Conspiracy Monday

Can September really be here? Most of June was a rain out, and all of July was a wash out, which left only August for a summer season. Where does all the time go? A bit short on time tonight, so I will spotlight a few items I found interesting. The theme tonight will be "compelling conspiracy theories" to try and make a slow Monday more exciting!

Export of "Gold Compounds" a Booming Business
This story was from back in late May, and I cannot recall seeing it at that time. Today the blog Market Skeptics takes another look at the massive exporting of "Gold Compounds" over the past year and a half (original article at Goldseek and can be found here.)
Key question:

I took special note of how 2,920 metric tonnes of “Gold Compounds” had been exported from the U.S. in 2008. This number seemed BIGGER than BIG – because the U.S is only alleged to have stockpiles of sovereign gold of 8,100 metric tonnes while annual U.S. mine production of gold is roughly 228 metric tonnes. This figure of 2,920 metric tonnes is equal to 36 % of all alleged sovereign U.S. gold stocks or more than 14 times annual U.S. gold mine production. So, I was left wondering, “just what is/are ‘gold compounds’?

I contacted the USGS and queried a qualified individual [who had working knowledge of this data stream] about the definition of “Gold Compounds”. I was told that, according to the U.S. Census Bureau – who supplies not only the definition but the actual reported numbers, gold compounds were typified by industrial type products containing low percentages/amounts of actual gold content – like gold paint.

I then reasoned with the USGS person, if such were the case, why would U.S. exports have increased in 2008 to nearly 3,000 metric tonnes [when the Global Economy was slowing and the U.S. Dollar was strong] from 2007, when U.S. exports totaled approximately 2,000 metric tonnes [when the U.S. Dollar was weaker and the Global Economy was booming]? I noted that this was counter-intuitive and made no fundamental economic sense...

When confronted with reason, the individual for the USGS agreed that the data, as published, did not make logical sense and explained that the U.S. Census Bureau was questioned as to the veracity of this particular line item in their data.

I asked the USGS employee if the gross weight or the gross value [not shown in the table but known to the USGS] of the “Gold Compounds” was queried.

The individual confirmed that their query to the U.S. Census Bureau dealt with the gross value being assigned to these exported goods.

I responded rhetorically, “being an issue of gross value – then let me guess that the U.S. Census Bureau is assigning an astronomically high value to these goods. Such a high value would be COMPLETELY INCONSISTENT with what the U.S. Census Bureau claims these items are- namely, industrial goods. The values being reported would be more in line with these goods being gold bullion or equivalents”.

The individual from the USGS confirmed my reasoning when he responded, “that would be CORRECT”.

At a minimum, this is a very peculiar event. Does the US sell that much gold paint, or those little gold flakes for alcohol shots? Does the US export enough "industrial use" gold to significantly effect US trade numbers? Market Skeptics offers his own idea:

Until someone explains to me what these “gold compounds” were, I am going to assume that they were half the US gold reserves leaving the country.

I am not ready to jump on that ship, but either this is a way to quietly move gold bullion on a large scale back to foreign central banks, or the numbers themselves are fictitious and constitute a blatant data manipulation on trade numbers. In any case, this is an important story.

Banking Bailouts by Other Means
The fact that shares of the worst financial institutions are both going parabolic and doing so on massive volume has been known since June. Finally, a concerted effort to try and put these numbers in perspective is happening, and the picture painted is both not surprising nor indicative of a "real" market.

Guest poster at The Big Picture, Steenbarger, has a nice summary of what has been going on:

Above I took C, FNM, and FRE and expressed their *composite* volumes (e.g., the volumes transacted across all exchanges) as a fraction of NYSE volume. What we see is that, early in 2007, those three stocks accounted for only 1-3% of NYSE volume. During the financial crisis of late 2008 and again as the market was bottoming in early 2009, that ratio skyrocketed to well over 50%...

Again, the question is what all this means. There is no way that mom and pop trader and investor are involved in any meaningful way in generating these kind of daily trading volumes. Nor are proprietary trading shops capable of generating volumes that exceed those of the entire New York Stock Exchange. While I have no doubt that the algorithmic trade close to the market is participating in this movement, the directionality of the involvement suggests that large financial institutions are systematically buying the beaten-up shares of the poster children for TARP: C, FNM, FRE, AIG, and the like.

It is worth noting in this regard that other major (healthy) financial firms, such as GS and JPM, have seen no such surge in their volume or their trading prices.

My best guess? We’re seeing a massive infusion of capital into very troubled financial institutions, no doubt aided by short covering and the participation of program traders and proprietary daytrading firms. Where is the capital coming from? Why has it poured in so suddenly (the really large infusions began in early August)? Why is it coming in at such a pace that it is dominating NYSE volume? Zero Hedge rightly wonders why this hasn’t triggered alarms at the exchange. And why is it happening with only the weakest financial institutions?

If you were the government and you saw that these institutions were on the verge of a major fail, with billions of taxpayer dollars at risk, I’m not sure you’d announce that to the world. Nor, at this point politically, could you ask for yet another bailout package. But you would only pour money into those stocks at a frantic pace (capable of detection) if you perceived a dire need for the capital.

I’m not inclined toward conspiracy theories, but it’s difficult to imagine a scenario in which this is not a (frighteningly necessary) coordinated capital infusion, with taxpayer dollars ultimately at work in financial markets.

Compelling.

The bumped up stock prices may allow secondary offerings to occur for the lucky few. Another angle is that the US government is buying the shares of these firms from foreign holders. Remember from last Wednesday's post "Repudiation of US Financial Engineering" it was clear that the US government is taken agency debt off the hands of foreign holders and exchanging them for treasury buys. I think that in a similar manner the US may be taking the holdings of the institutions listed above off the hands of foreign holders as well. In any case, the blatant manipulation going on in these stocks would be a case for the SEC to be involved in, if only they wanted to get involved.

Shadow Inventory; Conspiracy Theory or Real?
It is becoming group think that the housing market is bottoming based on a bunch of indicators that point to a somewhat less terrible market. I have offered that until I know how banks are handling all the foreclosures they have, I cannot make a call. Two opposing views are on display today to further confuse the issue.

Calculated Risk covers a Diana Olick CNBC piece on how Bank of America states they are handling their foreclosure process:

Bank of America:
Foreclosure sales have been abnormally low since we learned of the pending implementation of the administration’s Making Home Affordable program. From that point, we delayed the initiation of foreclosure proceedings and sales for customers that may eligible for a loan modification under MHA. As a result of this policy, our foreclosure sales in recent months have been as little as half the normal pace we experienced before. ...
Now that Making Home Affordable programs are operational, we do project an increase in foreclosures as we exhaust every available option to qualify customers for modifications and other solutions.
...
We do not hold foreclosed properties off the market.

So Bank of America does not hold foreclosure properties off the market, UNLESS, they are holding them off the market based on yet another mortgage modification plan to be enacted. Is that even an answer?

Dr. Housing Bubble offers another take on "Shadow Inventory" and the post today is a must read if you want to understand the games being played. Some excerpts:

Apparently acknowledging shadow inventory is like holding onto childhood superstitions like believing in Santa Clause or the financial Easter Bunny. Over the last week, many of you have sent me articles where many authors both amateur and professional have started attacking shadow inventory and started proclaiming that it was a myth. Shadow inventory does not exist according to these new articles. Some of these authors went ahead and made up their own definitions of shadow inventory which in itself is curious since this inventory supposedly does not exist. The problem of course is that there are many definitions of what shadow inventory is so I will try to reiterate what I have been talking about for months...

What is shadow inventory? First, shadow inventory is housing units that are not making it onto the public market for one reason or another. There is speculation surrounding why this is happening. Lenders are overwhelmed and simply do not have the human capital to handle the glut so goes one theory. Others speculate that lenders are simply too incompetent to have a system in place to handle the mess they created.”...

