My better GMAC bailout

Today, on the 30th of December 2008 - Bloomberg:

GMAC Gets $6 Billion From Treasury to Revive Lending

The Treasury will purchase a $5 billion stake in GMAC and lend $1 billion to GM so the automaker can contribute to the lender’s reorganization as a bank holding company, according to a statement issued yesterday. The loan is in addition to $13.4 billion the Treasury agreed earlier this month to lend to GM and Chrysler LLC.

The fresh capital will enable GMAC to expand lending to car buyers and help save GM.

Today, just a few hours later - Bloomberg:

GMAC Adds Loans as U.S. Injects $6 Billion to Aid GM

GMAC LLC, bolstered by a $6 billion federal bailout, resumed lending to General Motors Corp. customers with lower credit scores as the U.S. stepped up efforts to keep the automaker in business.

[...]

Reviving GM’s sales has become a priority for U.S. policy makers including the Federal Reserve because of concern that the automaker and its suppliers might go bankrupt and deepen the year-old recession by firing millions of workers. The funds for GMAC are on top of $13.4 billion the Treasury agreed earlier this month to lend to GM and Chrysler LLC.

A few things that are not so obvious to the blind eye:

• The Fed just allowed GMAC to become a bank a few days ago (Bloomberg report).
• The new capital will allow GMAC to lend to insolvent people and hence create some sort of subprime for auto-loans (Mish believes the same).
• The intended goal is to help US citizens to get more into debt in order to help save GM. This is just rephrasing the last quoted sentence of the first article ("The fresh capital will enable GMAC to expand lending to car buyers and help save GM.").

BUT, $6 billion is still a HUGE amount of dollars, even in these new era of quantitative easing where the word trillion has replaced billion in all the amounts quoted (this just precludes how enormous the inflation cataclysme will be a few months down the road).

Suppose that a basic GM car costs $20,000. With only $6 billion (= $6,000,000,000) , you can still buy 300,000 cars.

My suggestion — whic is totally silly, by the way, but probably less dumb and useless than what the Paulson and Bernanke are doing here — about how those $6 billion could have been taken from one pocket of the US citizens and returned to another, instead of just stolen from the public by GM with the help of this corrupt US Government is:

Why not just spend that $6 billion to buy 300,000 cars from GM and organize some sort of state lottery to allow the US citizen to win a free car? At least this would have been fun and cheerful, and would have made 300,000 US families happy. And it's Christmas!

But that wouldn't have been useful to the US government, which wants to keep the sheeps in the flock. People in debt are slaves to their creditors. The more people you keep in debt, and the deeper in debt they are, the more those in power (governments and banks) can extend this power... And the more they are scared/worried, the more they will beg the government to take more power in order to protect them. Do you see a pattern since the past 10 years?

I found these two quotes a few days ago while reading The Age of Inflation, Continued by Hans F. Sennholz, and I think they are two great ones:

"The state is no organism capable of bringing either moral or material improvements to the populace, but merely a vehicle of power for the men and party in power." [Sennholz attributes this one to Machiavelli but I couldn't get any confirmation from Google, so I doubt he is right]

"We are ever aware that politics is an ugly struggle that determines ‘who gets what, when, and how.’ It is the favorite occupation of people who serve special interests, who have axes to grind, and public careers to advance. It is a game in which benefits are bestowed according to political skill and connection, rather than merit. It is an arena of pressures and counter-pressures in which emotion often prevails over reason, and power over justice. Conflict politics has nothing to do with morals and ethics; it is a bitter battle about position, benefits, privileges, taxes, and obligations."

And you, can you think of a better GMAC bailout?

Obama will not prosecute Bush and Cheney [Updated]

I found this very interesting and very current article, while looking for a confirmation I saw on a conspiracy theory: a link between JFK's assassination and the Fed.

It is written by Joseph A. Lopisi — attorney, member of the Coalition against Election Fraud and a cofounder of the Massachusetts 9/11 Truth Group. I reproduce it here in its whole. You can get the source from Google...

Obama will not prosecute Bush and Cheney
By Joseph A. Lopisi

Mark my words. President Obama will follow in the footsteps of his predecessors by not holding his predecessor, George W. Bush and members of his administration, liable for violating the United States Constitution and criminally responsible for treason, 9/11, financial fraud, mass murder and war crimes.

Along the same lines as his predecessors, President Obama will deal with the current financial crisis by pointing his finger at everyone except the real culprit, the Federal Reserve Bank, the U.S. executive and legislative branches and their partners in crime, the Wall Street financial institutions.

The Federal Reserve Bank is a cartel of private banks with only one motive-profit. Presidents like Abraham Lincoln, Andrew Jackson and Woodrow Wilson all knew about the all pervasive control that a private central bank has when it is permitted to print the money for the government and then lend it back to the government at interest. The end result of this scheme is that U.S. government is in debt to the Federal Reserve Bank and taxes our income in order to pay this debt. As a result, we all live our lives in debt. Being in debt is a form of slavery.

John F. Kennedy passed an Executive Order six months before his assassination. This Executive Order would allow the federal government to print money based on a silver standard. This order was the beginning of the end of the Federal Reserve Bank.

Mark my words, President Obama will be:

Just like Al Gore, who after fighting in Court against the 2000 election being stolen by computer fraud and voter suppression, capitulated on the floor of the United States Senate by stopping anyone from objecting to the Certification of the Florida electoral College vote.

Just like Clinton, who stopped any investigation of George H.W. Bush and his involvement in the Iran-Contra affair and his involvement in the assassination of JFK and the attempted assassination of Ronald Reagan. Now you see Clinton and Bush acting as if they are bosom buddies. That is because they are and always have been. Clinton was involved in allowing cocaine to be imported into a small airport in Arkansas when he was governor. George H. W. Bush was involved in the importation of this cocaine to fund the Iran-Contra affair and the secret government populated by CIA agents. Now that I think of it, the payback for Clinton allowing this was for him to be elected president.

