Fin/Inv

Ahhh....

There is nothing like the smell of an economic collpase in October. The road to recovery on Wall St hit a pothole today as banking analyst Richard Bove downgraded Wells Fargo to a "SELL":

"Oct. 21 (Bloomberg) -- U.S. stocks tumbled in the final hour of trading after analyst Dick Bove downgraded Wells Fargo & Co., erasing an earlier rally spurred by better-than-estimated results at Morgan Stanley and Yahoo! Inc.
Wells Fargo, the largest U.S. home lender this year, slid 5.1 percent after Bove of Rochdale Securities cut the shares to “sell” and said earnings were boosted by mortgage-servicing fees rather than improving business trends.

‘Most Disturbing’

Bove said the “most disturbing” thing about Wells Fargo’s results is that loan losses seem to be accelerating. Assets no longer collecting interest climbed 28 percent to $23.5 billion from the second quarter, Wells Fargo said, while the reserve to cover future loan losses grew by $1 billion from the second quarter to $24.5 billion.
“It’s definitely had an effect on the market,” said Tim Smalls, head of U.S. trading at Execution LLC in Greenwich, Connecticut. Bove “has a very good following and very long track record of consistency,” he said."

My Take:

All I can do is laugh at the fraudsters on Wall St. The paragraph in bold is all you need to know folks.

The banking system remains basically insolvent as unemployment soars and the economy worsens. People are continuing to walk away from their homes in record numbers as home prices continue to nosedive.

The Wells number proves that the loan losses that the banks have bee hit with are STAGGERING! Please note that Richard Bove is a screaming bull when it comes to the major banks in the US. In fact, he was raving about Wells Fargo on CNBC this morning until he got a chance to see Well's numbers.

The housing problem continues to worsen and Wall St refuses to accept it. They continue to obsess about a recovery when in fact there isn't one.

What scares me most about the housing crisis is no one really knows how many empty homes the banks now sitting because they refuse to take the losses. The shadow inventories are still incredibly high. Just think, Wells only admitted to $23 billion of bad loans. Imagine what that number looks like when you include Well's shadow inventories?

Let's get real here folks: The banks would prefer to let empty houses sit versus forcing the buyer into foreclosure because they would then have to take the loss when the house was sold.

In other words, in this new world of zero mark to market accounting, it's in the banks best interest to just let the empty homes sit in limbo because they can keep a loan marked at full value versus taking a 40% loss on a sale via foreclosure.

THE SCAM ROLLS ON!

There was lots of chatter about a housing recovery in the comments section in this blog over the last few days. I think the data from Wells puts that issue to rest. The ONLY part of the housing market that is moving right now is the low end of the market(under 300k), and the foreclosure markets in the bubble areas that were the hardest hit with losses of 50% plus...Vegas/Florida anyone?

The housing market in general remains a complete disaster.

Chart of the Day

Hmmm....Take a look at this comparison of the bounces post the 1929 and 2008 stock market collapses.

Quick Take:

Keep in mind this was as of the end of August. The 2008 retracement has pretty much equalled the one seen following 1929.

Like today, Wall St screamed "The worst is behind us!" and "the recovery has begun!" as the market roared back in 1929/1930. Reality hit two years later in 1932 when the economy failed to turn around. The market then once again rolled over and eventually bottomed 90% from the highs in 1929 as the world realized the worst was yet to come.

Will the same thing happen again today? Every collapse is different and each one has its own unique way of playing out so it's difficult to predict. History however does tend to repeat itself.

The Bottom Line

The problem with relief rallies like the one we are seeing today is they are based on zero fundamentals. The profits that are currently being reported reported in the financial sector are rigged by vague accounting rules in order to keep the game going. This is the same type of thing we saw when the tech bubble crashed.

The banks recent record profits are a fraud because they aren't taking the losses from the previous housing bust. It's like they are pretending it never happened. The government has totally become an enabler to the banking system and refuses to force them to clean up their act via regulation and accounting standards.

Basically, they are letting the number crunchers on Wall St get away with bloody murder just like they did during the tech bubble.

The street continues to throw some bright red lipstick on this pig in an attempt to keep the game going.

However, like we have learned with every other on Wall St scam, the fraud can't be hidden forever. The truth always comes out and the fundamentals then take over:

The Wells Fargo surprise today allowed you to take a rare peek into the skeletons that sit in Wall St's closet.

After taking that peek we now know one thing for sure: It ain't pretty.

We have a long way to go before this is over folks. Please also take note that the dollar was once again down today. Oil almost hit $81/barrel.

As the dollar continues to drop you need to wonder: Has the world already concluded that we have already destroyed ourselves?

Disclosure: No position long or short in Wells Fargo.

Submitted by Nic Lenoir of ICAP

Most market commentators attribute the sharp reversal of fortunes of the equity markets in the afternoon to a downgrade of WFC by Bove. That definitely is a factor, but what is a bit puzzling is that every bank earnings coming out are usually put under a lot of scrutiny, maybe not on CNBC, but definitely amongst the financial community. Today's late sell-off is more reflective of the paper thin liquidity out there and how trading is become a ping-pong match between high frequency traders.

Now this is interesting, how we handle 1,070 through 1,075 will be key, we tested the area into the close, and the market should in theory range between 1,074 and 1,082 in the early part of the night session. The question is what happens when Europe walks in. The Dax as can be seen on the 30-minute chart is set to retest my key pivot at 5,750. We had a strong bounce after testing it this morning. Should we open there or below in the morning I would be very cautious. There is a gap to fill at 5,650 below and then straight onto the huge medium term support at 5,540. The way we closed I expect we will in the near-term try to nake a run for it, but that all depends about tomorrow's open. As seen on the weekly chart so far we have been capped by the 50% retracement of the entire bear move, and that big medium term resistance combined with heavy divergence of short-term indicators does bodes for lower prices.

