Weekly Update 27 June 2009

Curse the Darkness or Light a Candle?

These are indeed interesting times we live in, and we must be careful not to be people who complain yet do nothing to improve the world in which we live. There is no glory in saying "I told you so" when your dire predictions of doom prove to have been accurate. If you see trouble coming, don't merely talk about it - or worse, complain about it - do something constructive. Light a candle.

This week I finally started reading The Sovereign Individual: Mastering the Transition to the Information Age. It's been on my "must read" list for several years, but I didn't get to it until just today. The authors pinpoint many of the challenges facing our modern world, including the collapse of the economy, but their message is optimistic, not "gloom and doom". They consider the nation-state a relic of the industrial age and predict the end of nation-states as viable political entities. To put that into terms we can understand, they predict that the Government of The United States of America will cease to have political authority over Americans. What it does not mean is "the end of America".

As I was telling a friend this week, it is important that we make a clear distinction between the government and our country. The US government is a dying pig that makes promises it cannot keep and bullies people around. America is a country, an idea and a people who share that idea and that geography. America can get along just fine without that ravenous, lying, violent government. In fact, we will get along a lot better without it. The transition will cause a lot of pain and fear, but we can take hope knowing that the end state is going to be a lot better.

With that in mind, let's see what's happened in the world this week.

Headlines of the Week

What it is: Goldman-Sachs to pay record bonuses Goldman-Sachs told employees this week to expect the biggest bonuses ever.
Why it matters: When the government gave AIG some $80 billion late last year to "save them", AIG turned right around and sent $15 billion of that money to Goldman-Sachs. So your tax money is paying bonuses to the richest, most corrupt bankers on the planet. Think about that Goldman-Sachs banker sipping rare scotch on the porch of his vacation home in the Hamptons when you are trying to figure out how to make your mortgage payment.
What it means to the world: GS continues to make sure everyone else pays for their mistakes. If you or I had sold a bunch of worthless bonds to investors and then bought a bunch of worthless credit- default swaps on those bonds from AIG, we would first go broke and then go to jail when the government found out we had committed fraud. Not Goldman-Sachs though.
What it means to you: Your tax bill will be higher for years to come so that a handful of GS bankers can keep their vacation homes in the Hamptons. Remember that when the government fails, we won't have to put up with this kind of crap anymore.

What it is: Riots in CHina After months of calm, there have recently been a spate of riots being reported in the Chinese media, or on the internet. Is this because media restrictions have been lifted, allowing news of riots to spread, or has there been a genuine increase in social tension in the countryside? It is impossible to tell. China no longer publishes the figures for how many riots take place each year, but most people put the figure at around 80,000 and the vast majority go totally unnoticed.

Why it matters: The nattering boobs of the talking-head media machine are convinced that China will recover from the recession first and then lead the world into a brighter consumer future. But China is not recovering and in fact has deep, intractable issues that must be resolved before any sort of recovery or growth can occur.

What it means to the world: There are several pieces to this puzzle:

• China has millions of people who used to be peasants, then achieved middle class status, and are now out of work - people who will not willingly accept peasant status now. How you gonna keep 'em down on the farm (after they've seen Paree)
• Political leaders always try to divert attention from their failings.
• War is the most potent diversion there is.
• China has a huge army.
• China has a huge imbalance between the number of young men and marriageable women.

Put the pieces together.

What it means to you: Do not plan on China pulling the US economy out of its slump. It's not gonna happen. You need to make plans to survive without the help of the Chinese dragon.

What it is: China - Economic Catastrophe Unfolding This falls into the category of "Important" as opposed to "Urgent" news. I urge you to read this entire article.

China has a real estate bubble just like we do, and a stock market bubble, just like we did, and an unwillingness to book losses, just like Japan did. In addition, they have a huge population of peasants who moved to the cities during the boom, (as the article says, "the largest migration of a population in human history"), and now they cannot find jobs. Exports are plummeting, the government is lying about the numbers, and - as per the previous story - riots are breaking out all over the country.

Why it matters: China is a tinderbox and we'd better pray that there are no budding Lenins, Stalins, Hitlers or Maos whiling away their time in a Chinese prison right now.

