FedUpUSA

Archive for August 20th, 2011

So another week goes in the books with the market averages down about 5% each.

In Europe it’s much worse.  The DAX was off about 10% in the last two days.  Bank stocks worldwide are collapsing, with some threatening their 2008/09 lows and a few exceeding them.

The US market as a whole has lost nearly 20%, nearly straight down, with four straight weeks of losses.  The entirety of the “gains” since QE2 was announced are now gone – a year of market advance destroyed in less than four weeks.

Why is your 401k and IRA being ravaged – again?

Simply put, we have not stopped financial institution lies.

Sarbanes-Oxley allegedly makes every public company CEO attest under penalty of perjury (and a separate criminal offense) that the financials they present to the public are true, correct and complete.  If this law is being followed and violations prosecuted can someone explain to me why Colonial Bank, along with others, failed and then had their assets valued by the FDIC during consolidation at 20, 30, even 40% less than the publicly-presented values on those balance sheets just weeks before?

Why aren’t the executives who “signed” those balance sheets all facing federal indictment?

This is not (just) a United States problem, but the banks over in Europe that are in trouble have, in many cases, branches here in the US and trade in United States markets.  Some – such as Barclays, Credit Suisse, Deutsche Bank and HSBC, are even “primary dealers” and thus participants in US Treasury auctions.  Why is not US law applied to those firms that are considered “essential” to US financial stability?

Our government has turned balance-sheet games and lies into a legitimate business model.  This in turn has left the markets worldwide subject to rumor and innuendo, along with fact.  This is not acceptable in a financial system that is claimed to “need” these big institutions to remain stable.

The simple fact of the matter is that our entire market structure over the last 30+ years has been built on fraudulent edifice after fraudulent edifice.  The premise of “Credit Default Swaps” being traded over the counter means that there’s no nightly margin position enforcement and “netting” sounds great but is by and large a scam.  You cannot ask a bank CEO exactly how much his bank is underwater or to the good in his present positions across these markets and get an accurate answer, because he doesn’t know.  This lack of knowledge is both intentional and structural – and it must change right now.

This is distinct from trading in the regulated markets.  When I trade futures if I’m underwater by $200,000 in my positions that is tracked “by the minute” and my buying power reflects that.  Each night I am forced to post cash against any underwater positions, and it is “held back” from my cash balance.  If I run out of cash then an ominous number appears on my screen: Dollars to liquidation – and it means what it says; when that gets to zero the brokerage automatically closes my positions and my account goes poof!

Why don’t we implement the same thing for banks?  Markets have prices for nearly everything.  If there’s no price, then the value is simple: For the purpose of required reserves it’s zero.  That is, you must have one dollar of actual capital against anything you claim has no market price, or for which you refuse to accept the market’s valuation.

We must also end ZIRP.  Right now.  Pull liquidity out of the system (start by selling down The Fed’s balance sheet until it is at normal levels) until the short end of the curve rises to at least 1% above inflation.  Borrowing is supposed to come with a cost and it should be expensive enough that it is unattractive to do so for anything except productive purposes – that is, it should be unattractive to borrow to consume, speculate or try to create Ponzi schemes.  Left alone the market guarantees this will be the case – if The Fed won’t stop interfering on its own then it must be forced to do so.

This stops all the BS immediately.  It prevents market panics.  It protects depositors without the possibility of one dime of loss of their funds.  It forces bondholders to do diligence on what they’re lending money for and what institutions are doing with it.  It forces all credit instruments onto an exchange or forces banks to hold one dollar of capital for each dollar of notional exposure.  If they want to trade them over the counter that’s fine, but then they are by doing so refusing to accede to a market price valuation and by doing so must accept that they are unsecured credits – in full.

Oh, it also prevents banks from levering up 50:1, 30:1 or whatever, hiding risk and claiming that all is ok without strict proof.

But it is that strict proof and transparency that the market needs.  It is how we prevent market panics, it is how we prevent “bear raids” and it is how we stop the insanity.