Is there also a level at which commidities become a threat to recovery? It seems nothing but a bust will stop the boom in this market. Copper exited a bull flag to the upside and posted a bullish engulfing candlestick. That in theory would mean we will go challenge 330 or even 350, and that's a big buy signal for all the trend followers. There will be a point where demand and price are reconcilied, and the higher the price goes the more the demand goes... the other way. Let's face it, the rise is not really due to a shortage. 

The choppy conditions observed in trading and correlations breaking down as we are near the highs of a 60%+ rally have the sweet smell of exhaustion. I would expect more chopping with little advance and finally a break unless we do get the greenlight at the open tomorrow trading through 1,070/1,075 and 5,750 in the Dax (touching or breaking this level has been an automatic 100 points move). Either way this time we will get the move to 1,035 in S&P futures, where the market will decide weather this is a big clearing sale coming up or just a bargain discount before the holiday shopping.

Good luck trading,

Nic

The Wall Street Journal reports that the pay czar, Kenneth Feinberg, is going to cut executive comp at 7 TARP recipients for the 25 most highly paid employees.

Does this really mean anything? The press will noise it up as significant (and some outlets will no doubt finger wag at this “interference”) but the short answer is no.

First, recall Feinberg’s hollow mandate. He is limited to only TARP recipients, not the beneficiaries of other forms of government largesse. And as anyone who has an operating brain cell knows, the number of firms on the dole and the degree of subsidies is much greater than the TARP. Have a look at the Fed’s balance sheet for a reality check. Even Larry Summers said,

There is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support for the financial system.

So let us look at the list of companies affected. AIG, Bank of America, Citigroup, General Motors Co., GMAC Inc., Chrysler Group LLC and Chrysler Financial. AIG is effectively nationalized but is allowed to operate as a private company, a simply bizarre state of affairs. Pay cuts falls well short of the oversight the government should be exercising (any private owner with that big of a stake would have thrown out the board and installed new management, for starters, and be all over AIG like a cheap suit). So this is an overdue, token measure to appease the public over the AIG retention bonuses that were also extended to clearly non-essential support staff, which is a clear tipoff that they were also extended to non-essential management.

Four of the companies are auto bailout related, so we can exclude them as far as implications for big financial firms are concerned.

Citigroup is an obvious ward of the state too, and he AIG argument applies there. The government should have more control there too, which does NOT mean micromanagement. When the Swedish nationalized their banks, they replaced management and set strict goals and targets, but did not interfere in operations. Bank of America may look like a borderline case, but it would be dead now had it not gotten emergency infusions. Given its credit card losses, Merrill, and Countrywide (for starters) combined with the sudden exit of Ken Lewis, it may well be in worse shape than is now perceived.

The point is that the collection of these scalps will do nothing to comp levels ex these firms. The companies that also enjoy implicit government guarantees are free to do the “heads I win, tails you lose” game of privatized gains and socialized losses. And Ken Lewis is the poster child of why these measures are completely meaningless. He sacrificed his 2009 pay, but will still collect $125 million when he departs Bank of America.

If the government is going to backstop the industry (and this isn’t an “if” anymore), it needs to limit those firm’s activities to what is socially valuable and regulate them heavily to contain risk taking. As we have said, reining in executive pay (and note there is no will to do that anyhow) is not an effective approach. Those employees who don’t like that are free to decamp and raise money in ways that do not involve the regulated firms in any way, shape, or form, save perhaps counterparty exposures on very safe, highly liquid instruments.

Dave Altig writes at Macroblog: The growing case for a jobless recovery

Dr. Altig reviews several recent Macroblog posts, and adds:

The percentage of employee separations labeled permanent is at a recorded high.

Underneath the usual total unemployment numbers are the reasons an individual is unemployed: You are on temporary layoff; you quit your job; you have reentered the labor market and have yet to find a job; or you are entering the job market for the first time and have yet to find a job. Or, finally, you have been permanently separated from your previous employer, who has no expectation of hiring you back.

The last category is the dominant reason for unemployment at this time. That might not seem surprising, but it actually is. Never, in the six recessions preceding the latest one, did permanent separations account for more than 45 percent of the unemployed. The current percentage stands at 56 percent as of September and appears to be still climbing:


Of course, none of this is proof positive that we are in for a "jobless recovery," but, to me, the odds appear to be increasing.

So far the current recovery is even worse than "jobless"; it is a "job-loss" recovery.

After the close today, F5 Networks (FFIV) posted earnings that easily beat analyst estimates. Considering that F5 Networks has had a much rougher recession then Riverbed (RVBD) its encouraging to see the turnaround. F5 Networks reported an increase in their pipeline and movement of project on hold. All very promising for RVBD even though they aren't exactly the same business they somewhat track

Submitted By: Geoffrey Batt

No one rings a bell at the top?  Watch CNBC.  There may not be a better counterexample.   Late to just about every party, CNBC’s favorable coverage of a stock, commodity, ETF, etc., typically presages a turn and subsequent decline in the asset(s) in question.  Think wildcat oil in June 2008- to select one out of uncountably many examples.

Disclosure: I am long equities listed on the Iraq Stock Exchange, having made my first investment in January 2008.

Disclosure: upon learning CNBC’s Erin Burnett would spend the week highlighting ways to invest in Iraq, I threw up a little in my mouth. 

After watching three days of coverage, however, I take solace in the fact that Erin Burnett and sidekick Jim Cramer do not have the slightest idea what they’re talking about, enthusiastically promoting a private water bottling company, a sports complex, British Petroleum, Caterpillar, etc., while altogether neglecting the Iraq Stock Exchange: beautifully dysfunctional, cheap, and, it seems, off the radar. 

