Things that matter

Amazing inspiration from obstacles

2011-11-30T19:20:00.001-06:00

http://www.ted.com/talks/amy_purdy_living_beyond_limits.html

David Rosenberg: There is never just one cockroach

2011-11-12T08:08:00.001-06:00

http://www.zerohedge.com/news/david-rosenberg-depression-ecb-mf-global-canary-coalmine-all-surprise-ending

Ray Dalio on Charlie Rose

2011-10-25T20:08:00.000-05:00

http://www.zerohedge.com/news/ray-dalio-there-are-no-more-tools-tool-kit-complete-charlie-rose-transcript-head-worlds-biggest

Bradley Siderograph

2011-01-05T15:52:00.000-06:00

Source:
http://www.amanita.at/Interessantes/Artikel/detail.php?id=310

Ben on Fed

2010-11-08T21:11:00.000-06:00

Damon Vrabel: Debunking Money Part 4 and 5

2010-10-31T09:21:00.000-05:00

http://csper.wordpress.com/

In an attempt to layout what really drives the world rather than believing the false notion that 40-something fresh Ivy League grads serving as politicians have the power, these lessons further the Debunking Money narrative that debt-based hierarchical money = financial leverage = true power. Lesson 4 revisits the 20th century past to reconsider where we’ve been, and lesson 5 peers into the 21st century future for a clearer perspective on where we’re going. Huxley would like what he sees.

Damon Vrabel: Debunking Money Part 3

2010-10-31T09:17:00.002-05:00

http://csper.wordpress.com/

What is the biggest source of power in the world? Lesson 1 discussed the issue of financial power, but for those who haven’t lived in the world of balance sheet power it may still seem like a vague theoretical notion.
After a short intro about the need to restore the authentic real world vs. the fake corporate PR world, this lesson digs into financial power in more detail, explains how you might think of it in terms of the power parents have over children, and then evaluates some of the popular solutions being discussed in the political realm:

- ending the fed
- cutting back on government in the interest of a “free market”
- putting the banks through bankruptcy.

UNDERSTANDING MODERN MONETARY SYSTEMS

2010-10-19T22:03:00.001-05:00

http://pragcap.com/mmt-101

http://pragcap.com/n-y-fed-explains-government-spends-issues-bonds

ForeclosureGate

2010-10-17T20:26:00.001-05:00

Damon Vrabel: Debunking Money Part 2

2010-10-17T20:11:00.002-05:00

http://csper.wordpress.com/

This video describes the structural facts (as opposed to theory) of the monetary system. It avoids theoretical terms like “intrinsic value” and “fiat” and “out of thin air” that have been used to confuse us and just sticks to the facts.

The intent of lesson 1 was only to make a couple key points necessary to understand what is described here in lesson 2.

Damon Vrabel: Money, Myth, and Machiavelli

2010-10-10T11:04:00.001-05:00

http://csper.org/renaissance-20.html
Damon Vrabel:

The power delivered to a small group of people by our current privately controlled monetary system is unmatched by any source of power in history. This video reveals the secret that nobody else bothers to point out that explains why everyone in the system is basically controlled by the most senior capital holders behind the elite banks, and why even senior government officials do their bidding while letting them get away with the biggest crimes in history.

Understanding the basic structure of the system also reveals why Ellen Brown’s notion of commonwealth banks is a necessary complement to our current private monetary system.

TOP - Are we there yet?

2010-10-08T15:13:00.004-05:00

Check out: http://evilspeculator.com/?p=18124

Seth Klarman

2010-09-24T12:21:00.002-05:00

Seth Klarman -

Essentially, the problem is that government intervention interfered with the lessons investors needed to learn. Those who stared into the metaphorical abyss are right back at it, with the possible exception of college endowments, for whom the pain has been long lasting because of their spend rate. Almost everybody else is drinking the Kool Aid again, and it is very troubling. We could have another serious collapse, and people would again not be prepared for it.

http://pragcap.com/deep-thoughts-from-seth-klarman

http://rghost.net/download/2683758/d6e05e10410676bd74d69ecd91e171cd654d4b91/Seth-Klarman-CFA-Conference-2010.pdf

The myth about Buffet

2010-09-13T19:21:00.001-05:00

http://pragcap.com/the-many-myths-of-warren-buffett

TRR for Sep 2010

2010-09-07T14:04:00.001-05:00

TRReport21

Bond Bubble?

2010-08-29T12:11:00.000-05:00

http://pragcap.com/the-myth-of-the-great-bond-bubble

TED Talk - Benoit Mandelbrot: Fractals and the art of roughness

2010-07-07T07:50:00.001-05:00

Wall Street Cheat sheet

2010-07-01T09:25:00.001-05:00

http://wallstcheatsheet.com/

Thunder road report - 28 Jun 2010

2010-06-28T19:01:00.000-05:00

TRReport20

TPC on Greenspan's vigilante siren call

2010-06-18T15:33:00.000-05:00

http://pragcap.com/alan-greenspan-sounds-the-bond-vigilante-siren-call

followed by TPC:

Chas & Greed:

We do not finance our spending via the bond market. Taxes do not finance spending either. We issue bonds as a form of controlling the Fed Funds rate. It’s a pure monetary operation. Not a fiscal financing operation. We issue bonds to maintain the Fed funds target rate and control excess reserves. People think this is govt debt because that’s how the system works in Europe and under the gold standard. This thinking has never changed despite the dramatic changes in the monetary system after the Nixon shock. I am quite certain that Bernanke understands this (or at least partially), but I am also quite certain that most other people in power do not.

Let’s understand a few things first:

1. foreigners do not fund our spending. That is a fact.

2. The bond market is a monetary tool. NOT a fiscal financing tool.

3. We tax in order to create demand for the currency. In addition, it controls aggregate demand or effectively, the money supply.

I’ll use the example I often use. Please excuse the simplicity, but this can be a mind bending concept if you are textbook taught (trust me, I know the feeling) so I will keep it simple:

I start a productive economy/country and invite my 5 friends to become citizens. Rather than forcing all of us to trade with heavy gold I issue TPC notes. Now, in order to create real demand for these notes I create a tax. This makes you beholden to me via the TPC notes. You MUST have them in your account on April 15th of every year. I’ve created instant demand. This is what the US government does. In return, they spend money on public works, create jobs, supposedly spend money on furthering our nations prosperity (in theory at least) and protection of the nation (a military).

How do I enforce your use of the TPC notes? I create jobs via a military and a police force and pay them well. Don’t want to pay your taxes? Say hello to officer Joe. A group doesn’t want to pay their taxes? You can protest, but if you get out of control I will introduce you to 500 men wearing body armor holding M4 carbines. In other words, don’t question the currency or else….As long an economy is productive, the sovereign nation can enforce the use of said currency, and as long as we don’t issue excessive currency there should always be demand for it. In other words, trust in the national currency is safe as long as the rule of law is maintained, corporations are productive and I maintain my ability to tax you.

I do not borrow from governments or tax to spend as I would if my currency were backed by gold. Interestingly, I can’t TAX you until I’ve credited your accounts with TPC notes. There is no money to be taxed otherwise. So, in effect, I have to SPEND in order to TAX (counter-intuitive to what you have been taught). Taxing debits your accounts (saps liquidity) and crediting is government spending. On my island, I am never revenue constrained. If you don’t pay your taxes I will throw you in jail and confiscate your money. But that doesn’t mean I can spend more when I tax. What do I care if you send me your TPC notes? I can just press a button and credit my “spending” account right after I shred your tattered looking cash. This is what the government actually does. Taxation is essentially a form of maintaining control of private sector spending. Pay your taxes in cold hard cash. The IRS will shred those dollar. They don’t put them in a bag and mail them to the Treasury so they can’t go “spend” it. The only reason they might keep the dollars is if they are pretty and in good condition so they can go back out into circulation.

So what’s the bogey here? What’s the catch? The bogey here is inflation which is constantly moving up and down with the amount of money in the system based on my tax rate, spending, etc. Thus, govt cannot just spend and spend and spend or the extra dollars in the system will chase too few goods and drive up prices. Thus, it’s important to understand that govt cannot just spend recklessly.

In terms of the bond market, the issuance of bonds does not serve the same purpose it did under the gold standard. We actually issued bonds because we were revenue constrained (not enough gold reserves at all times to fund spending without creating massive inflation). Today, we effectively control the value of money in the banking system via bond issuance (a pure monetary operation to control the Fed Funds Target Rate). It can also be thought of as another form of government spending because a treasury bond is basically a savings account. Contrary to popular opinion, QE is actually a deflationary event because it takes an interest bearing instrument out of the private sector’s hands and replaces it with a non-interest bearing deposit. QE is a term that used by people who want to scare you into thinking that the govt is being reckless with their money. The reality is that QE is just an asset swap. Nothing more. Debt monetization is another tool of the fear mongerers who don’t understand that debt monetization is actually impossible so long as the Fed has a target rate. It’s operationally impossible.

The US government is never revenue constrained. They are not like a household or state government. We don’t need China to buy our bonds in order to spend. China gets pieces of paper with old dead white men on them in exchange for real goods and services. They can either hold that money in a checking account at the Fed OR they can do what they wisely do and invest those pieces of paper in what is actually a savings account at the Fed. We also don’t need taxes to spend. The budget deficit is in direct inverse correlation to private sector savings. TO THE PENNY.

This by no means says that the government can just recklessly spend. But it’s imperative that the government spend SOME money otherwise they are simply debiting the system each year via taxation without ever crediting accounts. Just ask yourself what would happen if the govt imposed a one time 100% asset tax?

Many financial theorists actually believe the Great Recession (and the Great Depression) was caused by account SURPLUS. You’ll notice that both events were preceded by great periods of “fiscal competence”, ie, budget surpluses. In reality, the govt had debited too many accounts and forced investors to use too few dollars to chase too many goods. This results in full blown deflation and excessive debt levels (because you borrow what you can’t actually get your hands on). I think the cause is a bit more complex than that but the fact that we are grossly overtaxed and the govt spends very inefficiently is a large contributing factor.

Hope that helps.

Niall Ferguson: Lessons & Legacies of the Financial Crisis

2010-06-15T17:18:00.001-05:00

http://www.zerohedge.com/article/history-making-lessons-and-legacies-financial-crisis

Bob Janjuah

2010-06-04T13:31:00.001-05:00

http://www.zerohedge.com/article/bob-janjuah-brewing-popular-anger-failure-keynesianism

Deflation?

2010-05-29T00:00:00.000-05:00

http://pragcap.com/talking-ourselves-off-the-edge-of-the-cliff

http://bilbo.economicoutlook.net/blog/?p=9956

Lessons from High-Performance Companies

2010-05-23T09:55:00.003-05:00

Excellent article from Mark. Here is the original link.

What can we learn from companies that have been able to achieve sustainable return on investment and grow their businesses at the same time? How can management teams adapt the strategies and practices of these "high-performance companies" as they consider their own pathways to improving profitability and growth? Let's take a look.

RESEARCH ON HIGH-PERFORMANCE COMPANIES

During the last three decades, there have been many attempts to study and learn from the experiences and practices of high-performance companies. An article in Harvard Business Review (Julia Kirby's "Toward a Theory of High Performance," July 2005) profiled a number of these studies, including In Search of Excellence, the 1982 book by Tom Peters and Robert Waterman, Jr. The question and comment in Kirby's article suggest that a need exists to further define the meaning of high performance: "What does it mean to be a high-performance company? Twenty-three years after In Search of Excellence, we're still searching--and just maybe getting closer to answers."

For the past 10 years, I've led a research project with Joel Litman called the Return Driven Strategy Initiative that has been attempting to describe what it means to be a high-performance company in terms of performance measures. That goes hand-in-hand with understanding the strategic activities and traits that lead to sustained periods of exceptionally high performance in terms of return on investment, growth, and wealth creation.

The Return Driven Strategy framework, which I've written about in the Strategic Management column for this magazine, stems from this research project and is based on three dimensions of performance:

1. Superior and sustainable return on investment (ROI),

2. Growth while maintaining superior return on investment, and

3. Superior total shareholder returns.

The logic of these three dimensions of performance begins with ROI. First, a high-performance company would need to achieve superior return on investment and be able to sustain superior ROI performance for a period of 10 consecutive years or more. Second, a high-performance company would be able to grow the business while continuing to achieve superior ROI during the same period. The combination of superior ROI and growth logically leads to superior shareholder value performance, the third level of performance, assuming the company has adhered to the ethical parameters of its constituents and communities. (See "Return Driven Strategy: The Research.")

But high performance isn't permanent. Every high-performance company we studied faces the risk of fading. Some have already begun to fade in returns or growth. In every case, the reasons for fade can be charted to how the tenets of Return Driven Strategy began to be neglected or couldn't be executed. Meanwhile, the elevation of these companies' performance and the sustainability of high performance can be attributed to attention to these tenets. Companies with mediocre or poor performance demonstrate significant gaps in their business models when viewed through the lens of Return Driven Strategy.

THE RETURN DRIVEN STRATEGY FRAMEWORK

What strategic activities add up to competitive advantage or disadvantage? The Return Driven Strategy framework has been built on a simple theme: If we can better understand how the success or failure of a business is driven by its plans and actions, then we can greatly improve how we value companies and how we run our businesses. The framework describes the pattern of strategic activities shown to drive superior corporate performance. It is composed of 11 core tenets and three foundations that together form a hierarchy of interrelated activities that companies must perform to deliver superior performance.

These tenets and foundations summarize the common activities of high-performance companies and can be used to identify flawed strategies of marginal performers. (For a summary of the framework, see www.returndriven.com and the book by mark frigo and joel litman, driven: business strategy, human actions, and the creation of wealth, www.driventhebook.com.)

