Damon Vrabel - Goldman Sachs, Chess, and the Godfather

Just this morning I was discussing that there were obviously games being played with Goldman. According to Mr. Vrabel, that game is chess.

And look at who he points to as a probably power behind the scenes, none other than the very same JPMorgan mentioned this morning:

Goldman Sachs, Chess, and the Godfather

Between the SEC charges and the congressional panels, the government is finally doing its job going after Goldman Sachs, right? And this last week in April ends with the Justice Department picking up the baton, which puts Goldman under threat of criminal prosecution. Things have suddenly gotten serious.

Two weeks ago on a radio interview, I suggested the SEC investigation will either be a chump charge to pacify the masses or it might potentially be the beginning of the sacrifice of Goldman Sachs for reasons explained below. The Justice Department referral makes the latter more probable.

Criminal prosecution is indeed appropriate. Goldman deserves to be broken up. In fact, all banks of that size need to be broken up so that power is passed down to state and local economies, and countries are no longer held hostage by the mega firms. Is that what is happening here? Are we being saved from the financial parasites that have destroyed our economy?

Childlike Perspective: Left vs. Right

The left thinks so. The major media establishment is suddenly, as if by script, trumpeting the idea that government is cracking down on boogie man Goldman Sachs. This view says, “Yey! Our good government servants that have our best interests at heart are fixing those greedy Wall Street parasites.” That’s the entire purpose of the congressional panels—a stageshow for the Wall-Street-funded media to promote this narrative. But those very same government officials were the ones who did what Goldman Sachs representatives and the real powers behind Wall Street told them for the last 20+ years. They still get all of their money from Wall Street. Have they suddenly turned on the very people who feed them? Of course not.

The right thinks this crackdown is bad because Wall Street and Goldman represent a benevolent free market. This view goes beyond childlikeness and approaches insanity, like Goldman CEO Lloyd Blankfein thinking of himself as an angel from God. Wall Street, the Fed cartel, is a government creation. There is nothing “free market” about it. It is the most powerful monopolized cartel in the history of the world. Conservative media mouthpieces who trumpet Wall Street do not have a clue about our monetary system. They have never looked beyond the false religion of neoclassical economics, which conveniently ignores the issue of money.

Conclusion: rule out the simplistic view of the left and right. The Washington DC government has served Wall Street and big business for decades. There is no divide between big government and big business. They go hand in hand. Neither could exist without the other.

Adolescent Perspective: “They’re All Criminals”

Another group of people, far more accurate than the left vs. right disciples, think that Wall Street is just a predatory bunch. Bringing down Goldman Sachs would therefore be a good thing in their view. But they think DC government is a predatory bunch as well. They see through the salesmanship and PR pumped through the corporate media. They understand that frat boy behavior creates a self-serving clique whether on Wall Street or in Washington DC. In fact, they understand how the boys in both groups get their power from working together. It is all one club.

Conclusion: as correct as this view is, it leaves us paralyzed. Adolescents are brilliant at seeing through adult facades, but they may fail to see the higher level picture.

The Godfather: Who the Criminals Work For

The key to what is really happening is to understand that the suits we see on television are not in charge. A bunch of random self-serving people would not be able to pull off strategic, coordinated plans—the adolescent view is only half correct. There are people far above the pay grade of a senator like Chris Dodd or a wage servant like Lloyd Blankfein. He may be the top operating officer at Goldman, but by definition that means he is a servant of the ownership class—the Anglo mafia—that controls all money in the system. The fact that he earns a wage and gets a W2 at the end of the year means he and his firm are not in charge.

Goldman Sachs is effectively a capo regime. It is a powerful player in a game of controlled chaos. It was given a territory and was then expected to deliver the goods. And Goldman delivered better than all the other capos in the system. It reaped the rewards. Goldman’s officers were paid better than any other regime throughout the last several decades. Its hit men were the most productive. The most loyal—Rubin, Paulson, etc—have been inducted into the upper level circle around the Godfather and removed from the stressful street jobs that bring public scrutiny. Those guys made their hundreds of millions and no longer care whether Goldman exists or not. And from the Godfather’s perspective, there comes a time when capos have served their purpose. At that point, their life is in danger.

“The Game of the Century:” Bobby Fischer and the Queen Sacrifice

But capos typically are not sacrificed unless doing so would serve a Machiavellian purpose. So what would be the purpose of sacrificing Goldman? Well, in one of the more famous games in chess history, 13-year-old Bobby Fischer brilliantly pounced on his opponent and guaranteed victory by boldly sacrificing his queen on move 17. The queen is the most powerful chess piece. Average people would narrowly play a game defensively protecting their queen and assuming any chance to take your queen would lead to victory. But that elementary view would be precisely the weakness upon which a true chess mind, a Godfather, would prey. Beware of the bait being laid in front of you.

Goldman Sachs is very much analogous to a queen in the chess game being played by the ownership class—the richest pools of private capital controlled by multi-generational wealthy families that hover above countries via the central banking system. It has been one of the most potent pieces on the board for many years, its most recent attack being on the entire nation of Greece. But as the endgame comes into view, perhaps the most brilliant play to reach checkmate is now the queen sacrifice. Goldman employees had better be sending their resumes to JP Morgan Chase—a critical chess piece in the endgame that will be protected at all costs.

The Great Global Restructuring

What is the end game? The ownership class is attempting to restructure the world under a new financial system. We have had a global currency for a long time—the US dollar—but it has run its course. Wall Street has leveraged up the dollar as far as possible. The dollar now holds most nations hostage thanks to the power of the bond market, the central banking system. The ownership class needs a new debt-based currency and banking structure to maintain control as they pump the capital engine through the 21st century. This is why the G20 is working feverishly to build up the IMF, BIS, and new global financial rules. This time the production center will be China rather than the US, which is why China and Japan are the most asset-rich countries in the world while the western world is the most indebted. The west is on track for decades of slow decline while Asia is on the verge of seeing “the rising sun.”

So unfortunately the government vs. Goldman Sachs story has nothing to do with reforming Wall Street in the interest of average Americans. Rather it is a strategic move to further the endgame of consolidating Wall Street power, focusing public rage on Goldman to protect JP Morgan Chase, fueling new regulations to clamp down on the smaller banks that we so desperately need, and creating a global structure even bigger than the already “too big to fail” banking system. This may be setting up one of the biggest, most successful queen sacrifices in history. We should take the queen by all means—Goldman is a predator. But heed the lesson from 13-year-old Bobby Fischer. Be wary of checkmate.

Sign of the Times

Yesterday my micro wave oven crashed, so I had to buy a new one today ( Having the old one fixed would have probably cost me more). I had several brands to choose from, including Whirlpool from America, LG from South Korea, Matsui from Japan plus two others who I can't remember. Ultimately, I chose the Matsui oven because it was the cheapest.

Anyway, I noticed something interesting. Regardless of whether the brand was American or Japanese or Korean or of unknown origin, they all had the "Made in China" text on them (Or "Made in P.R.C.", but that is China)

Morning Update/ Market Thread 4/30

Good Morning,

Equity futures are down just a little this morning, but are picking up momentum on the downside. In a switch, the dollar is down, bonds are up, oil is higher, and gold is gunning for its old highs. Gold is breaking out of yet another small consolidation and is at 1,178 an ounce. The prior high is at $1,227, not that far away, it would appear destined to go higher.

The big release this morning is the first stab at first quarter GDP. The headline number fell from Q4’s final reading of 5.6% to 3.2%. Expectations were for 3.4%, so this is a miss. Keep in mind that this 3.2% figure is an annualized quarterly figure, the growth in the quarter was therefore measured to be .8%. Also expect downward revisions to come. Here’s Econoday’s analysis:
Highlights
This morning we got an update on how the recovery is faring for the overall economy with the initial estimate for first quarter GDP. Even though growth in output (overall GDP) slowed from the fourth quarter, the big news is that the domestic final demand component picked up significantly. Real GDP growth for the first quarter came in at an annualized 3.2 percent, following a fourth quarter surge of 5.6 percent. Analysts had expected a first quarter gain of 3.4 percent.

While the inventory component was the driver behind fourth quarter growth, we got help in the first quarter from consumers and business investment (equipment purchases) as real final sales to domestic purchasers rose an improved 2.2 percent in the first quarter after an anemic 1.4 percent rise the period before. Although inventories rose, the "swing" in inventories was less positive than the drop in destocking the fourth quarter. Yes, sharply less negative adds more to GDP than slightly more positive-the "swing" is what matters. Net exports, however, worsened on a slowing in exports and continued increase in imports.

Year-on-year, real GDP advanced to 2.5 percent from 0.1 percent in the fourth quarter.

Inflation is still soft as the GDP price index rose an annualized 0.9 percent, following a 0.5 percent increase in the fourth quarter. The latest number essentially matched the consensus forecast for a 1.0 percent increase in the overall price index.

