Colbert Report: Standard & Poor’s Ratings Lawsuit

Great burn on Wells Fargo at the end

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here is the article referred to in the video: http://www.theatlantic.com/magazine/archive/2013/01/whats-inside-americas-banks/309196/?single_page=true

Why Gold is down

The Fed released a statement that they might discontinue quantitative easing (i.e., money printing).  Even though nobody believes the Fed would do this, somehow this supposedly caused a panic of gold selling, which was not at all market manipulation.   Not at all.  ;-)

Take a look at that 16 trillion dollar national debt number ticking to the right . . . there is NO WAY the Fed can let interest rates rise, because then the government would have to actually pay interest on that debt.

Gold pushed through a technical level called the "death cross" when the 50 day moving average went below the 200 day moving average at about 1,660.  That is about as reliable as Tarot Cards, but weak hands that bought gold recently would have set stop-loss orders there at and also at 1,600.

If you look at a ten year chart, gold has been going sideways for about a year.  look what happened last time it went sideways for a year (2008)  it then went from 800 to over 1900 in three years.  I think the third big wave is coming.

Macro Economics

GDP forcasts

Every year, the Congressional Budget Office predicts the economy to recover "next year".  Reminds me of how the Soviets always blamed the bad crops on the weather.  It's comical.

http://www.washingtonpost.com/blogs/wonkblog/wp/2013/02/19/forecasters-keep-thinking-theres-a-recovery-just-around-the-corner-theyre-always-wrong/

The farce continues

In last year's State of the Union address, the President promised a "mortgage fraud task force".  In short, it didn't happen.   http://www.salon.com/2013/02/13/wall_street_wins_again

Banks reached an $8.5 billion settlement to compensate people who lost their homes due to fraud commuted by banks (so-called "robo-signing").  After allowing the banks to waste almost $2 billion of the settlement paying their own consultants to review mortgage files, the government is now allowing the banks to just go ahead and decide for themselves which (former) homeowners deserve compensation.  http://dealbook.nytimes.com/2013/02/12/big-banks-are-told-to-review-their-own-foreclosures/?hp

You can't make this stuff up!

Stealth Inflation

Although officially inflation has been under 2%, in reality it's higher.  Food and energy is not included in "core" inflation: after all, who needs those things!  Also, cheaper goods are routinely substituted for more expensive ones in the official basket of goods used to track inflation.

Instead of increasing prices, producers reduce the amounts (by changing to metric units, for example)

Now horse meat is being sold as beef in Europe.

http://www.zerohedge.com/contributed/2013-02-14/hidden-inflation-everywhere-watered-down-bourbon-horse-meat-chili

Daniel Hannan on Occupy Wall St.

Reason.com: Nassim Taleb Talks Antifragile, Libertarianism, and Capitalism's Genius for Failure

From Reason.com:

Nassim Nicholas Taleb is a former trader and hedge fund manager, a best-selling author, and a ground-breaking theorist on risk and resilience.

Taleb drew wide attention after the 2007 publication of The Black Swan: The Impact of the Highly Improbable, which warned that our institutions and risk models aren’t designed to account for rare and catastrophic events. Among other things, the book cautioned that oversized and unaccountable banks using flawed investment models could bring on a financial crisis. He also warned that the government-sanctioned housing finance agencies, Fannie Mae and Freddie Mac, were sitting on a “barrel of dynamite.”

One year after The Black Swan was published, a global banking crisis was brought on by the very factors he identified.

Taleb doesn’t identify as a libertarian, but he often sounds like one. He has argued that we need to build a society where major actors have “skin in the game” and our public intellectuals can bloviate without subjecting the rest of us to the consequences of their bad ideas. He supported Ron Paul in the 2012 presidential election and has cited the libertarian economist Friedrich Hayek as an influence.