Before continuing a few points merit further comment:

• Contrary to what Erin Burnett would have you believe, there is nothing patriotic about investing in Iraq.     To slightly modify Samuel Johnson, patriotism is for scoundrels seeking refuge with fools, neither of whom have any business investing in Iraq at this stage in the game.  Patriotism implies irrational emotion, recognition of arbitrary borders and distinctions, and a spurious moral superiority best left to politicians and military recruiters.  Patriotism changes the focus from Iraq to the United States, from Iraqis to Americans- it’s hard to imagine a more odious, self-serving frame of mind.
• Recommending British Petroleum as a way to gain exposure to Iraq makes about as much sense as recommending Wal-Mart  as a play on China.  Wal-Mart = dead money; Wal-Mart seeks growth in China; China booms; Chinese and Hong Kong equities soar ; Wal-Mart still = dead money.  In much the same way:  BP moves into to Russia, Russia booms, Russian equities soar, BP still  = dead money.  For BP’s shareholders, Iraq will prove no different.
• Private Equity may work in Iraq.  Some will surely make their fortunes in PE; others will end up in an unmarked grave somewhere in Anbar.   Meddling with private Iraqi companies increases the likelihood of threatening powerful local interests, and in a place like Iraq that’s a game you do not want to play.

It’s fair to ask at this point what, apart from oil, makes Iraq’s economy and equities so special.

• Iraq’s economy is largely insulated from the global financial crisis.  It thus represents one of the few investments suffering from a set of problems wholly separate from those plaguing the rest of the world.  Those problems are very real and have the potential to turn the country into a failed state, but the key here is that in a world where everyone is attempting to figure out the same puzzle, it sometimes makes sense to find a different one to solve.  Moreover, as it’s increasingly obvious  world finance is dominated by issues of regulatory capture, there is little hope for all but the very well connected to consistently achieve above average returns.  To shift the metaphor slightly, when the game is rigged against you the rational choice is to either stop playing, or, as I hope I have done, find a completely different game where the house does not always win.
• The Central Bank of Iraq (CBI) could teach Chairman Bernanke et al a thing or two about sound monetary policy.  Consider, for instance, that Iraq’s CPI spiked 75% YoY in mid 2006, a time when it appeared the country was on the brink of civil war and total collapse.   Today CPI stands at 8% YoY.  To regain control over inflation the CBI allowed the Dinar to appreciate roughly 20% vis-à-vis the USD; in this respect Iraq enjoys an enviable advantage over other non-oil export oriented countries.  That is, since Iraq’s principal export is dollar denominated, Dinar appreciation does not make it more expensive for other countries to buy.  And the benefit of a stronger currency, of course, is that it reduces Iraq’s import costs, thus relieving a major source of inflationary pressure.
• CBI data from August put Forex Reserves at $42 billion, which represents approximately 15 months import cover.
• In 1980 Iraq had a population of 14 million.  Today it’s 30.7 million.  In case you’re curious, that’s equivalent to a 30yr CAGR of 2.6%.  In addition, with 40% of the current population aged 14 years or younger, Iraq will likely benefit from a strong demographic profile.
• While improving, the Iraq Stock Exchange is moderately dysfunctional, e.g., on a good day the exchange trades $2 million of stock, trading was not electronic until July 2009, the exchange holds three two hour trading sessions (this will change to five 2 hour trading sessions Nov. 1 2009), company information is hard, but not impossible, to come by, etc.  These problems,  coupled with the misaligned perception that Iraq already IS a failed state, mean this market is largely untouched by major institutions and foreign individuals.
• A depressed market with few participants indicates a lack of significant sources of selling pressure.
• Many listed companies are solidly profitable and have been for the past five years; some companies are beginning to experience YoY bottom line growth in excess of 200%.
• The Palestinian Stock Exchange’s market cap at the end of September 2009 was $2.36 billion.  As of last week, Iraq’s was $2.74 billion.  

For those eager to learn more, I encourage you to put the time into researching Iraq’s publicly listed companies.  The Iraq Stock Exchange offers the contrarian investor pure exposure to Iraq’s non-oil sectors.  The potential risks are great, but so too are the rewards.

They say first impressions mean a lot, but apparently not to Rochdale analyst Dick Bove. This morning following WFC's earnings release, the analyst was positive on the stock and said it was a good report. Now, later in the day he is reportedly advising clients to sell the stock. Below we highlight the headlines courtesy of Briefing.com. 08:07 WFC Wells...

Some quickies for hump day:

• Late edition bonus: Pay Czar to Slash Compensation at Seven Firms (WSJ)

• Car Czar Shocked by Detroit (Fortune)

• Blame It All On Ayn Rand (MarketTalk)

• How to manage the gigantic financial cuckoo in our nest (FT)

• Imperialism, Goldman Sachs Style (NYT)

• Bailout’s hidden costs (CNN/Money)

• Wall Street on edge as SEC top cop gets aggressive (Reuters)

• Persistent pessimism (Marketwatch)

• Google To Release New Music Service (TechCrunch)

• The 8 Best Viral Advertising Videos of 2009 (So Far)

What are you reading?

There were no notable movers in the September BLS State unemployment report: the worst states were the usual suspects: Michigan, Nevada, Rhode Island, California, and South Carolina, while the states that have 8 people to share among them, North and South Dakota, Nebraska, Utah and Iowa, continued being the best performers.

So, I was just chatting with Berk - we were going through our laundry list of short victims. We just had loaded up on some brand spanking new CCJ puts when suddenly the market fell off the plate.

So, I’m like: “Berk - WTF just happened?”

