Sun, Mar 23 2008
DEPRESSION FOR DUMMIES
Bank Rescues Means Exact Replication Of Great Depression
Elaine Meinel Supkis
Everyone at the very apex of the economic pyramid are celebrating the 'rescue' of Wall Street. Commodities are collapsing thanks to this 'rescue' mission run by the Fed. But cause and effect are harder to see than people expect. The underlying trade/debt problems, far from vanishing, are reaching a critical melt-down stage. Bernanke and his greedy friends all think they have prevented a descent in to a Great Depression II. Instead, the very actions they took to save their own status quo has triggered the exact same forces that created the Great Depression. This is because they misunderstand what the collapse of 1929 was all about: the bankruptcy of the Great Powers, Germany and England, due to excessive war debts which both were unable to pay when Wall Street loaded even more debts on top of that huge mountain of debts. Now we see the Federal Reserve trying to dump more debts on top of our mountain of war and speculative debts.
[Read the whole thing:]
From Futurecasts.com's excellent 'Great Depression' web page:
On September 15, 1930, the N.Y. Times editorialized:
"Everyone recognizes now that this is not a new economic era, in the sense that old-fashioned principles and penalties of economic law have been abolished. The new inventions in the way of manufacturing credit are seen to have been merely a novel way of repeating the very old practices of abuse of credit."
Abuse of credit: what is this, anyway? Traditional banking rules enforced by a central government which wishes to avoid massive lending bubbles/panics/depressions, the dreaded BPDs, sets rules for banks. One of the most useful rules is the one that prevents lending/holding ratios from dropping below a sensible limit. Banks have to attract some savings in order to lend. Now, in good times with stability and no bubbles, they are permitted to lend at a 10:1 ratio. Ten dollars can be lent on one dollar of savings. This rationalization of money via lending works in normal times. But when banks or QUASI banks such as investment/finance houses are allowed to do what Bear Stearns just did---lending on a 90-1 dollar ratio, it doesn't take much to trigger a complete collapse in any small downturn.
Years ago, I was very disgusted with the wild lending the 1% Fed rate triggered. I said, 'We now cannot afford even the smallest downturn.' Small changes in the direction of money flow or value of assets due to lack of lending ability can have tremendous effects. If the lending doesn't continue ever-faster, it could lead to a total collapse as everyone defaults on previous loans. This is true in all systems. Home buyers who put $0 down on houses have no capacity to sell if a market falls even 1% much less, 20%. Businesses that need ever-greater loans go bankrupt if they can't turn over their previous debts continuously.
Why did the Fed, unlike the dishonest Bank of Japan, raise interest rates in 2005 right at the peak of the lending frenzy?
They were behaving in the classic way: trying to stop a bubble. Of course, this bubble was launched when Greenspan dropped rates to a ridiculous level when the US went to war. The US needed to do this in order to run budget deficits far above even the high rates of previous Republican spend and spend administrations that ignored budget deficits. Running up an extra $4+ trillion in less than 6 years, cutting taxes and giving out money at 1%, this was a hyper-inflationary matrix. To fix this, the Fed in a panic, began to raise rates by 5% until it reached 6%. Of course, this caused all the lending frenzy games to come screeching to a halt. But not after terrible things happened: the entire financial system, increasingly offshore, ran off to the Bank of Japan. The bank was and still is, ignoring real inflation in Japan. The low rates enabled Japanese corporations to expand global market share, the weak yen due to this low rate and a high FOREX rate for holding dollars out of the markets, meant Japanese manufacturers were able to undersell and undercut everyone but fellow Asian nations like China that were doing the same.
So the 6% rate hikes had absolutely no effect on the big bankers and financiers who were generating massive loans. But it did hammer the US real estate market which is not global but internal. The collapse of this particular balloon triggered the meltdown in global finances. The housing bubbles in England and Europe were on the same plot line as the US markets. Now, they too, began their long collapse. Japan, in alarm at its own housing bubble, deliberately collapsed it by making its housing codes nearly impossible to follow. This way, they could keep the sub-inflation level interest rates that benefit the export industries.
So, despite a near-total collapse in banking in the G7 nations, Japan evaded the strictures of higher interest rates. Normally, higher rates trigger savings and recharges the banking industry's reserve accounts. Money ceases to flow to Wall Street or commodity speculation such as the rare metals markets like gold and platinum and instead, the money flows back into the banking system. Only this has been short-circuited by Japan. As the world, during 2006-2007, raised both reserve ratios and LIBOR interest rates, Japan defiantly refused despite obvious inflation. To kill this nascent inflation, Japan crushed worker compensation and killed its housing market, manually, not via rising interest rates.
So the 'carry trade' continued for two more fatal years. I must say, I stood alone for two years, hammering on all this. We cannot stop the economic destruction if we ignore what caused it. The carry trade enabled the banks and financiers to evade higher interest rates and continue lending! So the money supply continued to shoot upwards from 2006-2008. Only with the total collapse of the US housing markets across the board as the frantic Fed tried to kill inflationary Wall Street bubbles by raising rates, did this finally begin to hammer Wall Street and these carry trade maniacs in the banking system! Meanwhile, commodity inflation shot through the roof!
Commodities Drop, Rally in Dollar, Stocks Vindicate Bernanke
The biggest commodity collapse in at least five decades may signal Federal Reserve Chairman Ben S. Bernanke has revived confidence in U.S. financial firms.
The Standard & Poor's 500 Index posted its first weekly gain in a month, and the dollar leapt from its lowest level since 1973 after the Fed stepped in March 16 to rescue Bear Stearns Cos., the fifth-largest U.S. securities firm, and expanded its role as lender of last resort to embrace the biggest dealers in Treasury notes.
Investors who had poured money into gold, oil and corn, seeking a hedge against inflation and a weak dollar, sold commodities to raise cash or buy stocks. The Reuters/Jefferies CRB Index of 19 commodities tumbled 8.3 percent this week, the most since at least 1956, after touching a record on Feb. 29.
``Bernanke took care of the commodity bubble,'' said Ron Goodis, the retail trading director at Equidex Brokerage Group Inc. in Closter, New Jersey. ``Commodities are coming back to earth. The stock market looks OK, and Bernanke is starting to look a little better.''
Did commodities drop due to lower interest rates? ARE THEY NUTS? The lower the rates, the higher the ability to buy....except for in one case: when the lower rates are ONLY for bankers and financial houses! They are NOT passing this bonanza onwards to the masses of people seeking 1% loans to play speculative games. They are using these super-sub-inflationary loans to HOARD. They need this money to REPLACE LOST PROFITABLE LOANS THAT WENT BANKRUPT.
With this money in hand, they and only they, get these super-cheap loans. They HAVE to make money by turning the Fed Reserve loans into profits via lending at a HIGHER RATE to outsiders. Only outsiders need these 2% loans, too. The Fed gave everyone a great boost in 2003. But this time around, the entire boost will be confined to the con men of the biggest banks and financial companies. And they will boost the value of this by going to Japan. But ONLY if the yen drops vis a vis the dollar!