Yes, it also stops banks from looting the population and transferring huge percentages of domestic output to themselves.  It prevents governments from financing their desire to deficit spend with various fraudulent artifices (such as was done in the case of Greece) in order to hide their exposures.  It forces recognition that both government and private industry cannot grow credit faster than productive output and ends the Ponzi schemes.

It will result in a major, worldwide adjustment to the economy.  Downward.  GDP will contract – inevitably.  All the big banks with these lies on their balance sheets will fail.  This is good, not bad, as there will be new banks and sound banks that will take their place.  Unemployment will temporarily go up, not down and tax receipts will temporarily dive.  As such this path of action must come with fundamental tax and spending reform – not the crap being bandied about by both political parties, but something such as The Fair Tax or the proposal I put forward last week, not the intentionally bogus statements from people like Buffett.  It must come with trade reform such that we stop allowing wage and environmental arbitrage to be used as bludgeons – both by us and by other nations.  It must come with medical system (NOT “Medicare” and “Medicaid”) reform because the simple fact of the matter is that we cannot continue to support the outrageous looting that the medical industry in all its forms imposes on America.  It must come with the removal of leverage from the educational system, especially the post-secondary system, as there is no defense available on an economic basis for a 20-year old taking out $40, 50 or even $100,000 in debt for an “education” that is of dubious value in the marketplace.  Education must be returned to a cost structure that can be paid for by an enterprising individual willing to flip pizzas or fix computers during weekends and evenings, exactly as it was in the 1980s.

All of this has to happen now, and the first part of it – reconciling the banks and their bogus accounting – must occur today.  Europe is on the brink of a funding lockup, and if it occurs then the “bare bank tits” that I spoke of quite often in 2007 and 2008 are once again going to be exposed to the market and shown to be silicone-filled fakes.

There are many who say this is not 2008.  They’re right – it’s worse by an order of magnitude.  We now have financial institutions that are effective elements of the state that have bought unpayable bonds from nations, and then used them as collateral to lever up against.  The embedded losses at today’s market prices are enough to destroy all of these institutions and again the question arises on exactly who wrote credit protection against them and do they have the money.  The answer to the latter is exactly as it was in 2008: NO.

The problem is that this time around we in the United States have not only destroyed capital formation and savers with ZIRP and thus have little or no Federal Reserve policy response available, the Federal Government has taken on $4.5 trillion in new debt in a puerile and futile attempt to “stimulate the economy” and yet has failed at the goal.  Most of that money went straight into people’s pockets who had little cash and thus it should have been highly-efficient in promoting consumption and been passed back to through to sustainable production – or so the economists told us.

They were wrong: All it did was temporarily replace productive output; unemployment did not come down materially, the employment participation rate has not moved and thus the tax base has not recovered.

We tried their prescriptions, we used up our time and treasure with a path that I said at the time would not work as credit capacity within the economy had been exhausted and now we’re faced with the reality: We do the right thing and accept the consequences, here and now, or we risk a 1930′s style Creditanstalt collapse.

This is Part 3 of Aaron Russo’s 2006 documentary.

Everything You’ve Believed Is A Lie

If you’d like to watch the entire film, you may do so here:

Freedom to Fascism

Let’s revisit the theory of the bailout. The government holds a safety net under the financial system, preventing a worse panic, with consumers and business cutting back spending more radically, with more people losing jobs, with more houses going into foreclosure.

It made sense on paper and underlies claims today that the government has been a net profiter from its bailout activities.

But it becomes apparent that the 2008 crisis isn’t over. And our bailout strategy? In one presumed lesson of the Great Depression, a splurge of deficit-financed spending is supposed to support the economy while consumers and businesses get over their shellshock. But as George Soros noted to Der Spiegel, the U.S. government in the 1930s wasn’t saddled with huge debt. Unless today’s deficit spending is visibly directed at projects with a positive return, he says, it just frightens the public that the government itself is going bankrupt.

As we now know, the Obama stimulus did not fulfill the Soros condition—it consisted mostly of transfers to support the incomes of people who weren’t working or government employees who were already employed.

Under bailout theory, housing was supposed to hit bottom, but the bottom would be higher than if the economy had lapsed into depression. But housing hasn’t been allowed to hit bottom, thanks to policies designed to foil foreclosures and keep people in houses they can’t afford and have stopped paying for. As a result, the housing and construction industries remain paralyzed.