(See article for graphic) The public can see 465 homes with 114 short sales and 48 foreclosures. But the reality is, there are some 1,639 properties either in pre-foreclosure, default, or bank owned. Now, if we remove the public listings that would leave us with 1,477 homes not showing up. Given the entire MLS inventory is 465 I would say that is a rather significant number. Most of these homes will default. This is something we already know. This is in fact shadow inventory. Banks are simply self-serving and are holding off on foreclosing on homes because to do so, would implode their business. That is, they would need to take an immediate and gigantic write-down.

The article has plenty of graphs and real time housing data points to back up his opinion. Bank of America only has their reputation behind their claims. I leave it to you to decide who is more believable.

Have a good night.

Friday Topic Jumble

The Patriots preseason game is on at 8pm, so tonight's post will be a jumble of topics and then some entertainment.

Short Term Deficits, as In Decades are "Short Term"
My favorite economist Paul Krugman lashes out today, in this opinion article, against any and all that are concerned over the US debt load and deficit spending. Krugman notes:

As I said, deficits saved the world.

And I thought deficits were bad, but they can actually save the world! Maybe they should don a red cape and become a superhero or something.

Krugman goes on to use the same old Keynesian idea that "short term" deficits are ok, but not long term ones. I am wondering what Krugman's definition of short term is, as the US had run a budget deficit for almost every year of the last 30! 3 decades is short term I guess!

Ben Bernanke Success Story
If deficits did not save the world alone, they had help from FED head Bernanke. Faced with banks that were "too big to fail" Bernanke and company set in motion a corrective support program to solve the problem. Here is their solution to oversize banks that carry too much risk:
Banks 'Too Big to Fail' Have Grown Even Bigger
Behemoths Born of the Bailout Reduce Consumer Choice, Tempt Corporate Moral Hazard

Heck of a job Benny!

Creepy Similarity
Besides the chart showing the "4 bad bears" stock market comparisons from DS Short, Zero Hedge had an even more creepy comp chart of the S%P 500 and the Nikkei from matching bubble time terms:

Scary indeed!

5 Stages of Panic Buying
I saw this floating around today and I think it does offer a good "check yourself" lesson, enjoy "The 5 Stages of Panic Buying" from The Reformed Broker.

Friday Night Entertainment
All kinds of goodies to end the week.

Humor Can be Rough
I submit a picture (which I am sure was a photoshop deal) that I saw over at The Slope of Hope which is at once; nasty, funny, mean, hilarious, poor taste, wildly amusing, and just a must see. I cannot put it on the blog (no permission) but you need to check it out tonight.

The Wilhelm Scream
If you have ever seen a George Lucas or Steven Spielberg film, you have heard "The Wilhelm Scream". Once just a random added sound effect, it has become a staple of film and TV the world over. Once you learn to pick it out, you will always find one in most films. Here is a compilation of samples:

Now you will always hear it, just as if you see the arrow in the FedEx logo that is all you will ever notice.

Film Clips
Some cinematic snippets!

Perhaps you have noticed my bio picture is of a young Darth Vader given over completely to the Darkside of the Force. He first totally gives himself over the the Darkside on Mustafar, when Vader "takes care" of the Separatist leadership (in the novel, this scene is truly terrifying). Check out the 1:33 mark on and my picture comes from the 2:11 mark:

Awesome!

One of my favorite films is "Escape from New York". My favorite scene is when Snake Plisskin is made the offer to save the president. So many classic lines..."president of what".."Call me Snake". Enjoy:

Classic!

Rock Blogging
Time to get in a groove to start the weekend. From all the requests, I am not sure how to pick and choose! (sarcasm)

A song my Dad used to play on the guitar, and yes I would sing the lyrics at his behest, was Johnny Lee's "Looking for Love". I found this good quality video from the Urban Cowboy soundtrack, and I do like that film as well. Try it out:


Van Halen without David Lee Roth, to me, was never the same. Still, the song "Right Now" with Sammy Hagar at vocals is pretty good. Somebody should cut this song up and make it the theme song for the Audit the FED bill!:


Just like Todd Harrison from Minyanville, I like the HBO series "True Blood". The opening theme music is called "Bad Things" from Jace Everett and any song with a steel guitar is going to be a good one:


I did one for my Dad, and now one of my Mom's favorite songs (and I like it as well) is Dolly Parton's "Jolene". Dolly certainly has many assets, and a great voice is one of them:


An 80's hair band that never really caught on was Winger. Still, the song "Seventeen" certainly has some appeal, for various reasons:


Last Call! One more for the road.

As a personal favor, please subject yourself to another Randy Rhoads Tribute album song. This song is called "Revelation Mother Earth" and it is moving on many levels (lyrical, music, emotion, etc). I would ask you to try it out, especially when Ozzy and Randy meld piano with metal guitar at the 3:19 mark, which to me, is as beautiful as anything I have ever seen or heard. You will not regeret it. The end is pretty raucus as well:


Have a good night.

Two Excellent Questions

It went from 90 degrees and humid to 60 degrees and dry overnight! I had to use the car heater this morning on the drive in. Now we are looking at 7 days of low 70's for temps. Can the fall really roll in so fast? Say it ain't so!

Comic Relief
I realize the current market action can have a depressing effect on those among us that look behind the headlines see many issues still unresolved, or even ignored. I will lead off tonight with two comic relief items that should bring a smile to your face.

Street Lights
Winner of the hilarious headline award for today is an item from Clusterstock which had me almost in tears from laughing early this morning:
We Can't Afford To Keep The Streetlights On
Good news for kids that have to go home when the streetlights come on

The article covers the story of many municipalities cutting back on streetlight power to save money. My mother used to actually say "Come home when the streetlights come on" when I was small, so I was amused.

The winner of the "Understatement Award" goes to this article on Yahoo Finance this morning which explained the jobless claims number in a way that everyone can understand:
New jobless claims and total benefit rolls drop

WASHINGTON (AP) -- The number of newly laid-off workers filing claims for jobless benefits dropped last week, and the number of people remaining on the rolls also fell, evidence that layoffs have eased.
Still, both figures remain above levels associated with a healthy economy, and analysts expect the unemployment rate to keep rising.

A healthy economy does not have new claims at almost all time highs? Say it's not so!

Pushback from Behind the Curtain
As stated here, there is no way the FED will provide data on which banks were involved in loans, nor provide details on what sort of collateral was taken in. While I applaud the judgement made earlier in the week concerning the Bloomberg News case, you knew a push back was on the way. Zero Hedge has a nice summary, which can be read here.

The line from the appeal that struck me as strange was this:

Our members have accessed the New York Fed's Discount Window with the understanding that the Fed will not publicly disclose information about their borrowing, especially their identity. Industry experience, including very recent and searing experience, has shown that negative rumors about a bank's financial condition - even completely unfounded rumors - have caused competitive harm, including bank runs and failures.

I am confused. If the FED discloses that say Bank X took 5 Billion in loans, and exchanged 5 Billion in Pets.com expired options, than can there be "rumors" about the deal? Would it not be a known quantity? This argument is disingenuous. I will hope the appeal is summarily dismissed and then a presidential executive order denying the request (won fair and square in a court of law) for disclosure. I love democracy, USA style!

Must Read
Mr. Practical, who submits material to Minyanville, is simply the best at explaining complex market forces (derivatives, credit flow, dollar issues, etc) in a way that even I can understand. His posts are infrequent, so when one does come along you should take it in.

Today's lengthy article is a must read, and so I will only offer one snippet to get you hungry for more:

On Capitalism:

If we have too many condos in Florida those with capital say I don’t want to lend money to build more condos because there is too high a risk that they won’t sell and I won’t get my money back. So they raise the price of money; they raise the interest rate they charge to compensate for too much risk.

This is how an economy naturally controls itself. It’s called capitalism: the allocation of capital based on risk and return.

I think you can see how this will be a hard article for a Keynesian clown to stomach. I love it!

Two Excellent Questions
Today one of my favorite authors (and a major inspiration to start my own blog) Tim Iacono of The Mess That Greenspan Made asked a simple question:
What Can Stop This Stock Market Rally?

