Nassim Nicholas Taleb Fires Back

The Nassim Nicholas Taleb controversy won't stop and is being picked up by more and more news outlets. The latest news in the controversy is a response from Taleb that he attempted to correct the error about billions in profit, and charging his "enemies" as being "very, very stupid."

He posts an amplified yellow "sticky note" on the GQ story he features at his site, it now reads:

Note that NUMBERS are wrong. This is not a business/finance, but a philosophy article written by Will Self. So read the article for its ideas. Janet Tavakoli used the errors as a platform for her (failed) smear campaign.

I have very, very stupid enemies. The correspondence with GQ reporting errors was (before publication) was send (sic) to Felix Salmon.

The emails he refers to are reproduced below:

From: nassim nicholas taleb
Date: December 17, 2008 7:40:55 AM EST
To: Will Self
Subject:Re: From Will Self
Hello there (from Los Angeles airport). Thanks a million. I cannot interfere with the content, only to correct some minor facts.There are some potential problems with the numbers like the 20 billion, half a billion, etc. that may lead to confusion.
Also I am trying to add my middle name whenever possible to avoid confusing the byline.
I will read again on plane and send clarifications about the numbers.
Ciao.
BTW it was great seeing you.


From:nassim nicholas taleb
Date: December 17, 2008 6:13:44 PM EST
To:Will Self
Re: From Will Self
Here is what I found.

1- “when they went to the wall we made $20 billion for our clients, half a billion for the Black Swan fund.
“when they went to the wall we made almost half a billion for the Black Swan funds.”

2- “Mean variants” “mean-variance”

I will give it a second reading.
Thanks again.
Ciao,
Nassim

It is interesting to note that Taleb also requested that his middle name, Nicholas, be used in the article by GQ and that was not corrected either.

Here's what appears to have gone down. As you can note, Taleb's first email to Will Self is very cautious, and almost leaglistic. It is a sign of someone who does not want to get in trouble with legal authorities, by the second email it is clear he is attempting to correct errors that Self has in the article.

Self obviously didn't correct anything. An article done is done, I guess.

Tavakoli reads the article and the uncorrected $20 billion in profits number jumps out at her. As I have pointed out before, she is a numbers person. She publicly highlights the problem, when she doesn't receive a response from Taleb. What else is she supposed to do?

Why wouldn't Taleb respond to an inquiry from Tavakoli, a professional finance person and writer? Who knows? Perhaps Taleb will explain at some point.

In any case, Taleb's lack of response did look suspicious. In truth, it turns out that Taleb was probably protecting Will Self, who did write a passable profile of Taleb (Failed billion dollar errors excepted!). This would also explain Taleb's early nebulous defense of how the $20 billion remained in the story. Finally, the heat got too intense for Taleb and he threw Will Self under the bus.

There is no "smear campaign", Tavakoli followed a decent lead and Taleb was playing cat and mouse so that he wouldn't hurt the man who said so many nice things about him.

Bottom line. Taleb acted as though he is very needy, needs people to say very nice things about him, and very, very stupidly attempted to protect the man who said a few passable nice things about him.

There is a lesson here about dealing with Janet Tavakoli, also. Don't be very,very stupid and not answer her questions when she contacts you about numbers. She will eventually smoke the truth out of you. Just ask Nassim Nicholas Taleb.

UPDATE: In reviewing Tavakoli's columns on Taleb, I note that Taleb did respond to her email. She wrote:

I checked with Nassim Taleb regarding the $20 billion in gains and asked if he were misquoted. He responded via email: "The quote is inaccurate. THe [sic] 20 billion might correspond to the face value of positions." This response is both vague and different in character from the mythical $20 billion in gains inaccurately quoted in GQ’s article.

The point remains that the response as Tavakoli states is vague, as though it is a bother for Taleb to have to respond to Tavakoli. Taleb could have nipped the entire controversy in the bud, by simply writing, "I noticed the error in a draft copy that was sent to me by Will Self and emailed him a correction. Why it wasn't corrected is not clear to me." Again, the only explanation for the cat and mouse game seems to be to protect Will Self.

Ludwig von Mises On the Formation of the Mont Pelerin Society

I recently came across a copy of a private paper written by Ludwig von Mises in 1946, and titled, Observations On Professor Hayek's Plan. "The Plan" was the formation of what has become the Mont Pelerin Society. The paper is archived at Grove City College.

The paper is only 3 and 1/2 pages long but contains many interesting nuggets.

First, I have seen more than once the statement that Murray Rothbard advanced Misesian theory by pointing out that only governments can create monopolies. Not to take anything away from the genius that Rothbard was, but Mises wrote this paper in 1946, and it is there in black and white, Mises comes pretty close to saying the same thing. He writes in the paper "Not the unhampered market, but the governments foster monopolization."

It is also obvious in the paper that Mises is very concerned about bringing into Hayek's proposed organization those who are willing to compromise with the "foes of liberty." Mises calls them, "frightened intellectuals."

He further writes (Mises emphasis): "The practical politician must take into account the voters' reaction to his program if he wants to succeed in the short run. He must compromise. But the intellectual pioneer of a better world is not restricted by the concerns of Realpolitik. His program must be a sound program that triumphs in the long run. "

Mises sees that bringing in compromisers is a problem with Hayek's plan. Mises writes (Mises emphasis):

The weak point in Professor Hayek's plan is that it relies upon the cooperation of many men who are known for their endorsement of interventionism. It is necessary to clarify this before the meeting starts. As I understand the plan, it is not the task of this meeting to discuss anew whether or not a government decree or a union dictate has the power to raise the standard of living of the masses. If somebody wants to discuss these problems, there is no need for him to make a pilgrimage to Mont Pelerin. He can find in his neighborhood ample opportunity to do so.

Clearly, Mises saw trouble. Thus, when Mises stormed out at one point during part of the founding meeting of the Mont Pelerin Society in 1947, saying: “You’re all a bunch of socialists,” this action can be seen in better perspective.

It wasn't a spur of the moment action of a hot head, as is sometimes implied. It was the response of a careful thinking scholar who was concerned that the organization would fall under the influence of "frightened intellectuals."

It turns out Mises fears were well justified, see DiLorenzo.

UPDATE

The paper is now online here (pdf).

On the Decline in Consumer Confidence

The Conference Board Consumer Confidence Index, which had improved considerably in May, retreated in June. The Index now stands at 49.3 (1985=100), down from 54.8 in May. The Present Situation Index decreased to 24.8 from 29.7. The Expectations Index declined to 65.5 from 71.5 in May.

The Consumer Confidence Survey is based on a representative sample of 5,000 U.S. households. It is considered a leading indicator. I see it more as a late leader or an early concurrent, mostly because I don't buy the Keynesian theory behind it as a leading indicator, and see it more as reflecting current conditions. That said, the current dramatic drop leads one to ask what is going on in the economy that there has been such a swing in household views on the economy? If Bernanke was still pumping money at double digit rates, I would blow this dip off as possibly one month of statistical noise. However, with Fed tightening, I am leaning toward considering it as more significant and signalling that Bernanke's recent money growth slowdown is having an impact in the hinterland.

This suggests more negative shocks. in the not too distant future, across the economy.

Beating Up On Krugman

It turns out that Greg Mankiw's punch out of Paul Krugman was just the start of a major tag team match. Bob Murphy comes in with a body slam charging Krugman with being a big bluffer. Murphy then tags Bryan Caplan, Scott Sumner and then David R. Henderson, who have a go at Krugman. Finally fans in the stands are throwing chairs at Krugman, i.e., Presto Pundit's posts in Murphy's comment section shouldn't be ignored, either.

Soros, One Step Behind

Billionaire investor George Soros today predicted a "stop-go" economy for the United States, saying fears of inflation will drive up interest rates and choke off growth.

"As markets revive, fear of inflation will drive up interest rates, which will choke off recovery," he said at a breakfast hosted by WSJ.

This says two things about Soros. He is just pretty much a trend watcher and he doesn't watch money supply.

Although a lot of indicators continue to signal an upturn in the economy, this is the result of earlier Fed money printing. For the last three months the aggressive money printing has stopped, so rather than stop and go, right now, we are headed for a stall, and, if Bernanke persists with slow money printing, a second crash. The price inflation fears will subside (except at the consumer level.)

Welcome to...

...the person who searched for "Maria Bartiromo barefoot" and found EPJ.

Free Carbon Trading Seminar Today

Patsystems, which provides tailored solutions, built from modular components, to enhance derivatives trading performance and trade processing, will clearly get into the carbon trading gold rush.

They and Eurex will host a one-hour webinar explaining how you can also. The seminar will feature Jim Kharouf, editor for the Environmental Markets Newsletter. Kharouf will provide a comprehensive presentation on the current events in the U.S. carbon market and answer emissions questions. You'll also learn about the Eurex carbon emissions futures contracts.

Details are here.

A Debt for Nature Swap?

I am not making this up. But, after you look past the smoke, it's just the US government paying banks money instead of foreign governments that originally took on the debt.

Here are the details.

