Nouriel Roubini Calls The Recession's End in Late 2009?

Nouriel Roubini has been one of the few noteworthy economists to be right about the housing market. And to be bearish well enough in advance to alert people before this crisis unfolded. I don't really follow Roubini except for browsing anything that might be reported on a few of my internet feeds but as I understand it, the majority of his analysis is based on a very U.S.-centric view of the housing crisis and its implications. I'm going to repeat a fact that I repeated often over the years for any new readers. There is no such thing as a consumer-driven recession.

Roubini has stated that he was misquoted recently about being bullish, which I obviously understand. But, he is clearly quoted in this Bloomberg article as stating the recession will end in twenty four months and that he anticipates the recession will end yet in 2009. We may technically see the economy eek out some stimulus-driven GDP in 2009 but this crisis is not going to end in 2009. As long as the Federal government is able to fund a war and a massive budget stimulus, there is obviously some point at which we will see year over year positive GDP. That is, assuming the private sector's GDP doesn't take another leg down such that government provided stimulus must reach even more astronomical levels. (Of course, it is surely a reasonable probability that it will.) That doesn't mean the economy is going to return to the economic levels of 2007. The economy will still be operating at substantially below trend until the next crisis hits. And there will be future crises. With a little bit of effort, a very short term forecast of positive GDP growth shouldn't be too difficult as long as we see some continued stabilization. Beyond the next month or two, accurate GDP forecasts are now nearly impossible because the global variables are too many and they are changing way too fast.

All of this thinking about an economic recovery, be it Roubini or otherwise presumes one point in particular. That we can curve fit the future onto the past. So we have economists and pundits generally watching the rate of change of many economic indicators. These people are visually interpreting a substantial slowing in the drop of many indicators as a sign prosperity is just around the corner. They are using extremely faulty rationalizations in their analysis.

In other words, if I showed you a time function on a two dimensional x-y chart, could you visually tell me what that plot would look like in the future? To the right of what was shown? Of course you couldn't. Not without understanding the function. In economics we clearly cannot define the function. That very statement is why Wall Street is blowing up. They thought they could mathematically reason the future. And the "the recession is over or nearly over" prognosticators are unknowingly espousing the same faulty idiocy used to curve-fit the quantitative models blowing up left and right on Wall Street. Someone takes ten or twenty years of data and fits the model to the faulty data. Even if fifty or seventy years of data is used it is completely faulty. And, there are no quantitative models used on Wall Street that I am aware of that use a data set anywhere near fifty or seventy years. And, even if they did, using seventy years of data is still a completely contrived and completely faulty analysis.

When I analyze the curve-fitted data, I see a shape that looks like Humpty Dumpty. So, therefore, I conclude he's going to fall off the wall. You know the rest of the story.

All the kings horses,

And all the kings men,

Couldn't put globalization back together again.

The world has permanently changed. Curve-fit that.

The Wall Street Myth Machine - Finally An Expert Who Realizes We Are Going To Witness An Oil Bust

Now, an "expert" who is finally willing to embrace a bust in oil. It's coming folks. I don't care if the dollar goes to zero, which we have written for years isn't going to happen. That's another of Wall Street myths - oil goes up because the dollar goes down. Well, it's wrapped in another myth too - the dollar is going to collapse.

In fact, most everything we see is based on myths - commodity supercycle, China's economic emergence, the emergence of the Asian century, peak oil, the development of the Middle East economies, the genius of sovereign wealth funds, the protection provided by accumulated currency reserves, the safety of bonds, the dollar collapse, the emergence of Russia, the dollar-oil relationship, asset class investing, diversified investing, Wall Street's investment paradigms, Wall Street's quantitative finance, and on and on and on. This has been the biggest bamboozling in our history. And we wrote about all of it being bull-oney and now we get to experience the reality that proves it was all a scheme.

One of the biggest myths remains. That Goldman Sachs is brilliant and actually missed this crisis. Goldman Sachs would be bankrupt right now were it not for taxpayers. They would cease to exist. There are no assets worthy of reorganization. It would be kaput. Even though their alumni are sprinkled all throughout government and banking to pull levers for their benefit. Even though they have paid huge sums of money to government to get legislation and regulation that gives them a huge advantage to perpetuate their schemes. They were an architect of this mess. They participated heavily in buying toxic assets and perpetuating all of the crises we see before us. It was merely luck and connections that saved them. Yet this myth of brilliance continues to be perpetuated by even their detractors.

This perpetuation continues to give credence to the false truth that politicians and our elected leaders should listen to Goldman Sachs because they missed this crisis. So, therefore, they know what they are talking about and their advice is invaluable to dealing with this crisis. A hugely erroneous myth. And one that will ultimately increase the size of the global economic bust as the wrong policies and remedies are applied to the problems. And, ironically, that myth creates an even more challenging future for Goldman itself.

Paul Wilmott's Attempt To Save Wall Street & Frankenstein Finance

Let's get a post up while it is still relevant. Paul Wilmott, a very influential architect of quantitative finance, is the focus of a Newsweek article of some weeks ago. The topic of the story is Paul's belief that he can save Wall Street's Frankenstein finance.

Let's start this post with a remark I made on here when the world was in love with quantitative finance and the Frankenstein Wall Street had created around it. The remark is from April of 2007, a little more than two years ago.

....Frankly, because I don't believe anyone truly is a derivatives expert. ie, The system has not been tested through to every possible outcome. LTCM proved even simple messes can become exponentially large. ..... I've seen some minor "what if" analysis of a derivatives melt down. Nothing scientifically robust. The problem is I don't really think anyone can test every scenario and guarantee liquidity doesn't melt away if there is some type of derivatives mess. Maybe we won't get one. We have survived decades without much of a problem. ..... Everyone thinks the party on the other side of the trade will provide the liquidity in all scenarios and what if no one does? I am quite confident such an outcome exists. Then the only question is if that outcome will come to pass.

Well, the concern we highlighted on here this is exactly what came to pass. And it is going to happen again. At some point we are going to have to replenish Wall Street balance sheets. Again. Quantitative finance is simply one of many sources of depleted banking capital that will arise in the future. And, I seriously doubt it will take long for the next crisis to manifest itself. A year or less is surely a possibility. When we have a handful of financial institutions batting around these enormous sums of derivatives contracts, the largest risks are contained in the largest firms. There must be winners and losers in any contract. And a major flaw in the ointment is that these firms are so large and their risk profiles are so great that any substantial loser threatens all players in the derivatives game. In other words, any single firm being on the losing side of any large derivatives position will threaten all Wall Street firms. For goodness sake, how often do we as a society need to witness Wall Street gambling away our savings? Literally. In this scheme of pure gambling, if Wall Street wins, society loses by being the contract counterparty. If Wall Street loses, society loses by bailing out the counterparties. Where is any possible upside? What the hell are we doing? Derivatives should be banned or the risk profile involved in using them for specific risk management purposes only should be clearly quantified, clearly limited and highly regulated. Washington is still not serious about addressing these issues because Wall Street is oaying our government officials hundreds of billions of dollars to continue their insane gambling addiction.

Myron Scholes was a major proponent of derivatives. He received a Nobel Prize for his work on derivatives models. I believe he has now blown up three hedge funds employing derivatives. The hedge fund industry continues to lobby against regulation. Well, those that are remaining continue to lobby. In relatively recent remarks, he has said he (his work) was wrong and we need to wipe the financial slate clean and start over. A founder of Frankenstein finance principals has capitulated to the stupidity of his thinking. (I'm paraphrasing rather than spending time to dig up his specific quote.)

There is one thing I feel as though I do understand ad well as anyone. That is the limitations of our understanding and appreciation for unintended consequences and the avalanche effect of complex systems. We simply don't appreciate or seem to be able to quantify that the process is unmanageable when too many unexpected variables harmonically align. And because quantitative finance really doesn't understand the underlying factors or variables, (although they ignorantly believe they do or can manage the process.) they are blindly walking down the path of destruction.

We have railed on this deluded view of reality as it pertains to many topics on here. Three specific ones were futzing around with our food chain or attempting to bio-genetically alter nature without understanding the risks, another is Frankenstein finance which clearly cannot and has not quantified risks, and another is those misquoting of abstract economic theory with this radical notion that we just need to step back and let the world collapse. At that point the system will clean itself out and we will all live happily ever after. This last perspective concerns me more than any. And, it is the underlying economy that is the source of the most significant crisis here. Including for Frankenstein finance. This last position is a completely simpletonian view of the world. One that does not appreciate the scientific complexity of unscientific arguments better known as ignorance is bliss.