LESSONS FROM HIGH-PERFORMANCE COMPANIES

Here are three lessons from high-performance companies that management teams can use in assessing and executing their business strategy:

1. Commitment to Return on Invested Capital and High Integrity. High-performance companies show a strong commitment to and discipline for creating shareholder value by focusing on return on capital. They have goals, performance measures (such as return on invested capital or ROIC), and incentives that are firmly aligned with sustainable ROI. They also find ways to grow their business in a disciplined manner so as not to sacrifice returns. These companies achieve superior returns and growth while adhering to the ethical parameters of their constituents and communities.

A premise of our work in Return Driven Strategy is that the overriding goal of a business entity should be to achieve "superior long-term return on capital."Why is it important to have this commitment? Michael Porter provides insight on this point: "If you don't have the right goal of superior return on investment, you lack the anchor that will help you make good choices about how to compete in the marketplace." (See "The Importance of Being Strategic," Balanced Scorecard Report, March-April 2002.)

The importance of maximizing shareholder wealth "ethically" is a critical element of the Return Driven Strategy framework. We have found that ethics is a necessary (but not sufficient) condition for maximizing value. As Michael Jensen from the Harvard Business School stated in his work on corporate integrity and its relationship to performance: "A company with a culture of integrity will tend to have performance metrics far above those without integrity."

Companies like Johnson & Johnson have achieved superior ROI, grown their business, and shown an adherence to ethical standards. J&J is famous for its Credo, which is a foundation for ethical business conduct at the company and focuses on shareholder value through a philosophy of "capital-efficient profitable growth." One CEO who uses the Return Driven Strategy framework refers to Tenet One as "Doing the Right Things for the Right Reasons." (Kathy Apple, RN, CEO of the National Council of State Boards of Nursing (NCSBN), referring to Mission Driven Strategy, the application of the Return Driven Strategy model in not-for-profit organizations)

2. Focus on Unmet Customer Needs in Growing Market Segments. High-performance companies have a hypervigilant focus on customer need that's much deeper than and different from other companies' focus. To avoid commoditization, they concentrate on fulfilling otherwise unmet customer needs. They have the processes, capabilities, customer information, and customer intelligence to better identify and target customer needs. And they have the discipline to target customer needs only where they have unique capabilities and resources to fulfill those needs and where they can drive superior return on capital. These companies also target the right customer groups with the intent and ability to dominate.

In the mid-1980s, Harley-Davidson targeted otherwise unmet customer needs (lifestyle, freedom, adventure, community) with their offerings (the unique Harley experience) and earned corresponding price premiums (about 30% over competing motorcycles) while pursuing a growing customer group (the Baby Boom generation). This one-two combination of fulfilling higher-level customer needs and targeting and dominating an increasing market segment drove a 20-year run of superior ROI, growth, and shareholder value creation. Today, Harley faces the challenge of growing the business and maintaining superior returns in the face of a saturated market segment.

3. Innovate Offerings to Better Fulfill Customer Needs. High-performance companies constantly reexamine their products and services (their offerings), modifying existing ones and developing new ones that will better fulfill customers' unmet needs. In the Return Driven Strategy framework, "innovate" simply means "changing" your offerings to better fulfill targeted customer needs.

At the same time, companies must get customers to want their particular product or service offerings instead of someone else's (brand the offering). Also, at the outset, management must consider the executability and workability of plans to fulfill customer needs while adhering to the commitment to return on investment. All supporting activities--from partnering to value chain to employee engagement, research and development, and communication--are aligned with this continuous innovation of offerings. In other words, companies will change offerings only if they believe they will create more value for the customer and receive superior return on investment from the innovation.

PUTTING RETURN DRIVEN STRATEGY TO WORK

During the last several years, those of us working on the Return Driven Strategy Initiative research have seen how the Return Driven Strategy framework has been used by boards of directors, executives, management teams, entrepreneurs, and educators. Let's look at some of these uses.

Assessing and Developing Strategy

Assessing and developing the business strategy is an ongoing challenge for most companies. The framework has been used successfully to assess the existing business strategy of a company, a business unit, or a specific initiative. It has also been used in strategic planning to guide the development of the strategy in a way that will ensure alignment with the goal of ethically maximizing shareholder value. The case described in this article is a great example of this application.

Communicating Strategy

Communicating strategy is the first step in strategy execution. If this isn't done well, it can be the root cause of strategy execution failure. Using a common language for describing and communicating strategy can be an effective way to avoid this problem. The Return Driven Strategy framework has been shown to provide a simple, clear language that's consistent with widely used execution frameworks, such as the balanced scorecard, and it provides a link to how the strategy will drive growth and return on investment. Jim Folkes, former vice president, Strategy & Business Development at Laidlaw Education Services, expresses the benefit of the framework in communicating strategy: "Return Driven Strategy is an elegant framework in that it is marked by both ingenuity and simplicity. And it is also marked by completeness in the way it encompasses all aspects of business strategy."

Aligning and Leveraging Execution Frameworks

Over the decades, companies have been using a wide variety of execution frameworks whose popularity comes and goes. Examples are Total Quality Management (TQM), Six Sigma, Lean Manufacturing, and reengineering. The Return Driven Strategy framework provides a way to align execution frameworks to achieve the strategic activities that will drive superior performance. High-performance companies adapt rather than adopt execution frameworks.

Some execution frameworks, such as the balanced scorecard, have achieved a broad level of application and have become a leading strategy execution framework. Companies have used the Return Driven Strategy framework to refine or develop strategy as a logical first step in the development of strategy maps and balanced scorecards. They have also used it to reenergize existing scorecards.

Managing Risk

Risk management is a major concern of boards and executive teams. High-performance companies manage risk and manage the threats and opportunities in forces of change, achieve superior ROI, and grow their business, which can be very risky.

Companies also need to define "risk appetite" as part of their risk management efforts. In the Return Driven Strategy framework, risk appetite is part of the first tenet, "Ethically Maximize Wealth," which means defining exactly what "maximize wealth" means to the organization and what levels of risk are acceptable for a given set of wealth creation goals. This can provide a systematic approach for defining "risk appetite."With this approach for defining risk appetite, the framework can be used to examine an entire strategy and any specific initiative.

Another challenge in risk management is identifying key risk indicators. The primary foundation of Return Driven Strategy is "Disciplined Performance Measurement and Valuation," which should include risk metrics, specifically risk metrics and performance measures that will provide insight into the risk profile of an organization in the context of risk appetite.

Mark Beasley, a board member of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and director of the Enterprise Risk Management Initiative at North Carolina State University, comments about a more strategic approach to risk management: "This framework fully describes the business strategy and activities that drive great financial performance and makes the connection between strategy and shareholder value. It can provide a way for directors and management to evaluate strategic plans and strategic initiatives and identify key risks that could destroy shareholder value while considering the upside of risk in terms of the opportunities."

Business and Executive Education

The framework also has been used in business and executive education. It's the foundation for an innovative MBA curriculum in the Kellstadt Graduate School of Business at DePaul University, which is one of the largest part-time MBA programs in North America and is consistently ranked in the top 10 in the nation by U.S. News & World Report. The program is the fastest growing in the Kellstadt GSB.

In corporate universities and executive education programs, the Return Driven Strategy framework has been used as a foundation for executive leaders and management teams. Business educators like its focus on creating shareholder value ethically. Arthur Kraft, former chairman of the board of the Association to Advance Collegiate Schools of Business (AACSB International) and dean at George L. Argyros School of Business and Economics at Chapman University, puts it this way: "The principles and concepts in Return Driven Strategy capture what we as educators and thought leaders should embed in our curricula and teachings in business schools throughout our undergraduate, graduate, and executive education programs. Business schools must focus on the importance of a firm commitment to ethically create shareholder value."

MOVING FORWARD

How is your company doing? How can you move the company in the right direction? Empowering and enabling managers with a clear way of strategic thinking and a roadmap for execution in today's changing environment is a necessity. The lessons from high-performance companies are a good starting point and can provide valuable ideas for moving forward.

RELATED ARTICLE: Return Driven Strategy: The Research

IN 10 YEARS, more than 15,000 publicly traded companies around the world have been screened for deeper study by our research teams, who categorized firms based on their cash flow characteristics. As much as 30 years of cash flow performance of each firm was included in the screening process and in the deeper, company-specific analysis afterward. In each case, the cash flows provided a realistic lens of the economic reality of the business. With this perspective, the Return Driven Strategy Initiative was able to categorize and study the patterns of high-performing firms, mediocre businesses, early-life-cycle companies, turnarounds, cyclicals, perennial poor performers, and outright bankruptcies.

The financial discipline underlying this business strategy research isn't inconsequential. Many firms that receive substantial press for being highly admired companies are found to have admirable public relations skills but less than superior financial performance. At times, companies regarded as having become "great" have in actuality been great turnarounds. Firms like this are worthy of study for how to dig a business out of a hole, but they are greatly lacking as cases for sustainable high-value achievement.

In our research, companies deemed as having "superior performance" or as "high-performance companies" were required to meet the following stringent tests:

* Cash flow returns, comparable to a very diligently computed return on invested capital (ROIC), had to exceed twice the cost of capital consistently for more than 10 years straight (rate of return on equity (ROE) was used for financial services companies).

* Growth rates in invested capital, the principal of the business, much like a savings account, had to exceed local gross domestic product (GDP) growth rates and industry averages in rates or totals over the same period.

* Total shareholder returns (TSR)--a combination of the share price gains adjusted for any stock splits plus dividends--had to exceed market performance over the time period consistent with high cash flow return and growth levels.

Our research teams and partners also reviewed tens of thousands of articles, books, case studies, and annual reports covering each company. They conducted extensive financial analyses for each company; conducted interviews with managers, customers, vendors, and competitors of the companies; carefully analyzed compensation plans and other corporate governance issues; and examined how the companies created wealth while adhering to the ethical parameters of their communities.

Mark L. Frigo, Ph.D., CMA, CPA, is director of The Center for Strategy, Execution, and Valuation in the Kellstadt Graduate School of Business and Ledger & Quill Alumni Foundation Distinguished Professor of Strategy and Leadership in the School of Accountancy at DePaul University in Chicago. He is a leading expert in strategy design and strategic risk management. Mark and Joel Litman are the cocreators of the Return Driven Strategy[R] framework and the coauthors of DRIVEN: Business Strategy, Human Actions, and the Creation of Wealth. You can reach Mark at mfrigo@depaul.edu.

Mark would like to acknowledge Joel Litman, a director at Credit Suisse and cofounder of The Center for Strategy, Execution, and Valuation, for his contributions to this article.

Deep thoughts from Hugh Hendry

2010-05-20T12:59:00.001-05:00

Eclectica Letter May 2010

Field Guide to Cognitive Biases

2010-05-18T17:17:00.000-05:00

Cognitive Biases - A Visual Study Guide by the Royal Society of Account Planning

Must read on Commodities

2010-05-05T13:51:00.001-05:00

ARP -

Thoughts On The Intermediate Trend And On An Excess-Liquidity Driven Market, By Claasen Research

2010-05-02T22:28:00.000-05:00

Claasen

CDO's for Dummies

2010-04-25T22:24:00.001-05:00

http://www.zerohedge.com/article/cdos-dummies-yes-congress-we-are-looking-you

IRS schedule M rules link

2010-04-03T20:28:00.000-05:00

http://www.irs.gov/newsroom/article/0,,id=217793,00.html

Galbraith: The Age of Uncertainity, Ep 4 - The Colonial Idea

2010-03-27T20:08:00.002-05:00

Galbraith: The Age of Uncertainity, Ep 3 - The Massive Dissent of Karl Marx

2010-03-27T20:04:00.002-05:00

Galbraith: The Age of Uncertainity, Ep 2 - The Manners & Moralisms of High Capitalism

2010-03-27T20:01:00.001-05:00

Galbraith: The Age of Uncertainity, Ep 1 - The Prophets & the Promise of Classical Capitalism

2010-03-27T19:56:00.003-05:00

The Money myth exploded

2010-03-25T17:11:00.001-05:00

http://www.michaeljournal.org/myth.htm

What should Americans Do Now

2010-03-10T19:21:00.001-06:00

Its 2010 So What Should Investors and Americans Do Now

CDS Primer

2010-03-10T07:20:00.001-06:00

http://www.zerohedge.com/article/can-someone-please-finally-explain-what-cds-are-mainstream-media

Thunder road report 15Oct09

2010-02-24T18:59:00.000-06:00

15th October 2009 This Issue: Gold Market

Weekend readings

2010-02-21T05:55:00.002-06:00

http://pragcap.com/a-primer-on-cds

http://www.zerohedge.com/article/timing-exit-competitve-devaluation-looms-euro-25-overvalued-more-thoughts-albert-edwards

http://www.indexuniverse.eu/sections/features/7255-explaining-the-wild-things.html?Itemid=126

China: The Next Black Swan

2010-02-17T22:00:00.001-06:00

From Here:

26781802-China-The-Mother-of-All-Black-Swans-By-Vitaliy-Katsenelson -

Evening Readings: 16 Feb 2010

2010-02-16T13:33:00.000-06:00

http://www.zerohedge.com/article/guest-post-jobs-plan-wed-get-if-leading-innovation-scholars-and-growth-economists-werent-bei
http://www.zerohedge.com/article/guest-post-jobs-plan-we%E2%80%99d-get-if-leading-growth-economists-and-innovation-scholars-weren%E2%80%99t-b

CDS: Credit default swaps 101

2010-02-16T13:29:00.001-06:00

From Here:
http://www.zerohedge.com/article/all-you-ever-wanted-know-about-current-sovereign-cds-market-were-afraid-ask-cds-bond-basis-c

Now that sovereign CDS traders are about to reprise the role of Jason Bourne, and be hunted by international intelligence agencies just because under the not so wise advice of their prime brokers and preferred CDS salespeople, they dared to buy a minimum amount of $5 million in 5 year CDS of [Spain|Portugal|Greece], it is worthwhile to expose this sovereign CDS "thingy" once and for all. The following BofA research report 1will introduce not only the basics, but get into some of the more arcane concepts for those who feel that the need to roundhouse Spanish intelligence officers is about to reach boiling point (call it 30-bp spread induced synesthesia).

