FOMC Analysis 4/28
by ilene - April 28th, 2010 6:56 pm
FOMC Analysis 4/28
Courtesy of Karl Denninger
Information received since the Federal Open Market Committee met in March suggests that economic activity has continued to strengthen and that the labor market is beginning to improve.
Borrowing and spending 10% of GDP makes it appear the economy is doing reasonably well and has improved. We continue to accumulate GDP distortions, however, and now are up to about 52%, or twice what we were going into 1931.
Growth in household spending has picked up recently but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.
That 52% distortion comes out of private demand, of course, and that shows up directly in unemployment, lack of real income growth (it’s negative when one removes transfer payments and handouts) and house prices. No banker in their right mind will lend to someone without a job or assets, ergo, credit remains tight.
Business spending on equipment and software has risen significantly; however, investment in nonresidential structures is declining and employers remain reluctant to add to payrolls.
Business people are not as stupid as we think you are. Indeed, they’re putting pins in the Kewpie dolls with my name on them – daily.
Housing starts have edged up but remain at a depressed level.
Without a job you can’t buy a house, and nobody in their right mind would buy an overpriced house irrespective of income. We did that before and conned America – they wised up. Damn.
While bank lending continues to contract, financial market conditions remain supportive of economic growth.
Goldman Sachs’ HFT algorythm has been successful in passing shares of stock between each other and producing faux "prosperity" in the stock market. Ain’t it grand?
Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.
The stock market, on the other hand, has priced in a roaring recovery. Oh, and that claim of "price stability"? Don’t look at oil, eh? No inflation there!
With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.
Yes, we have record oil inventories…
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DiggDeath-Spiral Intercept
by Chart School - April 15th, 2010 3:53 pm
Death-Spiral Intercept
Courtesy of Karl Denninger at The Market Ticker
In essence, White was saying: "it’s the debt, stupid." When aggregate debt levels build up across business cycles, economists focused on managingwithin business cycles miss the key ingredient that leads to systemic crisis. It should be expected that politicians or private sector participants worried about the day-to-day exhibit short-termism. But White says it is particularly troubling that economists and their models exhibit the same tendency because it means there is no long-term oriented systemic counterweight guiding the economy.
This short-termism that White refers to is what I call the asset-based economic model. And, quite frankly, it works – especially when interest rates are declining as they have over the past quarter century. The problem, however, is that you reach a critical state when the accumulation of debt and the misallocation of resources is so large that the same old policies just don’t work anymore. And that’s when the next crisis occurs.
It seems that Mr. [Edward] Harrison has it figured out. He goes on to spend a lot of digital ink on the periphery of the bottom line, which is that we continue to think of debt in terms of service costs (indeed, you’ll hear Bernanke talk about it, but never about the actual gross financial system debt outstanding.)
When you boil all this down, however, you get to the following chart (trendline added by moi):
You can see what’s going on here – each "crisis" leads to lower lows and lower highs.
This presents two problems:
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Lower lows have run into the zero boundary. That wasn’t sufficient this time, which of course is why we got "Quantitative Easing" and other similar abortions intended to distort market rates – like guarantees on bank debt, for example. Ultimately this devolves into The Fed or The Government (as if there’s a real difference) guaranteeing everything to prevent spreads from blowing out.
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Far more sinister, however, is what happens to the top line. The top line – that is, the maximum rate between crises, declines because it becomes impossible to normalize rates - nobody can afford to pay "normal" rates with the amount of leverage they have.
This is where the ultimate failure in policy arrives, and it…
Don’t Invest In Ridiculously-Rigged (And Thin) Markets
by ilene - March 31st, 2010 7:14 pm
Here’s Karl Denninger’s must-read take on the gold market rigging story. – Ilene
Don’t Invest In Ridiculously-Rigged (And Thin) Markets
Janet Tavakoli has written an interesting piece over at Huffington Post related to the gold market and a potential cornering attempt:
First, let your greed overcome all regard for the stability of the global market, and overcome your aversion to illegal activities.
….