As I keep pointing out, many traitors here at home WANT unbalanced trade. They make money in many ways off of this mess. They WANT Japan to artificially weaken the yen and have 0.5% interest loans! They WANT Japan to play tricks! They make profits with this scheme. Even if it means destroying the US economy. So we are now in a new matrix, one that is twice as toxic as the old matrix.
We have a weak US dollar made stronger by hyper-holding by not only the Bank of Japan but by all of Europe! Europe is now dropping interest rates to catch up with the US dropping rates. Both Japan and Europe need to flood the US with more 'savings' via 'cheap loans' except the US can't soak up this money caused by our roaring trade deficit. The ONLY cure left for us today is to decrease our trade deficit by ceasing consumer buying. And this is happening, willy-nilly via rising CONSUMER interest rates and fees. The US consumer can't tap into 2% loans. We are increasingly forced into 30% lending traps. And the decline in housing values means we can't increase our mortgages eternally to fund our purchases of foreign imports. And this is the rock bottom problem: US consumers, hammered by lay offs, falling wages, rising health, food and energy costs, are unable to sustain the global trade system which focuses mainly on exports to the US consumer!
The $600 per American scheme hatched by our government is a frantic attempt at restarting the US consumer's consumption of foreign goods. But this can't work unless the commodities market is strangled. And it has been shot in the head. I can't say how, just yet. But I suspect the Wall Street gangs are behind this Tupac Shakur-style drive-by shooting. All I can say today is, something dark and fishy is going on and the gold buyers are going to be forced into insolvency. I warned them a month ago that the people running all our banking systems are aiming to destroy the gold market and the signal was, India and China were beginning to see their gold markets' sales turn from buying to selling off. Too much leveraged money flowed into gold markets as well as oil, etc. Now, the little buyers will be hammered by the Big Guys. Life is unfair. And these people doing this are always unfair. They get to keep all their loot no matter if markets go up or down. After all, they control all the levers of power!
Bloomberg:
Concern that the central bank would let inflation get out of control eased after the Fed cut its key interest rate by 0.75 percentage point on March 18, less than the reduction of at least 1 point that investors had expected.
``Clearly they've gotten some stability,'' said Keith Hembre, a former Fed researcher and chief economist at FAF Advisors Inc. in Minneapolis, which oversees more than $107 billion in assets. ``You have to stand back and say, for the time being, it looks to be a pretty successful combination of moves that have worked.''
This 'stability' is very unstable. This 'stability' is a weak yen/cheap Bank of Japan lending/cheap US Federal lending/high government debt accumulation/Wall Street bubble. I am astonished that a 10% drop in stocks could trigger total meltdown! But this is what happens when everyone is 'over-leveraged' which is smart talk for 'speculating using loans from the Bank of Japan.' Unfortunately, the world matrix has changed. The euro, not the dollar, is now the world's chief currency. The dollar is no longer plunging but this is due to market manipulation, not natural trading. The G7 central bankers are CONSPIRING to raise the value of the dollar. According to the IMF, countries with huge trade deficits are supposed to correct this via dropping the value of their currency. Japan broke this rule by having a very weak yen with RECORD trade SURPLUSES. The more they had surpluses, the weaker they made the yen. They hoped to keep this mal-adjusted system running as long as humanly possible. Ditto, China. The US couldn't drop the value of the dollar against either country due to them both buying our massive government war debts and also holding excess dollars in their FOREX funds. This has not been fixed at all, indeed, Japan recently redoubled parking US dollars in their FOREX reserves which shot up in the last year by over $300 billion. Our trade deficit with Japan is only $60 billion so this was far above that rate and is a signal that they are desperate to make their currency weak despite their huge trade advantage they already enjoy vis a vis the US.
So this stability is dearly bought: the only way the US can correct its trade deficit now is something we all should fear and dread. THE ONLY WAY TO BALANCE TRADE LEFT TO US IS DEPRESSION HERE IN THE USA.
Treasuries' Scarcity Triggers Repo Market Failures
Surging demand for U.S. Treasuries is causing failures to deliver or receive government debt in the $6.3 trillion a day market for borrowing and lending to climb to the highest level in almost four years.
Failures, an indication of scarcity, surged to $1.795 trillion in the week ended March 5, the highest since May 2004, and up from $374 billion the prior week. They have averaged $493.4 billion a week this year, compared with $359.6 billion over the last five years and $168.8 billion back through July 1990, according to Federal Reserve Bank of New York data.
Investors seeking the safety of government debt amid the loss of confidence in credit markets pushed rates on three-month bills today to 0.387 percent, the lowest level since 1954. Institutions worldwide have reported $195 billion in writedowns and losses related to subprime mortgages and collateralized debt obligations since the start of 2007, making firms reluctant to hold anything but Treasuries as collateral on loans.
``It shows you the kind of anxieties that are going on and the keen demand for Treasuries,'' said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co. in New York. ``The rise in fails tells us about the inability of dealers to obtain Treasury collateral.''
The bond markets are still malfunctioning. The banking crisis, far from being over, is entering a new stage. This is like watching a ship flounder and sink. The corrections are all making things worse. It is just amazing to me to see how attempts at bailing out the same men and women who put us into hazard is being cheered onwards even as it is painfully obvious that this is totally wrong. Resetting the status quo is doomed to failure since it doesn't address the core problems: the US budget and trade deficits. And moving even more money to offshore pirate coves which is what is happening today, is making both worse!
Goldman Will Reduce Capital Markets Workforce, N.Y. Post Says
Goldman Sachs Group Inc. plans to dismiss as much as 15 percent of its workforce in the capital markets and related support departments, the New York Post reported, citing unidentified people familiar with the matter.
The reductions are likely to come in the division that includes investment banking, debt and equity underwriting and merger advice, the newspaper said. Employees were first notified about the staff cuts on Monday, the Post reported.
Note that layoffs are increasing. These are no longer blue collar jobs. This is the cream of the white collar crop. How can housing rise in value if the people who are at the top of the buying spectrum can't buy due to job insecurity? And banks can't lend to people who might be laid off! This is the logic of our economic system. Banks can't lend easily in downturns due to layoffs! This is why we need solvent governments during GOOD times to have the capacity to take on huge debts in BAD times and thus, keep people employed and prevent a depressionary cycle! The reverse has been true during the last 7 years. As our government and Wall Street boasted about how great our economy was, everything was running in the red. And this means our own government can't run up another $10 trillion in debt in order to save us!
The scheme cooked up this last 6 months was for the Fed to simply create money and hand it over in the hopes this would create a thriving economy. This has OBVIOUSLY failed. For layoffs are accelerating, not decreasing. And the very houses that received most of the super-cheap loans are turning around afterwards and FIRING STAFF and reducing their commerce. They are in a devolving cycle, not a growth cycle. There is more proof of this below.
Fed Bypasses Emergency-Loan Policy on Rate for Securities Firms
The Federal Reserve bypassed its own emergency-lending policies to let securities firms borrow at the same interest rate as commercial banks as the central bank sought last weekend to stave off a financial-market meltdown.
Guidelines revised in 2002 say the Fed should charge non- banks more than the highest rate that commercial banks pay. Instead, Chairman Ben S. Bernanke and his colleagues, in emergency votes on March 16, invoked broader authority in the Federal Reserve Act to give Wall Street dealers the same rate as banks, a Fed staff official said on condition of anonymity.
