Thursday, August 27, 2009
Struggling financial firms Citi, BofA, Fannie Mae and Freddie Mac are dominating late summer Wall Street trading. Uh-oh. Who says speculation is dead?
(CNNMoney.com) -- They say you can't trust the government. Don't tell that to Wall Street traders.
A bizarre trend has emerged during these hazy, lazy days of late summer. Overall market volume is unsurprisingly wafer-thin, but a big chunk of trading has been in just four financial companies that have received a healthy dose of support from Washington in order to make it through the credit crisis.
For the past few days, Citigroup (C, Fortune 500) (which taxpayers now own a third of), mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) (which were placed under government conservatorship last September) and Bank of America (BAC, Fortune 500) (which has needed $45 billion in bailout funds) have been far and away the most actively traded stocks on the New York Stock Exchange.
In fact, these four wounded horsemen of the financial sector comprised 40% of the overall trading volume on the NYSE on Tuesday. These stocks haven't just been active, they've been surging.
This is kind of scary. It suggests that the late-summer portion of the almost six-month long market rally is being fueled more by speculation and momentum, not real optimism about a potential recovery in the financial sector and the overall economy.
"Anecdotally, I don't know anyone that really loves the market but it continues to go up," said John Norris, managing director of wealth management with Oakworth Capital Bank in Birmingham, Ala. "Whenever you have a concentration in a small group of stocks, it's worrisome. Perhaps it could be a sign that this rally is set to peter out."
Sure, there are legitimate reasons to be a little more excited about the outlook for the economy and markets. It does seem like the housing market may finally have hit bottom. Business spending appears to be picking up.
Nonetheless, experts said it would be more encouraging if the rally moved beyond this Gang of Four.
"People are taking more risk, which is a positive. And you can't fight the tape. But this rally is too selective," said Keith Springer, president of Capital Financial Advisory Services, a Sacramento, Calif.-based investment advisory firm. "The broader the rally, the more support it's going to have."
What's more, it's reasonable to worry that the market has simply done a 180 from last fall and earlier this year. After the Lehman Brothers' collapse, traders ignored anything that wasn't a sign of the impending apocalypse. Now, investors seem to be dismissing any news that suggests a recovery won't be robust.
Consumers still are reluctant to take out their wallets for anything but essentials -- or government-subsidized new cars.
Shares of Fannie Mae and Freddie Mac have been ablaze in August while Citigroup and Bank of America have enjoyed scorching rerurns as well.
And while Fannie, Freddie and the big banks probably no longer need to have a priest sitting by their deathbeds getting ready to read them their last rites, they're far from being healthy just yet.
"You have to scratch your head a little bit. All this volume has been in four huge financials that really have stunk," Norris said. "But there is nothing out there to suggest huge spike in economic activity. We're getting way ahead of ourselves."
Of course, many of the investors that are buying Citi, BofA, Fannie and Freddie probably aren't doing so based on any notion that they're going to all report strong financial results in the near-term. It's a speculative bet that the worst is at least over.
You could argue that all four stocks were oversold earlier this year and are now just returning back to some semblance of a fair price. That may be true. But momentum has driven the stocks up so much in light (not to mention volatile) trading.
"This rally is starting to get me very concerned. We've gotten the bounce that would be appropriate given how far things fell after last fall. Financials were mercilessly destroyed," said Gary Hager, founder and chief executive officer of Integrated Wealth Management, a financial planning firm based in Edison, N.J. "But things are starting to get out of hand and some of them have run up too far."
So you can't help but worry about what happens once more traders return from vacation. If investors decide enough is enough with this "cash for trash" rally and seek to lock in gains, these stocks could be in for a bloodletting. Momentum works both ways after all.
"I think you're seeing people buy with their left hand but their right hand is on the sell button waiting to get out. So if the market falls there could be little support on the down side," Springer said.
However, not everybody thinks that the financials, or the broader market, are doomed for another big plunge this fall.
Hager said that while he expects some sort of sell-off, there still is enough cash on the sidelines that could limit the pain. He added that "too many good things are starting to happen" in the economy to lead to another massive correction.
Eric Ross, director of U.S. research for Canaccord Adams, an investment bank, agreed. He said people cannot underestimate how important an improvement in housing will be for the financial services industry and broader economy.
Given that housing is what led us into this recession, Ross said that better home sales and prices should lead to a more stable banking sector. And if lenders can get back on track, that will go a long way toward fixing the problems in the economy.
Finally, Ross said that even though many experts (including him) believe that some pause in the market rally is inevitable, it's almost impossible to try and pinpoint when the pullback would start. In other words, stocks could continue heading higher despite the complaints about how frothy the market is.
"I don't think there's a rational investor out there who doesn't realize this market is overbought. But it could be overbought for months and months and months," Ross said.
The Federal Reserve argued yesterday that identifying the financial institutions that benefited from its emergency loans would harm the companies and render the central bank’s planned appeal of a court ruling moot.
The Fed’s board of governors asked Manhattan Chief U.S. District Judge Loretta Preska to delay enforcement of her Aug. 24 decision that the identities of borrowers in 11 lending programs must be made public by Aug. 31. The central bank wants Preska to stay her order until the U.S. Court of Appeals in New York can hear the case.
“The immediate release of these documents will destroy the board’s claims of exemption and right of appellate review,” the motion said. “The institutions whose names and information would be disclosed will also suffer irreparable harm.”
The Fed’s “ability to effectively manage the current, and any future, financial crisis” would be impaired, according to the motion. It said “significant harms” could befall the U.S. economy as well.
The central bank didn’t say when it would file its appeal.
Fed lawyer Kit Wheatley told Preska in a conference call today that she did not know how long it would take for the Fed board to search the New York Fed for records.
“We really don’t know what’s in New York,” Wheatley said. “We don’t control the system of record-keeping in New York.”
The Fed’s lawyer went on to say that she did not know what records would fall under a “delegated function,” which would be a task assigned to the New York Fed.
Preska interrupted Wheatley, saying that “Ms. Wheatley, I held that’s not the standard. You didn’t search under the regulation. You’re supposed to search under the regulation.”
Preska scheduled another conference call for 2:30 p.m. today to discuss the schedule for a search of the New York Fed.
“Nobody is going to deny you your right to an appeal,” Preska said on the call, “We’re going to do it expeditiously, not in a piecemeal fashion and hand it all off to the Second Circuit.”
The Fed has refused to name the financial firms it lent to or disclose the amounts or the assets put up as collateral under the emergency programs, saying disclosure might set off a run by depositors and unsettle shareholders.
Bloomberg LP, the New York-based company majority-owned by Mayor Michael Bloomberg, sued on Nov. 7 under the Freedom of Information Act on behalf of its Bloomberg News unit.
“Our argument is that the public interest in disclosure outweighs the banks’ interest in secrecy,” said Thomas Golden, a lawyer with New York-based Willkie Farr & Gallagher LLP who represents Bloomberg.
Preska’s Aug. 24 ruling rejected the Fed’s argument that the records should remain private because they are trade secrets and would scare customers into pulling their deposits.
“What has the Fed got to hide?” said Senator Bernie Sanders, a Vermont independent who sponsored a bill to require the Fed to submit to an audit by the Government Accountability Office. “The time has come for the Fed to stop stonewalling and hand this information over to the public,” he said in an e- mail.
The Clearing House Association LLC, an industry-owned group in New York that processes payments between banks, filed a declaration that accompanied the request for a stay.
“Experience in the banking industry has shown that when customers and market participants hear negative rumors about a bank, negative consequences inevitably flow,” Norman Nelson, vice president and general counsel for the group, said in the document. “Our members have accessed the discount window with the understanding that the Fed will not disclose information about their borrowing, especially their identity.”
Members of the Clearing House are ABN Amro Holding NV, Bank of America Corp., Bank of New York Mellon Corp., Citigroup Inc.Deutsche Bank AG, HSBC Holdings Plc, JPMorgan Chase Inc., UBS AG, U.S. Bancorp and Wells Fargo & Co.
The case is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).
The stock market has gotten way ahead of itself. Investors are banking on a booming economy to keep the party going. But the gains are just temporary. And when it ends, it's going to end badly.
Of course, writing that sort of thing nowadays is like spitting on Santa Claus. Everyone knows the jolly old man in the red suit is a fictional character. But nobody will tolerate mistreating him.
And so it is with the economy. Most folks realize the pickup in leading economic indicators and the momentum behind the stock market's gains comes as a result of the government throwing trillions of dollars into the system.
It's not a real demand-driven economic boost. But pointing that out could get you branded as a Grinch.
The economic bulls are convinced the stimulus package is working. And depending on how you look at it, it is. Whenever the government throws a few trillion dollars into the economy in a few short months, it's going to create a temporary pop higher. But "temporary" is the key word.
