Sunday, February 28, 2010

L.A.'s Library System Impacted by the Budget Crisis

AP's Michael Blood reports:
For two decades, Los Angeles built libraries with a vigor rarely seen in the nation, spending $335 million to get books and computers within the reach of those who might not otherwise have them.

Now, it's getter harder to get inside the buildings.

A hobbled economy has left the nation's second-largest city starved for cash, and 72 library branches now are closed Friday mornings to save money. More than 1,000 people work at the libraries, but layoffs and retirements could slash the staff by 20percent or more by June. Hours will be cut again.

Merkel: No Greek Bailout

Conflicting reports continue on the state of a bailout for Greece.

This morning, WSJ reported that a bailout plan was in place. We had our doubts and wrote:
This scheme is very shaky and points to the fact that there is no real solution to this problem short of bankruptcy.
Now comes word that German Chancellor Angela Merkel has denied talk of a German rescue plan for Greece.

The Sydney Morning Herald writes:
Greek bond prices rallied this week on a report that Europe's top economy was considering coming to the aid of debt-burdened Greece, as Prime Minister George Papandreou prepares to hold talks with Merkel in Berlin on Friday.

But the German chancellor denied any such plan was in the works, saying "there is absolutely no question of it".

"We have a (European) treaty under which there is no possibility of paying to bail out states in difficulty," Merkel told ARD public television.

Germany has repeatedly denied talk of a bail-out for Greece, further fuelled this week by a meeting between Papandreou and the head of Deutsche Bank....

The chancellor also ruled out providing support to Greece in the form of state guarantees to the banking sector, arguing that it would amount to aid.
If Merkel continues to stick to this position, it is clear that Germany has decided to bailout German banks dangerously exposed to Greek debt, rather than Greece itself. If this is the case, Greece looks like a sinking ship to me.(ViaBusinessInsider)

Roubini: Spain the Battle Ground for the Future of Europe

Bloomberg reports:

Spain needs to prepare for “hard times” to reduce its growing budget deficit, New York University Professor Nouriel Roubini said in an opinion piece published today in El Economista.

“It’s true that Spain is not Greece, yet it’s not Ireland either, but if such an important economy is unable to stop the deficit slip toward the debt levels of Greece, the distinctions will end up being merely academic,” Roubini wrote in the Madrid-based newspaper.

Spain needs to carry out reforms that will tackle the rigidity of the labor market and salaries to regain competitiveness, Roubini said. The initial spending plan by Spanish Prime Minister Jose Luis Rodriguez Zapatero to end the recession “intensified Spain’s fiscal problems,” Roubini wrote. The future of Europe is at risk, the professor said.

“If Spain succumbs, it will drag with it the future of the European monetary union and decades of political credibility in Brussels,” Roubini said in El Economista. “In the long term, a country could be forced to leave the euro zone,” he said. For those reasons, Spain has become “the battle ground for the future of Europe.”

California One Act Behind Greece; Here Come the Strikes

The California budget crisis appears to be developing with just one lockstep behind Greece.

Next up for Cali is a strike/protest of government spending cutbacks.
A March 4 protest has been announced by California's government education employees. The protest is scheduled to take place in downtown Los Angeles. The planners are encouraging students from K-12 to California run colleges to participate. It doesn't appear that the protest will have the intensity of the Greek protests, and no violence is expected, but Cali is sure marching down the same road, with no politically palatable solutions for a serious budget shortfall of $20 billion plus.

A Perfectly Framed Assassination

by Robert Baer

This is a fascinating article about assassination planning. The author seems to think the Dubai assassination team was done in by high technology, and they were. But technology is a two edged sword. Not only does it work against you, but it can work in your favor. All the obstacles that the author discusses the Dubai hit team came up against could have been neutralized, if the team had thought about them in advance. That said, read on for a great assassination thriller-RW

It was a little after 9 p.m. when a Palestine Liberation Organization official stepped out of the elevator into the lobby of Paris's Le Meridien Montparnasse, a modern luxury hotel that caters to businessmen and well-heeled tourists. The PLO official was going to dinner with a friend, who was waiting by the front desk. As they pushed out the Meridien's front door, they both noticed a man on a divan looking intently at them. It was odd enough that at dinner they called a contact in the French police. The policeman advised the PLO official to go directly back to the hotel after dinner and stay put. The police would look into it in the morning.

When the PLO official and his friend came back from dinner, the man on the divan was gone, and the Meridien's lobby was full of Japanese tourists having coffee after a night on the town. From here the accounts differ; in one version, a taxi blocked off traffic at the end of the street that runs in front of the Meridien, apparently to hold up any police car on routine patrol. In another, the traffic on the street was light.

What is certain is that as soon as the PLO official stepped out of the passenger side of the car, two athletic men in track suits came walking down the street, fast. One of them had what looked like a gym bag. When the friend of the PLO official got out of the car to say goodbye, he noticed the two but didn't think much of it. They looked French, but other than that it was too dark to see more.

One of the men abruptly lunged at the PLO official, pinning him down on the hood of the car. According to the PLO official's friend, one of the men put his gym bag against the head of the PLO official and fired two quick rounds into the base of his neck, killing him instantly. There was a silencer on the weapon. The two fled down the street and disappeared into an underground garage, never to be seen again.

That was 1992. And the world of assassins has changed a lot in the intervening years.

I knew the PLO official, and his assassins have yet to be found. Israel's Mossad security agency was quickly assumed to be behind the killing. Israel had accused the PLO official of having been a member of Black September, and his assassination seemed to be the last in an Israeli campaign to hunt down the perpetrators of the 1972 Munich Olympic attack. So far so good, but unable to identify even the nationality of the assassins, the French could do nothing but grumble. With no casings from the pistol found, no closed-circuit TV coverage in front of the Meridien, and no good description of the assassins, the French could not even send a strong diplomatic protest to the Israelis. If Israel indeed assassinated the PLO official, it got away with it cleanly.

Fast forward 18 years to the assassination of Hamas military leader Mahmoud al-Mabhouh on Jan. 20, and it is a graphic reminder of just how much the world has changed. Nearly the entire hit was recorded on closed-circuit TV cameras, from the time the team arrived at Dubai's airport to the time the assassins entered Mr. Mabhouh's room. The cameras even caught team members before and after they donned their disguises. The only thing the Dubai authorities have been unable to discover is the true names of the team. But having identified the assassins, or at least the borrowed identities they traveled on, Dubai felt confident enough to point a finger at Israel. (Oddly enough several of the identities were stolen from people living in Israel.)
Dubai had on its side motivation—Mr. Mabhouh had plotted the kidnapping and murder of two Israeli soldiers and reportedly played a role in the smuggling of Iranian arms into Gaza. And none of this is to mention that the Mabhouh assassination had all the hallmarks of an Israeli hit: a large team, composed of men and women, and an almost flawless execution. If it had been a Russian hit, for instance, they would have used a pistol or a car bomb, indifferent to the chaos left behind.

After Dubai released the tapes, the narrative quickly became that the assassination was an embarrassing blunder for Tel Aviv. Mossad failed spectacularly to assassinate a Hamas official in Amman in 1997— the poison that was used acted too slowly and the man survived—and it looks like the agency is not much better today. Why were so many people involved? (The latest report is that there were 26 members of the team.) Why were identities stolen from people living in Israel? Why didn't they just kill Mr. Mabhouh in a dark alley, one assassin with a pistol with a silencer? Or why at least didn't they all cover their faces with baseball caps so that the closed-circuit TV cameras did not have a clean view?

The truth is that Mr. Mabhouh's assassination was conducted according to the book—a military operation in which the environment is completely controlled by the assassins. At least 25 people are needed to carry off something like this. You need "eyes on" the target 24 hours a day to ensure that when the time comes he is alone. You need coverage of the police—assassinations go very wrong when the police stumble into the middle of one. You need coverage of the hotel security staff, the maids, the outside of the hotel. You even need people in back-up accommodations in the event the team needs a place to hide.

Read the rest here.


Jamie Dimon: California is a Greater Risk than Greece

President Obama's favorite banker is real worried about California.

Dimon told investors at JPMorgan's annual meeting that "there could be contagion" if a state the size of California has problems making debt repayments, reports James Quinn for UK's Telegraph.

"Greece itself would not be an issue for this company, nor would any other country," said Dimon. "We don't really foresee the European Union coming apart." Dimon did not explain how he expects the PIIGS to be bailed out. His focus is clearly not on the PIIGS. He said that JP Morgan Chase and other US rivals are largely immune from the European debt crisis, as the risks have largely been hedged.

California is a different story. Remember, he was gifted Washington Mutual last year, which has a huge California presence.

The California budget deficit will likely come in at between $20 billion and $3o billion. Where's California going to raise that kind of money? Dimon is correct to be nervous. Will he get Obama to put the squeeze on Bernanke to bail out Cali?

By the end of March, California's cash will be down to roughly a billion dollars, after that it goes negative.

Stay tuned.

Top Ten

Below are the Top Ten most viewed EPJ posts for the week ending Saturday February 27, 2010:

#1 Fed Chairman Bernanke Should Apologize to Ron Paul

#2 Where Did the Links Go That Point to the Government Forcing Your 401k and IRA Money into Treasury Securities?