Wall Street's quantitative schemes are based on a completely false reality. And Paul Wilmott seemingly shows a lack of appreciation of the enormity of the false thinking associated with this Frankenstein because he believes he can save the monster by re-educating its architects?

There are many people who believe that Wall Street is going to return to the status quo now that it has received a bailout. Wilmott apparently is one of them. I am supremely confident these people are giving us the very argument as to why quantitative finance is going to see even greater crises. Because they clearly don't understand the enormity of the fallacy that their careers were built upon.

Frankenstein lives. We continue to witness a deluded and completely false reality.

Paul Krugman - We Need More Debt That We Probably Can't Pay Back

You know, living in the hallowed ivory towers of learning often does something to one's brain. Economists pontificate about theories and abstractions that have no place in the real world. In fact some of Krugman's historical pontifications and theories almost certainly fueled this crisis to a much greater degree than most anything we see today. I'd be more than happy to enlighten Mr. Krugman if he wishes.

How did we get to the point where we are spending society's monies on these ivory tower abstractions? If we took Paul Krugman out of his ivory tower and put him to work in a West Virginia coal mine, he might quit publishing these hair-brained theories and develop a more practical real-world view of economics.

I don't think there is a lot of value in the Nobel Prize for economics since none of the winners in the last twenty years saw this environment coming and most of them don't seem to understand the deficiencies to their pontifications.

Of course, Krugman's theory seems alarmingly similar to Mad Money's Jim Cramer who believes Ben Bernanke has also saved us from Depression with the same line of reasoning. It's good to see a leading economist uses the same rationale as the financial buffoons on CNBC.

The Home Foreclosure Engine Steams Onward

In a time where Wall Street continues to pay record bonuses for completely screwing up the economy and continuing schemes that are continuing to screw up the economy, home foreclosures continue on their continuing record pace. Just wondering how many times I can say continue in a grammatically correct sentence.

We highlighted Alan Blinder's recommendation of reinstituting the HOLC as a possible measure to deal with the foreclosure problem before the economy fell off of a cliff. In hindsight, that still remains a substantially superior solution. But politicians used taxpayer money to bail out every bank on Wall Street so these firms could continue their heist perpetuated on the American people. All while the American people rot. Wall Street is most assuredly due a future collapse. We'll talk more about the specifics behind this statement in future posts but needless to say, I remain confident Wall Street is far from out of the woods given I have made this statement at least half a dozen times in the last month.

Congress Is Dragging Its Feet On HR 1207

Congress is dragging its feet on the Audit the Federal Reserve Act and we need to keep up the pressure. The dysfunctional codependency that exists between Congress and the banking industry is self-evident. Only the people of this country can force change in Washington. And that means we need to re-engage in politics in a big way. And if you, your friends or your family are unemployed or underemployed or can't afford to pay healthcare costs or are facing any substantial economic crisis, you may be best served in solving that crisis by engaging in political activism. I believe this legislation could provide a tipping point for regulatory and banking system reform. You don't need to support Ron Paul or even his perspectives on economics or government to support this bill. You just need to believe greater transparency will lead to better governance and accountability to the people of this country.

I just sent another letter to both my Congressperson and Senator. Some people often wonder what to type so below is a sample. This is what I sent to my representatives.

Senator or Congressperson,
I am writing about HR 1207. I would like to know why you are not supporting this bill. It is imperative that the sovereign people of the U.S. know what is going on at the Federal Reserve. A banking system controlled by private financial interests with no accountability to Congress or the sovereign is arguably unconstitutional. It didn't used to be this way and the American people want reform in Washington. As our Federal government careens further down the road towards potential default, the people will remember who supported reform and who did not in government. The economy is going to worsen and the next crisis will surely happen on your watch. Those in Congress who agitated for better governance will be best served in any future elections. I would like an answer as to why you are not supporting this bill. If I do not see any action on your part as it pertains to this bill, I plan to start organizing against your re-election. This is a time when I need to see accountability to the people and action from my Senator or Congressperson. Thank you for your service. Regards,

Federal Reserve Vice Chairman Kohn's Warnings To Congress Are A Complete Joke

I want to comment with a stream of conscience post about Donald Kohn's remarks from last week. And the continuous blather from the likes of Senator Dodd, Bernanke and other keepers of "the system". Dodd came out yesterday with similar remarks about independence and I just have to laugh. I guess that's why Dodd slobbered all over himself to get his ass permanently planted on the Senate Banking Committee. Banking independence, that is. Anyway last week Kohn testified before Congress and continues this generally perpetuated myth about Federal Reserve independence and its importance to our credit rating and stability. Is that a joke? We are in the worst financial crisis in our history, he is responsible for our financial system and he is concerned a change will jeopardize our stability. Am I watching Forrest Gump?

I would like someone from the Federal Reserve to actually explain this concept of independence and exactly how it impacts the economy, the sovereignty of the people and the working of our government. Then in their spare time they can explain how this structure fits into the Constitution. This is one of these mindless defenses of a position that involves no reasoning. It's an autonomic responses spoken without any rationale and the more people realize this, the more we can start to knock down some of these ridiculous beliefs.

When the American Congress and the American people have no idea what the Federal Reserve is doing with other central banks, within our banking structure and even within government, how can we accept that as a democracy? And, how can any banker within the Federal Reserve even attempt to defend such an antithetical position? These people need to go read the Constitution. This isn't the Soviet Union. Although the Federal Reserve under its current structure has many similarly endearing qualities.

It is completely ridiculous to argue monetary independence from Congress. Congress was handed the responsibility coining our money under our Constitution. Not a bunch of Wall Street crooks or unelected bureaucrats like Donald Kohn. So, in what way do I benefit from Kohn's argument of monetary independence? The Federal Reserve often monetizes government debt. The Federal Reserve doesn't offer any bulwark against runaway government spending and in fact perpetuates it. What does this supposed independence buy me? I'll tell you what it buys me. A system under which unelected officials are outside of the control of the American people. They are outside of our vote, our sovereignty, our transparency and apparently our rule of law. Here's what else it buys us. The Federal Reserve does not set monetary policy in the U.S. That is a farce. The Congress does by instituting laws and regulations that benefit the Federal Reserve regulated banks. And even non banks as we see with the shadow banking system. And Congress does so under the influence of hundreds of billions of dollars thrown their way by the impartial and independent banking system. This is all a joke. Donald Kohn should be publicly flogged (figuratively) for being so stupid. This argument of independence is like defending the flat earth society - one has to get a frontal lobotomy to argue it.

We know why we have a privately influenced monetary system. It's quite obvious. Monied interests in the government and banking pushed it through one hundred years ago. That's not a conspiracy. That's just a fact. But beyond that I am beginning to wonder many paranoid thoughts. Most of them have nothing to do with banking but, in fact, have to do with our government. All of this makes me wonder if the Federal Reserve might be monetizing much of the money associated with America's interventionist foreign policy or other equally obtuse activities. Who knows what a completely unaccountable agency is capable of. Oh, yeah. Actually we do know. They'll do whatever they bloody-well please.

The Agriculture Economy Is In Crisis

This story from Monday's NewsHour with Jim Lehrer highlights exactly what we said would happen in our latest update on Potash and the agriculture business. The exact same market dynamics, pricing dynamics and the exact same economic outcomes that we discussed.

Contrary to the Wall Street and commodities bulls who have been and continue to pump agricultural commodities, agriculture stocks, agriculture trading firms and fertilizer companies, market-based reality doesn't jive with Wall Street's expectations. The agriculture business is extremely unstable right now and we are likely to see substantial business failures and a profits implosion. Click here to be taken to the text or video of the story.

Let's Celebrate Goldman Sachs' Bailouts, Earnings, Low Taxes And Billions In Bonuses With Sasha Abramsky

When you listen to this, remember one thing. The people Sasha speaks of are now indebted to pay for Goldman Sachs and other Wall Street firms trillions of dollars in bonuses paid since 1995. Bonuses that we now find out were and continue to be taxpayer-funded. It's a glorious day because what is good for Wall Street is good for America.

Goldman Sachs Beats Estimates On Trading. Or Is It Stealing?

Just a few off the cuff remarks. The street knew Goldman was going to beat. The stock is pretty much stuck in neutral today. I just went to the Edgar database to see if their quarterly results were posted yet. Not available yet.

