Thursday, January 31, 2008

Unexpected Fed Consequences

"High finance, like some unreliable common stock, goes lower and lower. How did so many experts misjudge so badly? ... Economic growth was no longer spasmodic but smooth and almost predictable. The name [Ben Bernanke] gave to these manifold blessings was the Great Moderation, and he thanked the Fed, in which he then served as a governor under Alan Greenspan, for helping to bring them about. But it was actually the Great Complacency that Mr. Bernanke had put his finger on. In finance, to borrow from the economist Hyman Minsky, nothing is so destabilizing as stability. The paradox is easily explained. Profit-seeking people will take more financial risk when they believe the coast is clear. By taking bigger chances, however, they unwittingly make the world unsafe all over again. ... And nothing builds confidence like the magic belief that a greater power has conquered the business cycle and laid inflation low. ... As for the crackup in complex mortgage-backed securities, now at the center of the debt predicament, the global bank UBS has justly called it 'the biggest failure of ratings and risk management ever.' ... Yet inflation was almost an afterthought in the press release in which the [FOMC], the central bank's policy-making arm, explained its surprise intervention: 'The committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.' ... Bernanke ... is likely to keep the Fed's rate low--lower, even, than the measured inflation rate. ... The trouble is that, while the Fed is America's central bank, the dollar is the world's currency. It lines the vaults of central banks of America's creditors", James Grant (JG) at, 27 January 2008.

I agree with JG. JG is saying: the capital market line's slope decreases when people are optimistic. Amen. That the FOMC "expects inflation to moderate in the coming quarters" is interesting. Does it?

Justice Department Extortion Racket?-2

"German engineering giant Siemens AG hired New York law firm Debevoise & Plimpton LLP more than a year ago to get to the bottom of a widening bribe-for-business scandal and try to blunt possible U.S. sanctions. ... Debevoise's probe also highlights potential weaknesses in the legal outsourcing model pushed by the U.S. Department of Justice and the U.S. [SEC]. Faced with more cases than the staff can handle, the agencies have encouraged companies in recent years to hire outside law firms to conduct in-depth investigations of suspicious activity and then share the information with U.S. prosecutors. In return, co-operative companies hope for more lenient fines and sanctions. ... Siemens fears and FCPA fines could be much bigger than the already hefty fine imposed by the German court in October. ... Debevoise's white-collar crime practice boasts 11 former federal prosecutors, including Mary Jo White [MJW], the former U.S. Attorney for the [SDNY]", my emphasis, WSJ, 23 January 2008.

We know MJW, see my 10 August and 12 September 2007 posts. Imagine, the SEC and (In)Justice Department are "faced with more cases than the staff can handle", yet fail to use my Blankfein test, prosecuting Raben and Borchard, see my 19 January 2008 post. Crazy, unless you believe the Feds are running an extortion racket with delayed reaction payoffs. Can I get a piece of this "action" for say $1,000 per hour? Nah, I'm not an (In)Justice Department "alumnus". Barney Frank, have I got an idea for you: investigate the SDNY US attorney's office, but remember to don a hazmat suit before you enter the place.

Wednesday, January 30, 2008

The Fed and the Four-Letter Word: GOLD-2

"I strongly object to the idea that 'gold is an investment'. Gold is better described as a non-investment, more precisely a place where you park your savings when you cannot find satisfactory investment outlets either because interest rates are too low, or because the risk of holding equities is too high. ... [Anatole] Kaletsky, like everyone before him preaching the Anti-Gold-Gospel, studiously avoids the question why the Treasury and the [Fed] should have the privilege of issuing obligations that they have neither the means nor the intention to honor. If anyone else tried to run a business on that basis, he would land in jail like Charles Ponzi did in the 1920s. ... The rising gold price and its implications have been largely ignored by the financial press and the investing public so far. The proposition that gold is still a monetary metal and still has a monetary role to play is ridiculed, while some central banks around the globe (e.g., that of Russia, China, India, Argentina, Brazil, to mention but the most important ones) are quietly remonetizing gold as they diversify out of dollars and build gold reserves from scratch. They keep this activity under cover as much as possible since it is not their intention to upset the golden apple-cart", my emphasis. Antal Fekete (AF) at, 26 January 2008.

