Archive for September 27th, 2011

Four Boxes of Liberty

It really doesn’t get any more clear than this, does it?

As a way to solve the national debt crisis, North Carolina Democratic Gov. Beverly Perdue recommends suspending congressional elections for the next couple of years.

“I think we ought to suspend, perhaps, elections for Congress for two years and just tell them we won’t hold it against them, whatever decisions they make, to just let them help this country recover,” Perdue said at a rotary club event in Cary, North Carolina, according to the Raleigh News & Observer. “I really hope that someone can agree with me on that.”

Let me simply observe that such a “proposal”, if said other than in jest, is an open declaration by an elected official to literally seize power and refuse to cede either office or power to the will of the people.

Should such an act be contemplated, say much less recommended or acted upon, we no longer live in a Representative Republic and the remedies called for in The Declaration of Independence are the only ones remaining for any and all who intend to be a free people living in a nation that operates on the principles of a Representative Republic.

Oh, you don’t think that’s all, do you?  Why no!

“So what to do? To solve the serious problems facing our country, we need to minimize the harm from legislative inertia by relying more on automatic policies and depoliticized commissions for certain policy decisions. In other words, radical as it sounds, we need to counter the gridlock of our political institutions by making them a bit less democratic.” – Peter Orszag

Who is Peter Orszag?  Vice Chairman of Global Banking at Citigroup, Bloomberg “view” columnist, an adjunct senior fellow at the Council on Foreign Relations and……. most importantly…. The former director of the Office of Management and Budget for President Obama.

What time is it again?

Gee, why am I not surprised?

A split has opened in the eurozone over the terms of Greece’s second €109bn bail-out with as many as seven of the bloc’s 17 members arguing for private creditors to swallow a bigger writedown on their Greek bond holdings, according to senior European officials.

Thus the high-speed sell-off of about half of the rally in the last few minutes.  What’s the punchline?

Because of the recent economic downturn and Greece’s slow implementation of austerity measures, officials estimate Athens’ funding needs over the next three years have grown beyond the €172bn forecast this summer. The scale of the shortfall will be determined by international lenders over the next few weeks.

Wait a second….it was originally €100 billion, right?  Then it was €172 billion?  And now it’s how much?

Oh, we don’t know yet.  But we’re back to the same game again – the banks have been lying about their exposure, claiming it’s “only” 21% when the market says its twice that or more.  The Greeks have been saying 100 billion, then 172, and now…. who knows!

Remember, there’s an emergency €8 billion payment that needs to be made now so paychecks don’t bounce.  It looks like that’s delayed for at least another week, and one must wonder if there will indeed be bounced checks to be immediately followed by riots.

Of course the original claim that all was well was good for a 30% increase in bank stock prices over the last few days.  If that turns out to be a lie expect a 50% – and maybe a 100% – decline.

Incidentally, credit wasn’t narrowing today while the market was screaming higher.  You don’t think some of the smarter folks might have known about this before the FT reported it, do you?

Want a market crash folks?  This is how governments cause them – keep allowing banksters to lie and plant false hopes in the minds of investors.  They’ll either leave when you bankrupt them all or when they get tired of the crap and just refuse to play any more in an obviously-rigged casino.

Adding to last night’s BBC spot of Mr. Rastani’s truth-telling, we have yet another experienced market trader telling the full-monty of truth:

Here is a piece from ZeroHedge.com that hopefully will make you all understand, once and for all, that this ain’t the 1930′s, and that there is absolutely no way in hell that this Republic is going to make it to November 2012.

Five Banks Account For 96% Of The $250 Trillion In Outstanding US Derivative Exposure; Is Morgan Stanley Sitting On An FX Derivative Time Bomb?

Summary: The five largest banks in the U.S. (JP Morgan Chase, Citibank, Bank of America, Goldman Sachs and HSBC) are carrying $238 TRILLION dollars in derivative exposure. JP Morgan alone is carrying $78 TRILLION in derivative exposure BY ITSELF.