The Treasury has just announced that the United States and Indonesia, together with two environmental NGOs, Conservation International and Yayasan Keanekaragaman Hayati Indonesia have signed agreements for the largest debt-for-nature swap under the Tropical Forest Conservation Act (TFCA) since its passage in 1998. The agreements will reduce Indonesia’s debt payments to the United States by nearly $30 million over the next eight years. In return, the Government of Indonesia has committed these funds to support grants to protect and restore the country’s tropical forests.

According to the Treasury, the Indonesia agreement marks the 15th TFCA deal, following agreements with Bangladesh, Belize, Botswana, Colombia, Costa Rica, El Salvador, Guatemala, Jamaica, Panama (two agreements), Paraguay, Peru (two agreements) and the Philippines.

An Economist's Divorce Clause

When the economist Robert Lucas divorced in 1988, his ex-wife, Rita Lucas, had a clause placed in their divorce settlement that stipulated she would receive half of any Nobel Prize money won by Lucas during the next seven years. When Lucas did win the Nobel Prize in 1995, she was awarded half of the prize money

Dangerous Malinvestment in China

An Austrian sounding analysis of the current state of the economy in China, from Edward Harrison:

Late last year, I predicted that China, as a major exporter to the West, would feel a huge impact from the meltdown in the global economy, taking it’s growth rate down to 2% (See Top ten predictions for the 2009 global economy). Forgetting about the fact that data are highly suspect in China, I see that prediction as very unlikely to come true due to huge fiscal stimulus in China. The Chinese government is very much wedded to it’s 8% growth target and will do whatever it takes to come close to
that target – including flooding the domestic banks with a wall of money to lend.

However, preventing a downturn with easy money is a dangerous way to reflate the economy. The likely malinvestment will be large...

Harrison then points out, in a fashion similar to my own comment yesterday, that this bubble can go on for quite an extended period of time, but make no mistake, it is a money induced bubble.

Did the $20 Billion Bogus Profit Number Come from Taleb Himself?

That appears to be what Henry Blodget, CEO & Editor-in-Chief of The Business Insider, is implying. In the comment section of Joe Weisenthal's post, Blodget writes:

Henry Blodget said:
Jun. 29, 6:24 PM
He initially said he was misquoted. GQ is standing by its story. The fact that he is now merely saying that "the numbers are wrong" suggests that he wasn't misquoted.

Joe Weisenthal Covers the Alleged Taleb Smear Campaign (Sort Of)

The amazing Weisenthal is at it again. He reports on a note Nassim Taleb has posted on a copy of GQ UK article that Taleb has at his site. He writes:

Nassim Taleb has posted a copy (.pdf)of that infamous GQ UK article in which he's quoted as saying he made $20 billion for his clients. On the front he includes a big, yellow warning saying that someone is taking this alleged misquote as the basis for a smear campaign against him!

Ah, great job Joe, except for one minor thing. Wouldn't it help to post who is supposedly smearing Taleb and the details behind the smear? It's busy over there at Clusterstock Joe, so we'll help you out.

The Taleb warning came about after Janet Tavakoli questioned the $20 billion in profits claim in the GQ article, here and here.

Now, Taleb is making a BIG mistake in charging that Tavakoli is trying to smear him. Tavakoli is always all about the numbers. Take a look at the books she has written. She just saw some numbers out of whack and questioned them. In a way, what's going on is that Taleb is experiencing what might be called a black swan event. A very smart, very tenacious woman has noticed him. If Taleb was smart, he would have just corrected the numbers in his note or pulled the GQ article. Now everyone is going to be checking out this alleged smear campaign. And, he now, for sure, has Tavakoli really watching every move he makes.

Obama's Money Girl Raising Profile

Penny Pritzker, of Hyatt Hotel money and an early backer of Barack Obama, appears to be raising her profile.

Yesterday, she spoke at the National Finance Committee dinner in Washington, DC. and she is now scheduled to speak at the 19th annual National Investment Center for the Seniors Housing & Care Industry that will take place in September in Chicago.

It makes sense to keep an eye on what she has to say, given her close proximity to the President.

Battle of the Interventionists

Paul Krugman and Greg Mankiw are at it, again. I guess this means Bill Anderson can take a much deserved day of rest.

Krugman writes that Greg Mankiw and George Will are "either remarkably ignorant or simply disingenuous."

Mankiw responds:

On the issue of tone, I again think I understand Paul's point of view. He likely believes that civility is overrated.

All the gory details are here.

Coming to a Revolution Near You

Deep packet inspection.

The Arctic is Warming..

According to the Associated Press, "the Arctic Ocean is warming up, icebergs are growing scarcer and in some places the seals are finding the waters too hot."

NYT has concluded that "the Arctic appears to be warming up." and "Alpine glaciers are in full retreat."

NYT also reported "a radical change in climatic conditions and hitherto unheard of warmth" in Greenland.

The problem with these scare reports is that they were all made in the 1920's and 30's.

For the full story on global warming madness see this David Deming commentary.

"The Current Good Fortune of General Electric"

With a little help from a team of executives and outside attorneys, including Rodgin Cohen, chairman of the New York law firm Sullivan & Cromwell, GE is cashing in big time on the "bank rescue". Cohen has his fingers in nearly every bank rescue deal around.

Recently, the apparently power hungry Cohen was being vetted for a top Treasury position, until it became obvious that he had a better shot at making it to Treasury if he had represented Bernie Madoff and Charles Manson, and got them both probation, instead of working on deals such as:

Wells Fargo-Wachovia, PNC-National City, Toronto Dominion-Commerce, Bank of New York-Mellon Financial, Regions-AmSouth, Wachovia-Golden West, Wachovia-SouthTrust, Chase-Bank One, First Union-Wachovia, U.S. Bancorp-Firstar,Wells Fargo-Norwest, Wells Fargo-First Interstate, Chemical-Chase, First Union-First Fidelity, Key-Society, NationsBank-C&S, and Bank of New York-Irving as well as numerous other acquisitions. In cross-border and non-U.S. transactions, he was engaged in Banco Santander-Sovereign, Mitsubishi UFG-Morgan Stanley, Barclays-Lehman, Mitsubishi UFG-UnionBanCal, Standard Chartered-American Express Bank, Goldman Sachs-Sumitomo, Allianz-Dresdner, UBS-PaineWebber, Credit Suisse-DLJ, Société Générale-Paribas, Dexia-FSA, Mitsubishi-Bank of Tokyo, Credit Suisse-First Boston, Royal Bank of Canada-Bank of Montreal, and acquisitions or divestitures by Barclays Bank, National Westminster, Midland Bank, Lloyds Bank, Bank of Ireland and Istituto Bancario San Paolo di Torino. He has also worked on a number of major cross-industry and private equity acquisitions, including JPMorgan Chase-Bear Stearns, Merrill Lynch-BlackRock, J.C. Flowers-Sallie Mae, Mellon-Dreyfus and NationsBank-Montgomery, as well as acquisitions in the insurance industry, including Anthem-WellPoint and Manulife-Hancock...

He has also participated in the resolution of most major bank failures, including Washington Mutual, Continental, First City, Southeast, Franklin National and Bank of New England and, at the recommendation of the Federal Reserve, the Ohio thrift crisis.

Cohen also worked on regulatory, law enforcement and internal investigations of financial institutions for matters involving ABN AMRO, Bank of Montreal, Banco Popular, Bank of New York, Fifth Third, First Horizon, IDB, KeyCorp, Mellon, Mitsubishi UFG, Royal Bank of Canada, Standard Chartered, Sun Trust, Wachovia and Wells Fargo.

In short, he delivers when you need to get inside the government. And, boy, does he deliver. Reports, Propublica:

GE has joined major banks collectively saving billions of dollars by raising money for their operations at lower interest rates. Public records show that GE Capital, the company's massive financing arm, has issued nearly a quarter of the $340 billion in debt backed by the program, which is known as the Temporary Liqudity Guarantee Program [2], or TLGP. The government's actions have been "powerful and helpful [3]" to the company, GE chief executive Jeffrey Immelt acknowledged in December

The New Tyler Cowen-Alex Tabarrok Economics Textbook

I just received a review copy of the new Cowen, Tabarrok economics text, i.e., the macro edition, Modern Principles: Macroeconomics.

I haven't read the entire book, yet. However, I note: Part 3 is about "Business Fluctuations". There are four separate chapters in this section. I did not notice even one mention of Austrian Business Cycle theory, Hayek or Mises. There is no index in the review copy, so it's possible I missed a reference but very, very unlikely. Cowen and Tabarrok have dropped ABCT, Hayek and Mises into a memory hole.

According to Cowen and Tabarrok, it seems the Great Depression had nothing to do with the money printing of the 1920's, but simply developed out of the blue in 1929 as a result of an unexplained "great fall in aggregate demand". They don't mention the slowdown in money growth in early 1929 at all. (There is a mention of the 1931 Fed money contraction).

The text appears Keynesian to the core. Cowen, who was once considered by some the next Hayek, should know better

Does Ben Bernanke Have a Diabolical Plan to Help Treasury Finance $2 Trillion?

Federal Reserve Board Chairman Ben Bernanke is the most difficult Fed chairman that I have ever followed. Not only is he difficult to read, but he seems to change policy in mid-stream. He also has a penchant to invent new "tools", when the basic tools of controlling money supply, the Fed Funds rate, the discount rate and the reserve requirement, can pretty much handle any money policy that you can think of. .