Just like John Kerry who capitulated the day after the election knowing full well that Bush stole the election by voter suppression and computer fraud in many of the battleground states. Of course, he explained his concession in words that the everyday uninformed simplistic Americans would understand “I don't want to seem like a sore loser”. Since when would you be considered a sore loser if you accused your opponent of cheating when you knew he had and when the evidence was clear that he did.

Just like Gerald Ford who struck a deal with Richard Nixon which called for his resignation instead of impeachment hearings. In this way, the real reason for the Watergate burglary would be kept secret and the complicit Congress would continue to look good. The real reason was that there was evidence, including photographic evidence, placing E. Howard Hunt in Dealey Square on the day JFK was killed. If you are too young to remember, E. Howard Hunt was one of the Watergate burglars. He recently died. Before he died, he made an audiotape in which he clearly states that JFK assassination was a conspiracy of the CIA including Lyndon Baines Johnson. Of course, the mainstream media did not pick up on this earth shattering news.

While we are on the topic of Gerald Ford and the complicit mainstream media, Gerald Ford, on his deathbed, admitted that the Warren commission lied in its placement of the “magic bullet” as it went through JFK’s shirt. If not for this lie, the “magic bullet” theory would fall apart and consequently the “lone gunman” explanation would not be plausible. Of course, the mainstream media did not report this earth shattering news either. Just like the mainstream media does not question the official 9/11 conspiracy theory despite the fact that it is obviously a lie, has numerous unexplained circumstances and does not in any way talk to why WTC 7 collapsed on its footprint in freefall time late in the day on September 11. Neither does the 9/11 commission investigate in any way whatsoever funding of the attack. Any criminal investigator knows that if you follow the trail of the money you will find the perpetrators.

Just like Obama who will not investigate Bush and/or Cheney for all of the felonies, war crimes, financial fraud, treason including the planning and orchestration of 9/11. He will just chalk it up to “moving on for the good of the country”.

The good of the country requires the investigation and prosecution of all of these criminals starting with George H.W. Bush and moving forward.

[Update]Here's an interesting commentary on Bloomberg:
Bush Bailout for Rumsfeld, Torturers Might Be Next: Ann Woolner

Dec. 5 (Bloomberg) -- The season of forgiveness is here, and federal felons everywhere are hoping some of it will alight on them.

The period from about Thanksgiving until precisely noon on Jan. 20, is prime time for pardons in a president’s last term.

Junk-bond baron Michael Milken wants forgiveness, ex- WorldCom chief Bernard Ebbers a shorter prison term. More than 2,000 applications have flooded the White House and the Justice Department, most from run-of-the-mill crooks.

Then there are those people not yet charged, much less convicted, who nervously look for pardons, too. Suspecting the future might bring indictments, those within President George W. Bush’s administration who may have broken laws to carry out Bush- Cheney policies could use the boss’s protection.

Beyond the wiretappers, the perjurers, the obstructers of justice in the U.S. attorney firings are those who promoted the notion that torture isn’t torture, and even if it is, it isn’t necessarily illegal.

Will Bush preemptively pardon them? If he doesn’t, what are the chances some of them might wind up behind bars?

It would be pleasant to turn our back on the shame of the recent past, fervently denounce torture as un-American and, with a new president and a world eager to trust him, say it won’t happen again.

There is something to be said for forgiving the excesses of public servants, some of whom were risking their lives, who believed they were protecting their nation even if skating close to the law’s edge.

‘Not Even Past’

The problem with just moving on is, as William Faulkner put it, “The past is not dead. In fact, it’s not even past.”

We can’t expect the enemy to respect anti-torture laws when they capture some of our guys, if we have flouted those same laws.

“It’s a question of protecting future military personnel in future conflicts,” says Scott Horton, a New York lawyer to whom military lawyers turned when they couldn’t get the ear of the civilian leaders at the Pentagon. Now he writes for Harper’s magazine, often on torture.

Nor can we allow to rest undisturbed the precedent Bush set for his successors. We can’t simply forget that an administration assumed it had authority to violate the law and human rights.

When the torture at Abu Ghraib prison was exposed in 2004, then-Defense Secretary Donald Rumsfeld told a Senate committee he should be held accountable, if only because it “occurred on my watch.”

Lack of Accountability

Held accountable?

Rumsfeld stayed on the job for another two years without so much as a reprimand from the president. It was as if the torture that killed at least one man, humiliated others and brought shame to the U.S. wasn’t sufficient grounds to kick him out of the Pentagon.

There has to be some sort of accountability for what happened. I am not talking about vengeance or political retribution. I mean a somber, thorough look at what happened and how to make sure it doesn’t again.

If, in the course of that, evidence turns up criminal conduct, we can take it from there.

I’m not especially worried about punishing interrogators who stripped detainees naked, forced them into contorted poses for hours at a time, hosed them down and refrigerated them.

True Investigation

Nor am I focused on those who waterboarded Khalid Sheikh Mohammed, for example, to make the al-Qaeda leader think he was drowning, or who drugged and flew suspects to secret Central Intelligence Agency sites or countries like Egypt for more expert torture.

(But I wouldn’t rule out prosecution for anyone up or down the line, depending on what a true investigation shows.)

More than zeroing in on interrogators, I’m interested in those who declared that sort of conduct legal in the face of clear law that forbids it. This crowd includes former White House Counsel Alberto Gonzales, Rumsfeld, some of Rumsfeld’s top aides and a slew of lawyers at the White House, the Justice Department and the Pentagon. One of them, Jay Bybee, who used to run the Justice Department’s Office of Legal Counsel, now works as a federal appeals court judge.

They crafted memoranda that said interrogators could essentially ignore the Geneva Conventions, international treaties and U.S. law barring torture. They said the president can authorize it in time of war, even though he can’t legally. And they laid out a defense for those interrogators who engage in torture, bogus as that argument was.

Wise Counsel

To accomplish this, they had to reject the wise and persistent counsel of career military lawyers and leaders. These experts insisted time and again that in permitting torture, government lawyers would be breaking the law, making torture more likely for captured U.S. troops, giving the enemy recruiting material and inflicting irreparable damage to the U.S.’s reputation.

