Friday, August 26, 2011

The Buffett Bailout

For those who haven't seen it already, Berkshire Hathaway agreed to invest $5 billion in Bank of America this morning. The pop in stocks lasted all of 30 minutes.

But I wanted to discuss the last Buffett Bailout - of Goldman and what it may portend. My operating thesis is that WB has morphed into a completely political creature and will only make big, publicized investments for propaganda purposes. That certainly was the case with GS in 2008.

But like any actor, he has to receive something in return for the use of his name and image. That something is a political guarantee for his "investment" and the history of 2008 supports this. Buffett's deal with Goldman was announced before the US market opened on September 23, 2008. But behind the scenes a lot of political moves were being made that he obviously knew about but few others did at the time.

The Fed of course was involved. Over the next few days (through 9/29) they established or increased swaplines with a large number of foreign central banks. In effect they lent out $360 billion to foreign banks. The FDIC closed Wachovia and WaMu - pushing them to merge into the already bloated and insolvent Citibank and JP Morgan respectively. Wells ultimately outbid Citi for Wachovia. The Treasury moved to guarantee all money market funds and the TARP bailout was cooked up as a bill and submitted to the House over the weekend prior to initial rejection on the 29th.

The Bottom Line
My point is this. Last time Buffett was part of a full-court press designed to fool people into investing their earned money right along side his borrowed bank credit. Every lever was pulled by Wall Street and the Government in order to "restore confidence" and as the price of his participation, Buffett was given the privilege of front running virtually every central bank and government policy change.

I expect this time will be no different. The Fed is likely to announce something desperate and stupid tomorrow morning. It will likely be accompanied by something out of the Treasury and/or FDIC shortly thereafter if the Fed move proves insufficient to pump asset prices higher and bail out Warren after he stuck his neck out financially for favorable propaganda effect.

Of course the bad news if you're a bull is that it didn't work in 2008 despite truly extreme measures. Stocks, after a short sharp bounce continued to fall for another 6 months and housing prices merely rebounded slightly before resuming their decline. In 2008, stocks had already been falling for a year and had nearly been cut in half before they got that desperate. This time, we are 3.5 months past the rebound high and six weeks from the secondary peak. We are also only 15% off those highs - not 45% like in 2008.

There is probably a trading opportunity on the long side for the next week or two but I'm not going to get greedy or stupid. History indicates that Buffett is likely front-running SOMETHING here. But it sure as hell isn't fundamentals.

Wednesday, August 17, 2011

That Seventies Show

There is a serious situation brewing that few people are talking about. This absolutely required a blog update.

One of the most dramatic features of the economic landscape during the 1970s was the disruption of the Oil Shock. Today, people are misled to believe that this was THE cause of inflation in that disastrous decade but that is a long way from the truth. In reality, it was more of a reaction to inflation. LBJ's creation of the modern welfare state combined with his escalation in Vietnam put the US on the path of permanent debt.

Accelerating inflation rapidly ensued for nearly a decade had already resulted in cumulative dollar inflation of over 50% before the Arab Oil Embargo and overnight tripling of prices. OPEC was using their market power and leverage to compensate for the falling value of the dollar and to get ahead of the galloping inflation our government and central bank had created. They noticed that they were being robbed via currency debasement and were in a position to do something about it because they controlled a large chunk of the oil export trade.

Unfortunately, we may be about to see history rhyme if not repeat in the near future. The effects could be extremely serious, with social consequences much greater than in 1974. And it could all be triggered by one medium-sized Southeast Asian nation that few people focus on when looking at economics. That nation is Thailand and the critical commodity that will be impacted is rice.

The likely result arises from the politics of inflation. Thailand's exports are priced in dollars and the severe erosion in value of the dollars earned has created pressure to increase income to revive living standards damaged by inflation. Because Thailand is the largest rice exporter by far in a tight market, they are in a position to demand higher prices - just as OPEC was in 1973-74. The current ruling party in Thailand is committed to increasing the income of farmers and is pursuing policies to control the rice supply and push up prices. From Bloomberg:

Yingluck has said the government will buy unmilled grain from farmers at 15,000 baht ($502) a ton at harvest in November, above current market rates of 9,900 baht. With Thailand the world’s biggest exporter, that may raise rice prices across a region that accounts for 87 percent of global consumption. The leader presented her economic policies to Cabinet yesterday and is scheduled to announce them publicly by Aug. 24.