Okay, what the hell is derivative exposure? What this is referring to are over-the-counter non-exchange traded forward delivery (or “futures”) contracts of various kinds. I am a futures broker, but I only execute futures contracts on the futures exchanges, namely the Chicago Mercantile Exchange and the New York Mercantile Exchange. About ten years ago a new “novelty” emerged in the futures business – the so-called “over-the-counter” contracts. There was a kid in the office I worked in who got wind of this and had all kinds of stars in his eyes about making a killing off of these “OTC” contracts because the brokers’ commissions were not a flat fee but a percent of the contract value. Here’s the problem with OTC contracts: there is no exchange standing between the buyer and seller as a guarantor.

In my business, when a customer executes a trade on a futures or options contract, it makes no difference who the other guy is on the other side of the trade, be it executed electronically or in the pit. None of us have to worry for a second about the counterparty on our executions because the EXCHANGE ITSELF stands between ALL transactions as the ultimate guarantor. The exchange then enforces the financial requirement rules with the Clearing Houses, the Clearing Houses enforce the financial requirement rules with the brokers, and the brokers enforce the financial requirement rules with the customers. That is the chain of financial responsibility. So, even if a customer bugs out and fails to financially perform on a contract, the contract WILL BE MADE GOOD by extracting the money from the broker, then the Clearing House and finally the Exchange.  This massive enforcement buffering is what gives the system integrity.

OTC contracts have no exchange. They are a flipping free-for-all. If someone bugs out on a contract, the poop hits the fan. The counterparty has their pants around their ankles and the broker is caught in the middle. That’s why when that kid in my office years ago got all starry-eyed, I thought to myself, “I wouldn’t do that OTC crap if you put a gun to my head – no matter what the commissions were. It would be Russian Roulette. Eventually someone would default and it would financially destroy the broker instantly, and perhaps the counterparty as well.”

Let’s take my business – cattle futures. One contract is 40,000 pounds of live cattle. The spot contract settled at $119.725 per hundred pounds today. So, 40,000 pounds X $1.19725 (shift the decimal) = $47,890 total value of the contract. Since this is an exchange traded instrument, the customer doesn’t really don’t have to worry about default and can go ahead and book that $47,890 today, and it will be offset at a later time, and the net of the entry and exit will be the P&L. The contract isn’t going to default, so the derivative exposure is limited.

Okay. These banks are carrying these OTC futures contracts with NO exchange to guarantee anything. And they are carrying these contracts largely WITH EACH OTHER. So JP Morgan might be the long and Goldman Sachs, or some insolvent bank in Europe is the short on the other side. If these banks default, which is now a mathematical certainty because they are not only insolvent, but insolvent multiple times over and there isn’t enough money in the world to bail them out, there is going to be a cascading default on all of these OTC contracts.

Now look at the value and exposure of these OTC derivatives again: the top 5 banks in the US alone have exposure of $238 TRILLION dollars.

The total GDP of the United States is $14.5 Trillion.

The total GDP of China is $6 Trillion.

The total land mass on earth is 36.8 billion acres. If every acre of land on earth was “sold” for $6467 per acre, that would total $238 Trillion.

JP Morgan BY ITSELF has derivative exposure equal to over FIVE TIMES the value of the entire US GDP.

And no, there will not be a 1:1 offsetting in a collapse, because the collapse will be asymmetrical, and the bankrupt party will first pursue FULL payment on its “longs” (think of these as accounts receivables) while its “shorts” (accounts payable) will only pay out 20 cents on the dollar OR LESS. In other words, these entities will tear each other apart in a mad dogfight and this dogfight will take the entire world down with it.

TWO HUNDRED AND THIRTY-EIGHT TRILLION DOLLARS.

AND THAT IS JUST FIVE BANKS.

AND THE MASSIVELY CORRUPT AND INCOMPETENT SECURITIES REGULATORS, BOTH GOVERNMENTAL AND PRIVATE, SAT BY AND WATCHED THIS HAPPEN. That is what happens when you let a group of criminals run a bureaucracy of affirmative action hires to “audit” the financial industry. Scroll down and read my post titled “There Must Be A Reckoning.”

