Wells Fargo and Chase Quietly Prepare to Take Over BOA and Citi as They Collapse

Major banks [WELLS AND CITI] have reportedly made proposals to the Fed on how to pay for the restructuring of large financial institutions that collapse, with the idea being to avoid the chaos that followed Lehman’s bankruptcy. Among the suggestions, the largest financial-services holding companies would maintain combined debt and equity equal to 14% of their risk-weighted assets, which would be used to support any failed bank unit seized by regulators. Full Story: http://seekingalpha.com/currents/post/1100632?source=ipadportfolioapp

Editor’s Analysis: This is why I keep insisting on following the money trail rather than the paper trail. The paper trail is full of lies. The money trail cannot be faked. Or to put it more succinctly anyone who tries to fake the money trail will probably end up in jail. Checks, wire transfers, ACH transfers leave footprints throughout the electronic funds transfer infrastructure.  In the paper trail there are documents that describe transactions as if they had occurred. It is the money trail that will tell you whether or not any transaction in fact did occur and if so,  when and under what terms.

PRACTICE HINT:  the money trail (Canceled checks, wire transfer receipts) is the main point. The paper trail should only be used to corroborate your allegations concerning the reality of the transactions after you have shown that the money trail reveals an entirely different story —  or that the banks are stonewalling access to the money trail because it will prove beyond a reasonable doubt that everything they have said in the creation of the mortgage, transfers of the mortgage, defaults and the mortgage, foreclosures, auction sales, credit bids and attempts for modification is a complete lie.

Bank of America has approximately $300 billion on its balance sheet which are composed mainly of mortgage bonds (unsupported by any transaction in which money exchanged hands or any other consideration; and not backed by any loans which never made it into the asset pools that issued the mortgage bonds). It is one thing when people like me saying that the bonds are worthless and that Bank of America is broke. It is quite another when investors and traders arrive at the same conclusion. Recent trading activity indicates that a number of investors and traders are betting that Bank of America will collapse. They have arrived at the conclusion that the mortgage bonds are either worthless or not worth anything near what is reported by Bank of America. As rates go up the treasury bonds bought by Bank of America in exchange for free money at the Federal Reserve window, will drop like stones. This will leave Bank of America with insufficient capital to operate at its current levels.

What is interesting is that two banks submitted a proposal for resolution of a bank that had been too big to fail. The two banks that submitted the proposal were Wells Fargo and Chase. Notably absent was Bank of America and Citibank. I take that to mean that the government and the financial community are expecting Bank of America and possibly Citibank to collapse and that it might be very soon. The timing of the Wells Fargo and Chase proposal might well be their assessment that the time is near and that if their proposal is the only one on the table it will be the one that is used by the government.

FALLING BOND PRICES AND RISING YIELDS ARE THREATENING THE RECOVERY IN THE BALANCE SHEETS OF GLOBAL BANKS: Falling bond prices and rising yields are threatening the recovery in the balance sheets of global banks, which have built up huge portfolios of liquid securities to comply with regulatory requirements and due to a lack of better investments. For example, 90% of Bank of America’s (BAC) $315B portfolio comprises mortgage bonds and Treasurys. Some analysts, though, believe that QE tapering should increase interest margins and offset the one-time hit to book values because of rising bond yields. Full Story: http://seekingalpha.com/currents/post/1105882?source=ipadportfolioapp

THE FUTILITY OF OF BANKS FIGHTING REPRESENTATION AND WARRANTIES LAWSUITS OVER MORTGAGE BACKED SECURITIES: Flagstar Bancorp’s (FBC +2.7%) weekend settlement with Assured Guaranty (AGO -3.3%) for $105M (vs. the $106.5M court verdict) shows the futility of banks fighting representation and warranties lawsuits over MBS, writes Mark Palmer. Next up is BofA (BAC) which has already settled with Assured and MBIA (MBI), but is still tussling with Ambac (AMBC). Credit Suisse (CS) and JPMorgan (JPM) have also been reluctant to settle with the monolines. Flagstar is sharply higher in a bright red market as the settlement removes a big overhang on the stock. Full Story: http://seekingalpha.com/currents/post/1101932?source=ipadportfolioapp

[Editor: If the loans were real and the bonds were real, why would this be necessary?) BOA Caught Gesturing to Witness Coaching Answers: Bank of America’s (BAC) Article 77 hearing is on hiatus until July 8 to allow the presiding judge time on other cases. Day 8 of the hearing was an uneventful one, reports Mark Palmer, notable mostly for the judge admonishing an attorney representing the supporters to quit coaching (through gestures) a witness on the stand. Full Story: http://seekingalpha.com/currents/post/1087682?source=ipadportfolioapp