Berk: “I dunno, nothing really - we TOPPED :-)”

I think that quote goes on my wall tonight. It’s not just funny - it pretty much summarizes one major tenet I have learned about trading, which is that the news does not matter (see AAPL) and that the market does whatever it does based on trader sentiment, or what Prechter refers to as socionomics.

I am somehow counting 13 waves up since the early October low, so this sudden drop down looks extremely promising. However, it is occuring on almost zero participation on the Zero Lite, and that is making me very very cautious. But we are starting to reach some velocity, and I’m not about to pull the cord just yet.

If you really want to know what brought the market down I tell ya - it was my new Peter Jones avatar

This man does not fuck around…

I’m re-posting Berk’s chart from 3:30pm as it wasn’t up very long:

12:30EDT - Berk here.  Going along with Mole’s definition of insanity… I bring this old adage for everyone to remember… “The markets can remain irrational longer than you can remain solvent.” Remember this as we are expecting every new high to be the top.  It sure as hell is close, but “close only counts in horse-shoes and hand-greanades.”  The market eats “close” for break-fast, lunch, and dinner.  (And mid-night snack sometimes too).  As a reitterance of the caution you now have grown accustomed to me promoting, I will let you know that only 1 indicator of my 13 has bulled back.  It was the $CPC, but not to a level to indicate a top.  Everything else has strengthened.  Look at the $SPXA200R…  95% today, with the cluster of MAs ringing in above the 90 level.  That means that roughly 90% of all $SPX stocks are above their 200MA, and have been since July.  We are due for a DIP (not a huge drop yet) soon, but let it come to you folks…  Don’t chase.

Enjoy…  Berkster out.

4:30pm EDT: The Zero chart is quite interesting this evening:

It seems that no participation now precedes drops in the tape. We shall see - I remain skeptical but encouraged by this little exercise in terminal velocity.

The daily Zero’s fractal continues to play out thus far - I’m pretty stoked about this of course but tomorrow will be the acid test, so let’s remain on guard.

Program Trading Update:

geronimo/ES: -9.5
evil.rat/ES: -2.25
evil.rat/NQ: -2.25

Rough day for geronimo - got stopped out through the big drop.

Matt Taibbi once again writes in Rolling Stone, this time on naked short sales, and while he gets a good part of the issue right, he (and many others who have opined on this situation over the years) miss the forest for the trees.

Matt writes:

But the most damning thing the attack on Bear had in common with these earlier manipulations was the employment of a type of counterfeiting scheme called naked short-selling. From the moment the confidential meeting at the Fed ended on March 11th, Bear became the target of this ostensibly illegal practice — and the companies widely rumored to be behind the assault were in that room. Given that the SEC has failed to identify who was behind the raid, Wall Street insiders were left with nothing to trade but gossip. According to the former head of Bear's mortgage business, Tom Marano, the rumors within Bear itself that week centered around Citadel and Goldman. Both firms were later subpoenaed by the SEC as part of its investigation into market manipulation — and the CEOs of both Bear and Lehman were so suspicious that they reportedly contacted Blankfein to ask whether his firm was involved in the scam. (A Goldman spokesman denied any wrongdoing, telling reporters it was "rigorous about conducting business as usual.")

Matt gets so close, but fails in the closing.

See, there are two area of naked shorting that nobody wants to really deal with, yet both have to be if we are ever to make a difference.  Let's deal with them in turn.

The first, the writing of "naked" swaps, is one that I've written about before.  The essence of a "credit default swap" is a contract whereby the buyer of protection insures against the default of a credit instrument (usually a bond of some sort.)  If the bond issuer doesn't pay principal and/or interest, the buyer collects the face value of the bond from the seller of protection - but in turn must tender the defaulted bond to the seller. 

This "tender requirement" is due to the fact the most of the time a default bond is not worth zero - even in a bankruptcy most companies have some value, and the bondholders are entitled to that recovery.

This is pretty much like homeowners insurance if you think about it.  Your house might have a fire, but odds are it won't be worthless if there is.  Same with auto insurance - you buy insurance against a wreck, but if you have one, the insurance company can pay you the market value of the car prior to the crash and in turn they get to keep the (wrecked) car.

Now envision that we allow any number of people to buy fire insurance against your house.  There's only one house, but ten fire insurance policies.  Only one of those people (you) owns the house and only one of them (you) lives there, but ten people stand to collect whatever the damage amount is if there's a fire.

How likely would it be that someone would be sneaking around with a gas can at 3:00 AM were this to be allowed?

Now let's add another wrinkle to the mix - to collect on any of the insurance policies you must have possession of the house! 

Tonight, you have a real fire and the house burns to the ground.  The recovery value is zero; indeed, it might be negative (since you have to hire a bulldozer and cleanup crew to clear away the mess before you can rebuild.) 

But if there are ten insurance policies, suddenly that burned out smoking hulk has value that doesn't really exist, and a bidding frenzy is likely to develop for the (one) house.  See, without the (burned out) house to tender those insurance policies are worthless.

We don't allow this sort of thing in the insurance business because it both distorts the market and creates a reason for people to intentionally start fires.

Why do we allow it in the "credit default swap" business? 

Did a few people intentionally start some (financial) fires?

The same thing applies, ironically, when it comes to options.  See, if I buy a PUT option the market maker who sells it to me immediately hedges his exposure. If the market maker does not hedge and the price collapses, I will put the shares upon him at vastly more than their value and he will suffer a huge loss.  He has no reason to take that risk; his money is made on the bid/ask spread, and he has no reason to take a directional bet on the stock's price (he may, for that matter, agree with me on which way he believes the prices will move!)