"The other great casualty of the Fed's blunder has been the global dollar bloc. ... The collapse of the dollar bloc, if it continues, will add to this exchange-rate volatility and in the worst case make it easier for beggar-thy-neighbor currency manipulation. ... As the world's most important central bank, the Fed must take the lead. And the way to start is by sending a message that its monetary decisions will be based on a renewed determination to protect the value of the dollar and its role as a reserve currency", Editorial, WSJ, 26 January 2008.

"In recent months, the noisiest criticism of the Fed has come from Wall Street. ... Of course, the Fed doesn't think it was surrendering to critics. Instead, it was trying to avert a financial stampede. ... The Fed's first responsibility is to keep inflation at low levels because, without that, its other goals of maximum economic growth and low unemployment become impossible", Robert Samuelson (RS) at, 29 January 2008.

Amen, AF, well-said. Anyone who doubts gold is money should ask: why did Nixon "close the gold window" in 1971? Why does Uncle Sam hold 261.5 million ounces of gold? What is gold? MONEY! In "capital market line" terms, GOLD, not Treasury Bills, is the: least risky asset. Least risky asset, not riskless asset, there ain't no such animal! As Americans we are conditioned to believe there is a "riskless asset", but that is because like Pavlov's dogs we were brought up to think in dollar terms, not gold ounces. See also my my 24 December 2007 post.

How would the WSJ have the Fed send "a message"? By Helicopter Ben's saying so? That ain't gonna cut it no more. Either the banks fail or the dollar fails.

The Fed has some game going, that 75 years after its formation, RS can still write its, "first responsibility is to keep inflation at low levels".

The snare of stimulus

"Excessive savings was Keynes' bugbear; he believed that excessive saving had been Britain and the United States' principal problem in the late 1920s, so that only a demand-side kick could re-stimulate the economy. ... We now know that Keynes' remedy was basically wrong. ... However, even those who believe in Keynes can hardly suppose a Keynesian stimulus to be relevant now. Lack of consumer demand has not been the problem in the US economy since 1995, quite the opposite. ... At this point, the long term need is for a radical upward re-orientation of interest rates, to a level that provides savers with at least a 3% real return over and above the current inflation rate of nominally 4%. ... It would also reduce the excessive US investment in housing and financial services, both of which sectors are in the early stages of a very unpleaseant downsizing of their current bloated and carbuncular state. ... A major rise in interest rates would also have the useful side-effect of preventing a resurgence of inflation. ... Even by the heavily massaged numbers of the Bureau of Labor Statistics, US inflation is above 4% and likely to remain there. ...However, a major rise in interest rates we are not going to get, quite the opposite. Instead the Fed, seeking as ususal since 1995 to provide short-term palliatives to Wall Street at the expense of the long term health of the economy, clearly intends to cut the Federal Funds rate further at its meeting January 30th, probably by 0.50% to 3.75%. ... That will have one effect which may appear unattractive, but which to the short-term thinkers of the Fed is beginning to have a strange allure; it will cause much higher inflation. Not the wimpy 4-5% inflation from which we are currently suffering, but a genuine take-no-prisoners 10-15% inflation. ... House prices got too far ahead of incomes. ... It is a clever solution, first practised (largely accidentally) in Britain in the 1970s. ... However, in 1975 inflation ran at 25% and it remained well into double digits for the next five years. ... It would enrich homeowners and heavy borrowers, and impoverish pensioners, savers and renters, thus intensifying the Latin Americanization of the US economy", Martin Hutchinson (MH) at, 21 January 2008.

Stephen Cecchetti, please read this. I read John Maynard Keynes' (JMK) General Theory, 1936, and didn't realize what JMK was talking about until page 336 of his 365-page magnum opus when I realized JMK had taken old mercantilist fallacies and dressed them up with new terms. I don't believe JMK believed a word he wrote, but decided to give the US and UK governments a rationale to reduce real wages through inflation and money illusion.

I agree with MH and have long thought the Fed's "plan", which even Helicopter Ben does not understand, and will slide into, is to drive US inflation rates to 6-15% for a decade averaging 12%, with measured inflation at 4-6%, averaging 5%. After a decade of this, US prices will be 211% higher, with nominal inflation of 63%, greatly reducing Uncle Sam's real debt burden.

Tuesday, January 29, 2008

Coal Shortages?

China is facing widespread, temporary power shortages that could affect global energy markets if they aren't resolved soon. The shortages stem from a number of factors, but at their core is a pricing and distribution system that is having trouble keeping up with the country's rising demand for electricity. ... It is unclear how bad this year's power shortages will be. But this time there is an additional worry: China is becoming a big coal importer. The world's biggest consumer and producer of coal, China relies on coal for 78% of its electricity. ... Starting in 2006, coal prices were liberalized, allowing them to rise 10% each year after. But at the same time, electricity tarriffs have been kept flat or lowered by government officials worried about inflation and social unrest if prices rise too high", WSJ, 24 January 2008.

