Thursday, December 31, 2009

The Maker of the Times Square Ball Filed for Bankruptcy in 2009

Waterford Crystal, based in Ireland, designs a new pattern for the Times Square Ball each year.

This year the new crystals, triangular in shape, which number in the hundreds and are installed alongside the permanent Waterford crystals that remain in the ball year after year, are made in a Celtic knot pattern dedicated to the theme “Let There be Courage.”

Waterford Wedgwood filed for bankruptcy protection in January of the now outgoing year.

Unfortunately, this won't be a sign that the worst of the economic misery is over. There's a U.S. government debt clock somewhere near Times Square that may explode in 2010 because of how fast it will be required to change to update the increasing debt.

A Tiger Woods News Dump on New Years Eve

So far the top New Years eve news dump comes from ATT.

They have announced that they are ending our sponsorship agreement with Tiger Woods and wish him well in the future.”"

This has only been surpassed by yesterday's release of White House visitor logs.

Not Since the Movie "Grease" Hit Theaters Have Treasury Securities Had Such a Bad Year

Treasury securities are headed for a 2.5% loss this month -- and the biggest annual loss since "Superman" and "Grease" hit movie theaters more than three decades ago.

For the year, Treasurys of all maturities are on pace to lose 3.5% -- the biggest loss since 1978, according to an index compiled by Bank of America-Merrill Lynch. It will be the first annual loss since 1999, and only the fourth time Treasurys have lost money since at least 1978.

Merrill's month-to-date returns, which also account for price movements, show Treasurys of all maturities have lost 2.4% in December.

Like, I have said, given the debt the government needs to raise, over the next decade you will be able to make a career out of shorting the bond market.

You Have to Understand the Power Centers

Usually when I talk about power centers I am referring to government created power centers. However, there are somewhat similar power centers in the private sector (although in the private sector you can walk away from the game, not with government.)

I bring this up because of a story Bob Murphy relays about a friend who was at a table where someone walked out without paying their tab. Here's the key snippet:
One of the birthday girl's friends accidentally walked out without paying her check. Other than the birthday girl, no one else present knew the friend who walked out, so none of us felt any responsibility.The waiter and restaurant manager kept pushing the concept of "the table" as a single entity by which all persons present are accountable for every item brought to it. I tried to explain basic contract liability (which I presented as methodologically individualistic) but completely gave up when the manager looked at me and said, "Life is gray; nothing is black and white." It wasn't pleasant.
Now what is interesting is there is another way this could have gone down.

Sometime ago I was showing a buddy of mine the ropes and pointed out to him that the key guys to know in clubs are the bouncers. I mean we take care of bouncers. It's good to know the owner or manager, but in clubs most situations are at the bouncer level. In one very hot club my buddy actually put the head bouncer at the club on his payroll for some other type work the bouncer was interested in.

Anyway, one night we are in this hot club and it is the birthday of my buddy's girlfriend. She's kind of a wild nut job, not exactly my style, but he has to deal with her not me. For her birthday party, the girlfriend invites about 10 other nut jobs. Not officially to any party, just to the club.

I am sort of aware of the situation and hang in another section of the club, not really participating with the "birthday celebration."

Comes closing time, my buddy's girlfriend's friends all head for the door, only a few paid their tabs. The remaining tab is thousands. My buddy is refusing to pay. The waitress is there, and a female manager is there. They bring up the "table" concept, even though most of those that skipped were at another table (though clearly all part of the same group). Finally the manager calls for the head of security (Unbeknownst to the manager, this is the guy my buddy has on his payroll).

The security guy comes and starts taking the side of my buddy to the total bewilderment of the manager. The security guard finally tells the manager that he knows one of the guys that skipped out and he will hunt him down and get the bill paid.

Forget trying to "explain basic contract liability". You have to understand power centers, especially when government is creating more and more of them.

How Bogus Are the BLS Unemployment Numbers?

Even the establishment WSJ is negging them. Under the headline, 5.6 Million Reasons to Doubt Jobless Rate, WSJ's Mark Gongloff writes:

The way jobless claims have been receding should signal that U.S. unemployment has finally peaked. That probably isn't the case this time.

The Labor Department releases data on new claims for unemployment benefits on Thursday. Economists estimate claims rose to 455,000 in the Christmas week from 452,000 the prior week.

Holidays make it tricky to seasonally adjust claims, which are volatile in the best of circumstances. Many economists instead focus on the four-week moving average, which irons out weekly fluctuations.

Fortunately, that average has fallen steadily, from a high in April of 658,750 to 465,250, a 29% drop.

Since the Labor Department started tracking weekly jobless claims in 1967, such declines have signaled an unemployment peak. In fact, by the time this average has fallen by 29%, unemployment already has topped out, typically about six months earlier.

History suggests October's 10.2% unemployment rate was the worst of it, which would do wonders for the sustainability of the economic recovery. It also would mean the Federal Reserve raises rates sooner than investors expect.

So why do most economists still think unemployment has further to rise? Part of the blame goes to the unusually stubborn nature of joblessness in this recession.

The number of workers drawing regular benefits has fallen, from a record 6.9 million in June to just over five million. But instead of finding jobs, most of those people have exhausted regular benefits and joined the rolls of people drawing extended and emergency benefits.

That number has swelled from 2.8 million in late June, when regular continuing claims peaked, to 4.7 million in early December. That extra 1.9 million matches the number of people no longer drawing regular benefits.

Those people already are counted in unemployment. Another 5.6 million aren't: That is the number of people who have given up looking for work and no longer drawing benefits and thus aren't counted in the labor force or in unemployment, which is the jobless percentage of the labor force.

When they start looking again, as they typically do in recoveries, they will rejoin the labor force, competing with the roughly 9.9 million people drawing benefits. That alone will raise the unemployment rate again.

UN Denies Plans to Issue Gold Bullion Coins

A report has been circulating across the internet that the United Nations will be issuing gold bullion coins. In fact, it is in early viral stage. A Google search for "UN to produce bullion coins as world currency" brings up 22,300 results.

Those carrying the story include the World Gold Council, the industry trade association.

I just got off the phone with United Nations spokesman Fahran Han who denies that the United Nations has any such plans.

The story is a hoax.

Top Ten Posts for the Month of December

Below are the Top Ten most viewed posts for the month of December 2009:

#1 Inside Ben Bernanke's Wallet

#2 Shock: Inside the Healthcare Bill

#3 A Christmas Card from the Federal Government

#4 Tyler Cowen Rips "Ron Paul-Lew Rockwell Libertarianism"

#5 The Panic Over the Soaring Monetary Base Was a Bernanke Bluff

#6 Major North Korea Currency Devaluation

#7 Guess Who Showed Up At the White House?

#8 U.A.E. Removes Sunday London Times From Newsstands

#9 The Applicability of the Austrian Theory of the Business Cycle for Analyzing and Interpreting the General Features of the Current Economic Crisis by Richard Ebeling

#10 Primary-Care Doctors Who Refer Patients to Specialists Will Face Financial Penalties Under Obamacare

North Korea Bans Foreign Currency

A key signal that a country is near economic collapse is when the government bans foreign currencies. It knows that its citizens do not trust its currency, and it is always a distrust for good reason.

North Korea has banned the use of foreign currency. According to WSJ:
Reports say the decree warns of severe punishment for anyone using U.S. dollars, euros, yuan and other non-North Korean currencies. Foreign currencies previously were accepted in some shops, restaurants and other outlets, particularly those catering to foreigners.

The order, issued by North Korea's state security bureau and going into effect Jan. 1, aims to "forbid the circulation of foreign currency," China's state-run CCTV television said in a brief report late Wednesday.
"Severe punishment" in these situations can often mean the guillotine. Yet, people in the underground markets will defy the order because it is the only chance they have of surviving above the bare subsistence level. It's a cruel and a very harsh environment.

Central power can really grind you.

Top Ten Most Popular Homes of 2009

WSJ has a daily feature where they list a spectacular (at least in their minds) house that is for sale. Thanks to the recession, the prices have been cut on many of the houses and many are still available for purchase.

Here's a slide show of the 10 most viewed houses.

Wednesday, December 30, 2009

Well, This Is Interesting

Huffington Post founder Arianna Huufington has launched a campaign to get people to pull their money from "Too Big To Fail" banks and move the money to community banks.

She has a new web site called Move Your Money.

I like End the Fed better, but anything that confuses bankers who are in cahoots with the government is not a bad thing. It gives them less time to plot new schemes.

I hasten to add that small banks have associations that conduct very aggressive lobbying on behalf of small banks. If we take a theoretical and assume that the money is transferred to the small banks,then the small banks will become big banks,with a lobbying apparatus in place.

That's not to say there aren't some solid small bankers. Most sound, honest and conservative bankers are among the small bankers,but we should keep Hayek's warning when it comes to political events: "The worst get on top."

It's unlikely the solid bankers would control the lobbying efforts under a scenario where small banks end up with the deposits of the large banks.

The only way to gain victory is to eliminate the power centers that are captured by the bad guys, you do that by eliminating government regulations and agencies.