Tim offers a myriad of well thought out and well supported triggers for a market correction and I think all are both valid and probable.

My own answer to the question is this:
The current market lift is attributed in all aspects to the belief that government support is all of the following:
-open ended
-without intervention by outside forces (think foreign creditors)
-protective of less than savory practices (HF trading, delay of foreclosure action, mark to myth accounting, etc...)
-Recurring stimulus (Cash for whatever, housing subsidy, more to come)
-Safe from revolt from populace

Unless and until one of the above is proven either false or just in doubt, this party will not end.

The second question comes from Ilargi, author of the excellent blog The Automatic Earth (named by Michael Panzer as one of his top 10 best blogs, well deserved, and yes I am jealous!) who has a question truly twisted in both logic and reason:
Is it possible to grow your economy at a 4% rate when 10% of your population in unemployed?

My own answer to the question is this:
First off, if you want to lose an hour or two of your life, spend it trying to figure out just what the heck GDP, as defined, actually is.

After that, if you limit the discussion to the basic formula of:
GDP = private consumption + gross investment + government spending + (exports − imports), or,
GDP = C + I + G + (X − M),
then I would say it is not only possible, but very doable!

Any component where government spending adds to the bottom line is by definition fungible. Not only that, but masses of unemployed generate no inflation (unless they have guns, then they generate massive inflation due to military spending) so they are actually quite a boost.

I understand Ilargi wants a more substantial answer, but that answer is obvious. No doubt with unemployment over 9%, GDP growth is a facade, but please see question one for marching orders.

I leave you, the reader, with these ideas to roll around. I would ask you to both offer your take on these answers, and to make requests for Friday night entertainment.

Have a good night.

Repudiation of US Financial Engineering

I have to be honest with all the readers, I am having a hard time finding much to write about since returning from vacation. Maybe it was the week off from all the news, or maybe I am just having a hard time getting back into a groove. A short piece tonight, and I will be borrowing heavily from the spectacular work of others to highlight a key point.

Housing Bottom?
The economic landscape was awash in warm feelings after seeing home sales numbers and prices that are trending up. While seasonality has something to do with this (the year over year numbers are still abysmal) many are seeing the vaunted "bottom" in housing. So is this the bottom? Well, I cannot answer.

How is that for evasive!

My opinion simply cannot be final until I get a clear reading on just how many homes are out there right now, today, with a full technical default but no action by the bank holding the mortgage. I have seen reams of ink detailing how banks are dragging their feet to move on a foreclosure even thought the home "owner" is seriously delinquent. The average rent free span a foreclosure "victim" can expect to get? One YEAR seems to be about right. This is insane and it colors the entire universe of housing related statistics. Until this question can be resolved, I will refrain from entering judgement. One may wonder why so many much smarter than I have paid no notice to this phenomena. It would be a great question to ask Ben Bernanke at confirmation hearings if he condones this kind of activity.

Repudiation of US Financial Engineering
I always check in over at the site Housing Doom on Friday's for the weekly charts of foreign central bank holdings of US debt. Over time I have been watching a particular trend that smelled bad to me, and today both Zero Hedge and Jesse's Cafe Americain jump me on the story. I would add this is a good thing as they offer finer analysis than I could have.

First off, the relevant chart (via Housing Doom August 21, 2009):

Please note that foreign appetite for treasuries was strong, but then the better returns of agency debt during the ramp up of the housing bubble (agencies; think FNM, FRE) caused a cross over in demand right at the bubble froth peak of mania in August 2005. Chasing the bubble as it trended down, many had seen enough and a huge dump of agencies ensued in August 2008. It seems banks do their business directional plays in August, who knew?

Zero Hedge cover yet another bond market story by Chris Martenson which tries to delve further into the morass of what is getting swapped for what and how. The entire piece is a must read, as the details are many and all are important.

Tyler offers this summation:

As more and more people dig behind the Fed lustrous facade, increasingly more troubling discoveries are made. On one hand you see POMO auctions that repurchase recently auctioned off securities; on the other - potential capital rotation via custodial accounts of which there is no mention in mainstream media venues. If this analysis is in fact correct, the Fed is monetizing not only the Treasuries it purchases via POMO, but effectively also the indirect bidders' treasury interest, which is represented by their rolling out of agencies purchased by the Fed, and the newly raised cash used for UST purchases. Has the Fed essentially monopolized the entire Treasury Auction process?

This is a key question that demands attention.

Jesse covers a potentially ugly reality as it relates to foreign investment in the US today as well, namely there is not much:

"...The sad truth is that US collateralized debt packages and their derivatives have become toxic in the minds of the rest of the world, and there is little being done to change that, except an orderly winding down of the bubble, with the remaining assets being divided largely by insiders, and not price discovery and capital allocation mechanisms centered by the 'invisible hand of the markets.'"

A chart from the site showing "Foreign Assets in the US - Net Capital Inflow":


I would urge all readers to spend some time on the 3 articles shown tonight, as I think they are key to understanding where we are going.

My own personal thinking on this entire picture is thus:
Foreign buyers of US debt no longer want anything to do with exotic instruments, many of which were sold under less than honest marketing. This is a repudiation of US financial engineering products.

It is not clear to me as of writing if foreign holders are a) swapping agencies for treasuries, b) selling agencies to the FED for treasuries in return, c) some combination of the two or other. What is clear to me is that this makes no sense. Spooked by agencies because they were not tied to assets that reflected any real value, treasuries are accepted instead? I would ask how US treasuries will be paid off if the US gets stuck holding the mortgage paper that is worthless, as this may dent a balance sheet!

For now a rotation into treasuries may make many feel better. The end game is that the US will have to stomach losses, unless we can hold off until things improve (and you wondered where the banks got the "pretend and extend" plan of action). In any event, the US monetization of debt across the board continues, and now I see a way where the quantitative easing can be "ended" in October, yet continue on in other forms.

The final piece that is missing here is why foreign banks would take treasuries in place of agencies when the US dollar MUST suffer as a result of balance sheet destruction. This would only make sense if you could use treasuries to buy other asset classes (other currencies, gold, oil, etc) before anything goes wrong, or you think the US dollar will not get killed as bad.

Plenty to think about here, and I look forward to watching this particular topic. Closely.

Have a good night.

Tuesday Notes

I am home a bit late and i have a ton of errands to do, so just a few notes for the evening.

Bernanke Reappointed
The gushing praise for Bernanke "saving the world" was out in force. Even Calculated Risk praised Ben's response to the crisis, once he figured out things were really bad. I for one cannot see how bailing out everything under the sun can be seen as genius, anyone can do that.

Throwing a bit of cold water on the Bernanke news, a New York district judge rules in favor of Bloomberg news and states the FED must disclose terms and names of institutions that received support in the early panic of the credit crisis. A few thoughts:
-No way this happens in 5 days, so stop dreaming
-I am more interested in what the FED took as collateral for loans more than names of recipients (we know everyone was in on this); the collateral question could be a debt sale killer if it is known the FED has reams of bad mortgage paper (not triple A!) on the books. Still, I am of the mind we never get this information.

Fannie, Freddie Shares Soar, Puzzling Analysts
It seems day traders and momentum riders are playing craps with these stocks. Why are they even listed again? Good job Bernanke!

I am no expert in oil, but I do share the opinion that oil supplies have a limit and that extraction eventually will become too hard. Clusterstock had a dueling run at "Peak Oil" today prompted by a New York Times article;
View 1:
Peak Oil Is Totally Bogus
View 2:
Here's Why Peak Oil Is NOT Bogus
Food for thought.

For the first time since 1987, Central Banks are net BUYERS of gold. If you have followed by gold ramblings over time you understand that even small demand changes can really have an effect gold price dynamics.

Have a good night.

Artificial Demand as Designed by the Government

Any Monday after a vacation hurts, but today was rough! Back to the regular routine after doing practically nothing for a week reminds one just how much energy it takes to work day in and day out.