First, in theory...
Market pessimism
Sovereign CDS are the favourite instrument used by investors to target countries with fiscal troubles and debt-rollover problems. Since the global crisis started three years ago, governments’ role has grown exponentially worldwide, thanks to the efforts of all Keynesians. The resulting transfer of risk from private to public sector finally puts a price on government credibility, which is being reflected in the rise of sovereign CDS levels globally. Back in the days when Enron/WorldCom caused a spike in credit spreads to a level implying a 10% cumulative 5y default probability for A-rated firms, few believed that one in 10 US investment-grade companies could close their doors in five years. Not only did historical evidence not support such a view, common sense seemed to go against it. What do we have now? Even after prospects for Europe backstopping Greece have risen significantly, the default probability for Greece is still pricing at 25%. Now, Italy is the new single A, with 10% default probability assuming 40% recovery. There seem to be few “invincible” countries left in the world. The market puts a 4% likelihood of a US default and that ranks the seventh safest in the world. Things go downhill from there with the next level being China matching UK, both at 7% chance of default.
To position for a default, there is little dispute that the sovereign CDS is the most direct and effective instrument. However, it is worthwhile asking what is the real likelihood of a sovereign default. Of all the 57 countries that have sovereign CDS quoted on Bloomberg (SOVR ), the average stands at 203bp, which implies a default probability of 16%, again assuming 40% recovery. We are looking at nine countries out of these 57 to default if the world does evolve according to these metrics. Is the market too pessimistic or are we missing something here? Think about what happened when the US market was pricing in a 10% default probability for all ‘single A’ names back in Enron/WorldCom days and what happened to those investors who bought protection at the peak.
Instead of default, may keep printing
No, we are not suggesting investors sell sovereign CDS protection blindly simply because we think the market may be too pessimistic about the world when looking at such high implied default probabilities. Indeed, worldwide government intervention financed by printing money may be so disconcerting that we think the sovereign issue will stay with us for an extended period time. However, there are several things investors may want to pay attention to, and the relative value play does exist.
Although we have seen multiple incidents in the past of sovereign defaults on foreign liabilities, it is quite rare for countries to refuse to make payment in full in nominal terms on their domestic-currency-denominated debt. However, for countries that rely extensively on external financing, there is a chance of default; because you can’t print money to pay back foreign liabilities. For other countries that also have high and increasing debt burdens denominated in domestic currencies, the strategy may be different. We should not expect default; instead, we should form expectations on interest rate levels, yield curve shapes and volatilities. Interestingly, the second camp spans a large set of countries, including those many are familiar with: US, Japan, Germany, China, and many others.
Linkage of rates, volatility and CDS
Interestingly, when an economy starts to emerge from a deep recession, inflation tends to stay low for quite sometime due to the large overcapacity to be absorbed. The absence of inflation supports relatively loose monetary policy. If uncertainty about the recovery persists, the government will also likely err on the side of providing sustained support to the economy through active fiscal policy. Putting the two together, we usually get a yield curve that tends to be steeper to reflect increasing concerns on the government’s fiscal discipline and financing capability. Hence, wider CDS should also mean a steeper yield curve. The correlation between the rate level and the sovereign CDS spread, however, is less certain since a weak economy tends to depress the level of interest rates while concerns over government finance tends to push it higher.
What is more interesting is the relationship between the volatility and sovereign CDS spread. From a theoretical perspective, both capture the value of options. In both cases, one pays a premium and waits until the government runs into trouble with its finances. In this sense, the implied volatility and the CDS spread should see a positive correlation. The positive correlation should also express itself through market dynamics. Wider CDS reflects higher uncertainty which causes the market to whip around on each piece of positive or negative news. The increased realized volatility should also have an impact on the implied volatility. However, the relationship is more complicated. In addition to the usual factors impacting volatility, such as the mortgage dynamics in the US and structured products hedging in Japan, a government’s response to its financing difficulty may drive a wedge between swaption price and the CDS price. As we argued, for those countries with little external debt, printing money is always an option (typically a preferred one) for the government to avoid default. Thus, though interest rates may rise sharply, there may not be the default that allows CDS protection buyers to realize their reward. Thus, the correlation between the volatility and CDS spread may be weaker for these countries. On the other hand, for those countries with more external debt, the correlation should be higher, especially during periods of heightened sovereign risk.
The correlation matrix among sovereign CDS, volatility and volatility skew over the last 13 months reveals some interesting patterns. First, the correlation among the CDS is extremely high, reflecting the potential contagion effect which is prevalent based on historical observation in the emerging market crises of Latin and Asian cases. It also reflects the illiquid nature of sovereign CDS market. One needs to source multiple markets to build meaningful risk for a portfolio of reasonable size, forcing an order-driven correlation. Second, the correlation of volatilities is much lower and less certain. It ranges between -0.3 and 0.5. We try to choose the part of volatility surface which is relatively immune from mortgage and structured-hedging issues to isolate the effect of sovereign risk concerns driven by investor positions. We are not surprised by the dispersion of volatility correlation and believe it simply reflects the fact that factors affecting the volatility are too many to be removed cleanly. What is encouraging is the positive
correlation in 100bp-payer skew. They are all positive, though the magnitude is lower than that of the CDS. Similar to CDS, the correlation reflects investors’ unease over government actions that could potentially cause higher interest rates. What comes out as a surprise is the correlation between sovereign CDS and the volatility skew. They are negative! Even for the CDS spread with its own country/region’s volatility skew. It can be argued that if the sovereign risk rises, the interest rate is much more likely to rise, and there should be enhanced interest in buying high-strike payers to move up the skew at the same time as the CDS widens. However, for this to be true, we have to assume that the investor base is the same and they are equally likely to invest in both. Unfortunately, none of the assumptions seems to be true. The investor base does intersect at the macro camp. Beyond that, the swaption market has traditionally belonged to rates investors, until last year when the field attracted many equity and credit investors who were very concerned about hyperinflation spoiling their feast. The expansion of rates-volatility as an investment choice reflects one advantage the rates market enjoys – liquidity.
Implications
By using a shorter period to calculate rolling correlation, we found that the correlation between CDS and volatility is extremely unstable. For example, the correlation between US CDS and USD 2y30y volatility varies between -0.87 and 0.91 over the past one year. Similar results can be seen from EUR 2y10y volatility and German CDS. We view this as good news and there are some investment implications for both the macro-oriented and relative-value investors.
For macro-oriented investors, if the view leads to the conclusion that moneyprinting is unsustainable on a global basis, it is better to buy CDS protection and buy volatility through payers at the same time. Such a strategy should work even better for those countries with higher external debt dependence. Lack of correlation between the volatility and CDS at normal times would provide diversification benefit when both move sideways. In the event of a spike in sovereign risk, the volatility will rise with the CDS spread and positions will become correlated in favour of better portfolio performance.
For investors who are looking for relative value, however, we think that the default risk may have been overpriced at current levels, especially for countries like US and Japan. As such we would think selling CDS protection and buying payers may be a better trade. In this case, the correlation does not help that much due to the lack of it. However, in extreme cases where these countries face the prospects of immediate default, we expect the volatility will likely move up along with rates to offset the loss in CDS spread.
And now, in practice:
When Germany comes to the rescue
News on Euro sovereigns continued to shape performances in all European asset classes this week. Somewhat more concrete developments on the political front allowed for significant tightening in peripheral spreads as well as temporary pickups in risk appetite. The odds of a complete disaster scenario have declined but nevertheless, concerns regarding the fundamental differentiation between core and non core Europe are likely to subsist in the long term, in our view. In addition, open questions on the exact nature of the support and its implementation (including the resulting cost to be bared by core countries) are likely to maintain pressure on both core and peripheral spreads and keep volatility close to current levels.
The ECB can pursue its gradual exit
While some are hoping to hear about a possible extension of the relaxed ECB collateral rule at the March meeting, the reality is that the ECB is rather heading in the other direction, having already in mind the exact steps to remove its excessive liquidity provision. In comments made on 11 February, Weber provided a more specific description of the “gradual exit”, noting that first the maturity of outstanding liquidity will be reduced then that the “most likely next exit issues will be a gradual return to normal tenders in longer term operations”, meaning 3M LTRO operations will move from full-allotment back to fixed amount/variable rate.His comments suggested on the other hand that unlimited allocation via the 1W MROs should stay in place for longer, inline with our view that liquidity will remain abundant in the system in 2010.
A normalisation of sovereign credit curves is triggered
Inline with the usual positive relationship between spread levels and CDS curve slopes, the substantial tightening of CDS spreads/ bond peripheral spreads following first the headlines on the preparation of a potential aid package for
Greece was accompanied by a steepening (ie normalisation) of CDS and ASW curves.
The reduced probability of an imminent default prompted a stronger tightening in short term CDS spreads. The Spanish 3s5s CDS curve has now disinverted, ie the 3y Spanish CDS is now tighter than the 5y, but most impressive is the steepening observed in Portugal and Greece (6.5bp and 4.6bp respectively – see margin table). Going forward, we might see a short term breakdown of the positive relationship between spreads and slopes as the reaction this week from European officials will likely keep away concerns of an imminent disaster scenario and additional spread widening is therefore likely to be greater on the longer end, resulting in a steepening of CDS curves.
Bond ASW curves have also experienced some normalisation, with a stronger ASW richening of short term bonds. The 2y10y ASW curve remains however inverted in Greece (see Chart 14). The shape of ASW curves in peripherals is not only function of the risk assessment but also depends on distribution of coming supply. In Greece, the new 10y to be syndicated by Greece in February is likely to be the next key driver of the curve.
And signs of a transfer of risk can be expected
The next development in our view is a relative widening of German, French and other core countries’ CDS relative to peripheral CDS. If a concrete decision on Greek financial aid is taken at the Ecofin meeting on 15-16 February (not the base case scenario according to latest headlines), a guarantee for Greek bond issuance for instance, we expect the CDS market to react in a similar way as when sovereigns set up guarantees for their banks (see charts next page). The current high risk associated with peripheral countries would be partly transferred to those now deemed safe with the extent of the move depending on the involvement of each country in the rescue package. On the other hand, if no concrete announcement is made, it is also likely that CDS spreads for core countries will continue widening, as risks of a weakening of the overall Eurozone increases.
On the bond side, a concrete announcement would likely result in a compression of peripheral spreads as German bonds would likely sell-off (both due to a return in risk appetite and as a result of speculations on increased German borrowing needs to finance the Greek bailout) while peripherals would rally on lower credit risk.
And dissecting the CDS-bond basis...We sure hope the Spanish spies read this to realize how unfounded their prosecution of CDS traders is
Basis at much lower levels than in Jan-Mar 2009 Although most sovereign CDS spreads broke their Feb-09 record highs in the past two weeks, this did not translate in new highs for the CDS-bond basis. The latter was rather well contained for all countries (see chart 17 with SovX vs cash and chart 18 with single name basis, based on bond spreads to OIS).
The fact that five syndicated auctions took place in January could be one of the reasons behind the strong sell-off in peripheral bonds and therefore the tighter basis compared to Feb-09. Also, this crisis being more driven by fundaments (e.g. high deficit ratios, fears of unsustainable debt) rather than a global increase in risk aversion, it is reasonable to expect a more pronounced reaction in the bond market. Long term bond holders find more reasons to be concerned.
Since 11 January, the basis declined for Greece and Ireland (see Table below) while it increased most in Portugal and also Germany and France. Demand for bonds in the latter two held very well as a result of a flight to quality and liquidity.
Sharp jump in short dated CDS flattened basis curves
Up to the middle of this week, a very strong sell-off in the short end of peripheral curves resulted in a flat bond term structure for some countries (chart 14). However, it remains that the inversion of CDS curves was more dramatic, resulting in a flattening of basis curves across countries. So why the sharp jump in short dated CDS curves? Part of the movement was due to a sudden rush to hedge default risk – some banks were using short dated CDS to cover their country exposure. In market panics, CDS spreads react faster than bonds. Short dated CDS was the easiest (and in some cases the only way) to hedge country risk. As mentioned above, short dated CDS spreads have tightened this week, but for most countries the basis remains wide in the short end.
Trading thoughts
1) Tightening of German basis We believe in a tightening of front-end German CDS-bond basis. If Germany announces a concrete intervention to help Greece, its CDS should widen (see transfer of risk above) but German bonds could suffer to a greater extent. They will become less attractive in the higher risk appetite environments while also being pressured by heavy supply in the 2y and 5y.
2) Cross country: We like to go long Belgian basis versus Italian one in the 5y. Another trade to play a normalisation is to go short the French basis versus the Dutch one. France has cheapened much more than other AAA countries on the CDS side (see Table above), either due to fears regarding the exposure of French banks to Greece or its high rollover risk. Yet if the situation regarding Greek banks deteriorates we believe it should start to impact further on Dutch credit as well, while on the rollover risk, we highlight that Netherlands has a similar 27% of debt to refinance by year end.
Drivers of the CDS-bond basis
Theoretically, both CDS spreads and yield spreads to risk free rates represent premiums received when taking an exposure to the risk of default of an entity. However a basis can exist in practice between CDS spreads and bond spreads.
Difficulty to short in cash market (increasing the basis)
Sourcing of bonds in the repo market could be difficult. Banks tend to buy CDS instead of shorting cash bonds in order to hedge their credit exposures or to express a negative view on a single name. This pushes the basis up.
Difference in relative liquidity (basis increasing with high bond liquidity)
The basis will move in such a way that provides extra compensation for investors in less liquid segment/markets, favouring countries with very liquid bond markets. This is also true, when it comes to sectors; liquidity in CDS market concentrates on maturities in 5 and 10years, whereas in the bond market, liquidity is already high in the very front end and can extend to the 30y.
Issuance patterns (mixed effect, usually decreasing basis for govies)
Banks involved in bonds syndication tend to buy protection in CDS markets during the issuance, causing the basis to widen (mainly observed in the corporate side). On the other hand, new bonds (especially govies) are often issued at a higher yield in order to attract sufficient interest during auctions, depressing the basis as a result. This was for instance the case at the launch of the 5y Greek bond at the end of January and at the Portuguese 10y syndication on 10 February.
Funding issues (decreasing the basis)
Not all investors are able to borrow at repo levels. Some of them may find it easier to obtain credit exposure by selling CDS than by being long the bond. This makes CDS spread relatively low versus bond spreads (to OIS / repo). This is particularly true at year end, when balance sheet reductions are working against cash positions and contributing to the cheapening of the bonds versus CDS (off balance sheet instruments).
Difference in players
The divergence in the types of investors in each market, with bonds mostly taken up by pension and insurance funds, while banks and short term investors are more active in CDS.