Guess Who Showed Up At the White House?

Do you want to know who has power and influence in this country? Watch who visits the White House.

Another government release was sneaked out as the country begins to celebrate the New Year.

The White House has posted 25,000 additional records of those visiting the White House. It's all about investment bankers, union leaders and climatologists at the White House, judging by the visitors of President Obama and the President's chief economic advisor Larry Summers.

According to AP:
General Electric chief executive Jeffrey Immelt visited roughly a dozen times. Climate change expert Jonathan Lash visited as did Paul Hanrahan, the chief executive of major energy company AES.
Further research shows that Goldman Sach's CEO Lloyd Blankfein pretty much spent the entire day at the White House on October 29. He met with the president twice that day (one meeting had 119 attendees the other 16). On that day he also met one-on-one with Larry Summers. He also met one-on-one with Summers on February 4.

On October 29, Jamie Dimon met with the president twice, it appears in the same meetings as Blankfein. He also met on that day with Larry Summers but with another person present. He also met one-on-one with Rahm Emanuel that day, something Blankfein did not get to do.

Steven Rattner, who for a time ran the government's auto task force and is co-founder of the investment firm, Quadrangle Group, met with Larry Summers over 25 times.

Microsoft's Steve Ballmer met with Summers once. George Soros met with Summers in February.

While SEIU President Andy Stern doesn't show up on the visitors list this time, after topping it last time, his top assistant Anna Burger met with the President 10 times.

Leo Gerard, president of the United Steelworkers, met with the President 4 times.

In addition to his many meetings with Larry Summers, Steve Rattner met with the President twice.

David Rubenstein co-founder of the private equity firm, Carlyle Group, was in the 119 attendee meeting with Lloyd Blankfein and Jamie Dimon, when they met with the president.

Daniel Weiss, Senior Fellow and the Director of Climate Strategy, for the George Soros front group, Center for American Progress, visited with the President (in large groups) 4 times.

U.S. Taking Majority Ownership of GMAC

The Treasury has snuck out some government takeover news as the country prepares to welcome in the New Year.

The federal government said it will take a majority ownership stake in the troubled auto lender GMAC, the Treasury Department is reporting.

The government will also provide an additional $3.8 billion in funding for GMAC. This is in addition to the $12.5 billion it has already received.

The Treasury Department said it will increase its stake in GMAC to 56 percent from 35 percent and name four of nine directors.

What will they sneak out tomorrow?

Nigerian Scammers Hack Into Business Insider/Clusterstock Gmail Account

Henry Blodget and Dan Frommer have issued an alert:
On Monday, a hacker took control of our company's general Gmail account and sent a scam email to at least several dozen people who have corresponded with us at alleyinsider@gmail.com.

We got control of the account back quickly, but not without a fight and not before at least the one scam email went out.

First, we want to apologize to anyone who received an email ostensibly from us entitled "My Predicament" that recited a bogus sob story about getting mugged. ("Send money immediately...") Needless to say, we didn't send this email.
Blodgett and Frommer go into quite a bit of detail as to what they did to regain control of their email account and the counter-measures the hackers put in place.

They also go into detail on how the account was taken over.

In short, if you conduct any important business by email, their article is a must read. It will help understand how to defeat the scammers if they ever takeover your account, and also may prompt you to take a few measures to better protect your passwords.

The full story is here.

Bankers Get $4 Trillion Gift From Barney Frank

by David Reilly

To close out 2009, I decided to do something I bet no member of Congress has done -- actually read from cover to cover one of the pieces of sweeping legislation bouncing around Capitol Hill.

Hunkering down by the fire, I snuggled up with H.R. 4173, the financial-reform legislation passed earlier this month by the House of Representatives. The Senate has yet to pass its own reform plan. The baby of Financial Services Committee Chairman Barney Frank, the House bill is meant to address everything from too-big-to-fail banks to asleep-at-the-switch credit-ratings companies to the protection of consumers from greedy lenders.

I quickly discovered why members of Congress rarely read legislation like this. At 1,279 pages, the “Wall Street Reform and Consumer Protection Act” is a real slog. And yes, I plowed through all those pages. (Memo to Chairman Frank: “ystem” at line 14, page 258 is missing the first “s”.)

The reading was especially painful since this reform sausage is stuffed with more gristle than meat. At least, that is, if you are a taxpayer hoping the bailout train is coming to a halt.

If you’re a banker, the bill is tastier. While banks opposed the legislation, they should cheer for its passage by the full Congress in the New Year: There are huge giveaways insuring the government will again rescue banks and Wall Street if the need arises.

Nuggets Gleaned

Here are some of the nuggets I gleaned from days spent reading Frank’s handiwork:

-- For all its heft, the bill doesn’t once mention the words “too-big-to-fail,” the main issue confronting the financial system. Admitting you have a problem, as any 12- stepper knows, is the crucial first step toward recovery.

-- Instead, it supports the biggest banks. It authorizes Federal Reserve banks to provide as much as $4 trillion in emergency funding the next time Wall Street crashes. So much for “no-more-bailouts” talk. That is more than twice what the Fed pumped into markets this time around. The size of the fund makes the bribes in the Senate’s health-care bill look minuscule.

-- Oh, hold on, the Federal Reserve and Treasury Secretary can’t authorize these funds unless “there is at least a 99 percent likelihood that all funds and interest will be paid back.” Too bad the same models used to foresee the housing meltdown probably will be used to predict this likelihood as well.

Read the entire commentary here, but note Reilly does find one provision in the bill he does like. He fell for the propogannda being put out by commie Elizabeth Warren .

Beijing Says Billions in Funds Are Missing

Create government power centers, even in China, and the bad guys are going to corrupt it.

Auditors discovered that 234.7 billion yuan ($34.3 billion) disappeared from public funds in the first 11 months of this year, state media said Tuesday, in a report that underscores the depth of official corruption in China, reports WSJ.

Cases involving 67 senior officials and 164 others were handed over to judicial authorities.

Premier Wen Jiabao has called on state auditors to review public-investment projects to help avoid embezzlement and waste, Xinhua news agency reported.

Official corruption is one of the main causes of social unrest in China

GMAC Set for Another Cash Infusion

GMAC Financial Services is close to getting approximately $3.5 billion in additional aid from the U.S. government, on top of $12.5 billion already received since December 2008, according to people familiar with the situation, reports WSJ.

Just like in San Francisco, they need to keep the union workers happy.

Putin's a Damn Mercantilist

Heaven forbid that Russian citizens will actually have a valuable currency in their hands and that international investors supply capital to the country.

Vladimir Putin, now operating under the cover of Russia’s prime minister, said on Tuesday that Moscow would try to restrain the capital inflows that have caused the rouble to strengthen in recent months, reports FT.

His comments had an immediate impact on markets, with the Russian ruble falling 1.4 per cent and the RTS stock market index down 0.75 per cent.

However, Putin suggested that such efforts would stop short of full capital controls, which have been under discussion in policy circles. “There will be no revolutions,” he said.

Tuesday, December 29, 2009

Ponzi Scheme, Counterfeiting or None of the Above?

My posts, A New Tool for Bernanke and Mankiw Clues Us In: Monetary Base Is Not Money Supply, have generated a considerable number of emails and a few comments.

Many of the comments focus around a Zero Hedge featured paper by Eric Sprott and David Franklin.

Sprott and Franklin perform a solid analysis (to a degree) of who has been buying Treasury securities. Their analysis falls apart at the end, however.

They focus on the fact that the Federal Reserve Board of Governors Flow of
Funds Data
numbers show that the "Household Sector" was recorded as having bought $528 billion in Treasury securities in Q3 of 2009. They contrast this with the Q3 of 2008 number which showed 1/35 the size of purchases in the "Household Sector" compared to Q3 2009. They also point out that the "Household Sector" is where the Treasury puts all purchases that do not fit into other categories.

Here is where Sprott and Franklin derail.

Because of the large increase in "Household Sector" purchases in Q3 2009, and because it is a catchall for purchases that don't fit in other categories, Sprott and Franklin charge:
...who is the Household Sector?

They are a PHANTOM. They don’t exist. They merely serve to balance the ledger in the Federal Reserve’s Flow of Funds report.
This is a huge jump to make.

It is uncatogorized group(s), not phantom. Remember, a small little thing impacted the economy toward the end of Q3 2008, called a financial crisis. This caused panic buying of Treasury securities from quite possibly groups that had never ever purchased them before. Thus it is quite understandable how this category could explode as various groups sought out the safety of cash or near cash. Uncategorized from past trends, yes. Phantom, highly unlikely.

Once Sportt-Franklin derail however, their train picks up momentum.

They reveal that because of these phantom purchases, they have a concern:
Our concern now is that this is all starting to resemble one giant Ponzi scheme.
But a Ponzi scheme is when an operator, e.g. Bernie Madoff, takes in money, spends it and pays the earlier investors with money from new investors. Nothing of the kind is going on here, even if we grant for arguments sake, that these are just phantom numbers and the Fed is somehow secretly buying the Treasury securities.