Now, I'm wondering if the too clever by half Bernanke may have a diabolical plot to finance the record $2 trillion debt the Treasury is starting to raise. While China and pretty much everyone else are watching to see how much money the Fed is going to print to absorb the record debt, maybe Bernanke is going to fake out everyone and go in the opposite direction.

In the summer of '08, he nearly crashed the entire economy when he stopped printing money. A byproduct of the crisis he created was a flight to quality, i.e., Treasury securities. Is he now working toward another September panic that will frighten everyone into a flight to quality, i.e., Treasury securities, that will provide the opportunity for the Treasury to unload $2 trillion in debt? Is this what is going on with the new slowdown in money supply growth?

China's Brewing Bubble

China's banks are veering out of control. The half-reformed economy of the People's Republic cannot absorb the one trillion dollars blitz of new lending issued since December, writes Ambrose Evans-Pritchard.

His commentary is based on analysis out of Fitch, the rating agency.

Fitch's "macro-prudential risk" indicator for China threatens to jump from category 1 (safe) to category 3 (Iceland, et al).


Writes Pritchard:

Fitch traces the 2009 bubble to the central bank's decision to cut interest on reserves to 0.72pc. Bankers responded to this "margin squeeze" by ramping up the volume of lending instead. Over half the new debt is short-term. Roll-over risk is rocketing. China's monetary stimulus since November is arguably more extreme than the post-Lehman printing of the US Federal Reserve, though less obvious to the untrained eye.

The regime is so hellbent on meeting its growth target of 8pc that it has given banks an implicit guarantee for what Fitch calls a "massive lending spree".

China's M2 annualized money supply growth was 25.7% in May and 26.0% in April, according to the People's Bank of China. This is obviously very extreme money growth. It, however, does not mean a crash is just around the corner. A regime can keep money growth high for an extended periods of time, especially in an economy where productivity is climbing rapidly, but eventually the price inflation kicks in and slowed money growth creates the crash period.

Russia Closing All Casinos, 400,000 To Be Laid Off

No wonder Jim Rogers says Russia is too unpredictable to invest in.

The government is shutting down every last legal casino and slot-machine parlor across the land, under an antivice plan promoted by Vladimir Putin, reports NYT.

Putin's plan, writes NYT, was announced during a spy scandal between Russia and its neighbor Georgia, and the timing suggested that Putin was in part seeking to wound the Georgian diaspora, which is said to have an influential role in the industry in Russia.

Hayek and Feynman on Different Types of Thinking

Do we all think in the same manner?

Highly unlikely.

I just came across this fascinating discussion by the famous physicist Richard Feynman on his discovery that people may think in different manners:




This brought to my mind the essay by F.A Hayek,Two Types of Minds.

Hayek and Feynman are not both discussing the exact same thing, but it is fascinating that both of them seemed to recognize that others thought about things in different manners. Their two observations seem to dovetail, there's probably a lot to expand on and explore here.

A Comeback for Paul Volcker?

Bloomberg's Yalman Onaran has a long profile of Paul Volcker out. It includes this perhaps telling anecdote:

The topic of conversation in the second-story Family Dining Room on a warm evening in April: President Barack Obama’s economic policies.

Obama sat at the head of the table, administration insiders arrayed along one side to his right. To his left, facing a French marble fireplace, were some of his harshest critics: Nobel laureates Joseph Stiglitz and Paul Krugman and Harvard University professor Kenneth Rogoff.

One chair on the insiders’ side was empty, according to attendees. It was reserved for Paul Volcker, the 81-year-old former Federal Reserve chairman who was an adviser to Obama during the campaign and now heads the President’s Economic Recovery Advisory Board, or PERAB. He was stuck at the White House gate, trying to convince guards that he was expected for dinner. His plane from New York had been delayed by a storm, and his security clearance to enter the building that day had expired. .. While he doesn’t have a full-time job, isn’t paid for his advice and lives in New York, the 6-foot-7-inch (2.01-meter) Volcker is hard to ignore.

Volcker...eventually made his way to the dinner table the evening of April 27...

There's always been two sides to Volcker, inflation fighter, but also Rockefeller operative.

Indeed, Onaran's profile contains an endorsement of Volcker by none other than David Rockefeller:

“He was brilliant, eminently logical, and steadfastly devoted to his work,” says David Rockefeller, 94, who hired the Princeton graduate to work as an economist at Chase Manhattan Bank in 1957 after a stint in the research department of the New York Fed.

Onran, also, details Volcker's revolving door career between government work and Rockefeller work, if there is a difference:

Volcker, who also received a master’s degree in political economy and government from Harvard University in Cambridge, Massachusetts, left Chase to become the director of financial analysis at the Treasury Department in 1962. He rose to deputy undersecretary the following year during the administration of Lyndon Johnson, returned to Chase in 1965 and, when Richard Nixon became president, rejoined Treasury as undersecretary for international monetary affairs.

Onran then goes on to suggest that Volcker is experiencing somewhat of a comeback in the Obama White House. Given what is coming out of the mouths of other Obama advisers, Volcker is probably a lesser evil. He, for example, knows that it is nutty to put so much new control in the hands of the Federal Reserve, as is part of Obama's recent regulatory reform proposal. Writes Ornan:

“Do we want to make the Federal Reserve the chief regulator too?” Volcker asked during a Bloomberg TV interview on April 29. “Maybe that’s going a little too far.”

Curiously, though, while I saw Volcker often being critical, on record, of Alan Greenspan's monetary policies, I have seen nothing on record by Volcker about Ben Bernanke's roller coaster money printing operations--even though it has been reported that Volcker has said that he believes Bernanke will be a only a one term Fed chairman.

The Further Greening of Goldman Sachs

The Wall Street elite are ready for Tax and Trade. I'm talking really ready, as in, it is their show. Rachel Morris in Mother Jones' Washington bureau explains:

If the Waxman-Markey climate bill is signed into law, it will generate, almost as an afterthought, a new market for carbon derivatives. That market will be vast, complicated, and dauntingly difficult to monitor....Cap and trade would create what Commodity Futures Trading commissioner Bart Chilton anticipates as a $2 trillion market, "the biggest of any [commodities] derivatives product in the next five years." That derivatives market will be based on two main instruments. First, there are the carbon allowance permits that form the nuts and bolts of any cap-and-trade scheme. Under cap and trade, the government would issue permits that allow companies to emit a certain amount of greenhouse gases. Companies that emit too much can buy allowances from companies that produce less than their limit. Then there are carbon offsets, which allow companies to emit greenhouse gases in excess of a federally mandated cap if they invest in a project that cuts emissions somewhere else—usually in developing countries. Polluters can pay Brazilian villagers to not cut down trees, for instance, or Filipino farmers to trap methane in pig manure.

In addition to trading the allowances and offsets themselves, participants in carbon markets can also deal in their derivatives—such as futures contracts to deliver a certain number of allowances at an agreed price and time. These instruments will be traded not only by polluters that need to buy credits to comply with environmental regulations, but also by financial services firms. In fact, a study (PDF) by Duke University's Nicholas Institute for Environmental Policy Solutions anticipates that if the United States passes a cap-and-trade law, the derivatives trade will probably exceed the market for the allowances themselves. "We are on the verge of creating a new trillion-dollar market in financial assets that will be securitized, derivatized, and speculated by Wall Street like the mortgage-backed securities market," says Robert Shapiro, a former undersecretary of commerce in the Clinton administration and a cofounder of the US Climate Task Force.

Banks like JPMorgan Chase, Morgan Stanley, and Goldman Sachs already have active carbon trading desks that deal in instruments connected to Europe's cap-and-trade system and voluntary markets here. But business will explode if a cap-and-trade system becomes law. So it's no surprise that the financial industry has taken an intense interest in the fine print of the Waxman-Markey bill. According to data compiled by the Center for Public Integrity, the financial services industry has 130 lobbyists working on climate issues, compared to almost none in 2003. They represent companies like Goldman Sachs, JPMorgan Chase, and AIG (before it was shamed into temporarily halting its lobbying activities last fall). The industry "wants lawmakers to create a brand-new revenue stream for its bottom line, and cap and trade would do it," says Tyson Slocum of Public Citizen, who is a member of a Commodity Futures Trading Commission (CFTC) advisory committee considering how carbon trading should be regulated.

Bottom line: It's as if tree huggers convinced government that tree hugging be required by every man, woman and child, and thus a market for trees to hug developed with very complex rules as to the rights to hug a tree, and Goldman Sachs helped develop the complex rules and then started trading in those rights based on the comples rules only they understand.

In other words, Goldman Sachs has totally co-opted the green movement for lots of green of a very different kind.

The Neglected Costs of the Warfare State

Tom Woods in a new paper (pdf) revives the work of Seymour Melman on the hidden costs of war. Writes Woods:

Perhaps no scholar has applied [Frederic] Bastiat’s insights to military expenditures with more persistence and rigor than Seymour Melman (1917-2004). Melman was a professor of industrial engineering and operations research at Columbia University. In a scholarly career that yielded a great many books and articles, he focused much of his energy on the economics of the warfare and military-oriented state.

For an energized presentation of Melman's views listen to Scott Horton's interview of Woods.

