Thursday, October 31, 2013

Just When You Think It Can't Get Any More Absurd Out There...

We have a President who lies through his teeth straight into the camera - with a smile - about his knowledge of NSA spying, Obamacare and, really, just about everything else going on, and yet his approval rating - although it has hit a new record low - is still at 42%.  "Disapproval" is 51%, which means a majority of the country disapproves of the job he's doing.  As for the 42%, the only possible reason I can see his rating still being that high is that he gets unconditional support from his African American support base and from a high percentage of faux-liberals who believe that if they oppose Obama they will be branded a racist.  

And how about the fact that NSA chief Keith Alexander is telling anyone within ear-shot that the NSA is doing what it is doing in order protect our freedom and civil rights.  I'm not quite sure how the NSA accomplishes either by knowing about everytime I log onto to my email account and by tracking my daily trips to the grocery store with the Google and Apple GPS app loaded into my smart-phone.  I'd like to hear him explain that one and answer about 100 questions I have that Congress is getting paid well by SuperPacs to not ask.

I guess all you can do is laugh about what's going on.  I will say that I'm already fatigued from seeing "Duck Dynasty" Halloween costumes and it's not even noon in Denver.  If anything speaks to the inability of most people to think outside-the-box, it is the preponderance of people running around looking like a ZZ-Top band member in camo today.

I know a few other commentators are now remarking how ridiculous it is that Wall Street, the financial media and the entire investment community spend most of their time now analyzing every last sub-atomic particle that is part of every last punctuation mark of the FOMC statement to try and figure if and when the Fed will taper.  Probably the most patently absurd comic book portrayal of this is the bald Steve Liesman pouring over his copy with sweat beading up on his bare forehead as he strains and grunts to figure out exactly what changed from the previous FOMC statement.  It just can't get any more pathetic than that.

The fact of the matter - and I made this same statement shortly after Bernanke first uttered the word "taper" - is that the Fed unequivocally can not taper.  Well, it can start to reduce its Treasury and mortgage bond purchases but the entire financial and political system would collapse in short order.

Not only can the Fed NOT taper but it will actually end up having to INCREASE its money printing and bond buying.  Why?  Because despite the accounting games being used to hide the truth, big banks are choking on massive derivative bets and many other bad investments - like foreclosed home inventory and risky loans that are not paying interest.  This huge pile of assets has rendered the Too Big To Fail So We Must Bail banks increasingly insolvent.  This is a fact that can be seen by anyone who really knows how to sift through financial statements.

Secondarily, the Government will be issuing a lot more debt this year.  If you don't think that's the case then why did Harry Reid and his Republican sidekick Lisa Murkowski slip a provision that removes the debt ceiling limit for now into the agreement that ended the Government shutdown?  The United States in total - both the Government and the private sector - is taking on total systemic debt right now at a rate that is significantly faster than the ability of our economic system to generate the growth and cash flow needed to service that debt.

I don't know how much longer it will take before the Government is soon issuing debt just to make interest payments, but I would bet my life - and I'm serious about that - that it will happen far sooner than anyone - I mean anyone - out there is now forecasting.  If the Fed were to slow down its purchasing and monetization of Treasury debt, interest rates would shoot catastrophically straight up instantaneously.  We saw a preview of that in May.

At any rate, my recent article on Seeking Alpha which was highly critical of Pulte Homes use of accounting management techniques drew a very strong protest from Jim Zeumer, the investor relations nerd there.  So in the spirit of Shakespeare's, "the lady doth protest too much methinks," I asked him:  "We know that your management has been very good at selling a lot of stock lately.  If you are confident in your math and your company's decision-making with regard to its application of accounting standards, then why don't you and all the other upper level executives take money out of your bank account - as in cash already earned and taxed - and buy a real amount of stock?"  I might add that the Company spent $83 million in shareholder cash to buy back shares while the insiders were selling in copious amounts.

So far only crickets in my in-box.