Social security is a Ponzi scheme. But what Sprott and Franklin are charging is something different, that the Fed is simply printing up the money to support the Treasury market:
We are now in a situation, however, where the Fed is printing dollars to buy Treasuries as a means of faking the Treasury’s ability to attract outside capital.
But the Fed ALWAYS does this. That's one key role for their open market operations. And this is not a Ponzi scheme. It is more like a counterfeiting scheme that has been going on for decades.

In short, the Fed has been conducting business as usual, printing money, aka counterfeiting. It is highly unlikely they have attempted to cook the books when they have willingly reported the trillions in reserves they have otherwise pumped into the system. It makes no sense. What does make sense is that the panic has caused a flood of new Treasury buyers who want their money as close to cash as possible.

The government does enough lying and false flag operations that to spin new conspiracies with out foundation is a dangerous thing. It discredits those who attempt to point out real conspiracies.

There is no secret money being leaked into the economy via the Sprott-Franklin thesis. In fact, there is nothing in the Sprott-Franklin theory that would explain how such money would also be hidden from showing up in money supply numbers.

Sorry, no conspiracy here.

A Localized Breakdown of Joblessness in New York City

By Patrick McGeehan

The unemployment rate for all of New York City has risen above 10 percent in recent months, but broken down neighborhood by neighborhood, joblessness ranges from about half that bad to twice as bad, a new study shows.

The situation was worst in East New York, Brooklyn, where the unemployment rate for the third quarter of this year was 19.2 percent, according to the study, which was conducted by the Fiscal Policy Institute. That means that almost one-fifth of the adults living in East New York could not find jobs; it does not account for those unemployed residents who did not seek employment.

At the other end of the range, not surprisingly, were the Upper East Side and Upper West Side of Manhattan, where, near the depths of the recession last quarter, just 5.1 percent were unemployed. Manhattan’s most populous section, Harlem and Washington Heights, had by far its highest rate of unemployment, at 13.6 percent. In the Bronx, only the southern and central section was worse off, with a rate of 15.7 percent, according to the report.

James Parrott, the chief economist for the Fiscal Policy Institute, a liberal research group, said the racial disparities also were striking. In three of the five boroughs — the Bronx, Brooklyn and Manhattan — unemployment among blacks exceeded 15 percent. Hispanic unemployment was 15 percent or higher in five neighborhoods. But white unemployment exceeded 15 percent in only one neighborhood — East New York, where, at 25 percent, it exceeded the rates for blacks and Hispanics.


Click for a graphic representation.

I Couldn't Help Myself


See comment 8.

Which relates back to Krugman's post where he states he prefers banana fungus to deductive economic reasoning.

The guy does have a banana fetish.

Hong Kong Could Slip Into Second Recession in 2010, Leader Warns

Interesting, since China/Hong Kong appear to me to be the areas least likely to experience a double dip recession in, at least, the first half of 2010.

China has simply been printing too much new money as an attempt to support a distorted economy. This will ultimately lead to severe price inflation if they continue, but for now it removes any possibility of a double dip.

Hong Kong's territory leader Donald Tsang sees things differently.

Tsang, speaking in Beijing, said he was "rather pessimistic" and feared Hong Kong could be hit by the second wave of a double-dip recession in the middle of 2010.

His remarks followed repeated warnings from Hong Kong government officials than an asset bubble of inflated property and stock prices may be developing in the wealthy city of 7 million.

Tsang is correct about the asset bubble, but these things can sometimes go on for years. Witness the U.S. housing boom/bubble.

Synthetic CDO's, Spanish 21, And Sports Betting

By Kid Dynamite

As expected, my last post, "Fiduciary Duty and the Victim Mindset" sparked a lot of discussion. There are several intelligent comments on both my site, and on the republished version at Seeking Alpha, most of which I've done my best to respond to with clarifications of why I think my post is reasonable and accurate.

I had the epiphany this morning that the proper analogy with these CDO's lies in sports betting. I left the following comment (edited slightly here) on another blog this morning:

"To me, financial markets are not unlike sports bookmaking. In the bookie world, you have the "Squares" who are analogous to the retail investors. These are the guys who say things like "oh man - Tom Brady is wicked pissah - the Pats are SO totally gonna cover the 7 point spread," with little or no reasoning or analysis to back up their decision. They also might be guys who pay someone else (like a newsletter writer) to pick games for them (of course, these newsletters are almost always scams)

Then there are the professionals - I actually know a guy who was one of the biggest NFL bettors in the 80's. He still handicaps NFL games - he spends 30 hours+ a week analyzing the different matchups, weather, psychology, etc. Some weeks he finds several good bets, some weeks he finds none.

Now, in the investing world, pension fund managers need to be the PROFESSIONALS - they can't be in the "square" camp, and just say "hey - I paid the newsletter (ratings agency!!!) for the picks, if they lose, it's not my fault." That's amateur (square) thinking, and I could possibly be convinced that it's an acceptable excuse for RETAIL, amateur investors (but note, again, the culpability lies with the RATINGS agency here). Professionals, however, can't be allowed to make such excuses, or the system will never change! Similarly, you can't blame the bookie when you lose for having offered you an unfair bet.

Both sports betting markets and financial markets are efficient ENOUGH that you have to do your own work - and LOTS of it - if you expect to generate alpha.

Some people will deride me for making the analogy of markets to a casino or bookmaking operation - but I'm reasonably certain that most traders (myself, and everyone I know at least) do expected value calculation on their trades just like you'd do in the casino or in the sports book. It's not "Kid Dynamite is a naive immature gambler" - it's the realization that in both financial markets and in gambling markets, it's not a crime to have more information than the guy on the other side of the trade/bet."

People keep throwing the word "fraud" around here. As the NY Times article which prompted my original post explained, Goldman was creating these synthetic CDOs as far back as 2004. It took YEARS for them to blow up. I find it hard to use the fraud label there - it's just another case of most of the investing world being totally ignorant to the risks involved. There were few who saw the risks, and they positioned themselves accordingly - GS was in this camp on these synthetic CDOs, it seems. Sellers of synthetic CDOs didn't have to, as Tommy Boy so eloquently put it, "Take a dump in a box and mark it guaranteed," and coerce investors into buying them. Investors were screaming for yield- they were begging to buy these products. Blame it on the system, blame it on the ratings agencies, blame it on the investors - but don't put the lion's share of the blame on the virtual bookies - the sellers of the CDOs.

When you bet the Patriots, the bookie doesn't have to tell you that Tom Brady is out with a bad shoulder - you have to do that research yourself. Similarly, when you buy a synthetic CDO, which you can't do if you're a retail rube, you shouldn't expect the seller to tell you why he thinks you're on the wrong side of the trade.

You can read the rest here (and you should).

Two Economies: Government Workers Optimistic, Private Sector Not

Not surprisingly, given a pro-government president, government employees are much more bullish about the economy than those who work in the private sector. That’s a big change from the beginning of the year when those on the public payroll were a bit more pessimistic than private sector workers.

Data from the Rasmussen Consumer Index from the past seven days shows that a plurality of government workers think the economy is getting better while those who work in the private sector tend to have the opposite view. Those in the government sector are also more upbeat about the current state of the economy and their own personal finances.

Today, 46% of government employees say the economy is getting better while just 31% say it’s getting worse. Among those who work in the private sector, the numbers are reversed: 32% say better and 49% worse.

Twenty-four percent (24%) of government employees rate the economy as good or excellent while just nine percent (9%) of those in the private sector are so upbeat.

Fifty-five percent (55%) in the private sector rate the economy as poor, a pessimism shared by 38% of those on the public payroll.

Forty-four percent (44%) of government employees rate their own personal finances as good or excellent while 33% of private sector workers do the same.

Among those on the government payroll, 31% say their finances are getting better, and 40% say they’re getting worse. The comparable private sector numbers are 23% better and 47% worse.

These figures reflect a dramatic change from January 2009, with a growing optimism among government workers.

The Obama administration estimates that federal spending will reach 28% of GDP in 2009, up from 19% a decade ago. It’s the largest share of the economy consumed by the federal government since the fighting stopped in World War II.

In the private sector, such growth would be considered boom times for any industry, and government employees have undergone a remarkable change in attitude over the course of the year. In January, just 22% of government workers thought the economy was getting better, a figure that has jumped to 46% today. The number of government workers who think the economy has gotten worse has fallen in an equally dramatic manner, from 61% in January to 31% today.

Among those who work in the private sector, however, the change has been far less significant. In fact, the number of private sector workers who think things are getting better has improved just six points, from 26% up to 32%.

Bank Of Israel Raises Key Interest Rate

The Bank of Israel raised its key interest rate on Monday by 25 basis points to 1.2%. The new rate becomes effective January 1.

In late August, the Bank of Israel was the first bank globally to raise rates since the financial crisis, increasing the rate from a historic low of 0.50% to 0.75%. Then in late November, the bank raised the rate again by 25 basis points to its current December rate of 1%.