One way to profit from the false values of loans and the false representations of ownership is to buy them up as though they were real. The buyers have real bargaining power with the mere threat of revealing the bonds to be worthless and the ownership unknown. [I propose to put together a fund that offers the payment if ownership can be proven beyond a reasonable doubt]: Deutsche Bank (DB) is leading a wave of big banks ramping up exposure to single-family housing by extending credit to Wall Street firms so they can buy up homes to turn them into rentals. The bank reportedly just lent another $1.5B to Blackstone (BX) after an earlier $2.1B line got used up. Wayne Hughes’ American Homes 4 Rent has as much as a $1B line from Wells Fargo (WFC), and SilverBay Realty (SBY) just inked a $200M facility from Bank of America (BAC) and JPMorgan (JPM) Full Story: http://seekingalpha.com/currents/post/1087962?source=ipadportfolioapp

Traders betting big on BOA collapse: The purchase of 50K January $11 puts on Bank of America (BAC) yesterday was indeed a the initiation of a position, writes Steven Sears, noting this morning’s open interest shows a 50K rise to 116,958 contracts. Rather than an outright bearish position, the purchase could just as easily be a BofA long hedging his/her bet (though the recent uptick in volatility has made this a more expensive move).
Full Story: http://seekingalpha.com/currents/post/1111972?source=ipadportfolioapp

JPMorgan Looks Like A Winner to Traders — probably because the U.S. government will look to Chase and Wells Fargo when BOA and Citi collapse: Full Story: http://seekingalpha.com/article/1526362?source=ipadportfolioapp

BOND MARKET LIQUIDATION: Bond Funds Hit With Biggest Outflows Ever This Week

[Editor: When mortgage rates rise the price of older bonds with lower interest falls. Most people agree rate increases are inevitable which means that the value of Treasuries and other bonds offering tiny returns are going to fall like stones. The ripple effect is going to be on going for years] Mortgage rates jump to highest in 2 years [Some novices are trying to make the case that if rates double bond prices will fall by half. That is not true and never has been true. Despite the value of the bond on the market the face value remains the same so the GAIN between the purchase price and the Face Amount (Principal) of the Bond must be factored in by using the present value of the that gain over the remaining term of the loan]

[Editor: This is a disaster waiting to happen for the banks. When those modifications are done they will face trillions in liability for insurance and credit default swap proceeds and probably claims from the Federal Reserve because the true value of the bonds will be marked down to market contrary to the representations of the banks when they sell the bonds to the FED] Regulations are now in effect that will prohibit Mass. foreclosures if loan modifications cost less

Foreclosure documentation issues trap investors, creating litigation risk

Must See Video: Arizona Homeowners Losing their Homes to Foreclosure Through Forged Documents

Lawsuit: Bank of America Gave Employees Gift Cards for Hitting Foreclosure Quotas

[Editor: This is BOA putting distance between itself and policies and procedures that produce an illegal result] Bank of America Said to Send Property Reviews to India

[Editor: I doubt if this tactic applies to most people] Illinois Attorney Saves Homes from Foreclosure Using Reverse Mortgages


Securitization and the Future of Finance

The Future of Securitization
July 10, 2008; Page A15

The deconstruction of the financial services industry this past year has been something to behold. Unfortunately, the responses have been shortsighted, the equivalent of putting a band-aid on a gunshot wound. The blunt fact is that we’re in the midst of a major structural shift in the financial world: Yesterday’s business model has been invalidated.

Securitization as it has been practiced will not be the dominant means of financing it has been for the past decade and a half. And it has been truly dominant – moving from $1 trillion to $12 trillion in annual new issuance, capturing a significant share of all new loans including residential mortgages, commercial real estate and corporate loans, even auto and college tuition loans. Yet securitization will continue to play an important role – if adapted appropriately.

Securitization involves transferring a loan or pool of loans into a trust and then having that trust issue securities, or bonds, that are rated by the large rating agencies and purchased in the institutional bond market. Effectively, through what I will call “risk transference” securitization, whereby the originator retains no ongoing interest in the loan, the bond market becomes the at-risk lender. Implicit in that arrangement, especially at the high volume levels of past years, is the nearly complete delegation of credit underwriting by the ultimate lenders, the bond buyers, to others, mostly the credit rating agencies, and to a lesser extent the banks that originated, repackaged and sold the loans to these bond buyers.

It’s easy to see the model’s appeal over portfolio lending, where the banker held an originated loan to maturity. This limited the potential gross return on equity (ROE) that the loan could generate to something in the mid to high-teens. And from this seemingly unappetizing return, one must still deduct overhead expenses. Further, the bank remained on the hook for any losses during the life of the loan.