  1. Bill Erbey Made $2.3B Off Your Underwater Mortgage

    Undaunted by Complexity

    Erbey has a knack for diving into complex tax or accounting issues and, through a kind of alchemy, finding untapped reservoirs of value. More than 20 years ago, he developed a product called a NERD (non-economic residual) used to absorb phantom income created in certain types of mortgage securitizations.

    The fact that the Internal Revenue Service wrote a rule specifically dealing with the tax treatment of NERDs demonstrates their importance, says Viva Hammer, a Brandeis University professor who was previously responsible for law and policy in the taxation of financial products at the Treasury Department.

    "The IRS hardly ever writes regulations on financial products," Hammer says.

    If you are still not sold on the reason for HLSS's existence, you are not alone.

    Kramer, the hedge fund investor who is also former chairman of the New Jersey Investment Council, says a few pension funds he introduced to Erbey declined an opportunity to invest in HLSS ahead of the IPO.

    "It was so exotic, understanding it went beyond most people's skill sets. You've got a lot of that going on right now in financial services. Financial services is changing big time and so the people who have these new 'show me' stories where it's never been done this way before, you can imagine that when you walk into a room and say 'I'm going to develop a different model than what has existed previously' -- that people don't sort of naturally latch onto it."

    That said, Kramer points out that many of those same skeptics will "be comfortable investing in a bank even though the bank is now subject to a totally different rulebook which hasn't even mostly been written yet. So since the rulebook is totally different and the externalities are totally different, what's the difference what the historic multiples of earnings were? That was a totally different world with totally different rules, but people think they know what a bank is and how to value it. They don't know that about the things that Bill does."
    A Grim Future for Homeownership

    Erbey is one of many experts on housing and the economy who expects homeownership to decline in the U.S. in the years to come. Part of the reason as he sees it is that many Americans lack the education to qualify for middle class jobs in the post-industrial economy.

    Making things more difficult, he believes, will be an aspect of the 2010 Dodd-Frank legislation that will make it harder for many Americans to qualify for a mortgage.

    Erbey cites a February study by a consultant called CoreLogic which found that only half of the mortgage loans being originated today will qualify under new rules structured around something called a Qualifying Mortgage that go into effect at the start of 2014.

    Erbey created RESI to capitalize on what he believes will be rising demand for renters by turning foreclosed homes into rentals. While private equity firms including The Blackstone Group and Colony Capital as well as a company called Silver Bay Realty Trust Corp. are also looking to take advantage of this trend, hedge fund manager Kramer believes RESI is better-positioned because its national infrastructure and low cost of capital enable it to acquire the foreclosed homes more cheaply than competitors. That's because they buy the underlying loans rather than the homes themselves, which allows them to acquire the properties at a 17% discount, while facing less competition from other buyers, Kramer says.

    Don't you love the new model jargon...we've been here did that end?

  2. The theory that the Fed will taper because they are running out of treasuries to monetize because of the deficit situation is laughable. How many trillions of bills/notes/bonds have to be rolled in a given year? $2-3T. There is plenty of stock available for them to purchase. I am reading a white paper about how to escape from a liquidity trap, and the short answer here is print MOAR and convince people that you will never stop.

    The inherent function of a debt based monetary system which is compounding interest is to form an exponential function. The amount of debt/credit MUST grow to keep that system from collapsing. The old adage "inflate or die" comes to mind.

    I would also add that we ran $1T in deficits for the 5th consecutive year. Adding back the $328B (which I read they tapped the funds for nearly $400B) to the CBO approved $680B, gives you $1T +. But don't let that get away from the narrative that "we reduced the deficit at the fastest pace since 500 BC"

    Fuckface out

    1. LOL nice username.

      The idea that the Fed was running out collateral to buy was a theory that Zerohedge popularized. Of course, Zerohedge was also adamant that the Fed would taper.

      The fact is that the Treasury will be auctioning off new Treasury paper - "new" as in over above the amount to refund maturities, at a rate of at least $90-$100 billion per month based on what I believe will be the path of deficit spending.