1. Sovereign CDS are options too, like swaptions; February 12, 2010

The Math behind the US Deficits?

2010-02-14T20:09:00.005-06:00

From HERE: This one is of very HIGH significance:

THE PROBLEM:

All money in the United States, except coins, is created as someone’s debt. When our nation spends more than it takes in, a deficit is created and our government “borrows” the money mainly from commercial banks. As the debt builds, so does the interest. As the interest takes up a larger percentage of the budget, real programs get squeezed.

The latest example of the squeeze is Obama’s announcement cancelling future manned space flights. No more advancing the human race in space, it’s too expensive. NASA’s total annual budget? $18 billion. Amount spent on interest on just the current national debt? At the traditional rate of 5% it will total more than $700 Billion in 2010! But guess what? While the Treasury Department reports that “only” $383 billion was spent on interest last year…,

…the real amount of money spent on interest last year alone nearly equals the total amount of money our government takes in!

Please let that sink in.

That’s right, this is no joke! Yes, that chart from the Treasury is completely misleading – as in deceptive. In fact, when all the money spent buying down interest rates is considered, we are actually spending ALL of our nation’s income, or more, just for the privilege of using our own money system!

Consider that by the end of 2010 we will have $14.3 Trillion just in current debt, just at the Federal level. “Deficits don’t matter,” right? Yet we are seeing debt driven events ripple around the globe. And since the end of 2008 through September of 2009, the U.S. Federal Reserve had committed $6.4 Trillion just aimed specifically at programs designed to keep interest rates low! And that is conservative, in fact it can be said that the purpose of nearly all the backstops and bailouts was to keep the cost of debt low! This would include backstops like the one given to the FDIC to prevent bank panic from spreading… is that not in effect buying down interest rates? Of course it is. Total commitments? More than $11 Trillion as of September 2009.

If that’s too much of a stretch for you, let’s be really conservative and only look at the amount of money actually invested by the Federal Reserve during that timeframe to buy down rates, about $1.5 Trillion! The largest section of this money went directly into buying up mortgage paper through the GSEs.

So, we spent $1.5 Trillion, at least, buying down interest rates, the sole purpose of which is to mask the debt load. This is because debt saturation has occurred and at normal interest rates, the debt load cannot be supported by incomes. That is true on all levels.

If you combine the amount the Treasury spent directly on interest in 2009, $383 billion, and add it to the $1.5 Trillion used to keep rates low, then it can and should be said that the Treasury actually spent at least $1.88 Trillion on interest!

How much money did the Federal Government take in? $2.2 Trillion is all. Remember, comparing debt or interest to GDP is a FALSE argument, a Red Herring. Income is the only thing that matters when it comes to carrying debt.

$2.2 Trillion in income, $1.88 Trillion in real interest expense. How are we looking?

This conservative estimate means that we actually only have about $320 billion to spend on everything else that’s not interest related. States going bankrupt? Roads in disrepair? The value of your retirement falling? Jobs hard to find? People going hungry?

According to www.federalbudget.com, this is how Congress currently spends our money. Note that their Treasury Department expenditures exceed $700 Billion in 2010, and that just the top three budget items exceed the total amount of revenue collected by our government. That’s without any mention of the amount spent to keep rates low.

Have you ever been trapped by logic? When this happens to your brain, it will know it. Oh sure, you may try to weasel your way out, but deep inside you will know you’ve been had.

To those who think this can reverse or that it was a one-off expenditure, you simply do not understand the exponential growth that is occurring, nor will you see the parabolic collapse that is coming.

The collapse of debt has already begun in the private sector, but the government is simply picking up that collapse and creating a parabolic growth phase of government spending and government debt. Here it is presented in the Fed’s own charts… What exponential growth? This exponential growth:

That chart spans more than the past century and is experiencing a classic parabolic blow off move that has gone quite vertical. Parabolic moves ALWAYS collapse, it is just a matter of when. When this curve collapses, it is going to be very painful for many people indeed.

Looking at that chart, is there anyway possible to believe the budget forecasts stating that the deficit is going to start coming down soon? What would that mean to the economy if it really happens at this point? Would the economy still be growing or would it be shrinking? Are those light bulbs I see coming on? Pretty illuminating isn’t it?

Okay, now we’ve seen that our outlays (spending) are skyrocketing, let’s take a look at the collapse of current receipts, again our nation’s income, but this time let’s view it in terms of year over year change. Here you will see a historic collapse of tax revenue on the Federal level:

The chart of outlays has moved into a parabolic blow off phase upwards, while at the same time the chart of current receipts has already peaked and is now collapsing downwards. This, of course, is causing deficits to enter a parabolic move of their own – the Fed refers to this deficit as our “national savings.”

The hollow words “deficits don’t matter” echo through my mind. They are spoken in the arrogant tone of supposedly educated people who continue to spread their debt backed manure. Of course they spread this manure knowing that it fertilizes their returns.

The stench of that manure ripens further as many argue that we can simply print money without debt and that will inflate existing debt away. That is a comical notion if you understand that it requires income to service debt and that the rate of debt expansion is far outstripping the rate of income growth.

If that math doesn’t convince you that change is about to come to our monetary system, then nothing will! Remember the housing bubble? “Real estate never goes down,” remember? I was one of the few who was warning about it early on, but now everyone seems to think they saw it coming. Do you see this coming as well? Or, do you believe that it’s possible to “inflate away debt…” even though your money is backed by debt?

YES, absolutely the rules are going to change, that’s exactly what I’m saying. But I’m also saying that the rule changes will not be simply printing money within the same old framework.

The day after the TARP program was announced in November 2008, I wrote a paper called Death by Numbers. In it, I simply added up all the debts on the personal, corporate, and Federal Government levels and demonstrated how the same people are ultimately responsible for all the debt on each level to the tune of $303,053 per man, woman, and child in the United States – more than $1.2 million just for my family of four, and this did not include the debt on the state and local government levels. People were stunned, you cannot argue the numbers, yet nothing has changed. Besides getting worse that is.

Recently I updated the math in an article called Zombie Nation – The Rise of the Mathematical Plague. In it I added the cost of additional debt, not counting the trillions spent bailing out mortgages in the GSEs, and showed that each worker in the United States is now responsible for $704,530 each! This is an impossible math situation as the average wage simply cannot support that much debt, especially when interest is considered.

Now, through demonstrating how much of our income actually goes to interest on our debt, we are demonstrating the same bad math just expressed in another manner. But let’s have some fun and challenge the sanity of those who believe that adding debt will cure a debt problem by asking a couple of pretty easy questions…

“Is it possible to add money to inflate away debt in a system in which money is backed by debt?”

This is what many people are saying will happen, right? Of course the fact is that almost all of our money is backed by debt. Creating more money means creating more debt. The real question becomes how do incomes keep up with the debt creation? Are they? Of course not…

Next question:
“In a system in which money is backed by debt, what happens to the supply of money if you decrease the quantity of debt?”

Of course the supply of money would fall! Do you see the dilemma that is created when you back your money with debt? We can’t pay back our debts without decreasing the supply of debt backed money, and if we do that, then the economy will suffer. But if we continue to pile on debt, then more and more of our money will go to pay interest and our economy will suffer. Those are the choices we are presented with in our current Federal Reserve Debt based system.

Thus we are damned if we do, and damned if we don’t. And it’s not just us who are damned. The entire world is built around the same clearly unsustainable system.

This begs the question, “Why is our system built like that, and to whose benefit was it made that way?”

I think you know the answer to that question – this current system was built around the Federal Reserve Act that was passed in the year 1913, and it took the money power from Congress and moved it to the private banks and bankers.

The very same interests that created this monetary conundrum are telling us “consumers” that we need to spend more to get their credit (debt) flowing again! LAUGH OUT LOUD, that is hilarious! Then they use the money created and the tax dollars that flow to them from us CITIZENS to buy the political and judicial systems! Talk about irony of ironies, the money system doesn’t even belong to them, it belongs to us! We don’t have to pay anyone for the right to use our own monetary exchange system, that notion is simply ludicrous, yet we have all been living under that system our entire lives!

Simply put, our money system was stolen from us. We can either take it back or we can continue to swim in the manure, the choice is ours, not theirs.

The globe is saturated with debt. Adding one dollar of debt now subtracts 15 cents from GDP.

The velocity of debt is zero, the debt saturation point. Adding additional debt will only cause future defaults and falling employment.

This debt saturation is causing default waves that ripple around the globe. Subprime in the U.S., Banks in the U.S., Commercial Real estate, etc. Now the debt bombs are detonating in Dubai, then Greece, in Portugal, Spain, Ireland, and even Japan. The bombs are just waiting to explode in England, Germany, the rest of Europe, and even China. Even if the bombs don’t explode immediately, the debt smolders causing global economies to suffocate. Germany is the latest to report that despite all the efforts to prevent it, their GDP is simply not growing (neither is ours in reality).

Our statistics are not comparable with bygone eras. Debt saturation has caused a phase transition and attempts to cover-up this transition have resulted in huge distortions of the truth. Below is a chart published by SG Cross Asset Research showing their computations of net liabilities to GDP. This includes liabilities that are off balance sheet, and they far exceed the liabilities carried on balance sheet:

Yes, our governments are insolvent. Insolvent being a condition in which you can no longer service current debts. That has already occurred in the United States. That is why we resorted to “Quantitative Easing” and why we use several methods to artificially buy down our interest rates. If we could have continued to borrow more money at normal rates we would have but we didn’t and we can’t as the stress in our debt auctions is now showing time and again.

We can show that insolvency in the math in several different ways. Thus you are a witness to the biggest lie and accounting scandal in the history of mankind. No, that is not an exaggeration, it is a fact, a very sad fact that we are all going to have to face one way or the other and soon.

To all those who point to this (Democrat/ Republicans!) and that (bad assed unions who are ruining our country) and claim the other thing (banks need to lend more, lol) regarding our economy, all I can really say is that your eye is way off the ball. The game of debt backed money with the ever escalating interest going to private individuals is nearing an end… the mathematical outcome of the game was decided before it ever started.

If you view the current situation objectively, you will come to the inescapable conclusion that the rules of the game must change. Who is it that is going to bring those new rules to you? The same people who created the current debt backed system? Have you heard of any solutions that address this root of the problem? Are you waiting to be rescued, or are you hiding in your bunker?

THE SOLUTION:

Yes, printing money without debt is an alternative, but that doesn’t make the current debt go away and it doesn’t bring spending back to match income. The quantities of money required to be printed would be so vast that you would soon find yourself printing trillion dollar bills.

Another solution would be to buckle up, spend FAR less, tax FAR more, and default on current debts. The economy will suffer hugely and for decades as a result, and in the end, with debt backing our money the result would be that eventually the same old cycle would repeat as the next debt bubble builds anew.

The inescapable conclusion is that if you live inside of a debt backed box, our nation and human kind will continue to be held back.

There is only one right answer for the long haul, for the good of our nation and of the world. That answer is to replace the Federal Reserve Act with the provisions of Freedom’s Vision. This will return the money system to Congress and to the People where it belongs. It will cleanse the debts and derivatives to lessen leverage in the economy while restoring balance sheets, not just for our Federal Government, but for States, Banks, Businesses, and Individuals.

Implementing Freedom’s Vision will:
1. Avoid the disaster about to unfold – regardless of how we get there, by inflation or deflation, the math of debt that underlies our currency does not work. This would break that math and preempt the negative events that are going to follow should we fail to take action.

2. End the practice of debt backed money for our Federal Government. Lower taxes and more productivity result.

3. Provide direct and immediate relief for people in debt, accomplished in a way that’s fair to everyone including those who are not in debt and without creating excessive price inflation, deflation or a giant “moral hazard.”

4. Provide direct and immediate compensation for those who are savers and have been damaged by past practice.

5. Provide relief for States, almost all of whom are in deep debt trouble.

6. Cleanse the banks and financial businesses of unserviceable debts and derivatives and would ensure that they stay that way. All banks would survive the transition, immediately benefiting from improvements in our citizen’s balance sheets. The same process would be used to cleanse other financial like businesses.

7. Businesses, both large and small, would immediately benefit from our citizens and the banks improved balance sheets.

8. Unfunded liabilities would immediately get better with zero percent price inflation.

9. Limits on special interests would separate their money from politics lessening the pressure to continually increase the quantity of money. This allows long term decision making. Special interests associated with the banking, oil, defense, food, insurance, and other industries would no longer have their huge pull. Thus politicians would not have to focus on spending our resources on special interests, but instead on the interests of the people. Budget pressures would decrease as a result.