"Mining giant BHP Billiton said it won't be able to meet its commitments to ship Australian-mined coal used for steel, potentially putting further upward pressure on steel prices", WSJ, 25 January 2008.

Coal demand looks insatiable for the time being. Given that China has power shortages, I expect coal prices to rise worldwide.

Islamic Expertise?

"Maj. Stephen Coughlin ... aroused the ire of Mr. [Hesham] Islam and others in September by authoring an analysis of a Muslim Brotherhood document entered into evidence in the Justice Department's case against the Holy Land Foundation. ... Coughlin also took issue with the effort underway by intelligence community analysts to declare al Qaeda terrorists and insurgents in Iraq as 'false Muslims,' whose version of jihad conflicted with 'true' Islamic teachings. ... As he pointed out in his 333-page thesis, 'To Our Great Detriment: Ignoring what Extremists say about Jihad,' President Bush's statements downplaying the role of Islam in the terrorist attacks on America have 'exerted a chilling effect on those tasked to define the enemy's doctrine by effectively placing a policy bar' on examining the role of jihadist teachings. ... Pentagon higher-ups have planted stories that Coughlin was fired because he had unathorized contacts with reporters, a charge that [Bill] Gertz denied. ... 'Now our enemies have said publicly on film, on the Internet, their goal is to destroy our way of life. No equivocation on their part. ... They are saying their goal is to rid the Middle East of foreigners. Then overthrow all governments that are not friendly to them, which mean every single one of those governments,' [Peter] Pace said. 'The termination of Stephen Coughlin on the Joint Staff is an act of intellectual cowardice,' Lt. Col. Joseph C. Myers, Army adviser to the Air Command and Staff College, wrote on Jan 5 public letter of support", Kenneth Timmerman (KT) at, 20 January 2008.

What is "The extent of Islamist penetration of the U.S. government"? Is a question Frank Gaffney (FG) asks on 22 January 2008 at

Our intelligence community and generals are a joke. They can't know less about the history of Islam than I do. Or can they? Are they fools, knaves or cowards. Islam is not a "religion of peace" no matter what President Bush says.

FG's question is well asked.

A New Financial Product-2

"In December Vanguard introduced an Extended Duration Treasury [EDT] fund, which owns zero coupon Treasurys with maturities of at least 20 years. The minimum investment is $5 million for the mutual fund. You can get a round lot of the ETF mirror fund for $9,930. ... Kenneth Volpert, in charge of debt management for Vanguard developed the Extended Duration Fund and ETF. He hopes in typical Vanguard fashion that small investors will stay away, since zeros are very volatile. 'It's twice the duration of our long bond fund, which is 12 years,' he says. 'It's risky'," Forbes, 28 January 2008.

I like this kind of financial engineering. The Funds are "risky", but so is holding dollars. The ETF sounds like an excellent vehicle to "become" Uncle Sam. How? By enabling individuals to make "long-term" dollar short sales! Just like Uncle Sam. If you can't beat 'em, join 'em!

Monday, January 28, 2008

Rogue Trader Redux

"Societe Generale SA's [SG] $7.2 billion loss on a series of fraudulent trades is just the latest example of a breakdown in internal controls that are supposed to protect financial firms from disaster. ... 'Until recently, every investment bank believed it had built an outstanding risk-management system,' Ken Moelis, former head of investment banking at UBS wrote in a November letter to his new firm's investors. ... 'Through computer models and endless analysis, the banks believed they could measure every risk to the nth degree.' But reliance on such models and manuals 'overlooked' the importance of 'human judgment and the ability to evaluate the numbers being generated,' he added", WSJ, 25 January 2008.

"The official story goes something like this" A 31-year-old trader with in-depth knowledge of the bank's control procedures took unauthorized positions that he concealed with fictitious countertrades after having fraudulently removed his trading limits in the bank's system. ... The story has been understandably greeted with disbelief", WSJ, 25 January 2008.

"Christian Noyer, governor of the Bank of France [BOF] ... said the [BOF] undertook 17 routine investigations on site at Societe General in 2006 and 2007. Regulators examined the bank's models for evaluating risk, especially in sophisticated financial derivatives and products, and its system of controls. ... One thing regulators and banks can and should do is 'provide incentives for people working with the fraudster to catch the fraud,' said Charles Goodhart, program director of regulation and financial stability at the London School of Economics", WSJ, 25 January 2008.