In the risk transference securitization model, the potential of significantly enhanced ROE was breathtaking. The originating bank became an intermediary, or a manufacturer of loans. A loan originated and resold within six months for a 2% profit could – when combining the yield spread in the six-month warehouse period with the gain on sale – double the bank’s ROE, while also permanently removing the credit risk associated with that loan from the bank’s balance sheet. Thus large banks shifted from purely portfolio lending to a mix of portfolio lending and risk transference securitization.

The most profound change occurred in the investment banks. Their balance sheets ballooned more than 100-fold as they morphed, from entities engaged primarily in the business of advising corporate America and facilitating access to the capital markets, into gigantic originators and intermediaries of all forms of credit assets. Without the huge fixed costs associated with deposit-gathering that the banks have – and the benefit of nearly double the leverage ratios of their more tightly regulated competitors – risk transference securitization generated staggering gross ROEs that, in the good times, ranged between 50%-100%.

That business model is now being dismantled, and the search is on for a new vision. Financial players need to explain to investors, whose capital they may desperately need to survive this painful transition period that, even in the best case, the ROE upside will be significantly less. Investment banks need to construct a vision justifying their huge balance sheets.

And yet the truth is that securitization, with a simple tweak, is actually something that can and will surely continue to play an important role in finance. This mechanism brings two main attributes to the table that are worth preserving.

First, it is the only method available to the asset originator to finance his position in a loan without incurring a mismatch risk between the terms of his assets and the terms of his liabilities. In the old portfolio-lending model, the bank would make a loan that may have a five- or 10-year fixed-rate term with all sorts of prepayment provisions that could shorten the term, and then finance that asset with deposits or other liabilities that didn’t match the term or the duration characteristics of the loans themselves.

This model created the sort of systemic risk that has caused most of the serious financial dislocations of the past, including the collapse of the Savings & Loans in the 1980s all the way to the collapse of the SIVs in 2007 and Bear Stearns in 2008.

The second significant benefit of securitization is the transparency that it brings to bear on the system. While this is painful in bad times, as the mistakes of the market are more immediately and broadly known, only the most cynical among us would argue that better information is not hugely beneficial to the market at large.

Were a portfolio lending model crafted in which the lender – instead of relying upon shorter term deposits or other liabilities whose terms are uncorrelated to the assets that they are intended to finance – financed his loan inventory through the securitization process, the duration mismatch risk would be solved. The lender would create distinct pools of loans, all of which it would retain on its balance sheet and hold appropriate equity capital against, and then have the trust issue only the lowest risk and most highly rated securities.

Further, in this construct the bond market will not be taking on the full ownership of the loan. Instead it will be providing lower risk leverage to the originator, who will retain ownership. Thus, the bond market will be relying less on the rating agencies and more on the lender’s acumen, and the alignment of interest that results from the originator’s ongoing ownership of the loan. These securities would have payment and maturity characteristics that exactly mirrored those of the underlying loans they were financing, and it would be this perfect match that would serve to remove the heretofore systemic duration mismatch risk that has resulted in numerous bailouts.

I believe the next step for finance in the Western world is to create a system that marries the discipline of portfolio lending with the asset-liability management and transparency benefits of securitization. As in the portfolio-lending model, the originator will be left to hold the loan. The bond-buying community will provide financing to the originating lender by purchasing the securitized debt that is backed by the loans originated.

Equity markets will provide the capital to own assets and will thus discriminate as to which origination franchises deserve the licenses to participate in the business of finance going forward. It will be those franchises that have demonstrated credit underwriting expertise in the areas in which they are extending credit, and clean and understandable balance sheets with commitments to transparent reporting, that will likely dominate in the next cycle.

Mortgage Meltdown: Inflation, Devaluation and the Price of Your Home

The reality of inflation is that it is robbing nearly everyone blind and is going to get much worse before it gets better.