Artificial Demand as Designed by the Government
I will concentrate on a singular idea this evening as several strands of thought seem to snake back to the same source.

Cash for Blank Coming Soon
In the comments section from the last post, loyal reader Watchtower observes that my prior post that forcasted a "Cash for BLANK" program to be unveiled:

I believe you called this one with your "cash for 'blank'" analysis : )

"Latest in Stimulus: 'Cash for Refrigerators'
Beginning late this fall, the program authorizes rebates of $50 to $200 for purchases of high-efficiency household appliances."

I'm waiting for the 'cash for canned goods' program, or maybe the 'cash for toilet paper' program, or how about 'cash for cash's sake' program?
Who would have ever thought that you could actually borrow yourself rich by buying disposable products, genius, pure genius.

I maintain my expectation that by November we will see an entire arsenal of "Cash for BLANK" plans put into practice.

Cash for Clunkers Ends a Huge Success
At midnight Monday August 24, 2009 the Cash for Clunkers program ends. The program, which allowed up to $4500 to be credited towards a purchase of a new car (with many caveats), is by all accounts a great success. This program has really bothered me from the beginning, and I would expect another run of it as car sales collapse once again.

I can think of two things that bear watching regarding the results of this program:
-As I had written before, I think banks that jumped to make these new car loans were doing so under the idea that because the government was behind the program, and will not want to look bad should things go south, the loans themselves are perhaps "protected". What I mean is should a high percentage of these car loans default, the banks can always say "Hey, YOU wanted us to make these loans! YOU now will have to cover them". A "Cash for Repossession" program does not sound very good.
-There is going to be fraud. There has to be. As the paperwork finally gets processed and checked, I would be shocked if over 15% of these sales were not fraudulent or gamed. Considering the good press the program has had, and the expansion of others like it, we may never really get the hard details reported.

Congratulations to all the new car buyers that made this deal. Just think, that $4500 will almost cover the instant depreciation of your new car the second you drive off the lot. Quite a deal indeed.

Frenzied Market for Cheap Houses
The home sales numbers released last week were widely celebrated as a sure sign of a turnaround in housing. Digging into the number revealed some very suspect details, but that would have taken effort to figure out. Barry Ritholtz of The Big Picture does all the work for the mainstream media in this post, and I would encourage you to check it out. Barry vibes:

In the past, I have gone so far as to imply the Realtors group are spinmeisters. This month, I will be more blunt: Their actual data has become untrustworthy, their spokesmen lie for a living, and their “news releases” is little more than misleading junk.

Investors who rely on the NAR version of the news do so at their own great financial peril.

Ouch!

I came across this Bubble Meter post that has some comments by Diana Olick of CNBC, and this table by the NAR:

As I am from Eastern Massachusetts, I have never seen a home priced under $200,000 since I started looking at homes. Under $100,000? You cannot even get a shed around here for $100k!

Still, the 38% increase in sales at the low end is pretty impressive. Is this a good sign? Is this a real turnaround? Sadly, the answer is no. It seems the government once again is in the artificial demand game once again.

The First Time Home Buyer Tax Credit is a program that allows up to $8000 to be used as a down payment towards a home purchase. Calculated Risk has some observations on the program, but one in particular jumped out at me:

Anecdote: I've spoken with two younger guys (30 ish) who told me they had no down payment, but edit: were looking to buy a house NOW. They are using the tax credit and FHA to buy. I think that conversation is happening in many places.

Now you already know that Economic Disconnect is a free market type. You know I would rather eat glass than tell people what to do with their lives. You are aware that I would prefer everyone make their bed, then have to lie in it. Of course the government sees things different, and they would try and support poor choices using tax dollars. For once, I am going to actually offer some advice and try and tell people what to do.

If you are looking to buy your first home (or your first buy in 3 years, as per the program details) and you cannot save up even $8000 for a downpayment (on a regular home of say $250,000, $8000 is only about a 3% down payment) then allow this to sink in:

Stay out of the housing market. You have no discipline. You have no ability to budget. You do not make enough money, or you spend too much. That $8000 up front you think is so great now attaches you to a huge mortgage that you will have trouble paying, as you cannot even save up $8000 to begin with. There are huge costs associated with owning a home (taxes, upkeep, major repairs) that you will not be able to afford. If $8000 is enough for you to put your credit at risk (should you default on the loan) than you are a gambler that will hurt the markets over the long term. If you think that a 3% discount on a purchase that would cost you 10-20% less before this is all done is a good deal may I suggest you stick to scratch tickets as your investment vehicle. Normally I could care less what you do with your finances, but as Fannie/Freddie/FHA are making all these loans I am going to have to pay for this at some point.

End rant.

Demand rises and falls. It has done so since time began across every asset type ever known. When the only people that want to buy a home are the sort that jump at a 3% tax credit discount thinking they are getting a "Sweet Deal" (thanks Casey Serin, I will never forget you!) there is a problem. Keynesian thinkers try to argue to support demand in and of itself, as if it exists in a vacuum, as if there are not real factors behind demand changes. Sadly, the US government over the past two years has enacted policy in support of such cloistered thinking.

Calculated Risk thinks the Tax Credit program will be extended (it expires in November) and I agree fully. I would expect this to become a permanent fixture of policy, and it will be expanded to include all buyers of homes. The Clunker Cash will morph into any new car purchase cash. TV's, refrigerators, computers, furniture, you name it, will soon have a demand enhancing program behind it.

Of course all of this has a cost. While we can argue whether the US can indeed spend money to support artificial demand across all these consumer areas, I think a key point is being missed.

The US dollar, and hence belief that the US to repay its debt is built on pure fantasy. While this has been accepted for a long time, the US has up to now behaved as if they at least understand they need to keep up the appearance of fiscal discipline. When the worlds biggest economy resorts to hand outs to stimulate demand from their "villagers" then the storyline begins to get laughable. While foreign creditors like to play pretend, they tend to not like being made a fool of.

Have a good night.

Sunday Check In

I have returned from a week at the beach. I think I am sunned out for the rest of the season. Could not have had a better weather week; hot and humid inland but very comfortable at the coast.

I am still trying to get caught up with things. I did not read a paper nor watch any television except for the preseason Patriots game on Thursday.

It is always good to come back home after a vacation. Take care everyone and I should resume posting tomorrow.

Have a good night.

Friday Night Send Off

It is now Friday and I will be off on vacation around noon tomorrow. Next weeks weather is looking perfect, which just two weeks ago seemed like too much to hope for.

Friday Night Entertainment
I saw some good items today, but to be honest I have one foot out the vacation door and feel unable to write any thought provoking blurbs. Instead I will do an extended entertainment section. If you hate this section, just tune back in on August 24th for the regular write ups. I stand by the blogroll to the left as the best collection of content on the web, so there is always plenty to read.

FED Chairman Game
Saw this game over at Clusterstock and it is an amusing time waster! The FED Chairman Game allows you to set interest rates for 4 years and monitor unemployment and inflation based on your inputs. Of course this game is just silly, I played anyway!

I pegged the FED funds rate at 10% and kept it there for 8 quarters (2 years). My result? Unemployment after 2 years of 10% and inflation clocking in a -3.0%! I caused deflation! Funny that we are in reality at ZIRP and we have 10% unemployment and deflation anyways. Go figure.

Play the game here.

Film Clips
Last post I referenced the classic film "They Live". Below is the relevant clip when the hero puts the magic sunglasses on for the first time and what he sees (skip to 1:30 mark):

Love what the cash has printed on it!

