Monday, June 30, 2008

International Business Traveller Alert: Customs Agents Randomly Siezing Laptops, PDAs of Travelers Re-Entering U.S.

U.S. officials have been searching and seizing laptops, digital cameras, cell phones and other electronic devices at airports and other border crossings, of random U.S. citizens re-entering the United States. Apparently, keeping the electronic gear for up to two weeks.

The Baltimore Sun has the story, here.

Harvard Business School Buys Students BMW's and Porches

Sort of.

It's sophisticated financial engineering at work. NyPo has the details, here.

IRS Attempting To Get Info From Swiss Bank On $20 Billion Worth of Hidden U.S. Taxpayer Accounts

This should get interesting.

The IRS suspects that UBS bank may have up to $20 billion worth of assets that are hidden there by U.S. taxpayers. The information comes from one Bradley C. Birkenfeld, a former UBS banker, who has been squeezed by the Feds and has entered a plea deal with the government.

Justice Department lawyers said late Monday that they had filed court documents in Miami asking a judge to allow the IRS to get information from UBS. U.S. investigators are seeking permission for the first time to serve what are called “John Doe” summons to obtain information about possible tax fraud against taxpayers whose identities are not known.

IRS agent, Daniel Reeves, said in a declaration filed with the summons request that Birkenfeld was one of 40 to 50 UBS bankers who traveled to the United States “on a quarterly basis to service U.S. taxpayers.” He also said that UBS employees traveled with “encrypted laptop computers containing clients’ portfolios.” UBS also made it appear as if non-United States taxpayers, rather than its American clients, owned the offshore accounts.

The Feds may have leverage against UBS in that UBS has significant assets in the United States, including UBS Securities, that can be fined or confiscated if UBS fails to comply.

John A. DiCicco, Deputy Assistant Attorney General for the Justice Departments Tax Division said in a statement:

We are working cooperatively with both the Swiss government and UBS to obtain this information. However, we are prepared to seek enforcement if that process is not successful.

Of course, with $20 billion in hidden assets at UBS, there are probably some major players who may have some influence at top government levels and who may attempt to squash the investigation.

Phil Gramm, who we just wrote about, a couple of hours ago before this story broke, is co-chairman of UBS Securities.


Vaclav Klaus: Global Warming Activists Are the Direct Descendants of the Old Marxists

Environmentalism, Czech President Vaclav Klaus tells the Washington Times, is the new communism, a system of elite command-and-control that kills prosperity and should similarly be condemned to the ash heap of history.

The full Klaus interview by David R. Sands at WaTi is here.

The Best Move John McCain Has Made...

...is to make Phil Gramm part of his advisory team. You can clearly see the influence Gramm is having on the economic positions of McCain.

The former senator is a first rate economist and a tough, tactical politician. For the take on Gramm as a tough, tactical politician, see these not necessarily flattering comments about him from the economist Murray Rothbard and from former Citibank chairman, Sandy Weill, here.

For a sense of Gramm as a brilliant economist, be sure to read an interview of Gramm by the senior economics writer for the WSJ editorial page, Stephen Moore, here.

Gramm on entrepreneurs versus do-gooders, from the interview:

When you help a company raise capital, to put its idea to work, and you create jobs, those jobs are the best housing program, education program, nutrition program, health program ever created. Look, if a man in one lifetime is responsible for creating 100 real jobs, permanent jobs, then he's done more than most do-gooders have ever achieved.

Gramm takes a swipe at Obama:

Why is America the richest country in the world?...It's not because our people are more brilliant; it's because we have a better free-market system. Why has Texas created 1.6 million jobs in the last 10 years whereas Michigan has lost 300,000 jobs and Ohio has lost 100,000 jobs? Because governance matters, taxes matter, regulation matters. Our opponents in this campaign are so dogmatic in their goal of having more government because they love the power it brings to them that they're willing to let it impose costs on the working people that they say they want to help. I am not.

Dear President Obama

Say what? Don't we have an election coming up first?

Bill Gross, Managing Director and Chief Investment Officer of PIMCO, one of the largest specialty fixed income managers in the world, with more than $800 billion in assets under management, is obviously taking Obama Kool Aid intravenously. Yes, directly into the veins.

In his July, 2008 Investment Outlook report, he writes an open letter to Obama titled: Dear President Obama. The letter vacillates between bad economics and fawning over Obama.

In the fawning department, he calls Obama "too nice of a guy to distort reality." Gross has obviously never read or absorbed Friedrich Hayek's brilliant book, The Road to Serfdom, which includes the chapter, Why The Worst Get On Top. There is no such thing as a "nice guy" coming anywhere close to being president of the United States.

Leo Durocher was an optimist when he said, "Nice guys finish last." Nice guys, especially in politics, never get in the game.

And, as far as distorting reality, Obama has done his share. Obama, like any aggressive politician, can take any side of an issue when it is necessary or convenient, see Obama’s Two Faces and Forked Tongue.

Gross obviously gets his jollies from watching Obama on television. He writes:

Come to think of it, “President Obama” does have a certain ring to it. When I listen to your speeches, you even have me half convinced!

All the best, and a fist bump to ya!


As for Gross' economics, he reveals his complete Keynesian, tax and spend self, in his letter to Obama.

He endorses Obama's call for higher taxes:

I myself won’t enjoy paying that near 50 percent marginal tax rate after you remove the current cap on the payroll tax, but my wealthy neighbors and I in Newport Beach should just look at it this way: we’ve had an eight-year lease extension on the “high life.” Now it’s time to give something back...