  • This is the period I was talking about where merchants and consumers alike get caught in the middle. Some merchants can take advantage of inflation but most are stuck with being the “bad guy” — it is always the messenger that gets shot. This is like a triple barraled cannon. 
  • So consumers are paying more and more but they don’t even know that the merchants are doing everything they can to soften the pinch on consumers. In fact, they think the opposite is true and they blame merchants for using inflation as an excuse of increasing their margins when in fact the merchants are making far less money. 
  • This can ONLY mean that future price increase, at least double what we have seen are in order and as you can see from the front page of the Wall Street Journal, the effects of inflation are causing social unrest and violence. So to your question about home values: the bottom lines is that VALUES (measured in today’s dollar will probably continue down for a while). PRICES will continue up. 
  • When it costs $20 to buy a loaf of bread it is inconceivable that the price of a house won’t eventually reflect these changes even if the correspondence is uneven and fluctuating. 
  • Using models that appear to be valid now this can be figured as follows in an example I made up: 
  • Note the difference between value and price. 
  • VALUE is first based upon the price you could get today. It is therefore the same as price. 
  • VALUE changes with market conditions. Increased demand and diminished housing inventories causes demand to rise in proportion to supply and VALUE goes up. 
  • PRICE represents the measurement of VALUE. 
  • PRICE changes occur as a result of two things: (1) changes in VALUE and (2) changes in the value of the currency being used to purchase the asset. So if inflation and devaluation of the dollar were not a factor, then VALUE and PRICE would always be the same. 
  • And usually the difference, while present, does not figure prominently in the negotiated price for a house. 
  • That is all changing now because the dollar is slipping every other day and prices of everything are going up at rates reaching nearly 100% in some cases and the rate is expected to increase exponentially. 
  • So NOW the inflation and devaluation of the dollar must be taken into account when projecting the future price of an asset (in this case a home). In a flat market with inflation, the home would be no more desirable than it was before. But because of the fall of the purchasing power of the dollar through inflation and devaluation, the PRICE would still go up. Example. $200,000 house is still worth the same after 3 years. BUT the price still goes up by the amount of inflation. 
  • Stated inflation through reporting of the CPI is now like EPA mileage — completely out of touch with reality. And reality is what people deal with, not government statistics. 
  • EXAMPLE: Today’s home VALUE: $200,000 
  • Today’s home Price $200,000. 
  • 1 year from Now: 
  • home VALUE: $160,000 – $180,000 in today’s dollars as of April 14, 2008 (assumes 20% decline in home VALUES, which might be excessive) home 
  • PRICE: $184,000-$207,000 as of April 14, 2009 purchasing power of your dollars, assuming 15% inflation 
  • 2 years from now: 
  • home VALUE: $180,000 – $200,000 in today’s dollars as of April 14, 2008 (assumes 10% increase in home VALUES, which might be excessive) 
  • home PRICE: $234,000-$260,000 as of April 14, 2010 purchasing power of your dollars, assuming 15% inflation 
  • 3 years from now
  • home VALUE: $190,000 – $210,000 in today’s dollars as of April 14, 2008 (assumes 5% increase in home VALUES, which might be excessive) 
  • home PRICE: $275,000-$304,000 as of April 14, 2011 purchasing power of your dollars, assuming 15% inflation 

Of course this might look good on paper, but the only way it will have any meaning to you is if you sell the real estate for the “inflated” price, pay off your mortgage, and downsize to something much smaller. The reason is that the price of everything has gone up along with your house. 

From Ashes to Angels: Economics of Morality

There was an interesting study published in the Economist (March 15, 2008 pp 83-85), a conservative news magazine read around the world, that disclosed an incredibly close correlation between the “rule of law” and the health of the economy. It turns out that laws, rules and enforcement create a culture of integrity, civility and good faith. The epiphany is that those societies that follow morality, as we commonly know it around the world, have the strongest economies and greatest purchasing power. 

It’s true. Go read it yourself and research it all you want. Von Mises and Rothbard,  largely ignored but highly respected economists, came up with the same conclusion decades ago from a slightly different approach. (They are ignored because they sought truth rather than power. They believe the premise of modern economists is essentially skewed. History, particularly economic history proceeds from the motivation of people in public office or personal lives to change their current situation to something better. Reporting history relies on people who seek to be seen in the best light and thus their reports, whether of facts or indexes like the GDP, CPI etc., are skewed to mislead the reader. The theories used to explain economic history are therefore always based upon measurements of inaccurate reports. The policies based on those theories work only by happenstance — i.e., if consensus or conventional wisdom is created around the theory and policy, not the other way around).

The corollary is more disturbing and quite obvious in the context of today’s news stories of a collapsing economy.  Stray from morality as a matter of policy and practice and you undermine your economy, your society, your ability to achieve, and you gut the basis of your own happiness and contentment, as well as the prospects of future generations. 

All politics and all economics is about income distribution in some way or another. When we are out of touch with our own Godliness, we become out of balance in our society and our economy. By having no rule of law, secular or otherwise, govern the actions of those with power to do what they wanted, we have undermined our foundation, cut our societal fabric and diminished our moral high ground at the same time as losing our purchasing power in world commerce.