*snip*
``They certainly pushed the limit,'' said Brian Sack, a former Fed researcher who is now senior economist at Macroeconomic Advisers LLC in Washington. The law probably has ``enough gray area'' to allow the decision, he said.
They basically threw away all rules, regulations and possibly laws. They used every possible tool all the way up to simply handing over billions of dollars to super-wealthy financiers who wanted more money to replace lost profits! And being pirates, they all pocketed this money. As we shall see below:
Goldman Sachs President Winkelried sells $5.2 mln in company shares
Winkelried sold a total of 30,000 shares of the investment bank on Wednesday and Thursday for an average of $173.25 apiece, according to a filing with the Securities and Exchange Commission and data provider Washington Service.
This is Winkelried's first sale of Goldman Sachs shares since January when he sold the same number of shares at an average price of $200.50.
Separately, Vice Chairman Michael S. Sherwood reported selling about $1.28 million in Goldman Sachs shares through a family trust.
HAHAHA. They had to bring in someone, some DUPE to buy their shares they needed to unload! As they fire staff, they stuff their pockets and then board their Mega-yachts and off they sail into the sunset! Mission accomplished! This is what Mazilo did in 2006: he sold very rapidly, half a BILLION in shares to unsuspecting investors. Because he could see all the loans going bad in 2006. He bailed out and still has that money and hasn't been arrested yet.
As the recipients of Federal Reserve largess convert their own stocks into cash, a classic move in deflationary cycles, people are being pitched this happy story at the mainstream media that the banking crisis is over and happy days are here again.
Bank of England answers pleas with £5bn injections
The Bank of England announced an unprecedented series of £5 billion cash injections for the banking sector, after high street bank chiefs pleaded for more liquidity.
The auction yesterday of £10.9 billion by the Bank – £5 billion more than expected – was one of a series of props provided by central banks to the financial community.
The European Central Bank offered €15 billion (£11.7 billion) and the US Federal Reserve said that it would make $25 billion (£12.6 billion) available.
The Bank of England said that it would continue to offer an extra £5 billion of one-week money on top of its usual repo auctions every week until its policymakers decided whether to change lending rates at their next monthly meeting on April 9.
All the G7 banks are heading into deflationary collapse. All are trying to drop interest rates and all have collapsing housing markets! This dynamic was first seen in Japan in 1990. We know what will happen next. A number of commentators like in the New York Times are pitching all this as 'we are NOT Japan.' Only we are Japan, for Japan is part of the G7 banking system. Effects from 15 years ago can come back to whiplash the present. Time is patient when it comes to mega-forces in economics. We have been in this deflationary cycle since the US has tried to kill inflation in 1980. The high rates back then did the job but things eroded badly. So increasingly, the central banks have desperately tried to create deflation and the biggest tool in their bag has been to encourage free trade so that WAGES drop in all the top nations! And this has worked! Perfectly! And is fundamentally the basis for the present collapse into depression. Workers can't tap into profits anymore and so they can't buy manufactured goods much longer.
A good read I am including here. Enjoy.
Main Street Sacrificed to the Gods of Wall Street
By Trader Mark
I was looking through CNNMoney.com, and it is striking to now see the stories of the real effects I outlined long ago really beginning to hit people. [Do the Bottom 80% of Americans Stand a Chance?] But since it's a slow motion implosion it is not sexy like Bear Stearns turning into dust within 72 hours. So I believe it continues to get ignored and/or people are simply ignorant - with the salaries made on Wall Street, it creates a disconnect from Main Street.
What is striking is while the system is pumped with floodgates of paper money, and inflation is constantly pooh poohed as "moderating by 2nd half 2008" - almost all these stories have the common thread of rampant inflation busting frail budgets - keep in mind anecdotal study after study says 70% of Americans live paycheck to paycheck regardless of income strata (as we have greater incomes, our spending expands at similar pace). I am aghast at the CNBC cheerleading (paralleled by countless blogs, economists, and pundits) that the decision to cut 75 basis points instead of 100 is a clear sign the Fed now cares about the dollar and inflation. Pathetic. 75 basis point is a historic type of cut, rarely done in the past. 100 basis points was NEVER done before (don't quote me, but I believe I read that). So this move to only do 75 is "good" for the dollar and "a strike back at inflation"? Really, the logic on The Street is beyond me many times. I find it laughable. Main Street is being sacrificed to the gods so that NYC can be saved. Bottom line, no matter what line of crapola people in NYC says over and over - maybe if they say it enough they will believe it and not feel as guilty.
Now for the scary stuff: the depression being created by the Fed and the Bank of Japan is following nearly exactly, the collapse of the Great Depression. The information below is shocking and horrible. And a warning to us all. In this case, the US is not the creditor nation. We are a combination of England and Germany! And one more thing: we are not going to use tariffs to prevent our markets from being flooded with trade goods. We are going to use LACK OF BUYING POWER to fix this! Which is 10X uglier than tariffs! Trust me on this.
DESCENT INTO THE DEPTHS (1930):
Rebound:
There had been much talk about eliminating short selling. The NYSE now requested lists of all holders of borrowed stock (short sellers). The rush to cover to stay off the list and to realize profits assisted in ending the decline.
The discount rate was reduced again, to 4 1/2%. Congress rushed a tax cut. Rockefeller ordered 1 million shares of Standard Oil at 50. An order for 50,000 shares of U.S. Steel at 150 "pegged" that speculative leader. Its drop from 261 3/4 to 165 had been the bellwether of the crash.
The gyrations quieted. The stock market rallied in quiet trading for the rest of November.
Secured bank loans and borrowing on life insurance policies had each risen about $2 billion.
Bank deposits had been declining all year, for the first time in two decades. Banks reported 1/2 million fewer depositors.
By December 1, 1929, broker's loans had declined by over 50% to just over $4 billion. But unsecured bank loans were up $2 billion to almost $10 billion. Secured loans by banks were about $8 billion. There was $2 to $3 billion tied up in installment buying. Borrowing on life insurance policies rose over $2 billion to a new total of almost $10 billion. Bank deposits had been declining all year, for the first time in two decades. Banks reported 1/2 million fewer depositors. Both investors and consumers were living off capital, extending themselves further into available supplies of credit.
There was certainly no evidence that an increase in savings had played any role in the ending of the 1920s period of prosperity. Here, too, facts perversely refuse to conform to Keynesian theory.
Exports, imports, railroad car loadings, textiles, auto and steel production, commodity prices, all took big drops in November and went even lower in December. However, employment, wages, and retail sales remained good, and Christmas buying was encouraging.
The November rally continued into December, recouped 1/3 of the stock market loss, only to be hit by renewed unloading of distress stocks by banks and brokers and a large volume of short selling which drove prices down yet again.
Copper, autos, textiles and agricultural commodities were now suffering from accumulated inventories. The financial slump now accelerated the business decline. Steel production nose dived during the holiday season.
The Wall Street prop had been knocked out from under world finances, spreading the effects around the world. Germany and Austria suffered large market declines and increases in unemployment. Paris and London markets were also lower, but the French economy would not be seriously affected until the second quarter of 1930.