Taleb has called New York Times columnist Thomas Friedman “vile and harmful” and coined the phrase the “Stiglitz Syndrome”after Nobel-prize winning economist Joseph Stiglitz, which refers to the phenomenon of public intellectuals being held utterly unaccountable for their bad predictions. Paul Krugman and Paul Samuelson are among Taleb’s other Nobel laureate bête noires.

Taleb's new book - Antifragile: Things That Gain from Disorder Taleb’s new book is Antifragile: Things that Gain with Disorder, which argues that in order to create robust institutions we must allow them to build resilience through adversity. The essence of capitalism, he argues, is encouraging failure, not rewarding success.

Reason’s Nick Gillespie sat down with Taleb for a wide-ranging discussion about:

• why debt leads to fragility (5:16);
• the importance of “skin in the game” to a properly functioning financial system (10:45);
• why large banks should be nationalized (21:47);
• why technology won’t rule the future (24:20);
• the value of studying the classics (26:09);
• his intellectual adversaries (33:30);
• why removing things is often the best way to solve problems (36:50);
• his intellectual influences (39:10);
• why capitalism is more about disincentives than incentives (43:10);
• why large, centralized states are prone to fail (44:50);
• his libertarianism (47:30);
• and why he’ll never take writing advice from “some academic at Cambridge who sold 2,200 copies” (51:49).

Update: Lanny Breuer quit

The day after the Frontline episode aired, Lanny Breuer resigned and the Department of Justice has said they will not cooperate with the PBS program in the future. But since Lanny has successfully run out the clock and the statute of limitations has expired for any and all frauds leading up to the crash, I'm sure he'll be rewarded with a partnership at a big law firm where he will defend Wall St clients with help from his DOJ contacts.

Here are some more money quotes from Frontline's website:

"We spoke to a couple of sources from within the fraud section of the Criminal Division, and through mid-2010 they reported that when it came to Wall Street, there were no investigations going on; there were no subpoenas, no document reviews, no wiretaps."
...
"We’ve spoken to people inside the Residential Mortgage-Backed Securities Working Group who said that when they began their work in January, February, March of 2012 that they found nothing at the Justice Department in the pipeline, no ongoing cases looking at securitization." No Justice.

And here's a quote from Lanny's recent speech to the Bar Association:

"To be clear, the decision of whether to indict a corporation, defer prosecution, or decline altogether is not one that I, or anyone in the Criminal Division, take lightly. We are frequently on the receiving end of presentations from defense counsel, CEOs, and economists who argue that the collateral consequences of an indictment would be devastating for their client. In my conference room, over the years, I have heard sober predictions that a company or bank might fail if we indict, that innocent employees could lose their jobs, that entire industries may be affected, and even that global markets will feel the effects. Sometimes – though, let me stress, not always – these presentations are compelling.  "

No Justice.   Too big to fail --> too big to jail.

Frontline: The Untouchables

FRONTLINE investigates why Wall Street’s leaders have escaped prosecution for any fraud related to the sale of bad mortgages:


http://www.pbs.org/wgbh/pages/frontline/untouchables/

Voltron says, here's the money quote from Lanny Breuer, assistant Attorney General for the Department of Justice, Criminal Division.


Frontline: You gave a speech before the New York Bar Association. You talked about your use of nonprosecution and deferred prosecution agreements. And in that speech, you made a reference to “losing sleep at night over worrying about what a lawsuit might result in at a large financial institution.” Is that really the job of a prosecutor, to worry about anything other than simply pursuing justice?

Breuer: I think I am pursuing justice. And I think the whole entire responsibility of the department is to pursue justice. But in any given case, I think I and prosecutors around the country, being responsible, should speak to regulators, should speak to experts, because if I bring a case against institution A, and as a result of bringing that case there’s some huge economic effect, it affects the economy so that employees who had nothing to do with the wrongdoing of the company –

Frontline: Or shareholders.

Breuer: Well, first let’s talk about the employees. Employees may lose their jobs. Shareholders may or may not lose, and shareholders invested. But the employees perhaps did something different.