Cali Finds a New Way to Hand Out Cash

California regulators have apparently not noticed the budget crisis going on in the state, or perhaps they don't realize that spending more money will intensify the crisis.

They expanded a state car-scrapping program Friday to provide incentives of as much as $4,000 to motorists who turn in high-polluting vehicles and replace them with cleaner cars.

Some 300,000 California drivers who own cars older than model year 1976 will be solicited by local air districts.

Drivers could get $1,000 if they turn their car in to a licensed dismantler. And, naturally, what's the point in new regulations, if you can't throw in a little California style egalitarian hocus pocus while you are at it, for some of the poor slobs driving the smog machines? Low-income Californians would be eligible for $1,500.
The regulation also provides a voucher between $2,000 and $2,500 to drivers in two of the state's most polluted regions - Southern California and the San Joaquin Valley.

The vouchers could be redeemed at new and used dealerships for a fuel-efficient car that's four years old or newer. Low-income Californians could buy a fuel-efficient car up to eight years old.

I'm all for clean air, but the simple way to solve this problem is to tell anyone who has a car that blows exhaust into the face of those walking on the sidewalks, to fix the problem or get a new car.

Note: This program is different from the program signed into law Wednesday by President Obama, California's effort is not primarily designed to replace gas guzzlers with more fuel-efficient vehicles. In this sense, California's program is less nutty than Obama's, since, if it really made economic sense to take a gas guzzler off the road, people would do so. The math just isn't there at current prices. It's basic economics ignored, again. If gasoline, say, on an inflation adjusted basis shot up to $20 a gallon, gas guzzlers would disappear quicker than Ben Bernanke is going to at the end of January 2010.

The Myth of the K Wave

I didn't realize that the Kondratieff Wave has a new spiffed up 21st century name, the K Wave. Gary North points this out in a column at LRC.

The Kondratieff Wave has even more lives than Keynesianism but, like Keynesianism, even when facts move in a different direction then the theories predict, the theories march on. As North notes:

Maybe you have not heard of the Kondratieff wave. But if your favorite investment guru is structuring his recommendations in terms of the Kondratieff wave, you are in big trouble if you have followed his advice.

The Kondratieff wave is a supposed macroeconomic force that creates a 54-year cycle of boom and bust. There is no explanation for it. The man who discovered it, or thought he had, said that there was no theory to explain it...

The K-Wave is supposedly going to bring a deflationary collapse Real Soon Now. The Western world's debt structure will disappear in a wave of defaults. Kondratieff's 54-year cycle is almost upon us.

Again.

The last deflationary period ended in 1933. This became clear no later than 1940. World War II orders from Great Britain, funded by American loans and Federal Reserve policy, ended the Great Depression by lowering real wages.

In 1942, price and wage controls were imposed by Washington, the FED began pumping out new money, ration stamps replaced the free market, the black market overcame shortages, and the inflationary era began. That was a long time ago. But the K-Wave is heralded as a 50 to 60-year cycle, or even more specifically, a 54-year cycle. That's the entire cycle, trough to trough or peak to peak.

The K-Wave supposedly should have bottomed in 1933, risen for 27 years (1960), declined in economic contraction until 1987, and boomed thereafter. The peak should therefore be in 2014.

There is a problem here: the cyclical decline from 1960 to 1987. It never materialized. Prices kept rising, escalating with a vengeance after 1968, then slowing somewhat – just in time for the longest stock market boom in American history: 1982–2000.

OK, say the K-Wavers: let's extend the cycle to 60 years. Fine. Let's do just that. Boom, 1932–62; bust, 1963–93; boom, 1994–2024. Does this correspond to anything that happened in American economic history since 1932? No...

There is always a market for bearish stock market scenarios. It doesn't matter what theory is offered. There are believers who love the conclusion but who don't have the ability to explain the particular chart, theory, or logic behind the forecast.

Here is an oddity. In 35 years, I have never seen a bullish stock market forecast based on the Kondratieff wave. Yet half of the time a cycle is in the upswing. Why isn't there someone out there who made his subscribers a lot of money by using the Kondratieff wave to forecast the peak (sell short) and the trough (go long)? Why is it that the cycle's peak is always immediately behind us? Why is it that we are never in the trough?

There is much more in North's article which can be read here. One note. North is a bit tough on Julian Snyder. North writes:

Julian Snyder was the most visible of these newsletter editors. His International Moneyline ($282/year – $560 in today's money) began predicting this cyclical decline sometime around 1976. He even went so far as to pay for a translation of Kondratieff's Russian language articles, which he published as The Long Wave (1984). In 1989, Richard Russell took over the unexpired subscriptions for International Moneyline.

It should be noted that Snyder also was instrumental in getting Murray Rothbard to write The Mystery of Banking. Probably the best book going as far as an explanation of how the Fed creates money. Snyder actually came up with the title and published the book.

North Carolina Web Sites Will No Longer Be Paid for Directing Traffic to Amazon

The growing reach of governments at all levels, federal, state and local, continues to slowly lower the standard of living of its citizens at the edges. The latest victims, booksellers who linked through Amazon.com.

Amazon. said it has ended business relationships with marketing affiliates in North Carolina to avoid collecting sales tax in the state.

North Carolina within the next week could pass a law that would force companies to collect the tax if they have in-state online-marketing affiliates -- people who get a sales commission from links on their Web sites. To avoid getting caught by the law, Amazon is dropping the affiliates.

Tweleve Hundred Pages of What?

Overnight,at 3 AM, House Democrats tacked on to the "climate change" bill a 300-page amendment, making the entire bill more than 1200 pages long.

House Minority Leader John Boehner(R-OH) nailed part of the problem.

“Is there anything we aren’t regulating in this bill?” Boehner asked, leafing through the pages. He wondered if the community group ACORN qualified for certain grants. He asked why an energy and climate bill was “trying to solve the problems with Fannie (Mae) and Freddie (Mac).”

Of course, the entire necessity for "climate change" legislation itself is questionable.

The bill passed 219-212.

Legislation by speed, first the bailout legislation and now climate legislation, are completely ignoring Paul Volcker's advice to slowdown and think about what is being called for. Speed is the refuge of the crooked and paid for politician. Somewhere late last night, Goldman Sachs insiders popped more bottles of champagne and got ready to turn the lights on at their carbon trading desks.

"Something Called the Internet"

In 1994, Bill Gates and Tom Brokaw discuss "something called the internet."

Note at the end of the clip that Brokaw is concerned about the jobs that "will be lost" because of the internet. How in 1994 would it have been possible to explain to a blockhead like Brokaw the theoretical free market principle that new jobs will be created when old jobs are gone? If they don't get the theroetical, it is impossible at that early stage to detail, to a large degree, the specifics of what would ultimately arise, such as demand for workers in fields like web design, search engine design, email software design etc. That companies with unlikely names, like Yahoo, Google, Twitter, Facebook, Amazon and GoDaddy would employ thousands upon thousands.


viaPaulKedorsky

Did Zhao Danyang Get His Money's Worth During His Lunch with Warren Buffett?

Janet Tavakoli answers the question and explains what it is like to have lunch with Warren Buffett. BTW Tavakoli didn't pay $2.11 million to have lunch with Buffett. Superior knowledge of markets, especially derivatives will get you lunch with Buffett, and as Tavakoli says, he will pick up the tab:

$2.1 million lunch with Berkshire Hathaway chief: 'Warren will give him his money's worth'
Examiner - June 26, 2009

By William Freehling -

$2.1 million is a lot to pay for lunch with anyone, even if it is with the world's second-richest man -- Berkshire Hathaway's Warren Buffett -- and even if it is for charity.

But Janet Tavakoli says Zhao Danyang of Hong Kong will get his money's worth from the charity lunch he had with Buffett this week at the Smith and Wollensky restaurant in New York City. Proceeds from the lunch went to the Glide Foundation, which helps the underprivileged in San Francisco.

Tavakoli should know a thing or two about the value of lunch with Buffett. She dined with the Berkshire chief in 2005 and wrote a book, "Dear Mr. Buffett," partly about the experience. Tavakoli, who still communicates with Buffett periodically and was in Omaha, Neb., for this year's annual meeting, is founder and president of Chicago-based Tavakoli Structured Finance, a financial consulting firm.

As the bidding for this year's charity lunch auction wound down (it was at about $500,000 as of this writing but is expected to shoot higher in the next several hours as the deadline approaches), Tavakoli agreed to answer our questions about her lunch and experiences with Warren Buffett.

Examiner: When and where did the luncheon occur?

JT: Warren and I had lunch on a hot summer day--August 25, 2005, five days before his 75th birthday, and on the eve of the global financial meltdown. We had roast beef and mashed potatoes at Gorat's in Omaha. Warren asked me to lunch, and he picked up the check.

Examiner: How did it come about?

JT: Years before, I had sent Warren a copy of Credit Derivatives, one of the technical finance books I had written. Warren had called derivatives "financial weapons of mass destruction" in his 2002 shareholder letter after an accounting restatement shows losses -- chiefly in his GenRe Securities credit derivatives unit -- of around $173 million.