Writing a bad legal opinion doesn’t make the author a criminal conspirator. But it’s another matter if a lawyer whose duty is to guide government agents in behaving legally, instead writes memos intended to distort the law and gives cover for illegal conduct.

So far, none of the investigations have led to a definitive account of what happened, though more are under way. If none produce a complete picture, the next president should empanel a commission that will.

Whether through full disclosure or actual prosecutions, there must be acknowledgement of past sins, a determination not to repeat them and accountability for any sinners.

(Ann Woolner is a Bloomberg news columnist. The opinions expressed are her own.)

GBP arbitrage opportunities

Alright, so with the collapse the GBP against EUR, and the emergence of what I call the British Euro (GBP - EUR parity), I think the current correction too deep and can be explained only by massive shorting of the GBP. I mentioned this already last week, and the British Euro has sunken a lot deeper since that time.

The Euro has basically rised by about 50% against the GBP in the past 18 months.



Apart from financial markets, it looks like there are other arbitrage opportunities, which also confirm that on the short term at least, the GBP is undervalued against the EUR, as I show in the next paragraphs below. I am very bearish on the UK economy and have been for the past 3-4 years, but this shouldn't prevent you from taking such great arbitrage opportunities.

So, it's Christmas, and it's Sunday, so instead of going to my broker I might just go on the web and shop for Christmas presents. Here are some random thoughts:

How much can you save by buying your Apple products from the UK instead of France?

Another great opportunity here:

Looks like you have to be selective anyway. This one is still cheaper in GBP but not by a massive amount:

[update] Disclaimer: Although I am short USD long EUR, I have no speculative GBP positions yet.
[update 20090304] Please read the follow up on this post here.

The Fed bails out the Hedge Fund industry

One more day, one more bailout. After the $14 billion load to the auto-industry agreed by the Bush administration on Friday, the Fed announced that it will lend $200 billion to the hedge fund industry.

I am tired of commenting on these bailouts. It seems like everyday, the burden on the back of the united states citizen's children is increased by a few hundred billion dollar in order to save the statu-quo or the establishment - in the form of debt by the US government or assets on the balance sheet of the Fed.

This is the FT report:

Hedge funds gain access to $200bn Fed aid

Last updated: December 20 2008 05:01

Hedge funds will be allowed to borrow from the Federal Reserve for the first time under a landmark $200bn programme intended to support consumer credit.

The Fed said on Friday it would offer low-cost three-year funding to any US company investing in securitised consumer loans under the Term Asset-backed Securities Loan Facility (TALF). This includes hedge funds, which have never been able to borrow from the US central bank before, although the Fed may not permit hedge funds to use offshore vehicles to conduct the transactions.

Congressman McFadden on the Fed

In case you didn't know yet:

"Mr. Chairman, we have in this Country one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board and the Federal Reserve Banks, hereinafter called the Fed. The Fed has cheated the Government of these United States and the people of the United States out of enough money to pay the Nation's debt. The depredations and iniquities of the Fed has cost enough money to pay the National debt several times over.

"This evil institution has impoverished and ruined the people of these United States, has bankrupted itself, and has practically bankrupted our Government. It has done this through the defects of the law under which it operates, through the maladministration of that law by the Fed and through the corrupt practices of the moneyed vultures who control it.

"Some people who think that the Federal Reserve Banks United States Government institutions. They are private monopolies which prey upon the people of these United States for the benefit of themselves and their foreign customers; foreign and domestic speculators and swindlers; and rich and predatory money lender. In that dark crew of financial pirates there are those who would cut a man's throat to get a dollar out of his pocket; there are those who send money into states to buy votes to control our legislatures; there are those who maintain International propaganda for the purpose of deceiving us into granting of new concessions which will permit them to cover up their past misdeeds and set again in motion their gigantic train of crime.

"These twelve private credit monopolies were deceitfully and disloyally foisted upon this Country by the bankers who came here from Europe and repaid us our hospitality by undermining our American institutions. Those bankers took money out of this Country to finance Japan in a war against Russia. They created a reign of terror in Russia with our money in order to help that war along. They instigated the separate peace between Germany and Russia, and thus drove a wedge between the allies in World War. They financed Trotsky's passage from New York to Russia so that he might assist in the destruction of the Russian Empire. They fomented and instigated the Russian Revolution, and placed a large fund of American dollars at Trotsky's disposal in one of their branch banks in Sweden so that through him Russian homes might be thoroughly broken up and Russian children flung far and wide from their natural protectors. They have since begun breaking up of American homes and the dispersal of American children. "Mr. Chairman, there should be no partisanship in matters concerning banking and currency affairs in this Country, and I do not speak with any.
[...]
"The Federal Reserve Bank destroyed our old and characteristic way of doing business. It discriminated against our 1-name commercial paper, the finest in the world, and it set up the antiquated 2-name paper, which is the present curse of this Country and which wrecked every country which has ever given it scope; it fastened down upon the Country the very tyranny from which the framers of the Constitution sough to save us."

-- Congressman McFadden on the Federal Reserve Corporation Remarks in Congress, 1934

On May 23, 1933, Congressman, Louis T. McFadden, brought formal charges against the Board of Governors of the Federal Reserve Bank system, The Comptroller of the Currency and the Secretary of United States Treasury for numerous criminal acts, including but not limited to, CONSPIRACY, FRAUD, UNLAWFUL CONVERSION, AND TREASON.The petition for Articles of Impeachment as thereafter referred to the Judiciary Committee and has YET TO BE ACTED ON.

(source AFN.org)

Credit Suisse to Use $5 Billion of Illiquid Assets for Bonuses

This is not even a joke:

Dec. 18 (Bloomberg) -- Credit Suisse Group AG's investment bank has found a new way to reduce the risk of losses from about $5 billion of its most illiquid loans and bonds: using them to pay employees' year-end bonuses.