Surely one lesson of the Great Depression commands common assent: Do as FDR did and support demand with public spending, but, for goodness’ sake, don’t do as FDR did and vilify the private sector while burying it under untimely and confidence-sapping policy initiatives.

Oops. We haven’t executed very well on this lesson either.

Which brings us to Bank of America, successor to Citigroup as the problem child of American megabanks.

Associated Press

Bank of America CEO Brian Moynihan.

When BofA agreed to buy Countrywide in 2008, the bailout was already in full swing. In carefully worded responses to investigators for the Financial Crisis Inquiry Commission (FCIC), then-CEO Ken Lewis said regulators showed “keen interest” in his planned takeover of the troubled mortgage giant, “but no one asked us to do the deal . . . nothing coercive.”

Mr. Lewis here is constrained by confidentiality rules. Wall Street analysts at the time were widely predicting Countrywide’s bankruptcy. As the Journal recently noted, “Regulators saw Bank of America as a savior for the tottering mortgage lender. They believed its failure could pose a major risk to the economy.”

Read the rest at the Wall Street Journal

Every professional has their own method of analyzing markets, finance and economies, and some do well coming up with the direction of social and political issues as well. The other 97% miss one-half to two-thirds of the time. That is not very good and one asks why? The answer is simple they really haven’t studied history as well as they should have.

Some believe that the crisis in Europe is the heart of today’s problems. It certainly is a strong integral part, but not the primary causation. The 3-year old finance bubble was created by the Federal Reserve, which began the situation starting in 1993. We saw the dotcom boom, which they could have stopped in its tracks. All they had to do is raise margin requirements from 50% to 60% temporarily. After that collapse in mid-March 2000, they decided rather than purge the systems, as they as well should have done in 1990-92, they created another bubble in real estate. They have been trying to recover from that bubble and other layover problems since we’d say 2000.

Yes you can blame Europe for its part, but the blame lies with the Bank of England, the European Central Bank, and the banks and personages, who control those entities. Those in England, Europe and in the US, who control business, finance and economics from behind the scenes, have played the partsthey have in order to bring about world government. If you can perceive and accept that from an historical perspective, they you can understand what is really going on.

European banks are struggling with their fundings and credit is drying up. This is what happened in 2008. As a result Europe is a disaster waiting to happen. Europe is finally realizing this is all about debt. The socialists want it go away, just disappear but it does not happen that way.  Debt and credit default swaps will in the end rule the day.

Few reflect back to 12 years ago when the Maastricht Treaty was being approved. The cornerstone was public debt that was not supposed to be more than 3% of GP. That did not last long. Then Italy and Greece, with the help of Goldman Sachs and JPMorgan helped these two basket cases qualify for the euro and euro zone by Mickey Mousing their balance sheets. We saw one interest rate fits all and we knew the euro was doomed before it got started. The condition of the euro zone and Europe is certainly terrible, but so are US debt problems. Policy decisions are bad, but not any worse than they are in the US.

We see pundits trying to separate sovereign debt from bank debt. They are one in the same, because the banks control the governments, and tell them what to do. Europe particularly France, was very upset last week when SoGen was rumored to be insolvent. The answer from those accused was rubbish. SocGen has a history of one of the most criminal banks in the world, so what is new. Just more criminality. SopGen and France are under pressure because they own loads of PIIG debt and are being asked to supply more funds to bail out their neighbors, a role they cannot fulfill without going under themselves. The situation France is in is three times worse what it was in 2008. Everyone expects France and Germany to bail out the bankrupts and that cannot happen. Neither the banks nor the governments can continue to do what they have been doing and at the same time control their financial systems and economies. Now you can understand why CDS credit default swaps trade above 180, when they traded at 80 in 2008. We feel that if the six countries in trouble are not allowed to default it will take the other nations under as well. There is much at stake here. Not only the insolvency but also the breakup of the euro zone and the euro and the dream of using them as a template for a new world order.