#3 And Now a Word from a Satisfied Toyota Owner by Lew Rockwell

#4 Soros: Use the PIIGS Crisis as an Opportunity to Put Additional One Government Controls over the EU

#5 Beware July (2nd week on list)

#6 More on the Federal Reserve Cover-Up of Saddam Hussein Payoffs

#7 How the Elite Talk in Code (A classic is back for the second week in a row.)

#8 Soros Invests In a People Tracking Company

#9 GREECE: Bank Runs!!! Money Controls!!!

#10 Shock: Inside the Healthcare Bill (34th week on list)

The Jekyll Island Club Pictures

The Jekyll Island Club is the location where a secret meeting took place in November 1910 to plot the formation of the Federal Reserve. Rockefeller and Morgan interests were well represented.

On the evening of November 22, 1910, Sen. Nelson Aldrich(A Rockefeller operative. His daughter married John D. Rockefeller Jr.), A.P. Andrews (Assistant Secretary of the Treasury Department), Paul Warburg (representing Kuhn, Loeb & Co.), Frank A. Vanderlip (president of the National City Bank of New York-a Rockefeller controlled bank), Henry P. Davison (senior partner of J. P. Morgan Company), Charles D. Norton (president of the Morgan-dominated First National Bank of New York), and Benjamin Strong (representing J. P. Morgan), together representing about one fourth the worlds wealth at the time, left Hoboken, New Jersey on a train in complete secrecy, dropping their last names in favor of first names, or code names, so no one would discover who they all were. The cover story they used was that they were going on a duck hunting trip on Jekyll Island. In a sense this was true, the ducks were the America people.

This weekend another meeting was held at the Jekyll Island Club. It was the good guys this time, plotting an End to the Fed.

Under the sponsorship of the Mises Institute, some of the best minds in economics were brought together to explain and discuss the Fed. Checkout the speakers and their topics:

Robert Murphy "Only the Austrians Can Explain Depressions"

Christopher Westley "Why the Fed Got Birthed"

Peter G. Klein "Did Keynesian Economics Win the Battle of Ideas?"

Douglas E. French "Failure and Prosperity"

Llewellyn H. Rockwell, Jr. "Parallel Lives: Liberty or Power?"

Joseph Salerno "The Macroeconomics of the Fed: Mainstream and Austrian"

Mark Thornton "What Were They Saying in July 2007?

George Selgin "The Fed's Dismal Record"

Gary North "Heckle and Jekyll: How Murray Rothbard Got the Fed's Story Right"

Thomas Woods "The Source and Workings of the Latest Crisis"

Ron Paul "My Battle Against the Fed"

How radical of a group is this? An informed source tells me EPJ was referenced and quoted approvingly.

Ilya Kinros was there and sends along these pictures:

Bob Murphy, author of The Politically Incorrect Guide to the Great Depression and the New Deal, drew a crowd.

The Austrian Business Cycle Theory Enforcers, Tom Woods and Joe Salerno--Never mention John Maynard Keynes in front of them.

They couldn't get enough of Murphy-Here they line up to get personal nuggets of wisdom from the man.

A hallowed hall in the Jekyll Island Club hotel.

100 years too late, Ilya prepares to plant a bug inside the now named, "Federal Reserve" room, where it is thought the plotting was done that resulted in the creation of the Fed.

Inside the room where the Federal Reserve Act was likely designed.

Details about the Jekyll Island Club here.

Saturday, February 27, 2010

The (Krugman?) Thinking that Blows Up Portfolios, Companies and Countries

Larissa MacFarquhar has a fairly boring profile of Paul Krugman, in The New Yorker. It's not her fault, Krugman and his wife seem to be pretty boring people. The gist of the profile is that he writes things and his wife "focuses on making him less dry, less abstract, angrier."

MacFarquhar writes:
Recently, he gave her a draft of an article he’d done for Rolling Stone. He had written, “As Obama tries to deal with the crisis, he will get no help from Republican leaders,” and after this she inserted the sentence “Worse yet, he’ll get obstruction and lies.” Where he had written that the stimulus bill would at best “mitigate the slump, not cure it,” she crossed out that phrase and substituted “somewhat soften the economic hardship that we face for the next few years.”
I used to at least give Krugman points for his writing style, but now I am wondering if I have been too generous in doing so. Clearly, his wife appears to be the one who can turn a phrase. With the clips that MacFarqhar shares, Krugman sounds like a second rate academic with a plodding writing style. It's his wife who seems to put the life and energy into the writing.

Aside from that, we learn that the Krugman's have three residences and that they have two cats instead of kids.

There is one curious sentence that MacFarquhar writes without attributing it to Krugman, or his wife. Is MacFarquhar adding her own view? Unlikely. She is more likely repeating a view of at least one of the Krugmans' without a direct quote. Here it is, it is one of the goofiest damn pieces of reasoning I have ever come across:
...failure to represent reality accurately is rarely a fatal flaw in an economics model—what’s valued is the model’s usefulness as an analytic tool.
How can a model be a useful analytic tool if it doesn't reflect reality? A model can take only certain elements from reality to make a specific point, but those points better reflect reality. The collapse of Long Term Capital Management and the mortgage backed securities market occurred because of models that failed to take into account key elements of reality.

Does Krugman really believe that models don't have to reflect reality and can simultaneously be used as analytical tools?

Later in the article MacFarquhar points to Krugman rejecting this belief:
Last fall, Krugman wrote an article for the Times Magazine, “How Did Economists Get It So Wrong?,” about the profession’s failure to anticipate the financial crisis, and what that revealed about its failings in general. He accused his colleagues of mistaking beauty for truth. They were so enamored of the elegance of their models and the consistency of their logic, he wrote, that they had come to believe that assumptions that were originally adopted merely as tools (perfectly rational individuals, efficient markets) by Milton Friedman’s generation were so sacrosanct that economics wasn’t economics without them
But then again, maybe this is his wife's words. Clearly, someone in this group of three is real confused about models, though we can't know which.

Bottom line: The only thing this profile does is cause us to now think when we read another Krugman bylined piece, "Is this Krugman's sentence or that of his wife?"

Latest Greek Bailout Talk

WSJ reports on a new scheme to bailout Greece.

This one would involve the German and French governments coming up with a total of €15 billion, with Greece raising another €15 billion in the markets.

Since, Greece needs to raise €54 billion this year, the current scheme is obviously just a stop gap measure and doesn't address the problem of the other PIIGS.

As I have pointed out before, the real test comes in July when Spain has to step up to the plate and borrow big.

Are the German and French governments going to bail Spain out also? Will the market participants be willing to pick up €15 billion in Greek debt, now?

This scheme is very shaky and points to the fact that there is no real solution to this problem short of bankruptcy.

Head of IMF Proposes New Reserve Currency

Word of the future launch of a new international currency floats out every couple of months. Here's ABC's version based on comments from IMF head, Dominique Strauss-Kahn:
Dominique Strauss-Kahn, the head of the International Monetary Fund, suggested Friday the organization might one day be called on to provide countries with a global reserve currency that would serve as an alternative to the U.S. dollar.

"That day has not yet come, but I think it is intellectually healthy to explore these kinds of ideas now," he said in a speech on the future mandate of the 186-nation Washington-based lending organization.

Strauss-Kahn said such an asset could be similar to but distinctly different from the IMF's special drawing rights, or SDRs, the accounting unit that countries use to hold funds within the IMF. It is based on a basket of major currencies.

He said having other alternatives to the dollar "would limit the extent to which the international monetary system as a whole depends on the policies and conditions of a single, albeit dominant, country."
What's really going on here is a back-up plan TO KEEP a major role for the dollar. U.S. government officials are aware that the dollar's role as the international reserve currency is one bad news headline away from collapse.

The fear among U.S. government officials is that gold or another currency, the euro or, perhaps, China's yuan may begin to replace the dollar (Note this is long term thinking, it is clear that the euro is on the skids short-term). Instead of allowing this to occur, the U.S. puppet, the IMF, is ready with a back-up plan that would be a basket of currencies where the dollar will play a major role.

It would be a retreat, but U.S. government officials fear the alternative would be a total collapse of the dollar, if central banks around the world bail out of the dollar for another currency or gold. The new currency plan is an attempt to head off an dilute such an occurrence.

Jim Rogers Clarifies Position on the Pound

WSJ reports:
A press release sent Thursday ahead of a conference in March at which Rogers is scheduled to speak said the famed investor predicted a collapse of the pound within weeks. Clarifying the confusion, Vince Stanzione, one of the organizers of the London conference, said he wrote the comments attributed to Rogers in the press release. Rogers “is obviously a little bit upset because he’s saying some of these statements are harsher than he would like to say,” Stanzione said.

In a telephone interview from Singapore, Rogers said he will attend the conference for investors in London in March, citing “contractual obligations.” As regards his views on the pound: “I do not think the pound sterling is going to collapse within the next few weeks. I’m on record as saying the U.K. has serious problems, serious debt problems, and the pound sterling has got problems, too,” Rogers said. He emphasized the U.S. and other countries also face serious economic problems.

Regarding a separate forecast released by UBS earlier this week calling for a possible fall in the pound to “$1.05 and below,” Rogers said he wouldn’t be surprised if sterling fell that far, “but whether that happens this year or this decade, I don’t have a clue.”