Food makes up more than 30 percent of inflation indexes on average in Asia, according to Rabobank Groep NV. The weighting of rice in consumer-price indexes varies from 9.4 percent in the Philippines, 4.7 percent in Indonesia and 2.9 percent in Thailand, according to Bank of America.

Collateral Damage
The sad irony is that the people most affected by this will be innocent bystanders. The western central banks most responsible for currency debasement will hardly even notice. Few people in the West will be impacted at all. The people who will feel the pain will be Asian city dwellers. Middle and lower class urbanites will be especially hard hit. There will be a partial offsetting benefit in rising incomes for rice farmers but the disruption from shifting so much money from urban consumers is sure to trigger political unrest and likely a great deal of violence as well.

The numbers suggest a 50% increase in rice prices if the official Thai government pricing dictates to the world export market. This seems likely to us since they account for over a third of all rice exports nearly every year. With rice in short supply already, it is doubtful that importers will be able to refuse to buy at the higher price for very long. Because of rice consumption patterns, the effect will be overwhelmingly confined to Asia (85% of world consumption) and North Africa. As if those areas needed more economic pressure place upon them.

Once the Asian nations understand the full consequences of this move, the drive to move their economies away from the dollar should accelerate. With the dollar as the global reserve currency, the Fed is able to inflict widespread damage with its irresponsible policies. It appears the casualties in this round will be overwhelmingly Asian. That will increase the urgency to find alternatives to a dollar that is being sabotaged at the whim of Ben Bernanke.

Saturday, March 26, 2011

Catalyst for Jawboning

Over the last several days, the Fed has trotted out multiple spokesmen to suggest there might not be another round of trash credit creation (quantitative easing). The Dallas Fed's Fisher came out on Tuesday and suggested the program should not be extended when it ends in June and that things may already have gone too far. Lockhart of Atlanta stated "it's a high bar" in response to questions about QE3. Minneapolis' Korcherlakota stated the economy would have to "worsen materially" to extend the bond market manipulation. Finally, Plosser of the Philadelphia Fed recommended not merely stopping or even reversing the bond buying but also raising interest rates.

The central bank should set a pace for selling its mortgage and Treasury holdings in conjunction with raising interest rates, Plosser said today in a speech in New York. He suggested selling $125 billion for every 0.25 percentage-point rise in the benchmark rate to almost eliminate $1.5 trillion in bank reserves.
So why is the Fed so concerned suddenly after abusing their authority in blatant fashion for more than two years? Clearly they don't care about inflation - having inflicted a tripling of oil prices, a doubling of most grains and even worse in some commodities upon the world. It would seem that they are concerned that people are catching on to what they are doing and starting to point the finger in the right direction. So now they need to very publicly posture as "inflation fighters" until people's attention wavers. And the spotlight is definitely turning their way. As the Financial Times reports:

The finger of blame is increasingly pointing toward central banks and the US Federal Reserve in particular. By printing money through quantitative easing, there are supposedly more dollars, yen and pounds chasing the same number of Beefy Crunch Burritos. Fed chairman Ben Bernanke actually was asked during a speaking engagement last month whether the central bank was culpable for the revolution in Egypt.

“I think it’s entirely unfair to attribute excess demand pressures in emerging markets to US monetary policy because emerging markets have all the tools they need to address excess demand in those countries,” said the clearly annoyed banker.

But an increasingly common view is that, with the very best intentions, he is at fault. Critics regularly cite the words of Milton Friedman, who said that “inflation is always and everywhere a monetary phenomenon”.
Essentially, the Bernak is standing over the body with a bloody knife in his hands and the lights have just turned on. He seems determined to brazen it out and has sent out his minions to talk about all of the wonderful things he's done and will do if we just leave him alone with his power. This is all an attempt to distract attention for the Fed's culpability in the destruction of purchasing power worldwide.

It is all about perception. That is why the Fed cares about inflation expectations, even while deliberately inflicting inflation on the economy. They can more effectively steal the value of your savings and income if you don't know what is going on. That job becomes much harder when the population starts to adjust their thinking and behavior to account for the destructive acts of the Fed. It is so important to prevent that change in thought and deed that Paul Volcker once raised short-term interest rates above 15% to prevent it.