Home sales today are higher this month than last, but way lower from this time last year. Auto sales have picked up due to the "cash for clunkers" program. But all that has happened is we've pressed next year's auto sales into this year. And the pickup in nearly every other consumer durable product is due mostly to restocking depleted inventory levels.
In order to gauge the strength of economic activity, it's better to look at the action in the Baltic Dry Index. This index tracks the price it costs to ship a variety of commodities overseas, and it's one of the most reliable economic indicators available anywhere.
Here's the Chart
While the index is well off the bottom it hit back in December, during the depth of the recession, it is still more than 60% below where it was one year ago.
Maybe a few trillion dollars doesn't buy what it used to.
More worrisome, though, is the recent downdraft since the peak in June. Better than anything, this illustrates the temporary nature of the economic recovery. The index has retraced nearly all its price gains since March.
If the economy were truly in "recovery" mode, and if consumer demand were truly picking up, the Baltic Dry Index should be moving consistently higher.
It's not. And that fact should be a major warning sign for anyone buying stocks and betting the economy's current blip higher is sustainable.
Best regards and good trading,
Sunday, August 23, 2009
The first INTERNATIONAL Swine Flu Conference finished August 21st. As Jesse Woodrow states in this video, THERE HAS NOT BEEN ANY MENTION OF THIS ON ANY NEWS NETWORK. Go to Google news and type in "Swine Flu Conference" You would think it would be the top news article. IT ISN'T EVEN MENTIONED !! WHY NOT?
This is the pdf Jesse referring to in the video-
Friday, August 21, 2009
America is just a few days away from a possible day of reckoning. I again call attention to this day, August 25, when the Federal Deposit Insurance Corporation issues its 2nd Quarter report for 2009 on the state of health of American banks.
It has not particularly alarmed Americans that its growth and prosperity have been built upon debt. The American public is a bit desensitized, particularly since the Y2K threat fizzled. We must wait and see how Americans respond to the upcoming FDIC report.
The following charts tell the story. There are roughly 8400 American banks that set aside a small portion of their profits to aggregately insure bank depositors should their local bank fail. A plethora of bank failures has depleted the FDIC reserve fund from $52.8 billion in 2008 to $13 billion in the 1st Quarter of 2009. (See chart below)
Alison Vekshin, writing for Bloomberg, indicates
"The failure of 77 banks this year is draining the fund, prompting the agency in May to set an emergency fee of 5 cents for every $100 of assets, excluding Tier 1 capital, to raise $5.6 billion in the second quarter. The agency has authority to set fees in the third and fourth quarters, if needed, to prevent a decline in the fund from undermining public confidence."
Vekshin goes on to report that 56 bank failures since March 31 have cost the FDIC an estimated $16 billion. (For comparison, in the 1st Quarter, bank failures only cost the FDIC $2.2 billion.) That $16 billion bank rescue would fully deplete the FDIC fund as it only had $13 billion at the close of the 1stQuarter. It’s possible the FDIC has already tapped into its line of credit at the Treasury Department without setting off alarm bells to the public.
The FDIC is required by law to maintain a reserve ratio, or balance divided by insured deposits, of 1.15 percent. It was at 0.27 percent as of March 31. It could be near zero at the current moment. (See 1st Quarter FDIC reserve ratio chart below)
Banks will be assessed extra fees
The FDIC's 8400 banks will likely be assessed special fees to shore up the FDIC's treasure chest.
Bloomberg’s Vekshin, quoting Robert Strand, a senior economist at the American Bankers Association, says the industry will pay $17 billion in premiums this year, including $11.6 billion from the annual fee.
The following chart shows the aggregate profits of all 8400 FDIC-insured banks, which is about $5–7 billion per quarter. This figure is AFTER the banks have set aside funds for anticipated losses in real estate loans.
Insured institutions set aside $60.9 billion in loan loss provisions in the 1stQ, an increase of $23.7 billion (63.6 percent) from the first quarter of 2008.
Banks have been slow to foreclose, allowing mortgage holders a few months before their home is deemed in default and giving another 2 years before the property is foreclosed on its accounting books. This practice has been able to temporarily hide most of the banking collapse.
But banks must eventually write down their real estate home mortgage losses. First-quarter net charge-offs of $37.8 billion were slightly lower than the $38.5 billion the industry charged-off in the fourth quarter of 2008.
As banks write off bad home loans, this downsizes their asset values. Downsizing at a few large banks caused $302-billion decline in industry assets in the 1stQ. The FDIC report says:
Total assets declined by $301.7 billion (2.2 percent) during the quarter, as a few large banks reduced their loan portfolios and trading accounts. This is the largest percentage decline in industry assets in a single quarter in the 25 years for which quarterly data are available. Eight large institutions accounted for the entire decline in industry assets;
You can see by the following chart that US banks are directing a great deal of their profits towards write-offs (loss provision in the following chart) for non-paying home mortgages (foreclosures). So the banks only have about $5–7 billion of profit to direct to the FDIC to shore up its quickly vanishing reserve account. This aggregate profit equates to about $890,000 profit per bank in a quarter. That is a pretty thin margin.
The FDIC, which claimed only about 300 problem banks in the 1st Quarter of 2009, but hid the fact there were about 2000 total lame banks among its 8400 members, This has given rise to the term "zombie banks," which are defined as "a financial institution with an economic net worth that is less than zero, but which continues to operate because its ability to repay its debts is shored up by implicit or explicit government credit support."
Examination of the following FDIC chart shows geographically that most banks are not making a profit.
FDIC's $13 billion against $220 billion liabilities
So just how much liability does the FDIC bear aggregately for its "problem banks?"
At the end of the 1st Quarter in 2009 the FDIC said that figure was $220 billion. Remember now, the FDIC had only about $13 billion to over these institutions at the time. (See chart below) This figure will likely grow beyond imagination with the issuance of the FDIC 2ndQ report.
How do American banks make profit today?
So how to American banks make any money today? You can see in the following chart that in the recent past American banks derived most of their profits (45%) from residential and commercial property loans. These income sources are obviously crashing.
So the FDIC 1st Quarter report tells all – our so-called conservative American bankers, entrusted with your hard-earned savings, with no place to turn to generate traditional profits, have entered the gambling parlor. Here is how the FDIC said it:
Sharply higher trading revenues at large banks helped FDIC-insured institutions post an aggregate net profit of $7.6 billion in the first quarter of 2009.
Trading revenues means profit generated from trading stocks and other risky investments. Recall, when your money was being financed commercial and residential property it had some collateral behind it. An asset (real estate) was held in balance against the risk of failure to pay the loan. Now bankers are "investing" your money in the stock market in what appears to be a replay of how the Japanese propped up their stock market in recent years – by simply having major companies purchase each other’s shares to prop up value.
The FDIC's 1stQ report says: "Total equity capital of insured institutions increased by $82.1 billion in the first quarter, the largest quarterly increase since the third quarter of 2004 (when more than half of the increase in equity consisted of goodwill)."
What the hoot is "goodwill" you want to know? It is how the banks are cooking their books. Arbitrary value is being given to bank holdings.
The FDIC 1stQ report goes on to say that:
Most of the aggregate increase in capital was concentrated among a relatively small number of institutions, including some institutions participating in the U.S. Treasury Department’s Troubled Asset Relief Program (TARP).
Banks valued by goodwill and bailout funds
So there, you can see that in addition to goodwill, the bank's capital was largely increased by bailout funds. So a dose of reality therapy will lead one to conclude that nearly all American banks are essentially insolvent.
If this leaves you feeling a bit queasy, well, you may need to reach for Dramamine when you realize the FDIC is not only broke, but it will probably announce it is tapping into its line of credit at the US Treasury Department, which is also insolvent (America is spending $1.58 trillion more than it collects in taxes this year).
Here is how Bloomberg’s Vekshin says it:
If the fund is drained, the FDIC also has the option of tapping a line of credit at the Treasury Department that Congress extended in May to $100 billion, with temporary borrowing authority of $500 billion through 2010.
Compared with savings and loan crisis
American banks weathered the savings and loan/real estate appraisal crisis in the 1980s and 1990s by loading from the US Treasury. In 1991–92, during the last part of the savings and loan crisis, the FDIC borrowed $15.1 billion from the Treasury and repaid it with interest about a year later.
But just exactly how will American banks ever pay back the treasury while facing years of write-offs from home mortgages? The banks do not have sufficient profits to offset their losses.
The entire cost of the savings and loan crisis of the 1980s and 90s was finally calculated at $153 billion, which was four times the reserves held by the FDIC (FSLIC at the time) in 1982. Of this, taxpayers paid out $124 billion while the thrift industry itself paid $29 billion. (FDIC Banking Review, volume 13, no.2, December 2000) So there is a false notion that the banks underwrite their own members’ losses. In fact, the public bears the brunt of the losses when bankers are reckless.