Possible Warren Buffett Successor: I Rank People According to Who I Would Fire First

From David (D.L.) Sokol's new book, Pleased, But Not Satisfied:
I force myself to rank my team in order in which I would terminate each member if I was forced to do so one at a time. Additionally, I define why I would terminate one before the next…

Tsunami Amplitude Forecasts; Largest Forecast North American Waves: Pismo Beach, CA (1.43m) and Santa Monica, CA (1.18 m)

From NOAA's National Weather Service:

Site Name Forecast Amplitude (0-to-pk in m) Observed Amplitude

Attu 0.84
Shemya 0.71
Adak Dock 0.73
St. Paul 0.37
Nikolski 0.59
Unalaska TG 0.98
Akutan 0.35
False Pass 0.27
Sanak 0.75
Cold Bay 0.31
King Cove 0.47
Belkofski 1.10
Sand Pt. 0.59
Ivanof Bay 0.63
Perryville 0.41
Kodiak CG TG 0.65
Port Lions 0.49
Ouzinkie 0.45
English Bay 0.16
Seldovia 0.12
Homer Spit 0.10
Halibut Cove 0.12
Seward 0.35
Whittier 0.14
Tatitlek 0.24
Valdez 0.14
Cordova 0.18
Icy Bay 0.35
Yakutat dock 0.88
Elfin Cove 0.33
Gustavus 0.14
Auke Bay 0.08
Sitka Dock 0.39
Langara 0.16
Cape Scott 0.73
Tofino 0.45
Neah Bay 0.20
Port Angeles 0.10
Bellingham 0.14
Everett 0.04 ?
Seattle - Pier 48 0.04
Moclips 0.39
Westport 0.24
Long Beach, WA 0.14
East Astoria 0.12
Cannon Beach 0.33
Newport TG 0.18
Yachats 0.18
Empire 0.12
Charleston 0.16
Bastendorf Beach 0.39
Port Orford 0.27
Crescent City TG 0.61
Trinidad 0.47
South Spit 0.47
Humboldt Bay 0.41
Eureka 0.20
Ten Mile River 0.69
Elk 0.51
Arena Cove 0.49
Bodega Bay 0.80
Fort Point 0.22
Sausalito 0.24
Alameda 0.18
Pacifica 0.67
Half Moon Bay 0.96
Rio Del Mar 1.00
Santa Cruz 0.51
Monterey 0.45
Morro Bay 0.82
Pt. San Luis 0.84
Pismo Beach 1.43
Surf 0.86
Naples 0.57
Santa Barbara 0.75
Malibu 1.02
Santa Monica 1.18
L.A. 0.77
Laguna Beach 0.90
La Jolla 0.84
Ballast Point 0.65
San Diego Navy Pier TG 0.27

Tsunami First Wave Estimated Time of Arrivals

From NOAA's National Weather Service:

The following list gives estimated times of arrival for
locations along the North American Pacific coast from a
tsunami generated at the given source location. The
list is ordered by arrival time starting with the earliest.
Since tsunami speed is directly related to
water depth, tsunami ETAs can be computed independent of
time is the initial wave arrival. Tsunamis can be dangerous
for many hours after arrival, and the initial wave is not
necessarily the largest.

Lat: 36.1S
Lng: 72.6W
Mag: 8.8
O-time: 0634UTC
Date: FEB 27

Estimated times of initial tsunami arrival:

DART 46412 1144 PST FEB 27 1944 UTC FEB 27
La Jolla, California 1202 PST FEB 27 2002 UTC FEB 27
the California-Mexico border 1204 PST FEB 27 2004 UTC FEB 27
Newport Beach, California 1212 PST FEB 27 2012 UTC FEB 27
San Pedro, California 1215 PST FEB 27 2015 UTC FEB 27
Point Concepcion, California 1217 PST FEB 27 2017 UTC FEB 27
Santa Monica, California 1225 PST FEB 27 2025 UTC FEB 27
Santa Barbara, California 1231 PST FEB 27 2031 UTC FEB 27
Point Sur, California 1232 PST FEB 27 2032 UTC FEB 27
Port San Luis, California 1235 PST FEB 27 2035 UTC FEB 27
Monterey, California 1243 PST FEB 27 2043 UTC FEB 27
DART 46411 1257 PST FEB 27 2057 UTC FEB 27
Point Reyes, California 1259 PST FEB 27 2059 UTC FEB 27
Point Arena, California 1304 PST FEB 27 2104 UTC FEB 27
Fort Bragg, California 1307 PST FEB 27 2107 UTC FEB 27
Cape Mendocino, California 1322 PST FEB 27 2122 UTC FEB 27
San Francisco, California 1326 PST FEB 27 2126 UTC FEB 27
DART 46407 1332 PST FEB 27 2132 UTC FEB 27
Humboldt Bay, California 1333 PST FEB 27 2133 UTC FEB 27
Crescent City, California 1346 PST FEB 27 2146 UTC FEB 27
Cape Blanco, Oregon 1350 PST FEB 27 2150 UTC FEB 27
the Oregon-California border 1350 PST FEB 27 2150 UTC FEB 27
Charleston, Oregon 1402 PST FEB 27 2202 UTC FEB 27
DART 46404 1406 PST FEB 27 2206 UTC FEB 27
Cascade Head, Oregon 1426 PST FEB 27 2226 UTC FEB 27
Newport, Oregon 1429 PST FEB 27 2229 UTC FEB 27
Tillamook Bay, Oregon 1434 PST FEB 27 2234 UTC FEB 27
the Oregon-Washington border 1439 PST FEB 27 2239 UTC FEB 27
DART 46419 1440 PST FEB 27 2240 UTC FEB 27
Seaside, Oregon 1446 PST FEB 27 2246 UTC FEB 27
La Push, Washington 1456 PST FEB 27 2256 UTC FEB 27
Westport, Washington 1457 PST FEB 27 2257 UTC FEB 27
Point Grenville, Washington 1459 PST FEB 27 2259 UTC FEB 27
the Washington-British Columbia border 1501 PST FEB 27 2301 UTC FEB 27
Neah Bay, Washington 1507 PST FEB 27 2307 UTC FEB 27
Astoria, Oregon 1511 PST FEB 27 2311 UTC FEB 27
Tofino, British Columbia 1515 PST FEB 27 2315 UTC FEB 27
the north tip of Vancouver Island, British Columbia 1516 PST FEB 27 2316 UTC FEB 27
Port Angeles, Washington 1544 PST FEB 27 2344 UTC FEB 27
Langara Island, British Columbia 1551 PST FEB 27 2351 UTC FEB 27
DART 46409 1505 AKST FEB 27 0005 UTC FEB 28
DART 46403 1508 AKST FEB 27 0008 UTC FEB 28
Port Alexander, Alaska 1515 AKST FEB 27 0015 UTC FEB 28
DART 46410 1519 AKST FEB 27 0019 UTC FEB 28
DART 46402 1524 AKST FEB 27 0024 UTC FEB 28
Sitka, Alaska 1529 AKST FEB 27 0029 UTC FEB 28
DART 46408 1538 AKST FEB 27 0038 UTC FEB 28
Elfin Cove, Alaska 1538 AKST FEB 27 0038 UTC FEB 28
Seattle, Washington 1641 PST FEB 27 0041 UTC FEB 28
Ketchikan, Alaska 1549 AKST FEB 27 0049 UTC FEB 28
DART 46413 1553 AKST FEB 27 0053 UTC FEB 28
Craig, Alaska 1600 AKST FEB 27 0100 UTC FEB 28
Yakutat, Alaska 1619 AKST FEB 27 0119 UTC FEB 28
Prince Rupert, British Columbia 1720 PST FEB 27 0120 UTC FEB 28
Atka, Alaska 1622 AKST FEB 27 0122 UTC FEB 28
Nikolski, Alaska 1624 AKST FEB 27 0124 UTC FEB 28
Akutan, Alaska 1625 AKST FEB 27 0125 UTC FEB 28
DART 21414 1626 AKST FEB 27 0126 UTC FEB 28
Bella Bella, British Columbia 1727 PST FEB 27 0127 UTC FEB 28
Kodiak, Alaska 1628 AKST FEB 27 0128 UTC FEB 28
Sand Point, Alaska 1629 AKST FEB 27 0129 UTC FEB 28
King Cove, Alaska 1634 AKST FEB 27 0134 UTC FEB 28
Juneau, Alaska 1635 AKST FEB 27 0135 UTC FEB 28
Perryville, Alaska 1637 AKST FEB 27 0137 UTC FEB 28
Dutch Harbor, Alaska 1638 AKST FEB 27 0138 UTC FEB 28
Old Harbor, Alaska 1638 AKST FEB 27 0138 UTC FEB 28
Amchitka, Alaska 1639 AKST FEB 27 0139 UTC FEB 28
Seward, Alaska 1639 AKST FEB 27 0139 UTC FEB 28
Adak, Alaska 1642 AKST FEB 27 0142 UTC FEB 28
Valdez, Alaska 1657 AKST FEB 27 0157 UTC FEB 28
DART 21415 1702 AKST FEB 27 0202 UTC FEB 28
Cordova, Alaska 1706 AKST FEB 27 0206 UTC FEB 28
Alitak, Alaska 1708 AKST FEB 27 0208 UTC FEB 28
Cold Bay, Alaska 1709 AKST FEB 27 0209 UTC FEB 28
Shemya, Alaska 1721 AKST FEB 27 0221 UTC FEB 28
Attu, Alaska 1727 AKST FEB 27 0227 UTC FEB 28
Homer, Alaska 1739 AKST FEB 27 0239 UTC FEB 28
St. Paul, Alaska 1750 AKST FEB 27 0250 UTC FEB 28
Port Moller, Alaska 2002 AKST FEB 27 0502 UTC FEB 28
Saint Matthew Island, Alaska 2026 AKST FEB 27 0526 UTC FEB 28
Cape Newenham, Alaska 2134 AKST FEB 27 0634 UTC FEB 28
Gambell, Alaska 2243 AKST FEB 27 0743 UTC FEB 28
Dillingham, Alaska 2324 AKST FEB 27 0824 UTC FEB 28
Hooper Bay, Alaska 0044 AKST FEB 28 0944 UTC FEB 28
Little Diomede Island, Alaska 0140 AKST FEB 28 1040 UTC FEB 28
Nome, Alaska 0335 AKST FEB 28 1235 UTC FEB 28
Unalakleet, Alaska 0626 AKST FEB 28 1526 UTC FEB 28