10. States would exercise more control over their own destiny. Lower taxes on the state level, more productivity. Low cost money would become available to repair and upgrade current infrastructure and to build the infrastructure of tomorrow’s commerce.

11. The powers possessed by the central banks would be greatly diminished freeing our country and others from their methods of control via debt, now even issued worldwide by the IMF. Countries would no longer be working to pay central banks interest. Instead they would work to develop their own rule of law. Their productive labors could be used to improve their own infrastructure, to feed and cloth themselves, and to build a future for themselves. In other words, they need to be taught how to fish, not simply given a fish and asked to pay it back forever and ever.

12. No price inflation eroding away future savings. People who take on reasonable debt could once again make progress towards paying it off.

13. Massively supports education, underpinning progress so that we may continue to lead the world in innovation and the production of meaningful technologies.

14. Provides a national mission - focused on creating the energy and infrastructure of the future. REAL and meaningful economic growth would ensue and massive new employment would result.

Many argue that such a plan is not possible or is too difficult to implement. Some feel that collapse must happen first while others do not see the threats at all.

As I look back through history, here is what I see: I see that mankind has been making a steady march towards progress. I see the evolution to the Magna Carta, then to our own Constitution. I see the evolution of economic theory, although painfully slow, it has progressed from rudimentary trade, theories of self-interest, to Adam Smith’s Invisible Hand, to an understanding of supply and demand. I see monetary systems and their progression from sea shells, to wooden sticks, to metal coins, to gold, to paper, to digital.

Now THE major hurdle to overcome is how debt backs our money. We CAN and we WILL overcome this obstacle. It is the next step in the progression, a step that will be taken. To think that we will not progress goes against thousands and thousands of years of history. It will happen because the math of debt is forcing it to happen, it is the only logical conclusion. Nature has a way of pointing in the right direction. When that direction is clear, you know it, it is just, the math supports it and therefore it will last and become the next step forward for humankind.

Yes, “it’s the DEBT, Stupid!” It time to get on with Freedom’s Vision!

Pleasure Vs Pain

2010-02-12T13:18:00.001-06:00

http://www.zerohedge.com/article/just-how-ugly-sovereign-default-truth-how-self-delusions-prevent-recognition-reality

The Collapse Of The Euro: Insights By Joseph Stiglitz And Hugh Hendry - Two Part BBC Miniseries

2010-02-12T07:12:00.000-06:00

Source: ZH

The Obama banking plan

2010-02-12T07:04:00.001-06:00

The Obama banking plan explained
Tom Braithwaite, Helen Warrell and Caroline Nevitt
FT, February 4 2010
http://www.ft.com/cms/s/0/8c6665d2-11a6-11df-bceb-00144feab49a.html

Weekend SPX - 5 Feb 10

2010-02-05T16:52:00.002-06:00

Dow 1000

2010-02-05T16:38:00.000-06:00

Dow 1000 is Not a Silly Number
Winter Warning

Bradley charts for 2010

2010-01-17T10:21:00.001-06:00

Readings

2010-01-09T15:34:00.004-06:00

http://economicedge.blogspot.com/2010/01/freedoms-vision-answers-to-readers.html

Creating the Floating Exchange Rate System--The Fate of the Dollar 2010 and Beyond 1/11/10

Armstrong economics: The full monty

2010-01-09T15:31:00.001-06:00

Behind The Curtain--The Full Monty (Part One)

Behind The Curtain--The Full Monty (Part Two)

Behind The Curtain--The Full Monty (Part Three)

Links this new year

2010-01-05T18:23:00.005-06:00

http://pensionpulse.blogspot.com/2010/01/more-predictions-for-2010.html

http://www.calculatedriskblog.com/2010/01/pimcos-gross-on-fed-mbs-purchases.html

http://yelnick.typepad.com/yelnick/2010/01/predictions-2010.html

http://slopeofhope.com/2010/01/pessimistic-on-optimism.html

http://www.pimco.com/LeftNav/PIMCO+Spotlight/2009/Cyclical+Outlook+Paul+McCulley+December+2009.htm

http://www.zerohedge.com/article/316000-nfp-print-friday-bls-seasonal-fudge-factors-make-it-very-likely

http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2010/Let’s+Get+Fisical+January+2010.htm

Weekend readings

2009-12-18T16:44:00.002-06:00

TRReport18 (2)

BMO Capital Markets Basic Points Dec 2009
Gold Enjoys a 10% Bath

Weekend SPX 18th Dec09

2009-12-18T16:34:00.000-06:00

2010 Person of the year

2009-12-17T13:08:00.002-06:00

Weekend SPX

2009-12-04T15:43:00.000-06:00

Roubini on dollar carry trade and coming crash

2009-11-05T07:23:00.000-06:00

Weekend SPX

2009-10-30T15:14:00.002-05:00

Readings for this week

2009-10-27T07:52:00.003-05:00

From ZeroHedge:

JGLetter_ALL_3Q09 -

Soros Transcript

Sprott Oct 2009 Comment

Bill Gross Nov 09 comment -

Weekend SPX

2009-10-23T15:26:00.001-05:00

Weekend readings ..more..

2009-10-16T22:21:00.000-05:00

Option Bets 100 Dollar Oil by Yr End

Weekend SPX

2009-10-16T15:43:00.002-05:00

Trutle Trading rules

2009-10-16T14:43:00.000-05:00

Turtle Trading rules.

Weekend readings

2009-10-15T21:51:00.003-05:00

Nathans update on the bond markets here.
Nathan has also shared the thunder road report:

TRReport17

Weekend SPX charts

2009-10-12T08:42:00.001-05:00

Funnies

2009-10-12T07:14:00.004-05:00

Must Reads

2009-10-06T22:56:00.000-05:00

CBO

Flow of Funds

Chalmers Johnson

2009-10-06T22:52:00.001-05:00

Readings and listenings ..

2009-10-06T07:16:00.003-05:00

http://www.zerohedge.com/article/deep-thoughts-kyle-bass-0

http://www.zerohedge.com/article/charles-biderman-trashes-bls-flawed-payroll-model

http://www.zerohedge.com/article/joseph-stiglitz-market-irrationally-exuberant

http://www.zerohedge.com/article/guest-post-bank-america-how-much-should-bond-holders-be-haircut-restore-solvency

http://www.safehaven.com/article-3766.htm

Weekly US Railroad data - 26 Sep 09

2009-10-02T07:50:00.001-05:00

Weekend Charting...

2009-09-25T16:47:00.002-05:00

Michael Pettis on China

2009-09-23T08:53:00.001-05:00

Video Here

Weekend SPX

2009-09-18T16:02:00.002-05:00

Intermediate high nearby?

2009-09-14T22:49:00.000-05:00

Bougearel 9.14

TED: Where we are right now?

2009-09-14T08:18:00.000-05:00

Must Watch: Max Keiser on Gold

2009-09-14T08:11:00.000-05:00

Weekend SPX

2009-09-11T19:02:00.002-05:00

Weekend funnies

2009-09-06T22:43:00.005-05:00

Rosenberg on Aug Unemployment Numbers

2009-09-06T13:18:00.001-05:00

Here

Review of Industries

2009-09-06T13:17:00.000-05:00

Review of industries

Below are our comments on various industries and companies

Improving industries

Yet another company from the H. C. Equipment & Supplies industry in the broadly defined Health Care sector of the Standard Industrial Classification list is, we believe, worthy of favorable mention in this space. Hill-Rom Holdings, Inc. (HRC), whose sole operating subsidiary is Hill- Rom Co., Inc., is perhaps best known for its hospital beds in patients' rooms, but the product line also includes specialized operating-room and intensive-care beds, and non-invasive devices to improve circulation and treat bed sores - problems often experienced by bed-confined patients. The HRC entity was formed in March 2008 with the spin-off of Batesville Casket Co. from Hillenbrand Industries. Batesville kept the Hillenbrand name, while the health care business adopted the Hill-Rom moniker. HRC's revenues have grown at a 5.6% CAGR in recent years, but in view of a now-declining trend in hospital admissions management expects a top line smaller by 7.3% - 8.6% this year, and is guiding to an EPS range of $1.03 - $1.13 vs. $1.40. HRC's net debt of $80M compared to a market cap of $1.2B indicates a high degree of flexibility. Ultimately, the financial condition of the nation's hospital system is a key determinant of HRC's growth and profitability going forward; major pressures on the system include declining elective procedures, reimbursement pressures and patient mix, significant declines in philanthropy and endowment funds, and of course the impact of health care and/or health insurance reform. Egan-Joness recent review of HRC saw fit to upgrade its rating from BBB- to BBB.

Consumer Staples – We commented recently about the diametrically opposite strategies that Coca-Cola (KO) and PepsiCo (PEP) were following with respect to their relationship with their distribution organizations, noting in the course of our report a $6B cash offer for the balance of shares of Pepsi Bottling Group Inc. (PBG; 67%) and PepsiAmericas Inc. (PAS; 57%) that it does not already own. Rejection of the offer as "grossly inadequate" by its independent board of directors puts several issues on the table relating to PBG's credit quality. One is weak and declining interest coverage as a result of an aggressive, debt-financed acquisition program. Other issues are more positive: purchase by PEP would be a major positive, as would a higher bid from a third party if it were to materialize. We note in this connection that PBG's market price has been trading at a premium to the rejected offer's $29.50/share. Egan-Jones's recent reviews of both bottling organizations resulted in upgrades, PBG from BBB to A- (subsequently affirmed, assuming an increase in the offer price) and PAS from A- to A.
Neutral industries

Information Technology – IBM was one of nine companies selected as "safe" investment ideas in our January 2009 issue of this monthly review, with more recent discussion of "Big Blue" that focused on its aborted merger negotiations with Sun Microsystems. Citing IBM's strong credit ratios and the high level of financial flexibility that supported an increase in the common dividend from $2.10 to $2.20, Egan-Jones affirmed its A+ rating. Now, we have the unusual situation of a 12% increase for June quarter earnings despite a 13% y-o-y decline (down 7% ex-currency) in revenue. The dramatic margin improvement (18.3% pretax vs. 14.2% last year) driving this result clearly justifies management's strategic shift to emphasis on services and software; sales of mainframes and other computer hardware declined 26% compared with 2Q08. Confidence in the near-term outlook prompted management to raise full-year EPS guidance from $9.20 to $9.70. Egan-Jones, meanwhile, has upgraded IBM's rating from A+ to AA-.

Drugs – As the concluding sentence of our review of this industry in January 2008, we wrote, "Five years from now, this industry will look very different." In less than two years, this statement has been validated as a result of two mega-mergers that reduce the roster of major drug houses from eight to six, namely, the combinations of Pfizer with Wyeth, and Merck with Schering-Plough. In that article we described how a long-established and highly successful business model has shown increasing evidence of breaking down under intense and persistent competitive pressure. For many years a strategy of massive research effort, rigorous efficacy and safety testing to obtain regulatory approval, and intensive marketing under patent protection to health care providers has delivered steady earnings growth at wide profit margins. The main component of the aforementioned competitive pressure has, of course, been the growth of generic versions of off-patent drugs, now reinforced by the terms of most health insurance plans as part of a collective effort to restrain the rapid growth of health care costs. The current threat has elements of each of these issues: a marked slowdown in the development of new drugs with "blockbuster" potential just as the industry is facing a surge in patent expirations over the next five years. Its strategic response will likely involve some mix of diversification, intensive cost reduction, more focused research, and perhaps consolidation. Industry-specific strategies involve the combination of new-drug pipelines and therapy expertise in the hopes of reviving slowing revenue growth, and cost reduction achieved through the elimination of duplicative sales and market development staffs. Egan-Jones rates Pfizer, Wyeth and Merck at A+ (the latter recently upgraded from A), and Schering-Plough at A-/positive.

Banks – Capital adequacy and the various issues that affect it has once again moved front and center as a key determinant of banks' credit quality, what with the number of bank failures at 81 thus far this year and the FDIC's list of endangered banks now at 416 following the addition of 111 lenders during the latest quarter. A major risk is the ticking time bomb of commercial real estate loans, mentioned twice in this space in recent months. Our June comments cited a recent Wall Street Journal analysis of 940 small and mid-size banks using methodology similar to the Fed's stress test of nineteen major banks, and its finding that close to half of the more than $200B in potential losses was attributable to commercial real estate loans that have been a traditional specialty of regional banks. The FDIC data also reveals that the total of non-performing assets and net charge-offs is rising faster than loan loss reserves are being increased, so that the industry's ratio of reserves to bad loans, at just 63.5%, is at its lowest level since 1991.

Arrayed against this negative picture, there are positive developments to report. With respect to capital adequacy, nine of the nineteen large banks included in the stress test exercise have now paid back a total of $67B of stock issued to Treasury under the TARP program with funds raised in the private capital markets. And although Citigroup's (C) management may find political considerations affecting its decision-making process (see Autos below) as a result of the preferred-for-common exchange that gives the government a 34% voting stake in the bank, that transaction at least had the benefit of substantially increasing C's tangible common equity balance. C, along with Bank of America (BAC), Goldman Sachs (GS), and J. P. Morgan Chase (JPM) all reported June quarter bottom-line earnings in the $3B - $4B ballpark, all four showed solid profits from trading operations during the quarter, and all four passed the Fed's recent stress-test program. Also making a positive contribution to the industry's better-than-expected earnings reports was the change in accounting rules - the notorious FAS 157 - announced at the beginning of April that essentially allows the deferment of mark-to-market losses. Most positive of all was the aggressive activity by strong banks as markets began to show signs of recovery. Benefiting hugely from management's decision to put more risk capital to work as markets revived, GS delivered the most profitable quarter in its storied history. The absence of many former competitors had the predictably beneficial impact on profit margins in trading markets for credit and interest rate products as well as currencies. JPM, like GS, benefited from more aggressive activity in its traditional businesses such as investment, commercial, and retail banking and asset management, and from acquisitions of Bear Stearns and Washington Mutual at bargain-basement prices. GS, JPM, C, BAC, and Morgan Stanley (MS) have all been recently upgraded by Egan-Jones.