Conclusions (?):

• A bank that has lost countless billions of USD will still pay bonuses to employees. And not a little bonus, according to their accountants, managing directors and directors will share a slice of these $5 billion package?
  
• Nobody wants to buy those assets, which makes them virtually valueless, otherwise they wouldn't be giving them away. So the only way of removing them from the balance sheet is to give them away?
  
• If they are worthless, maybe they are not really paying bonus then, and just fooling their employees?
  

Blatant incompetence of former Fed governors and current market strategists

I just watched these series of video on YouTube, featuring Peter Schiff on Larry Kudlow's:

1. Part 1
2. Part 2
3. Part 3
4. Part 4
   

It is truly amazing the things you can hear from these people. I couldn't resign myself into making a transcript of this show, but really, really, how can these people come on TV, talk so much non-sense, and get away with them? More importantly, how is that possible that they have so much responsibility and weight on our every-day life and economy? I highly recommend watching the videos and making your own opinion...

SEC is a big failure, admits Chairman Cox

Dec. 17 (Bloomberg) -- U.S. Securities and Exchange Commission Chairman Christopher Cox said the agency failed to act for almost a decade on “credible and specific allegations” of wrongdoing by Bernard Madoff, who authorities say bilked investors of as much as $50 billion.

Allegations dating back until at least 1999 “were repeatedly brought to the attention of SEC staff, but were never recommended to the commission for action,” Cox, 56, said in a statement yesterday. He announced an internal probe to review the “deeply troubling” revelations.
[...]
The SEC was under fire before Madoff’s fraud came to light. The collapses of investment banks Bear Stearns and Lehman this year tarnished the SEC’s reputation and lawmakers such as Dodd and Senator Charles Grassley, an Iowa Republican, have questioned its vigilance in enforcing securities laws. Cox, a Republican appointed by President George W. Bush, has said he will leave office at the end of the Bush administration. His term officially ends in June 2009.

No Inspections

SEC Inspector General H. David Kotz released reports this year critical of the agency’s conduct. He said in one that the SEC “failed to carry out its oversight” of Bear Stearns, the New York investment bank that faced collapse in March. He’s also questioned the handling of investigations by the agency’s enforcement staff.

The SEC hadn’t inspected Madoff’s investment advisory business since he registered the firm with the agency in September 2006, two people familiar with the matter said. The SEC tries to inspect advisers at least every five years and to scrutinize new firms in their first year of registration, former agency officials and securities lawyers said.

SEC examiners reviewed Madoff’s brokerage business in 2005 after an investment manager, writing to the agency, and press reports questioned the validity of his investment returns. The SEC’s enforcement division completed an investigation involving the company last year without bringing a claim.

It seems obvious that the SEC has been consistently failing for the past 10 years or so (the Bloomberg report doesn't even mention Fannie and Freddie...). Thank god Cox is leaving. But he should actually have been fired a while ago and maybe brought to justice.

Bernanke has lost it [updated]

It's now official, Bernanke and his friends at the Fed have decided to shoot their last bullet by targeting rates from 0.00% to 0.25%. Deciphered, this statement means that they are going to try to kill the US dollar, and if they are successful, the US might face the same fate as Argentina or more recently, Iceland or Ecuador. By stating that they will print to buy government bond, what they are really saying is that they are defaulting on their debt and printing to pay it back. The market is not that stupid, as the USD felt 3% against the Euro just today, bringing the total loss to 10% for the week. These are massive moves for forex, and specially for mature economies... The Fed can drive the interest rate on a 30-year bankrupt US government bond to zero, but it cannot prevent the USD from collapsing...

The good news is for China and Japan, they have a great opportunity to get rid of their Treasuries and hopefully convert the proceeds into gold, silver or oil...

[update:] Please note that the real rate of the Fed funds have already been around 0.00% for quite some time, as I have already mentioned it here, early October.



From Bloomberg:

“The Fed is sending a message that it will print money to an unlimited extent until it starts to see the economy expanding,” William Poole, former president of the St. Louis Fed and now a senior fellow at the Cato Institute in Washington, said in an interview with Bloomberg Television. Poole is also a contributor to Bloomberg News.

The statement noted that the Fed has already announced it will purchase the debt issued or backed by government-chartered housing finance companies, and said the Fed is ready to expand the program. The central bank said it continues to weigh the potential benefits of buying longer-term Treasury securities.

The official press release from the Fed (emphasis mine):

Release Date: December 16, 2008

The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.

Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.

Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

They are confusing "economic growth" with "monetary expansion" (= inflation).

The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.

Of course, the best way to get out of insolvency and excess debt, is to get more into debt. That should be obvious to anyone who has lost their mine.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Richmond, Atlanta, Minneapolis, and San Francisco. The Board also established interest rates on required and excess reserve balances of 1/4 percent.

So it's not just Bernanke who has lost it, all his friends at the board are as incompetent and insane has their Chairman.

Bernanke is out of control

NEW YORK (Reuters) - American International Group, the insurer bailed out by the U.S. government in September, said on Monday it sold $39.3 billion of assets to a fund established by the Federal Reserve Bank of New York.
[...]
The U.S. government saved AIG from bankruptcy in September with a rescue plan that has ballooned to about $152 billion so far.

Truly amazing the kind of things that can happen when fearful and incompetent people take the power.

Dec. 16 (Bloomberg) -- Treasury 30-year bond yields fell to a record low as government reports showed inflation dropped by the most on record last month and the Federal Reserve was expected to cut borrowing rates to near zero percent.

The 10-year note’s yield touched 2.465 percent, the lowest level since the beginning of the Fed’s daily data in 1962, as investors sought the highest yields of the safest government securities. The Fed also may also say it’s considering unconventional methods such as buying long-term debt to keep interest rates low.

[...]

“It’s not about the absolute rates, it’s allocation to safety,” said Paul Horrmann, a strategist in Jersey City, New Jersey, at ICAP Plc, the world’s largest inter-dealer broker. “Treasuries may be at a premium, but that’s the cost of risk aversion.”

This guy clearly doesn't understand what he's doing...

