Monday, October 31, 2011

A Simple Three-Item Agenda for "Occupy Wall Street/We Are 99%"

There are really only three ways to cripple Wall Street's democracy-killing concentration of wealth and power: take our money out of Wall Street and the TBTF banks, eliminate private money from elections and abolish Wall Street's dealer, the Federal Reserve.



There are only three things--and only these three--that will cripple Wall Street's democracy-killing concentration of wealth and power:


1. Transfer the 99%'s money out of Wall Street and the Too Big To Fail Banks


2. Remove campaign contributions from our democracy in a way that the corporate legalist lackeys in the Supreme Court cannot overturn, i.e. entirely publicly financed elections


3. Abolish Wall Street's dealer, pusher and protector, the Federal Reserve.


My reasoning is very simple:


Everything else people want to see happen cannot happen if:


1) Wall Street and the SDI (systemically dangerous institutions) a.k.a. too big to fail banks, control most Americans' financial assets and debts


2) The Federal Reserve exists to enable and protect the SDI's wealth and power via Primary Dealers, the discount window and other pusher/dealer mechanisms


3) Wall Street and the other SDIs can use the billions of dollars they skim from our accounts, IRAs, 401Ks and pensions to buy political influence and protection from regulation and competition.


Therefore these are the necessary foundations of any real change.


As long as Wall Street and the other SDIs control much of the nation's financial markets, assets and debts, and the Federal Reserve exists to protect and enable their predation and parasitic skimming, they will have the means to reap billions in profits which can then be funneled into our cash-corrupted political system of for-sale toadies and apparatchiks.


The only real leverage we have is our money and our compliance. Leaving our money in Wall Street and the Too Big to fail banks enables their dominance. Leaving our money in checking accounts, money market funds, savings accounts and brokerage accounts, and then using credit and debit cards issued by the SDIs, is to remain deeply complicit in their dominance.


This concept is now entering the cultural dialog, for example this recent entry on Zero Hedge: Want To Defeat The Banks? Stop Participating In The System!


Frequent contributor Harun I. summed the argument up even more forcefully:

I applaud this movement only if people are coming to the recognition that, collectively, we as a nation have been wrong and now need to move in a different direction. We must now engage in discussing how best to do so.


However, I remain skeptical. Why are the TBTF banks still operating? From fraud to extortion to money laundering for drug cartels, the list of crimes against humanity is quite clear and long. Exactly what does it take before people will stop doing business with demonstrably corrupt entities?


And now there is a General Strike scheduled. I am all for it. But understand that our government will borrow the shortfall and nothing meaningful other than an increase in public debt will occur.


However, if you want to see an instantaneous and dramatic effect, every person close every account they have with all the TBTF banks and their subsidiaries on the same day.


Immediately or almost immediately they would have to be taken into receivership, their assets marked to market and sold off. The End.


Why destroy the TBTF banks? Most of them are Primary Dealers. The Fed then comes under pressure as it becomes the only lender of resort.


Then, once we have gotten their attention we tackle monetary reform, lobbying, and term limit in Congress and the Supreme Court.


It is time for government to "fear the people". Rest assured that if government does not fear the people, nothing will change.

As for the Supreme Court's legalist worship of the Corporate State: I believe this court will be remembered by history as the court which veered close enough to Corporate-State fascism to give it a big wet kiss. Corporate "rights" of personhood? No problem, you got it! The "right" to fund unlimited campaign contributions? No problem, you got it!


"Fascism should more properly be called corporatism because it is the merger of state and corporate power." Benito Mussolini


We might profitably ask how the Founding Fathers would have responded to calls that the U.S. Constitution should contain a clause granting the East India Company the same rights of personhood as U.S. citizens, and then further granting it the unlimited right to buy political favors as a function of "free speech."


One wonders how any of the Revolutionary War veterans among the Founding Fathers might have responded to such toadying claptrap. Yet this is precisely what the corporate toadies in the flowing black robes claim is "defended" by the U.S. Constitution.


A close reading of the Constitution reveals no amendments or clauses granting private corporations personhood, or granting them the right to inject unlimited sums of money to sway elections. If we turn to the Federalist Papers, we find fear of a "tyranny of the minority"--and what is a private corporation but an extreme minority bent on purchasing a limited but oppressive, exploitative and parasitical tyranny?


The legalist lackeys on the Supreme Court have hidden far too long behind the reputation of the Court--a reputation punctured by history, we might note--as a forum of disinterested legal debate. Rather, the court is nothing but another collection of imperfect human beings who are easily swayed by the tenor of the times and the ideological agendas of the wealthy and powerful. ("These are not the campaign reforms you're looking for. Move along.")


Given that we have a court that worships Corporate-State fascism slicked over with a thin veneer of democracy for public relations purposes--every single attempt to limit corporate campaign contributions has been struck down by the court--then our only choice as a people is to ban all private money contributions and institute a system of 100% publicly financed elections. Yes, it's imperfect, and yes, it's messy and costly, but nowhere near as corrupting and costly to liberty as the Corporate-State fascism we now endure.


Libertarians may be aghast at this option, but we have been reduced by the legalist lackeys in the Supreme Court to this choice: either we continue to be ruled by the corrupting corporate-State nexis of unlimited corporate/private Elites funding of elections, or we go with public financing. Thanks to the Supreme Court, there is no other choice.


As a lagniappe thought: one of the primary concerns of many "OWS/we are the 99" supporters is rising income disparity. That is a legitimate concern in any nation claiming to be a democracy with a free-market economy. Yet a close examination of the roots of income disparity and rising poverty leads straight to the Federal Reserve.


Winners And Losers: The New Economy (Zero Hedge)

What Mr. Gross and Mr. Frank and many others don't see is that it is the creation of fiat money that destroys wealth and misdirects the investment of capital into less productive assets. That is, monetary inflation destroys capital (wealth). The reason why the production of goods and services do not bear higher yields than financial assets is that the production of goods and services suffers from a lack of real capital. Remember that real capital comes only from the saved profits of production and from the savings of workers from wages earned in production.