More on Charlie Munger as Genius

Below, I propose the notion that Charlie Munger is probably a better investor than Warren Buffett. WSJ steps up to the plate to back me up:
Charlie Munger — Berkshire vice chair and Warren Buffett’s longtime partner — knows a good thing when he sees it.

It was Munger who first learned of an obscure Chinese maker of batteries and automobiles called BYD Inc., several years ago and championed an investment in the firm. “BYD was Charlie’s idea,” Buffett told the Journal in a story back in May. “When he encounters genius and sees it operating in a practical way, he gets blown away.”

Judging by the return Berkshire has seen so far on BYD, Munger might not merely be encountering genius. He might be one. In 2008, Berkshire decided to invest $232 million for a 10% stake in BYD.

In his shareholder letter, Buffett reports that it now values that 10% stake at $1.99 billion, putting the value of that investment above other better-known Berkshire common stock holdings such as Johnson & Johnson, ConocoPhillips and U.S. Bancorp...
It should be noted that Munger was 84 years old when he discovered BYD.

Tracking Nouriel Roubini

NYU economics professor Nouriel Roubini is the most wired in economist in the world. He is close to many Obama Administration people, including Fed Chairman Ben Bernanke, Treasury Secretary Timothy Geithner and top White House economic adviser Larry Summers.

He has worked for the International Monetary Fund, the Federal Reserve, the World Bank and Israel's Central Ban. He holds Turkish, U.S. and Iranian citizenship's.

He has attended seminars and conferences in the U.S., China and the Middle East.

After dark, he has been spotted partying with Donald Trump, Russian oligarchs and movie director, Oliver Stone.

It makes sense to keep an eye on this operator.

Newest entry in Roubini's calendar: He will be in Bucharest from May 24 to May 26, 2010.

He is scheduled to take part in the seventh edition of the central and South-Eastern European Financial Forum, organised by the Romanian National bank (BNR) and Invet Forum.

During the Financial Forum in Bucharest, Nouriel Roubini will have a dedicated panel and will also take part in a series of meetings with Romanian business and political representatives,according to Romania's

Buffett: Bill Gates and Jack Welch Got Out at the Top

I don't now how else to interpret this comment by Buffett, in his latest annual report:
....evaluations covering as long as a decade can be greatly distorted by foolishly high or low prices at the beginning or end of the measurement period. Steve Ballmer, of Microsoft, and Jeff Immelt, of GE, can tell you about that problem, suffering as they do from the nosebleed prices at which their stocks traded when they were handed the managerial baton.

Buffett on the Difference Between the Government Manipulated Housing Interest Rate and the Free Market Rate

Buffett in his annual letter:

...the punitive differential in mortgage rates between factory-built homes and site-built homes... [a] problem for...large numbers of lower-income Americans...The residential mortgage market is shaped by government rules that are expressed by FHA, Freddie Mac and Fannie Mae. Their lending standards are all-powerful because the mortgages they insure can typically be securitized and turned into what, in effect, is an obligation of the U.S. government. Currently buyers of conventional site-built homes who qualify for these guarantees can obtain a 30-year loan at about 5 1⁄ 4%.

In addition, these are mortgages that have recently been purchased in massive amounts by the Federal Reserve, an action that also helped to keep rates at bargain-basement levels.

In contrast, very few factory-built homes qualify for agency-insured mortgages. Therefore, a meritorious buyer of a factory-built home must pay about 9% on his loan.

Tsunami Warning for Hawaii....

FIRST WAVES to hit 4:19 PM ET, approximately 4 hours from now.

Charlie Munger On Pooping Dogs

Warren Buffett is out with his latest annual letter. Here's Buffett telling a story where his partner Charlie Munger has the best analysis of an acquisition:
I can’t resist telling you a true story from long ago. We owned stock in a large well-run bank that for decades had been statutorily prevented from acquisitions. Eventually, the law was changed and our bank immediately began looking for possible purchases. Its managers – fine people and able bankers – not unexpectedly began to behave like teenage boys who had just discovered girls.

They soon focused on a much smaller bank, also well-run and having similar financial characteristics in such areas as return on equity, interest margin, loan quality, etc. Our bank sold at a modest price (that’s why we had bought into it), hovering near book value and possessing a very low price/earnings ratio. Alongside, though, the small-bank owner was being wooed by other large banks in the state and was holding out for a price close to three times book value. Moreover, he wanted stock, not cash.

Naturally, our fellows caved in and agreed to this value-destroying deal. “We need to show that we are in the hunt. Besides, it’s only a small deal,” they said, as if only major harm to shareholders would have been a legitimate reason for holding back. Charlie’s reaction at the time: “Are we supposed to applaud because the dog that fouls our lawn is a Chihuahua rather than a Saint Bernard?”

The seller of the smaller bank – no fool – then delivered one final demand in his negotiations. “After the merger,” he in effect said, perhaps using words that were phrased more diplomatically than these, “I’m going to be a large shareholder of your bank, and it will represent a huge portion of my net worth. You have to promise me, therefore, that you’ll never again do a deal this dumb.”

Yes, the merger went through. The owner of the small bank became richer, we became poorer, and the managers of the big bank – newly bigger – lived happily ever after.
BTW, I think Munger is a much more astute judge of investment opportunities than Buffett. If you look at a lot of Buffett hits in the relatively early years, they came out of California, where Munger lived and was generally familiar with the operations.

If I had to choose between giving money to Buffett or Munger to manage, it would be Munger, no question.

This doesn't mean that Buffett isn't an Einstein of investing, but it does mean that Munger is probably the god of investing. Damn Right! is a great biography of Munger.

Chile Earthquake About the 5th Largest Since 1900

CNN reports:
The 8.8-magnitude earthquake that hit Chile Saturday was similar in intensity to the fifth most powerful quake recorded since 1900.

That quake struck off the coast of Ecuador in 1906. It is not known how many people were killed.

The biggest quake recorded since 1900 hit the coast of southern Chile on May 22, 1960. The 9.5-magnitude quake killed more than 1,600 and left around two million people homeless.

Interactive map here.

"The Ghost Writer": Evoking the spirits of Bill and Hillary Clinton, Dick Cheney, Halliburton and the Carlyle Group

By Ann Homaday

"I'm your ghost," announces Ewan McGregor's character in "The Ghost Writer," in which he plays a steadfastly anonymous young author assigned to pen the memoirs of a retired British prime minister. Indeed, there are hauntings aplenty in this sleek, masterful thriller that recalls such classics as "All the President's Men" and the more recent "Michael Clayton" in its pared-down, paranoid style. Like an expert driver behind the wheel of a purringly expensive automobile, director Roman Polanski invites viewers to settle back and simply enjoy a ride whose sinuous curves he navigates with supreme assurance and skill -- banishing, at least for the moment, thoughts of the skeletons that haunt his own life.

The Ghost, as McGregor's protagonist is called, has taken on the memoir project after the first author's mysterious death. The day the Ghost seals the deal, he's whisked to an island off Massachusetts, where former prime minister Adam Lang (Pierce Brosnan) lives in an elegantly appointed concrete bunker with his wife (played with biting asperity by Olivia Williams) and a staff of comely assistants, led with velvet-gloved authority by Lang's personal aide, Amelia (Kim Cattrall). As the Ghost sets to work on the project, he realizes that Lang's distant reticence, a tight deadline and curiously tight security around the project will be the least of his problems.

It's difficult to overstate how good "The Ghost Writer" is, if only because the things it does well are so simple: Working with co-writer Robert Harris, here adapting his own novel, Polanski smoothly threads viewers through a story that on paper might seem ludicrously contrived but that with his exacting execution comes alive with flawless detail, convincing performances and an uncanny prescience.

Lang is clearly based on Tony Blair, but the film also evokes the spirits of Bill and Hillary Clinton, Dick Cheney and such private enterprises as Halliburton and the Carlyle Group.

Read the rest here.

