Civil unrest in the US in the next few years

Demonstrations, violence, civil unrest, revolts, and even revolutions are going to shape a new face for many countries in the months/years to come. The reason is simple: the vast majority of people does not understand anything about politics or economics or finance, but what they do understand, is that they have to struggle to get food or pay rent, and that things are getting worst and worst, politicians do not care about them and hand over hundreds of billions to the banks. After some time, once they will see that not only haven't the problems been solved, but find that actually things got a lot worst, they will have only one place to go: the street.

But so far, we have seen many cases of violent demonstrations, and civil unrest: Iceland, Spain, Italy, Greece. These are not small and poor countries, these are western European ones. And things are far worst in Madagascar, Martinique and Guadeloupe. We are also seeing farmers demonstrate in many countries like Bulgaria, France, Greece, Lettonia, Germany who according to Jim Rogers, should be the ones who are going to profit from the current crisis.

And here's some more news for the UK, in the Gardian(read the full report for more details):

Britain faces summer of rage - police
Middle-class anger at economic crisis could erupt into violence on streets
Police are preparing for a "summer of rage" as victims of the economic downturn take to the streets to demonstrate against financial institutions, the Guardian has learned.

Britain's most senior police officer with responsibility for public order raised the spectre of a return of the riots of the 1980s, with people who have lost their jobs, homes or savings becoming "footsoldiers" in a wave of potentially violent mass protests.

Expect the same kind of trouble in Ireland, since the country is unofficially bankrupt. AFP/Google:

Up to 120,000 protesters brought Dublin city centre to a standstill on Saturday over government austerity measures aimed at stabilising the once high-flying economy now wracked by recession.

The demonstration came a day after the global economic crisis led to another political casualty elsewhere in Europe, with Latvia's prime minister quitting as his country grapples with deepening recession.

I have been talking about this for quite some time now but even my friends do not take me seriously and think that I am over-exaggerating things. So I am glad to see that some very clever forecasting gurus start also mentioning it.

Gerald Celente has been talking about it in recent interviews, and now, Jim Rogers, in this interview on an Indian TV, says that he expects civil unrest and violence in China (in the interview after 7"40) and even in the US in the next 3-4-5 years (in the interview after 5"20).

I am expecting things to get really really bad in the US, since they are have no social security for the poor, that education levels are very low, weapons are on sale everywhere, and poverty/unemployment/homelessness are rising at a frightening pace.

Bernankerama

It should be any news for readers of my blog that Bernanke is an incompetent person which is committing mistakes after mistakes and with a weapon of massive currency-destruction in his hands. Unfortunately, he has already triggered many times with that weapon, to the point where not only the US currency is in danger, but the whole US economy and the future of the Americans is now on the line.

Please see previous posts:

• Bernanke has lost it
• Bernanke is out of control

But during the past few days, he has been talking a lot. Probably too much. The problem with this kind of people, is that usually, they do not express themselves, and it makes it that much easier for them to hide their lack of understanding and knowledge...

Here are various reports and articles of Bernanke's appearance during the past 8 days:

The Fed chairman, Ben S. Bernanke, spoke at the National Press Club in Washington on the 18th of Feb:
NYT:

The chairman of the Federal Reserve, Ben S. Bernanke, vowed on Wednesday to do whatever it took to pull the economy out of its downward spiral, even as he acknowledged that the most recent indicators were “dismal.”

The people who drove us in this mess are now expected to pull us out. Interestingly, even when the collapse had started, he didn't notice it. But now, he will pull the economy out. As if the Economy needed him.

Speaking at the National Press Club, the first time that a Fed chairman has taken questions from journalists in a public forum, Mr. Bernanke defended the central bank’s efforts and tried to allay concerns that it had been printing money at a dangerous pace.

Indeed, doubling the amount of currency in 6 months is not dangerous at all....

“The Federal Reserve has done, and will continue to do, everything possible within the limits of its authority to assist in restoring our nation to financial stability,” he said.

Within the limits? That's a blatant lie, Mr. Chairman! Please refer to Mish for details.

[...] He also warned that the unemployment rate, which reached 7.6 percent last month, would climb to 8 percent “for sure.” [...]

Now I can see how bright the Chairman is. After 30 years of academic study, he can see that with the current trend, unemployment will rise by another 0.4%

Fed policy makers also expect the economy to shrink this year in a range of 0.5 to 1.3 percent, which mainly reflects deepening gloom about the severity of the downturn in the first half of this year. Last October, most Fed officials had predicted that the United States would come out of the recession quickly enough to end this year with a small gain.

Indeed, they don't understand what is going on, but people still listen to these people. I am wondering why?

For the first time, the Fed also released projections of longer-term growth going beyond its normal one-to-three-year predictions. The committee members said that the American economy was expected to grow by 2.5 to 2.7 percent annually over the next five to six years, and that unemployment rates would hover near 5 percent in the longer term.

Another big lie. They couldn't predict what was unfolding as they were speaking and denying the crisis just a few month ago. But now, they are predicting what is going to happen in 6 years or so! I think they are back to their old strategy: simply talking up the market.

Mr. Bernanke focused his remarks on the Fed’s expansion of lending activities since last fall. Using its power to create additional money at will, the central bank has more than doubled its “balance sheet” of holdings to about $2 trillion, from $900 billion since last September. The expansion reflects the Fed’s effort to thaw the frozen credit markets by pouring money into the financial system through a half-dozen new programs.

Acknowledging that some experts had raised fears that the Fed would end up stoking inflation, or losing money on risky loans, Mr. Bernanke argued that the central bank would be able to reverse course fairly swiftly as soon as the crisis abated.

Riiiiight! This is exactly what his predecessor, Alan Greenspan - called the Maestro at that time - managed to do, right? He raised interest rates at the exact time when they needed to be raised, leaving them at 1% for only 2 years. Bernanke dropped them to 0% and will probably leave them there for many years...

“A significant shrinking of the balance sheet can be accomplished relatively quickly,” he said, adding that most of the Fed’s new holdings were short-term loans that had to be repaid within a few months. Most of the loans, he added, entail very little credit risk because they are either routine, short-term loans to financial institutions or currency “swap agreements” with foreign central banks.

“For the great bulk of Fed lending, the credit risks are extremely low,” Mr. Bernanke said. About 5 percent of the Fed’s lending entails comparatively risky assets, and those are the ones involved in the central bank’s rescues of Bear Stearns and the American International Group.

Indeed, they are so little risk that the Fed is going to make money out of this. If there aren't any risk, why does he refuse to disclose what he has been doing? To the point where Bloomberg and Fox has sued the Fed?

[...] “Extraordinary times call for extraordinary measures,” Mr. Bernanke said. “Increased transparency is the best way to demonstrate that the Federal Reserve’s nontraditional policies are well conceived.”

At this point, I need to be pitched. Please, someone.

Today, on MarketWatch: Bernanke tells Congress Fed knows what it is doing

"We're not making it up," Bernanke told the House Financial Services panel.
"We're working along a program that has been applied in various contexts," he said.
"We're not completely in the dark."
[...]
Bernanke told Congress Tuesday that the key to ending the recession was fixing the financial system.
"If there is one message that I'd like to leave you with, if we're going to have a strong recovery, it has got to be on the back of a stabilization of the financial system. It is black and white," Bernanke said.
"If we don't stabilize the financial system, we're going to flounder for some time."

Isn't he responsible for stabilizing that system? Hasn't he been constantly failing for the past 18 months?

To me, what they are doing is completely clear, black on white. They are:

• Buying time for the banks, hoping that something good is going to come out of the pile of garbage. This reminds me of CDOs made of subprime mortgage. Bernanke the Alchemist is here to save us.
• They are grabing more and more power, extending their reach and the one of the government. And since they are extending, they are limiting and reducing the freedom of the US citizens.
• They are doing a massive transfer of wealth from the USD barer (the US citizen, the US tax-payer, but also the Chinese, Japanese, Saudi, and every other creditor nation) to their friends in the banks.
  

Feb. 24 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke rejected the idea that officials plan to use reviews of banks’ balance sheets as a pretext for government takeovers of the nation’s largest lenders.
[...]
The stress tests “will look at the balance sheets and the capital needs of each of our 19 largest $100-billion-dollar-plus banks over the next two-year horizon,” Bernanke said

Buying time...

Regulators won’t let banks “hide anything” as they look at how lenders have valued their assets, and will ensure that firms are using “appropriate models” for mark-to-market accounting, Bernanke said.

Hum... I am surprized to see that he's not discarding MtM accounting!

Bernanke took issue with some observers’ characterization of major U.S. banks as “zombie” firms, kept alive only through access to federal programs. They have “substantial franchise value,” he said.

Buying them two years and hoping they will be able to clean their balance sheets in the meantime is the definition of "zombie" to me.

Feb. 25 (Bloomberg) -- The government set a six-month deadline for the biggest 19 U.S. banks to raise any new capital deemed necessary after a mandatory review of their balance sheets.