He endorses government healthcare meddling and calls for more government meddling in mortgage crisis:

Anyway, so you’re gonna do the tax thing, Mr. President, and throw in some form of universal healthcare to boot that your buddy Hillary will help spearhead. You hope you can get a lot of this passed despite a potentially long string of filibusters from a Senate that won’t quite have sixty Democrats. In addition, you’ll need to provide some immediate relief to homeowners in the form of FHA (Federal Housing Administration) subsidies and low mortgage rate loans that somehow have been studied and studied in Congress for the past six months yet still haven’t been passed into law.

As if the "Bank America" Bill wasn't enough abuse of the taxpayer, he calls on Obama to spend another $500 billion on some kind of stimulus program:

....this economy will need an additional jolt of $500 billion or so of government spending real quick.

Who knows where Gross thinks this money will come from, or is he so under the influence of Obama Kool Aid that he thinks it will come out of thin air?

Oh, I get it, just increase the deficit by $500 billion, to a trillion:

According to that old C + I + G formula (scratch the trade deficit for now) when C + I is reduced by $500 billion, then G should increase by that amount in order to fill the gap. The G, Sir, is you – the government deficit, the fiscal stabilizer popularized by Keynes following the Depression. And since the fiscal deficit for 2008 is likely to press $500 billion even before you take the oath of office, well there you have it: $500 billion + $500 billion = $1 trillion big ones, probably by sometime in 2011 or so. It takes time to spend those types of bucks.

Amazingly, this Kool Aid drinker does understand the destructive impact of what he is proposing:

A trillion dollars of government deficit spending is potent medicine. Its potency regarding inflation will not be felt fully during the peak deficit period. Rather, inflation will accelerate during the subsequent recovery as the government bonds acquired during the recession are transformed once again into risk bearing assets and high levels of investment. That suggests that intermediate and long-term yields on government bonds have already bottomed and will gradually rise throughout your first, and perhaps second Administration. Your term will not go down in history as investor friendly.

Oh, what some will do, say or advocate for the love of Obama.

Rising interest rates are certainly in the future, especially if another $500 billion "stimulus" package is launched, but Gross' timing on the accelerating inflation is off. The acceleration is already occurring. And somewhere, early on, in the next administration, whether it is an Obama or McCain administration, the inflation rate could very well hit 20%, if the Federal Reserve continues to print money at double digit rates.

Oh and, one more thing, government bonds, which are 20 and 30 year obligations, are not magically "transformed" into risk bearing assets. I have no idea where Gross gets this notion.

When issued, such debt would either be bought by investors, thus crowding out the ability of corporations from raising private debt. Or, the Federal Reserve buys the debt by printing even more money, thus creating and even more serious inflation problem.

All in all, I have never before seen an investment letter that so completely lowers the stature of a high profile money manger.


The Logic That Forecasts A 2009 Terrorist Attack

Sen. Joe Lieberman I-Conn. says a terrorist attack in the Unted States is likely in 2009.

"Our enemies will test the new president early," Lieberman, I-Conn., told Face The Nation host Bob Schieffer. "Remember that the truck bombing of the World Trade Center happened in the first year of the Clinton administration. 9/11 happened in the first year of the Bush administration.


Sunday, June 29, 2008

Bank Of America Basically Wrote the Bank Mortgage Bailout Bill

In posts below we detailed the curious meetings between the Federal Reserve and private equity funds such as Carlyle Group, on the attempts to change banking regulations to make it easier for private equity funds to buy large chunks of banks. We wrote:

While we have no problem with free markets being allowed to operate, as we asked in our earlier post, what's all this "dialogue" between the Fed and Carlyle Group and other private equity funds about?... There's a few lessons to be learned here about how the power elite operate. First, they always take advantage of crisis to make a grab...[And]They always make things complicated.

Always be suspicious of "dialogue" between a regulator and the regulated. It usually ends up being a plot by the regulated to carve out some benefit.

Indeed, the mortgage crisis is turning into a feast for the well connected power elite to take advantage of the crisis atmosphere and use it for their own benefit. Not only is private equity attempting to grab the banks, but the elite banks are writing the mortgage bailout bill to their benefit. Where's my proof. Here's my proof. My comments on private equity attempting to grab banks is here, here and here. As for the power elite banks, consider:

It appears that Bank of America essentially wrote the bailout section of the Dodd-Shelby mortgage bailout bill. National Review Online obtained a copy of an internal Bank of America's 64 page “discussion document” on the Dodd-Shelby bill.

Stephen Spruiell at NRO writes:

Almost all of BofA’s preferences are mirrored in the Dodd-Shelby legislation. The BofA document even offers PR tips, such as “We believe that any intervention by the federal government will be acceptable only if it is not perceived as a bail-out of the bond market.”... the similarities between BofA’s ideal bill and the bill before the Senate are obvious even to the layperson — read the document, then read David C. John’s analysis of the bailout and see for yourself.

The bill itself, as would be expected, is totally to the benefit of the likes of Bank of America and Countrywide. (Bank of America agreed in January to buy Countrywide.) MrMortgage writes:

This $300 billion Dodd-Shelby bailout is an absolute crime. It bails out the banks by limiting their loss to 10%; a joke since many of the problem areas like CA are down as much as 30% already on the median in the past 12-months and the rate of acceleration of the price declines are picking up steam. The subprime crisis is nearly over and now Prime, Alt-A, Pay Option ARMs and Home Equity Lines/Loans are failing. If they get this $300 billion passed, another $1 trillion+ will have to come on its heels for all of the other bailouts.

This needs to be fought and/or vetoed or it’s potentially $300 billion of taxpayer money down the toilet.

Timothy Carney reports:

We call it the 'Bank of America bill on steroids.'" A House staffer told me that, demanding anonymity, but speaking on behalf of aides to GOP members of the House Financial Services Committee.

In Profile: Zhao Danyang

So who is Zhao Danyang, the man who paid $2.1 million to have lunch with Warren Buffett?