What it is: Insider Selling is the Fastest in 2 Years The people inside the largest publicly held companies in the us - people with intimate knowledge of their companies' propsects for the future, believe that the stock prices in their companies are going down, not up.
Why it matters: Since March 6th, the S&P500 index of the 500 largest companies in America has risen by more than 40%, from a low of 666 to a high of about 950. That means that the "dumb money" is driving this rally. The smart money is selling in anticipation of a fall.
What it means to the world: This stock market rally is a classic bear-market rally that traps the unsuspecting and destroys them. It is not a new bull market.
What it means to you: If you hold any long positions in the market, make sure you are either hedged or have stop-loss orders in place to protect your profits when the market falls.

What it is: Some additional updates on the bearer bonds saga:

• This was either the biggest smuggling operation in history or the biggest counterfeiting operation in history. Either way, why did the Italian governments release the two men caught with the bonds?
• One of the quickest ways to sabotage and usher in the death of a currency is to raise legitimate questions about its ability to withstand counterfeiting efforts. Prove that counterfeiting is not only possible but highly likely, and the world’s confidence in the sabotaged currency will undoubtedly plummet. This certainly has the "smell" of an attack against the US dollar as the world's reserve currency, and yet why would a counterfeiter be skilled enough to create almost perfect $500 million bearer bonds and then create a counterfeit of a $1 billion bearer bond that "never existed"?
• What organization would make nearly perfect counterfeits of bonds they could never hope to cash?

Nothing about this story makes sense, other than this: worldwide confidence in the ability of the US government to pay its debts is growing increasingly shaky.

Till next week: Light a candle!

Weekly Update 20 June 2009

This week is a little less eventful than last. We have no update on the rumored Federal Government Trading account at State Street, but we're keeping an eye on it. The government is saying that the $134 billion in bonds recovered by Italian border police last week were fakes, but they let the two guys go. Nothing about this story makes any sense - nothing. We may never get to the bottom of this, but I will point out that the men carried Japanese passports and that $134B is about 1/4th of Japan's holding of US debt. Draw your own conclusions.

This week's stories focus on the continuing effort by the media and the government to rob from us and enslave us. Enjoy:

Headlines of the Week
ABC TURNS PROGRAMMING OVER TO OBAMA; NEWS TO BE ANCHORED FROM INSIDE WHITE HOUSE
What It Is: ABC news is giving the Obama administration an hour of free air time to promote its Health Care plan.
Why It Matters: ABC and the White House are colluding to violate the FCC fairness doctrine, (but don't expect the FCC to do anything about it.)
What It Means To The World: The paper-thin divide between the government and the media is now officially shredded. Regardless of what you believe about nationalized health care, this cooperation between a government-protected and allegedly non-partisan broadcast company and the Executive Branch of government is nothing less than state-sponsored propoganda.
What It Means to You: It means nothing if you don't watch or if you watch and do nothing. But if you write ABC, their owners The Disney Corporation and their advertisers and declare your intent to boycott them all unless they give equal time to opposing viewpoints, it will mean a great deal.

What It Is: NY Times story from 2002 confirms that housing bubble was intentional
Why It Matters: The "Official Story" about the housing bubble and subsequent collapse is that "No one could have predicted it." This is patently false, as many people predicted it, among them Karl Denninger, Mish Shedlock, Nouriel Roubini and Peter Schiff. I'm sure there are others, but those are the four I know about who sounded the warning as early as 2005
What It Means To The World: The people currently in charge of "fixing" the economic mess are the same people who not only created it, but created it intentionally. This is not to say they intended to crash the world economy, only that they intentionally did all the stupid, illegal and immoral things that created the crash. Therefore, it is safe to assume that whatever they do, they will not be able to fix the problem.
What It Means to You: You should stop believing anything said by Hank Paulson, Ben Bernanke, Alan Greenspan, Timothy Geithner or anyone who is now or ever was employed by Goldman Sachs. These are the criminals who have consistently been wrong about everything, but they get rich anyway. They are proven to be liars of the worse sort and it is foolhardy to believe a liar.

