Monday, September 24, 2007

Signs of the Economic Apocalypse, 9-24-07

From Signs of the Times:

Gold closed at 738.90 dollars an ounce Friday, up 2.9% from $717.80 at the close of the previous week. The dollar closed at 0.7097 euros Friday, down 1.5% from 0.7206 at the close of the previous Friday. That put the euro at 1.4091 dollars compared to 1.3877 the Friday before. Gold in euros would be 524.38 euros an ounce, up 1.4% from 517.26 for the week. Oil closed at 81.62 dollars a barrel Friday, up 3.2% from $79.10 at the close of the week before. Oil in euros would be 57.92 euros a barrel, up 1.6% from 57.00 for the week. The gold/oil ratio closed at 9.05 Friday, up 0.2% from 9.07 at the end of the week before. In U.S. stocks, the Dow closed at 13,820.19 Friday, up 2.8% from 13,442.52 for the week. The NASDAQ closed at 2,671.22 Friday, up 2.7% from 2,602.18 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.63%, up 17 basis points from 4.46 for the week.

Bank runs, a plunging dollar, skyrocketing gold and oil accompanied rising stocks and a sharp U.S. interest rate cut by the Fed this week. The Fed was in a bind. It needed to respond to the banking crisis caused by the housing collapse by pumping liquidity (money it creates) into the system and restoring confidence. But it can only do that by lowering interest rates which reduces the value of the dollar at a time when the dollar is poised at the brink of an abyss. So it lowered interest rates more than forecast on Tuesday. Stocks rose, but the dollar fell to record lows against the euro and gold and oil rose sharply.

As usual, Mike Whitney sums up the move best:
Bernanke, Rate Cuts and the "Greenspan Put"
The Era of Global Financial Instability

Mike Whitney

September 22 / 23, 2007

"Give me control over a nation's currency and I care not who makes its laws."
--Baron M.A. Rothschild

Wall Street loves cheap money. That's why traders were celebrating on Tuesday when Fed chief Ben Bernanke announced that he'd drop interest rates from 5.25% to 4.75%. The stock market immediately zoomed skyward adding 336 points before the bell rang. The next day the giddiness continued. By mid-morning the Dow was up another 110 points and headed for the stratosphere. Everyone on Wall Street loves Bernanke. He brings them candy and sweets and lets the American worker pay the bill.

So far, the scholarly-looking Bernanke has shown that he is no different than his predecessor Alan Greenspan. Facing his first crisis, the new Fed chief chose to reward his fat-cat friends at the hedge funds and investment banks by savaging the dollar. As soon as he announced his plan to cut the Fed funds rate by .50 basis points; gold soared to $736 per ounce, oil shot up to $82 per barrel, and the euro climbed to a new high of $1.40. These are all the predictable signs of inflation. Food and energy prices will surely follow. The bottom line is that the investor class has been bailed out at the expense of everyone else who trades in dollars.

Bernanke invoked the "Greenspan put", which means that he used his power to protect his friends from the losses they should have incurred from their bad bets. Now, the big market players know that he can be counted on to bail them out whenever they make poor investment decisions. He's also lived up to his nickname, "Helicopter Ben"; ready to deal with every new calamity by tossing trillions of freshly-minted US greenbacks into the jet-stream over the NYSE so elated traders can jack-up their PEs and fatten their bottom line . We think Bernanke should abandon the helicopter altogether and personally deliver pallet-loads of $100 bills to Wall Street's doorstep, just like Bush does with contractors in Iraq. That way the fund managers can keep stoking the market with cheap cash without dawdling at the Fed's Discount Window.

Despite the merriment on Wall Street, there is a downside to Bernanke's actions. The Fed chief has shown foreign investors that he WILL NOT DEFEND THE DOLLAR. That is a powerful message to anyone who hopes to profit by investing in the US. It alerts them to the fact that the "strong dollar" policy is a fraud and that they're better off getting out of US Treasuries and dollar-backed assets. Apparently, many have already gotten the message. Last month, foreign central banks and investors dumped $9.4 billion of US Treasuries and bonds compared to net purchases in June of $24.7 billion. That means that foreigners have stopped buying our debt which is currently $800 billion per year. That's the last leg holding up the wobbly greenback. The dollar will undoubtedly fall precipitously.

So, why would Bernanke weaken the dollar even more by lowering rates 50 basis points?

Is he crazy or did he panic?

We don't know, but we do know that this is the beginning of Capital flight---the sudden exodus of foreign investment from US debt and equities. Most likely, it will be accompanied by the hissssing sound of gas escaping from a punctured equity bubble followed quickly by a painful round of deflation, massive unemployment and the gnashing of teeth.

The size of the current account deficit, which peaked in 2005 at 6.8% of GDP, has dropped to 5.5% by the end of the second quarter of 2007. This is an indication that the maxed-out American consumer is running out of gas and that our foreign trading partners are slowing their intake of US dollars. Now comes the painful part. As the trade deficit shrinks, foreign investment will become scarcer and the dollar will tumble. That means interest rates will have to go up and American's will face an agonizing economic downturn.

This is all part of the Federal Reserve's master-plan for reorganizing the US economy and political system. Since Bush took office in 2000, the dollar has been deliberately weakened; losing more than 40% of its value when compared to the euro. (from $.85 per euro in 2000 to $1.40 per euro in 2007) It has fared even worse against gold. The Fed "rubber stamped" Bush's $400 billion per year tax breaks for the wealthy and looked on approvingly while $4 trillion of national wealth was transferred to foreign investors and banks via the current account deficit (the result of currency deregulation) Also, we now know that Alan Greenspan supported the plan to invade Iraq. He even shamelessly admitted that the war was really about oil which suggests that he was attempting to preserve the dollar's link to petroleum. That linkage is what maintains the dollar's position as the world's "reserve currency". These things indicate that the Central Bank plays a vital role in the policy decisions which are reshaping American life. We assume that the Fed's members are equally supportive of the repressive police-state measures which have been put in place in anticipation of problems that will undoubtedly arise from the economic meltdown they have painstakingly engineered.

The rate cuts tell us that the Fed is now planning to balance the current account deficit on the backs of the American middle class. Prices at the supermarket and gas pump will rise immediately; probably within the next few months if not weeks. It will be harder to get credit. Wages and living standards will decline. Stocks will fall. Consumer spending will shrivel.

…Bernanke is just prolonging the pain by not allowing the market to complete its cycle so that bad debts to be written off and industry can retool for the future. He's buying time for his banker-friends, but doing considerable damage to the dollar in the process. Jim Rogers, the chairman of Beeland Interests Inc. summed up the rate cuts like this:

“Every time the Fed turns around to save its friends on Wall Street, it makes the situation worse. The dollar's going to collapse, the bond market's going to collapse. There's going to be a lot of problems in the U.S.”

Rogers is not alone in his conclusions.

Even foreign leaders, like Venezuelan President Hugo Chavez, have commented recently on the worrisome state of US markets. Three days ago Chavez said on public television that we may be facing a "global financial earthquake" as the result of "irresponsible" US economic policies. Chavez quoted Nobel Laureate Joseph Stiglitz's warning that we may be facing a major economic disaster which could lead to "widespread misery, hunger and severe unrest. And the United State is to blame."

Chavez added that the Bush administration "has had to inject $300 US billion into the private banks this month to avoid a collapse of the dollar and the world economy .The dollar is going down, they don't see that it isn't supported by reality" and because it is "because its fiscal deficit is the largest in history."
Chavez's predictions appear to be accurate as we can see that gold has suddenly skyrocketed while the dollar continues to fall.

…We are now seeing the first signs that this enormous debt-bubble is beginning to unwind. There's very little the Fed can do to affect the inevitable crash that (we believe) they engineered. As defaults in housing continue to rise; the swaps and derivatives in the secondary market will implode. Trillions in market capitalization will vanish in a flash.

US GDP for the last 6 years has largely depended on transactions involving the exchange of massively over-levered assets. Production in the real economy has remained flat. The investment banks are at the epicenter of this controversial new system called "structured finance". We continue to believe that the banks that depended on mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) (as well as asset-backed commercial paper) for the bulk of their income; are in deep trouble. Robert E. Lucas alluded to potential bank-woes in an article in the Wall Street Journal, "Mortgages and Monetary Policy":

"There is an immediate risk of a payments crisis, a modern analogue to an old-fashioned bank run. Many institutions -- not just banks HAVE PAYMENT OBLIGATIONS THAT ARE FAR IN EXCESS OF THE RESERVES TO WHICH THEY HAVE IMMEDIATE ACCESS. Against these obligations they hold short-term securities that they believed could be liquidated on short notice at little cost. If some of these securities turn out not to be liquid in this sense (and especially if no one is sure who holds them) then everyone wants to get into Treasury bonds."

Its rare when we are in agreement with the far-right viewpoints of the WSJ's Editorial page, but in this case, Lucas nailed it. The banks have "obligations that are far in excess of the reserves to which they have immediate access." This is a direct result of the new market architecture of "structured finance" which stacks debt on debt until the whole system is pushed to the breaking point.

Low interest rates can't fix this "systemic" problem. Only fiscal policy can soften the blow of a deflating credit bubble. Economist Henry Liu offers this constructive "New Deal-type" proposal which is a sensible (and ethical) way to address the prospect of growing unemployment and increasing economic hardship for the middle and lower classes:

"A case can be made that what is needed under current conditions is not more cheap money from the Fed, but full employment with rising wages by government fiscal stimulants to boost consumer demand. The US government should make use of the money that the banks cannot find worthy borrowers to lend to, with money-cautious investors seeking to lend to the government, creating jobs for infrastructure rehabilitation and upgrading education to get the economy moving again off the destructive track of privatized systemic financial manipulation." ("Either Way, It could be an Unkind Cut" Henry C K Liu, Asia Times)

Liu is right. We should be enacting the policies which reflect our values on social justice and the equitable distribution of wealth. Instead, the system is being manipulated by an oligarchy of racketeers who have savaged the currency, drained our treasury, and paved the way for a painful cycle of deflation. The US consumer is now being blamed for the massive current account deficit; as if shopping at Walmart for the lowest prices was a crime. But the Fed is the real culprit. They have been opposed to protective tariffs or currency regulation from the very beginning. No country in the history of the world has ever allowed its industrial base to be so ruthlessly decimated (offshoring, outsourcing, factory closures) just to feed the insatiable avarice of its criminal elites.

The current account deficit is the logical upshot of "free trade". And, free trade is the Orwellian moniker used to describe the millions of decent paying jobs which are sacrificed on the altar of globalization. The workers had no part in creating this destructive self-aggrandizing system.

Nor did they have any say-so in the design of the modern market, which is often referred to as "structured finance". Structured finance has been promoted as a way of using capital more efficiency by distributing risk more evenly throughout the system. In fact, it has turned out to be a colossal swindle which is now threatening to break the banks and bring the stock market crashing down. It is essentially mortgage-laundering scheme concocted by the investment banks; winked-at by the so-called regulators, facilitated by the ratings agencies, and exploited by the hedge funds. The victims of this scam are the insurance companies, foreign investors, pension funds and over-leveraged homeowners. Their losses are liable to soar into the trillions of dollars.

Fed chief Alan Greenspan enthusiastically endorsed every dodgy "structured finance" idea; including subprime lending, ARMs, Mortgage-backed securities, currency deregulation, credit expansion and structural changes to the financial services industry. These are the pavers on the road to perdition carefully put in place by the Federal Reserve.

Historian Gabriel Kolko summed up "structured finance" in a recent article "The Predicted Financial Storm Has Arrived":

"We are at an end of an era ... Now begins global financial instability. It is impossible to speculate how long today's turmoil will last-but there now exists an uncertainty and lack of confidence that has been unparalleled since the 1930s-and this ignorance and fear is itself a crucial factor. The moment of reckoning for bankers and bosses has arrived. What is very clear is that losses are massive and the entire developed world is now experiencing the worst economic crisis since 1945, one in which troubles in one nation compound those in others.