If it creates a ripple effect so that suddenly counterparties and other financial institutions or other companies that had nothing to do with this are affected badly, it’s a factor we need to know and understand.

We have, as a government and as an administration, dug out of one of the great financial crises in the world. And at the Department of Justice, we’re being aggressive, but we should in fact take into consideration what the experts tell us.

That doesn’t mean we won’t go forward, but it has to be a factor. And if you look at deferred prosecution agreements and nonprosecution agreements, they are a tool that we use in appropriate cases. And we have to continue to use those.

Gold Infographic

Click on the image below to view the big infographic. Be sure to check out part IV, Gold as an Investment

Germany wants its gold back

Suddenly after months of mocking those calling for an audit of German gold held in the US as kooks and conspiracy theorists,  the Germans decided they want their gold back.  For some reason it is going to take seven years to return 300 tons of gold, even though the Fed says it has 6,700 tons.  They are also requesting all 374 tons held in France.

For comparison, Hugo Chavez repatriated 110 tons in the summer of 2011, gold went from the $1600s (roughly where it is now) to the all-time nominal high of almost $2000.  The last time Germany repatriated gold was 1000 tons from the UK.  Between 1999 and 2002, The Chancellor of the Exchequer, Gordon Brown, (basically their Treasury Secretary) conducted pre-announced sales of 60% of the UK's gold reserve under the absurd pretext of diversifying away from volatile gold into the more stable Euro. The real reason was to drive the price down to a low of $252 - known today as "Brown's Bottom" - in order bailout the banks that had already swapped the UK's gold for cash.   Gordon Brown's reward for dumping 60% of the UK's gold at massive low point: election to Prime Minister of course!

Trillion dollar platinum coin

Steven Colbert's take on it:

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Voltron's take: It's silly for congress to pass a budget and not fund it properly.  Congress were the ones that gave the executive branch the authority to issue platinum legal tender coins.  Clearly it violates the spirit of the law and it's silly to argue about the law with the people who make the laws, but in this case it's just a way to break the filibuster gridlock in the Senate.  If the Senate can't get enough votes to raise the debt ceiling, it probably won't get enough votes to repeal the coin law.  Obama should do it.

It also brings to light the absurdity of our fiat money system.

Is gold the answer?

As GASG readers know, I've been an advocate of investing in gold, basically since the beginning.  I don't think we should move to a gold standard for many reasons.  We do need monetary reform, though.

The people who are in favor of the gold standard now (or fiscal austerity) are the same people who made a fortune because of the debt-based money system.  They own debt, not wealth.  Now they want to convert that debt into wealth.  Wealth that can't be inflated away or defaulted on.  They want gold.  If they just tried to convert all of their debt based money into gold by buying gold in the market, the price of gold would go up too quickly.  They want a gold standard to guarantee them gold at the current price.  A free call option.

I read a brilliant reposte to a Paul Krugman column in which the writer "Pavlo" very eloquently describes what he calls the three phase crisis cycle.

In the first phase - The Bubble - you have  some kind of mania or boom.   In the second phase - The Stall - people realize that the mania created way more debt than it can service.  This is when the panic and bailouts happen.  Under emergency conditions, the bad debt is then transferred to, or guaranteed by, the government.  In the third phase - The Payback - the government, which also has no way of servicing this huge debt, has to deal with it through austerity, taxation, write-off, default or inflation.

The Bubble phase can only occur if debt is allowed to grow unchecked.  A debt based money system facilitates this.  A gold standard would inhibit it.  This is the time when a gold standard might be useful, but who would want to take away the punch bowl in the middle of the party?   No, it is during the third phase that the gold standard is proposed so that the claims on wealth that were accumulated during the bubble won't be inflated away.  This same wealth was protected from default when the government took it on during the panic of the second phase.  Once their purchasing power is secured,  they will advocate austerity so that the deflation it causes will allow them to scoop up assets at fire-sale prices.  Those now flush with assets will pour them into the next mania that comes along and the cycle repeats.