You obviously cannot print wealth, but if you try that fiat money distorts the entire economy by directing investment to things which appear to appreciate but what is really happening is that the dollar is depreciating. As a result, fiat money and real capital are invested in financial assets because they appear to have greater yields than returns from the production of goods. Prices rise (price inflation) and it creates the inevitable boom which always busts. The fall out is that we are stuck with things people don't want (in the present re/depression it is housing). And we fall for it every time.

Allow me to simplify the argument:


1. The Federal Reserve has financialized the economy as an intrinsic expression of its reason for being.


2. Financialization necessarily creates systemically rising income disparity.


I think that's all we need to understand to grasp the utmost importance of abolishing the Federal Reserve, a private banking monopoly created and protected by our Congress. Limiting Wall Street and the TBTF banks is structurally impossible as long as the Federal Reserve exists.



If this recession strikes you as different from previous downturns, you might be interested in my new book An Unconventional Guide to Investing in Troubled Times (print edition) or Kindle ebook format. You can read the ebook on any computer, smart phone, iPad, etc.Click here for links to Kindle apps and Chapter One. The solution in one word: Localism.

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My new book is available in both print and ebook formats: An Unconventional Guide to Investing in Troubled Times (print edition) or Kindle ebook format. You can read the ebook now on any computer, smart phone, iPad, etc. Click here for links to Kindle apps and Chapter One.

Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Mobi ebook) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller.

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Saturday, October 29, 2011

One Way to Understand the EU's Inevitable Crash Landing: the Autopilot Analogy

The leaders of the EU don't actually know how to fly; they only know how to watch the financial sector's autopilot do its "magic." Too bad the autopilot shorted out last May.



Recent anecdotal evidence out of Asia suggests that the flight training received by some civilian airline pilots is based entirely on the aircraft's autopilot functions.Recall that an autopilot is a mechanical, electrical, or hydraulic system used to guide a vehicle without assistance from a human being. This deficiency in their training has been revealed in a most disconcerting fashion: when the aircraft's autopilot malfunctions, thepilots do not know how to actually fly the airplane.


In other words, pilots are not actually trained to fly aircraft, i.e. to know how the aircraft responds in real time to actual human intervention/control; they're trained to monitor and manage the autopilot system which does the actual flying.


This is a precise analogy for the European Union's leadership: they don't know how the financial system actually works, they only know how to follow the banking system's autopilot. Now that the financial system's autopilot has been fried, they are clueless and increasingly panicky: what does this lever do? Why is the stick so sluggish? We're losing power... there must be an auxiliary power switch, like in Star Trek... Good God, doesn't anyone know how to actually fly this thing?


Sadly, the answer is no. The EU leadership, just like that of the Federal Reserve and the U.S. government, only know how to blindly follow the system's autopilot program: increase leverage and debt, keep interest rates low so everyone (and every nation) with a pulse can increase their debt load, and let high-frequency trading (HFT) programs goose the stock market ever higher.


Nobody knows what to do once the autopilot fails. The EU's "pilots" are hoping that their oft-repeated "determination" to save their spinning-out-of-control economy will magically grant them the knowledge and skills to fly their craft through violent crosswinds and unprecedented storms. It won't; PR, spin and "meetings" can't teach anyone how to fly.


Here in the U.S., Fed chairman Ben Bernanke has studied the flying manual of 1929-era aircraft, and he is absolutely confident that this book learning will enable him to fly the overloaded, losing thrust 747 U.S. economy on manual. Needless to say, his confidence is tragi-comically misplaced; all he really knows how to do is blindly follow the financial system's autopilot: increase leverage and debt, keep interest rates low, goose the markets with intervention, money-printing and HFT, and repeat his "determination" to fly this plane like it's never been flown before, through typhoons and wind shear and whatever Nature throws at it, because, by gum, determination and the shorted-out autopilot will somehow keep the aircraft from buying the farm.


Unfortunately, determination has nothing to do with the end result of willful ignorance, incompetence and supremely misplaced confidence.


Which aircraft do you want to be on? The one with pilots who keep babbling about their "determination" to learn to fly in hastily convened cockpit meetings, or the one with pilots who actually know how to fly? The citizens of the EU, the U.S. and yes, China and Japan, too, will soon enough discover that determination doesn't give you an understanding of financial gravity or the experiential skills to fly through unprecedentedly challenging weather.


If this recession strikes you as different from previous downturns, you might be interested in my new book An Unconventional Guide to Investing in Troubled Times (print edition) or Kindle ebook format. You can read the ebook on any computer, smart phone, iPad, etc.Click here for links to Kindle apps and Chapter One. The solution in one word: Localism.

My Big Island Girl (song) Buy fromCD Baby or amazon.com (99-cent MP3 download)


Readers forum: DailyJava.net.


My new book is available in both print and ebook formats: An Unconventional Guide to Investing in Troubled Times (print edition) or Kindle ebook format. You can read the ebook now on any computer, smart phone, iPad, etc. Click here for links to Kindle apps and Chapter One.

Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Mobi ebook) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller.

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Friday, October 28, 2011

Want a Truly Healthy Housing Market? Here Are the Five Essential Steps

The housing market will remain crippled until we eliminate perverse incentives to financialization and speculation, Fed/Federal intervention and all subsidies/giveaways.



If there is one goal that the financial cartels, their politico apparatchiks and the public might actually agree upon, it would be restoring the housing market to health. This is because the financial cartel, their politico lackeys and homeowners would all benefit from the stabilization of housing values at current levels:


1. SDI (systemically dangerous institutions) a.k.a. too big to fail banks, would avoid insolvency by keeping all their mortgage assets marked to unicorns-and-pixies, i.e. artificial valuations.