[...]
Fed Chairman Ben S. Bernanke said in a Dec. 1 speech the central bank would consider buying longer-term government debt to prevent yields from rising. One option, Bernanke said, is to buy “longer-term Treasury or agency securities on the open market in substantial quantities.” He said there was limited room to lower rates.
[...]
The Treasury’s annual report yesterday showed government spending exceeded revenue by $1.01 trillion in the 12 months to Sept. 30, compared with $276 billion a year earlier, under stricter accounting methods used to calculate the shortfall.

This screams INSOLVENCY. If Helicopter Ben wants to support the Treasuries, he will sink the USD.

Dec. 16 (Bloomberg) -- The Federal Reserve may today reduce its main interest rate to the lowest level on record and prepare for one of the boldest experiments in its 94-year history: using its balance sheet as the key tool for monetary policy.

The Fed’s Open Market Committee will probably cut the benchmark rate in half, to 0.5 percent, according to the median of 84 forecasts in a Bloomberg News survey. The central bank may also signal plans to channel credit to businesses and consumers by further enlarging its $2.26 trillion of assets.

Chairman Ben S. Bernanke plans new steps to combat the credit crunch and prevent the worst recession in a quarter century from turning into a depression. The danger is the Fed’s credibility could be hurt if policy makers don’t clearly communicate a new strategy of manipulating the supply of money, at a time when FOMC members have diverging views on the subject.

Somebody, please stop him!

Madoff fraud exposes the asset management industry [updated]

Lots of articles have appeared on the web about the Madoff fraud/ponzi scheme. Below a few links.

This whole blow off is another big hit for the financial industry, and more precisely, the asset management world, because the people who have been fooled by Madoff are either incompetent people who just didn't do their job properly, or worse, they were cheaters themselves, who understood that Madoff was a fraud but they wanted to profit from his fraud!

On the other hand, as any crisis, this is good news actually: it will help the competent people to be singled out, as so many incompetents managers are loosing either their shirts or their liberty. Good and competent asset managers will be better off after this.

The major drawback, however, will come from excess regulation being built on top of the current regulatory body. Let's hope this won't happen...

Interesting quotes:

“Whenever a fund had money with Madoff, it raised a red flag,” said Konig [chief investment officer for Artemis Capital Partners LLC in Aventura, Florida, which invests with hedge funds], who said he rejected at least 20 funds of funds as potential investments for that reason alone. “It means that they didn’t do their due diligence they were supposed to and were chasing those returns.” (source: Yahoo via Mish)

The fraudsters united:

We're hearing that the smart money KNEW Bernie had to be cheating, because the returns he was generating were impossibly good. Many Wall Streeters suspected the wrong rigged game, though: They thought it was insider trading, not a Ponzi scheme. And here's the best part: That's why they invested with him.

One Madoff investor, himself a legend, told me that Madoff's performance "just doesn't make sense. The numbers can't be straight." Another sophisticated Madoff investor actually went through trade confirms in order to reverse-engineer the strategy and said, "it doesn't add up."

So why did these smart and skeptical investors keep investing? They, like many Madoff investors, assumed Madoff was somehow illegally trading on information from his market-making business for their benefit. They didn't consider the possibility that he was clean on that score but running a good old-fashioned Ponzi scheme. (Yahoo, via Mish)

Karl Denninger (whole post worth reading):

Yeah, the SEC couldn't see that coming. Uh huh.

Never mind that they were apparently warned several years ago in written communications that Madoff's "returns" were highly abnormal given the published strategies he was using and the numbers he was posting.

Investigate? What's that? Why, that's unamerican!

Another type of fraud is exposed here again:

Dec. 15 (Bloomberg) -- Tremont Group Holdings Inc., a hedge- fund firm owned by OppenheimerFunds Inc., had $3.3 billion invested with Bernard Madoff, according to a person familiar with the matter.

Tremont’s Rye Investment Management unit had $3.1 billion, virtually all of its assets, invested with Madoff, said the person, who declined to be identified because the information is private. Tremont had another $200 million invested through its fund of funds group, Tremont Capital Management.

So they take the money of their investors, put 98% under management by Madoff, do not even carry proper due diligence, but cash in a yearly management fee of 1 or 2%, and maybe even performance fees. It's a great business to be in, isn't it?

Again, this will make the whole industry look very bad on the short term, but on the longer term, competent asset managers with high integrity will benefit from the current situation.

Links:

• Mish's blog, Mish's again
• The New York Times, the New York Times again
  

Bullish oil and GBP [update]

It looks like I am turning bullish on crude oil and the GBP (against USD and EUR).

The facts are simple: both of them have collapsed in a very brutal way.

Oil is fundamentally a precious commodity as it cannot be created and there are going to be shortages on the long term. On the short term, I think it has fallen way too much compared the the fundamentals and it is likely due to the Great Unwind and to shorting. Shorts will have to cover, and fundamentals will prevail some time in the mid- to long-term.

The GBP has collapse almost vertically, and while I am very bearish on the UK economy, the way the collapse has happened leads me to think that this is mostly due to massive shorting. Shorts will have to cover and a rally is very likely on the short term. If you combine that with the over-valuation of the USD, a long GBP/short USD trade sounds tempting to me.

Plus, for both of them, almost all the analysts have come up with their "new" estimates (they always update their estimates after a major move, making them wrong about 95% of the times) which is also very bullish to me, since most forecast oil between $25 to $40 and EURGBP at 0.92 or something close.

Disclosure: I am long oil. I am also long GBP because my salary is in GBP. But I have not taken a speculative position on the GBP/USD yet, I might or might not do it depending on how things evolve.

[Update on the 2009-02-03: I am no longer bullish on the GBP since the last rate cut of the BoE. I have sold most of my remaining GBP that day at about 1.13€. I think the GBP's short term value will fluctuate around 1.15€ although I wouldn't be surprised by a rally to 1.20€ due to short covering but the mid- to long-term value (6 months to 3 years) of the GBP against the Euro will be about parity.