Large volumes of short selling? We have seen this since November. The three attempts at saving Wall Street foundered and failed by Thanksgiving. The hope was, the American consumer would go on a spending binge at Xmas anyway. This, of course, didn't materialize. But enough price cutting lured customers into stores giving the impression that all was well and would increase again. So now we go into the New Year with the bears waking up again and preparing to rip up the system that is sick and dying.
The new year, 1930, dawned bright, cheery and confident. A parade of business, financial, labor, academic and government leaders made page one news with reviews of promising business conditions and future growth. December retail sales reports were quite good. The stock market had edged steadily upwards during the last half of December despite year end cash selling and the continued unloading of the distress stock held by banks and brokers.
Wall Street was openly bullish. Broker's loans moved impressively upwards as hope continued to surge through the breasts of bull speculators. The Big Board actually gained $1.1 billion in December, to a new total value of $64.7 billion. Broker's loans were down to about 6.16% of this tota
As we look at stocks, we can see how they fall only to whip back upwards. But this is not NATURAL. Every sudden shot upwards since October has been due entirely to government interventions by the G7 nations trying desperately to funnel huge sums, now well over a trillion, into the system by hook or crook.
There were great expectations of a quick business revival in the spring of 1930. Credit was ample and available at low rates. Bank rates had been cut sharply by the Federal Reserve Bank and all the major European national banks. Private interest rates had been cut even faster and sharper as people with money found it increasingly difficult to profitably employ it. Not only were business risks rising, the profit inducement to borrow was clearly declining, making the availability of money at sharply declining interest rates increasingly irrelevant.
Now doesn't this ring a loud bell? Alarm bells going off! BZZZZT. They are expecting a quick business revival this time around just like then! And contrary to Bernanke's assertions, the banks DID drop rates like crazy right after the stock market collapse. They were dying to get it all going again! This was top priority. If handing out masses of loans to the biggest banks and financial houses could restart world trade, they were willing to do this. March, 1930, was only a mere 5 months after record highs on Wall Street, after all!
As each drop in interest rates only caused more banks and financiers to turn it into CASH, did they try yet again to restart the lending cycle by making loans ever-easier. People with equity and capable of taking on loans fell for these cheap loans and began to leverage things again. Including the stock market that shot upwards with each infusion.
But the traditional spring trade revival would put everything straight. Hopeful expectations plus what appeared to be a normal increase in business in anticipation of a healthy spring trade pushed Big Board stocks up more than $4 billion in January, 1930, to a new total of $69 billion.
*snip*
Total NYSE stocks reached just under $80 billion by April 10, 1930, making up about 73% of its losses since its September, 19, 1929 highs. The Big Board had surged about $30 billion in five months, a gain of about 65%. Its loss from its September, 19, 1929 highs, was just about 12%. Bond prices were running above 1929 levels, and bond financing was now running at 10 times the rate of stock flotation - reversing the tendency in 1929.
The securities markets had staged a nearly complete recovery by any measure, and, despite weak spots, the domestic economy was doing well. But brokers loans were rising sharply, indicating the speculative nature of much of the recovery. v
*snip*
This was the "spring rally" of 1930. The stock market remained determinedly over optimistic - bouncing back vigorously after each selling climax - rising in expectation of each possible trade turning point - and falling back only when disillusionment became inevitable.
OK: if stocks soar during March and April to regain 65% of what they lost in the previous six months, what shall we all say? Oh my god? How about 'History is a bitch who likes to repeat herself over and over again'?
Copper had been pegged at 18 cents per pound by an international cartel. It had been as high as 24 cents per pound in April, 1929. However, overwhelming stockpiles and sales from secondary sources at lower prices broke the dam. The price dropped to 12 1/2 cents in the beginning of May.
Um, this is too much, isn't it? As the Fed and the bankers rejoice in killing the metals markets and thus, proving that gold, etc, are mere commodities, the fall in value is just another signpost on the road to depression. Why are they pleased with this? They should look at the past and scream, 'We are going the wrong way!'
But the need to kill inflation by hook or crook is all-pervasive. But the simple tool of using rising interest rates is VERBOTEN. So they use the utterly awful tool of dropping rates while strangling the working classes which is pure 1930-depression ethics.
Commodity prices were now sinking like stones - at something more than 2 1/4% per month - with a big decline in April. World money rates had been cut in half since October, 1929, and private lending rates had declined even faster.
This typical whipsawing was killing the margin speculators, both long and short, and was chasing many out of the market.
On June 9, the stock market suffered its sharpest loss of the year as the decline resumed. The next day, short covering and bargain hunters pushed a market recovery of practically all the previous day's loss. But U.S. Steel production declined to 71% and its unfilled orders report showed a dramatic decline. On June 11 an even bigger market drop wasn't stemmed until financial leaders stepped in with big orders for key stocks.
Each crash was followed by a sharp partial recovery as shorts covered and new "bargain hunters" were lured in. The rediscount rate was lowered to 2 1/2% - the lowest level in history - recognizing an already existing fact as there was little demand for Federal Reserve funds. Steel dropped to 65% of capacity, railroad car loadings continued to drop, and other bad news kept coming in. Each rally petered out, followed by a slipping movement, culminating in a sharp selling climax.
Markets never reach bottom until the last bargain hunter is eaten by the last bear. Then the bears depart and the markets lie there, dead. Reviving it is nearly impossible. The destruction of credit and the resulting bankruptcies now continue to burn for several more years. The banking system, far from being saved, now faces total melt down. The banking system limped along after 1930 for 2 more years until it totally fell in 1933. Along with many governments. Millions of people starved to death across the planet. Draconian measures were suggested. One of them being, 'loot the Jews' launched by Herr Hitler in Germany. The Russians launched the 'loot the landowning peasants in the Ukraine', Italy decided to loot Africa. Japan lashed out at China and invaded Manchuria to take over the factories there and cease trade and replace it with slavery. Spain began a revolution which was crushed by the German fascists. The world was set towards WWII.
Dr. Schacht, former president of the Reichsbank, predicted cessation of reparations payments. The flight of capital out of Germany forced an increase in her bank rate to 5% in spite of the worsening Depression. Tariffs, quotas, higher taxes and interest rates were forced on the overburdened German public by the growing burden of her huge debts.
The cumulative effects of reparations payments, massive debts, and the trade war - building up for more than a decade - had destroyed Germany -- and the whole world would pay the price.
We are Germany. We are running two war mongers, McCain and Clinton, both of whom want to increase military spending, government debt, cutting taxes, increasing imports and in general, all want to do the same thing so the lack of choice in this critical junction is exactly none. It is now painfully obvious that Obama won't rise to power for the simple reason, he might change something. And NOTHING dares change no matter how tiny. This is because the entire push right now is to restart the dying status quo. The one that China is no longer interested in continuing. Which means it won't continue. No, not at all.Sun, Mar 23 2008
NY TIMES CALLS BULLSHIT
The lead story in Sunday's (today) New York Times biz section calls a spade a spade, names names and points fingers. BOOM, baby!
What Created This Monster?