I had tucked a forgotten note between the pages of the book. Warren wrote me a letter saying he had been looking at the book again and found the note. He invited me to stop in to talk about credit derivatives the next time I came to Omaha. When I responded, Warren invited me to lunch.

READ THE FULL INTERVIEW HERE

The Stock Market in December 2002 and Now

"No Axe" in a comment below makes the following point:

The current status of the markets is strikingly similar to mid-December 2002 in the previous bear market. On December 10, 2002, the FOMC released a ho-hum announcement that resulted in uncharacteristically low volatility in the S&P 500 that day (similar to Wed's announcement) and the time period was close to the end of the year (paint the tape scenario similar to end of Q2 09 now). Though the S&P 500 had just failed to take out a previous high in 2002 and we have currently taken out the high from the beginning of 2009, the situations are still close. What is different is that in December 2002, M2 was growing at 6.3% whereas currently M2 is only growing at 3.9% as you point out. The result in 2002 was a failure to “paint the tape”, another rally that failed and created a head and shoulders that, once it broke the neckline, saw a return to test the lows. Should this current rally fail over the next few weeks, we could also have a head and shoulders pattern with 875 as the neckline. I'm not a big believer in backtesting esoteric derivations of price, but the coincidence of the two major chart patterns and the actions of the Fed in both time periods should not be ignored.

I couldn't agree more, including the point that it generally doesn't make a lot of sense to backtest. What we have here are two very similar periods--except as "No Axe" points out money supply growth is even more anemic now.

The Man Who Paid $2.11 Million to Have Lunch with Warren Buffett

Zhao Danyang, president and founder of the Hong-Kong based investment management firm, Purheart Asset Management, bid $2.11 million last year to have lunch with billionaire investor Warren Buffett.

They had that lunch on Wednesday in New York City at the restaurant Smith and Wollensky's. I sat down with Danyang on Thursday to find out why someone would bid $2.11 million to have lunch with Buffett, and to find out what they talked about.

The first thing I noticed about Danyang was his genuine entusiasim for the investment methodology that Buffett uses. Before our meeting I suspected that the bid was a way for Danyang to gain attention for his fund, and while that might be one of the goals, Danyang is clearly a big fan of Buffett's. He attributes his long-term success to applying Buffett's methodology on stocks in China.

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) .

Not only does it appear that Danyang has captured Buffett's investment style, but also Buffett's openness about his investments. Danyang seemed to be willing to spend as much time talking about his losses as he did his gains. In 2007, Danyang saw the froth in the market and put much of his fund into cash, late in the year. This resulted in his showing a loss of only 18% in 2008, while the Hang Seng Index dropped by more than 70%. But, of that 18% loss, Danyang actually lost 10% by poor timing in trying to profit by selling stocks short. Danyang says he has learned his lesson and will no longer short stocks.

As for his lunch with Buffett, he says Buffett brought up BYD Co., China’s biggest maker of rechargeable batteries. Buffett through a subsidiary owns 9% of the company. Buffett also brought up PetroChina, a company Buffett once owned a stake in.

He said Buffett now considers oil stocks and other natural resource stocks too volatile, and that Buffett now prefers companies that have steady to increasing pricing like Coca-Cola.

Buffett is clearly very bullish on China. Danyang brought his five year old son along to the lunch with Buffett. At one point Buffett recited his long standing point that he was born at the right time and in the right place, then he pointed to Danyang's son and said he is likely to also have been born at the right time and in right place.

When I asked Danyang if there were many money managers in China that applied Buffett's approach, he said there were a few. He then smiled and said that he was the best.

Danyang gave Buffett a stock tip, Wumart Stores Inc. It is Beijing’s largest supermarket chain and it is the largest position held in Danyang's funds. Danyang told me that he thought Wumart could become the Walmart of China.

He also told me that he likes the stock of Tsingtao Brewery, makers of the internationally popular Tsingtao Beer.

When asked if he thought Hong Kong or Shanghai would become the premier money center in China, he said that China was big enough to support both as top money centers.

Danyang told me he has launched a new fund that is available to American investors through Citibank. He told me that most of his investors have been Chinese, who live throughout the world, everywhere from the United States to Switzerland. He roughly has about $130 million under management.

UPDATE: The name of the new fund is Pure Heart Natural Selection Fund (Non-US feeder fund). For US investors, they can subscribe to Pure Heart Natural Selection US Fund (US feeder fund).

China Repeats Criticism of Dollar Dominance

Another attack on the dollar from the People’s Bank of China. The PBC has repeated its call for the world to cut its reliance on a small set of reserve currencies(Read: the dollar).

In its annual financial stability report, the PBC said it saw serious defects in one currency dominating the global monetary system.

If this mumbling ever turns into a panic rush out of the dollar, the price inflation that would hit the U.S. would be dramatic.

New Fed Data Points to a New Decline in the Stock Market and Economy

The most recent H.6 Fed data, although showing a return to positive growth from last week's decline in M2 (nsa) growth, is still at anemic levels. Three month annualized M2 (nsa) is now at 3.9%. This compares with 6 month annualized growth of 9.2%.

Bottom line: Money growth is now clearly slow money growth which sets up the stock market for a major decline in the weeks ahead, and an overall second downturn in the economy.

Also of note, the monetary base is down from its peak, as are excess reserves. Both the monetary base and excess reserves appeared to have peaked about a month ago, with the peak coming in the May 20 data.

It's a bit easier for the Fed to control the monetary base, than it is money supply. So the fact that the base itself is declining, suggests that an intentional effort by Ben Bernanke is underway to do do.

Things can change quickly under Gentle Ben, but right now they don't look good for the stock market or economy.

Government Taking Stakes In Two AIG Insurance Companies

WTF? The wire reports state AIG is "paying back" $25 billion to the government. Well, sort of, but here's how it is really going down.

Under the deal, AIG will give the New York Fed preferred interests in its two largest life insurance units outside the United States — American International Assurance, or A.I.A., and American Life Insurance Company, or Alico.

The Fed will hold an equity stake in A.I.A. worth $16 billion, and a stake in Alico worth $9 billion, according to the AIG statement.

Curiously, the statement says that:

The face value of the preferred interests represents a percentage of the estimated fair market value of AIA and ALICO.

But, then the statement does not provide what the percentages actually are. Does this smell or what?

Last month AIG said that it would "accelerate steps" to spin off AIA through a public listing on an Asian stock exchange, as part of its efforts to repay a government bailout totaling up to $173.3 billion. This is part of that step, but clearly the government doesn't appear to be planning on an immediate liquidation of its position at the time of the IPO. More curious paper in the drawer of the Fed.

Goldman Sachs as "a great vampire squid wrapped around the face of humanity"

Rolling Stone is out with a 12-page story (Not available on the internet) by Matt Taibbi on Goldman Sachs.

I haven't read the article, yet. Here's Felix Salmon's take:

I don't agree with all of Taibbi's article, but I'm surprised at how much of it I do agree with, especially when it comes to the subject of regulatory capture. Taibbi spends no little time looking at Goldman subsidiary J Aron, and the semi-secret letter it was issued by the CFTC in 1991, the existence of which wasn't even known to Brooksley Born, who was then the chair. The letter allowed Goldman to ramp up its activities in Chicago by orders of magnitude. When Congress asked to see the letter, the CFTC was careful to ask Goldman first if that would be OK.

I can't, off the top of my head, think of a single government regulation over the past couple of decades which has remotely harmed Goldman Sachs; by contrast, there are many which have done it a world of good. The chances that the Fed, or any other systemic risk regulator, will be able to rein in this powerful organization are probably slim.

U.S. Embassies Stock Piling Cash?

I have no idea what to make of this. If the rumor came out of any newsletter, other than the Harry Schulz Letter, it is unlikely I would run it. But, HSL essentially started the investment newsletter business, decades ago, and Harry Schultz has been operating in Europe for just as long, and sometimes he does hear things. So here goes. From a recent HSL:

Some U.S. embassies worldwide are being advised to purchase massive amounts of local currencies; enough to last them a year. Some embassies are being sent enormous amounts of U.S. cash to purchase currencies from those governments,
quietly. But not pound sterling. Inside the State Dept., there is a sense of sadness and foreboding that 'something' is about to happen ... within 180 days, but could be 120-150 days.

Schultz over the decades has been way off base on some of his reports, and at other times has been spot on. Where on the spectrum this doozie of a report falls, only time will tell.

The Governor with the Argentine Mistress...

Mark Sanford was "In 1987 while working towards his MBA...trained at Goldman Sachs," according to his official web site.

According to US News, he worked at the New York office of Goldman Sachs. While in New York, he went by his birth name, Marshall. Upon returning to South Carolina, he switched back to using Mark

Ben Bernanke's Father Is Losing His Mind

How bad does Ben Bernanke want to hold on to his position as Fed chairman? He has let some PR flack talk him into disclosing that he is spending quality time with his parents and that his father's "memory is starting to fade."

Writes NyPo's John Crudele:

BEN Bernanke is a very busy guy. But whenever the Federal Reserve chairman can retreat from the hubbub of Washington politics and the whirl of Wall Street finances he sneaks off to an assisted living facility in North Carolina to visit his parents, Philip and Edna. The Secret Service agents back off so the Fed chief, who yesterday presided over yet another uneventful meeting of his policy making committee, can have some quality time with his elderly parents.

