The Wall Street Shuffle

The Cofall Curve: Why Government Spending & Jobs Are Burden

2010-08-05T14:06:00.000-07:00

Smaller is better…really…

If there was ever a time to make a more compelling case for smaller government, this is it.

We are in the midst of a slow motion, economic dream sequence wherein a rapidly aging work force yields declining personal consumption. There is a virtual absence of any wage pricing power, predominantly due to the effects of globalization on a maturing economy and an education system that now ranks 14th in the world and getting worse. Short-term deflationary pressures will tip the hand of the Fed and debt monetization will become the norm. Property values continue to decline and taxes at all levels of government continue to decline.

Deficits are unsustainable and will soon become unserviceable if we have any hope of retaining any semblance of dollar purchasing power.
Our options are quickly diminishing but every scenario requires, at its very core, smaller government at every level.

Yet this is much more about the financial viability of the Republic as opposed to a political position. In 1980, our national deficit was about $1T. Today, it is in excess of $14T. This is a GDP to national debt ratio of 1:1. This is third world territory, at least according to the International Monetary Fund (not one of my favorite sources, however). Both parties are responsible for this debacle.

As our economy continues to contract, only the most “experimental” economists (“Keynesian” if you prefer) believe that increasing taxes will right the ship and increase wages and employment. This leaves us with only Hobson’s Choices (a choice with equally negative alternatives) and each and every scenario includes shrinking government.

It is imperative that a simple and irrefutable case be made directly to the American public.

Simply, there are certain essential costs a society must bear – these costs are represented on the X-axis and are percentages of our GDP. Currently, our total federal government spending is approximately 30% of our GDP. This number approaches 50% when you consider state, regional and local government spending.

Certain benefits to our society are derived from these expenditures and these are represented on the Y-axis. Essential services yield significant social benefits. Yet, at some point, government spending becomes discretionary and detrimental. Beyond this point, each dollar of government spending has a greater than one dollar of negative effect on society. The negative effects include inefficient allocation of capital to the essentially administrative public sector and the equally inefficient and insufficient capital allocation to the productive private sector.

For example, private sector jobs and public sector jobs are not the same. There are essential government jobs that, without which, our economy and our quality of life suffer. Soldiers, food inspectors, intelligence gatherers, law enforcement, fire and rescue, some legislators and other value added public sector employees.
However, past a certain point, the benefit of these employees is overshadowed by the cost to and burden on a society. Bureaucrats, paper pushers, administrators, regulators, layers of middle management, employees doing the jobs that the private sector can do more efficiently, some legislators…these are all examples of costs and not benefits to society.

Take for a moment the very simple fact that it takes the taxes paid by 5 to 10 private sector jobs to pay the cost of just 1 public sector employee. Recent data suggests that total compensation to each public sector employee is approximately $120,000 -double that of the $60,000 compensation for each private sector employee. Let’s say the average private sector employee cost is $60,000, including taxes and benefits. That employee pays about $9,000 in federal income tax. The average public sector employee costs $120,000, including benefits. This means that it takes 13 private sector jobs to pay for the cost of just 1 government employee. For the moment, we will ignore excess state and local taxation and employment, though this curve works at all levels.

The benefit to our society of essential public sector employees vastly out weighs the costs…what price can you put on our military, our intelligence community or food inspectors, just to name a few? Remember, first responders and teachers are the fiscal responsibility of local, regional and state governments. Yet, once we begin to hire federal governmental employees merely to create jobs, we burden the private sector with unnecessary taxes, more national debt and a devalued currency based upon merely printing money…monetizing the debt. We must levy ever more taxes just to service the debt created by excess public sector employment.

At the apogee of this curve, the benefits to our society out weigh the costs. Beyond this point, each marginal government employee becomes a huge burden. Every public sector job added beyond this point burdens society with excess costs as well as the almost incalculable additional fiscal burden upon the private sector created by these massive bureaucracies and the resulting red tape and excessive and conflicting regulations.

Once we begin to equate a public sector job to a private sector job, we loose sight of how many private sector jobs are lost paying for just that one public sector employee. At this point, conventional wisdom becomes counter-intuitive. Past the peak of the cost-benefit curve, the greatest benefit to society becomes reducing government employees and not creating “make-work” jobs. This means fewer burdens on tax revenues, more capital available for private investment and more private sector job growth.

Due to the leverage of the number of private sector jobs necessary to support a public sector job, our economy is dramatically and negatively affected by surplus governmental employment.

The debate about how large our federal government should be is as old as our country. This argument becomes more essential as federal spending dramatically escalates at the same time as federally mandated state spending is bankrupting virtually every state. And states can go bankrupt. Remember, states do not have printing presses. But these excess public sector employees will find abundant jobs in the private sector as tax payers, who no longer bear the financial burden of make-work government employees nor the excessive regulatory and bureaucratic pressure, will create new businesses and consume more due to having more disposable income.

The essential problem is that we have relied upon the fallacy of Keynesian economic policies for so long, it seems so logical that if we have high unemployment we should put these unemployed to work for the government. An essential element in this debate is that public sector employees generally administer society while private sector employees generally produce things and services of transactional value. Don’t believe this? May I ask the last time you asked the government to invent anything, to sell you a gallon of gas, to brew a cup of morning coffee for you or build a house for you? When is the last time you asked a machinist to renew your driver’s license, asked a dentist to put out a fire or asked a bartender to record a deed? And, yes, this example does not take into account the amazing accomplishments of our military and intelligence communities and DARPA that have created everything from the Internet to space travel. Remember, we said that there are such things as essential government employees.

We need to resist the “benevolence” of excess government spending and the unneeded public sector employment at exactly the wrong time. We cannot fall for the trap of substituting the immediacy of “feel-good” public sector employment producing virtually no long term benefits for the more difficult to create yet more sustainable and valuable private sector job growth. This will be one of the most difficult decisions a politician or central banker will every make – bring on the “Big Reset” now, face the financial pain now and shorten the recovery time OR make the easy choices, kick the can and grow government. This should separate the statesmen from the politicians.

Bank of England Takes First Step to Nationalizing Consumer Credit

2010-07-26T12:10:00.000-07:00

Credit in the UK is so broken that the idea of banks being able to submit almost all forms of consumer credit as collateral for liquidity loans actually seems like a good idea to the BOE…read the full article at Minyanville

Feeling Rich vs. Being Rich

2010-07-13T07:16:00.000-07:00

Nationalizing the consumer credit industry is one way to simulate a healthy economy. Future administrations can deal with the mess it leaves behind...check out my article at Minyanville:
http://www.minyanville.com/businessmarkets/articles/cofall-bush-tax-cuts-capitalism-government/7/13/2010/id/29129?camp=featuredslide&medium=home&from=minyanville

Making Tough Decisions to Repair Our Fiscal Future

2010-06-29T07:32:00.000-07:00

How we handle our money, government spending, Social Security, and many other factors must be re-evaluated. It will hurt today, but tomorrow will be better...read the full article at Minyanville: http://www.minyanville.com/businessmarkets/articles/dan-cofall-keynes-spending-politicians-america/6/29/2010/id/28962?page=2

Hyper-stagflation© - Where we are today, what we must go through and where we will be

2010-06-18T07:49:00.000-07:00

Hyper-stagflation© - This newly minted term is fixed wages due to lack of pricing power resulting from globalization combined with the devaluation of the dollar combined with rising consumption costs and higher borrowing costs. This is the economic version of the bogie-man in the basement that your parents always warned you about.

The missing link between where we are today, what we must go through and where we will be is the delta between 2010 and 2011 US Budget actual and estimates.

Estimates are for a deficit of $1.3T in 2010 rest entirely upon 2010 being a recovery year and an improvement in GDP. If this does not happen, and it does not look as if it will, budget gaps will widen, the dollar will be pressured and borrowing will become more costly. As borrowing costs increase, so will the budget gap widen further.

The Federal Reserve will become the lender of last resort.

However, until this happens, the economy will feel “normally sluggish” for a few months. Markets will be choppy. Some days it will feel like a recovery and others not so much. New and unexpectedly high unemployment will persist and the costs of increasing employment artificially with government jobs will further balloon the deficit. New stimulus plans will add additional burden. January 1, 2011, taxes will revert to pre-Bush cuts and the economy will now face a dramatic drop in disposable income that will accelerate this cycle.

The result will be less private sector jobs, health care costs pushed onto government, state and local governments relying upon federal bailouts and we will have passed our “Peak Lifestyle©” with declining disposable incomes, fewer private sector jobs, dramatically increasing debt at all levels of government and fewer tools for the FED and the Treasury to use. Any future social benefits from the government will be in dollars will declining purchasing power.

We have already reached unsustainable debt levels at all levels of government and these debts will increase at an increasing rate. After all, we don’t want rioting in the streets do we?

The governments must now figure out what benefits to cut and to whom to cause the least likelihood of rioting in the streets. Any guess as to whether benefits for older or younger Americans will be cut? And guess as to whether healthy or not so healthy American’s benefits will be cut? It is all about who will react most violently and who are the most productive. Just as Zeke Emmanuel (more on him later but look him up now…no, really, right now…and look at his “life cycle curve”). Let’s hope that you are not very young, very old, unproductive or sick.

The key is to look to assets not directly linked to the dollar…the Australian, Canadian and Swiss currencies, gold, silver, etc. Be cautious of the Australian Dollar as they are directly linked to the prosperity of China and China is just now facing their own massive banking crisis with vast amounts of bad real estate loans yet unreserved for. Canada is linked to the US and may face their own problems. The Swiss economy is fragile. There are not many sure bets out there over the long term except for gold but there will be great values if you have quick reactions and don’t listen to the drumbeat of the perma-bulls on TV and radio and from our own government and the entirely independent Federal Reserve. Remember, they are selling PMA – Positive Mental Attitude – not reality.

Of great importance is that you must focus upon purchasing power and wealth preservation. If everything goes down but you go down less, you win. Paper is still paper and US paper is still the most at risk. Going to cash (including non-TIP treasuries) is your first instinct for safety (as you have always been taught). But this will be a trap mid-term. Going to non-US related cash and cash equivalents (including the ultimate currency, gold) will be essential.

One thing you cannot do is to pull out of all investments and stay in US cash. Cash will decrease in purchasing power and we want to preserve purchasing power. That requires that you stay invested but you must improve your investment strategy and the speed with which you adopt and proactively act. Speed is critical in this worldwide game of investment musical chairs. To win, you must be right and fast and you must look further into the future and ignore the noise around you. You must act on conviction and not on whim.

The wild card is world conflict. If it is regional, the US dollar and treasuries will see an improvement but will ultimately succumb. The likely area of conflict is the Middle East. The Korean Peninsula is a second possibility but the key is whether or not it is a nuclear exchange. A nuclear exchange and all bets are off. Non-nuclear and it is manageable.

Assuming conflict will not escalate, the tealeaves are cast for the US on its current path and with the current administration. State, regional and local governments are bankrupt, tax burdens will increase and jobs and investment will suffer. Unions will be rescued and national healthcare for all is just about here but no one has thought through to the end game. That endgame will be here sooner than you might think.

2010-06-13T20:08:00.000-07:00

It now seems apparent that stimulus spending will not end any time soon. Given this inevitability, we have our own proposals to IMMEDIATELY help middle America and small businesses and all taxpayers simultaneously. And it will cost less than the government intends to spend. We will cover these ideas daily on our show and I will update these postings as we cover them.