While not a film, my favorite cinema over the past couple of years was HBO's series "Rome". The progression of Octavian to Emperor Augustus was amazing, and there were many plot lines which were a nice take on history. Of course the action was great, and in this scene (warning very violent) we see one of the lead characters have to face his death in the arena. Great acting, great action, great music, what else is there?:


I was very upset when I read that a remake of the classic film "Red Dawn" is in the works. I have no idea how you can redo such an iconic (to my generation anyway) film, nor how to change the story line to fit today's landscape. Rumor is Russia uses China to invade the US, but China could just buy the US, so why fight for it? (Kidding)

Anyways, the most chilling scene in Red Dawn is when the colonel tells the tale of what happened to America. The line that scared me when I was younger:
"Last I heard there were a Billion screaming China men?"
"There were"
Enjoy, but skip ahead to the 5:15 mark for the big scene:


Rock Blogging
So you want to make some noise? You want to feel the bass vibrate your sternum? Ok, no problem.

I will lead off the night with a song that features a bass line that is thunderous, vocals that will blow you away, and a rhythm section that fills in nicely. On a second note, for all the guys and gals, some advice:
Buy some flowers (men) or beer (women), dim the lights, be nice for a day, load this song, and then see the results. 60% of the time, it works every time! Enjoy Garbage with "#1 Crush":

You can thank me after I get back from vacation.

I love the film "Walk the Line" and I still cannot believe Joaquin Phoenix and Reese Witherspoon sang their own lyrics for the film. Please enjoy a personal favorite, with "It Ain't Me Babe":


Now I had played the above tune before, over a year ago, and while I was looking for it, I saw the following song, which I really love as well. I played it the same night! As there were no comments on that post that night I will offer Sha Na Na and "Those Magic Changes" once again for your review:


Up front, I hate metal that features screaming. I hate metal that vibes nasty. That said, I can tolerate such things for a start to a song that features the guitar method known as "rolling chords" that is just plain wild. Listen, maybe, just to the first 30 seconds of Pantera with "Mouth for a War":


1 more or 2 more? Ok, 2 more!

Any song that starts off with the lyrics "Silver Coins..." is bound to get my attention. Add to that, it is Don Williams, and you get "Gypsy Woman":

Nice!

Sadly, it is time to close the show. I think you, the readers, may not realize just how much fun I have on Friday night adding this kind of content. I would hope there is something here for everyone to enjoy.

So what to close with? Very little in the requests.

“Hey, do you like ‘Flock of Seagulls?’
“I can see you do!”
-the film “The Wedding Singer”

This song by the Gulls is hacked on as an 80’s music relic, but I love relic’s!! Enjoy “I Ran”:


Have a good night, and a good week.

Consumption Must be Maintained

With the first preseason game for the Patriots on at 7:30, and probably the first look at Tom Brady, I will have a few quick items for tonight. The author of The Housing Time Bomb left a comment that perhaps we may be enemies because I am a Patriots fan, and he is a Pittsburgh Steelers lover. To this I can only ask, why? The Steelers are a beloved good luck charm here in New England. In 2001 the Patriots shocked the Steelers, in Pittsburgh, at Heinz field on their way to the Superbowl win. In 2004's AFC title game the Steelers where soundly trounced, in Pittsburgh, at Heinz Field again as the Pats moved to repeat as champs. So in my opinion, I think the Steelers rock and I hope to see them in this years playoffs. We can still be friends!

I am expecting to do the usual Friday night fun stuff, so leave requests. Tomorrow will be the last post for a while so enjoy while you can.

Why Would the Government Take Your Gold?
The always entertaining "Mogambo Guru" penned a hilarious missive that answers the often asked question "Will the government take private gold away?". Key excerpt:

Why the Government Does Not Need Your Gold
...Perhaps it is all this talk of confiscation of gold that has Doug Hornig of Casey Research’s Gold & Resource Report commenting that when FDR made private ownership of gold illegal in 1933, the dollar was on the gold standard and thus 100% backed by gold.

The difference between then and now is that “we have long since abandoned the gold standard, and Obama doesn’t face FDR’s constraints on monetary inflation” which is (insert sound of trumpet fanfare) the winner of the coveted Mogambo Award For The Understatement Of The Week (MAFTUOTW).
It wins for two reasons, the first being that is so terrifyingly true! There are no constraints on the government getting the Federal Reserve to create as many dollars as it, or anyone, needs or wants, and thus it is beyond ludicrous to even compare the 1933 gold-backed dollar against the pathetic piece of almost-worthless fiat money that the dollar has become, to which Mr. Hornig alludes when he says that Obama has it easy, as “However much money is needed to finance his New Deal Redux, he can have it. All he has to do is rev up the printing press or turn an unlimited number of bits and bytes into electronic cash.”

And he is, alas, absolutely right. Unlimited amounts of money can be created just by asking for it. In fact, no one has ever disputed that fact, as it is the whole reason behind having a fiat currency! Hahaha!

In relation to the prospects for a confiscation of gold, he asks, “Given this kind of clout, what does he need gold for?” which is exactly right! If you can print money to spend, why do you need gold to sell to get money to spend Hahaha.

Makes you laugh until you cry.

Consumption Must be Maintained
Mish had an article up today that called attention to some comments made by Toll Brothers CEO Bob Toll during an outlook conference call. I read it early in the morning and it stuck with me all day.

Luckily Seeking Alpha provides written transcripts of such calls, so tracking down the information was no problem.

Here is the section on page 7 (near the bottom):

Steve Sullivan - Banyan Securities asks:
Bob, could you give us your thoughts about any form of government rebates going forward given the federal levels rebate is set to expire in the fall?

Robert Toll:
I sure can. My thought is that the government, which means we, are foolish for not following the example and lesson of cash for clunkers that's been made evident to us. You can feel, sense and smell that the market wants to turn in housing. If you took that 8,000 make it 15,000, did it just four months, and did it for new home construction, you'd put twice as many people to work, twice as fast as what's being done with the auto industry...

...This isn't China. They decide to build a highway, two weeks later they're going to work. You decide to build a highway here, two years later, you're still talking to the audience about the repercussions of that highway on the neighborhood. It's just a shame we don't jump on this...

...I don't know how many dining room sets and sets of curtains and garden tools are bought every time we build a tunnel, but I'll be they're very few. So the collateral impact on the economy from building homes is known to be tremendous and therefore I think the government, which again is we, ought to jump on it.
So send those cards and letters in folks to your local reps and to your senators. Maybe we could get it cooking.
With respect to the rebate expiring, I don't think it will for all of the reasons above."

This guy is serious about this.

On August 3rd I wrote exactly about "Cash for Blank" programs and estimated a $25,000 housing component, so $15,000 is a steal!

This put me in mind of a great science fiction film.

In John Carpenter's "They Live" the hero (Roddy Piper) stumbles upon sunglasses, which once put on, reveal that aliens have taken over the Earth and use hi tech signals to mask their appearance. the aliens also use hidden messages on magazines, newspapers, TV, and billboards to influence behavior. Here is a shot of one scene:

Please notice the huge "BUY" sign and the "CONSUME" sign is partially hidden.

Bob Toll thinks handing out cash, which he even knows comes from our own pockets, to encourage buying a home so you can fill it with curtains and such is a grand idea. I would ask Mr. Toll to start us all of with the handout by donating 10% of his net worth towards the cash for homes programs he would dearly love to see out in place. You will make it back and more on the back end Bob, no worries!

At a time when housing prices are still in freefall, inventory of homes is huge (with plenty of "shadow" inventory to boot), and mortgage losses have yet to reveal their final number, the pushing of housing sales is at best poor judgement, and at worst criminally insane.

Consumption must be maintained at all costs. No matter the costs.

Have a good night.

Why Should any Loss be Recognized?

As I had mentioned in the comments before I will be on vacation all next week at the beach. When I go on vacation I take nothing that can connect me with "the world", no cell phone, no computer, and I will tend not to read newspapers though I may this time due to the NFL season being so close at hand.

FOMC Roller Coaster Wednesday
Today was the FOMC announcement on policy. I was both surprised at their statement and then I was surprised by reaction across almost all markets. I will not recount the exact statement, by now you have seen a copy.

To start, I will have to say that I was wrong on this one. I fully expected the FED to change their quantitative easing (QE) stance to expand the program both by amount of money and time until end. Instead the FED just squeezed the time frame out a month and did not add to the 300 Billion already communicated. I was wrong about this, and I fully admit it. I am going to try and give the FED some credit here and say that perhaps ramping down this one support program may be for real. I hope this is correct.