Philip Bernanke's memory is starting to fade. And so their time together is probably precious to Ben, whose job comes up for renewal next January.

Now ask yourself, how does Crudele know this stuff? There are not many people that know the Secret Service agents back off when he visits his parents, and that Bernanke's father's mind is going.

This smells completely like a bad PR flacks idea of a good story. Paint Bernanke as Gentle Ben.

This is probably how it went down. New PR Flack sits down with Bernanke and says, "Tell me everything you do from the minute you get up in the morning." Eventually, PR flack learns about Bernanke's father and bingo, Bernanke is now Gentle Ben.

Note to new PR Flack: Wall Street really doesn't give a shit about Bernanke's father.

I have long claimed that Bernanke is tone deaf to Wall Street, and the fact that Bernanke is letting a PR flack get away with this nonsense, when all people (on Wall Street and Main Street) really care about is the economy, demonstrates just how tone deaf Bernanke is.

As for Crudele, who does write many interesting columns, we have lost him from tough reporting on Bernanke. The new PR flack has clearly gotten to him.

After word on Bernanke's father, Crudele tells us that:

So as the debate heats up over whether President Obama will continue to employ the Fed chairman in his current position, consider this: Bernanke might not want another term.

Yeah, right.

Then, of course, Crudele tells us that:

To be sure, Bernanke is the front-runner for another four-year term.

And then Crudele, like a good attack dog, lunges at Larry Summers:

The competition for the Fed chairmanship -- while not likely to be intense -- probably won't be a pillow fight either.

The guy in the Obama administration who is said to covet Bernanke's job is economics adviser Larry Summers.

A former Treasury Secretary for President Clinton, Summers not only made lots of enemies while president of Harvard (especially of the female variety) but is said to be widely disliked in many corners of the globe.

There's a photo circulating on the Internet of Summers doing a very credible imitation of a sleeping man during an important April 23 meeting with top credit-card officials.

But you can count on this: A political veteran, Summers won't be snoozing when the talks begin on Bernanke's tenure at the Fed.

Bernanke, for sure, is vulnerable.

But while he might not be doing everything right Bernanke is at least awake.

Plunge Protection Team Meeting

The plotters meet.

Treasury Secretary Geithner will convene the President's Working Group on Financial Markets tomorrow at the Treasury According to a Treasury release, the PWG will play a critical role in coordination around the Administration’s comprehensive plan for regulatory reform.

Members include:

The Secretary of the Treasury
The Chairman of the Board of Governors of the Federal Reserve System
The Chairman of the Securities and Exchange Commission
The Chairman of the Commodity Futures Trading Commission

There's Better Stuff to do Than Read the Fed Statement

There will be a lot of attempted reading of the "tea leaves" in the Fed statement released today. But, there really is not a lot there to get a sense for any changes in Fed policy.

Instead, it is best to watch three items:

1. The effective Fed Funds rate.

2. The H.6 report on Money Stock Measures.

3. The H.3 report on Aggregate Reserves of Depository Institutions and the Monetary Base.

The effective Fed Funds rate will show data on where the rate is relative to the target. Right now, for reasons still unclear, it is bumping up against the top end of the Fed's target rate.

The H.6 report will provide data on the rate of money supply growth, which Bernanke has slowed again.

The H.3 report will provide data on excess reserves and help signal when banks might start loaning out the bundles of cash they have sitting on the sidelines.

Karen DeCoster on Michelle Bachmann

I have posted favorable comments on Congresswoman Michelle Bachmann (R-MN), two or three times, here at EPJ.

I now note that Karen DeCoster has given Bachmann two thumbs up. DeCoster writes:

Be mindful that Bachmann is actually intelligent, unlike Sarah Palin, who is a trained monkey and came out of nowhere, thanks to her gender, sprightly sparkle, and the problems with McCain’s uninspiring, snooze-a-rama campaign. Bachmann is also articulate and pretty—which is never detrimental to a woman in politics—and comes across as steady and confident. The attribute of hers that gives me hope is her tendency to reveal recurring signs of un-Republican-like behavior. Questioning the constitutionality of the census and making Timothy Geithner stutter like a pickled parrot are just a couple of strong points in her favor.

Actions in Bachmann’s favor are that she voted against the Wall Street bailouts, opposed the auto industry bailout, questioned Bush’s plan to increase troops in Iraq, opposed greater subsidization of student loans, opposed light bulb tyranny, correctly blamed Fannie Mae and Freddie Mac for their part in the economic meltdown, opposes a one-world currency, has spoken out against mandatory government service, and isn’t fooled by the political agenda of the global warming alarmists...

I should add that I have been following DeCoster's writings for years and she is a tough grader. I think DeCoster sees something big in Bachmann.

FOMC Statement

The Federal reserve's open market committee issued the following statement after its two day meeting.

Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.


Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen

Economic Trend Followers Are About to Get Slapped...

...by a new downturn in the economy

Ben Bernanke's sudden reversal in Fed policy, to very slow money growth, is about to nip the current rebound. This is going to cause major forecasting errors by those who don't have a business cycle theory, and merely follow stacks of data. They get long term trends righ, but they always miss the inflection points.

Mark Perry, for example, puts some mighty interesting information up at his blog, but it is clear he doesn't have any business cycle theoy and just watches bunches of data for trends.

His two most recent posts show the improving economy (which are the result of prior Fed money printing). He posts the Richmond Fed Manufacturing Index and the latest ECRI Leading Index data.

Both these pieces of information are great pieces of data to confirm a trend, but they will lead you astray when money growth is changing direction.

If money growth was still in heavy double digits, I would be using this same data to confirm the money growth recovery signal, but now that money growth is slowed, it will take some time for the data to show the new down trend in the economy. When that happens, I will be posting that data as a confirmatiom of the new money slowdown that is now going on.

Changes in trends always start with the money supply, ALL other data follows.

Standing Room Only Crowd at Central Casting

This is a tricky time for employment from a downturn to the start of a recovery to Fed tightening again. But, there's one good place to find work at a time like this, as a movie extra.

Which is where many of Cali's newly unemployed are looking for work. CNBC's Jane Wells stopped by Central Casting and finds it's standing room only.

Note: In down periods, there is the shift to consumption goods. Therefore, movies always do well, and thus demand for extras.

Book Sighting: Meltdown

My first meeting this morning was at the Grand Hyatt Hotel in downtown Washington D.C.

In the lobby, I spotted a middle age Filipino woman reading Tom Woods' book, Meltdown. She was about halfway into the book. I went up to her, introduced myself and asked here what she thought of the book. With a slight accent she replied, "Very realistic."

I asked her how she heard about the book. "Through a web site," she said.

The Roof Collapses at Red Roof Inn

Red Roof Inn has defaulted on $332 million of mortgage debt. the defaults Tuesday.

All told, Red Roof's properties carry at least $1 billion in debt, including mortgages, mezzanine loans and other notes.

Occupancy at Red Roof's properties, which averaged 62% when the mortgages were originated in 2007, sank to 50.7% in the first four months of this year.

In 2007, Red Roof was acquired from Accor SA for $1.3 billion by a group led by Citigroup Inc.'s Global Special Situations Unit...


VIAwsj

ECB Pumps Record €442bn Into System

Talk about money pumping.

The European Central Bank has pumped a record €442.2bn into the eurozone banking system in a first-ever offer of unlimited one-year funds.

Demand for the one year funds – offered at the ECB’s main policy rate of just 1 per cent – was obviously strong given that that ECB interest rates are not likely to fall any further. This was a big hand out to banks that are part of the ECB system.

Bernanke has tightened here short-term but the ECB is certainly not following in those foot steps/

Intriguing Climb in Fed Funds Rate

Jack Krupansky points out the the Fed Funds rate has been trading near 0.25% for the last couple of days. This is the ceiling on the Feds current target range.

I am not sure what is causing this. There are no obvious signs. The latest data from the Fed continues to show plenty of excess reserves in the system. Though they are down from their peak.

What has gone on since last week? Are banks starting to lend more? Is there a big bank in trouble? Is the Fed draining reserves? Do banks just want to be paid more? Suddenly, Thursday's H.3 report, the report on Aggregate Reserves of Depository Institutions and the Monetary Base has become a must watch release. It hits at 4:30 PM ET.

This Fed Funds climb is like a low grade fever without a clear understanding of the cause, something new is going on, what it is, is not clear. But it does call for close monitoring.

The $2.11 Million Lunch with Warren Buffett

Mr. Zhao Danyang, who runs the Pureheart China Growth Investment Fund in Hong Kong, and who won an auction to have lunch with Warren Buffet by bidding $2.11 million, is scheduled to dine with Buffett on Wednesday.

I will be meeting with Mr. Danyang on Thursday for an exclusive interview. If you have any questions that you would like me to ask Mr. Danayang, please put them in the comments.

Janet Yellen as Fed Chairperson?

Scott Lanman at Bloomberg is floating the name of San Francisco Fed president Janet Yellen as a possible alternative to Ben Bernanke as Fed chair. I have no idea where this is comintg from. It's completely off my radar screen.

It's Larry Summers job, unless he says or does something real stupid between now and end January 2010. Of course, this is Larry Summers so saying or doing something stupid can not be ruled out.