Although overall growth slowed in the first quarter, the composition shifted to a stronger position in terms of domestic demand. The change is gradual but in the right direction. Equity futures slipped on the release.
My take is that our GDP does not reflect reality at all. I believe that the deflator numbers do not reflect reality and that a great deal of our nation’s “productivity” (measured in dollars) is simply paper fluff engineered by our criminal financial industry using false accounting. Enron times a million.

Yes, it’s time for a do-over! Freedom’s Vision would do it.

For those who are into the details, here’s the entire GDP report from the BEA:

GDP Q1 2010

The Employment Cost Index rose .6% in the past quarter (1.7% year over year), which is greater than the forecast for a quarterly rise of .4%. The rise is mostly due to higher benefit costs. The difference in the rate of WAGE growth to the rate of growth in other costs, and in particular DEBT, is a guarantee for running into the inability to service the debt – debt saturation eventually occurs, it’s just math.
Highlights
A jump in benefit costs fed a surprising jump in the employment cost index that is definitely not wanted by policy makers. The ECI rose a quarter-to-quarter 0.6 percent in the first quarter for the highest rate of the recovery and compared with a 0.4 percent rise in the fourth quarter. The year-on-year rate rose to 1.7 percent, 2 tenths above the fourth-quarter pace.

Benefit costs jumped 1.1 percent in the first quarter more than doubling the fourth quarter's 0.5 percent rate. The year-on-year rate for benefit costs is at plus 2.2 percent, the highest rate since second-quarter 2007 and far above the prior quarter's plus 1.5 percent rate. Questions over how the implementation of healthcare reform will play out adds special uncertainty to the outlook for benefit costs.

Wages & salaries remain tame at plus 0.4 percent, down 1 tenth in the first quarter in the only headline that Federal Reserve officials will welcome. The year-on-year rate for this reading is unchanged at plus 1.5 percent.

A base effect is at play in this report as the fourth quarter marked a deep low for this series. But the gains can't be ignored and will raise doubts over how extended the Fed's zero-rate policy will prove to be.



Well, let’s see… how did holding rates too low for too long work out last time? What’s the definition of insanity? What one has to keep in mind is that the Fed does not work for the people of the United States. They work for the Central Banks. Once you understand WHO they are working for, then it all makes perfect sense. This is why WHO controls the money is so important and why the “FED” must be disbanded.

It would seem that someone else is finally starting to wake up – for what reason and motive is not clear, I don’t take anything at face value anymore. All I know is that Goldman stock just cratered $10 a share this morning as this was released:
Feds begin criminal probe into Goldman - reports

NEW YORK (CNNMoney.com) -- Federal prosecutors are reportedly looking into whether Goldman Sachs has committed securities fraud.

The Securities and Exchange Committee referred its investigation of Goldman to The Justice Department for possible criminal prosecution, according to several media reports, including one by the Wall Street Journal, Thursday night. The reports cited sources familiar with the situation.

Goldman has been accused by Levin's committee of betting aggressively against the nation's housing market, making as much as $3.7 billion in the process.

Documents released by the committee this week also demonstrated that Goldman may have been engaging in other questionable practices.

Goldman has maintained that it too got hit when the U.S. housing market collapsed, losing some $1.2 billion in 2007 and 2008. It has also rejected charges that it bet against American homeowners or against its own clients.

Rather, the company has maintained it merely was trying to insulate itself from other large bets it made on residential real estate.

"We didn't have a massive short against the housing market and we certainly did not bet against our clients," said Blankfein at the hearing Tuesday.

Fabrice Tourre, the 31-year-old French trader who allegedly helped broker the investment deal that is the subject of the SEC's civil lawsuit, also appeared Tuesday. He said he planned to fight the charges brought by the federal government.

Goldman has placed the London-based Tourre on paid leave indefinitely and stripped him of some of his credentials with British regulators, however.
Goldman has absolutely committed securities fraud. All that’s required to commit fraud is to materially misrepresent your product or to fail to disclose meaningful positions. Goldman is not the only Investment bank guilty of this fraud, they are all guilty of it. That leaves one to wonder why the SEC is taking action now… it feels like public manipulation to me and I’m certain the real motivations are more complex. The market is going to have a difficult time gaining ground with Goldman shares plummeting.

The Chicago PMI was just released at 63.8, a reading of 60 was expected.

The Greek debt crisis gets “solved” just about every day. And every day it seems the amount of money needed balloons:
April 30 (Bloomberg) -- Greek Prime Minister George Papandreou said the nation’s survival was at stake in talks to win a potential $159 billion European Union-led bailout that included budget cuts denounced by unions as “savage.”

“Now, today, immediately, what is at stake is the survival of the nation,” Papandreou said in parliament in Athens today. “This is the ‘red line.’” He said talks with the EU and International Monetary Fund were “tough,” with his government resisting “not in the street with rocks, but in negotiations.”
Oh sure, piling an additional $14,500 for every man, woman, and child of Greece’s 11 million people will surely make the current unserviceable debt all better, won’t it? What a joke! The people rising up? They absolutely should be.

The same exact thing IS happening here. Only ours is more stealth due to our ability to devalue our dollar. That game, however, is getting more difficult for us by the day as well. As soon as the “austerity” measures begin to set in, even the fluffed up false GDP growth will turn negative again. The real desperate acts will come as we fall during the next cycle.

Yesterday’s ramp job peaked out at the 78.6% retrace level. The VIX did generate a market buy signal by closing inside of the upper Bollinger band.



Remember, this signal is a leading signal and it is very reliable. You can see that the Bollingers are now spread wide, I would not look for another VIX signal for quite some time. That said, events can always override technical indications, if Goldman breaks beneath $148 a share, for example, the market will have a difficult time making progress. Tops are a process, they take time.

As I type, Goldman shares just landed on the $148 level. A break beneath $148 will find limited support at $140, but then there’s really nothing all the way back down to $100. That would not be particularly helpful to the XLF or to the broader market:



Couldn’t happen to a nicer group of guys, I’m sure a lot of this theatre is playing off that sentiment. Sure, there are a lot of good songs I could choose to pile on top of Goldman, they certainly deserve it. Instead of that, though, here’s one for the masses who believe in the growth story propagated by all the central bankers, our administration, the BEA, and our media…

Styx – Fooling Yourself:

The Insanity of Farm Subsidies

I've reported repeatedely about the insanity of farm subsidies. Now Johan Norberg has an interesting post about how these farm subsidies just keep getting more and more insane:

"First they paid farmers to farm.

Then they paid farmers not to farm.

Then they took another step by paying non-farmers not to farm.

And just when you thought they´d run out of ideas, here comes the logical conclusion: Agricultural subsidies for the dead. Washington Post reports that deceased farmers in the US get $157 million a year. That makes a decent wage per working hour."

Morning Update/ Market Thread 4/29

Good Morning,

Equity futures are higher this morning, now retracing roughly half of the losses incurred early this week. Below is a 5 minute chart of DOW futures on the left showing the overnight action, and a 15 minute chart of the S&P on the right. Both appear to be making a rising wedge which is normally bearish, however, the pattern is still young and has not been created on the cash charts as of yet:



The dollar is lower, bonds are higher, oil is significantly higher, and gold is down slightly while it digests recent gains.

Goldman’s bounce continues off the $150 level for now, I think what happens there will impact the XLF and the entire market.

Financial reform is now progressing, there’s really no point in commenting until we hear what it contains. That said, there is a lot of talk about including a no bail out provision. Of course that’s the right thing to do, however it is the type of constraint that shows how the mood will be different on the next leg lower when it occurs. Remember, the banks are still insolvent, their “assets” as underwater as the city of Atlantis.

Weekly jobless claims fell by 8,000 to 448,000, a level which is still extremely elevated. Here’s Econoday:
Highlights
Initial jobless claims fell in the April 24 week to 448,000 vs. 459,000 in the prior week, which is revised 3,000 higher. The four-week average is up 1,500 to 462,500 and compares negatively with 448,000 at the end of March.

Continuing claims are down 18,000 to 4.645 million in data for the April 17 week. The four-week average here compares favorably with month-end March but only slightly, at 4.639 million vs. 4.651 million. But a month-end to month-end comparison of the unemployment rate for insured workers shows a 1 tenth uptick, at 3.6 percent vs. 3.5 percent.

Today's report is not overwhelmingly positive but does show improvement in what counts most -- the latest weeks. Early expectations are calling for a solid gain in April payrolls but roughly the same size gain as in March which came in at 162,000. The stock market slipped very slightly following today's report.



From the Department of Labor’s release, “States reported 5,200,473 persons claiming EUC (Emergency Unemployment Compensation) benefits for the week ending April 10, a decrease of 146,641 from the prior week. There were 2,286,186 claimants in the comparable week in 2009.”

That’s roughly 3 million more people on emergency unemployment this year over the same timeframe last year.

The first manipulated stab at quarter 1 GDP will be released tomorrow, can’t wait! The crowd is guessing 3.4%, I believe that true GDP is still negative, remove false accounting practices, calculate true inflation, and mark financial “assets” to market and GDP would fall tremendously. Enron times a million, and just because the whole world’s in on it doesn’t mean the ending is going to be any different.

