Archive for the ‘Vigilantes’ Category
Do you think that is an alarmist headline? Well, I am not the one saying this. Law enforcement authorities all over the country are telling citizens that they can no longer deal with all the crime and that people need to lock their doors and prepare to defend their families. Just recently, the city attorney of San Bernardino, California told citizens to “lock their doors and load their guns” because there is not enough money to pay for adequate police protection any longer. The murder rate in San Bernardino is up 50 percent this year, but the city is dealing with bankruptcy and has been forced to lay off 80 police officers. But San Bernardino is not the only city dealing with this kind of a thing. In Oakland, burglaries are up 43 percent so far this year, and to say that there is a “crime wave” going on in Oakland would be a massive understatement. If you can believe it, in Oakland “more than 11,000 homes, cars or businesses have been broken into so far this year – translating to about 33 burglaries a day.” Sadly, there simply are not enough police to keep up with it all. Due to budget cuts, it is being projected that by February the size of the police force in Oakland will be about 25 percent smaller than it was back in 2008. But what is happening in Detroit is perhaps even more frightening. Today there are about 1,000 fewer police officers in Detroit than there was a decade ago. But crime just continues to rise. So now even the police are telling people to “enter Detroit at your own risk“. With very little police protection, an increasing number of citizens are taking matters into their own hands. As I noted in a previous article, justifiable homicide in the city of Detroit increased by 79 percent in 2011, and the rate of self-defense killings in Detroit is approximately 2200 percent above the national average. But don’t laugh at what is happening in cities like San Bernardino, Oakland and Detroit. What is happening in those cities will be coming to your community soon enough.
From coast to coast, criminals are becoming increasingly bold and increasingly desperate. My sister lives near a large city in the middle part of the country, and a house across the street from the one her family just moved into was recently vandalized. The criminals took all of the exposed copper pipe and copper wire that could be accessed easily.
Other criminals have become very focused on gold because it has soared in value and it is easy to resell. For example, there have been more than 250 gold chain robberies in Stockton, California just since the month of April. According to the CBS News affiliate in Sacramento, criminals are just ripping these chains right off of the necks of unsuspecting citizens, and many of the victims that have tried to resist have ended up getting hurt. Normally the criminals sell off the jewelry within 24 hours, so solving these crimes is a real challenge…
Most victims of the robberies are female (65 percent), and 44 percent of victims are age 50 or older, the data showed. The most common time of day for the crimes were between 12 and 5 p.m., though this only accounts for about a third of the crime.
Parino said robbers took even police by surprise initially.
“When [criminals] do these crimes, they normally get rid of the items within 24 hours,” he said.
That’s why police are now checking up on secondhand stores and pawn shops on a weekly basis.
Many dismiss reports such as these as “anomalies”, but how many “anomalies” do we need before we finally admit that we have a widespread problem in our society?
Personally, there are many major U.S. cities that I would not want to be living right in the middle of right now.
Just take a look at Chicago. It has become one of the deadliest major cities on the entire globe. In recent years we have seen massive cuts to the police budget coupled with a dramatic increase in gang activity in Chicago.
The murder rate in Chicago is way up this year and the police force is massively outnumbered.
As I have written about previously, there are only about 200 police officers assigned to Chicago’s Gang Enforcement Unit. It is their job to handle the estimated 100,000 gang members living in the city.
How would you like to be outnumbered 100,000 to 200?
When things really hit the fan, Chicago is going to be a complete and utter nightmare.
And sometimes we get a peek into how people will behave when things break down. Just look at what happened during the aftermath of Hurricane Sandy.
If you can believe it, some criminals actually took advantage of the Thanksgiving holiday to loot homes in the Breezy Point neighborhood of Queens. That was the neighborhood where approximately 100 homes burned down. The suffering of the residents of that neighborhood made headlines all over the nation. But that has not stopped criminals from moving in and taking advantage of their vulnerability…
Cops told the victims burglaries are on the rise in Breezy Point.
There were 14 home break-ins from Nov. 12 to Nov. 18, compared with none a year before.
And in the 28 days before that, there were 48 burglaries. Only four break-ins were reported in that time period the year before.
In the days after Sandy, some of the hardest-hit areas were plagued with store looting, home burglaries, street muggings and other crimes.
There are some very sick people out there. These days you simply do not know who you can trust. The person you meet on the street may be perfectly fine or they may be a total sicko. It is so hard to tell. But without a doubt there are a lot of sickos out there. Just check out what authorities in Pennsylvania found recently…
Animal welfare workers say 11 puppies were found dead and skinned near an eastern Pennsylvania park.
Sadly, authorities in that area had come across another similar incident recently…
The discovery is second disturbing incident in the county in less than a week. About 20 miles away in Lynn Township police say a dog was discovered skinned and cooked.