Internationalization of finance has meant less regulation than ever, and regulation was scarcely very effective even at the national level. Greed's only bounds are what makes money. Existing international institutions-of which the IMF is the most important--or well-intentioned advice will not change this reality."

The people must take over control of their own currency again. The Federal Reserve must be abolished.

The past week also saw discussion of Naomi Klein’s new book, Disaster Capitalism. Klein argues that capitalism uses the same depatterning techniques pioneered by torturers and evil psychologists.

Can Radical Capitalism Survive the Disasters It Creates?

By John Gray, The Guardian

September 22, 2007

Over the past few decades, many of the ideas of the far left have found new homes on the right. Lenin believed that it was in conditions of catastrophic upheaval that humanity advances most rapidly, and the idea that economic progress can be achieved through the devastation of entire societies has been a key part of the neo-liberal cult of the free market. Soviet-style economies left an inheritance of human and ecological devastation, while neo-liberal policies have had results that are not radically dissimilar in many countries. Yet, while the Marxist faith in central planning is now confined to a few dingy sects, a quasi-religious belief in free markets continues to shape the policies of governments.

Many writers have pointed to the havoc and ruin that have accompanied the imposition of free markets across the world. Whether in Africa, Asia, Latin America or post-communist Europe, policies of wholesale privatisation and structural adjustment have led to declining economic activity and social dislocation on a massive scale. Anyone who has watched a country lurch from one crisis to another as the bureaucrats of the IMF impose cut after cut in pursuit of the holy grail of stabilisation will recognise the process Naomi Klein describes in her latest and most important book to date. Visiting Argentina not long before the economic collapse of 2002, I found the government struggling to implement an IMF diktat to roll back public spending at a time when the economy was already rapidly contracting. The result was predictable, and the country was plunged into a depression, with calamitous consequences in terms of poverty and social breakdown.

Klein believes that neo-liberalism belongs among "the closed, fundamentalist doctrines that cannot co-exist with other belief-systems … The world as it is must be erased to make way for their purist invention. Rooted in biblical fantasies of great floods and great fires, it is a logic that leads ineluctably towards violence." As Klein sees it, the social breakdowns that have accompanied neo-liberal economic policies are not the result of incompetence or mismanagement. They are integral to the free-market project, which can only advance against a background of disasters. At times, writing in a populist vein that echoes her first book No Logo, published seven years ago, Klein seems to suggest that these disasters are manufactured as part of a deliberate policy framed by corporations with hidden influence in government. Her more considered view, which is also more plausible, is that disaster is part of the normal functioning of the type of capitalism we have today: "An economic system that requires constant growth, while bucking almost all serious attempts at environmental regulation, generates a steady stream of disasters all on its own, whether military, ecological or financial. The appetite for easy, short-term profits offered by purely speculative investment has turned the stock, currency and real estate markets into crisis-creation machines, as the Asian financial crisis, the Mexican peso crisis and the dotcom collapse all demonstrate."

There are very few books that really help us understand the present. The Shock Doctrine is one of those books. Ranging across the world, Klein exposes the strikingly similar policies that enabled the imposition of free markets in countries as different as Pinochet's Chile, Yeltsin's Russia, China and post-Saddam Iraq. Part of the power of this book comes from the parallels she observes in seemingly unrelated developments. In a fascinating and alarming examination of the underside of recent history, she notes the affinities between the policies of shock therapy imposed in the course of neo-liberal market reform and the techniques of torture that have been routinely used by the US in the course of the "war on terror." Klein begins her first chapter with a moving account of a conversation she had with a victim of a covert programme of mind-control experiments, carried out in Canada in the 1950s, which used people suffering from minor psychiatric ailments to try out techniques of "de-patterning" that aimed to scramble and reshape their personalities.

Employing electroshock therapy, sensory deprivation and drug-induced comas, these experiments helped develop some of the "coercive interrogation techniques" that have been practised in Guantánamo Bay.
Klein uses torture as a metaphor, and does not claim any cause-and-effect link between its re-emergence and the rise of neo-liberal shock therapy; but she does point to some disquieting similarities. Individuals and societies have been "de-patterned" with the aim of remaking them on a better, more rational model. In each case, the experiments have failed, while inflicting lasting and often irreparable damage on those who were subjected to them.

But has the free market experiment failed? As Klein sees it, free market shock therapy may actually have succeeded in achieving its true objectives. Post-invasion Iraq may be "a ghoulish dystopia where going to a simple business meeting could get you lynched, burned alive or beheaded." Even so, Klein points out, Halliburton is making handsome profits -- it has built the green zone as a corporate city-state, and taken on many of the traditional functions of the armed forces in Iraq. An entire society has been destroyed, but the corporations that operate in the ruins are doing rather well. Klein's message, then, seems to be that -- at least in its own, profit-centred terms -- disaster capitalism works…

It certainly does work for the sadists and psychopaths who are running things. Unless we can implement a new economic system, the rest of us don’t have much to look forward to, just one disaster after another with increasing subjection and deprivation.

Monday, September 17, 2007

Signs of the Economic Apocalypse, 9-17-07

From Signs of the Times:

Gold closed at 717.80 dollars an ounce Friday, up 1.1% from $709.70 at the close of the previous week. The dollar closed at 0.7206 euros Friday, down 0.8% from 0.7263 at the close of the previous Friday. That put the euro at 1.3877 dollars compared to 1.3768 the Friday before. Gold in euros would be 517.26 euros an ounce, up 0.3% from 515.47 for the week. Oil closed at 79.10 dollars a barrel Friday, up 3.1% from $76.70 at the close of the week before. Oil in euros would be 57.00 euros a barrel, up 2.3% from 55.71 for the week. The gold/oil ratio closed at 9.07, down 2.0% from 9.25 at the end of the week before. In U.S. stocks, the Dow closed at 13,442.52 Friday, up 2.6% from 13,100.70 for the week. The NASDAQ closed at 2,602.18 Friday, up 1.6% from 2,560.21 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.46%, up nine basis points from 4.37 for the week.

In his new book, former Federal Reserve Chair Alan Greenspan is calling for an economic depression. He didn’t put it quite that way, of course, but that’s what he did when he called for the Fed to raise interest rates through the roof .
Greenspan predicts double-digit rates

Barbara Hagenbaugh, USA TODAY

WASHINGTON — A day before the Federal Reserve is expected to cut interest rates, former Fed chairman Alan Greenspan predicts in a new book out Monday that the Fed will have to raise rates to double-digit levels in coming years to thwart inflation.

Greenspan's prediction comes a day before Fed officials are widely expected to cut interest rates for the first time in more than four years following turmoil in mortgage markets that has rippled through the entire financial sector, leading to concerns about a credit crunch and a slowdown in the overall economy.

Fed Chairman Ben Bernanke and his colleagues have kept their target for short-term interest rates, which influence borrowing costs economywide, at 5.25% for more than a year.

Greenspan, 81, says in his book The Age of Turbulence that the inflation-damping effect of globalization, which has led to lower wage pressures, inflation and interest rates worldwide, will recede.

At some point, the flow of people into the workforce in developing countries such as China, which has seen a movement of workers from farms into factories, will slow, leading to stronger wage pressures and prices, he says. The impact will be global.

And the shift "may be upon us sooner rather than later," he says. Evidence: Prices of Chinese imports coming into the USA started rising earlier this year. That suggests that in the "next few years," inflation will build unless action is taken.

Greenspan can’t really be serious about higher pay in China, India and elsewhere causing inflation. He knows as well as anyone that they can always find ravaged countries for cheap labor (Haiti, Africa, etc.). What he most likely is worried about is a collapse of the dollar if interest rates are lowered. The steady fall in the dollar’s value in recent weeks combined with a slowing of the U.S. economy raises the risk of a complete collapse, since a slowing economy normally would call for lower interest rates. But for foreign investors and central banks, the lower the interest rate on the dollar the less value it will have.
Dollar's retreat raises fear of collapse

Carter Dougherty, International Herald Tribune

Septermber 13, 2007

(Frankfurt) Finance ministers and central bankers have long fretted that at some point, the rest of the world would lose its willingness to finance the United States' proclivity to consume far more than it produces - and that a potentially disastrous free-fall in the dollar's value would result.

But for longer than most economists would have been willing to predict a decade ago, the world has been a willing partner in American excess - until a new and home-grown financial crisis this summer rattled confidence in the country, the world's largest economy.

On Thursday, the dollar briefly fell to another low against the euro of $1.3927, as a slow decline that has been under way for months picked up steam this past week.

"This is all pointing to a greatly increased risk of a fast unwinding of the U.S. current account deficit and a serious decline of the dollar," said Kenneth Rogoff, a former chief economist at the International Monetary Fund and an expert on exchange rates. "We could finally see the big kahuna hit."

In addition to increased nervousness about the pace of the dollar's decline, many currency analysts now also are willing to make an argument they would have avoided as recently as a few years ago: that the euro should bear the brunt of the dollar's decline.

The euro, shared by 13 countries, once looked like a daring experiment. But it has gained credibility and euro-denominated financial assets are as good as their U.S. counterparts. With a slow economic overhaul under way in European capitals, and a fundamentally sound corporate structure, a weaker dollar justifiably means a stronger euro.

"The euro has earned what it has gotten," said Stephen Jen, global head of currency research at Morgan Stanley in London. "It is not simply rallying by default."

So long as Americans buy more than they earn from exports - and they did, creating a current account deficit of $850 billion last year - the rest of the world financed the binge by bringing dollars into the United States for investment in stocks, bonds, real estate or other assets, thereby preserving demand for the dollar.

The continued appetite for U.S. investments stemmed from a track record of strong economic growth and a financial system that has been remarkably resistant to shocks.

But the latest turmoil in mortgage markets has, in a single stroke, shaken faith in the resilience of American finance to a greater degree than even the bursting of the technology bubble in 2000 or the terror attacks of Sept. 11, 2001, analysts said. It has also raised prospect of a recession in the wider economy.

While most economists just a few months ago would have dismissed the prospect of a dollar collapse outright, they now are debating the possibility that something on par with the dollar debacle of the 1970s might just happen again.

When a currency collapses, the central bank can push up interest rates to attract needed investment, but strangle the economy in the process. Alternatively, it can let the currency fall and watch prices of imports - and eventually competing domestic goods - rise sharply.

Double-digit inflation resulted in the 1970s and only a global recession brought it to an end.

Today, the dollar's current weakness is being driven by uncertainty over how central banks will react to the turmoil in financial markets, unleashed by the collapse of the U.S. market for subprime mortgages given to borrowers with shaky credit histories.

The European Central Bank put off an interest rate increase it had planned for September, but is still inclined to tighten credit at least one more time by the end of this year. By contrast, the U.S. Federal Reserve has hinted at a rate cut at its meeting next Tuesday - a step that would diminish the appeal of dollar-denominated assets, almost certainly sending the dollar lower.

But across a horizon of 18 months to two years, investors are pondering how quickly the dollar will fall, a question to which there are no easy answers.

After a run of strong growth, the U.S. economy has lurched into a phase of slower expansion, and last Friday the most serious warning sign appeared - an outright deterioration in employment growth.

The data has coincided with profit warnings from major U.S. retailers like Wal-Mart Stores and Home Depot, suggesting that consumer spending, the backbone of the American economy for years, was ebbing. This step would logically follow the rapidly cooling housing market, since Americans have spent heavily with money borrowed against rising home values.

A drop in consumer spending by Americans means fewer imports. The current account deficit peaked at 6.8 percent of gross domestic product in late 2005 and is now running at about 5.5 percent, with figures for the second quarter of 2007 due out on Friday.

A lower deficit means less capital needs to flow into the United States, and is consistent with a steady decline in the dollar. Since the middle of last year, the dollar, weighted for trade flows, has fallen steadily against a broad range of currencies, according to data collected by the Fed.