More time buying here... Banks cannot raise capital at the current share prices, and they are all insolvent by definition, but with a leverage of 30-times and given the current climate, there's only two ways to raise money: the Fed or the Treasury.

The regulators will oversee the so-called stress tests by the end of April, which will identify how much extra cushion each bank will need, the Treasury said today in Washington. Lenders will have six months to raise private capital or accept government funds and the conditions that come with it.

Here they admit that banks are not well capitalized. Yet, they won't send them the FDIC to shut them down and liquidate them. Instead, they will give them money...

[...]
Bernanke said today that while the U.S. government may take “substantial” stakes in Citigroup Inc. and other banks, it doesn’t plan a full-scale nationalization that wipes out stockholders.

Another thing that's interesting about Bernanke is that the Fed is supposed to be independent from the other governmental bodies. But for the past many months, he has been actually working hand in hand with various government bodies, the President, the Treasury Secretary and he's been actually doing the policies!

Related interesting reads (published within the last few days):

• Bernanke Admits Fed Is Clueless and Banks are Zombified
• Bernanke's Boiled Frog Plan To Recapitalize Banks
• Bernanke's Hide and Seek Delaying Tactics
  

[NB: this post is quite rough and will be updated and improved...]

More free money for financial institutions: converting prefered share to common stock

Feb. 23 (Bloomberg) -- The Obama administration, which says it doesn’t want to nationalize U.S. banks, may find itself taking another step in that direction if it converts the government’s preferred shares in Citigroup Inc. into common equity to help the firm withstand losses.
[...]
The government already holds $52 billion of preferred shares in Citigroup, five times the bank’s market value as of Feb. 20.

So, according to this figure, Citigroup's market cap is about $10b, and 40% of $10b is hence $4b right? So the genius investors at the government would transform a $52b investment into $4b ! a loss of more than 90% for now, until more money is needed...

[...]
Financial firms can apply to convert U.S. preferred stakes into common equity “to strengthen their capital structure,” said Treasury spokesman Isaac Baker, who declined to comment on specific banks. “We are open to considering a request to do so if the institution and its regulator believe it would promote the long-term stability of that institution, and if we believe it’s in the best interest of long-term stability of our economy and financial system,” Baker said.

Yes, stealing from the $-barer to give to banks will always be in the best interest of the financial system. I am sure about that too!

Feb. 23 (Bloomberg) -- American International Group Inc., the insurer bailed out by the U.S., may seek to convert preferred shares held by the government into common stock, a person familiar with the situation said.
[...]
“We continue to work with the Federal Reserve Bank of New York to evaluate potential new alternatives for addressing AIG’s financial challenges,” said Christina Pretto, an AIG spokeswoman. She declined to comment further.
[...]
The company may post a $60 billion loss, CNBC said today, citing a source it didn’t identify.
[...]
The U.S. previously expanded the AIG bailout package to about $150 billion in November, when the insurer posted a third- quarter loss of $24.5 billion. The initial $85 billion federal credit line, provided in September when AIG agreed to turn over an 80 percent stake to the U.S., wasn’t enough to rescue the insurer.

Here again, the government investments are doing so great for the tax-payer! Let's see who's coming next. Maybe converting all the $700b TARP funds into common equity will be done before the end of the month. It would be the greatest and latest performance of Hank Paulson, the Alchemist who turn a $700b investment into $15b in just 3 months!

But wait a minute, there's more free money coming.

Feb. 23 (Bloomberg) -- U.S. financial regulators pledged to inject additional funds into the nation’s major banks to prevent their collapse and will this week begin examinations to determine whether they have enough capital.

Banks that cannot privately raise the additional capital they need after the so-called stress tests will get taxpayer money, regulators said in a statement in Washington. Government funds would be in the form of “mandatory convertible preferred shares” that would be exchanged into common equity “only as needed over time.” Stakes the Treasury has already bought will be eligible to be changed to convertible preferred shares.

I think we just heard about a wonderful story about preferred shares being converted into common equity, didn't we?

“The goal here is to incrementally provide as much support as necessary,” up to what could be called “temporary nationalization,” said Kevin Petrasic, a former official at the Office of Thrift Supervision, who is now a lawyer at the Paul, Hastings, Janofsky & Walker law firm in Washington.
[...]
Citigroup gained 10 percent to $2.14 after plunging 44 percent last week on concern it can’t keep going without some form of nationalization that hurts shareholders. Bank of America rose 3.2 percent to $3.91.

“The market is voting and saying ‘this is a good thing, it looks like they’re not going to do anything stupid,’” said Michael Holland, who oversees assets worth $4 billion, including JPMorgan Chase & Co. shares, as chairman and founder of Holland & Co. in New York.

So much nonsense is beyond anything I could imagine. They are not going to anything stupid? The shares are rising because basically the government is giving free money to banks. So obviously, the values of the shares climb by that amount. And since it's not going to be enough yet, they are going to give more free money, AS MUCH AS NECESSARY they said, right? Let's see by the end of the year how many more trillions they have wasted this way, and how the fiat currencies of the world will look like compared to gold...

Also, if you read the full article, you'll see how the regulators, the FDIC, the SEC, the CEOs and the Gov are pledging that the banks are well capitalized, and yet, they are still injecting hundreds of billions of fresh money into the black hole...

Dubai receives a $10 billion bail out by the UAE Central Bank

As I mentioned just about a week ago, Dubai was on the brink of collapse, and indeed, it would have collapsed if it didn't get bailed out by the UAE Central Bank.

Feb. 23 (Bloomberg) -- Dubai shares surged the most in three months after the United Arab Emirates’ central bank bought $10 billion of Dubai bonds, easing concern that the emirate’s companies will be unable to refinance debt.
[...]
Dubai, home to the world’s tallest building, most expensive hotel suite and largest manmade islands, needs to repay $15 billion of debt maturing this year, Moody’s Investors Service said this month.
[...]
Dubai borrowed $80 billion to turn itself into a regional financial and tourism hub, according to government figures. Real-estate prices have fallen 25 percent in Dubai from September’s peak

Feb. 23 (Bloomberg) -- The United Arab Emirates’ central bank stepped in to support Dubai after concern increased the emirate will struggle to repay its debt as global financial turmoil pushed up credit costs and burst a real-estate bubble.

For info, $10 billion is about 20% of Dubai's GDP!

And also, do not forget that this probably just means inflation, since central banks do not have money to lend, they just create it.

Just to remind how economic forecaster are myopic, here's what you can read on the UEA web site, written after the collapse started in the US:

Posted on 29/03/2008
Dubai's real gross domestic product (GDP), which surged to a record Dh198 billion in 2007, is predicted to sustain an average growth rate of 11 per cent for the next eight years. The main driver of this remarkable growth - outpacing the average growth rate forecast for the GCC - will be the non-oil sector, growing at a spectacular pace.

It looks like people who can't even predict what is going to happen just a couple of months down the road were trying to predict what would happen for the next 8 years! 11% of growth per year during all that period... Complete nonsense... This guys really don't understand compounding... (And GDP is supposed to be calculated after discounting for inflation as well).

Roubini is WRONG

Nouriel Roubini was on Bloomberg and the interview is very interesting because as usual, he has a very good view on the economic issues. I always listen what he has to say ; but only because I am interested in his forecasts, not because I want to hear about his solutions to the problem.

He saw the collapse coming, but now, he is trying to offer solutions, and — being a Keynesian — his solutions are a lot worse than the actual problems.

Points of interest:

• Gold is rising not because of the fear of inflation but of sovereign defaults.
  My comment: they really are the same: sovereign countries default when they don't want - or can't - print off their debt.
• Bigger banks in the Eastern countries are too big to bail out as their size is several times the GDP of these countries. This would force the EU to act and for example he suggests, taxes could go up in Germany to pay for the bailouts.
  My comment: I think Roubini is confused , since most of the Eastern European Countries ARE NOT YET part of the Eurozone, and are in deep trouble. Only 16 countries are currently in the Eurozone. Some big European banks have lent a lot to ex-USSR countries, but that's another problem.
  
• Fiscal stimulus is required to help collapsing private demand, and this is what got the US out of the Great Depression.
  My comment: It's actually quite the opposite of what happened, and the US got out of the Great Depression in spite of the destructive power of Hoover and Roosevelt. Check for yourself by reading Rothbard's America's Great Depression.
• The US is ahead of the curve because they are spending a lot and a lot.
  My comment: again, this is non-sense, they are not ahead of anything, they are in very deep trouble, and they are going deeping and deeping into the whole, and are trying to take as many countries are as they can with them, by borrowing from them and hence destroying their savings, since the US will not be able to pay back what they borrow.

I recommend watching the interview nonetheless.