Hey, maybe I'll ask him about his silent partnership with Nouriel Roubini, aka Dr. Doom.

Geithner Headed to Europe and Middle East

More One World global planning.

Treasury Secretary Timothy Geithner will travel to Europe and the Middle East from July 12 – 16, 2009. Geithner will meet with officials in London, England; Jeddah, Saudi Arabia; Abu Dhabi, United Arab Emirates; and Paris, France.

DC Train Crash and the Ghost of AIG?

As I reported earlier, back in March I noted that DC Metro train money was frozen by some banks caught up in the AIG crisis. This frozen money likely caused slowdowns in some maintenance.

Now,WSJ is reporting:

Federal transportation investigators warned Washington transit authorities in 2006 to upgrade or eliminate their oldest train cars, including one that slammed into another train Monday, killing seven people, out of concern they could not withstand the force of a crash...The moving train was an older, 1000 series car... and...Garrett Dorsey, 44 years old, a passenger on the stationary train, said it had been sitting for two to three minutes after an announcement of unspecified electrical problems. Suddenly, there was a "big bang," said Mr. Dorsey, a plumber who works at Walter Reed Medical Center. "It was like a bomb going off."

Was the Metro money frozen because of the AIG crisis responsible for part of the delay in replacing older train cars? Did lowered maintenance standards because of Metro money frozen result in the electrical malfunctions in the stopped train?

Bernie Madoff Scores a 54

Unfortunately for Bernie, it wasn't at a Country Club golf course.

As a result of his billion dollar scamming, Madoff has tallied up an "offense level" of 54, according to CNN. This far exceeds the requirements for a life sentence.

"The life sentence begins at [the offense level of] 43," said William Sullivan, a former federal prosecutor and a partner at Winston & Strawn, according to CNN . "But Bernie found a way to go literally off the charts."

Juiced Inflation Numbers Just Ahead?

The CPI number coming out of the Bureau of Labor Statistics has been relatively tame of late, partly due to seasonal adjustment factors. Bob Murphy took notice recently and wrote:

The trend continues. The actual CPI rose 0.3% in May--an annualized price inflation rate of 3.7%--but the BLS "seasonally adjusted" it down to 0.1%, which is a much more reasonable annualized inflation rate of 1.2%.

In a private email correspondence with Murphy, I wrote:

What I find, and this is pretty much a mathematical identity, is that the seasonal adjustments (up and down) balance themselves off over a year--really by definition.

And I continued:

The way they would monkey is if they changed the seasonal adjustment factors retroactively once it was time to increase the actual number. This would, of course, mean the current numbers wouldn't have so much of a downward revision--but no one would be looking at the current numbers, in say, October.

Murphy agreed.

Now comes along John Crudele at Nypo, who just loves to dig into BLS data methodology, and comes up with pretty much the same analysis:

For the past couple of springs the BLS, which is in charge of calculating the nation's inflation rate, has been understating the amount of inflation we are experiencing.

Here's what is happening.

Because we've had annual run-ups in the cost of energy these past few springs, the computers that calculate inflation at the BLS now tend to anticipate a jump in gasoline prices [RW: Technically, what the BLS is doing is attempting to smooth the climb in gasoline prices over 12 months, not ex-out anticipated increases].

The computers look at the past five years for guidance on their seasonal adjustments. In other words, they saw this spring's increase in gas prices coming.

And since it was expected, some of the rise in gasoline prices this year was subtracted out of the CPI by the seasonal adjustments.

Just look at the numbers that were reported by the BLS and repeated by the media.

Consumer prices rose just 0.1 percent on a seasonally adjusted basis in May compared with April. The index that measures energy prices rose 0.2 percent, but that was the first time in three months that there was an increase in energy costs.

Say it with me: How can that be?

You and I have both seen the price of gasoline go up and up at the pumps. Gas was a dollar a gallon cheaper last December and most of that increase has come in just the past few months as speculators anticipated (wrongly, it turned out) that people would do more driving and need more gasoline as the summer approached.

So why hasn't the CPI reflected that rising cost?

Because the BLS' CPI calculations -- see, it really is dry -- have gone kerflooey.

Wall Street doesn't understand this. In fact, the million-dollar economists at financial companies were expecting energy prices in the CPI to rise more sharply this spring and were disappointed.

Here's what they also don't know: Because the CPI understated the rise in energy prices these past few months the BLS' index will probably overstate gasoline prices in the coming months...

...here's the real problem with seasonal adjustments like this: What the computers give, they have to take away.

By definition, if the effects of increased gasoline prices are understated in the spring they need to be overstated at some other time.

In the end, the effects of these seasonal adjustments have to be neutralized. They must offset each other by the end of the year...

Crudele expects that this will translate into stronger inflation. He may be right. But, he does correctly add the caveat that a drop in gasoline prices could cancel out any upward seasonal adjustment in the CPI.

Crudele should have perhaps discussed a fall in declining gasoline prices with much more than just an aside in his column. With Bernanke now slowing money supply growth, it is quite possible that gasoline prices may drop significantly over coming months. So we may have countervailing forces in coming months on the CPI. Seasonal adjustment juicing the CPI, with actual gasoline price declines neutralizing the upward thrust.

PE and Hedge Funds Still at Work on Charlie Rangel

Wall Street sure took care of Eliot Spitzer. And they continue to have their sights on Charlie Rangel. Back in September '08 I wrote:

After 38 years in the U.S. House of Representatives, suddenly Congressman Charlie Rangel wakes up to almost a hit piece a week in New York City newspapers....Wall Street friends tell us that it is the hedge fund and private equity industries.The hedge fund and private equity industries have targeted Rangel because of his legislation in the House that would have taxed the earnings of hedge fund and PE managers at a 35% income tax rate, instead of the current capital gains rate they pay of 15%. Rangel's legislation for a tax increase on the fund managers passed the House 233-189, but it was blocked in the Senate. Now it's time for Rangel to experience payback..

Obviously nothing has changed since September.

Today NyPo reported

A Port Authority police lieutenant who officials believe is the niece of Rep. Charles Rangel helped spring a trio of suspected pot smugglers from jail -- just a month after trying to get a mentally ill, gun-toting Navy castoff on a flight out of JFK, The Post has learned...Smith has so far been spared serious charges from the airport shenanigans. Insiders believe she is getting lenient treatment because of her high-powered uncle, who has great influence over federal grants to the agency as dean of the New York congressional delegation, the sources said.

Charlie is fuming at this report. Elizabeth Benjamin at the Daily News takes over the story:

Rangel told the DN yesterday that not only is he not related to Smith, he’s never even heard of her. And he offered to give $1,000 of his own money to the favored charity of anyone who can prove he is related to Smith.

“It is going to be difficult for you to print this, but the only connection between that woman and me is she is a person of color,” Rangel said. “I have never heard of her, I don’t know anybody that knows her, and I don’t know why The Post would do this, except that I am a public official.”

“But...I am prepared to give a charity $1,000 if they can find any connection between this lady and me. I don’t know the woman.”

Asked a second time if he might be distantly related to Smith through blood or marriage, the powerful chairman of the House Ways and Means Committee denied any and all ties to her.

“Blood, marriage, fraternity, neighborhood - it is just as though (the Post editors) are drunk with ignorance and they wake up in the morning and say, ‘What can we make up?’” he said.

“And I don’t know how to be more forceful in saying not just how untrue it is, but how vicious it is.”

Rangel knows full well what is going on. He's a tough fish to beach, but PE and hedge funds have plenty of money to spend on this "project." It's sport to them. They really don't care if the stories are true or not.

Harvard's Bond Chief to Resign

Marc Seidner, the head of U.S. fixed-income investing at Harvard University’s endowment, plans to resign.

Harvard has said it estimates its endowment will fall approximately 30 percent in the year ending June 30, leaving assets at about $25.8 billion.

You live by Keynes, you die by Keynes. Harvard management clearly hasn't kept its eye on M2 money supply.

AIG and the D.C. Metro Crash?

It's much too early to know the reasons behind today's subway crash in D.C. but, if "faulty maintenance" comes down as having any part in the crash, keep in mind what I wrote in March.

Alert: Fed FOMC Meeting

The Fed's open market committee starts a two-day meeting Tuesday. Don't expect any changes in rates. The Fed will keep its targeted range for its bank lending rate between zero and 0.25 percent, but watch the statement released on Wednesday after the meeting is completed for a signal of any changes in Fed thinking.

Will there any comment about the recent run-up in rates on mortgages and Treasury securities? Remember the Treasury is just in the early stages of the $2 trillion it will need to raise this year.

Geithner to Feed the Homeless

No Goldman type bailout for the homeless. But Treasury Secretary Geithner will pass out the soup, for an hour.

On Thursday, Geithner and Treasury Department staff will serve lunch to DC area homeless and families in need as part of the United We Serve summer service initiative.

Roubini Significant Correction Coming

Dr. Doom is at it again.

Nouriel Roubini perhaps while contemplating the artwork on the walls of his loft, now sees a "W" formation for the economy.

"I see even the risk of a double-dip, W-shaped recession… towards the end of next year," Roubini told CNBC's "Squawk Box Europe."