369 Twitter Banned Passwords

Twitter has banned these passwords as security risks for being too damn easy to guess:

via TechCrunch:

1. 111111
2. 11111111
3. 112233
4. 121212
5. 123123
6. 123456
7. 1234567
8. 12345678
9. 131313
10. 232323
11. 654321
12. 666666
13. 696969
14. 777777
15. 7777777
16. 8675309
17. 987654
18. aaaaaa
19. abc123
20. abc123
21. abcdef
22. abgrtyu
23. access
24. access14
25. action
26. albert
27. alexis
28. amanda
29. amateur
30. andrea
31. andrew
32. angela
33. angels
34. animal
35. anthony
36. apollo
37. apples
38. arsenal
39. arthur
40. asdfgh
41. asdfgh
42. ashley
43. august
44. austin
45. badboy
46. bailey
47. banana
48. barney
49. baseball
50. batman
51. beaver
52. beavis
53. bigdaddy
54. bigdog
55. birdie
56. bitches
57. biteme
58. blazer
59. blonde
60. blondes
61. bond007
62. bonnie
63. booboo
64. booger
65. boomer
66. boston
67. brandon
68. brandy
69. braves
70. brazil
71. bronco
72. broncos
73. bulldog
74. buster
75. butter
76. butthead
77. calvin
78. camaro
79. cameron
80. canada
81. captain
82. carlos
83. carter
84. casper
85. charles
86. charlie
87. cheese
88. chelsea
89. chester
90. chicago
91. chicken
92. cocacola
93. coffee
94. college
95. compaq
96. computer
97. cookie
98. cooper
99. corvette
100. cowboy
101. cowboys
102. crystal
103. dakota
104. dallas
105. daniel
106. danielle
107. debbie
108. dennis
109. diablo
110. diamond
111. doctor
112. doggie
113. dolphin
114. dolphins
115. donald
116. dragon
117. dreams
118. driver
119. eagle1
120. eagles
121. edward
122. einstein
123. erotic
124. extreme
125. falcon
126. fender
127. ferrari
128. firebird
129. fishing
130. florida
131. flower
132. flyers
133. football
134. forever
135. freddy
136. freedom
137. gandalf
138. gateway
139. gators
140. gemini
141. george
142. giants
143. ginger
144. golden
145. golfer
146. gordon
147. gregory
148. guitar
149. gunner
150. hammer
151. hannah
152. hardcore
153. harley
154. heather
155. helpme
156. hockey
157. hooters
158. horney
159. hotdog
160. hunter
161. hunting
162. iceman
163. iloveyou
164. internet
165. iwantu
166. jackie
167. jackson
168. jaguar
169. jasmine
170. jasper
171. jennifer
172. jeremy
173. jessica
174. johnny
175. johnson
176. jordan
177. joseph
178. joshua
179. junior
180. justin
181. killer
182. knight
183. ladies
184. lakers
185. lauren
186. leather
187. legend
188. letmein
189. little
190. london
191. lovers
192. maddog
193. madison
194. maggie
195. magnum
196. marine
197. marlboro
198. martin
199. marvin
200. master
201. matrix
202. matthew
203. maverick
204. maxwell
205. melissa
206. member
207. mercedes
208. merlin
209. michael
210. michelle
211. mickey
212. midnight
213. miller
214. mistress
215. monica
217. monkey
218. monster
219. morgan
220. mother
221. mountain
222. muffin
223. murphy
224. mustang
225. naked
226. nascar
227. nathan
228. naughty
229. ncc1701
230. newyork
231. nicholas
232. nicole
233. nipple
234. nipples
235. oliver
236. orange
237. packers
238. panther
239. panties
240. parker
241. password
242. password
243. password1
244. password12
245. password123
246. patrick
247. peaches
248. peanut
249. pepper
250. phantom
251. phoenix
252. player
253. please
254. pookie
255. porsche
256. prince
257. princess
258. private
259. purple
260. pussies
261. qazwsx
262. qwerty
263. qwertyui
264. rabbit
265. rachel
266. racing
267. raiders
268. rainbow
269. ranger
270. rangers
271. rebecca
272. redskins
273. redsox
274. redwings
275. richard
276. robert
277. rocket
278. rosebud
279. runner
280. rush2112
281. russia
282. samantha
283. sammy
284. samson
285. sandra
286. saturn
287. scooby
288. scooter
289. scorpio
290. scorpion
291. secret
292. sexsex
293. shadow
294. shannon
295. shaved
296. sierra
297. silver
298. skippy
299. slayer
300. smokey
301. snoopy
302. soccer
303. sophie
304. spanky
305. sparky
306. spider
307. squirt
308. srinivas
309. startrek
310. starwars
311. steelers
312. steven
313. sticky
314. stupid
315. success
316. summer
317. sunshine
318. superman
319. surfer
320. swimming
321. sydney
322. taylor
323. tennis
324. teresa
325. tester
326. testing
327. theman
328. thomas
329. thunder
330. thx1138
331. tiffany
332. tigers
333. tigger
334. tomcat
335. topgun
336. toyota
337. travis
338. trouble
339. trustno1
340. tucker
341. turtle
342. twitter
343. united
344. vagina
345. victor
346. victoria
347. viking
348. voodoo
349. voyager
350. walter
351. warrior
352. welcome
353. whatever
354. william
355. willie
356. wilson
357. winner
358. winston
359. winter
360. wizard
361. xavier
362. xxxxxxxx
363. yamaha
364. yankee
365. yankees
366. yellow
367. zxcvbn
368. zxcvbnm
369. zzzzzz

'Cadillac Care' Is Largely A Myth

By Allan Sloan

Can you tell a Chevy Malibu from a Cadillac Escalade? I'm sure you can, but I've got doubts about the folks in Washington who want to impose a stiff excise tax on what they call "Cadillac Care" health plans to raise revenue and reduce health spending.

The problem is that they define "Cadillac" not by the benefits a plan delivers but by how much a plan costs. But as any insurance maven will tell you, costs depend more on the people being covered (old, sick, or both?) and location (high-cost New York or low-cost Montana?) than on the level of benefits. "High-cost plans aren't necessarily generous plans," says Beth Umland, director of research for health and benefits for the Mercer consulting firm.

Indeed. Here's an example. Let's say that the 100 members of the U.S. Senate (average age: 63), where the excise tax idea originated, had their own health plan rather than being part of the Federal Employees Health Benefits Program (average policy-holder age: 46).

The federal plan's Blue Cross option with vision and dental care will cost $6,971 for individuals and $16,124 for families in 2010, well below the threshold ($8,500 and $23,000) at which the excise tax, which starts in 2013, would apply.

This same plan just for senators would probably cost about $14,000 for individuals and $32,000 for families -- way, way up in excise tax land. My estimate is based on the work of economist Henry J. Aaron, who has analyzed the way people's ages affect health-care costs. See? A Malibu policy for a big pool of employees becomes an Escalade if it covers only older ones.

Now to Medicare -- no Cadillac plan -- which will spend about $510 billion this year to cover fewer than 46 million people. That's more than $11,000 a person, well over the Cadillac threshold of $9,850 for single retirees 55 and up. And that's without counting Medigap coverage (for which I have no numbers), which would send the average higher.

Let me hasten to say that Medicare wouldn't be subject to the excise tax. My point is to show that high costs don't necessarily equate to cushy benefits. Medicare is expensive because its beneficiaries are old, disabled, or both. Not because it's lush.

The tax would be 40 percent of the amount by which a plan's expense (employer and employee premiums plus flexible spending accounts plus medical savings accounts plus "wellness" programs) exceeds thresholds.

Read the full column here.

Roubini Parties with Trump, Schwarzman and Soros

NyPo reports:
Oliver Stone holding court with billionaires Donald Trump, George Soros and Steve Schwarzman at a private party hosted by Nouriel Roubini -- nicknamed "Dr. Doom," for predicting the economic crisis -- at RdV Lounge in the Meatpacking District.

Billionaires on the Move: Soros, Dell and Paulson All Invest in the Same Bank

The OneWest Bank holding company, created a year ago from the assets of failed mortgage lender IndyMac Bank, earlier this month acquired First Federal Bank of California when it failed. The acquisition doubled OneWest’s branches to 72 and increased total assets by a third to $24 billion.

OneWest’s investors include investment firm J.C. Flowers & Co., hedge fund Paulson & Co., computer mogul Michael Dell’s investment vehicle MSD Capital, and a fund controlled by billionaire investor speculator George Soros.

Janet Tavakoli Responds to FT's Perception of Widely Held Views Among the Financial Elite

FT writes:
What has been the most useful innovation from the financial world in recent decades? That is a question Paul Volcker, the former head of the US Federal Reserve, likes to pose to investors and bankers.

His slightly tongue-in-cheek answer might make some financiers seethe: instead of highlighting any derivative or complex financial product, Mr Volcker nominates the automatic teller machine (ATM)...His scepticism is echoed in the political and regulatory world. "Wall Street was chiefly responsible for the 'financial innovation' that did massive damage to the US economy," says Janet Tavakoli, a structured finance consultant, expressing a widely held view.
In an email Tavakoli comments:
Most of the attendees at the Wall Street Journal's Future of Finance Conference at which Paul Volker made his remarks were oblivious to this "widely held view," as I mentioned in my comments on the conference.

