but cooked at this point.
The size and scope of these disasters (Capmark and CIT), each of which would have individually rattled markets to their core just a few years ago, are now being shrugged off as "normal" - but they are not. These are extremely large, interconnected lynchpins of our overly-financialized economy.
A Change in Trend
In the markets this week, we saw some exceptional movements in the main stock indexes. The S&P 500 essential ground down all week from 1090 to 1040, losing 50 points by Thursday when the "miracle GDP report" was released, launching a 23-point gain.
This proved to be another sucker's rally; the next day, it gave up all of those 20 points, plus 7 more to boot.
Inquiring minds would like to know: Has the stock market topped? Was this all a bear market rally that has now ended?
One indicator I watch for signs that a change in trend is upon us is the so-called Volatility Index (VIX).
VIX is the ticker symbol for the Chicago Board Options Exchange Volatility Index, a popular measure of the implied volatility of S&P 500 index options. A high value corresponds to a more volatile market and therefore more costly options, which can be used to defray risk from this volatility by selling options. Often referred to as the fear index, it represents one measure of the market's expectation of volatility over the next 30 day period.
When the VIX is very low, there's a good chance of a market selloff, and when the VIX is high, there's a good chance for a market rally. When the VIX changes from low to high or vice versa, it is usually a pretty good mark of a change in trend.
Recently the VIX has been very low, and this week it broke out of its former down channel in a convincing fashion, leading me to wonder if a change in trend in stocks is finally upon us.
More qualitatively, volatility tends to mark market tops as opposing sides (belief systems) duke it out, often quite violently in the end. This was true in 2000 and 2007, and we may be seeing it here as well.
The breakout in the VIX certainly looks convincing. I will wait to see what Monday brings before making any moves. I am very close to reapplying my market shorts, which have been on the sidelines (in a bond fund) since January of 2009, but I will wait to see what sorts of rescues are attempted this week before going "all in."
The Strange Behavior of Gold
What really stuck out for me this week was that gold, which has been tracking the stock market practically tick-for-tick for months, recovered in the afternoon, even as the stock market remained pinned to the floor.
The red arrows and the blue arrows cover the same time periods in both charts (which are at slightly different scales):
This was an unusual turn of events and got me thinking that perhaps there is something lurking in the background…another financial breakdown, or an Israeli attack on Iran, or something.
I have found that keeping a close eye on the behavior of gold is one of the better 'early warning' indicators out there. While it doesn’t ever tell us what is happening, it does inform us that something is happening. It has been unusually reliable for me over the years, but one has to watch it closely.
What I mean by this is that looking at just the daily close would not give quite as much information as looking at the intraday behavior. It is highly unusual to see that the break-away occurred at 1:00 (on a Friday!), because it means that it happened right at the close of the London Physical bullion market for the weekend and because Friday post 1:00 is nearly always a sell off to the close (I don't know why, that's just an observation).
If we compare the S&P 500 to gold on a percentage chart (below), we see that they have recently been tracking each other tick-for-tick, and even percent-for-percent…until this week.
In particular, the largest percentage spread occurred on Friday of this week, with gold only losing $3 while the S&P 500 gave up 29.
For those keeping track at home, the price of gold has once again closed higher than the price of the S&P 500 ($1044 vs. 1036).
Of course, we could also look at gold compared to the dollar, specifically the USD index, as it has been trading in near-perfect opposition to the dollar for quite some time as well. In fact, stocks, commodities, and currencies have all been trading in a quite unnerving manner, with upticks in the dollar being associated with downticks in everything else. I cannot recall a time like this in all my years of watching the market, but I'd have to do an exhaustive data analysis to see if this observation is accurate.
Dollar up; stocks, commodities, and gold go down. And not just in the US either - but all over the globe, in near-perfect lockstep. It's almost as if the entire world's collective asset markets are trading as a single, gigantic blob. Like an enormous ocean liner without a single bulkhead. If the hull is ever pierced, the entire thing will sink.