New York Times - LIKE Noah building his ark as thunderheads gathered, Bill Gross has spent the last two years anticipating the flood that swamped Bear Stearns about 10 days ago. As manager of the world’s biggest bond fund and custodian of nearly a trillion dollars in assets, Mr. Gross amassed a cash hoard of $50 billion in case trading partners suddenly demanded payment from his firm, Pimco.
And every day for the last three weeks he has convened meetings in a war room in Pimco’s headquarters in Newport Beach, Calif., "to make sure the ark doesn’t have any leaks,” Mr. Gross said. "We come in every day at 3:30 a.m. and leave at 6 p.m. I’m not used to setting my alarm for 2:45 a.m., but these are extraordinary times.”
Even though Mr. Gross, 63, is a market veteran who has lived through the collapse of other banks and brokerage firms, the 1987 stock market crash, and the near meltdown of the Long-Term Capital Management hedge fund a decade ago, he says the current crisis feels different — in both size and significance.
The Federal Reserve not only taken has action unprecedented since the Great Depression — by lending money directly to major investment banks — but also has put taxpayers on the hook for billions of dollars in questionable trades these same bankers made when the good times were rolling.
"Bear Stearns has made it obvious that things have gone too far,” says Mr. Gross, who plans to use some of his cash to bargain-shop. "The investment community has morphed into something beyond banks and something beyond regulation. We call it the shadow banking system.”
It is the private trading of complex instruments that lurk in the financial shadows that worries regulators and Wall Street and that have created stresses in the broader economy. Economic downturns and panics have occurred before, of course. Few, however, have posed such a serious threat to the entire financial system that regulators have responded as if they were confronting a potential epidemic.
[Read the whole thing:]
As Congress and Republican and Democratic presidential administrations pushed for financial deregulation over the last decade, the biggest banks and brokerage firms created a dizzying array of innovative products that experts now acknowledge are hard to understand and even harder to value.
On Wall Street, of course, what you don’t see can hurt you. In the past decade, there has been an explosion in complex derivative instruments, such as collateralized debt obligations and credit default swaps, which were intended primarily to transfer risk.
These products are virtually hidden from investors, analysts and regulators, even though they have emerged as one of Wall Street’s most outsized profit engines. They don’t trade openly on public exchanges, and financial services firms disclose few details about them.
Used judiciously, derivatives can limit the damage from financial miscues and uncertainty, greasing the wheels of commerce. Used unwisely — when greed and the urge to gamble with borrowed money overtake sensible risk-taking — derivatives can become Wall Street’s version of nitroglycerin.
Bear Stearns’s vast portfolio of these instruments was among the main reasons for the bank’s collapse, but derivatives are buried in the accounts of just about every Wall Street firm, as well as major commercial banks like Citigroup and JPMorgan Chase. What’s more, these exotic investments have been exported all over the globe, causing losses in places as distant from Wall Street as a small Norwegian town north of the Arctic Circle.
With Bear Stearns forced into a sale and the entire financial system still under the threat of further losses, Wall Street executives, regulators and politicians are scrambling to figure out just what went wrong and how it can be fixed.
But because the forces that have collided in recent weeks were set in motion long before the subprime mortgage mess first made news last year, solutions won’t come easily or quickly, analysts say.
In fact, while home loans to risky borrowers were among the first to go bad, analysts say that the crisis didn’t stem from the housing market alone and that it certainly won’t end there.
"The problem has been spreading its wings and taking in markets very far afield from mortgages,” says Alan S. Blinder, former vice chairman of the Federal Reserve and now an economics professor at Princeton. "It’s a failure at a lot of levels. It’s hard to find a piece of the system that actually worked well in the lead-up to the bust.”
Stung by the new focus on their complex products, advocates of the derivatives trade say they are unfairly being made a scapegoat for the recent panic on Wall Street.
"Some people want to blame our industry because they have a vested interest in doing so, either by making a name for themselves or by hampering the adaptability and usefulness of our products for competitive purposes,” said Robert G. Pickel, chief executive of the International Swaps and Derivatives Association, a trade group. "We believe that there are good investment decisions and bad investment decisions. We don’t decry motor vehicles because some have been involved in accidents.”
Already, legislators in Washington are offering detailed plans for new regulations, including ones to treat Wall Street banks like their more heavily regulated commercial brethren. At the same time, normally wary corporate leaders like James Dimon, the chief executive of JPMorgan Chase, are beginning to acknowledge that maybe, just maybe, new regulations are necessary.
"We have a terribly global world and, over all, financial regulation has not kept up with that,” Mr. Dimon said in an interview on Monday, the day after his bank agreed to take over Bear Stearns at a fire-sale price. "I can’t even describe the seriousness of that. I always talk about how bad things can happen that you can’t expect. I didn’t fathom this event.”
TWO months before he resigned as chief executive of Citigroup last year amid nearly $20 billion in write-downs, Charles O. Prince III sat down in Washington with Representative Barney Frank, the chairman of the House Financial Services Committee. Among the topics they discussed were investment vehicles that allowed Citigroup and other banks to keep billions of dollars in potential liabilities off of their balance sheets — and away from the scrutiny of investors and analysts.
"Why aren’t they on your balance sheet?” asked Mr. Frank, Democrat of Massachusetts. The congressman recalled that Mr. Prince said doing so would have put Citigroup at a disadvantage with Wall Street investment banks that were more loosely regulated and were allowed to take far greater risks. (A spokeswoman for Mr. Prince confirmed the conversation.)
It was at that moment, Mr. Frank says, that he first realized just how much freedom Wall Street firms had, and how lightly regulated they were in comparison with commercial banks, which have to answer to an alphabet soup of government agencies like the Federal Reserve and the comptroller of the currency.
"Not only did Wall Street have so much freedom, but it gave commercial banks an incentive to try and evade their regulations,” Mr. Frank says. When it came to Wall Street, he says, "we thought we didn’t need regulation.”
In fact, Washington has long followed the financial industry’s lead in supporting deregulation, even as newly minted but little-understood products like derivatives proliferated.
During the late 1990s, Wall Street fought bitterly against any attempt to regulate the emerging derivatives market, recalls Michael Greenberger, a former senior regulator at the Commodity Futures Trading Commission. Although the Long-Term Capital debacle in 1998 alerted regulators and bankers alike to the dangers of big bets with borrowed money, a rescue effort engineered by the Federal Reserve Bank of New York prevented the damage from spreading.
"After that, all was forgotten,” says Mr. Greenberger, now a professor at the University of Maryland. At the same time, derivatives were being praised as a boon that would make the economy more stable.
Speaking in Boca Raton, Fla., in March 1999, Alan Greenspan, then the Fed chairman, told the Futures Industry Association, a Wall Street trade group, that "these instruments enhance the ability to differentiate risk and allocate it to those investors most able and willing to take it.”
Although Mr. Greenspan acknowledged that the "possibility of increased systemic risk does appear to be an issue that requires fuller understanding,” he argued that new regulations "would be a major mistake.”
"Regulatory risk measurement schemes,” he added, "are simpler and much less accurate than banks’ risk measurement models.”
Mr. Greenberger, still concerned about regulatory battles he lost a decade ago, says that Mr. Greenspan "felt derivatives would spread the risk in the economy.”