So without quarterly results, I'll just think out loud a little. One, it will be interesting to see how much in taxes they pay this year. Last year Goldman paid a 1% tax rate while receiving massive bailouts both implied and in actual cash from the American people. They give some bullshit answer as to why this is so. Something about international earnings mix. Maybe they could clarify this for us given Americans now have to pay Goldman's bonuses ad infinitum with all of the bailouts they received. Two, much of the earnings was trading. Trading and derivatives contracts are a a zero sum game. So, who lost at Goldman's expense? Well, first of all society lost. Goldman is trading against its clients and the American people. And, secondly, since they almost surely took much of that money from other U.S. financial institutions who are also trading, society lost again if government is invoked to bail out firms again in the future. Additionally, many people are questioning if Goldman is involved in illegal trading that is effectively stealing. Barry Ritholtz remarked on this a week or so ago. And, so have quite a few other bloggers.

It's good to be the king. Not much longer though.

Hedge Fund Guru Barton Biggs Is Bullish On China And The Global Economy

Let's give someone with a different perspective some air time. Barton Biggs is very bullish on China and the global economy. Click on the graphic of Barton below to be taken to the Bloomberg video.

Secretary Geithner On Middle East Investment For Future Growth

“The world has yet to fully appreciate the scale of ambition and investment we are seeing in the Kingdom and the Gulf region to lay the foundation for future growth. You are diversifying your economies to build a future less dependent on oil and natural gas.” -- Treasury Secretary Geithner

Oh I think we understand quite well. We have been extremely bearish on the Middle East since this blog's inception. May I get you some ketchup and mustard to help you eat those words?

It's nice to see Secretary Geithner's masters degree in international economics is serving him well.

Meredith Whitney Calls Goldman Sachs Higher. It's Time To Call A Probable Peak In Whitney's Stock.

Meredith Whitney made a name for herself this cycle by giving an honest assessment of banks while many on Wall Street opened wide and had the market pound incredible banking losses down their throat. I like Meredith Whitney for her integrity and honesty.

But, as a contrarian I can't let today's remarks by Whitney pass. Whitney has called Goldman higher with a new "buy" rating and a price target of $186 today. Wall Street loved her remark and it send the stock up $7 yet it is still below the early June high. Her call is after the stock has already run up 160+ percent off of its lows. The stock issued clear buy signals on my trading program numerous times since November but here I would be looking to take profits. Buyers started scaling out of Goldman a month ago. That could be seasonal malaise or it could be the start of something more sinister. Regardless I wouldn't be waiting to find out. Remember my post of a few weeks ago - probable period of malaise followed by weakness. People may be getting ahead of themselves believing an imminent decline to new lows is just around the corner. Longer term, I believe Goldman is very likely to endure a fight for its very existence as it tries to transform its business model. Today the company seems oblivious to fundamentals lining up against its major lines of business.

This brings up a good point. Much of what I would classify as "hyper"-success in business fits under the idiom of a one-hit wonder. Being in the right place at the right time to make an inordinate sum of money or receive tremendous accolades is hard to replicate. Sometimes its better to be lucky than good. That applies to Goldman's business model and to Meredith Whitney's current fame. Making a call on Goldman to move higher after it has already run 160% isn't what I would classify as a prescient or even noteworthy call. Noteworthy would have been to make the call at $55 or $65 or $75 or $85 or $95 or $105 not $145. Whitney now has her own company and she is responsible for getting all of her calls right. Not just the one call that made her famous. Just as fundamentals are lining up against Goldman's business model and continued hyper-success, so too will it be difficult for Whitney to maintain the perception of her prescience. As a contrarian, I would say it's pretty close to the time that I would be selling Meredith Whitney's stock. Not that it is likely to go to zero. But that it has likely hit its all time peak. Sorry Meredith.

Banking Index Update

While the media and most of the establishment are now quite comfortable that the economy has averted the worst case outcome, reality is very different. We averted "a" worst case outcome. There will be more outcomes that most likely cannot and will not be averted. It seems quite obvious to me that this is reflected in the Banking Index. In fact, its rally can now be contained to a mere four days worth of positive price action. I would suspect much of these gains were fueled by substantial short covering as the actual advance-decline line for the index made a new low quite quite some time ago. But all of the spin surrounding a recovery has allowed the banks to raise tremendous amounts of new capital (weakening shareholder equity) and given many a chance to repay their TARP funds. A very foolish decision given the enormity of this crisis. But we already knew management at these institutions was incompetent because they wouldn't be here were it not for you and me. Banks pay massive bonuses courtesy of the American people while we rot.

As an aside, I was talking to a friend a few weeks ago who works on the JP Morgan Chase company acquisition integration team. He was talking about how great their bonuses were this year. He was even talking about the possibility of JP Morgan Chase buying Citigroup. Now, this was his personal opinion as opposed to any insider information. I couldn't help but laugh when he said that. I told him he was living in a bubble.

The First Public Official To Tell The Truth About The Economy. It's Not Coming Back Without A New Economic Model.

Robert Reich is one of the few public officials I admire. It's no coincidence his is the only blog on my link list. Not that there aren't other bloggers I enjoy. There are many. But in a world where former politicians end up on K Street as charlatans, pimps and proseltyzers, Reich earns an honest living.

Reich seems to remain in close contact with the political establishment and yet has had the independence to blog about many of the most important issues facing society without the typical political varnish and spin. And now he chimes in on when the economy will recover. His answer? Never. Effectively, he's right as long as economic ideology remains what it is today.

It's too bad our political leadership isn't willing to be as honest with the American people. There is a way forward. But, it is by embracing the economic ideals that made America great. Not the economic ideology of the past handful of decades. One way or another we will eventually get there regardless of what goes on in Washington. Unfortunately, we seem to be taking the worst case route.

The Grim Reaper Is Knocking On China's Door

Link here.

The people, mostly bloggers, talking down the dollar comparative to the yuan, ruble, real, etc. are going to be eating one big turd sandwich when the world reveals itself. It is absolutely hilarious to hear the communist cretins in Shanghai lecture the U.S. on sound fiscal or monetary policy. It's even more hilarious to hear people in the U.S. side with the Maoists. China is and has been printing money at a rate never before seen in the United States. Ever. And has been doing so for a decade. Now we have a few people finally noticing that loan growth in the last six months is a problem? Are you kidding me? The last six months are just the frosting on the cake. By the time this crisis passes we will all look back on any discussions of using toilet paper dipped in the Communist Manifesto, better known as the yuan, as laughable.

I think it's ironic that many on Wall Street are now starting to express concern about China. How does this help anyone? Wall Street pumped the China story like there was no tomorrow. Now that Chinese investments have collapsed, some on Wall Street are waking up. Huh? Sorry all of those investments we pumped over and over and over are now worth 20% of what they were when you bought them. Shit happens. Oh, by the way, these investments aren't coming back in your life time either.

The investing community needs actionable intelligence not after the fact remarks about the obvious. Wall Street is the Soviet Union of our economy. It's not a wonder they love the communists in Russia and China. Let's see. Wall Street has monopoly access to capital, they don't have to compete in the real world, they have tremendous conflicts of interest, there is unbelievable corruption, they don't have to follow any rules of transparency and they come out of business and economics programs teaching voodoo. Joseph Stalin would be proud.

Volatility Rears Its Head Again - The San Andreas Fault's Mysterious Tremors

Increasing volatility has been and remains one of our main themes. Over the past few years we have highlighted a few sources of volatility with beached whales, the current swine flu and bird flu mutations, seismic phenomena and unusual volcanic electrical storms. Over the last handful of years we have seen substantial earthquakes in China, Iran, Italy, Pakistan, Russia, Central America and the South Pacific tsunami. Now it appears the San Andreas fault is showing signs of coming to life as well.

I believe there is plausible evidence to conclude volatility of all types are interrelated and that we are, in fact, in a major cycle of volatility. In other words the economic volatility we have been witnessing over the last decade or so is closely related to the natural phenomena above. (The explosive upward move in economic volatility from the late 90s onward followed by its downward movement starting in late 2006.) There is no way for me to prove this beyond doubt because humanity's grasp of our world is substantially too simplistic. But I have spent quite a bit of time studying the topic and have some well-formed theories.

The debt bubbles we now see are simply symptomatic as opposed to a root cause of building economic calamities we see around the globe. The banking system is identified as the cause of this crisis but it's quite evident to me that were it not a debt bubble, economic volatility would manifest itself in other equally destructive outcomes. Economic volatility did not start with modern banking structures as is often supposed by those citing fractional reserve banking as unstable. (Eventually they clearly are.) But before we had modern banking systems able to blow major bubbles, we still experienced periods of substantial volatility, economic collapse and substantial depressions often lasting centuries. In other words, the argument that were it not for the Federal Reserve, we would no longer experience the business cycle or economic calamities relies on the very poor argument confusing correlation with causation.