In addition it is very significant CDS for Brazil jumped from 35 to 152 as did Mexico, which is an indirect result of what is going on in Europe, UK and the mortgage bond market and by cutting back 30% on loans to small and medium sized businesses. Although they are very leveraged in their other operations, such trading and global leveraged speculation include great counterparty risk. This time exposure is somewhat different but the exposure in the theatre could be just as bad risk wise as it was in 2008. Generally speaking they are not long gold and silver bullion and shares, they are for the most part short. The venue that could be very dangerous is derivatives. The way these major banks and countries have become interconnected the danger always persists and once a fallout begins it could bring down all major banks and countries. Don’t let that fact escape you. They dodged the bullet in 2008, but they might not the next time. The carry trade is as large as it has ever been and the cost of borrowing is close to zero, again, encouraging taking on too much risk.

This past two weeks currency markets have seen large swings, especially in second and third tier countries. No one knows the size of carry trades affecting these countries. We have seen a number of countries quickly give up almost all of their dollar gains of the past several months and the Swiss and Japanese have spent billions of dollars trying to push down the value of their currencies, but to no avail. The euro and the dollar have stayed about the same, but we see the euro weaker due to ongoing financial problems, which contrary to conventional wisdom have not been solved. Throughout Europe not only has money been lent at very low rates, but also much of it is uncollectible. This broken European bubble will deflate for some time to some. It will affect all other sovereign debt negatively as well. These are the borrowers of part of that $16.1 trillion that was lent by the Fed over the last few years, which has never been paid back. European banks are buried in debt and the politicians, whom they own, will do their best to protect them. Unfortunately, there is no painless solution. The contagion is underway and the latest meeting to solve these problems was a failure. The latest European version of the issuance of quantitative easing to buy Italian and Spanish bonds will prove to be futile, just another attempt with taxpayer funds to bail out the banks. This possible “Black hole of Calcutta” at this point puts Europe in a worse position compared to the US, which is no piece of cake, and probably won’t far any better in the future. The working out of US problems will just take longer. As each day passes and in spite of the disinformation, confidence in Europe and the US falters and rightly so. The US has no periphery to support essentially Europe does and that is in favor of the US, but ultimately US problems are far more overwhelming.

The recent commitment of the Fed for zero interest rates for the next two years showed great weakness and will in time come back to haunt them. This was another reward for Wall Street speculators and another moldy bone thrown to the nations savers and elderly. There is no question Wall Street and banking, which own the Fed are desperate, to make such a commitment. The decision for QE 3 was made 15-months ago when we predicted it. We could see it coming and we know the decisions of the last 11 years and the pressure being exerted on the Fed will ultimately bring about its demise, and its days of looting the American public will be over. What the Fed and the ECB have done in greed and for their dream of world government is over. We are closing in on payback time, as desperate measures become more noticeable and a solution remains out of their reach. They will pay for what they have done to us.

Even though we expect at least a few more years of unrestrained leveraged speculation, it will then come to an end. It has become a crucial factor for monetary policy championed by both Sir Alan Greenspan and Ben Bernanke. Wall Street and baking love it, because their positions allow them to create inside information, which allows them to make money consistently with little or no risk. We also have the SEC and the CFTC perpetually looking the other way aiding and abetting their criminal behavior. If you add in that there are no limits to what they can do you essentially have an ongoing free for all. This is unrestrained finance via a policy of zero interest rates. This gives Wall Street and banking a license to steal.

All this has caused a bubble and that bubble is in the process of bursting, a product of fiscal and monetary stimulus. That is not only in the US, UK and Europe, but worldwide As a result confidence in the global system is being lost. De-leveraging of bullish bets in markets of bonds and stocks is underway. Ironically these speculators are short gold and silver and the shares. Short covering is in process with some even switching to the long side in the gold and silver bullion and share markets. How any economist could believe that leveraged speculation reduces risk is beyond us. Fortunately the other shoe has dropped and such theory has been disproved.