With the spotlight now focused firmly on the Fed, this weeks' jawboning is just the first act of their attempt to change the subject. If that doesn't work, they might actually be forced to DO something. In particular they will need to act to stymie commodity speculation - which is the portion of the iceberg that everyone can see, as it affects the daily life of nearly everyone. While they are also likely to attempt to prop up the stock market, it will be tough to do both at the same time since commodity producers and related firms have been a key driver of the new equity bubble.

With private lending in the US essentially dead, the government is the sole source of credit growth right now. If the debt limit interferes with further bubble finance at the same time as the Fed is forced to try and look responsible, the speculative markets could be in for a rough ride indeed.

Friday, March 25, 2011

Federal Debt and the Bank of Timmy

There has been much breathless discussion lately surrounding the national debt ceiling as total government debt approaches the legal limit. Treasury Secretary Timothy Geithner said there was "no alternative" and threatened Congress with unspecified "catastrophic" consequences if the limit was not increased. Of course, he is merely following in the tradition of terroristic threats by corrupt Treasury officials.

But just as the implied threats of martial law were used by Henry Paulson as cover for one of the biggest thefts in history, we must now ask what lurks behind the current spate of threats out of Treasury? Paulson lied about what the TARP was to be used for - which is why he demanded immunity in advance. Geithner is lying about the need for an immediate increase in the debt limit. What is being hidden is many activities that aid speculators and bureaucrats that will have to end if the limit stays in place.

In the real world there is a problem that a lot of money is being spent that has nothing to do with the operations of the federal government. This can be seen clearly in the recent announcement that the Treasury will be selling off some of its $142 billion of MBS (mortgage backed securities). There really is no legitimate function of government that relates to manipulating the price of bonds. It's good that they are looking to get rid of them but there is no reason to have them in the first place other than to overpay to help sellers and also to make continuing holders look more solvent by deliberately distorting the "market" price.

Then there are the loans which Treasury has extended to the states to cover their own spending. The state unemployment funds are in hock to Washington for $46.3 billion as of March 23. This is problematic in that it undermines the constitutional requirements that many states must balance their budget every year. It also undermines the ability of the states to function as sovereign entities when they are financially so beholden to the central government. Thus it is a direct attack on the our Federal system of government.

Secretary Tim Geithner is not running a Treasury Department. He is in fact running a bank under the aegis of the federal government and Congress needs to keep that in mind as he goes begging them for more money. Treasury should not be in the business of lending money to the states or of buying private market debt. Those are functions for commercial banks and bond markets. Worse still, those banking functions have been performed using the credit of the American People. If Geithner was not playing these games, the Treasury would have another $190 billion in borrowing authority remaining.

Any increase in the debt limit should be conditional on the Treasury ceasing all interference in state finances and public financial markets.

Saturday, March 19, 2011

Panic Room

We will be breaking from our normal practice of commenting on economic issues to address something that is bigger and more important today. That is growing panic over radiation from Japan. Trace levels of radioisotopes have been detected in water and food near the Fukushima plant site. In one case, it exeeded the legal limits so if you are in Japan, you should take some precautions - and especially so in Northern Japan. The governments involved have no one to blame but themselves since they have destroyed their own credibility and many people won't believe them even when they tell the truth. As of today, the truth is this:

There is no threat of radiation in North America and with a couple tiny of exceptions, there is no measurable increase above background levels.

One of the sources I see quoted often by the panic-mongers is Radnet - a data gathering program of the EPA. But most people have no idea what the data means and there are many problems with the data itself. The most serious problems with the Radnet data are as follows:

1) Collection is by volunteers and by agencies that often specialize in other things. For instance, most of the California data is gathered by regiona agencies like the Bay Area Air Quality Management District. BAAQMD certainly knows what it is doing with regard to routine air pollution issues but they are hardly specialists in radiation exposure.

2) Inconsistency of the data due to the varied and non-specialist nature of the data gatherers. The data should be comparable over time at any given location but may not be comparable between different locations gathered with varying practices.

3) Timeliness is weak. The typical collection method is to use air filters to gather particulate matter and then apply a radiation detector after a 5-hour field deployment period.