On the opening bell the VIX fell beneath the upper Bollinger band. Should it close beneath it will have produced a market buy signal. Again, these signals are usually very reliable. For this signal to be triggered, it must be on a closing basis. Below is a 3 month chart of the VIX, note the broadening Bollingers:



Below is a daily chart of the dollar. Note how the 82 level neatly closes off the gap area I highlighted months ago in red. The 82.20 level is key here, a rise above is bullish for the dollar and bad for equities. A drop below probably means we have more to come on the upside with equities and that would correspond with a buy signal on the VIX should it occur.



Hey, the bank’s toxic paper is still so far underwater I’m surprised John Paulson didn’t moniker his CDO fund “Atlantis.”

Donovan – Atlantis:

Kerrynomics

John Kerry, Massachusetts Senator and former Democratic Presidential Candidate, famous for voting against proposals just before he votes for them and insulting troops just before flattering them, now tries to demonstrates that he understand economics better than he holds on to his political views. He fails-before he succeeds (if he ever manages to do that...that is one flip-flop Kerry is unlikely to succeed with...).

Anyway, George Borjas here quotes him saying this:

"In order for America to remain truly competitive in a global economy, we must invest in our workforce to stimulate small business growth. Small businesses create two-thirds of all new jobs in this country, and the vast majority of them are paying their new workers higher than the minimum wage.

It's no secret that good wages result in increased productivity, ultimately improving a firm's bottom line and economic development in their community. In fact, the last time Congress raised the minimum wage, our country experienced the strongest economic growth in decades. We saw lower unemployment, lower poverty rates, and lower inflation.

Small businesses get it. By raising the minimum wage, we're creating a prosperous future for our small businesses, their workers and their families."


To which Borjas comment:

"(1) If a $5.85 minimum wage creates a more "prosperous future for our small businesses" than a $5.15 minimum wage, isn't it a little irresponsible to stop there? Let's go for the $10.00 minimum wage? Or a $15 one? Or...

(2) No matter how disappointed one is with the Bush administration, all it takes is a little googling of John Kerry's latest nonsense to appreciate that things could be worse."


Indeed. With regard to point number one, you could go further , asking P.J. O` Rourke's question: "And if minimum wage laws work, why fool around? Why not make it a thousand an hour?"

Morning Update/ Market Thread 4/28

Good Morning,

Equity futures are higher this morning following yesterday’s tumult. The SPX gave up 2.3% on the day and overnight the Nikkei Index lost 287 points or 2.6% in sympathy. The dollar and bonds are slightly lower this morning, the Euro is up slightly after making new lows yesterday, oil is up a little and gold is down a little.

The action in gold yesterday was interesting as it moved up strongly in opposition to the market. That’s an important clue for what to expect as it becomes more clear that indeed sovereign risk is for real and it’s not just a Greek problem – it’s a global problem.

According to Bloomberg:
The yield on two-year Greek notes surged to more than 23 percent today, and the nation’s securities regulator imposed a two-month ban on short sales on the Athens stock exchange.

The euro gained today after the Financial Times reported the International Monetary Fund may increase its financial assistance in the first year to Greece by 10 billion euros from the current 15 billion euros, citing unidentified bankers and officials in Washington. The currency was trading at $1.3195 at 12:45 p.m. in Tokyo, having earlier traded at $1.3145, the lowest since April 29, 2009.
Got to love those unidentified bankers, and when all else fails ban short selling, yeah that'll work... not! The bankers don't care about any "risk," they are certainly willing to print up an instrument of debt and skim from the people’s productive efforts – austerity, that’s for other people.

The worthless MBA Purchase Index produced yet another wild swing, gaining 7.4% on the week. The refinance index, however, lost 8.8%! The composite index lost 2.9%. I don’t even know why I waste my time with this report, somebody please make it stop! Econoday plays right along, gee, no mention of the weather?
Highlights
The approaching end to second-round stimulus is giving a big lift to housing demand as the Mortgage Bankers Association's purchase index jumped for a second week, up 7.4 percent in the April 23 week. But the outlook after the latest stimulus expires at month-end is in serious question. This report two weeks from now will likely offer the first indication of how deeply stimulus pulled sales forward. MBA reports a disproportionate share of government purchase applications which rose 11.9 percent in the latest week vs. a 3.5 percent rise for conventional purchases.

If it weren't for sovereign-debt issues now pulling U.S. rates lower, the prospect of high mortgage rates was a central risk to future housing demand. Rates did rise in the week, up 4 basis points on 30-year loans to 5.08 percent, but rates are very likely to move lower in the next report given ongoing sharp declines in long Treasury yields. Lower rates should help the refinance index which however fell 8.8 percent in the latest reporting week. The fall in the refinance index offset the rise in the purchase index, making for a 2.9 percent decrease in the composite index.
Of course the FOMC meeting announcement will occur at 2:15 Eastern this morning, boy, can’t you just wait to hear what these geniuses have to say? I’m still waiting for Bernanke to utter the words “debt saturation” which he actually came pretty close to yesterday. In fact, he came pretty close to saying that there’s no more room for deficit spending, and doesn’t that fly in the face of his entire prevent depression thesis?

Here’s a thesis for you – central bankers and their debt backed money schemes are the CAUSE of credit bubbles and depressions. Let’s see whose thesis wins out over time.

Yesterday’s move in the markets produced a bunch of technical damage, most of the current uptrend lines were broken, but not all. McHugh’s current short term count shows that we may need one more wave higher, but I’m not so certain that we’ll get it. This descent had a different flavor to it, it was very strong, a 95% down day on much heavier volume and it was not just based on one concern, it was based on several.

It is quite typical that following a 90% plus move that some correction or sideways action occur to digest that move.

Note that the selloff occurred the day following an all time record high number of new highs. Here’s the resultant chart of new highs, according to the WSJ new highs fell to 191, that’s a huge drop from 674:



The other technical indicator to watch is the VIX which gained more than 30% yesterday, leaping over the 50dma and even bounding over the 200dma to close miles outside of the upper Bollinger band:



The close outside of the upper Bollinger sets up a market buy signal that will be triggered once the VIX returns to inside of the normal range. That may happen quickly or it may take a few days depending on the market direction from here. Once triggered, the coming market buy signal may indicate that a wave 2 bounce is coming. Remember, these VIX signals usually lead by a few days or even a week or two, but they are highly reliable. Keep in mind that this is a future event we’re talking about, it’s quite possible that there is much selling between here and there – if I had to guess, this was not a one day wonder and may be the start of a larger correction. If that read is correct, we should resume selling with the VIX remaining above the upper Bollinger for perhaps a few days – we’ll see, we really need a little more on the downside here to break the uptrend lines on indices like the RUT.

Many of the indices, including the NDX, produced new bearish targets on their respective Point & Figure charts. The VIX produced a new bullish target of 36. The 30% move yesterday certainly made options instantly more expensive, removing good entry points for retail "investors" (gamblers) to get positioned:



For now Goldman is higher having bounced off the $150 level. There is strong support for their stock just beneath that range, however, should it break beneath there it may prove to be quite damaging for them.

From my perspective DEBT continues to rattle the world, one event after the other. This will not stop, it will continue to get worse until we either change WHO controls our money and how it is backed by debt, OR we rush headlong into other nasty events that history says is coming if we’re not smart enough to remove the central bankers from power. Don’t buy the bullshit, the world’s problems are not caused by unions, illegal immigrants, or any other such nonsense. They are caused because We The People have failed to uphold the rule of law and demand that our representatives take back control of our money as the Constitution, the basis for law in this country, demands.

Did you see the Goldman billionaires slither like the snakes in the grass they are? No apologies forthcoming from the snakes. Lord Blankfein is up today, more fun in the theatre of the absurd.

Velvet Revolver – Slither:

Richard Koo – “Balance Sheet Recession”

Richard Koo, Chief Economist, Nomura Research Institute describes what he calls “Balance Sheet Recession.” He struggles for a term for it, but what he describes is exactly what I call “Debt Saturation.”

His discussion is good because it shows the dilemma and cycle created by deficit spending - deficits increase until they are no longer tolerated, financial reform comes in and that causes yet another contraction because balance sheets (debt saturation) have not been repaired.

This is why financial reform will fail – because you are saturated with debt, financial reform causes another contraction. Where Mr. Koo misses the boat in discussing Keynes is that the root cause of this dilemma is our monetary system – it is what sets up the need for fiscal stimulus and is the root of that cycle. We will not escape the problems created with debt cycles until we fix our underlying monetary system. (ht Kevin)

Why Financial Reform will Fail…

“Americans can always be counted on to do the right thing… after they have exhausted all other possibilities.”
-Winston Churchill
There is no doubt that financial reform is needed – badly. But any financial reform, meaningful or otherwise, is destined to fail by itself because it is NOT the root of our financial problems.

