FedUpUSA

Archive for May 31st, 2011

From Bloomberg:

Mark Mobius, executive chairman of Templeton Asset Management’s emerging markets group, said another financial crisis is inevitable because the causes of the previous one haven’t been resolved.

“There is definitely going to be another financial crisis around the corner because we haven’t solved any of the things that caused the previous crisis,” Mobius said at the Foreign Correspondents’ Club of Japan in Tokyo today in response to a question about price swings. “Are the derivatives regulated? No. Are you still getting growth in derivatives? Yes.”

The total value of derivatives in the world exceeds total global gross domestic product by a factor of 10, said Mobius, who oversees more than $50 billion. With that volume of bets in different directions, volatility and equity market crises will occur, he said.

Let that sink in.  TEN TIMES GLOBAL GROSS DOMESTIC PRODUCT.  In other words, banks have created enough ‘financial weapons of mass destruction’ to wipe out every human being’s production….ten times over.

For those who don’t quite understand what a derivative is, it is a financial instrument the value of which depends upon other, more basic, underlying variables.  Such a variable is called an ‘underlying’ and can be a traded asset, such as an economic index (like the S&P 500) or even the unemployment rate.  People may know the most popular of these, which are the stock market futures.  People place ‘bets’ on which way the market will go and if they are right, they make money, if they are wrong, they lose money.

In the above example, the ‘underlying’ is the actual stock market value.  This is something that has a tangible, measurable value.  The stock market value at any given time is completely transparent and available for anyone to see.  However, the prevailing derivatives over the past decade were not something that could be readily and transparently measured.  They were derivatives on collateralized debt obligations.  These were the other weapons of financial destruction designed by our favorite investment banks on Wall Street to capitalize on the bad mortgages they were peddling and shoving down people’s throats.  It was never about the quality of the loans; it was instead, about the quantity of loans they could make, so that they could be bundled into these CDOs, slapped with a nice AAA rating (by the agencies the banks themselves owned), and re-sold to unsuspecting investors (suckers), the majority of which happen to be your retirement plans.

Derivatives were the key to not only maximizing their return profits, but also off-setting the massive risk in writing these bad loans.  Matter of fact, the worse the loan, the more the profit, because while they were busy bundling and selling the CDOs, the investment banks were also placing bets that these loans would fail – i.e. in market parlance, taking a short position against what they were selling and, in some cases, against the very firms to which they were selling the CDOs. 

While hedging or mitigating risk is certainly a legitimate investment practice (everyone should do so with their investments), the problems here were:  (1) there was absolutely no transparent way to gauge the value of the asset being traded; they were all dependent upon the rating the agencies gave to them, and as mentioned above, the ratings agencies were and still are owned by the banks themselves; and (2) none of the banks selling these instruments ever disclosed whether or not they themselves had a position for or against these investments they were selling.

In many cases, these instruments had no true underlying value at all.  Still, the little bundles of CDOs were sold and re-sold and sold again, each time it changed hands, the seller pocketed a profit and passed it off to the next unsuspecting investor.   Since the underlying value was only as much or as good as the original mortgage loan, one can see exactly how the collapse began in late 2007.  With all these ‘easy credit’ mortgages being bought and sold, and Wall Street’s insatiable appetite for the CDOs, this pushed up home prices to the point at which the majority of people could not afford them.  At the peak of the housing boom, many markets had average home prices at SIX TIMES the average income.  Historically speaking, it has never been possible to sustain home prices over three times average income.  Collapse was inevitable when the majority of people could no longer sustain monthly mortgage payments even with ‘creative financing.’ 

So, as we have been saying here at FedUpUSA, the homeowners are not to blame.  You did exactly as the banks planned you should do: took a loan you couldn’t afford.  The world has been scammed, defrauded, robbed and it is now all over but the big kaboom.  These derivatives are still out there, lurking under the bed like the monster from your childhood.  Nothing has been fixed.   Many of these derivatives are worthless because a great majority of the CDOs are, in reality (as opposed to the falsified balance sheets banks are allowed to have) worth pennies on the dollar at best, or absolutely nothing.  All it will take is one big bank to be unable to pay out on its bets.  The monster must be fed, which is why governments around the world are using taxpayer money to support the banks and it is also why we have quantitative easing (i.e. money printing), which is causing the massive price increases in everything we need to buy.  Governments will keep trying to cover up the lies and they’ll keep stealing money from you to do it.  The question now is, how long will you let them?  I know what this guy would do.