Mr. Zhao manages Pure Heart Asset Management, based in Hong Kong. He says he invests based on "logic and reviews of financial statements", but he told Euromoney that "...he has [also] sneaked into factories to talk directly to workers of a manufacturer, checked sell-by dates on bottles of pills to ascertain stock turn levels for a Chinese medicine company and even resorted to counting cars on the highways of a toll road operator."

The former consumer electronics factory owner is dong well as a fund manager. According to data supplied to us by Pure Heart Management.

In 2003, Pure Heart China Growth Investment Fund showed a return of 46.51% (versus 29.7% for the Hang Seng Index). In 2004, a return of 23.86% (versus 13.5% for the Hang Seng Index). In 2005, a return of 31.64% (versus 4.5% for the Hang Seng ndex). In 2006, a return of 141.75% (versus 34.2% for the Hang Seng index). In 2007 a return of 10.70% (versus 37.02% for the Hang Seng Index) and for the first 5 months of 2008, a decline of 9.70% (versus a declne of 7.4% in the Hang Seng Index).


Mr. Zhao claims to use "the spirit of the professional paparazzi" to probe deep into the companies he examines. He is dedicated to fundamental research and holds long term, with turnover that is below average for an institutional investor.

Pure Heart's web site states:

We may find ourselves standing at the starting point of a new era in the Chinese capital market when looking forward 30 years from now on this historical chapter. Pure Heart China Growth Investment fund will accompany you to reap the rewards from these changes.

Mr. Zhao graduated from Xiamen Universty in 1994. He received a Bachelors Degree in Systems Engineering. He began his career in the securities business in 1996.

He was invited by Guotai Junan (HK) Securites Ltd in 2002 to oversee the fund management of Pure Heart China Growth Investment Fund. Mr. Zhao is currently the General Manager of Pure Heart Asset Management Ltd., Pure Heart China Growth Investment Fund. He is also acting in the post of Chief Investment Officer of "ICBC Custody Trust", "Ping An I Unit Trust", "Ping An II Unit Trust", and "SZITIC Investment Trust" .

The Value of Connections

It is rare that you get to see an exact dollar price on the value of a connection, although connections can, of course, be very valuable. That's why leading government bureaucrats are so in demand by law firms and lobbyists. The bureaucrats can provide access to, as well as info on the methods of operation of, specific government agencies.

But the value of connections extends well beyond the corridors of Washington DC. What better example can there be than the recent auctioning off for charity of the opportunity to have lunch with Warren Buffett?

The winning bid: $2.1 million. Clearly, someone sees great value in connecting with Buffett.

Zhao Danyang of the Hong Kong-based Pureheart China Growth Investment Fund won the auction, which ended Friday evening with a bid of $2,110,100.

One Small Step For Immigration Reform, One Giant Leap For Single Men

Rep. Anthony Weiner, D-N.Y wants Congress to amend current visa rules to allow 1,000 foreign models into the United States each year under their own immigrant classification.

Greg Mankiw has the details.



Saturday, June 28, 2008

Quarles Goes Public With His Case for Allowing Private Equity to Buy Bank Stocks, Without Current Restrictions

Apparently the full court press is on. In addition to Bloomberg reports on the Carlyle Group talking to the Fed on "reforming" the restriction on limitations to the size of positions private equity funds can take in bank stocks, there's also an Op-Ed calling for the same.

Carlyle Group managing directors Oliver Sarkozy (half brother of French President Nicolas Sarkozy) and Randal Quarles are now aggressively promoting, very publicly, their reasons why private equity should be allowed to own major stakes in bank stocks.

While we have no problem with free markets being allowed to operate, as we asked in our earlier post, what's all this "dialogue" between the Fed and Carlyle Group and other private equity firms about? Only one sentence is required to remove the restrictions.

Further, Quarles continues to bring up the fact that public markets will not be able to provide the necessary funds the banking sector will need. Does this really mean that Quarles is angling to prevent public markets from investing at any new level that private equity funds will be allowed to invest at?

This has been an on going project for Quarles. His current argument is not any different from his argument during the luncheon I attended back in April.

See my report here.

See his recent WSJ Op-Ed piece here.

Note that the WSJ article identifies him as the former "under secretary of the Treasury for Domestic Finance in the Bush administration." More precisely, and importantly, he was the Treasury's coordinator to the President's Working Group on Financial Markets (aka, The Plunge Protection Team) But, of course, identifying him as such would add a new layer of mystery to the always mysterious operations of Carlyle.


Watching The Power Elite As They Grab Some Power and Money

Earlier this year, April 6, to be exact, I attended a luncheon meeting of the Washington D.C. National Economists Club. The guest speaker was Randal Quarels.

Quarles was former Under Secretary of the Treasury who led the Treasury Department’s effort in the coordination of the President’s Working Group on Financial Markets (aka, The Plunge Protection Team) and he is currently a Managing Director at Carlyle Group.

Plunge Protection Team coordinator? Managing Director at Carlyle Group? Folks, this is what is known as a major league insider.

At the time, I posted on the luncheon meeting and wrote in part:

In his talk, Quarles said that estimates go into the hundreds of billions in terms of capital that will be required by the financial industry because of losses sustained as a result of the current crisis. He said there will be more financial institutions that will go under in coming months.

He said that public markets will not supply the necessary funds because they don’t have the capabilities to study in detail the risks and potential rewards of the complex financials of financial institutions. He said private equity firms have the capabilities to do so and to supply the necessary funds. (N.B. Carlyle Group is a private equity firm).

Quarles stated that some changes in the structure of regulations that Paulson proposed were necessary but would take time to develop. He specifically stated that one regulation that needed to be changed is the limitation on the size of positions that non-banks can take in banks. (Note: Limitations in the size of non-banks positions in banks now limits Carlyle Group from taking large positions in banks).