The Coming Open Source Revolution

Until today, I really hadn't done any thinking on any topics that would help me put into perspective the action of the Austin, Texas pilot who crashed his plane into the IRS building. I had not reached any deep picture meaning about the pilot's actions. That is, until I read Doug Casey's thought on the action. Casey clearly has been doing a lot of thinking on topics tangential to the pilots action. He immediately saw the big picture implications.

Casey's thoughts are revealed in a recent interview of Casey by Louis James. It is must reading for an understanding of why more of these type of lone actor attacks may occur . Casey puts the pilot's actions in perspective and relates it to the growing encroachment of Big Government in our lives. He explains how the encroachment might spawn an Open Source Revolution.

The interview is here.

Deception and Abuse at the Fed

Remarkable new details have surfaced regarding Federal Reserve activities surrounding the financing of the Watergate break-in and the cash funding of Saddam Hussein. It becomes more and more difficult to believe that Fed Chairman Bernanke was not aware of at least some of these details when he called Congressman Ron Paul's questions on these matters "bizarre." Below is a statement and letter that Ron Paul entered into the Congressional Record about the matter.

Before the US House of Representatives, February 25, 2010

Madame Speaker, I would like to enter into the record the following letter from Professor Robert D. Auerbach, a professor at the LBJ School of Public Affairs at the University of Texas. This letter provides additional information regarding remarks I made at yesterday's Financial Services Committee Humphrey-Hawkins hearing, remarks which Federal Reserve Chairman Bernanke categorized as "bizarre."

Thank you Congressman Ron Paul for bringing these important facts to the public's attention.

I thank Congressman Ron Paul for bringing to the public’s attention the Federal Reserve coverup of the source of the Watergate burglars’ source of funding and the defective audit by the Federal Reserve of the bank that transferred $5.5 billion from the U.S. government to Saddam Hussein in the 1980s. Congressman Paul directed these comments to Federal Reserve Chairman Ben Bernanke at the House Financial Services Hearing February 24, 2010. I question Chairman Bernanke’s dismissive response.

BERNANKE: "Well, Congressman, these specific allegations you've made I think are absolutely bizarre, and I have absolutely no knowledge of anything remotely like what you just described."

The evidence Congressman Ron Paul mentioned is well documented in my recent book, Deception and Abuse at the Fed (University of Texas Press: 2008). The head of the Federal Reserve bureaucracy should become familiar with its dismal practices.

First, consider the Fed’s coverup of the source of the $6300 in hundred dollar bills found on the Watergate burglars when they were arrested at approximately 2:30 A.M. on June 17, 1972 after they had broken into the Watergate offices of the Democratic Party. Five days after the break-in, June 22, 2003, at a board of directors’ meeting of officials at the Philadelphia Fed Bank, it was recorded in the minutes [shown on page 23 of my book] that false or misleading information had been provided to a reporter from the Washington Post about the $6,300. Bob Woodward told me he thought he was the Washington Post reporter who had made the phone inquiry. The reporter "had called to verify a rumor that these bills were stolen from this Bank" according to the Philadelphia Fed minutes. The Philadelphia Fed Bank had informed the Board on June 20 that the notes were "shipped from the Reserve Bank to Girard Trust Company in Philadelphia on April 3, 1972." The Washington Post was incorrectly informed of "thefts but told they involved old bills that were ready for destruction."

The Federal Reserve under the chairmanship of Author Burns not only kept the Fed from getting entangled in the Watergate coverup, which the Fed’s actions had assisted, it allowed false statements about bills the Fed knew were issued by the Philadelphia Fed Bank to stand uncorrected. Blocking information from the Senate and House Banking Committees [letters shown in my book, Chapter 2] and issuing false information during a perilous government crisis imposed huge costs on the public that had insufficient information to hold the Fed officials accountable for what they had withheld from the Congress. Had the deception been discovered the Fed chairmen following Burns may have been forced to rapidly implement some real transparency to restore the Fed’s credibility. That would have reduced or eliminated many of the lies, deceptions, and corrupt practices that are described in my book.

The second subject brought up by Congressman Ron Paul is the exposure of faulty examinations of the Federal Reserve of a foreign bank in Atlanta, Georgia through which $5.5 billion was sent to Saddam Hussein that a Federal Judge found to be part of United States active support for Iraq in the 1980s.

On November 9, 1993, several federal marshals brought a prisoner, Christopher Drogoul, into my office at the Rayburn House Office Building of the U.S. House of Representatives. The marshals removed the manacles. Drogoul took off his jump suit and changed into a shirt, tie, and business suit. He immediately looked like the manager of the Atlanta agency with domestic headquarters in New York City of Banca Nazionale. Drogoul had come to testify about "scheme prosecutors said he masterminded that funneled $5.5 billion in loans to Iraq’s Hussein though BNL’s Atlanta operation. Some of the loans allegedly were used to build up Iraq’s military and nuclear arsenals in the years preceding the first Gulf War."1

Drogoul’s "‘off book’ BNL-Atlanta funding to Iraq began in 1986 as financing for products under" Department of Agriculture programs.2 The loans allegedly had been authorized by the U.S. Department of Agriculture. Since Drogoul told the committee he was merely a tool in an ambitious scheme by the United States, Italy, Britain and Germany to secretly arm Iraq in their 1980–88 war, the testimony was politically contentious and unproven. He was sentenced in November 1993 to 37 months in prison and he had already served 20 months awaiting his sentencing hearing.

U.S. District Judge Ernest Tidwell found that the United States had actively supported Iraq in the 1980s by providing it with government-guaranteed loans even though it wasn’t creditworthy. The judge said such policies "clearly facilitated criminal conduct."3

Gonzalez was drawn to Drogoul’s answer about the Fed examiner who had visited his Atlanta operation. Gonzalez said that:

"At the November 9, 1993 Banking Committee hearing I asked Christopher Drogoul, the convicted official of the Banca Nazionale Del Lavoro agency branch in Atlanta, Georgia, how the Federal Reserve Bank examiners could miss billions of dollars of illegal loans, most of which ended up in the hands of Hussein.

Mr. Drogoul stated:

The task of the Fed [bank examiner] was simply to confirm that the State of Georgia audit revealed no major problems. And thus, their audit of BNL usually consisted of a one or two-day review of the state of Georgia’s preliminary results, followed by a cup of espresso in the manager’s office."

Gonzalez was appalled at the of lack of effective examination of a little storefront bank and also appalled by the gifts exchanged by officers of the New York Federal Reserve and the regulated banks in New York City where the main U.S. office of BNL was located. A description of what followed is in my book.

The Fed voted in 1995 to destroy the source transcripts of its policy making committee that had been sent to National Archives and Records Administration. Chairman Alan Greenspan had the committee vote on this destruction, telling the members: "I am not going to record these votes because we do not have to. There is no legal requirement." (p. 104 in my book.) Greenspan thus removed any fingerprints on this act of record destruction. Donald Kohn, who is now Vice Chairman of the Board of Governors at the Federal Reserve, answered some questions I had sent to Chairman Greenspan about this destruction. Kohn replied in a letter on November 1, 2001 to me at the University of Texas that they had destroyed the source records for 1994, 1995 and 1996, they did not believe it to be illegal and there was no plan to end this practice. That is one reason why the Federal Reserve audit supported by Congressman Ron Paul is needed. The Fed must stop destroying its records.

Robert Auerbach is Professor of Public Affairs at the Lyndon Baines Johnson School of Public Affairs, The University of Texas at Austin. He was an economist with the House of Representatives Financial Services Committee during the tenure of four Federal Reserve Chairmen: Arthur Burns, William Miller, Paul Volcker, and Alan Greenspan. Auerbach also served as an economist in the U.S. Treasury's Office of Domestic Monetary Affairs during the first year of the Ronald Reagan administration and as a financial economist with the U.S. Federal Reserve System. Auerbach has been a professor of economics at the American University in Washington, D.C. (1976–83), and a professor of economics and finance at the University of California-Riverside (1983–93). He has written numerous articles, and two textbooks in banking and financial markets. He received two Masters degrees in economics, one from the University of Chicago and one from Roosevelt University, where he studied under Abba Lerner, and a Ph.D. in economics from the University of Chicago, where he studied under Milton Friedman.


Marcy Gordon, "Banker Imprisoned in BNL Case Tells Story to House Committee," The Associated Press, November 9, 1993.
U.S. Newswire: "Former Executive of Atlanta Agency of Italian-Owned Bank Pleads Guilty to Conspiracy," from U.S. Department of Justice, Public Affairs, June 2, 1992.
Peter Mantius, "Drogoul given 37 months Judge in BNL case also blasts actions of U.S. prosecutors," The Atlanta Journal and Constitution, December 10, 1993, Section A, p. 12.

Friday, February 26, 2010

Banker Update: The Fear Factor

The banker I quote below emails me this afternoon:
We actually cut off out of state money today. No sense in letting unwanted money drag down our earning stats.

This broker gave us actually $2.5 million for a 6 month CD—the latest 26 week T-bill pays around 19 bps, so she’s making a killing of 46 bps for the same level of risk. What she is not doing is buying bonds, munis, agencies, or the like. The fact that she is not putting the money to work in other investments tells me that there’s fear, a la 2008, coming back into the play here.
The banker is absolutely right about the risk avoidance factor. That's part of why Bernanke hasn't grown the money supply despite the sizable growth in the monetary base. Market players continue very risk averse and are willing to sit with funds as excess reserves and in T-bills. To the degree the anecdotal evidence of this banker is being experienced by other bankers, this fear factor may be increasing again.