Just for reference, the President today began the process of floating a new stimulus plan. This without a care for any semblance of fiscal responsibility. But that is fine as it seems that the EU's charade of refocusing on Austrian economics and acknowledging the abuses of Keynesian economics is becoming more apparent. One might say that monetizing is preferred to rioting.

The biggest coming bull market will be in printing press manufactures and service companies. And pity the poor countries without their own central bank. Those are the countries that can go bankrupt. And they can drag others down with them.

However, my tea leaves still say it's pedal to the metal for the reflation trade. Print, monetize, demonize inflation while debasing every currency. As long as all currencies are essentially devalued simultaneously, maybe folks won't notice. Remember the old story about boiling a frog.

There is always a vaccine for deflation and our FED holds the patent. The only thing that kept the Federal Reserve from doing this in the 30's was gold. Today, that's no barrier.

Stimulus plans are here to stay. And, buried deep within each bill will be bailout monies for state and local governments.

Stayed tuned. We will show you, if you must stimulate, how to get the biggest bang for your buck...and exactly why our government has neither the will nor the intelligence to choose this option.

If you could lie to save the world, would you?

2010-05-10T12:53:00.000-07:00

This may be the most profound question and thought process I have had about the financial problems of the world today. It was astonishing how clear things have just become knowing that this is how things work. It is rather peaceful knowing that we have absolutely no control over our financial world. The only question is whether to keep playing or dig in. Infinite number of metaphors that may be applied to this thought process. Even if you dig in, you must be exceptionally careful that you have REALLY dug in, not just engaged in “papering the downside”.

This might be a really good opening for your seminars. You said that fear sells and I agree but in this case, the truth would sell because it is terrifying. I’m curious what you think. Read below...

How far would you go to save the financial world if you were in charge?

Here is the solution to all of our worldwide financial problems...LIE.

Lie about your debt (Greece/Goldman).

Lie about how much money you print (England – they agreed to stop telling their citizens how much they are printing).

Lie about your bad loans (the whole damn banking crisis AND STILL lying – what do you think the off-balance sheet accounts and unconsolidated companies are for?

Lie about how much you REALLY owe (US - $100T worth of accrued but unexpensed liabilities Social Security, healthcare, etc).

Lie about who you lent it to (US – IMF – EU). The US has really lent to the EU through the IMF – almost the same as the payment through the European banks BACK to Goldman.

Lie about it being paid back (GM and CEO Whitacre and the $4.7B).

Who would know? Print too much, lend too much, write off trillions in bad loans...

If there is no proper accounting and no proper audit of central banks...who will know?

How will we know? What metric will tell us? We don’t report M3 anymore...too “expensive to do so”, according to the FED.

Governmental accounting has no balance sheet – it is essentially cash based.

What is really parked on the balance sheets of local, state and federal governments and financial institutions and companies and central banks?

Isn’t the capacity to borrow only constrained by the ability and desire to lie – especially if we do not have audits and safeguards in place?

Question:

If you were a central banker, how far would you go to “save your country or your Euro or the world?

The excuse that everyone who supported bailouts and stimulus is that we must do EVERYTHING we can to avert a collapse.

They did and it is getting worse with the $600B to $1T the EU is about to put up.

Does the end justify the means?

Does the world really want you to fix the problem or tell the truth?

Just where is the EU going to get $1T to “fix” the sovereign debt problem? IMF? It gets it primarily from the US and we are bankrupt!

We have praised Bernanke for the way he handled the crisis – we praised him for lying!

The ONLY reason for the gold standard was to PREVENT our leaders from lying!!!

We are taught not to lie but we seldom think why not lie. Usually, it is because of the consequences. What if there were no consequences because no one could prove you lied?

In our world, the best liar wins and we wonder why.

So how will you know when it is time to get out?

Bernard Beruke said “The secret to my wealth is always getting in too late and out too early.

Maybe smart money has already gotten out...

Maybe our financial and political leaders all lie...

But it’s for our own good...

Isn’t this really just like the fantasy of Merrill saying they knew the mortgage fiasco would end badly but that they would lay right up until the end and they couldn’t get out in time?

Is this your investment strategy – invest right up until the end and hope that you can get out in time?

My money says that this is exactly what virtually every investor thinks because you cannot ignore the fact that the world is bankrupt...and that our leaders lie.

2009-10-23T11:05:00.000-07:00

For all the folks, talking heads, financial analysts, etc. that say this market MUST go up because those investment advisors that have not been in the market over the last 5 month MUST play catch-up before the year end performance figures are released (the whole "Alpha") thing, I say this:

Jump in, baby. If you are so shallow and are such a lemming that you will park your commonsense and jump into an overpriced market and bid that market up to even more over-priced levels, do it soon.

This will be nothing more than an even more sure-thing short opportunity for folks like me. What would make you jump into a bidding war over over-priced stocks with increasing unemployment and a devalued dollar (no, exports wont save you...we don't make much anymore) just to chase "Alpha"?

Should you choose to do this, you are not acting in a fiduciary manner for your clients but rather only in your own best interest.

Friends, ask your investment advisor about this before you get another "portfolio re-balance" at just the wrong time.

2009-10-21T21:37:00.000-07:00

If you have been following the show, we have discussed poverty. Poverty is not something that needs to be studied or analyzed. The minute you do nothing or create nothing or do not improve your thinking ability, you have ceased creating value and you are poorer. Poor is the natural state of being. Success, productivity, personal improvement are all things that must be studied as you must do something to achieve these things. Do nothing and you are poor.

This also relates to our jobs, our community and our country. At what point do each of us say that voluntarily contributing to charities around the country and the world is good but voluntarily redistributing our wealth to others or other countries through a single payer healthcare system, "Cap and Trade" or the newly proposed "Copenhagen" treaties is bad? Do we want to voluntarily make us more poor? Do we want our poor to become more poor while we enrich the world with wealth redistribution and pollution reparations?

Your voice must be heard. Whatever your position, write your congressmen. A handwritten letter is thought to represent 15-25,000 voters. Make your letters count. But first, please understand the issues. There is nothing we can do to help you invest better if the national economy is in the dumper. You must understand the world that is coming before you can protect what you have and improve your purchasing power.

More on Thursday's show including a discussion of personal property rights.

2009-10-11T14:18:00.000-07:00

This is a reprint of a great article about "Gold Leasing" from "Whiskey and Gun Powder". When "leasing" becomes transparent OR gold rises sufficiently on its own, leasing will cease and Gold will continue to vastly new highs.

The Gold Carry Trade

Jul 25th, 2007 | By Whiskey Contributor | Category: Gold

On July 24, 1998, Alan Greenspan stood before the House Committee on Banking and Financial Services and said, “Central banks stand ready to lease gold in increasing quantities should the price rise.”

That is exactly what the gold carry trade consists of. It is the process in which central banks lease out goldbullion to be sold on the open market to suppress prices.

Here’s the thing: The large majority of these transactions take place on the London Bullion Market (LBM). This is an over-the-counter (OTC) market in which there is little-to-no transparency. A number of organizations have conducted studies on the amount of gold lending that takes place. Some of the organizations include Gold Fields Mineral Services (GFMS), the World Gold Council (WGC), and Virtual Metals (VM). As a result of the lack of transparency, the numbers reported in regard to gold leasing vary slightly from one another. For the sake of argument, I will be using the most conservative figures reported.

This may be the most significant piece of the gold bull puzzle that will push gold to $2,000 and beyond. I will dig in and share my in-depth research with you, starting with how the process is carried out, then going into the market impacts of the gold carry trade, and concluding with the future of the market for gold leasing.

How Does the Gold Carry Trade Work?

Gold leasing takes three different forms: direct leasing, central bank swaps, and forward hedging.

Direct Leasing

I am going to run through this in a simple step-by-step process. Central banks don’t directly take their bullion to the market and lease it out. They use a vehicle called a bullion bank (BB).

Although bullion banks are numerous, some of the more well known are Barclays, Goldman Sachs, JP Morgan, Bank of America, UBS, and Citibank.

The central banks loan gold to the BBs at a rate of approximately 1%. The BBs take it to the LBM and sell it on the open market. The BBs take the cash from selling the bullion and in turn buy Treasuries.

So if the story were to end here, the bullion banks would just walk away with a net 4% return. But it doesn’t end, because they only have the leased gold for a certain length of time. They eventually have to give the gold back to the central banks, but now they are at risk of price swings in a very volatile market.

The answer to their problem is to go long the futures market. Essentially, they buy futures contracts to hedge their risk. In other words, they secure gold for delivery at a specific price, on a specific date in the future. Once they buy their futures contracts, it doesn’t matter what the price action of gold is.

In a perfect scenario, after the gold lease rate and price risk hedging, the bullion bank will walk with a modest 1–2% gain. The central banks will receive a return on their gold, keep the price of gold suppressed in order to keep real inflation suppressed, and get a boost in the demand for Treasuries. It’s a win-win situation for both the bullion and central banks.

Gold Swaps

Gold swaps are very similar to direct leasing. The difference is that gold swaps usually take place between two central banks. These types of transactions occur in two different forms.

The first is very simple. Essentially, two central banks swap gold reserves and then carry out the action of directleasing of each other’s gold. The reason for this is that it just adds more confusion for the accounting of the leased gold.

The second is slightly different. This transaction occurs when one central bank exchanges gold for currency with another central bank. Like gold leased to the BBs, a future date and price are set for the redelivery of the goldback to the initial central bank.

The IMF says of this type of gold swap, “Typically, both parties will treat the transaction as a collateralized loan.” Or the CB leasing the gold doesn’t remove the gold from its balance sheets, and the CB receiving the gold doesn’t add it to its balance sheet. As far as accounting goes, no transaction has even taken place. The goldmarket is flush with new supply and would beg to differ that a transaction hasn’t taken place.

In other words, the CB receiving the gold loans it out on the market while it is still on the balance sheet of the initial central bank. One might refer to this practice as double-counting the reserves.

Forward Hedging

Forward hedging is a form of gold leasing practiced by gold producers. The most famous of these is BarrickGold, but there are many other producers who partake in forward hedging.

Forward hedging is when a producer presells gold on the spot market that has yet to be extracted from the earth. Most of the buyers want delivery of physical gold. So the producer leases gold from a CB, with the idea that it will pay the CB back with future production.

The problem is that these producers often sell their gold at suppressed prices on the spot market and they often sell more gold then they can produce.

On the note of Barrick, did I mention that it has recently been sued for price fixing and price manipulation of thegold market? Barrick and its bank JP Morgan have admitted to price manipulation and that they have worked with the central bank in this process.

Implications of the Gold Carry Trade

The gold carry trade has one main goal, and that is to add huge amounts of supply to the market in order to suppress the price of gold. Although there are other added bonuses along the way for the participants, the main reason for suppressing the price of gold is so the world doesn’t know the true value of worthless fiat currencies.

I would like to use some statistics to inform you as to the implications of gold leasing on the market for gold. Remember that I will use the most conservative numbers I could find.

In 2005, according to GFMS, gold leasing was estimated to have added 2,970 tonnes of supply to the market. In that same year, jewelry demand was 2,700 tonnes, world investment was 736 tonnes, and official central bank sales were 656 tonnes. Over the last 10 years, average mine production has run at an estimated 2,500 tonnes per annum. So the amount of leased tonnage exceeded all of the above-mentioned statistics.

Remember that central banks are not required to report at all on their transactions of loaned gold. So those 2,970 tonnes of extra supply were also counted in central bank reserves, or they were double-counted.