"In reality,” Mr. Greenberger added, "it spread a virus through the economy because these products are so opaque and hard to value.” A representative for Mr. Greenspan said he was preparing to travel and could not comment.
A milestone in the deregulation effort came in the fall of 2000, when a lame-duck session of Congress passed a little-noticed piece of legislation called the Commodity Futures Modernization Act. The bill effectively kept much of the market for derivatives and other exotic instruments off-limits to agencies that regulate more conventional assets like stocks, bonds and futures contracts.
Supported by Phil Gramm, then a Republican senator from Texas and chairman of the Senate Banking Committee, the legislation was a 262-page amendment to a far larger appropriations bill. It was signed into law by President Bill Clinton that December.
Mr. Gramm, now the vice chairman of UBS, the Swiss investment banking giant, was unavailable for comment. (UBS has recently seen its fortunes hammered by ill-considered derivative investments.)
"I don’t believe anybody understood the significance of this,” says Mr. Greenberger, describing the bill’s impact.
By the beginning of this decade, according to Mr. Frank and Mr. Blinder, Mr. Greenspan resisted suggestions that the Fed use its powers to regulate the mortgage market or to crack down on practices like providing loans to borrowers with little, if any, documentation.
"Greenspan specifically refused to act,” Mr. Frank says. "He had the authority, but he didn’t use it.”
Others on Capitol Hill, like Representative Scott Garrett, Republican of New Jersey and a member of the Financial Services banking subcommittee, reject the idea that loosening financial rules helped to create the current crisis.
"I don’t think deregulation was the cause,” he says. "And had we had additional regulation in place, I’m not sure what we’re experiencing now would have been averted.”
Regardless, with profit margins shrinking in traditional businesses like underwriting and trading, Wall Street firms rushed into the new frontier of lucrative financial products like derivatives. Students with doctorates in physics and other mathematical disciplines were hired directly out of graduate school to design them, and Wall Street firms increasingly made big bets on derivatives linked to mortgages and other products.
THREE years ago, many of Wall Street’s best and brightest gathered to assess the landscape of financial risk. Top executives from firms like Goldman Sachs, Lehman Brothers and Citigroup — calling themselves the Counterparty Risk Management Policy Group II — debated the likelihood of an event that could send a seismic wave across financial markets.
The group’s conclusion, detailed in a 153-page report, was that the chances of a systemic upheaval had declined sharply after the Long-Term Capital bailout. Members recommended some nips and tucks around the market’s edges, to ensure that trades were cleared and settled more efficiently. They also recommended that secretive hedge funds volunteer more information about their activities. Yet, over all, they concluded that financial markets were more stable than they had been just a few years earlier.
Few could argue. Wall Street banks were fat and happy. They were posting record profits and had healthy capital cushions. Money flowed easily as corporate default rates were practically nil and the few bumps and bruises that occurred in the market were readily absorbed.
More important, innovative products designed to mitigate risk were seen as having reduced the likelihood that a financial cataclysm could put the entire system at risk.
"With the 2005 report, my hope at the time was that that work would help in dealing with future financial shocks, and I confess to being quite frustrated that it didn’t do as much as I had hoped,” says E. Gerald Corrigan, a managing director at Goldman Sachs and a former New York Fed president, who was chairman of the policy group. "Still, I shudder to think what today would look like if not for the fact that some of the changes were, in fact, implemented.”
ONE of the fastest-growing and most lucrative businesses on Wall Street in the past decade has been in derivatives — a sector that boomed after the near collapse of Long-Term Capital.
It is a stealth market that relies on trades conducted by phone between Wall Street dealer desks, away from open securities exchanges. How much changes hands or who holds what is ultimately unknown to analysts, investors and regulators.
Credit rating agencies, which banks paid to grade some of the new products, slapped high ratings on many of them, despite having only a loose familiarity with the quality of the assets behind these instruments.
Even the people running Wall Street firms didn’t really understand what they were buying and selling, says Byron Wien, a 40-year veteran of the stock market who is now the chief investment strategist of Pequot Capital, a hedge fund.
"These are ordinary folks who know a spreadsheet, but they are not steeped in the sophistication of these kind of models,” Mr. Wien says. "You put a lot of equations in front of them with little Greek letters on their sides, and they won’t know what they’re looking at.”
Mr. Blinder, the former Fed vice chairman, holds a doctorate in economics from M.I.T. but says he has only a "modest understanding” of complex derivatives. "I know the basic understanding of how they work,” he said, "but if you presented me with one and asked me to put a market value on it, I’d be guessing.”
Such uncertainty led some to single out derivatives for greater scrutiny and caution. Most famous, perhaps, was Warren E. Buffett, the legendary investor and chairman of Berkshire Hathaway, who in 2003 said derivatives were potential "weapons of mass destruction.”
Behind the scenes, however, there was another player who was scrambling to assess the growing power, use and dangers of derivatives.
Timothy F. Geithner, a career civil servant who took over as president of the New York Fed in 2003, was trying to solve a variety of global crises while at the Treasury Department. As a Fed president, he tried to get a handle on hedge fund activities and the use of leverage on Wall Street, and he zeroed in on the credit derivatives market.
Mr. Geithner brought together leaders of Wall Street firms in a series of meetings in 2005 and 2006 to discuss credit derivatives, and he pushed many of them to clear and settle derivatives trading electronically, hoping to eliminate a large paper backlog that had clogged the system.
Even so, Mr. Geithner had one hand tied behind his back. While the Fed regulated large commercial banks like Citigroup and JPMorgan, it had no oversight on activities of the investment banks, hedge funds and other participants in the burgeoning derivatives market. And the industry and sympathetic politicians in Washington fought attempts to regulate the products, arguing that it would force the lucrative business overseas.
"Tim has been learning on the job, and he has my sympathy,” said Christopher Whalen, a managing partner of Institutional Risk Analytics, a risk management firm in Torrance, Calif. "But I don’t think he’s enough of a real practitioner to go mano-a-mano with these bankers.”
Mr. Geithner declined an interview request for this article.
In a May 2006 speech about credit derivatives, Mr. Geithner praised the benefits of the products: improved risk management and distribution, as well as enhanced market efficiency and resiliency. As he had on earlier occasions, he also warned that the "formidable complexity of measuring the scale of potential exposure” to derivatives made it hard to monitor the products and to gauge the financial vulnerability of individual banks, brokerage firms and other institutions.
"Perhaps the more difficult challenge is to capture the broader risks the institution might confront in conditions of a general deterioration in confidence in credit and an erosion in liquidity,” Mr. Geithner said in the speech. "Most crises come from the unanticipated.”
WHEN increased defaults in subprime mortgages began crushing mortgage-linked securities last summer, several credit markets and many firms that play substantial roles in those markets were sideswiped because of a rapid loss of faith in the value of the products.
Two large Bear Stearns hedge funds collapsed because of bad subprime mortgage bets. The losses were amplified by a hefty dollop of borrowed money that was used to try to juice returns in one of the funds.
All around the Street, dealers were having trouble moving exotic securities linked to subprime mortgages, particularly collateralized debt obligations, which were backed by pools of bonds. Within days, the once-booming and actively traded C.D.O. market — which in three short years had seen issues triple in size, to $486 billion — ground to a halt.