As far as the reaction to the news, well, it was all over the place. Heading into the 2:15 headline the dollar was lower, gold and silver were higher, and the indices were breaking out and up ( much unlike the Asian markets overnight). All of this action pointed towards a "QE surprise" expansion.

After the new policy stance was out, things went about as you would expect:
-equities dropped
-gold and silver dropped
-the dollar spiked higher

But then all that turned around in about 20 minutes and equities surged, metals regrouped and the dollar gave back the upside move it had just made. An example of the whipsaw (today's dollar chart):

With this kind of noise I do not want to draw any big picture ideas right at this moment. You could argue that the market thinks the FED was only kidding about ending QE (where do they get those ideas?) or that the FED statement added to confidence about the economic "recovery". I will want to see how this all shakes out a bit longer to make a final call. In any case, everything and anything was all over the place today.

For more FED related writing, I would point you towards a piece today by The Mess That Greenspan Made author Tim Iacono. Since relocating Tim has been writing better than ever (and that is saying something) and today he brings attention to a never mentioned problem with ultra low interest rates; namely the punishment of savers. No excerpt, it is a must read:
The Federal Reserve is Immoral

Why Should any Loss be Recognized?
Current US economic policy regarding bad asset prices has been termed such colorful names as "pretend and extend", "delay and don't pay", "running out the clock", and "mark to model". Ok, that last one is an actual banking term! All are descriptive of a concept where prices of today are deemed either incorrect or temporary, not reflective of fundamentals or true market forces. As this is the unifying force (Star Wars really obscure reference) behind policy it may be a good time to take a look at both a real world application, and then a hypothetical one. All names will be changed to protect the innocent.

Real World Application
Country XYZ had a burst bubble in their stock market. Their central bank, the FAD, over-reacted and lowered rates to all time lows and left them there for a long time. A cheap credit fueled binge on real estate ensued. This may all sound familiar, so I will skip ahead.

Faced with collapsing real estate values which were made worse due to all kinds of creative tricks to expand mortgage lending, the banks of XYZ are in real trouble. Many have failed and any left are in bad shape. (Did I mention that country XYZ has a fractional reserve lending system and thus even minor losses can cause total wipeout? No? Well, I just did.)

The Central Bank, FAD, sees a scenario where tanks will be on the streets if the banking sector implodes, so they embark on a novel strategy to survive the crisis: They take potential losses onto their books (taxpayer funded books) in an attempt to wait until "correct values" return to the markets and then the FAD can sell off their holdings and be made whole once again.

The idea that things will rebound is so persuasive that all kinds of leveraged instruments are included in this mix, and the FAD exchanges cash (treasuries) for anything rated "AAA" by some agencies paid by the banks.

Benefits to this program:
-Banks do not have to suffer liquidity (not solvency?) problems as they have the cash equivalent of their bad assets at full or almost full value
-The FAD can create as much money as needed to backstop the difference in now vs. future values
-Everything can continue as before with no hiccups

Immediate problems with this program:
-Banks are not punished, they are in fact encouraged, to make the same kinds of credit extension as before (some banks are even blamed for sitting on excess reserves, the nerve!!)
-The program discourages any progress towards remediation of the underlying issues

Potential problems with the program:
-Bad asset values either never reach "real value" or will not reach that valuation for many years, thus exposing the FAD to shortfalls
-As county XYZ is totally dependent on foreign investment, creditors may balk at such an abuse of money
-At some point the numbers get so large (a trillion used to be a big number) the math breaks down as it relates to tax receipts and budget issues

Assume for a moment that the FAD sees their work, and now they get inspiration to expand the program to cover all kinds of losses that are rooted in "temporary market dislocations". At this point no one has called their game, and so they decide to press on.

Hypothetical Application
Trading house Gilded Socks (GDSK) has losses stemming from stock market losses related to many holdings, not the least of which is the ticker GUUG. GDSK sees these losses as a function of a silly market, and does not want to post a loss if they sell (it's never a loss until you sell!) but they would like to dump the stock to raise cash to buy into another government program to rebuy their own bad assets using only 10% of their own money. I mean, who would not?

The FAD, seeing the dilemma, checks with the XYZ's Treasury department, and they give the thumbs up to a new program.

The FAD will accept all stocks at the holders buy price, regardless of current market price, and supply the cash equivalent. Now banks like GDSK have even more "excess reserves" with which they can play fun types of games with.

The FAD makes it clear that small investors need not apply as they are not a systemic risk, plus GDSK needs to unload other securities on them through their brokerage accounts, 401k's, and pension plans. It is a rough world.

The FAD figures at some point in the future (when exactly?) they will be able to recoup their losses when the true market price of GUUG comes back. On an alternate timeline (if you buy Everett-Wheeler theory) stocks such as Pets.com and Bear Stearns never came back, but the FAD is not a physics club.

In this way, here and now, I would propose that losses at any level never really have to be recognized. As long as you have willing creditors (we do) and you have the reserve currency (we do), and a compliant government (do we ever) than all losses can be postponed, delayed, and ignored until they disappear. As long as real estate tracks inflation (it has in the long run, returning on average over time 0-2% yearly) at some point yesterdays prices become tomorrows. Stocks will do the same (unless they go totally bust) and thus any loss can be ignored until the even mark.

Of course this all implies these assets reach a dollar denominated "value" which would make the central bank whole. If this recovery happens in 5 years or less, this show just may work. Anything more and it is a crap shoot.

I could mention that stocks are around where they were 10 years ago. I could throw out that home prices after the late 1980's-early 90's bust took about a decade to reach even. I could do that.

I recognize this is a gross simplification that does not take into many aspects I am aware of, and many I am sure I am not. This is a thought exercise, so treat it as such. If we can hide losses in the banking system the way we are, why not hide all losses ever on any level? Identify what would be the limits and what would be the breaking points. The comments section should be the sounding board, and you never know if a prize will be awarded.

Have a good night.

Tuesday Notes

I am home a bit late and a threatening lightning and thunder storm has already made the computer flicker a few times so no post this evening. Big bond auction tomorrow and of course the FOMC will explain if and when they will be winding down quantitative easing purchases. Use the comments to leave the evenings best articles and I will get caught up tomorrow.

Have a good night.

Don't Break Your Arm Patting Yourself on the Back

Hot and humid here, almost 90 degrees. I love the heat, so no complaints from me! The heat forces you to put on the car air conditioner, or risk sticking to the seats. I hate running the air conditioner because it makes the car much less responsive due to the power drain to run the A/C compressor. Oh well.

Gold and Silver Observations
I know you all have been waiting for yet another precious metal themed section, so here one comes!

China Pushing Silver Investment?
Economic Disconnect is a big fan of silver. Silver has on its resume the following (all data is from Wikipedia, so you know it is true):

- highest electrical conductivity of all metals
- Among metals, pure silver has the highest thermal conductivity
- the highest optical reflectivity
- Silver also has the lowest contact resistance of any metal

Now those are some fine qualities!

Silver was once the money standard, and even China was set on a "silver standard" for some time. Seems things run full circle as this video from the blog The Prudent Investor shows. Key point summary:
-Official Chinese television announced silver bullion now open for public investment
-500 gram, 1, 2 and 5 kilo bars are offered
-Chinese news aware of the gold/silver ration, making them about 100 times smarter than CNBC

So is this a big deal? I would say it could be, how is that for finality?

I think back to Treasury head Geithners talk a while back in China when he said their US treasury holdings were "safe" and the laughter it garnered. If given a chance to put their own money to work, Chinese nationals may indeed look to silver as an investment. This is even more plausible when you consider how much China, as a country, has money tied up in US debt.