"Financial service entities are traditionally inundated with systems of internal accounting control and auditors. ... It is just too convenient to saddle one rogue individual at one institution as some isolated incident in the unfolding drama of the worldwide breakdown of our financial system network. I'm just not buying it", Fred Cederholm at, 27 January 2008.

"I find it difficult to believe that a rogue trader can tally $7 billion of losses in a relatively exotic business of a French bank, given the number of margin calls and cash funding requests that would have arisen in the past few months", Chan Akya at, 27 January 2008.

I don't believe the "official story". Having lost $7.2 billion SG apparently decided to "disavow" the trades and claim they were unauthorized. If there were no margin calls by the counterparties to SoGen's trades, we have a new problem: the counterparties accounting systems have problems!

Wow, "provide incentives". What does a BOF "routine investigation" look at?

What's Bothering Asia?

In hearing that Asia's stock markets fell Monday morning, I wondered, "what's bothering them? Is it fear that Helicopter Ben (HB) won't cut rates another 50 basis points at the next Fed meeting? Or what? What happened over the weekend to bother Asia"? No new news about HB. Why the big drops? My answer: South Carolina (SC)! What? The Asian markets are bothered that Barack Obama got 55% of the SC vote, now has a serious chance of becoming American president and enacting protectionist legislation opposed to Asia's interests, like 1930's Smoot-Hawley tarriff. Or at least that's what I think is happening.

Inflation, Where?

"Central bankers pondering what to do in the event of a U.S. recession are finding that inflation just isn't what it used to be. ... But several factors, including the surge in demand from emerging-market heavyweights like China, are set to keep commodity prices high during this downturn. ... For sure, the inflation spikes of the 1970s aren't likely to stage a global comeback. ... But after years of persistently low inflation, prices are rising at a faster clip in the developed world--and some of the jumps in food and energy are spilling over into other areas. ... Many economists ... argue that the entry of millions of Chinese, Indian and other former communist-country workers into the world economy was a one-time disinflationary force that has lost it oomph. ... But some economists say ... that emerging markets will continue to surge even as U.S. growth slows. Not everyone buys that", Joellen Perry and Justin Lahart at the WSJ, 25 January 2008.

I am in partial agreement. I agree the entry of China, India and Eastern Europe into the world's economy was an "exogenous shock" which reduced measured inflation. I disagree that "the inflation spikes of the 1970s aren't likely to stage a comeback".

Sunday, January 27, 2008

Peoples' Justice?

"Attorney Terry Yates [TY] continued to accuse the two grand jurors, foreman Bob Ryan and assistant foreman Jeffrey Dorrell, of breaking the law by publicly discussing the case outside the grand jury. ... In a scathing letter sent to the Houston Chronicle Sunday, Ryan blasted Yates for calling him and Dorrell 'runaway jurors' after they publicly criticized the [DA's] office. ... DeGuerin said he did not call the grand jurors nutty but had said that it was 'nutty' for a grand jury to indict people when prosecutors have said insufficent evidence was available to support an indictment", Houston Chronicle, 21 January 2008.

"I waited the appropriate 48 hours before communicating my displeasure with [TY] ... and his outlandish statements at his 'press conference' on Friday. As a former assistant [DA], he well knows that ... for a true bill to be handed up there must be a minimum of nine votes in the affirmative, not two 'runaway jurors'. ... Numerous people have called me to shed additional light on Yates' client. Many things that I have heard outside of the jury room give me pause to wonder what the real story is", Robert Ryan letter to the Houston Chronicle, 21 January 2008.

Bob "Ryan told me Monday, half kidding. 'Dorrell and I ... went public about the arrogance, the sheer arrogance, of the office of [DA].' The jurors' decision to comment on their verdict, which is public, may be the only check on a secret system", my emphasis, Lisa Falkenberg at the Houston Chronicle, 22 January 2008.

"A judge criticized the Harris County [DA's] office on Tuesday for not supporting a grand jury's decision to indict a Texas Supreme Court justice and his wife for a 2007 arson that destroyed the couple's Spring home. 'Why did they bring the case to the grand jurors if they didn't want the grand jury to do its job?' state District Judge Jim Wallace asked. ... Wallace disbanded the grand jury that last week indicted David Medina and his wife, Francesca, citing a procedural error by Harris County [DA's] Chuck Rosenthal's [CR] office. ... 'The unusal aspect of this case is that it was dismissed so quickly,' said Wallace, a Republican judge who has served 14 years. 'It should have been allowed to run its course'," Houston Chronicle, 23 January 2008.