Who would do such things?
What in the world is happening to this country?
Things are changing, and this is just the tip of the iceberg. As conditions shift, we are all going to have to carefully evaluate what is necessary to protect our families. Don’t ignore all of the warning signs. Sticking our heads in the sand and pretending that everything is going to be okay is not going to help anything.
So what do all of you think about all of this? Please feel free to post a comment with your opinion below…
Hoh, hoh…. they say he’s got to go go go BondZilla!
But Ben, you said this wouldn’t happen! You said you had it all under control. That rates on the long end would go down, not up….
Never mind that there was never a bit of evidence you were doing anything other than either lying or “wishcasting” – pick one.
Why? Because the last time Bernanke did “QE”, the so-called “QE1″ (now), bond rates actually went up, not down, and now it’s happening again.
Why not? Because there is no exit plan, Bernanke knows it, he’s lying, and the market has figured it out.
Here’s the problem in the main. Bernanke’s only tool to “tighten” monetary policy means selling bonds into the market and taking in cash from the system.
But what happens if he holds bonds that have all gone down in value? He gets screwed, that’s what. In an extreme case The Fed could go “bankrupt.” Bernanke will avoid this, of course, and he can – but only by not soaking up that liquidity – that is, allowing the cash he printed to remain in the system while the rotting bonds he bought are “absorbed” by The Fed.
The market knows this. It also knows that the duration of his holdings has gone up a lot and that he cannot pull enough liquidity via short-term roll-off to matter – that is, despite his claim of being “100% confident” he cannot tighten policy – not now and not for many years.
The market thus sees risk – that if the economy improves you get inflation, and lots of it, as Bernanke can’t do anything about it. If the economy doesn’t improve then the only way for the government to continue spending like crazy, which it clearly is going to do, is to continue to devalue the currency, which means interest rates go up too as commodities will continue to skyrocket (priced in dollars) and this will destroy the tax base upon which government funding rests from the bottom up.
I talk a lot about the tax base, which is best-represented as the labor participation rate. It sucks, it is not improving, and it cannot improve so long as commodity prices continue to ramp and the currency devaluation continues:
This was the prime error made during The Depression. Contrary to Bernanke’s claims of being “a student” of The Depression he’s really the Fool-in-Chief of that time. FDR’s devaluation of the currency trashed the tax base and guaranteed sky-high unemployment for the same reason it’s happening now – devaluation of the currency destroys the finances of the middle class and below as their spending on essential commodities (food, fuel, clothing) is not only more-or-less fixed in volume (which means their cost to those people ramps as price rises) but as a percentage of income this expenditure is much higher than it is for upper-income earners.
That in turn suppresses entry-level and lower-wage jobs, which holds down the labor participation rate. And it is that labor participation rate that drives the ability of government to collect taxes – you can only tax someone who has income, and only people pay taxes – all attempts to tax any other entity, such as corporations, are simply passed through to people.
It is not a coincidence that after stabilizing this chart took a major second leg down when Bernanke initiated QE1 – April of 2009. It is also not a coincidence that it began to recover when QE1 ended around the beginning of 2010 nor that when Bernanke started to threaten QE2, in the summer of 2010, that it weakened again and continues to weaken.
This is the precise dynamic that played out in the 1930s and Bernanke is causing it, not reacting to it.
Yesterday afternoon Obama made reference to Mitch McConnell and he “not being willing to threaten the sovereign credit of the United States.”
Mr. President, you, in re-nominating Bernanke and not putting a stop to both the outrageous deficit spending and allowing Bernanke to back himself into this corner without removing him, have destroyed the sovereign credit of the United States.
You may not recognize it yet, and neither has the market in the main, but I assure you that recognition will come, and precisely where the “tipping point” happens to be where you no longer have any meaningful degree of control over the situation is not determinable in advance.
And before you start spouting off about how smart you and Bernanke are, remember that neither Iceland, Greece or Ireland knew where that tipping point was in advance either.
Submitted by Tyler Durden
Now that Greece is thoroughly irrelevant, the market just told the ECB, the IMF, and the EMU to prepare another $1 trillion in bailout packages. The reason: the Greek bailout just made it abundantly clear the bond vigilantes have free reign to call the bureaucrats’ bluff whenever they see fit. The result: CDS of all non Greek PIIGS are now blowing out, and represent the top 4 names of all biggest CDS wideners for the day, each pushing a 10%+ change from yesterday. This movement wider will not stop until the IMF resolves to backstop all the PIIS ex. G. At this point nothing that happens in Greece is important, although the thing that will most likely happen is that the Greek government will fall imminently, killing the austerity package and destroying whatever credibility the EMU and the EU have left, but not before the IMF and the EU soak up another 110 billion euro in their slush funds. However, even with the bailout the Greek stock market is tumbling: the Athens Stock Exchange is now down 3.4% to just under 1,800. As we expected, the euro is about to breach 1.31 support. At that point, not even the US algos and the Liberty 33 traders will be able to prevent the contagion. And adding insult to injury is the latest rumor of an upcoming downgrade or very cautious language of Germany by the suddenly hyperactive rating agencies. When that occurs, you can kiss Europe goodbye.