Jastram's Classic: The Golden Constant [2009 edition] [update]

[This is an updated release of the post I made back on the 19th of November 2008]
Roy Jastram's Classic, The Golden Constant, has been out of print for many years now and I have been unable to find it for less than about $500 on Amazon's MarketPlace before it totally disappeared... and reappeared. The Golden Constant is a very important work on the price stabilizer role of gold throughout modern times (from 1560 to 1976 when the book was published) aas a store of value and as a way to keep prices stable.

It is now being republished — this is great news — and even better, the data has been updated by Jill Leyland.

I can't wait to receive my copy!

[update:] Amazon.com already lists it, and now Amazon.co.uk as well, with an availability date of 1 May 2009. I have pre-ordered it already and can't wait to receive it.

E-Elgar upcoming titles:

The Golden Constant
The late Roy W. Jastram, formerly of University of California, Berkeley, US with updated material by Jill Leyland
With the gold price reaching new records in 2008, this new edition of Roy Jastram’s seminal work, considered by some to be the finest empirical study of the gold price, is timely. Published in 1977, the author’s painstaking work on historical statistics enabled fluctuations since 1560 in the value of gold and its purchasing power to be studied. It established, for the first time, how gold’s purchasing power had been maintained over the centuries. This edition reprints Jastram’s entire original text but adds two more chapters to bring the book up to date shedding new light on gold’s relevance today.

Fannie and Freddie in deeper trouble: Asians want a free lunch sponsorized by the US tax payer

After the two unofficial warnings from China regarding the US debt (first, second) and another one from Japan, it looks like the Asians are waking up to the biggest Ponzi scheme in the whole history, far far bigger than Maddof [$50 billion] and Stanford [$8 billion — WSJ reported that the scheme had been running for as long as 22 years!]: the US debt.

So, interestingly, the Asians want to have a full US government backing of the Fannie and Freddie debt.

Basically, Asians don't want to buy Freddie and Fannie debt unless it is fully backed by the US government. Question: If they were fully backed, what would be the difference between those debt securities and the T-bonds? Answer: None. So they would both yield the same, or maybe the same Asians want to have the higher yield for the same risk? In which case it would be a free lunch, paid by the US tax payer! The solution might actually be that the US will provide a full backing, but would then double the national debt. This would then make their bonds collapse and the yield will get a big boost.

The clear message is really that foreigner want a higher yield. And if the government doesn't provide it, the market will.

Also worth noting from the report:

• Fannie and Freddie actually needed twice as much as what the government stated last year: $400 billion
• Foreigner have become net sellers of these securities
• The Fed might start buying $600 billion of that same securities (keep an eye on that for the resulting inflation!)
  

As a side note: I wrote previously that this crisis would uncover many Ponzi schemes, specially in the hedge fund industry, and it looks like we are headed for big numbers. Indeed the Hedge Fund is in deep trouble because now, hedge funds which are losing money see redemptions because of their poor performance but hedge funds which report positive performances look suspicious and see redemptions as well. The last decade might have seen the rise and fall of the hedge fund and fund of hedge fund industry... Wait & See...

The Bloomberg report is very interesting [emphasis mine]:

Feb. 20 (Bloomberg) -- Asian investors won’t buy debt and mortgage-backed securities from Fannie Mae and Freddie Mac until they carry explicit U.S. guarantees, similar to those given on bonds issued by Bank of America Corp. or Citigroup Inc.

The risks are too great without a pledge that the U.S. will repay the debt no matter what, according to Hideo Shimomura, chief fund investor in Tokyo for Mitsubishi UFJ Asset Management Co., and other bondholders and analysts in Japan, China and South Korea interviewed by Bloomberg. Overseas resistance may hamper U.S. efforts to hold down home-loan rates and rebuild the nation’s largest mortgage-finance companies.

Even after President Barack Obama vowed on Feb. 18 to sink as much as $400 billion of capital into Fannie Mae and Freddie Mac, double the original commitment, “there is still a concern that there is no guarantee” from the government, said Shimomura, who oversees $4 billion in non-yen bonds for the arm of Japan’s largest bank.

“Looking at the risk, they’re not so attractive,” he said. “We need a guarantee before we’ll buy.”

Foreign investors sold $170 billion of agency debt and securities in the second half of 2008, the largest amount since the Treasury began tracking sales in 1977, according to the most recent data. Asians, the biggest non-U.S. block of owners in the category, unloaded $70 billion worth from July through December, after scooping up $55 billion in the second quarter and being net buyers during much of the last decade.

The sell-off and calls for a guarantee reflect a continuing lack of confidence among foreign investors five months after the U.S. seized control of Fannie Mae and Freddie Mac. The takeovers followed the biggest surge in mortgage defaults in three decades.
[...]
At a minimum, the Fed may have to spend more than $600 billion in its buying program for securities issued by Fannie Mae, Freddie Mac, Ginnie Mae and the Federal Home Loan Banks, according to Margaret Kerins, an agency-debt strategist at RBS Greenwich Capital in Greenwich, Connecticut. The Treasury also bought $94.2 billion worth of mortgage-backed securities to make up for the withdrawal of foreign investors.
[...]
The Fed’s buying program resulted in a yield of 2.06 percent on Fannie Mae notes maturing May 2012 at the close of trading Feb. 18 -- 0.15 percentage point less than government- guaranteed Bank of America bonds maturing a month later and 0.12 percentage point less than similar Goldman Sachs Group Inc. debt, according to RBS Greenwich data.

Fannie Mae, based in Washington, and Freddie Mac, in McLean, Virginia, have about $1.7 trillion of corporate debt outstanding and $3.7 trillion of their guaranteed mortgage-backed securities held by other investors. The two mortgage companies finance almost half of the $12 trillion of residential loans outstanding.
[...]
“Overseas investors are looking for the full-faith-and- credit clarification,” Goodman said. Such a pledge would essentially about double the U.S.’s debt, potentially boosting the country’s own borrowing costs.
[...]
Sellers in the fourth quarter included Caribbean-based investors, often hedge funds, which dumped a net $35.8 billion of the agency debt and securities after buying $15.7 billion in September. China sold $10.4 billion in the period after unloading $8 billion in September, while South Korea got rid of $10.5 billion.

“China’s demand for U.S. agency bonds will gradually decrease because China has drawn lessons from the credit crisis and learned to invest smarter,” said Yi Xianrong, a researcher at the Beijing-based financial research institute of the Chinese Academy of Social Sciences, which advises the government. “We will try to stay away from these types of bonds.”

Fukoku Mutual Life Insurance Co. spent last year trimming “risky assets,” and it sold all agency holdings in the third quarter, said Satoshi Okumoto, general manager at the company in Tokyo, which has $63.5 billion in assets.

“It’s not really the same credit” as government debt, Okumoto said. “It’s one step below.”

China warns the US - 2nd semi-official warning?

This post is the sequel to the original post that I made back in August 2008, about the tensions rising between the US and China due to the major losses China was making on their investments in all sorts of US papers:

• China warns the US - 1st semi-official warning?

I might as well start a new series, as I see the tension between the two countries rise to dangerous levels. So, anyway, here's the second warning, as published on Bloomberg (emphasis mine). And I'll keep an eye on the this Cino-American relationship that might sooner than later go sour:

Feb. 11 (Bloomberg) -- China should seek guarantees that its $682 billion holdings of U.S. government debt won’t be eroded by “reckless policies,” said Yu Yongding, a former adviser to the central bank.

The U.S. “should make the Chinese feel confident that the value of the assets at least will not be eroded in a significant way,” Yu, who now heads the World Economics and Politics Institute at the Chinese Academy of Social Sciences, said in response to e-mailed questions yesterday from Beijing. He declined to elaborate on the assurances needed by China, the biggest foreign holder of U.S. government debt.
[...]
China’s loss of more than $5 billion from investing $10.5 billion of its reserves in New York-based Blackstone Group LP, Morgan Stanley and TPG Inc. since mid-2007 may increase its demand for the relative safety of Treasuries.

“The government will be a net buyer of Treasuries in the short-term because there’s no sign they have changed their strategy,” said Zhang Ming, secretary general of international finance research center at the Chinese Academy of Social Sciences in Beijing. “But personally, I don’t think we should increase holdings because the medium- and long-term risks are quite high.”

General hypocrisy around the pay limits [update]

So the government would like to impose a pay limit for top-executives where the company has been bailed-out by the TARP funds. This would limit the total compensation of those top executives to $500,000 per year.

So who would have his compensation limited? According to Bloomberg, the top 20 most paid employees would have their compensation restricted.

Restrictions would apply to senior executive officers and the next 20 highest paid employees at companies that receive more than $500 million from TARP. Companies receiving between $250 million and $500 million would face restrictions on their senior executive officers and their next 10 highest-paid workers. The limits would apply to the top five employees at companies receiving between $25 million and $250 million.