In fact, the math of our economy is so far gone at this point that meaningful financial reform will probably do more harm than good. This is because all our money is debt and our system requires never ending growth or failures will occur. Tighten the reigns now on financial growth, debt contracts, our money contracts, and recession sets back in making the long term math even worse. It’s an impossible math situation rooted not in the financial system, but in our monetary system.

It is because of our monetary system that we are damned if we do, and we are damned if we don’t.

All money is debt. Without debt there would be no money. It’s an insane system, quite literally nuts, for it ignores the reality of math. If I stood in front of you holding 4 rocks in my hands and insisted that I held 6, you would call me nuts, wouldn’t you? Thus the term, “economic mass psychosis” is completely apropos.

Below is a chart showing the diminishing productivity of debt over time. Financial reform will not change this chart:



Ask yourself this… what will financial reform accomplish in regards to our national debt, to the bad math of Social Security or to Medicare? Nothing, that’s what. And constricting or confining the financial industry will not help the short run, nor will it help the long run UNLESS it is accomplished in conjunction with monetary reform and political reform that works to separate special interest money from politics. Short of that there is nothing but problems facing our future.

Would financial reform help Greece out of their debt problem? No? Why would anyone think it would help us out of ours? Your attention is being diverted AGAIN, they are attempting to take your eye off the ball. The ball is DEBT and the way in which private banks control the production of money - because they control the money, they control us.

The single most important reform is producing our own sovereign money. That is money that is spent into being without obligating the people of America to pay interest on their own money system to private banks – a ridiculous notion under which we have all lived our entire lives. The expense of such folly is now growing exponentially and will continue to be an anchor around our futures until we set our monetary and political systems straight - we must return control of money production to Congress where it belongs.

To see and understand a system that can work, please visit SwarmUSA.com and read up on the provisions of Freedom’s Vision. Yes, financial reform is needed, but to be successful it MUST be accomplished along with monetary reform or the long term problems will remain.

Velvet Revolver - The Last Fight (Libertad):

Morning Update/ Market Thread 4/27

Good Morning,

Equity futures are lower this morning with the SPX approaching a support area right around the 1,200 level. The dollar is higher, bonds are up significantly, both oil and gold are down a little.

Case-Schiller reported that home prices gained .6% yoy in the month of February compared to a consensus rise of 1.3%. It was the first year over year price gain in two and a half years.
April 27 (Bloomberg) -- Home prices in 20 U.S. cities rose less than forecast in February from a year earlier, a sign a housing recovery will take time to develop.

The S&P/Case-Shiller home-price index of property values in 20 cities increased 0.6 percent from February 2009, the first gain since December 2006, the group said today in New York. The median forecast of economists surveyed by Bloomberg News projected a 1.3 percent advance.

Home prices in February were 30 percent below the peak reached in July 2006, indicating the industry that helped trigger the worst recession since the 1930s will take years to recover lost ground. A pickup in employment is needed to help stem the damage from mounting foreclosures that are restraining further gains in property values.

“The sharp drop in home prices has ended,” Michelle Meyer, a senior economist at Barclays Capital Inc. in New York, said before the report. “We believe that prices are bouncing around the bottom and see little upside potential over the next few years. There is an alarmingly large foreclosure pipeline.”

Stock-index futures held earlier losses following the report on growing concern over Greece’s debt crisis. The contract on the Standard & Poor’s 500 index fell 0.5 percent to 1,202.2 at 9:03 a.m. in New York.

I think the buyers incentives directly added to the price of homes, artificially of course. As the wave of option-ARM loans hits in the next year we should see some resumption of home price declines, especially in the upper end.

Citizen Confidence numbers are released at 10 Eastern this morning.

I was reading the Puget Sound Business Journal yesterday when a blatant example of stock manipulation jumped off the page at me:
Frontier Financial shares skyrocket 97% Monday

Shares of Frontier Financial Corp., of Everett, soared nearly 96 percent in trading Monday, pushing the stock to more than $7 a share at one time before closing at $5.84 and perplexing bank executives and analysts.

On an online trading message board for the bank, rumors circulated that Frontier will be seized by government regulators this Friday, fueling the theory that short sellers are betting against Frontier’s survival. Banks are typically taken over by the government on Friday.

More than 23 million shares of stock traded on Monday. There are less than 5 million outstanding Frontier (NASDAQ: FTBK) shares and on a typical day, only about 200,000 shares trade. Frontier Financial is the holding company for Frontier Bank.

Sara Hasan, an analyst with Seattle-based brokerage McAdams Wright Ragen, said it’s possible short sellers are betting against the bank’s stock. Another possibility is that the surge is caused by what’s known as a “program trade,” when a fund purchases a chunk of the stock without much research, Hasan said.

“I have no idea what’s driving it,” Hasan said.

Frontier Financial chief executive Pat Fahey said he was perplexed Monday. He said the company has not announced any news — and has no plans to do so. The NASDAQ stock exchange also called the bank asking about the stock movement, he said.

He said that any trading based on a takeover by government regulators would be “pure speculation.”

“That’s been going on for a year — what’s new about that?” he said regarding rumors about the bank’s health.

Great example of a lawless market, no police, no worry about being jailed for manipulating stock price, something that’s pretty easy to do with a small company. It would probably take the SEC all of 5 minutes to find out who was behind something like this, but nothing will happen, no enforcement of the rule of law.

Meanwhile Lord Blankfein is being grilled in the theatre of the absurd. “We did not bet against our clients.” Riiight, Lloyd, tell us another. While Hank Paulson was their CEO they were most certainly betting against their own clients, they were even throwing parties after successfully offloading their crap onto unsuspecting clients.

And the theatre is also occurring over “financial reform.” I am definitely skeptical that anything meaningful will come of that. Even if meaningful financial reform comes now, it is too late to stop the progression of impossible math, a function of our monetary system and the reason that monetary reform is what’s needed to actually heal our economy permanently.

There were 674 new highs on the NYSE yesterday, an all time record. That’s the type of extreme that will likely precede a pull-back of some kind, watch the number of new highs, once they begin to fall, a pull-back is likely.

Below is a six month chart of the SPX, note the large megaphone that was drawn in quite awhile ago:



The upper trendline has held prices and stopped the advance right on the 1,220 level. That level is also coincident with the 200 week moving average. If that megaphone is in play, we could be very near a pullback that would take prices down to the 1,000 area, that’s a pretty large correction should it occur. It may not be what’s in play, there is only one touch on the lower trendline, but it is the same angle as the upper trendline so it’s a possibility. Megaphones usually have 5 waves, obviously this one has had 3. If it’s in play, 4 would take it down to the bottom, then what’s typical is for a 5th wave to only make it half way back up and then fail. Megaphones are typically price reversal formations although not always. This is just conjecture at this point.

Velvet Revolver – Patience:

Bullish & Bearish In U.S. GDP Report

The second quarter GDP numbers came in at 3.4%, within my expected range of 3-3.2% give or take a few tenths of a percentage points. Looking at the details, the main reason why it came in at the high end of that range was that government spending increased more than expected. As a result, government demand rose to its highest share of GDP since the first quarter of 1993. Also, Net exports was somewhat higher than expected but on the other inventories increased lower than expected.

More interesting was the revision. As I predicted yesterday, it did indeed downwardly revise growth in 2004-2006. 2004 was revised down to 3.6% from 3.9%, 2005 to 3.1% from 3.2% and 2006 to 2.9% from 3.3%. Inflation was on the other hand upwardly revised, but not by as much as the downward revision to real growth, so nominal growth was also downwardly revised. The related measures of GNP (GDP plus net factor income) and national income (In principle GNP minus capital consumption, but in practice it also includes a statistical discrepancy as its data come from other sources).

But the most interesting aspect of the revision was the change of distribution within national income. This revision implies a somewhat more bullish outlook for private consumption than I outlined yesterday, but it also implies a much more bearish outlook for business investments.

The bullish news from the revision was that disposable income was upwardly revised even as consumer spending was downwardly revised. As a result, the savings rate was actually +0.6% instead of the -1% to -1.5% one could have expected from the unrevised April and May numbers. While there was a small upward revision to compensation of labor, the main reason for the upward revision of personal income was much higher dividend income. That the savings rate is positive rather than negative, if only slightly, means that consumer spending now seems less vulnerable to falling house prices.

The really bearish news was the downward revision to corporate profits. And with dividend payments upwardly revised, that of course also implies that retained earnings was even more downwardly revised. As a result of the downward revision to profits and upward revision of dividend payments, retained earnings in the first quarter of 2007 fell to their lowest level since 2003 (except for the special case of Q4 2004 when Microsoft's special dividend depressed the number) in nominal dollars. You have to go back all the way to the recession year of 2001 to find retained earnings at a lower share of national income. Including dividends, corporate profits aren't fully as weak. But even including dividends, domestic corporate profits were at their lowest share of national income since 2004 (except for the third quarter of 2005, when Katrina related damages depressed it). And I expect profits for the second quarter to be even lower.