A step back may provide some clarity. Assume just 30% of the average retail investors decided tomorrow that gold and/or silver should make up just 1% of their portfolios, this would consume nearly all the gold and silver available and cause a huge price run up. Precious metal investing is a small time operation related to public investment, so any expansion can make a big difference. Hopefully there will be some way to monitor how this program fares.

Gold is Not Readily Fungible
The next tale come form Jesse's Cafe, and it is a good find.

While checking out a video presentation by Max Keiser, a startling revelation about German gold reserves comes up. The entire video is worth a look, especially the section where Keiser is at the German Bundesbank on the day Bear Stearns collapsed. You can clearly see the fear and panic from the bank officials he does talk with:

Jesse offers the following commentary which as usual hits the bulls eye:

"The most fascinating thing that I learned is that all the gold 'in Germany' is in New York." Around 7:25 in the tape.

This is of particular interest because it has been repeatedly denied by Bundesbank in the past, when questioned about the rumoured gold swaps the the US Exchange Stabilization Fund for 1,700 tons of gold, now being held at West Point, NY with the designation "custodial gold."

Has the Bundesbank, like the Bank of England, sold (or lent if you will) half of its national gold reserves? Interesting.

The other side of this rumour is that Bundesbank desperately wishes a 400 ton IMF gold sale to help it recover the 1,700 tonnes of gold which it has lent out to the bullion banks, who subsequently sold it into the market.

Why does it matter? It matters because of the lack of transparency of various Central Banks with the size and timing of their gold sales, and its impact on the markets. Its never really the initial act, it is the subsequent cover up and dissembling that brings down careers and governments.

As I had written above, gold is not held by a large base. Central banks are the main movers of bullion (though the gold ETF is making moves up the ladder all the time). One may wonder why in the world, if fiat money is so perfect and amazing, that the central banks do not just dump all their gold. I think that question leads to a few answers and truths one would do well to keep in mind (I will not answer for you).

Gold expands as a base around 0-2% per year. The outstanding derivative notional bets on gold far outweigh what exists above ground. The central banks have long played with gold sales to target gold prices (why bother, gold is useless remember?) and the possibility that the German gold may be "on the lend" even while the metal itself sits in New York is one of those real world examples of how notional instruments get far ahead of reality. Of course you can always print more money, issue more bonds, or write more stock to cover such things. You cannot invent or print gold.

Don't Break Your Arm Patting Yourself on the Back
I think the current euphoria rankles me as it does because of the reliance on "confidence" measures to effect behavior. When an entire marketplace is built on perception and illusion it can be easier than one would believe to "make it so just by saying so".

In a NY Times op-ed today, my favorite Keynesian economist, Paul Krugman, begins a victory lap for big government spending which seems a bit premature (excerpts):

Averting the Worst
So it seems that we aren’t going to have a second Great Depression after all. What saved us? The answer, basically, is Big Government.

Just to be clear: the economic situation remains terrible, indeed worse than almost anyone thought possible not long ago. The nation has lost 6.7 million jobs since the recession began. Once you take into account the need to find employment for a growing working-age population, we’re probably around nine million jobs short of where we should be...

A few months ago the possibility of falling into the abyss seemed all too real. The financial panic of late 2008 was as severe, in some ways, as the banking panic of the early 1930s, and for a while key economic indicators — world trade, world industrial production, even stock prices — were falling as fast as or faster than they did in 1929-30.

But in the 1930s the trend lines just kept heading down. This time, the plunge appears to be ending after just one terrible year.

So what saved us from a full replay of the Great Depression? The answer, almost surely, lies in the very different role played by government...

The point is that this time, unlike in the 1930s, the government didn’t take a hands-off attitude while much of the banking system collapsed. And that’s another reason we’re not living through Great Depression II.

Last and probably least, but by no means trivial, have been the deliberate efforts of the government to pump up the economy. From the beginning, I argued that the American Recovery and Reinvestment Act, a k a the Obama stimulus plan, was too small. Nonetheless, reasonable estimates suggest that around a million more Americans are working now than would have been employed without that plan — a number that will grow over time — and that the stimulus has played a significant role in pulling the economy out of its free fall.

All in all, then, the government has played a crucial stabilizing role in this economic crisis. Ronald Reagan was wrong: sometimes the private sector is the problem, and government is the solution.

And aren’t you glad that right now the government is being run by people who don’t hate government?...

I’m still very worried about the economy. There’s still, I fear, a substantial chance that unemployment will remain high for a very long time. But we appear to have averted the worst: utter catastrophe no longer seems likely.

And Big Government, run by people who understand its virtues, is the reason why.

The thing to remember about Paul Krugman is that he is a political hack first, and an economist second. The cheerleading for big government in all of his writings colors his view.

The second thing to remember is that Mr. Krugman never asks nor answers any questions that have relevance. After considering the events of the 1930's Depression and how it compares to today's calamity does Krugman ask:
-Why the "hands off" approach during the Great Depression? In this I think there is a monster hole in Depression thinking. The US Federal Reserve could not just print money (we were on the gold standard) like they do today. Also, and this is key, public opinion was such at the time that making believe by having fake spending would not have worked as nobody would have bought it! I know, in the old days folks were a mistrusting sort and had more than a modicum of understanding.
-If the big government solution has been so effective, why does Krugman desire yet another stimulus? What's the matter Paul, maybe not so sure about this recovery?

The always great blog, Owner Earnings, does not post as regularly as they once did. When a new post is up, however, you would be well advised to check it out. From the most recent post the author compiles a list of "things that the government has done to prevent (delay) a depression" that is a must read review:

A list of things that the government has done to prevent (delay) a depression:
Banned short selling.

Eliminated mark to market.

Allowed Vikram Pandit to send a memo saying (lying?) that things were going well back in March. The rally started shortly after.

Reduced interest rates to 0%.

Extended unemployment benefits.

Running a $1 trillion budget deficit.

Reduced finance rates for banks via the Discount Window.

Bailed out Fannie Mae

Bailed out Feddie Mac

Bailed out AIG

Bailed out GM, though temporarily

Bailed out Chrysler, though temporarily

FDIC has spent billions closing down insolvent banks

Credit of $8,000 first time home buyers credit.

Credit of $4,500 via Cash for clunkers.

Credit of $600 via a rebate check.

Guaranteed $250,000 bank account balances via FDIC, up from $100,000

Guaranteed financial bonds

Guaranteed money market accounts

Guaranteed Bear Stearns assets

Bought preferred stock in financial companies

Bought agency bonds

Bought Treasuries

Expanding to the next logical step:

A list of things that the government has yet to do, but probably will do:
Bail out State governments (Bond guarantee?)

Bail out Local governments (Bond guarantee?)

Guarantee health care (which I would approve of)

Raise taxes (The republicans will try to force democrats to admit it before the 2010 election. The democrats will have to admit it once the 2010 election is over.)

Significant devaluation of the dollar. This is already playing out compared to the emerging markets, but will begin to play out more against the Euro and the Yen.

Significant reduction in Social Security and/or Medicare benefits.

Allow companies and or officials to either avoid telling the truth and/or flat out lie.

Manipulate or stop providing data that shows how bad things are. Transparency anyone?

I agree with Paul Krugman here, to make good on that entire list it would take Gigantic Government, not just a big one!

Adding to this list will soon be the commercial real estate bailout which may run another 1 trillion in losses (maybe more).

While Krugman, the president, and many others are trying to take a victory lap and proclaim the wisdom of their actions, I would ask you to review the above lists again. The entire financial system in the US is now government guaranteed. While there has been talk of "exit strategies" as of late, there really is no way out now. Every item above will soon become a ward of the state and carry a Fannie Mae like "implicit, but explicit" seal of approval. There will be no exit. If the government disagrees with me, I would ask them to stop any one of the above programs and see what happens. I triple dog dare you!

A visual:


Have a good night.

Contentious Friday

Now how about this Friday! There was high drama all around from a "great" jobs report to a heated debate about FED activities. Something for everyone. A few quick items and then off the the entertainment as I am about as fried as an egg on a tin roof next to a cat in the summer time!