2. The political class of toadies, lackeys and grifters would finally free itself of an unsolvable problem that keeps highlighting its incompetence and irrelevancy.


3. Homeowners' most treasured fantasy--that valuations will rebound and thus restore their dreams of "free" home equity-- will be reanimated.


In other words, everyone exposed to losses in the corrupt, speculative apex of malinvestment known as the U.S. housing market doesn't want a truly healthy housing market, they just want a return to the bubble era.


Sorry, folks, ain't gonna happen. (And yes, I own property, too, but it is what it is.) Bubbles do not reinflate, even with the Fed chanting its Keynesian Cargo Cult mantras ("zero interest rates forever!") and waving dead chickens over the embers. The conditions which inflated the bubble cannot be called up by incantations; faith in the system has been destroyed, and only the complete socialization of the mortgage market by the forces of Central Planning--the Fed and the Federal government's Socialized Mortgage Makers, Fannie and Freddie-- have staved off the complete collapse of prices which would have wiped out the banks and cleared the market via actual capitalism in practice, i.e. a transparent marketplace which is allowed to discover price.


Despite the fact that a truly healthy housing market is anathema to the Status Quo and current property owners sitting on huge mortgages, let's lay out the necessary characteristics of such a housing market. A lot of this will strike many of you as counter-intuitive, but that only highlights the pervasiveness of the speculative propaganda that slowly hollowed out our culture's previous understanding of housing and replaced it with a devilishly magnetic financialization model.


In the previous era (when income and prosperity were more evenly distributed), housing was in essence a "patient investment" that offered low-cost shelter and a type of forced savings: by paying a mortgage for 30 years, the homeowner built a nestegg of savings that more or less kept up with inflation. With the mortgage paid off, the homeowner enabled a low-cost retirement (no more mortgage payment, and no rent due, either) and the eventual transfer of a valuable asset to their children.


Contrast that to this era's perception of housing: fundamentally, housing is a speculative vehicle which is available, thanks to low/no down payments, government giveaways and low interest rates, to Everyman and Everywoman. The idea of actually staying in one home long enough to pay off a 30-year mortgage--or even the idea of paying off a mortgage--are as antiquated as stone tools.


Paying off a mortgage? That's Squaresville, man; the name of the game in financialized markets like housing is to buy and sell constantly, churn, baby, churn, with an eye on "flipping" for a quick speculative profit.


Housing isn't a store of value, it's a way to leverage zero savings and a bit of income into speculative wealth.


This financialization of housing was the inevitable consequence of the Federal Reserve's money-printing and low interest rates, as explained in this brilliant essay on Zero Hedge: Winners And Losers: The New Economy:

You obviously cannot print wealth, but if you try that fiat money distorts the entire economy by directing investment to things which appear to appreciate but what is really happening is that the dollar is depreciating. As a result, fiat money and real capital are invested in financial assets because they appear to have greater yields than returns from the production of goods. Prices rise (price inflation) and it creates the inevitable boom which always busts. The fall out is that we are stuck with things people don't want (in the present re/depression it is housing). And we fall for it every time.


This has led to the phenomenon that Messrs. Frank and Gross describe: the financialization of the economy.

If we think this through, then we are forced to conclude:


1. The first step toward restoring a healthy housing market is to eliminate the tools and forces of financialization: low/no down payments, low interest rates, securitized mortgages, government giveaways, Federal Reserve buying of mortgage-backed securities, and the Federal "Socialism Is Good When It's the Mortgage Market" agencies, Fannie Mae and Freddie Mac.


Yes, that is step one: eliminate the Federal Reserve, Fannie and Freddie and all housing subsidy programs. In other words, restore a transparent, private-sector mortgage and housing market freed of Central Planning manipulation, cronyism and corruption.


The goal is her quite simple: restore "patient investing" by eliminating all the perverse incentives for speculation and the resulting culture of rampant cheating, obfuscation, lies, deceit via omission and corruption--the inevitable consequences of financialization.


Requiring a 20% down payment is viewed, perversely, as an impossibly restrictive standard; yet requiring a substantial down payment is the only way to incentivize "patient capital" and squeeze out speculation and its destructive culture of deceit and churn.


2. Focus resources on neighborhoods that can be adequately supported by property taxes at a level 25% lower than current taxes; abandon the unsustainable exurbs and suburbs.


The one thing we can safely predict is that housing values and thus the owners' ability to pay high property taxes are both eroding. Thus property taxes will decline, either via falling housing prices, voter revolt or wholesale abandonment of the properties. That is the basis for anticipating lower property taxes going forward.


The postwar suburban model of development is fundamentally a pyramid-Ponzi scheme based on eternal growth: more homes and more residents will generate higher tax revenues that will enable the future maintenance of the new roads, schools and other infrastructure that are added year after year.


This dynamic is explained in this excellent slide presentation: A Complete Guide To The Ponzi Scheme That Is Suburban America. (via Adam T.)


So what happens when growth stops and taxes contract? The model falls apart, quite literally. There is no longer sufficient revenue to maintain the sprawling expanses of roads, schools, parks and the city staffing which also expanded every year along with growth and taxes.


What happens when the tax base contracts? Roads crumble, parks are left to become overgrown homeless encampments and those who can leave for more liveable environs do so. There is anecdotal evidence that the Pareto Principle comes into play: when 20% of homes are underwater, values dive, and when 20% of homes are abandoned, the neighborhood deteriorates.


I first addressed this dynamic about four years ago: The Great Fall: How Suburbs De-gentrify to Ghettos (November 20, 2007)


There is nothing mysterious about the process:


A) There are upper limits on how much increasingly strapped homeowners can pay in property taxes


B) Maintenance costs are relatively fixed and can only be deferred


C) When revenues fall below minimum maintenance costs, the neighborhood deteriorates


D) When 20% of the homes are distressed, abandoned or foreclosed, then a positive feedback loop is triggered: those still able to move will do so, followed by those who give up trying to maintain their mortgages/property


Clearly, those neighborhoods that harbor dense congregations of homes and enterprises offer a compact footprint to be maintained, and a diverse network of households and enterprises to share the tax burden of that maintenance.


