Congressman John Campbell's Moment Of Epiphany - Realizes US Is One Big Ponzi
By Tyler Durden
Created 03/14/2011 - 13:43
Zero Hedge first observed the duration mismatch in US Treasury holdings back in November 2009 [1], when we highlighted the concerning amount of debt [2]that the government has to roll every year courtesy of about 30-40% in outstanding paper that is of very short duration (under 2 years or so). We have also been pretty adamant that by now the US economic system is nothing but a ponzi scheme pure and simple. Today, we observe how this epiphany manifests itself when it occurs to a congressman, in this case John Campbell (California). The punchline: "I understand that the Fed and the Treasury are trying to keep interest rates low and improve the economy and the deficit. But, when coupled with the huge deficits, these moves look a bit like a Ponzi scheme that will soon unravel." Amen brother.
From John Campbell's website [3]:
Treasury Bonds: I learned something last week. I learned that fully 40% of the over $9 trillion in Treasury debt currently outstanding to the public has a maturity of 3 years or less. Put another way, it means that we are rapidly approaching $4 trillion in U.S. debt that matures by 2014 or sooner. As I write this, the yield (interest rate paid) on a 2-year Treasury note is 0.645% or about 2/3 of one percent. The yield, at the same time, on a 10 year Treasury note is 3.4%, and on a 30 year is 4.55%. In bond parlance, this is called a "steep yield curve" where interest rates get much higher as you go farther out in time.
It's pretty clear why the Treasury is doing this. By issuing mostly short-term notes, the Treasury is paying less interest, thereby keeping interest costs and, consequently, the deficit down. In addition, the Federal Reserve is in the middle of its "quantitative easing #2" (QE2) under which it is buying $600 billion of our own Treasury debt over about a 6 month period. The Fed is not buying the short-term notes, but is buying 10 year maturities and longer in order to hold those rates down. And, since the Fed is earning the interest thereon (paid by the U.S. Treasury), it is improving its yield. We are currently running a deficit of about $130 billion per month, so the Fed is basically buying all of the new bond issuance from the deficit for almost 5 months.
What does this all mean? I understand that the Fed and the Treasury are trying to keep interest rates low and improve the economy and the deficit. But, when coupled with the huge deficits, these moves look a bit like a Ponzi scheme that will soon unravel.
We are printing money ($600 billion) to buy our own debt so that the full effects of the deficit are not felt. We are buying long-term bonds to artificially hold down the rates on those bonds since home mortgages and many other things are based on those rates. We are selling the short-term bonds at cheaper rates to hold down costs now, but are leaving ourselves open to huge cost increases when interest rates go up. And, we are at historic lows on these short-term bond rates. If they were to rise by 3 points (which would put them where they were at as recently as 2008), our deficit would increase by another $150 billion per year, even if the long-term rates stay the same. And, once the Fed ends QE2, even if it doesn't reverse it, the markets will then have to absorb a new influx of long-term bonds at a time when our ability to pay them is in question. The Fed can cure a bunch of this simply by printing a lot more money. That, however, will result in an inflationary period with major wealth destruction and economic malaise.
In the period between 2005-2007, we were sowing the seeds of the 2008 financial crisis through too much leverage in the private sector. But, very few people could see it coming. Today, we are sowing the seeds of another crisis with too much leverage in the public sector. This time, though, it's easy to see it coming.
Tuesday, March 15, 2011
Friday, March 4, 2011
Making the Chicken Run
Making the Chicken Run
By Doug Casey
With the U.S. government’s ever-increasing stranglehold on Americans’ assets, smart investors are now taking their wealth abroad. Doug Casey tells you how to do it, and why you shouldn’t put it off any longer.
“Making the chicken run” is what Rhodesians used to say about neighbors who packed up and got out during the ‘60s and ‘70s, before the place became Zimbabwe. It was considered “unpatriotic” to leave Rhodesia. But it was genuinely idiotic not to.
I’ve written many times about the importance of internationalizing your assets, your mode of living, and your way of thinking. I suspect most readers have treated those articles as they might a travelogue to some distant and exotic land: interesting fodder for cocktail party chatter, but basically academic and of little immediate personal relevance.
I’m directing these comments towards the U.S., mainly because that’s where the problem is most acute, but they’re applicable to most countries.
Rolling into 2011, the U.S. is in real trouble. Not as bad as Rhodesia 40 years ago, and definitely a different kind of trouble, but plenty serious. For many years, it’s been obvious that the country was eventually going to hit the wall, and now the inevitable is rapidly becoming imminent.
What do I mean by that? There’s plenty of reason to be concerned about things financial and economic. But I personally believe we haven't been bearish enough on the eventual social and political fallout from the Greater Depression. Nothing is certain, but the odds are high that the U.S. is going into a time of troubles at least as bad as any experienced in any advanced country in the last century.
I hate saying things like that, if only because it sounds outrageous and inflammatory and can create a credibility gap. It invites arguments with people, and although I enjoy discussion, I dislike arguing.
It strikes most people as outrageous because the long-running post-WW2 boom has been punctuated only by brief recessions. After 65 years, why should it ever end? The thought of a nasty end certainly runs counter to the experience of almost everyone now alive – including myself – and our personal experience is what we tend to trust most. But it seems to me we're very close to a tipping point. Ice stays ice even while it’s being warmed – until the temperature goes over 32 F, where it changes very quickly into something very different.
First, the Economy
That point – economic bankruptcy accompanied by financial chaos – is quickly approaching for the U.S. government. With deficits over a trillion dollars per year for as far as the eye can see, the U.S. Treasury will very soon be unable to roll over its maturing debt at anything near current interest rates. The only reliable buyer will be the Federal Reserve, which can buy only by creating new dollars.
Within the next 24 months, the dollar is likely to start losing value rapidly and noticeably. Foreigners, who own over 7.3 trillion of them (including T-bills and other IOUs), will start panicking to dump them. So will Americans. The dollar bond market, today worth $36 trillion, will be devastated by much higher interest rates, a rapidly depreciating dollar, and an epidemic of defaults.
And that will be just the start of the trouble. Since the U.S. property market floats on a sea of debt (and is easy to tax), it’s also going to be hit very hard – again. This time by stifling mortgage rates. Forget about property owners paying their existing mortgages; many won’t be able to pay their taxes and utilities, and maintenance will be out of the question.
The pain will spread. Insurance companies are invested mostly in bonds and real estate; many will go bankrupt. The same is true of most pension funds. If the stock market doesn’t collapse, it will only be because money is looking for a place to hide from inflation. The payout for Social Security will drop significantly in real terms, if not in dollars. The standard of living of most Americans will fall.
This rough sequence of events has happened in many countries in recent decades, and they’ve survived the tough times. But it has the potential, at least in relative terms, to be more serious in the U.S. than it was in Argentina, Brazil, Serbia, Russia, Mozambique or Zimbabwe, for two main reasons.
First, many people in those countries knew they couldn’t trust their government and acted accordingly, even in contravention of the law, by accumulating assets elsewhere. So there was a significant pool of capital available for rebuilding. Americans, on the other hand, tend to be much more insular, law-abiding and trusting in their government. When they lose their U.S. assets, they'll have lost everything.
Second, those societies were significantly more rural than the U.S. is today. As in the America of 100 years ago, much of the population lived quite close to the land and had practical skills and habits that helped them get through the tough times. For 21st-century Americans, it's a different story. Shortages and disorder are going to hit commuters who live in suburbs, and urban dwellers who think milk appears in cartons magically, like a ton of bricks.
One thing you can absolutely count on is that everyone will look to the government to “do something." Americans really do think governments control the way the world works. Another certainty is that the U.S. government will “step in” massively, because everyone will want them to, and the politicians themselves believe they should. This will greatly aggravate the crisis and make it last much longer than necessary.
Then It Gets Serious
But that’s just over the short run. The long run is much more serious, because the next chapter of the Greater Depression has every chance of radically, and at least semi-permanently, overturning the basic character of American life. Ice turned to water – suddenly and unexpectedly – in Russia in 1918, Germany in 1933, China in 1949, Vietnam in 1954, Cambodia in 1975, and Rwanda in 1995. Those are just the first examples that come to mind. There are scores more.
The economic events I’ve outlined are going to mean serious hardship and unpleasantness for many people. But that doesn't concern me nearly as much as the social and political reaction.
Everybody gets hurt in a serious depression, but if you understand what’s going on and prepare for it, you can do well enough. Of course, political and social change always follow economic and financial upheaval, but I think it’s going to be much more drastic this time, because the U.S. has been on the road to becoming a police state for quite a while. The trend was supercharged by the so-called War on Terror, starting in 2001. And it’s likely to go into hyper-drive in the months to come as the economy emerges from the eye of the storm. I know it seems asynchronous to think of a police state in a suburban country dotted with shopping malls. But not really.
Think in terms of science fiction, a genre that has far more predictive value than the work of any futurist or think tank.
Reality is mimicking art. In 1932, Aldous Huxley described a highly controlled utopia in Brave New World, where drugs made everybody think (actually feel, because thinking could only make you unhappy) that they were happy. The U.S. has pretty much done that drill, consuming massive quantities of everything on credit, watching American Idol and its clones in every spare moment, and using plenty of Ritalin and Prozac along the way.
Sixteen years later, George Orwell described an even more tightly controlled dystopia in 1984. Everybody knows that story, even if they haven’t read the book.
Interestingly, like good sci-fi writers, both authors were just a generation or so ahead of events. What we’re likely to see in the next few years is elements of both their worlds.
Actually, we’re seeing it right now, or at least a preview. Whenever I return to the U.S., dealing with Immigration and Customs makes my skin crawl. And they’re no longer just at airports and the border; they now range many miles inland and make random stops to see if your papers are in order.
They’re almost as objectionable as the TSA, which has developed a highly dangerous corporate culture, even as it’s grown in numbers and power, now reaching into busses, trains, and soon the highways. The FBI, the CIA, the DEA, the ATF, the Secret Service, the Federal Marshals, FEMA, and literally scores of other national law enforcement agencies are all expanding rapidly.
They’ve long constituted a veritable Praetorian Guard but now truly have lives of their own. Homeland Security is completing its new 400-acre campus in Washington, DC. Police forces all over the country are increasingly militarized in both equipment and attitude. And the military itself, bloated on a budget of hundreds of billions a year, has come a long way from the slapstick world of Beetle Bailey, full of steroid-pumped Black Ops wannabes who’ve picked up plenty of bad habits in the government's numerous undeclared wars. All these types endorse the dozens of “fusion centers” that have been created across the U.S. to collect and correlate information from every source imaginable, for some purpose.
All these organizations are bureaucracies. They serve themselves first. Their prime impulse is to grow and increase their budgets. They tend to attract the wrong kind of person and drive out people of good will. And it’s reached a stage where even if John Galt were elected president, he’d find them not just impossible to uproot but dangerous to confront.
So here’s another prediction. Riding the economic and social disorder, these new Praetorians, oriented as they are toward professional paranoia and the “national security” state, are going to become truly virulent. They’re going to use the continuing economic crisis to increase their power, like it or not. The American people will demand it, since they are so degraded that they really do prefer the appearance of security to the prospect of having to take personal responsibility.