Bankers prodded to loan money
Sheila Bair, FDIC chief, is trying to get US bankers to begin loaning money again. But to do so bankers must begin to assess the worth of real estate at more realistic values. Then the real value of their asset package would be revealed and the banks would all collapse. Furthermore, if banks begin to loan money under their fractional banking scheme (banks loan out 10–50 fold more money than they have in reserve), then massive inflation will likely result. This would not only result in Americans bearing the brunt of higher cost of goods and services, but it could trigger Asian banks, seeing their savings devalued, to sell off their stash of US treasury bonds. America as a debtor nation depends upon billions of dollars every day, loaned from Asian banks, to stay afloat financially.
The FDIC's Bair is aghast at American bankers shift away from traditional sources of revenue backed by collateral to risky investments. Bair wants to charge banks additional fees tied to risks when their business expands beyond traditional lending, such as stock trading. This idea hasn’t advanced in Congressional committees yet. American bankers are walking a tight rope with their depositors’ money.
The mother of all bank runs?
Now if just a small portion of American bank depositors hear that the FDIC had to tap into the US Treasury for funds, and these depositors feel their banked money is at risk and want to withdraw some of it, the mother of all bank runs could ensue. This could create the day of reckoning that many have predicted. A short banking holiday would have to be declared and who knows what happens from there – troops in the streets, issuance of new currency, martial law? Don’t think those in the Federal government haven’t made plans for such an occurrence.
Of surprising interest, the FDIC reveals that millions of Americans don’t trust or don’t use banks. These Americans have been called the unbanked or underbanked, meaning that they "do not have access to banks or are not fully participating in the mainstream financial system," says the FDIC. The FDIC guesstimates that 10 percent of American families are "unbanked." That’s a lot of capital the banks don’t have access to. Those who hold currency outside of banks are anathema to the gods of banking.
Sources: Alison Vekshin, FDIC May Add to Special Fees as Mounting Failures Drain Reserve, Bloomberg News August 20, 2009; FDIC 2ndQuarter report 2009.
Thursday, August 20, 2009
President Obama’s ultimatum that Iran must start talks and quickly "or else" may be based on the belief that pressuring the government in Tehran will produce a positive result. If that is the judgment, it is wrong. Sanctions did not force Italy to change its policies in 1935, nor those of Japan five years later. Saddam Hussein survived them in the 1990s, and they have most certainly not brought the Cuban government down after fifty years of trying. The Iranian government will only respond by closing ranks against foreign pressure. Quite possibly, the only result an enhanced sanctions regime backed by a military threat will produce is a war, which would be catastrophic both for the United States and for Iran. Nor would it be particularly good for Israel in spite of what the current crackpot regime in Tel Aviv might think.
And the usual characters are lining up to play ball. The US mainstream media is united in supporting without any examination the view that Iran is intending to develop a nuclear device and will likely soon have one. It is clear that leading members of the Obama Administration, including Biden and Secretary of State Hillary Clinton believe the same thing. And Congress is never far behind when it comes to supporting any nonsense coming out of Israel. On July 30th the Senate passed a bill that prohibits companies that sell gasoline and other refined oil products to Iran from also receiving any Energy Department contracts to provide crude oil for the US Strategic Petroleum Reserve. Senator Joseph Lieberman of Connecticut is also drafting a bill to block all oil imports to Iran. Yes, the same Joseph Lieberman who has never hesitated to put Israel first even as he wraps his rhetoric in the American flag. A pusillanimous Democratic Congress failed to strip Lieberman of his chairmanship of the Homeland Security committee even after he ran for the Senate as an independent and campaigned actively for Republican John McCain. Lieberman therefore remains a powerful senator instead of a political turncoat who should be rightly shunned by his former colleagues.
Lieberman’s bill, which already has in draft 67 co-sponsors in the Senate, is a de facto declaration of war which could easily start World War III. It would block all imports of refined petroleum products to Iran, which sits on sea of oil but has only limited refinery capacity. Its economy would grind to a halt. According to the Israeli media, other sanctions such as banning trade insurance are being considered, which would make it difficult for Iran to do any business internationally. Sanctions might also be extended laterally and placed on any company that trades with Iran. Iranian-flagged ships might also be refused docking permission in Western seaports and the country’s airplanes could be denied landing rights at European and American airports.
Lost in the shuffle is any United States national interest. Congress seems to be convinced that Iran threatens the United States and must be dealt with, a fiction no doubt generated by a barrage of "position papers" emanating from the American Israel Public Affairs Committee (AIPAC). But the facts tell us otherwise. Iran’s leadership may be an unpleasant crew and the currently unfolding show trials complete with possibly coerced confessions is a disgraceful spectacle, but it just might be that claims that the US and some western Europeans have been meddling in the country’s politics have more than a grain of truth to them. Iranian paranoia vis-à-vis the rest of the world, and particularly the United States, is all too understandable. And its alleged nuclear ambitions are far from a proven case. In its quarterly reports on Iran’s monitored nuclear program, the United Nations’ International Atomic Energy Agency continues to assert that there is absolutely no evidence that Iran has a weapons program. The most recent examination of the Iranian nuclear program was conducted by the highly respected US State Department’s Bureau of Intelligence and Research (INR). Its report, released last week, stated that there is "…no evidence that Iran has yet made the decision to produce highly enriched uranium, and INR assesses that Iran is unlikely to make such a decision for at least as long as international pressure and scrutiny persist." It concluded that even if Iran makes the essentially political decision to construct a nuclear device it will not have enough fissile material to do so before 2013. The INR assessment used current intelligence to update the CIA National Intelligence report of 2007 that concluded that there could not be a nuclear device until after 2010 even if an accelerated program of development were to be initiated. Military analysts have also noted that Iran would be unable to deliver the weapon on target even if it were able to overcome the considerable technical obstacles to building the bomb itself.
It is curious that in spite of the fact that there is a consensus that Iran is not yet seeking a nuclear weapon and has no capability to accumulate sufficient weapons grade uranium to do so for some time to come, US politicians and media accept without question the Israeli argument that Iran is hell bent on obtaining such a device and will do so soon. Perhaps American politicians should stop listening to the Israelis and should start reading the reports being prepared at great expense by the United States intelligence community. All of which leads to another way of looking at the issue and that is, of course, that it is all about Israel. Iran is without doubt a major power in the Persian Gulf region even if it does not threaten the United States or Europe. It potentially does threaten Israel even if the track record shows the Iran has not attacked anyone since the seventeenth century while Israel itself has been engaged in something like perpetual warfare with all its neighbors. So the assumption must be that Israel and its very effective lobby are driving the push for war with Iran against the real interests of the United States. But the real question has to be, "Why is Obama, who must know that the argument against Iran is essentially bogus, buying into it?" Has he already surrendered to AIPAC? If it is true that at the end of September the US government will begin to tighten the screws on Iran we Americans will all know the answers to those questions and we will quite likely be set on the path for yet another "preventive" war.
BAGHDAD — Iraqi and American troops seized a rocket launcher loaded with about a dozen Iranian-made rockets aimed at an American base in the southern city of Basra, Iraqi officials said Tuesday.
The United States military said in a statement that Iraqi and American forces conducted a search operation on Basra’s outskirts after hearing explosions near the base Monday night. The American statement said that Iraqi security forces confiscated 16 rockets and arrested three in connection with the operation without giving further details.
No casualties were reported.
A spokesman for the Basra police force, which took part in the operation, said that a rocket launcher loaded with 13 Grad rockets, positioned on the back of a pickup truck, was found in the Shatt al Arab district northeast of Basra. There was no explanation for the discrepancy in the number of rockets.
“They came from a neighboring country,” said the spokesman, Lt. Col. Rafie al-Jawad, but he refused to specify which one.
An Iraqi Army officer in Basra, who spoke on condition of anonymity because he was not authorized to disclose the information to the news media, said the rockets came from Iran.
Anyone else smell a rat? Anytime sources are sited based on the condition of anonymity, be very suspect its nothing more then political propaganda.
Every time until this date, when pressed about the real country of origin, US military has had to back down about the rockets and/or rocket launchers coming from Iran.
For all we know, if in fact these weapons are of Iranian origin, they could have been purchased third-party, then placed around Basra by the Mossad.
Folks, the rhetoric and claims about what Iran is or is not doing, either in terms of their support for Palestinians groups, or interfering with the US occupation of Iraq, or building nuclear weapons, are building to a fever pitch.
Apparently, Obama has promised Israel that he will "take care" of Iran by the end of September/ beginning of October.
The world may see some kind of "October Surprise" regarding Iran, and trust me; if it happens, it won't have anything to do with negotiations.