What It Is: Chinese Analysts Pinpoints the Achilles Heel in the Economic Recovery
Why It Matters: He makes several important points:
1. The financial industry is a disproportionate size compared to the rest of the economy.
2. The financial industry salaries are several times higher than comparable positions in other industry
3. The finanical press has no incentive to be truthful in its reporting, and great incentive to always be bullish.
What It Means to the World: The talk of "green shoots" in the economic recovery is mere propaganda. The economy is not improving.
What It Means to You: Two things - first, this should confirm for you that you have other sources of economic news you can trust besides the Federal Reserve, the Treasury Department and their lapdogs in the financial press. Second, do NOT make financial commitments based on the erroneous belief that the economy is improving. There is a lot more pain to come.

What It Is: Moody's Warns of Multi-Level Downgrade of California Debt, California Aid Request Turned Down by US (two different stories)
Why It Matters: California's economy is the eighth largest in the world. This downgrade means that California will have to pay much higher interest rates to borrow money than it has had to in the past. The Federal government is saying they won't give California money, which means the legislature will have to get serious about making cuts to services. No one seriously believe's California has any chance of repaying its debt, but a downgrade by Moody's makes that opinion official.
What It Means to the World: All this talk of green shoots is baloney. California is essentially bankrupt. The federal government will undoubtedly loan the state more money, but it won't fix the problem anymore than all the other bailout programs have failed to fix the underlying problem.
What It Means to You: Expect interest rates to continue to rise. Make sure you know whether or not you hold any California state government bonds in your portfolio. A downgrade will hurt you.

And finally, in the category of "Interesting and a Little BBit Alarming" is this story about tapping your cellphone.

As always, if you don't want to get these updates anymore, just drop me a note, but if you DO like them, please pass them on.

Spot On Financial Analysis from a Chinese Analyst

This is some of the most succinct and compelling analysis I have seen yet. Here's the money quote:

"The Greenspan era has nurtured a vast financial sector. All the people in this business need something to do. Since they invest other people's money, they are biased toward bullish sentiment. Otherwise, if they say it's all bad, their investors will take back the money, and they will lose their jobs. Governments know that, and create noise to give them excuses to be bullish.

This institutional weakness has been a catastrophe for people who trust investment professionals. In the past two decades, equity investors have done worse than those who held U.S. market bonds, and who lost big in Japan and emerging markets in general. It is astonishing that a value-destroying industry has lasted so long. The greater irony is that salaries in this industry have been two to three times above what's paid in other sector."

Weekly Update 13 June 2009

Last year, 2008, I spent the months of March, April, May, June & July bombarding you with emails imploring you to bombard your congressman with phone calls, letters, faxes and emails. The reason for my alarm was the financial time-bomb that was ticking and that I hoped Congress would have the courage and foresight to defuse. In July, Congress ignored us and voted to gift $800 billion to "bail out" Fannie Mae and Freddie Mac. That was the point that I realized the game was over. The American government was no longer "of the people, by the people and for the people". We had told Congress - by a ratio of 300:1 - not to bail out Fannie Mae & Freddie Mac, and they ignored us. I could no longer ignore the reality that Congress was owned by the bankers.

I quit sending out updates at the point because I could not imagine wasting any more energy trying to get Congress to do the right thing. And I am glad I didn't because it would have been a waste of energy. Washington is owned by the bankers, and Washington does whatever the bankers say. I don't even feel a need to explain that assertion. If it is not obvious, then you are not paying attention.

That brings me to the substance of this letter.

As some of you know, I make my living as a trader. I'm involved in the markets all day, every day, and I spend most of my spare time in research, hoping to understand what is happening in the world that will affect my work. I love what I do. What I have recently begun to realize is that most of you do not have the time or the inclination to study what I study, and yet your lives are likely to be affected by the things I am discovering. For that reason, I have decided to do a weekly update of the news that I think is important for you to know and an analysis of why it is important. This is my view, my opinions, and is certainly subject to my own biases, so "Handle With Care".

I hope you enjoy it. If you don't want to get these updates, just drop me a line and I will remove you from the list. On the other hand, if you DO enjoy them, please let me know and always feel free to pass them along to others.