Briefing: Hot Money in Alaska; Banks Trading Their Prepaid Assessment Credits

A banker from Alaska emails:
We’re getting unsolicited “hot” money from 4-5000 miles away to get a lousy rate here. We took in $2 million in smaller 6 month CDs, for 65 basis points, from a NY broker this morning. It’s been happening for several weeks now. We’ll probably close the tap from Outside (Alaskan slang for lower 48) because their problem (brokers and their customers) now becomes our problem. The problem is, quality loan demand is minuscule and investment (bond) options pay lousy rates. What the hell am I going to do with this money?

I think this may be a symptom of the existing crisis, or a harbinger of a new one.

Maybe I’m over-caffeinated and overreacting, but I don’t like the feel of this.

On another note…

I’m on a conference call with the ABA about a program from Promontory Interfinancial Network, the people who bring the super rich the CDARs program. Today’s scheme is banks trading their prepaid assessment credits with each other. The FDIC, has the final call if a “trade” is approved. It’s a sign of the times…
I asked the banker for a little more detail on the Prepaid Assessment Credits. He wrote back:
Banks that are going to need more assessment credits can now trade with those who have extra. You see, the 3.25 year prepaid was made on assumptions on how a bank would look like down the road—because not everyone pays the same $$ amount for their “insurance”. Banks that have extra and need the liquidity would then go to the sponsor’s website and put their credits out to bid. If I needed liquidity, why would I go to this level? If you needed liquidity and had extra credits, you’d have to be in sorry shape to see this as a good way to raise liquidity.

It’s the Sign O’ the Times because who would’ve thought we would be talking about stuff like this 20 years ago? Maybe it seems strange to only me.

Definitely too much caffeine today.

The State of the States: Mid-Year State Budget Deficits at $38 Billion

The Center on Budget and Policy Priorities reports that:
41 States have a cumulative mid-2010 budget shorfall of $38 billion, or 7% of their total budgets.

2011 is set to be much worse, with $103 billion in deficits — 17% of the total budgets — across 42 states.
WSJ has a state by state breakdown here Of note, Arizona has a mid-year budget shortfall equal to 19.7% of its General Fund budget. Oaklahoma is at 15.1%, Illionois 14.3%, Rhode Island 13.0%, Nevada 12.5%. The closest to budget is Florida with only a 0.6% deficit.

January '10 Existing Home Sales - the numbers actually are bad?

M. Siegel emails:
One shouldn't be so quick to discount the decline in the most recently reported NAR existing home sales as related to inclement weather in January.

As this release from NAR suggests, the January data reflect closings of contracts executed in the months of November and December. See here.

"NAR chief economist, said there is still some delay between shopping and closing that affected current sales. “Most of the completed deals in January were based on contracts in November and December. People who got into the market after the home buyer tax credit was extended in November have only recently started to offer contracts, so it will take a couple months to close those sales,”"

and, from Footnote Number 1 of NAR's release:

"Existing-home sales, which include single-family, townhomes, condominiums and co-ops, are based on transaction closings."

Thus it would appear the January data is not based on contracts signed in that month (which would have been affected by the weather), but rather represents sales completed ("transaction closings") from contracts entered into during November and December.
I think Siegel has something here, though bad weather could have postponed some closings, and perhaps pushed some into February. Bottom line, January and February numbers are very difficult to read, especially when you have the bad weather we had this year.

New Study Shows Money Has Tightened

Ah, no kidding. This study reports what EPJ readers were aware of in real time. Here's WSJ with the details:
In an unusual collaboration, the chief economists from Goldman Sachs and Deutsche Bank teamed up with economists at Princeton University, Columbia University and New York University to produce an index measuring financial conditions. It is an important exercise because financial conditions help to drive economic growth, inflation and asset prices. When money is loose and easy, the economy tends to grow faster in the short-run, though inflation and asset price booms can build. Tight money, on the other hand, is like a lack of oxygen which can strangle growth....

What they found is that after improving markedly in the first half of 2009 — thanks in large part to the Fed’s money pumping exercises — financial conditions tightened again in the second half of the year, unusually so for the early stages of a recovery. “The fact that financial conditions are still impaired, at least in some parts of the system, is consistent with the idea that the recovery is going to be a slow one,” Mr. Hatzius said. “It is consistent with a fairly slow, U-shaped recovery.”
Actually, the Fed printed money (M2) at a near 15% annualized rate from September 2008 to end-February 2009, then stopped.

Since this report, like Bernanke, is confusing low interest rates with money supply tightening, they are not getting the slow down in money supply, itself, rather they are getting the slightly delayed impact a couple of months later when it hits in terms of less actual financing.

This is where the economy stands now. The stock market will be the next to break.

Major Hedge Funds Bet Against the Euro

WSJ reports:
Heavyweight hedge funds have launched large bearish bets against the euro in moves that are reminiscent of the trading action at the height of the U.S. financial crisis.

The big bets are emerging amid gatherings such as an exclusive "idea dinner" earlier this month that included hedge-fund titans SAC Capital Advisors LP and Soros Fund Management LLC. During the dinner, hosted by a boutique investment bank at a private townhouse in Manhattan, a small group of all-star hedge-fund managers argued that the euro is likely to fall to "parity"—or equal on an exchange basis—with the dollar...
Reportedly, the trade is being called a "career trade", you plow all your money into this bet, and it will make your career.

As I have pointed out, I do no believe the PIIGS crisis is the key to euro weakness, but rather the fact that the Fed is not printing any money. Thus, if there is some short-term stability, in say, the Greek crisis, the euro is likely to rally, which would provide a great entry point for adding to euro short positions.

Jim Rogers: British Pound Could Collapse Within Weeks

Digital Journal reports:

[Jim] Rogers, making statements prior to delivering a keynote speech at next month’s Global Trading Day seminar in Westminster, believes the collapse of the Pound could foreshadow a global economic disintegration before the end of the year. The last few months of increases in the markets have been a “false bounce” and occurred due to government interference in the market and throwing everything at it except for the kitchen sink.

“But it can’t last. We’ve been applying temporary sticking plasters, not long-term cures. Later this year we’ll see the start of the real recession, with more Lehman-scale disasters and a fallout which won’t stop until the underlying malaise is genuinely cured,” said Rogers.

The author of “Hot Commodities” believes the beginning of the collapse of the UK will start with the Pound, adding that the Pound has devalued against all other currencies and is a “basket case,” which will put Great Britain in a bad position when the “shakedown” occurs.
The entire financial world is pretty unstable right now. The pound could very well be the flashpoint, but there are a thousand mines buried under this global economy. No one really knows which will go off first.

Rand Paul Has Large Lead in Kentucky Race

According to a new independent poll just released by Magellan Strategies, Rand Paul has a commanding 44-23 percent lead over Trey Grayson in the race to be Kentucky's Republican nominee for the U.S. Senate. 33% of likely voters remain undecided.

A Bankers Reaction to Obama's Proposal... ban foreclosues on home loans, unless they have been screened and rejected by the government’s Home Affordable Modification Program:
If this comes to reality, Banks that are on the ropes now, with a battered loan book (credit quality), will get absolutely hosed.

What good is having collateral? For that matter, what good is signing a contract?

It's dumbass proposals like these that dim my hopes for the future.

CNBC and Marketwatch Continue to Report Useless Data...

CNBC headlines: Existing-Home Sales Plunged An Unexpected 7.2% in January

It carries this from Reuters:
Sales of previously owned homes in the United States unexpectedly plunged in January, an industry survey showed Friday, fresh evidence the housing market has yet to find stable ground.

MarketWatch blares:7-mo. low for resold homes
U.S. existing-home sales fall 7.2% to slowest annualized pace since mid-2009. January's decline is second in a row — on heels of steady prior pickup.
There is no mention of the heavy snow cover that began to fall in January. As I mentioned earlier this week, you pretty much have to throw out all economic data for January and February this year because of the unusually heavy snow. Indeed, if you look at the regional housing sales numbers, you will be able to see that the greatest declines were in the regions of the snow fall.

Sales fell 10.9% in the Northeast, 7.4% in the South, 6.9% in the Midwest, and 5.2% in the West.

Given February's heavy snowfall, the numbers are likely to be even more out of whack for the next report..

Bottom line: These numbers coming out are not good or bad, they are distorted by the weather. There won't be any type of meaningful numbers, for most economic data, until March numbers are out.

Simon Johnson Should Just Shut Up, Already

China's central bank has accumulated massive amounts of Treasury securities. This is nothing more than China propping up the dollar. Further, the accumulation of the Treasury securities has acted liked a sponge that has absorbed a significant amount of the new debt issued by Treasury.

China's propping up of the dollar has been a bonanza for U.S. consumers, since dollars are more valuable then they otherwise would be on international exchange markets. It has also been a huge gift to the U.S. government, since without the Chinese market interventions a U.S. debt crisis would most likely be roiling the markets right now.

It is true that the propping up of the dollar does limit U.S. exports. However, the resources that would be directed toward producing exports can now be redirected to producing other goods for the U.S. market. Thus, it is a win, win for U.S. consumers.