3. Require all lenders, banks, the Federal Reserve (a private bank) and all government agencies to mark their housing and mortgage assets to market. This will force two other essential actions: write off all bad, uncollectable mortgages and liquidate insolvent banks, lenders and agencies via open, transparent auctions of homes and other real estate assets.


There is nothing mysterious about this process; the government undertook a similar program in the early 1990s to clean up the savings and loan debacle spawned by corruption and speculation run wild.


This will dramatically lower the value and thus the price of housing in most markets around the nation. There is no substitute for letting a transparent open market discover price. The alternative is a culture and economy constructed of lies, bogus accounting and eventually, a total loss of faith in financial and political institutions.


Another part of the "discovery" process should be the investigation of fraudulently originated mortgages and MBS (mortgage-backed securities), with the perpetrators of the frauds brought to justice and the fraudulent debt liquidated. Messy, yes, easy, no, essential, yes--if you want to restore faith in a hopelessly corrupted, fraud-based, opaque, manipulated market for mortgages.


Needless to say, the murky/non-existent title documentation for millions of mortgaged homes will also have to be addressed on a national level.


4. Owning a home as a patient investor should be cheaper than renting. The down payment is capital invested, and the yield on that capital is lower shelter costs.


The benefit/yield on renting is that it doesn't tie up scarce capital and it does not commit the renter to staying in one locale. These benefits require a premium, i.e. renting is more costly than buying and owning a home as a patient investor.


In a market with too many homes and too few qualified buyers (especially if subsidies and giveaways were removed from the system), this rent/buy equilibrium would likely be established by home prices dropping significantly.


5. A truly liquid market for housing must be re-established, and there is only one way to do so: Only a transparent, private, free market of mortgages and houses will create a truly liquid market that enables buyers to purchase a home and have some reasonable expectation of being able to sell it in a reasonable length of time to willing, unsubsidized private buyers.


Right now, the housing market is so constipated with bad debt, politically untouchable banks, Central State manipulation and the corrupting grip of speculative financialization, that no buyer can be assured that he/she will be able to sell their home in the future.


This leads to a very rational hesitation: in a weak, fractured and increasingly volatile labor market, it is risky to commit oneself to buying a house that could rapidly decrease in value and cannot be sold.


Talk about a bad deal: not only is one's capital trapped, you're physically trapped in an asset which could fall dramatically in value if the constipated market ever clears. No wonder the housing market has been reduced to ill-informed foreign investors ("I can offer you this bridge in Brooklyn for very cheap, cash only"), people with a mere $100 skin in the game (Got A Hundred Bucks? Buy A Home (Or Virtually Anything Else) Using 2,000x Non Recourse Leverage Zero Hedge) or those funded by other government giveaways and subsidies.


There is no other way to restore a healthy housing market than these actions:


1. Eliminate financialization by eliminating the Fed, the insolvent banks, the mortgage securitization racket and all the incentives for speculation, corruption and deception.


2. Clear the market by writing off all bad debt/mortgages and auctioning off all bank/lender assets in a transparent, free auction market.


3. Require 20% down payments and let interest rates rise to what private capital demands as fair compensation.


4. Encourage patient investing, not speculation.


5. Conserve resources to neighborhoods that are sustainable in eras of contracting tax revenues.


Unfortunately for future generations who might like to own a home whose price was set by the market rather than a Central State devoted to "saving" predatory banks and Wall Street's financialization machine, Wall Street and the banks are terrified of a healthy housing market, because an unfettered "price discovery" would doom their marked-to-Tinkerbell house of cards.


The nation, and its future homeowners, deserve better.


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My new book is available in both print and ebook formats: An Unconventional Guide to Investing in Troubled Times (print edition) or Kindle ebook format. You can read the ebook now on any computer, smart phone, iPad, etc. Click here for links to Kindle apps and Chapter One.

Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Mobi ebook) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller.

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Thursday, October 27, 2011

EU Leaders Throw Europe a Plutonium Life Preserver

The euro system was doomed from inception for fundamental reasons; trying to conjure up "something for nothing" solutions will fail catastrophically, and soon.



As Europe flails helplessly in the waves of insolvency, its leadership has tossed it a life preserver. Too bad it's plutonium, and will take Europe straight to the bottom.Plutonium is of course one of the most toxic materials on the planet, and the "rescue" cooked up by the EU leadership is the financial equivalent of plutonium.


Stripped of propaganda and disinformation, the "rescue" boils down to this: something for nothing. Sound familiar? Isn't "something for nothing" what inflated the bubbles which have popped so violently? The EU "rescue" conjures something for nothing in two ways:


1. The financial alchemist's favorite magic: leverage. Take a couple hundred billion euros in cash, leverage it up with various magic (unlimited power is now at your fingertips!) and voila, you can suddenly backstop 1 trillion euros of banking-sector losses, all with illusory money. Something for nothing.


2. "Guarantees" to cover the first 20% of loan losses. This is being presented as the equivalent of 100% guarantees, because it is inconceivable that losses could exceed 20%. In other words, the credulous buyer of at-risk Euroland bonds is supposed to be reassured enough to load the wagon because 20% of the bond is backstopped.


This is something for nothing because the EU leadership is explicitly claiming the at-risk portion--80% of every bond--is somehow "safer" because the first 20% will be paid by EU taxpayers.


In essence, the EU is claiming that its illusory "something for nothing" magic will turn lead into gold. Abracadabra....oh well, close; it's heavy, it's metallic--oops, it's plutonium.