This sound quite ridiculous to me. How are these figures decided? Why? But hold on, there's even more ridiculous provisions:

The plan requires TARP beneficiaries to create a company- wide policy regarding “excessive or luxury expenditures” such as corporate jets, entertainment and “other activities or events that are not reasonable expenditures for staff development.”

Company-wide policy regarding excessive luxury or expenditures? How do you define them? Is it the role of the government to interfere as much with what companies should be doing? It feels like being in France again! Shouldn't the shareholders (the real owners of the company) be deciding? Or does the state need to decide for them, like in a good fascist economy?

It bans “any compensation plan that would encourage manipulation of the reported earnings” of TARP beneficiaries in order “to enhance the compensation of any of its employees.”

Also, what does "ban any compensation that would encourage manipulation of the reported earnings" mean? Aren't some compensations built around the profit they generated? The income sales people brought in? Aren't they quantifiable? If yes, they are not manipulation. If not, well, they are not profits yet! So they should not give any rights to any additional compensation. Seems pretty easy to me. Oh yeah, but that guy, just sold for $50 million of CDO^2 and the profits (or rather losses!) will be known in 30 years only. So what do we do now? Well, maybe the problem is the product itself? Or maybe the problem is that compensation plan is bound to the current year only? But that's not manipulation from the salesman in any way!

But wait, there's still more absurdity and hypocrisy:

New restrictions on executive pay at U.S. banks receiving federal aid may cause talented managers to flee to hedge funds and foreign-owned banks, say critics of the measure. [...] “Non-TARP companies, like hedge funds and foreign firms, don’t have this restriction, so it will be easier for them to hire the top producers away.”

So, not only has the debate moved to "How much should we compensate incompetent and fraudulent top-executives who made their companies collapse" from "The top executives should be fired and maybe even sentenced". So now, instead of firing them, let's just limit their pay to $500,000. It's a wonderful world isn't it?
Then "talented managers could flee to hedge funds and foreign-own banks"? Where are these talented managers? Are we talking about the same who made their companies collapse? Those would were just riding the wave with high leverage and got crushed against the wall? And non-TARP companies don't have the same restrictions??? So what is that guy asking for? Not only that the failed companies are saved with public money, but that those who didn't fail, not receiving any free money should also be imposed restriction??? I am really really not-chocked I must admit. I couldn't expect less from these people anyway.

And then, on another report, Bloomberg points that:

Treasury Secretary Timothy Geithner and Lawrence Summers, Obama’s top economic adviser, sought modifications in Congress’s proposed executive compensation provisions, an administration official who requested anonymity said yesterday.

Again, no surprises coming from top fraudster Geithner and Summers...

Do never forget that all these people are here to robe the people blind. Nothing less, but maybe some more to come who knows...

[Update] Mish published an opinion which goes in the same direction:

Geithner Plan Inspires Mistrust

How can there possibly be any trust in a system that may or may not be taken over by the government, under unspecified conditions, with unspecified strings, when there is no transparency as to what is happening anywhere along the line?

I have no problem with the audit. I have a massive problem with Geithner's intention to hide the results and I have a massive problem with squandering taxpayer money to bailout banks whose greed was a big part of the problem. Shareholders and bondholders of failed institutions should be wiped out and management of failed banks should be fired and replaced with executives of banks that avoided these problems.

Inflation or Deflation? - 5

This is a sequel to the "Inflation or Deflation?" series, previous posts are available here:

1. Inflation or Deflation - 1 (07/12/2008)
   
2. Inflation or Deflation - 2 (10/12/2008)
3. Inflation or Deflation - 3 (24/01/2009)
4. Inflation or Deflation - 4 (26/01/2009)

Well, this post is not really about inflation or deflation, but since so many people consider that inflation is the same as prices increasing and that is the opposite, that's to say: deflation means pricing decreasing, I found this interesting piece of information in French, about prices in France, that I will sum up in English (the original is pasted below, sorry, I lost the source.)

The very interesting thing to understand from this article, is that prices have been increasing during the past several months, despite commodities prices collapsing (and the impacts coming from the current economic and financial mess). So here's what to remember from the article:

According to a study by Nielsen, prices in France have risen in January, with rice and pasta rising more than 10% (11.2% and 10.8% respectively). Prices rose by about 2% in January 2009 while they had risen "only" 2.5% in January 2008 (according to respectively January 2008 and January 2007).

Entry level/basic products rose a lot more than big brands products, specifically Supermarket brands (for example, first price rice rose 36.3%.

Only a few prices declined and by very small amounts like frozen food (-1.8%), yogurts (-1.5%)...

All these tend to confirm my hypothesis that it's going to be a lot more difficult to see declining prices and rising ones, and that not only am I not sure to see deflation, but I am not sure neither to see declining general prices (although I expected and expect even further declines in asset prices like real estate, bonds, stock markets, specially in the US and UK).

Les prix des produits de grande consommation ont continué d'augmenter en France en janvier, atteignant des augmentations de plus de 10% pour les pâtes et le riz, indique une étude du cabinet Nielsen publiée dans l'hebdomadaire LSA à paraître jeudi.

Ces augmentations se poursuivent alors que les matières premières agricoles baissent depuis l'été 2008 et que le contexte, avec la réforme du cadre législatif en vigueur depuis janvier, est censé entraîner une baisse des prix à la consommation.

En janvier, les prix des produits de grande consommation ont augmenté de 2% par rapport à janvier 2008 où ils avaient déjà grimpé de 2,5% par rapport à janvier 2007, selon Nielsen.

Les produits de grandes marques affichent l'augmentation la plus faible (+0,45%). Ceux à marques de distributeurs (MDD) ont augmenté de 2,6% et les produits dits de "premiers prix", vendus par les distributeurs classiques pour concurrencer le maxidiscompte, de 5,2%.

Par familles de produits, le riz a connu la plus forte augmentation en janvier (+11,2%), les pâtes alimentaires (+10,8%) et l'huile alimentaire (+8,4%). Le vin de table a augmenté de 8,1%, la farine de 5,7% et le lait en poudre de 5%.

Le prix du riz "premier prix" a explosé de 36,3% et celui en MDD de 14,6%..

Quant à l'huile moteur, Nielsen a noté une hausse de 11%.

L'ampleur des baisses est plus faible: les produits surgelés sucrés ont reculé de seulement 1,8%, les yaourts de 1,5% et les produits capillaires de 0,5%.

A trillion here, a trillion there, pretty soon we're talking real money.

“A million here, a million there, sooner or later it adds up to real money.”, the famous quote from Everett Dirksen, Congressman in the 60s now seems ridiculously small in amount and percentage of GDP compared to what our new reverse-alchemists are trying to achieve: transforming the Greenback into Toilet Paper.

Feb. 10 (Bloomberg) -- The U.S. Senate has enough votes to pass an $838 billion economic stimulus package and clear the way for negotiations with the House to get a bill to President Barack Obama’s quickly.

Feb. 10 (Bloomberg) -- Treasury Secretary Timothy Geithner pledged government financing for as much as $2 trillion of efforts to spur new lending and address banks’ toxic assets, seeking to end the credit crunch hobbling the economy.
[...]
Now, the Treasury will provide up to $100 billion to support the expanded $1 trillion Fed program. The central bank said in a statement that eligible collateral may be broadened to include other newly issued AAA-rated debt including commercial mortgage- backed securities and private-label residential mortgage-backed securities.

Are there really any AAA-rate new mortgage backed debt around? Who can believe in such a foolish statement?

Feb. 9 (Bloomberg) -- The stimulus package the U.S. Congress is completing would raise the government’s commitment to solving the financial crisis to $9.7 trillion, enough to pay off more than 90 percent of the nation’s home mortgages.

And in the end, Geithner spent so much time playing smoke and mirrors that his speech today did nothing but sink the equity markets (see Bloomgerg report) as it wasn't credible at all.

While incompetent Obama forced the Senate to pass a stimulus plan which will result in wasting hundreds of billions of dollars (actually, it is more accurate to say that they will transfer hundreds of billions of dollars from the US Citizens and foreigners holding US dollars to the Establishment and Corporatocracy). He uses the same tactics as Bush, spreading fear and lies, in order to get what he wants:

(Boomberg) In Elkhart and in Washington, the president painted a dire picture of the economy. He called the recession a “full-blown crisis” and warned “the problems are accelerating instead of getting better.”

“It is only government that can break the vicious cycle, where lost jobs lead to people spending less money, which leads to even more layoffs,” Obama said. “And breaking that cycle is exactly what the plan that’s moving through Congress is designed to do.”

Even the Republicans seem to get it this time, after being supportive of the Bush/Paulson plan which was really the same, but smaller. That's what we call ethics and integrity:

“The legislation moving its way through Congress bears little resemblance to what President Obama described at tonight’s press conference,” Republican National Committee Chairman Michael Steele said in a statement. “The spending bill written by Nancy Pelosi and Harry Reid is filled with unnecessary and wasteful programs that will saddle future generations with massive debt.”