I am still bullish on oil]

Fed Refuses to Disclose Recipients of $2 Trillion

Bloomberg sued the Fed about a month ago in order to get them to disclose the recipients of $2 trillion USD (I mentioned this here). I am definitely supporting Bloomberg here and I wish that soon, thanks to all their reckless actions, the Fed is going to lead to their own demise.

Bloomberg have published an update which is definitely worth reading. Here are a few quotes from their article (emphasis mine):

Dec. 12 (Bloomberg) -- The Federal Reserve refused a request by Bloomberg News to disclose the recipients of more than $2 trillion of emergency loans from U.S. taxpayers and the assets the central bank is accepting as collateral.

The Fed responded Dec. 8, saying it’s allowed to withhold internal memos as well as information about trade secrets and commercial information. The institution confirmed that a records search found 231 pages of documents pertaining to some of the requests.

[...]

Total Fed lending exceeded $2 trillion for the first time Nov. 6. It rose by 138 percent, or $1.23 trillion, in the 12 weeks since Sept. 14, when central bank governors relaxed collateral standards to accept securities that weren’t rated AAA.

[...]

Bloomberg News, a unit of New York-based Bloomberg LP, on May 21 asked the Fed to provide data on collateral posted from April 4 to May 20. The central bank said on June 19 that it needed until July 3 to search documents and determine whether it would make them public. Bloomberg didn’t receive a formal response that would let it file an appeal within the legal time limit.

On Oct. 25, Bloomberg filed another request, expanding the range of when the collateral was posted. It filed suit Nov. 7.

[...]

“Notwithstanding calls for enhanced transparency, the Board must protect against the substantial, multiple harms that might result from disclosure,” Jennifer J. Johnson, the secretary for the Fed’s Board of Governors, said in a letter e-mailed to Bloomberg News.

“In its considered judgment and in view of current circumstances, it would be a dangerous step to release this otherwise confidential information,” she wrote.

[...]

The Freedom of Information Act obliges federal agencies to make government documents available to the press and public. The Bloomberg lawsuit, filed in New York, doesn’t seek money damages.

[...]

The Fed’s five-page response to Bloomberg may be “unprecedented” because the board usually doesn’t go into such detail about its position, said Lee Levine, a partner at Levine Sullivan Koch & Schulz LLP in Washington.

“This is uncharted territory,” said Levine during an interview from his New York office. “The Freedom of Information Act wasn’t built to anticipate this situation and that’s evident from the way the Fed tried to shoehorn their argument into the trade-secrets exemption.”

[...]

“Americans don’t want to get blindsided anymore,” Mendez said in an interview. “They don’t want it sugarcoated or whitewashed. They want the complete truth. The truth is we can’t take all the pain right now.”

The Bloomberg lawsuit said the collateral lists “are central to understanding and assessing the government’s response to the most cataclysmic financial crisis in America since the Great Depression.”

In response, the Fed argued that the trade-secret exemption could be expanded to include potential harm to any of the central bank’s customers, said Bruce Johnson, a lawyer at Davis Wright Tremaine LLP in Seattle. That expansion is not contained in the freedom-of-information law, Johnson said.

“I understand where they are coming from bureaucratically, but that means it’s all the more necessary for taxpayers to know what exactly is going on because of all the money that is being hurled at the banking system,” Johnson said.

The Bloomberg lawsuit is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Mark Pittman in New York at mpittman@bloomberg.net;

Last Updated: December 12, 2008 17:12 EST

[Off Topic] Just added two cool widgets

Following 'dojski' in the comments from a previous post, I found these two really cool widgets from Feedjit and they are very easy to install. You can see them on the right hand side of the blog.

The problem is: according to feed burner, 98% of my readers use an RSS reader and not the web page. Is it going to show up anyway?

Pedge Fund performance - 200811

Just a quick post to relate the performance of PedgeFund for the month of November. October is available here.

Summary:
Pedge Fund USD
November performance: +5.4% (gross, approx)
Year to Date performance: +50% (gross, approx)

Highlights:

• Gains thanks to the precious metals (long gold and silver)
• Losses on long equities
• Losses on short treasuries
• Was in holiday the last week of November, where substantial volatility occurred (and the losses on the treasuries).
• Little support thanks to dividends and put options on the dow

That's it really!

Inflation or Deflation? - 2

We have seen on my previous post a couple of days ago, that inflation/deflation should not be confused with their consequences which are the rise/decline of the general price level. I also pointed to this article from Joseph Salermo (An Austrian Taxonomy of Deflation), on the Mises Institute, which contains valuable information and is a must-read. The article was written in 2002, but it's even more relevant today than it was back then.

So first, let us define inflation/deflation using Salermo's words (emphasis mine):

Before World War 2, whenever the terms “inflation” and “deflation” were used in academic discourse or everyday speech, they generally referred to increases or decreases in the stock of money, respectively. A general rise in prices was viewed as one of several consequences of inflation of the money supply; likewise, a decline in overall prices was viewed as one consequence of deflation of the money supply. Under the influence of the Keynesian Revolution of the mid-1930, however, the meaning of these terms began to change radically.

It's hence important to also understand what the money supply is, in terms of the Austrian School of economics, since there's no consensus on this. Let us quote Murray N Rothbard himself to define the money supply in his book The Mystery of Banking (emphasis mine):

The crucial distinction, and the crucial way to decide what is part of the money supply, must focus on whether a certain claim is withdrawable instantly on demand.
[...]
The test, then, should be whether or not a given bank claim is redeemable, genuinely and in fact, on demand at par in cash. If so, it should be included in the money supply.
[...]
But are money market funds money? Those who answer Yes cite the fact that these funds are mainly checkable accounts. But is the existence of checks the only criterion? For money market funds rest on short-term credit instruments and they are not legally redeemable at par. On the other hand, they are economically redeemable at par, much like the savings deposit. The difference seems to be that the public holds the savings deposit to be legally redeemable at par, whereas it realizes that there are inevitable risks attached to the money market fund. Hence, the weight of argument is against including these goods in the supply of money.
[...]
The Fed also publishes an L figure, which is M-3 plus other liquid assets, including savings bonds, short-term Treasury bills, commercial paper, and acceptances. But none of the latter can be considered money. It is a grave error committed by many economists to fuzz the dividing line between money and other liquid assets. Money is the uniquely liquid asset because money is the final payment, the medium of exchange used in virtually all transactions to purchase goods or services. Other nonmonetary assets, no matter how liquid—and they have different degrees of liquidity—are simply goods to be sold for money. Hence, bills of exchange, Treasury bills, commercial paper, and so on, are in no sense money. By the same reasoning, stocks and bonds, which are mainly highly liquid, could also be called money.