Defense/Aerospace – Some time ago, we commented favorably on L-3 Communications Holdings, Inc. (LLL), including an admonition to our readers not to confuse LLL with Level 3 Communications Inc. (LVLT) because the gap in credit quality between the similarly-named entities has widened significantly. LLL is the sixth largest defense contractor, a solidly profitable and well-capitalized communications systems company, whereas LVLT, operating one of the world's largest internet protocol-based fiber-optic networks, has reported losses in each of the last five years and nine of the past ten quarters through June 30, 2009. Since early 2007, LLL has been upgraded twice, from BB+ to the recently affirmed BBB, while Egan-Jones has lowered LVLT from B- to C on four separate occasions. We believe the strong contrast between LVLT and LLL is actionable, and accordingly suggest switching LVLT into LLL.
Declining industries

Autos – Last month in this space we discussed our belief that political considerations could carry increasing weight at all levels of the decision-making process at GM, now that the company has emerged from bankruptcy with 60.8% of its stock owned by the U. S. Treasury Department, with the ultimate net result being highly inefficient operating performance and grossly inadequate returns for taxpayers. We sense the presence of such considerations in the publicity behind GM's Chevrolet Volt, simply because there are so few sound economic reasons for its development and marketing on the one hand, and for its purchase and use by consumers on the other. The climate-change component of the Obama Administration's domestic policy goals is visible in GM's promotion of the Volt's projected 230 miles per gallon fuel economy from a power plant that will utilize new hybrid electric-and-gasoline technology and likely win plaudits from the "green" special interests, but we question the size of the potential market for a new, non-luxury vehicle with a distinctly luxury projected price of $40,000. Even after a $7,500 government subsidy for buyers, the Volt will be too expensive for the vast majority of the car-buying public when it is launched late next year as a 2011 model. We have often cited GM's steadily shrinking market share as an important negative credit quality issue; it does not appear that the Volt is capable of contributing to stabilization, much less to reversal, of the trend. Egan-Jones's most recent review affirmed the D credit rating for GM that has been in place since 11/19/08 when it was lowered from C to its present level.

Building Materials – The industry's construction spending reports for June show a mixed pattern, with total construction down 10.2% on a y-o-y basis but up 0.3% for sequential months. Also, the public construction component of total spending was up 5.1% y-o-y, offsetting to some degree the 16.3% y-o-y decline in private construction. Private residential construction, not surprisingly, was very weak (down 30.0%), while public health care construction spending was a bright spot with a 24.0% y-o-y increase. Departing from our usual focus on the two industry leaders, Vulcan Materials and Martin Marietta Materials, our comments this month highlight Texas Industries (TXI) and U. S. Concrete (RMIX). Following the spin-off of Chaparral Steel in 2005, TXI became a pure play in building materials, with 42% of its sales provided by cement (largest producer in Texas with a 30% market share), 35% by ready-mix concrete and consumer products, and 23% by aggregates. RMIX, as its ticker symbol implies, is virtually a pure play in ready-mix, concentrating in major markets including California, Texas, New York, New Jersey and Michigan. Increased government spending for infrastructure improvement will, we believe, be focused more on highway resurfacing than on new building or rebuilding, and is therefore likely to have a greater impact on demand for asphalt than for crushed rock or stone or cement. Although both companies' recent operating results have been depressed by the weakness in overall construction activity, comparative analysis finds TXI with greater financial flexibility than the much smaller RMIX. Egan-Jones accordingly rates TXI at BB and RMIX at B-/negative.

Energy – As we learned from their 2Q09 earnings reports, the supermajor status widely accorded ExxonMobil (XOM), Chevron (CVX), and ConocoPhillips (COP) offered scant protection against the damage to profitability caused by weak oil and gas pricing that pervaded the industry's international scene during the quarter. When the dust had settled, XOM's earnings were down 66% y-o-y, CVX's down 71%, and COP's down 76%. Clearly, oil and gas prices were by far the primary driver of bottom-line results. XOM revealed that its global upstream earnings of $3.812 billion were $6.200 billion lower than last year, of which difference $6.100 billion was attributable to lower prices. The higher production volumes achieved by CVX (+5.1%) and COP (+7%) (XOM was down 3.1%) did not come close to offsetting the negative impact of prices. Despite currently depressed earnings, credit quality of these U.S.-based supermajors remains strong. The AA ratings for XOM and CVX that have been in place since 2003 remain fully justified, in our view, with the former's cash position of $$15.6 billion as of June 30 continuing to exceed debt of $9.2 billion, even though the company has drawn down somewhat a balance that exceeded $30 billion at each of the prior three year-ends and fell just shy of $39 billion as of June 30, 2008. XOM's market cap, meanwhile, is $332.46 billion. CVX is next in line with a market cap of $138 billion, cash of $9.2 billion, and debt of $12.2 billion. CVX's Board of Directors recently increased the common dividend by 4.6% from a $2.60 annual rate to $2.72. Relatively speaking, COP is the weak sister here, with a market cap of $65.5 billion, cash of $802M, and debt of $29.5 billion. Even so, Egan-Jones rates COP at the A- level.

Machinery – Caterpillar's (CAT) 2Q earnings report included a number of unusual aspects, beginning with a bottom-line net income figure that declined y-o-y by 66% on 41% lower revenue, but on an EPS basis ($0.60, after redundancy costs of $0.12) still blew away the Wall Street consensus ($0.22). We say unusual, but CAT's operating performance exemplifies what may have become the standard corporate financial model whereby intensive cost reduction trumps sluggish or non-existent revenue increases at least temporarily as the principal driver of profit growth. In CAT's case lower SG&A and R&D expenses lessened the y-o-y decline in 2Q operating profit by $291M, while an $832M reduction of CAT's inventory during the quarter was the source of a $110M LIFO profit ($0.14 per share). Although changing currency values had a negative impact on dollar-denominated revenue, the net result for operating profit was favorable by $89M due to the beneficial effect on costs. Finally, CAT's 2Q tax rate was just 10.0% vs. 28.2% last year; the income tax line item was $40M vs. $434M. In updating its guidance for full-year sales and earnings, management cited "improved expectations" in tightening the sales forecast from "about $35B" to a $32 - $36B range vs. $51.3B in 2008, and EPS in a $1.15 - $2.25 range (before redundancy costs of $0.75), vs. $5.66 last year and up from $1.25 three months ago. All this looks like CAT may be near the trough of this cycle, for which reason Egan-Jones recently upgraded its rating from BB+ to BBB-.

Chemical – We have kept a close eye on Monsanto (MON) during the past year for several reasons. One, because its fiscal year ends August 31, its quarterly earnings reports are more visible than those from the much more numerous companies on the 3-6-9-12 cycle. Two, global agriculture is the principal driver of MON's earnings rather than the spread between volatile petroleum commodity prices that define much of the industry's raw material cost structure, and demand for industrial and consumer products that, together with highly competitive global pricing, generate the industry's revenues. Finally, Egan-Jones has carried a solid A+ rating for MON since 1/3/08 that, in our opinion, continues to be justified by persistently strong operating performance. Recently-reported operating income was essentially flat for the May quarter, despite an 11% decline in revenue, as MON's very profitable seeds business offset a 50% reduction in sales of glyphosate-based herbicides (including Roundup). In significant contrast to many other companies that have either reduced EPS guidance for the current year or withdrawn it altogether, MON management expects to report full-year results in a $3.76 - $3.92 range vs. $3.62, the former after write-offs of $0.60 - $0.66 for restructuring and acquisition-related in-process R&D. Egan-Jones's recently affirmed A+ rating for MON also includes a positive-outlook modifier.

Auto Suppliers – Back from the brink - American Axle & Manufacturing (AXL) will receive up to $210M from GM, its principal customer, an agreement that could help the supplier of axles and driveshafts stave off bankruptcy, and could also allow GM to acquire a 19.9% stake in AXL. Three entities are involved in the transaction: AXL, GM, and AXL's lenders, who so far have twice waived a deadline for a breach of AXL's loan covenants. If the loan's terms can be satisfactorily revised, GM can pay AXL $110M for pre-bankruptcy contracts and also make available a loan facility of up to $100M that initially grants GM five-year warrants for up to 7.4% of AXL stock. Then, if AXL draws the full $100M, GM's option increases by a further 12.5% of AXL stock, giving GM a potential holding of 19.9% of this key parts supplier. Egan-Jones review of these developments resulted in an upgrade of AXL from D to CC, continuity of GM support going forward was cited as a key issue. We see it as likely as long as GM remains under government control.

Retail – Although most of the current news stories about cautious consumer spending identify Wal-Mart (WMT) as the store where a lot of those folks do spend the lesser amounts of cash that they are willing to part with, we'd like to discuss another discount store chain that is more than holding its own in this very difficult environment for retailers. TJX Companies, Inc. (TJX) recently reported a 4% sales increase for 2QF1009 (ended May 1) supported by a 4% positive quarterly same-store sales comparison, and a 23% boost in net income. TJX's four domestic retail chains include the two largest off-price clothing retailers, T. J. Maxx and Marshalls; HomeGoods, focused entirely on home furnishings; and A. J. Wright clothing stores aimed at lower-income shoppers. Clothing and footwear contributed 62% of F2008 revenue, home fashions 25%, and jewelry and accessories 13%. Financially, the company presents a very strong picture with cash exceeding debt, rent-adjusted coverage ratios around 30 times, and a market cap of $14.4B. Egan-Jones-s recent review of TJX resulted in an upgrade from A- to A/positive. A fashion/style disclaimer should probably be included in our suggestion of a switch from Saks, rated at the D level since earlier this year, into TJX.

Home Builders – Don't look now, but a plus sign actually appears in front of one year-over-year percentage change figure for an important industry metric. Toll Brothers' (TOL) net new orders rose 3% for 2Q09 vs. 2Q08, the first such increase for the company since 2005. Lest this be interpreted too positively as a harbinger of improving market conditions in this beleaguered industry, TOL's net new orders in dollar terms were down 5%. Pricing is still under severe pressure from a vastly oversupplied market that now includes a significant segment of banks' sales of foreclosed homes. Rating reviews by Egan-Jones since our last comments included Centex (CTX, affirmed at CC/negative), D. R. Horton (DHI, affirmed at C), Pulte Homes (PHM, affirmed at B-/negative), and Ryland Homes (RYL, affirmed at B-/negative). No ratings were changed during the past month for any of the ten homebuilders we follow.

Source: Egan-Jones Ratings And Analytics

China and the OIL market?

2009-09-05T20:12:00.002-05:00

This may turn out to be big:

Excellent article. I have replicated from the above link below:

Thursday, September 3, 2009

CHINA AND THE BUZZ OF A PENDING BANK DEFAULT

Let’s put the pieces together here. Just this past weekend China announced that State Owned Enterprises (SOEs) will be allowed to default on commodity derivative contracts. Think of that. China has given the green light and authorized the defaulting on commodity derivative contracts.

This story broke over the weekend but has not gotten much mainstream media attention on this side of the pond. (North America). The only inference to it was the talk or “buzz” on the Wall Street floor that another bank was rumored to be close to defaulting. As Art Cashin of UBS Securities indicated in the video clip I posted earlier, normally when a market sells off on a rumor and the rumor turns out to be false, the market will tend to correct itself. IT DIDN’T.

The Reuters report cited 6 foreign banks that received letters indicating that the Chinese State Owned Enterprises would be given the green light to default on their derivatives.

A look at what a derivative actually is may be useful here. A Derivative is a financial instrument that is derived from some other underlying asset, index, event, value or condition. Rather than trade or exchange the underlying itself, derivative traders enter into an agreement to exchange cash or assets over time based on the underlying. A simple example is a futures contract: an agreement to exchange the underlying asset at a future date. Commercial and investment banks make up the foundation of the over the counter (OTC) derivatives market. Investors use derivatives to protect against risks, such as sudden changes in price or value of the underlying asset. Others tap derivatives to take on extra risk, in the hope of extra gains.

Well China owns billions of these products and it has finally come to light they have had enough of having the value of their derivatives manipulated by the manipulation of the price of the underlying asset. They have finally woken up to the fact that these derivatives have been bundled together like junk in a manner that resembles the mortgage backed derivatives that brought down the world markets last year.

Back to Reuters. Some of the State Owned Enterprises that stated their potential intentions to default were Air China. China Eastern and Cosco. Mainly in part because they took major derivatives losses over the past year but also, concerns are arising that the derivatives that they were sold by these foreign institutions are garbage, underwater and may never see the light of day. So why continue to pay for them? So the concern in the financial world is that holders of these losing products may just walk away, not unlike a home owner with a $600,000 mortgage on a home valued at $475,000 deciding to just hand in their keys. However, read on...this has nothing to do with morgtgage backed products. This time, the concern may be over Oil.

They (Reuters) cited 6 foreign banks.Where the story gets really intriguing is that among the major derivatives providers according to Reuters but also widely known in the industry, are Goldman Sachs, UBS and JP Morgan.

Here is the looming problem. These products are worth billions. One report that a good friend of mine did showed that if Goldman Sachs for example were to take this one up the rear, they could stand to lose 15 billion dollars. (This number is by no means confirmed)

An important history lesson is needed here. “Potential default” was the concern that sparked and prompted the most recent economic crisis. These intricately weaved products along with highly speculative CDOs and CDSs began to fall apart when the bubble that was in large part significantly contributed to and created by the financial institutions that were packaging this junk started to fall apart.