It sounded to me like a power grab was being set up, and I titled my post:

Carlyle Group's Plan to Takeover the Banking Industry

Lo and behold, three months later Bloomberg is reporting that the Carlyle Group, and other private equity firms, have been meeting with the Federal Reserve to discuss removing limitations on the size of positions equity funds can take in banks.

Writes Craig Torres at Bloomberg:

Federal Reserve officials are reviewing regulations that limit investment firms' stakes in banks in an effort to channel more capital into the U.S. banking system....Fed officials have met with the Washington-based buyout fund Carlyle Group, spokeswoman Ellen Gonda confirmed. ``There is an ongoing dialogue,'' she said. ``It's not unusual for regulators to seek private sector input on policy.''

There's a few lessons to be learned here about how the power elite operate.

First, they always take advantage of crisis to make a grab. Notice how Quarles in his talk at the luncheon mentions Treasury Secretary Paulson's call for reform in financial regulation and structures.

Of course, Paulson made his comments about financial reform under the guise of changing things because of the current mortgage crisis. Nowhere did Paulson specifically state, "As part of this reform we are going to allow private equity funds, such as Carlyle Group, to buy bigger stakes in banks."

Quarles at the luncheon also mentioned that he picked the topic of financial reform way back in January. So we now have something of a timeline. Quarles had financial reform on his mind in January. Thus, one can assume, with a large degree of confidence, that the plotting was certainly going on at Carlyle back then. Paulson doesn't come out with a speech about the need for financial reform until late March. And, viola, here we are in late June and meetings between the Fed and the Carlyle Group are leaked to the press.

Which brings us to point two, of how the elite operate. They always make things complicated. Just what exactly are the Fed and Carlyle Group meeting about? It's "an ongoing dialogue" says the Carlyle Group.

If the Fed simply wanted to increase the amount of capital that banks could take from any one investor or investor group, the problem is fairly simple and could be solved with a Fed statement as follows:

Restrictions are hereby removed that prevent investors from increasing their stake in a financial institution above a specified level.

or

Restrictions on what individual investors or investor groups can invest in a financial institution have been increased to X.

Anytime a regulation is more than one sentence long, special interests are carving up little slivers for themselves and putting up barriers to entry that make it difficult or impossible for others to play the game.

The barriers to entry come in the form of complex regulations that require teams of lawyers to understand. Unless, of course, you are "in dialogue" with the regulators and help design the regulations so you know where the loopholes are, and in fact probably suggested some of them.

Taking advantage of crisis and making things complex is how the elite play. The current crisis is the mortgage crisis. They are taking advantage of the crisis to sweep up and buy into banks on the cheap, and they are sitting in a conference room with the Fed to create regulations so onerous that only the elite will be able to play.

When do you as an individual investor come in? Three to five years down the road when the banks stocks are prettied up and sold to the public at a price somewhere between 5 to 20 times what the elite paid for them.




What's Behind The Oil Price Climb?

Stefan M.I. Karlsson provides a thorough analysis of the oil markets in a column at LRC, today. He explains what is causing the current spike in oil prices, including a great analysis of why speculators are not the cause of the current price spike in oil.

My only slight quibble with Karlsson is that he seems to put a bit more emphasis on new demand factors, then on the Federal Reserve's monetary policy, for the spike in oil. He certainly mentions the money supply factor, I just think it should have been emphasised a bit more, given the seeming across the board hikes in commodity prices--which, to me, is an indication of a strong monetary influence.

Karlsson's column is here:

http://www.lewrockwell.com/orig6/karlsson9.html



No Apparent Inflation Concerns Displayed In Newest Fed Member's Significant Stock Portfolio

The U.S. Senate on Friday confirmed former Virginia bank executive Elizabeth "Betsy" Duke to the Federal Reserve Board.

Duke began her banking career as a part-time teller, helped organize a Virginia Beach community bank and later served as its chief executive officer. She also worked on mergers while an executive vice president of Wachovia Bank and was the first woman to chair the American Bankers Association. She was also at one time a director of the Federal Reserve Bank of Richmond.

Her disclosure statement for 2007 suggests that she didn't have any inflation fears, given the stock positions she held.

Although she maintained a number of money market funds, checking accounts, savings accounts and mutual funds, she also held over 50 stocks in her portfolio, 8 were banks stocks, including Wells Fargo, Wachovia, Bank America and Bank of Hawaii. She was apparently bullish on the overall market as she held a position worth more than $1 million in the Vanguard Index Trust 500 Fund.

Her total net worth is somewhere between $8 million and $35 million, according to the filing. Other stocks in her portfolio included Harley-Davidson, Harrah's Entertainment, Nike Class B, and Sirius Satellite Radio. She apparently had no major inflation concerns. Outside of a minor position in Exxon-Mobil, she held no stocks that would be clear beneficiaries of inflation. No gold stocks for this new Fed member.

Wednesday, June 25, 2008

Federal Reserve Maintains Inflationary Stance On Interest Rates

Below is the Federal Reserve announcement stating that they will keep the Federal Funds at a target rate of 2%. At this interest rate level, M2NSA money supply is growing at a rate of around 10%. Thus, by the Fed keeping interest rates steady at this level, the Fed will most assuredly be required to continue to increase the money supply at the 10% growth rate, if not faster. Only Richard Fisher appears to be any kind of an inflation hawk, as he voted against
the current target rate, and wanted a higher rate
:

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.

Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.

The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was
Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.

Friday, June 20, 2008

House Passes War Funding Bll

The House has passed a $162 billion war funding bill.

The bill will bring to more than $650 billion the amount provided by Congress for the war in Iraq since it started five years ago. Nearly $200 billion in additional funding has gone to operations in Afghanistan, according to congressional analysts.