This is a very important quote. It debunks all I read in financial papers/blogs about the current confusion of "asset price deflation" and "deflation". It's not because house prices and share/bond prices are collapsing that we will see deflation. Here we see the difference between "could occur" and "will occur".

As I also stated in my previous post, it is not clear we are in deflation, even if the asset prices are collapsing, and it is not even clear the general price level is going to decrease, as a consequence of moneteray deflation or not.

I will quote Joseph Salermo to back my opinion here, in this crucially important quote. This is very counter intuitive and that could explain why so many people do not see it this way (my emphasis):

The fallacious assumption underlying this proposition is that there always exists a positive relationship between movements in raw commodity prices and movements in consumer prices. However, as the Austrian theory of the business cycle teaches, consumer goods’ prices and capital goods’, including raw commodity, prices change relative to one another during the different phases of the cycle and may very well vary in absolutely opposite directions during a recession.
[...]
Meanwhile, because the Fed typically continues to expand bank credit and money during postwar recessions, although at a slower pace, the prices of consumer goods never do stop rising as the persistent injections of new money work their way through the economy from “monetized” government deficits and more slowly growing bank loans and investments to consumers. This vital lesson was illustrated time and again in the series of inflationary recessions or “stagflations” that the U.S. has suffered through since 1969 during which the CPI soared and the value of the dollar plummeted without interruption right through the recession phase of the cycle despite plunging commodity prices.
[...]
Writing in an earlier era of deflation-phobia, the mid-1980, Murray Rothbard gave a definitive response to those, including supply-siders, who claimed then that a fall in a handful of industrial commodity prices presaged a general deflation:

The fact that industrial commodity prices have fallen sharply means precisely nothing for the reality or the prospect of inflation or deflation. Industrial commodity prices always fall in recessions. They fell in the steep 1973-74 recession and they fell very sharply throughout [the recessions of] 1980 and 1981.... What was the impact of commodity prices on inflation or deflation? Precisely zero. The point is that consumer prices kept rising anyway, throughout these recessions and through the generally depressed period from 1980 to 1983....

Most laymen and economists think of industrial commodity or wholesale prices as harbingers of the move of consumer prices, which are supposed to be ‘sticky’ but moving in the same direction. But they are wrong. One of the most important and neglected truths of business cycle analysis is that consumer prices and capital goods or producer prices move in different directions. Specifically, in boom periods capital goods or producer prices rise relative to consumer prices, while in recessions, consumer prices rise relative to producer prices. As a result, the fact that industrial commodity prices have been falling in no sense presages a later fall in consumer prices. Quite the contrary.

So basically, I will stand on my inflation beliefs so far, even though bank credit is contracting, the money creation at the Fed is so enormous, that it has in my opinion by far compensated the credit contraction.

This might also be one of the rare case where Mish's analysis is totally wrong (Helicopter Ben Pulls Out Bazooka here and Huge Demand For Treasuries As Banks Refuse To Lend here) and Peter Schiff might be right contrary to what Mich states several times on his analysis. I also strongly disagree with his opinion about US Gov bonds but that might be discusses in a future post.


PS: Your comments and opinions are welcome. Also, if you like this post/blog please inform your friends/family

3 Month Treasury Bill hit negative rate

Bloomberg reports that the Treasuries are going higher and higher, as high that the 3-Month bill rate hit negative 0.01% and that the government was able to sell $30 billion dept of 4-week bills at ZERO percent.

And some still think that the US bonds are not in bubble?

Usually, the more dept you carry, the more insolvent you are, the higher the yield. But what happens here? The US gov dept is skyrocketing but the yield is at an all time low!




For full disclosure, I am short the long bond (and other long term gov dept) via TBT

Of market interventions and unintended consequences - 20081207

The government interfering with the free markets always ends with the opposite result of what was the government was originally trying to achieve. This is the law of unintended consequences.

So I have been watching this interview of Bill Ackman with Charlie Rose. I really like Bill Ackman and really respect him a lot. He is very bright and it is always worth listening to him when he makes public statements. You can wath the interview on YouTube. He says a lot of interesting things in this interview (and also a few things I strongly disagree with), but what really stroke me was this unintended consequence of the ban on short selling that the government's regulation body, the SEC, imposed on the market participants overnight a few weeks ago. I am not a hedge-fund manager so I hadn't seen this unintended consequence of banning short selling:

The rules of the game were changed midstream. I think if the government had said: "Look, we’re going to phase out short selling over a period of time", it wouldn’t have been disastrous for the industry. But if you have investors who commit to their partners to stay balanced, they don’t want to be more than a certain amount long versus the amount that they’re short. You lose the ability to insure yourself. Short selling is really a form of protecting yourself from the market going down. By taking away that very important tool, managers got imbalanced. They were actually forced to sell their long positions. [emphasis added]

Inflation or Deflation?

While most are fighting as hard as they can the supposedly coming deflation (like Helicopter Ben Bernanke), and that the whole debate is understanding how bad the deflation is going to be, deflation doesn't seem so obvious to me.

One thing is for sure: asset prices are collapsing and after a major credit bubble burst, a cleansing detox (also known as deflation) is nice to have. Ignoring the bogus and manipulated CPI which I do not trust and consider irrelevant, it still seems that prices are declining. They are not declining directly as the figure marked on the price tags but rather I see more and more special offers - it's like the whole superstore I go for grocery shopping is on sale. But still, I think prices are sticky on the downside. They tend to decrease with a lot more difficulty and pain than when they rise.