While Americans have pursued the dollar with religious zeal, other countries have been pursuing happiness, morality, civility, and integrity – albeit with the usual human imperfections.  The resulting changes in the purchasing power of the U.S. dollar and the relative strength of the U.S. in the marketplace of ideas and commerce can thus be explained. 

The fundamentalist in any major religion has a point: that societies, especially U.S. dominated societies, have lost their way. There is a growing sense of senselessness and lack of meaning in such societies. 

American men are dropping out of the work force and discarding goals and plans for their future, American children are not being educated nor are they taught to think critically, make moral judgments, build character, know their personal and world history and geography, please themselves and the world with their talent in the arts, or acknowledge the obligation and rewards of doing good deeds. 

Of course fundamentalists of all sects violate their own standards when they create inequality between women and men, when they impose a rule of a leader in lieu of a rule of laws, and so forth. But even from the most obvious perversity of fact and good sense, we can gleam some truth about ourselves, our society and where we are heading.

Today’s Torah reading talks about removing the ashes from the alter, an almost janitorial task. Yet the ancient Rabbi’s rushed to perform this task, competing for who would be first. Yes for fun but also to Honor the higher sense, the higher power we have the capacity to follow, if we are willing. My lesson in this world has been worship the riches and become poor regardless of how much money you have. Worship goodness and you become rich regardless of how much money you have.

Competition is fine if we follow our best instincts, our higher calling which all of us know we have inside. When we step onto the track and enter the secular race, make your goal the altar of your own Godliness. 

“There is much in life that people value, yet is utterly meaningless. There is equally much in life that people do not value – that is very meaningful and good. Do not judge by wealth. Do not judge by what others think. Judge by what you honestly believe to be good. And do it, no matter how belittling and ‘dishonorable’ it might seem to others. In the end, that’s what is truly worthy of praise.”

Whether we look to leadership to inspire us, or we simply change our minds and take the high road in our lives regardless of what others do, we rebuild our American experiment, we strengthen our society and reassert ourselves in the marketplace of ideas, morality and commerce. 

If we want to finish the American experiment, rejoin England and the European Union and give up our role as leaders, we are certainly on the right track. 

It won’t be long before the currency of choice becomes the Euro, a currency of consensus from countries actively seeking to do good things for their citizens. 

The U.S. dollar, including those bills in your pocket and those numbers in your bank and securities accounts, are being undermined by you and what you allow in your little corner of the marketplace. 

Only you (all of us in our own worlds) can turn it around. But it takes real faith rather than faking it or just giving lip service to it.

Investment Advice

  • Several people have emailed me regarding what to do with their investments. I am not Warren Buffett and I don’t have a crystal ball so what I say here should be checked against other knowledgeable analyses. Keep in mind that most people are full of s–t. Everyone thinks they are a genius in an up market. In a down market, everyone still thinks they are a genius, like gamblers because they count their successes and don’t count their losses. Most economists, securities analysts (I used to be one), institutional traders (I used to be one), fund managers (I used to be one) etc are ill-trained, poorly educated, not well-rounded, and basically go with the herd. They sound good but they don’t know a thing about real economic behavior. Account representatives are even worse. Their job is to get you to do something without concern to wether you make or lose money (if you find one that doesn’t fit the mold, hold onto him or her for dear life).
  • First any investment in money market, CD, US Treasury, or other strictly dollar denominated assets including actual cash or deposits on hand should be converted to non-cash assets or non-dollar denominated assets. There are several internet banks and other companies that will allow you to keep accounts in dual currencies or more. My assumption is that the dollar is in for a crash. My theory is that if I am right, then you will make a lot of money. If I am wrong, there is little to suppose that the Euro or Canadian dollar or the Yen or Yuan will do badly. Either way you are probably pretty well protected.
  • Precious metals are always an inflation hedge but you are depending, again, on perception of value as opposed to real value. It is not likely that Gold ever again be “money.” hence it will always be a commodity and thus subject to the rules and trends of the commodity trading marketplace. The same holds true for corn, oil, and other commodities. yes they are likely to increase in value (and they present an inflation hedge as well) but you probably should not venture into commodities now unless you are already a successful commodity trader. Pick an ETF or other fund and let someone else make the trading decisions.
  • Stocks are not necessarily bad particularly if the company does not depend upon US consumer spending, and if the company does not hold or depend upon receiving US dollars. If it is getting Euros in payment for goods and services or other currencies around the world that are not pegged (i.e. a currency whose value is derived from whatever the value of the U.S. dollar is — BE CAREFUL),  then if it is a good company it will do well in the intermediate term even if it gets hit with the usual over-selling that occurs when an economy fails. 
  • Don’t stop looking at fundamentals just because it is in another currency. It is true that you “make money” if the dollar dives and the foreign stock dives less, but that is not a very safe strategy. Find even financial institutions that are oversold because of the general fear of bank failures. Avoid Citi, BOA, Lehman, and all of the other major national banking groups. They are all at risk. Think about the firms that figured out the crash months or years ago, like Goldman Sachs and see how they are doing now. 
  • Bonds are not necessarily bad either for the same reason, and the same with CD equivalents etc. As long as principal interest, dividends etc are paid in Euros or some other currency not tied to the dollar, you should do OK, if you pick right on the company or mutual fund.
  • Keep in mind that most people are unwilling to accept the coming crash and that they may be right and that I may be wrong.
  • Why Euros? Because it is the ONLY currency of consensus. 2 dozen countries are involved in the Euro, thus giving you immediate diversification of risk. 
  • Real estate: Avoid bargain locations — they might never come back, avoid locations that might be affected by flooding from rising sea levels, use leverage if you can afford the staying power, and stay in for the long haul (3-5 years minimum). This is a non-cash asset whose value will rise proportionately to the decline in the value of the dollar. If the dollar does not decline, and you have avoided problematic locations, you will still be OK. 
  • Jewelry: For short term trading and turnovers in the marketplace there are probably some profits to be made. I don’t recommend it. There are a lot of people who know more at a glance than you would with an electron microscope and a handbook.
  • Lending Money: Tie the interest payments and the principal to the real rate of inflation and use an index like oil rather than the CPI which at this point has been rearranged so many times the tires are worn out. 
  • Borrowing Money: Avoid borrowing at ridiculously high rates (in case I am wrong) and avoid if possible, the imposition of indexing on inflation. If indexing is going to occur, argue for the CPI, which the government will keep at the lowest possible levels in order to keep social security and other payment increases to a minimum. A reasonable loan will put you in the position of tremendous leverage and profit if I am right and still give you ordinary returns on investment if I am wrong.