Pump up the gold story. Get your friends to tell retail investors to buy some gold every month. Get your buddies in the financial business to offer exchange traded gold funds (ETFs) that claim to buy physical gold. This will sound safe to retail investors, but in fact, the ETFs are very risky. This will serve your purpose when you are ready to start a panic. These particular ETFs will allow the "gold" to be commingled with the custodian’s gold, and the custodian can lease out the gold. Moreover, the "gold" custodian can give it to a sub custodian that the manager doesn’t know. The sub custodian can give it to yet another sub custodian unknown to the original custodian. The manager will never audit the gold, and the gold is not "allocated" to a particular investor. Since this is an "exchange traded" gold fund, investors will probably assume the gold is regulated by the Commodities Futures Trading Commission (CFTC), but it isn’t. By the time investors wake up to the probability that there is very little actual gold backing their investment, your plan will be ready to execute.
That could be a problem, right?
Zerohedge has run a piece of alleged manipulation of the market (specifically, selling short an insane number of contracts – which would obligate you to deliver – when you have no possible way to do so.) This, however, isn’t necessarily manipulation per-se, nor is the assertion that these are "financial" (that is, we trade ‘em for money, not to actually buy or sell physical gold) assets false. They in fact are; if I sell short a S&P 500 Futures Contract I can assure you that I do not deliver a basket of 500 stocks to the buyer if I’m right (or wrong!)
However, the elements of a scam – which could be the intended…
All You Need To Know About Bank Balance-Sheet Fraud
by ilene - March 7th, 2010 2:43 am
All You Need To Know About Bank Balance-Sheet Fraud
Courtesy of Karl Denninger at The Market Ticker
I am constantly amused by those people who claim there is some vast "conspiracy" in this country when it comes to banks, balance sheets, and fraudulent lending and accounting.
There is no conspiracy.
It is, in fact, "in your face" fraud.
The FDIC does us the courtesy of explaining it virtually every Friday night, right on their web page.
I am simply going to take last night’s bank closures, which numbered four. One of them has no "deposit insurance fund" estimated loss available, because they didn’t find someone to take the assets – they’re just mailing checks. But the other three do.
- Waterford Bank, Germantown MD: $155.6 million in assets, $156.4 in insured deposits. They were "underwater" by $800,000, right? Wrong: Estimated loss, $51 million. That is, the assets of $155.6 million were overvalued by approximately 30% at the time of seizure.
- Bank of Illinois, Normal IL: $211.7 million in assets, $198.5 million in deposits. They were "underwater" by $13.2 million (which is why they were seized), right? Wrong: Estimated loss $53.7 million. That is, the the assets of $211.7 million were overvalued by more than 25% at the time of seizure.
- Sun American Bank, Boca Raton FL: $535.7 million in assets (so they claimed anyway), $443.5 million in total deposits. Heh, why did you seize them – they have more assets than liabilities? Oh wait: Estimated loss: $103.8 million, so the actual assets are worth $443.5 – $103.8, or $339.7 million. That is, the assets of $535.7 million were overvalued by a whopping 37% at the time of seizure.
This isn’t new, by the way. In August of 2009 I went through Colonial Bank’s failure based on BB&T’s presentation to its shareholders on the "merger" – and gift it was given by the FDIC. It too showed that Colonial had been carrying assets on their books at a ridiculous 37% above where BB&T ultimately marked them as a whole.
Folks, your bank is being assessed deposit insurance premiums to pay for these losses. You are paying these losses through increased fees and interest expense on your credit cards and all other manner of borrowing.
You are paying for outrageous, pernicious and endemic balance sheet fraud.