The worst part is that Obama knows the real solution:

(Bloomberg) “We are going to have to work with the banks in an effective way to clean up their balance sheets so that some trust is restored within the marketplace,” Obama said in his first prime-time news briefing. At “any given bank they’re not sure what kinds of losses are there. We’ve got to open things up and restore some trust.”

But do you think they would ask the banks to just disclose their balance sheets and level-3 assets? Of course not, because then the obvious reality would blind them all: that the financial system is bankrupt! Instead, they are going to rob the people and save their friends and the current system.

UBS: another year of mega loss and mega bonuses?

Just follow this trail of events:

3rd of Feb 2009:

Feb. 3 (Bloomberg) -- UBS [...] hired more than 200 brokers in the U.S. in the fourth quarter as it sought to counter client defections.

The largest Swiss bank lured employees by offering signing bonuses of as much as 260 percent of the revenue the brokers brought in over the previous 12 months, said two people with knowledge of the matter who declined to be identified. [...]

“It was one of the more aggressive deals that we’ve ever seen in this industry,” said Rick Peterson, the president of Rick Peterson & Associates, a recruitment firm in Houston.

Just a week later:

Feb. 10 2009 (WSJ) Swiss banking giant UBS AG announced further cuts at its troubled investment-banking operation Tuesday, saying it would cull more than 2,000 jobs as it reported a larger-than-expected loss for 2008.
[UBS Reports Loss, Plans Job Cuts] Reuters

UBS plans to cull more jobs from its investment-banking operations.

Only months after turning to the Swiss government for a bailout package, the Zurich-based bank reported a net loss of 8.1 billion Swiss francs ($6.92 billion) for the fourth quarter of 2008, down from a loss of 12.97 billion francs a year earlier, bringing its loss for the entire year to 19.7 billion francs.

UBS also said it would sharply reduce bonus payments as part of an agreement with Swiss regulators, paying out only 1.16 billion francs for 2008, compared with 7.91 billion francs in 2007.

I think this is the 6th consecutive loss (and all were in the many million dollars) but they will pay bonuses! For more information, you can check the full earnings report.

Feb. 10 (Bloomberg) -- UBS AG, Switzerland’s biggest lender, said it will offer investment bankers more pay this year after announcing 2,000 additional job cuts at the unit.
[...]
The bank is slashing 2008 bonuses for all staff, excluding U.S. brokers, by 78 percent to 2.16 billion francs, a bigger cut than any of its rivals, according to UBS. That may foster discontent and result in departures of “senior rainmakers” and delay a turnaround at the investment bank, analysts including Sanford Bernstein & Co.’s Dirk Hoffmann-Becking have said. UBS executives say the investment bankers will reap the benefits of a rebound in earnings.

Two jokes in the last sentence only:

1. The US bankers will get more bonus on which grounds? Because they managed to create such an unbelievable mess?
2. Rebound in earnings? Not for the coming several years, that's for sure.

It's really difficult to understand what is going on at UBS, as plan change every week and a lot of contradictory information if spread around...

Dubai on the brink of collapse - The Skyscraper Curse [update]

In just a matter of 48 hours, I ran into a couple of articles describing the fall of the Dubai bubble economy, hugely driven by speculation in real estate (and propelled by easy borrowing and lax lending standard). I went to Dubai just for a week-end in January 2006 and I could tell that the fall will come and that it would hit hard.

Here are some quotes from a the Times Online and Bloomberg - and also very interestingly, Bloomberg made me discover an economic indicator that I had never heard about: the Skyscraper Curse. After digging, it appears that not only is this indicator is not new at all, but that it is quite reliable, for various reasons that will follow.

Let's first take a look at the Times Online article [emphasis mine]:

For many expatriate workers in Dubai it was the ultimate symbol of their tax-free wealth: a luxurious car that few could have afforded on the money they earned at home. Now, faced with crippling debts as a result of their high living and Dubai’s fading fortunes, many expatriates are abandoning their cars at the airport and fleeing home rather than risk jail for defaulting on loans.

Police have found more than 3,000 cars outside Dubai’s international airport in recent months. Most of the cars – four-wheel drives, saloons and “a few” Mercedes – had keys left in the ignition.

Some had used-to-the-limit credit cards in the glove box. Others had notes of apology attached to the windscreen.

When the market collapsed and the emirate’s once-booming economy started to slow down, many expatriates were left owning several homes and unable to pay the mortgages without credit.

“There were a lot of people living the high life, investing in real estate and a lifestyle they couldn’t afford,” one senior banker said.

Under Sharia, which prevails in Dubai, the punishment for defaulting on a debt is severe. Bouncing a check, for example, is punishable with jail. Those who flee the emirate are known as skips.

The abandoned cars underscore a worrying trend. Five years ago the Emir, Sheikh Mohammed bin Rashid Al Maktoum, embarked on an ambitious plan to transform Dubai into a hub for business and tourism. A building boom fuelled double-digit growth, with thousands of Westerners arriving every day, eager to cash in on the emirate’s promise of easy living and wealth.

Many Westerners invested in Dubai’s skyrocketing real estate market, buying and reselling homes before building was even complete. But, as the recession took effect, property and financial companies made thousands of workers redundant and banks tightened lending. Construction companies have delayed or cancelled projects and tourism is slowing.

There are increasing signs that the foreigners who once flocked to Dubai are leaving. “There is no way of tracking actual numbers, but the anecdotal evidence is overwhelming. Dubai is emptying out,” said a Western diplomat.
[...]
Most of the emirate’s banks are not affiliated with British financial institutions, so those who flee do not have to worry about creditors. Their abandoned cars are eventually sold off by the banks at weekly auctions. Those recently advertised include BMWs, Porsches and Mercedes.
[...]
Police have issued warrants against owners of the deserted cars. Those who return risk arrest at the airport.

3.62 million expatriates in Dubai
864,000 nationals
8% population decline predicted this year, as expatriates leave
1,500 visas cancelled every day in Dubai
62% of homes occupied by expatriates
60% fall in property values predicted
50% slump in the price of luxury apartments on Palm Jumeirah
25% reduction in luxury spending among UAE expatriates
Sources: arabbusiness.com ; Times database

More useful information in this Bloomberg report:

Feb. 6 (Bloomberg) -- As construction cranes littering Dubai’s skyline go idle, it’s time to revisit that ever intriguing economic indicator: the Skyscraper Curse.

As this columnist has pointed out periodically, there’s an uncanny, if unscientific, correlation between financial crises and efforts to build the world’s tallest building. Look no further than Kuala Lumpur in 1997, Chicago in 1974, New York in 1930 and in biblical times with the Tower of Babel.

The human propensity for architectural overreach has been a surprisingly reliable omen. It’s not a stretch to think of such projects as visual punctuation marks. A giant billboard made of steel, glass, concrete and money. A common thread between skyscrapers and economic disasters has to be easy credit, which fuels irrational growth, valuations, and hubris.

The gleaming Burj Dubai, as fate would have it, recently overtook Taipei 101 as the tallest building at 818 meters (2,684 feet). Right on cue, Dubai’s economy is looking unthinkably shaky.

A year ago, with oil prices heading toward $200 a barrel, few dared question property prices in the United Arab Emirates. Now, there is evidence they “fell off a cliff” as banks reduced lending and speculators withdrew amid the worsening global crisis, Mai Attia, a Morgan Stanley analyst based in the sheikdom, said in a Jan. 30 report.

Strong language, and yet it’s a reminder of how far and wide a credit crisis that began in the U.S. is traveling. China, that other supposed juggernaut, is looking shaky, too. Japan is back in recession, while Singapore seems to have fallen off the same cliff as the U.A.E.’s asset markets.

Thanks to deteriorating economic conditions, job cuts and the unavailability of mortgages, Dubai property prices are down 25 percent from the market peak in September, Morgan Stanley said.

The implications of that will travel the globe. Take the Philippines, where money sent home from overseas workers in booming economies such as Dubai’s are taking a hit. Remittances make up about 10 percent of the Philippine economy, fueling purchases of homes and cars in a nation where private consumption accounts for about two-thirds of gross domestic product. That support is now questionable.

It’s easy now to look back and say we should have seen this coming. Some did, of course. After a Dubai visit in late 2006, Claudia Zeisberger [...] told me: “All the building going on made me feel like I was experiencing the last days of ancient Rome.”
[...]
Few seriously doubt Dubai is a development miracle. Yet it’s fair to wonder if it’s the epicenter of an Arabian asset bubble tied largely to surging energy prices. With crude oil now around $35, fortunes are shifting. Construction booms should have been a harbinger of trouble.

Where else should we be looking? Well, China. Of the 10 tallest high-rise buildings listed by Darmstadt, Germany-based Emporis Buildings, five are in the third-biggest economy and one is in its special administrative region, Hong Kong. Of the 20 tallest, nine are in mainland China or Hong Kong.