If I’m right (and I feel as sure about this as I ever have about anything), then it’s not going to go well for libertarians, classical liberals, old-line conservatives, individualists, free-thinkers, non-conformists, people who subscribe to letters like this or who cruise suspicious websites, or gamma-rats generally. It was a dangerous environment for these types (not to mention those of Japanese or German descent and members of various religious groups) during America’s past crises. When the chimpanzees are hooting and panting, you’d better join them, or they’ll start wondering why not.
I expect what we’re looking at is going to be much more serious than any past crisis, partly because America has already evaporated, like the morning haze on a hot summer's day. You're not in Kansas anymore. Kansas isn't in Kansas anymore.
Practical Objections
All very well, you may say. But there are practical issues, you also say. A person can’t just pick up and leave and go where he wants and do what he wants… can he? Get real, Casey. There are reasons a person has to stay where he is, aren’t there?
Let’s look at some of those reasons.
“America is the best country in the world. I’d be a fool to leave.” That was absolutely true, not so very long ago. America certainly was the best – and it was unique. But it no longer exists, except as an ideal. The geography it occupied has been co-opted by the United States, which today is just another nation-state. And, most unfortunately, one that’s become especially predatory toward its citizens.
“My parents and grandparents were born here; I have roots in this country.” An understandable emotion; everyone has an atavistic affinity for his place of birth, including your most distant relatives born long, long ago, and far, far away. I suppose if Lucy, apparently the first more-or-less human we know of, had been able to speak, she might have pled roots if you’d asked her to leave her valley in East Africa. If you buy this argument, then it’s clear your forefathers, who came from Europe, Asia, or Africa, were made of sterner stuff than you are.
“I’m not going to be unpatriotic.” Patriotism is one of those things very few even question and even fewer examine closely. I’m a patriot, you’re a nationalist, he’s a jingoist. But let’s put such a tendentious and emotion-laden subject aside. Today a true patriot – an effective patriot – would be accumulating capital elsewhere, to have assets he can repatriate and use for rebuilding when the time is right. And a real patriot understands that America is not a place; it’s an idea. It deserves to be spread.
“I can't leave my aging mother behind.” Not to sound callous, but your aging parent will soon leave you behind. Why not offer her the chance to come along, though? She might enjoy a good live-in maid in your own house (which I challenge you to get in the U.S.) more than a sterile, dismal and overpriced old people’s home, where she’s likely to wind up.
“I might not be able to earn a living.” Spoken like a person with little imagination and even less self-confidence. And likely little experience or knowledge of economics. Everyone, everywhere, has to produce at least as much as he consumes – that won’t change whether you stay in your living room or go to Timbuktu. In point of fact, though, it tends to be easier to earn big money in a foreign country, because you will have knowledge, experience, skills, and connections the locals don't.
“I don’t have enough capital to make a move.” Well, that was one thing that kept serfs down on the farm. Capital gives you freedom. On the other hand, a certain amount of poverty can underwrite your freedom, since possessions act as chains for many.
“I'm afraid I won't fit in.” As I explained a little earlier, the real danger that's headed your way is not fitting in at home. This objection is often proffered by people who’ve never traveled abroad. Here’s a suggestion. If you don’t have a valid passport, apply for one tomorrow morning. Then, at the next opportunity, book a trip to somewhere that seems interesting. Make an effort to meet people. Find out if you’re really as abject a wallflower as you fear.
“I don’t speak the language.” It’s said that Sir Richard Burton, the 19th-century explorer, spoke 10 languages fluently and 15 more “reasonably well.” I’ve always liked that distinction although, personally, I’m not a good linguist. And it gets harder to learn a language as you get older – although it’s also true that learning a new language actually keeps your brain limber. In point of fact, though, English is the world’s language. Almost anyone who is anyone, and the typical school kid, has some grasp of it.
“I'm too old to make such a big change.” Yes, I guess it makes more sense to just take a seat and await the arrival of the Grim Reaper. Or, perhaps, is your life already so exciting and wonderful that you can't handle a little change? Better, I think, that you might adopt the attitude of the 85-year-old woman who has just transplanted herself to Argentina from the frozen north. Even after many years of adventure, she simply feels ready for a change and was getting tired of the same old people with the same old stories and habits.
“I’ve got to wait until the kids are out of school. It would disrupt their lives.” This is actually one of the lamest excuses in the book. I’m sympathetic to the view that kids ought to live with wolves for a couple of years to get a proper grounding in life – although I’m not advocating anything that radical. It’s one of the greatest gifts you can give your kids: to live in another culture, learn a new language, and associate with a better class of people (as an expat, you’ll almost automatically move to the upper rungs – arguably a big plus). After a little whining, the kids will love it. When they’re grown, if they discover you passed up the opportunity, they won’t forgive you.
“I don’t want to give up my U.S. citizenship.” There’s no need to. Anyway, if you have a lot of deferred income and untaxed gains, it can be punitive to do so; the U.S. government wants to keep you as a milk cow. But then, you may cotton to the idea of living free of any taxing government, while having the travel documents offered by several. And you may want to save your children from becoming cannon fodder or indentured servants, should the U.S. reinstitute the draft or start a program of “national service” – which is not unlikely.
But these arguments are unimportant. The real problem is one of psychology. In that regard, I like to point to my old friend Paul Terhorst, who 30 years ago was the youngest partner at a national accounting firm. He and his wife, Vicki, decided that “keeping up with the Joneses” for the rest of their lives just wasn’t for them. They sold everything – cars, house, clothes, artwork, the works – and decided to live around the world. Paul then had the time to read books, play chess, and generally enjoy himself. He wrote about it in Cashing In on the American Dream: How to Retire at 35. As a bonus, the advantages of not being a tax resident anywhere and having time to scope out proper investments has put Paul way ahead in the money game. He typically spends about half his year in Argentina; we usually have lunch every week when in residence.
I could go on. But perhaps it’s pointless to offer rational counters to irrational fears and preconceptions. As Gibbon noted with his signature brand of irony, “The power of instruction is seldom of much efficacy, except in those happy dispositions where it is almost superfluous.”
Let me say again, time is getting short. And the reasons for looking abroad are changing.
In the past, the best argument for expatriation was an automatic increase in one's standard of living. In the ‘50s and ‘60s, a book called Europe on $5 a Day accurately reflected all-in costs for a tourist. In those days a middle-class American could live like a king in Europe; but those days are long gone. Now it’s the rare American who can afford to visit Europe except on a cheesy package tour. That situation may actually improve soon, if only because the standard of living in Europe is likely to fall even faster than in the U.S. But the improvement will be temporary. One thing you can plan your life around is that, for the average American, foreign travel is going to become much more expensive in the next few years as the dollar loses value at an accelerating rate.
Affordability is going to be a real problem for Americans, who’ve long been used to being the world's “rich guys.” But an even bigger problem will be presented by foreign exchange controls of some nature, which the government will impose in its efforts to “do something.” FX controls – perhaps in the form of taxes on money that goes abroad, perhaps restrictions on amounts and reasons, perhaps the requirement of official approval, perhaps all of these things – are a natural progression during the next stage of the crisis. After all, only rich people can afford to send money abroad, and only the unpatriotic would think of doing so.
How and Where
I would like to reemphasize that it’s pure foolishness to have your loyalties dictated by the lines on a map or the dictates of some ruler. The nation-state itself is on its way out. The world will increasingly be aligned with what we call phyles, groups of people who consider themselves countrymen based on their interests and values, not on which government's ID they share. I believe the sooner you start thinking that way, the freer, the richer, and the more secure you will become.
The most important first step is to get out of the danger zone. Let’s list the steps, in order of importance.
1.Establish a financial account in a second country and transfer assets to it, immediately.
2.Purchase a crib in a suitable third country, somewhere you might enjoy whether in good times or bad.
3.Get moving toward an alternative citizenship in a fourth country; you don’t want to be stuck geographically, and you don’t want to live like a refugee.
4.Keep your eyes open for business and investment opportunities in those four countries, plus the other 225; you’ll greatly increase your perspective and your chances of success.
Where to go? The personal conclusion I came to was Argentina (followed by Uruguay), where I spend a good part of my year, and even more when my house at La Estancia de Cafayate is completed.
In general, I would suggest you look most seriously at countries whose governments aren’t overly cozy with the U.S. and whose people maintain an inbred suspicion of the police, the military, and the fiscal authorities. These criteria tilt the scales against past favorites like Australia, New Zealand, Canada, and the UK.
And one more piece of sage advice: stop thinking like your neighbors, which is to say stop thinking and acting like a serf. Most people – although they can be perfectly affable and even seem sensible – have the attitudes of medieval peasants that objected to going further than a day’s round-trip from their hut, for fear the stories of dragons that live over the hill might be true. We covered the modern versions of that objection a bit earlier.
I’m not saying that you’ll make your fortune and find happiness by venturing out. But you’ll greatly increase your odds of doing so, greatly increase your security, and, I suspect, have a much more interesting time.
Let me end by reminding you what Rick Blaine, Bogart’s character in Casablanca, had to say in only a slightly different context. Appropriately, Rick was an early but also an archetypical international man. Let’s just imagine he’s talking about what will happen if you don’t effectively internationalize yourself, now. He said: “You may not regret it now, but you’ll regret it soon. And for the rest of your life.”
[You may well regret it for the rest of your life if you don’t take appropriate steps now to internationalize and thus protect your wealth. To find out how to do it, what to watch out for, and which perfectly legal tactics to employ, read our free report “Does Your Bank Account Speak Spanish?”
By Doug Casey
With the U.S. government’s ever-increasing stranglehold on Americans’ assets, smart investors are now taking their wealth abroad. Doug Casey tells you how to do it, and why you shouldn’t put it off any longer.
“Making the chicken run” is what Rhodesians used to say about neighbors who packed up and got out during the ‘60s and ‘70s, before the place became Zimbabwe. It was considered “unpatriotic” to leave Rhodesia. But it was genuinely idiotic not to.
I’ve written many times about the importance of internationalizing your assets, your mode of living, and your way of thinking. I suspect most readers have treated those articles as they might a travelogue to some distant and exotic land: interesting fodder for cocktail party chatter, but basically academic and of little immediate personal relevance.
I’m directing these comments towards the U.S., mainly because that’s where the problem is most acute, but they’re applicable to most countries.
Rolling into 2011, the U.S. is in real trouble. Not as bad as Rhodesia 40 years ago, and definitely a different kind of trouble, but plenty serious. For many years, it’s been obvious that the country was eventually going to hit the wall, and now the inevitable is rapidly becoming imminent.
What do I mean by that? There’s plenty of reason to be concerned about things financial and economic. But I personally believe we haven't been bearish enough on the eventual social and political fallout from the Greater Depression. Nothing is certain, but the odds are high that the U.S. is going into a time of troubles at least as bad as any experienced in any advanced country in the last century.
I hate saying things like that, if only because it sounds outrageous and inflammatory and can create a credibility gap. It invites arguments with people, and although I enjoy discussion, I dislike arguing.