Economic Status report

Back from a cross country trip for 6 weeks accumulating data “on the ground.” I am have discovered that the ripple effects of the economic mismanagement, the mortgage meltdown, the credit crisis, the housing crash, and many other factors are playing havoc not only with our current status but with our prospects. These are the things that the next President will face.
They are also the issues that the current administration adn the current congress face but are slow to admit, fully appreciate or address. There is nothing on the horizon that seems to indicate that these issues will be tackled any time soon.
The following article is at least as good as anyting I could have wirtten. Pay Special attention to the assertion that commodities are becoming the new currency. It heralds a return to an advanced hybrid barter system that can be gamed if you spend the time, but that will threaten the way of life for millions of Americans who cannot spend the time, or who don’t know where to turn for sound, truthful financial advice in the coming crash.
While the publications of the Handbooks is still in the works, I have decided to take a proactive role in approaching local, state and federal officials who are now concerned with inflation, large scale currency devaluation, social services, real estate and other tax revenues, and bank failures.  
11 reasons Bernanke’s recession lasts till 2011
Timing the next bull: Kick-start it in 2008? Or is it a long secular bear?


11 reasons Bernanke’s recession lasts till 2011

ARROYO GRANDE, Calif. (MarketWatch) — Remember that hot 1973 Stealer’s Wheel song marking the end of the Nixon era? “‘Cause I don’t think that I can take anymore. Clowns to the left of me, jokers to the right, here I am stuck in the middle with you!”


It’s still a perfect metaphor. Testifying before Congress: Fed Chairman Ben Bernanke on the left. Treasury Secretary Henry Paulson on the right. The American public stuck in the middle.
 Last summer they assured us the subprime-credit crisis was “contained.” We now know that was a big lie. They knew, had the facts, early warnings, lied and are still lying. More proof? They just told Congress: “America will avoid a recession.” New data tells a different story.