The decline in profitability and the weaker cash flow implies that it seems unlikely that corporate executives will really find it profitable to increase investments significantly, especially with the weakness in domestic demand. For this reason, it seems likely that the decline in investment goods demand implied by the durable goods report yesterday was not an anomaly, and that business investments will be stagnant or even negative.

All in all, the report does not significantly strengthen or weaken the bearish case as the more bullish outlook for consumer spending is cancelled out by the more bearish outlook for business investments. Ultimately though, as business investments is what builds the productive capacity, the supply side of the economy, the more bearish case for investments is more important than the more bullish case for consumption-particularly in the long term.

52 Week Highs – Oh My…

As I type on Monday morning, the DOW and S&P 500 are up and setting new rally highs, the largest uninterrupted rally in recorded market history…

The VIX, however, is up nearly 4%, and Goldman Sachs is down another 3%.

CAT, whose revenues fell 11% from the “bottom” (quarter 1 of 2009), is back nearly at 2007 prices after having its first profitable quarter in the past seven! Price to Earnings ratio? Only 50, that's all. North American sales? DOWN 15% year over year.

This mirrors another manufacturing bellwether, Boeing (BA), who reported revenues down 13% quarter one of this year over the same quarter the year prior. Current P/E of “only” 45!

A buying opportunity that can’t be passed, or an extreme in sentiment and valuation?

I vote the later.

This Friday the Wall Street Journal reported that NYSE 52 week highs reached 634, a high that dates back to 1982. Some (uninformed) market callers say that this is a sign of strength showing great breadth in the market. I say it shows an extreme, one that is almost always seen near major turning points in the market, let’s examine the history.

Below is a 3 year weekly chart of NYSE new highs with the SPX in the background for comparison:



Let’s examine this chart carefully. Note that in late ’07 there was a cluster of 4 events with readings over 300. What followed? One of the greatest stock collapses in history. Note how the peaks in the new highs correlates with tops, certainly not buying opportunities, that’s for certain.

Those extreme readings reversed, the number of new 52 week highs went to near zero and stayed there as the market bottomed.

Now that the market has literally been climbing uninterrupted for over a year, the number of new 52 week highs has hit insane and never before heard of levels. We just experienced our 5th weekly close over the 300 level in the latest cluster, culminating in an extreme just as the markets reach their 200 week averages and their inverted Head & Shoulder targets.

Now let’s examine a chart of new NYSE 52 week lows for comparison. What’s immediately clear is that there is a distinct correlation between peaks in new lows and bottoms, probably one of the best correlations you’ll find. As you move across the chart, you’ll see a spike in the number of new lows at the March ’09 bottom and it has flatlined near zero ever since. This is not a healthy condition, it is an extreme!



It’s true that as the number of new highs tilts strongly in favor of the bulls that it shows a breadth and a desire for the market to rise – the same is true for new lows when a market is moving lower. Extremes, however, show a lopsided flow of money. This lopsided condition reaches a point mathematically when it HAS to reverse! This is due to the fact that as more buyers enter the market, you have more and more money and sentiment bringing buyers in until the last buyers enter… at that point there is no more new money to take prices higher. The opposite is true on the way down.

We are definitely seeing those types of extremes now. However, beware that major turning points take time to develop, so be patient and do not expect instant crash – look at those charts and how long it took for a meaningful and sustained change of direction to occur. It's clear that it takes clusters of extreme reading to turn the entire market direction, while a single high reading can indicate a correction. We've seen a cluster of extreme readings now, haven't we?

I am often asked about Hindenburg Omens. They are triggered when certain market conditions exist AND the number of 52 week highs and lows are BOTH elevated. This happens very rarely and is a good indication that a substantial market decline is about to occur.

In order to trigger another Hindenburg Omen now, it would require that the number of new lows rise to 85 or above while the number of new highs remains above that level as well. It’s not likely to happen until we get an extended decline because stocks now have a long way to travel to get to new lows.

The Hindenburg works because it shows a market that is internally split, some stocks are doing great while others are doing poorly. The most recent example was when housing and construction related stocks were making new lows yet the overall market was continuing to put in new highs into the face of that. Remember the sentiment at the time? The “experts” were saying not to worry while a select few, like myself, were warning that it would affect overall consumer spending and that eventually the rest of the market would follow. It did.

This current “recovery” is not a consumer led recovery, it is a paper led false bounce, one that has bankrupted our nation and introduced new systemic risks that are only added to the prior risks which have not been allowed to clear. Ignore those new highs if you dare, I wouldn’t.

Pink Floyd - Shine On You Crazy Diamond / Learning to Fly:

U.S. Economy Weakening Again

There have been a lot of economic reports today, which I will return to soon, but the big number for the week is tomorrow's U.S. GDP report. This report will also include revisions of GDP for 2004-2006. The GDP revision for 2004-2006 is likely to slightly -but only slightly- downwardly revise real GDP growth, just like the 2005 and 2006 revisions did.

As for Q2 2007, I basically agree with the average Wall Street forecast of 3-3.2% at annualized rate ( give or take a few tenths of a percentage points) compared to the previous quarter. Personal consumption will likely increase about 1.5% (The decline in June retail sales means however that it could be lower), which is enough to add roughly 1%:point in growth. Meanwhile, both inventories and net exports will each add slightly less than 1%:point. In dollar terms, the trade deficit is likely to be assumed stay roughly unchanged compared to the first quarter, but as import prices (primarily oil prices) rose sharply, this will still mean that net exports will add slightly less than a percentage point to GDP given the prevailing -and illegitimate, but never mind that now- volume methodology. Meanwhile, business investments -particularly private nonresidential construction- will likely add some to GDP, but this will likely largely be cancelled out by continued falling residential investments, so the total net addition from fixed investments will probably be small. Also, increased government spending will likely add a few tenths of a percentage points. If we add this up, we come up with the number of 3% or slightly more than that.

This will represent a significant acceleration in growth from the 0.7% rate of the first quarter, although the terms of trade factor means that the real improvement is not as big as the headline volume number would suggest. Moreover, growth will likely decelerate significantly again in the third quarter. It is way too early to give any exact forecast, but it seems unlikely that growth will exceed 1% and there is a significant possibility of negative growth.

The reason I believe this is that there are a number of strong factors pushing down the economy.

First and foremost, the subprime mess just keeps getting worse and shows signs of spreading to the junk bond sector and to other mortgage borrowers. This implies first of all that residential investments will continue to fall. The sharp decline in new home sales confirms this, as it shows that builders are finding it increasingly difficult to sell newly built homes. Secondly, falling house prices implies that despite higher stock prices, consumers will find it increasingly difficult to expand or even just continue with their negative savings rate. That in turn means that real personal consumption will at most increase (or decrease) at the same rate as real disposable income, and likely be even weaker than real disposable income. Thirdly, higher yield spreads on junk bonds means that M & A activities and business investments will be restrained, as is illustrated by the difficulties for private equity firms to raise the capital needed to buy Chrysler from Daimler. The loose monetary conditions that supported the stock market rally may thus be about to dissipate, which would end the rally and reinforce the effect from lower house prices.

Another factor which will certainly drag down the U.S. economy is the continued sharp increases in oil prices. The sharp increase in oil prices means that real disposable income is likely to be stagnant at most, and it could even turn negative. That also implies for the above mentioned reasons that real personal spending is likely to be stagnant or negative for the third quarter.

Furthermore, business investments aren't likely to increase particularly much, if anything at all. Durable goods orders excluding aircraft and defense orders, a proxy for future business investment spending fell again in June. While tomorrow's GDP release isn't going to say anything about corporate profits, the earnings reports from Wall Street suggest that profits for domestic companies fell as a general theme of the earnings reports was that earnings on average increased only because of higher foreign profits. While absolute profit level remain high, the fact that they are declining and the aforementioned higher junk bond yield means that business investments are likely to be stagnant or negative.

And if final sales are weak, inventories are likely to fall back again.

Somewhat counteracting the above mentioned forces are strong foreign growth and the weak dollar, both of which should imply that net exports at least according to the volume methodology will contribute to growth. The higher oil price means that the dollar trade deficit may fall only slightly or not at all and so this boost will largely be just a statistical illusion. The aforementioned boost in earnings from foreign subsidiaries will likely support U.S. incomes, but not to any significant extent.

All in all, increased net exports and net factor income from the weak dollar and global economy and the stock market rally that is to some extent a result from higher net factor income will provide some support to the U.S. economy. But will it really be enough to counteract the fallout from the subprime mess, the soaring oil prices and the weak domestic profits? That is possible, but it looks increasingly unlikely.

Two Great Mises.org Articles

While most of my readers have presumably already read them, to those that haven't I would like to recommend two great mises.org articles.

First, Lew Rockwell describes the hell that China was during its communist era. While the Chinese government can still be oppressive in some non-economic areas and is far from consistently laissez faire in economics, it is clear that there has been a dramatic improvement in particularly the economic aspects and to a lesser extent also the non-economic aspects since Deng Xiaopings capitalist reformation.