Cycles of economic volatility are a constant regardless of our modern banking system. (Which, by the way, I clearly believe needs reformed.)

As I have said before, at some point in time we might delve into this esoteric and bizarre topic in more detail. But for now, I just want to document the San Andreas fault's unusual activity as part of our discussions and highlights of volatility.

Tour de France Live On Versus

For any Tour fans, today is the first test in the mountains. Versus has a live video and audo feed on their web site.

China's Most Recent Currency Remarks At The G8

What we really see as a driver for countries like Russia and China seeking reserve currency reform is that these countries have benefited from beggar they neighbor economic policies - better known today as globalization. Now these manipulative tactics aren't working so they want change. In other words, they were more than happy to accept an economic model that benefited them. But now that it doesn't work to their benefit, they don't want to play by those rules anymore. Good luck. We might see change in global commerce but it isn't going to be dictated by Russia or China. And however this ends up, it won't benefit them either. We remain a lone voice of reason - globalization is dead.

As part of our countless China posts, we have highlighted the yuan is substantially worthless on some level. China is now coming to a realization of their economic reality and that is the driver behind their desire for change. This is about self-preservation more than anything else. Their economy is built on the need for ever greater access to dollars and the party is over. To believe their unorganized and confusing remarks about the dollar is some effort to restore some type of fairness is hilarious. This from a country whose economic policy is one of predation? Additionally, do we need reminded that we are talking about a communist leadership that preaches harmony while terrorizing the people of China? Taking any of China's remarks at face value is very foolish.

Yes, yes this yuan currency remark sounds ridiculous but it sounds much less ridiculous now than when we made those remarks now doesn't it? Remember we said the same thing about the ruble when most everyone on Wall Street cited it as a sound currency and Russia as a sound economy. Even many well-respected realists like Marc Faber or Jim Rogers would have laughed as they pumped emerging markets. Now? Russia is one shock away from collapse.

All in due time.

Arnoldbucks - The New Currency Of California

There is nothing funny about this economic environment but sometimes we need to laugh to keep our insanity. California's problems are not insurmountable and they'll figure out how to deal with their fiscal crisis. Necessity is the mother of invention - a timeless maxim of American perseverance.

Another LTCM Founder Hedge Fund Implodes

Title link here.

We appreciate LTCM on here. Not for their ability but for their stupidity. It provided a foundation to highlight the recursive unwinding that was about to take place in the financial sector and the global economy as we wrote of back in 2007's post on The Game.

Cerberus Investors Barred From Redemptions

Title link here.

I really don't care for Cerberus for one simple reason - it is the private equity equivalent of Goldman Sachs. Cronyism reigns where the who's who of former politicians and connected business leaders land. Not because of their merit but because of their connections.

It's no irony that for decades we heard Wall Street tell the auto industry, as an example, how to fix their business. Then Cerberus acquired Chrysler basically for free from Daimler and promptly mismanaged it into bankruptcy. Pushing money around has little resemblance to running an actual capital-producing business.

Private equity is in serious trouble. Very serious trouble. It's pretty common knowledge that fees as the main source of income for private equity firms. Yes, there is the infrequent Google and other investments but private equity generally is a zero sum game. Especially when private equity firms can't ride the asset inflation trade as we wrote about a few years ago.

I have told many of my friends in the finance industry that there is a reasonable probability private equity could literally disappear from the economy. That would be quite a severe outcome but it is not implausible. Mostly because private equity is an extension of the Wall Street bubble that really performs little to no quantifiable benefit to capital production in the economy.

If the economy worsens, many private equity investors will likely end up in legal proceedings as they attempt to get their money back. They'll need it back as a matter of economic survival as their other sources of income and wealth evaporate.

Alan Greenspan's Deluded Sense Of Reality

"I recognise that I accord a much larger economic role to equity prices than is the conventional wisdom. From my perspective, they are not merely an important leading indicator of global business activity, but a major contributor to that activity, operating primarily through balance sheets. My hypothesis will be tested in the year ahead. If shares fall back to their early spring lows or worse, I would expect the “green shoots” spotted in recent weeks to wither.

Stock prices, to be sure, are affected by the usual economic gyrations. But, as I noted in March, a significant driver of stock prices is the innate human propensity to swing between euphoria and fear, which, while heavily influenced by economic events, has a life of its own. In my experience, such episodes are often not mere forecasts of future business activity, but major causes of it."

There are many forms of intelligence. One I value most significantly is acquired intelligence or wisdom. There are very few ways to cheat the process. Wisdom is only available through life's experiences or by learning from other's life experiences be it history or those around us. Regardless, the process of acquired intelligence is time dependent.

It's very disappointing to hear the person most responsible for global economic ideology for the past twenty years utter the words above. On the very topic for which Greenspan was supposedly an expert, he is apparently an intellectual nincompoop at the ripe old age of eighty three.

If Alan had grown up in most American families and actually had to work for a living instead of being a life-long politician, he would realize wealth is not created by blowing bubbles. The above remark is completely absurd. Seemingly Greenspan believes as long as the government can make more money without working for it, asset prices will rise. That will lead to ever greater prosperity. Isn't this ideology exactly why we have the global economic crisis today? Greenspan never learned from history or its elders. And because the entire world's economic leadership embraced this ideology, the global economy is imploding.

Matt Taibbi's Retort To Criticisms Of His Rolling Stone Wall Street Mafia Article

The critics of Matt Taibbi's Rolling Stone article are great comic relief from this crisis. If you can't understand his context and that he wasn't literally blaming Goldman Sachs as the sole perpetrator of Wall Street's misdoings, then you need to get back in your cave.

This brings up an important point. There are a lot of unsavory people in this world. This is the type of environment where many feel as though they are given cover to express their often twisted views and actions. On this blog, we abhor violence of any kind. Hate crimes and racism rise to the very top of the list as most wicked and heinous. We agitate for change because that is what makes democracy great. Especially when it is threatened by the Wall Street machine.

“What country can preserve its liberties if its rulers are not warned from time to time that their people preserve the spirit of resistance?” -- Thomas Jefferson

More Green Shoots Courtesy Of The Federal Reserve

We can all breathe a sigh of relief. The crisis has passed. Whew! I feel so much better now. This is just like the G8 and G20 meetings - a few dozen bureaucrats from the Federal Reserve imparting their years of economic wisdom gained by turning the credit crank. My favorite is still Richard Fisher, the media hound from Dallas. Seemingly every time he opens his mouth, something comes out that is exactly opposite to current reality.

The G8 Conference - More Pretty Pictures For The Photo Album

I take every opportunity I can to mock these types of meetings. We have remarked quite a few times on prior G8 and G20 meetings as worthless photo-ops. Bureaucrats get together and talk themselves into a state of stupor. So, the dollar-is-going-to-zero crowd was foaming at the mouth that China and other nations supposedly put the topic of a new reserve currency on the G8 agenda. Well, that was fun. It didn't make the agenda. Maybe they can wish for next time.

Can someone please explain to me in concise terms how a handful of bureaucrats, keepers of the status quo that created this crisis, are going to solve the problems facing hundreds of millions, if not billions of people? Maybe wave a magic wand? How is Hu Jintao going to make my life better? Actually, he left the conference because he is needed at home to quell the uprisings of people yearning for freedom and the subsequent state-sponsored killings taking place in China.

Say cheese......

Washington Is Killing The Economy And The Healthcare System Courtesy Of Lobbyists

This is terribly disconcerting. There are so many corporate lobbyists with their fingers in the healthcare reform debate that we are almost assured to see some attempt at mandates. Don't have a job? Pay your healthcare bill or go to jail! Well, Washington politicians are generally brain dead but not that brain dead. What does Dick Armey or Richard Gephardt bring to a debate about health care? Oh, pick me, I know the answer to that! Connections. Crony capitalism.

I think we should vote anyone out of Congress who is over 50 and replace them with the next generation. The mindset of that whiny, self-centered generation of politicians is just about impossible to bear. I would honestly rather grab 500 people off of the street and send them to Congress than watch these intransigent party hacks.

I believe we need healthcare reform of some sort but not what we are seeing today. By the way, did you know half a dozen states have passed legislation to stop a possibly mandated Washington solution?

Is Goldman Sachs Manipulating Markets?