Three American soldiers were killed in a rocket attack on their base in Basra last month. In April, American troops took responsibility for southern Iraq, including Basra, from departing British forces.
Separately, at least 2 Iraqis were killed and 15 were wounded when a roadside bomb exploded in a market Tuesday in the predominantly Shiite neighborhood of Abu Dshir in southern Baghdad, the Interior Ministry said.
In Mosul, four Iraqi police officers and an Iraqi soldier were killed in a series of shootings and bomb attacks on Tuesday, according to a police official.
BBC Interviewer calls claim that Arctic ice would disappear by 2030 “misleading information” and using “exaggeration and alarmism”
Greenpeace leader Gerd Leipold has been forced to admit that his organization issued misleading and exaggerated information when it claimed that Arctic ice would disappear completely by 2030, in a crushing blow for the man-made global warming movement.
In an interview with the BBC’s Stephen Sackur on the “Hardtalk” program, Leipold initially attempted to evade the question but was ultimately forced to admit that Greenpeace had made a “mistake” when it said Arctic ice would disappear completely in 20 years.
The claim stems from a July 15 Greenpeace press release entitled “Urgent Action Needed As Arctic Ice Melts,” in which it is stated that global warming will lead to an ice-free Arctic by 2030.
Sackur accused Leipold and Greenpeace of releasing “misleading information” based on “exaggeration and alarmism,” pointing out that it was “preposterous” to claim that the Greenland ice sheet, a mass of 1.6 million square kilometers with a thickness of 3 km in the middle that has survived much warmer periods in history, would completely melt when it had stood firm for hundreds of thousands of years.
“There is no way that ice sheet is going to disappear,” said Sackur.
“I don’t think it will be melting by 2030. … That may have been a mistake,” Leipold was eventually forced to admit.
However, Leipold made no apologies for Greenpeace’s tactic of “emotionalizing issues” as a means of trying to get the public to accept its stance on global warming.He also argued that economic growth in the United States and around the world should be suppressed and that overpopulation and high standards of living should be combated because of the perceived damage they were doing to the environment.
“Leipold’s admission that Greenpeace issued misleading information is a major embarrassment to the organization, which often has been accused of alarmism but has always insisted that it applies full scientific rigor in its global-warming pronouncements.”
Similar claims that the north pole will be “ice free” crop up almost every summer yet are routinely disproved.
Indeed, it was discovered that during August 2007 to August 2008, Arctic ice had in fact grown by around 30 per cent, an area equivalent to the size of Germany.
A new peer reviewed study has also discovered, “Total annual precipitation in Greenland ice sheet for 1958-2007 to be up to 24% and surface mass balance up to 63% higher than previously thought.”
Climate scientists allied with the UN IPCC were also caught citing fake data to make the case that global warming is accelerating, in another shocking example of mass public deception.
In November 2008, NASA’s Goddard Institute for Space Studies (GISS), run by Al Gore’s chief scientific ally, Dr James Hansen, announced that the previous month had been the hottest October on record. It later emerged that the data produced by NASA to make the claim, and in particular temperature records covering large areas of Russia, was merely carried over from the previous month. NASA had used temperature records from the naturally hotter month of September and claimed they represented temperature figures in October.
Watch a clip from the Sackur- Leipold interview below.
Monday, August 17, 2009
In Washington these days, the only topics of discussion seem to be how many trillions to throw at health care and the recession, and whom on Wall Street to pillory next. But watch out. Lurking just below the surface is a bailout candidate that may soon emerge like the great white shark in Jaws: Social Security.
Perhaps as early as this year, Social Security, at $680 billion the nation's biggest social program, will be transformed from an operation that's helped finance the rest of the government for 25 years into a cash drain that will need money from the Treasury. In other words, a bailout.
I've been writing about Social Security's problems for more than a decade, arguing that having the government borrow several trillion dollars to bail out Social Security so that it can pay its promised benefits would impose an intolerable burden on our public finances.
However, I've changed my mind about what "intolerable" means. With the government spending untold trillions to bail out incompetent banks, faddish mortgage borrowers, General Motors, Chrysler, AIG (AIG, Fortune 500), GMAC (GJM), and Wall Street, it should damn well bail out Social Security recipients too. But in a smart way.
Unlike the pigs feeding at Uncle Sam's trough, the people who qualify for Social Security old-age benefits -- the ones who'll benefit from the bailout -- have played by the rules and paid Social Security taxes for decades. It would be immoral to tell them, "Sorry, we have to trim your cost-of-living adjustment because we can't afford it," while expecting them to continue footing the bill for bailing out imprudent people and institutions.
Why am I talking about Social Security when health care is sucking up virtually all the oxygen in Our Nation's Capital? Because Social Security is a really big deal, providing a majority of the income for more than half the people 65 and up, and also supporting millions of disabled people and survivors of deceased workers; because the collapse of stock prices and home values makes Social Security retirement benefits far more important even to upscale baby boomers than they were during the stock market and home-price highs of a few years ago; and because the problems aren't that hard to solve if we look at Social Security realistically instead of treating it as a sacred, untouchable program (liberals) or a demonic plot to make people dependent on government (conservatives).
Finally, this is a good time to discuss Social Security because the Obama folks say it's next on the agenda, after health care. No one at the White House, Treasury, or Social Security Administration would discuss specific Social Security proposals, however.
It ought to tell you something that Peter Orszag, director of the White House Office of Management and Budget, is a noted Social Security scholar. He's co-author of an influential 2004 book, Saving Social Security: A Balanced Approach, that advocated substantial tax increases (and a few benefit trims) to preserve the program. Alas, he wouldn't tell me what he plans to propose this time around. "Health care first" was all he'd say.
Meanwhile in Congress, Rep. Steny Hoyer (D-Md.), the House majority leader, says he intends to deal with Social Security as soon as possible. But he also declined to be specific. "I've been more inclined toward a commission" than to introduce legislation, he said.
That makes this a good time -- and maybe our last chance -- to have a rational conversation about Social Security. After proposals start getting leaked and the game-playing and finger-pointing start, it won't be possible.
So I'd like to show you that Social Security has a real and growing cash problem even as its trust fund is getting bigger than ever, explain how the program really works, and -- immodest though it may seem -- propose a few simple solutions to fix it, restore it to its roots, and make its finances less incomprehensible.
Social Security's cash-flow problem
How can Social Security possibly need a bailout when by Washington rules it's "solvent" for another 26 years? To understand the problem, all you have to do is look at me. I'm the distinguished -- okay, old -- guy above and to the right, holding an ancient (but real) Social Security card that Fortune's photo mavens have doctored to display an invalid number (so don't try using it).
I'll turn 66 near the end of next year, making my wife and me eligible for full Social Security benefits. They'll be about $42,000 a year starting on Jan. 1, 2011, and are scheduled to rise as the consumer price index rises.
Social Security, which analyzed my situation at Fortune's request, values those promised (but not legally binding) benefits at a bit more than $600,000. In other words, that's how much Social Security would have to set aside today to pay benefits to my wife and me, assuming that we live out statistically average lives, and that the current benefit formula stays in place.
Even though 600 grand is a lot of money, Social Security is way ahead on my wife and me because the value of our benefits is far less than the Social Security taxes we and our employers will have paid by the end of next year, plus the interest Social Security will have earned on that money in the decades since we started working. Those taxes and interest will have totaled more than $800,000 by Dec. 31, 2010. For example, the $5.18 my employer and I paid in 1961 -- the year I got that card I'm holding -- will have grown to $140 by the end of next year.
I don't have a problem with this $600,000-to-$800,000 disparity, by the way. One of the principles of Social Security is that higher-paid folks like me -- I'll get the maximum old-age benefit because I earned the maximum Social Security-covered wage (currently $106,800 a year) for 35 years -- support the lower paid. That's as it should be, given that the Social Security tax (12.4% of covered wages, split equally between employer and employee) is regressive, far more costly as a percent of income to a $40,000-a-year person than it is to me. According to the Tax Policy Institute, five out of six U.S. workers pay more in Social Security tax (including the employer's portion) than in federal income tax -- something that makes it especially important (and only fair) to preserve the program for lower earners, who get old-age benefits of up to 90% of their covered wages, while I get only 28%.
How can my wife and I pose a problem to Social Security when our benefits are valued at $600,293, while our tax payments ($271,508 through next year) plus interest will total $804,686? Answer: because the obligation is real, but the $800,000-plus asset is illusory, consisting solely of government IOUs to itself.
Now let's step back a bit -- to 1935, actually -- to see how we got into this mess. Franklin Delano Roosevelt set up Social Security to look like an insurance company and a funded-benefit program, even though it's neither (a point, by the way, that Fortune made almost 75 years ago, in our December 1935 issue).