There is no conspiracy. It is right under your nose. One of these three banks, based on their balance sheet, wasn’t…
Keiser Report No.19: Markets! Finance! Scandal! – And Karl Denninger
by ilene - February 24th, 2010 2:59 pm
Keiser Report No.19: Markets! Finance! Scandal! – And Karl Denninger
Courtesy of JESSE’S CAFÉ AMÉRICAIN
Although I don’t always agree with them, obviously, I am always interested, informed, and entertained by what madcap Max Keiser and his cerebral colleague Stacy Herbert have to say on The Keiser Report. As you may know, Max is the latest American in Paris, having left the States after selling his Hollywood Stock Exchange to Cantor Fitzgerald of Wall Street. Perhaps some day we can have a drink at the Ritz and philosophize, as expatriates are often wont to do, about the tragic transience of empire. The Ritz. Alas, when I was a visiting student at ESSEC I could not afford it, and now that I can, I do not get out much anymore. But who can tell what the future may bring.
The most recent broadcast of the Keiser Report has an added attraction in its second half, Karl Denninger. Karl is probably more familiar to our American patrons as theoutre financial commentator from The Market Ticker.
Karl always has something interesting to say, spoken plainly, and without the kind of courtly manner towards corporate America that is so fashionable among the journalists in the mainstream media who are members of the Wall Street demimonde.
Mr. Denninger is particularly effective, when he gets it right as he frequently does, in describing complex transactions because he is not an economist or a financial professional, but a computer engineer, an honest technical sort, who brings some formidable analytical skills to a relatively unfamiliar subject. He often gets ‘nit-picked’ by the pros who play word games with their jargon, but more often than not he is directionally correct.
And he occasionally admits it when he is wrong, and changes tack, a refreshing trait amongst the greater universe of financial commentators. But if you post on his chat board, be prepared for ideological frisking, and little patience for deviation from the local standards and fundamental assumptions. A weakness perhaps, from the perspective of ideological diversity, but more common than most moderators care to admit.
Enjoy.
Bonus post by Jesse at the Cafe,
How Bad Can It Get?
They have our money. What more can they want?
EXPLOSIVE: AIG Bailout Flat-Out Illegal?
by ilene - February 3rd, 2010 12:35 pm
EXPLOSIVE: AIG Bailout Flat-Out Illegal?
Courtesy of Karl Denninger at The Market Ticker
Big government has presented an explosive story related to AIG and The NY Fed in which the claim is made that the trust agreement that established AIG’s "grab" by The NY Fed was in fact outright unlawful:
This afternoon on Secure Freedom Radio we announced a breaking news story concerning the Administration’s ongoing cover-up of AIG financial wrong-doing. In an interview with David Yerushalmi, senior litigator on the Murray v. Geithner et al lawsuit, we expose possible fraud, money-laundering and criminal activity.
Money laundering?!
I looked at the source document folks – and while most of it looks ok, there’s one little line in the trust agreement that might be the problem referred to - specifically, here:
Section 1.03. Trust is Irrevocable. This Trust Agreement and the Trust shall be irrevocable and, except as provided in Section 5.01 hereof, unamendable except that the Board of Governors may terminate or amend its authorization pursuant to Section 13(3) of the Federal Reserve Act, thereby revoking or amending the Trust in accordance with Federal law, provided, however, that a Trustee’s rights to resign as a trustee hereunder and to compensation and indemnification with respect to acts or omissions occurring prior to any such revocation or amendment may not be modified without the written consent of that Trustee.
A trust of this sort, to be lawful, has to be irrevocable – you can’t reserve the ability to modify it later. The NY Fed knew they didn’t have the authority to take equity – thus, these "trust" agreements.
I’ll note for the peanut gallery that I’m not an attorney, but I do have a reasonable understanding of the requirements for an irrevocable trust of this general sort to be valid. A phone call with the plaintiff’s attorney, David Yerushalmi this morning confirmed that this indeed was the primary problem. Mr. Yerushalmi went on to assert that this establishes a prima-facie violation of the money laundering statute - an extremely serious allegation as that law, if violated, carries very heavy criminal penalties.
There is also apparently a second issue in that the beneficiary is named as The US Treasury, which is, effectively, a bank account and not a "person or entity." That’s a potential problem too although I can see the…
Did The President FINALLY Wake Up?
by ilene - January 21st, 2010 1:55 pm
Did The President FINALLY Wake Up?