All this suggests that, in spite of headline-grabbing news about the latest low, the dollar could be adjusting gradually as the U.S. economy becomes driven less by lending on the back of rising home price.

The problem, as every economist knows, is that the current account deficit - about $770 billion - is still colossal in absolute terms.

And foreigners are being asked to provide those dollars at a time when the subprime turmoil is threatening to spill over into the broader economy.

Put another way, at a time when the psychology of crisis has gripped financial markets, intangible attitudes toward the dollar have become all the more important. And with growth strong elsewhere in the world, there are appealing places to go besides the dollar.

"The problem is that the deficit is still very, very large," Jen said. "And there are plenty of other investment opportunities outside the United States."

Pressed to make an educated guess, most economists opt for calm, believing the dollar is unlikely to go into a tailspin even as they mark up the odds of one.

The major holders of dollars - notably the Chinese, with their $1.3 trillion in currency reserves - have little incentive to see the dollar weaken, and their support provides the dollar with a bulwark of strength. And since investors need to stay diversified, and U.S. markets are deep and liquid, abandoning the dollar wholesale is hardly a realistic option.

"Rather than a precipitous decline, we are probably be looking at a move steadily lower," said Simon Derrick, chief currency strategist at Bank of New York in London.

Of course most economists “opt for calm” in predicting a dollar crash. Given their track record in predicting the housing crash, no one should believe their optimistic statements:
Forecast says: Chances of recession growing

Andrew Leonard, Salon

Confirmed pessimists on the economy can be excused for reacting with a big fat "I told you so" to the news today from the Wall Street Journal that its latest survey of economists had raised the chances of a U.S. recession occurring in the next 12 months to 36 percent.

Too bad the survey is essentially worthless. The monthly roundups are called "forecasts" but all they really tell us is the conventional wisdom prevailing in the moment, and for reasons not particularly clear, that wisdom almost always appears skewed toward the don't-worry-be-happy end of the spectrum.

Just for fun, let's review. One popular question posed by the Journal over the last year has been to ask whether or not "the worst of the housing bust is behind us."

In November 2006, 65 percent of the economists surveyed agreed: The worst is over.


In December 2006, 57 percent said the tide had turned.


In March 2007, an amazing 80 percent told us the worst was in our rearview mirrors!

Really, really wrong.

In April 2007, 71 percent said we'd seen the worst.

Still wrong!

In May, the Journal did not ask the question. But in June, 74 percent said the baddest of the bad stuff was bye-bye.


In August, 64 percent were whistling a happy tune.

Strangely, in September, the Journal again did not ask the question.

The evidence that we've yet to hit bottom on the housing bust can be seen in mounting foreclosures, falling home prices, accelerating construction job losses, and a flood of red ink for homebuilders. But for the most convincing proof that a chill wind is getting more blustery, one need only review the latest prediction from the National Association of Realtors, an organization renowned for its steadfast cheerfulness in the face of all real estate data to the contrary. On Tuesday, the NAR revised its estimate for existing home sales in 2007 downward, for the seventh month in a row, to an 8.6 percent drop. New home sales, it declared, would plummet by 24 percent.

Maybe that's why the Journal didn't ask the question this month. It would have been too embarrassing.

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Monday, September 10, 2007

Signs of the Economic Apocalypse, 9-10-07

From Signs of the Times:

Gold closed at 709.70 dollars an ounce Friday, up 4.1% from $681.90 at the close of the previous week. The dollar closed at 0.7263 euros Friday, down 1.1% from 0.7340 at the close of the previous Friday. That put the euro at 1.3768 dollars compared to 1.3624 the Friday before. Gold in euros would be 515.47 euros an ounce, up 3.0% from 500.51 for the week. Oil closed at 76.70 dollars a barrel Friday, up 3.6% from $74.04 at the close of the week before. Oil in euros would be 55.71 euros a barrel, up 2.5% from 54.35 for the week. The gold/oil ratio closed at 9.25 Friday, up 0.4% from 9.21 at the end of the previous week. In U.S. stocks, the Dow Jones Industrial Average closed at 13,100.70 Friday, down 2.0% from 13,357.74 for the week. The NASDAQ closed at 2,560.21 Friday, down 1.4% from 2,596.36 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.37%, down 16 basis points from 4.53 for the week.

It’s happening. Gold and oil up sharply, stocks and the dollar down, and the job numbers for August in the United States showing an actual reduction. All this can be attributed to the housing collapse. Unfortunately, that collapse has not yet come close to running its course. It’s just building up a head of steam:
Record drop in pending home sales

Index that measures contracts being signed for existing home sales drops to lowest level since 9/11 attack.

Chris Isidore

September 5 2007

NEW YORK ( -- The meltdown in the mortgage market caused the biggest drop on record in July for pending home sales, taking the index down to the lowest level since the month that included the Sept. 11, 2001 terrorist attack.

The National Association of Realtors' pending home sales index, which measures contracts to buy existing homes, fell 12.2 percent to a reading of 89.9.

It is the second lowest reading on record for the seven-year-old index, trailing only the 89.8 reading in September 2001. Economists had been looking for only about a 2 percent decline in the latest reading.

"There's bad reports and then there are truly awful ones. This is clearly the latter," said Mike Larson, real estate analyst for independent research firm Weiss Research. "Even I'm shocked by a 12 percent decline."

But Realtors' spokesman Walter Molony said the large drop isn't a surprise, given that the problems in the mortgage markets seen in July and August were the biggest disruption to the home buying market since 9/11.

"It's difficult to fully account for mortgage disruptions in the index, and our members are telling us some sales contracts aren't closing because mortgage commitments have been falling through at the last moment," said Lawrence Yun, the Realtors' senior economist, in the index report.

…The months of July and August saw rising delinquencies and defaults cause problems in the sale of mortgage backed securities. In August Countrywide Financial, the nation's leading mortgage lender, had to tighten its underwriting standards and drastically cut back many types of loans used by borrowers with less than top credit or those needing loans of greater than $417,000. Other lenders pulled out of the mortgage market altogether…

Friday saw an acceleration of the trends with gold rising sharply and stocks falling sharply:
U.S. Stocks Retreat on Payroll Drop; Bear Stearns, Alcoa Fall

Lynn Thomasson

Sept. 7 (Bloomberg) -- U.S. stocks tumbled, wiping out this week's gains, after the first monthly decline in payrolls since 2003 spurred concern the economy is headed into a recession.

General Motors Corp., Alcoa Inc. and Bear Stearns Cos. dropped after analysts slashed profit estimates. A gauge of homebuilders slid to the lowest since May 2003 after Beazer Homes USA Inc. said it received default notices from a lender.

Stocks in Europe also fell after the unexpected decrease in U.S. payrolls stoked speculation that credit-market losses will lead to a contraction in the world's largest economy. The yield on the two-year U.S. Treasury note sank to the lowest since 2005 as traders anticipated a Federal Reserve interest rate cut.

The Standard & Poor's 500 Index lost 24.09, or 1.6 percent, to 1,454.46 as of 3:04 p.m. in New York. The Dow Jones Industrial Average fell 238.99, or 1.8 percent, to 13,124.36. The Nasdaq Composite Index slid 52.71, or 2 percent, to 2,561.61.

“It's a headache for stock investors,” said Keith Wirtz, who helps manage $22 billion as chief investment officer at Fifth Third Asset Management in Cincinnati. “You've got to worry about whether we're going into a massive slowdown.”

Employers cut 4,000 jobs last month, compared with a 100,000 gain expected by economists in a Bloomberg survey. Manufacturers, builders and the government led the drop in payrolls. All 10 industry groups in the S&P 500 declined following the report.

Even publications like Fortune are joining the gloom-and-doom club:
Danger: Steep drop ahead
Even if the credit crunch passes without a major catastrophe, the prices of stocks, bonds and real estate have a long way to fall.

Jeremy Grantham

September 5 2007

(Fortune Magazine) -- Credit crises have always been painful and unpredictable. The current one is particularly hair-raising because it's occurring amid the first truly global bubble in asset pricing. It is also accompanied by a plethora of new and ingenious financial instruments. These are designed overtly to spread risk around and to sell fee-bearing products that are in great demand. Inadvertently (to be generous), they have been constructed to hide risk and confuse buyers.

How this credit crisis works out and what price we end up paying has to be largely unknowable, depending as it does on hundreds of interlocking and often novel factors and how they in turn affect animal spirits. In the end it is, of course, the management of animal spirits that makes and breaks credit crises.

But even if this crisis is contained, we are facing some near certainties that should be understood.

First, house prices may move on euphoria in the short term, but long term they depend on family income - the ability to pay mortgages and rent. At levels well above the normal four times family income, the market gradually loses first-time buyers until prices break and fall back to affordable levels.

House prices are in genuine bubble territory in the U.S., Britain and many other markets. In Britain and in some critical large cities in the U.S., for example, the multiple of family income has risen to over six times from below four times, and in London last year the percentage of first-time buyers was the lowest since records began.

From these high levels, prices are guaranteed to fall. In doing so, they will reduce consumer borrowing and spending power. They will also increase mortgage defaults, most of which lie ahead, and lower financial profits and confidence.

Second, profit margins are at record levels around the world. They have lifted stock prices directly alongside the rising earnings. They have served to raise P/E multiples as well, for surprisingly, investors on average reward higher margins with higher P/Es. This is fine for an individual stock, but for the entire market, multiplying boom-time profits by high P/Es is horrific double counting and sends markets far too high in good times (and far too low in bad times).

Higher margins also indirectly raise prices by providing more cash flow for buybacks and takeovers. So high profit margins offer multiple supports for the market, but they will certainly decline. They are the most dependably mean-reverting series in finance: If high margins do not attract greater competition, then a wheel has fallen off the capitalist machine. For U.S. and developed foreign markets, fair value (defined as normal P/E times normal profit margins) is about one-third below today's level, and for emerging markets it is about 25 percent lower.

Third, and most important, risk will be repriced. Last year a broad base of risk measures - including volatility (VIX), junk and emerging debt spreads, CD rates, high-quality vs. low-quality stock values - reflected the lowest risk premiums in history. On some data, indeed, investors actually appeared to be paying for the privilege of taking risk.

For fixed income, some spreads widened slowly at first this year and then unexpectedly widened rapidly in recent weeks. For equities, though, the process has hardly started. Junkier stocks continued to outperform into June, even as the subprime woes spread. At the end of the cycle, high-quality blue chips will once again sell at normal premiums or better.

Investment bubbles and high animal spirits do not materialize out of thin air. They need extremely favorable economic fundamentals together with free and easy, cheap credit, and they need it for at least two or three years. Importantly, they also need serial pleasant surprises in such critical variables as global GNP growth. All of this has been provided.

These conditions always produce excess and are always extrapolated. Unfortunately, like almost all other investment factors, they eventually move back to normal.

As wonderfully favorable factors cool off, asset prices will be under broad pressure, and risky assets will be under extreme pressure. If the credit crisis gets out of control, this will happen quickly and painfully. The important point to make here is that even if all works out well on the credit front, it will still happen slowly.

What makes all this market instability so much more dangerous is the fraud and criminality that seems to be anywhere in the economy where you turn over a rock. Where would the U.S. economy be without the housing bubble, ridiculous amounts of debt at all levels (consumer, business, and government) and out-of-control war spending? As for the latter, Rolling Stone ran a long piece on fraud in Iraq war spending by the Bush regime. Here are a few excerpts:
The Great Iraq Swindle

How Bush Allowed an Army of For-Profit Contractors to Invade the U.S. Treasury

Operation Iraqi Freedom, it turns out, was never a war against Saddam ­Hussein's Iraq. It was an invasion of the federal budget, and no occupying force in history has ever been this efficient. George W. Bush's war in the Mesopotamian desert was an experiment of sorts, a crude first take at his vision of a fully privatized American government. In Iraq the lines between essential government services and for-profit enterprises have been blurred to the point of absurdity -- to the point where wounded soldiers have to pay retail prices for fresh underwear, where modern-day chattel are imported from the Third World at slave wages to peel the potatoes we once assigned to grunts in KP, where private companies are guaranteed huge profits no matter how badly they f*** things up.