Biggest CDS intraday movers (from CMA):
Is The Federal Reserve Insolvent?
Submitted by Tyler Durden
With Geoffrey Batt
The ongoing troubles at the GSEs are no secret: it is public knowledge that Fannie had a 5.38% delinquency rate at December, while Freddie just passed the 4% threshold in January; both continue to rise rapidly each month. The fact that the mortgage-bond spread has just hit a record tight is merely an ongoing artifact of the Fed’s endless meddling in the mortgage market, with the sole purpose of keeping rates artificially low, and preventing banks from being forced to take massive writedowns on their entire loan book. This is all well known. What, however, seems to have escaped public attention is what the impact of these delinquencies is on the one largest holder of Mortgage Backed Securities, the Federal Reserve. What also seems to have escaped the public is that the Fed is now the world’s largest bank, with total assets near $2.3 trillion. We provide a weekly update of the Fed’s balance sheet and while we briefly note the liability side, our, and everyone else’s, attention, is traditionally focused on the asset side. Yet a more detailed look at the liability side reveals something very troubling, specifically that the Fed’s capital, i.e. equity buffer, which as of most recently was $53.3 billion (a comparable metric for plain vanilla banks is their equity buffer, or Tier 1 Capital, or however the FASB wants to define it on any given day when it is covering up massive capital shortfalls) is in fact negligible and could well be substantially negative, if the Fed were to account for the rapidly rising level of delinquencies in its one largest asset holdings: the $1.027 trillion in settled MBS. And while there is no possibility of a run on the Fed, the reality is that the Fed now likely runs with a negative real capital balance, meaning that the US Federal Reserve is now essentially insolvent.
First, we present the Fed’s assets broken down by key segments. The chart below shows the most recently disclosed asset holdings as per the H.4.1 statement. Of the $2.3 trillion in assets, the vast majority, or $1 trillion is held in MBS. As pointed out previously, this is only the settled amount – in reality the Fed has already purchased $1.22 trillion in MBS, which will settle over time. In practice, this merely means that the potential for asset impairment at the Fed is even greater by about 20%.The chart also shows what happens to MBS holdings if haircuts of 5%, 10% and 15% are applied.
Like any balance sheet, where there are assets, there are liabilities, and some version of capital/equity. The Fed’s liabilities are two principal components: currency in circulation, which has been at about $900 billion for an extended period of time, and the much more relevant recently line item called “Bank Deposits”, which has been popularized as Reserves with Federal Reserve Banks (or excess reserves). The Reserve line has increased from essentially nothing to nearly $1.3 trillion in the span of a few months. Furthermore, as more and more MBS purchased are settled, the excess reserve line will soon reach at least $1.6 trillion, if not more, if indeed Q.E. 2 is launched at some point in the future. The persistent discussions of potential inflation center precisely on the interplay between the green and blue blocks in the chart below: as long as the Currency in Circulation is flat, and Bank Deposits keep rising, the probability of inflation is slim to none. In essence, excess reserves exist only due to the Taylor rule implied negative Fed Funds rate. Should there be a material shift from green to blue, or from excess reserves to currency in circulation, that is when the hyperinflationary threat becomes all too real, as suddenly far too much money will chase a fixed amount of assets. This is also where the discussion about all the various mechanisms that the Fed has at its disposal to moderate tightening comes into play, whether it involves selling of assets, increase of the rate on reserves, or some combination inbetween (we point readers to yesterday’s paper from the Minneapolis Fed which discusses these options, and the caveats associated with each). While the asset reallocation debate is very interesting, it is not the topic of this discussion.
The one item on the balance sheet that is often ignored, is the Fed’s “Equity”, or as it is defined, “Capital.” As previously pointed out, this line item is currently $53.3 billion. It is shown graphically in the leftmost column of the chart below, which depicts actual Fed liabilities. Where the interesting part comes in, is when one analyzes what happens to the Fed’s capital when the abovementioned MBS haircuts are applied.
A 5% realized haircut on MBS alone would result in a complete elimination of the Fed’s capital balance. Applying a 10% or even 15% haircut, results in a capital deficiency of $50 billion and $100 billion respectively. This deficiency will grow as more and more MBS are settled, and as the serious delinquency rate on MBS keeps increasing (no danger in this moderating any time soon).