Roubini bases his forecast on the price of oil heading higher:

Oil could be closer to $100 a barrel towards the end of this year, this could be a negative shock to the economy...That's why I believe there's going to be a significant market correction for equities, for commodities and even for credit,"

Roubini may be correct about a double-dip recession, but it could come a lot sooner than next year, and it won't be the result of higher oil prices, but the result of a slowing money supply, which Ben Bernanke has put into crash dive mode again.

Money supply growth under the Bernanke regime has been terribly erratic, thus, it is possible he could resume printing again, but as of right now he will crash the economy again, if he continues to keep the brakes on money supply growth.

HyperInflation Anecdotes

Bill Bonner has them here.

His key observation is about the central banker of Germany and the Fed's Ben Bernanke:

But neither Karl Helferich nor Ben Bernanke set out to ruin their economies. Central bankers don’t do it intentionally; they do it inevitably. Not because they want to, but because they have to. Like the Germans in the ’20s, America has no politically acceptable way to pay her growing debts – except by printing more money. And now, her leading intellectuals urge her on. Cometh the hour when the feds begin to think about cutting back on their program of inflation, cometh the experts who will tell them to keep at it.

“The crisis seems to be easing, and a chorus of critics is already demanding that the Federal Reserve and the Obama administration abandon their rescue efforts,” writes Nobel winning economist Paul Krugman in the New York Times this week. “Those demands should be ignored. It’s much too soon to give up on policies that have…pulled us a few inches back from the abyss.”

As I wrote:

Either government spending has to be cut way, way back--obviously unlikely under Obama, or the Federal Reserve is going to be buying a lot of debt by printing money. Who else is going to buy it? At some point the American public (and in the dollar's case, world dollar holders) figure out that the money printing is going to lead to more and more price inflation, and people start to buy anything rather than hold dollars. It will be the exact opposite of what we have now, instead of a strong demand to hold cash balances, the opposite will occur. There will be a desire to spend the depreciating dollars by keeping cash balances low.

At some point this madness takes on a life of its own. Treasury bond interest rates suddenly jump to 10%, which will be viewed as unacceptable by the Obama Administration and so Bernanke, by making huge Treasury purchases, gets the rate down to 8.5%, but the new money used to push rates down pushes price inflation even higher and, thus, puts upside pressure on Treasury bonds, which results in rates climbing to 15%. Of course, this will be viewed as unacceptable and Bernanke will have to add twice as much money as last time to get rates down to 12.5%. At this point the Chinese will be in total panic, and use the Bernanke buying support to unload the remains of the U.S. bonds they hold, which will mean even more money printing by Bernanke to take the Chinese out of their position. This will mean even more inflation and the Treasury bond interest rate climbing to 25%. And the vicious circle continues. That's how you can end up getting to Zimbabwe type inflation, 500 basis points at a time.

Bill Bonner is exactly correct, Bernanke won't start out to bring about hyperinflation, if it does occur, it will sneak up on Bernanke and most of the American people.

Obama's Approval Index in Negative Territory

The Rasmussen Reports daily Presidential Tracking Poll for Sunday shows that 32% of the nation's voters now Strongly Approve of the way that Barack Obama is performing his role as President. Thirty-four percent (34%) Strongly Disapprove giving Obama a Presidential Approval Index rating of -2. That’s the President’s lowest rating to date and the first time the Presidential Approval Index has fallen below zero for Obama.

Overall, 53% of voters say they at least somewhat approve of the President's performance so far. Forty-six percent (46%) disapprove.

Clawing at Leon Black

Huh, private equity guys usually have all the angles covered. Not Leon Black.

Black and his partners have been cashing out to the tune of hundreds of millions of dollars in their partnerships, as they liquidated various investments and have taken 20% of profits. But, here is the kicker, they are only supposed to get profits equal to 20% of net profits of an entire fund, not of individual investments. By pulling 20% of each individual deal that was liquidated, Black and crew were, for all practical purposes, assuming that all deals would be sold off at a profit.

The downturn, however, has changed all that, and Black is so underwater with the remaining investments in Black's Apollo Fund IV that it will show big time losses and Black will have to payback hundreds of millions that he has withdrawn based on the assumption of a profitable liquidation of all investments. According to NyPo, Black's firm, Apollo Management, needs to payback $365 million--money which flowed through to Black and other Apollo partners.

Attempting to get money back from a PE partner in these situations is known as a clawback.

This could get interesting.

Goldman to Payout Record Breaking Bonus Money

Imagine my surprise.

The UK's Guardian reports:

Staff at Goldman Sachs staff can look forward to the biggest bonus payouts in the firm's 140-year history after a spectacular first half of the year...A lack of competition and a surge in revenues from trading foreign currency, bonds and fixed-income products has sent profits at Goldman Sachs soaring, according to insiders at the firm.

The lack of competition comes about, of course, as a result of Lehman Brothers going bankrupt and Bear Stearns being swallowed by JP Morgan. Both events occurred during the financial crisis while former Goldman CEO Hank Paulson was Treasury Secretary. The fate for Goldman was much different. When indications appeared that AIG securities held by Goldman might fail to be repaid, the Treasury rushed in to prop up AIG which protected Goldman from a Bear Stearns or Lehman type fate. Thus, setting up the stage for the current Goldman bonuses.

Hollywood's Take on David Rubenstein as Evildoer

In the middle of a pretty hectic few days, I managed to slip off for a couple of hours to catch the movie, The Taking of Pelham 123. The film is a remake of the 1974 thriller that starred Walter Mathau.

The remake has received only mediocre reviews, but I don't know what critics could have possibly been expecting. The film is a first class action thriller starring two of the best current day actors, Denzel Washington and John Travolta. The film, if nothing else, provides an opportunity to watch these two master actors at work. Travolta can pull off a mean bad guy like no one else.

And, it is fun to watch James Gandolfini in a supporting role as Mayor of New Yory City. He tones down his Anthony Soprano character just enough to make a very believable Mayor.

The script is a tight, action script with a few good one liners.

A surprise for anyone following Wall Street is the profile the police eventually pull up on the Travolta character. It turns out he is a former Private Equity partner who stole $20 million from a New York City pension fund and spent time in jail for the theft. While the facts don't completely fit the profile of Carlyle Group president David Rubenstein, it clearly is close enough that one is left to think that some of the details were changed to protect from a Rubenstein lawsuit.

Rubenstein, of course, hasn't spent anytime in jail, but he is a PE partner at Carlyle, and Carlyle did have a small problem in the way they acquired access to some New York City pension fund money (They ended up paying a fine to make it go away).

It's clear some Hollywood writers are paying attention to Wall Street and they know who the bad guys are.

Bill Gross Another Government Bailout Profiteer

Devin Leonard of NYT does a great job exposing the conflicts of interest money manager Bill Gross of PIMCO is operating under as he cashes in on the government bailout:

A frequent complaint is this: Why is the Federal Reserve paying Pimco to buy mortgage securities on its behalf, when the firm is already a huge buyer and seller of the same bonds?...No one, of course, has actually accused Pimco of theft. But there is a larger question: Whose interests is the firm looking out for in the bailout? Money managers, after all, have a legal obligation — a fiduciary responsibility — to put the interest of their investors before anyone else. Even Mr. Gross acknowledges that Pimco’s interests won’t always be aligned with those of the government...

He says he assumes that Pimco traders working on behalf of the government don’t talk to their peers trading for Pimco’s own accounts. Then again, he said he doesn’t know for sure what happens after hours...

His mood brightens when he talks about how much money Pimco could reap by participating in the Geithner [PPIP] plan. No wonder: the terms are deliciously favorable for participants selected as fund managers. Money managers like Pimco would be expected to raise at least $500 million from their clients. The Treasury would match that with taxpayer dollars. Then Pimco and the Treasury would create a jointly owned fund of at least $1 billion that would buy distressed mortgage bonds.

Government largess doesn’t stop there. The fund will be eligible for low-interest financing from both the Treasury and the Fed that analysts at Credit Suisse First Boston estimate could be as high as four times the total equity in the fund. So if Pimco ponied up $500 million, the fund that it manages could borrow $4 billion.

Pimco would then negotiate with banks to buy their wobbly mortgage-backed securities. Mr. Gross says that some of these securities pay an interest rate as high as 14 percent and that even if default rates were 70 percent, Pimco and the government would still make a 5 percent return after covering their negligible borrowing costs. That means the government-Pimco partnership could make at least $250 million in a year on a $5 billion investment fund. Of that amount, Pimco would get $125 million — a 25 percent return on its original investment.

But here’s the part that makes Mr. Gross salivate. If things go badly, the government is responsible for repaying all that debt...Pimco is proud of its partnership with the government. Mr. Erian points out that the firm’s executives have been members of the Treasury Department’s Borrowing Advisory Committee (along with many other Wall Street executives) for years. Its current representative, the Pimco managing director Paul McCulley, says part of his job is to ingratiate himself with officials at the Treasury and the Federal Reserve so Pimco can better understand impending policy decisions. He boasts that he is on a “first-name basis” with both Mr. Geithner and the Fed chairman, Ben S. Bernanke.

Pimco apparently covers all bases in its attempt to be on a first name basis, Gross currently has Alan Greenspan on his payroll at Pimco.

HTnick