Clowns to the left … jokers right … stuck in the middle … can’t take it anymore.
But we have to, we have to hang on at least 10 months more, praying they won’t do too much more damage. But I’m afraid they will: more lies, blunders and incompetence will drag out this bear. Like the song says: “Got a feeling something ain’t right.”
Read the new InvestmentNews, a professional journal for financial advisers. The lead headline grabs you: “Bad times for stocks could last many years.” A long secular bear.
Do you believe it? That’s the big question today: When’s the next bull? How long will the bear last? And forget Washington’s rhetoric about “no recession.” The truth is, you can call it a “bear,” “slow growth,” a “downturn,” a “recession” — call it whatever you want. Timing’s the real question. How long will it last? When will it bottom? 2008? 2011?
Test your timing skill. You tell us, what’ll drag this out 30 months, like in 2000-2002? Or shorten it? Here are 11 critical factors for your timing equation, things that could make this bear-recession shorter or longer. You tell us. Add a comment. What’s your prediction: How long before the next bull?
1. Stagflation: Bernanke’s no-win Achilles heel
Reading Fed-watcher William Fleckenstein’s new book, “Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve,” you get the feeling that for 18 years America’s banking system was run like a “new age” hippy commune, by a Ayn Rand free spirit who believed “anything goes.”
Now the Fed’s run by a college professor and Fleckenstein says he’s “in over his head.” Except this is the real world, a $13 trillion economy in a $48 trillion world, not a college seminar on economic theory.
In the 1970s Nixon faced a similar problem, convinced then by Fed Chairman Arthur Burns: “No one ever lost an election on account of inflation.” Wrong! Low rates generated inflation not growth. That stagflation triggered a bear/recession. Is Professor Ben trapped, repeating history?
2. Housing-credit meltdown: We’ve got a long way to go!
It’s far from over folks and still spreading: Years of inventory, foreclosures, building slowdown, risky bond insurers, weak rating agencies, funds holding bad debt, freezing exits and fuzzy math on values. Yet Bernanke and Paulson still live in a Washington bubble of wishful-thinking fantasies.
Economic realists say what’s needed is a massive $1.6 trillion demand-driven program (that’s the record cash Corporate America’s hoarding) not a dinky $160 billion supply-side “appease the voters” giveaway that ends up increasing the odds of a lengthy Nixon/Burns style bear-recession.
3. Commodities: World’s new reserve ‘currency,’ not dollars
Forget paper money and IOUs. Commodities are the world’s new “currency:” Hard stuff like oil, grains, metals, gold. And that means America is financing the growth of our enemies, surrendering our long-term economic power for short-term oil-guzzlers and plastic toys. We are responsible for making Russia and China into threatening world powers. Buffett warned us. We’re selling the farm, piece by piece.
4. Toxic derivatives: World’s $516 trillion ticking time bomb
Derivatives are great for deal-by-deal risk management in a $48 trillion GDP world. But leverage them 10 times over across the globe and we got a financial “weapon of mass economic destruction.”
Bill Gross warns that the world’s new unregulated “shadow banking system” is printing new money, now at $516 trillion, out of thin air, with no “central banks of last resort” backing up the “Frankenstein” monsters they’ve created.
5. Massive debt: Everywhere, trade, federal, states, local
America’s Comptroller General David Walker, Congress’s head accountant who is leaving his position next month, warns our government is “bankrupting America.” Using unethical accounting worse than Enron’s. Fiscal responsibility lost. He sees “striking similarities” with Rome. Both parties are gluttons in a spending orgy.
We spend-spend, load debt on future generations, then use accounting gimmicks to hide our greedy excesses: Hidden earmarks. Supplemental war appropriations. Meaningless IOUs after stealing from Social Security.