If this is now a widely held view, it is also news to many reporters at the Financial Times. Gillian Tett was one of the first journalists to follow the saga of questionable financial practices. We disagree on the need for widespread investigations and felony indictments. I am for them, she is against. The problem is much more profound than shattered faith in a flawed product; the manufacturers knew or should have known they poisoned the global financial food supply.

In late 2008, John Gapper told me he was the first and best stop to review an advance copy of Dear Mr. Buffett, my book on the financial crisis. He never wrote a word, and buried it. In late February 2009, Paul Davies, an FT reporter who was in the forefront of exposing dodgy financial products, wrote a good review shortly after I sent him the already published book. I clearly state that the relationship between imploded mortgage lenders and Wall Street's securitization and sales process was the largest Ponzi scheme in the history of the capital markets. Ponzi schemes are illegal in the United States. Problems were not limited to mortgage products and numerous players were involved: investment banks, certain banks and thrifts, credit rating agencies, hedge funds, CDO "managers,” monoline insurers, mortgage brokers, regulators, and Congress.

I do not know whether the book's content had anything to do with John Gapper's not writing a review. I am well aware that for the past several years, my views have not been widely held. Perhaps as Gapper claimed, he was busy with a new project. John Gapper recently authored a hagiography of Goldman CEO Lloyd Blankfein and dubbed him "Man of the Year" without mentioning what Tett labeled a "widely held view." Christopher Whalen cancelled his FT subscription after reading Gapper’s profile of Blankfein.

Monday, December 28, 2009

Fannie Mae: Delinquencies Increase Sharply in October

This will tell you more about the state of economy than any CNBC talking head:

Fannie Mae reported today that the rate of serious delinquencies - at least 90 days behind - for conventional loans in its single-family guarantee sector increased to 4.98% in October, up from 4.72% in September - and up from 1.89% in October 2008.

Note: These are on conventional mortgages. Not pretty.

Mankiw Clues Us In: Monetary Base Is Not Money Supply

I have been pointing this out for months, now even Harvard's ultimate textbook salesman Greg Mankiw gets it. He writes:
An article in Saturday's Wall Street Journal says that some big-league investors are betting that inflation will rise significantly. The reason? "The nation's exploding monetary base is a harbinger of inflation." Is this right? Probably not.

It is true that the monetary base is exploding... Normally, such surge in the monetary base would be inflationary. The textbook story is that an increase in the monetary base will increase bank lending, which will increase the broad monetary aggregates such as M2, which in the long run leads to inflation.

That is not happening right now, however. The broader monetary aggregates are not surging. Much of the base is instead being held as excess reserves.
So you have two ways to learn your economics, go to Harvard and get your economics filtered through Greg Mankiw or you can read EPJ, invest the tuition money it would have cost you to go to Harvard AND get the same analysis seven months earlier.

Jamie Dimon Tells the U.K.: Governments Are Supposed to Bailout the Major Banks, the Major Banks Are Not Supposed to Bailout Governments

Jamie Dimon is finding out that the UK is not his lap dog. Philip Aldrick and Jonathan Sibun report for the UK's Telegraph:
JP Morgan, the giant US investment bank, has warned the Chancellor it may scrap plans to build a £1.5bn flagship European headquarters in Canary Wharf if politicians don't rein in their attacks on the City.

Jamie Dimon, chief executive, made the coded warning to Alistair Darling in an angry phone call after the Government revealed its 50pc super-tax on bonuses in the pre-Budget report. Although Mr Dimon did not explicitly threaten to can the 1.9m square foot Docklands development, he pointedly used it to demonstrate the bank's commitment to London...

JP Morgan is now considering its options, in part as a result of the authorities change in attitude. Concerns have been raised by the Financial Services Authority's (FSA) crackdown on pay, which bankers say is stricter than any other major financial centre, and the 50pc higher rate of income tax, as well as the super-tax on bonuses above £25,000...

Sources close to the bank said scrapping or substantially scaling down the development has been on the cards for the past two months. "Why would you want to make that kind of investment in London now?" a senior insider said. Others claimed that Mr Dimon was so furious with the Treasury about the super-tax – as JP Morgan has not received UK Government support – that "he wanted to lay down a marker".
The real answer to all this is that government's role in the banking sector should be eliminated, but it is fun to see Jamie with a little sand in his eyes. It certainly must be a new experience for the President Obama's favorite banker, who was gifted by U.S. authorties both Bear Stearns and WaMu.

The Lap Bomber Mystery

With much greater detail, Justin Raimondo delves into my cui bono question and the curious timing of the Christmas Day event staged by Umar Farouk Abdulmutallab.

(ViaNick)

A New Tool for Bernanke

The Federal Reserve wants even another way to drain reserves from the system.

The Federal on Monday proposed amendments to Regulation D (Reserve Requirements of Depository Institutions) that would enable the establishment of a term deposit facility.

Under the proposal, the Federal Reserve Banks would offer interest-bearing term deposits to eligible institutions through an auction mechanism. Term deposits would be one of several tools that the Federal Reserve could employ to drain reserves to support the implementation of monetary policy.

Mortgage Rates Climb Even Higher

Mike Dunton a community banker and friend of EPJ emails:

The 30-year mortgage rate is at 5.25% today. This could be vacation influenced. After all, interventionists have to recharge their batteries, too.

The Worst-Run Big City in the U.S.

Benjamin Wachs and Joe Eskenazi report via SF Weekly:

It's time to face facts: San Francisco is spectacularly mismanaged and arguably the worst-run big city in America. This year's city budget is an astonishing $6.6 billion — more than twice the budget for the entire state of Idaho — for roughly 800,000 residents. Yet despite that stratospheric amount, San Francisco can't point to progress on many of the social issues it spends liberally to tackle — and no one is made to answer when the city comes up short.

The city's ineptitude is no secret. "I have never heard anyone, even among liberals, say, 'If only [our city] could be run like San Francisco,'" says urbanologist Joel Kotkin. "Even other liberal places wouldn't put up with the degree of dysfunction they have in San Francisco. In Houston, the exact opposite of San Francisco, I assume you'd get shot."...

In 2007, the Department of Children, Youth, and Families (DCYF) held a seminar for the nonprofits vying for a piece of $78 million in funding. Grant seekers were told that in the next funding cycle, they would be required — for the first time — to provide quantifiable proof their programs were accomplishing something.

The room exploded with outrage. This wasn't fair. "What if we can bring in a family we've helped?" one nonprofit asked. Another offered: "We can tell you stories about the good work we do!" Not every organization is capable of demonstrating results, a nonprofit CEO complained. He suggested the city's funding process should actually penalize nonprofits able to measure results, so as to put everyone on an even footing. Heads nodded: This was a popular idea...

Job protection for even the most obviously unfit Muni workers is among the strongest in the city. Peskin had proposed increasing the percentage of employees who could be fired for incompetence from 1.5 to 10 percent. But if that provision were included in the measure, union reps said, they would flood the "No on A" campaign with money and volunteers. "This is a union town," one transit worker warned. "And we expect it to stay that way."

Peskin caved. He had to. This is a union town. You can't reform the city charter without winning an election; winning an election requires union support; and unions — almost by definition — don't want major reform. It would be a paradox — but that would contravene a number of union bylaws.

You can't get San Francisco running efficiently, because that would require large numbers of unionized city workers to willingly admit their redundancy and wastefulness. Inefficiency pays their salaries. "It's been going on for decades," Peskin says.

This problem comes up almost every time the city negotiates labor contracts, which is part of the reason San Francisco is constantly on the brink of fiscal ruin. Politically powerful unions — the progressives are beholden to the service unions; moderates cater to police, firefighters, and building trades; and Republicans ... what's a Republican? — negotiate contracts the city knows it can't afford. Politicians approve them, despite needing to balance the budget every year, because the budget impact of proposed contracts is examined by the Board of Supervisors only for the following year, no matter how long contracts run. According to former city controller Ed Harrington, it has become common practice not to schedule any raises for the first year of a contract, but to provide extensive raises in later years.

The result is a contract that looks affordable one year out, then blows up in the city's face. City employees receive up to 90 percent of their already generous salaries in pensions and many also receive lifetime health care — meaning that as they retire, labor costs soar.

The unions worked their magic on Peskin's Muni reform, gutting the ability of management to fire workers and getting a higher base salary out of the deal. But they did keep their word, and helped the revised Prop. A win at the ballot box. Some good should have come out of that. But it hasn't. That's because unions were only part of the toxic combination that rendered Muni reform impossible, no matter what the voters said.

Prop. A gave Muni tens of millions of dollars in parking meter money that had previously been spread around the city. But even though voters decided that money should go to Muni, city departments found novel ways to keep it for themselves — and then some. Denied funds by Prop. A after 2007, departments began charging Muni for "services" they were legally required to provide anyway. Police charged Muni whenever they went onto transit vehicles; ambulances charged Muni for picking up people off the buses. [Mayor] Newsom, meanwhile, paid his green advisers' hefty salaries from Muni's coffers. By 2009, this was costing Muni about $63 million — more than double what the agency was making in new revenue from Prop. A. Muni is the city's slush fund — even though that money was supposed to go to help your commute. You voted for it.