Central banks are the largest holders of gold tonnage, estimated to have around 30,000 tonnes. So they have loaned out approximately 10% of their total reserves.

How Long Can This Go On?

If you are looking at this in a practical way, you probably came up with the exact questions I did when I first started to read about the gold carry trade. When the gold enters the market via a BB, it all has to be bought back at the end of the lease contract. Doesn’t that put us back at square one with the amount of supply in the market negating any long-term implications?

The answer would be yes if there were just a couple of transactions. But there are several gold leasing contracts signed every day. All the supply is constantly being recycled in and out of the market and there is always freshgold being leased into the market.

The length of a gold leasing contract can extend anywhere from one month to several years. This allows for the central banks to analyze these markets and best time their transactions and how long they will be, in order to suppress the price of gold.

So can this go on forever? Definitely not, and the implications of the gold carry trade coming to end will bring with it the most spectacular price actions ever seen in the gold market.

Let me tell you why the gold carry trade will not be sustainable forever. It’s very simple. All we have to do is look at the step where bullion banks have to buy back the gold sold on the spot market in order to pay back the central banks.

In order for this to be profitable for the BBs, the price of gold has to experience very limited gains during the time the gold is leased out. Or the price of the futures contract purchased by the BB has to be near enough to the price of gold when the bullion bank initially unloaded the leased bullion on the spot market. If the price of goldheads too high, it will not be profitable for BBs to partake in being the intermediary for such transactions.

All we have to do is look at the fundamentals for gold and we realize very quickly that the price of gold is definitely going to go higher one way or another, which will disallow future leasing in the gold market. You are probably well aware of the fundamentals: Every one of the major economies of the world printing money at a rate of over 10% per annum; the Mount Everest of debt from both budget and trade deficits; an inevitable recession here in the U.S.; the inability of the U.S. to raise interest rates, due to the complete mess of the housing market; rising energy costs putting downward pressure on the U.S. dollar and increasing inflation in every other aspect of the economy; mine supply at historic lows; a possible U.S. policy that would include trade protectionism against China; and, last, but definitely not least, a U.S. Federal Reserve whose main goal is to create credit by keeping interest rates below the rate of inflation (negative real interest rates).

Fundamentals are fundamentals, but there has been some action in the International Monetary Fund (IMF) recently on this very topic. Before I go any further, I just want to let you know that I don’t trust the IMF any further than I can throw it. And I don’t really expect any timely results from its actions. What is important is that the notion of the gold carry trade is coming forefront. Here’s what’s going on in the IMF.

Hidetoshi Takeda of the IMF’s statistics department recommended in early 2006 that all loaned gold be excluded from the central bank’s reserve figures. The IMF’s committee on reserve assets considered Mr. Takeda’s paper and came to the conclusion that a new definition of gold reserves excluding loaned gold needs to be officially documented. It also stated that unallocated gold loans should be disallowed. Nothing recommended in Mr. Takeda’s proposal was rejected. Full details of his report can be read here.

The IMF continued its research regarding the issue and made another report with a similar conclusion. What does this all mean? Well, the IMF is currently working on another official proposal to be worked through the system making it necessary to make all loaned gold public information and to exclude loaned gold from reserve accountings. The IMF currently “encourages” central banks to record gold loans/swaps, but does not “require” the recording.

If everything goes perfectly, and I don’t believe that it will, we could see these actions implemented by the IMF at the end of 2008. As I said, it seems like a far reach, but the more people become aware of the gold carry trade, the sooner it will come to an end. And I don’t like to put my bets on the IMF to make progress with in the accounting of leased/swapped gold, but it DOES have the power to change how central banks report the reserve holdings of gold.

The eventual unwinding of the gold carry trade, whether it be from the IMF or just market fundamentals, will bring amazing action to the gold market. Remember that gold leasing didn’t begin until after the precious metals run from 1979–1980. For the bull market in gold to continue, it will need to overcome the barriers set by central banks’ leasing of gold. But when this does occur, the floodgates will open and we can expect to see the price of our favorite yellow metal skyrocket.

Regards,
Nick “Child Prodigy” Jones

2009-10-06T12:15:00.000-07:00

Whew! Finally a link back to our old blogging site.

We will keep this up to date each day.

On the show today we will open with Craig Smith, founder of Swiss America Trading Corp. He is a recognized expert in all things gold and, with today's news about denominating oil partially in gold, it will make a great conversation.

Also, for all of those that say that gold is only a commodity, it is a commodity, a currency, a rare element and the oldest store of value. There is very little of it EVER mined (about 2 Olympic pools full) and the us has less than $250B in gold reserves, less than 1/3 of the Stimulus Plan!

Stay tuned and stay alert to gold and its pretty cousin, silver.

2009-05-12T22:04:00.000-07:00

This is why we have not yet begun to face our financial crisis. Here are the next two huge waves of home mortgage refinances. Our long term interest rates must stay low to allow these mortgages to reset at a rate that the debtors can service. That means that the rate on the 10 year Treasuries must stay in the 3% range until 2012 - nearly 3 years!

And, just to add a little complexity. this does NOT include retail or commercial mortgage obligations that require permanent financing. It is important to note that distress in the commercial and retail mortgage markets happens about 18-24 months AFTER the onset of residential mortgage distress.

Our media and government should be ashamed for not reporting these statistics. To jump on the recovery bandwagon is shameful. If you assume that we will begin to require higher rates of return to compensate for greater risk and inflation, this means that asset values will go down just as rates rise. This leads to a "death-spiral" effect for real property.

Just food for thought...

2009-05-10T20:03:00.000-07:00

We sure hit it right during the last few minutes of the show on Friday.

There are plenty of possible reasons the government might act the way it does right now, regarding fiscal and monetary policy, but the only logical reason for the government to act the way it does is to intentionally stoke the fires of inflation.

With a recognized national debt of nearly $12T and unrecognized additional liabilities of $60T for social programs and additional $10T plus for recently authorized federal guarantees, our government has no hope of paying the debt down and very little hope of servicing the debt UNLESS the debt and the debt service are paid back in highly inflated dollars.

There is no reason to spend trillions of borrowed or printed dollars on useless "stimulus" construction plans that neither create long term revenue, when the projects are completed, nor create many short term jobs. And the jobs created are primarily in the construction industry. To be entirely politically incorrect, a rather large number of these jobs will not go to Americans.

The very idea that we might possible face deflation is absurd. Bernanke was right when he said deflation can be cured quite easily by throwing dollars out of a helicopter. This is a guaranteed inflation inducing act, no different from borrowing or printing money that is backed by nothing but a promise.

And I'm not referring to a gold standard. The zero inflation theory is that a dollar is created only when new assets are created and the new dollars represent the increased quantity and quality of assets held. When you print a dollar and there is no concurrent increase in asset value, you create inflation and devalue the dollar. This devaluation is said to increase the attractiveness of our exports but we must actually make things that have relatively greater value than our foreign competition.

Overall, the government's plan is very transparent but only if you keep your eye on the pea under the shell. The pea is our debt and no one wants you to focus on it. They want you to keep your eye on social issues that, while morally relevant to each of us in different ways, are entirely irrelevant to the financial survival of our economy.

The government will engineer every possible way to increase tax revenues while decreasing government services. This is the only thing that they can do. They know it. It is just the American people that I am concerned about.

2009-05-04T11:45:00.000-07:00

Take a good look...this is the future of employment in the US...

2009-04-11T19:28:00.000-07:00

2009-04-07T22:53:00.000-07:00

Listen Wednesday as we discuss the "0% Solution" and how this radical investment concept is gaining traction.

Also, plenty of new information about the completely unstable banking world and the huge mistakes investors are making right now in this major bear market rally.

Learn how major banks, with terrible balance sheets, are using your tax dollars to purchase bad assets from other major banks, at a premium...and then will use mark-to-market to mark up their own assets to these newly inflated prices. This is exactly how the fraudulent real estate scams of the early '90's and lately were created except this time the fraudulent appraisals are based upon mark-to-market.

While Wall Street and Washington rearrange deck chairs, listen to The Wall Street Shuffle and learn how your money is being stolen each day. After all, the "Shuffle" is not a dance but really an elaborate confidence game...and you are the mark every time. Learn the game any you will never invest the same.

2009-04-07T10:21:00.000-07:00

This from our "Spies in Washington", the new Car Capital of the World.

FLASH: GM releases latest prototype of the Obamamobile - a one world car, designed in Washington, by a committee of politicians. Welcome to The New World Order where even if you want to run and get away from your government...well...you might actually need to run as you could probably out run this thing.
"Like a rock..."

2009-04-02T12:02:00.001-07:00

This chart should be interesting to anyone who thinks this current market drop is only a "bump in the road".

Short but very important gold lesson

2009-03-18T11:56:00.000-07:00

Well, now we know a lot more about gold. Today, gold was down about $30 to the $890 range. Then, immediately upon the announcement that the Fed would buy long dated treasuries to "help" the market, gold reverses itself and went up about $20 to close above $930.

If there was ever a better indication that as long as the government continues to try to do things to "help" us, they will fail and gold will win.

You cannot take from those that have and give to those that do not and create wealth. If you are exceptionally lucky, you won't have any effect. But, in virtually every situation, this redistribution will hurt the economy and the dollar and help gold.

2009-03-17T07:52:00.000-07:00

The next time you hear about a "market bottom" or the end to the recession or that it is time to jump back into real estate or anything like that, take a look at the 5 waves of mortgage problems. Notice that we are just now beginning to deal with the second wave.

We will talk more today about this but I suggest that you sear this into your mind before you make any long range financial plans.

But you should only be worried if you believe that bad mortgages and bad credit actually started this debt crisis. Also, you should not be worried if you think more bad credit can fix the existing bad credit!

I will let you decide...

2009-03-17T07:40:00.000-07:00

Any idea who this is? If so, listen to our show today (031709), call in and take home something from the WSS gift shop.

2009-03-15T16:30:00.000-07:00

OK, now that we have the previous two posts out of the way, Monday (03.16.09) we will discuss how the markets and the US Economy are linked but not dependent upon each other.
Essentially, our economy is based upon the number of domestic jobs, the average $/hour/resident of the US and the general mood and optimism of these residents.
The markets, however, are based upon expected earnings after taxes (both domestic and foreign) and the general mood and optimism of investors.
I hope you noticed the domestic and foreign earnings part. Remember, if you are a CEO of an international company (and virtually all listed stocks are international), you are rewarded based upon your consolidated earnings (foreign and domestic) and, consequently, your stock price. There are no rewards for making the US, or US residents, more prosperous.
Globalization is Kryptonite to national economies IF you are a "have" and not a "have not". Globalization levels the playing field. The game is to increase profits, at the expense of the "haves", without destroying them. It is not quite a zero sum game but the US and its residents will think it is.
Think about the higher value (meaning "wage") jobs that have been lost - maybe for a very long time. Unless we replace these jobs with new and equally high value jobs, this means less disposable income, less consumption, less tax revenue for federal, state and local governments. But the countries that landed these jobs improve their standard of living - though their revenue does not go up as much as our revenue goes down.
And that is the trick. Companies seek to globalize to the point where marginal cost equals marginal revenue. This is the old Economics 101 MC=MR graph. At this point, it takes $1 of cost to generate $1 of revenue or a break even. But, right before this $1 came a $1 of revenue that cost just slightly less than $1 to generate - and that is earnings - and that creates value in the share price.
The same is true for the global production/consumption. You globalize right up to this point. It helps you to reduce the costs for your company (even if you eliminate US jobs) just so that you do not kill consumption in the US.
But, as you reduce jobs in the US, the debt stays the same. And here we are...fewer jobs, less income, same debt, more defaults, falling asset prices. We crammed too much debt down the throats of consumers at the same time we cut their jobs and wages.
Finally, just for reference, all of the stimulus the US can throw at our economy won't work because you cannot take from those that have (through taxes, borrowing and inflation) and give it to those that don't and change a thing. And, if you are going to borrow the money, what ever you spend the stimulus on better make money after you build it. But if you REALLY want to muck things up, just print the money. Now you have fewer jobs, less income AND inflation - exactly the definition of stagflation.
And, for the record, stagflation is the mortal enemy of equity markets - IF you use purchasing power as your measure.
We are so screwed...