And just maybe, reviewing this appalling history of invoicing orgies and million-dollar boondoggles, it's not so far-fetched to think that this is the way someone up there would like things run all over -- not just in Iraq but in Iowa, too, with the state police working for Corrections Corporation of America, and DHL with the contract to deliver every Christmas card. And why not? What the Bush administration has created in Iraq is a sort of paradise of perverted capitalism, where revenues are forcibly extracted from the customer by the state, and obscene profits are handed out not by the market but by an unaccountable government bureauc­racy.

… It was an awful idea, perhaps the worst America has ever tried on foreign soil. But if you were in on it, it was great work while it lasted. Since time immemorial, the distribution of government largesse had followed a staid, paper-laden procedure in which the federal government would post the details of a contract in periodicals like Commerce Business Daily or, more ­recently, on the FedBizOpps Web site. Competitive bids were solicited and contracts were awarded in accordance with the labyrinthine print of the U.S. Code, a straightforward system that worked well enough before the Bush years that, as one lawyer puts it, you could "count the number of cases of criminal fraud on the fingers of one hand."

There were exceptions to the rule, of course -- emergencies that required immediate awards, contracts where there was only one available source of materials or labor, classified deals that involved national security. What no one knew at the beginning of the war was that the Bush administration had essentially decided to treat the entire Iraqi theater as an exception to the rules. All you had to do was get to Iraq and the game was on.

But getting there wasn't easy. To travel to Iraq, would-be contractors needed permission from the Bush administration, which was far from blind in its appraisal of applicants. In a much-ballyhooed example of favoritism, the White House originally installed a clown named Jim O'Beirne at the relevant evaluation desk in the Department of Defense. O'Beirne proved to be a classic Bush villain, a moron's moron who judged applicants not on their Arabic skills or their relevant expertise but on their Republican bona fides; he sent a twenty-four-year-old who had never worked in finance to manage the reopening of the Iraqi stock exchange, and appointed a recent graduate of an evangelical university for home-schooled kids who had no accounting experience to manage Iraq's $13 billion budget. James K. Haveman, who had served as Michigan's community-health director under a GOP governor, was put in charge of rehabilitating Iraq's health-care system and decided that what this war-ravaged, malnourished, sanitation-deficient country most urgently needed was . . . an anti-smoking campaign.

… Town-selectmen types like Haveman weren't the only people who got passes to enter Iraq in the first few years. The administration also greenlighted brash, modern-day forty-niners like Scott Custer and Mike Battles, a pair of ex-Army officers and bottom-rank Republican pols (Battles had run for Congress in Rhode Island and had been a Fox News commentator) who had decided to form a security company called Custer Battles and make it big in Iraq. "Battles knew some people from his congres­sional run, and that's how they got there," says Alan Grayson, an attorney who led a whistle-blower lawsuit against the pair for defrauding the government.

Before coming to Iraq, Custer Battles hadn't done even a million dollars in business. The company's own Web site brags that Battles had to borrow cab fare from Jordan to Iraq and arrived in Baghdad with less than $500 in his pocket. But he had good timing, arriving just as a security contract for Baghdad International Airport was being "put up" for bid. The company site raves that Custer spent "three sleepless nights" penning an offer that impressed the CPA enough to hand the partners $2 million in cash, which Battles promptly stuffed into a duffel bag and drove to deposit in a Lebanese bank.

Custer Battles had lucked into a sort of Willy Wonka's paradise for contractors, where a small pool of Republican-friendly businessmen would basically hang around the Green Zone waiting for a contracting agency to come up with a work order. In the early days of the war, the idea of "competition" was a farce, with deals handed out so quickly that there was no possibility of making rational or fairly priced estimates. According to those familiar with the process, contracting agencies would request phony "bids" from several contractors, even though the winner had been picked in advance. "The losers would play ball because they knew that eventually it would be their turn to be the winner," says Grayson.

To make such deals legal, someone in the military would simply sign a piece of paper invoking an exception. "I know one guy whose business was buying ­weapons on the black market for contractors," says Pratap Chatterjee, a writer who has spent months in the Mideast researching a forthcoming book on Iraq contracts. "It's illegal -- but he got military people to sign papers allowing him to do it."

The system not only had the advantage of eliminating red tape in a war zone, it also encouraged the "entrepreneurship" of patriots like Custer and Battles, who went from bumming cab fare to doing $100 million in government contracts practically overnight. And what business they did! The bid that Custer claimed to have spent "three sleepless nights" putting together was later described by Col. Richard Ballard, then the inspector general of the Army, as looking "like something that you and I would write over a bottle of vodka, complete with all the spelling and syntax errors and annexes to be filled in later." The two simply "presented it the next day and then got awarded about a $15 million contract."

The deal charged Custer Battles with the responsibility to perform airport ­security for civilian flights. But there were never any civilian flights into Baghdad's airport during the life of their contract, so the CPA gave them a job managing an airport checkpoint, which they failed miserably. They were also given scads of money to buy expensive X-ray equipment and set up an advanced canine bomb-sniffing system, but they never bought the equipment. As for the dog, Ballard reported, "I eventually saw one dog. The dog did not appear to be a certified, trained dog." When the dog was brought to the checkpoint, he added, it would lie down and "refuse to sniff the vehicles" -- as outstanding a metaphor for U.S. contractor performance in Iraq as has yet been produced.

Like most contractors, Custer Battles was on a cost-plus arrangement, which means its profits were guaranteed to rise with its spending. But according to testimony by officials and former employees, the partners also charged the government millions by making out phony invoices to shell companies they controlled. In another stroke of genius, they found a bunch of abandoned Iraqi Airways forklifts on airport property, repainted them to disguise the company markings and billed them to U.S. tax­payers as new equipment. Every time they scratched their asses, they earned; there was so much money around for contractors, officials literally used $100,000 wads of cash as toys. "Yes -- $100 bills in plastic wrap," Frank Willis, a former CPA official, acknowledged in Senate testimony about Custer Battles. "We played football with the plastic-wrapped bricks for a little while."

The Custer Battles show only ended when the pair left a spreadsheet behind after a meeting with CPA officials -- a spreadsheet that scrupulously detailed the pair's phony invoicing. "It was the worst case of fraud I've ever seen, hands down," says Grayson. "But it's also got to be the first instance in history of a defendant leaving behind a spreadsheet full of evidence of the crime."

But even being the clumsiest war profit­eers of all time was not enough to bring swift justice upon the heads of Mr. Custer and Mr. Battles -- and this is where the story of America's reconstruction effort gets really interesting. The Bush administration not only refused to prosecute the pair -- it actually tried to stop a lawsuit filed against the contractors by whistle-blowers hoping to recover the stolen money. The administration argued that Custer Battles could not be found guilty of defrauding the U.S. government because the CPA was not part of the U.S. government. When the lawsuit went forward despite the administration's objections, Custer and Battles mounted a defense that recalled Nuremberg and Lt. Calley, arguing that they could not be guilty of theft since it was done with the government's approval.

The jury disagreed, finding Custer Battles guilty of ripping off taxpayers. But the verdict was set aside by T.S. Ellis III, a federal judge who cited the administration's "the CPA is not us" argument. The very fact that private contractors, aided by the government itself, could evade conviction for what even Ellis, a Reagan-appointed judge, called "significant" evidence of fraud, says everything you need to know about the true nature of the war we are fighting in Iraq. Is it ­really possible to bilk American taxpayers for repainted forklifts stolen from Iraqi Airways and claim that you were just following orders? It is, when your commander in chief is George W. Bush. There isn't a brazen, two-bit, purse-snatching money caper you can think of that didn't happen at least 10,000 times with your tax dollars in Iraq. At the very outset of the occupation, when L. Paul Bremer was installed as head of the CPA, one of his first brilliant ideas for managing the country was to have $12 billion in cash flown into Baghdad on huge wooden pallets and stored in palaces and government buildings. To pay contractors, he'd have agents go to the various stashes -- a pile of $200 million in one of Saddam's former palaces was watched by a single soldier, who left the key to the vault in a backpack on his desk when he went out to lunch -- withdraw the money, then crisscross the country to pay the bills. When desperate auditors later tried to trace the paths of the money, one agent could account for only $6,306,836 of some $23 million he'd withdrawn. Bremer's office "acknowledged not having any supporting documentation" for $25 million given to a different agent. A ministry that claimed to have paid 8,206 guards was able to document payouts to only 602. An agent who was told by auditors that he still owed $1,878,870 magically produced exactly that amount, which, as the auditors dryly noted, "suggests that the agent had a reserve of cash."

In short, some $8.8 billion of the $12 billion proved impossible to find. "Who in their right mind would send 360 tons of cash into a war zone?" asked Rep. Henry Waxman, chairman of the House Oversight Committee. "But that's exactly what our government did."

Because contractors were paid on cost-plus arrangements, they had a powerful incentive to spend to the hilt. The undisputed master of milking the system is KBR, the former Halliburton subsidiary so ubiquitous in Iraq that soldiers even encounter its customer-survey sheets in outhouses. The company has been exposed by whistle-blowers in numerous Senate hearings for everything from double-charging taxpayers for $617,000 worth of sodas to overcharging the government 600 percent for fuel shipments. When things went wrong, KBR simply scrapped expensive gear: The company dumped 50,000 pounds of nails in the desert because they were too short, and left the Army no choice but to set fire to a supply truck that had a flat tire. "They did not have the proper wrench to change the tire," an Iraq vet named Richard Murphy told investigators, "so the decision was made to torch the truck."

In perhaps the ultimate example of military capitalism, KBR reportedly ran convoys of empty trucks back and forth across the insurgent-laden desert, pointlessly risking the lives of soldiers and drivers so the company could charge the taxpayer for its phantom deliveries. Truckers for KBR, knowing full well that the trips were bulls***, derisively referred to their cargo as "sailboat fuel."

In Fallujah, where the company was paid based on how many soldiers used the base rec center, KBR supervisors ordered employees to juke the head count by taking an hourly tally of every soldier in the facility. "They were counting the same soldier five, six, seven times," says Linda Warren, a former postal worker who was employed by KBR in Fallujah. "I was even directed to count every empty bottle of water left behind in the facility as though they were troops who had been there."

Yet for all the money KBR charged taxpayers for the rec center, it didn't provide much in the way of services to the soldiers engaged in the heaviest fighting of the war. When Warren ordered a karaoke machine, the company gave her a cardboard box stuffed with jumbled-up electronic components. "We had to borrow laptops from the troops to set up a music night," says Warren, who had a son serving in Fallujah at the time. "These boys needed R&R more than anything, but the company wouldn't spend a dime." (KBR refused requests for an interview, but has denied that it inflated troop counts or committed other wrongdoing in Iraq.)

One of the most dependable methods for burning taxpayer funds was simply to do nothing. After securing a contract in Iraq, companies would mobilize their teams, rush them into the war zone and then wait, citing the security situation or delayed paperwork -- all the while charging the government for housing, meals and other expenses. Last year, a government audit of twelve major contracts awarded to KBR, Parsons and other companies found that idle time often accounted for more than half of a contract's total costs. In one deal awarded to KBR, the company's "indirect" administrative costs were $52.7 million, and its direct costs -- the costs associated with the ­actual job -- were only $13.4 million.

Companies jacked up the costs even higher by hiring out layers of subcontractors to do their work for them. In some cases, each subcontractor had its own cost-plus arrangement. "We called those 'cascading contracts,' " says Rep. Van Hollen. "Each subcontractor piles on a lot of costs, and eventually they would snowball into a huge payout. It was a green light for waste." …

There’s more but you get the idea. The fraud and criminality extends to the markets as well. Here is Dennis Hudson on the possibility than as much as 50% of stocks are actually “counterfeit.”