It strikes most people as outrageous because the long-running post-WW2 boom has been punctuated only by brief recessions. After 65 years, why should it ever end? The thought of a nasty end certainly runs counter to the experience of almost everyone now alive – including myself – and our personal experience is what we tend to trust most. But it seems to me we're very close to a tipping point. Ice stays ice even while it’s being warmed – until the temperature goes over 32 F, where it changes very quickly into something very different.
First, the Economy
That point – economic bankruptcy accompanied by financial chaos – is quickly approaching for the U.S. government. With deficits over a trillion dollars per year for as far as the eye can see, the U.S. Treasury will very soon be unable to roll over its maturing debt at anything near current interest rates. The only reliable buyer will be the Federal Reserve, which can buy only by creating new dollars.
Within the next 24 months, the dollar is likely to start losing value rapidly and noticeably. Foreigners, who own over 7.3 trillion of them (including T-bills and other IOUs), will start panicking to dump them. So will Americans. The dollar bond market, today worth $36 trillion, will be devastated by much higher interest rates, a rapidly depreciating dollar, and an epidemic of defaults.
And that will be just the start of the trouble. Since the U.S. property market floats on a sea of debt (and is easy to tax), it’s also going to be hit very hard – again. This time by stifling mortgage rates. Forget about property owners paying their existing mortgages; many won’t be able to pay their taxes and utilities, and maintenance will be out of the question.
The pain will spread. Insurance companies are invested mostly in bonds and real estate; many will go bankrupt. The same is true of most pension funds. If the stock market doesn’t collapse, it will only be because money is looking for a place to hide from inflation. The payout for Social Security will drop significantly in real terms, if not in dollars. The standard of living of most Americans will fall.
This rough sequence of events has happened in many countries in recent decades, and they’ve survived the tough times. But it has the potential, at least in relative terms, to be more serious in the U.S. than it was in Argentina, Brazil, Serbia, Russia, Mozambique or Zimbabwe, for two main reasons.
First, many people in those countries knew they couldn’t trust their government and acted accordingly, even in contravention of the law, by accumulating assets elsewhere. So there was a significant pool of capital available for rebuilding. Americans, on the other hand, tend to be much more insular, law-abiding and trusting in their government. When they lose their U.S. assets, they'll have lost everything.
Second, those societies were significantly more rural than the U.S. is today. As in the America of 100 years ago, much of the population lived quite close to the land and had practical skills and habits that helped them get through the tough times. For 21st-century Americans, it's a different story. Shortages and disorder are going to hit commuters who live in suburbs, and urban dwellers who think milk appears in cartons magically, like a ton of bricks.
One thing you can absolutely count on is that everyone will look to the government to “do something." Americans really do think governments control the way the world works. Another certainty is that the U.S. government will “step in” massively, because everyone will want them to, and the politicians themselves believe they should. This will greatly aggravate the crisis and make it last much longer than necessary.
Then It Gets Serious
But that’s just over the short run. The long run is much more serious, because the next chapter of the Greater Depression has every chance of radically, and at least semi-permanently, overturning the basic character of American life. Ice turned to water – suddenly and unexpectedly – in Russia in 1918, Germany in 1933, China in 1949, Vietnam in 1954, Cambodia in 1975, and Rwanda in 1995. Those are just the first examples that come to mind. There are scores more.
The economic events I’ve outlined are going to mean serious hardship and unpleasantness for many people. But that doesn't concern me nearly as much as the social and political reaction.
Everybody gets hurt in a serious depression, but if you understand what’s going on and prepare for it, you can do well enough. Of course, political and social change always follow economic and financial upheaval, but I think it’s going to be much more drastic this time, because the U.S. has been on the road to becoming a police state for quite a while. The trend was supercharged by the so-called War on Terror, starting in 2001. And it’s likely to go into hyper-drive in the months to come as the economy emerges from the eye of the storm. I know it seems asynchronous to think of a police state in a suburban country dotted with shopping malls. But not really.
Think in terms of science fiction, a genre that has far more predictive value than the work of any futurist or think tank.
Reality is mimicking art. In 1932, Aldous Huxley described a highly controlled utopia in Brave New World, where drugs made everybody think (actually feel, because thinking could only make you unhappy) that they were happy. The U.S. has pretty much done that drill, consuming massive quantities of everything on credit, watching American Idol and its clones in every spare moment, and using plenty of Ritalin and Prozac along the way.
Sixteen years later, George Orwell described an even more tightly controlled dystopia in 1984. Everybody knows that story, even if they haven’t read the book.
Interestingly, like good sci-fi writers, both authors were just a generation or so ahead of events. What we’re likely to see in the next few years is elements of both their worlds.
Actually, we’re seeing it right now, or at least a preview. Whenever I return to the U.S., dealing with Immigration and Customs makes my skin crawl. And they’re no longer just at airports and the border; they now range many miles inland and make random stops to see if your papers are in order.
They’re almost as objectionable as the TSA, which has developed a highly dangerous corporate culture, even as it’s grown in numbers and power, now reaching into busses, trains, and soon the highways. The FBI, the CIA, the DEA, the ATF, the Secret Service, the Federal Marshals, FEMA, and literally scores of other national law enforcement agencies are all expanding rapidly.
They’ve long constituted a veritable Praetorian Guard but now truly have lives of their own. Homeland Security is completing its new 400-acre campus in Washington, DC. Police forces all over the country are increasingly militarized in both equipment and attitude. And the military itself, bloated on a budget of hundreds of billions a year, has come a long way from the slapstick world of Beetle Bailey, full of steroid-pumped Black Ops wannabes who’ve picked up plenty of bad habits in the government's numerous undeclared wars. All these types endorse the dozens of “fusion centers” that have been created across the U.S. to collect and correlate information from every source imaginable, for some purpose.
All these organizations are bureaucracies. They serve themselves first. Their prime impulse is to grow and increase their budgets. They tend to attract the wrong kind of person and drive out people of good will. And it’s reached a stage where even if John Galt were elected president, he’d find them not just impossible to uproot but dangerous to confront.
So here’s another prediction. Riding the economic and social disorder, these new Praetorians, oriented as they are toward professional paranoia and the “national security” state, are going to become truly virulent. They’re going to use the continuing economic crisis to increase their power, like it or not. The American people will demand it, since they are so degraded that they really do prefer the appearance of security to the prospect of having to take personal responsibility.
If I’m right (and I feel as sure about this as I ever have about anything), then it’s not going to go well for libertarians, classical liberals, old-line conservatives, individualists, free-thinkers, non-conformists, people who subscribe to letters like this or who cruise suspicious websites, or gamma-rats generally. It was a dangerous environment for these types (not to mention those of Japanese or German descent and members of various religious groups) during America’s past crises. When the chimpanzees are hooting and panting, you’d better join them, or they’ll start wondering why not.
I expect what we’re looking at is going to be much more serious than any past crisis, partly because America has already evaporated, like the morning haze on a hot summer's day. You're not in Kansas anymore. Kansas isn't in Kansas anymore.
Practical Objections
All very well, you may say. But there are practical issues, you also say. A person can’t just pick up and leave and go where he wants and do what he wants… can he? Get real, Casey. There are reasons a person has to stay where he is, aren’t there?
Let’s look at some of those reasons.
“America is the best country in the world. I’d be a fool to leave.” That was absolutely true, not so very long ago. America certainly was the best – and it was unique. But it no longer exists, except as an ideal. The geography it occupied has been co-opted by the United States, which today is just another nation-state. And, most unfortunately, one that’s become especially predatory toward its citizens.
“My parents and grandparents were born here; I have roots in this country.” An understandable emotion; everyone has an atavistic affinity for his place of birth, including your most distant relatives born long, long ago, and far, far away. I suppose if Lucy, apparently the first more-or-less human we know of, had been able to speak, she might have pled roots if you’d asked her to leave her valley in East Africa. If you buy this argument, then it’s clear your forefathers, who came from Europe, Asia, or Africa, were made of sterner stuff than you are.
“I’m not going to be unpatriotic.” Patriotism is one of those things very few even question and even fewer examine closely. I’m a patriot, you’re a nationalist, he’s a jingoist. But let’s put such a tendentious and emotion-laden subject aside. Today a true patriot – an effective patriot – would be accumulating capital elsewhere, to have assets he can repatriate and use for rebuilding when the time is right. And a real patriot understands that America is not a place; it’s an idea. It deserves to be spread.
“I can't leave my aging mother behind.” Not to sound callous, but your aging parent will soon leave you behind. Why not offer her the chance to come along, though? She might enjoy a good live-in maid in your own house (which I challenge you to get in the U.S.) more than a sterile, dismal and overpriced old people’s home, where she’s likely to wind up.
“I might not be able to earn a living.” Spoken like a person with little imagination and even less self-confidence. And likely little experience or knowledge of economics. Everyone, everywhere, has to produce at least as much as he consumes – that won’t change whether you stay in your living room or go to Timbuktu. In point of fact, though, it tends to be easier to earn big money in a foreign country, because you will have knowledge, experience, skills, and connections the locals don't.
“I don’t have enough capital to make a move.” Well, that was one thing that kept serfs down on the farm. Capital gives you freedom. On the other hand, a certain amount of poverty can underwrite your freedom, since possessions act as chains for many.
“I'm afraid I won't fit in.” As I explained a little earlier, the real danger that's headed your way is not fitting in at home. This objection is often proffered by people who’ve never traveled abroad. Here’s a suggestion. If you don’t have a valid passport, apply for one tomorrow morning. Then, at the next opportunity, book a trip to somewhere that seems interesting. Make an effort to meet people. Find out if you’re really as abject a wallflower as you fear.
“I don’t speak the language.” It’s said that Sir Richard Burton, the 19th-century explorer, spoke 10 languages fluently and 15 more “reasonably well.” I’ve always liked that distinction although, personally, I’m not a good linguist. And it gets harder to learn a language as you get older – although it’s also true that learning a new language actually keeps your brain limber. In point of fact, though, English is the world’s language. Almost anyone who is anyone, and the typical school kid, has some grasp of it.
“I'm too old to make such a big change.” Yes, I guess it makes more sense to just take a seat and await the arrival of the Grim Reaper. Or, perhaps, is your life already so exciting and wonderful that you can't handle a little change? Better, I think, that you might adopt the attitude of the 85-year-old woman who has just transplanted herself to Argentina from the frozen north. Even after many years of adventure, she simply feels ready for a change and was getting tired of the same old people with the same old stories and habits.
“I’ve got to wait until the kids are out of school. It would disrupt their lives.” This is actually one of the lamest excuses in the book. I’m sympathetic to the view that kids ought to live with wolves for a couple of years to get a proper grounding in life – although I’m not advocating anything that radical. It’s one of the greatest gifts you can give your kids: to live in another culture, learn a new language, and associate with a better class of people (as an expat, you’ll almost automatically move to the upper rungs – arguably a big plus). After a little whining, the kids will love it. When they’re grown, if they discover you passed up the opportunity, they won’t forgive you.