2009-03-15T16:18:00.000-07:00

Here is a quick guide to using our web site. Every day is topical and we use a lot of sources for research. If we use articles, we will tag them and they will be listed on the "News and Events" tab (this tab name will change just as soon as figure out the coding!) under "Research Links" and "My Delicious Bookmarks".
This research will remain linked to this site. Each bookmark has a date tag on it and that date corresponds to the date of each show. So, if you choose to listen via Podcast, you can listen to the show and read each link. If you listen live to the show, you can read the research.
Some days, we will post graphs and charts to this blog and refer to them in the show.
We are an open source for information, articles, research and links. Our blogs tie into each show. If we can figure out a way to make our research more user friendly and find more ways for you to enjoy the show, you can bet that we will.
Still no charge for the research...or our opinions...

2009-03-15T16:09:00.001-07:00

Just for everyone's enjoyment, here are the lyrics to "The Wall Street Shuffle"...written nearly 35 years ago! The group was 10cc. What a song! Not much has changed as far as the "Shuffle" goes - just today, it is played with many more zeros and commas - but it is the same old greed game...

Enjoy and go buy a copy of the song...

Do the Wall Street Shuffle
Hear the money rustle
Watch the greenbacks tumble
Feel the sterling crumble
You need a yen to make a mark
If you wanna make money
You need the luck to make a buck
If you wanna be Getty, Rothschild
You've gotta be cool on Wall Street
You've gotta be cool on Wall Street
When your index is low
Dow Jones ain't got time for the bums
They wind up on skid row with holes in their pockets
They plead with you, buddy can you spare the dime
But you ain't got the time
Doin' the....
Doin the....
Oh, Howard Hughes
Did your money make you better?
Are you waiting for the hour
When you can screw me?
`cos you're big enough
To do the Wall Street Shuffle
Let your money hustle
Bet you'd sell your mother
You can buy another
Doin' the....
Doin' the....
You buy and sell
You wheel and deal
But you're living on instinct
You get a tip
You follow it
And you make a big killing
On Wall Street

2008-08-10T14:07:00.000-07:00

The war between Russia and South Osseta that continues to expand will likely turn out to be a significant financial story. There is a map of the region for your reference.

Please notice that South Osetta is within 100 miles of Turkey, a NATO ally and a dominant military power. Turkey's southern border is Iraq.

Here is a quote that summarizes the conflict:

Mr. Saakashivili, the Georgian president, said Russia’s oil riches and desire to assert economic leverage over Europe and the West had emboldened Kremlin country to attack. Georgia is a transit country for oil and natural gas exports from the former Soviet Union that threatens Russia’s near monopoly.

“They need control of energy routes,” Mr. Saakashvili said. “They need sea ports. They need transportation infrastructure. And primarily, they want to get rid of us. ”

Finance is not all about stock tips.

Just remember the next time someone tells you about the "BRIC" countries as if they are a homogeneous, ubiquitous "one", ask if Brazil is at war or if India has invaded Pakistan. Just because there has been economic growth in these countries does not mean that there is equal risk.

All the more reason for "Deep Due Diligence". This will be a regular segment on The Wall Street Shuffle. Charts and stock picks only get you so far. Little things like war are also part of the "risk premium" that we all remember from first year finance...the risk free rate (usually a short term treasury) + the rate of inflation (feel free to insert your own calculation here) + market risk premium (THIS is where you might factor in war, pestilence, politics, first strike capabilities, etc.).

This formula has never changed and it never will. And it works for every form of investment. It's just important to remember that "risk" is a much broader word than the financial community would have you believe.

2008-08-09T22:02:00.000-07:00

More on this on Monday's show but...

Did you know the FED has about $1T in assets, mostly (90%) in treasuries, at least 8 months ago. They now have less than half that with the balance made up of a collage of CDO's, MBS's and other "difficult" to value collateral. The term "Level 3 Assets" really do not do justice to the nearly impossible to value transfer of bad paper for good (relatively) treasuries.

And, yes, when the FED runs out of treasuries they go right back to the Treasury and ask for more. How does the Treasury fund the FED? They borrow and issue the treasuries to the FED.

And when the Treasury borrows, the US debt increases and the US debt service increases and the US deficit increases and you either owe more or pay more taxes.

No matter how it goes, you pay.

This is really simple stuff when you follow the money.

2008-08-09T17:47:00.000-07:00

Since When is "Bankruptcy" a Four Letter Word?

Memo to: Freddie, Fannie, GM, Ford, Chrysler, Ambac, Citi et al.

If it is right to save Fannie and Freddie and other financial institutions from Chapter 11, why isn't it right to save every other company? For that matter, why even bother with bankruptcy laws?

A little short on cash and and a little long on liabilities? Call the FED. Paid your lying, thieving management team big bonuses and stuck "investors" (lol...sorry, this word in this context always makes me laugh) with worthless debt? Call the FED. Too big to fail? Call the FED. Raped and pillaged your pension plan? Call the government.

This is the old saying about telling the same lie often enough it becomes the truth. Tell everyone you are too big to fail...seek the bail.

If we put aside the massive wave of hysteria, talk of financial pandemonium and world economic collapse and every other financial PR hack's message, you still have poorly managed companies that lost billions of dollars and have billions more to loose. Actually, they never really "made" the money in the first place; but that is another story. They lobbied relentlessly for this solution and they won.

Haven't companies entered and emerged from bankruptcy in the past? Sure, the equity is wiped out...AND IT SHOULD BE. If the company is too far gone, then the bond holders are wiped out and the company goes room temp and the last will is read, Chapter 7.

But there is no one to step in and save the equity holders. That is why equity returns a higher amount than debt does...specifically because equity is the first to go in a troubled company and the higher return is the higher reward for the additional risk.

By allowing Fannie and Freddie to continue status quo and for the FED to be allowed to actually buy into the equity is a crime, a felony of the highest magnitude. It is the the theft of tax payer dollars to support the FED (and, yes, this is exactly what it is, no matter what you may hear to the "contrary") to buy equity in bankrupt companies. Absolutely anyone else would have been indicted by now. Add to this the now explicit guarantee of the "full faith and credit" (what is left of it) of the US Government.

Did anybody ever hear of Delta Airlines? 2007? How about the $2.5B in post-bankruptcy financing provided by...wait...JP Morgan, Goldman, Merrill, Lehman, UBS and Barclays. What a cast of characters! Basically the same team borrowing hundreds of billions from the FED right now. THEY apparently heard of post-bankruptcy financing because they would not provide the financing without taking a first priority collateral in the debtor-in-possession facility.

So why exactly are we in such a rush to sweep under the rug bad management, let the equity stand (and, apparently now prosper) and stand behind the debt? Just why couldn't the FED or the US Government take a senior position or own the company? Why provide guarantees and equity?

We are re-writing all of the rules anyway. Why not just write a rule that says that Freddie, Fannie, Sallie, Merrill et al CAN operate with $0 equity AND the backing of the FED or the US Government? Why not replace the management with new management (it is done all of the time)? Why leave the exact same regulators in place and call them something different and give them "expanded" powers? They had all of the power they needed, They just heeded to exercise that power and not bend to the massive lobbying efforts.

When a bank fails, new management is installed by the FDIC over the weekend and the bank re-opens Monday under a new name, government guarantees in place and it is transparent to the depositors. Why can't an investment bank failure work like this?

Where are the consequences for bad performance? You and I face consequences every day for every act and choice we make.

How do you learn a lesson if you can't fail?

Why would you improve?

Why train a dog?

Why no just pass every student?

Why have jails?

Why have immigration laws?

Why wars?

Why have rules?

I guess this is just the ultimate result of a society with an unbridled sense of entitlement and with a complete loss of a moral compass.

This isn't good fiscal governance. This isn't world financial salvation. In our every day lives, this is just a thief and "selective"prosecution.

It makes no sense at all to justify these actions based upon saying "Well, we can't worry about why we got here, we just need to save it." It is precisely this logic that continues to nurture this bad behavior. Politicians, captains of financial industry, indulgent parents, lazy educators all may lay claim to this "cranial-anal inversion" of financial logic.

I just want to say the the next police officer that hands me a speeding ticket "Let's not worry about why we are here. I promise to do better." Let's say to the next murderer on death row Let's forgive and forget. Go home." Tell your children when you find them experimenting with drugs "Don't worry, just don't do it again." Pet your dog when he tears up the house.

Re-elect the same politicians that allow this theft.

2008-07-30T08:27:00.000-07:00

Can something be worth less the zero?

I really liked the quote about Merrill Lynch yesterday:

Thain ``is trying to control the mess that he inherited,'' Scott Rothbort, president of Lakeview Asset Management LLC, said in a Bloomberg Television interview. ``I would not rule out at this point their having to write down even more, but you can't write things down beyond zero.''

I beg to differ. You can write ans asset down beyond zero. You buy a gas station, thinking that it is a profit and revenue generating company. Then you find a leaking storage tank. Your business shuts down, the property is now classified by the EPA as a hazardous site any you pay and pay to clean it up. Hence the less than zero valuation.

The same is true for some financial instruments. Let's say you purchased a credit swap derivative. If you bought it for $X, you must think its value is $X+something. You see it become worthless, you write it to zero. But what if the swap goes against you and you cannot hedge effectively due to the markets. You are now exposed to "less than zero" losses and may continue to mount as the underlying security exposes you to increasing losses.

This is a very real possibility so the notion of "you can't write something off below $0" is just no longer true.

We will be discussing exactly that in today's show regarding the great Merrill Lynch Fire Sale of $30B worth of assets at 1/5th their "value".

But did you know that Merrill is financing 75% of the sale? Did you know that a drop of 5% or more in the value exposes Merrill to more risk?

Nothing in the I Bank world is ever quite what it seems. Remember what we said in yesterday's blog, capital is a difficult thing to both create and keep. And, leverage works in both directions.

More on the show today. Join us and call in.

Here is a link to the story:

http://www.bloomberg.com/apps/news?pid=email_en&refer=us&sid=atfHM8sh2xtw

2008-07-28T18:17:00.000-07:00

I have always found that an aptitude for mathematics is an essential skill for a financial professional (or talk show host). Captain obvious, at your service!

Let's take the case of a change in value of an asset. Let's say a hypothetical house was purchased for $300,000 and the down payment was 25%, or $75,000. This results in a mortgage of $225,000. This means your debt to equity ratio was 3:1, $225,000 in debt divided by $75,000 in equity.

Now, let's say that same house declines 25% in value, as many markets around the country have. This means that the house is now worth $225,000. Your debt to equity ratio is now infinite. Your house is worth $225,000 and you owe $225,000. You nave no equity and, consequently, you have an incalculable debt to equity ratio, $225,000 in debt divided by $0 equity.