STOP THE LOOTING AND START PROSECUTING!

Do you ever have the feeling that there are holes in your pockets?  These days our money seems to slip through our hands faster than ever.  The Federal Reserve keeps telling us that the rate of inflation in 2011 is “close to zero”, and this is causing confusion for many Americans because they are making just as much money as they did in previous years but it doesn’t seem to go nearly as far.  So what in the world is going on out there?  Well, sadly, the truth is that we really don’t even know what the government considers “inflation” to be anymore.  The way that the U.S. government calculates inflation has changed an astounding 24 times since 1978.  You see, it is always politically beneficial to have a low inflation rate, so recent administrations have been changing the formula constantly in an attempt to look good.  But these days most Americans know something is up.  All they have to do is stop at a gas station, go shopping for food or open up their bills. The reality is that inflation in 2011 is about as bad as we saw back in the 1970s, it is just that the government is much less honest about it now.

Many years ago Kenny Rogers released a song that contained the following lyrics….

You got to know when to hold em, know when to fold em
Know when to walk away and know when to run
You never count your money when you’re sitting at the table
There’ll be time for counting when the dealer’s done

Well, the U.S. middle class has been dealt a losing hand, but in the game of life you just can’t fold.

Over the past 3 decades, the average household income for the bottom 80 percent of Americans has been remarkably flat.  In fact, over the past several years we have actually seen median household income decline several times. If you do not know about how the U.S. middle class is being ripped to shreds, just read this article.  Without a doubt, America is getting poorer.

Well, not the top 1 percent, but the vast majority of the rest of us sure are.

Meanwhile, prices have started to rise with a vengeance.

According to an article in the Daily Mail, a Memorial Day cookout will cost you 29 percent more this year than it did last year.

That doesn’t sound good.

Will it be 29 percent more expensive again next year?

Perhaps some of us will just have to stop having Memorial Day cookouts because we can’t afford them anymore.

The price of gas is also digging into our paychecks big time.

A gallon of gas costs about a dollar more than it did a year ago, but we can’t avoid buying gas.  All of us have got to get to work and drive to the store.

Sadly, each time the price of gasoline goes up 50 cents it takes about $70 billion out of the U.S. economy (on a yearly basis).

A recent article in USA Today described the kind of impact these high gas prices are having on average American families….

For every $10 the typical household earns before taxes, almost a full dollar now goes toward gas, a 40 percent bigger bite than normal.

 Households spent an average of $369 on gas last month. In April 2009, they spent just $201.

But don’t worry, according to Ben Bernanke we barely have any inflation at all in 2011.

Some companies are trying to avoid raising their prices by reducing their package sizes.  A recent article posted on Marketwatch entitled “Inflation diet: same price, less product” explored this phenomenon in detail.  Millions of Americans are going to the supermarket and are finding that many of their favorite products are now 10 or 20 percent smaller and yet they are paying the same price as before.

Another thing that is happening is that product quality is going down.  Have you noticed how things just don’t seem to be made the way that they used to?  This is not a coincidence.

According a recent article on CNBC, retailers are skimping on quality as a way to deal with rising costs….

According to Global Hunter Securities Macro and Consumer Strategist Richard Hastings, retailers have been collaborating with their production contractors for about two years. They are trying to push back on the total volume, cost and weight of every unit.

“Along the way, the consumer barely noticed. By now, everybody knows something is wrong,” said Hastings. “If we had to put a number on it, it’s probably a 7.5% decline in total quality and durability of products compared to a bigger increase in the cost of production per unit made outside of the U.S.”

But no matter how hard companies try to hide it, at some point the American people are going to wake up and they are going to realize that they aren’t getting as much for their money as they were before.

This is why so many people get upset when the Federal Reserve and the U.S. government devalue our money.  Inflation is a “hidden tax” on every single one of us.  When our dollars don’t buy as much stuff, that means that we are all poorer than we were before.

All of this inflation is coming at a time when the economy is really struggling.  Personally, I am seeing all kinds of signals that the economy is really starting to slow down once again.

What is going to make things even worse is all of the government austerity that is going to be implemented over the next couple of years.

Once upon a time, a government job was the safest kind of a job you could have.  Sadly, as a recent Reuters article noted, those days are long gone….

Around 450,000 people who work for U.S. states, counties, cities, towns and villages could get pink slips in fiscal 2012, sharply up from the 300,000 positions shed this year, a report said on Monday.

So should we, as many of our liberal friends insist, tax the rich so that we can pay for all of those government workers?