Jeremy Grantham, chairman and chief investment strategist at GMO, a Boston investment firm, said: "When we had the shot across the bow and people realized something was going wrong with subprime, I said: ‘Treat this as a dress rehearsal. Stress-test your portfolios because the next time or the time after, the shot won’t be across the bow.’ ”
In the fall, the Treasury Department and several Wall Street banks scrambled to try to put together a bailout plan to save up to $80 billion in troubled securities. The bailout fell apart, quickly replaced by another aimed at major bond guarantors. That crisis was averted after the guarantors raised fresh capital.
Yet each near miss brought with it growing fears that the stakes were growing bigger and the risks more dangerous. Wall Street banks, as well as banks abroad, took billions of dollars in write-downs, and the chiefs of UBS, Merrill Lynch and Citigroup were all ousted because of huge losses.
"It was like watching a slow-motion train wreck,” Mr. Grantham says. "After all of the write-downs at the banks in June, July and August, we were in a full-fledged credit crisis with C.E.O.’s of top banks running around like headless chickens. And the U.S. equity market’s peak in October? What sort of denial were they in?”
Finally, last week, with Wall Street about to take a direct hit, the Fed stepped in and bailed out Bear Stearns.
It remains unclear, exactly, what doomsday scenario Federal Reserve officials consider themselves to have averted. Some on Wall Street say the fear was that a collapse of Bear could take other banks, including possibly Lehman Brothers or Merrill Lynch, with it. Others say the concern was that Bear, which held $30 billion in mortgage-related assets, would cause further deterioration in that beleaguered market.
Still others say the primary reason the Fed moved so quickly was to divert an even bigger crisis: a meltdown in an arcane yet huge market known as credit default swaps. Like C.D.O.’s, which few outside of Wall Street had ever heard about before last summer, the credit default swaps market is conducted entirely behind the scenes and is not regulated.
Nonetheless, the market’s growth has exploded exponentially since Long-Term Capital almost went under. Today, the outstanding value of the swaps stands at more than $45.5 trillion, up from $900 billion in 2001. The contracts act like insurance policies designed to cover losses to banks and bondholders when companies fail to pay their debts. It’s a market that also remains largely untested.
While there have been a handful of relatively minor defaults that, in some cases, ended in litigation as participants struggled over contract language and other issues, the market has not had to absorb a bankruptcy of one of its biggest players. Bear Stearns held credit default swap contracts carrying an outstanding value of $2.5 trillion, analysts say.
"The rescue was absolutely all about counterparty risk. If Bear went under, everyone’s solvency was going to be thrown into question. There could have been a systematic run on counterparties in general,” said Meredith Whitney, a bank analyst at Oppenheimer. "It was 100 percent related to credit default swaps.”
Amid the regulatory swirl surrounding Bear Stearns, analysts have questioned why the Securities and Exchange Commission did not send up any flares about looming problems at that firm or others on Wall Street. After all, they say, it was the S.E.C., not the Federal Reserve, that was Bear’s primary regulator.
Although S.E.C. officials were unavailable for comment, its chairman, Christopher Cox, has maintained that the agency has effectively carried out its regulatory duties. In a letter last week to the nongovernmental Basel Committee of Banking Supervision, Mr. Cox attributed the collapse of Bear to "a lack of confidence, not a lack of capital.”
IT’S still too early to assess whether the Federal Reserve’s actions have succeeded in protecting the broader economic system. And experts are debating whether the government’s intervention in the Bear Stearns debacle will ultimately encourage riskier behavior on the Street.
"It showed that anything important is going to be bailed out one way or the other,” says Kevin Phillips, a former Republican strategist whose new book, "Bad Money,” analyzes what he describes as the intersection of reckless finance and poor public policy.
Mr. Phillips says that it’s likely that the Fed’s actions have ushered in a new era in financial regulation.
"What we may be looking at is a rethinking of the whole role of the Federal Reserve and what they represent,” he says. "If they didn’t solve it in this round, I’m not sure they can stretch it out and do it again without creating a new law.”
On Capitol Hill, leading Democrats like Senator Christopher J. Dodd of Connecticut, chairman of the Senate Banking Committee, and Mr. Frank of the House Financial Services Committee are pushing for just that.
Last Thursday, Mr. Frank offered up a raft of suggestions, including requiring investment banks to disclose off-balance-sheet risks while also making the firms subject to audits — much like commercial banks are now. He also wants investment banks to set aside reserves for potential losses to provide a greater cushion during financial panics.
Earlier in the week, Mr. Dodd said the Fed should be given some supervisory powers over the investment banks.
But broad new rules aimed at systemic risk are likely to face strong opposition from both the industry and others traditionally wary of regulation. Analysts expect new, smaller-bore laws aimed at the mortgage industry in particular, which was the first sector hit in the squeeze and which affected Wall Street millionaires as well as millions of ordinary American homeowners.
THERE is an emerging consensus that the ability of mortgage lenders to package their loans as securities that were then sold off to other parties played a key role in allowing borrowing standards to plummet.
Mr. Blinder suggests that mortgage originators be required to hold onto a portion of the loans they make, with the investment banks who securitize them also retaining a chunk. "That way, they don’t simply play hot potato,” he says.
Mr. Grantham agrees. "There is just a terrible risk created when you can underwrite a piece of junk and simply pass it along to someone else,” he says.
Ratings agencies have similarly been under fire ever since the credit crisis began to unfold, and new regulations may force them to distance themselves from the investment banks whose products they were paid to rate.
In the meantime, analysts say, a broader reconsideration of derivatives and the shadow banking system is also in order. "Not all innovation is good,” says Mr. Whalen of Institutional Risk Analytics. "If it is too complicated for most of us to understand in 10 to 15 minutes, then we probably shouldn’t be doing it.”Sun, Mar 23 2008
HOW THEY DID IT
Excellent analysis on the commodities sell-off. Amero, here we come. Got gold?
The Fed-Engineered Commodities Cave-In
by Alex Wallenwein
The world-wide fiat system functions like a roach motel: Investors check in - but they NEVER check out! By it's latest hit on commodities, the Fed as the system-leader gave investors a shot across the bow. The message: "If you try to leave, we will hurt you!"
("Leaving the fiat system" here means to store your wealth in more tangible forms that are not as susceptible to engineered currency collapses.)
Well, wasn't that just too neat?
JP Morgan Chase got to buy its long-time competitor Bear Stearns at less than ten cents on the dollar, even at Bear's super-low share price of the previous trading day (while the JPM co-owned Fed itself supplies 30 billion USD by "loan" to bolster Bear's balance sheet), and suddenly everything turns around. Stocks are up, the markets calm down, and even the commodities decline. Wow!
If all of the commodities sag at the same time, then at least nobody can reasonably accuse anyone of "gold manipulation", can they?
Well, maybe it wasn't gold manipulation, but something surely doesn't smell right (sniff, sniff...)
Ask yourself: has anything fundamentally changed in the markets to cause this across-the-board commodities sell-off? Let's see:
* Mortgages are still toxic, they are still on every US bank's balance sheet or tucked away in off-balance sheet SPVs and other "conduits".