In this next chart, we can see the relationship between gold and the dollar. If you trace each dotted line carefully you'll notice the near perfect "anti-dollar" behavior of gold (or is it the "anti-gold" behavior of the dollar?).
That last white candle for the dollar should have resulted in a pretty big sell-off for gold, but it did not. As I've already said, this is enough to make me sit up and begin watching everything with just a bit more vigilance and alertly scouring the weekend news.
Conclusion
Given the apparent lack of media concern over the bankruptcy of Capmark (beyond noting the facts), and given the odd strength of gold over this past week, my strongest suspicion is that we've got another financial crisis in the works. I believe that this is a ruined family weekend for many a Fed and Treasury staffer.
The stock prices of BAC, JPM, C, CIT, insurance companies, and other financial players are all signaling the same sorts of troubles I saw last spring before the big sell-off. While there always the possibility that another rescue will be engineered, we should be prepared for the possibility that one might not.
Speculating a bit, I think gold might be indicating that another Fed rescue is in the works, which will result in yet another round of dollar devaluation, as the world glumly concludes that the US is simply going to print its way out of every problem instead of taking its lumps.
Why the world has not already come to this conclusion is a great mystery.
I think that there is undoubtedly something brewing in the background, larger even than the nine bank failures announced this weekend. Something on the order of a renewed issue of insolvency for Citi, or perhaps a nasty derivative accident on the heels of the Capmark bankruptcy, is touching the core of the financial system.
The fact that the world's paper-asset markets are trading in such tight correlation (and have been for months) is additionally worrisome, because it means that an uncontained derivative accident will spread through all markets, leaving none untouched.
I strongly advise keeping a portion of your holdings in gold, in your physical possession, and always maintaining a sharp eye on your bank to assure that it is safe from entering FDIC receivership. While there have been no issues so far with any FDIC-insured accounts, I think that there is a strong possibility that we will see much greater difficulties going forward, including the possibility of actual losses (should a funding crisis develop).
My sense is that something is (again) seriously amiss. But as always, you should trust yourself and your own assessment of the situation above all else.
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Severe Market Dislocation
Tuesday, November 3, 2009, 11:13 am, by cmartenson
This insider has been opened to allow for intra-day commentary on what is going on in the markets. As I see it there's something quite profound going on at the moment, I just don't know what it is yet.
As I wrote in the last Martenson Report, the behavior of gold was quite note-worthy as it ran counter to both the dollar and the stock market.
As of this writing, gold has suddenly vaulted to a new, all-time high even as the dollar remains in positive territory and the stock market is negative. Silver is following.
Here are the relevant charts.
That 60 cent move in silver over only 20 minutes is one for the books. I've not seen a move to the upside like that before, only the downside. Is it possible that stops work in both ways now in the metals markets? (note: that last sentence is said in jest...sort of...I've seen a lot of stop-clearing runs to the downside in silver over the years, this may be the first to the upside).
The Euro has broken down out of an intermediate uptrend channel (meaning it is weakening against the dollar) and this would ordinarily have resulted in an immediate gold (and silver) thumping. The stock market, inversely correlated with the dollar lately, is selling off as expected.
But not gold and silver. What gives?
Perhaps it's the emergence of a surprise buyer for half the IMF gold sales?
India buys half of IMF's gold for sale
MUMBAI/WASHINGTON, Nov 3 (Reuters) - The International Monetary Fund has sold 200 tonnes of gold to the Reserve Bank of India for $6.7 billion, quietly executing half of a long-planned bullion sale that has threatened to slow gold's ascent.
The deal, which surprised traders who expected China to be the most likely buyer, will relieve the gold market of some uncertainty over how and when the IMF would sell 403.3 tonnes of gold, about one-eighth of its total stock. The deal will increase India's gold holdings to the tenth largest among central banks.
Perhaps the movement in silver is related to the GATA report that several million ounces had been recently withdrawn from the Comex warehouses?
Perhaps there's another monetary/fiscal crisis in the works?