The intervention does damage the standard of living of the Chinese, since it makes the importation of U.S. goods much more expensive. It further leaves the Chinese government in the akward poistion of holding huge amounts of Treasury securities that it has no clue as to how to liquidate.

It is, in other words, a terrible policy for internal China. It only helps Chinese exporters.

Yet, in the world of bizarre economic thinking, the Chinese fight the idea that they should stop propping up the dollar, while U.S. economists devise plans that call for the U.S. to demand that China stop its dollar support.

The latest to propose and end to this gift from China is MIT Professor, and former chief IMF economist, Simon Johnson. He writes in NYT:
The exact amount of China’s foreign-exchange reserves is not knowable based on publicly available information. But a reasonable working assumption is that China owns close to $1 trillion of United States Treasury securities. That would be nearly half of the stock of Treasuries thought to be in the hands of “foreign official” owners, which was $2.374 trillion at the end of 2009, and just under one-seventh of all American government securities outstanding ($7.27 trillion, of which $3.614 trillion was held by all foreign owners, official and private, at the end of 2009).

China holds such large reserves because it intervenes to buy dollars in order hold down the value of its currency, the renminbi. It is in the interests of both the United States and global economic prosperity that China allows its currency to appreciate. Foreign-exchange market intervention on this scale is a breach of China’s international commitments (as a member of the International Monetary Fund) and constitutes a form of unfair trade practice.

If China were to end its intervention, the renminbi would appreciate substantially, likely in the region of 20 to 40 percent. The primary effect would therefore be an effective depreciation of the American dollar against the Chinese renminbi – and against all other countries’ currencies that are implicitly pegged to the renminbi (more precisely, to the dollar rate with an eye on China’s competitiveness).

Such a change in the value of the dollar would help expand our exports and improve our ability to compete against imports; .
It is true, as I said, that U.S. exports would improve, but overall it appears that Johnson has taken this part of the equation and is treating it as though it is the entire equation, when it is nothing of the sort,

First, when Simon writes:
...this would aid in the process of recovery, job creation and broader adjustment in the American economy
He ignores the fact that China has been propping up the dollar for years, which means that here in the U.S. the jobs that would have gone into export production have been redirected to other sectors. A Chinese halt to its propping up of the dollar would, thus, not create new jobs in the U.S. but rather transfer jobs away from domestic production. It would thus lower the standard of living for those living in the U.S.

Simon's position suggests the absurd situation that there is a part of the unemployment rate that should be labeled, "People sitting around waiting for China to stop propping up the dollar."

Further, he fails to mention the huge elephant in the room, China's massive Treasury security purchases and what it would nean to the Treasury market if China stopped buying Treasury securities. Does he really think that the debt markets will remain stable if China stops adding to its Treasury portfolio?

Bottom line, China's foreign exchange intervention is a huge gift to the U.S. It is a mad policy as far as China's domestic policy is concerned. An end to the policy would cause a dramatic lowering of the standard of living in the U.S. and would cause crisis like conditions in Treasury debt markets. U.S. economists should really just shut up about China's policy that bails out the U.S. and damages China, and hope China never figures out what it is doing to itself.

Please, somebody give Johnson a quick kick under the table.

A Long Weekend for the Treasury Secretary?

The Treasury has not released a schedule for Treasury Secretary Geithner's activities today.

Where Did the Money Come from to Fuel the Housing Bubble?

by Tom Woods

No supporter of the market economy could have been surprised when the recent financial crisis was inevitably blamed on “capitalism” and “deregulation.” The free market, we were told, was a recipe for financial instability. “Advocates of the free market must confront the fact that both the Great Depression and the current financial chaos were preceded by years of laissez-faire economic policies,” wrote Katrina van den Heuvel, editor of The Nation, and author Eric Schlossel, in September 2008.

It is not enough to call this a distortion of the truth. It is a grotesque distortion, worthy of the Soviet politburo. The crisis is in fact the altogether predictable fruit of massive government and central-bank distortions of the economy. That may be why the free-market economists of the Austrian School were practically the only ones to have seen it coming.

There has been much discussion on right-wing radio and in the conservative press about Fannie Mae, Freddie Mac, and the Community Reinvestment Act (CRA), which have been described as forms of government intervention that contributed to the financial crisis. To a certain extent that is all well and good: Fannie and Freddie enjoyed special government-granted privileges, along with an implicit bailout guarantee, that allowed them to become much more substantial actors in the secondary mortgage market than would have been possible in a free market. Furthermore, politicizing the lending process and cajoling banks into abandoning traditional standards of creditworthiness cannot make a positive contribution to the health of the banking industry.

But although there is no question that those factors exacerbated the problems that led to the crisis, they are not the primary culprits. Britain has also experienced a housing collapse, even though there is no British analogue of Fannie, Freddie, and the CRA. Moreover, no matter what encouragements these and other institutions may have given to home purchases, where did all the money come from to buy all those houses and drive up their prices so high so quickly?

We should instead focus on the Federal Reserve System, an institution few Americans know much about but which, in addition to systematically undermining the value of the U.S. dollar – which has lost at least 95 percent of its value under the Fed’s supervision – gives rise to the boom-bust business cycle.

A business-cycle primer

Economist F.A. Hayek wanted to understand why the economy moved in a boom-bust pattern – why there was, in the words of the British economist Lionel Robbins, a sudden “cluster of error” among entrepreneurs. Why should the people the market has rewarded in the past for their skill at anticipating consumer demand suddenly commit serious errors and all in the same direction?

Hayek won the Nobel Prize for his answer.

Building on the insights of Ludwig von Mises, who first began to develop what is known as Austrian business-cycle theory in his book The Theory of Money and Credit in 1912, Hayek pinpointed the central bank’s artificial creation of credit as the nonmarket culprit in the business cycle. (Economist Jesús Huerta de Soto applies Austrian business-cycle theory to cycles that occur in countries that have lacked a central bank in his treatise Money, Bank Credit, and Economic Cycles.)

To understand Hayek’s point, which exonerates the free market, consider two scenarios.

Scenario 1. Consider what happens when the public increases its savings. Since banks now have more funds to lend (namely, the saved funds deposited by the public), the rate of interest it charges on loans will fall. The lower interest rates, in turn, stimulate an expansion in long-term investment projects, which are more sensitive to interest rates than short-term projects are. (Think of the difference in the decline in monthly payments that would occur between a 30-year mortgage and a 1-year mortgage if interest rates came down by even 2 percentage points.)

Lower-order stages of production are those stages closest to finished consumer goods: retail stores, services, and the like. Wholesale and marketing are examples of higher-order stages. Mining, construction, and research and development are of still higher order, since they are so remote from the finished good that reaches the consumer. When people’s consumption spending contracts, it is a perfect time for higher-order stages of production to expand: because of people’s additional saving, there is relatively less demand for consumer goods, and the resulting contraction of lower-order stages of production will release resources for use in the higher-order stages.

Scenario 2. Government-established central banks have various means at their disposal to force interest rates lower even without any corresponding increase in saving by the public. (For more on this, see The Mystery of Banking, by Murray N. Rothbard, or his shorter classic, What Has Government Done to Our Money?) Just as in the case in which public saving has increased, the lower interest rates spur expansion in higher-order stages of production.

The difference, though, is a critical one and guarantees that these artificially low interest rates will not yield the happy outcome we saw in Scenario 1. For in this case, people have not decreased their consumption spending. If anything, the low interest rates encourage further consumption. If consumption spending is not constricted, the lower-order stages of production do not contract. And if they do not contract, they do not release resources for use in the higher-order stages of production. Instead of harmonious economic development, there will instead ensue a tug of war for those resources between the higher and lower stages. In the process of this tug of war, the prices of those resources (labor, trucking services, et cetera) will be bid up, thereby threatening the profitability of higher-order projects that were begun without the expectation of this increase in costs.

Read the rest here.

Thomas E. Woods, Jr. [visit his website; send him mail] is the author of nine books, including two New York Times bestsellers: Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse and The Politically Incorrect Guide to American History. Read Congressman Ron Paul's foreword to Meltdown.

The EU Is Shocked—Shocked I Tell You!

Janet Tavakoli emails:
Speaking of faltering economies, while Ben Bernanke and Chris Dodd are investigating transactions that destabilize countries, they should open investigations into the massive number of phoney securitizations issued by U.S. investment banking firms that helped destabilize the U.S. economy in recent years and contributed to the woes of the global economy. They might look into the derivatives transactions, too. They seem determined to ignore the blindingly obvious at home.

With respect to the EU, there are separate issues involving 1) the original legal asset securitizations for EU countries and 2) the current use of market instruments for hedging and speculation. The appropriate questions should be directed to the business purposes of the transactions.

The EU is shocked—shocked I tell you!—that weaker members used legal financial engineering to qualify for admission. Exactly how did they think these countries managed to meet the requirements? Leaders would have you believe they lack basic human curiosity. Countries may or may not have had legitimate plans to employ the present value of future receivables for a purpose that could generate better returns as opposed to say, blowing it all on national bling. In some cases, using the national credit card (backed by future receivables) may have been a futile attempt to appear prosperous enough to keep up with the Joneses. In a faltering global economy, the pain would be inevitable.