Market makers are exempt from the prohibition on naked short sales.  They should not be.  To allow them to be is to remove one of the actual risks in an option transaction - execution risk.  That is, it is entirely possible to have more PUTs (or CALLs) outstanding than there is public float of the underlying issue!  It is also possible for those to go out in the money and be exercised, and if that happens then you have created exactly the same sort of counterfeiting fraud that exists with a raw naked short.

The same problem exists on the long side.  When a naked short has to be bought back, there are insufficient shares available to do so.  This creates a dislocation in price to the upside.  While everyone talks about "bear raids" nobody talks about synthetic and fraudulently-generated short squeezes - yet they are just as pervasive in impact as naked shorting, but in the opposite direction.

How many of the so-called "vertical" moves we have so often seen in stocks since last fall, in both directions, can be attributed to this? 

The answer?  Most of them.

The only check and balance on this is to not exempt market makers from the constraints that everyone else must follow - that is, you can't short shares you cannot actually borrow, and you can't buy something that nobody is willing to sell at the desired price.  Put more simply, the quantity of a given stock in "float" is in fact fixed, determination of the float is made by the corporation when they decide how many shares to issue, and nobody can be allowed to count a given share twice, no matter how that double-counting would otherwise occur.

Removing this pervasive fraud from the markets would cause option premium to rise a lot when the open interest began to approach a meaningful fraction of the float, and it would bar the writing of credit default swaps in amounts that exceed, in total value, the underlying reference.  That's how it should be, and it would have made the sort of bets placed last year uneconomic, as execution risk, which in fact exists, would have to be computed into the option's (or CDS') value.  Today, it is not.

Matt gets so close, but then fails in the end. 

The reality is that this sort of "counterfeiting" is in fact part and parcel of both the option and credit-default-swap markets, and in each and every case, including old-fashioned naked short sales, it is in fact an act of fraud.

We don't need new laws - we simply need the existing laws that deal with forgery and counterfeiting enforced across all investment products, and the "special exceptions" that legalize certain sorts of fraud must be removed.

If this is the kind of garbage data that moves the market, then fuck this shit. Click here for a primer on Dick Bove.

By George Washington of Washington’s Blog.

In 2000, America was described as the sole remaining superpower – or even the world’s “hyperpower”. Now we’re in real trouble (at the very least, you have to admit that we’re losing power and wealth in comparison with China).

How did it happen so fast?

As everyone knows, the war in Iraq – which will end up costing $3-5 trillion dollars – was launched based upon false justifications. Indeed, the government apparently planned both the Afghanistan war (see this and this) and the Iraq war before 9/11.

And the financial system collapsed last year due to looting and fraud.

How Empires Fall

But Paul Farrel provides a bigger-picture analysis, quoting Jared Diamond and Marc Faber.

Diamond’s book ’s, Collapse: How Societies Choose to Fail or Succeed, studies the collapse of civilizations throughout history, and finds:

Civilizations share a sharp curve of decline. Indeed, a society’s demise may begin only a decade or two after it reaches its peak population, wealth and power…

One of the choices has depended on the courage to practice long-term thinking, and to make bold, courageous, anticipatory decisions at a time when problems have become perceptible but before they reach crisis proportions

And PhD economist Faber states:

How [am I] so sure about this final collapse?

Of all the questions I have about the future, this is the easiest one to answer. Once a society becomes successful it becomes arrogant, righteous, overconfident, corrupt, and decadent … overspends … costly wars … wealth inequity and social tensions increase; and society enters a secular decline.

[Quoting 18th century Scottish historian Alexander Fraser Tytler:] The average life span of the world’s greatest civilizations has been 200 years progressing from “bondage to spiritual faith … to great courage … to liberty … to abundance … to selfishness … to complacency … to apathy … to dependence and … back into bondage”

[Where is America in the cycle?] It is most unlikely that Western societies, and especially the U.S., will be an exception to this typical “society cycle.” … The U.S. is somewhere between the phase where it moves “from complacency to apathy” and “from apathy to dependence.”

In other words, America’s rapid fall is not really that novel after all.

How Consumers, Politicians and Wall Street All Contributed to the Fall

On the individual level, people became “fat and happy”, the abundance led to selfishness (”greed is good”), and then complacency, and then apathy.

Indeed, if you think back about tv and radio ads over the last couple of decades, you can trace the tone of voice of the characters from Gordon Gecko-like, to complacent, to apathetic and know-nothing.

On the political level, there was no courage in the White House or Congress “to practice long-term thinking, and to make bold, courageous, anticipatory decisions”. Of course, the bucket loads of donations from Wall Street didn’t hurt, but there was also a religion of deregulation promoted by Greenspan, Rubin, Gensler and others which preached that the economy was self-stabilizing and self-sustaining. This type of false ideology only can spread during times of abundance and complacency, when an empire is at its peak and people can fool themselves into thinking “the empire has always been prosperous, we’ve solved all of the problems, and we will always prosper” (incidentally, this type of false thinking was also common in the 1920’s, when government and financial leaders said that the “modern banking system” – overseen by the Federal Reserve – had destroyed instability once and for all).

And as for Wall Street, the best possible time to pillage is when your victim is at the peak of wealth. With America in a huge bubble phase of wealth and power, the Wall Street looters sucked out vast sums through fraudulent subprime loans, derivatives and securitization schemes, Ponzi schemes and high frequency trading and dark pools and all of the rest.

Like the mugger who waits until his victim has made a withdrawal from the ATM, the white collar criminals pounced when America’s economy was booming (at least on paper).

Given that the people were in a contented stupor of consumption, and the politicians were flush with cash and feel-good platitudes, the job of the criminals became easier.

A study of the crash of the Roman – or almost any other – empire would show something very similar.