  3. Couldn't agree with you more Dave. Ann Pettifor and Paul Singer also provided some interesting commentary regarding failed monetary policy. I find it comical that the money set vomits the minute the Fed says anything remotely akin to taking away the punch bowl. Did anything change with yesterday's statement? Of course not! What's astounding is that these fools still think the "recovery is underway. Just read the statement.

    ..."the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program as consistent with growing underlying strength in the broader economy."

    OK, If they really believed that, then why didn't they taper? Because they know all hell would break loose that's why!

    It's pretty obvious that the Fed has backed themselves in to a corner and they have no easy way out. What's comical is that anyone puts any stock in what these clowns say when it's blatantly obvious they wouldn't know a bubble unless it bit them in the ass. Check out the chart of the Wilshire US REIT. I'm sure this time will be different. LOL!

    1. Volcker Got Wood

      “My confidence in economists, in general, is not high. What surprised me about Greenspan is the enormous faith he placed in mathematical models. We have 250 PHD’s on the Federal Reserve Board. We’d probably get along fine with 50. If we had another 50, perhaps we’d find the right model. Greenspan thought he knew the world much better reading from a text book.”

  4. Dave, did you see Mike Maloney's Hidden Secrets part 4 on the unsustainably exponential nature of our money supply? It is the best video to explain money creation in laymen's terns and also indicates as you say, that QE will need to be INCREASED and then increased again and it is QE until currency crisis. The only question I have is the impact of the fact that a dollar can be spent more than once in a year, i.e. the same dollar can be used to pay down two debts, so reality is a little more complicated than Maloney's example entails.

    1. Thanks. I'll take a look at it.

    2. The same dollar cannot be used to pay down two debts. It can be spent twice for sure...and/or it can be deposited and potentially get multiplied in the fractional reserve system..but that's not really at issue because the system is not being driven by loan demand right now, and it does not really need reserves to get the loan train going anyway. Money is created as debt, and extinguished when debt is paid off. The system is fundamentally imbalanced in that it creates the principle, but not the interest, hence interest (total debt) tends to run away from total money. This is somewhat mitigated by the fact that banks take the bulk of interest early, and some of that gets spent back into the system.. but it does not fix the problem in the long run. If you understand this imbalance, then you can understand lots of things... like why the FED is supposed to strive for, "price stability", yet actually targets 2% inflation. Like why there have been almost no periods of actual dollar deflation since about 1950 (see this chart by Doug Short - truly a picture worth 1000 words when it comes to the fact that our centally planned system does not allow deflation, ever, anymore;

      All the best, 1Kg Lunar Dragon

  5. Good post Dave, and yet the economy is doing so well they ( Economists ) are telling me I should pile into equities lol. Sure I have positions in the markets but the fact of the matter is with out this $85 billion a week POMO, equities would be in the tank.

    I also feel the FED is facing a Liquidity trap of epic proportions here. Bottom line hold a little bit of everything Cash, Equities, Gold and Silver, and stay as far away from the banking system as possible, other than of course cashing checks and paying bills.


    1. it's not a valid investment strategy to hold stocks just because the Fed is printing money. At some point the stocks will lose traction unless the Fed increases QE - that's the law of diminishing marginal returns that we learned in Econ 101.

      I would hold as little as possible inside the financial system.

  6. I used to take drugs to make things look weird. I now take drugs to make things look normal.

  7. After Fraud, the Fog Around Libor Hasn’t Cleared

    Even without fraud, Gary Gensler, the chairman of the Commodity Futures Trading Commission, said this week in a speech at Harvard, Libor rates “are basically more akin to fiction than fact.”

    Unfortunately, nothing fundamental is being changed. Libor lives on. Regulators who wanted to change that, most notably Mr. Gensler, have been outmaneuvered by those who did not want to risk damaging one of the biggest and most lucrative markets around.