“I don’t want to give up my U.S. citizenship.” There’s no need to. Anyway, if you have a lot of deferred income and untaxed gains, it can be punitive to do so; the U.S. government wants to keep you as a milk cow. But then, you may cotton to the idea of living free of any taxing government, while having the travel documents offered by several. And you may want to save your children from becoming cannon fodder or indentured servants, should the U.S. reinstitute the draft or start a program of “national service” – which is not unlikely.
But these arguments are unimportant. The real problem is one of psychology. In that regard, I like to point to my old friend Paul Terhorst, who 30 years ago was the youngest partner at a national accounting firm. He and his wife, Vicki, decided that “keeping up with the Joneses” for the rest of their lives just wasn’t for them. They sold everything – cars, house, clothes, artwork, the works – and decided to live around the world. Paul then had the time to read books, play chess, and generally enjoy himself. He wrote about it in Cashing In on the American Dream: How to Retire at 35. As a bonus, the advantages of not being a tax resident anywhere and having time to scope out proper investments has put Paul way ahead in the money game. He typically spends about half his year in Argentina; we usually have lunch every week when in residence.
I could go on. But perhaps it’s pointless to offer rational counters to irrational fears and preconceptions. As Gibbon noted with his signature brand of irony, “The power of instruction is seldom of much efficacy, except in those happy dispositions where it is almost superfluous.”
Let me say again, time is getting short. And the reasons for looking abroad are changing.
In the past, the best argument for expatriation was an automatic increase in one's standard of living. In the ‘50s and ‘60s, a book called Europe on $5 a Day accurately reflected all-in costs for a tourist. In those days a middle-class American could live like a king in Europe; but those days are long gone. Now it’s the rare American who can afford to visit Europe except on a cheesy package tour. That situation may actually improve soon, if only because the standard of living in Europe is likely to fall even faster than in the U.S. But the improvement will be temporary. One thing you can plan your life around is that, for the average American, foreign travel is going to become much more expensive in the next few years as the dollar loses value at an accelerating rate.
Affordability is going to be a real problem for Americans, who’ve long been used to being the world's “rich guys.” But an even bigger problem will be presented by foreign exchange controls of some nature, which the government will impose in its efforts to “do something.” FX controls – perhaps in the form of taxes on money that goes abroad, perhaps restrictions on amounts and reasons, perhaps the requirement of official approval, perhaps all of these things – are a natural progression during the next stage of the crisis. After all, only rich people can afford to send money abroad, and only the unpatriotic would think of doing so.
How and Where
I would like to reemphasize that it’s pure foolishness to have your loyalties dictated by the lines on a map or the dictates of some ruler. The nation-state itself is on its way out. The world will increasingly be aligned with what we call phyles, groups of people who consider themselves countrymen based on their interests and values, not on which government's ID they share. I believe the sooner you start thinking that way, the freer, the richer, and the more secure you will become.
The most important first step is to get out of the danger zone. Let’s list the steps, in order of importance.
1.Establish a financial account in a second country and transfer assets to it, immediately.
2.Purchase a crib in a suitable third country, somewhere you might enjoy whether in good times or bad.
3.Get moving toward an alternative citizenship in a fourth country; you don’t want to be stuck geographically, and you don’t want to live like a refugee.
4.Keep your eyes open for business and investment opportunities in those four countries, plus the other 225; you’ll greatly increase your perspective and your chances of success.
Where to go? The personal conclusion I came to was Argentina (followed by Uruguay), where I spend a good part of my year, and even more when my house at La Estancia de Cafayate is completed.
In general, I would suggest you look most seriously at countries whose governments aren’t overly cozy with the U.S. and whose people maintain an inbred suspicion of the police, the military, and the fiscal authorities. These criteria tilt the scales against past favorites like Australia, New Zealand, Canada, and the UK.
And one more piece of sage advice: stop thinking like your neighbors, which is to say stop thinking and acting like a serf. Most people – although they can be perfectly affable and even seem sensible – have the attitudes of medieval peasants that objected to going further than a day’s round-trip from their hut, for fear the stories of dragons that live over the hill might be true. We covered the modern versions of that objection a bit earlier.
I’m not saying that you’ll make your fortune and find happiness by venturing out. But you’ll greatly increase your odds of doing so, greatly increase your security, and, I suspect, have a much more interesting time.
Let me end by reminding you what Rick Blaine, Bogart’s character in Casablanca, had to say in only a slightly different context. Appropriately, Rick was an early but also an archetypical international man. Let’s just imagine he’s talking about what will happen if you don’t effectively internationalize yourself, now. He said: “You may not regret it now, but you’ll regret it soon. And for the rest of your life.”
[You may well regret it for the rest of your life if you don’t take appropriate steps now to internationalize and thus protect your wealth. To find out how to do it, what to watch out for, and which perfectly legal tactics to employ, read our free report “Does Your Bank Account Speak Spanish?”
Monday, February 28, 2011
Why Aren't These Wall Street Crooks in Jail?
Another Brick in the Wall:
Why Aren't These Wall Street Crooks in Jail?
Ed Pawelec
Imagine if you will that you are walking down the street flush with pay day cash when a mugger steals your wallet. Several people witness this theft, and all are willing to testify on your behalf. Unfortunately, the cop who apprehends our felon, rather than slap cuffs on him, suggests that he take the cash and the credit cards and pop into a nearby Tiffany's to see if there is anything the wife might like. With a bagful of blue boxes in hand, the thief returns the cash empty wallet with maxed out credit cards to the cop. Our protector then turns to us and hands us a newly minted financial burden with a shrug.
A seemingly ridiculous scenario, but one that has occurred repeatedly in the last decade. Some thieves didn't get away. Jeff Skilling, Dennis Kozloski, and Bernie Madoff, to name a few, are all doing time for their frauds. While their crimes hurt a lot of people, none participated in the near collapse of the financial system we experienced just a few short years ago. Those particular bandits have mostly escaped without prosecution and with a boat load of cash.
The following three crooks had an impact on your life, whether as a victim of deceptive lending practices, falling portfolio values, or by losing your job as a result of an economy that spiraled out of control when the methods they used to enrich themselves imploded ...
"Listen, suckers were throwing money at us from both sides, you think I would turn a blind eye to that?"
Remember how the whole mess started in sub-prime mortgages, a large chuck of which were originated at Countrywide Financial (now owned by Bank of America) under the leadership of Angelo Mozilo. Mozilo co-founded Countrywide in 1969 along with the now defunct IndyMac Bank, both of which, for the most part, were standard mortgage originators until the housing bubble started inflating.
Mozilo and Countrywide did not create products like the option ARM, the 80-20 product, FlexPay, or any of the other dubious mortgage products that were developed in the early 2000s, but they swooped into the fray when it was clear that there was money to be made. In fact, according to the Center for Public Integrity, Countrywide was the top subprime lender between 2005 and 2007, originating $97 billion in loans at the peak of the housing market.
From 2001-2006, Mozilo is estimated to have received total compensation of $470 million. That includes $140 million in stock he sold prior to Countrywide's demise. In fact, in a 2006 e-mail written just days after the massive sale, Mozilo is quoted as saying, "We have no way, with any reasonable certainty, to assess the real risk of holding these loans on our balance sheet."
During the period that Mozilo disposed of chunks of his shares, Countrywide was engaged in an aggressive share buyback program. How can a CEO possibly justify a share buyback while unceremoniously dumping the stock?
Publicly, while reducing guidance for 2006 in October of that year, Mozilo continued to tout the strength of Countrywide and cited expected improvement of results from refinancing activity, while downplaying the real risk to the balance sheet.
For not disclosing the full extent of the risks a declining housing market posed to Countrywide's portfolio, and for selling the stock while clearly in possession on material non-public information, Mozilo paid $67.5 million in fines, and the criminal investigation has been recently dropped. Not only is that a paltry sum for a man purportedly worth as much as $600 million, but $45 million of that is being paid by Bank of America as part of its obligations in the takeover of Countrywide.
It simply makes your head spin.
"I can't hide myself very well, so how could I be hiding anything else?"
Cassano, former head of AIG Financial Products, is the man "credited" with the collapse of the insurance giant. Cassano amassed large returns for his division and AIG by writing insurance on bond portfolios in the form of Credit Default Swaps (CDS)-- and that was fine, when he was winning. He bragged about his large, unhedged positions, fought internal audits that valued the swaps far below Cassano's claims, and claimed that his products were so safe that investors would not lose as much as $1.
For a time the con was successful, but as the housing market began to crumble and the mortgages insured by Cassano's CDS began to default, write offs began to mount. As late as December of 2007, Cassano still had AIG CEO Martin Sullivan convinced. Sullivan commented at the time that the probability of the housing crisis causing losses at AIG were "close to zero," despite the fact that the company was witting off $1.1 billion as a result of CDS covering American mortgages. Two months later, that number became $11.1 billion, and the death spiral began.
For the eight year period from 2000-2008, Cassano earned roughly $315 million, including a $35 million bonus received after the collapse of the insurance giant and the $182 billion tax payer funded bailout. Despite clear evidence that he sought to conceal the massive problems in his division, no criminal charges have been filed.
How this cannot be considered fraud raises serious questions about the effectiveness of our legal system when it comes to financial crimes.
Dick Fuld
"If you look over here I will distract you from everything that is relevant."
Fuld headed Lehman Brothers from 1994 until its collapse in 2008, and received total compensation in excess of $500 million, although he claims it was only $310 million. Under Fuld, Lehman engaged in some serious financial chicanery using what is known as "Repo 105".
Repos, or Repurchase agreements, are used throughout the financial sector as a means of balancing the books for short periods. The Federal Reserve is active in the repo market, providing temporary funds collateralized by some securities (usually Treasuries) with an agreement that the receiver of the funds will repurchase the securities at a later date for a specified amount. All part of normal business, and the process basically amounts to a secured loan.
The thing that Lehman discovered is that, if you over collateralize a loan, you can treat it as a sale of assets, not a loan, despite the fact that you are contractually bound to repurchase your collateral. The name "Repo 105" stems from the loop hole that allowed Lehman to use $105 of collateral for $100 in cash.
So at quarter end, when the company's financials would come under scrutiny in coincidence with its earnings release, Lehman routinely "sold" assets under the repo agreement and used the proceeds to pay off some debt, thereby reducing leverage and "improving" its financial condition. A few weeks after earnings, Lehman would releverage by borrowing to repurchase the assets.
Fuld claims that he had no knowledge of the Repo 105 transactions, despite the fact that in one quarter Lehman used the transactions to "remove" as much as $50 billion of assets and debt from its balance sheet.
Now I am not the CEO of a large securities firm, but if I were, and my numbers changed for a few days by $50 billion, I think I might notice. So either Fuld is a complete idiot and should never have been doing anything more mentally strenuous than finger painting, or he is complicit in what amounts to fraudulent reporting.
As yet, no charges or penalties have been levied against Fuld.
Each of these three men -- and I use the term loosely, as they may indeed be something less than human -- was involved in one way or another in reaping ill-gotten gains at the expense of millions of people. While it was a confluence of events originating from the housing crisis that led to the "Great Recession", the failures and/or bailouts of these firms clearly made the crisis worse, and we are still paying the price while they rest comfortably on their millions.