"I have to wonder at the competence of a DA's office that couldn't get a grand jury--which is something of a captive audience--to decline to indict Justice David Medina in connection with what fire investigators say was arson that destroyed the Medina home. It's kind of the flip side of the old saying that a good prosecutor can get a grand jury to indict a ham sandwich. ... Victor ... Wisner's argument ... boils down to 'trust me,' and lists his own personal accomplishments as reasons why we should. ... Grand jury evidence is secret, but there is a provison in the law that would allow Medina, under certain circumstances, to ask a judge to make the evidence public. Any chance of that, your honor?", Rick Casey at the Houston Chronicle, 23 January 2008.

Why care what DA CR thinks? TY may have blown this as the case may become a reverse "Durham Three" as people volunteer information to Ryan and Dorrell. Stay tuned.

I'll suggest an answer Jim Wallace's question: CR expected the grand jury to return "no bill" and exonerate the Medinas. Consider: CR dismissed 30 other indictments because of the "procedural error". Why didn't CR find it before? Why didn't CR look for the "error" in the 30 other cases in question? How often has CR's office made such "errors"? Are there thousands of inmates in Texas' prison system that should similarly have their indictments quashed and be released? Was the "error" not an error at all, but made to thwart the grand jury's actions should it have returned a "true bill"? I don't believe the "error" story for a second. I'd like to see a new grand jury investigate CR's office.

WSJ and Voxeu Debate Fed PANIC!

"And such a panic is unfortunately what we have. ... The worst part of yesterday's decision is that it looked like more Fed appeasement of banks and equity traders, suggesting even a hint of panic by the Fed itself. ... Mr. Bernanke's interest in more Fed transparency is admirable, but we'd prefer if he saved his explanations for when he acts. ... The larger risk is that these rate cuts will contribute to a further flight from the dollar, along with more inflation down the road. ... Above all, Mr. Bernanke needs to be clear with everyone--Congress, Wall Street, investors--that easier money is not some magic elixir for the underlying problem of bank insolvency", my emphasis, Editorial, WSJ, 23 January 2008.

"The FOMC did not act because the stock market was declining precipitously. ... Importantly, every Fed official knows that they should not and can not cut interest rates every time the stock market falls, or threatens to fall, by 5 or 10 percent in a day or two. Instead of focusing on high-frequency stock market gyrations, central bank officials are surely focused on the evolution of real economic activity. ... A second explanation for the timing of the cut is the possibility that this vintage of the FOMC would like to show that it can be more nimble than some people think they might be. ... If the proper interest rate instrument setting is 2 or 3 or 4 percentage points below or above the current level, why not just change it all at once? ... I should not sign off without making some comment about inflation. ... Clearly, today's actions are not directed at combating this gathering menace. Instead, for now the FOMC is forsaking its inflation objective in an attempt to keep the recession from getting worse", Stephen Cecchetti (SC) at, 23 January 2008.

Bank insolvency? Say it ain't so Joe. What does Michael Woodford think of this, see my 25 January 2008 post? As it is written, "Beware of false prophets, who come to you in sheep's clothing, but inwardly they are ravenous wolves. You will know them by their fruits. Do men gather grapes from thornbushes or figs from thistles? Even so, every good tree bears good fruit, but a bad tree bears bad fruit. A good tree cannot bear bad fruit, nor can a bad tree bear good fruit. Every tree that does not bear good fruit is cut down and thrown into the fire. Therefore, by their fruits you will know them", Matthew 7:15-20 (NKJV). Ignore anything Helicopter Ben (HB) says. HB's fruit is: sacks of dollars. As I have said many times, either the Fed destroys the banks or the dollar. It's that simple. Your answer: got gold? Get more! Let HB be "thrown into the fire" by himself.

Has SC ever traded stocks or bonds? Has he had any contact with the capital markets? "If the proper interest rate instrument setting is 2 or 3 or 4 percentage points below or above the current level ... ". How would he know? Or HB? Or anyone else? Speculators determine this when they trade bonds! Does SC think interest rates are a thermostat that a homeowner can set at 68 or 78 degrees? How does SC know the Fed is concerned about "real economic activity"? Because it says so? I disagree, "the FOMC is forsaking its inflation objective". It's furthering its' inflation objective: more rather than less! I mention SC in my 28 November and 16 December 2007 posts. The Mogambu Guru blasted SC for not understanding the inflationary effects "of dollar depreciation". Apparently SC's learned something since then.

