Jul

24

What Doesn’t the FED Want You To Know?

Filed Under Economics | Leave a Comment

Heroic.

Visit msnbc.com for Breaking News, World News, and News about the Economy

The most successful heists are the ones that occur every day that we are not even aware of.  The Federal Reserve, the quasi-governmental agency run by ex-bankers, that controls the money supply, interest rates and manages the economy is an agency very few are familiar with.

Given the trillions of taxpayer dollars on the hook and the delicate state our economy is in, H.R. 1207 aims to audit the ongoing Federal Reserve activities.

For years, the author of this bill, Ron Paul, has spoken up and drawn attention to the importance of sound money (money with tangible value, like gold and silver) and an economy which is not micromanaged by ex-bankers or manipulated in a secretive fashion. Paul has always been a political outsider and it is good to finally see his attempts to uncover the truth finally gain some momentum.

Since politicians, like all of us, are self-interested, we need to exert our influence and let them know we expect this bill to pass.

Since this bill would expose a great deal of financial/governmental/corporate connections, it would not surprise me if there is another financial panic/disaster and this bill is pushed aside to give even more power to the Fed and Executive Branch.

The above video speaks volumes about the shape of our economy and the level of dishonesty that is fraught in our financial and economic system.

Takeaway:  As a man, it is imperative to be ever-inquisitive, curious and non-complacent.  Reading and questioning your beliefs can help you generate an Accurate Model of Reality and prepare better for your future.  Think for yourself and stand up for what you believe in, even if you stand alone.

hat tip:  Zero Hedge

Jul

15

MorganStanleySmithBarney Ad

Filed Under Intellectual Honesty | 1 Comment

Disgraced financial institutions Merrill Lynch, Bank of America, Morgan Stanley and SmithBarney were all hours from keeling over last fall.

That hasn’t stopped them from publishing gaudy, chest-thumping ads about their own greatness.

Pen_ad

Since the coming together of Bank of America and Merrill Lynch1, we’ve emerged as a business of strength2, size and capability. Our two top-tier3 firms are now one financial powerhouse4, offering you an unrivaled range of financial solutions, and the ability to more efficiently structure and close deals5. In fact, we’re already doing just that with leading companies and institutional investors around the world. Our aim is clear: To continue delivering on the great potential of our union by helping to grow businesses like yours. And in doing so, build a shared prosperity for the future6.

  1. Thanks to an illegal shotgun marriage involving secrecy and corruption at the highest levels of the government.
  2. Please don’t make us mark to market because then we would be insolvent!
  3. Top tier firms in banking often need explicit and implicit bailouts…
  4. Dutifully leeching off the taxpayer…
  5. Do you have any deals?  Please let us know we are hurting!
  6. (Tear rolls down cheek)  Fin.

MorganStanleySmithBarney

This ad is just bizarre.  Standing on a ladder with binoculars in the middle of nowhere?  Well, you convinced me…

Please… take my money, charge me fees for your “research” and let me benefit from your years of experience.  Oh. Wait.  Nevermind…

Takeaway: Merrill Lynch, Bank of America, Morgan Stanley and SmithBarney are only standing today because the taxpayer had to bail them out.  Their scorn is well-deserved.

Jun

28

Human Capital Bubble

Filed Under Economics | Leave a Comment

Is the Human Capital Bubble a failure of the free market or a failure of government mismanagement? 

In his article on Yahoo Finance, Charles Wheelan makes the claim that the market sent out faulty signals.

While I agree with the premise of the article since I share Wheelan’s sense of disappointment that some of the brightest minds in the world clicking green and red buttons in front of monitors rather than building alternative energies and infrastructures, I strongly disagree with the notion that this phenomenon is solely the result of free-market forces.

The human capital bubble is not a reaction to free market forces, but rather the reaction to government influence on market forces.  Can anyone honestly claim we have a free market when:

The government controls the money supply by buying and selling securities in the open market?

Legal tender laws prohibit competing currencies?

The former CEO of an investment bank becomes the watchdog of the very organization he used to run?

A government literally creates money out of thin air to attempt to CONTROL the expansion of the economy?

Supposed regulators are asleep at the wheel… Harry Markopoplous tipped off the United States Securities and Exchange Commission repeatedly both verbally and in writing starting in 1999, when he argued that it was not legally possible for Madoff to deliver the returns he’d claimed to deliver.  The SEC took no action.

The government sets short term interest rates via committee?

The government jawbones to strengthen or devalue its currency at the whim of whoever is in charge?

Banks leveraged 30:1 borrow from the government at below market interest rates?

A POPULIST PRESIDENT ALLOWS TEN DIFFERENT CORPORATE WELFARE PROGRAMS DESIGNED TO BAILOUT THE FINANCIAL INDUSTRY?

The message Mr. Wheelan neglects to mention is that an economic system which is constantly manipulated cannot possibly send out accurate signals.  If we want to avoid bubbles and misallocation of resources, we need a truly free market.  This means a private money system, a private banking system, competing currencies and a government that cannot obfuscate economic reality with accounting tricks.

This bubble was a perfectly natural outcome from the market responding to supply and demand.  When there is massive demand (for housing, caused by low interest rates), you can be sure that profiteers/businessmen/entrepreneurs will do everything they can to satisfy that demand by providing plenty of supply.