Assistant U.S. Attorney Joseph Facciponti told a federal judge that Aleynikov’s alleged theft (of Goldman Sachs trading software) poses a risk to U.S. markets. Aleynikov transferred the code, which is worth millions of dollars, to a computer server in Germany, and others may have had access to it, Facciponti said, adding that New York-based Goldman Sachs may be harmed if the software is disseminated. “The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways,” Facciponti said.

It's quite ironic that the U.S. Attorney arguing this case states that someone could manipulate markets in unfair ways by using Goldman Sachs trading programs. What exactly does this say about Goldman Sachs? That we should believe in their altruistic adherence to the honor system? May I ask why the FBI isn't investigating Goldman Sachs if this is indeed the case? Frankly, why isn't it investigating all of Wall Street? This all goes back to my post a few weeks ago where I highlighted the need for a Pecora-type investigation of Wall Street's potentially criminal and fraudulent activities.

Could Goldman Sachs please clarify these statements and concerns expressed throughout the blogosphere?

Illinois Treasurer - "Years Of Mismanagement, Poor Leadership......"

A few remarks from the Illinois State Treasurer, some paraphrased because of his pauses - "Years of mismanagement, poor leadership, skimming the pension funds, sort of kicking the can down the street, skimming the funds sweep, not making the right decisions....."

Hmm. Let's see what history hath taught us about such folly.

"There is one safeguard known generally to the wise, which is an advantage and security to all, but especially to democracies as against despots. What is it? Distrust." -- Demosthenes,

"Those who have been once intoxicated with power and have derived any kind of emolument from it can never willingly abandon it." -- Edmund Burke

"Eternal vigilance is the price of freedom" -- Thomas Jefferson

"The only maxim of a free government ought to be to trust no man living with power to endanger the public liberty." -- John Adams

"One man with courage makes a majority." -- Andrew Jackson

And finally, "Moral excellence comes about as a result of habit. We become just by doing just acts, temperate by doing temperate acts, brave by doing brave acts." -- Aristotle

SEC Anniversary Event Paid For By Wall Street's Finest

You just can't make this stuff up. I wonder if FBI events were ever sponsored by Al Capone? Seriously, is this not the most egregious conflict of interest to have a regulatory agency event sponsored by the companies they are supposed to be regulating?

Union Pacific Railroad CEO - There Are NO Green Shoots

I only watched the first ten minutes of this video because the rest gets into discussions that aren't relevant to the economy. Worth a watch. It's not a pretty picture. Interestingly, Young is well too optimistic including his remarks about food. Although it's hard to take anything he says as optimism. Let's supplement Young's remarks with some cumulative statistics across all of the railroads that have held relatively stable for all of 2009. These numbers are year over year. Coal is down 12+%, grains down 30+%, industrial metals down 60+%, autos down 50% and food down 10+%. We haven't seen this type of collapse since the Great Depression.

Green shoots? Wall Street will tell you whatever they can get away with to keep their corrupt party going. This discussion about the economy bottoming has nothing to do with reality. It is an attempt to manipulate the public at-large. And, it is the ignorant or brainwashed elite who never saw this crisis coming attempting to do the manipulating. Or, using the Thomas Paine quote in the last post, "........and so effectually had the tyranny and the antiquity of habit established itself over the mind........." If Wall Street can hoodwink people to keep from true reform and re-ignite the economy, that's exactly what they are going to do. It's what they did in the last major crisis they created in 1989. Why wouldn't they try to keep the party going? They have robbed us blind. It won't work.

Young also points to the scope of the international drop in business. What is surprising to me is that everyone is still surprised by this. I think we are really the only source in the blogosphere or the financial community who has been saying for the last four years that emerging markets are headed for a lengthy depression. Some are now waking up to the fact that this crisis is going to be global but the appreciation of how deep and lengthy the emerging market collapse will be is still lacking.

Be prepared for the future.

S&P 500 Update

From much of what I follow, I believe it's likely that we are entering a period of malaise and eventual weakness in the market over the next handful of months. As I have noted a few time, I suspect we have seen the market lows for 2009. But, I really don't like shorter term predictions. Predicting reduces the effectiveness of returns. It's betting too far into the future and that is partly what has buried Wall Street. That coupled with leverage.

That said, let's look at a chart we have thrown up here two or three times since the rally started. But, this time it's the SPYders rather than the cash S&P. Back on June 12th we wrote that the first major support level for the S&P is 800 using the Market Profile and Volume at Price. That corresponds nicely with the 50% retracement level that has developed on the above chart. It also corresponds well with the head and shoulders pattern developing on the chart which has a downside of about 810 on the SPYders. If the market does resolve itself in this manner, I don't anticipate it will be the end of any market weakness because we are essentially looking at a micro pattern. Again, I prefer to take what the market gives rather than speculate on the short term so we shall see.

What Happened To The Signers Of The Declaration Of Independence

One more post this 4th of July weekend. It seems many in today's world view freedom as being able to do whatever they want. Often at the expense of others. And does so without concern or conscience.

"For the support of this Declaration, with firm reliance on the protection of the Divine Providence, we mutually pledge to each other, our lives, our fortunes, and our sacred honor."

Maybe it's time for society to dust off the Declaration of Independence and make a new declaration to rid ourselves of the likes of Goldman Sachs as it pays the largest bonuses in its history. This after being bailed out by Americans with no health insurance and no jobs. And needing that bailout because of its complete lack of regard for society and the ideals expressed in our Declaration of Independence. That is, if the neoliberal economic policies they paid government so handsomely to create doesn't actually finish them off first.

Is this really democracy? What would Thomas Jefferson or Thomas Paine think?

Money Can't Buy You Love But Apparently $250,000 Donations Can Buy Corporate Lobbysts Access To The White House Courtesy Of The Media

If anyone doubts our government is for sale, I'm not sure what else it will take. Why would politicians care first and foremost for their constituency when corporations are so much more lucrative?

It's funny that this event was only canceled after the public became aware of it courtesy of Politico blowing their cover. Apparently the Post's publisher was even willing to sell out her own news department. If that's the case, how can we ever trust corporate owned news? Well, hopefully you have answered that question for yourself years ago. We can't. It's a cabal. It appears there was a minor revolt amongst the Post's journalists when they found out they were even for sale.

The system has the wrong incentive structure. The system is corrupt and needs to be reformed. The most sickening point to this is that it is all legal. Americans are rotting in an economic collapse. Americans are dying in two wars. What is going on in Washington? Monied interests are scheming to write our future with little or no regard for the plight of the rightful owners of this country. Us.

A government loses its ability to rule when moral superiority and confidence are lost. Our government must be returned to the people regardless of whether that is a big government, a small government, an active government, a silent government or anything in between. The issue is not one of political ideology. It is one of morality and Constitutionality.

No more corporate lobbying. Period. Do you think politicians are ever going to change the laws? Only we have the power to do that. We are the only challenge to Washington run amok. We the people, We the States. The biggest proponent of abolishing corporate personhood over the last thirty years has been Ralph Nader. The two party system marginalized him. Called him a kook. A quack. A egomaniac. In fact, what he was was right. Forget about party ideology. It's a monopoly racket on power to marginalize democracy and keep change off of the agenda.

It's good to be the king. Not much longer though.

A 4th Of July Tribute - Economic Colonialism Versus American-Style Capitalism. Don't Blink Because The World Is Changing Before Our Very Eyes

"The revolution of America presented in politics what was only theory in mechanics. So deeply rooted were all the governments of the old world, and so effectually had the tyranny and the antiquity of habit established itself over the mind, that no beginning could be made in Asia, Africa, or Europe, to reform the political condition of man. Freedom had been hunted round the globe; reason was considered as rebellion; and the slavery of fear had made men afraid to think." - Thomas Paine, 1791 in The Rights of Man

This will probably be the last post for 4th of July week. But before we get to details, I want to highlight a link from my link list. It goes hand in hand with this post and with the celebration of freedom over tyranny. No better time than today to re-acclimate ourselves to what freedom means. That would be Thomas Paine's The Rights of Man. The weak cliff notes Wikipedia overview can be found here.

A friend sent me a Joseph Stiglitz article a few weeks ago. I thought it was relevant to this week given it is the 4th of July. I have grown to develop an appreciation for Joseph Stiglitz since this crisis started. Plus he's not considered an insider amongst the elite or the economics community. His report card says he rankles egos and doesn't play well with others. A plus from my perspective when talking about cronyism. I believe in playing well with others when there is a functional team. But when it comes to the elitists who trashed the economy, those charges are simply ridiculous attempts at marginalizing dissent. The elitists don't want the voices of reason to drown out their voices of corruption. A perfect example of this was my post last week on banksters attempting to subvert the voices of the American people.