No, it's not a Ponzi scheme as some folks claim. A Ponzi uses money from today's investors to pay yesterday's investors and -- the key element -- lies about it. Social Security, in contrast, doesn't lie about what it is: an intergenerational social-insurance plan, with today's workers supporting their parents (and disabled and survivors) in the hope that their children will support them. It's not a pension fund. It's not an insurance company.
Social Security exists in its own world. In this world taxes are called "contributions," though they're certainly not voluntary. "Trust funds," which in the outside world connote real wealth bestowed on beneficiaries, are nothing but IOUs from one arm of the government (the Treasury) to another (the Social Security Administration). And "solvency," which in the real world means that assets are greater than liabilities, means only that the Social Security trust fund has a positive balance.
Alas, the trust fund is a mere accounting entry, albeit one with a moral and political claim on taxpayers. It's Social Security's cash flows, not its trust fund, that will determine what the system can actually pay. It's really a pay-as-you-go system, its trust fund notwithstanding.
To understand why I say that Social Security will soon need a bailout while most people say everything's fine through 2035, we have to examine the trust fund. It currently holds about $2.5 trillion of Treasury securities and is projected to grow to more than $4 trillion, even as Social Security begins to take in far less cash in taxes than it spends in benefits. For instance, in 2023 it projects a cash deficit of $234 billion. However, the trust fund will grow because it will get $245 billion of Treasury IOUs as interest -- the Treasury pays its interest tab with paper, not cash.
"The trust fund has no financial significance," says David Walker, former head of the General Accountability Office and now president of the Peterson Foundation, which advocates fiscal responsibility. "If you did [bookkeeping like] that in the private sector, you'd go to jail."
Let me show you why the Social Security trust fund isn't social or secure, has no funds, and can't be trusted, by returning to my favorite subject: myself.
The cash that Social Security has collected from my wife and me and our employers isn't sitting at Social Security. It's gone. Some went to pay benefits, some to fund the rest of the government. Since 1983, when it suffered a cash crisis, Social Security has been collecting more in taxes each year than it has paid out in benefits. It has used the excess to buy the Treasury securities that go into the trust fund, reducing the Treasury's need to raise money from investors. What happens if Social Security takes in less cash than it needs to pay benefits? Watch.
Let's say that late next year Social Security realizes that it's short the $3,486 it needs to pay my wife and me our Jan. 1, 2011, benefit. It gets that money by having the Treasury redeem $3,486 of trust fund Treasury securities. The Treasury would get the necessary cash by selling $3,486 of new Treasury securities to investors. That means that $3,486 has been moved from the national debt that the government owes itself, which almost no one cares about, to the national debt it owes investors, which almost everyone -- and certainly the bond market -- takes very seriously.
Think about this for a second. The Treasury has to borrow money to make good on the Social Security trust fund's obligations. Remember that the Treasury and Social Security are both part of the government. This example shows you that the trust fund is of no economic value to the government as a whole (which is what really matters), because the government has to borrow from private investors the money it needs to redeem the securities. It would be the same if the trust fund sold its Treasury securities directly to investors -- the government would be adding to the publicly held national debt to fund Social Security checks. See? The trust fund isn't a savings vehicle -- it's nothing but a bookkeeping entry.
If you look at the "Social Security cash flow" chart, above and to the right, you'll see that Social Security's projected annual cash-flow deficit starts small but grows quickly to 12 digits. It's like having an AIG every year, then two AIGs, then more. It's simply unsupportable.
You won't find anything like our chart in Social Security's annual trustees report -- we used information from a special online version of a table buried on page 196 of this year's 222-page report.
Social Security's "solvency" calculations -- and the insistence by the status quo supporters that there's "no problem" until 2036 because the trust fund will have assets until then -- assume that the Treasury can and will borrow the necessary money to redeem the trust fund's Treasury securities. They also assume that our children, who by then will be running the country, will allow all this money to be diverted from other needs. I sure wouldn't assume that.
This whole problem of Social Security posting huge surpluses for years, using proceeds from a regressive tax to fund the rest of the government, and then needing a Treasury bailout to pay its bills is an unanticipated consequence of the 1983 legislation that supposedly fixed Social Security.
In order to show 75 years of "solvency," as required by law -- a law that should be changed -- Congress, using the bipartisan 1983 Greenspan Commission report as political cover, raised Social Security taxes sharply, cut future benefits, and boosted the retirement age (then 65, currently 66, rising to 67). That was the first such step-up in retirement age, even though life spans have increased greatly since Social Security was founded in 1935, when someone who reached 65 really was old.
The changes transformed Social Security from an explicitly pay-as-you-go program into one that produced huge cash surpluses for years, followed by huge cash deficits. No one in authority seems to have realized that the only way to really save the temporary surpluses was to let the trust fund invest in non-Treasury debt securities, such as high-grade mortgages (yes, such things exist) or corporate bonds. That way, interest and principal repayments from homeowners and corporations would have been covering Social Security's future cash shortfalls, rather than the Treasury's having to borrow money to cover them.
This problem has been metastasizing for 25 years. Now I'll show you why the day of reckoning may finally be here, using numbers to back up my earlier assertion that Social Security could go cash-negative this year.
Burdened further by the recession
Just last year Social Security was projecting a cash surplus of $87 billion this year and $88 billion next year. These were to be the peak cash-generating years, followed by a cash-flow decline, followed by cash outlays exceeding inflows starting in 2017.
But in this year's Social Security trustees report, the cash flow projections for 2009 and 2010 have shrunk by almost 80%, to $19 billion and $18 billion, respectively. How did $138 billion of projected cash go missing in just one year? Stephen Goss, Social Security's chief actuary, says the major reason is that the recession has cost millions of jobs, reducing Social Security's tax income below projections.
But $18 billion is still a surplus. Why do I say Social Security could go cash-negative this year? Because unemployment is far worse than Social Security projected. It assumed that unemployment would rise gradually this year and peak at 9% in 2010. Now, of course, the rate is 9.5% and rising -- and we're still in 2009.
I'd love to be able to give you a report on Social Security's cash flow so far this year, which is more than half over. However, it's impossible to get interim numbers. So I don't know where we stand, and we probably won't find out before next spring, when the 2010 trustees report comes out.
Social Security's having negative cash flow this year would be a relatively minor economic event -- what's a few more billion when the government's already borrowing more than $1 trillion? -- but I think it would be a really important psychological, political, and journalistic event.
OMB's Peter Orszag -- remember, he's a Social Security maven -- pooh-poohed my thinking when I met with him. He says I'm wrong to harp on Social Security's near-term cash flow -- a term, by the way, that he won't use. "I think the real question of Social Security is how we bring long-term revenues in line with long-term expenses," he said, "not whether the primary surplus within Social Security turns negative within the next few years." I guess we'll see.
When you look back at numbers from previous years, as I did while reporting this article, you suddenly realize that Social Security's finances have been deteriorating for a long time. As the "2009 cash-flow projections" chart, above and to the right, shows, Social Security's cash flow (and thus its trust fund balances) has fallen well below earlier projections. Seven years ago, the projected 2009 cash flow was $115 billion, which as we've seen had fallen to $87 billion by last year and is now $19 billion. Ten years ago the trust fund was projected to be $3 trillion at the end of this year, rather than the currently projected $2.56 trillion.
In 1983 the system was projected to be "solvent" until the 2050s. This year it's only until 2036.
Social Security's Steve Goss says the major reason is that over the past two decades the wages on which Social Security collects taxes have grown more slowly than projected. He said Social Security projected them to grow at 1.5% above inflation, but they've been growing at only 1.1%. While this reduces future obligations because benefits are based on salaries, for now the below-projected salaries cut sharply into cash-flow projections.
The scariest thing, at least to me, is that even as its financials erode, Social Security is as important as ever -- maybe more so.
Let me elaborate on what I said earlier, about how older people depend heavily on Social Security. It accounts for more than half the income of 52% of married couples over 65, and 72% of that of 65-and-up singles, according to the Social Security Administration. For 20% of such couples and 41% of singles, it's more than 90% of their income.
What's more, this dependence -- which Goss says isn't projected to change -- comes despite 30 years of broadly popular self-directed retirement accounts such as 401(k)s, IRAs, 403(b)s, and such.
Why haven't those reduced dependence on Social Security? Part of the reason is that it takes a lot of money to generate serious retirement income: about $170,000 for a $1,000-a-month lifetime annuity. Inflation protection, if you can find it, is ultra-expensive. Vanguard, which offers a lifetime inflation-adjusted annuity in conjunction with -- shudder! -- an AIG insurance company called American General, quoted me a staggering price for an annuity mimicking my wife's and my Social Security benefit. Would you believe ... $774,895? Yes, that was the number.