A new GI Bll was attached and a 13-week extension of unemployment checks for those whose benefits have run out.

The new GI Bill essentially would guarantee a full scholarship at any in-state public university, along with a monthly housing stipend, for people who serve in the military for at least three years. It is aimed at replicating the benefits awarded veterans of World War II and more than doubles the value of the benefit — from $40,000 today to $90,000.

Swiss Banker to Talk.....and Talk

A former private banker for the Swiss giant UBS pleaded guilty in Federal District Court on Thursday to a charge of helping a wealthy American real estate developer evade taxes on $200 million.

The former banker, Bradley C. Birkenfeld, in his plea, also agreed to cooperate with prosecutors in a widening investigation of the bank’s practices and its clients.

Mr. Birkenfeld, 43, was accused of helping the developer, who has been identified as Igor Olenicoff, hide more than $200 million in accounts in Switzerland and Liechtenstein. But Birkenfeld had “numerous” other American clients, according to his lawyer, Danny Onorato.

In a seven-page statement of facts, Birkenfeld described some of the tactics of the private banking trade. On one occasion, according to the court document, Mr. Birkenfeld, at the request of an unidentified American client, bought diamonds using the client’s Swiss bank account and then smuggled them into the United States in a toothpaste tube. UBS trained its private bankers traveling to the United States to tell customs authorities that the trip was for pleasure, not business, according to the court papers.

He said that he and other unidentified UBS private bankers urged their American clients to destroy all offshore private banking records held in the United States; to use Swiss credit cards that could not be discovered by American tax authorities; and to falsely characterize money pulled out of Swiss accounts as loans from UBS. The entire business brought in $200 million a year in revenues to UBS.

Thursday, June 19, 2008

Fed's Yellen Sees Signs of Recovery, But Conditons Not Normal

Always keep an eye out for comments from San Francisco Fed President Janet Yellen. She never rocks the boat and always tows the line. If you want to really know what Bernanke is thinking, Yellen will channel his thoughts.

This morning she spoke at an Asian banking conference in San Francisco and said that:

While there have been glimmers of hope that strains in our markets may be easing, conditions are still not normal...

Translation: The Fed is in no hurry to battle inflation and raise rates aggressively.

Let The Show Trial Begin!

Billions upon billions in mortgage losses, and the Feds bust these two poor saps, Matthew Tannin and Ralph R. Cioffi--subprime fund managers at the defunct Bear Stearns....














While the real criminals, Alan Greenspan and Ben Bernanke, get away...


...and the counterfeiting, that will really take out the middle class, goes on to this day!



Last look Bernanke is printing new money (M2NSA) at a 10.0% plus rate...and you wonder why prices are climbing? When the inflation rate hits 20%, and it will, can you imagine the price collusion show trials we will have?

To the execs reading this blog, keep in mind what the show trial expert of all-time, Eliot Spitzer, said, before he got busted for his own (heh, heh) private shows:

Never write when you can talk. Never talk when you can nod. And never put anything in an e-mail.

Wednesday, June 18, 2008

Obama Comes Out Against Technology,Yet Wants to Manage and Spur On Government Involvement In Technology Research

The man lives in a world of mirrors.

"...the combination of globalization and technology and automation all weaken the position of workers," Barack Obama tells WSJ in an interview.

But, Obama wants to take corporate tax money and have the government invest it in technology:

You might undoubtedly get to a point where the capital gain and dividend taxes are so high that they distort investment decisions and you're weaker economically. But you know if you've got a sensible policy that says, we're going to capture some of the nation's economic growth … and reinvest it in things we know have to be done, like science and technology research or fixing our energy policy, and then that is actually going to be a spur to productivity and not an inhibitor.


Then he just disses free markets and comes out in favor of controlling the investment stream himself by adopting, get this, the "CIA model":

I have identified one gap that I think has to be filled, and that is the step between discovery and commercialization. You have this point in time where things haven't quite taken off yet and still entail huge risks. A lot of ventures may not want to get involved in that middle stage. They like the early stage, but if it doesn't take off right away, then oftentimes, innovation stalls. The model I'm looking at the model the CIA put into place in Quintella. But it basically partnered with the private sector to help subsidize investment in socially productive activities, but with an aim towards commercialization as well.

Obama's desire to subsidize private sector operations in "socially productive activities" is simply and indication that Obama does not understand how free markets work, but, further, his willingness to seek out new technologies seems to fly in the face of his statement that "technology weakens the position of workers." If this is so, why does Obama want to subsidize technological innovation? Me thinks, Obama go round'n circles.

Tuesday, June 17, 2008

How To Monitor The Economy

This column is not about theory. It is about the practical methods of observing the economy. Obviously, the more you understand correct theory, such as business cycle theory, the more meaningful will be the data you observe.

Data about the economy can be segmented into the three separate categories, market price data, non-price raw data and processed data.

Each of these three categories offers different insights about the economy,some more valuable than others.

The key to understanding an economy is to monitor as much data as possible, not in the sense of creating "economic models" that spit out forecasts that fail to account for the complex ever changing nature of the economy, but by looking at the minutiae of economic data so that you can begin to understand what is really going on.

We have significant disagreements with the theoretical economic beliefs of Alan Greenspan, but he gets it right when he studies the minutiae.

The most valuable information about the economy comes from actual market price data. Market price data is unique in that it is not "assembled" data, but is the data of actual pricing going on in the markets. Watching actual prices results in receiving pure data untouched by human hands.

By watching actual prices, one can often notice trends in the economy that are not broadly acknowledged. For example, the price of the dollar vis a vis other currencies is for all practical purposes in an early stage free fall. Over the last five years the dollar is down against most currencies by greater than 30%. There is scant media coverage of this free fall, but by watching actual prices, this trend becomes obvious. Likewise, watching actual prices will clue the individual watching the economy to, for example, the current rising costs of many goods including wheat, gold and oil.