This is why it's so hard to "reform" anything in San Francisco: Pass a bill giving Muni a dedicated revenue stream, and you end up eviscerating its finances; try to hold Muni workers more accountable for their jobs, and you end up giving them a raise. Muni isn't getting fixed anytime soon, because these are the fixes...

Research by professor Bill Watkins of California Lutheran University over the past decade reveals that San Francisco is shedding its middle-class population at double the state rate. The city, however, is not losing low-income people at nearly the state's pace — and is gaining wealthy residents at far more than California's overall rate. In short, we are replacing our middle class with a rich elite and a burgeoning underclass.

It doesn't surprise me. See They Have Lost Their Minds in San Francisco and I Told You It's a Crazy Crime Zone: The Mayor of Sacramento Robbed in San Francisco.

San Francisco is a living, breathing example of what happens when you have leaders that expect the government sector to solve problems by adding more regulations, more things for government to control and taxing more.

What the anti-private property crowd has done to San Francisco, President Obama wants to do to the nation. Starting with your health.

How Warren Buffett Maintains His Nice Guy Image

Warren Buffett is a skilled PR operator and when it comes to doing the tough stuff Buffett hires bad cops, says Buffet biographer Alice Schroeder:
Even in a crisis, Warren Buffett has avoided crisis communications PR: for example, at Salomon, and during General Re. His approach is: pick up the phone and talk. Berkshire does not have an internal PR person; Buffett is Berkshire’s PR person. He has exceptional media skills, rarely makes mistakes, and is skillful at negotiating when to speak on background, off the record, or with quote approval...

You may be asking yourself, why is the management change at [Berkshire owned]
NetJets a crisis? Berkshire has had money-losing businesses before. At NetJets, Sokol has got an enormous challenge on his hands. The changes he’s making at NetJets are so significant that Sokol’s angry employees apparently took their complaints about him to the press.

Try to imagine Berkshire employees doing that to Buffett. It’s unthinkable, right? Buffett could order animal sacrifices on his birthday and his employees probably wouldn’t complain to the New York Times.

One reason for that is that Buffett almost never criticizes anyone by name. In keeping with that practice, he is not quoted anywhere in [an NYT article about NetJets]. Although the harsh changes have been ordered by him and are being made with his approval, he is staying well out of the way. Sokol has signed up to be the bad cop.

Morgan Stanley Expects 10-Year Note Rate to Increase by 40%

Lock in long-term rates now.

Morgan Stanley is telling you what is going to happen.

Yields on benchmark 10-year notes will climb about 40 percent to 5.5 percent, the biggest annual increase since 1999, according to David Greenlaw, chief fixed-income economist at Morgan Stanley in New York. The surge will also push interest rates on 30-year fixed mortgages to 7.5 percent to 8 percent, almost the highest in a decade, Greenlaw said.

My guess is the 30-year mortgage rate will climb even higher by the end of 2010.

How Harvard Can Finally Get Something Valuable from Larry Summers

You have to give Larry Summers, President Obama's top economic advisor, one thing, he sure has the Obama talking points down. In an interview with WSJ, Summers gives the ultimate performance of how a presidential apologist should act, stick to the talking points, justify everything the administration does (even when its contradictory), never get off point(regardless of how absurd the point may be).

Harvard should make this a case study.

A Banking Insider Reveals How the Fed Manipulates the Mortgage Game

Occasional EPJ commenter Michael J. Dunton, aka Mike in Alaska, is a community banker.

Bob Murphy asked him to put together a report from his insider perspective on what is going on in the mortgage industry. Here is his report:


Let me explain to the average reader what excess reserves mean in a context of a small community bank. Each day a young lady from my staff would come into my office and show me where we were at, in cash (paper and electronic), from the day’s course of business. I always had to know what time it was in the morning so as to be ready for her visit between 11:30 and Noon—I sometimes could be in a meeting in the building, or could be somewhere about town. If we needed cash, I would call up the Federal Home Loan Bank that we belonged to and borrow overnight funds—or I could borrow for 30, 60, 90, 12, 180, or 360 days if the rate was too good to pass up. We could even borrow on a term facility for up to 30 years, but going out that long on the yield curve, whether borrow or lending, is a bit dramatic for me. The same goes if we had excess cash: I could lend it out overnight, or buy a CD of varying maturities and rates.

That was then.

Fast forward to now and we get the situation where we haven’t had to borrow for daily liquidity for so long that I have forgotten the Federal Home Loan Bank’s phone number and our bank’s account number (don’t worry, I have it written down). We are swimming in excess cash. We see this as a result of several events: first, mortgage-backed securities we hold have been paying off at a faster speed due to the Federal Reserve’s purchase of MBS in the market; second, our loan demand is down—our loan balances are about 5% lower than normal; third, other bonds' yields are being dragged down and issuers are calling the higher yielding securities and reissuing new bonds at lower yields; lastly, our customers are holding higher cash balances. I now needn’t worry if I have to borrow for my daily liquidity on any given day for the foreseeable future—I just need to worry how to stay in business with $15 million stuck earning 0.25% and flat to decreasing loan demand for the next year.

Let’s explore why the Fed has been affecting excess reserves by way of buying up mortgage-backed securities. The Fed is trying to stimulate the economy, help homeowners, and buoy the banks by re-inflating the housing asset bubble. Most mortgages are rolled up into securities (MBS) and sold to investors. We’ve written, through November, $126 million in mortgages versus $58 million last year. We’ve only kept on our books about $28 million in mortgages. Most of our mortgages are sold to Fannie, who then rolls them into large pools of MBS. Regular banks (the big boys), in the past, have done the same thing as Fannie and Freddie and rolled their mortgages into private-label MBS. As I will discuss later, Fannie and Freddie pretty much control the mortgage landscape right now and other players are living off the crumbs.

Read the rest here.

Cui bono?

In attempting to understand global events I like to understand who benefits from international incidents.

Just last week President Obama ordered a U.S. military strike on Yemen terrorists. I wonder how the American people are going to react to that? Obama expanding war beyond Iraq and Afghanistan?

Umar Farouk Abdulmutallab, who set himself on fire on the Northwest flight Christmas day while the plane was on approach to Detroit airport, has lived to tell his story. Abdulmutallab claims that the attack originated with al-Qaeda's network in Yemen.

Cui bono from this admission?

President Obama does. He now has perfect cover for expanding the war into Yemen.

Just saying.

UPDATE -NYT Headline this morning: U.S. Widens Terror War to Yemen, a Qaeda Bastion

The story continues:
In the midst of two unfinished major wars, the United States has quietly opened a third, largely covert front against Al Qaeda in Yemen.

Recession Sets Italy Industry Output Back 25 Years

Italy's industrial production fell by around a quarter during the global economic downturn, cutting its output to levels last seen 25 years ago, the Bank of Italy said in a study.

Italy is the Euro-zone third largest economy, following after Germany and France.

Sunday, December 27, 2009

Jim Rogers Schools Nouriel Roubini on Commodity Bubbles:

Jim Rogers is interviewed by Wall St Cheat Sheet:
Damien Hoffman: Jim, you were in the media a few times last week and I want to follow up on a few points you made. You said on Bloomberg that Nouriel Roubini did not do his homework regarding the asset bubbles about which he is now warning. Can you explain what homework he did not do?

Jim: All of it. How can you talk about a bubble when assets such as silver are 70% below their all-time high? Same for coffee, sugar, cotton, natural gas, and many more. I have a problem talking about a bubble when assets are this depressed from their all-time highs.

A bubble is when assets are screaming to new highs everyday, everyone is talking about them, and everyone owns them. Right now, virtually no one owns commodities. So for Mr. Roubini to talk about a bubble in commodities defies comprehension. It proves he does not understand markets.

I am flabbergasted at Mr. Roubini’s comment about bubbles because there is not a single market in the world making all-time highs except Gold, US Government Bonds, Cocoa, and the Sri Lankan stock market. That’s hardly reason to call for a bubble. So, I am most perplexed about this alleged bubble which is out there.

If an asset rises 100% in one year, that’s a great year, but not necessarily a bubble. Look at oil. It’s up huge off the bottom but nowhere near it’s old highs. Look at Citigroup. The stock is up 3 or so times off the bottom …

Damien: … and I doubt long term shareholders feel like they are in a bubble.

Jim: Exactly. And since Mr. Roubini thought oil would stay below $40 a barrel for all of 2009, I would love for him to tell me and the rest of the world exactly where are all the oil supplies because the International Energy Agency (IEA) — which has the best global data set on energy supplies — has no idea where is the oil. Mr. Roubini should tell us where this price suppressing oil supply is hidden. All the oil possessing countries in the world have declining reserves. All the oil companies have declining reserves. So Mr. Roubini must know something the rest of us don’t.