Imagine the impact for a brief moment if you will, on the impact to the financial landscape if China were to say “we are walking away” from those products. I would imagine that China, being the biggest purchaser of US debt, could surely collapse the US institutions that were at one point deemed too big to fail if they decide to go ahead with this plan.

This is why I don’t take tonight’s news that China purchased 50 billion dollars of IMF bonds lightly. In fact, I take it very seriously. This is why I take the buzz on the floor over the past two days very seriously as well as I do the incredible spike in Gold today. Most importantly, I do not take lightly the recent 25% correction we have seen in the Chinese Stock Market. Can all these events be interconnected some how? Is the Chinese stock collapse giving us a hint?

The Reuters story came out on Mon Aug 31, 2009 at 7:42am EDT. I find it quite interesting that the mainstream media did not take this more seriously. Reuters reported that the above noted Chinese companies have already issued letters to the banks. The Reuters article cites 4 clear points.

• State-owned firms may default on commodity hedges - report

• Bankers dismayed, confused by report; seek more details

• Lawyers question legality of the move

• Traders suspect lurking losses may have prompted warning (Adds analysts comments)

Analysts are fearing that if these three big companies came out and spelled out their losses and dismay at these products then this might prompt other large Chinese corporations to do the same.

Let’s take a closer look at the companies that have been mentioned in these news articles out of China. They are Air China, China Eastern and Cosco. If you ask me, this conundrum might have to do with oil. I deduce from this that if there is a problem brewing it has everything to do with their Oil Derivatives business.

Here’s a brief overview of what might happen should these companies, and others, default. The banks, namely Goldman Sachs, J.P. Morgan and from other accounts possibly Deutsche Bank will find themselves LONG on oil futures with no customers on the short side of the derivatives. This will most likely lead the banks to sell the excess oil futures without a care for the price. This is no different than what happened when Bear Stearns was forced to sell off their gold futures in March of 2008 which then resulted in a sharp downturn in the price of Gold.

Reuters stated:

Spokespersons at Goldman Sachs (GS.N) and UBS (UBSN.VX) declined comment, and media officials at Morgan Stanley (MS.N) and JPMorgan (JPM.N) were not immediately available for comment. All are major global providers of commodity risk management.

We have yet to hear their commentary. A Chinese statesperson was quoted as saying “"If we were among the banks receiving that letter, we would be very angry.” You bet your bottom dollar. You don’t think the firms listed above are angry, or, are they frightened that if the Chinese State Owned entities start taking affirmative action it could theoretically bring down some of the biggest remaining names on Wall Street?

Remember Reuters initial story was titled Beijing's derivative default stance rattles market. Read it thoroughly for more information.

Then, read the story that broke last Saturday to get a clearer perspective before the political and corporate spin started to enter the story. China warns banks on OTC hedge defaults –report.

“BEIJING, Aug 29 (Reuters) - Chinese state-owned enterprises (SOEs) may unilaterally terminate derivative contracts with six foreign banks that provide over-the-counter commodity hedging services, a leading financial magazine said.

China's SOE regulator, the State-owned Assets Supervision and Administration Commission (SASAC), had told the financial institutions that SOEs reserved the right to default on contracts, Caijing magazine quoted an unnamed industry source as saying.”

On September 1, 2009 Reuters said that the Banks, not the commodities would be at risk if China followed through.

Yes, legal battles would ensue should this happen and we can also expect to have Chinese political figures downplay the story in an effort to avert panic. However, if they can prove that these derivatives or the underlying asset was manipulated in a manner to profit the bank that issued the product then that may even do more damage than the default themselves.

Perhaps the “buzz” on the floor is indeed true. Perhaps we are going to see action that could annihilate one of the biggest Wall Street firms ever.

If there is one thing I have learned of late is that when the Chinese speak, we must listen. Their list of allies is ever growing and they are simply fed up of having to swallow the US garbage that has turned out to be toxic and dangerous to their highly controlled and coveted state owned enterprises.

I leave you with these thoughts that I alluded to above. The Chinese market has corrected 25%. This news broke this past weekend. New York saw a sharp sell-off on Monday. Buzz of a bank default hit the floor. The rumor did not abate and the selling intensified. The selling carried over into Tuesday. Gold, a classic hedge against troubled times has broken out to the upside, China has purchased 50 billion in IMF bonds and has been questioning the US dollar now for upwards of a year. China was up 5% overnight and Gold has continued to climb this morning.

Where there is smoke there is often fire.

Weekend SPX

2009-09-04T15:16:00.003-05:00

Karl Denninger: Kneale Abuse

2009-09-03T23:24:00.001-05:00

From Here:

How will China handle the Yuan?

2009-09-03T22:53:00.002-05:00

Source: Mish

Inquiring minds are asking "How Will China Handle The Yuan?"

It's a good question, too. Lance Lewis has a conversation with Professor Ryan Krueger in How China Will Handle the Yuan describing how it might play out. Please click on the above link for one possibility.

Here is the same conversation except with me replying to Lance instead of Professor Ryan Krueger.

Lance Lewis: You notice the extra chunky volume in the Chinese Yuan ETF (CYB) yesterday at the same time that the dollar reversed violently?

Mish: This violent reversal?

That looks like normal day to day action to me.

Lance: I’m telling ya. Something is up with China and the yuan. It would explain a lot. What if it were close to revaluing against the dollar?

We know it's fed up with funding US debt, but it can’t stop funding it as long as it continues to peg to the dollar and is forced to buy dollars every day in order to hold down the yuan. The US isn’t even its largest export market anymore. The EU is. The US consumer is broke. Why does China need to keep exporting cheap goods to the US if the US consumer can’t buy them anyway?

Now look at the recent market action in August. Normally when Chinese stocks go down, the dollar rallies and commodities get hit, just like in early August when people were betting on “the usual.” But this time, after the initial knee-jerk reaction to Chinese stocks sliding, “the usual” didn’t happen. Oil is now back on its highs. Gold is close to breaking out, and the dollar is back on its low for the year. And all of this is occurring even as Chinese stocks are back on their lows as of last night?

China revaluing the yuan is the only thing that fits, and the US Treasury may even have an inkling that it’s coming, which would explain why Obama suddenly renominated Gentle Ben on a Tuesday in late August when he was supposedly on vacation. Rather odd timing, but not so if the intent was to remove as much uncertainty as possible as to who will be running the Federal Reserve going forward in order to prevent complete panic in the dollar and Treasuries if China were to one day say “I’ve had enough” to buying more dollars and Treasuries every single day in order to hold her dollar/yuan peg.

It’s the only thing that fits. If so, the dollar would get smoked, literally, “overnight” and gold would explode. Bonds would probably get crushed, too.

Mish: No, it's not the only thing that fits. China is printing more RMB (yuan) on a relative basis than the US is printing dollars. It is using that printed money to buy commodities and China is arguably on the verge of overheating.

Moreover, the Baltic Dry shipping index is collapsing. This suggests a weakening of demand for commodities.

Oil is indeed firm, but China has also been stockpiling. How much longer that can go on with little demand for China's exports is anyone's guess.

EU may have passed the US as China's biggest trading partner, but EU consumers are not in such great shape either. For a discussion of Europe and how it relates to this mess, please see Deflation Is A Bitch.

Indeed, consumers are tapped out everywhere, and arguably European and Chinese banks are in worse shape than US banks.

Moreover, there is also a not-so-little thing called peak oil that might be keeping oil firm. And it's hurricane season.

The critical issue however, is simple math.

The US runs a trade deficit with China. That means China must accumulate US assets. China does not have a choice in the matter; it is purely a mathematical function. When the US runs a deficit, mathematically someone must run a surplus.

There is no choice in the matter other than to raise the price of goods so high that consumers won't buy them. Pray tell, what would that do to unemployment and civil unrest in China? What would that do to demand in Europe? It is virtually impossible for China to strengthen its currency to the US dollar without affecting every other currency as well.

Some might suggest that China should buy oil with those dollars, but then what would the Mideast exporters do with them?

The reason China is buying fewer US treasuries recently is that the US deficit with China is shrinking. Again this is a simple mathematical equation, not some massive conspiracy to dump the dollar. Of course China could buy US ports and bridges or oil companies instead of treasuries, but such maneuvers have been blocked by Congress and last I checked no ports or bridges are for sale.

Lance: Wal-Mart (WMT) would be in trouble. It probably wouldn’t be able to raise prices on all the cheap Chinese goods, and I’d likely have to just eat it with thinner margins. That would go for a lot of retailers actually, and their pain would be compounded by higher gasoline prices squeezing the consumer even more. What fun we’ll have.

Mish: The whole world is on thinner margins. Deflation has set in and one quarter or two of massive stimulus that is likely to fail sooner rather than later does not change that fact. Deflation is a process that takes years to play out. One or two quarters of rebound means no more to the US than it did to Japan over its two lost decades, now going on three.

In spite of record worldwide stimulus, a global recession is everywhere you look except perhaps in China. The reason is simple. When the Chinese government "suggests" banks should lend, banks lend. This is how command economies "work", using the word "work" loosely. Yes, the US has massive problems, but let's have an honest assessment of problems elsewhere.

Bottom line, China is busy ramping up production for consumers that don't exist: Not here, not in the EU, and not in China (not yet). This love affair with China, a country that will not float its currency or offer freedom of speech, and hides bank solvency issues even more so than the US, is way overdone.

Ironically, over the years, I have been a staunch defender of China, on average. Remind me to reconsider decoupling when China allows freedom of speech and floats the RMB instead of pegging it.

Lance: Question is how smart are the Chinese? Dumb enough to keep printing yuan in order to hold it down versus the tidal wave of dollars that are crashing on her shores, and at the same time fund gargantuan US government-deficit spending out of the kindness of its heart? Or smart enough to say “enough!”

Mish: As discussed above, that tidal wave is a mathematical equation. More importantly, "dumb" might be in the eyes of numerous dollar bears expecting dollar Armageddon vs. Chinese officials fearing social unrest.

Please remember the other side of the coin, namely 10's of millions of workers that China desperately wants to keep employed at nearly any cost to avoid civil unrest. A weak currency helps Chinese exports, thus keeping workers employed.

A 4-Minute Tour of the China Property Bubble

What is China doing with all that printing? Please take a A 4-Minute Tour of the China Property Bubble to find out.
World's Largest Shopping Mall Sits Vacant

The world's largest shopping mall, South China Mall in Guangzhou, China, is almost entirely empty. Click on the link to see a fascinating video.

If you thought Minnesota's Mall of America was the world's biggest shopping center, think again. South China Mall is a Vegas-like spectacle built in 2005 that now sits almost entirely empty. In the current economic climate, could this be a symbol of things to come?

The entire mall sits empty save 10-12 small shops.

Malinvestments and Commodity Prices

Think about all the concrete, steel, copper, and energy it took to build that mall. This is not an isolated case either as the previous 4-minute video shows.

Let's not confuse a renewed crack-up boom in China with a sustainable recovery. And let's not pretend much of this building is anything other than malinvestment.

Decoupling Theories Way Premature

Think about the wages those store owners get. Think about wages in China in general.

For more on wages and malinvestments please see Inside China: A Sculptor's View, an email exchange with Bill Hopen, a sculptor who frequently travels to China, often for months at a time. That post and the above videos should help open eyes.

Decoupling theories are very premature, at best.

What Would Happen If China Floated The RMB?

Yes, the US is printing. However, please remember that China, the UK, and most other countries are too. And on a relative basis, China's stimulus package is greater than the US stimulus package.

It's relative differences in printing and other such factors that will help determine currency trends. And as much as commentators pick on US stats like GDP, mark to market accounting, off sheet balances, etc, bear in mind we have far less believable data on China.

For starters, Chinese GDP numbers are simply bogus.

Professor Vitaliy Katsenelson has discussed that idea on several occasions including China's Growth an Accounting Miracle.

Once China had announced its 8 percent growth target, it began to disburse funds directed at a sharp increase in public works spending. It is important to understand that the disbursal of funds is recorded as GDP growth. So the government can easily control the pace of growth by the pace at which it releases funds that have already been allocated in the stimulus package to the creation of higher production or growth numbers. Funds disbursed for fixed-asset investment by state-owned enterprises or provincial governments are counted as having been spent when they are disbursed.

.... I am not convinced China will have inflation in the long-run. It appears that deflation is a more likely scenario as China is ridden with overcapacity – the country was geared for much higher global growth. I can, however, see inflation erupting in a very short timeframe as money has been thrown at the consumer/companies, and we are seeing this in the stock market and real estate. But in the long run, inflation appears an unlikely outcome: overcapacity and slower demand from the US and Europe will force Chinese producers to cut prices to increase utilization and stimulate demand.

And finally, I'm sure China doesn’t want the renminbi to be the world’s currency as it would drive up the value – a suicide for an export-based economy.

Professor Katsenelson was discussing China: Bogus Boom? by John Makin. It's a real gem, and well worth a look.

For all the complaints about US banks hiding things (and yes US banks are hiding things massively so), at least we have balance sheets and footnotes to look at and decipher. Can we say the same about China?

US banks are in trouble, but it is a huge mistake to think Chinese banks are in better shape.

I repeat my comment made earlier: When the Chinese government "suggests" banks should lend, banks lend. This is how command economies "work", using the word "work" loosely. Yes, the US has massive problems, but let's have an honest assessment of problems elsewhere.

In light of the above, if China floated the RMB while giving an accurate assessment of its GDP and the true state of affairs with its banks, the RMB might crash.

How would China handle that? Better yet, how would the world handle that?

Such fears are the most likely reason behind China's currency peg in the first place. Yes, China is taking steps towards floating the RMB, but China seldom rushes into things, often taking years or even decades to make major policy shifts.