This minor mathematical inconvenience is the root of our financial situation. All typical reserve calculations are irrelevant. All coverage ratios cease to exist. All debt to equity ratios have been decimated and lending capacity reduced, in many cases, to below zero, effectively requiring debt outstanding to be recalled, when possible, and no issuance of incremental debt. This shrinks capital (debt plus equity) and makes the available capital very expensive.

What does this mean? This means that, with fractional banking (and investment banking) that the smaller the equity, the greater the leverage and the greater the effect of any change in equity. On the upside, leverage is your friend, allowing you to feel like a financial Batman.

However, on the downside, your equity disappears faster than Casper in a blizzard. With the unconscionable leverage of many, if not all, financial institutions, this means that your equity has gone from a positive to a negative. We know that a negative equity means that you MUST reduce your lending, unless, of course, you reduce your reserve requirements to $0 or 0%, in which case, there are no rules anymore so let's make up new ideas, laws and controls as we go. This results in bad policies and laws that reduce the ability to short investments and inject huge capital guarantees and cash into zombie companies and industries.

We have now arrived at this financial and economic precipice. You cannot create equity out of thin air. The Government may print more money but money is a debt; it is not equity. The only way many financial institutions can survive is for shadow equity to be created, giving the illusion of real equity. When the FED exchanges good (or relatively good) treasuries for bad Level 2 and Level 3 assets, negative equity was exchanged for positive equity. The bad equity now sits on the FED's books.

At this point, people like me would offer to buy this bad debt of a few pennies on the dollar but as long as the FED does not sell it, it looks like an even swap, treasuries for bad paper, thereby protecting the illusion of a sufficient equity base of the financial institutions.

Here is the real problem. This is nothing more than a guarantee without equity or substance. It is no different than the Department of Education backing Sallie Mae bonds, the Federal Government finally explicitly backing Fannie and Freddie or the FDIC backing IndyMac. There comes a point in time when all of the guarantees of all these institutions are finally recognized to be vapid assurances. Investors finally accept the fact that each of these guarantees will be honored but with no change in equity backing them. That will, indisputably, lead to massive inflation.

I believe that this is the real message we must take from the current market.

Buy gold, buy silver, short the market, take a closer look at puts, research ETF's that are inversely related to the market. Remember, you can make money in a market like this. Just bet on any investment that prospers during this "inconvenient asset revaluation period".

Should anyone disagree with this conclusion, call the show and take away our WWF ("World Wide Financial") tag team championship belt that was awarded (by us to us) for understanding the current situation better than any other host or team of hosts.

I hope that you win and take our belt. That means that we are wrong and we all live to fight another financial day. If we win, we really all loose.

2008-07-26T17:40:00.000-07:00

Pop quiz.

Did anyone read the news late Friday that the new housing assistance bill passed?

Did you wonder why a bill of this "significance" and "importance" was so ill-reported?

For those of us that believe and know that deficits and debts do matter, while the bill does provide some $300B in mortgage "assistance", did you notice that the national debt ceiling was raised to $10.6T?

Essentially, our recognized national debt as nearly doubled in 7 years. Let's not forget that this amount does NOT include the now explicit guarantee of Fannie and Freddie of $12T. Nor does it include the unfunded liabilities of...who really knows...but estimates run from $40T to $60T.

First, thanks to several shy but pretty creative monks many years ago, we have a double-entry method of accounting. That means nothing is created out of thin air. For every debit there is a credit. Therefore, in order for the U.S. to spend, it must first borrow, as we have a national debt, a massive and growing deficit and no reserves. This is neither a new nor a unique thought. It is fact. If this were not true, then why track the national debt - for kicks?

If we could create wealth and "money" (in any form) out of electronic bits and bites, then why not just create a million dollars for everybody in the U.S. and eliminate poverty? BECAUSE YOU CAN'T!!!

The current postulation is that as long as we create this whole transaction in our own currency, then we can create as much "money" as we like. Unfortunately, this is partially true...but...the effect would be the ultimate end-game of "Helicopter Ben" and it would create massive inflation. That would be bad enough but we continue to import things and those things will become massively more expensive as we debase our currency. The real race is to see which country can debase their currencies faster.

If we accept this as true, and I defy anyone, anywhere to challenge this statement with even a whiff of a fact, then we must consider the burden of this deficit and why it matters. Right now, our national budget is about $3T annually (not including huge amounts of "off-budget" things such as war). Of this $3T, 1/6th or $500B is interest on our debt. The debt ceiling just increased by about $1T. Interest on this additional borrowing alone will be about $40B, at our current borrowing costs. That is a huge increase in the annual deficit, a deficit that must be financed by borrowing.

Come on, folks, this has to matter to you at some point.

Look at the "what-if's. What if the U.S. incremental cost to borrow increases? The deficit and the debt increase. As the debt increased, the interest carry increases and the deficit increases. What if the FED needs to be re-financed by the Treasury? When the FED craps out on the last of the $1T or so of capital it has (and it has already committed $500-$600B), it must go to the Treasury and ask for more securities. The Treasury must then float these securities (borrow) and give them to the FED. What if we give away another stimulus package? Where do you think that money comes from? What if we need another mortgage bailout? What if the FDIC, with about $53B of capital (before the $8B it spent on IndyMac or the two bank failures this weekend) needs more capital? What if $300B just isn't enough to save the 3-5 million homes already in or expected to enter foreclosure within the next year?

Time for the comic relief of the chart above, thanks to our friends at The Sovereign Society. Banks have borrowed nearly $200B through January of 2008. Other borrowings have brought the total amount borrowed from the FED to $500-600B. The FED has taken instruments of completely unknown value and exchanged them for still relatively valuable Treasury securities. Yes, this is old news, but the national debt ceiling now exceeding $10T is new news. And it matters. Just like it matters to you when you have more debt than you can service.

The payoff of this column, since our entire BizRadio and Wall Street Shuffle teams are committed to giving you the tools to make a better financial decision, is that you should take inflation very seriously. In fact, the only treatment for the problems we have right now (notice I did not say "cure") is inflation. Bet on it, bank on it, invest accordingly. Bernanke is praying for it and he is pulling out all the stops to create it. He knows the alternative is massive deflation, and that is something no one wants or knows how to cure.

The U.S. is nothing more that than the collective earning and borrowing capacity of its citizens based upon the opinion of those that would lend to us. At some point, these numbers matter. It is at that point that we will really understand the term "defend the dollar".

The very uncomfortable reality is that our dollar is strong only as long as the world believes we will defend it. That defense could have been with a sound fiscal and monetary policy but it will depend, ultimately, upon the lenders' perception of our military strength and their perception of our willingness to use it.

Maybe that this the real reason Cheney said that "deficits don't matter". I respectfully disagree.

2008-07-25T10:50:00.000-07:00

Welcome to the premier of The Wall Street Shuffle.com.

This is your one stop shop for your financial day.

From this one location, you can:

Stream our show (and all of the other shows on BizRadio)

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John and I and the entire BizRadio Team (including our trusty Operations Manager in Dallas who keeps us running, Ed Moyer) all want to thank you for joining us and listening.

We want this to be an entertaining blend of business, finance, macro, micro, audio, video, entertainment and, above all, serving it all up with our original irreverent style.

You are the most important person to all of us. When you are happy, we are happy.

Thanks to all and join us as we grow at The Wall Street Shuffle and BizRadio 1110AM in both Dallas / Ft. Worth and Houston.

2008-07-20T20:30:00.000-07:00

I believe in the "End of Days" concept for the American Consumer. While I'm not sure exactly what the signs are or what the final sign will be, I can say with certainty that we are managing to leverage every valuable asset we have. When we have run out of things to borrow against, that will be the last sign. Until then, for the American Consumer, these will have to do (and these are pretty darn close to the final act):

The Seven Signs of The Financial Apocalypse of the American Consumer
1) Reverse mortgages
2) Life settlements (for the sellers)
3) Negative am, Alt-A, sub-prime, cash-back mortgages
4) Property tax loans
5) Payday loans
6) Debit cards for your 401K
7) Paying your mortgage with your credit card

I have friends in the property tax lien business. It is huge in Texas. If you cannot pay your property taxes, you can go to a firm that lends you the money at 18% interest over 48 months. They take a lien on your home. In Texas, this lien jumps to the head of the priority line, even jumping in front of your first mortgage holder.

Even people that own $3 million homes are borrowing the $90,000 of property taxes due.

You would think this is almost an entirely risk free investment, as property taxes are about 3% of the value of your home annually. A lender lends 3% of the value of your home to you and pays your taxes for you and they take a first lien.

Know what is slowing this lending practice right now?

The lack of qualified applicants!

Can you imaging? You are so concerned about the borrower paying back your puny 3% loan and worried that the property that you have taken as collateral won't sell that you won't lend 3% against the property. AND you have a first lien?

That, my friends, is truly amazing. And just a weeeee bit concerning.

Our next post will list the Seven Signs of the Financial Apocalypse of our federal government.

2008-07-20T20:13:00.000-07:00

The big question is whether this is a permanent consumer buying shift.

If it is, this is a big problem for an economy that prides itself on being more than 70% consumer driven.

Also, as you drive through familiar neighborhoods, have you noticed browner and slightly less manicured lawns? And, in the evenings, have you noticed that many homes are dark that were previously lighted at night?

Think this has anything to do with your July power bill was up more than 50% from July of 2007? How do you think increased water prices are affecting the average American?

A better question is what do you think winter heating bills will do to consumption?

Does anyone think this is just a small problem with middle America? I have friends that have what once were considered to be great middle class jobs. They now have problems just meeting their monthly obligations. And they have no wage pricing power. And they face increased commodity costs. And their home value is declining. And their 401K's and retirement plans are shrinking.

This is not just your neighbor's problem. If the average American consumer is struggling, the nation struggles. If the nation struggles, the exporters of the world struggle. If that happens, your choice of investments, no matter where they are in the world, face challenges.

Never was there a better time to remember Will Rogers when he said that he was more concerned with the return of his investment rather than the return on his investment.

2008-07-17T19:03:00.000-07:00

And just one more thing. In that Freddie and Fannie have contributed some $170 million dollars over the last few years to campaigns and lobbying...

Can they still do it if the U.S. Government REALLY is backing their paper now? Or if the FED REALLY makes an investment into some new class of preferred stock in either or both of these companies?

At what point does a private company become a GSE then become a ward of the country?

Can we at least stop them from now using our tax dollars and guarantees to lobby our Congress?

2008-07-17T19:01:00.000-07:00

You heard it on "The Wall Street Shuffle" weeks before this release. And we have no inside information, just a lot of common sense...and we read everything.

NEWS ALERT
from The Wall Street Journal

July 17, 2008

J.P. Morgan Chase posted a 53% fall in net income to $2 billion, or 54 cents a share, from $4.2 billion, or $1.20 a share, a year earlier. The decline in earnings was driven partly by a higher provision for credit losses. Items related to the acquisition of Bear Stearns amounted to a net loss of $540 million. The firm beat analysts' expectations of on average 44 cents a share.

Chairman and Chief Executive Officer Jamie Dimon said, "Our expectation is for the economic environment to continue to be weak -- and to likely get weaker -- and for the capital markets to remain under stress. We remain conscious that since substantial risks still remain on our balance sheet, these factors will likely affect our business for the remainder of the year or longer."

2008-07-17T17:51:00.001-07:00

FLASH - Bernanke admits that inflation is both a hidden tax and a monetary phenomenon.