Anyway, that's not even our concern. It's important to not confuse cause and consequence. Prices declining is only a consequence of deflation, it is not deflation itself. The definition of deflation is a decline of the monetary base which results in the reevaluation of the currency and hence in a decline in the general price levels (BTW: Wikipedia's entry for deflation is WRONG, so is Investopedia's so are MOST OF THE DEFINITIONS YOU CAN FIND ON THE WEB. Just check this link to see how poorly deflation is understood. I digged the first 3-4 pages of results on Google and still coud not find the proper definition). Wikipedia contains something almost correct about deflation: Alternatively, the term deflation was used by the classical economists to refer to a decrease in the money supply and credit; some economists, including many Austrian school economists, still use the word in this sense. Really? Some people like the Austrian economists still use the term for its meaning and do not confuse cause and consequence?

So now, with the proper definition of deflation in mind, looking at this chart should give us the big picture about whether we are going to see deflation or inflation in the near future (please note that the data is as of 1st of Nov, and the Fed has been printing like crazy during November):


Also, the data gathered by ShadowStats.com show that even if the growth of M3 is decelerating, M3 is still growing at an annualized rate of 8% while we are now seeing a major spike in the growth of M1 (reaching almost a 12% yearly growth) and the growth of M2 is also accelerating.


I don't really want to draw a conclusion about inflation/deflation yet and look like a fool later, but to me it is not obvious that deflation is going to hit the world, specially outside the US, since the currencies are collapsing against the USD (all but the JPY). It is not unlikely neither that the foolishness of the central banks and politicians will make things worse and worse, and probably make their dream of sustained inflation turn into a nightmare of runaway inflation.

An interesting article about deflation is available at the Mises Institute here.

Finally, do not forget, our financial system is safe and sound:

Incompetence of economic/financial experts

I just spent 15 hours in a plane, so before taking off, I thought it would be good to catch up and downloaded all the videos from Peter Schiff's EuroPac web site so that I could watch them from 32,000 feet above ground ;-)

One thing is for sure when you watch these people debate on TV, is that many of the so called expert have still not understood anything about the economy (and I am not even mentioning the politicians...)

Here are a couple of statements that were so chocking that I decided to transcript them and post a blog about...

CNBC Reports, on 21st of Nov 2008 with John Browne and Thomas Donladson

Thomas Donaldson, wharton professor of legal studies and business ethics:

"We're talking about the economics of fear and the old rules just don't apply" [...] "there has to be an explanation of what happened, and that hasn't happened yet" [...] "This is 90% psychology and 10% fundamentals, the old rules don't work: the old rules of economics said when you have the price of something like a security or a refrigerator, if it falls far enough, demand will rise to meet supply."

Does it occur to Mr Donaldson that the prices simply haven't droped enough? It's easier for him to dismiss the old rules than just consider that the prices are still super high, for most stocks!

When I think of students and family who pay college tuitions in the hundreds of thousands of dollars to listen to these kind of incompetent people, it makes me sick.

CNN Campbell Brown 20th Nov 2008

Christian Weller, Center for American Progress, University of Massachusetts Professor. He says that it's very important for the US to rebuild the middle class (who can be against that, really?). But his argument is:

"A strong union movement, a strong labor movement, is one of the most proven ways of strengthening the middle class."

This is totally wrong logic and confuses the cause with the consequence. Because the economy was doing well and the industry was in great shape, it lead to the creation of unions. The industry was so strong that it remained strong in spite of the interference and destruction of efficiency and wealth by the unions. It probably got weaker than it would have been without them. It is not because the unions were there that the middle class got strong, it's because the middle class was strong that the unions were born.

He also forgets that what destroyed the middle class is inflation (by the US politicians and the Fed) and the destruction of goods producing jobs in order to move to hamburger flipping jobs. To those who want to understand what is happening to the middle class, I suggest watching this long but very interesting lecture - The Collapse of the America's Middle Class.

Jesse Livermore's eternal words

Jesse Livermore is probably one of the most successful traders in history (even though, he went bankrupt 3 times, he made it up again) and successfully predicted the 1907 and 1929 crashes, during which crashes he made dozens of millions of USD (remember, at that time, the USD was actually worth something, and was redeemable in gold). He committed suicide in 1940, shortly after publishing his book.

Here are a few quotes from him that I find particularly interesting.

"Wall Street never changes, the pockets change, the stocks change, but Wall Street never changes, because human nature never changes."

"There is nothing new on Wall Street or in stock speculation. What has happened in the past will happen again, and again, and again. This is because human nature does not change, and it is human emotion, solidly built into human nature, that always gets in the way of human intelligence."

"I have never always been suspicious of everything I read in the newspaper and I never accept what I read at face value I try to look for hidden agendas and self-serving reasons that could have generated the articles, no matter what paper published the information." [I have been doing the same, and on top of that, I do not have a TV set and have not been watching television for the past 10 years, and avoid reading newspapers and magazines. Blogs and the web are a better way to go, and choosing what you want to read instead of being fed by what the adviser wants you to see is a better approach]

"Often I have observed that the Chief Executive Officer of most companies is little more than a cheerleader, who has only one job with regard to the market. He must assure and reassure the shareholders that everything is fine — if sales are down he tells the shareholders that the decline in sales is nothing more than a sight problem due to some temporary reason. If profits are down, he assures the shareholders there is nothing to worry about since the company has already reacted and made adequate plans to recapture their profitability." [Any resemblance with what has been happening for the past 24 months?]

"After a while, and some substantial lost money, I never asked an insider about how their business was doing. Why waste my time listening to half-truths, shadowy statements, inaccurate projections, and just plain bold-faced lies when I could simply just look at the behavior of the stock. The story was clear in the action of the stock. The truth was in the tape for anyone and everyone to see." [Any resemblance with what has been happening for the past 24 months?]