Another problem is that the stock market has been stinko, the post-March rally notwithstanding. Stocks are below their level of April 2000, when the great bull market (August 1982 to March 2000) ended. It's hard to make money in stocks when they've been down for nine years. The Employee Benefit Research Institute estimates that the average retirement account balance of people 65 to 74 was about $266,000 in 2007 but had fallen to about $217,000 as of mid-June.
Then there's the problem of lost home equity. According to a study conducted for Fortune by the Center for Economic and Policy Research, people in the lower-income to upper-middle-income ranges have lost a far greater proportion of their net worth as a result of the housing bust than the most wealthy people have.
The bottom line is that many older people who felt reasonably well-fixed for retirement a few years ago now need Social Security more than ever. That makes it even more important to come up with a way to sustain it and to show our children a realistic plan to give them benefits, rather than to rely on the trust fund and the supposed political clout of the geezer and the approaching-geezerhood classes to keep benefits flowing when cash flow goes negative.
So how do we fix these problems? Let me divide it into three categories: what to do, what to change, and -- this is crucial -- what not to do.
What to do
Many of the old standbys: raising the "covered wage" limit, but not to outrageous levels; tweaking the benefit formulas so that high-end people like me get a little less bang for the buck; modifying cost-of-living increases for us high-end types; and most important, raising the retirement age to 70, with a special "disability" earlier-retirement provision for manual laborers, who can't be expected to work that long.
What to change
The law requiring 75-year solvency. It's hard to predict what will happen 75 days from now, let alone 75 years from now. But the obsession with 75-year solvency and the status of the trust fund has obscured what's really going on in Social Security.
This requirement forces Social Security's actuaries --who are among the best and smartest public servants I know -- to make all sorts of impossible projections, such as the one we show, above and to the right, about how many beneficiaries we'll have per worker decades from now.
As we've seen, even one faulty projection -- such as overestimating wage growth -- can cause substantial problems. Would you bet your life on the beneficiary-to-worker ratio, given the rising pressures for people to work longer? I sure wouldn't.
The trust fund. Before the Greenspan Commission-related changes in 1983, the trust fund was a checking account. The workings of Social Security post-1983 have turned it into something it was never intended to be: an investment account. Let's gradually draw down the trust fund by having the Treasury redeem $100 billion or so annually (less than the current interest the fund earns) by giving the fund cash rather than Treasury IOUs, gradually increasing the redemptions. That will let the fund buy assets that will be useful when serious cash-flow deficits hit -- things like high-grade mortgage securities and high-grade bonds.
That way we'll be bailing out Social Security a bit at a time, which is realistic, rather than in huge chunks, which isn't. Combine that with the lower costs and higher revenues we've mentioned, and today's kids could see there really is a way they'll get benefits when they attain geezerhood. They'll be looking at what will have become a pay-as-you-go system with a checking-account-size trust fund. That would give any numerate person more confidence in Social Security's future than the current system does.
What not to do
Depend on taxing "the rich." One of the solutions you hear in Washington is restoring "covered wage" levels to the good old Greenspan Commission days, when 90% of wages were subject to Social Security tax, compared with 83% now. Sounds simple and fair, doesn't it? However, that would increase the Social Security wage base to about $170,000 from the current $106,800, according to Andrew Biggs of the American Enterprise Institute -- at 12.4%, a huge new tax to middle-class workers. (And yes, that's middle-class income, not rich-person income, in large parts of the country, including much of the East and West coasts.)
During the presidential campaign, President Obama proposed (and then dropped) a plan to leave the Social Security wage cap where it is but to apply the 12.4% Social Security tax to all wages above $250,000. That -- like the 90%-level-of-income idea -- would be an enormous new tax that would greatly weaken support for Social Security among higher-income people. I'm not saying "rich people," because truly rich people generally have huge amounts of investment income, which isn't subject to Social Security tax.
Don't means-test benefits. It's already being done. We'd be making a terrible mistake to means-test Social Security by saying that people above a certain income level can't get it. That would violate the current social compact that everyone pays Social Security taxes and everyone gets something. It would turn Social Security from an earned benefit into a flat-out welfare program. Remember what happened to welfare when Bill Clinton was in office? Imagine what would happen to a welfare Social Security program the next time we have a conservative administration and a conservative Congress.
Besides, Social Security is already means-tested, indirectly. That's because if you have enough non-Social Security income -- about $23,000 a year in my case -- you pay federal income tax on 85% of your benefit.
Given the three pensions I stand to collect from previous employers, I'm reasonably sure to hit that level. So, for the final time, let's go through the numbers on me. If my wife and I are in the 28% federal tax bracket when we start collecting benefits, we'll be giving almost a quarter of our benefit right back to Social Security (0.28 x 0.85).
It would also mean that the $600,000 benefit I talked about earlier would cost Social Security only about $450,000 -- just 55% or so of the $800,000-plus value of our taxes.
I don't mind that big haircut -- but I'd be furious if the government decided to just confiscate all the money my wife and I put into Social Security over the decades by saying we were "rich" and had no right to any benefits. And I wouldn't be alone.
Given the way health care has bogged down, Social Security may not make it onto the agenda until next year. But it's going to show up sooner or later, probably sooner, because the numbers are so bad that something's going to have to be done. As I hope I've shown you, we're going to have to bail out Social Security or else risk hurting a lot of low-income older people or putting the whole program's future at risk by gouging and alienating upper-income Social Security sympathizers like me.
So let's fix this, already. By the numbers. And by the right numbers, not fantasy ones.
Friday, August 14, 2009
It's financial fraud or what former high-level Wall Street insider and former Assistant HUD Secretary Catherine Austin Fitts calls "pump and dump," defined as "artificially inflating the price of a stock or other security through promotion, in order to sell at the inflated price," then profit more on the downside by short-selling. "This practice is illegal under securities law, yet it is particularly common," and in today's volatile markets likely ongoing daily.
Why? Because the profits are enormous, in good and bad times, and when carried to extremes like now, Fitts calls it "pump(ing) and dump(ing) of the entire American economy," duping the public, fleecing trillions from them, and it's more than just "a process designed to wipe out the middle class. This is genocide (by other means) - a much more subtle and lethal version than ever before perpetrated by the scoundrels of our history texts."
Fitts explains that much more than market manipulation goes on. She describes a "financial coup d'etat, including fraudulent housing (and other bubbles), pump and dump schemes, naked short selling, precious metals price suppression, and active intervention in the markets by the government and central bank" along with insiders. It's a government-business partnership for enormous profits through "legislation, contracts, regulation (or lack of it), financing, (and) subsidies." More still overall by rigging the game for the powerful, while at the same time harming the public so cleverly that few understand what's happening.
Market Rigging Mechanisms - The Plunge Protection Team
On March 18, 1989, Ronald Reagan's Executive Order 12631 created the Working Group on Financial Markets (WGFM) commonly known as the Plunge Protection Team (PPT). It consisted of the following officials or their designees:
-- the President;
-- the Treasury Secretary as chairman;
-- the Fed chairman;
-- the SEC chairman; and
-- the Commodity Futures Trading Commission chairman.
Under Sec. 2, its "Purposes and Functions" were stated as follows:
(2) "Recognizing the goals of enhancing the integrity, efficiency, orderliness, and competitiveness of our Nation's financial markets and maintaining investor confidence, the Working Group shall identify and consider:
(1) the major issues raised by the numerous studies on the events (pertaining to the) October 19, 1987 (market crash and consider) recommendations that have the potential to achieve the goals noted above; and
(2)....governmental (and other) actions under existing laws and regulations....that are appropriate to carry out these recommendations."
In August 2005, Canada-based Sprott Asset Management (SAM) principals John Embry and Andrew Hepburn headlined their report on the US government's "surreptitious" market interventions: "Move Over, Adam Smith - The Visible Hand of Uncle Sam" to prevent "destabilizing stock market declines. Comprising key government agencies, stock exchanges and large Wall Street firms," this group "is significant because the government has never admitted to private-sector membership in the Working Group," nor is it hinting that manipulation works both ways - to stop or create panic.
"Current mythology holds that (equity) prices rise and fall on the basis of market forces alone. Such sentiments appear to be seriously mistaken....And as official rhetoric continues to toe the free market line, manipulation has become increasingly apparent....with the active participation of selected investment banks and brokerage houses" - the Wall Street giants.
In 2004, Texas Hedge Report principals Steven McIntyre and Todd Stein said "Almost every floor trader on the NYSE, NYMEX, CBOT and CME will admit to having seen the PPT in action in one form or another over the years" - violating the traditional notion that markets move randomly and reflect popular sentiment.
Worse still, according to SAM principals Embry and Hepburn, "the government's unwillingness to disclose its activities has rendered it very difficult to have a debate on the merits of such a policy," if there are any.