Watch the video.

http://www.house.gov/paul/index.shtml

2008-07-13T21:49:00.000-07:00

Care to watch the CEO of Indymac, the second largest bank failure, at a press conference this weekend?

Listen to the words carefully. You will hear something that is entirely untrue but it is carefully scripted to suggest that your deposits are safe and secure.

Let me know if you pick it up.

http://www.youtube.com/watch?v=YWObzm9O1Nc

2008-07-12T09:14:00.000-07:00

By the way, THIS is what you have been seeing as the "OFFICIAL" unemployment rate.

Please read on...

2008-07-12T08:41:00.000-07:00

I can't make this up, folks. Hot off of the Bureau of Labor Statistics ("BLS") press.

FLASH : REAL UNEMPLOYMENT NEAR 10% - and that is our own lying number (I added for effect).

And, guess what? It was over 8% for May of 2007 - LAST YEAR! Did you read that anywhere? Noooooooo. You read unemployment at historical lows - 4.5%.

These definitions are real and also from the BLS. Please focus on the hitherto unmentioned crazy relative locked in the basement - U-6.

Definitions of U-1 to U-6:
U-1: Persons unemployed 15 weeks or longer, as a percent of the civilian labor force
U-2: Job losers and persons who completed temporary jobs, as a percent of the civilian labor force
U-3: Total unemployed persons, as a percent of the civilian labor force (the official unemployment rate)
U-4: Total unemployed persons plus discouraged workers, as a percent of the civilian labor force plus discouraged workers
U-5: Total unemployed persons, plus discouraged workers, plus all other “marginally attached” workers, as a percent of the civilian labor force plus all “marginally attached” workers
U-6: Total unemployed persons, plus all “marginally attached” workers, plus all persons employed part time for economic reasons, as a percent of the civilian labor force plus all “marginally attached” workers

U-6 IS the real unemployment, as bad as it gets. It is still a lie but it's now more like a really, really big white lie.

No more needs to be said.

This is a lot like the FED no longer publishing the M-3 measure of the money supply because it so, so, so massively disturbing. They know what it is but they no longer publish it. Best guess of folks that try to continue to calculate it...in excess of 20%...per year.

Or consider the insulting "core" inflation numbers of 3%+/-. Does anybody actually live without energy or housing or any other "adjusted-out" items?

Are you now beginning to understand why you feel like you have been in a recession?

Of course you do because you've been in one one for more than a year.

Wait until the next post for a discussion of Greenspan's ultimate bonehead thought. This one, if we un-correct his correction, would reduce GDP by nearly 2%. Sooooo, for as long as our "reported" GDP has been less than 2%, we have actually been in a recession.

So, we have understated unemployment, understated inflation and understated growth in the money supply. And these are just the first three crazy relatives!

Ah, I feel so clean now. Now we can talk about ALL of the other relatives in the basement. It's actually a small compound down there. We'll bring them up one at a time to get you used to them...slowly.

Hell, some one left the basement door open...they are all coming out...they're hideous...derivatives, Alt-A mortgages, negative am mortgages, consumer loans, real government deficits, real government debt, unfunded government liabilities, Level 3 assets...AAARRRGGGHHH!

2008-07-11T19:15:00.000-07:00

By the way, check out the June 22nd blog. Very prophetic.

You don't have to be smart. You just have to read a lot and think like a sneaky bastard...just like a Central Banker or the head of the Treasury.

To make money, you don't need a lot of warning. I think 19 days was enough.

Did anyone else short Freddy or Fannie or think Indy would fail?

An you call yourself "Shufflers"!

What do you think will fail next?

2008-07-11T18:07:00.000-07:00

To the tune of the intro to "The Rockford Files":

"Eh, yo, Danny Boy. This is your buddy, Fat Sally…Sal Minela. You still bustin’ knee caps? I gotta couple of stugotts been a little light recently and I need some persuasive collections. Names Skinny Fannie, Fast Freddy and their pal Mini Indy. It’s about $6 trillion with the vig. U interested? Call me."

OK, let's go over this again.

1. You can't lend money to people that can't pay it back.

2. You are not a government that can print money so you must either earn it, borrow it or have someone buy your equity.

3. Contrary to some folk's opinion, money is not just digital bit and bites created at the Treasury's or the FED' whim.

4. If you leverage your equity 30:1 (or even 220:1 ala Bear Sterns), just a weeeee little decline in the market wipes out your equity and, therefore, your capital structure.

"What we have here is a failure to communicate."

Let's remember just what our government is. It is nothing more than the collective capabilities of all of its citizens. That's it. We, as productive citizens, produce value in excess of what we consume, after tax (or at least that is what we are supposed to do). This is called savings.

Then there is the government. It is funded by our taxes. These taxes may be invested in things that last, such as bridges, roads, utilities, etc. We can spend it on social requirements such as the military. We can spend it on the necessary expenses of our country (though you and I might differ on the definition of "necessities"). Then, after all of this investing and spending, we still don't have enough, the country may use our collective ability to service new debt and we can borrow. To support that debt, we must pay interest, but that interest must be paid out of our taxes UNLESS you have a giant governmental negative-am economy.

That is it! We have a giant negative-am country!!!

We tax, we spend more than we tax, we borrow to spend and we borrow to pay the interest on the debt we borrowed. How do we get away with it? We have a giant printing press. The world uses our currency and they have wanted our dollars. Also, it helps that we have 13 or so aircraft carriers, a large number of "boomers" (submarines that break things, not you and me), an even larger number of warheads and the demonstrated ability and desire to use them to defend liberty and capitalism (OK, not really but it sounds good). This is the real meaning of "defending the dollar".

But, you and I do not have a trigger in our hands so our debts must be paid and serviced. We don't have a personal printing press.

Another truism: Most people think that assets are fixed in value and debt is variable. It is quite the opposite. Assets vary in value and debt is fixed.

As an example, you buy a house for $500,000 and borrow $475,000 (a very generous, by current standards, 5% down). If, just if, the value of your home declines by 25%, as they have in many parts of the country, your home is now worth $375,000 BUT you still owe $475,000. You must pay that off somehow and you must service the debt while you owe it.

If you don't pay this debt, the bank looses money. That loss reduces their equity and they can now lend less. Less lending, less growth capital, higher rates, etc.

This is right where we are now. Over valued assets everywhere supported by too much debt and too little income to service the debt. This is true for individuals and for the country.

And for Fannie and for Freddy and for Indy. And the "ands" just keep on coming!

2008-07-04T19:58:00.000-07:00

Yes, I know that I have always been inspired by Ross Perot's charts (he has a new web site with new charts "perotcharts.com").

This chart, however, is a real game changer.

For everyone who thinks the consumer may return soon, therefore driving stocks back up, think of this. For our Texas listeners, most of whom heat their homes with natural gas, see what impact natural gas prices will have on your disposable this fall and winter.

Let's round for effect. Last fall, natgas spot was about $7. Today it is about $14. Assuming that it does not go up any more this year, your home heating bill will more than double, after taxes and fees.

Soooooo, if my monthly home heating bill was $700 last year, this year it will be $1400.

We pause for effect...

Did anyone out there plan to spend $500-$1000 more each month to heat their homes? What effect do you think this will have upon disposable incomes? Think this will make consumers spend more or less? And this is just the heating bill. This does not include the increased cost of virtually everything else.

Just food for thought when deciding upon whether we have a bottom in sight anywhere. Especially financials. If financials are struggling with write-offs, what do you think this massive decrease in disposable income will have on the propensity of consumers to pay their outstanding obligations? My bet is that write-offs and foreclosures will continue to increase dramatically. And this is if the natgas prices just don't go up any more.

Cash, puts, shorts, precious metals seem a whole lot safer right now. Obviously, if you believe that the tops are in for energy, then take another tack. If you believe that energy is flat to increasing or if you think some further conflict is probable in the Middle East, this chart might be conservative by the end of this year.

Pull out your crystal ball and take your choice.

2008-06-30T20:56:00.000-07:00

And just one more thing...why isn't it a bigger deal that the FED has chosen to bail out the IBanks? Notice, I did not say the commercial banks. If the I Banks, why not companies? Why not individuals?

I know this is a tiresome question, but it is one that I will continue to ask.

And, with all credit to Ed Wallace on KLIF, when the government bailed out Chrysler with a $2B loan in the early 80's, they made Chrysler sell off their GulfStream Aerospace subsidiary. Has the FED asked ANY I Bank to sell off even one of their aircraft, let alone a whole division, let alone cut their salaries, let alone eliminate their bonuses or sell even one Maserati?

But, you are expected to honor all of your debts...with less disposable income because of the inflation that the FED caused.

I never deny anyone an opportunity to earn more money. I am, however, quite upset about those that not only don't earn their living but lose what you may have given them to invest and yet continue to pay themselves outrageous sums essentially with your money through FED guarantees.

And, just don't listen to anyone that says the FED's money is not your money. When the FED needs more money, after they have used up their $1T balance sheet, they go to, you guessed it, the Treasury for a fill-up. Where does the Treasury get their money? Yep...you.

2008-06-30T20:40:00.000-07:00

By the way, stay tuned for our new super-sized, Wall Street Shuffle blog and site. News from our men on the street, our regular guests, our hidden mics, insights that are truly ahead of the curve, John Sheely's commentary, our show schedules and other really cool things.

Or, at least, that is the plan. It should be here by mid-July. Just in case, include us in your prayers tonight!

2008-06-30T20:04:00.000-07:00

I wish I had something pithy, clever, funny or profound to say about this chart. I don't.

Except that I told you a long time ago. that this would happen And, contrary to the dog poo you've heard about this being the 7th or 8th inning, the home team hasn't come to bat yet.

And, for those of you in REITs ("Re-allocating Equity and Income Trusts" - that is your equity and income being re-allocated to someone else), "The pain, Boss, the pain".

Local and regional banks made a lot of money lending to residential and commercial builders, not buyers. And I do mean "made". Simple deductive reasoning, that which is lacking almost everywhere right now, suggests that major bank and their ugly step sisters, the I Banks, made A LOT of bad home loans, securitized them and sold them off. This inflated home prices beyond all imagination, someone woke-up and figured it out, buyers stopped buying, lenders stopped lending, no more HELOCs, home prices fell, developers failed, loans were written off, the economy took a dive, consumer's disposable income dropped and consumer demand dropped.

What did I forget? Oh, yea, that's right, RETAIL and COMMERCIAL building continues, financed primarily by local and regional banks. Let's not forget the commercial REITs. And just what happens when consumption drops, the supply of retail and commercial space increases and retail and commercial building continues? Failed new projects, declining rents and a general failure to meet the rosy projections that tempted you into these investments in the first place. This will result in a rather pronounced "headwind" for commercial and retail property investments. And soon.

Of course, you can follow the general advice of investment professionals and "hang in there for the long term". That's rich. Buy high, ride it down, hang in there for years and, then, you are finally back to even many years in the future with an aging building that has been vacant for years.

There aren't too many places to hide from a "general risk re-pricing" (I call it deflation, but what's in a word?). One place might be in all of the retail and commercial space that will be very vacant very soon.

2008-06-22T21:42:00.000-07:00

Here is a short test.
1. Has anyone seen this ad?
2. If so, where?
3. If you saw this ad, why do you think the FDIC ran this ad? And why now?

There are many reasons to advertise. You need customers (the FDIC does not), you need investors (the FDIC does not), you need institutional support (the FDIC does not), you need institutional awareness (the FDIC does not).