    It turns out that the financial crisis did not cause the fraud; it merely made it so obvious that regulators finally noticed. It had been going on for years, aided by an international culture that treated market manipulation as a matter of course. If a bank did not have its own good reason for manipulating the market, then a trader would agree to do so as a favor for a trader at another institution. Why not? Maybe he would need a favor on another day.

    “In the U.S.,” Mr. Gensler said in his speech, “Libor is the reference rate for 70 percent of the futures market and more than half of the swaps market. It is the reference rate for more than $10 trillion in loans.”

    “As the new administrator, we plan to return credibility, trust and integrity to Libor, by bringing the essential combination of strong regulatory framework and market-leading validation techniques, administered by a pre-eminent market infrastructure provider,” the exchange promises.

    But the language may not be matched by reality. When the scandal first broke, and Robert Diamond was forced to resign as chief executive of Barclays, there was talk of the need for an interest rate indicator to reflect actual transactions. But that goal fell by the roadside. The new promise is that the rate will be “anchored” in “relevant transaction data.”

    What does that mean? It means that banks may use the rates they pay on certificates of deposit, or on commercial paper, or on repurchase agreements, or by observations about other markets, and adjust those rates as appropriate. The Libor rate is supposedly a rate for unsecured loans between banks, but there do not seem to be many such transactions these days. The N.Y.S.E. says that it may be appropriate for banks to use the rates they pay on insured deposits in estimating the Libor rate.

    If all else fails, “expert judgment should be used to determine a submission,” wrote Martin Wheatley, whose report set the course for allowing Libor to continue without fundamental reform. Mr. Wheatley is now chief executive of the Financial Conduct Authority, a British regulator.

    What do you think it takes to shut the whole fraudulent model down?

  8. I e-mailed relatives two articles of importance of what is going on with all this paper debt. What I got back was childish stuff of what they thought were important (and we're talking people in their 50's and 60's). So much for Maturity.....

  9. Hillary Clinton’s Lucrative Goldman Sachs Speaking Gigs

    Hillary Clinton spoke at two separate Goldman Sachs events on the evenings of Thursday, October 24 and Tuesday, October 29. As both Politico and the New York Times report, Clinton’s fee is about $200,000 per speech, meaning she likely netted around $400,000 for her paid gigs at Goldman over the course of six days.

    Last Thursday, Clinton spoke for the AIMS Alternative Investment Conference hosted by Goldman Sachs, a closed event exclusively for Goldman clients. AIMS is an annual conference that explores the latest strategies and products available to financial advisers. At the event, Clinton offered what one attendee described to me as “prepared remarks followed by questions.”

    On Tuesday, Clinton spoke at the Builders and Innovators Summit, devoted to discussing entrepreneurship and how to help innovators expand and grow their businesses. According to Politico, Clinton conducted a question-and-answer session with Goldman CEO Lloyd Blankfein. Goldman Sachs declined to comment on the subject of her remarks or why Mrs. Clinton in particular was invited to the events.

    Keeping close to the investment world, Clinton also made visits to private-equity firms KKR in July and the Carlyle Group in September. At KKR’s annual investor meeting in California, Clinton answered questions from firm co-founder Henry Kravis on the Middle East, Washington, and politics. At Carlyle Group, Clinton made a speech to shareholders moderated by Carlyle founder David Rubenstein.

    Clinton’s office did not respond to a request for comment.

    1. Ms. Clinton is being groomed for the Presidency. What this means is more of the same antics being perpetrated by the same criminals to achieve the same ends. The Wall Street/City of London cabal shall continue to export dollar inflation to the rest of the world while keeping a boot on the neck of real money. As Dave pointed out, servicing the massive debt load associated with this policy will become increasingly problematic in an era of negative economic growth.

      What attendees of these private speaking engagements are looking for are assurances that US policy will remain skewed in their favor. They can rest assured it will. How long the rest of humanity puts up with their bullshit is another question.