Second, Robert Blumen has an interesting review of Peter Schiff's book. While the book is not flawless, it does seem interesting (I haven't read it myself yet, so I can't review it yet).

The Problem With Ad Hoc Tax Cuts

The Swedish centre-right government wants to increase employment. And it realizes that this is done most effectively by reducing taxes. So far, so good, in other words. The problem is that it remains unwilling to significantly reduce government spending. And to the extent the burden of spending for structural and cyclical reasons falls, it seems committed to using this to run large surpluses and pay off the government debt.

And so, it is not willing to commit to any significant across the board tax cuts. But how then will they be able to increase employment through tax cuts? Well, radical libertarian turned centrist technocrat finance minister Anders Borg probably thinks he is a real brilliant economist by coming up with the idea of targeted tax cuts to specific sectors. Labor cost sensitivity is higher in some sectors compared to others, mainly due to the fact that some are more labor intensive than others and the related fact that some products and services can more easily be done by consumers themselves or within the unofficial sectors. For example, you can cut your own hair or have a friend or relative do it, but you could hardly build your own car. And so, Borg probably thinks he is really smart by targeting the tax cuts to just specific sectors.

And well, targeted tax cuts to these sectors are indeed likely to generate more jobs than across the board tax cuts of a similar amount. The problem is that while it may "work" in that sense, this solution will have negative side effects that wouldn't have appeared with across the board tax cuts. First of all, it will lower productivity as it in effect means extra punitive taxation of more capital intensive sectors. And while consumers may not be able to build cars themselves, they can always substitute Swedish cars with foreign cars.

And secondly, this new special rules will create lots of extra bureaucracy, red tape and complications for small businesses. As is highlighted in this Dagens Industri-article, just about all organizations reject the proposal on precisely the massive amount of extra red tape for businesses. For example car mechanics will get tax relief when they fix cars-but not when they fix buses- Cafes will get tax relief except when they sell bread and so on.

It is time for the Swedish government to show that they really are different from the Social Democrats-and implement more broad based tax cuts financed by real spending cuts-something which would be unequivocally good and make the pick-up in Swedish growth more sustainable.

Very Funny

BBC Business News reports on the increased trade surplus in Japan with the headline "Cars drive Japan's trade surplus", alluding to how increased car exports was one of the factors behind the increase.

The key factor behind the increase is of course the extremely undervalued yen. The surplus is likely to continue increase albeit at perhaps a slower rate due to higher oil prices and a weaker U.S. economy.

Subprime Mess Getting Worse

Nouriel Roubini has as usual a good wrap up of the bearish news on the subprime sector, with lots of useful links.
An especially interesting link is this columns by Bill Gross on how yield spreads are rising in other sectors as well as a result from the subprime (Try to ignore the socialist-egalitarian nonsense in the first half of the column and focus on the latter parts about yield spreads).

Another interesting story, not included in the Roubini post, is this story about how a leading subprime lender believes there will be no recovery in the housing market before 2009.

Japanese Deflation Underestimated?

The "Alpha-Sources" blog notes that inflation in Japan and the United States are measured with different methodologies, with the U.S. applying to a much higher extent "hedonic adjustment" and substitution adjustments. As the anonymous blogger and the authors of the study he(?) quotes thinks the U.S. methodology is the correct, they argue that this means that price deflation in Japan have been even higher than previously thought, which also means that real growth have been higher. I would be more inclined to think the Japanese methodology is better and that inflation in the U.S. has been higher and real growth lower.

But regardless of whether Japanese deflation or
U.S. inflation have been underestimated, two things are clear: First, relative inflation in the U.S. has clearly been higher and relative growth lower compared to Japan. Second, this implies that the real depreciation of the yen has been even more dramatic than I reported before and that the case for believing that the yen is extremely undervalued is even stronger

Martin Armstrong – The Paradox of Solution

With some behind the scenes help we finally managed to get Martin out of the hole. He has already jumped back onto his typewriter to talk about "The Paradox of Solution."

Reading his paper, it certainly sounds like a paradox. On the one hand history shows that we need to press the limits and experience failure before we can implement meaningful change. Yet on the other hand we see the need to reform prior to collapse in order to prevent events from unfolding the way that history teaches us they will.

I have been corresponding with Martin and he has been picking up on some of the solutions that I’ve been recommending in Freedom’s Vision. In this document he is now chanting Bill Still’s line about the importance of WHO controls the money. Martin is not, however, all the way there yet in his understanding of the money trail/ system and the role of the Federal Reserve in corrupting government.

To fully understand what’s happening, one needs to follow the ownership and money trail created when the 12 Reserve banks were formed by the Federal Reserve ACT. This is where to look to truly see WHO’s behind our money system. Martin had already fallen in line with Freedom’s Vision on the major point of producing our own sovereign money and swapping that money for debt in an equity for debt swap. There are two areas, however, where I disagree with Martin in terms of a solution. The first is the need for a global currency – currencies do not need to be traded into a global currency, they can easily be valued against one another directly, especially in the age of computers. The problem with having some international standard is that some body of people must control it – the WHO part.

Having such a middle-man currency, may ease the way people think about international trade, but in fact the question to ponder is WHO sets the exchange value, what mechanism is used? There is no need for a mechanism if one country is trading directly with another, the exchange will happen at whatever exchange rate the market will naturally bear – no need to first exchange into a global currency, and no need for any exchange market to be created that would be under anyone’s control.

This is hard for most people to conceptualize because we want to label everything. No matter what country we are in we want to price oil, for example, in dollars. It simply doesn’t have to be that way, if you are in Mexico, you can simply buy oil directly in pesos. That means that the country who produced the oil has to be willing to take the pesos in exchange and hold them knowing that they can later spend those pesos somewhere else on something else. If they fear the value of the Peso will not hold up over time, they will demand more pesos for their oil. That’s all the mechanism you need – no reserve currency, no exchange that some entity owns and makes billions from, completely not necessary.

If any existing currency is chosen as the world’s “reserve” currency then the world is conceding a large portion of control to those so designated. Is it possible to set up a global currency not based upon an existing currency, one that doesn’t act as money that can be spent, one that only acts as a medium of exchange? Yes, that’s possible, let’s call it The “Reserve.”

The only way to make such a global currency fair to everyone is to keep the bankers away from it! Such a world reserve would have to exist only in a central global exchange where an independent international panel would run the exchange, allowing traders to set the price of each nation’s currency in relation to the Reserve. Thus commodities would be priced in the Reserve and each nation would have to always be aware of their local currency’s exchange value in relation to the Reserve. This is a huge and complex bucket of worms, vulnerable to all the problems of any exchange. Who runs the exchange, are there fees to make exchanges? The questions and complexities are endless, again, it’s a market that simply does not need to exist. For example, if I decide to go to Canada tomorrow, I don’t need to exchange into an international currency, I simply cross the border and exchange directly from U.S. dollars into Canadian dollars. Anytime anyone suggests a new or reserve currency, the question to first ask is WHO? If they tell you no one, immediately raise the BS flag!

The other point I disagree with Martin on is the role of the FED.

When Martin says “…the Fed never had any regulatory control over investment banks who created this nightmare.” He is completely oblivious to the fact that the Investment banks OWN/ ARE the Fed! All other statements and meanings by Armstrong surrounding this issue are therefore false in my judgment and should be ignored.

The Fed is THE problem, the failure of the SEC is a symptom. The SEC has been corrupted and co-opted by the WHO (that actually produces the money) behind the Fed. Neither the Fed nor the Treasury actually produce any money in the current system, it is all produced by the banks! Yes, the Treasury is responsible for actually printing greenbacks, but all new money is ultimately borrowed from private entities! This is the root of the problem! Martin’s points in this paper about the markets leading the Fed on interest rates is irrelevant. What’s far more important is following the payments of interest on the national debt and seeing who’s productive efforts produce that money and seeing into who’s hands that money eventually lands. Money, being a construct of man MUST, as in will always, have man behind the control of the quantity in one way or the other. What’s most important is creating complete transparency, producing money as an asset not a liability, separating special interests from the quantity decision, and having some type of independent control over the quantity of money itself.

Those are two major points, but the fact Martin is advocating sovereign money and talking about WHO controls it is a giant step in the right direction.

Morning Update/ Market Thread 4/23

Good Morning,

Equity futures are flat this morning, the dollar index is higher, bonds are lower, oil and gold are both slightly lower.

Yesterday’s action saw a large move lower with an even larger reversal to close slightly higher. The action over the past few days has produces a symmetrical triangle in the SPX which makes it appear that we have formed a sideways wave 4 formation that will most likely lead to a wave 5 higher. That triangle is outlined on the 30 day, 30 minute SPX chart below:



If that pattern is playing out, we may need to descend one more leg down into the triangle and then bounce back up – hey, just in time for a Monday ramp job?

Both the NDX and RUT made new highs yesterday, once again the market is not moving to new highs together, it is requiring the rotational trade to do so, the same type of action that was occurring all during late 2006 and most of 2007 prior to October of that year.