Hong Kong is already in recession and China may be heading that way. For a nation at China’s level of development, growth below 6 percent is arguably a recession and anything below 5 percent is crisis territory.

What skyscrapers say about China is investor overreach. The conventional wisdom was that China could grow 10 percent indefinitely. That view meant the numerous mini-Manhattans popping up around the nation were a logical extension of its potential. Or was it merely a textbook case of an easy-credit- driven boom going bust?

Russia may avoid a meltdown, meanwhile, thanks to billionaire Chalva Tchigirinski. In November, Tchigirinski halted construction on the Russia Tower, which would have been Europe’s tallest. Ditto for the U.S., where Donald Trump reined in his ambitions to erect America’s tallest building. His Trump International Hotel is the world’s 11th-tallest high rise.

The Skyscraper Curse may be nothing more than a whimsical exercise to entertain, not inform. Then again, it’s proving to have some pretty solid foundations as an economic barometer.

This report was by William Pesek who has also written on Bloomberg about the Skyscraper Curse before in December 2006 and in November 2007 which share a common base but are still worth having a read.

[Update] An interesting video on YouTube from a German TV report about the collapse of the real estate. I am wondering if I should hope for this guy who still wants to go on with his "Michael Schumacher" luxury tower to really make it to the construction or not, because if he does build it without selling them beforehand, I am 99% sure he's going to be bankrupt before the construction is over.

[Update 20110208] For an in depth analysis and discussion about the Skyscraper Curve, please read this post.

Third multi-billion dollar ponzi-scheme/fraud

After Maddoff's $50 billion ponzi scheme and it's 3 million victims, followed by Satyam's $1 billion accounting fraud, here's another ponzi scheme - 1.4 billion dollars - that just went bust, in Japan this time:

TOKYO (AFP) — Japanese police on Thursday arrested a business executive who built a cult-like status among thousands of investors whom he reportedly defrauded of at least 1.4 billion dollars.

Kazutsugi Nami, chairman of now bankrupt bedding supplier L&G K.K., had promised 36 percent annual returns. His company even issued its own electronic money, which he predicted would be a hit during the global economic crisis.

I am pretty sure that lots of small hedge funds and another asset managers will soon be on the list as well.
Maybe it would make sense to actually keep track of them here?
Wait & See...

Bloomberg exposes Geithner (and hence Obama)

Bloomberg has been doing a great job of exposing many things and showed an impressive independence that every libertarian must applaud. Last week, they exposed the corrupt bureaucracy in the US, and today, their columnist exposes Geithner and hence make a hit against Obama (change you dreamt about will remain a dream). Obama already picked two tax-cheaters in his team (only 2? only tax-cheaters?).

If you still believe in any change coming from Obama's presidency, please have another read at my post Voice of Wisdom: Jeremy Grantham - pt2

And Yahoo: Obama Warns of 'Catastrophe:' What Happened to 'Hope' and 'Change'?: A failure to act, and act now [on the bill], will turn crisis into a catastrophe," Obama said, sounding a lot more like his predecessor than the candidate of hope and change.

Here's the Bloomberg opinion column [emphasis mine]

Feb. 5 (Bloomberg) -- Presidential admissions of fallibility are about as common as humility on Wall Street -- until now.

“I screwed up,” Barack Obama said in TV interviews Tuesday, following Tom Daschle’s withdrawal of his nomination for Secretary of Health and Human Services. “It’s important for this administration to send a message that there aren’t two sets of rules, you know, one for prominent people and one for ordinary folks who have to pay their taxes.”
[...]
If Obama screwed up in nominating and backing Daschle, the former Senate majority leader who ponied up $140,000 in back taxes and interest, what does that say about his support for Geithner?

Geithner was in arrears to the Internal Revenue Service, an agency he now heads, for $50,000. Somehow he “missed” the part in the annual hand-outs from the International Monetary Fund, his former employer, where he was told about his obligation to pay Social Security and Medicare taxes -- a document he signed annually in order to get reimbursed.

After a 2006 audit by the IRS, Geithner paid back taxes for 2003 and 2004, waiting until he learned of his nomination for the Treasury to settle his 2001 and 2002 liability. (Nothing concentrates the mind like the prospect of a public hearing.)

Geithner also took a dependent-care deduction for the cost of his kid’s sleep-away camp, a creative interpretation of the tax code, to say the least. You’d think that in all those years of public service, including seven years at the Treasury, he would have run across a smart Internal Revenue Service agent who could answer his tax questions.

Like Daschle, Geithner was teed up as the only person who could possibly do the job. His major selling point was his familiarity with the Treasury’s Troubled Asset Relief Program.

TARP flunked its first and second oversight exam.

“The panel still does not know what the banks are doing with taxpayer money,” the oversight panel said in its Jan. 9 report.

As president of the Federal Reserve Bank of New York from 2003 through 2008, Geithner was at the scene of the crime when the financial system cratered. The fact that the Fed is a bank regulator and supervisor with direct responsibility for the safeness and soundness of the financial system, and that most of the big banks are in the New York Fed’s district, never posed a remote challenge to his competence or his confirmation.
[...]
At first it looked as if Daschle would skate through his Senate confirmation as well, his tax problems dismissed as an “innocent mistake” by his former Senate colleagues. Daschle was an early Obama supporter; the president tapped him for a dual role as secretary of HHS and health-care czar, entrusted with revamping one-seventh of the U.S. economy.

When the issue threatened to spiral out of control and distract Obama from the important business at hand, Daschle bowed out.

And it was a good thing, too. Obama came to Washington pledging to drain the swamp of influence-peddling and the system of pay-to-play: You put me on the payroll, and I’ll get you a job as Commerce secretary. In addition to his tax problems, Daschle was an unregistered lobbyist who parlayed his Rolodex into a $5 million paycheck in the last four years. It sure sounds like business as usual.

Tactically it was a smart move for Obama to take responsibility for nominating and supporting a tax cheat for high office. As a practical matter, his stance creates a credibility problem for Geithner.

The economy is Obama’s No. 1 issue: getting it going, not restructuring one-seventh of it. His relationship with his Treasury secretary is almost as important as the public’s confidence in his choice.

The Treasury faces a Herculean task of fixing the banking system to stabilize the economy. It will consume trillions of dollars in new borrowing. It will require the trust and confidence of foreigners, who are bristling at the “Made in America” provision included in the $819 billion economic stimulus bill passed by the House of Representatives last week.

Geithner said as much when he appeared with Obama at a press conference yesterday.
“Financial systems are built on trust and confidence,” he said.
That’s true. Daschle started with the same premise and came to a different conclusion.

“This work will require a leader who can operate with the full faith of Congress and the American people and without distraction,” Daschle said in a statement announcing he was bowing out. “Right now, I am not that leader.”

Geithner has to be wondering if he is -- along with the rest of us.

Pedge Fund Performance 200901

Just a quick post to relate the performance of PedgeFund for the month of January 2009. December and 2008 returns are available here.

Summary:
Pedge Fund USD
December performance: +8% (gross, approx)
Year to Date performance: +8% (gross, approx)

Highlights:

• Gains thanks to the precious metals (long gold and silver)
• Nice gains on Northgate Minerals, bought at $0.56 on the 5th of December, and worth $0.83 on the close of 31st December 2008 (gain of 48% within a month) and $1.23 on the 31st of Jan (another gain of about 46%) though it's a small holding in the portfolio.
  
• BIG losses short USD
  
• BIG gains on short treasuries
  
• Losses on short USD are almost equal to gains on the short treasuries

I am quite happy with the performance of the portfolio for this start of the year, but Feb will be a difficult month and it's likely that such gains are not going to hold...

One very good reason to be bullish on Oil

I mentioned mid December that I was bullish on oil, and I started to grow a position in various oil and oil-related commodities/stocks.

Now that the quarterlies season has started, here's what I've noted so far:

• BP: net loss of $3.3 billion in Q4
  
• Chevron: $4.9 billion in Q4 thanks to hedging
  
• Exxon: Big drop in profits in Q4
  
• Shell: Big drop in profits in Q4
  
• ConocoPhilips: net loss of $3.2 billion in Q4
  
• Valero: net loss of $3.3 billion in Q4
  

What is interesting here is not that Exxon, Shell or Chevron made money or even that their profits dropped, this is normal. What is very interesting, is that companies which didn't hedge their production made big losses. This means that the current prices are below the cost of production, and that huge losses like these are not sustainable. The consequence should be a major rise in prices of crude.

If you have seen some other major oil companies that I missed, please post a comment.

Nixon: lies, damn lies

I am amazed by how great a tool like Youtube can become when previously unavailable recordings are all of the sudden made available to all the people on the planet who have access to the Internet. I believe this is a great tool for spreading freedom of speech and knowledge.