It’s over. There is no coming back from this. The only thing that can happen is a total and complete collapse of EVERYTHING we now know, and humanity starts from scratch. And if you think that this collapse is going to play out without one hell of a big hot war, you are sadly, sadly mistaken.

Ann Barnhardt – Barnhardt Capital Management, Inc.

I’m going to add to what Ann has explained so well:

By the end of 2007, all the Too-Big-to-Fail (TBTF) banks were writing these things hand-over-fist because they already knew they were in doo-doo.  All this did was put massive leverage into the system…..debt, leveraged upon debt, with no asset value behind much of it.   And here is where it gets truly ugly for my conservative friends who refuse to look at Wall Street as the criminals they are:  THEY DID THIS KNOWING FULL WELL THE MAJORITY OF THE DERIVATIVES THEY WERE CREATING WERE FRAUDULENT AND BACKED BY NOTHING.   How do I know this?  A myriad of lawsuits filed all over the country with a literal shitton of depositions on discovery.  These are not lawsuits filed by merely disgruntled foreclosure victims; these are lawsuits filed by large insurance companies like Allstate and MetLife, and even The Federal Housing Finance Agency (FHFH) because they all realized far too late that they’d been sold worthless crap.  This is not to mention how adamantly the TBTFs have lobbied against any whiff of the idea of forcing these things onto an exchange where they would be made transparent.  That’s pretty much a tipoff that they’re hiding something very bad.  If the used car salesman won’t let you look under the hood, you can be pretty sure there’s something there you won’t like much.

The idea Wall Street had here with creating these fraudulent pieces of toxic waste was that if even a fraction of these ‘paid out’ for them, they could ‘save themselves.’  Unfortunately this doesn’t work when Wall Street runs out of suckers; you know, pension plans, insurance companies, retail investors and other places they could sell these things to without anyone understanding what they were buying.  Most importantly, when they ran out of suckers they could put into home loans they couldn’t afford, this was the beginning of the end and the whole scheme began to unravel.

Even better, our government not only looked the other way when they were made aware of what was going on, they began to aid and abet the criminal activity….because the TBTFs convinced the government that ‘economic meltdown could be avoided’ if they were just given time for the ‘asset values to come back.’  THIS whole game was facilitated by none-other than Hank Paulson.  You know, ‘Mr-I-Have-A-Bazooka.’

Our entire global economy is a giant Ponzi Scheme.  Makes Social Security look like a rounding error.  This also gives one a better perspective on the stock market movements.  (Yeah, 400 point Dow Jones Industrial ranges in a day is a ‘stable market’.)  What the market is now is merely the TBTF banks chasing government cheese.  Where is the next bailout coming from?  Wherever they THINK it is (and since they push for it, they have a good idea), they front run it and pile in, using HFT to try to position better than the next TBTF.  Who is going to get the next ‘exemption from the law’?  Wherever they think THAT is coming next, again, they go ‘all-in’ – thus providing the massive swings in the market with both bonds (treasuries and corporate debt) and stocks.   Any idea that there is ANYTHING left of a ‘free-market’ is a LIE.  Wake up and smell the Ponzi conservatives, and stop defending the criminals with your cries of ‘it’s anti-capitalist to protest against Wall Street.’  It’s not about your neighbor getting a free house, it’s about massive, global, legalized financial rape.

Wall Street a/k/a the Too-Big-To-Fails are chasing corruption.  They’re chasing legalized theft sanctioned by our government and you can watch it in real-time every day….just pull up a stock chart.  Any stock chart.

Have a nice day.

Perhaps now you will start screaming STOP THE LOOTING & START PROSECUTING!

This tidbit is good for a chuckle this morning.

A new RFP is out for a “tracking system” that The Fed wishes to bid to…… track the opinions expressed about The Fed in various social media.

Yep.

I’m sure they’ll spend millions to discover what I can tell them with two words, and which shouldn’t take more than 30 seconds to figure out.  So rather than spend those millions, Mr. Fed, let me give it to you short and sweet:

YOU SUCK

There, I just saved you (the taxpayer?) millions of dollars.