Spreads have continued to ramp for Greece and most of Europe, the Euro hit another new low overnight, evidently this was enough pressure to get Greece to capitulate and ask the IMF for loans, this is according to a Bloomberg report. If true, the people of Greece had better get busy and run their government out or they will be staring at a future owned and controlled by the central banks – a fate I certainly wouldn’t want to leave to my children.

The headline on Bloomberg says, “U.S. Durable-Goods Orders Excluding Transportation Jump by Most Since 2007.” Sounds terrific! Yet, when you go to look at the details you will find that durable goods orders for March FELL by 1.3% when the consensus was looking for a positive .4% increase. Not to worry, because when you remove aircraft orders from it (besides military hardware about the only thing we still know how to make), it was positive. This is the ridiculous type of reporting and hype that just seems to never stop. Here’s Econoday’s cheerleading:
Highlights
Aircraft orders pulled down the headline number but otherwise, durable orders look great. New orders for durable goods in March dipped 1.3 percent after gaining a revised 1.1 percent in February. The headline number came in well below market forecasts for a 0.4 percent rise. Excluding the transportation component, however, new durables orders spiked 2.8 percent, following a revised 1.7 percent rebound in February. Transportation fell 12.9 percent in March with civilian aircraft leading the decline, decreasing a monthly 99.5 percent. Outside of transportation, gains were widespread.

On the upside were primary metals, up 3.5 percent; machinery, up 8.6 percent; electrical equipment, up 4.9 percent; and "other" durables, up 0.1 percent. In addition to transportation, fabricated metals decreased-by 1.2 percent.

Nondefense capital goods orders excluding aircraft gained another 4.0 percent in March, following a 2.1 increase the month before. Shipments for this category-and source data for equipment investment in GDP-rose 2.2 percent in February, following a 1.5 percent increase the month before.

Year-on-year, overall new orders for durable goods in March were up 11.9, compared to 11.4 percent in February. Excluding transportation, new durables orders improved to 13.5 percent from 8.5 percent in February.
The year over year figures are up, but not because of growth, it is because the previous March was a complete freeze that had fallen below the previous February.

This same type of easy year over year comparison has many people fooled into believing that earnings season has been terrific. Remember that a year ago in the first quarter our economy was frozen solid, nothing moved. So let’s say a company managed to earn a grand total of ten cents, if they now earn twenty cents then their profit rose by 100%! What’s important is the trailing price to earnings figures which are still far above historic norms – that means that stocks are expensive. Future and “operating” P/E’s are nothing more than a marketing tool, forget them – they are forecasts made by marketing people who may actually believe they are accountants or corporate executives – they are all marketing, you have seen time and again how accurate their forecasts are.

New home sales are released at 10 Eastern this morning.

Here’s a headline and article for you:

SEC staffers watched porn as economy crashed

(CNN) -- As the country was sinking into its worst financial crisis in more than 70 years, Security and Exchange Commission employees and contractors cruised porn sites and viewed sexually explicit pictures using government computers, according to an agency report obtained by CNN.

"During the past five years, the SEC OIG (Office of Inspector General) substantiated that 33 SEC employees and or contractors violated Commission rules and policies, as well as the government-wide Standards of Ethical Conduct, by viewing pornographic, sexually explicit or sexually suggestive images using government computer resources and official time," said a summary of the investigation by the inspector general's office.

More than half of the workers made between $99,000 and $223,000. All the cases took place over the past five years.

The inspector general's report includes specific examples of misuse by employees.

A regional office staff accountant tried to access pornographic Web sites nearly 1,800 times, using her SEC laptop during a two-week period. She also had about 600 pornographic images saved on the hard drive of her laptop.

Separately, a senior attorney at SEC headquarters admitted to downloading pornography up to eight hours a day, according to the investigation.

"In fact, this attorney downloaded so much pornography to his government computer that he exhausted the available space on the computer hard drive and downloaded pornography to CDs or DVDs that he accumulated in boxes in his office," the inspector general's report said.

"It is nothing short of disturbing that high-ranking officials within the SEC were spending more time looking at pornography than taking action to help stave off the events that brought our nation's economy to the brink of collapse," said Rep. Darrell Issa. The Republican is a ranking member of the House Committee on Oversight and Government Reform.

"This stunning report should make everyone question the wisdom of moving forward with plans to give regulators like the SEC even more widespread authority," he said.

"Inexplicably, rather than exercise its existing regulatory enforcement authority, SEC officials were preoccupied with other distractions."

The investigation came to light on the same day President Obama gave a speech in lower Manhattan, calling for reform in the finance industry.

My, that’s an interesting one. Again the timing on this release certainly makes me go “hmmmm.”

All I can say is that the degeneration of morals and ethics across the entire spectrum is simply amazing, it is reminiscent of late stage Roman Empire.

Don Henley – The End of the Innocence:

P.J. O Rourke On Minimum Wages

Like everyone else, I have been basically forced to switch from VHS to DVD format with regards to new movies, but since I've got dozens of old VHS tapes with a lot of stuff I want to keep I have a dual VHS/DVD format VCR. Anyway though, I have in many cases not been so good in writing down what I have on what VHS cassette so I have now started a project to look through them all, a project which will likely take some time before it's finished since again we're talking about dozens of 4-hour tapes.

In one of the tapes I recently looked through I saw a really great old clip from 60 minutes. Next week, America will see its first increase the minimum wage for a decade. Because the real value of it is still relatively low both in historical terms and compared to other countries, I don't think it will do much damage. But it will certainly do even less good, and the net effect, while small, will certainly be negative. The clip in question featured a short duel with first an opponent holding a monologue against the increase and then a supporter holding a monologue in favor of the increase.Libertarian-conservative humorist P.J. O'Rourke had been chosen to argue against an increase and now deceased left-liberal Molly Ivins had been chosen to argue for it. Ivins had no real strong arguments and simply argued against O'Rourke's arguments below that "free market fundamentalism is as dead as the dodo. We had this debate a 100 years ago, and the good guys won". The only thing resembling a factual argument was denying O'Rourke's argument that wage increases means fewer jobs with this line "if this were true, how come we have so many CEO:s around? Their salaries have sky-rocketed". A rather pathetic argument as it of course overlooks that pay increases driven by rising marginal productivity will not be empirically associated with the same change in employment as pay increases mandanted by government (or union) decree. O'Rourke on the other hand was really good arguing:

"Why is Congress even debating the minimum wage? Where does the constitution say that government sets the price of delivering pizza? And if government knows the best price of everything, then how come the B-1 bomber cost so much? And if minimum wage laws work, why fool around? Why not make it a thousand an hour? Molly, if workers are more expensive fewer workers are hired. I wish this weren't so. I also wish I could wear the same size jeans I wore in College. Free market value isn't good or bad, it's a measurement. Laws won't fix it. We can pass a law saying a foot has ten inches*. I put a tape around my waist-same size jeans I wore in College! But the gut is still there. Raise the minimum wage, pay goes up a little, prices goes up and poor people are back where they started. But liberals feel good, which is of course the whole point of government. If we want to help the working poor, we should cut sales taxes, cut gas taxes, cut farm subsidies that keep food prices high. And get rid of all the nonsense regulations, such as minimum wage laws, that just keeps poor people from starting businesses and getting richer".

*=To those used to the metric system of measurement it should be pointed out that a foot currently has twelve inches.

Morning Update/ Market Thread 4/22

Good Morning,

Equity futures are substantially lower this morning following yesterday’s mixed closed. The Dollar is stronger, the Euro is weaker continuing to break beneath short term support on Greek debt concerns. The IMF is fanning those concerns talking about contagion into other countries of Europe. The daily chart of the Euro is below:



According to Bloomberg, “The International Monetary Fund on April 20 called rising state debt the biggest threat to the global economy.”

Why do you suppose the IMF (group of central bankers) would say something like that? Keep in mind their goal is to produce debt obligations on their desktop PC (bonds) in order to indebt the nations of the world. They don’t really care how “risk filled” it may be, they simply want the power and control that comes via the use of the debt which they perform no productive effort in order to create.

Meanwhile, those who do spend their lives in the pursuit of productive effort, the workers in Greece, are going out on their fourth strike of the year in protest of being controlled with debt. First the people of Iceland saw through the debt game and now the people of Greece are not putting up with it either, that’s a most promising development for the world from my point of view. The people need to rise up, these debt issues are the key issues holding back progress of mankind.

The PPI came in smoking hot for the month of March, rising .7% for the month, but up a whopping 6.1% year over year. Yes, the year over year figure is in relation to the freeze up, but it is still significant. The PPI price tends to lead the CPI. Here’s Econoday talking about the weather again:
Highlights
Producer price inflation unexpectedly surged as atypical winter freezes jacked up food prices and gasoline made a partial comeback. The overall PPI rebounded 0.7 percent after declining 0.6 percent in February. The boost in March was considerably above analysts' expectation for a 0.4 percent increase. At the core level, the PPI inflation rate was steady with a 0.1 percent gain that also matched market forecasts.