Additionally, Mozilo and Fuld plead that whatever actions they took were, to the best of their abilities, in the interest of their companies -- Cassano just doesn't care what anybody thinks. Clearly, the end result was not in the best interest of shareholders or their companies. Amazingly, there are some defenders of these thieves who suggest that, because they intended the best for their companies, they shouldn't be prosecuted.
Give me a break!
If I purposely attempt to hide risks, fudge disclosure of leverage, and generally manipulate the numbers, this is a crime, particularly when it jeopardizes the very structure of our capitalistic society in a way that Jeff Skilling or Bernie Ebbers could never achieve.
Until financial criminals are pursued and prosecuted with consistency like any other criminal, the incentives for malfeasance, theft, and general financial shenanigans will far outweigh the potential for punishment. So while politcos in Washington shout and point fingers, they don't really accomplish anything, and it's only a matter of time before another financial felon is captured, patted on the back, and released to enjoy your money
Why Aren't These Wall Street Crooks in Jail?
Ed Pawelec
Imagine if you will that you are walking down the street flush with pay day cash when a mugger steals your wallet. Several people witness this theft, and all are willing to testify on your behalf. Unfortunately, the cop who apprehends our felon, rather than slap cuffs on him, suggests that he take the cash and the credit cards and pop into a nearby Tiffany's to see if there is anything the wife might like. With a bagful of blue boxes in hand, the thief returns the cash empty wallet with maxed out credit cards to the cop. Our protector then turns to us and hands us a newly minted financial burden with a shrug.
A seemingly ridiculous scenario, but one that has occurred repeatedly in the last decade. Some thieves didn't get away. Jeff Skilling, Dennis Kozloski, and Bernie Madoff, to name a few, are all doing time for their frauds. While their crimes hurt a lot of people, none participated in the near collapse of the financial system we experienced just a few short years ago. Those particular bandits have mostly escaped without prosecution and with a boat load of cash.
The following three crooks had an impact on your life, whether as a victim of deceptive lending practices, falling portfolio values, or by losing your job as a result of an economy that spiraled out of control when the methods they used to enrich themselves imploded ...
Angelo Mozilo
"Listen, suckers were throwing money at us from both sides, you think I would turn a blind eye to that?"
Mozilo and Countrywide did not create products like the option ARM, the 80-20 product, FlexPay, or any of the other dubious mortgage products that were developed in the early 2000s, but they swooped into the fray when it was clear that there was money to be made. In fact, according to the Center for Public Integrity, Countrywide was the top subprime lender between 2005 and 2007, originating $97 billion in loans at the peak of the housing market.
From 2001-2006, Mozilo is estimated to have received total compensation of $470 million. That includes $140 million in stock he sold prior to Countrywide's demise. In fact, in a 2006 e-mail written just days after the massive sale, Mozilo is quoted as saying, "We have no way, with any reasonable certainty, to assess the real risk of holding these loans on our balance sheet."
During the period that Mozilo disposed of chunks of his shares, Countrywide was engaged in an aggressive share buyback program. How can a CEO possibly justify a share buyback while unceremoniously dumping the stock?
Publicly, while reducing guidance for 2006 in October of that year, Mozilo continued to tout the strength of Countrywide and cited expected improvement of results from refinancing activity, while downplaying the real risk to the balance sheet.
For not disclosing the full extent of the risks a declining housing market posed to Countrywide's portfolio, and for selling the stock while clearly in possession on material non-public information, Mozilo paid $67.5 million in fines, and the criminal investigation has been recently dropped. Not only is that a paltry sum for a man purportedly worth as much as $600 million, but $45 million of that is being paid by Bank of America as part of its obligations in the takeover of Countrywide.
It simply makes your head spin.
Joe Cassano
"I can't hide myself very well, so how could I be hiding anything else?"
Cassano, former head of AIG Financial Products, is the man "credited" with the collapse of the insurance giant. Cassano amassed large returns for his division and AIG by writing insurance on bond portfolios in the form of Credit Default Swaps (CDS)-- and that was fine, when he was winning. He bragged about his large, unhedged positions, fought internal audits that valued the swaps far below Cassano's claims, and claimed that his products were so safe that investors would not lose as much as $1.
For a time the con was successful, but as the housing market began to crumble and the mortgages insured by Cassano's CDS began to default, write offs began to mount. As late as December of 2007, Cassano still had AIG CEO Martin Sullivan convinced. Sullivan commented at the time that the probability of the housing crisis causing losses at AIG were "close to zero," despite the fact that the company was witting off $1.1 billion as a result of CDS covering American mortgages. Two months later, that number became $11.1 billion, and the death spiral began.
For the eight year period from 2000-2008, Cassano earned roughly $315 million, including a $35 million bonus received after the collapse of the insurance giant and the $182 billion tax payer funded bailout. Despite clear evidence that he sought to conceal the massive problems in his division, no criminal charges have been filed.
How this cannot be considered fraud raises serious questions about the effectiveness of our legal system when it comes to financial crimes.
Dick Fuld
"If you look over here I will distract you from everything that is relevant."
Repos, or Repurchase agreements, are used throughout the financial sector as a means of balancing the books for short periods. The Federal Reserve is active in the repo market, providing temporary funds collateralized by some securities (usually Treasuries) with an agreement that the receiver of the funds will repurchase the securities at a later date for a specified amount. All part of normal business, and the process basically amounts to a secured loan.
The thing that Lehman discovered is that, if you over collateralize a loan, you can treat it as a sale of assets, not a loan, despite the fact that you are contractually bound to repurchase your collateral. The name "Repo 105" stems from the loop hole that allowed Lehman to use $105 of collateral for $100 in cash.
So at quarter end, when the company's financials would come under scrutiny in coincidence with its earnings release, Lehman routinely "sold" assets under the repo agreement and used the proceeds to pay off some debt, thereby reducing leverage and "improving" its financial condition. A few weeks after earnings, Lehman would releverage by borrowing to repurchase the assets.
Fuld claims that he had no knowledge of the Repo 105 transactions, despite the fact that in one quarter Lehman used the transactions to "remove" as much as $50 billion of assets and debt from its balance sheet.
Now I am not the CEO of a large securities firm, but if I were, and my numbers changed for a few days by $50 billion, I think I might notice. So either Fuld is a complete idiot and should never have been doing anything more mentally strenuous than finger painting, or he is complicit in what amounts to fraudulent reporting.
As yet, no charges or penalties have been levied against Fuld.
Each of these three men -- and I use the term loosely, as they may indeed be something less than human -- was involved in one way or another in reaping ill-gotten gains at the expense of millions of people. While it was a confluence of events originating from the housing crisis that led to the "Great Recession", the failures and/or bailouts of these firms clearly made the crisis worse, and we are still paying the price while they rest comfortably on their millions.
Additionally, Mozilo and Fuld plead that whatever actions they took were, to the best of their abilities, in the interest of their companies -- Cassano just doesn't care what anybody thinks. Clearly, the end result was not in the best interest of shareholders or their companies. Amazingly, there are some defenders of these thieves who suggest that, because they intended the best for their companies, they shouldn't be prosecuted.
Give me a break!
If I purposely attempt to hide risks, fudge disclosure of leverage, and generally manipulate the numbers, this is a crime, particularly when it jeopardizes the very structure of our capitalistic society in a way that Jeff Skilling or Bernie Ebbers could never achieve.
Until financial criminals are pursued and prosecuted with consistency like any other criminal, the incentives for malfeasance, theft, and general financial shenanigans will far outweigh the potential for punishment. So while politcos in Washington shout and point fingers, they don't really accomplish anything, and it's only a matter of time before another financial felon is captured, patted on the back, and released to enjoy your money
Friday, February 25, 2011
Amerikan Intervention
Amerikan Intervention
Oil was once again in the news today, but this time not for another price spike.
Yesterday I wrote, “While speaking at a Bloomberg breakfast in Washington Wednesday, Tax-Cheatin-Timmy of the Treasury admitted to central banking manipulation when he said, ‘The economy is in a much stronger position to handle’ higher oil prices. ‘Central banks have a lot of experience in managing these things.’ If anyone outside the Federal Reserve would have deep knowledge of how the ANTI-free market central banksters operate, it would be the head of the US Treasury. Moreover, Benron Bernanke has already admitted numerous times that his QE policy was designed to manipulate the stock market higher. Add oil to the list now, and soon the destruction of the gold and silver markets.”
From its high today, oil plummeted 8%. Tax-Cheatin-Timmy wasn’t bluffing, but I didn’t think he was anyway.
What got the oil market falling today was a rumor that the Libyan dictator Gaddafi had been shot and killed. With this news the initial reaction of the market was, “Great, now that that’s over relative calm will put Libyan oil back on the market.” My initial reaction was, “Wow, the central bankers just murdered Gaddafi.” It wouldn’t really be the first time that the global banking cartel put a hit on someone that interfered with its interventionist plans – would it?
The real news of what was slamming the oil market come out later: margins. The ICE exchange increased margins for both WTI and Brent crude oil contracts, while the NYMEX (now owned by the CME) increased the overnight margins for its WTI crude oil contract. Overnight margins were increased for speculators and hedgers alike.
With this news the reaction of the market was, “Damn it! I can’t afford to carry all of these long positions and this announcement will keep a lot of new traders from getting long and helping my current positions. SELL!” My reaction was, “Oh, so that’s how Tax-Cheatin-Timmy and Benron Bernanke manipulated the market – with a phone call. With one call from the Chairman of Intervention, the head of the CFTC was given his marching orders to bring oil down who in turn called the exchanges.”
Why didn’t EZ-Al Greenspin do the same with Nasdaq margins in 1999 and 2000? Oh yeah, because that would have brought sanity to the EQUITY bubble and we can’t have that. What was I thinking? My bad.
Trade well and follow the trend, not the so-called “experts.”
Behold the age of infinite moral hazard! On April 2nd, 2009 CONgress forced FASB to suspend rule 157 in
favor of deceitful accounting for the TBTF banksters.
Larry Levin (888) 755-3846 http://www.tradingadvantage.com/
Friday, February 11, 2011
Sunday, February 6, 2011
An Answer to the Most Popular "End of America" Question
An Answer to the Most Popular "End of America" Question
By Porter Stansberry with Braden Copeland
Saturday, February 5, 2011
I've been on the radio a few times in the last month.
Producers are contacting us with interview requests because of our new promotional video, "The End of America."
I imagine most DailyWealth readers have seen this video already. You know the core components of our argument: The debts assumed by the Western democracies will overwhelm their economies and lead to the end of our current dollar-denominated, global currency regime. This has profound implications for Americans' standard of living and our empire's role in the world.
During these interviews and taking call-in questions from people around the country reminds me of why we made the video: People suffer from a shocking lack of knowledge about the serious financial problems facing our country. For example, the most popular question is: "When will the crisis begin?"
The question assumes we ought to ignore the collapse of the automakers, the complete destruction of America's investment banks, and the receivership of the world's largest mortgage firms (Fannie and Freddie), and the world's biggest insurance company (AIG)…
The question implies nothing unusual has taken place with housing prices… or in the markets for strategic commodities like lithium, copper, oil, coal, and corn – all of which are soaring in the face of the moribund U.S. economy. The question assumes nothing is going on with the value of our dollar, despite silver trading near $30 and gold trading close to $1,500 – up 100% in only two years.