This is not the time for a gold standard!  That would only be rewarding the thieves (again).  I do think that monetary reform is essential to breaking this cycle.  This is not such a radical concept, in fact it's historically overdue.  The US monetary system has been reformed every 30-40 years (the last time was when we came off the gold standard in 1971)  The world reserve currency has changed every 100 years or so.  (the last time was when the British Pound fell to the Dollar after World War I)

Our paper money system is antiquated anyway.  In the information age, shouldn't we have some kind of electronic money?

In Money As Debt III, Paul Grignon proposes a self-issued digital currency where people, companies and governments pledge promises of specific goods and services.   As an interesting example, password protected cell-phone minutes credits has become the de-facto currency in Kenya and can be sent by text message.  It doesn't need to be electronic though: Canadian Tire Money is widely accepted in Canada and I used to use NYC subway tokens to buy candy in high school.

What does this mean for us?  Just like the oligarchs who made money during the bubble, you need to preserve your purchasing power.  Unlike them, you can buy gold without having to worry about pushing up the price.  Then you too will be able to scoop up assets at fire-sale prices in the near future and then enjoy the roaring 2020s

Here is a post about the three-phase crisis cycle from Pavlos' blog: http://pavlos.geekhost.org/2011/03/23/the-three-phase-crisis-cycle/

Here is an article on the Safaricom text message payment system: http://www.nakedcapitalism.com/2013/01/lazy-corporate-monopolies-are-why-america-cant-have-nice-things.html

Merry Christmas!

Make Your Own Christmas Tree Card


I think there's a trade idea in there somewhere...

By DJ Matt King from Citigroup

O little tail of downside risk

O little tail of downside risk
How still we see thee lie!
Awash with deep and dreamless greeks
The spreadsheets cannot lie.
Yet in thy dark cells shineth
The markets’ scope for fright
The hopes and fears of traders’ years
Are met in thee tonight.

For selling vol this rangebound year
Has seldom gone astray.
With bears asleep, the hedgers keep
Being killed by time decay.
And central banks encourage
The reckless search for yield
They’ve said they’ll do whate’er it takes –
No wonder risk appeals.

How casually, how frighteningly
The risks are now dismissed.
Spain’s fall to junk, Greek exit
The looming fiscal cliff.
For recent years do demonstrate
The power of QE.
What matters sovereign solvency
When you have OMT?

But history says when vol is low
There lies complacency.
The worldly wise should use this time
To buy convexity.
For if crisis strikes, then all assume
The powers will intervene
But where there is consensus
There tail risk lurks unseen!

Jingle bells (fiscal cliff remix)

Dancing on the edge
Of the looming fiscal cliff
Impossible to hedge
The politicians’ tiff.
It’s spending cuts we need
To cut the deficit
But taxes too must rise
That much is definite!

Fiscal cliff, fiscal cliff
Drama all the way!
Surely sense will soon prevail
And help them meet halfway? Hey!
Fiscal cliff, fiscal cliff
Washington at play
With Congress so polarized
Who knows which way they’ll sway?

Obama wants a rise
In tax rates for the rich
Yet Boehner’s compromise
Still can’t help decide which!
Republicans are bound
By Norquist’s famous pledge
There’s little common ground
Will we fall off the edge?

Fiscal cliff, fiscal cliff
Drama all the way!
Surely sense will soon prevail
And help them meet halfway? Hey!
Fiscal cliff, fiscal cliff
Washington at play
With Congress so polarized
Who knows which way they’ll sway?

On the spending side
The problem’s Medicare
We simply can’t provide
Now baby boomers have grey hair!
Republicans want cuts
A trillion, maybe more
But Democrats will not discuss
Their favourite candy store!