4) The data is difficult to interpret. Because of we do not know with certainty the exact equipment used to measure beta and gamma exposure at a given location, we cannot be certain what conversion factor should be used for CPM to millirems or milliseiverts.

Also, the gamma exposure is divided into energy ranges. Due to the normal slope, we can feel confident that the lower ranges are lower-energy (longer wavelength) gamma rays. This is a typical pattern for background radiation. In fact, many of the less energetic "gamma rays" detected by a typical geiger counter are not technically gamma rays at all. Quite often the detection threshold for a geiger is 20 kEv or less - at a wavelength more associated with X-rays so the lower bands of gamma reported by Radnet are actually mostly X-rays. Even so, I cannot locate a chart showing the frequency or wavelength with which each gamma energy range is associated.

Nevertheless, Radnet can be a valuable tool to measure changes over time in a single location. If better data were not available, I would be forced to use it for other purposes as well. Fortunately, we have something run by people who are focused on radiation and the only real weakness is that the network is only regional.

The Department of Energy and the Desert Research Institute maintain a network of radiation monitoring stations across Nevada and western Utah known as the Community Environmental Monitoring program. The explicit purpose of CEMP is to monitor sites downwind of the underground nuclear test site in Nevada. Thus, CEMP is "focused like a laser" on radiation. Most stations update every 10 minutes and the rest do so hourly.

The data is comparable between stations and presented in an easily analyzed format. Exposure dosages are measured in microrems per hour (uR/hr) and measured constantly. The only downside is that only gamma radiation is measured, not beta but this is not a severe drawback in my opinion. There is even a tab on the display for each monitoring station that allows you to display the data from the past week in graphical format.

I checked a sampling of the monitoring stations and all of them showed gamma radiation steady as a rock for the past week. There is NO EVIDENCE of any increase in ambient radiation in Nevada or Utah at least.

The website can be found here:

I want everyone to be safe and informed. Don't panic out of ignornace. If the data call for you to take precautions you should absolutely do so but rationally and based on facts. Good luck.

--- dataSlave

Friday, February 4, 2011


Obviously there is a pretty bad discrepancy between those numbers in this morning's edition of blowing sunshine up your skirt from the Ministry of Truth.

current employment report

Given the size of the country, it SHOULD take 600k jobs to move the rate that much so obviously there's a problem here. How did this happen? Dig a bit deeper and you'll see that they simply defined 504k out of the labor force from December to January and rounding did the rest. Wave a wand and define those people out of existence. If they don't exist, they can't be unemployed now can they?

If you look at the chart, you'll see that they did the same thing in December from November. In that case only 260k unemployed people disappeared from the statistics. There is a clear and systemic effort to deceive the public about the state of the economy and it's getting worse.

latest household data

But there's is an even bigger deception in the numbers that helps to reveal the systemic fraud of the numbers. Last month the B(L)S claimed that their establishment survey measured 130,712k employed:

December 2010 employment report

But THIS month they show 130,265k employed and claim that it is an increase of 36k, rather than the massive drop of 447k that it actually is. They did this by altering history. Now, the record shows that 130,229k were working in December and the rest of those people have disappeared down the memory hole. It wouldn't be a concern if the revisions were random but the pattern is very consistent - almost perfectly so. Report good news now and back away later. This is the same game played with corporate earnings to deceive investors. Loudly trumpet "good" current results. Then quietly go back later and revise them down. Then use the revised numbers to show "growth" with the next fraudulent set of numbers.

The B(L)S calls this rebasing. Corporations call it a "one time charge" but it's the same scam. The objective in both cases is to mislead the public. It's nothing more than fraud with the goal of getting the public to buy the hopium of the confidence game. That's why I think that freebasing is a more appropriate name.

Friday, January 28, 2011

The Permanent Bailout

Milton Friedman once said that "Nothing is so permanent as a temporary government program." The central banks, as rogue private bodies exercising governmental powers a proving that axiom true yet again. The Federal Reserve claimed yesterday that we are in a recovery but none of their emergency programs can be rolled back.

... the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011.

Meanwhile, over in Europe, there is growing recognition that the bailouts have failed and that the money isn't going to be paid back. Instead of actually admitting anything of the sort, the ECB is now talking about effectively making the loans permanent. Sure, they SAY it's going to be a 30 year loan instead of 3 years but if Ireland and Greece can't pay the money back now and continue to run deficits, what makes anyone think they'll be in a better position to pay it back later?