Damien: On another note, Gold has been reaching new all-time highs, although not inflation adjusted. You said Gold may reach $2,000 an ounce over the next decade. Can you explain what variables will push Gold to $2,000?

Jim: First, I hope you will keep Mr. Roubini’s statement where he said Gold going to $2,000 an ounce by 2019 is “utter nonsense.” I think you’re going to get a chance to call him before 2019 to ask him what he thinks of Gold at $2,000 and why he thought it was “utter nonsense.”

Regarding variables, it’s very clear there is huge suspicion about paper money around the world. This suspicion is gathering steam. Governments are printing huge amounts of money. This has always led to higher prices. Maybe I am wrong and it’s different this time. But I doubt it.

Additionally, no new large gold mines have been opened in decades. Some of those mines are over 100-years old. They are all depleting. On the other hand, central banks have huge Gold reserves above ground — and they are less interested in selling than in the past.

If you adjust Gold for inflation and go back to it’s former all-time high in 1980, Gold should be over $2,000 an ounce right now if you want to say it’s reaching new inflation adjusted all-time highs. That does not mean Gold has to get back to a true all-time high. Nothing has to. However, I suspect that given all the money printing in the world, we will see much higher prices for hard assets.

Despite Gold’s potential, I think I will make more money in other commodities such as silver, cotton, or coffee — all of which are terribly depressed.
Note: While I agree with Rogers' long term view, at present he is incorrect by saying all governments are printing money. China is. The United States is not.

Read the full interview here.

Top Ten

Below are the Top Ten most viewed posts for the week ending Saturday December 26, 2009:

#1 Shock: Inside the Healthcare Bill (24th week on list)

#2 Over the Top Behavior by Obama in Copenhagen

#3 Primary-Care Doctors Who Refer Patients to Specialists Will Face Financial Penalties Under Obamacare

#4 The Panic Over the Soaring Monetary Base Was a Bernanke Bluff (2nd week on list)

#5 Is a Big Problem Brewing for Larry Summers?

#6 Nader Blasts Obamacare

#7 Daley Machine Sends Message to Obama

#8 How Obamacare Will Screw the Young By Prateik Dalmia

#9 A Major Warning on the Slowed Money Growth

#10 Part 2 - The Bernanke Bluff: On the Trillion Dollars of Excess Reserves (2nd week on list)

Econometricians Gone Totally Mad in Support of Tyranny

There has always been speculation among economists who apply a verbal deductive methodology to the science of economics as to why econometricians adopt a worshipful posture towards using equations when attempting to explain the economy.

One theory holds that it provides cover to bring about more intervention in the economy. A current proposal by Yale economist Robert Shiller provides an object lesson in how phony equations are created to advance government intervention.

In today's NYT, Shiller writes:
Corporations raise money by issuing both debt and equity, the latter giving investors an implicit share in future profits. Governments should do something like this, too, and not just rely on debt.

Borrowing a concept from corporate finance, governments could sell a new type of security that commits them to paying shares in national “profit,” as measured by gross domestic product.
Notice what Shiller is doing here.

He is taking a real concept, corporate profits and attempting to adopt it in a manner that is very different.

A shareholder in a corporation is actually a part owner of that corporation. Thus, his profits based on his percentage of ownership are entirely understandable. Where else would the money go?

The government is not a profit producing entity. There are no "profits" to distribute. But Shiller seems to imply there are. What the hell is he talking about? Here's where his worship of everything that can fit into an equation turns him into an apologist for state tyranny:
Historically, one impediment [to issuing shares that commits to pay a share of GDP] was the difficulty in accounting on a national scale: governments didn’t even try to measure G.D.P. until well into the 20th century.

Although G.D.P. numbers still aren’t perfect — they are subject to periodic revisions, for example — the basic problem has been largely solved. So why not issue shares in G.D.P. now.
Talk about seeing everything through cult like eyes of an econometrician. Shiller thinks a share of GDP "profits" haven't been issued before because it is only recently that econometricians have been able to measure GDP.

Of course, the real problem is that there are no "GDP profits" to distribute. GDP measures in a sketchy method "national production". If Joe creates shoes and exchanges them with Pete for a coat. They each gain, but there is no external profit that the government owns in this transaction. There are no shares in GDP to issue, despite how complex an equation the econometricians can design.

But Shiller sees it differently. Read the last Shiller paragraph I quoted, again:
Although G.D.P. numbers still aren’t perfect — they are subject to periodic revisions, for example — the basic problem has been largely solved. So why not issue shares in G.D.P. now?
What Shiller is really saying here, if we take an eye off his equations, is that the government owns all production and it's about time that the people realize this. Such a claim thus makes it easier for governments to raise money. Shiller is clear about this:
Such securities might help assuage doubts that governments can sustain the deficit spending required to keep sagging economies stimulated and protected from the threat of a truly serious recession.
Once he let's the cat out of the bag that it is about making it easier for governments to raise money, he quickly shifts into explaining in more detail the equation that will divide up the GDP:
In a recent pair of papers, my Canadian colleague Mark Kamstra at York University and I have proposed a solution. We’d like our countries to issue securities that we call “trills,” short for trillionths.

Let me explain: Each trill would represent one-trillionth of the country’s G.D.P. And each would pay in perpetuity, and in domestic currency, a quarterly dividend equal to a trillionth of the nation’s quarterly nominal G.D.P.

If substantial markets could be established for them, trills would be a major new source of government funding.
This is really all mad mumbo jumbo, except for the last paragraph.

Shiller is designing an equation based on exchanges where there is nothing spun off to create any ownership "profits." He intuitively must understand this, since he then tells us about trills:
Trills would be issued with the full faith and credit of the respective governments. That means investors could trust that governments would pay out shares of G.D.P. as promised, or buy back the trills at market prices. [Note: I am not sure what Shiller means by "paying out shares". In another part of his column he talks about paying out from "cash flow". Same thing with his comment as to buying back trills at market price. If it truly is a market price, why would it be necessary for the government to buy back trills, or important to even mention, since if it truly is a market price, they could be sold in the market? This indicates a very amateurish effort by Shiller in his entire proposal that doesn't appear to be even internally consistent.-RW]
He brings in the full faith of government because Shiller realizes that the only thing that brings value to trills is plain and simple, the power of the state to tax. That's what "backed up by the full faith and credit of the government" means. Shiller just covers it all up in mumbo jumbo about ownership in GDP.

Shiller then goes on to explain how a trill will pay out based on one trillionth of "the annual cash flow". Which is simply another way of saying that the interest on this type security will be variable based on nominal GDP, but it does so in a deceiving way by suggesting that somehow there is an annual "cash flow"to be divided. There is no such thing. There is simply the ability of governments to tax, nothing more, nothing less.

Shiller's equations do nothing but attempt to obfuscate this fact through fancy equations, so that it becomes easier for governments to borrow money that ultimately must be paid for through taxation or inflation. Nothing new here.

Saturday, December 26, 2009

Berkshire Hathaway Eliminates 21,000 Jobs

Warren Buffett's holding company come has experienced a significant decrease in employees at its operating subsidiaries.

Berkshire Hathaway Inc. reported 21,000 fewer employees than it had at the end of 2008, Bloomberg reports.

Berkshire and its subsidiaries have about 225,000 workers. That’s 8.6 percent lower than the 246,083 disclosed in the 2008 annual report. Berkshire provided the jobs information in an SEC filing tied to its planned $26 billion takeover of railroad Burlington Northern Santa Fe Corp.

Berkshire's size and diversification means that it starts to mimic, to some degree, the overall economy.

Krugman’s Christmas Carol

By William L. Anderson

It is the year 2014 and Tiny Tim is ill, but he does not need the generosity of Ebenezer Scrooge to bring him back to health. No, as Paul Krugman insists,
the Cratchits have health insurance. Not from their employer: Ebenezer Scrooge doesn’t do employee benefits. And just a few years earlier they wouldn’t have been able to buy insurance on their own because Tiny Tim has a pre-existing condition, and, anyway, the premiums would have been out of their reach.

But reform legislation enacted in 2010 banned insurance discrimination on the basis of medical history and also created a system of subsidies to help families pay for coverage. Even so, insurance doesn’t come cheap – but the Cratchits do have it, and they’re grateful. God bless us, everyone.

Now, Krugman admits that this is just a story, but he has seen the Ghost of Christmas Future and declares:
O.K., that was fiction, but there will be millions of real stories like that in the years to come. Imperfect as it is, the legislation that passed the Senate on Thursday and will probably, in a slightly modified version, soon become law will make America a much better country.
Indeed, we know that the legislation that will place more chains upon us than which bedeviled Jacob Marley is going to be costly, much more costly than Krugman will admit, and I am not about to say that imposing new costs and taking the individual out of medical care will make this a better country. In fact, I would not be surprised if it made the USA a place that people will want to leave, if only to find a place where they can receive adequate care.