I want to make a critical distinction as it pertains to the Stiglitz article. (Link at the end of this post. I highly recommend it.) His perspective on today's environment is very accurate but the world in which we live is a very gross mischaracterization of what truly represents American-style capitalism. The topic of American-style capitalism is going to be the basis of my post. What better way to celebrate freedom over tyranny in this week honoring Independence Day?

We have made a clarification before when others have cited the end of American-style capitalism. To the contrary, this environment is a reaffirmation that American-style ideals must return to the economy. Instead, what Stiglitz writes about is corrupt European-style colonialism that has infiltrated our economic model over the last generation. Enabled through the revolving door of political & business interests and corruption associated with corporate personhood. We now see much of American economics reflecting the corrupt European statist model that actually led to the American Revolution. Well, what it really led to was a swell of destabilization of tyranny across the entire colonial European continent and the subsequent Age of Enlightenment. We effectively see our modern-day economic model rooted in a historical context which led to a revolution of ideas and ideals which formed a basis for our country. Ironically, it is now our society that has become the source of tyranny. Yet we should anticipate the outcome will be no different. We are simply in the early stages of a new age of enlightenment two hundred and fifty years after the prior instance. And if you are reading this, you are hopefully part of the new movement seeking truth, honesty and reason over elitism and tyranny.

Successful American-style capitalism for the vast majority of our existence has been defined by the antithesis of European-style colonialism. It has been defined by what I would generally define as both entrepreneurial capitalism and worker capitalism. Yet both are under attack from monied special interests today. These forms of capitalism more closely align with our ideals of democratization of economic opportunity and meritocracy as opposed to the feudal system of tyranny imposed by contexts of European-style colonialism - give the masses enough opportunity to create stability while the elitists steal anything and everything they can from society. That includes our jobs, our wages, health care, pensions, Social Security, etc.

In America this art has been perfected by elitists blaming the economic collapse on socialism, worker's rights, bloated government and the fact that workers now have to compete against people around the world willing to work for a fraction of our pay and benefits. It is in fact monied interests that are to blame for this collapse. A collapse that has now jeopardized the social structures provided to citizens and the very foundation of our society. The problem is not the social structures themselves as is often cited by the monied interests seeking to perpetuate their theft. You see, Social Security, health care reform, pensions, entrepreneurialism and worker-involved capitalism threatens the elitist's ability to continue their theft of society. Elitists living off of the government dole see these democratically-enacted structures as competition for the limited amount of capital available in society. So, in the mainstream media, pensions, health care and Social Security are portrayed as overly burdensome plagues by unwitting media and yes-men beholden to the very tyranny threatening the livelihood of these yes-men.

Our uniquely American capitalistic ideals are what made this country the land of economic opportunity for the world's underprivileged, hungry and poor - the world's latent and suppressed human talent. Those living under the tyranny of European-style colonialism, communism, outright dictatorship and anarchy. Yet throughout history uniquely American ideals have continually been subverted and abhorred by the elitist class seeking to control economic opportunity and wealth.

Elitists aren't the most capable people in society. In fact, most don't have the intellectual capital, desire or work ethic to compete on merit and gain the status in society that control and tyranny affords them. Why compete when it's so much easier to control? To heist?

How many kings and queens throughout the history of Europe had the intellectual capacity, desire or work ethic to compete against the common man on a level field of opportunity? Most would be slopping hogs were they required to compete in a democratized economic model. The same holds true with modern day hog-slopping politicians and elitists. Economics has morphed into a game of power as opposed to economic meritocracy. The cream seldom rises to the top. The well-connected does.

How would the world be different if democratized access to capital were afforded the children in Compton or East Los Angeles with the same opportunity as those on Wall Street? American society would become substantially more entrepreneurial, have greater discoveries and advancements in the arts & sciences, have greater self-sufficiency and substantially greater economic vibrancy because opportunity would be democratized. All of this would require ever less involvement of government services that often have the perverse outcome of creating the opposite effect of what is desired. That is the America which used to exist for many. That is the America we must rebuild. But, this time we must rebuild it for everyone regardless of race or creed.

The ideal economy would obviously be one where every citizen works for themselves. That we are all entrepreneurs. This would truly transcend the democratization of economic opportunity and self-determination. Obviously, that is not possible for many reasons. But, we must see a return to entrepreneurialism and greater economic self-determination for everyone. Not just by franchising McDonald's but by encouraging and allowing Americans to once again create and own much of the capital-forming and capital-producing businesses in the United States. Policies should be skewed to allow this transformation to take place at the expense of the monied monopoly interests in the economy. And that includes much more than banking but the monopolies that dominate all industry. And that includes the monopoly of special interests in Washington.

As it pertains to the future of the economy, I wouldn't be too wedded to the idea that we are going to return to what we have seen in the past. We may see something similar to historical examples of American-style capitalism or we could even see economic models turned on their head in many instances. That could actually involve portions of the economy working under economic models much different than today's capitalism. While this may be hard to imagine, that is simply because the monied interests are trying to re-ignite the rear view mirror image that served them so well. And given elitists aren't the creative and entrepreneurial elements of wealth-creation in the economy, you shouldn't be looking to them for hints of the future for they will surely fail in re-igniting the past. Remember, the elitists believed the world was fine and still believe we are experiencing a normal but deep recession. They told you finance was the future of the economy. They were happy destroying the economy from their now precarious perches of private equity, hedge funds, lobbyist firms, political consultancy, business schools and Wall Street. All control points for subverting the free flow of capital in the economy. They were and are wrong. In fact, their particular economic future is extremely precarious at best and nonexistent at worst.

We have talked about the fact that the world is returning to a self-funding economic model. No one seems to be acknowledging this yet but the signs of this can be seen today if you know what to look for. If we extend this concept to the concentric rings of our economy at the national, state and local level, we could easily very unique and different economic models arise from the ashes. An example might be localities embracing cooperatives or similar structures to rebuild economic opportunity at the local level. This would have a two-fold effect. One, as a local counterbalance of employment and economic opportunity to monopolies of both power and economic interests. Two, to create sustainable economic opportunity which can never be replaced, sold or consolidated by monied interests in some far away office. Examples might be energy-based cooperatives in the tens of thousands of American communities. Or even food cooperatives. Community-based businesses that democratically serve all of the people. Remember, the competition of capitalism improves the breed but what improves the breed even more is innovation. A locally-owned or even community-owned energy cooperative employing innovative solutions not beholden to national banks, national monopolies and shielded from international competition would provide tremendous sustainable economic development. Whatever the business or the structure, even newly created ones, economic localization is the future as globalization busts. This may seem as though I am grasping at straws but in fact I am not. We are going to effectively be rebuilding the economy from the ground up. And that is why, as I have written for quite some time, we are returning to a local banking model, why we have discussed the introduction of sustainable economics and why we have fervently advocated State's Rights. Because regardless of what Washington wants or thinks, power is going to eventually flow out of Washington as the economy grinds further into the abyss for two primary reasons. One, people will finally realize Washington doesn't have the power to solve their problems so they must find their own solutions. That means empowerment of local and state economies at the expense of Washington. And two, because the money bubble that fueled the Washington bubble is going to burst and with it Washington's undue influence on the economy. That means all of the lobbyists, politicians and banksters caught up in the Washington party are unwittingly watching their economic future disappear as I type this. Like lambs to the slaughter. The economy will rebuild itself in a manner that passes around the choke points of corruption and economically-limiting policy.

I always try to put the most thought-provoking remarks in the close of my posts. Mostly because I suspect many readers tire of long reads in our world of short attention spans. Haha. So most will likely miss this part. Here goes.

I want to circle back to a post I had some time ago where I commented that the role of government should be to always inject inefficiencies into the market. I said at that time you may want to think about that remark and we would take an opportunity to discuss it at some point in the future. The latter half of this post provides a good foundation to do just that given the topic at hand. All of this reordering of the economy I refer to above really entails injecting inefficiencies back into the market - a role government should be always and actively playing as we wrote in that prior post. Economics is no different than any other cyclic process. That is, permanent efficiency or order is simply not sustainable. So, by government not actively checking the ever increasing efficiencies achieved in the economy, they ultimately create a self-fulfilling prophecy where even greater disorder is created out of efficiency or order. This eventual disorder is likely proportional to the energy used to artificially subvert the economy's natural state of disorder over some specific period of time. (That is why the volatility and scope of this crisis is still substantially underappreciated. These forces have been building for decades. And the debt bubble is a symptom not the problem as we will show in a later post.)