Counterfeit Stocks

Bearing in mind that any trigger can set off the others, perhaps the most intriguing and overtly threatening is the issue of counterfeit securities. Be sure of it, if you own stock or mutuals, you are almost certainly holding from 10-50% counterfeit or more.

Most people are not terribly sophisticated about stocks (they have better things to do, like having a life), so we need to first explain a few things so everyone can see the true nature of the counterfeit threat. You may own only blue chips, the trading of which is mediated by two parties, your broker and a floor specialist. Trades in lesser stocks are mediated by your broker and a market maker ("mm"). For practical purposes, market makers and specialists perform much the same function- they bring buyers and sellers together. Stocks listed on the Amex involve neither market maker nor specialist- the Amex is fully computerized. For the sake of simplicity, I'll talk only about how market makers operate, and that can be roughly translated into how specialists operate as well. But the Amex is not immune from what I'll describe, merely by virtue of lacking mm's and specialists, and you'll see why.

Do you have a pension coming to you one day? A lot of pension money goes into stocks. You might want to keep that in mind while reading this.

To be fair to legislators, regulators, mm's and specialists alike, whether they deserve it or not, I want to begin by explaining why counterfeit shares, up to a point, actually benefit the markets. This brings us to the perfectly legal procedures known as naked short selling ("nss") and short selling ("shorting") in general. Let's start with shorting.

In a normal stock trade, you try to buy low and sell high. In a short, you try to sell high and buy low, i.e., you are taking the position that the price will go down- and if it does, you will make money. A short works this way... let's say you believe that ABC Cookies (we'll call its symbol ABCC) is about to drop in price. You tell your broker you want to short $10,000 worth of ABCC. Your broker then lends you a number of shares equal to that amount for you to sell into the market (this whole process is at the click of a mouse or with a phone call). And you were right, the price drops 20%, at which point you instruct your broker to close the position. Your broker promptly buys the shares back for you at this new lower price. You sold the shares you borrowed at $10,000 and now you buy them back at $8,000 (note that if you're wrong and the price instead goes up, you will lose money). So your broker gives you your $2,000 profit, takes back the shares that were loaned to you, and all is well. Or is it?

The truth is, your broker often never owns the shares they loan you to begin with. This is called naked short selling (nss). All was done on trust and handshakes among you, the broker, the market makers, the buyer's broker, and the buyer. As long as the trade settles and everybody got what they wanted (or deserved), no harm appears to have been done. But what if you sell those phony shares but the buyer never liquidates their position (you might liquidate yours, but you'd be buying the shares back from someone else willing to sell)? The buyer is living under the old wisdom we talked about- buy and hold for years and years. So now there's $10,000 worth of phony ABCC stock just sitting out there, right? And if you multiply that times millions of transactions daily, times 250 days per year, times dozens of years since the practice began... well, you get the picture. But, there's supposed to be a legal mechanism to prevent this accrual of counterfeit in our financial markets.

Supposedly, before or seasonably after executing a naked short trade, mm's and brokers have to make arrangements to borrow or otherwise acquire the actual shares in question. It's an admirable concept, providing the markets with the benefits of liquidity while supposedly preventing massive counterfeiting. After all, when you make a trade, you want to do it now, not sometime next week after the real shares have been delivered to your broker for loan to you. But for many years, there was virtually no oversight of this, nor enforcement, nor even any apparent penalties for failure to comply. In other words, it put brokers and mm's on an "honor system", a ludicrous oxymoron if ever I heard one when applied to key players in financial markets.

And there's more to this. By putting counterfeit shares out there, and then failing to deliver the actuals shares in a seasonable manner (called "ftd's"- "fails to deliver"), brokers and market makers are constantly diluting the stock and either forcing its price down or at least preventing it from rising as it should over time. Why? Because the greater the supply is, relative to demand, the lower the price. I'll give you some concrete and disastrous examples of the effects of nss and ftd's on particular stocks in a minute, but first let's look at a much larger example of this unpleasant phenomenon.

As already noted, if you short a stock you profit by the price going down, not up, and you lose money if it goes up. Keep in mind also that shorting is the process of first selling and then buying back, the exact reverse of normal "long" trading. Back to the example of ABCC: suppose that a lot of people want to buy ABCC (we call them "longs") because some news just came out that the company might get bought by RJR Nabisco. Assume the stock is sitting at $30 when news hits. With this type of news, you would easily expect the price to jump to $45 that day. Longs flood into it, mm's start shorting (selling to the longs) and quickly run out of real shares, but they keep selling ghost shares anyway, more and more of them. So at first the price jumps to $33, then $35, then starts to stall at $37, until the longs (scratching their heads) stop buying. Meanwhile, the longs who have already bought fear a reversal and start selling like crazy, profit-taking, we call it.

The process gains momentum, even triggering automatic stop-losses in the accounts of longs who weren't even watching the market at the time, price finally settling at $25. A handful of longs who got out above $30 made money; all the other longs got screwed. So where'd all that other money go? Right into the pockets of the mm's. Remember, the mm's were shorting; at first they were losing money as the price rose from $30, but as it dipped back below $30, they started making money hand over fist. So you can see that it's always in their best interest to naked short a stock to death, which is exactly what they do whenever they can get away with it, which in turn gives you some idea of just how much of your own stock may be counterfeit.

Adding to the sense of fear and uncertainty last week was the strange case of a nuclear-armed B-52 “mistakenly” flying from North Dakota to Louisiana. This comes at a time of rampant rumors that Bush is crazy enough to launch an aerial attack on Iran. Here is Bill Van Auken:
Why was a nuclear-armed bomber allowed to fly over the US?

Bill Van Auken
7 September 2007

Wednesday’s revelation that a US Air Force B-52 bomber flew over the length of the United States armed with six cruise missiles carrying nuclear warheads has attracted amazingly little media attention.

The story, first broken by the Military Times web site based on tips from military officers, was relegated to the bottom of page 16 in Thursday’s New York Times and to page 10 of the Washington Post.

Featured prominently in both newspapers and generally in media coverage were reassurances from a spokesman for the Air Force that it represented “an isolated mistake” and that “at no time was there a threat to public safety.”

This incident, however, has immense and ominous significance. Describing it as an “isolated mistake” begs the obvious questions of how a nuclear-armed B-52 was allowed to become airborne—ostensibly without the approval of senior officials—and who ordered this extraordinary flight, and why.

The B-52 took off from Minot Air Force Base in North Dakota and flew to Barksdale Air Force Base in Louisiana on August 30 after six nuclear-tipped Advanced Cruise Missiles were mounted on the pylons under its wings. Each of the warheads carried a yield of up to 150 kilotons, more than ten times as powerful as the US bomb that leveled Hiroshima at the close of the Second World War.

As far as is known, the incident marked the first time that a US plane has taken off armed with nuclear weapons in nearly 40 years. While bombers were kept in the air in the 1960s as part of the nuclear brinksmanship with the USSR, the practice was halted in 1968 after a series of accidents involving nuclear-armed B-52s. After that, bombers loaded with nuclear weapons were kept on alert at the end of runways for rapid takeoff until 1991, when this practice was halted as well.

A Pentagon spokesman said that the incident prompted an emergency call by the Air Force chief of staff, Gen. Michael “Buzz” Mosley, to Defense Secretary Robert Gates, adding that “it was important enough that President Bush was notified of it.”

In response to the episode, the Pentagon has announced that a munitions squadron commander at Minot has been relieved of his duties and several airmen have been decertified for handling nuclear weapons. It also reported that an investigation is continuing.

The Air Force announced in March that the Advanced Cruise Missile (ACM) is being phased out under a nuclear reduction treaty signed with Moscow in 2002, and it has been suggested that the weapons were being transported between the two bases as part of this process. The transport of weapons from one base to another, however, is normally carried out in the holds of C-17 and C-130 cargo planes, not fixed to the wings of combat bombers.

Someone had to give the order to mount the missiles on the plane. The question is whether it was a local Air Force commander—either by mistake or deliberately—or whether the order came from higher up.

The first scenario recalls nothing so much as the 1964 black comedy produced by filmmaker Stanley Kubrick, Dr. Strangelove. The film’s plot centered on the unilateral order given by a delusional air force commander, Gen. Jack D. Ripper, for an air wing to carry out an unprovoked nuclear first strike against the Soviet Union. The US president is shocked to find out that supposed failsafe systems barring any such strike without his direct order have been overridden.

Given the Pentagon’s claim that the incident represented a “mistake,” the Minot-Barksdale flight indicates that the present failsafe systems—either deliberately or inadvertently—do not prevent a single commander from deploying nuclear weapons.

Experts on nuclear weapons have described the episode as shocking and inexplicable. “It seems so fantastic that so many points, checks can dysfunction,” said Hans Kristensen, the Federation of American Scientists chief researcher on US nuclear forces. “That’s perhaps what is most worrisome about this particular incident—that apparently an individual who had command authority about moving these weapons around decided to do so.”

Representative Edward Markey, a ranking Democrat on the House Homeland Security Committee, issued a statement declaring it “absolutely inexcusable that the Air Force lost track of these ... warheads, even for a short period of time.”

Markey added, “Nothing like this has ever been reported before and we have been assured for decades that it was impossible.”

The second possibility—that the flight was authorized at a higher level—poses an even more immediate threat.

B-52s from Barksdale have been used repeatedly to strike targets in Iraq, firing cruise missiles at Iraqi targets in 1996 and 1998, and in the “shock and awe” campaign that preceded the 2003 invasion, carrying out some 150 bombing runs that devastated much of the southern half of the country.

Moreover, the weapon that was fixed to the wings of the B-52 flying from Minot air base was designed for use against hardened targets, such as underground bunkers.

Given the ratcheting up of the threats against Iran and the previous reports of plans for the use of “tactical” nuclear weapons against Iranian nuclear installations, there is a very real possibility that the flight to Barksdale was part of covert preparations for a nuclear strike against Iran.

If this is indeed the case, the claims about a “mistake” by a munitions officer and a few airmen in North Dakota may well be merely a cover story aimed at concealing the fact that the government in Washington is preparing a criminal act of world historic proportions by ordering—without provocation—the first use of nuclear weapons since the bombings of Hiroshima and Nagasaki more than sixty years ago.

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Monday, September 03, 2007

Signs of the Economic Apocalypse, 9-3-07

From Signs of the Times:

Gold closed at 681.90 dollars an ounce Friday, up 0.6% from $677.50 at the close of the previous week. The dollar closed at 0.7340 euros Friday, up 0.4% from 0.7312 at the close of the previous Friday. That put the euro at 1.3624 dollars compared to 1.3676 the Friday before. Gold in euros would be 500.51 euros an ounce, up 1.0% from 495.39 for the week. Oil closed at 74.04 dollars a barrel Friday, up 4.1% from $71.09 at the close of the week before. Oil in euros would be 54.35 euros a barrel, up 4.5% from 51.98 for the week. The gold/oil ratio closed at 9.21 Friday, down 3.5% from 9.53 at the end of the previous week. In U.S. stocks, the Dow closed at 13,357.74 Friday, down 0.2% from 13,378.87 for the week. The NASDAQ closed at 2,596.36 Friday, up 0.7% from 2,576.69 at the close of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.53, down nine basis points from 4.62 for the week.

While stocks were mixed overall for the week, with the Dow and the S&P 500 falling a little and the NASDAQ rising, the markets gained a lot on Friday, thanks to statements by the Great White Fathers in Washington, George Bush and Fed Chair, Ben Bernanke. Bernanke reassured investors that the Fed was willing to pump as much money as needed into the markets to avoid problems in the real economy. Bush, for his part, addressed the subprime housing crisis for the first time:

Stocks End Up After Bernanke, Bush Speak

Tim Paradis

Friday August 31, 4:42 pm ET

NEW YORK (AP) -- Wall Street closed out another erratic week with a big gain Friday after investors took comments from President Bush and Federal Reserve Chairman Ben Bernanke as reassuring signs Wall Street won't be left to deal with problems in the mortgage and credit markets on its own.