Saturday, January 26, 2008

Supreme Injustice

"In the latest of a series of victories for Wall Street, the Supreme Court sharply limited the ability of shareholders defrauded by a company to sue other parties, including advisers, lawyers and accountants. ... Wall Street has successfully argued that Congress intended only the [SEC] to police fraud, not to open the door to lawsuits by private shareholders. ... The SEC took the position that federal law permits private lawsuits against third parties. ... Stoneridge also sued Motorola Inc. and Scientific-Atlanta, now a unit of Cisco Systems Inc. Both vendors agreed to charge artificially high prices for cable boxes they sold to Charter. They used the extra money to 'buy' advertising from Charter, money which Charter used to inflate its bottom line ", WSJ, 16 January 2008.

"When did protecting big, fraudulent business enterprises become the hallmark of conservative thought, or was it ever thus? ... Writing for the court, Justice Anthony Kennedy said Charter didn't need to collude with the other two companies in order to defraud its accountants and investors. If that were the case, Charter would not have engaged in the charade, taking the chance that one of the third parties would blow the whistle", Houston Chronicle, 18 January 2008.

"They're basically providing escape routes for people who are going to be pursuing their own game at the expense of investors,' said Stephen Arbogast, a finance professor at the University of Houston. ... The box makers can't be held accountable because the 'deceptive acts were not communicated to the public'. That, of course, in the nature of deceptive acts. They're not deceptive if you tell everyone about them", Loren Steffy (LS) at the Houston Chronicle, 18 January 2008.

I predicted the Stoneridge votes of seven of the eight voting Supremes, only Antonin Scalia surprised me. This ruling is a DISGRACE. If it comes to it, I hope President Hillary has Congress impeach these black-robed hooligans. Stoneridge flies in the face of 250 years of common law and prior Supreme Court rulings like: Pinkerton v. US, 90 LEd 1489, (1946) which upheld the concept of co-conspirator liability. This is basic, it's in Torts, 4th Edition, 1984, Section 46, by Prosser; literally, it's hornbook law. I am mortified. The "Crits" are right, "law" serves the interests of the ruling class. "Pretty Boy Roberts" pays off for the plutocrats like a "fixed" slot machine. Shame on these gangsters in black robes. Harvard Law Review (HLR), big deal. I remember reading a 1959 HLR article on conspiratorial liability. What don't the Supremes understand? Way to go LS.

This case is such a disgrace. Why weren't all the parties involved in the overbilling scheme indicted under the federal mail and wire fraud statutes, 18 USC 1341 and 1343?

Let's look at the "Supreme Five" who voted for Stoneridge:

Antonin Scalia, Harvard Law Review.
Anthony Kennedy, Harvard Law School.
John Roberts, Harvard Law School, Magna Cum Laude.
Clarence Thomas, Yale Law School.
Samuel Alito, Yale Law Journal.

Texas Attorney General, Greg Abbott, explained the ruling on 88.7 FM radio this way: If a person plans a bank robbery and drives the getaway car, he cannot be sued in tort by the bank. Why? He never went into the bank and no teller ever saw him. So? Under the felony-murder rule and Pinkerton, if one of the four robbers in the bank killed someone, the getaway driver could be charged with murder, but the Supremes say not sued in civil court for tort damages. Amazing. This is: ALICE IN WONDERLAND law! This is the worst decision by the Supremes since Kelo. See my 1 September, 9 and 17 October and 9 November 2007 posts on Stoneridge.

Upon hearing the Supreme's ruling in Worcester v. State of Georgia, 8 LEd 483 (1832), President Andrew Jackson (AJ) is supposed to have said, "Justice Marshall has made his decision, now let him enforce it". Where is an AJ today? Kennedy's opinion is crazy. To believe it, you would have to believe no conspiracy could take place for fear a conspirator would "rat" on his fellows! Who in his right mind could believe this?

Here we have peasants like Joseph K in Franz Kafka's Before the Law, waiting for the Law and never being admitted to it. Supremes, you should be ashamed of yourselves.