Now in an environment, such as the one we live in today, when mark-to-myth is the new normal, and when banks are encouraged to come up with creative ways to indicate that their Residential and Commercial Loan portfolios are worth par (despite recent disclosures by the FDIC), to assume that the Fed would do something that lowly depositor banks are told not to do, would be folly. Yet, for those who prefer to live away from Never Never land, and brave this thing called reality, just what will happen if and when the Fed finally does disclose that it is, for all intents and purposes, insolvent?
The pragmatics among you will say: this is irrelevant, the Fed can just print more money and fill in any capital hole. Well, yes and no. As an increase in cash would have to be offset by a comparable increase in some asset, it is not that simple. For a refined analysis of what would happen in that moment of clarity when the world realizes the world’s biggest bank is broke, we turn to a presentation by Chris Sims, given before Princeton University, titled “Fiscal/Monetary Coordination When The Anchor Cable Has Snapped.” We encourage all readers to read this powerpoint cover to cover, as it discusses precisely the issues were are faced with today: namely a monetary policy that has run amok, seignorage, exploding excess reserves, the impact of these on “power money”, and, in general, a Fed balance sheet that is increasingly reminiscent of a drunk, rapid and schizophrenic bull in a China store.
Among other relevant things we note that as the author points-out that “Interest bearing deposits at the Fed do not (yet) count against the Federal debt ceiling” and “if substantial interest is paid on reserves, they could constitute a major leak in the US system for legislative control of debt creation or they are not backed by the full faith and credit of the US government, which has implications for inflation control” – the consequences here are material – with a $1 trillion plus in vacuum interest-collecting paper which in all other world would be counted toward the debt ceiling, the US debt subject to limit would increase from the $12.5 trillion currently to about $13.7 trillion. Add in $6 trillion from the GSEs and America is already at the dreaded $20 trillion threshold. And furthermore, what happens to the interest payments by the Fed should rates go up to 100 bps, 200 bps? On $1.6 trillion in excess reserves this is a material amount that would reinforce inflation in a circular loop, further justifying why the Fed is mortally worried about a rise in rates.
As for the topic at hand, we turn to pp 23-24 of the presentation:
- Central bank operations generate fluctuating levels of net earnings (seigniorage), most of which are turned over to the Treasury as revenue
- Central bank balance sheets sometimes go into the red. The Treasury may then recapitalize it by creating, and giving to the central bank, new government debt
- [The Fed's] Independence meant that the legislature and the Treasury did not complain [much] about seignorage fluctuations or about the effect of interest rate changes on the Treasury’s interest expense
- Fed can always “print money” to pay its bills.
- There is no possibility of a run on the Fed, since its liabilities make no conversion promise.
- A commitment to a path for inflation or the price level makes the balance sheet matter.
- Without Treasury backing, the Fed must rely on seigniorage to raise revenues, and that can conflict with inflation-control goals.
So here is the crux of the issue: the only way to deal with a mark-to-market of the Fed currently is to embrace monetization. It is no longer a question of semantics, of who promised what: it is the only mechanical way by which the Fed can dig itself out of a capital deficiency. With GSE delinquencies exploding, and with the Fed (and Congress) singlehandedly facilitating imprudent lender policy by allowing ever more borrowers to become deliquent without consequences, the MBS delinquency rate will likely hit 10% over the next 6-12 months. At that moment, someone will ask the Fed: “what is the true basis of your capital account?” And when the Fed is forced to justify a valid response, is when monetizaton will begin.
Since the market deals in expectation absolutes, all it would take for rates to breach the inflection point black swan and commence going up, is the mere possibility of open monetization.
What we hope to show with this exercise is that no course of action, even the one currently employed by the Fed, can continue in perpetuity: you can’t have infinitely low housing rates in an environment of exploding delinquencies, as even more MBS are onboarded on the taxpayer’s balance sheet. The reality is that inflationary conerns will come to a fore, and have a material impact on rates, the second all these speculations are voiced in a more reputable arena. At that point the game will be up; the Fed’s attempt to continue the status quo will be over, and the relentless rise up in rates will begin, culminating with the long-awaited Minsky moment.
As for the timing of this development? We will join the Bob Janjuah camp on this one. While few have the guts to take the money printer head on, doing so early is certainly suicidal. Yet with each passing day, all those who are fully aware that the Fed’s course is one of self-destruction, grow bolder, until finally one day a new class of investors – the Fed vigilantes will emerge, looking for cheap opportunities to make a killing (think ABX) on the other side of the “Fed trade”, which ultimately will lead to a systemic catharsis of unprecedented proportions.
At that point neither gold, nor lead will be in any way useful. Beta and gamma radiation will make sure of that.
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