We respond to the popular question with a question of our own: What will have to happen before you'll say we're in a crisis right now?
How high will gas prices have to get before your neighbors notice something is wrong? How high will gold have to get? Or silver? How many banks will have to go under? How high will unemployment have to rise? How many cities will have to go bankrupt? Where's your threshold? How bad will things have to be before you begin to see what's really happening?
In addition to raising these questions, I've compiled a list of seven key facts that might spring people into taking action to protect themselves. They are the factors I believe MUST lead to the end of the global U.S. dollar standard – what we call "The End of America."
1) The price of gold has gone up 10 years in a row. We can't think of another market that's ever risen for 10 consecutive years. This is a historical anomaly, and it means something has gone badly wrong with the world's reserve currency (the U.S. dollar). Markets, if left to find their own equilibrium, will naturally fluctuate. Gold isn't fluctuating. Its steady move up proves something strange is happening to our money.
2) Our government's deficits are out of control. The government's annual deficits now routinely surpass $1 trillion. The first $1 trillion deficit came in 2008 – and the government explained it away as the consequence of the financial crisis. But we racked up another $1 trillion deficit in 2009 and yet another in 2010.
We'll have another in 2011 and so on. Our national debt has doubled since 2005. We've borrowed more money in the last five years than we had in the entire history of our government until then. This isn't sustainable.
3) The government cannot increase tax revenues enough to cover our spending or repay our debts – ever. Our annual deficits have become completely unlinked to taxes. Total federal income taxes and corporate taxes generate $1.1 trillion a year in revenue, and we still ran a $1.3 trillion federal deficit last year. So even if we increased tax revenues by 100%, we would still have fallen $200 million short. This is totally unsustainable.
4) Special-interest groups – particularly government unions – are looting our Treasury. Self-serving special-interest groups have completely hijacked government spending. We now spend $200 billion a year on federal pensions. We're spending another $450 billion on welfare. This spending, combined with our defense spending ($700 billion), exceeds total federal tax revenue and leaves nothing to pay the $200 billion in interest on our debt, nothing to pay for actual government services (like roads), and nothing to pay towards the inevitable Social Security/Medicare shortfall.
Remember… most voters do not pay taxes. It's politically impossible to reform this interest group-based spending. These people are robbing the Treasury. They will cause our currency and eventually our government itself to collapse.
5) We're printing money just like the banana republics we used to mock. To support the government's runaway spending, the Federal Reserve is now continuously buying government debt. This process was commonly called "monetizing the debt" or, more simply, "printing money."
In addition to the inevitable economic consequences of monetizing debt (massive inflation), there's another, even more serious problem: a lack of confidence in the leadership of the Fed. We would support an audit of the Fed. We would support replacing Fed Chairman Ben Bernanke. After all, Bernanke has alternately defended his decision to print massive quantities of new money and denied ever doing it. However, we are certainly aware that as people (rightly) lose confidence in the Fed and in the dollar, there will be serious consequences for our economy.
6) We can't repay our debts. Total debt outstanding in the U.S. currently exceeds $55 trillion. That's $681,165 in debt per U.S. family. There is simply no way to repay (or even maintain) debt of this magnitude using the income of the average American family, which is slightly less than $50,000 per family per year. Interest alone on these debts (based on a 5% rate) would total $34,000 per family every year. Total debt in the U.S. economy is unsustainable and can't be financed without printing vast new sums of money.
7) Shockingly, new debt issuance in the U.S. is soaring, with the lowest-quality debtors borrowing record amounts. Despite all the evidence that the U.S. economy carries far too much debt, both public and private debt issuance soared to new record levels in 2010. Overall, more than $3 trillion in new corporate debt was issued last year – the second record year in a row.
And junk-bond issuance set a new, vastly higher record. In 2010, 509 speculative-grade corporate borrowers sold $287 billion worth of new debt. That compares to the previous record (2009) of $167 billion. Our economy has become so warped by its debt load, it cannot function without ever-larger amounts of debt.
In summary, anyone who carefully looks at these numbers must realize this is not safe and will not last long. That's why I'm telling everyone: Don't ask, "When will the crisis begin?" Instead, ask, "Where can I get the best deal on gold and silver bullion to protect my family's finances?"
Good investing,
Porter Stansberry
By Porter Stansberry with Braden Copeland
Saturday, February 5, 2011
I've been on the radio a few times in the last month.
Producers are contacting us with interview requests because of our new promotional video, "The End of America."
I imagine most DailyWealth readers have seen this video already. You know the core components of our argument: The debts assumed by the Western democracies will overwhelm their economies and lead to the end of our current dollar-denominated, global currency regime. This has profound implications for Americans' standard of living and our empire's role in the world.
During these interviews and taking call-in questions from people around the country reminds me of why we made the video: People suffer from a shocking lack of knowledge about the serious financial problems facing our country. For example, the most popular question is: "When will the crisis begin?"
The question assumes we ought to ignore the collapse of the automakers, the complete destruction of America's investment banks, and the receivership of the world's largest mortgage firms (Fannie and Freddie), and the world's biggest insurance company (AIG)…
The question implies nothing unusual has taken place with housing prices… or in the markets for strategic commodities like lithium, copper, oil, coal, and corn – all of which are soaring in the face of the moribund U.S. economy. The question assumes nothing is going on with the value of our dollar, despite silver trading near $30 and gold trading close to $1,500 – up 100% in only two years.
We respond to the popular question with a question of our own: What will have to happen before you'll say we're in a crisis right now?
How high will gas prices have to get before your neighbors notice something is wrong? How high will gold have to get? Or silver? How many banks will have to go under? How high will unemployment have to rise? How many cities will have to go bankrupt? Where's your threshold? How bad will things have to be before you begin to see what's really happening?
In addition to raising these questions, I've compiled a list of seven key facts that might spring people into taking action to protect themselves. They are the factors I believe MUST lead to the end of the global U.S. dollar standard – what we call "The End of America."
1) The price of gold has gone up 10 years in a row. We can't think of another market that's ever risen for 10 consecutive years. This is a historical anomaly, and it means something has gone badly wrong with the world's reserve currency (the U.S. dollar). Markets, if left to find their own equilibrium, will naturally fluctuate. Gold isn't fluctuating. Its steady move up proves something strange is happening to our money.
2) Our government's deficits are out of control. The government's annual deficits now routinely surpass $1 trillion. The first $1 trillion deficit came in 2008 – and the government explained it away as the consequence of the financial crisis. But we racked up another $1 trillion deficit in 2009 and yet another in 2010.
We'll have another in 2011 and so on. Our national debt has doubled since 2005. We've borrowed more money in the last five years than we had in the entire history of our government until then. This isn't sustainable.
3) The government cannot increase tax revenues enough to cover our spending or repay our debts – ever. Our annual deficits have become completely unlinked to taxes. Total federal income taxes and corporate taxes generate $1.1 trillion a year in revenue, and we still ran a $1.3 trillion federal deficit last year. So even if we increased tax revenues by 100%, we would still have fallen $200 million short. This is totally unsustainable.
4) Special-interest groups – particularly government unions – are looting our Treasury. Self-serving special-interest groups have completely hijacked government spending. We now spend $200 billion a year on federal pensions. We're spending another $450 billion on welfare. This spending, combined with our defense spending ($700 billion), exceeds total federal tax revenue and leaves nothing to pay the $200 billion in interest on our debt, nothing to pay for actual government services (like roads), and nothing to pay towards the inevitable Social Security/Medicare shortfall.
Remember… most voters do not pay taxes. It's politically impossible to reform this interest group-based spending. These people are robbing the Treasury. They will cause our currency and eventually our government itself to collapse.
5) We're printing money just like the banana republics we used to mock. To support the government's runaway spending, the Federal Reserve is now continuously buying government debt. This process was commonly called "monetizing the debt" or, more simply, "printing money."
In addition to the inevitable economic consequences of monetizing debt (massive inflation), there's another, even more serious problem: a lack of confidence in the leadership of the Fed. We would support an audit of the Fed. We would support replacing Fed Chairman Ben Bernanke. After all, Bernanke has alternately defended his decision to print massive quantities of new money and denied ever doing it. However, we are certainly aware that as people (rightly) lose confidence in the Fed and in the dollar, there will be serious consequences for our economy.
6) We can't repay our debts. Total debt outstanding in the U.S. currently exceeds $55 trillion. That's $681,165 in debt per U.S. family. There is simply no way to repay (or even maintain) debt of this magnitude using the income of the average American family, which is slightly less than $50,000 per family per year. Interest alone on these debts (based on a 5% rate) would total $34,000 per family every year. Total debt in the U.S. economy is unsustainable and can't be financed without printing vast new sums of money.
7) Shockingly, new debt issuance in the U.S. is soaring, with the lowest-quality debtors borrowing record amounts. Despite all the evidence that the U.S. economy carries far too much debt, both public and private debt issuance soared to new record levels in 2010. Overall, more than $3 trillion in new corporate debt was issued last year – the second record year in a row.
And junk-bond issuance set a new, vastly higher record. In 2010, 509 speculative-grade corporate borrowers sold $287 billion worth of new debt. That compares to the previous record (2009) of $167 billion. Our economy has become so warped by its debt load, it cannot function without ever-larger amounts of debt.
In summary, anyone who carefully looks at these numbers must realize this is not safe and will not last long. That's why I'm telling everyone: Don't ask, "When will the crisis begin?" Instead, ask, "Where can I get the best deal on gold and silver bullion to protect my family's finances?"
Good investing,
Porter Stansberry
Tuesday, January 18, 2011
Thursday, September 30, 2010
Thursday, September 23, 2010
Thursday, September 9, 2010
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Thursday, September 2, 2010
What Is A Depression Anyway?
What Is A Depression Anyway, And Why We Continue To Be In It?
Submitted by Tyler Durden on 09/02/2010 11:27 -0500
• David Rosenberg
• Government Stimulus
• Gross Domestic Product
• Japan
• New Home Sales
• Personal Income
• Price Action
• Reality
• Recession
• recovery
• Rosenberg
• Unemployment
You will pardon us for posting two excerpts from David Rosenberg today, but this one is a must read, and explains more clearly than anything written on the matter why America is currently, and without doubt, in a depression, due primarily to ongoing secular changes in consumer and investor behaviour, something not experienced during mere recessions. As such any intraday or short-term bounces in the stock market that merely confirm that there was a liquidity injection by one player or another, or a successful short squeeze engineered by the wily folks at the custodian firms or due to simple headfakes, are completely irrelevant (especially with record implied correlations), as the long-term trend has only one way to go in the long-run. Down. Of course, those who believe they can time the moment when the last lingering support pillar collapses and everything tumbles down, are more than welcome to keep trying their top-ticking. We are confident that when the mass exodus begins, the HFT liquidity "support" of the market will be alive and well, and provide everyone with a perfectly acceptable exit price level...
WHAT IS A DEPRESSION ANYWAY?