I just happen to have found this video:
Nixon Ends Bretton Woods International Monetary System (On YouTube)

It is an extraordinary event that happened then: the United States devalued its currency and defaulted on its debt.
What is not so extraordinary is how many lies and nonsense Nixon manages to put into his speech. In a typically corrupt politician, he begins his sentences by stating a real issue but by giving a completely wrong solution or even worse, by announcing some actions that are completely irrelevant to the issue he just mentioned just to achieve their (him and his fellow conmen in the establishment) own personal goal.

Here are examples:

• He needs to build a new prosperity: creating jobs and containing inflation and protecting the value of the dollar. How will he achieve that? With devaluation!
• The dollar is collapsing in value because of the money printing of the Fed (= inflation). He blames the "international money speculators" for the trouble on the American dollar and all other currency crisis.
• How does he defend the dollar? By suspending the convertibility of the USD into gold and other assets (my guess: silver).
• How will devaluation impact US Citizens? Devaluation doesn't impact the US citizens who want to buy American made products in America and it will actually stabilize the dollar!!!
• "The US Dollar must never again be a hostage in the hands of international speculators." Is he talking about the Fed and other fellow bankers of the proponents of the partial reserve banking?
• Finally, to protect the US dollar and the American citizens, he creates a 10% tariff on all goods imported into the United States (just "to make sure that American products are not disadvantaged by unfair exchange rates" - what is an unfair exchange rate???). So basically, by forcing the US Citizen to pay a higher price for the product they wanted or to be forced to buy another one instead not impacted by the tariff, he will help the American citizens? Tariffs are only beneficial for the companies which products are facing competition. They are detrimental to the general population, but beneficial for shareholders of some companies (the Establishment...)

Bloomberg exposes the extend of corruption in US government

I am glad to see so many disturbing reports coming from Bloomberg and showing how independent and professional they are. Here are some quotes from a report published on the 30th of Jan 2009 [emphasis mine]:

Jan. 29 (Bloomberg) -- U.S. Senator Kit Bond shifted in his chair at a 2005 congressional hearing, poised with a question on national security. He turned to Treasury Secretary John Snow, who was seated at a witness table.

Was Snow sure, asked Bond, a Missouri Republican, that a Treasury Department computer on order for $8.9 million would help detect terrorist money laundering?

“Yes, absolutely,” Snow said.

A year later, in July 2006, the U.S. Treasury Department abandoned the project. The computer didn’t work. The department had spent $14.7 million -- a 65 percent increase above the original budget -- for nothing.

There was a final ignominy: Under the terms of the contract, Electronic Data Systems Corp., the vendor, collected a bonus of $638,126.

As the federal government’s $700 billion bailout of banks sputters, there’s an object lesson for the new administration of President Barack Obama: Federal departments, including Treasury itself, routinely squander tens of billions of dollars a year in taxpayer money as they farm out public business to private corporations.

Obama, like presidents before him, said during his bid for the White House that he wanted to curtail waste in government. With contracting, he faces a mismanaged system that accounts for almost 40 cents of every federal dollar spent outside of mandatory obligations such as Social Security and Medicare.

Not Earmarks

When compared with all federal contracting, just a fraction of U.S. spending waste comes from so-called earmarks, which elected officials often criticize as the unnecessary pet projects of politicians.

The “Bridge to Nowhere” in Alaska, for example, had a price tag of $398 million. By contrast, the government spent $368.4 billion on all contracts in 2008, and Republican Oklahoma Senator Tom Coburn estimates that about $100 billion of that was wasted.

U.S. spending on 3.7 million contracts in 2008 represented an increase of 76 percent over 2000 levels.

“We have a broken, broken system that rewards incompetence,” says Coburn, 60, who has been examining purchasing breakdowns since his election to Congress in 2005. “We need to totally change contracting.”

Bureaucrats, not elected officials, run the U.S. purchasing system, well out of public sight. And their bosses keep the spending secret by not releasing complete contract files to the public.

Just as taxpayers can’t find out how the Treasury and the Federal Reserve used the first half of the bank bailout, Americans are often denied access to public records that provide details on how hundreds of billions of taxpayer dollars are spent in contracts.

Bloomberg News filed Freedom of Information Act requests with the Treasury Department, the Commerce Department and the Fed asking for documents on the bailout and routine contracts.

As of Jan. 12, seven months after receiving the first request, the three agencies had provided incomplete documents with blacked-out words or nothing at all.

In many cases, bureaucrats are motivated to give millions of dollars in bonuses to contractors no matter how poorly a company performs because generosity with taxpayer money may help them land better-paying jobs after they leave the government.

Contractors on dozens of jobs at federal departments collected more than $8 billion in what federal auditors said were unwarranted bonuses from 1999 to 2005.

In 2007, military radio maker Harris Corp. developed a hand-held computer for the 2010 census that failed to work in tests in a California heat wave. Still, the Commerce Department’s Census Bureau awarded Harris $14.2 million in bonuses in a contract that increased to $798 million from $600 million, according to federal investigators.

“Contracting is a total mess,” says John Lehman, who fought procurement waste as secretary of the Navy from 1981 to 1987 partly by banning costly contract changes once work was under way, according to Navy records.

“I don’t think in the history of the country it’s been as bad as it is today,” says Lehman, 66, now chairman of J.F. Lehman & Co., a New York-based private equity firm. “You have a system where no one is in charge and no one is held accountable.”
[...]
Obama’s spending plan will create new federal contracts as the government pours money into education, public works and expanded technology.
[...]
Most Cabinet secretaries don’t probe for waste in contracts on their own and don’t push procurement subordinates to police work that’s farmed out.

That lack of accountability holds true even when projects make up significant chunks of their budgets, says Todd Zinser, inspector general at the Commerce Department.
[...]
Federal departments have long since abandoned the intended purpose of cost-plus, and bureaucrats who run contracts routinely award bonuses for almost everything, even when a program fails completely, Lehman says.

“There’s too much gold plating and little accountability with most programs being done on a cost-plus basis,” he says. “We’re paying through the nose.”
[...]
KPMG LLP of New York, the fourth-largest accounting firm by revenue, paid $456 million in 2005 to settle a Justice Department complaint that it had sold phony tax shelters to wealthy clients, wrongly diverting $2.5 billion that should have gone to Treasury.

That wasn’t the only time KPMG has been accused of cheating the government. In 2006, a year after the tax shelter case, KPMG and three other consulting companies paid $25.7 million to settle federal civil lawsuits accusing them of overbilling the Treasury Department and various agencies for travel. KPMG didn’t admit or deny wrongdoing.

Still, the [Treasury] department continued to award contracts to KPMG. Treasury spokeswoman Courtney Forsell says agency contracting meets federal rules. KPMG spokesman Daniel Ginsburg declined to comment.

Mostly, the contracting system goes wrong through spending waste and not lawbreaking. When the Census Bureau hired Harris Corp. in 2006 to provide a hand-held computer for the 2010 nationwide survey of Americans, the agency heralded the $600 million contract as a milestone in census modernization.

Census director Louis Kincannon said the computer would cut down on paper by allowing canvassers to electronically survey households that didn’t return census forms.

“We are revolutionizing the census,” he said in a press release on March 30, 2006.

In June, three months after the contract was signed, Coburn peered down at Kincannon at a congressional hearing and asked what would happen if the computers didn’t work.

“They will work,” Kincannon said. “You might as well ask me what happens if the Postal Service refuses to deliver the census form.”

They didn’t work.
[...]
“I had people quit on me,” she says. “It was definitely frustrating.”

Today, the revolution is largely a bust. Last April, the Census Bureau said it would go back to pen and paper for canvassing and use the computers only to verify addresses of households.

The project has cost $798 million -- about $200 million more than the original estimate. In a big gaffe, both the government and Harris had miscalculated the cost of a help desk for canvassers. Harris and the agency had originally budgeted $5 million.

The price has since jumped to $220 million, a 44-fold increase, according to government records.

Perhaps worst of all, Coburn says, was that Harris collected $14.2 million in bonuses.

“It’s ridiculous,” he says. “They didn’t even perform competently. You could do what they tried to do on a cell phone.”

At a congressional hearing last April, Representative Alan Mollohan, a West Virginia Democrat, questioned Commerce Secretary Carlos Gutierrez about the reason for the payout.

Gutierrez said officials handling the census contract appeared to have let Harris get away with unacceptable work.

[Many examples here, with hundreds of billions wasted, worth reading the whole report]

“This situation is beyond troubling,” says Senator Thomas Carper, a Democrat from Delaware. “More than ever, taxpayers need to know that their hard-earned money is being used wisely. The financial strain on everyone is daunting. I just shake my head when taxpayer money is wasted like this.”
[...]

Protests against foreign workers spread in UK

The Economy in the UK is in extremely bad shape, and will keep on getting worse and worse even though Moorad Choudry thinks that Rolls Royce will save the whole British economy thanks to its exports. I have wrote about this many many times and some people like Jeremy Grantham and Jim Rogers think the same. So hopefully, I am not the only idiot who believes the UK is finished.