Well, the truth is that the wealthy are already being taxed into oblivion.  If you doubt this, just read this editorial in The Wall Street Journal: “A 62% Top Tax Rate?”

Most of the “ultra-wealthy” have learned how to avoid most of this taxation by moving their wealth offshore.  In fact, as I have written about previously, it is estimated that a third of all the wealth in the world is now held in “offshore” tax havens.

So why are we seeing so much inflation right now?

Well, I covered that in my previous article entitled “When Faith In U.S. Dollars And U.S. Debt Is Dead The Game Is Over – And That Day Is Closer Than You May Think“.

The Federal Reserve and our politicians in Washington D.C. have been very naughty.  They have been systematically destroying the value of our dollars.

Someday when you are using your money as toilet paper because toilet paper is actually much more valuable than dollars are you will wish that the American people had stood up and insisted on a different path.

Don’t laugh – during the hyperinflation that the Weimar Republic experienced in the 1920s, German citizens were actually burning stacks of money in their furnaces in order to keep their homes warm.

100 years ago, a U.S. dollar had more than 20 times the purchasing power than it has today.

Sadly, we are now in a terminal phase of dollar devaluation.  It is only going to get worse from here.  Someday we will look back and long for the days of “low inflation” that we had back in 2011.

The Economic Collapse

You got a 20% debasement (roughly) in the currency, a 20% increase in the stock market (net zero) but look at what went for a rocket ride…. just all the things you need to buy….

QE2 and Bernanke: FAIL

The Market-Ticker

Visit msnbc.com for breaking news, world news, and news about the economy

Read about The Big Bank Ploy: We Never Got Your Documents

Amazing….

BERLIN—Germany is considering dropping its push for an early rescheduling of Greek bonds in order to facilitate a new package of aid loans for Greece, according to people familiar with the matter.

Berlin’s concession that it must lend Greece more money, even without burden-sharing by bondholders in the short term, would help Europe overcome its impasse over Greece’s funding needs before the indebted country runs out of cash in mid-July.

What this really means is that Merkel has been apprised of the fact that her banks over there have written too many swaps and are too highly leveraged to survive a Greek default without yet another round of taxpayer funds from the Germans.  She is therefore willing to risk political suicide (which is almost-certain) in order to avoid having to admit that the game-playing has continued post the original Greek crisis, and that in fact there has been no de-leveraging or cleanup of the German (and French, incidentally) balance sheets at all.

In fact, what I suspect is that these banks over in the Eurozone have been buying up these Greek bonds at a nice discount and then tendering them to the ECB on a Repo basis for cash at full par value.  This of course is manifestly unsound but it’s what happens when nobody can see inside the “magic box.”  The problem comes if Greece suddenly decides not to pay, at which point the Repo transaction becomes uncovered and the ECB is screwed.

Euro-zone governments have ruled out lending to Greece without IMF participation. Greece will face a payment crisis in July unless it receives €12 billion of credits on June 29 from the IMF and Europe, euro-zone officials say.

I’ll lay even odds that Greece doesn’t have until June 29th.

Meanwhile Bloomberg says:

“There’s a degree of confidence that cooler heads will prevail and the next round of assistance will be forthcoming”for Greece, said Robert Rennie, chief currency strategist in Sydney at Westpac Banking Corp.

Cooler heads?  What’s “cool-headed” about giving an entity that has proved it cannot balance its budget more and more money on loan? 

Oh yeah, I get it – we can’t possibly let the truth out.  You know, the ugly truth: Greece is insolvent and so are a significant number of banks that lent it money while being levered up 30:1.

Yes, still levered 30:1.  You are over there in Europe, aren’t you?

Why I bet you are.

Of course there’s also a public charge of Treason that has now been leveled against the Greek Prime Minister too….

The gist of the allegations rest on the charge by Mr. Kammenos, that the Greek Prime Minister, Mr. George Papandreou and members of his team, presided over the sale of 1.3 billion dollars worth of credit default swap contracts (CDS on Greek sovereign debt) on or around December of 2009, shortly after coming to power. The 1.3 billion dollars worth of insurance protecting against a Greek default was bought during the spring and summer of the same year, by the Hellenic Postbank, a public banking arm of the Greek government.

Oh that’s very nice.  Isn’t that kinda like our Fed writing credit derivatives?  They haven’t done that, right?  That would be illegal, right?  Oh wait, they have done that…

Oh boy……

The Market-Ticker