Watching interest rates can also clue the observer in, as to when the Fed is in a easing mode. If short-term interest rates are lower than long-term rates, then the Fed is in an accommodative mode because banks can profitably borrow short-term and lend long-term.

The more prices you watch, the more you will understand about the economy.

After market prices, the best source for information about the economy is raw data. In the raw data camp, we put such items as auto sales, newspaper advertising, money supply numbers etc. This information, often on an industry by industry basis, or better yet when it is obtained on a company by company basis, generally is private sector data.

If one watches the data minutiae in news releases by various corporations,one will began to understand what is occurring in the economy: if sales of autos are up or down, if layoff announcements are spreading across a broad spectrum of industries, or are limited to a specific sector such as the subprime industry, if money raised in the securities markets is increasing or decreasing.

The more raw data you watch, the more you will understand about the economy.

But, because this data is assembled data, there is the possibility of human error or distortion. A particular industry group may have incentive to assemble data in a way that benefits its agenda. Thus this data is not as pure as market price data and the more "assembled" it is, the more one has to be careful for distortions.

Government data and industry association data both have the potential to be finessed. Specific company data may sometimes be finessed but because there are so many separate data points when looking at a multitude of individual company pieces of data, an outlier piece of data will be more quickly spotted. With association and government data, the data is already assembled so even that check of looking at individual pieces of data is gone.

Money supply data assembled by the Federal Reserve appears to be data that is fairly accurate, but the further one travels from the United States the more one has to be careful of even central bank data.

In his book, The Age of Turbulence, Greenspan relates this story about the
Fed's dealing with the Asian currency crisis of 1997:

Korea's central bank was sitting on $25 billion in dollar reserves--ample protection against the Asian contagion, or so we thought.

What we didn't know, but soon discovered, was that the government had played games with those reserves. It had quietly sold or lent most of the dollars to South Korean commercial banks, which in turn had used them to shore up bad loans. So when Charlie Siegman, one of our top international economists, phoned a Korean central banker on Thanksgving weekend and asked, "Why don't you release more reserves?" the banker answered, "We don't have any." What they'd published as reserves has already been
spoken for.


The third category of data is processed data, this is data that is not only assembled, but assumptions are added because of lack of raw data. Most often this data comes from government and includes such data as price indexes, unemployment figures, gross domestic product numbers and productivity numbers. In addition to being extremely dangerous data because of assumptions that are made to create the data, there is also, for some of the data, political pressure to finesse the data. Of all the data, we find the processed data to be the least useful data in getting a true grip on the economy. Unfortunately, it is some of the most widely followed data,
which thus causes it to be important data in the sense that markets will react to it on a short-term basis--even though it is probably the least reliable information about the economy.

In most situations, this data is skewed to a positive reading on the economy, but during a period of the 1990's productivity numbers were actually skewed dramatically negative. This probably happened because not as many eyes are focused on productivity numbers as they are on, say,inflation numbers or employment numbers. No one put pressure on the productivity people to make them more positive--or, for that matter, to notice how out of whack they were with true productivity gains in the
economy.

Greenspan, however, spotted the inaccuracies in the numbers. He caught this because of his detailed studies of economic numbers. He tells the story in his book:

The data we were getting from the Commerce and Labor departments showed that productivity (measured as output per hour worked) was virtually flat in spite of the long-running trend toward computerization. Icould not imagine how that could be. Year in and year out, business had been pouring vast amounts of money into desktop computers, servers,networks. software, and other high-tech gear...This became evident as early as 1993 when new orders for high-tech capital began to accelerate after a protracted period of sluggish growth. The surge continued into 1994suggesting that the early profit experience with the new equipment had been positive.

There were other, even more persuasive indications that the official productivity numbers were awry. Most companies were reporting rising profit margins. Yet few had raised prices. That meant their costs per unit of output were contained or even falling. Most consolidated costs (that is, for business considered as a whole) are labor costs. So if labor costs per unit of output were flat or declining, and the rate of growth of average hourly compensation was rising, it was an arithmetical certainty, that if these data were accurate, the growth of output per hour must be on the rise; productivity was truly accelerating.


Bottom line, the statistics gatherers and econometricians at the Commerce and Labor departments missed the productivity gains of the personal computer!

Recent examples of problems with processed government data include consumer price index data and unemployment data.

Bloomberg's John F. Wasik had this to say about CPI numbers:

The U.S. consumer price index continues to be a testament to the art of economic spin.

Since wages, Social Security cost-of-living increases and some agency budgets are tied to it, the government has a vested interest in keeping it as low as possible.

Yet your real cost of living -- what you keep after taxes, medical bills, college expenses and other household costs -- is probably much higher than the 2 percent annual rate the government reported in July, showing a slight decline.... The single-largest expense for most Americans is housing, accounting for as much as a third of household outlays. Yet the Labor Department's Bureau of Labor Statistics only tracks ``owner's equivalent rent,'' or what a home would yield if it was rented out. Rental units and homes are two very different animals, though, and the government casts a
blind eye to total home ownership expenses.


Most recently, CPI numbers have been declining, because of lower energy costs over the past three months. Anyone watching real price data knows this won't last given that oil is trading at all-time highs! But the CPI distortions continue.

As far as unemployment numbers, on September 7 we commented on the much weaker than expected payroll numbers released at the time:

An odd outlier was employment in local government education which fell by 32,000 in August, as seasonal hiring was less than usual. This unusual education jobs number accounted for approximately 30% of the difference between consensus forecasts and the actual payroll number. This would be the first time in history that a recession was led by summer school teachers!