  10. I wonder if the farce and lying going on during the decline of the Roman empire was worse than what is going on now.
    We have gone from bread and circuses to SNAP cards and TV to placate the plebs.
    Sadly, the powers that be will go right on lying to us to the bitter end

  11. Obama: ten times more popular than JFK, almost as big as Jesus, leaves MLK in the dust (just google the words Obama, JFK, MLK and Jesus to see how many results show up)

  12. A new world order and China's key role
    By Henry C K Liu
    This is the first in a series.

    The unraveling of the global financial network and trading system since the onset of the global financial crisis that began in New York in mid-2007 has continued for more than five years with no end in sight, despite coordinated, extended monetary easing by many central banks to shore up a seriously impaired neoliberal global financial system that has been disintegrating at the core from its own internal contradictions.

    On the occasion of the First G20 Leaders Summit of 2008, Paul Davidson and I co-authored an Open Letter to World Leaders dated November 7, a week before the White House meeting. The Open Letter was co-signed by a large number of other supportive economists worldwide. The Open Letter recommended a new international financial architecture based on an updated 21st century version of the Keynes Plan originally proposed at Bretton Woods in 1944.

    This new international financial architecture proposed in the Open Letter will aim to create:
    1) a new global monetary regime that operates without national currency hegemony,
    2) global trade relationships that support rather than retard domestic development and
    3) a global economic environment that provides incentives for each and every nation to promote full employment and rising wages for its labor force.
    After two decades of substituting wage increases with consumer debt in order to maximize return on capital by tilting the distributional balance between capital and labor against labor to the benefit of capital, and the detriment of demand, overlooking the structural wage-price dynamics of Fordism that built the US middle class, this win-win illusion of comparative advantage in international trade without the prerequisite of global full employment with rising wages has been shattered by concrete data: relative poverty has increased worldwide and global wages, already low to begin with, have declined since the Asian financial crisis of 1997, and by 45% in some emerging market economies, such as that of Indonesia. As wages failed to grow, demand was kept high by debt unsustainable by low wages.

    Under dollar hegemony, export to US markets is merely an arrangement in which the exporting economies, in order to earn dollars to buy needed commodities denominated in dollars and to service dollar loans and direct investments, are forced to finance the US consumption beyond the level supported by US wages, and by the need to invest their trade surplus dollars in dollar assets as foreign-exchange reserves, giving the US a rising capital account surplus to finance its rising current account deficit.

  13. Finland’s Gold

    Half Finland's gold is stored at the Bank of England, and "no more than half" is "invested". If any "investment" is to take place it would be in London. It is not immediately clear what is meant by invested, but presumably this is a result of translation of what has happened from English into Finnish plus explanation for a non-specialist readership. However if it has been invested, then by definition it is no longer in the possession of the Bank of Finland, and will most probably have been sold into the market in return for a promise to redeliver at a later date. This follows the Austrian National Bank's admission to a parliamentary committee a year ago that it had earned EUR300m by leasing its gold through London.

    The evidence is mounting that Western central banks through the Bank of England have been feeding monetary gold into the market through leasing operations. Indeed, the Finnish blog says as much: "Gold investment activities are common for central banks".

    This explains in part how the voracious appetite for gold by China, India and South-East Asia is being satisfied, without the gold price rising to reflect this demand. It is also consistent with my disclosure earlier this year of the discrepancy of up to 1,300 tonnes between the gold in custody as recorded in the Bank of England's Annual Report, dated 28th February 2013 and the amount recorded on the virtual tour on the Bank's website the following June.

  14. U.S. Treasury Department Guarantees Debt Issued by the Jordanian Government

    From the U.S. Treasury Department’s press release:

    This guarantee marks the conclusion of a process that President Obama set in motion in March 2013 when he visited Jordan. During his visit, President Obama noted that a U.S. guarantee, “can help deliver the results that Jordanians deserve… to see their schools better, their roads improved, healthcare, clean water all enhanced, the training that I know a lot of Jordanians seek, particularly young people, to get a job or to turn entrepreneurial skills into a business that creates even more jobs.” That vision was further affirmed by the signing of a loan guarantee agreement in Amman on August 14, 2013.