What are you seeing?
My personal belief is that we (Americans) are beginning to wake up to many truths. We are beginning to question many of the things that are being told to us by political and financial leaders.
“The new economic statistics put growth at a healthy 3.5% for the third quarter. We should be dancing in the streets. No one is, because no one has any faith in these numbers.”
We no longer believe the lies that are being told to us on a daily basis.
“No one believes the bad time is over. No one thinks we're entering a new age of abundance. No one thinks it will ever be the same as before 2008.”
The article below by Peggy Noonan speaks to many truths today. I encourage you to read the entire article - but I’m adding it to this blog mainly for the following passage.
“The biggest threat to America right now is not government spending, huge deficits, foreign ownership of our debt, world terrorism, two wars, potential epidemics or nuts with nukes. The biggest long-term threat is that people are becoming and have become disheartened, that this condition is reaching critical mass, and that it afflicts most broadly and deeply those members of the American leadership class who are not in Washington, most especially those in business.”
I am posting this – because the words above are true. This is something that the global elite want to happen. They want you to become disheartened. They want you to accept a world monetary system and a world government. They want to control you – every aspect of your life. They want total control of the world’s population. They want you to believe that they are too powerful. They want you to ask – ‘how can I stand against them?’ They want you - to give up.
I will admit here – that when I first began to look into the world’s monetary system and the global elite – I could not see anyway out of our predicament. It became clear that our economy was doomed and that the people controlling the world’s central banking system were much too powerful to overcome. They have infiltrated our government and they own/manipulate the world’s financial system. How can we possibly overcome this?
I won’t lie to you – when you begin to understand the magnitude of what we face – fear will begin to creep into your consciousness.
So – how do we overcome this fear and find the faith required to stand against such overwhelming odds? The only way for us to overcome our enemies and to succeed in saving our nation – is by recognizing what we have become and seeking forgiveness from our Creator. If we will seek Him and His plan for us – if we will allow Him to strengthen us – then we will be able to stand. Without Him – we fail and the United States of America will cease to exist as a sovereign nation. There will be many who ridicule this – but it’s the truth.
I do not know how this ends. I do not know the choice our nation will make. I only know how it will start. It will start with a severe economic crash in the United States – and the world.
We will get one more chance to choose God’s way. What will we choose?
jg – November 3, 2009
OCTOBER 31, 2009
We're Governed by Callous Children
By PEGGY NOONAN
Wall St. Journal
The new economic statistics put growth at a healthy 3.5% for the third quarter. We should be dancing in the streets. No one is, because no one has any faith in these numbers.
Waves of money are sloshing through the system, creating a false rising tide that lifts all boats for the moment. The tide will recede. The boats aren't rising, they're bobbing, and will settle. No one believes the bad time is over. No one thinks we're entering a new age of abundance. No one thinks it will ever be the same as before 2008.
Economists, statisticians, forecasters and market specialists will argue about what the new numbers mean, but no one believes them, either. Among the things swept away in 2008 was public confidence in the experts. The experts missed the crash. They'll miss the meaning of this moment, too.
The biggest threat to America right now is not government spending, huge deficits, foreign ownership of our debt, world terrorism, two wars, potential epidemics or nuts with nukes. The biggest long-term threat is that people are becoming and have become disheartened, that this condition is reaching critical mass, and that it afflicts most broadly and deeply those members of the American leadership class who are not in Washington, most especially those in business.
It is a story in two parts. The first: "They do not think they can make it better."
I talked this week with a guy from Big Pharma, which we used to call "the drug companies" until we decided that didn't sound menacing enough. He is middle-aged, works in a significant position, and our conversation turned to the last great recession, in the late mid- to late 1970s and early '80s. We talked about how, in terms of numbers, that recession was in some ways worse than the one we're experiencing now. Interest rates were over 20%, and inflation and unemployment hit double digits. America was in what might be called a functional depression, yet there was still a prevalent feeling of hope.