Gold Seasonality And Fundamentals

By the way, I happen to agree with professor Lewis that gold seasonality is favorable. I agree with him that the intermediate to long-term fundamentals for gold are positive. We simply differ as to what those fundamentals are.

At times, in unfavorable seasonality gold has rallied. At times it doesn't. And please don't think that gold does well in times of inflation and deflation because it doesn't. Proof is simple: There was inflation every step of the way from 1980 to 2000 with gold dropping from 850 to 250 while every other asset class soared.

Gold does well in times of credit stress (stagflation, hyperinflation, or deflation). I think we can all agree (one way or another) that this has been a period of high credit stress.

Short-term I do not know, nor does anyone else what gold will do. Last year at this time, in spite of favorable seasonality gold sold off. However, unlike most other commodities, gold regained nearly everything it lost. Are we in for a repeat? No one really knows.

However, should a dollar crash occur and gold soar, given that I own gold I would benefit. On the premise that gold is money and gold should do well in deflation, I did expect gold to hold up well and it did.

Prechter, who does not view gold as money, thinks gold will collapse. Thus, not all deflationists think alike.

This post is long enough. Inquiring minds may wish to consider Countdown To Dollar Implosion Madness for a discussion of how trade deficits affect the situation.

Key Take-Aways From The Discussion

1) China will act in China's best interest.
2) China, not US market theorists will make the decision. That decision is not so clear cut once one looks at both sides of the coin.
3) China tends to move slowly in such decisions.

Regardless of what happens, dollar-crash theories involving China and BRIC mandates, secret meetings, and other speculation are getting a bit out of hand in numerous places. There are easily two sides of the coin (if not more), and China is apt to move slowly whichever way it moves.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Readings for this week

2009-09-02T23:56:00.001-05:00

1)

Wegelin Document on American Taxes and Assets[1]

2).

TRReport16

Weekend cartoons

2009-08-30T17:57:00.001-05:00

Weekend SPX - 30 Aug 2009

2009-08-30T09:59:00.002-05:00

Rosenberg: Aug 27th 2009

2009-08-27T22:04:00.002-05:00

The picture says it all.

Eclectica Fund August Commentary

2009-08-27T20:27:00.001-05:00

Source: Here
eclectica 0809

Rosenberg: Aug 26th 2009

2009-08-26T19:50:00.001-05:00

Rosenberg's commentary today:

THE MARKET DOES NOT MAKE THE NEWS
Yesterday, we witnessed some pretty fascinating things that were reported on
bubble-vision. We were told how the equity market was rallying on the news that
(1) Bernanke was reappointed; (2) the first increase (0.7% MoM seasonally
adjusted terms) in the Case-Shiller home price index since May 2006 in June,
and; (3) the seven-point jump in the Conference Board's consumer confidence
index in August, to 54.1 — taking it all the way back to where it was .... in May!
Uncork the champagne.

NOT SO FAST
1. Bernanke reappointed
We really fail to see how it could possibly be that the same central bank official,
who, over a span of a decade, presided over two massive bubbles and their
busts, can be viewed as being a positive force for the markets. Perhaps there is
some solace in knowing that the same person who created this awesome and
complex $2 trillion Fed balance sheet will be around to dismantle the largesse
since he’s probably the only one that knows how.
2. The first monthly increase in the Case-Shiller home price index
As for the second point, there is a difference between a trendline and the noise
around that trendline. Home prices are down a massive 31% from their peak
and have been in a vertical-down pattern for nearly three years. Perhaps a
respite is in order, but with the true underlying unsold inventory near 12 months’
supply, which is double what would typify a balanced housing market, it would
seem like wishful thinking that we have suddenly achieved a fundamental low in
residential real estate values (especially at the high end).
3. The seven-point jump in consumer confidence in August
With regard to point number three, we welcome any rise in consumer confidence
but an honest appraisal of the data would show that 54.1 is still a very
depressed level. In fact, the average index level during recessions is 73.0 —
August’s reading was nearly 20 points below that. So, if the recession is indeed
over and done, somebody forgot to tell this 70% chunk of GDP otherwise known
as the consumer.
Now, what about Mr. Market, who is still in a most joyful mood. Well, the normal
level of consumer confidence in the month in which the S&P 500 is up 55% from
an oversold bear market low is 100. So, the stock market is behaving as if
consumer confidence is twice the level it really is.

Look — nobody ever said Mr. Market was rational. Why, look at October 2007
when the market was trying to come up with new and exciting definitions of
global liquidity. Little did Mr. Market realize that we were within two months of
the onset of the worst global economic downturn in 70 years.
What caught our eye in that Conference Board survey was the investor
sentiment segment. Those bullish on equities rose 8 percentage points to
36.5% and the bear-share slipped to 26.4% from 34.0%. That 10 percentage
point gap in favor of the bulls is now the largest since ... October 2007.
Something to ponder about whether or not you share our contrarian streak.

Green Shoots

2009-08-25T23:08:00.000-05:00

Steve Keen: Debunking Economics

2009-08-25T23:02:00.001-05:00

Steve Keen - Getting to Grips with the Economy part I and II:

Japanese Yen Fractal - Path for the U.S. Dollar?

2009-08-24T21:50:00.001-05:00

Source: Here

August 24, 2009 Japanese Yen Fractal - Path for the U.S. Dollar? by Adam Brochert

Though I keep hearing how we're different than Japan and their lost two decades of deflation (or as close to it as we seem to get in a fiat world), we are making the same foolish mistakes: protecting the financial/banking keiretsu that caused the current mess, burying the bad debt under a cloak of secrecy, and engaging in a massive quantitative easing campaign to "stimulate" the economy. Yes, there are important differences, and unfortunately, they make the U.S. picture more grim! We have no savings to fall back on and our access to the reserve currency printing press ensures that we will abuse this privilege until the dam breaks and our currency spirals out of control. However, one step at a time. The deflationary forces engendered by the collapse of the private credit/debt markets continue to pull Americans and their favorite bankers deeper into an asset price decline/debt morass. If you are a bank or overleveraged financial institution or individual, this is a problem that has not yet gone away (for large banks, this is true even after pillaging the world's taxpayers). While it is true that our government and its [privately held, non-federal, corporate] federal reserve central bank have caused a great deal of damage to the structure of the U.S. economy and the longer-term viability of our currency by their actions, it is also true that other countries with their fiat money machines are engaging in similar plans of taxpayer-sponsored spendthrift madness. It is a race to the bottom for all fiat currencies and this is why I hold debt-free money (i.e. physical Gold). However, secular credit market implosions are not minor events and bureaucrats only have so much control over the economy, even in places like China and Russia. So, yes, the U.S. Dollar (just like all fiat currencies) will eventually get even closer to its intrinsic value of zero before it is replaced. But the game is not so simple for those looking to trade the markets (as an example, please don't ask how I've done in my trading account over the past 3 months!). Despite bailing out the banks and "printing money," the Japanese saw their currency strengthen during their mighty cyclical deflationary bear market in the 1990-1993 time frame. I know, I know, we are printing more in the U.S. and we are different, blah, blah, blah. Yes, the greater government debt creation will eventually come home to roost and cause more problems down the road. But I again believe that a rise in the U.S. Dollar on an intermediate-term basis is upon us. I found an interesting fractal in the Japanese Yen price from the 1990-1991 time frame I wanted to share to show what could happen with the US Dollar despite all of its problems. And again, keep in mind that I store my savings in physical Gold, not fiat dollars from any country. I am a [transient] deflationist who is bullish on Gold because the value of Gold relative to other assets rises during deflationary wipe outs. I also more importantly believe that we are getting dangerously close to the end game for the current global fiat currency system. This is an event one MUST be early for, as being a day late could leave you close to wiped out as a holder of U.S. Dollars. Anyway, following is a weekly chart of the Japanese Yen during the 1990-1991 time frame. Keep in mind that this chart includes the time frame following two brutal legs down in the cyclical bear market that began their lost 2 decades (which by the way haven't ended!): And in case you haven't seen it lately, here's a 22 month weekly chart of the U.S. Dollar: Now, for the obligatory "what happened next" chart in the Japanese Yen: If you don't think this can happen to the US Dollar, ask yourself why. Think of it this way: what caused the US Dollar to rise so spectacularly last fall? Whatever your answer is, do you think that those forces cannot occur again? The reason I keep harping on this is because I am passionate about Gold as an asset class in this environment. It seems that 90% of Gold bulls ignore the "reserve currency of last resort" function of Gold / its role as money. This means that Gold can do well during deflation by holding its value. It also means that commodities can tank while Gold can remain strong (which is wildly bullish for Gold miner profitability). Many Gold bulls are also commodity bulls, but I think the commodity bubble, if its poster child oil is any indication, has already burst. We are closer to the 1930s disaster than the 1970s disaster, though both decades are inexact comparisons. The governments and central banks of the world hold physical Gold as a monetary asset and reserve "just in case." Well, we are now at one of those "just in case" decades where Gold's insurance function is just as important as its appreciation function. I believe Gold will rise significantly in price and possibly in a wild and exponential fashion. But if Gold just sputters along and holds its value in the $1,000/ounce range while every other asset class that a typical individual desires collapses in value, the holder of Gold has become significantly richer in real world terms. No, I am not talking about the world coming to an end, eating Gold, or using Gold to buy groceries. Last I checked, stocks and bonds were not used to buy food or guns! I am talking about value as well as stabilization and enhancement of one's net worth in a scary investment environment. Those who plan to hold U.S. Dollars will profit from the Dollar's rise during the pending wave(s) of further deflationary panic. "Cash is king" during deflation. However, eventually the world will pull the plug on the U.S. Dollar as the reserve currency of the world. Though this could come about as an orderly process, history suggests otherwise. I don't know when this will happen and, at this point, Obama and Bernanke probably don't know either. I think another buying opportunity in Gold is pending (still...). Once the US Dollar starts rising, Gold will take an initial hit precisely because so many are holding Gold for the wrong reasons right now. When the Dollar spikes higher, you can bet the Gold bulls and momentum traders will panic, shorts will press their advantage, and a brief price spike down will allow longer-term oriented investors to pick up more Gold on weakness. As an aside, although change often happens at the fringe, expect to see more stories like this one about the role of Gold as money throughout the world.
Adam Brochert http://goldversuspaper.blogspot.com/

China's Bogus boom

2009-08-21T22:42:00.001-05:00

Source: Here
Bogus Boom

SPX Three peaks and dome house pattern?

2009-08-21T22:18:00.001-05:00

Source: Here

SP500 After the Aug 21 Existing Home Sales

Weekend SPX Charts

2009-08-21T16:13:00.002-05:00

Reforming healthcare?

2009-08-19T09:33:00.002-05:00

US Representative Barney Frank walks past a sign prior to a town hall meeting on healthcare reforms in Dartmouth, Massachusetts. (AFP Photo)

Precther on the dollar

2009-08-17T18:35:00.002-05:00

Robert Prechter on the dollar: Dollar may move to the upside.

Weekend SPX

2009-08-16T19:41:00.002-05:00

Things that matter

Amazing inspiration from obstacles

David Rosenberg: There is never just one cockroach

Ray Dalio on Charlie Rose

Bradley Siderograph

Ben on Fed

Damon Vrabel: Debunking Money Part 4 and 5

Damon Vrabel: Debunking Money Part 3

UNDERSTANDING MODERN MONETARY SYSTEMS

ForeclosureGate

Damon Vrabel: Debunking Money Part 2

Damon Vrabel: Money, Myth, and Machiavelli

TOP - Are we there yet?

Seth Klarman

The myth about Buffet

TRR for Sep 2010

Bond Bubble?

TED Talk - Benoit Mandelbrot: Fractals and the art of roughness

Wall Street Cheat sheet

Thunder road report - 28 Jun 2010

TPC on Greenspan's vigilante siren call

Niall Ferguson: Lessons & Legacies of the Financial Crisis

Bob Janjuah

Deflation?

Lessons from High-Performance Companies

Deep thoughts from Hugh Hendry

Field Guide to Cognitive Biases

Must read on Commodities

Thoughts On The Intermediate Trend And On An Excess-Liquidity Driven Market, By Claasen Research

CDO's for Dummies

IRS schedule M rules link

Galbraith: The Age of Uncertainity, Ep 4 - The Colonial Idea

Galbraith: The Age of Uncertainity, Ep 3 - The Massive Dissent of Karl Marx

Galbraith: The Age of Uncertainity, Ep 2 - The Manners & Moralisms of High Capitalism

Galbraith: The Age of Uncertainity, Ep 1 - The Prophets & the Promise of Classical Capitalism

The Money myth exploded

What should Americans Do Now

CDS Primer

Thunder road report 15Oct09

Weekend readings

China: The Next Black Swan

Evening Readings: 16 Feb 2010

CDS: Credit default swaps 101

The Math behind the US Deficits?

Pleasure Vs Pain

The Collapse Of The Euro: Insights By Joseph Stiglitz And Hugh Hendry - Two Part BBC Miniseries

The Obama banking plan

Weekend SPX - 5 Feb 10

Dow 1000

Bradley charts for 2010

Readings

Armstrong economics: The full monty

Links this new year

Weekend readings

Weekend SPX 18th Dec09

2010 Person of the year

Weekend SPX

Roubini on dollar carry trade and coming crash

Weekend SPX

More readings for this week

Readings for this week

Weekend SPX

Weekend readings ..more..

Weekend SPX

Trutle Trading rules

Weekend readings

Weekend SPX charts

Funnies

Must Reads

Chalmers Johnson

Readings and listenings ..

Weekly US Railroad data - 26 Sep 09

Weekend Charting...

Michael Pettis on China

Weekend SPX

Intermediate high nearby?

TED: Where we are right now?

Must Watch: Max Keiser on Gold

Weekend SPX

Weekend funnies