A depression, put simply, is a very long period of economic malaise. A series of rolling recessions and modest recoveries over a multi-year period of general economic stagnation as the excesses from the prior asset and credit bubble are completely wrung out of the system. In baseball parlance, we are in the third inning of this current debt deleveraging ball game.
You know you’re in a depression when interest rates go to zero and there is no revival in credit-sensitive spending.
The economy is in a depression when the banks are sitting on $1.3 trillion of cash and yet there is no lending going on to the private sector. It's otherwise known as a liquidity trap.
Depressions usually are caused by a bursting of an asset bubble and a contraction in credit, whereas plain-vanilla recessions are typically caused by inflation and excessive manufacturing inventories. You tell me which fits the bill today.
When almost half of the ranks of the unemployed have been looking for a job fruitlessly for at least six months, you know you are in something much deeper than a garden-variety recession. True, we can’t see the soup lines; the soup lines are in the mail — 99 weeks of unemployment cheques for over 10 million jobless Americans. Don’t be lulled into the view that we are into anything remotely close to a normal economic cycle.
Basically, in a depression, secular changes take place. Attitudes towards debt, discretionary spending and homeownership are altered for many years, or at least until the scars from the traumatic experience with defaults and delinquencies fade away. That is why, as per last week’s data releases, we saw existing home sales slide to 15-year lows and new home sales to record lows despite the fact that mortgage rates have tumbled to their lowest levels in modern history. There is no economic model that would tell you that declining mortgage rates should lead to lower home sales.
In a depression, radical changes occur in terms of social norms and spending behaviour. In recessions, people don't cancel their life insurance policies - as one example. But in a depression, tragically, that is what happens - almost 35 million Americans now have no such coverage, up from 24 million five years ago. This reflects the focus by households to pay down their debts at all costs and how companies have bolstered profits - by eliminating benefits.
More fundamentally, in a recession, the economy is revived by government stimulus. In depressions, the economy is sustained by government stimulus. There is a very big difference between those two states.
After all, we are now in a situation where every 1-in-6 Americans is now receiving some form of government assistance — more than 50 million Americans, from food stamps, to Medicaid, to extended jobless benefits, are on one or more taxpayer-supported programs. That transcends the definition of a recession.
In a recession, everything would be back to a new high 33 months after the initial decline. This time around, everything from organic personal income to employment to real GDP to home prices to corporate earnings to outstanding bank credit are still all below, to varying degrees, the levels prevailing in December 2007.
Let’s be clear: After all the monetary, fiscal and bailout stimulus, the economy should be roaring ahead, as would be the case if the economy were coming out of a normal garden-variety recession. The fact that there has been no sustained response to all these efforts by the government to turn things around is a testament to the view that this is not actually a traditional recession at all, but something closely resembling a depression. That, my friends, is exactly what the bond market is signaling, with Treasury yields rapidly approaching Japanese levels.
For all the chatter about whether the recession that started in December 2007 ended sometime last year, here is what you should know about the historical record. The 1930s depression was not marked by declining quarterly GDP data every single quarter. In fact, the technical recessionary aspect to the initial period following the asset and credit shock goes from the third quarter of 1929 to the first quarter of 1933.
What is important to know is this; in that initial four-year economic downturn, from 1929 to 1933, there were no fewer than six — six! - quarterly bounces in GDP data. The average gain in these up-quarters was 8% at an annual rate! But because they proved not to be sustainable, the National Bureau of Economic Research (NBER) refused to declare that the recession officially ended, even though the stock market rallied 50% in the opening months of 1930 on the belief that the downturn was about to end. False premise. And guess what? We may well be reliving history here. If you’re keeping score, we have recorded four quarterly advances in real GDP, and the average is only 3%.
I can understand how emotional the debate can get over whether or not we have actually just stumbled along some post-recession recovery path or whether or not this is actually a depression in the sense of a downward trend in economic activity merely punctuated with noise that is influenced by recurring rounds of government intervention. The reality is that the Fed cut the funds rate to zero, as was the case in Japan, to little avail. Then the Fed tripled the size of its balance sheet - again with little sustained impetus to a broken financial system. Government deficits of nearly 10% relative to GDP, or double what FDR ever ran during the 1930s, have obviously fallen flat in terms of providing and lasting impact to the economy.
This is going to sound like a broken record but it took a decade of parabolic credit growth to get the U.S. economy into this deleveraging mess and there is clearly no painless “quick fix” towards bringing household debt into historical realignment with the level of assets and income to support the prevailing level of liabilities. We are talking about $6 trillion of excess debt that has to be extinguished either by paying it down or by walking away from it (or having it socialized). Look, we can understand the need to be optimistic, but it is essential that we recognize the type of market and economic backdrop we are in.
The markets are telling us something valuable when (after a period of unprecedented government bailouts, incursions and stimulus programs) we had a 2-year note auction that saw the yield dragged to new record low of 0.46%. Instead of lamenting over how attractively priced equities must be in this environment, market strategists and commentators would bring a lot more to the table if they tried to decipher what the macro message is from this price action in the Treasury market. Conducting stock market valuation analysis based on unrealistic consensus earnings assumptions does nobody any good, especially when these estimates are in the process of being cut.
If the Treasury market is correct in its implicit assumption of a renewed contraction in the economy, then we could well be talking about corporate earnings being closer to $60 or $65 in the coming year as opposed to the current consensus view of almost $90. In other words, we may wake up to find out a year from now that whoever was buying the market today under an illusion of a forward multiple of 12x was actually buying the market with a 17x multiple.
How’s that for a reality check?
Submitted by Tyler Durden on 09/02/2010 11:27 -0500
• David Rosenberg
• Government Stimulus
• Gross Domestic Product
• Japan
• New Home Sales
• Personal Income
• Price Action
• Reality
• Recession
• recovery
• Rosenberg
• Unemployment
You will pardon us for posting two excerpts from David Rosenberg today, but this one is a must read, and explains more clearly than anything written on the matter why America is currently, and without doubt, in a depression, due primarily to ongoing secular changes in consumer and investor behaviour, something not experienced during mere recessions. As such any intraday or short-term bounces in the stock market that merely confirm that there was a liquidity injection by one player or another, or a successful short squeeze engineered by the wily folks at the custodian firms or due to simple headfakes, are completely irrelevant (especially with record implied correlations), as the long-term trend has only one way to go in the long-run. Down. Of course, those who believe they can time the moment when the last lingering support pillar collapses and everything tumbles down, are more than welcome to keep trying their top-ticking. We are confident that when the mass exodus begins, the HFT liquidity "support" of the market will be alive and well, and provide everyone with a perfectly acceptable exit price level...
WHAT IS A DEPRESSION ANYWAY?
A depression, put simply, is a very long period of economic malaise. A series of rolling recessions and modest recoveries over a multi-year period of general economic stagnation as the excesses from the prior asset and credit bubble are completely wrung out of the system. In baseball parlance, we are in the third inning of this current debt deleveraging ball game.
You know you’re in a depression when interest rates go to zero and there is no revival in credit-sensitive spending.
The economy is in a depression when the banks are sitting on $1.3 trillion of cash and yet there is no lending going on to the private sector. It's otherwise known as a liquidity trap.
Depressions usually are caused by a bursting of an asset bubble and a contraction in credit, whereas plain-vanilla recessions are typically caused by inflation and excessive manufacturing inventories. You tell me which fits the bill today.
When almost half of the ranks of the unemployed have been looking for a job fruitlessly for at least six months, you know you are in something much deeper than a garden-variety recession. True, we can’t see the soup lines; the soup lines are in the mail — 99 weeks of unemployment cheques for over 10 million jobless Americans. Don’t be lulled into the view that we are into anything remotely close to a normal economic cycle.
Basically, in a depression, secular changes take place. Attitudes towards debt, discretionary spending and homeownership are altered for many years, or at least until the scars from the traumatic experience with defaults and delinquencies fade away. That is why, as per last week’s data releases, we saw existing home sales slide to 15-year lows and new home sales to record lows despite the fact that mortgage rates have tumbled to their lowest levels in modern history. There is no economic model that would tell you that declining mortgage rates should lead to lower home sales.
In a depression, radical changes occur in terms of social norms and spending behaviour. In recessions, people don't cancel their life insurance policies - as one example. But in a depression, tragically, that is what happens - almost 35 million Americans now have no such coverage, up from 24 million five years ago. This reflects the focus by households to pay down their debts at all costs and how companies have bolstered profits - by eliminating benefits.
More fundamentally, in a recession, the economy is revived by government stimulus. In depressions, the economy is sustained by government stimulus. There is a very big difference between those two states.
After all, we are now in a situation where every 1-in-6 Americans is now receiving some form of government assistance — more than 50 million Americans, from food stamps, to Medicaid, to extended jobless benefits, are on one or more taxpayer-supported programs. That transcends the definition of a recession.
In a recession, everything would be back to a new high 33 months after the initial decline. This time around, everything from organic personal income to employment to real GDP to home prices to corporate earnings to outstanding bank credit are still all below, to varying degrees, the levels prevailing in December 2007.
Let’s be clear: After all the monetary, fiscal and bailout stimulus, the economy should be roaring ahead, as would be the case if the economy were coming out of a normal garden-variety recession. The fact that there has been no sustained response to all these efforts by the government to turn things around is a testament to the view that this is not actually a traditional recession at all, but something closely resembling a depression. That, my friends, is exactly what the bond market is signaling, with Treasury yields rapidly approaching Japanese levels.
For all the chatter about whether the recession that started in December 2007 ended sometime last year, here is what you should know about the historical record. The 1930s depression was not marked by declining quarterly GDP data every single quarter. In fact, the technical recessionary aspect to the initial period following the asset and credit shock goes from the third quarter of 1929 to the first quarter of 1933.
What is important to know is this; in that initial four-year economic downturn, from 1929 to 1933, there were no fewer than six — six! - quarterly bounces in GDP data. The average gain in these up-quarters was 8% at an annual rate! But because they proved not to be sustainable, the National Bureau of Economic Research (NBER) refused to declare that the recession officially ended, even though the stock market rallied 50% in the opening months of 1930 on the belief that the downturn was about to end. False premise. And guess what? We may well be reliving history here. If you’re keeping score, we have recorded four quarterly advances in real GDP, and the average is only 3%.
I can understand how emotional the debate can get over whether or not we have actually just stumbled along some post-recession recovery path or whether or not this is actually a depression in the sense of a downward trend in economic activity merely punctuated with noise that is influenced by recurring rounds of government intervention. The reality is that the Fed cut the funds rate to zero, as was the case in Japan, to little avail. Then the Fed tripled the size of its balance sheet - again with little sustained impetus to a broken financial system. Government deficits of nearly 10% relative to GDP, or double what FDR ever ran during the 1930s, have obviously fallen flat in terms of providing and lasting impact to the economy.
This is going to sound like a broken record but it took a decade of parabolic credit growth to get the U.S. economy into this deleveraging mess and there is clearly no painless “quick fix” towards bringing household debt into historical realignment with the level of assets and income to support the prevailing level of liabilities. We are talking about $6 trillion of excess debt that has to be extinguished either by paying it down or by walking away from it (or having it socialized). Look, we can understand the need to be optimistic, but it is essential that we recognize the type of market and economic backdrop we are in.