Here's why. Everyone thought they could figure a way through. We knew we could find a path through the mess. In 1982 there were people saying, "If only we get rid of this guy Reagan, we can make it better!" Others said, "If we follow Reagan, he'll squeeze out inflation and lower taxes and we'll be America again, we'll be acting like Americans again." Everyone had a path through.
Now they don't. The most sophisticated Americans, experienced in how the country works on the ground, can't figure a way out. Have you heard, "If only we follow Obama and the Democrats, it will all get better"? Or, "If only we follow the Republicans, they'll make it all work again"? I bet you haven't, or not much.
This is historic. This is something new in modern political history, and I'm not sure we're fully noticing it. Americans are starting to think the problems we are facing cannot be solved.
Part of the reason is that the problems—debt, spending, war—seem too big. But a larger part is that our government, from the White House through Congress and so many state and local governments, seems to be demonstrating every day that they cannot make things better. They are not offering a new path, they are only offering old paths—spend more, regulate more, tax more in an attempt to make us more healthy locally and nationally. And in the long term everyone—well, not those in government, but most everyone else—seems to know that won't work. It's not a way out. It's not a path through.
And so the disheartenedness of the leadership class, of those in business, of those who have something. This week the New York Post carried a report that 1.5 million people had left high-tax New York state between 2000 and 2008, more than a million of them from even higher-tax New York City. They took their tax dollars with them—in 2006 alone more than $4 billion.
You know what New York, both state and city, will do to make up for the lost money. They'll raise taxes.
I talked with an executive this week with what we still call "the insurance companies" and will no doubt soon be calling Big Insura. (Take it away, Democratic National Committee.) He was thoughtful, reflective about the big picture. He talked about all the new proposed regulations on the industry. Rep. Barney Frank had just said on some cable show that the Democrats of the White House and Congress "are trying on every front to increase the role of government in the regulatory area." The executive said of Washington: "They don't understand that people can just stop, get out. I have friends and colleagues who've said to me 'I'm done.'" He spoke of his own increasing tax burden and said, "They don't understand that if they start to tax me so that I'm paying 60%, 55%, I'll stop."
He felt government doesn't understand that business in America is run by people, by human beings. Mr. Frank must believe America is populated by high-achieving robots who will obey whatever command he and his friends issue. But of course they're human, and they can become disheartened. They can pack it in, go elsewhere, quit what used to be called the rat race and might as well be called that again since the government seems to think they're all rats. (That would be you, Chamber of Commerce.)
***
And here is the second part of the story. While Americans feel increasingly disheartened, their leaders evince a mindless . . . one almost calls it optimism, but it is not that.
It is a curious thing that those who feel most mistily affectionate toward America, and most protective toward it, are the most aware of its vulnerabilities, the most aware that it can be harmed. They don't see it as all-powerful, impregnable, unharmable. The loving have a sense of its limits.
When I see those in government, both locally and in Washington, spend and tax and come up each day with new ways to spend and tax—health care, cap and trade, etc.—I think: Why aren't they worried about the impact of what they're doing? Why do they think America is so strong it can take endless abuse?
I think I know part of the answer. It is that they've never seen things go dark. They came of age during the great abundance, circa 1980-2008 (or 1950-2008, take your pick), and they don't have the habit of worry. They talk about their "concerns"—they're big on that word. But they're not really concerned. They think America is the goose that lays the golden egg. Why not? She laid it in their laps. She laid it in grandpa's lap.
They don't feel anxious, because they never had anything to be anxious about. They grew up in an America surrounded by phrases—"strongest nation in the world," "indispensable nation," "unipolar power," "highest standard of living"—and are not bright enough, or serious enough, to imagine that they can damage that, hurt it, even fatally.
We are governed at all levels by America's luckiest children, sons and daughters of the abundance, and they call themselves optimists but they're not optimists—they're unimaginative. They don't have faith, they've just never been foreclosed on. They are stupid and they are callous, and they don't mind it when people become disheartened. They don't even notice.
Printed in The Wall Street Journal, page A19
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