Any questions?
Frbny Social Media Rfp

The Market-Ticker

Discussion (registration required to post)

Todd Martin, an Asia equity strategist at Societe General SA, talks about the outlook for China’s economy and credit market. Martin also discusses global stocks and commodities. He speaks with Rishaad Salamat on Bloomberg Television’s “On the Move Asia.”

The interview starts off with a very weak idea “fundamentals have been thrown out the window”.  However the analysis gets much better as the video progresses. Here are a few key ideas from Todd Martin.

• RMB offshore vs. onshore rate is at a historic low. This shows Hong Kong or China mainlanders are hoarding cash, possibly to repay debts.
• The liquidation phase is concerning. Markets are looking into a deflationary abyss.
• Recent capital inflows into China are misleading. It was not investment but rather mainland money repatriated to repay debt.
• Cash crunch in China picks up momentum. We are going into a new down phase and true credit cycle in China. That can take on a life of its own.

Select Quotes

Rishaad Salamat: “Are you saying at the moment that the Chinese economy is teetering on the edge as a consequence of all this?”

Todd Martin: “It’s beginning to look like that. There are signals that there is a cash crunch and it is picking up momentum. The offshore RMB market for one. The repatriation of capital for two. This could cascade into a property correction. Once that gets going, you could probably get a lot of sellers jumping into the market.”

Rishaad Salamat: Is commodities the worst asset class to be in, at the moment?

Todd Martin: “Commodities is probability the worst asset class to get hit. If you are in a business seeing input prices fall and you have some pricing power downstream, then you could come out OK. Steel prices are still falling faster than iron ore, so that is still not one to be in yet. It’s pretty bloody. We are withing 15% of the bottom but the credit cycle concerns me.”

Fundamentals

I disagree with Martin about the fundamentals. I think fundamentals on China are horrible. I have been bearish on commodities because China is overheating at a time global demand from Europe and the US will collapse.

For further discussion, please see Michael Pettis: Long-Term Outlook for China, Europe, and the World; 12 Global Predictions written August 22.

Hopping into commodities or commodity-related currencies with a strengthening US dollar, falling global demand, a potential breakup of the Eurozone, a default by Greece,  etc, was a poor investment idea.

Please see the link for a very nice discussion of 12 detailed ideas for the global economy.

This is what I said on August 22, in response to the ideas of Pettis.

Six Key Ideas

1. China Will Slow Much More than China Bulls and Commodity Bulls Think
2. Non-food Commodities Take Big Hit
3. Eurozone Experiment Ends in Breakup
4. US Protectionism Takes Hold
5. Deficit Countries Control Demand, Thus Have the Best Cards
6. Disaster Hits BRICs

Contrarian Thinking

Except perhaps for points three and four (and perhaps for all six  points) investors and analysts have taken the opposite view. Most are  looking to buy the dip, invest in commodities, invest in commodity  producing currencies, and invest in the BRICs.

We did not have commodity producer decoupling in 2008 and there is  no reason to expect it as debt-deflation plays out and China abandons  its reckless investments in infrastructure.

I suspect China slows sooner than Pettis thinks, but no sooner than  the next regime change in China. Markets, however, may react well in  advance.

Global Deflationary Outlook

Pettis does not use the word “deflation” in his writeup, but he  describes a very deflationary global outlook complete with  protectionism, beggar-thy-neighbor policies, currency wars, and falling  non-food commodity prices.

Pettis did not discuss energy, but the forces are clear: peak oil.  vs. global slowdown. Given peak oil and the possibility of war over it,  energy is a wildcard.

China did not decouple in 2008 (except perhaps in reverse), and it will not be immune from this global slowdown either.

Mike  “Mish”  Shedlock
Global Economic Analysis

Who isn’t paying attention here?

Andreas Vosskuhle, head of the constitutional court, said politicians do not have the legal authority to sign away the birthright of the German people without their explicit consent.

“The sovereignty of the German state is inviolate and anchored in perpetuity by basic law. It may not be abandoned by the legislature (even with its powers to amend the constitution),” he said.