The markets are telling us something valuable when (after a period of unprecedented government bailouts, incursions and stimulus programs) we had a 2-year note auction that saw the yield dragged to new record low of 0.46%. Instead of lamenting over how attractively priced equities must be in this environment, market strategists and commentators would bring a lot more to the table if they tried to decipher what the macro message is from this price action in the Treasury market. Conducting stock market valuation analysis based on unrealistic consensus earnings assumptions does nobody any good, especially when these estimates are in the process of being cut.
If the Treasury market is correct in its implicit assumption of a renewed contraction in the economy, then we could well be talking about corporate earnings being closer to $60 or $65 in the coming year as opposed to the current consensus view of almost $90. In other words, we may wake up to find out a year from now that whoever was buying the market today under an illusion of a forward multiple of 12x was actually buying the market with a 17x multiple.
How’s that for a reality check?
Thursday, August 26, 2010
Congress Hypocrites? You Tell Me
Congress Calling for Legal Action Against Lenders who Sold Bad Debts to Fannie and Freddie
Posted by Carole VanSickle on Thursday, August 26th 2010
Earlier this week, we reported on a movement gathering momentum in Congress that would enable Fannie Mae and Freddie Mac to force lenders to buy back bad loans to help the mortgage giants recoup some of their combined $354 billion in losses due to delinquent mortgages and bad debt. Now, some members of the House of Representatives (Barney Frank, D-MA, and Paul E. Kanjorski, D-PA) are taking things a step further and calling for the president, both GSE’s and anyone else that they can get their hands on to use “all of [their] power to recover money” from underwriters and issuers of underwater securities that ultimately made their way to Fannie Mae and Freddie Mac [1].
The two representatives claim that Fannie and Freddie have cost taxpayers $150 billion to date, and blame a significant portion of these losses on “deception” on the part of “private companies [that] sold Fannie and Freddie loans or securities based on fraudulent documents.” Now, I am certainly not saying that there was no fraud on the part of any lenders, and we all know that some pretty lousy mortgages made it through the underwriting process in the past decade. But wasn’t this partly because of the lenient and even aggressive policies that not only encouraged but rewarded and even demanded these types of loans? Why should only half of the guilty parties pay the price now, especially when Fannie and Freddie were bailed out specifically to help disperse these losses?
Thank you for reading the Bryan Ellis Real Estate Letter! Your comments and questions are welcomed below.
Read more: http://realestate.bryanellis.com/2359/congress-calling-for-legal-action-against-lenders-who-sold-bad-debts-to-fannie-and-freddie/#rIFcQfPBtTWy#ixzz0xjz9fc2G
Posted by Carole VanSickle on Thursday, August 26th 2010
Earlier this week, we reported on a movement gathering momentum in Congress that would enable Fannie Mae and Freddie Mac to force lenders to buy back bad loans to help the mortgage giants recoup some of their combined $354 billion in losses due to delinquent mortgages and bad debt. Now, some members of the House of Representatives (Barney Frank, D-MA, and Paul E. Kanjorski, D-PA) are taking things a step further and calling for the president, both GSE’s and anyone else that they can get their hands on to use “all of [their] power to recover money” from underwriters and issuers of underwater securities that ultimately made their way to Fannie Mae and Freddie Mac [1].
The two representatives claim that Fannie and Freddie have cost taxpayers $150 billion to date, and blame a significant portion of these losses on “deception” on the part of “private companies [that] sold Fannie and Freddie loans or securities based on fraudulent documents.” Now, I am certainly not saying that there was no fraud on the part of any lenders, and we all know that some pretty lousy mortgages made it through the underwriting process in the past decade. But wasn’t this partly because of the lenient and even aggressive policies that not only encouraged but rewarded and even demanded these types of loans? Why should only half of the guilty parties pay the price now, especially when Fannie and Freddie were bailed out specifically to help disperse these losses?
Thank you for reading the Bryan Ellis Real Estate Letter! Your comments and questions are welcomed below.
Read more: http://realestate.bryanellis.com/2359/congress-calling-for-legal-action-against-lenders-who-sold-bad-debts-to-fannie-and-freddie/#rIFcQfPBtTWy#ixzz0xjz9fc2G
Friday, August 20, 2010
Steve Rattner and Nancy Pelosi
We close with a parting shot at Steve Rattner. You might recall us heckling Rattner earlier this year during a presentation at an elite investment conference in New York. We were flabbergasted that a guy like Rattner – who made hundreds of millions as a private-equity manager while his clients reportedly made almost nothing – would lecture a room of real investors about the supposed "evils" of income inequality. We booed him and then called him a joke – to widespread applause from the audience. (By the way, Vanity Fair reports about the spectacle in its current issue.)
Our booing, the negative press, and even a corruption indictment for bribing New York State pension officials don't appear to have slowed him down or weakened his impressive self-esteem. He is not only publishing a book that brags about his role in restructuring General Motors (where he arranged for the union to steal 20% of the company, despite the fact that the union's policies and strikes led to the firm's demise). Rattner now says the tens of billions of dollars the U.S. taxpayers are going to lose on the upcoming GM initial public offering are a great stimulus for the U.S. economy. I'm not making this up. Here's what Rattner told Fortune: "If the government loses $10 to $20 billion, that's one of the most effective stimulus programs around."
Apparently Rattner and Nancy Pelosi went to the same school of economics. (Remember, Pelosi said paying for people to stay unemployed was the best way to stimulate the economy...) If the government losing money in bailout after bailout was truly good for our country, why wouldn't the government simply print billions up every day and mail it randomly to people across the country? We could have new billionaires every day!
It has never occurred to these people (Rattner and Pelosi) that when you take money away from profitable and productive people (taxpayers) and give it (by the billions) to failed companies and unemployed workers, you're not stimulating anything but more failure. Or maybe it has occurred to them... but they're merely operating (successfully) under the new rules of Amerika, where everything is done to appease the mob.
Porter Stansberry
Our booing, the negative press, and even a corruption indictment for bribing New York State pension officials don't appear to have slowed him down or weakened his impressive self-esteem. He is not only publishing a book that brags about his role in restructuring General Motors (where he arranged for the union to steal 20% of the company, despite the fact that the union's policies and strikes led to the firm's demise). Rattner now says the tens of billions of dollars the U.S. taxpayers are going to lose on the upcoming GM initial public offering are a great stimulus for the U.S. economy. I'm not making this up. Here's what Rattner told Fortune: "If the government loses $10 to $20 billion, that's one of the most effective stimulus programs around."
Apparently Rattner and Nancy Pelosi went to the same school of economics. (Remember, Pelosi said paying for people to stay unemployed was the best way to stimulate the economy...) If the government losing money in bailout after bailout was truly good for our country, why wouldn't the government simply print billions up every day and mail it randomly to people across the country? We could have new billionaires every day!
It has never occurred to these people (Rattner and Pelosi) that when you take money away from profitable and productive people (taxpayers) and give it (by the billions) to failed companies and unemployed workers, you're not stimulating anything but more failure. Or maybe it has occurred to them... but they're merely operating (successfully) under the new rules of Amerika, where everything is done to appease the mob.
Porter Stansberry
GE "Government Electric?"
"I read Porter's analysis of GE's financial status and after doing my own reseach came to the same conclusion. Yet to date, GE is neither dead nor in a coma. Immelt seems to be well connected to the current administration. Is the government proping up the company similar to what it did for GM?" – Paid-up subscriber Butch
Porter comment: Actually, in some ways, what the government did for GE was much more valuable than what it did for GM. The government guaranteed nearly $300 billion in GE's debts. Probably no other force in the world could have saved GE from bankruptcy in the fall of 2008. Stupidly, the government didn't demand any substantial payment for that guarantee. Dumb, dumb, dumb.
But in any case, GE's problems really have nothing to do with liquidity. The problem is solvency. And more debt (or more guarantees) won't help the situation. They only forestall the inevitable. How do I know GE's problems are really about solvency, not just liquidity? Well, ask yourself the obvious question: How much is GE able to earn from its asset base? The answer is around $30 billion a year before taxes and interest. Its asset base is nearly $800 billion. Thus, its return on assets is a bit more than 3.5%. How can it afford to leverage these assets, when it's not generating enough income to cover reasonable interest? This analysis, by the way, doesn't even consider the massive losses GE faces from its investment into European mortgages.
Porter Stansberry
Porter comment: Actually, in some ways, what the government did for GE was much more valuable than what it did for GM. The government guaranteed nearly $300 billion in GE's debts. Probably no other force in the world could have saved GE from bankruptcy in the fall of 2008. Stupidly, the government didn't demand any substantial payment for that guarantee. Dumb, dumb, dumb.
But in any case, GE's problems really have nothing to do with liquidity. The problem is solvency. And more debt (or more guarantees) won't help the situation. They only forestall the inevitable. How do I know GE's problems are really about solvency, not just liquidity? Well, ask yourself the obvious question: How much is GE able to earn from its asset base? The answer is around $30 billion a year before taxes and interest. Its asset base is nearly $800 billion. Thus, its return on assets is a bit more than 3.5%. How can it afford to leverage these assets, when it's not generating enough income to cover reasonable interest? This analysis, by the way, doesn't even consider the massive losses GE faces from its investment into European mortgages.
Porter Stansberry
Roger Clemens
Poor Roger Clemens. It's bad enough to be exposed as a steroid user. And it's even worse to be caught lying about it (as it appears he has been). But the worst thing, from my perspective, is being accused of lying to Congress. I mean, that shouldn't even be a crime, should it? I thought you had to be a pretty damn good liar just to get into Congress. Imagine going to jail for doing something that nearly every other person in the room gets paid to do.
When it comes to lying to Congress, Clemens is a small-time perp. The big fish never get charged. Why haven't Hank Paulson and Ben Bernanke been investigated for the whoppers they told the world in front of Congress in July 2008? I watched both of them swear that Fannie and Freddie were "sound" and "well capitalized" just months before they completely collapsed. I knew they were lying and told you so at the time. What do you think is more important to our country... No. 1: On the record comments by the Secretary of the Treasury and the Chairman of the Federal Reserve about the solvency of government-backed financial institutions that were $10 trillion in debt and owned or guaranteed 50% of the mortgages in the United States? Or No. 2.: Whether or not Roger Clemens used steroids?
Porter Stansberry
When it comes to lying to Congress, Clemens is a small-time perp. The big fish never get charged. Why haven't Hank Paulson and Ben Bernanke been investigated for the whoppers they told the world in front of Congress in July 2008? I watched both of them swear that Fannie and Freddie were "sound" and "well capitalized" just months before they completely collapsed. I knew they were lying and told you so at the time. What do you think is more important to our country... No. 1: On the record comments by the Secretary of the Treasury and the Chairman of the Federal Reserve about the solvency of government-backed financial institutions that were $10 trillion in debt and owned or guaranteed 50% of the mortgages in the United States? Or No. 2.: Whether or not Roger Clemens used steroids?
Porter Stansberry
Monday, July 26, 2010
Wednesday, June 2, 2010
Monday, May 24, 2010
Tuesday, May 11, 2010
Monday, May 3, 2010
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