The question sort of answers itself. The bailouts are throwing good money after bad as every one of these banks is so far underwater they can't even see the surface from here. Without honest accounting, we have no idea just how deep that hole is but it certainly looks like a bottomless pit from here. It's been stunningly clear for a while now that so much bad debt needed to be purged from the system but the central and TBTF banks have made every effort to PREVENT such a purge.

(Wall) Street Corner Hustle
The latest brainstorm from the ECB is exactly the same sort of shell game. Greece and Ireland can't pay the money back and they know it. Instead of acknowledging reality, we'll just convert it into a long-term "loan" so they don't have to pay it back within the term and maybe even the lifetime of the people making the decisions. It can't be paid back and it won't be paid back but maybe they can keep up the lies for a little while longer.

This is simply more Extend and Pretend so that they can keep trying to fool people into impoverishing themselves by overspending and taking on too much debt to keep up the illusion. That is the meaning of "prosperity" in a keynesian ponzi economy. You use inflation to convince people to eat their seed corn, making them feel better - for a little while. This is why central bankers place so much emphasis on "confidence" - in practical terms that measures the willingness of the population to deplete their capital and eat their seed corn due to the inflationary deception of the central banks.

The UDB gave us the biggest illusion of false prosperity the world has ever seen. The bankers are now trying to cover their tracks and delay the inevitable hoping you'll forget their complicity. But the best simple summation can be found from the creators of South Park:

Friday, January 7, 2011

The Law

Here at Financial Jenga we have hoped, even prayed for the law to be enforced for the last couple of years. Yet the fraud has raged unchecked and if anything grown worse. Banks have mass filed false affidavits to fraudulently seize houses through the foreclosure process and then said "oopps, we made a technical paperwork error" when caught. At first they got away with it. They HAVE seized houses through this procedure when there was no mortgage and no lien at all.

The Fed has gone and done things far beyond the scope of authority given to it by Congress - like using our money to prop up the investment banks and the stock fraud they are running. They are given the power to buy exactly two thing - bonds carrying the full guarantee of the US government and short-term loans for planting of crops. Buying junk bonds containing mortgages violates both the letter and the spirit of their charter. Buying stocks is so far beyond their legal powers that someone should be in prison and probably a lot of someones.

No one has shown much sign of really stopping the Fed yet but the Massachusetts Supreme Judicial Court landed a major blow for the law today by confirming a lower court ruling that nullified two foreclosures because they plaintiffs couldn't show they owned the property. In both cases, "robosigned" affidavits were introduced as proof of ownership and later shown to be without merit.

The state Supreme Judicial Court today upheld a judge’s decision saying two foreclosures were invalid because the banks didn’t prove they owned the mortgages, which he said were improperly transferred into two mortgage-backed trusts. As reported by

“We agree with the judge that the plaintiffs, who were not the original mortgagees, failed to make the required showing that they were the holders of the mortgages at the time of foreclosure,” Justice Ralph D. Gants wrote.

While there have been many similar rulings across the country, this is the first such decision by a state supreme court. And since property law is still properly the jurisdiction of the states, this decision is final as far as Massachusetts is concerned. Hopefully they will follow up with prosecutions for the mass of fraud represented by those false affidavits.

And this entire financial crisis is bound up with a struggle to centralize political power in Washington. One of the key enablers of the late-bubble madness was the effective nullification of state lending regulations. This was done in 2004 when the Office of Comptroller of the Currency used
federal preemption to overrule state laws against predatory lending. It was one of the worst moments of the Bush Administration:

The Office of the Comptroller of the Currency Feb. 21 published for comment a ruling that Georgia's predatory lending law, the Georgia Fair Lending Act (GFLA), is preempted for national banks.

At the same time, it issued two advisory letters to national banks to clarify its expectations for banks to avoid involvement with "predatory" lending practices.

So basically, the OCC's action wiped out state legal protections against predatory lending. And they substituted a finger wagging "don't do it" with a nudge and a wink to just go ahead. And of course the very worst mortgage paper was written over the next three years after the change. We have documented the results of those no-doc, alt-A and option ARM loans here from the very beginning. But those abusive mortgages would not have been possible without Washington stepping in to remove the legal shield that states provided their citizens.