Further, "virtually no one ever mentions government intervention publicly....Our primary concern is that what apparently started as a stopgap measure may have morphed into a serious moral hazard situation."
Worst of all, if government and Wall Street collude to pump and dump markets, individuals and small investment firms can get trampled, and that's exactly what happened in late 2008 and early 2009, with much more to come as the greatest economic crisis since the Great Depression plays out over many more months.
That said, the PPT might more aptly be called the PPDT - The Plunge Protection/Destruction Team, depending on which way it moves markets at any time. Investors beware.
Manipulating markets is commonplace and as old as investing. Only the tools are more sophisticated and amounts involved greater. In her book, "Morgan: American Financier," Jean Strouse explained his role in the Panic of 1907, the result of stock market and real estate speculation that caused a market crash, bank runs, and hysteria. To restore confidence, JP Morgan and the Treasury Secretary organized a group of financiers to transfer funds to troubled banks and buy stocks. At the time, rumors were rampant that they orchestrated the panic for speculative profits and their main goals:
-- the 1908 National Monetary Commission to stabilize financial markets as a precursor to the Federal Reserve; and
-- the 1910 Jekyll Island meeting where powerful financial figures met in secret for nine days and created the private banking cartel Federal Reserve System, later congressionally established on December 23, 1913 and signed into law by Woodrow Wilson.
Morgan died early that year but profited hugely from the 1907 Panic. It let him expand his steel empire by buying the Tennessee Coal and Iron Company for about $45 million, an asset thought to be worth around $700 million. Today, similar schemes are more than ever common in the wake of the global economic crisis creating opportunities to buy assets cheap by bankers flush with bailout cash. Aided by PPT market rigging, it's simpler than ever.
Wharton Professor Itay Goldstein and Said Business School and Lincoln College, Oxford University Professor Alexander Guembel discussed price manipulation in their paper titled "Manipulation and the Allocational Role of Prices." They showed how traders effect prices on the downside through "bear raids," and concluded:
"We basically describe a theory of how bear raid manipulation works....What we show here is that by selling (a stock or more effectively short-selling it), you have a real effect on the firm. The connection with real value is the new thing....This is the crucial element," but they claim the process only works on the downside, not driving shares up.
In fact, high-volume program trading, analyst recommendations, positive or negative media reports, and other devices do it both ways.
Also key is that a company's stock price and true worth can be highly divergent. In other words, healthy or sick firms may be way-over or under-valued depending on market and economic conditions and how manipulative traders wish to price them, short or longer term.
The idea that equity prices reflect true value or that markets move randomly (up or down) is rubbish. They never have and more than ever don't now.
The Exchange Stabilization Fund (ESF)
The 1934 Gold Reserve Act created the US Treasury's ESF. Section 7 of the 1944 Bretton Woods Agreements made its operations permanent. As originally established, the Treasury ran the Fund outside of congressional oversight "to keep sharp swings in the dollar's exchange rate from (disrupting) financial markets" through manipulation. Its operations now include stabilizing foreign currencies, extending credit lines to foreign governments, and last September to guaranteeing money market funds against losses for up to $50 billion.
In 1995, the Clinton administration used the fund to provide Mexico a $20 billion credit line to stabilize the peso at a time of economic crisis, and earlier administrations extended loans or credit lines to China, Brazil, Ecuador, Iceland and Liberia. The Treasury's web site also states that:
"By law, the Secretary has considerable discretion in the use of ESF resources. The legal basis of the ESF is the Gold Reserve Act of 1934. As amended in the late 1970s....the Secretary (per) approval of the President, may deal in gold, foreign exchange, and other instruments of credit and securities."
In other words, ESF is a slush fund for whatever purposes the Treasury wishes, including ones it may not wish to disclose, such as manipulating markets, directing funds to the IMF and providing them with strings to borrowers as the Treasury's site explains:
"....Treasury has often linked the availability of ESF financing to a borrower's use of the credit facilities of the IMF, both to support the IMF's role and to strengthen assurances that there will be timely repayment of ESF financing."
The Counterparty Risk Management Policy Group (CRMPG)
Established in 1999 in the wake of the Long Term Capital Management (LTCM) crisis, it manipulates markets to benefit giant Wall Street firms and high-level insiders. According to one account, it was to curb future crises by:
-- letting giant financial institutions collude through large-scale program trading to move markets up or down as they wish;
-- bailing out its members in financial trouble; and
-- manipulating markets short or longer-term with government approval at the expense of small investors none the wiser and often getting trampled.
In August 2008, CRMPG III issued a report titled "Containing Systemic Risk: The Road to Reform." It was deceptive on its face in stating that CRMPG "was designed to focus its primary attention on the steps that must be taken by the private sector to reduce the frequency and/or severity of future financial shocks while recognizing that such future shocks are inevitable, in part because it is literally impossible to anticipate the specific timing and triggers of such events."
In fact, the "private sector" creates "financial shocks" to open markets, remove competition, and consolidate for greater power by buying damaged assets cheap. Financial history has numerous examples of preying on the weak, crushing competition, socializing risks, privatizing profits, redistributing wealth upward to a financial oligarchy, creating "tollbooth economies" in debt bondage according to Michael Hudson, and overall getting a "free lunch" at the public's expense.
CRMPG explains financial excesses and crises this way:
"At the end of the day, (their) root cause....on both the upside and the downside of the cycle is collective human behavior: unbridled optimism on the upside and fear on the downside, all in a setting in which it is literally impossible to anticipate when optimism gives rise to fear or fear gives rise to optimism...."
"What is needed, therefore, is a form of private initiative that will complement official oversight in encouraging industry-wide practices that will help mitigate systemic risk. The recommendations of the Report have been framed with that objective in mind."
In other words, let foxes guard the henhouse to keep inventing new ways to extract gains (a "free lunch") in increasingly larger amounts - "in the interest of helping to contain systemic risk factors and promote greater stability."
Or as Orwell might have said: instability is stability, creating systemic risk is containing it, sloping playing fields are level ones, extracting the greatest profit is sharing it, and what benefits the few helps everyone.
Michel Chossudovsky explains that: "triggering market collapse(s) can be a very profitable undertaking. (Evidence suggests) that the Security and Exchange Commission (SEC) regulators have created an environment which supports speculative transactions (through) futures, options, index funds, derivative securities (and short-selling), etc. (that) make money when the stock market crumbles....foreknowledge and inside information (create golden profit opportunities for) powerful speculators" able to move markets up or down with the public none the wiser.
As a result, concentrated wealth and "financial power resulting from market manipulation is unprecedented" with small investors' savings, IRAs, pensions, 401ks, and futures being decimated from it.
Deconstructing So-Called "Green Shoots"
Daily the corporate media trumpet them to lull the unwary into believing the global economic crisis is ebbing and recovery is on the way. Not according to longtime market analyst Bob Chapman who calls green shoots "Poison Ivy" and economist Nouriel Roubini saying they're "yellow weeds" at a time there's lots more pain ahead.
For many months and in a recent commentary he refers to "the worst financial crisis, economic crisis and recession since the Great Depression....the consensus is now becoming optimistic again and says that we are going to go from minus 6 percent growth to positive growth in the second half of the year....my views are much more bearish....The problems of the financial system are severe. Many banks are still insolvent."
We're "piling public debt on top of private debt to socialize the losses; and at some point the back of (the) government('s) balance sheet is going to break, and if that happens, it's going to be a disaster." Short of that, he, Chapman, and others see the risks going forward as daunting. As for the recent stock market rise, they both call it a "sucker's rally" that will reverse as the US economy keeps contracting and the financial system suffers unexpected or manipulated shocks.
Highly respected market analyst Louise Yamada agrees. As Randall Forsyth reported in the May 25 issue of Barron's Up and Down Wall Street column:
"It is almost uncanny the degree to which 2002-08 has tracked 1932-38, 'Yamada writes in her latest note to clients.' " Her "Alternate Hypothesis" compares this structural bear market to 1929-42:
-- "the dot-com collapse parallels the Great Crash and its aftermath," followed by the 2003-07 recovery, similar to 1933-37;
-- then the late 2008 - early March 2009 collapse tracks a similar 1937-38 trajectory, after which a strong rally followed much like today;
-- then in November 1938, the market dropped 22% followed by a 26% rise and a series of further ups and downs - down 28%, up 23%, down 16%, up 13%, and a final 29% decline ending in 1942;
-- from the 1938 high ("analogous to where we are now," she says), stock prices fell 41% to a final bottom.
Are we at one today as market touts claim? No according to Yamada - top-ranked among her peers in 2001, 2002, 2003 and 2004 when she worked at Citigroup's Smith Barney division. Since 2005, she's headed her own independent research company.