“There is little leeway left for giving up core powers to the EU. If one wants to go beyond this limit – which might be politically legitimate and desirable – then Germany must give itself a new constitution. A referendum would be necessary. This cannot be done without the people,” he told newspaper Frankfurter Allgemeine.

Oh I see.  So the expansion of the EFSF, including the “re-purposing” to turn it into a giant SIV which can then lever itself up to €2 trillion or more, isn’t legal from a German perspective without a formal vote of the people?

Yet Thursday, the markets believe, will mark the day this happens.  The Euro is soaring this morning and the futures have been on a relentless march since midnight when Europeans woke up “over there” and started trading among themselves.

The problem with leverage is that it magnifies losses as well as gains.  There is never a free lunch in finance just as there is not in thermodynamics – you can trade one thing for another, but never is there a move that is free of risk, and just as in thermodynamics loss is also an inescapable part of the equation.

I have to be cynical on this one.  Should the EFSF actually “pass” the immediate result is likely to be a credit downgrade for both France and Germany, and this assumes that implementation can be put forward.  I don’t see it.

The problem is that thus far we’re not seeing what has to happen to actually fix the problem be proposed: Reduction of debt to sustainable levels and a removal of systemic leverage.

The reason this isn’t being proposed (here or there) should be obvious: Doing so means an end to the “vote us some more free shit and then write a new and larger rubber check to cover both it and the previous rubber check that Joe’s trying to present over there so it doesn’t bounce!”

This is a losing formula for economic stability just as taking another hit off the crack pipe to “solve” your withdrawal from the previous night’s binge doesn’t work either.  Oh sure, it stops the shakes – for a while.  But every hit you take weakens your heart and deepens your addiction.  Eventually you run out of either money (for most of us) or margin in your cardiovascular system (if you’re a rock star) and turn to crime or fall over dead.

The politicians of the world are acting like the addict who has run out of money and rocks – they’re sniffing the carpet looking for the one little piece they dropped last night during the height of their binge, desperate for another hit.  Our economy has $53 trillion in debt outstanding against $15 trillion in GDP; at a blended 5% interest rate that’s more than $2.5 trillion in interest payments, or one dollar in six that does no useful “work” in the economy but merely shifts around who gets the benefits.

Many people decry “wealth disparity” but in point of fact this sort of slavery is self-inflicted and no amount of legislation to “redistribute” fixes it.  The solution is simple: No more shifting of risk to the taxpayer and sheltering people from their own stupidity.

The only solution that actually works is to default that which cannot be paid and allow those who wrote these bad loans to eat them.  This will bankrupt many of those “rich” who knowingly lent money to people who can’t pay – whether they be governments, businesses or people.  It will cause a gross contraction in GDP on a temporary basis.

If you have a serious desire to see “wealth disparity” addressed this is how you do it.  Those who are paper rich will get trashed in such a correction, but it’s not only the appropriate means to address the problem it’s the only sustainable way you can address it.  The Deutsche Banks and JP Morgans have to be told to stuff it where the sun doesn’t shine, be forced to perform honest accounting of their asset values and when shown to be insolvent, be closed with their bondholders and shareholders absorbing the loss.  Let the directors and executives of these corporations stand before the shareholders and pensioners who own their bonds and shares (indirectly in most cases) and stand trial in a very public court of the “angry mob” for their sin of excessive abuse of leverage.  The threat of having to face those who got shafted might cause them to seek trial in an ordinary criminal court instead, as at least in prison they can find some modicum of security.

At the same time we must stop the capital drain that our unbalanced and idiotic trade policies have put in place, we must neuter the so-called “Fed 2% inflation mandate” and enforce the written law of stable prices, and we must resolve our energy problem here at home as this is responsible for about half of the trade deficit issue.

I don’t believe for a minute that Greece is going to successfully avoid default.  Rather, they’re going to do what we’re doing – they will play along, lie and cheat right up until the rug gets pulled out from under them.  And why not – it’s worked thus far, and addicts only fix their addictions when they either die or hit rock bottom – from where there is nowhere to go by upward toward recovery.