The result of all this is that we have an escalating debt crisis worldwide and now the experts in and out of government do not have any solutions as to how to rectify the situation. The sovereign debt crisis has been underway since the early 1970s. This experience shows you how long bad things can last. Before this is over trillions of dollars will be defaulted upon. The days of overwhelming stimulus to gain traction in the economy or economies is in the process of being ineffective. We like to call it the law of diminishing returns. The $2.3 to $2.5 trillion we project that the Fed will have to create in the coming fiscal year will at best produce GDP growth of zero. The minute the Fed and Congress stop feeding the system we will be looking at negative growth of 5%. We are headed toward crunch time and there is no avoiding it. Uncertainty and instability are America’s and the world’s next challenge. Currencies are going to react widely. Gold and silver will fly along with the gold and silver shares as a result of debt and falling economies accompanied by inflation. The big problem will not only be de-leveraging, but also the opaque derivative markets and the Exchange Traded Funds, many of which are leveraged. Yes, it will be a very rough ride, so you had best get ready for it. We never had a recovery and the trappings of growth are quickly falling away.

Extending the time line for all these problems is coming to an end, but it probably will not be abrupt. There will be all kinds of terrible events, but it looks like the elitists are going to play this out over an extended time frame before they attempt to pull the plug. That means these problems could be extended out five or even ten more years on a degenerating basis. That also means we will continue to have limited wars for financial gain and distraction. The strategy has been and will continue to be to keep creating money and credit and allow inflow to reduce the size of the debt. These comments regarding debt quoting Bernanke and throwing money from helicopters and Greenspan’s admission that the US cannot be downgraded, because it can always print money are flippant and very unprofessional. What they have both done rather than allow the US government to default is to perpetually create money and credit to paper over the economy’s failure.

This process increases inflation that quietly steals the value of purchasing power like a thief in the night. Both men can be classified as thieves for having done to the American people and others by stealing the fruits of their labor. This trick used by money masters and politicians for centuries is little understood by the public and most cannot understand how it works and the ultimate ramifications. These characters and others create additional debt, which is followed by other nation’s central banks, which has created a race to the bottom and eventually all nations cannot pay their debts and default. Eventually in order to prevent a collapse in the financial system a meeting is held such as was held at the Smithsonian talks in the early 1970s, or the Plaza Accord in 1985 and the Louvre Accord in 1987. All currencies are revalued and devalued and there is multilateral debt settlement. We believe that is how all this will come about.

Evidentially a deal has been made from behind the scenes to relieve the Fed of having to produce $850 billion in stimulus and that task has been delegated to Mr. Obama. The President, while calling for budget cuts, is calling for $850 billion for stimulus 3. Observing recent actions by Congress some idiotic excuse will be made up and like magic stimulus 3 will appear. We also suggest that the President will use the London rioting as a cause for such stimulus. Remember never let a crisis go to waste. It is sure to be sold in the behalf of preservation of order. We do not believe the powers behind government will get the desired results.

Admittedly, Ben Bernanke inherited a can of worms from Sir Alan Greenspan. Ben has been able to accumulate $3 trillion worth of an assortment of Treasuries, Agencies and CDS, and MBS’s, also known as toxic waste, over the past few years. Those moves decidedly have been negative for the rating of US government debt. The rating really should have been lowered five years ago during the Greenspan years and perhaps even sooner than that. Due to massive increases since 2006 by the Fed we now already are in a bubble.

The 12 person congressional debt commission, we like to refer to as the Obama Enabling Act, patterned after Adolph Hitler’s legislation of 1933, which allowed him to become dictator of Germany, supposedly will produce moderate spending cuts. Knowing that Standard and Poor’s has warned this “Star Chamber” proceeding, which bypasses Congress, that there are not substantial cuts in Social Security and Medicare, that S&P will again lower the US debt rating. Everyone seems to overlook that fact. That means that if there is not large Social Security and Medicare cuts and an increase in taxes, S&P will strike again, and the bond market will burst, and Mr. Bernanke’s house of cards will collapse. As we explained previously the debt extension could have been passed in 15 minutes, but it wasn’t because the powers behind government the Council on Foreign Relations, wanted to chop up SS and Medicare, and to put this panel in place. All is never what it seems to be.

Bob Chapman – International Forecaster for Global Research

There appear to be some people who’ve got the right idea.

Read about the rally organized by the Western Rifle Shooters Association here.