Investors balked early in Friday's session when comments from Bernanke didn't indicate a cut in the benchmark federal funds rate was imminent. However, they moved past some of their initial disappointment and appeared to concentrate on comments that the Fed would step in if needed.

Bernanke, speaking at the Fed's annual conference in Jackson Hole, Wyo., said the central bank will "act as needed" to prevent the credit crisis from hurting the national economy.

The major indexes fluctuated but by midday extended their gains after President Bush spoke about details of a plan to help borrowers facing trouble paying their mortgages.

"You've got all the speeches working for the market here," said Michael Church, portfolio manager at Church Capital Management in Philadelphia. "What we've seen in the last few weeks is that Ben Bernanke and the Federal Reserve are paying attention to what's going on. They will help correct the credit markets. For now, we're in a trading range and we have to sort through this mess."

According to preliminary calculations, the Dow rose 119.01, or 0.90 percent, to 13,357.74.

Broader stock indicators also rose. The Standard & Poor's 500 index rose 16.35, or 1.12 percent, to 1,473.99, and the Nasdaq composite index rose 31.06, or 1.21 percent, to 2,596.36.

Bond prices fell. The yield on the 10-year Treasury note, which moves inversely to its price, rose to 4.53 percent from 4.51 percent late Thursday. The U.S. bond market closed early ahead of the holiday weekend, and will be closed Monday along with the stock markets.

Since the stock market started tumbling in late July on fears that problems in mortgage and corporate lending would lead to a credit freeze and hurt the economy, the Fed has injected tens of billions of dollars into the banking system and lowered its discount rate -- the charge on its loans to commercial banks. But the Fed hasn't yet said it will lower the benchmark federal funds rate, and Wall Street's uncertainty over what the central bank will do next has kept the markets volatile. The Fed's next meeting is Sept. 18 and some investors had expected the central bank might hint at or even go through with a rate cut before then.

Bush's comments that the nation's economy can "weather any turbulence" in what he termed a period of transition for the financial markets appeared to help reassure investors. He outlined proposals to assist borrowers in trouble from a pullback in the housing market and credit problems.

Economic news, as Bernanke indicated Friday, appeared less relevant than normal as investors remained focused on upheaval in the credit market and mortgage concerns.

The Commerce Department reported on personal income and spending and the core personal consumption expenditures deflator, one of the Fed's preferred gauges of inflation. Personal incomes and spending edged up by 0.5 percent and 0.3 percent, respectively, and year-over-year core PCE stayed at 1.9 percent -- within the Fed's comfort range.

The Commerce Department also said orders to factories jumped by 3.7 percent in July, topping a 3.3 percent increase that had been expected. The rise, which came after three months of modest gains, followed an 11 percent jump in demand for transportation goods, including the biggest increase in orders for cars in more than four years.

Also, the Chicago purchasing managers index rose to 53.8 in August from 53.4 in July; the index, which measures manufacturing in the Midwest, is seen as a precursor to the Institute for Supply Management index, to be released on Tuesday.

Church said the market was helped by Friday's economic figures as well as a stronger-than-expected reading on second-quarter gross domestic product released Thursday.

"The consumer has been in the crosshairs of the bears for a while now," he said, referring to concerns that a pullback in consumer spending will upend economic growth. "I think this helps clarify a lot of the situation. The news from the consumer is good."

But despite relatively upbeat economic data, it is becoming increasingly clear that the Fed is going to have to lower interest rates to help the credit market turmoil from dragging down the economy, said Tom Higgins, chief economist at Payden & Rygel Investment Management in Los Angeles.

"The impact on economic growth in the coming quarter is going to be what we have to watch in order to gauge whether this is going to be a full on easing cycle at this point and what impact there is going to be on the financial markets.

"Volatility is going to be high in the coming weeks because the Fed's not sure what is going to happen due to these financial market interruptions and investors can't be sure either," Higgins said.

The dollar was mixed against other major currencies, while gold prices rose.
Light, sweet crude settled up 68 cents at $74.04 per barrel on the New York Mercantile Exchange.

Advancing issues outnumbered decliners by about 7 to 1 on the New York Stock Exchange, where volume came to a light 1.39 billion shares compared with 1.03 billion shares traded Thursday. Trading in late August often is light as investors take end-of-summer vacations.

The Russell 2000 index of smaller companies rose 9.75, or 1.25 percent, to 792.86.

In market action abroad, Japan's Nikkei stock average surged 2.57 percent, Hong Kong's key index jumped 2.13 percent, and China's Shanghai Composite Index rose 0.99 percent. In Europe, Britain's FTSE 100 rose 1.47 percent, Germany's DAX index rose 1.57 percent, and France's CAC-40 rose 1.25 percent.

Bernanke’s statements came in response, in part, to the sharp drop in stocks on Tuesday:
U.S. Stocks Fall Most in Three Weeks; Lehman Leads Banks Lower

Michael Patterson

Aug. 28 (Bloomberg) -- U.S. stocks posted their biggest drop in three weeks on weaker consumer confidence and speculation tighter credit markets will hurt bank earnings.

Citigroup Inc., Lehman Brothers Holdings Inc. and Bear Stearns Cos. led all 93 financial companies in the Standard & Poor's 500 Index lower after Merrill Lynch & Co. reduced its recommendation on the shares. Lennar Corp. and D.R. Horton Inc. sent homebuilders to the lowest level since May 2003.

The declines erased all of last week's gains. The S&P 500 decreased 34.43, or 2.4 percent, to 1,432.36, as 487 of its members fell. The Dow Jones Industrial Average lost 280.28, or 2.1 percent, to 13,041.85. The Nasdaq Composite Index slipped 60.61, or 2.4 percent, to 2,500.64.

The Conference Board reported today consumer confidence fell the most since 2005, while S&P/Case-Schiller said home values had the steepest tumble in at least five years in June. Financial shares have posted the biggest drop among 10 industry groups in the S&P 500 this year amid concern that higher borrowing costs sparked by subprime mortgage defaults will erode earnings from trading and debt underwriting.

"Our concern when we look out is with the U.S. consumer," said David Chalupnik, who helps manage about $100 billion as senior managing director at First American Funds in Minneapolis. "Are the housing issues that we're seeing going to finally depress the U.S. consumer? That's the risk that we see."

Broad Decline

All 10 industry groups in the S&P 500 fell as the index wiped out last week's 2.3 percent gain that was spurred by speculation the Federal Reserve will take steps to stem losses in credit markets.

More than 20 stocks dropped for every one that rose on the New York Stock Exchange, the broadest retreat since Feb. 27.

Stocks extended their decline today after minutes from the Fed's Aug. 7 policy meeting showed central bankers put aside concerns about the rising cost of credit because they weren't convinced a slowdown in inflation would last.

Markets in Europe and Asia retreated, led by financial companies on concern the subprime mortgage rout is spreading and will erode global economic growth. The Morgan Stanley Capital International World Index slipped 1.8 percent to 1,520.88.

Consumer confidence fell this month by the most since just after Hurricane Katrina two years ago.
The New York-based Conference Board's index declined to 105 from 111.9 in July. Economists surveyed by Bloomberg News forecast the index would slip to 104 from an originally reported July reading of 112.6.

Property values in 20 metropolitan areas decreased 3.5 percent in June from a year earlier, according to S&P/Case- Shiller.

Fed Minutes

The minutes from the Fed's last Open Market Committee meeting don't include the Aug. 16 emergency video conference when officials revamped their policy statement and cut the rate the Fed charges banks on direct loans. The benchmark lending rate was kept unchanged.

Bush’s statements were significant beyond the proposals they contained, since this is the first time he has acknowledged the seriousness of the problem.
Bush outlines aid for mortgage holders

Deb Riechmann

Friday August 31

WASHINGTON (AP) -- President Bush on Friday outlined ways to help homeowners facing foreclosure — the administration's first effort to deal with an expected wave of defaults fueled by the mortgage crisis.

The initiatives, which are not aimed at bailing out lenders or speculators, are designed to help homeowners with risky mortgages keep their houses. In remarks in the Rose Garden, Bush also discussed efforts to keep the problems from arising in the future.

"The government's got a role to play, but it is limited," Bush said. "A federal bailout of lenders would only encourage a recurrence of the problem."

The president insisted that the U.S. economy was strong and could weather recent turbulence in the financial markets. He said the mortgage market, especially the subprime sector, has shown particular strain. One of the most troubling developments has been an increase in adjustable-rate mortgages, which start out with low interest rates, then reset to higher rates after a few years.

"This has led some homeowners to take out loans larger than they could afford based on overly optimistic assumptions about the future performance of the housing market," Bush said. "Others may have been confused by the terms of their loan, or misled by irresponsible lenders. Whatever the reason they chose this kind of mortgage, some borrowers are now unable to make their monthly payments, or facing foreclosure."

A key element of Bush's plan would allow homeowners with good credit histories, but who cannot afford their mortgage payments, to refinance into mortgages insured by the Federal Housing Administration to keep from defaulting.

Earlier this month, Bush predicted that the ongoing decline in the housing market wouldn't become precipitous, but would result in a "soft landing."

He rejected any direct government aid to homeowners losing their houses to foreclosures, saying he only supported federal government help that would encourage refinancing and educate prospective home buyers about risky mortgage terms

"Anybody who loses their home is somebody with whom we must show enormous empathy," the president said at an Aug. 9 news conference. "The word `bailout,' I'm not exactly sure what you mean. If you mean direct grants to homeowners, the answer would be no, I don't support that."

On Friday, Bush:

• Urged Congress to pass legislation that would give the Federal Housing Administration more flexibility to help mortgage holders with subprime mortgages.

• Pledged to work with Congress to reform the tax code to help troubled borrowers rework their loans.

• Called for rigorously enforcing predatory lending laws and strengthening lending practices.

Foreclosure and late payments have spiked, especially for so-called subprime borrowers with blemished credit histories or low incomes. Higher interest rates and weak home values have made it impossible for some to pay or to keep up with their monthly mortgage payments. Some overstretched homeowners can't afford to refinance or even sell their homes.

Mortgage foreclosures and late payments are expected to worsen. Some 2 million adjustable rate mortgages are to reset to higher rates this year and next. Steep penalties for prepaying mortgages have added to some homeowners' headaches.

The economy enjoyed a strong revival in the spring although growing troubles in housing and credit markets have darkened prospects considerably since then. The Commerce Department reported Thursday that the gross domestic product grew at an annual rate of 4 percent in the second quarter — the strongest showing in more than a year.

But that growth could be the best showing for some time as the economy continues to be battered by the worst housing slump in 16 years and a widening credit crisis that has sent financial markets on a roller-coaster ride in recent weeks.

That the administration has finally taken notice of the housing collapse is a sign both of the seriousness of the problem and that they know the people are becoming aware of it. Had they not tried to pull the wool over our eyes for so long, continually repeating how strong the economy was, they might have been able to prevent the problems. But their backers would make a lot less money by preventing the boom and bust cycle.

I even heard a lead-in for an NPR (National Public Radio in the United States) news story on the issue saying that “it now looks like the housing slump will be worse than predicted.” Predicted by whom? This has been the easiest thing in history to predict. It seems NPR took seriously the statements put out over the past several years intended to keep the boom going and to drive people further into debt.

Confident talk as credit crisis unfolds

Bob Hoye

August 27, 2007

Bob Hoye is a market historian and editor of Institutional Advisors, a provider of research to financial institutions, mining, and petroleum companies internationally at

“This is a liquidity driven market."

“Getting rid of M3 makes expansion invisible."

“Bernanke is closely attuned to the market and as to how much liquidity needs to be in the system for the market to be supported.”- Marty Chenard,, July 20

That was not an isolated voice of confidence, as one usually critical and widely-followed observer on August 18 wrote, “Rather than the End of the World, credit markets will get back to normal, as there is a lot of money that needs to find a home.”