Latest FED Open Market Activity Clarification
In my last post I covered the story about the FED possibly juicing indirect bid results in last weeks 7 year bond auction, as reported by both Zero Hedge and Chris Martenson. I qualified my presentation that there may well be an easy explanation of the event, but I did think the story was a big one.

What can happen overnight and into a day can be stunning.

There has been a billion pixels spilled out on this topic across the web all day, and I really do not think I can add too much more. A summary for those with an interest:

John Jansen, who pens the site Across The Curve, offered this response to the possibility that the FED was acting out of bounds:
Monetizing the Debt: Disinformation in the Blogosphere
Mr. Jansen is a sharp bond market observer and I was very impressed with his knowledge. After spending some time looking over his work on the site I came away with the feeling that he knows more about bonds and bond markets than Bill Gross!

The key to his write up is that the FED purchase of the 7 year bonds was withing the scope of the quantitative easing program they have already disclosed. On this I appreciate the clear information; I thought this purchase came from another set of money outside the known QE pool. I was clearly wrong in that thought.

I would still offer that the FED actions so soon after the 5 year sale went so bad is certainly a directed use of their purchases to influence results, but that cannot be known.

We can actually resolve this argument very soon. The 300 billion set aside for QE will be used up by mid September. The FED will have to either extend the program, or close it and use other avenues to target bond sales and yields. This is where the rubber meets the road in my view. If the FED was just doing their regular business, then come early October the assist to the markets will have to stop. If they still want to have influence on sales and target yields they will have to reopen the program, or try something else that at this point is "No Disclosed". That should settle the matter.

There was enough concern over the FED being seen as "monetizing the debt" that Bloomberg carried this item today with this quote:

“Given the worries in financial markets that the Fed might be monetizing the debt, the sooner they disabuse the markets of that notion, the better off they’ll be,” Gramley said.

Don't worry, the FED was not monetizing debt, other than the 300 billion they are monetizing that is.

If you would like another possible strange FED based bond buying tale, check out Housing Doom today where he covers the ever expanding agency debt purchases by the FED through various channels.

As for me, I guess I should stick just to what I know about. I guess i could redo the blog as:

DNA Polymerase Disconnect
Examining the disconnect in polymerase fidelity between PFU and Taq isolates

Somehow I do not think I would get many visitors!

Monetizing the Money System with Gold?
Over at The Big Picture think tank section, I saw this article that really got me excited (small snippet):

Trade of the Century?
"..It would work like this: The Fed would monetize gold at a substantial premium to its current nominal price. As we quantified through the SGP, the gold price peg would have to approximate $6000/oz to remediate all past monetary inflation. We doubt this would occur. It would be more likely that the Fed would announce a public tender for privately held gold at, say, $3000/oz. Any gold tendered would be funded with the creation of new Federal Reserve Notes."

Now that is exciting. Check out the entire piece.

Jobs Report
The attributed reason for the market moonshot today was a better than expected (is there any other kind of data anymore?) jobs report. Only 300,00 or so folks lost their job this month on an annualised basis. That sure sounds great!

This data point conflicts with both the ADP report and the TrimTabs information, so it is far from clear what is really going on.

Parsing the numbers, if you work for the government or in health care you are doing ok, otherwise things stink. There are jobs out there, you just have to look! Today from Yahoo Finance:

Now hiring: Everywhere you didn't want to work
In this job market, even slaughterhouses and sewage plants look good to long-term unemployed
Some of the dirtiest, smelliest, most dangerous jobs are suddenly looking a lot more appealing in this economy. People who have been out of work for months are lining up for jobs at places they once considered unthinkable: slaughterhouses, sewage plants, prisons.

"I have to just shut my mouth because I can't do anything about it," said Nichole McRoberts of Sedalia, Mo., who pictured more for herself at age 30 than working in a poultry plant, cutting diseased or damaged flesh off chicken carcasses.

Recessions and tight job markets always force some people to take less-desirable or lower-paying work than they are used to. But this recession has been the most punishing job destroyer in at least 60 years, slashing a net total of 6.7 million jobs.

All told, 14.5 million people were out of work last month, with a jobless rate of 9.4 percent. The result is that many people have had to seek jobs they would not have considered in the past.

Take Kristen Thompson. Before the recession, she worked at an upscale Los Angeles-area gym arranging pricey one-on-one personal training sessions. Now she's a guard at a women's prison in rural Wyoming.

After the gym laid her off last year, Thompson spent months looking for work. Even fast food restaurants failed to respond to her application. For each opening, dozens of other people seemed willing to work for less money. When she heard that a prison in Lusk, Wyo., (population 1,447) was hiring, she leapt at the chance.

In her new job, she patrols cellblocks and monitors the mess hall. Back in L.A., she never had to worry about inmates with weapons or drug stashes or prisoners getting into fights. Yet she's hardly complaining. It's a job.

"People have to pay the bills, so what we see is people kind of grasping at straws and taking anything that's available," said Matthew Freedman, assistant professor of labor economics at Cornell University.

I applaud the people highlighted in the story; they could (many do) just complain but instead they are doing what they have to. Nothing but respect for that kind of drive. Any job is a good job if you keep at it, but I think the story shows that we are far from real job creation in this country. My only weed be gone for the green shoots is that should the jobs number even swing positive for the next year, things are still way behind.

It is like a stock that is down 50%; you need to gain 100% to get back to even. With a year of tremendous job losses, even a positive print will have to be huge and long running, it will have to make up for lost time. But that matters very little in the current thinking.

Friday Night Entertainment
After some serious debate and another monster market move up, I need a break! At least until I have to face the enormous amount of yardwork ahead me both days of the weekend.

Automotive Musings
There are a few readers here that are car lovers, as am I. I wanted to point out that the NASCAR race this weekend is at Watkins Glen. For those that think driving around in circles is dumb, this race is a roadcourse. The track features plenty of elements; S turns, hairpins, and extreme elevation changes. If you like road course racing, check it out around 2pm on Sunday.

The first preseason game for the NFL is on Sunday night, and I am so desperate for football, I am actually looking forward to a meaningless game. So sad.

Film Clip
Perhaps my favorite film ever (there are a few contenders) is Ben Hur with Charlton Heston. I especially appreciate the depiction of a strained friendship and how heart breaking a fall out can be. In this clip (please ignore subtitles, all I could find!) Judah and Messala finally see that they are worlds apart, and the pain is palpable:


Rock Blogging
I actually got some requests, and here at Economic Disconnect I strive to deliver the goods!

Loyal reader GawainsGhost (or the soothsayer if you will) requested "happy music" in the form of Jackson Browne and "Rosie". If this is happy for Gawains, I would hate a request for sad music! "Running on Empty" is my favorite Jackson Browne tune BTW:


Another reader that visits regular is Watchtower. While I may be inclined to say no to his request for inspiring Jeff form The Housing Time Bomb to make Beatles requests, I am the forgiving sort. Up now is The Pretenders and "Brass in Pocket". I prefer to have silver in my pocket, but I digress:


The Cult have always been a secret favorite of mine. Why not let it all out then? Enjoy "Sweet Soul Sister":


Up front let me say that I hate rap. I hate pop. I hate the Beatles, well you knew that. Given that, one could argue that the Beastie Boys feature rocked out rap, as was the song "Bring the Noise" by Anthrax/Public Enemy. After an exhaustive search I was able to find an old school Ice-T rap song that is almost metal in influence. Try out "Party People", trust me it is not bad at all:


I often have a hard time finding contemporary music to feature as I really do not like new rock. One song I do find very good is the Shinedown song "Second Chance" and I hope you might too:


Ok, I am now a big Depeche Mode fan! Close the night with a more sensual selection than you would not expect from me, undulate to "In Chains" (song stars really at 1:10 mark):


Last note:
Ok, I dug, I searched, I explored and I found what maybe a Beatles song I can tolerate. If you are of the persuasion, then my favorite Beatles song is here, as I could not find the strength to embed it!

Have a good night.