Courtesy of Karl Denninger at The Market Ticker
…
Karl Denninger’s 2010 Outlook
by ilene - January 7th, 2010 11:22 am
Interview with Karl Denninger, courtesy of Miss Trade – Ilene
Karl Denninger’s 2010 Outlook
Karl Denninger recently made his annual Where Are We, Where We’re Heading Post. We invited him on MissTrade TV to give us his input on the year ahead.
The Last Word On Bernanke: FAIL
by ilene - December 3rd, 2009 12:25 pm
The Last Word On Bernanke: FAIL
Courtesy of Karl Denninger of The Market Ticker
I have written two Tickers in recent days in which I put forward what I believe is a clear and convincing, if lengthy, case that Bernanke simply can’t be justified for re-confirmation – So Bernanke, You Want To Be Reconfirmed? and The Black Hats Strike Back.
But today, on the eve of Bernanke’s reconfirmation hearing in the Senate Banking Committee, I want to focus on one and only one thing – The Fed’s basic mandate:
The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.
Ok.
Let’s look at the performance.
We shall first look at the growth of GDP and credit aggregates:
Data is through the latest "Z1" statement showing credit aggregates.
This is The Fed’s performance of its mandate. GDP growth is in green, credit aggregates in various shades of orange and red, and the debt-to-GDP ratio in light gray on the right scale.
You can see the problem. "Credit Aggregates" have grown much faster than has GDP. This is the definition of Ponzi Finance – that is, debt pyramiding or "credit leverage."
This is an intentional violation of The Fed’s lawful mandate to properly manage the growth of credit aggregates (that, by the way, is what they’re really doing – interest rates move in relationship to liqudiity, which governs the growth or contraction of credit aggregates.) Why? Because when credit expands faster than GDP over time, as has occurred here, you have an inherently unstable system that with mathematical certainty will eventually melt down.
In order for the debt to be serviced – debt that is growing much faster than GDP – it should be obvious that ever-lower interest rates are required. When the interest rate "required" to prevent massive default rates from occurring reaches zero, as we have recently seen, The Fed is reduced to the raw printing of money. This in turn debases the currency which forces risk premia higher – and thus causes real rates
…
Short Sales: The Real Issue
by ilene - October 22nd, 2009 1:45 pm
Karl Denninger presents a compelling argument that market makers should not be exempt from rules preventing short-selling shares that cannot be borrowed (naked short selling). Because the quantity of a given stock in "float" is fixed, traders and market makers should not be allowed to create unreal and illogical bets on stocks that result in perversion of market dynamics and wild price swings. That’s my summary, Karl explains in detail. – Ilene
Short Sales: The Real Issue
Courtesy of Karl Denninger at The Market Ticker
Matt Taibbi once again writes in Rolling Stone, this time on naked short sales, and while he gets a good part of the issue right, he (and many others who have opined on this situation over the years) miss the forest for the trees.
Matt writes:
But the most damning thing the attack on Bear had in common with these earlier manipulations was the employment of a type of counterfeiting scheme called naked short-selling. From the moment the confidential meeting at the Fed ended on March 11th, Bear became the target of this ostensibly illegal practice — and the companies widely rumored to be behind the assault were in that room. Given that the SEC has failed to identify who was behind the raid, Wall Street insiders were left with nothing to trade but gossip. According to the former head of Bear’s mortgage business, Tom Marano, the rumors within Bear itself that week centered around Citadel and Goldman (GS). Both firms were later subpoenaed by the SEC as part of its investigation into market manipulation — and the CEOs of both Bear and Lehman were so suspicious that they reportedly contacted Blankfein to ask whether his firm was involved in the scam. (A Goldman spokesman denied any wrongdoing, telling reporters it was "rigorous about conducting business as usual.")
Matt gets so close, but fails in the closing.
See, there are two area of naked shorting that nobody wants to really deal with, yet both have to be if we are ever to make a difference. Let’s deal with them in turn.
The first, the writing of "naked" swaps, is one that I’ve written about before. The essence of a "credit default swap" is a contract whereby the buyer of protection insures…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
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