Then on August 21 someone at the Wall Street Journal less conditioned by wishful thinking reported, “Debt isn’t merely more expensive, it is scarcely available at any price or on any terms.” The latter is reality and it will likely be as severe as when Thomas Gresham was agent and advisor to the British government in Antwerp when it was the financial capital of the world. Elizabeth’s royal demands for funds were considered undeniable, but during the crisis of 1561 Gresham was obliged to report that there was no credit available, “even at double collateral.”

Being a trader he could accept fate in the market place. There have been many booms and panics since accompanied by generations of academics who all seem to have to do something about the crisis and over the centuries all come up with the same solutions to a credit contraction. Add more credit without understanding that the problem is directly due to the over-use of credit, and cut administered rates without understanding the short-dated market rates of interest plunge during the early stages of a contraction.

As the saying goes, “Nonsense so blatant that only an intellectual would fall for it”.

Stock Markets continue to be suspended by convictions about earnings, valuations, the miracles of policymaking and the soundness of the economy. This is the story that has worked since 2003 when the economy began to support the bull market that started in October 2002.

The point to be made is that the stock market leads major turns in the economy so there is little reason to use economic trends or, shudder, projections.

The next point is that changes in credit markets lead turns in the stock market, and central banks typically follow changes in the yield curve.

For some months now we’ve been trying to place orthodoxy in perspective and recently market forces are adding a practical instruction. A salient event was that the decline in bill yields, in Canada and the US, was not by any means anticipating a “managed” decline in administrative rates. The decline in bill rates is a classic “cash in a crash” rush, which is the next indelible step towards a cyclical credit contraction.

And as these pages repeat, credit is money of the mind and that mind has changed, from using any asset for the application of leverage to a revulsion for credit.

The truly sophisticated series in the play is once again the yield curve. Inversion shows a strong demand by speculators for short-term funds and the transition to steepening indicates a decline in speculative demand and all that that entails.
Of course, with the boom NYSE margin debt soared, exceeding the peak reached in 1Q 2000 by some 35%. On the big picture, this is nothing. In May the guys at Dominion Bond Rating Service (DBRS) provided a world-wide calculation on different positions and they go as follows:

1% Cash

10% Securities such as stocks, bonds and money market

11% Structured asset-backed product

78% Derivatives

This attempts to put some numbers on the most egregious house of cards in history. At the culmination of great manias, typically the reckless exposure is in fringe banks that are going to show traditional banks the “new” way to do business. In the 1772 bubble it was the Ayr Bank, which example was used by Adam Smith in The Wealth of Nations, published in 1776.

As noted in The Unholy Trinity of July 21 ( the corruption of fiduciary responsibility starts at the top with the Fed, which has been run far too long as an instrument of experimental economics. The next two corruptions have been math modeling of pricing and credit rating. This has enabled the penetration of fringe, or as described in the US during the calamities of 1837 and 1857 as “wildcat” banking, further into the realm of traditional banking than at any time in history.

In some religions repentance takes only a moment. In political-economy it takes a lot longer, with salvation much longer than that. It seems like changes in credit markets will continue to influence the stock market. In looking to the near term, there has been little change in traditional credit spreads over the past week and the BBB subprime bond price has improved from 41.42 last Thursday to 43.21. This has likely been the foundation of the rally since last Thursday.

The change in the credit markets has hit credit spreads from long to money market desks, and has done a huge number to the curve. The loss of liquidity has yet to hit long treasuries – it will, and it could be the last boot to fall.

Conditions remain hazardous.

[Wall Street is] “a colossal suction pump steadily draining the world of capital.”- Jesse Livermore, June 11, 1929

“If recession should threaten (as is not indicated at present) there is little doubt that the Reserve System would take steps to check [it].”- Harvard Economic Society, October, 1929d

The numbers Bob Hoye cited about percentages of total global investment holdings (highlighted in red) are startling. For a little background into what this means, here is Stephen Lendman:

Economist Hyman Minsky was mostly ignored while he lived, but his star may be rising 11 years after his death in 1996. Some described him as a radical Keynesian based on the theories of economist John Maynard Keynes who taught economies operate best when mixed. He believed state and private sectors both play important roles with government stepping in to stimulate or constrain economic activity whenever private sector forces aren't able to do it best alone.

It's the opposite of "supply-side" Reaganomics and its illusory "trickle down" notion that economic growth works best through stimulative tax cuts its proponents claim promote investment that benefits everyone. It was Reagan-baloney then and now, and so is the notion markets are efficient and work best when left alone.

Minsky explained it, and people are now taking note in the wake of current market turbulence. His work showed financial market exuberance often becomes excessive, especially if no regulatory constraints are in place to curb it. He developed his theories in two books - "John Maynard Keynes" and "Stabilizing an Unstable Economy" as well as in numerous articles and essays.

In them, he constructed a "financial instability hypothesis" building on the work of Keynes' "General Theory of Employment, Interest and Money." He provided a framework for distinguishing between stabilizing and destabilizing free market debt structures he summarized as follows:"

Three distinct income-debt relations for economic units....labeled as hedge, speculative and Ponzi finance, can be identified."

-- "Hedge financing units are those which can fulfill all of their contractual payment obligations by their cash flows: the greater the weight of equity financing in the liability structure, the greater the likelihood that the unit is a hedge financing unit."

-- "Speculative finance units are units that can meet their payment commitments on 'income account' on their liabilities, even as they cannot repay the principle out of income cash flows. Such units need to 'roll over' their liabilities - issue new debt to meet commitments on maturing debt."

-- "For Ponzi units, the cash flows from operations are (insufficient)....either (to repay)....principle or interest on outstanding debts by their cash flows from operations. Such units can sell assets or borrow. Borrowing to pay interest....lowers the equity of a unit, even as it increases liabilities and the prior commitment of future incomes."

"....if hedge financing dominates....the economy (in) equilibrium. In contrast, the greater the weight of speculative (and/or) Ponzi finance, the greater the likelihood that the economy is a deviation-amplifying system....(based on) the financial instability hypothesis (and) over periods of prolonged prosperity, the economy transits from financial relations (creating stability) to financial relations (creating) an unstable system."

"....over a protracted period of good times, capitalist economies (trend toward) a large weight (of) units engaged in speculative and Ponzi finance. (If this happens when) an economy is (experiencing inflation and the Federal Reserve tries) to exorcise (it) by monetary constraint....speculative units will become Ponzi (ones) and the net worth of previous Ponzi units will quickly evaporate. Consequently, units with cash flow shortfalls will be forced to (sell out). This is likely to lead to a collapse of asset values."

Minsky developed a seven stage framework showing how this works:

Stage One - Displacement

Disturbances of various kinds change investor perceptions and disrupt markets. It may be a tightened economic policy from higher interest rates or investors and lenders retrenching in reaction to:

-- a housing bubble, credit squeeze, and growing subprime mortgage delinquencies and defaults with spreading contagion affecting:

-- other mortgages, and the toxic waste derivative alchemy of:

-- collateralized debt obligation (CDO) instruments (packages of mostly risky junk and other debt), --commercial and residential mortgage-backed securities (CMBS and RBMS - asset backed by mortgage principle and interest payments), and even

-- commercial and AAA paper; plus

-- home equity loans harder to service after mortgage reset increases.

Stage Two - Prices start to rise

Following displacement, markets bottom and prices begin rising as fundamentals improve. Investors start noticing as it becomes evident and gains momentum.

Stage Three - Easy credit

Recovery needs help and plentiful easy credit provides it. As conditions improve, it fuels speculation enticing more investors to jump in for financial opportunities or to borrow for a new home or other consumer spending. The easier and more plentiful credit gets, the more willing lenders are to give it including to borrowers with questionable credit ratings. Yale Economist Robert Shiller shares the view that "booms....generate laxity in standards for loans because there a general sense of optimism (like) what we saw in the late 80s" preceding the 1987 crash that doesn't necessarily signal an imminent one now.

New type financial instruments and arrangements also arise as lenders find creative and risky ways to make more money. In recent years, sharply rising housing prices enticed more buyers, and lenders got sloppy and greedy by providing interest-only mortgages to marginal buyers unable to make a down payment.

Stage Four - Overtrading

The cheaper and easier credit is, the greater the incentive to overtrade to cash in. Trading volume rises and shortages emerge. Prices begin accelerating and easy profits are made creating more greed and foolish behavior.

Stage Five - Euphoria

This is the most dangerous phase. Cooler heads are worried but fraudsters prevail claiming this time is different, and markets have a long way to go before topping out. Greed trumps good sense and investors foolishly think they're safe and can get out in time. Stories of easy riches abound, so why miss out. Into the fire they go, often after the easy money was made, and the outcome is predictable. The fraudsters sell at the top to small investors mistakenly buying at the wrong time and getting burned.

Stage Six - Insider profit taking

The pros have seen it before, understand things have gone too far, and quietly sell to the greater fools buying all they can. It's the beginning of the end.

Stage Seven - Revulsion

When cheap credit ends, enough insiders sell, or an unexpected piece of bad news roils markets, it becomes infectious. It can happen quickly turning euphoria into revulsion panicking investors to sell. They begin outnumbering buyers and prices tumble. Downward momentum is far greater and faster than when heading up.

Sound familiar? It's a "Minsky Moment," and the irony is most investors know easy credit, overtrading and euphoria create bubbles that always burst. The internet and tech one did in March, 2000, and since mid-July, reality caught up with excess speculation in equity prices, the housing bubble, growing mortgage delinquencies and subprime defaults. Goldilocks awoke and sought shelter as lenders remembered how to say "no." This time, central banks rode to the rescue (they hope) with huge cash infusions, the Fed cut its discount rate a half point August 17, and it signaled lower "fed funds" rates ahead if markets remain tight.

If the numbers are right, then, 78% of all investment money in the world is in “Ponzi units.” Not good news.

Today is Labor Day in the United States. Yes, I know the rest of the world celebrates it on May 1, but here in the U.S. we don’t want to have it on the same day as all those foreign socialists and communists. It is a good time to look at the state of the labor movement. Last week we wrote a bit about the IWW (International Workers of the World) or “Wobblies.” So, too, did Stephen Lendman:

The War on Working Americans - Part I

Stephen Lendman

As Labor Day approaches, what better time to assess the state of working America. It's under assault and weakened by decades of eroding rights in the richest country in the world once regarded as a model democratic state. It's pure nonsense in a nation always dedicated to wealth and power, but don't try finding that discussed in the mainstream. Today, it's truer than ever making the struggle for equity and justice all the harder. That's what ordinary working people now face making beating those odds formidable at the least.

In a globalized world, the law of supply and demand is in play with lots more workers around everywhere than enough jobs for them. It keeps corporate costs low and profits high and growing with Business Week (BW) magazine reporting in its April 9 issue "the share of (US) national income going to corporate profits (compared to labor) is hovering around a 50 year high." BW then quoted Harvard economist Richard Freeman's research paper saying only "a global pandemic that kills millions of people" could cause a labor shortage and elevate worker bargaining power.

There's little in sight, and the result is a huge reserve army of unemployed or underemployed working people creating an inevitable race to the bottom in a corporatized marketplace. It harms workers everywhere, including in developed nations. They're outsourcing good jobs abroad to lower wage countries and pressuring workers to do more for less because they've got little bargaining power to fight back. More on this below.

Organized Labor in the US - Its Rise and Decline

Organized labor's rise began modestly and was fragile in the earliest days of the republic. It gained strength in good economic times, then lost it in downturns like the depression in 1873. By the 1880s, things were better as the nation underwent rapid industrialization. With it came rising prosperity and workers wanting a share of the benefits. They turned to unions for help with skilled artisans leading the way helping the unskilled as well in their efforts to organize.

New labor organizations arose, older ones expanded, and as they did, they grew more active and militant. It led to the "great uprising of labor" in 1886, including the landmark Chicago May 4 Haymarket Riot protesting police violence against strikers the previous day. Its impact was hugely negative at first. It forced organized labor to regroup and settle in for a long period of recovery.