The financial media reports that sovereign credit derivatives are a fraction of the total debt issued. While that is true, it doesn’t take much to start a run on a country, because trading on the margin sets the price. Chairman Bernanke is right to question all related transactions, not just derivatives. The issue is the business purpose. While banks may want to claim they are doing customer business, one should remember that Goldman Sachs claimed its destabilizing transactions with AIG were “customer business.” How did that work out?
Tavakoli also told Canada's Globe & Mail that:

...she doubted anything concrete would emerge from the Fed's scrutiny of such instruments.

The problem with swaps, she said, is that they can create a loop of negative consequences for the country involved. Such swaps are a cheap and easy way for investors to bet that a country's finances will deteriorate. As the demand for such instruments rises, that sends a negative signal to the bond market, where investors become inclined to sell the country's debt, sending its borrowing costs higher. As the cost of borrowing rises, it adds to worries about a country's creditworthiness, increasing appetite for the swaps.

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). .

Thursday, February 25, 2010

Matt Taibibi Gives a Reporter a Coffee Facial

Holy S@#%t, Matt Taibbi handles criticism about as well as a hood hanging on a street corner, who thinks you just dissed him as you passed by.

James Verini explains how he got a Taibbi coffee facial, here.

D.C. Hoteliers: What Recession?

Another sign that things are rosy at the center of the Federal government, while the rest of the economy is mired in recession.

Hotel News reports:

Of the major metropolitan areas examined, the Washington, D.C. hotel market achieved the highest compound annual revenue-per-available-room growth from 2001 to 2009 and was the only lodging market not to record a double-digit RevPAR
decline between 2008 and 2009.

The following graph demonstrates the underlying strength and consistency of the Washington, D.C. hotel market through its reduced RevPAR volatility.

Politicians Calculating Obamacare Benefits:

President Obama makes the absurd claim that his healthcare proposal will save money:
When enacted, health reform is completely paid for and will reduce the deficit by more than one hundred billion dollars in the next ten years.
Nancy Pelosi makes the absurd claim that the new “healthcare” bill will “create 4 million jobs – 400,000 jobs almost immediately.”

Got that? A plan that will cut costs AND add 400,000 jobs immediately.

At the same time, the CBO says there isn't enough information on President Obama' s plan to make any calculations.

Obama's Plan to Kill the Mortgage Industry

The Obama administration may expand efforts to ease the housing crisis by banning all foreclosures on home loans unless they have been screened and rejected by the government’s Home Affordable Modification Program, reports Bloomberg.

Bloomberg continues:
The proposal, reviewed by lenders last week on a White House conference call, “prohibits referral to foreclosure until borrower is evaluated and found ineligible for HAMP or reasonable contact efforts have failed,” according to a Treasury Department document outlining the plan.

“It is one of the many ideas under consideration in the administration’s ongoing housing stabilization efforts,” Treasury spokeswoman Meg Reilly said in an e-mail. “This proposal has not been approved and there are no immediate planned announcements on the issue.”

She confirmed the authenticity of the document, which hasn’t been made public.
Who in their right mind is going to make mortgage loans if they know and the prospective borrower knows that borrowers can run mortgage holders through growing mounds and mounds of bureaucratic red tape.

Texas GOP Primary Numbers

Rasmussen reports:
Just days before Texas Republicans pick their nominee for governor, incumbent Rick Perry has his biggest lead yet. A new Rasmussen Reports telephone survey of likely Republican Primary voters finds Perry leading Senate Kay Bailey Hutchison 48% to 27%, with...Debra Medina earning 16% of the vote. Nine percent (9%) of Texas GOP voters remain undecided

The Knowledge Problem of New Paternalism

Mario Rizzo posts at ThinkMarkets:
Glen Whitman’s and my article, “The Knowledge Problem of New Paternalism” has been published in The Brigham Young University Law Review, 2009, no. 4. The theme is that the project of the new/soft/libertarian paternalists to make us better off by our own standards fails because the paternalists lack sufficient knowledge of the circumstances of time and place that affect the welfare and decisions of agents. The analysis is quite comprehensive and should be of interest to many of our readers here.

This article should be viewed as a companion piece to our “Little Brother is Watching You: New Paternalism on the Slippery Slopes” published in the Arizona Law Review a few months ago. It was also summarized in eight posts at TM by Glen Whitman. The latest one can be found here.

The President’s Health Summit Proposal: Rhetoric vs Reality

by Bob Moffit

The President’s health care proposal contains little that is new. The well tested rhetoric used by the White House to sugarcoat the health policy outline should not fool ordinary Americans. This proposal is even more expensive than the Senate bill upon which it is apparently based: $950 billion over ten years rather than $871 billion.

Consider the claims made by the White House regarding the effects of the President’s proposal on the health care system.

The Rhetoric on Affordability. “It makes insurance more affordable by providing the largest middle class tax cut for health care in history, reducing premium costs for tens of millions of families and small business owners who are priced out of coverage today.”

The Reality: In fact, the tax credit would be limited to only a limited number of persons within a limited set of income brackets, not the entire middle class. One cannot ignore the tax increases, or the prescribed cost of the health care benefits packages themselves. As the premiums increase, the cost of the subsidies, based on percentage of income, would track these increases, resulting in another direct cost shift onto all taxpayers. In fact, the President’s proposal, based on the Senate bill, would result in major tax increases (estimated at $629 billion over ten years) and would include a variety of middle class tax increases. This, of course, once again violates the president’s promise to refrain from imposing taxes on those with family incomes of less than $250,000 per year.

The Rhetoric on Personal Choice. According to the White House:“It sets up a new competitive health insurance market giving tens of millions of Americans the exact same insurance choices that members of Congress will have.”

The Reality: The Health Exchanges in Congress’ health bills and the President’s proposals are not structured to serve as a real competitive marketplace for insurance, in the sense of anything that would resemble real free market competition; rather these institutions would primarily serve as the federally designed mechanism to impose strict federal regulation on private insurers. By contrast, in the FEHBP, the federal government does not standardize the health benefits of private health plans for its employees. For federal employees and retirees, there are a wide variety of health benefit offerings and combinations of benefit packages, ranging in price from expensive health plans (like the Blues Standard Option) to low cost plans (like the Mail handler’s Value Plan, a union plan), and a variety of health plan types, ranging from comprehensive plans to health savings accounts and high deductible plans, plus a wide range of premiums and co-payments.

Read the rest here.

Steve Jobs: Cash Is King

Apple Inc. CEO Steve Jobs told shareholders Thursday that the company's massive $40 billion cash hoard provides "tremendous security and flexibility," but also hinted that the company would not rule out a big "opportunity" if one presented itself, reports Marketwatch.

The best thing you can have during a volatile time like this is cash. Jobs is doing the right thing. If the right opportunity comes along, he will be able to move quickly, when others may be strapped. That said, Jobs has to be careful that he is not stuck with such an un-hedged high cash balance when inflation starts to heat up. Also, just because he has such a cash balance doesn't mean that he should not borrow reasonable amounts of money, if he can lock in the current low rates.

As far as, down the road, hedging his cash position, I wouldn't be surprised f Jobs will be on top of that. There are indications he may have been one of the first goldbugs.

Why the Financial Collapse of Greece Is Not Necessarily a Negative for the Euro

The dollar is approaching an eight month high against the euro. Many commentators are attributing this to the Greek crisis. But the dollar is climbing against other currencies, as well. The US dollar index, for example, has been climbing since November.

Euro weakness would have occurred even without the Greek crisis. The Greek crisis is not necessarily damaging to the euro as long as the EU doesn't try to bailout Greece by printing more euros.

The real fuel behind dollar strength is. as I have long forecast, the result of supply/demand factors. Put simply, the Fed is not printing money (M2) to any significant degree, which means the supply of dollars is not growing. Thus, there is no reason for a decline in the dollar.

Further, since the global economy has been structured based on a declining dollar, a global restructuring based on a US no/slow money supply growth is occurring, a kind of covering of dollar shorting, if you will. This is the primary factor behind dollar strength and weakness in the euro.

Given that the dollar would be climbing against the euro, even if there wasn't a Greek crisis, this may present, in the not too distant future, a trading opportunity.

Since many traders believe that it is the Greek crisis that is primarily fueling dollar strength, any short-term lifeline thrown the Greeks is likely to spur a kneejerk short-term rally in the euro. Any such rally should be shorted. A Greek bailout at best would be neutral for the euro, but would be extremely negative if euro money printing is included as part of the bailout.

Obama's Bad Trip Back to the 1970's

by Simon Constable

Just when you thought policy-making couldn't get more bizarre...the President wants to revisit a disastrous economic idea that failed when it was tried in the 1970s.

Specifically, price controls are back on the table, this time in the health-care debate.
That's bad news for anyone wanting an efficient running economy and real reform in the health-care sector.

(In order to evoke the appropriate mood of the dodgy decade, this column is best read listening to Disco Inferno by The Trammps. Think, "Burn Baby Burn" Watch the video. )

Tucked inside the latest version of ObamaCare, which was announced Monday, is a provision to introduce a "Health Insurance Rate Authority."

That entity would determine whether health-insurance companies are charging too much for coverage. If so, the "Authority" could mandate that prices be capped. In effect, the proposal could mean price controls at the discretion of a quasi-government entity.

The last time the U.S. gave the government broad powers to cap prices was in the 1970s.
Lest anyone forget, that was an economic mess.

Read the rest here.