California Housing Crash-2

"Falling home values helped push a record number of Californians--more than double the previous high--into foreclosure and out of their homes in the last three months of 2007, data released Tuesday show. ... Many have already been forced out or hit the road, helping to drive foreclosures up to 31,676 statewide in the final three months of last year. That's more than double the record set in 1996 near the end of the last real estate downturn. The all-time low was 637 foreclosures statewide in the second quarter of 2005, when home values were still booming. ... Statewide, the median price for a home peaked last year in March at $484,000, then fell to $402,000 by years' end, according to DataQuick Information Services", Peter Yang and Andrea Chang at, 23 January 2008.

The article includes a chart showing foreclosures in 2007's last quarter were 421% more than in 2006's last quarter. My guess: things will get worse.

Friday, January 25, 2008

The Curse of Unreality

"Influenced by television, the culture is obsessed with imagery. ... Vital political energy is spent on fabricated political positions, so that the public is diverted by an unreal parade while grave dangers remain unacknowledged. Real debate, real issues, real problems cannot be discussed let alone solved because the 'actors' running for office have rehearsed a performance that has nothing to do with the dangers that confront us and everything to do with feeding our hunger for fantasy, for easy answers and slick solutions. ... The domestic political game in the United States, as it is currently played, threatens the country's prospects for long-term survival. ... Without an intelligent, painfully honest discussion of current economic and international problems, the world's greatest country is bound to fall into chaos while its enemies gather strength abroad. It is, first and foremost, a crisis of leadership. It is also an intellectual crisis. A system that stuffs the 'public' with political sweets easily loses touch with strategic as well as economic realities. Consider the sorry state of education--the collapse of historical knowledge in the face of pop fiction. ... There has developed a consensus around these fictions "(1) that the [US] is the world's only superpower, when in fact, a severe economic crisis would cripple America's ability to project military power overseas. ... (3) There is the fiction that nuclear war signifies the end of all life on earth. ... (4) There is the fiction that civil defense is useless. ... (5) There is the fiction that the U.S. economy is going to continue to lead the world economy; when in fact, the dollar is falling and the [US] no longer manufactures (at home) the items necessary to maintain its military or economic ascendency", J.R. Nyquist (JRN) at, 11 January 2008.

"What we lack, as Westerners, is imagination. ... The appeasement strategies of the West are not evidence of 'stupidity,' [Robert] Conquest explained. They are evidence of the fact that men lack the scope needed to 'envisage alien minds'. ...Nuclear weapons have already fallen into dangerous hands. ... Russia is the West's most dangerous enemy. Al Qaeda doesn't even rate a distant third. ... History teaches that totalitarian regimes cheat when it comes to arms control. They always have and they always will. Anyone who does not know this, politically speaking, is a child. A nuclear-free planet merely signifies a nuclear-free West", my emphasis, JRN at, 18 January 2008.

What don't our politicians understand? I do not feel Russia is an enemy today, however, we should base our military posture only on Russia's military capabilities as opposed to its intentions.

Forward Guidance

"'Forward guidance' is communcation by a central bank [CB] aimed at signalling the likely future path of policy rates. All of the big-3 [CBs] (the Fed, Bank of Japan and the ECB) have experimented over recent years with more explicit forward guidance through their official communications. ... Is it in fact appropriate for [CBs] to try to communicate about future interest rates, or is this a point on which they are better advised to say as little as possible. ... The economic effects of monetary policy depend almost entirely on the anticipated future path of the policy rate, rather than on the current level itself of a rate such as the federal funds rate; announced changes, or non-changes, in the funds rate operating target matter only to the extent they often imply changes in the expected path of the funds rate months or even years into the future", Michael Woodford (MW) Columbia University professor at, 17 January 2008.

I agree with MW's conclusion "the anticipated future path of the policy rate" as this is consistent with the "rational expectations" hypothesis. I disagree with MW about his apparent goal in writing the article, i.e., it is desireable for a CB to control anything. If you assume a CB is good, you may want it to control "the economy" to the extent it can. If you assume: the CB exists to redistribute wealth from monetary claims holders to debtors, you see anything aiding the CB in its mission as undesireable. Besides, how can a CB do anything unless "the anticipated future path of the policy rate" is wrong! Absent market errors, the CB cannot redistribute anything! Therefore the CB must deceive the market to effect its policy preferences! As I read in Barron's in 1979, "How do you know when the Chairman of the Fed is lying? Every time he moves his lips"! I await MW's comment on the Fed's recent 75 basis point interest rate cut.