* Banks are still loathe to lend money to each other because they all know how polluted the other's asset positions are (all they have to do is look at their own balance sheet and remember how it got there).
* The economic outlook hasn't changed and home prices are not improving any, so homeowners are still going to default on mortgages like they've been doing. Result: mortgages are still as toxic as they were before. Even the "AAA-rated" top-grade ones.
* Persian Gulf nations are still under enormous pressure to go off their dollar-pegs because their inflation figures simply do not allow them to follow the Fed's successive interest-rate cliff jumps.
* The US economy is still in recession by all ascertainable data, and it doesn't look like that's going to change anytime soon.
* Foreigners have stopped buying long term US treasuries as shown in last week's 10-year note auction (down to under 6 from previously 25%). Yet, treasury prices are still going up (so who on earth is doing the buying, hmm?)
* There are still way too many dollars in the world.
* There is still way to much other fiat currency in the world.
* Ben Bernanke is still the chairman of the US Fed.
* Bush is still in office.
* Euro-zone inflation is still above three percent.
This list could be longer, but we'll stop here to preserve precious cyberspace.
Here is another ground for suspicion: Sunday's mega-intervention was done right at the point where the Dow hit theoretical support from its 2000 high at 11,750, to create the impression among investors that this technical level has "held" and that the ensuing rally could be for real. Hope springs eternal, you know.
[Worth reading the whole thing:]
(If you want to know whether this level has really "held", just ask yourself whether it would have held in the absence of any action by the Fed!)
Yet, investors, - especially institutional ones - are acting as if all of these negative factors have simply disappeared as a result of the Fed's "magic."
Let's take a good look at what the Fed really did:
Actual Fed Actions:
1. In December, it instituted its series of "Term Auction Facility" (TAF) by which it auctioned off 28-day cash loans to banks at preferred lending rates;
2. It cut rates at breakneck speed, reducing the federal funds target rate from 5.25 to now 2.25 percent in under seven months;
3. In March, it instituted the new "Term Securities Lending Facility" (TSLF), by which it loaned US treasuries from its balance sheets to broker-dealers of treasuries (i.e., big banks only) for 28-day terms and took their mortgage-slime onto its own balance sheet.
4. It did an overnight, over-the-weekend emergency cut of the discount rate (the rate at which banks can borrow from the Fed overnight) by 25 basis points.
5. Finally, it loaned $30 billion to Bear Stearns while taking Bear's mortgage-slime onto its own balance sheet, also overnight/over the weekend, ostensibly to "stabilize" Bear's balance sheet while getting JP Morgan Chase to offer a paltry, ridiculous $2 per share on stock that on the Friday before still traded for $30per share.
Mind you, all of this Fed lending is really no more than that: lending!
What good does it do a big broker-dealer bank to carry borrowed treasuries on its balance sheet? If it needs to borrow money in the short term market, which potential creditor-bank would be dumb enough to think that just because the borrowing bank now has Fed-loaned treasuries on its balance sheet instead of its own mortgage slime, the borrowing bank is now a "better credit risk"?
It makes absolutely no sense - unless all of this is done with the tacit understanding that the Fed's loan of "prime for slime" is intended to be permanent, or at least nearly so until this entire mess blows over.
So, why did the commodities begin to sell off right at the time the Fed's sale of Bear Stearns to JP Morgan Chase was announced? And why did the dollar bounce at that very moment?
Well, the commodities sold off because the dollar bounced. Commodities are still mainly traded in dollar terms around the world.
Why Did the Dollar Bounce?
One piece in the puzzle may well be the following blog entry recounting what the ECB's Bini Smaghi was quoted as saying by Dennis Gartmann.
"The author of The Gartman Letter referred to comments made by ECB executive board member Bini Smaghi in September, when he detailed how such an intervention could play out:
* Step One: Monitoring and assessing exchange rate markets and developments, with a focus on underlying fundamentals.
* Step Two: Discussing these developments with other major players to assess currency developments and policies.
* Step Three: Making public statements on the situation.
* Step Four: Intervening in the foreign exchange markets.
Since verbal interventions have already begun, we are between steps three and four, with actual interventions due next, Mr. Gartman said. Mr. Smaghi has set the table for central banks and their governments around the world, he added."
In other words, the dollar bounced for the sole reason that the Fed and the rest of the world finally performed what is known as a currency intervention. The other central banks agreed to buy dollars. Nothing new, here.
Everything Is Still the Same
The end result of all of the above is that nothing has really changed - except for the thus-far undisclosed international dollar-support action. Other than that, everything is still the same.
So, what was the real point of these actions? If the only change that has any kind of teeth was the coordinated dollar-support action, why did the world's central banks not disclose that?
Answer: Because everybody knows that such action would prop up the dollar and probably result in a correction in the commodities markets. Under those conditions, the battered US Fed would not be able to stand there and accept the adulation of the cheering masses as the "hero who saved the markets."
It's a con-man's trick, through and through.
The dollar's short-term reversal is being pointed to as proof that the Fed's actions "saved the day" while in truth it was the otherwise typical, very un-dramatic, and common-sense currency intervention that did the job. At the same time, one of the Fed's owner banks was able to buy up a competitor at fire-sale prices while benefiting from Fed-injected taxpayer money (i.e., the $30 billion "loaned" to Bear Stern's balance sheet).
The self-defecating, bootlicking, sycophantic financial press hails this as the next best thing to Jesus' second coming, of course. More sober observers can only shake their head at the gullibility of consumers of what goes under the name of "financial news."
Has Gold Topped Out?
Doubtlessly, it eventually will, but we aren't even close yet. Has it corrected? No doubt about that, as well. Can it drop further form here? Sure I actually expected gold to drop back to $750 when it became clear the Indians were selling theirs to buy paper stocks. Occurrences since then made me revise that estimate upward somewhat, to the vicinity around $850.
If gold dropped that far, I would not be surprised in the least - but that is a far cry from "the end" of this gold bull market, as the following chart shows:
Gold is at weak support right now near the $900 mark, which also coincides with where the (green) lower uptrend line of the Phase III slope hits the right side of the chart.
The stronger "Level 1" Support is at $850, the level of the November 2007 short-term top that is nominally equal to the 1980 blow-off top.
"Level 2" Support lies at $725, the 2006 interim high, which also coincides with where the green Phase II uptrend line hits the right wall.
In fact, "the end" of this bull market would have to take us all the way back to below $550, which is where the uptrend line from 2001 would hit the right wall, were we to bother drawing it.
Just look past the smoke, break some of the mirrors, and reality looks exactly the way it did before Bernie staged this rehabilitation of the Fed's image as an institution that can "save" the markets.
Of course, none of this even addresses the issue of what ultimate effect yet another rescue action really has on the economy. It can only make things worse in the long run - and that's what the Fed's real raison d'etre seems to be:
Destroy the world's largest, most powerful economy so the US can be "integrated" with other nations in the western hemisphere - but do it slowly, so nobody can point the finger at one particular Fed action and go lynch the bastards. In other words: plausible deniability. That way, at least, that pesky thing called a "Constitutions" that some hopelessly backwards Americans still believe in no longer needs to be paid lip service to.
At least, that appears to be the plan.
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