Fiscal cliff, fiscal cliff
Drama all the way!
Surely sense will soon prevail
And help them meet halfway? Hey!
Fiscal cliff, fiscal cliff
Washington at play
With Congress so polarized
Who knows which way they’ll sway?

The outlines of a deal
Are plain for all to see
No! False alarm! It’s been revealed
They’re going for Plan B!
This posturing is mad
And if that’s vetoed too
They’ll have to start a clean scratch pad
Unless there’s some breakthrough!

Fiscal cliff, fiscal cliff
Drama all the way!
Surely sense will soon prevail
And help them meet halfway? Hey!
Fiscal cliff, fiscal cliff
Washington at play
With Congress so polarized
Who knows which way they’ll sway?

Too late, we’ve fallen off
Let’s hope we bungee jump
Otherwise this trough
Will turn into a slump!
Hooray! The cliff’s been fixed
With short-term compromise
Too bad it’s in the abyss beyond
The real problem lies!

Fiscal cliff, fiscal cliff
Politics in play!
The only thing they have in mind
Is the next election day! Hey!
Fiscal cliff, fiscal cliff
Isn’t politics great?
They've left us now in such a mess
We’ve no choice but to inflate.

The Miasma School of Economics

From Angry Bear Blog:

Economics today has a profound resemblance to medicine before the germ theory of disease.

Lots of people in 1854 were trying to figure out what caused cholera, and how it was transmitted. The dominant theory was “miasma” — basically bad air emanating from smelly, unsanitary conditions, especially in poor areas with lots of leaking, overflowing basement cesspools full of shit. These were contaminating the water supply, of course, so the real transmission mechanism was people drinking the effluent from previous victims.

The solution to the miasma problem? Empty the cesspools into the Thames River— systematically poisoning the water supply. Yes, that’s what they did.

Voltron says: Steve Keen refers to it as "Ptolemaic economics"   It reminds me of how the bubonic plague was blamed on cats.  After all the cats were killed, the actual cause, flea bearing rats, ran wild.

Full article: http://www.angrybearblog.com/2012/11/the-miasma-school-of-economics.html

Colbert: High Frequency Trading

Voltron says: Proponents of high frequency trading say that it adds liquidity. True, you can buy stock 1/10 of 1 cent cheaper because of it. But that is not going to be much help when the stock later has a flash crash of 50% and your stop-loss order gets triggered.

The Colbert Report	Mon - Thurs 11:30pm / 10:30c
High-Frequency Trading
www.colbertnation.com
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Depicting the denial of reality

This was too funny not to post . . .

The dark line is the GDP of Greece.  The dashed lines were the official projections from the group that is bailing Greece out.  Not only were they wrong five years in a row, but the more the situation worsened the more rapid the predicted recovery.  The latest forecast was for an *immediate* improvement.

If you've been reading my blog long enough, you probably already know not to listen to official government projections.  If you are waiting for a bureaucrat, central bank or stockbroker to tell you when to sell, it will be far too late.

Debts vs Wealth

"Debts are subject to the laws of mathematics rather than physics. Unlike wealth, which is subject to the laws of thermodynamics, debts do not rot with old age and are not consumed in the process of living. On the contrary, they grow at so much per cent per annum, by the well-known mathematical laws of simple and compound interest ... It is this underlying confusion between wealth and debt which has made such a tragedy of the scientific era." 

-Frederick Soddy, 1926

Where's the gold?

There have been a flurry of reports in the mainstream media (e.g., here) about Germany wanting to audit it's gold reserves, most of which is kept in the US.  The concern is that the gold has been leased or swapped and is not actually at the Federal Reserve Bank of New York.  Gold is commonly leased to finance gold mines.  Since the miners owe gold, not dollars, they are hedged in case the price of gold goes down.  I have a theory that the gold was leased to China (a major holder of US debt) and possibly Russia under the pretense of financing mines, but in reality to reassure them with regard to our national debt.  I don't think we'll ever see it again.