Dylan Ratigan has issued a direct challenge to Goldman Sachs:

There is a sense that if you make money you are going to give. Making money, however, is different from stealing money. If you steal the money, you are not expected to give it to a charity my friends. If you steal the money we will take the money back from you, by way of the government, and put you in jail. The American taxpayer in fact has given trillions of dollars, billions directly to Goldman Sachs so that Goldman can use the taxpayer subsidy to play a parlor game and pay themselves record bonuses.

What apparently set Dylan off so much, were the hypocritical statements made earlier by Goldman employee Lord Brian Griffiths, at a conference on morality and markets, in which he implored bankers, in addition to saying that inequality helps all, to increase charitable giving to "boost the banking industry's tarnished reputation."

Dylan's proposals on how to effectuate the anti-Goldman movement:

• Move money to small banks
• Use cash, not credit cards
• Contact your lawmakers.

Full clip below:

From the Fed: Beige Book

Reports from the 12 Federal Reserve Districts indicated either stabilization or modest improvements in many sectors since the last report, albeit often from depressed levels. Leading the more positive sector reports among Districts were residential real estate and manufacturing, both of which continued a pattern of improvement that emerged over the summer. Reports on consumer spending and nonfinancial services were mixed. Commercial real estate was reported to be one of the weakest sectors, although reports of weakness or moderate decline were frequently noted in other sectors.

On real estate:

Most Districts reported that housing market conditions improved in recent weeks, primarily from a pickup in sales of low- to middle-priced houses. Contacts reported that sales were boosted by the government's tax credit for first-time homebuyers. Resale activity also edged up in parts of the New York District, although prices continued to be depressed due to a substantial volume of foreclosures and short sales. New and existing home sales remained flat in the Philadelphia District, and home sales continued to decline throughout the St. Louis District. Sales of higher-priced homes were very slow, according to Philadelphia, Cleveland, and Kansas City. Moreover, real estate agents in the Boston and Cleveland Districts were uncertain about the future of home sales once the tax credit expires. Availability of financing continued to be a concern for potential buyers in the Cleveland and Chicago Districts.
...
Commercial real estate continued to weaken across the 12 Districts, although even this sector had scattered bright spots. Each District indicated that demand for private commercial real estate was weak, with New York, Philadelphia, Cleveland, Atlanta, Chicago, St. Louis, Kansas City, and San Francisco all characterizing activity as declining further since the last report. An inability to obtain credit was often cited as a problem for businesses that wanted to purchase or build space. High vacancy rates were noted as a key concern especially for landlords who were not offering concessions. And, while industrial real estate in the Richmond District was generally weak, renewed interest by retailers to revisit postponed expansion plans was also noted. Finally, public nonresidential construction activity funded by federal stimulus projects was a source of strength in the Cleveland, Chicago, Minneapolis, and Dallas Districts, but gains were often offset by state and local government cutbacks.

Mervyn King Speech Break Up Banks

Well first off, I want to thank Tim for hosting this space and allowing me to bludgeon you with some theory on the Gold-Silver Ratio (GSR), assuming he approves and publishes :-).  I found Slope a while back and really appreciate the quality with which Tim presents his ideas on a daily basis.

My name is Gary and I have been trading the markets quite actively for about ten years.  I run this blog and the website biiwii.com.  My primary focus is not on being bearish or bullish, but as a trader, on being right.  As a human being I, like Tim, am bearish due to the unhealthy and crooked dynamics that go into keeping this bloated construct afloat. 

But keeping a disciplined psychological profile is important in the effort not to micromanage or try to control the markets.  There are also many tools that can be used ('signposts' as I call them) as well, to help filter the noise.  One of those is the all-important GSR.  I got the idea to highlight this after reading one of Tim's posts regarding Robert Prechter and a coming USD rally.

The GSR is one signpost that can give us a leg up on impending market events.  The lower panels on the above chart show what I mean.

You will hear all manner of cheering by gold bugs when silver is leading gold, and as the first panel shows, when gold began to out-perform silver, the gold miners (HUI) gave a clear indication that all was not well.  To this day, many gold bugs seem to think that the gold stocks will escape the coming carnage when the GSR turns up again.  Pardon me if I do not go along with this idea in the short term, although beyond a coming correction, I believe this sector is the place to be for reasons I will explain a bit later in the post.  But here is the nugget, if you will:  The gold miners need the USD to strengthen and the GSR to turn up in order to establish the next leg up in their positive fundamentals and in order to become distinguished from the general commodity/inflation trade that is positively correlated to the economy. 

We all remember how well-gamed crude oil was in the summer of '08.  This was the final high profile bubble of what was in my opinion, a series of rolling bubbles that made up the commodity (and inflation) mania which led directly to the crash of Q4, 2008.  This bubble did not get the memo that the end was near as sincere 'peak oil' believers were about to be hit with the reality of an epic deflationary impulse.  Oil was just another play, positively correlated to the economy.

The next two panels are industrial metals and the stock market, which are of course, also items of positive economic correlation.  They had their bubble tops previously and acted as we might expect leading into the upturn of the GSR and onset of the crash; they diverged negatively.

The GSR signals the draining of liquidity as the mass speculative urge begins to fade.  It rises with the same dynamics that make the USD rise in a bout of deflation.  In other words, it rises with the collective need to get liquid, get safe and get the heck out of the casino.  So, any bottoming or bullish activity in the GSR can be looked upon as an early warning system on a USD rise and accompanying decline of nearly all asset markets. 

But here is what I love about the GSR.  While it can give signals to get short certain bloated and hope-fueled markets, the rising GSR also signals that things like oil, industrial metals and even human hopes for prosperity will be declining in terms of gold.  I find Prechter's analysis that gold will decline in a deflation therefore so too will the gold mining stocks, to be too simplistic.  Gold will probably decline in a deflation, but here are two vital points to be considered beyond the short term:

1) Gold will decline much less than positively correlated items - like silver, like oil, like copper, etc.  Gold will decline less than gold mining cost inputs, which means margins at the companies that dig the yellow stuff out of the ground will expand as their product out-performs relative to their costs.  The best part is that another epic buying opportunity is likely to present itself even as the miners' fundamental picture improves.  Now that's risk/reward I can deal with.  I am getting my HUI downside targets prepared, just as was the case in Q4, 2008.