Markets are unavoidable since humans are always seeking to maximize their happiness and maximize their resources; it is for this reason that markets exists in prisons, elementary school cafeterias and even amongst people that don’t speak the same languages.

The genius of the free market is that it converts greed into consumer-satisfying productivity – Gary North

Takeaway:  Those of us that believe in individualism, freedom, liberty and no corporate welfare need to enunciate that the human capital bubble is not the result of free market forces, but the market reacting perfectly to politicians/economists meddling unnecessarily with interest rates.

Let us hope that as our economy contracts, the power government exerts on our economy will contract as well.

Jun

18

Citigroup Bailout – Taxpayer Losses

Filed Under Intellectual Honesty | 1 Comment

A special guest post from my friend, Matt M.

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My morning bus rides invariably begin with a visit to the Bloomberg app on my iPhone. I find their journalism to be second to none in the financial space, thanks to Bloomberg’s worldwide focus and very informed opinion writers. However, I was taken aback when I came across the following headline and attached article last Thursday:  Citigroup Rescue Earns Three Times as Much as S&P 500

It is important to note the new title was modified from the original title “Citi pays taxpayers 3 times as much as S&P“.

Regardless of the title, this article contains blatant propaganda that is designed to mislead and deceive the Average Joe.  The general tone of the article suggests that the entire Citigroup “situation” is now a complete piece of historical fact to be analyzed as such.

Logic leads the reader to conclude that we (the taxpayers) have locked in some sort of gain, thus proving the Citi bailout was a good idea since we’ve collected a couple billion in dividends.

Nothing could be further from the truth, and there are many examples of how this logic is an inappropriate way to analyze any investment.

First, the author of this article is only talking about one government department, the Treasury.  Let’s review what happened here:  The Fed has purchased some $2-5 trillion in assets (depending on who you ask, and don’t you dare ask the Fed what they’ve purchased) from U.S. banks. This is the most important aspect of the multi-faceted bank bailout, for without these purchases, most major U.S. banks would be out of business.

What’s relevant here is that the Fed and the Treasury are completely separate government entities. The Fed is directly responsible for bidding up toxic assets and exposing taxpayers to massive, unknown, impossible to define amounts of credit risk. This socialization of losses is what saved Citi, but it didn’t cost the Treasury a dime.  To suggest that the taxpayers somehow made out like bandits is untrue, amateur reporting.

By stepping in and literally becoming THE market in many segments of the credit market, the Fed has so far done a fantastic job of propping up the assets on their balance sheet. That’s not to say they’re showing a gain, that’s not to say the Fed is showing a loss. Once again: no one knows.

What we do know is that the eventual value of most of these assets is going to be dependent on cash flows from mortgage payments, rather than current marks. Right now, these cash flows are a monumental risk, a subject which is completely ignored by this Bloomberg article.

Perhaps most important, the Fed is desperate to see these investments work out. Ultimately, this will corrupt what’s left to be corrupted in the political process. No wonder the Fed recently hired Linda Robertson, former lobbyist for Enron. They need to convince Congress to bailout everyone who can’t pay their mortgage.

Finally, this article represents a shift in attitudes towards government intervention since the March lows in the markets.  I have been complaining about this for months and it really bothers me.

When governments around the world intervened and markets still fell off a cliff, I felt like everyday people were finally thinking critically about the futility and backward logic of government.  When S&P went from 1575 to 900, people were really freaking out. When we went from 900 to 666, people got to talking about genuine reform. They expressed anger about how the government incentivizes bad behavior and excessive use of leverage.  Now that markets have bounced from 666 back to 900, people have turned back into mindless cheerleaders.

Talk of genuine reform has stalled as our problems have been bandaged by trillions of borrowed dollars.

The government has declared victory and the media keeps churning out propaganda, as evidenced by the article discussed above.

Aren’t we better than this?

Apr

15

Cramer declares Depression over

Filed Under Economics | Leave a Comment

You would think after getting humbled by Jon Stewart on the Daily Show, Cramer would scale back predictions and prognostications…

Cramer has declared that The Depression Is Over.  While I admire his optimism, I find many important questions unanswered:

  • Is an inevitable bankruptcy of GM, Ford or Chrysler fixed?
  • Has the US stopped throwing money at wars?
  • Have Social Security, Medicare, Medicaid and municipal pension plans all been adequately funded?
  • Do you think any of these issues will slap consumer spending in the face?
  • Isn’t there a chance that people will liquidate their portfolios as savings draw down?
  • Isn’t it very possible things will get worse if our expectations about perpetually rising asset values are erroneous?

Tocqueville Asset Management did a great piece on this a while back.  Head fakes of 45, 54, and 67 percent happened in Japan, and they could likely happen here.  Likewise, we could have three bear market rallies and still end up lower 10 years from now.

The stock market is not the economy and the economy is not the stock market.  A stock market rally does not portend an improvement in the economy if the underlying fundamentals (entitlements, unfavorable business climate, corporate welfare, all-time low interest rates, proliferation of the FIRE economy) are not solved.

Takeaway:  It is important to have the most accurate model of reality as possible.  No matter which way the stock market goes, if the fundamentals haven’t changed, our economic behaviors (saving habits, spending habits) should not change either.

For my take on Cramer’s Daily Show appearance, click here.

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