So what exactly do I mean by these statements? The amount of energy consumed to create the unnatural effect of efficiency or order that we saw develop over some period of time will now likely be released to restore the natural state of disorder of the economy. And, let's be clear. U.S. firms are far and away the most efficient of any on earth. Ruthlessly so. We showed a graphic, I believe back in late 2006, which validated this fact of economic efficiency - a graphic of the earnings bubble we were seeing in the economy. The earnings bubble was a sign of tremendous efficiency or order in the economy. A substantial amount of this efficiency achieved in the American economy was a result of the endless drive to maximize economies of scale and remove competition from the market place. In other words, larger and larger companies buying every competitor in site to become even larger. Larger and larger companies squeezing inefficiencies out of their business models. And the energy used to create these economies of scale subverted the natural state of disorder in the economy. This happened in industry after industry as regulatory laws on the books were thrown aside as politicians of both parties embraced a market-based perspective as it pertained to monopolies. In other words, the natural and continual free flow of capital in the creation and destruction of thousands upon thousands of businesses representative of competition for new ideas, new products and new customers was subverted by an ever increasing state of efficiency in the economy. Put in terms of our original remarks about injecting inefficiencies in the market, a vibrant economy was subverted by lack of government enforcement of injecting inefficiencies into the economy.

I wrote back in 2006 that many who lived through the Great Depression believed monopolies contributed substantially to the economic crisis of that time. Those remarks received no interest. But, now I'm guessing people can actually appreciate what I am now writing because of what they see today - a continual subversion of American-style capitalism by monied interests that have gained this control over the economy by achieving great efficiency.

You see, we know that disorder in the economy must be ever increasing. Well, I'm not sure anyone in economics knows this but they should. So, let me rephrase that last statement since economics most assuredly is not a science nor are most economists ever to be confused with scientists. Disorder in any cyclic system is ever increasing. The fact that this process has been subverted for decades implies this crisis has been building since well before 2001 or 2002 when most people believe its foundation was built. You don't see history's greatest economy brought to its knees because of five years of economic mistakes as is foolishly argued by most everyone. (2001-2006) But, since the government has been loathe to undertake any efforts of consistently injecting inefficiencies into the economy, ie, enforcing anti-competitive and anti-monopoly laws, and we have now seen what appears to be a pinnacle of economic efficiency over this past cycle, the market is now going to inject the natural reorder of disorder back into the market regardless of what government or monied interests so desires. And it is going to be substantially more painful and difficult than anyone imagines. Yet, were government policies to embrace this reordering process, the U.S. could pull out of this crisis relatively rapidly. The only thing standing in the way of government embracing this process are the very monied interests which created this cataclysm in the first place. The world is full of great ironies.

Let me summarize these points of economic efficiency with a final comment. This is why I generally don't like conspiracy theories. There is generally a reasoned explanation for most everything that is happening today. Those telling us this Bilderberger Group or some ruling global secret society caused all of this chaos for personal gain is utter nonsense. As are the ridiculous notions that these secret societies are going to determine how long this down turn lasts. This is no different that the annual Davos summit of elites that we have railed against. That elected officials attend a conference outside of view of their constituents is anti-democratic. Yet, these clowns were partying like it was 1929 before this crisis started. And we highlighted that very fact and the impending doom while these clowns lived the good life. The forces of nature are far more powerful than a roomful of elitist idiots who are so consumed with greed and control that they would be king would we let them. This conspiracy is utter nonsense and involves the assignment of intelligence and ability where it doesn't belong. Do rich people get together and connive? Of course they do. But they sure as hell don't control the world.

Maybe we'll write more extensively of the above topics and/or the transformation that lies before us but we have planted plenty of seeds on here for the last four years. The road map has been laid bare if you have been with us. It's easy to follow. But for now I want to enable your creative juices on the topic since Stiglitz's highlighted article is so germane to this discussion.

Tomorrow is a new day and with it will come new ways of thinking. Ways which will refocus American society and more importantly the American economy. And as I wrote in one of my very first posts on here four years ago, that means hell to pay for emerging markets that have relied heavily on American wealth and capital for their development.

What we witnessed over the last few decades as it pertains to the world economy is not coming back. And the sooner politicians quit trying to stimulate that dead economic model and society quits waiting for it to come back, the sooner we can do what Americans do best. That is, getting down to business and solving problems. Job one is rebuilding our economy. From the ground up. The more time that is wasted trying to reflate what no longer works, the greater this crisis becomes. The market has decided and if we would simply listen, it is guiding our future. Instead, it's going to get a lot worse while monied interests do everything in their power to resurrect what has served them so well. What is now dead. In the end the markets will ultimately fix what monied interests and politicians don't have the will or desire to fix. It'll just be a more painful process but we'll get to the same outcome. And in the end future changes in the economic model will only move to weaken Wall Street and the monied interests. What's good for America isn't necessarily what's good for Wall Street. Ben Bernanke, Hank Paulson, Timothy Geithner, President Bush and President Obama would do well to take note of that fact in their policy decisions. Goldman Sachs and other Wall Street bank business models are in serious, serious, serious trouble.

Enjoy your 4th of July festivities. It may feel as though we are reliving the days of our Revolution. And to a certain extent we are. But, unlike history, our Founding Fathers have graced us with a new tool to accomplish the same outcome without the need for bloodshed or violence. They have instead graced us with the ability to initiate a bloodless coup every two years simply by voting. The human mind and its ideas and ideals are much more powerful than any weapon. And that means the shape of our future lies within the very mind that is reading this. Yes, that would be you. You will determine the shape of the American economy. The politicians don't hear you. But, they will. All in due time.

Now to the Stiglitz article. This month in Vanity Fair, Stiglitz again hammers home the demands for constructive change and a repudiation of colonialism.

Vanity Fair actually has a compendium of excellent articles on the economic morass which grips the world.

The Porsche Debacle

I don't know how many of you have followed the debacle between Porsche and Volkswagon but this seems like a script written time and again around the globe this cycle. Takeovers not supporting fundamentals. These deals were pumped like mad by companies like Goldman Sachs and other private equity and investment banking firms. (Every major bank in the U.S.) We said these deals would come crashing down and they sure are. It's apparent a company once known for its engineering excellence has allowed financial idiots to jeopardize the stability of the company.

Investment Banker - It's Time To Raise Taxes On Poor People

Investment bankers are just above frogs on the evolutionary scale. Were we to truly have free markets, much of what is comprised of investment banking would be illegal. They are net destroyers of capital in the economy. And their involvement in this crisis has been substantial. Now one of them has a great new idea. Raise taxes on poor people. This is the head of one of the same firms that we highlighted last week as helping themselves to extraordinary fees paid for by taxpayers in the case of GM.

Five States See Possibly Shutdowns

Link here.

Now, I don't wish to see states shut down more than anyone but let's put this in perspective. We had a post some time ago where we highlighted California as an example. The state budget went from $80 odd billion in 2000-2001 to $140 odd billion in 2008-2009. What increase in services did the state offer citizens with this massive increased burden? Did your standard of living double in the last eight years to support a near doubling of taxes? Cut the budget back to levels of a few years ago and the budget problem is solved.

Threats of suspending basic services are a form of economic terrorism. Every state government has more than enough resources to meet basic services to society. Cut wages, cut workers, cut benefits, cut nonessential spending, cut new projects that don't have a two year ROI and on and on and on. The government has to join the real world. A world they created through policy. Maybe if the taste is bitter enough, we'll see a change in said policy. And, on the Federal level, there is easily a trillion dollars per year in nonessential spending, excluding stimulus, that could easily be cut. That would be spending associated with wars and international games of the state.

Madoff Gets 150 Years For Heisting $50 Billion. Wall Street Gets $12 Trillion Bailout For Far Worse Crimes.

"The liberties of a people never were, nor ever will be, secure when the transactions of their rulers may be concealed from them." -- Patrick Henry

"The British people can face peril or misfortune with fortitude and buoyancy, but they bitterly resent being deceived or finding that those responsible for their affairs are themselves dwelling in a fool's paradise." -- Winston Churchill

Indeed, timeless truths. And while those that created this crisis are trying to feed us more gruel, transparency and honesty would have prevented much, if not all of this crisis. Instead the American people are on the receiving end of a mockery of justice and democracy.

I believe the new political leadership in Washington is making a grave mistake as it relates to this crisis. In fact, I think it's arguable that political strategy mistakes are the largest Washington miscalculations made since this crisis revealed itself. And these mistakes will ultimately contribute substantially to sinking the economy even deeper into a morass.