The leadership is resorting to Cargo Cult incantations and legerdemain because the alternative is to raise the 1 trillion euros in cold hard cash needed to bail out the first wave of failed banks and underwater bondholders by raising taxes and cutting budgets, i.e. austerity. (Recall that the total bill will be at least 3 trillion euros, so 1 trillion is just a down payment.)


Raising cash the hard way is politically unacceptable in both France and Germany, not to mention every other nation in the EU, so the political lackeys of the banking sector and bondholders are cravenly substituting a "something for nothing" magic show which they hope will fool the global bond market.


Note to EU lackeys: there is no free lunch. Leverage is plutonium, not gold, and guaranteeing the first 20% of bonds that are doomed to lose 40%-75% is not terribly appealing to anyone not influenced by the ECB's mind tricks. ("These are not the euros you're looking for; move along.")


No wonder France was so anxious for the ECB to crank up the euro printing press: they wanted-- just like everyone else involved--something for nothing.


The best way to understand the EU's current situation is to imagine an astoundingly dysfunctional family of deep-in-denial-addicts, screaming co-dependent parents, and grown-up grifters acting like spoiled brats, all trapped in a rat-infested, flooded flat that's had the gas turned off for lack of payment--and there's a plutonium life preserver glowing in the knee-high water. Admittedly, this analogy is imperfect, but it does capture the essential psychology of the end-game being played out.


A slightly more formal model for understanding the increasingly unstable dynamics of the EU is the post-colonial "plantation" model I've described here before. The key characteristics of the Colonial Model of Capitalism are:


1. Low cost labor and low-value materials flow from the periphery (colonies) to the Empire (center), which then ships high-value, high-profit finished goods back to the colonies.


2. The colonies must buy the high-value finished goods on credit that is issued and controlled by the Imperial center.


Hmm--doesn't this sound like the relationship of Germany to the European periphery? The euro cemented this co-dependency: Germany had the most efficient production, and once the euro raised the cost of production in the periphery nations, then of course nobody could beat Germany's cost advantages. The euro actually lowered Germany's cost of production in terms of foreign exchange rates while raising the costs in periphery nations that were previously able to lower their cost of production via currency devaluations.


Having surrendered that mechanism to access the deep credit markets of the center, then they had no choice but to buy the high-margin finished goods from Germany, as nobody else could make the same goods for the low German price.


These booming high-profit German exports of finished goods to the European periphery generated vast surpluses of capital that were then loaned to the periphery to enable their further purchases of German goods. Why risk the heavy investment costs of production in the periphery when Germany had the lowest costs of production and was willing to loan the buyers the cash needed to keep buying?


It's the classic mercantilist-consumer co-dependency on a gigantic scale, with low-cost credit fueling both increased consumption and production. As long as the credit flowed in vast torrents of low-cost, easy to borrow money, the co-dependency looked like a "virtuous cycle." Debt junkies eventually have to start servicing their debts, of course, and that's when the ugly realities of colonial dominance become visible.


Germany casts itself in this melodrama as the wronged party, the industrious craftsfolk churning out high-quality goods who have somehow been lured into pouring hard-earned cash down various ratholes to save nefarious EU banks--including their own.


But setting aside the melodrama for a moment, let's ask: how many German goods would have been imported by the EU periphery if those nations had been forced to pay cash for everything from the start? Precious little is the answer; the cash--in the form of actual surpluses available to spend on imports--would have run out immediately after the euro was launched.


In other words, the debt orgy enabled not just carefree consumption, it also enabled vast German exports to the Eurozone. Now we start seeing how the once-mutually beneficial co-dependency has become toxic: now that the periphery's debtors have become debt-serfs, German exports to the periphery are contracting.


This helps explain why even the supposedly prudent Germans are seeking something for nothing as the painless answer to an intrinsically unstable and self-destructive system. When it all implodes, German exports to the periphery will be a shadow of their past glory, and the surpluses which enabled the leveraged orgy of credit will dwindle. (Germany's other big export markets, China and the U.S., are also contracting.)


Sovereign currencies are the only mechanism for discounting differences in credit worthiness and production costs. The euro was established as the currency equivalent of gold, holding the same value in every member country. But the mercantilist/quasi-colonial model requires credit to flow from the center to the periphery, and that is precisely what has happened in the EU.


In the colonial model, the colonists are indebted and poor. The net value of their labor flows to the Imperial center as interest payments, and the banks at the center set the cost of money and the terms--naturally.


This co-dependency based on credit flowing from the mercantilist center to the periphery is both exploitative and systemically unstable. Now that the ontological instability of the euro is being revealed, the dysfunctional family members are blaming each other and desperately trying to conjure up something for nothing to bail themselves out of a system which was doomed to implode from its very inception.


All the complexity and confusion distills down to this: the EU leadership needs something for nothing to save the EU, but there is no free lunch. There is only one solution to the exploitation, the illusory leverage, the crushing debts: massive write-offs of all the bad debt everywhere in the EU. And since debt is someone else's asset, then that means writing down the assets, too. The only way to clear the insolvency is to write off 3 trillion euros of debt-based assets and re-enable sovereign currencies. Anything else is simply more tiresome melodrama.


If this recession strikes you as different from previous downturns, you might be interested in my new book An Unconventional Guide to Investing in Troubled Times (print edition) or Kindle ebook format. You can read the ebook on any computer, smart phone, iPad, etc.Click here for links to Kindle apps and Chapter One. The solution in one word: Localism.

My Big Island Girl (song) Buy fromCD Baby or amazon.com (99-cent MP3 download)


Readers forum: DailyJava.net.



My new book is available in both print and ebook formats: An Unconventional Guide to Investing in Troubled Times (print edition) or Kindle ebook format. You can read the ebook now on any computer, smart phone, iPad, etc. Click here for links to Kindle apps and Chapter One.

Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Mobi ebook) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller.