I have also been mentioning for quite some time that we will start to see lots of protests - many of them will be violent - and maybe revolutions in the next few years if not wars. So far, we have seen protests in Spain, Italy, Greece, Iceland, violence in Madagascar, and now the UK.

The interesting thing in the UK, is that the protests are against foreign workers. Whoever lives in London knows that the foreigners handle most of the lowest end jobs (bus drivers, 24/7 cashiers in Tesco, Sainsbury's, janitors, etc.) and that most of high-end jobs in finance are handled by the Americans, French, etc. But now, nationalism is spreading, and it's not the first time I heard that recruiters should give priority to British citizens and avoid hiring foreigners when they do not have a good reason to do so...

Things look really bad... And now protests on top of all that:

LONDON – Thousands of energy workers across Britain walked off the job Friday, joining a growing campaign of protests against foreign citizens being hired for an oil industry construction project in England.
Seven hundred employees held a wildcat strike at the Grangemouth refinery in Scotland, provoked by the decision of Italian construction company IREM SpA to use Italian and Portuguese workers for a 200 million-pound ($280 million) project at Total's Lindsey refinery in northeastern England.

Expect to see a lot more of these, and not just in the UK, but everywhere in Europe, and probably in the US as well.

Voice of Wisdom: Jeremy Grantham - pt2 [Updated]

Precisely 3 months ago, I made the first post about Jeremy Grantham and his quarterly letter and how crystal clear and realistic his views about the world were. So here we are again, his Q4 letter is again full of insights, with which I mostly agree, and even worse, I feel like he sometimes is writing exactly what I wish I had the time and the patience and the writing skills to write myself :-)

Two things I highly disagree with him, before I forget: Keynes is his hero (!!!) and he believes that the market has reached fair value.

[NOTE: I do not have time to add comments now, but I will update this post with additional info]

Here what some quotes [emphasis mine]:

In their desire for mathematical order and elegant models, the economic establishment played down the inconveniently large role of bad behavior, career risk management, and flat-out bursts of irrationality. The dominant economic theorists so valued orderliness and rationality that they actually grew to believe it, and this false conviction became increasingly dangerous. It was why Greenspan and Bernanke were not sure that bubbles – outbursts of serious irrationality – could even exist. It was why Bernanke, who had studied the bubble of 1929, could still not see it as proof of irrationality and could still view the Depression (à la Milton Friedman) as a mere consequence of incredibly bad, easily avoidable policy measures. Of more recent importance, it was why Bernanke could dismiss a dangerous 100-year bubble in U.S. housing as being nonexistent.

Indeed, I would recommend reading Bill Fleckenstein's book: Greenspan's Bubble - the Age of Ignorance at the Fed

[...]
But after exulting in Obama’s election, I couldn't even reach his inauguration before finding fault![...] But in the critical financial arena, he appears to have brought in Rubinesque retreads, “yes men,” or both, none of whom appeared to have seen the most obvious developing bubbles in the history of finance.
One can only admire Bob Rubin’s ability to retain influence and have his protégés in powerful positions. Rubin is the guy who was last seen exhorting Citibank to take more leverage and keep swinging. No, come to think of it, he was last seen paying a visit to Hank Paulson, his relatively recent underling at Goldman Sachs. He pleaded with his old chum, with brilliant success, for an unprecedented bailout. He was part of the establishment that failed to express early, loud concerns over slipping financial standards, and in fact helped to create an environment where prudence was a career risk and CEOs felt obliged to keep dancing.

His man Summers has proven he has some bite. Because he has written often for the Financial Times we at least know his public stance on matters financial. Well, let’s put it this way: he runs no risk of being on any of the many lists of people who gave clear warnings of potential financial disaster. And dozens did. Summers was emphatically not a whistleblower. He did not rail against falling financial standards. What he did, with his allies Greenspan and Rubin, was beat back a heroic attempt in late 1998 by Brooksley Born, then boss of the CFTC in Chicago, to supervise OTC derivatives. They held her off, presumably in the Greenspanian spirit of “the less regulation, the better.” Obama appointed Gary Gensler to lead the CFTC. Gensler has a good reputation, but was hired into Treasury by … you’ve guessed it … Robert Rubin.

And as for Tim Geithner! The FOMC minutes are available, so at least we know what he added to Greenspan’s and Bernanke’s meetings. Over the Greenspan years, there were a few cautionary words from other members – a very, very few from a rather spineless group – and we know from the records how they were greeted. A typically precise response from Greenspan was: “So, this seems like a good time to break for coffee,” or words to that effect. And we can study Geithner’s objections to the Fed’s long journey down the primrose path, but our study period will not be a long one, for he questioned nothing! He was, if anything, a cheerleader, and wrote in support of the new era of “Great Moderation.” He, however, was not picked by Rubin. No, he was picked by Summers, who was picked by Rubin. These guys are very, very loyal!

Mary Schapiro, appointed to head the SEC, has been greeted with great enthusiasm by the financial industry precisely because she has been a great supporter of the industry’s financial well-being during her career, which has included positions at the SEC and the CFTC. She is seen as one who poses no threat by way of introducing nasty, inconvenient new regulations. Where is Brooksley Born when we need her? (In the interest of space, this anti-Schapiro section is brief. To help out, on January 15, there was a detailed criticism of her for being a softy in The Wall Street Journal, of all newspapers. Bush would have been proud to hire her!)

What a missed opportunity this all is. Obama was given a mandate that could have included some serious bottom kicking. We could have quickly taken quite a few steps down the long road leading to a credible financial system deserving of respect. The time to do that was now.

Obviously, Obama is the same as his predecessors, the likes of Bush, Clinton, etc. who are just there to perpetrate the continuity of the current masquerade and rob the people blind. Those who believe in Obama will get a major disappointment...

This blog deals with these issues on a daily basis, but here are just a few related posts:

• The Conmen take over the US
• The Conmen take over the US - part 2
• Obama will not prosecute Bush and Cheney
• The SEC is a big failure, admits Chairman Cox
• The Government Bodies have no clue about what they are doing
  

[...]
So it would be very encouraging if there were someone included in Obama's appointments who had actually blown the whistle on the spiraling Ponzi scheme that our leveraged financial system had become (which is why the Madoff fiasco is such a fitting capstone to our troubles). If only there were someone with real toughness who could do unpopular things. Someone, say, like Volcker. Oh, wait a
minute. Didn't he get a job? Or was that only a game to get obstreperous characters like me on board with the program? Unfortunately, I have a sneaking misgiving that Volcker was indeed window dressing for the Presidential campaign. Dollars to donuts he has not been pestered around the clock for advice so far. And I'll tell you one thing. You don't have to know him well to know that he'll resign within a year if they don't get serious.
[...]

I am among the people who believe that Volcker will resign in a matter of months. Interestingly, I have also heard the same coming from Peter Schiff. I believe realists are getting this one right as well : Volcker has a great reputation and will not allow it to be tainted by the current establishment.

Most of our society got richer in the last 20 years, but there is not a hint of research that suggests we got happier, and plenty that suggests the reverse. In the process, we took some giant steps toward ruining the planet and had to live with the sight of many wealthy firms funding expensive PR programs that attempted to obscure the science and suggest that coal is clean and all is well.
[...]

Indeed, it's been 20 years that no real progress has been made on cleaner and more efficient energy sources as the big oil corporation, pretending to invest in these technologies are actually doing their best to divert investments from them (and themselves do not invest at all, prefering to pay off huge dividends and bonuses instead) or worse, destroying any new company that could emerge with a great solution (I don't have proof of this). It's also interesting to read John Perkin's Confessions of an Economic Hitman and its sequel The Secret Story of the American Empire.

First, Warren Buffett. At about 950 on the S&P on October 16, he announced that he was a personal buyer of U.S. stocks because they were cheap and their prices reflected widespread fear. This is not typical for him, but he certainly did it in 1974. When he said it back then, every stock in our portfolio at Batterymarch yielded almost 10%! The portfolio P/E was below 7.5x. Even with hindsight, if you value the market in 1974 using our current methodology, it was very much cheaper than it is today at 950, which is what we calculate as almost precisely fair value.

His recent announcement made the market seem so much more exciting than boring old fair value. So what are the possibilities? Was he performing a civic duty? Certainly, animal spirits are a critical component of any recovery, so encouragement to take risk from an authoritative source makes perfect sense. Does he believe that 1974- type cheapness can never return, or is very unlikely in this particular case? If that were the argument, we would disagree; we suspect that cheaper prices are not just possible but probable, although admittedly far from certain. Has he perhaps a tactical market timing model that produces his obvious excitement, despite these ordinary values? Most unlikely, given his style. Or are our numbers wrong? Perish the thought! In any case, it is all an interesting conundrum.

We have been several times over Buffett's course of action here:

• Warren Buffett's unhappy new year
  
• Loosing my Integrity - Warren Buffett's next book?