Headlines of the Week
Italian Border Patrol Confiscates $134 Billion
What It Is: Two men carrying Japanese passports tried to smuggle $134 billion in US Government Bonds into Switzerland from Italy. The US press has not reported this story. Conflicting reports on whether the bonds are real or counterfeit.
Why It Matters 1: $134B is an amount of money so large that only governments, the World Bank and the IMF would deal in those. If this is stolen, then what in the world is wrong with these governments or banks that they can't keep track of their investments? If it is not stolen, then why was it being smuggled into Switzerland?
Why It Matters 2: If they are counterfeit, it means that there are more counterfeit bonds out there, which could de-stabilize the already precarious bond market. If they are real, it means someone is trying to unload US Government bonds without selling them through the open market process, which could destabilize the already precarious bond market.
What It Means To The World: Big bond holders are worried that the US may default on its debt. Japan this week made a formal announcement that they are fully confident that the US will pay its debts. This is code for, "we are very worried about the US paying its debts."
What It Means to You: The cost of credit just took another body blow. If you are trying to buy or re-finance a house, the window to get a low-interest rate loan is closing fast. If you are trying to get a business loan, either for new credit or to roll over an existing loan, the cost of credit is going higher and higher. This is going to work against the government's attempt to goose the economy.

Government possibly interfering in the market via State Street
What It Is: An unsubstantiated report that the government has opened several private trading accounts with State Street Securities and is buying and selling securities through a single broker there.
Why It Matters: If true, it means the government is using government money to speculate in the market. Because of the nature of the account, the type of broker that State Street is and - most importantly - the amount of money the government has available to it, then the government is not merely speculating, it is directly influencing the market.
What It Means to the World: Nothing until substantiated, but could be very, very important if proven true.
What It Means to You: Nothing yet, but watch it.

Federal Reserve Transparency Act has 222 Sponsors
What It Is: A Ron Paul-sponsored bill to conduct a pricvate audit of the Federal Reserve.
Why It Matters: In theory, an audit of the Fed will show how their money is being used. The belief is that the Fed is violating its charter by buying and selling securities that are not 100% backed by the full faith and credit of the US government.
What It Means to the World: Nothing. The Congress will do whatever the bankers tell them to do. Even if this passes, nothing will change. Congress will not bite the hand that feeds it.
What It Means to You: You should learn to watch what the government does rather than listen to what they say. The government works hand-in-hand with the bankers. Ron Paul has his heart in the right place, and this makes for good political theatre, but Congress had the chance to do something meaningful last summer when we bombarded them with requests to not bail-out Fannie Mae & Freddie Mac. They instead obeyed their masters on Wall Street. Do not expect the government to do ANYTHING that harms the big bankers.

Government Overturns Contract Law in GM & Chrysler Bankruptcies
What It Is: The government ignored contract law when they compelled GM and Chrysler into bankruptcy. Senior debt holders who - under the terms of contract law - should have been first in line to be paid under the bankruptcy, were pushed to the back of the line and will get something like 17 cents on the dollar for their investment.
Why It Matters: The sanctity of private property and contracts is central to the functioning of a free society. This action by the government strikes at the heart of our free society. It also provides a disincentive for future investors to put their money into bonds for fear that the terms of the bond contract will be overthrown if the government deems it "necessary".
What It Means to the World: Investors will be far less likely to buy bonds issued by any company or municipality that has the slightest whiff of instability for fear that the government will simply ignore the law and trash the contract if they think it necessary. This will serve to drive the cost of credit higher, it will reduce the pool of available credit, and it will drive down the value of existing municipal and corporate debt.
What It Means to You: If you hold any sort of corporate or municipal bonds in your investment portfolio, you should find out exactly what those bonds are. If they are bonds backing any sort of entity that is at risk, you should consider moving into something less at risk of government intervention.

One Trillion Dollar Bill - Not news but funny

Almost Legendary Heist - Foiled!

Viva Italiana! Sometime in the last week, the Italian border patrol stopped a couple of Japanese nationals with $134 billion dollars in US Bearer Bonds trying to cross into Switzerland.

A hundred and thirty four BILLION!

If these are counterfeit, it's the greatest counterfeiting job in history. If they are real, then this is even bigger news.

Doncha wonder why this isn't being reported ANYWHERE in US papers of record like say, the New York Times, Washington Post or Wall Street Journal? (Bloomberg has a wee bit.)

Maybe the bankers and their lapdogs at Treasury are scared spitless about this. Maybe they should be.

The REAL Role of the Fed

Excellent article on what the Federal Reserve is really in business to do. Key point, "pay attention to what they do, not to what they say."

The Symphony Orchestra and the Remote Control

Proof that there are still magnificent musicians in the world - and proof that they know how to entertain.