Almost a month later, with the masses looking for the next distorted piece of government data, WSJ comments on the outlier we discussed on the day of the release:

Many economists suspect the drop in August payrolls was exaggerated by a fluky fall in local government payrolls, and new data from the Bureau of Labor Statistics supports that.

On Tuesday the BLS released state payroll data for August. If you sum up the changes across the 50 states and the District of Columbia, the total rose 159,000, compared to the decline of 4,000 in the national data.

That doesn’t mean the national tally is wrong; sum-of-the-states data are hampered by differing response rates by states and the fact the BLS seasonally adjusts each state separately, notes Ray Stone of Stone&
McCarthy Research Associates.

That said, he says the difference is unusually large. In part that may simply be catchup, since the sum of the states total has lagged the national total for some time. But he says the principal source of divergence in August appears to be in government payrolls. The national tally of government jobs fell 28,000, while the sum-of-the-states tally rose 88,000.

Mr. Stone takes this as evidence that the national data have been distorted by quirky seasonal adjustment, which is made difficult by “the timing issues
surrounding academic years, and the inconsistency in how teachers are paid over the summer. Some get paid on a 12-month basis, others on a 9- or 10- month basis. Any shift from year to year in the relative incidence of “months-paid” will play havoc with the seasonally adjusted teacher payrolls.”


In short, prices are prices, they are the most accurate data out there. Raw data is the second most valuable data, the closer to the source the better. Government processed data not only suffers from political pressures but also faces the difficulty of being assembled data where assumptions are made about all sorts of things, from the quality of product from period to period, to estimates on data not yet received, to seasonal adjustment factors which can greatly impact final data.

The fact that the media, investors and traders focus on the processed data provides an edge to any trader or businessman willing to do the work and look at real prices and raw data. The real prices, raw data minutiae observations, we'll call it the Greenspan Approach, is conducted in depth by very few. There are literally millions of prices and raw data out there that no one is looking at from an analytical perspective. There is room for industry specific analytical economists to do this work and also for economists at the national and international macro-economic level to do so. All that needs to be done is for economists to throw away their near useless processing equations, take a look at the economy from a non-processed framework, and use the Greenspan Approach of just looking at and studying the
minutiae.

In The Age of Turbulence, Greenspan explains the philosophy of the
approach this way:

I have always argued that an up-to-date set of the most detailed estimates for the latest available quarter is far more useful for forecasting accuracy than a more sophisticated model structure.

The fact that this, Greenspan Approach, is not being used, and that most economists tend to build forecasting model structures which suck the life out of data, indicates that true analytical work on the economy is still in its infancy.

Thursday, June 12, 2008

Barack Obama Site Puts Michelle Obama at the Scene of the "Crime"

Barack Obama has set up a web site, Fight the Smears, in an attempt to discredit various rumors circulating on the internet about Obama. One of the rumors circulating is that, in a rant, Michelle Obama in the summer of 2004 used the word 'whitey' and blamed the ills of African-Americans on 'whitey'.

In an attempt, at his Fight the Smears web site, to refute the 'whitey' charge, Barack Obama may have inadvertently provided a bit more evidence to prove the case by putting Michelle at the scene of the "crime".

At his, Fight the Smears, web site Obama charges that the following statement is a lie:


The Michelle Obama Rant Tape was filmed between June 26th - July 1st 2004in Chicago, IL at the Rainbow/PUSH Coalition Conference at Trinity United Church:
specifically the Women’s Event



Indeed, the event was held at the Chicago Sheraton, not at Trinity United Church.

BUT, the site goes on to say:


Michelle Obama was not on a panel... at the Sheraton.


It then links to a schedule of the event that shows Michelle Obama WAS on a panel at the event, or at least a "special guest” which certainly suggests the possibility of a speaking role, especially since two television personalities are MC’s. What are they Master of Ceremonies of ?...

From the schedule on Monday June 28:


12:00p.m ~ 2:00p.m.SHERATON BALLROOM 1-7


Womans Luncheon

M.C.’s: Cheryl Burton and Karen Jordan, ABC 7

Keynote Speaker: Reverend Jesse L. Jackson,
Sr.

Special Guests:
Shoshana Johnson, Retired United States Military

Michelle Obama, University of Chicago

Tuesday, June 10, 2008

Obama Names Jason Furman As Economic Policy Director

Barack Obama today named Jason Furman as economic policy director, in an annoucement coming from the campaign.

A quick perusal of his writings, and you can only reach the conclusion that Furman doesn’t have a clue. There is no indication he understands business cycle theory or fears inflation. In fact, it appears he believes the economy can be micromanaged by government, while at the same time he is a Keynesian and an inflationary monetarist.

In the following quote, Furman manages to come off as a Keynesian and inflationary monetarist in the same sentence!

The good news is that the rate cuts will have a big effect on the economy — leading economic forecasters are predicting that the rebate checks and other stimulus measures will add about 0.7% to real GDP.

And once the fiscal and monetary madness makes everything fine, according to Furman, he is going to solve all the rest of government created problems with more government programs:

When the economy does start growing more strongly again, we should use that as an opportunity to focus on some of the long-run growth issues…We should also focus on reforming unemployment insurance, health insurance and taxation in ways that automatically reduce the severity of business cycles and, more important, cushion families from some of the worst downsides of those business cycles.

"Reforming unemployment and health insurance …in ways that can reduce the severity of business cycles” is a new one for me. What does health insurance have to do with the business cycle?

The man doesn’t have a clue, except when it come to understanding the con. He gets that:

…policymakers from both political parties have also been attracted to using the tax code for health reform because of the perception that the public prefers measures described as “tax cuts” to substantively similar measures that are treated in budgetary conventions as “spending increases.”