2) I do not believe that a real deflation is going to take hold.  Pull up a monthly chart of the 30 year bond and you will see that the 100 month exponential moving average has not been broken.  This condition has gone on for decades and it means that inflation expectations have not broken out despite the best hopes of the inflation alarmists.  What this actually means is that while deflationists and inflationists duke it out, policy makers are allowed to continue to inflate at will as inflation hysterics inevitably swing back to deflation hysterics.  I tried to get this point across recently in this article entitled Yin/Yang, Deflation/Inflation.

My main point is that as long as confidence by the majority remains intact, policy makers will continue their macro game of hide the cheese.  They need a deflation event right about now, which will likely be used as an inflationary lever yet again.  The GSR is one tool to watch constantly going forward because if that is a bullish consolidation of last year's hysterical upside, the ratio will find support - and a higher low - in the noted zone and that will not be good for any markets in the short term.  In the intermediate term it will signal that gold mining companies will be one of the few flourishing sectors as the 'real' price of gold continues its rise, as indicated first and by the GSR and gold's ratio to many other assets.

I hope this post is not too dry.  This is a blog with a very entertaining publisher who writes in a clear and concise manner.  As I review what I have written above, I realize this stuff can be a tough read.  But I hope it helps add some perspective to the ongoing debates on inflation, deflation and gold's role amid the noise.

Best to you all, and thank you again Tim!

Gary Tanashian

Well first off, I want to thank Tim for hosting this space and allowing me to bludgeon you with some theory on the Gold-Silver Ratio (GSR), assuming he approves and publishes :-).  I found Slope a while back and really appreciate the quality with which Tim presents his ideas on a daily basis.

My name is Gary and I have been trading the markets quite actively for about ten years.  I run this blog and the website biiwii.com.  My primary focus is not on being bearish or bullish, but as a trader, on being right.  As a human being I, like Tim, am bearish due to the unhealthy and crooked dynamics that go into keeping this bloated construct afloat. 

But keeping a disciplined psychological profile is important in the effort not to micromanage or try to control the markets.  There are also many tools that can be used ('signposts' as I call them) as well, to help filter the noise.  One of those is the all-important GSR.  I got the idea to highlight this after reading one of Tim's posts regarding Robert Prechter and a coming USD rally.

The GSR is one signpost that can give us a leg up on impending market events.  The lower panels on the above chart show what I mean.

You will hear all manner of cheering by gold bugs when silver is leading gold, and as the first panel shows, when gold began to out-perform silver, the gold miners (HUI) gave a clear indication that all was not well.  To this day, many gold bugs seem to think that the gold stocks will escape the coming carnage when the GSR turns up again.  Pardon me if I do not go along with this idea in the short term, although beyond a coming correction, I believe this sector is the place to be for reasons I will explain a bit later in the post.  But here is the nugget, if you will:  The gold miners need the USD to strengthen and the GSR to turn up in order to establish the next leg up in their positive fundamentals and in order to become distinguished from the general commodity/inflation trade that is positively correlated to the economy. 

We all remember how well-gamed crude oil was in the summer of '08.  This was the final high profile bubble of what was in my opinion, a series of rolling bubbles that made up the commodity (and inflation) mania which led directly to the crash of Q4, 2008.  This bubble did not get the memo that the end was near as sincere 'peak oil' believers were about to be hit with the reality of an epic deflationary impulse.  Oil was just another play, positively correlated to the economy.

The next two panels are industrial metals and the stock market, which are of course, also items of positive economic correlation.  They had their bubble tops previously and acted as we might expect leading into the upturn of the GSR and onset of the crash; they diverged negatively.

The GSR signals the draining of liquidity as the mass speculative urge begins to fade.  It rises with the same dynamics that make the USD rise in a bout of deflation.  In other words, it rises with the collective need to get liquid, get safe and get the heck out of the casino.  So, any bottoming or bullish activity in the GSR can be looked upon as an early warning system on a USD rise and accompanying decline of nearly all asset markets. 

But here is what I love about the GSR.  While it can give signals to get short certain bloated and hope-fueled markets, the rising GSR also signals that things like oil, industrial metals and even human hopes for prosperity will be declining in terms of gold.  I find Prechter's analysis that gold will decline in a deflation therefore so too will the gold mining stocks, to be too simplistic.  Gold will probably decline in a deflation, but here are two vital points to be considered beyond the short term:

1) Gold will decline much less than positively correlated items - like silver, like oil, like copper, etc.  Gold will decline less than gold mining cost inputs, which means margins at the companies that dig the yellow stuff out of the ground will expand as their product out-performs relative to their costs.  The best part is that another epic buying opportunity is likely to present itself even as the miners' fundamental picture improves.  Now that's risk/reward I can deal with.  I am getting my HUI downside targets prepared, just as was the case in Q4, 2008.

2) I do not believe that a real deflation is going to take hold.  Pull up a monthly chart of the 30 year bond and you will see that the 100 month exponential moving average has not been broken.  This condition has gone on for decades and it means that inflation expectations have not broken out despite the best hopes of the inflation alarmists.  What this actually means is that while deflationists and inflationists duke it out, policy makers are allowed to continue to inflate at will as inflation hysterics inevitably swing back to deflation hysterics.  I tried to get this point across recently in this article entitled Yin/Yang, Deflation/Inflation.