She says structural bear markets typically last 13 - 16 years so this one has a long way to go before "complet(ing) the repair process." She calls the current rebound "a bungee jump," very typical of bear markets. Numerous ones occurred during the Great Depression, 8 alone from 1929 - 1932, some deceptively strong.
Expect market manipulators today to produce similar price action going forward - to enrich themselves while trampling on the unwary, well-advised to protect their dollars from becoming quarters or dimes.
Wednesday, August 12, 2009
Bernanke has increased excess reserves in the banking system by $800 billion, but lending is still slow. The banks are hoarding capital in order to deal with the losses from toxic assets, non performing loans, and a $3.5 trillion commercial real estate bubble that's following housing into the toilet. That's why the rate of bank failures is accelerating. 2010 will be even worse; the list is growing. It's a bloodbath.
The standards for conventional loans have gotten tougher while the pool of qualified credit-worthy borrowers has shrunk. That means less credit flowing into the system. The shadow banking system has been hobbled by the freeze in securitization and only provides a trifling portion of the credit needed to grow the economy. Bernanke's initiatives haven't made a bit of difference. Credit continues to shrivel.
The S&P 500 is up 50 percent from its March lows. The financials, retail, materials and industrials are leading the pack. It's a "Green Shoots" Bear market rally fueled by the Fed's Quantitative Easing (QE) which is forcing liquidity into the financial system and lifting equities. The same thing happened during the Great Depression. Stocks surged after 1929. Then the prevailing trend took hold and dragged the Dow down 89 percent from its earlier highs. The S&P's March lows will be tested before the recession is over. Systemwide deleveraging is ongoing. That won't change.
No one is fooled by the fireworks on Wall Street. Consumer confidence continues to plummet. Everyone knows things are bad. Everyone knows the media is lying. Credit is contracting; the economy's life's blood has slowed to a trickle. The economy is headed for a hard landing.
Bernanke has pulled out all the stops. He's lowered interest rates to zero, backstopped the entire financial system with $13 trillion, propped up insolvent financial institutions and monetized $1 trillion in mortgage-backed securities and US sovereign debt. Nothing has worked. Wages are falling, banks are cutting lines of credit, retirement savings have been slashed in half, and home equity losses continue to mount. Living standards can no longer be bandaged together with VISA or Diners Club cards. Household spending has to fit within one's salary. That's why retail, travel, home improvement, luxury items and hotels are all down double-digits. The easy money has dried up.
According to Bloomberg:
"Borrowing by U.S. consumers dropped in June for the fifth straight month as the unemployment rate rose, getting loans remained difficult and households put off major purchases. Consumer credit fell $10.3 billion, or 4.92 percent at an annual rate, to $2.5 trillion, according to a Federal Reserve report released today in Washington. Credit dropped by $5.38 billion in May, more than previously estimated. The series of declines is the longest since 1991.
A jobless rate near the highest in 26 years, stagnant wages and falling home values mean consumer spending... will take time to recover even as the recession eases. Incomes fell the most in four years in June as one-time transfer payments from the Obama administration’s stimulus plan dried up, and unemployment is forecast to exceed 10 percent next year before retreating." (Bloomberg)
What a mess. The Fed has assumed near-dictatorial powers to fight a monster of its own making, and achieved nothing. The real economy is still dead in the water. Bernanke is not getting any traction from his zero-percent interest rates. His monetization program (QE) is just scaring off foreign creditors. On Friday, Marketwatch reported:
"The Federal Reserve will probably allow its $300 billion Treasury-buying program to end over the next six weeks as signs of a housing recovery prompt the central bank to unwind one its most aggressive and unusual interventions into financial markets, big bond dealers say."
Right. Does anyone believe the housing market is recovering? If so, please check out this chart and keep in mind that, in the first 6 months of 2009, there have already been 1.9 million foreclosures.
The Fed is abandoning the printing presses (presumably) because China told Geithner to stop printing money or they'd sell their US Treasuries. It's a wake-up call to Bernanke that the power is shifting from Washington to Beijing.
That puts Bernanke in a pickle. If he stops printing; interest rates will skyrocket, stocks will crash and housing prices will tumble. But if he continues QE, China will dump their Treasuries and the greenback will vanish in a poof of smoke. Either way, the malaise in the credit markets will persist and personal consumption will continue to sputter.
The basic problem is that consumers are buried beneath a mountain of debt and have no choice except to curtail their spending and begin to save. Currently, the the ratio of debt to personal disposable income, is 128% just a tad below its all-time high of 133% in 2007. According to the Federal Reserve Bank of San Francisco's "Economic Letter: US Household Deleveraging and Future Consumption Growth":
"The combination of higher debt and lower saving enabled personal consumption expenditures to grow faster than disposable income, providing a significant boost to U.S. economic growth over the period. In the long-run, however, consumption cannot grow faster than income because there is an upper limit to how much debt households can service, based on their incomes. For many U.S. households, current debt levels appear too high, as evidenced by the sharp rise in delinquencies and foreclosures in recent years. To achieve a sustainable level of debt relative to income, households may need to undergo a prolonged period of deleveraging, whereby debt is reduced and saving is increased.
Going forward, it seems probable that many U.S. households will reduce their debt. If accomplished through increased saving, the deleveraging process could result in a substantial and prolonged slowdown in consumer spending relative to pre-recession growth rates." ("U.S. Household Deleveraging and Future Consumption Growth, by Reuven Glick and Kevin J. Lansing, FRBSF Economic Letter")
A careful reading of the FRBSF's Economic Letter shows why the economy will not bounce back. It is mathematically impossible. We've reached peak credit; consumers have to deleverage and patch their balance sheets. Household wealth has slipped $14 trillion since the crisis began. Home equity has dropped to 41% (a new low) and joblessness is on the rise. By 2011, Duetsche Bank AG predicts that 48 percent of all homeowners with a mortgage will be underwater. As the equity position of homeowners deteriorates, banks will further tighten credit and foreclosures will mushroom.
The executive board of the IMF does not share Wall Street's rosy view of the future, which is why it issued a memo that stated:
"Directors observed that the crisis will have important implications for the role of the United States in the global economy. The U.S. consumer is unlikely to play the role of global “buyer of last resort”— other regions will need to play an increased role in supporting global growth."
The United States will not be the emerge as the center of global demand following the recession. Those days are over. The world is changing and the US role is getting smaller. As US markets become less attractive to foreign exporters, the dollar will lose its position as the world's reserve currency. As goes the dollar, so goes the empire. Want some advice: Learn Mandarin.
SAGGING EMPLOYMENT: A "no new jobs" recovery
July's employment numbers came in better than expected (negative 247,000) lowering total unemployment from 9.5% to 9.4%. That's good. Things are getting worse at a slower pace. What's striking about the BLS report is that there's no jobs-surge in any sector of the economy. No signs of life. Outsourcing and offshoring are ongoing, and downsizing is the new path to profitability. Businesses everywhere are anticipating weaker demand. The jobs report is a one-off event; a lull in the storm before the layoffs resume.
Unemployment is rising, wages are falling and credit is contracting. In other words, the system is working exactly as designed. All the money is flowing upwards to the gangsters at the top. Here's an excerpt from a recent Don Monkerud article that sums it all up:
"During eight years of the Bush Administration, the 400 richest Americans, who now own more than the bottom 150 million Americans, increased their net worth by $700 billion. In 2005, the top one percent claimed 22 percent of the national income, while the top ten percent took half of the total income, the largest share since 1928
Over 40 percent of GNP comes from Fortune 500 companies. According to the World Institute for Development Economics Research, the 500 largest conglomerates in the U.S. "control over two-thirds of the business resources, employ two-thirds of the industrial workers, account for 60 percent of the sales, and collect over 70 percent of the profits."
... In 1955, IRS records indicated the 400 richest people in the country were worth an average $12.6 million, adjusted for inflation. In 2006, the 400 richest increased their average to $263 million, representing an epochal shift of wealth upward in the U.S." "Wealth Inequality destroys US Ideals"
Working people are not being crushed by accident, but according to plan. It is the way the system is supposed to work. Bernanke knows that sustained demand requires higher wages and a vital middle class. But what does he care. He's not a public servant. He works for the banks. That's why the Fed's monetary policies reflect the goals of the investor class. Bubblenomics is not the way to a strong/sustainable economy, but it is an effective tool for shifting wealth from one class to another. The Fed's job is to facilitate that objective, which is why the economy is headed for the rocks.
The free market is a sham to conceal the crimes of the rich. Read Taibbi. Read Marx. Karl, not Groucho.
The financial meltdown is the logical outcome of the Fed's monetary policies. That's why it's a mistake to call the current slump a "recession". It's not. It's a planned demolition.