Of Two Minds Kindle edition: Of Two Minds blog-Kindle



Thank you, Mark L. ($6.25), for yet another generous contribution to this site -- I am greatly honored by your steadfast support and readership. Thank you, Dennis G. ($20), for yet another extremely generous contribution to this site -- I am greatly honored by your continuing support and readership.

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Wednesday, October 26, 2011

Obama's Re-Fi Plan: The Perfection of Debt-Serfdom

How better to corral restive underwater debt-serfs than to herd them into accepting a new, "better" set of lifelong servitude shackles?



President Obama is taking credit for a new government plan to "save homeowners." That is of course pure propaganda to mask the plan's true goal: the perfection of debt-serfdom. The basic thrust of the plan is straightforward: encourage "underwater" homeowners whose mortgages exceed the value of their homes to re-finance at lower rates.


The stated incentive (i.e. the PR pitch) is to lower homeowners' monthly payments via lower interest rates.


This is the Federal Reserve's entire game plan in a nutshell: don't write off any debt, as that would reveal the banking sector's insolvency, but play extend-and-pretend with crushing debtloads by lowering the cost of servicing the debt.


The key purpose of this "plan" is to leave the principle owed to banks on their books at full value while ensnaring the hapless debt-serf (the "homeowner") into permanent servitude to the banks.


If the net worth of your home is a negative number, then what exactly do you own? You have the right to occupy the shelter, and you own the debt. So how is this any different from a lease? There is no equity, and no equity being built: there is a monthly payment in return for the right to occupy the dwelling.


The difference is the leaseholder can move at the end of the lease with no debt obligations. The underwater "homeowner" debt-serf is trapped by his/her mortgage into what amounts to lifetime servitude to the holders of the mortgage.


All the plan does is perfect this debt-serfdom. In a truly capitalist, transparent, free-market economy in which assets were always marked to market, then mortgages that are grossly misaligned with the market value of the house would be written down and the mortgage holders forced to book the loss.


Over-leveraged lenders, i.e. the "too big to fail" banks which dominate the U.S. mortgage market, would see their capital reduced to zero by the writedowns. They would be declared insolvent and liquidated. Their shareholders and bondholders would book losses.


But these losses are unacceptable in our crony-capitalist/cartel-capitalist Status Quo, so the "solution" to systemic insolvency is to manipulate the debt-serfs to keep paying, and thus keep the unicorn-and-pixies valuations of real estate on the banks' books at full value.


This is the same game that Japan's lenders and Central State have played for two decades, and it remains the heart of their failed policies and decaying economy. In Japan, lenders papered over their bad debts with all sorts of back-door machinations: they extended new loans to debtors so the debtors could continue to make interest payments, they created zombie accounts filled with delinquent loans that were still kept on the books at full value, they wrote new loans at near-zero rates so interest payments were lowered, and so on--the same ploys and games being played by the Federal Reserve, the Federal government's housing lenders (Fannie and Freddie) and the banks.


The propaganda machine is running at full throttle, of course, with the usual parade of toadies and lackeys trotted out to say what a great and wonderful thing this plan is for poor homeowners. But industry analyst Ken Rosen inadvertently revealed the real motivation for the plan: to keep underwater homeowners from "walking away" in so-called "strategic defaults." underwater homeowners thrown lifeline by Obama (Mercury News).


Why is strategic default anathema to the Status Quo? Because the abandoned house will eventually have to be sold on the market, and at that point its true value revealed. The mortgage holder will then be forced to book a stupendous loss, and the inflated-paper "asset" on the books vanishes.


The Big Lie here is implicit: "your house will someday come back in value, so hang in there, debt-serf." No, it won't. The bubble has popped, and the mania has left town. Housing will retrace to pre-bubble valuations circa 1996-98.


As usual, the Plan is all about managing perceptions and political theater: we're here to help the little guy, the struggling homeowner; we are in charge, we have a plan, we're competent, this will fix the housing market.


Too bad they're all lies. Perception management is not the same as actually solving the underlying problem, yet perception management is the Status Quo's response to every problem.


The perfection of debt-serfdom is now complete. First, make student loans "necessary" for the "good life" and then make that debt permanent and unbreakable. In other words, institutionalize debt-serfdom and lifelong servitude to the financial sector.


The re-fi "plan" herds potentially rebellious mortgage debt-serfs into new corrals, with the incentive of slightly lower interest rates. The lifetime of servitude to financial Overlords remains firmly in place. That's the "plan."


The Plan has other flaws as well:



Got A Hundred Bucks? Buy A Home (Or Virtually Anything Else) Using 2,000x Non Recourse Leverage (Zero Hedge)


On the Administration’s Latest Potemkin Help Struggling Homeowners Plan (Naked Capitalism)




If this recession strikes you as different from previous downturns, you might be interested in my new book An Unconventional Guide to Investing in Troubled Times (print edition) or Kindle ebook format. You can read the ebook on any computer, smart phone, iPad, etc.Click here for links to Kindle apps and Chapter One. The solution in one word: Localism.

My Big Island Girl (song) Buy fromCD Baby or amazon.com (99-cent MP3 download)


Readers forum: DailyJava.net.



My new book is available in both print and ebook formats: An Unconventional Guide to Investing in Troubled Times (print edition) or Kindle ebook format. You can read the ebook now on any computer, smart phone, iPad, etc. Click here for links to Kindle apps and Chapter One.

Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Mobi ebook) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller.

Of Two Minds Kindle edition: Of Two Minds blog-Kindle



Thank you, Mike K. ($100), for your outstandingly generous contribution to this site -- I am greatly honored by your support and readership. Thank you, John D. ($25), for your remarkably generous contribution to this site -- I am greatly honored by your support and readership.

Read more...

Tuesday, October 25, 2011

Is the Market Rally "The Real Thing" or Just More Perception Management?