Let me start by saying that almost all calls for justice as it pertains to this crisis have been met with political rhetoric that the problems we see today are not the result of broken laws. Or even shielding of Wall Street or Washington from accountability by invoking many absurd claims. These fallacies exist because Wall Street has paid Washington handsomely to change the laws to their favor. Indeed, there was egregious disregard for the rule of law and terrible crimes committed. But, the rule of law was mangled such that our legal system has become a mockery in many regards. Wall Street has bought and paid for legal asylum and the American people know it.

If I am any representation of the American people, and I have very mainstream political views, the government has a serious problem. I am loyal to a way of life that respects the rights of the people to rule. To our Constitution. To a government that represents the interests of its sovereign above all others. I am not loyal to anything but these ideals and that means confidence is completely lost.

I realize a new political administration does not bear primary responsibility for this crisis regardless of any ridiculous attempts to assign blame for this an inherited mess. Yet I have no desire to support a system that has bankrupted our country and destroyed millions upon millions of lives just because someone tells me it's the right thing to do. The brow beating by those with the microphone, including a relatively recent urging by JP Morgan's CEO that we should all fall in line behind this new administration contains no sense of morality or truth. At times such as this, the people must remember that being an American is to embrace ones own thoughts and views. To challenge and demand excellence in government and in leadership. To seek the truth over political ideology. To seek democratization of economic opportunity. To seek justice where injustice exists. To smite tyranny and repression. To agitate nonviolently for effective change. That is what made this country great. It is only ideals of virtue that will restore our greatness. Because it is only these ideals that will transform government and restore society's confidence. If the politicians in Washington want Americans to support a policy of sacrifice through bailouts or handouts which we are told are necessary for our future, we need a call to account.

What does that mean to me? That means we need a post 1929-type commission with broad investigative capabilities to restore confidence in our banking system and government. Something a few who understand the depths of this crisis have already demanded. A commission that has the wherewithal and legal authority to follow the money trail. To investigate wherever the trail of evidence may lead be it lobbyists, politicians, regulators, the banking industry or anyone else to get to the root of what went wrong and how. Not a witch hunt as is so popular with politicians. Not the state sponsored terror of McCarthyism. But a search for facts. For truth. For restoration of the rule of law. To find out why the safest banking system in the world was systematically dismantled over the last thirty years. To restore American virtue and values. And, to report these findings with complete transparency and without prejudice directly to the American people. And, to recommend apolitical solutions that will permanently support an environment where a few elitists can never destroy our banking system or economy ever again.

I would accept any such investigation's conclusions were the process open, transparent, free of lobbyist influence and truly apolitical. Not a process controlled by government. One independent of government. I will not rally around anything or anyone just because there is political or social pressure being exerted to do so. These rallying calls aren't calls of a free nation. Or, because we have seemingly adopted a new political ideology. As we wrote before, a new ideology solves nothing if it is also an equally failed or flawed ideology. Rallying calls around the status quo are calls of repression. Of suppression. Fall in line or be publicly ostracized or marginalized. They are patently anti-democratic.

Our new President has the power to strike a permanent blow to cronyism, corruption, backroom dealings and the seamy opaqueness of Washington in the name of The People. To become a greatest of leaders. To restore policies of economic populism. To democratize economic opportunity. To restore America to its destiny. To charter a new course of enlightenment with laws that are permanently written into our Constitution if necessary so that these crisis can never develop again. But, first, he must prove his leadership by providing an account and transparency to the American people. It won't be easy to fight the forces so entrenched in Washington and Wall Street. In fact, it will surely involve extreme risks. Yet, were he to do this and commit to economic policy changes, transparency changes into government, a sound banking system and apply the rule of law to those complicit in wrongdoing, I believe society would embrace the sacrifice needed to rebuild a nation of the people, by the people and for the people. For all people regardless of race, gender, political affiliation, personal affiliation or religious belief.

Americans never wither from a great challenge of dignity and honor. But, we must be presented that great challenge in order to accept it. To date we have not been presented any such challenge.
Until the American people see a call to account, there remains a serious political problem in Washington. Politicians are going to run into a tremendous amount of push back in any efforts to accomplish anything that involves greater tyranny on the peoples of this country to save a system that has not benefited the vast majority of its citizens. Remember, it's our money, our government and our nation. It's not Washington's to give. It's ours to give and the President's to lead simply because we allow him to serve at our discretion.

Where is the justice? Where is the protection of the just? Where is the desire to identify the causes of this crisis and permanently resolve them to the satisfaction of a nation?

China - Bubble Of Belief

Someone who is finally not insane. We were a first, if not the first voice writing of impending doom in China years ago and many times since. If there is one fact I am completely certain of in everything we have accurately anticipated on this blog, it is that China is going to completely bust. Even now, where else have you read of the potential for up to a 50% decline in China's GDP? No where.

Let's Meet All Of Angelo Mozillo's Secret Friends In Congress

Link here.

Max Keiser - Goldman Sachs Extorting Money From The American People

Max Baucus Loves Lobbyists And His Health Care "Reform" Draft Shows It

“They (lobbyists) really care about our country.” - Senator Max Baucus on ABC News, January 2009

More gruel for the American people. More party favors for Max's buddies. Hey Max. Would you be willing to have all future conversations with lobbyists take place in your office and be taped? Then have these conversations uploaded to Youtube for the American people to watch? You know, since you are a public servant who serves at the pleasure of the American people. And, obviously because lobbyists really care about our country. I guess just like those same lobbyists representing corrupt foreign dictatorships, communist countries and oil fiefdoms that teach American hatred in madrassas. They all hire American lobbyists to do their bidding to our government as well.

Speak of pleasure. I bet you experience lots of it given the influence of the finance industry in the healthcare reform legislation you are chairing. I am sure any videotaping and transparency would be a mere formality since you obviously have our best interests at heart in healthcare and all of your other endeavors as Senate Finance Committee chair.

It's good to see Senator Baucus is following in the footsteps of other esteemed Senate chairmen. Like former Senate Banking Committee chairman Phil "I destroyed the banking system" Gramm, who worked so well with lobbyists on behalf of the American people. You remember Gramm. We incessantly ranted over the last four years about the overturning of Glass-Steagall courtesy of Mr. Gramm and the esteemed President Clinton. I would like to personally thank the lobbyists on this one. For destroying our banking system. Don't worry. You'll really love this one before the party is over.

As I type this I am watching Mitt Romney, the world's biggest political idiot, tell us the economy is going to turn soon. Just like the private equity firms he represented so well that as an industry are now imploding. Hopefully, we will elect his ego as President in 2012.

Link here.

The Wall Street Bubble Mafia - How Goldman Sachs Took Over Washington By Engineering Every Major Market Manipulation Since The Great Depression

Link to the Rolling Stones article here.

When the world was partying hard three years ago, we wrote that historically Goldman's perceived brilliance was tied to impending doom. And, we have railed on just about every manipulation that Taibbi has written of in this article. And we did so well before the bubble popped. A time when most no one would listen and most even discounted any validity of our remarks. Will they listen to Taibbi now? Let's hope so because we won't get any reality from the mainstream media. If you want to understand what is really going on, turn off the television, chuck the radio blow hards and burn the mainstream magazines. It's time to reign in Washington and Wall Street corruption.

Agrium's Takeover Of CF

Re our post this week on agriculture stocks, commodities and Potash. Without doing any type of analysis, I can almost assure you this deal with end up in bankruptcy court in the future. When the mergers & acquisitions and private equity buying binge was in full bloom, we had many posts on these dealings ending up in busts. Close to a year ago, over three hundred of these deals had already landed in bankruptcy court. By now we can surely assume it is in the thousands. The banksters sure did their diligence now didn't they? This deal isn't any different and surely isn't supported by sustainable cash flows or fundamentals. My memory may be hazy but I seem to recall a time when a certain idgit on a show by the name of Mad Money had a list of possible takeover stocks blessed by Goldman Sachs. And he used television to pump these stocks. Trillions of dollars were allotted to these deals. That would be "T" not "B".

See you in bankruptcy court.

Russian Bank Bailout Coming

No surprise to us. Coming Russian crises and their banking system mess have been on our radar for years. Wait till the fun really begins. Remember, we are in the eye of the hurricane. Patterns, be they economic or natural, share many commonalities. The greater the energy of a hurricane, the greater the back end damage. So, let's see. How many times in the history of capitalism have we seen an economic storm hit with such initial force? ie, The front side of a hurricane. How about never. Be prepared for what comes.