Or it can be a public service announcement. Now we are on to something. But why would the FDIC want the public to be aware of the FDIC and its insurance limitations?

Simple...public confidence.

Now add that to the massive hiring spree that the FDIC is in right now. They are making every effort to rehire past employees with bank foreclosure experience, especially those with RTC (the Resolution Trust Corp. that worked to manage and "resolve" the S&L crash of the early 1990's).

Bank losses have not yet begun to be realized, let along recognized. About 80 banks are now on the FDIC watch list. Only 4 have failed in recent years but the watch list is growing.

By the way, have investors recently lost money in an FDIC insured account? The ad implies no but the real answer is, surprisingly, yes. Anyone with balances in excess of $100,000 (coincidentally the amount of the paper currency in the ad) have not had those excess balances honored.

So be sure that you manage your personal and corporate deposits with this in mind. There are many ways to keep more than $100,000 in each bank but it does take diligent cash management, especially if you have a corporate operating account with regular daily transactions in excess of this limit.

Call us at the Wall Street Shuffle if you want to know how to protect your deposits. Probably a lot of listeners want to know how but just won't take the time to ask.

I'm not saying that the crisis is not over for financial institutions, I'm really not. I am, however, saying that the crisis has barely begun.

My CSIQ (Common Sense Intelligence Quotient) tells me that if a bank takes a loss, it goes directly to equity. If equity is impaired, then reserves are impaired and, therefore, lending limits. Assuming that the bank was fully leveraged (as most are), then every dollar of loss must be replaced with a dollar of new equity. This has not happened.

So, new lending must be curtailed. And it is, right now. Tighter lending standards, greater equity requirements for borrowers and higher interest rates all have the effect of reducing lending. Reduce lending and you reduce bank earnings and the cycle starts all over again.

This is the essences of de-leveraging. HELOC (home equity lines of credit) are cut, personal and corporate lines of credit are cut, unused credit card available credit is cut. Decreasing home prices result in reduced re-fi's, especially cash back re-fi's.

This whole process will put immense strain on our banking systems. Add to this the soon-to-be problem loans to regional and local banks from commercial and retail and residential developers that will fail and you have the virtually complete recipe for increasing financial system failures.

How any moron, including Cramer (last week), could say that it's time to bottom fish in financials right now is beyond me. I'm not the brightest fisherman out there but I can safely say that shorting financials, virtually any financial, will be a much better bet than anything in Las Vegas, or better than just about any other financial advice out there. You are highly skilled (and often just plain lucky) when your winners exceed your losers. Betting against the financials is still the best game in town.

2008-06-21T19:40:00.000-07:00

I thought that you might find this interesting, just in case someone asks what our governement, the BLS, feels is the current BEST case for May '08.

2008-06-18T21:22:00.000-07:00

False Premise

"Our nation has come to expect the Federal Reserve to step in to avert events that pose unacceptable systemic risk...But the central bank has neither the clear statutory authority nor the mandate to anticipate and deal with risks across our entire financial system.

We should quickly consider how to appropriately give the Fed the authority to access necessary information from highly complex financial institutions and the responsibility to intervene in order to protect the system so they can carry out the role our nation has come to expect."

Short but sweet, folks...this is an argument, not a debate. The argument is based upon this entirely false premise put forth today by our idiot savant Treasury Secretary, Henry Paulson.

Just who said that we have "...come to expect..." the FED to step in and do anything? I didn't. You didn't. Nobody asked them to save us from anything. Did you ask them to bail out a private investment bank with the ultimate result that risk taking actually increased because there is a new sheriff in town with bail cash for all?

And, petty though this may sound, who in Hell asked them to save us from them?

Though many voices will say this is wrong...well...who really cares what "many voices" will say. The fact is that inflation is a monetary occurrence. Inflation is not possible without too much liquidity. And the FED has accommodated this liquidity rush with the best financial drugs known to man...massive credit and low interest rates and ridiculously low reserve requirements. Oh, and by the way, virtually no enforcement of existing regulations. Remember Greenspan's "What could I have done?" bit?

A house of financial mirrors...every direction looks right and yet every direction is wrong. Raise rates and kill any hope of a real estate recovery and huge losses become unimaginable losses. Lower rates and systematic inflation is assured and the dollar drops like George Michael's pants in Central Park.

In reality, the FED wants inflation and a lower dollar. Inflation, in the vision of the FED, will lead to rising incomes. At least that is their hope. Wage pricing power is completely non-existent right now. But IF the FED can move wages up, then perceived purchasing power increases and real estate has a chance. Values begin to grow again, the existing debt may be paid off in cheaper (devalued) dollars and everyone feels better and richer.

But, like a stripper bathed in red stage lights, all is not what it seems. The FED is actually focusing NOT on commodity prices as their "canary in the mine" but rather the very thing that they need to make this whole plan work...wages! That's right, the FED is actually using wage increases as a signal to "act decisively" to ward off that nasty inflation because it should be obvious to all that rising wages are bad and rising prices are good.

What kind of world does the FED live in? You are going to tie your decision to fight inflation to an increase in wages...Really?...Seriously?

Didn't the FED just assure us of the next worst thing next to deflation - stagflation? That is the very definition of stagflation - rising prices and flat wages.

The name of the game right now is real wealth preservation, adjusted for inflation. A rate of return of even 12% is a sucker's bet with inflation running 7-10% and taxes of 35%. Add a risk free rate and a risk premium and you need high teens returns to beat inflation and earn a small net return to assure growing purchasing power.

I can still hear Will Rogers saying "Last year we said, 'Things can't go on like this', and they didn't, they got worse."

2008-06-10T21:09:00.000-07:00

"The three stages of magic:

First, there is the setup, or the "Pledge," where the magician shows the audience something that appears ordinary but is probably not, making use of misdirection.

Next is the performance, or the "Turn," where the magician makes the ordinary act extraordinary.

Lastly, there is the "Prestige," where the effect of the illusion is produced. There are "twists and turns, where lives hang in the balance and you see something shocking you've never seen before."[

From the movie “The Prestige”.

Bernanke is the illusionist.

We are the audience.

We must be willing to suspend disbelief. We paid for the ticket. We know that a railroad car or the Statue of Liberty cannot disappear. But we want to believe they can. We want to be entertained.

The setup, or the “Pledge”, is a fair market and real, inflation adjusted growth. It seems normal and fair but all is not what it seems.

The “Turn” is the illusion of exceptional economic growth and prosperity beyond all rational expectations. Interest rates are low, zero down, cash back financing, asset values increasing far in excess of any wage and earnings growth. People making $50,000 per year are buying houses for $500,000. Houses are “flipped” for huge profits. Assets sell for more than the asking price. Wages increasing faster than prices. Security of social contracts (social security, etc.). $700T worth of derivatives that are perfectly hedged. Banks with sufficient reserves. Solvent muni bond insurers. Sufficient equity and cash flow for the debt load.

The “Prestige” is the appearance of real growth of your wealth and the financial stability of the US, all the while the “lives hanging in the balance” are real estate crashes, massive bank write-offs, increasing unemployment, historic rise in prices of oil, unimaginable federal budget deficits, a war in Iraq, prescription drugs, Medicare, Medicaid, Social Security, trade deficits, Sovereign Wealth Funds moral authority via their investments, complete lack of wage pricing power, record foreclosures, negative savings rates, increasing bank failures.

All of these are mis-directions. All real and, yet, you WANT to believe that these problems are solvable at the wave of a wand by the Illusionist.

You walk away from the event knowing what you saw can’t be real yet you still believe.

The only problem is that when you leave the theatre, the Pledge, the Turn and the Prestige, the entire illusion, stay in the theatre. You don’t have to go back and your memory of the illusion grows richer over time.

In the real world, you pay for that Illusionist each and every day with your tax dollars, your depreciating disposable income and your diminishing asset values. You feel richer but you are not.

Inflation erodes your purchasing power, deflation diminishes the value of your home. Your net worth increases BUT your real value, in terms of purchasing power, decreases.

The FED CANNOT raise interest rates and have economic growth. The FED CANNOT lower rates and stop inflation. They have finally reached their “Hobson’s Choice”…a choice that is really no choice at all.

We have no wage pricing power in a globalized world. We have no pent-up demand to drive a recovery via new jobs in manufacturing or service. Our real savings are decreasing.

To raise interest rates, oil must come down, thereby freeing up disposable income to pay the higher interest rates. But if rates increase, housing dies, more mortgage and credit losses, more FED lending to banks and investment banks, the FED runs out of balance sheet (about $1T total to work with but having used about $500B already), the FED goes to the Treasury for re-funding, that means more federal debt, higher federal interest costs, bigger budget deficits.

This is the quintessential “Hobson’s Choice” and the greatest illusion ever attempted.

The FED will not raise rates in this election year, no matter what the “Pledge” is.

And our audience will not suspend disbelief. Therefore, the illusion is no illusion at all.

Fade to black…

2008-05-30T20:27:00.000-07:00

Why bad debt matters

This is the financial equivalent to the crazy uncle in the basement...something no one talks about or understands. It is bad debt.

Bad debt is a very different animal. Ask someone that is not in the business to define it and they'll get it wrong. Bad debt, also called charged-off debt, is the direct result of a customer not paying their bill. It is not past due debt or delinquent debt. It is debt that the customer has never paid and your company has fully reserved for the debt and your company now carries debt that is a net $0 value.

Let's take an easy example. Say your company revenues are $100. The average company makes about 10% or $10 in after tax profit. Built into this number is an expense to cover the cost of the part of the $100 in sales that are never collected. To be very simple, say that 1% or $1 has been expensed and charged to the bad debt reserve and the 10% net income is after this expense.

Next, assume that your company is public and trades for 20 times earnings. Your stock is worth 20 times $10 or $200.

Now, let's say that your bad debts go from 1% up to 2%. This is commonly referred to in the media as "only up 1%". It seems insignificant and nothing to talk about. Dismiss it. It's lost in the details. What are you worrying about?

He's why you should be very concerned. If the bad debt goes up from 1% to 2%, that means that your earnings have gone down from $10 to $9, or 10%. Your stock price has just gone from $200 down to $180.

Does that seem important to you? Now imaging that this bad debt goes up another 1 or 2 percentage points. This is real erosion of your stock price or market capital. All due to just a few more consumers and companies not paying their debt.

Most people think of this debt as mortgage debt because that is all the rage in the financial media. There is also auto loan debt, consumer debt, RV debt, boat debt, lines of credit, HELOCs, payday loan debt, signature loan debt, utility debt, property tax debt, bad check debt, overdraft fee debt, parking ticket debt, speeding ticket debt, library debt, medical debt and credit card debt.

And that is just the consumer side.

Don't forget commercial debt. Oooops, forgot LBO debt and derivative debt.

The point is that every dollar of unpaid debt destroys a much larger amount of capital. When that capital goes down in value, transactions based upon that asset value decrease in value. It's the equivalent to the "Dead man's spin" to a pilot.

The FED knew this when they bailed out the banks and the investment banks. These folks cannot earn money quickly enough to rebuild their capital base without significant FED intervention. Without the $400-$500B provided by the FED, many, many more banks and investment banks would have been in the trash heap by now.

Since the FED is taking care of the banks and the IB's, just who will take care of the consumer credit issuers, hhhhmmmmm?

So, next time someone says that debt charge-offs are up "just 1%", you now know that this is a rather nasty increase. Knowing this, financials are a very difficult long position right now as every bank, by its nature, makes loans and is exposed to the declining ability of both consumers and companies to service their debt.