Monday, June 9, 2008

So Just How Did ‘Core Inflation’ Come About?

‘Core inflation’ takes food and energy out of the inflation index. Many mainstream economists and Fed members pray at the ‘core inflation’ altar. So what economist came up with the wacky notion. Was it some Einstein type creating a concept that few other earthlings can understand? No.

‘Core inflation’ was created at the behest of Tricky Dick, himself, Richard Nixon.

Kevin Phillips, a political and economic commentator for more than three decades and onetime Nixon strategist, reports that President Richard Nixon asked his Federal Reserve chairman, Arthur Burns, to concoct a new inflation number that would be split off from traditional headline CPI, dubbed “core” inflation—and thus make inflation look less threatening.

Writes Phillips:
Richard Nixon, besides continuing the unified budget, developed his own taste for statistical improvement. He proposed albeit unsuccessfully—that the Labor Department, which prepared both seasonally adjusted and non-adjusted unemployment numbers, should just publish whichever number was lower. In a more consequential move, he asked his second Federal Reserve chairman, Arthur Burns,to develop what became an ultimately famous division between "core" inflation and headline inflation. It the Consumer Price Index was calculated by tracking a bundle of prices, so-called core inflation would simply exclude, because of "volatility," categories that happened to he troublesome: at that time, food and energy. Core inflation could be spotlighted when the headline number was embarrassing, as it was in 1973 and 1974. (The economic commentator Barry Ritholtz has joked that core inflation is better called "inflation ex-inflation"—i.e., inflation after the inflation has been excluded.)
But, they all mess around with the numbers

In 1983, Phillips says the Reagan administration monkeyed around even more with inflation data, when the Bureau of Labor Statistics decided that housing, too, was overstating CPI.

Phillips says in the 1990s, the CPI has been subjected to three other adjustments, all delivering a downward bias and all dubious:

*Product substitution: If flank steak gets too expensive, people are assumed to shift to hamburger, but nobody is assumed to move up to filet mignon, he says;

*Geometric weighting: Goods and services in which costs are rising most rapidly get a lower weighting for a presumed reduction in consumption

*And, most strangely, hedonic adjustment: An unusual bit of monkeyshines by which the government says that product improvements in things like computers, cell phones or television actually amount to a reduction in price, so a $2000 laptop with a built in camera is less expensive than a $1500 laptop without one.

Under Bill Clinton, Phillips says, the nation’s employment figures were massaged.

In 1994, the Bureau of Labor Statistics redefined the work force to include only that small percentage of what it called “discouraged workers” who had been seeking work for less than a year, Phillips says. The longer-term “discouraged”-some 4m U.S. adults who simply are not working-fell out of the main monthly tally. Some now call them the “hidden unemployed.”

-RW

Friday, June 6, 2008

Can You Know an Economist By The Redistributionist Commies He Supports For President?

The following is a list compiled by Economists for Obama, of Obama supporters:

Economic policy advisors:

Austan Goolsbee (chief advisor), University of Chicago tax policy expert
Karen Kornbluh (policy director)
Jeff Liebman, Harvard welfare expert
David Cutler, Harvard health policy expert
Michael Froman, Citigroup executive
David Romer, Berkeley macroeconomist
Christina Romer, Berkeley economic historian
Richard Thaler, University of Chicago behavioral finance expert

Other economists who support Obama:

Paul Volcker, Chairman of the Federal Reserve 1979-1987
Brad Delong, Berkeley macroeconomist
Joseph Stiglitz, 2001 Nobel laureate
Edmund Phelps, 2006 Nobel laureate
Ray Fair, Yale macroeconomist

Prominent finance people who support Obama:

(not technically economists)
William Donaldson, Securities and Exchange Commission (SEC) Chair 2003-05
Arthur Levitt, SEC chair 1993-2001
David Ruder, SEC chair 1987-1989

The heavy Berkeley influence doesn’t come as any surprise, but what is a Citigroup exec doing on the list? Et tu, Paul Volcker?

Tons of SEC chairmen are big Obama supporters. SEC chairmen who have increased securities regulation from chairman to chairman but never managed to nip an Enron or a housing securitization crisis,before they exploded into national crises.Strikes me a lot as to what an Obama Administration might look like: Lots of regulation and no success at solving any problems.

Wednesday, June 4, 2008

Bernanke Tells Harvard: Things Are Different This Time

Federal Reserve Chairman Ben Bernanke ’75 spoke to Harvard College’s graduating class today in Tercentanary Theatre at Harvard.

Bernanke spoke to the class about the year 1975, the year he graduated from Harvard. He told the class:

Then as now, we were experiencing a serious oil price shock, sharply rising prices for food and other commodities, and subpar economic growth. But I see the differences between the economy of 1975 and the economy of 2008 as more telling than the similarities.

Oh yeah, they are different alright.

Bernanke again:

Economists generally agree that monetary policy performed poorly during this period. In part, this was because policymakers, in choosing what they believed to be the appropriate setting for monetary policy

Sure, it is real different this time, for the worse. In 1975 money supply (M2) grew at 8.0%, today it is growing at 10.2%.

Bernanke again:

For a central banker, a particularly critical difference between then and now is what has happened to inflation and inflation expectations. The overall inflation rate has averaged about 3-1/2 percent over the past four quarters, significantly higher than we would like but much less than the double-digit rates that inflation reached in the mid-1970s and then again in 1980.

The inflation rate in 1975 was 9.0%. According to John Williams at Shadow Government Statistics, if you calculated the inflation rate now, the same way it was calculated in 1975, the CPI is near 12% this year.

Bernanke then had the chutzpah to add:

The Federal Reserve and other central banks have learned the lessons of the 1970s… as a central banker, I would be remiss if I failed to mention the contribution of monetary policy to the improved productivity performance.