    Did you catch that? The Treasury Department expressed its preoccupation with Jordanian healthcare on the same day it is revealed that the top hospitals in America will not accept Obamacare.

    Oh, and good thing we are so concerned with Jordanian infrastructure spending. Meanwhile back in the USSA:

  15. CFTC Delays Cases, Shelves Probes, in Funding Squeeze
    Outgoing Enforcement Chief Says Agency is 'Undersized;' No Charges for Two Men in J.P. Morgan Debacle

    The Commodity Futures Trading Commission is so cash-starved that the agency is being forced to delay cases, shelve certain probes and decided not to file charges against two former traders over J.P. Morgan Chase JPM +1.72% & Co.'s "London whale" trading mess, a top official said.

    In an interview, David Meister, who stepped down this week as the CFTC's enforcement chief, said the agency is "absolutely undersized" for the sprawling futures and options markets it must police.

    "We will do everything we can…but we have limited staff and limited resources," Mr. Meister said. "Ultimately, it comes down to the math."

    One CFTC commissioner, Republican Scott O'Malia, this year opposed President Barack Obama's request for a $315 million budget for the agency, saying he didn't believe granting "unsubstantiated appeals for massive budget increases" made financial sense.

    Mr. Meister declined to comment on the continuing congressional to-and-fro over the CFTC budget. But he said his concerns go deeper than the typical regulatory refrain of "more, please." His enforcement division is trying to do extra cases with fewer people, he said. It has about 155 officials, down 10% from when he started, and roughly the same level as 11 years ago.

    "That's a very small staff compared with the size of the job," Mr. Meister said, comparing the CFTC with the Securities and Exchange Commission, which has more than 1,200 enforcement officials. "It's remarkable how small we are."

    The funding squeeze is forcing the CFTC to make "some very tough choices" about its work, Mr. Meister said. One example: the agency's decision not to charge Julien Grout and Javier Martin-Artajo, the two former J.P. Morgan traders accused by the government of hiding multibillion-dollar losses.

    how convenient.........................

    1. House Passes Deregulation Bill Written by Citigroup

      Published on Nov 1, 2013

      Bill Black: Both parties support Wall Street's effort to deregulate derivatives

  16. Maguire: “People will ask me, ‘With such strong physical demand, how can the price (of gold) be going down?’ The answer is simple. Physical gold is completely unleveraged. Synthetic Comex supply is not gold at all, it’s just fake supply, and it temporarily overwhelms the underlying (true physical) demand.

    It’s pretty easy to do if you are the Fed. The Fed has a complete visibility into the (trading) ‘book,’ and knows exactly how much synthetic gold to dump into the market at any time to overcome the ‘bid stack,’ and ignite the algorithm-driven momentum follow through selling. It’s their (the Fed’s) game....

  17. My 20 Minute Talk at the Liberty Mastermind Conference


  18. J.P. Morgan's Legal Woes Extend to Oil Patch
    Problems Surface With a Lease in Eagle Ford Shale

    When a small Houston energy-investment company called Orca Assets G.P. LLC agreed three years ago to pay $3.2 million to lease more than 900 acres in oil-rich south Texas, it thought it had a surefire winner.

    The DeWitt County plot is part of the Eagle Ford shale formation, one of the hottest spots in oil country thanks to improved horizontal drilling and hydraulic-fracturing methods. The value of mineral leases in that part of Texas has leapt to $10,000 an acre or more from just a few hundred dollars since 2010, a lawyer representing Orca said.

    But before Orca drilled a single well on the property, it received some unsettling news from J.P. Morgan Chase JPM +1.88% & Co., which represented the seller, the Red Crest Trust, and also administered the trust. It turned out that the then-trustee in the deal, Philip Mettham of J.P. Morgan's Fort Worth office, already had leased the land to another company.

    How the bank came to double-lease the land and whose responsibility it was to make sure that didn't happen are at the heart of a dispute that is J.P. Morgan's latest, and perhaps most unusual, legal headache.