Last point, now add into this equation just a slight drop in disposable income, due to, say, oil, food, taxes or some other such insignificant expense. Since disposable income as a percentage of gross earnings is at exceptionally low levels, just a small increase in expenses drives disposable income into the ground. And it is this very disposable income that allows you to service your debt.

Such simple circular logic, really. And now you know. Sleep well.

2008-05-24T16:25:00.001-07:00

Did I mention Part Two of the "Black Gold Rope-A-Dope"?

Remember that owners, more than likely, are also speculators.

Accepting this premise, and acknowledging that there is enormous wealth (growing exponentially) controlled by oil owners and related sovereign wealth funds, this might lead one to conclude that even free markets may be moved (up and down) with relative ease by a very few.

Should this ring untrue, remember the huge silver bull market nearly 30 years ago when silver spiked to more than $50/oz. Members of the Hunt family had essentially full control of the delivery of silver. This was not acceptable to people with even more money than the Hunts and the rules were changed in the middle of the game, forcing several members of the Hunt family into virtual financial ruin.

Think this process can't happen again? It's happening right now as new rules have been discussed and proposed regarding futures trading of food related commodities. It should be noted here that the oil owners have accumulated far more wealth than the food commodity owners and these rules changes have not yet been proposed for oil.

Besides, it couldn't work anyway. Money goes where it is wanted. Over-regulate trading in the US and the trading will move elsewhere.

The current oil price hearings in the House right now are a side show - a game of "Three Card Monte" - for the entertainment of the American voters.

"Something must be done!"

"Something will be done!"

Our trusted, elected officials will ask even more insightful questions such as "Did you make more than $4m last year in salary?" to the heads of Big Oil. That will show Big Oil and the voters we are serious. Quick, ask them another question so that we can adjourn and get back to campaigning.

Which rules do you think will change first?

2008-05-23T20:36:00.001-07:00

Just another thought about oil.

How are oil prices determined? Is it "Big Oil", oil executives, speculators, the "Government"?

There is no ambiguity. You'll never need to ask this question again. Here is the only complete and correct answer.

The only people that know where the price of oil is going are the folks that OWN the oil.

This is so simple, it defies logic that anyone even asks the question. Owners can raise prices until they squeeze out the last drop of profit. They can take the world to the brink of ruin. The world reacts and begins to kind of maybe think about thinking about maybe doing something about improving a completely dysfunctional energy policy. Just after investments are made in other energy sources, the owners WILL LOWER THE PRICES to make these alternative investments no longer financially feasible. New energy goes belly-up, and the owners RAISE THE PRICES again, only MUCH higher this time.

Black gold rope-a dope.

Holy sweet crude, Oil Man, this isn't news! The owners have done this EXACT SAME THING several times before to us. Are our brains so filled with useless crap and crippled with media induced ADD ("Speed Racer" comes to mind) that we can't remember what the owners have done to us over the last 35 years? Have we no long term memory?

Consider yourself completely armed for the next idiot that asks you this question. Be swift, be merciful, put him out of his moronic misery...and don't let him breed!

2008-05-21T20:03:00.001-07:00

With all due credit to George Carlin, circa last century, these are the seven deadly words today...Inflation, stagflation, recession, depression, peak oil, sub-prime and gold. I believe that Carlin also hyphenated two of his words.
No one is to speak of these words. And never in threes (think "Beetlejuice" and you get the idea). God forbid that a politician, ANY politician, should utter any of these words. We might actually begin to understand the enormity of our dilemma.
More liquidity? More inflation, higher gold, higher oil, lower dollar.
Lower rates? More inflation, higher gold, higher oil, lower dollar.
More bailouts? More inflation, higher gold, higher oil, lower dollar.
No bailouts? Recession, Govt. and FED try to stop it, more liquidity, more inflation, higher gold, higher oil, lower dollar.
I sense a pattern...let's see...gutless and down right stupid politicians (both parties please step forward) making horrid decisions to further their careers and appeal to the unwashed and uneducated voters. Nearly 50% of voters pay little or no federal income taxes soooooooo...that means that this 50%+ can vote for the remaining 49% to support them virtually without consequences. Since these voters don't have to work for it, environmentalism, global warming and tree hugging sound like good things to be "for". Therefore, we are "for" these causes with no plan to deal with the effects. Pols know this so they either intentionally or unintentionally pander to this block.
Oil companies-bad, profits-bad, polar bears-good, environment-bad...or good...depending upon perspective. Suspend gas tax for summer-good, build refineries-bad, beg the Saudis to produce just a few drops more oil-good (but not for our national stature). Nuclear-bad.
I really think every putz in Washington needs a basic class in cause and effect.
Today would be the effect. The cause has been happening for many years. No new nuclear plants for 30 years. No new refineries for about half that time. Can't drill off the coasts even though China and other countries drill just outside our national waters. Now we wonder why this happened all of a sudden. Oil goes up, jobs go away, the economy is "sluggish" (Did you ever think about the derivation of the word "sluggish"? To be like a slug. In this context, it sounds just a bit more repulsive rather than politically correct.)
This is all about supply. We have not even touched the surface of demand. 85m barrels of oil produced each day, 85m barrels of oil consumed. If you remember your basic college economics, the moment that there is 1 more barrel of oil demanded than there is supply, the incremental price of that barrel is indeterminate. It is what anyone can or will pay. And the price does not have to go up gradually. Just look up or remember the 1973 and 1979 oil crisis.
Everything old is new again and here we are with all kinds of causes and all kinds of effects. Only this time, the world is playing the game at the same time.
By the way, the peak oil for the US occurred in the mid-70's, more than 30 years ago. No one said we were quick studies...

2008-04-29T21:21:00.000-07:00

If anyone thinks the financial crisis is over, then why are the banks and IB's selling their LBO debt at deep discounts AND financing the transactions at capital costs BELOW their actual cost of capital (not counting the gifts from the FED)?

The FED's money is the Treasury's money and the Treasury's money is YOUR money. Sooo...that means that the banks are using your money to rid themselves of problem debt and finance it at cheap rates subsidized by you.

But, then again, it's only a problem once everyone figures it out.

Just don't ask the question "Exactly how much debt do we owe?" While relevant, it's not immediately life threatening. It's like saying "OK, we owe $1mm and we make $100k but I can afford the payments."

But don't EVER ask the question "And just how much does it cost to service that debt?" This question is just a bit more timely, like a femoral laceration. This is the same as "Holy Cow! If I add up all of my mortgage debt, car loans, credit card debt, boat loans, second home mortgage, HELOC's, RV loans, credit lines, student loans (that I am paying for my kids), payday loans to cover the past due credit card payments, property taxes, con summer loans to pay for the new furniture and plasmas and any anything else that comes out of my paycheck, I might have just a weeeee problem here." Time for the wife to work a double at the Thrifty Mart.

OK, think of that and then add lots and lots and lots of zeros and you begin to get the idea that consummers and the government might be in the deep end with lead flippers. Or, just don't ask...

2008-04-28T20:49:00.000-07:00

Don't believe everything you hear about "core" inflation and the "CPI" rate. Try going to the Bureau of Labor Statistics web site (bls.com) and take a look at the rates of inflation for various goods and services. I love the fact that the only thing that was cheaper in 2007 was apparel as that was virtually all made in China.

And don't talk about wild extrapolations. Inflation is worse now than in 2007. Go to the grocery, buy gas, take a vacation, pay your utilities or try to get a job in trucking.

Also, remember that inflation has the greatest effect upon average Americans as this group (no matter how you define "average") has the most fragile disposable income and is the most exposed to daily expenses of fuel and food. Oh...that's right...the government DOESN'T count food or fuel in their posted inflation rates.

But you DO eat and drive, don't you? And don't listen to the line of BP (bull poop, for those with sensitive ears) saying that inflation is only when the dollar declines. Any time your purchasing power declines, whether via dollar decline or demand/supply imbalance, you get less for each dollar you earn and that is inflation.

To make matters worse, we have virtually no pricing power when it comes to wages, due to globalization, so we are left with price inflation, stagnant wages, shrinking purchasing power, tighter credit, declining home prices and less disposable (and savable) income.

When has this combination ever been bullish? Can the market really see into the future six months and this bull rally is really a vision of future bounty? Well...NO...if the market was so darn good, you would have not had the collapse of financials and Bear Sterns.

So, the lesson of the day is do your research, trust the facts (when you can find them) and see how your financial life is changing. If you expect to be better off in six months, then maybe the market can see the future. If you are not so sure, then why are you long financials? After all, you must be betting that the FED will continue to lend against (really buy, but that is another story) bad mortgages, the Department of Education will buy bad student loans, some agency will buy bad credit card debt, the Department of Are You Kidding Me, You Spent How Much on that Boat? will buy bad boat loans, the Department of Commerce (I'm running out of Departments) will buy bad corporate debt, the Treasury Department will buy 1/5 of 1% of bad derivatives (did I mention that amounts to about $1T US dollars?) and so on and so on...

The only full employment job category in the nation is printing press operators...pass me the oil, boys, she's gonna blow....

2008-04-18T16:24:00.001-07:00

By the way, welcome to our new fans in Oklahoma City, Chicago, Detroit, Ft. Worth, Dallas, Houston and around the country via podcasts and simulcasts.

2008-04-18T08:34:00.000-07:00

OK, folks, I finally found the ultra secret combination that gets me into this blog! Sorry that it has taken so long but we are here now and the party can start!

The financial world isn't ending but the rules are changing. Throw out the old rule books and watch how the FED and the Treasury re-write the game. Pay careful attention because they have taken a lot of the penalties out of the game...think the championship game in RollerBall with Ben Bernanke as the head of the Houston team (OK, too obscure - go rent the movie - THE ORIGINAL version - and you'll understand).

If the FED or the Treasury or any government agency now stands ready to guarantee every piece of bad mortgage, student loan, LBO loans and other types of financial toxic waste that only the bankers got fee rich when they birthed these securitized hell spawns, what makes you think that the folks that actually OWE these debts are now MORE willing to pay?

A financial Yucca Mountain is just a few strokes of a President's pen away. See it grow, feed it with your tax dollars and then just water it a bit with other give-aways and entitlement programs. The Manhattan Project had nothing on this little gem of a financial MOAB (see reference to Taliban cave dwellers having the air sucked right out of their caves)!

I'm not the brightest bulb in the pack but if you think your rich uncle is going to leave you a fortune very soon, my guess is that you begin to work just a weee bit less and begin to anticipate the unearned windfall coming your way. Paying your bills somehow now seems just a little less important.

These guarantees will do more real harm that good. Oh, it will feel good for a while until you realize that each and everyone of us, as taxpayers, are taking it in the shorts with increasing federal debt, higher inflation and more interest on the federal debt. Depending upon how large these guarantees get, the bigger the problem. A drunk has to sober up sometime.

Remember, the big, bad voodoo daddy of all such guarantee programs, Social Security, is neither very social nor very secure and it is eating our national fiscal lunch. Do you think any of these guarantee programs will be better administered or have better consequences?

Final thought, would you ask your brother-in-law (the one your wife MADE you hire because "he really needs a job"), who nearly ruined your company by posting the combination to the company safe on "My Space" because he thought it would be safe and because he couldn't remember it), to run your finance department, manage your retirement plan and balance your check book? Any thoughts as to why it's a good idea to ask the FED to "manage" all institutions that affect our economy?

"Hey, Ben, grab me a beer, NASCAR is on." How did that work out for you, huh?