This was at a time the incipient labor movement was over two million and rising beginning with its organizing efforts launching it in the 1870s. By the 1880s, it had enough strength to stage huge strikes for better pay and working conditions like the struggle for an eight hour day that had 80,000 strikers parading peacefully down Chicago's main Michigan Avenue on May 1, 1886 in what's now regarded as the first ever May Day Parade.

Workers were helped from community-based emerging independent political parties sensitive to their rights. That's unheard of today in an age where no effective political party stands for working people despite Democrats and Republicans saying they do. Workers are now on their own. They're left to struggle in a global marketplace with pathetically little help weak unions can provide.

Earlier in the 19th century, the first national union arose as workers began asserting their rights. It was called the National Labor Union (NLU), emerged after the Civil War, but was short-lived. Next came the Knights of Labor in 1869 with a mandate to protect all workers including women and blacks after 1883. They were represented by industry groups rather than trade and skill level that was common until then. Its goals were high but achievements few at a time of widespread worker repression in the 1880s. It led to its decline as a more resilient union emerged the result of disaffection with the Knights.

It was called the American Federation of Labor (AFL) and was founded by Samuel Gompers in 1886 to replace its predecessor, the Federation of Organized Trades and Labor Unions. The ill-fated American Railway Union (ARU) followed in 1893, the largest industrial union of its day for a time, and the Industrial Workers of the World (IWW) that at its peak in the 1920s had 100,000 members.

The Wobblies are still around 102 years after Big Bill Haywood, Eugene Debs and others founded the union in 1905 as a commitment to working people in their struggle with corporate employers. It's motto was "an injury to one is an injury to all," its goal was revolutionary, and it's still true to its root ideology today as stated in the current IWW Constitution:

"The working class and the employing class have nothing in common. There can be no peace so long as hunger and want are found among millions of the working people.....Between (workers and employers) a struggle must go on until the workers of the world organize as a class, take possession of the means of production, abolish the (unfair) wage system, and live in harmony with the Earth....It is the historic mission of the working class to do away with capitalism....By organizing industrially we are forming the structure of the new society within the shell of the old."

That philosophy under dedicated men like Haywood, Debs and others set the Wobblies on a collision course with government and big business that tried to crush it. During WW I in 1917, it was vicious under Woodrow Wilson's Justice Department (DOJ). It used the repressive Espionage and Sedition Acts to raid and disrupt union meeting halls across the country. It's the same tactic used today against Latino immigrants and Muslims in the concocted "war on terrorism" and the one against undocumented workers.

In 1917 and later, Wilson's DOJ acted much the same way arresting 165 Wobbly leaders on the grounds they hindered the war effort by using their First Amendment right to speak out against it. They were tried near war's end in 1918, all convicted, and given long prison terms under a Democrat President thought of reverentially today. Bill Haywood was luckier. After conviction, he was released on bail and fled to the Soviet Union where he remained until his death, but the IWW was never again the same.

They were hammered again from 1918 - 21 during the infamous Palmer Raids under Wilson Attorney General Mitchell Palmer. He targeted radical left wing groups like the Wobblies at the time of the first "Red Scare" after the 1917 Russian Revolution.

It launched J. Edgar Hoover's career in the DOJ Bureau of Investigation's new General Intelligence Division that later became the FBI in 1935. The IWW is still around, still dedicated to its founding principles, but it's worldwide membership is only around 2000, mostly in the US.

The AFL fared much better. It became the largest union in the first half of the 20th century even after the founding of the Congress of Industrial Organizations (CIO) in 1935 with which it merged in 1955. Today, it's still the country's largest federation of unions. Its web site claims a membership of around 10 million workers, even after the Service Employees International Union (SEIU), Teamsters, UNITE-HERE and United Food and Commercial Workers (UFCW) broke away from the federation in 2005. The United Brotherhood of Carpenters and Joiners of America (UBC) did as well in 2001, and the Laborers International Union of North America (LIUNA) left in 2006. They formed a new Change to Win federation in September, 2005 representing about 5.5 million workers. It likely left AFL-CIO with fewer members than it claims with its true size closer to 8 million or less.

AFL-CIO's state is a metaphor for the times. Organized labor today is weak in the face of declining membership and corporate dominance with workers losing out in a globalized world. It's fall has been long-term and painful with worker rights hammered since the 1980s. It's a long way today from when the landmark Wagner Act passed in 1935 under Franklin Roosevelt. It established the National Labor Relations Board (NLRB) guaranteeing labor the right to bargain collectively on equal terms with management for the first time ever, but it wasn't an act of kindness.

It came at the height of The Great Depression when those in power feared the worst. FDR and Congress acted to save capitalism at a time they feared mass worker hostility might boil over like it did in 1917 Soviet Russia. Like all other worker victories, this one came through struggle. It was from organizing, pressing their demands, taking to the streets, going on strike, holding boycotts, battling police and National Guard forces supporting management against working people, paying with their blood and lives and finally achieving results. They got an eight-hour day, a living wage, and on-the-job benefits because strong unions went head-to-head with management and won. It's worlds different now with corporate giants in bed with friendly governments, and Democrats and Republicans vying to see which party can be more accommodative.

From the 19th century forward, it was never easy for labor from the height of the movement's strength to the present. Unions were always disadvantaged even at a time of reasonable labor-management harmony. The passage of the harsh 1947 Taft-Hartley Labor-Management Relations Act showed how tenuous their position always was. Harry Truman vetoed the bill but was overridden. He called it a "slave labor bill" and then hypocritically used it 10 times, the most ever by any President to this day. The law throttles organized labor by giving the President power to stop strikes by court-ordered injunction for 80 days. He can claim the national interest, some other one, or none at all that's always the same one - to help corporate management deny workers their rights.

Taft-Hartley is still the law and was last invoked by GW Bush in the summer of 2002 against 10,500 west coast dock workers "locked out" (not striking) by the Pacific Maritime Association representing shipping companies and terminal operators.

Earlier in 2001 and new in office, Bush showed his anti-labor stripes straightaway. He invoked the Railway Labor Act blocking a threatened strike by 10,000 mechanics, cleaners and custodians at Northwest Airlines set for March 12. He acted again against United Airlines' 15,000 mechanics in December. He also took management's side in August, 2006 against Northwest's 8700 flight attendants' planned job action against the bankrupt airline's unfair demands for huge wage cuts and increases in hours worked. Bill Clinton was just as unfriendly invoking the Railway Labor Act against American Airline's pilots and to prevent railroad strikes 13 times.

Laws like these, and Presidents' willingness to use them, crushed the spirit and letter of the Wagner Act. They greatly weakened or revoked hard won provisions, and as a consequence, diminished union clout. Taft-Hartley allows stiff penalties for union violations but minimal ones for companies. It enacted a list of "unfair (union) labor practices" prohibiting jurisdictional strikes (relating to worker job assignments), secondary boycotts (against firms doing business with others being struck), wildcat strikes, sit-downs, slow-downs, mass-picketing against scabs brought it, closed shops (in which employees must join unions), union contributions to federal political campaigns, and more while legalizing employer interventions aimed at preventing unionizing drives.

It began a process of gradual erosion of union power to bargain collectively. That's their weapon now weakened because of devious employer tactics. They can illegally fire union sympathizers (thousands each year) and get away with only minor wrist slap fines after years of expensive litigation to prove wrongdoing. Further, employers can fire workers for any lawful reason like incompetence or no stated reason at all. Even the right to strike is neutralized with employers able to hire replacements or threaten to ship jobs offshore. With government on their side, they're empowered to fire union workers and legally replace them with lower-paid scabs or Latino immigrants.

The Reagan administration marked the beginning of the current trend in its first year. He was contemptuous of organized labor while hypocritically saying "I support unions and the rights of workers to organize and bargain collectively." He showed it in August, 1981 by firing 11,000 striking PATCO air traffic controllers, jailing its leaders, fining the union millions of dollars, and effectively busting it in service to the monied interests backing him. It was a shot across organized labor's bow and a clear message to business and industry of what to expect from a friendly Republican President. Nothing changed since under Democrat or Republican administrations with workers unable to match the power and influence of capital. The toll ever since has been devastating.

Union membership has been in steady decline from its post-war high of 34.7% in the 1950s. It held fairly constant through most of the 1970s at around 24% where it stood in 1979. At the end of the Reagan era, it was down to 16.8% and is currently around 12% overall with about 36% of government workers unionized but only 7.4% of them in the private sector. It's the lowest it's been since the beginning of the mass unionization struggles of the 1930s and in the private sector in over 100 years. It's because of Democrat and Republican antipathy to organized labor and corporate threats to close plants and outsource jobs. It's forced workers to take pay cuts and fewer benefits that are dropping to where they'll be none, and they'll be on their own to live or die by market-based rules rigged against them….

It was no accident that the IWW declined and was supressed while the AFL (American Federation of Labor) succeeded. The Wobblies called for all workers everywhere to stop working until the employers gave up. The AFL maintained cozy relationships with employers. It represented mostly skilled workers and called strikes on individual companies for better pay and conditions for its members, but not for all workers. Here is Howard Zinn in A People’s History of the United States:
The AFL was an exclusive union—almost all male, almost all white, almost all skilled workers. Although the number of women workers kept growing—it doubled from 4 million in 1890 to 8 million in 1910, and women were one-fifth of the labor force—only one in hundred belonged to a union.

…Racism was practical for the AFL. The exclusion of women and foreigners was also practical. These were mostly unskilled workers, and the AFL, confined mostly to skilled workers, was based on the philosophy of “business unionism” (in fact, the chief official of each AFL union was called the “business agent”), trying to match the monopoly of production by the employer with a monopoly of workers by the union. In this way it won better conditions for some workers, and left most workers out.

AFL officials drew large salaries, hobnobbed with employers, even moved in high society….

The well-paid leaders of the AFL were protected from criticism by tightly controlled meetings and by “goon” squads—hired toughs originally used against strikebreakers but after a while used to intimidate and beat up opponents inside the union. (pp.320-2)

That was a textbook case divide-and-conquer, raise-a-class-of-collaborators strategy by the ruling class. Very effective. The Wobblies, on the other hand, called for Direct Action. As an IWW pamphlet put it,
Shall I tell you what direct action means? The worker on the job shall tell the boss when and where he shall work, how long and for what wages and under what conditions. (Ibid., p. 323)

Direct action means industrial action directly by, for, and of the workers themselves, without the treacherous aid of labor misleaders or scheming politicians. A strike that is initiated, controlled, and settled by the workers directly affected is direct action… Direct action is industrial democracy. (Ibid.)

According to Zinn, the Wobblies,
… were attacked with all the weapons the system could put together: the newspapers, the courts, the police, the army, mob violence.

Let’s close, then, with a dedication to the Wobblies and a song by Patti Smith:

People Have the Power

I was dreaming in my dreaming

of an aspect bright and fair

and my sleeping it was broken

but my dream it lingered near

in the form of shining valleys

where the pure air recognized

and my senses newly opened

I awakened to the cry

that the people / have the power

to redeem / the work of fools

upon the meek / the graces shower

it's decreed / the people rule

The people have the power

The people have the power

The people have the power

The people have the power

Vengeful aspects became suspect

and bending low as if to hear

and the armies ceased advancing

because the people had their ear

and the shepherds and the soldiers

lay beneath the stars

exchanging visions

and laying arms

to waste / in the dust

in the form of / shining valleys

where the pure air / recognized

and my senses / newly opened I

awakened / to the cry


Where there were deserts

I saw fountains

like cream the waters rise

and we strolled there together

with none to laugh or criticize

and the leopard and the lamb

lay together truly bound

I was hoping in my hoping

to recall what I had found

I was dreaming in my dreaming

god knows / a purer view

as I surrender to my sleeping

I commit my dream to you


The power to dream / to rule

to wrestle the world from fools

it's decreed the people rule

it's decreed the people rule

LISTEN I believe everything we dream

can come to pass through our union

we can turn the world around

we can turn the earth's revolution

we have the power

People have the power ...