Being a skeptic about this impending legislation places me in Krugman’s gunsights. You see, the only possible reason that I could oppose this attempt to impose "universal" medical care is that I want the Tiny Tims of the world to become sicker, and ultimately to die. Lest one think I exaggerate, here is Krugman in his own words:
First, there’s the crazy right, the tea party and death panel people – a lunatic fringe that is no longer a fringe but has moved into the heart of the Republican Party. In the past, there was a general understanding, a sort of implicit clause in the rules of American politics, that major parties would at least pretend to distance themselves from irrational extremists. But those rules are no longer operative. No, Virginia, at this point there is no sanity clause.

Actually, he is wrong, as many of the "tea party" and "death panel" folks are not Republicans, at least in the mainstream sense of the word. They are libertarians and supporters of Ron Paul and others like him, but since Krugman considers Paul and other adherents to Austrian Economics to be ignorant nuts and financial illiterates, they obviously are going to be targets of his scorn.

Furthermore, the prospects of "death panels" are quite real; they exist in all of the other countries that have the kind of "universal care" that Krugman endorses.

Although Krugman claims that any "horror story" about medical care in places like Great Britain is nothing but lies, I will present a real-live horror story that tells volumes not only about socialist medical care, but also people like Paul Krugman, who believe that egalitarianism is the highest principle of all, even if it leads to someone unnecessarily dying a horrible death.

Read the full article here.

What NYT and Bill Gross Don't Get

NYT has a piece out on the extremely low interest rates that banks are paying.

They quote Pimco's Bill Gross as saying:
“What the average citizen doesn’t explicitly understand is that a significant part of the government’s plan to repair the financial system and the economy is to pay savers nothing and allow damaged financial institutions to earn a nice, guaranteed spread,” said William H. Gross, co-chief investment officer of the Pacific Investment Management Company, or Pimco. “It’s capitalism, I guess, but it’s not to be applauded.”

Mr. Gross said he read his monthly portfolio statement twice because he could not believe that the line “Yield on cash” was 0.01 percent. At that rate, he said, it would take him 6,932 years to double his money.
What Gross doesn't seem to get is that this is only at the very start of the yield curve. Roughly under 90 days where rates are extremely low AND this is NOT caused by the Fed. The farther you go out on the yield curve, the higher the rates are. The effective Fed Funds rate is 0.12%. This means that the Fed is NOT pushing rates below 0.12%, the market is. It is for all practical purposes an extreme desire to hold cash or near cash pushing very short rates down--not the Fed.

The government is thus not screwing the average investor by keeping short term rates too low. The market desire to hold short-term money is just huge, which is what is pushing the short-end of the yield curve lower.

Indeed, as ZeroHedge points out even the Primary Dealers are holding huge amounts of T-Bills as a proxy for cash:
T-Bill holdings indicate that this security class is still seen as a simple cash replacement. Oddly, the fact that PDs still have such historically high Bill holdings indicates that all is far from clear, at least at seen by the PD community. An odd observation: T-Bills hit a record on June 3, when over $90 billion in Net T-Bills was being held on bank balance sheets. Since then this amount dropped to flat by November and has since surged again.

Thus, it should be clear that the short term rate in and of itself is not the key factor. The banking system's ability to loan money out farther down the yield curve without repercussions of bank runs is the result of the fractional reserve system and the governments willingness to bailout any major banks that experience runs as a result of the crooked system. The Fed could do the same thing if the real short term rate was 10%, if it allowed the banks to borrow at this short-term rate (or lower) and lend out long.

Yes, the tax payer is getting screwed, but there is no special screwing going on. It has been going on since at least the start of the Federal Reserve System.

To misunderstand what is going on here has significant practical implications with regard to interpretation of the current positive yield curve and what it means for trends in the economy. I'll have a major comment on this Monday.

Response to Goldman Sachs

By Janet Tavakoli

The New York Times published a Christmas Eve expose of Goldman Sachs’s so-called “Abacus” synthetic collateralized debt obligations (CDOs). They were created with credit derivatives instead of cash securities. Goldman used credit derivatives to create short bets that gain in value when CDOs lose value. Goldman did this for both protection and profit and marketed the idea to hedge funds.

Goldman responded to the New York Times saying many of these deals were the result of demand from investing clients seeking long exposure. In an earlier Huffington Post article about Goldman’s key role in the AIG crisis; it traded or originated $33 billion of AIG’s $80 billion CDOs. AIG was long the majority of six of Goldman’s Abacus deals. These value-destroying CDOs were stuffed with BBB-rated (the lowest “investment grade” rating) portions of other deals. These BBB-rated portions were overrated from the start. Many of them eventually exploded like firecrackers.

Goldman said it suffered losses due to the deterioration of the housing market and disclosed $1.7 billion in residential mortgage exposure write-downs in 2008. These losses would have been substantially higher had it not hedged. Goldman describes its activities as prudent risk management. Many Wall Street firms wound up taking losses. The question is, however, how did they manage to get through a couple of bonus cycles without taking accounting losses while showing “profits?”

The answer is that they sold a lot of “hot air” disguised as valuable securities. Goldman claims this was prudent risk management. In reality, Goldman created products that it knew or should have known were overrated and overpriced.

If Wall Street had not manufactured value-destroying securities and related credit derivatives, the money supply for bad loans would have been chocked off years earlier. Instead, Wall Street was chiefly responsible for the “financial innovation” that did massive damage to the U.S. economy.

Earlier, Goldman denied it could have known this was a problem, yet acknowledged I had warned about the grave risks at the time. If Goldman wants to stick to its story that it didn’t know the gun was loaded, then it is not in the public interest to rely on Goldman’s opinion about the greater risk it now poses to the global markets.

Goldman excuses its participation by saying its counterparties were sophisticated and had the resources to do their own research. This is a fair point if Goldman were defending itself in a lawsuit with a sophisticated investor trying to recover damages. It is not a valid point when discussing public funds that were used to bail out AIG, Goldman, and Goldman’s “customers.”

Goldman claims the portfolios were fully disclosed to its customers. Yet at the time of the AIG bailout, Goldman did not disclose the nature of its trades with AIG, and Goldman did not disclose these portfolios to the U.S. public. If it had, the public might have balked at the bailout.

The public is an unwilling majority owner in AIG, and public money was funneled directly to Goldman Sachs as a result of suspect activity. The circumstances of AIG’s crisis were extraordinary and without precedent. I maintain that the public is owed reparations, and it would be fair to make all of AIG’s counterparties buy back the CDOs at full price, and they can keep the discounted value themselves.

Some similar CDOs currently trade for less than a dime on the dollar in the secondary market. Goldman’s trades amounted to more than $20 billion (albeit Goldman traded or originated $33 billion of AIG’s $80 billion of this ilk). If Goldman wants to claim it was “only following orders” for customers, that is between Goldman and the hedge funds or other “customers” involved. Goldman can fight it out with them if it wants its money back.

Goldman’s synthetic deals that are still on AIG’s books can be settled at ten cents on the dollar. This is the value at which other bond insurers have settled similar deals. The excess money already paid to Goldman can used to pay down AIG’s public debt.

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago's Graduate School of Business. Author of: Credit Derivatives & Synthetic Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008). Tavakoli’s book on the causes of the global financial meltdown and how to fix it is: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009).

Cap and Trade Estimated to be a $300 Billion to $2 Trillion Market

Wall Street wants a leading role in the new carbon-trading market being designed in Washington. It is based on the questionable science that carbon is causing global warming, which even if true suggests an anti-warmth position. But it will mean $$$$$$$ for the usual Wall Street suspects who have heavy government influence.

Lisa Kassenaar of Blommberg provides a peek into what is going on here.

The Woman Who Sank Galleon

By Anthony Effinger, Katherine Burton and Ian King

Danielle Chiesi spent a lot of time in hotel ballrooms and bars during the past decade.

As an analyst at New Castle Funds LLC, a New York hedge fund firm that manages about $1 billion, she was a regular at conferences on technology stocks, where she could get face time with executives and press them on how many microprocessors and how much software they were shipping that quarter.

Chiesi wore short skirts and low-cut tops, according to people who saw her over the years. One ploy was to go barhopping with a group, and then peel someone off to talk to on the dance floor, says a person who attended conferences with her.

A blond, blue-eyed former teenage beauty queen, Chiesi used her sexuality to build sources at male-dominated tech companies, says Deborah Stapleton, president of Stapleton Communications Inc., an investor relations company in Palo Alto, California.

“It amazes me that grown, wealthy, successful, hardworking men fell for that,” Stapleton says. Chiesi was proud of her network, too. “She bragged about her contacts in public,” Stapleton says. “She was like a teenager who wanted everyone to know she knew some rock star.”

Click here for the full Bloomberg story.

Proof Warren Buffett Has Made It

I don't recall who said it, it might have been a dictator of some Third World country, but I read sometime ago about someone who said that you know you have made it when you don't have to carry ID or a pass and you still get in.

Joe Weisenthal at Clusterstock is running this photo of Warren Buffett. I don't know what the event is, it might even be the Berkshire shareholder meeting, but whatever the event, Buffett has made it based on Third World dictator standards. Notice everyone around Buffett is wearing a stage pass, but Buffett apparently doesn't need one.