My main point is that as long as confidence by the majority remains intact, policy makers will continue their macro game of hide the cheese.  They need a deflation event right about now, which will likely be used as an inflationary lever yet again.  The GSR is one tool to watch constantly going forward because if that is a bullish consolidation of last year's hysterical upside, the ratio will find support - and a higher low - in the noted zone and that will not be good for any markets in the short term.  In the intermediate term it will signal that gold mining companies will be one of the few flourishing sectors as the 'real' price of gold continues its rise, as indicated first and by the GSR and gold's ratio to many other assets.

I hope this post is not too dry.  This is a blog with a very entertaining publisher who writes in a clear and concise manner.  As I review what I have written above, I realize this stuff can be a tough read.  But I hope it helps add some perspective to the ongoing debates on inflation, deflation and gold's role amid the noise.

Best to you all, and thank you again Tim!

Gary Tanashian

By George Washington of Washington’s Blog.

Congressmen Grayson, Clay and Miller are introducing an amendment to the Consumer Financial Protection Agency bill:

Today we will offer the “Financial Autopsy” amendment. The Grayson/Clay/Miller amendment is essential to attacking the root problem of consumer bankruptcy and foreclosure because it requires the CFPA to do a financial audit of products that have caused the highest rates of bankruptcy and foreclosure annually. Not later than March 31st of each calendar year, the CFPA will list these anti-consumer products, submit their conclusions on why these products “fail” consumers, the companies and employees that underwrote these products, and authorizes the CFPA to take action to restrict these products.

Financial Autopsy Amendment:

- Requires the CFPA conduct a “Financial Autopsy” of each state’s bankruptcies and foreclosures (a scientific sampling), and identify financial products that systematically led to a large number of bankruptcies and foreclosures.

- Requires the CFPA report to Congress annually on the top financial products (the companies and individuals that originated the products) that caused consumer bankruptcies and foreclosures.

- Requires the CFPA take corrective action to eliminate or restrict those deceptive products to prevent future bankruptcies and corrections

- The bottom line is to highlight destructive products based on if they are making people “broke”. Thank you for your consideration, we hope you will join us in supporting this amendment.

Sincerely,
Alan Grayson Wm. Lacy Clay Brad Miller

Is this a good amendment or a bad amendment?

It is a great amendment.

Why?

Instead of trying to pass a one-size-fits-all bill prohibiting certain specified conduct, it will force an annual analysis of what financial products are sticking it to the consumer.

Remember, credit default swaps didn’t bring down the economy because they are toxic while all other financial vehicles are pure as the driven snow. CDS brought down the economy because they were the choice du jour of the looters.

If we outlaw CDS (which I have argued for in the past), then the looters would create some other instrument for looting.

The Grayson/Clay/Miller amendment would help to force an annual review of the tool-of-trade of the rip-off artists.

Note: Given the huge incentives for financial “innovation”, the armies of lawyers, mathematicians and other footsoldiers employed by the financial giants, the pressure that the “too big to fails” to earn their way out of the hole, and the rapidity with which imbalances in the modern financial system can build up when alot of people are making the same kind of trade, an annual review is probably not enough.

So my only suggestion for Congressmen Grayson, Clay and Miller is that the amendment require:

(1) Annual reviews generating formal written reports

Plus …

(2) Monthly informal reviews. If a review reveals a large number of bankruptcies or foreclosures caused by a specific type of financial product, this would trigger a formal report

Trust me . . . the boys can still cause the economy to thoroughly crash if their actions are not examined for a year at a time.

Call your congressional representatives and demand that they support the Grayson/Clay/ Miller amendment.

Update: Karl Denninger has some additional suggestions here.

Freeport-McMoRan (FCX) is a big miner of copper and gold and a favorite of Stone Fox Capital. They are possibly one of the best run mining companies in the world. With China being the largest user of copper, it stands to reason that copper will benefit from their rapidly expanding economy. Not to mention that FCX has a large gold operation and $1,000+ gold prices is a big help.Today FCX reported

Mark the date: October 29, 2009. It will be characterizied by a drop in futures for a few minutes followed by a rapid and inexplicable pop on no news, courtesy of last ditch attempt by the Fed to "liquify" the market thanks to $1.6 billion devalued portraits of George Washington. And poof, just like that... Treasury purchases are gone (until Bernanke wakes up on the wrong side of the bed and wants to see Dow 36,000).

 

click for video

A top advisor to French President Nicolas Sarkozy - Henri Guaino - said on Tuesday that hat the United States was "flooding the world with liquidity" to try to inflate away its debt.

But as UBS economist Paul Donovan, prominent economist Michael Hudson and others have shown, it is a myth that governments can inflate their way out of debt traps.

As I have previously noted, trying to inflate our way out of debt is like a monkey trying to outrun a lion.

Though the major large cap indexes have made fresh bull highs in October, some stock groups have been languishing and failing to register new highs. Those include the Russell 2000 Index stocks (IWM; top chart); insurance stocks ($KIX; second chart from top); industrial stocks (XLI; second chart from bottom); and raw materials stocks (XLB; bottom chart). We also see some stock group barely registering highs and now struggling to maintain those, including banking stocks ($BKX) and semiconductor issues (SMH). Midcap shares (MDY) have also failed to make fresh bull highs in October, as have homebuilder stocks (XHB).

On September 16th, we saw over 2300 stocks across the NYSE, NASDAQ, and ASE register fresh 65-day highs. That number hit 1470 on October 14th and 1238 on Monday. This suggests a narrowing of participation in the rally, which I currently interpret as part of an extended topping process following from the momentum highs of September. As a rule, the more extended the period of topping, the more significant the subsequent correction. While I don't expect this to end the bull market that began in March, I believe we could see a healthy pullback from recent strength.
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