A few charts call into question the current euphoric rally in most global stock markets.



The growing consensus among technical and fundamental analysts is that the stock market has bottomed for the year and is now in full rally mode. There are five basic arguments in favor of a "real thing" rally that runs higher for months to come:


1. Stocks almost always rally in November-December, and end in positive territory in the 3rd year of the presidential cycle (2011)


2. September data in the U.S. was mildly positive, fears of recession have faded


3. Corporations like Google and Catepillar are posting blow-out earnings


4. Europe is finally solving its debt crisis in a comprehensive fashion


5. China is still growing and thus is still the tugboat pulling the global economy ahead


There are seven factors on the other side of the ledger:


1. The ECRI announced the U.S. is already in recession: ECRI Recession Call: ‘You Haven’t Seen Anything Yet’

Recession is a binary: the U.S. is either in a recession or it isn't. ECRI says it is, the stock market is assuming it isn't. Only one can be correct.


Question: if the U.S. is already in recession, how can that be positive for incomes, tax revenues, sales and ultimately, corporate profits and stock valuations? Bulls have to answer this question; ignoring it is not an option for any risk-conscious investor.


2. China's stock market has failed to join the global euphoria: The Shanghai Indicator (dshort.com) has fallen to multiple critical support levels and is still declining.


Question: if China's growing so wonderfully, then why isn't it own stock market soaring? Perhaps the data supporting the official story of 8-9% growth (as usual) is more "perception management" than reality. If it was real, then why aren't Chinese stocks soaring along with other global markets? Once again, Bulls have to explain this disconnect; ignoring it is not an option for any risk-conscious investor.


3. Despite its 7% rally yesterday, copper is in a clear technical decline. Given its historical role as leading indicator of stock market trends, then this suggests global markets are due for a massive decline, not a rally. Bulls have to explain this disconnect; ignoring it is not an option for any risk-conscious investor.


Here is a chart of copper, courtesy of The Chart Store (subscription required to access a vast array of financial and economic charts):



4. If the E.U. solves its debt problems by effectually transferring bad bank debt to the sovereign balance sheets of Germany, France, Finland, et al., then taxpayers will see their incomes significantly reduced by austerity and higher taxes, in both debtor and "savior" nations.


Incomes and GDP are already declining in the weaker EU nations which have supported Germany's export-dependent economy by importing billions of euros of goods from Germany. What happens to German exports in Europe as its customers' economies contract?


Question: how can lower incomes, and thus lower sales and lower profits, possibly be supportive of higher stock market valuations? There is no free lunch; the hundreds of billions, and possibly trillions, of euros needed to save the banks and bondholders from losses will come out of the pockets of taxpayers and recipients of State/government payments. That necessarily means those taxpayers/recipients will have less income and thus less money to spend. More government revenue will be devoted to interest payments, and so less will be available to transfer to citizens.


Question: will the supposed benefits of saving large European banks via massive taxpayer-funded bailouts offset the declines in personal income which the bailout will require? How is a dramatic decline in personal income supportive of higher profits and higher stock valuations? Bulls have to answer this question; ignoring it is not an option for any risk-conscious investor.


5. Technically, the chart of the S&P 500 has some bearish elements:



-- A classic megaphone pattern has emerged, a pattern which is usually a topping formation.


-- The current rally could be forming the right shoulder of a long-term head-and-shoulders top. If we examine the "head," we discern a classic head-and-shoulders pattern; the break of the uptrend set up a test of the neckline, and now the current rally is the right shoulder of a multi-year top.


A decisive rally above 1,350 to new highs would of course negate this pattern.

There are also some similarities to the 2008 time frame just before the meltdown. For example:



6. The market's valuation is still extremely rich in terms of the nation's GDP:



7. Perception management. Since the Powers That Be have publicly proclaimed the stock market is their chosen proxy of the American economy, then we have to ask: would it be in the interest of the Status Quo to engineer a rally? The answer is obviously yes; a decline in the market would negate the official happy story that everything's fixed, there is no recession, etc.


Then we have to ask: what's the best way to engineer a rally? Answer:


A. Crank the market higher in light-volume periods such as pre-market and the last 30 minutes of trading. Evidence: most of the big gains of the past three weeks have occurred in pre-market or the last 30 minutes of trading.


B. Manage perceptions of future Federal Reserve/Central Planning "easing" via rumors of yet more buying of mortgage-backed securities, speeches by top toadies discussing more "easing" programs are in the works, and all the other usual techniques of Central Planning propaganda.


C. Goose the markets above key technical levels, which then triggers computer "risk-on" buying that turns a Central Planned rally into a self-sustaining "the real thing" rally.


Technically, this rally hasn't shown the big volumes of "real rallies." That in itself should spark some skepticism about the nature of the rally.


Bonus chart: As The Chart Store's Ron Greiss notes on this chart, analog charts are interesting but not necessarily predictive. Nonetheless, they offer potentially valuable "food for thought." This one is worth studying, as the present has tracked the 1907 chart to an uncanny degree. We can posit that the only reason the market didn't roll over last year was the Fed's "surprise announcement" of QE2. Perhaps this extend-and-pretend strategy will be followed by the decline witnessed in the 1907 chart.



For a similar chart, please see Doug Short's Real Mega-Bears Chart which overlays the current SPX against the Depression-era Dow and the post-crash Nikkei.


Has perception management replaced fundamentals as the foundation of all stock market rallies? Investors with an eye on risk would be well-served to ponder the question, and its many implications.


If this recession strikes you as different from previous downturns, you might be interested in my new book An Unconventional Guide to Investing in Troubled Times (print edition) or Kindle ebook format. You can read the ebook on any computer, smart phone, iPad, etc.Click here for links to Kindle apps and Chapter One. The solution in one word: Localism.

My Big Island Girl (song) Buy fromCD Baby or amazon.com (99-cent MP3 download)


Readers forum: DailyJava.net.