6. America’s new ‘pushers:’ Banks feeding consumer addicts
Trader’s Daily captured it perfectly: “Never underestimate the power of the superpsycho, hyper-spending American consumer. Where there is no cash, they will sell their soul. Or just charge it. Let’s just not think about what it all means for credit-card debt down the road.”
Meanwhile, the credit meltdown is making banks desperate for money. A recent Chase credit-card commercial fuels consumer addictions: Wife wants bigger television. Husband smiles. They shop to the pounding drumbeat of Queen’s hit 80s song: “I want it all, I want it all, I want it all … and I want it now!” Tag line: “Chase what matters!” Yes, Chase debt, all you addicts. Forget saving, spend like there’s no tomorrow.
7. More wars: Pentagon predicts bigger, costlier conflicts
The Pentagon’s internal studies see a perfect storm accelerating wars worldwide: Global population growth, limited natural resources and global warming. Our war machine is exploding. The Pentagon gets over 50% in the new federal budget. We’re only 21% of the world’s GDP, yet spend 47% of the world’s total military expenditures.
Our power-hungry mindset is becoming self-destructive, suicidal. Remember Nixon strategist Kevin Phillips’ warning: “Most great nations, at the peak of their economic power, become arrogant and wage great world wars at great cost, wasting vast resources, taking on huge debt, and ultimately burning themselves out.”
8. Greed: Wall Street and Corporate America’s defining ‘value’
Values start at the top. But the top won’t change for 10 months. Leadership, statesmanship and character are vanishing. Five short years ago Corporate America and the mutual fund industry were consumed by greed. How quickly we forget.
It’s worse today. We see greed consuming not just Wall Street’s clueless CEOs, but the entire industry: Outrageous bonuses of $38 billion amid mega-billion write-offs. Fire sales of billions more American equity to sovereign nations.
From the top down, greed is driving America from bubble to bubble. Wall Street’s already fueling the next bubble, trading on a volatile market.
9. Democracy failing: America now run by 35,000 lobbyists!
Forget government “of the people, by the people, and for the people.” Adam Smith’s “invisible hand” is now a small group of 35,000 highly paid, greedy lobbyists demanding handouts. They run America from the shadows, for those at the top of the economic food chain and vastly outnumber Washington’s 537 elected officials.
Nationally there’s an estimated quarter million lobbyists, with hundreds of millions of dollars to buy favors in campaign contributions. Politicians talk “change,” but America’s lobbyists will still be working for their special interest clients in 2009. And they’ll fight all “changes.”
10. America’s already in a recession, and in denial
This year’s elections will be a huge factor in lengthening the recession. Our lame-duck government will delay action on critical issues. It reminds me of my days counseling addicts and alcoholics. Change never happens until they admit they have a problem. Same here.
Paulson and Bernanke cannot admit there’s a recession. They’d have to take blame for America’s failed policies. And congressional Democrats are weak co-conspirators in this meltdown. Nobody has the guts to take responsibility. They’re all like addicts and alcoholics, in denial, giving lip-service to “change,” while they blame the other guys and support ineffectual stimulus plans.
Vote for whomever, but this lame-duck mindset plus lingering partisan rancor will push any recovery at least into 2009, probably delay the next bull till 2010 or 2011.
11. Class warfare: Superrich vs. Main Street America
No matter who wins, the presidential campaign is warning us: A major battle’s coming between “the rich and the rest;” over taxes, benefits, cuts, power.
For years the media collaborated with Wall Street and Corporate America, hyping “Ownership, the New American Dream,” where everyone benefits, shares the wealth, gains a piece-of-the-action, ownership in “The Dream” through the magic of housing, stocks, growth, profits, retirement plans. But the housing-credit contagion killed the dream.
Yes, the superrich did get richer. But “the rest” didn’t. And they’re waking up to a widening gap. A backlash is brewing and will explode … delaying a recovery and a new bull.
Clowns to the left, jokers right, we’re stuck in the middle. Can’t take it anymore? Add a timing comment. Tell us: When’s the recovery? Next bull? Late 2008? Not till 2011? End of Story


Credit Crisis, Mortgage Meltdown, Economy Short Circuit: ACTION NOW PLEASE!

It is as though everyone has their head stuck in the ground, which is the most polite way of putting it.

Look at the figures coming out — even PRIME borrowers are going delinquent. Lenders are struggling to regain capital requirements for lending, The Federal Reserve is essentially having no effect on the downslide, retail spending is at a forty (40) year low, and the U.S. dollar has never been worth less than it is now. Housing prices are trending lower for at least another 15% drop and inflation is on the way up each month. Real unemployment and underemployment is at an all time high, and regardless of employment status at least 2/3 of the country’s citizens can’t make it on their current standard of living. All of these indicators are still trending down in a reverse hockey stick if you want to graph it.

My point is not just that the sky is falling, my point is that this crisis must be treated as seriously as it presents itself.

Extreme measures must be put in place NOW to mitigate or prevent tens of millions of American citizens from being displaced from their homes, jobs, and way of life.

The entire foreclosure scheme must be frozen. All debt must be restructured to a level that borrowers can pay with money left over to buy consumer goods. That includes subprime, prime and all other debt. Failing loans must be restored to a status that provides relief to financial insitutions seeking to comply with capital requirements for lending. The holders of CDOs must be given some of the relief to restore some measure of confidence in the U.S. financial markets, and the players who sold these securities should be given immunity if necessary in exhange for their complete cooperation in achieving these objectives.

This issue is not “who gets the bailout”, the issue is how do we get all the players back in equilibrium. The issue is NOT who is to blame. The issue is who is needed to fix the situation. The answer is everyone.  

Fundamentally there are a number of obvious regulatory, monetary, legislative and enforcement issues that need to be visited and corrected. But let’s get serious. These corrections will fix nothing in the current crisis. The “stimulus package” represents a tiny fraction of a tiny percent of the crisis we are in. We need bold actions now not by candidates who will hold public office in the future but by those with the power and authority to do it. We need leadership by people of courage who are willing to take risks to stem the incoming tide of inflation, foreclosures, bankruptcies, delinquencies, bank failures, business failures and the further decline of the U.S. dollar.

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