The jump in the headline PPI was led by a 2.4 percent spike in food prices, after a 0.4 percent rise in February. The March surge reflected the loss of some vegetables to atypically cold winter weather in key growing regions in the U.S. For the latest month the fresh and dried vegetables category surged a monthly 49.3 percent.

Turning to energy, this component rebounded 0.7 percent after dropping 2.9 percent the month before. Gasoline rose 2.1 percent after a 7.4 percent drop in February.

At the core level, inflation is almost nonexistent outside of commodities related gains. According to the BLS, 85 percent of the core rise came from higher jewelry prices due to higher gold and other metals costs.

For the overall PPI, the year-on-year rate jumped to 6.1 percent from 4.6 percent in February (seasonally adjusted). The core rate year-ago pace edged down to 0.8 percent from 0.9 percent the month before. On a not seasonally adjusted basis for March, the year-ago increase for the headline PPI was up 6.0 percent while the core was up 0.9 percent.

Inflation at the producer level jumped in the latest month but much of it is temporary as food price inflation will ease as crops from other regions come into play, adding to supply. And while high, oil prices have steadied.

Bond yields could firm on today's headline number, combined with a notable drop in initial jobless claims. But flight to safety may offset as Wall Street bashing appears to be today's sport and as worries about Greece have resurfaced.

Jobless claims fell back to “only” 456,000 for the prior week. Here’s some cheerleading:
Highlights
Initial jobless claims fell back to trend in the April 17 week, coming in at a largely as-expected 456,000 and reversing two weeks of administrative delays that swelled claims to as high as 480,000 in the prior week (revised from 484,000). The 456,000 level compares with 445,000 in the March 20 period, offering a flat comparison at best to gauge monthly payroll change. Despite the distortions of the prior two weeks, the four-week average shows a similar comparison: at 460,250 vs. 454,000 at mid-March. Continuing claims for the April 10 week fell 40,000 to 4.646 million with the four-week average down slightly to 4.644 million.

Today's results are a relief that confirms administrative and not economic factors behind the earlier climb. But even so, the current comparison with March doesn't show the kind of positive momentum that was expected for April following March's big payroll gain. Stocks firmed slightly in initial reaction to the report.



The FHFA Home Price Index sunk further into negative territory. This index had worked its way back to zero but the year over year price change is accelerating downwards again, falling 3.4% year over year versus the prior month’s 3.2% price drop year over year.
Highlights
Home prices for government sponsored mortgages remain under downward pressure despite improvement in sales. The FHFA purchase only home price index slipped 0.2 in February on a seasonally adjusted basis, following a 0.6 percent decline the month before. On a year-on-year basis, this index was down 3.4 percent, compared to down 3.2 percent in January.

For the nine Census Divisions, seasonally adjusted monthly price changes for month-ago February ranged from minus 1.7 percent in the South Atlantic Division to up 1.9 percent in the Middle Atlantic Division. Although the U.S. dip for February is a little disappointing, the fact that some portions of the country are seeing modest price increases is encouraging. Four of the nine Census Divisions showed gains for February. The big question is what is going to happen to prices after the end of the special homebuyer tax credits in April. Prices could temporarily soften further.



Is it just me, or does that chart seem to correspond pretty well with this chart? Look at the end of year climb back towards zero price decline, that corresponds pretty closely to the trough in the chart below. If they do correspond, we should see continued pressure on home prices moving forward.



Existing home sales jumped 6.8% in March. Year over year home sales jumped 16.1%, again keep in mind that comparible is against March '09 where there was a complete freeze occuring. In this case, it is spring time, so you expect the month over month increase, I think you'll find that by July of this year, these sales numbers will not look so good as the effect of the tax credit wears off:
Highlights
Sales of existing homes rose as expected in March but still show a less-than-robust pace ahead of this month's expiration of second-round stimulus. Existing home sales rose 6.8 percent to an annual rate of 5.35 million with February revised slightly downward to 5.01 million. Details are solid including a 7.3 percent gain for the key single-family component and evenly distributed gains across regions.

Supply fell back to 8.0 months from February's 8.5, and the median price rose 3.7 percent to $170,700 with the year-on-year comparison once again positive at 0.4 percent. All cash sales remain very high, at 27 percent, reflecting tight credit and low home prices. Distress sales rose 3 percentage points to 36 percent with first-timers making up 44 percent of total sales, up 2 percentage points from February.

Though the housing market is still soft, the National Association of Realtors believes second-round stimulus "has done its job" and is not asking Congress for another extension. The NAR said foreclosures are being absorbed at a "manageable" rate. Stocks are edging lower following the report.

Zero Hedge has an article in which Richard Koo states exactly what I’ve been saying all along about the banks being insolvent should they be forced to mark their assets to market. The opening paragraph is a classic, and Koo is right, of course.
Richard Koo Says If Banks Marked Commercial Real Estate To Market,It Would "Trigger A Chain Of Bankruptcies"

Richard Koo's latest observations on the US economy are as always, a must read. The critical observation from the Nomura economist explains why the realists and the naive idealists are at greater odds than ever before: the government continues to perpetuate, endorse and legalize accounting fraud in the hope that covering everything up under the rug will rekindle animal spirits. The truth, as Koo points out, is that were the FASB to show the real sad state of affairs, the two core industries in the US - finance and real estate, would be bankrupt. "If US authorities were to require banks to mark their commercial real estate loans to market today, lending to this sector would be extinguished, triggering a chain of bankruptcies as borrowers became unable to roll over their debt." In other news Citi, Bank of America, and Wells just reported fantastic earnings beats on the heels of reduced credit loss provisions. Nothing on the conference call mentioned the fact that all would be bankrupt if there was an ounce of integrity left in financial reporting, and that every firm is committing FASB-complicit 10(b)-5 fraud. One day, just like Goldman's mortgage follies, all this will be the subject of epic lawsuits. But not yet. There is some more money to be stolen from the middle class first, by these very firms.

Koo is 100% correct, but commercial real estate is only one part of the cover-up. Residential real estate and other derivatives are the other two parts. Mark all of those assets to market and the largest banks in America fail – no if, ands, or buts. This will become evident over time, Ponzi schemes based on accounting fraud always come to an unfortuitous end.

Speaking of Ponzi schemes, the SEC just shut down a Florida man, accusing Mr. Shapiro of using new investors to pay prior investors while skimming millions from his grocery buying and distribution business. This will be an interesting one to see unfold as there appears to be some legitimate business occurring there on the surface, probably more legitimate than Goldman’s, so let’s see how this one plays out once his defense attorneys get into motion. The media has already hung him. The SEC had better make sure they go after the biggest Ponzi players too, the rule of law is only truly protected when it is applied equally to everyone.

Did you realize that our government is giving out money to prevent people from becoming homeless? It’s true, the following article tells the story of a mortgage broker turned hamburger flipper ($70k per year to $10 per hour, but hey, statistics count him as employed), who can no longer pay his rent and is in danger of being forced onto the streets. A tragedy of our economy and a victim of the Ponzi for sure. However, to step in and pay his rent for him is yet another “safety net” that when added to all the others certainly makes not working more attractive than flipping burgers. It’s a slippery slope and this article dives into some of the problems the government, with no set procedures, are having giving away the billions they possess. Here’s a link:

Handing Out Money to Stave Off Homelessness

Returning to the markets this morning, bonds are higher which shows money flowing away from more risk filled assets like oil and gold which are both down hard, oil is currently down 2%.

Qualcomm earnings report was not strong and their stock is down about 7%. This is a big deal as demand for their chips is not as strong as the pundits were expecting. Their chips go into almost all mobile devises. Then this morning Nokia got trounced for reporting bad earnings, they are down 15% this morning.

Yesterday’s see-saw action produced a small movement in the McClelland oscillator, so we can expect a large directional price move which is already occurring as I type this morning. When under these conditions, knowing that occurred will often make me hold onto a short term position longer than I might have otherwise.

The market is clearly overextended and wound up having great difficulty getting through strong overhead resistance. The DOW closed just below the 200 week moving average yesterday and is pulling back away from it this morning. Below is a 3 month chart with weekly bars showing how we pinned the 200 wma (red line) and are now pulling back:



The market is still sitting on a VIX market sell signal, following that signal the VIX spiked, then fell back and is now rising sharply again:



Below is a chart from Sentimenttrader.com showing the percent of mutual fund cash. On a percentage basis the amount of cash held by fund managers is at the lowest point in modern history. This is yet another bullish extreme, one that clearly shows the majority of institutional investors are long the market, another sign that a top is in or approaching:



A close in the markets below SPX 1,200 could mean that a meaningful correction is beginning. I would not, however, remain short should we exceed the highs put in last week.

Hey, talking about the IMF always gets me thinking about the pushers of debt, they do far more damage to the world than the pushers of drugs.

Steppenwolf – The Pusher:

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