My new book is available in both print and ebook formats: An Unconventional Guide to Investing in Troubled Times (print edition) or Kindle ebook format. You can read the ebook now on any computer, smart phone, iPad, etc. Click here for links to Kindle apps and Chapter One.

Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Mobi ebook) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller.

Of Two Minds Kindle edition: Of Two Minds blog-Kindle



Thank you, Lincoln F. ($20), for your most generous contribution to this site -- I am greatly honored by your support and readership. Thank you, David D. ($25), for your much-appreciated generous contribution to this site -- I am greatly honored by your support and readership.

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Sunday, October 23, 2011

The European Financial Crisis in One Graphic: The Dominoes of Debt

The dominoes of debt are toppling in Europe, and there is no way to stop the forces of financial gravity.



After 19 months of denial, propaganda and phony fixes, the political and finance leaders of the European Union are claiming a "comprehensive solution" will be presented by Wednesday, October 26-- or maybe by the G20 meeting on November 3, or maybe on Christmas, when Santa Claus delivers the gift global markets are demanding: a "solution" that actually pencils out and that forces monumental writeoffs of debt and thus equally monumental losses on European banks and bondholders.


There have been any number of insightful descriptions of what's going on beneath the artifice, spin and lies, for example:


Four Facts that PROVE the EFSF (rescue fund) Doesn’t Matter At All (Zero Hedge)


Revised Troika Forecast Sees Total Greek Debt-To-GDP Peaking At 186%: Here Is What Happens Next


There Is No Bailout Spoon: The Math Behind The €2 Trillion EFSF Reveals A "Pea Shooter" Not A "Bazooka" (Zero Hedge)


Citi Expects A 76% Haircut On Greek Debt (Zero Hedge)


EU Bank Stress Test: When No. 1 Financial-Strength Ranking Spells Doom (Bloomberg)


I have summarized the fundamentals in this one graphic: the European dominoes of debt. Simply put, there is no way the EU authorities can stop the first domino--Greek default or equivalent writedown of its impossible debt load--from toppling the over-leveraged banks which will be rendered insolvent when forced to recognize their losses.



That leaves each nation with the politically unsavory option of bailing out its premier banks with taxpayer money, and squeezing the money out of its citizenry via higher taxes and austerity. That assumption of bank debt will in turn trigger downgrades of heavily indebted sovereign nations such as France, moves that will raise rates and make the bailout even more costly to taxpayers, who will also be suffering from reductions of income due to global recession.


Once the banks and bondholders accept a 50%-75% writedown in Greek debt, then the other debtor nations will be justified in demanding the same writedown in their crushing debts. This dynamic leads to estimates that 3 trillion euros will be needed to bail all the players out. Alternatively, total losses will equal 3 trillion euros, wiping out banks and bondholders of sovereign debt.


The German economy is simply not big enough to fund a 3 trillion-euro bailout.Germany has 81 million people and its GDP is $3.3 trillion; the EU GDP is roughly $16 trillion. Compare those with the U.S., with 315 million people and a GDP of around $14.6 trillion.


As an act of self-preservation, Germany will be forced to either exit the euro outright or cloak its withdrawal with a "euro 1 and euro 2" scheme, a scenario I first laid out in March 2010: Why the Euro Might Devolve into Euro1 and Euro2 (March 2, 2010). (Other recent entries on the end-state of the European debt crisis:)

The Eurozone's Three Fatal Flaws (September 21, 2011)
The Dynamics of Doom: Why the Eurozone Fix Will Fail (July 25, 2011)
Why The European Union Is Doomed (March 28, 2011)


In any event, the last domino, the artifice of a single currency, will fall one way or another.


It's important to understand that the supposedly "prudent" economies of France, Germany, South Korea and Canada are just as heavily indebted as the U.S. or "drowning in debt" nations such as Italy. In the long view, is Germany's load of 284% of GDP really that different from Italy's 313%? Yes, the mix of debt is different, but the point is that all of Europe, and indeed the developed world, is overloaded with debt: state, bank and private.


The idea that leveraging more debt can resolve this gargantuan over-indebtedness is beyond absurd. (Source: BusinessWeek)



It has recently come to light that in the worst-case scenario (i.e. reality), "solving" Greece's debt crisis would absorb the entire EFSF Rescue Fund's 400 billion euros. By all accounts, every estimate of Greek tax revenue is overstated, and every estimate of its expenses understated; Greek GDP is collapsing. In all probability, the reality is worse than anyone is willing to confess, which means this chart is already outdated and hopelessly rosy:



Way back in August, the euro was reckoned to be 20% above fair value of 1.15 to the U.S. dollar; once the dominoes start toppling in earnest, what will the euro's fair value be? Parity, or perhaps even lower? Why hold euros when the end-game is already visible?



He/she who gets out first gets out best.


If this recession strikes you as different from previous downturns, you might be interested in my new book An Unconventional Guide to Investing in Troubled Times (print edition) or Kindle ebook format. You can read the ebook on any computer, smart phone, iPad, etc.Click here for links to Kindle apps and Chapter One. The solution in one word: Localism.


My Big Island Girl (song) Buy from CD Baby or amazon.com (99-cent MP3 download)



Readers forum: DailyJava.net.


My new book is available in both print and ebook formats: An Unconventional Guide to Investing in Troubled Times (print edition) or Kindle ebook format. You can read the ebook now on any computer, smart phone, iPad, etc. Click here for links to Kindle apps and Chapter One.

Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Mobi ebook) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller.

Of Two Minds Kindle edition: Of Two Minds blog-Kindle



Thank you, David K. ($50), for another stupendously generous contribution to this site -- I am greatly honored by your steadfast support and readership. Thank you, Gene B. ($60), for yet another outrageously generous contribution to this site -- I am greatly honored by your long-standing support and readership.

Read more...

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