Thursday, January 24, 2008

Anatole of France Lives-4

"A grand jury's bitter backroom struggle to charge a Texas Supreme Court justice and his wife in the burning of their house burst into the open on Friday after a prosecutor who has opposed the indictments went to court and had them quashed. ... Mr. [Chuck] Rosenthal [CR], ... referred questions to his prosecutor in the case, Vic Wisner [VW], who said, 'Any claim that I stonewalled is not true.' 'We have an ethical duty to seek justice,' said Mr.. Wisner, a 24-year veteran of the office. 'And it would be unlawful, unethical and irresponsible for me to proceed with a case that I do not think has the ability to get beyond a directed verdict of acquittal, much let alone beyond a reasonable doubt. ... Although a grand jury may be guided by a prosecutor, it alone decides in secret if there is probable cause to charge someone with a crime. A petit jury then determines guilt or innocence. Dick DeGuerin [DD], a leading criminal lawyer here representing Mrs. Medina, said the accelerant was explainable because any homeowner had chemicals like mower fuel and weed defoliants in his garage. Mr. DeGuerin portrayed the Medinas as innocent victims of a 'runaway grand jury.' Mr. Ryan said the grand jury was experienced, with two lawyers and three police officers, and that at least half the members had been grand jurors multiple times", Ralph Blumenthal at, 19 January 2008.

The Medina case gets worse every minute. The grand jurors should consider indicting CR and VW for obstructing their operations. DD's "explanation"of the accelerant is irrelevant to the indictment. What? The "explanation" should be reserved for DD's case in chief and presented to the petit jury. It shouldn't be able to quash an indictment. DD, one of our best local criminal defense lawyers should know that. That it was used to quash the indictment indicates: DD, CR and VW concluded the trial petit jury will disbelieve the "explanation" and convict! Under any circumstances, I think this should proceed to trial.

The (In)Justice Department called the Rocky Flats grand jury "runaway" too. So? I don't believe anything that comes out of CR's office on this one. It appears a backroom deal was struck to protect the Medinas which is blowing up on page one of the Houston Chronicle.

California Housing Crash

"Our friends said we were crazy. ... We got nearly three times what we had paid for the place nine years earlier. It seemed to us like a staggering profit--and a sign that the market had been pumped up beyond reason. ... For a while, we wondered whether we would prove to be the crazy ones as home values in Southen California overall continued rising through last spring. But a closer inspection of real estate sales data shows that signs of trouble were already appearing when we sold. ... The music's volume went up as real estate agents said that if we stuck to our plan to sell and then rent, we could be priced out of the hot Southern California market for good. ... Now that the bubble has burst, my friends think I am a master of market timing. Those who haven't had their financial legs taken out from under them by the real estate crash are asking when they should buy investment properties to ride the next big wave of rapid appreciation. ... The idea of an ever-rising real estate market was a favorite topic in much of the news media. ... About the time I was getting out of the market, Mark Kiesel was thinking about unloading his Newport Beach home. An executive vice president of the Pimco investment firm, Kiesel's day job involved studying the housing market. ... 'Basically, prices were inflated by incredibly cheap financing,' Kiesel said. ... He and his wife, a lawyer, invested their proceeds in energy, metals and mining stocks. ... They are still renting the apartment. ... As a general rule, financial planners don't advise people to sell their house at a profit and invest in stocks or mutual funds", Peter Yang (PY) at, 20 January 2008.

Bravo PY. I bought a Hollywood Hills condo in April 1998 which I sold in December 2006 for 391% of my purchase price. Since then condos in my old building have fallen 8%. Now a war story.

In 1996 I approached some of my tax clients to syndicate some Los Angeles (LA) area apartment buildings. Why did I think they were cheap? They were available at 12-14% cap rates. In 1996 financing them was difficult as every bank I approached demanded 30% down. So? If you buy a property with 30% down and pay 8% for the mortgage, with a 12% cap rate you make 21.3% on your money. How? .7 x .08 = .056; .12 - .056 = .064, .064 / .30 = .213. It looked good to me. This calculation excludes potential property appreciation. None of my clients would do it. They were scared. In 2002 some of them asked me, "What's good? Surely you know. What should I do now?" I told them, "I haven't a clue. Good opportunities usually look bad, but if I saw something really attractive, I would say so". Since 1996, LA area real estate cap rates have fallen and rents increased, such that the properties are triple their 1996 prices! Had we bought the properties in question, we would have realized a 33.4% internal rate of return for nine years, assuming we sold the properties at the end of 2005 for triple the initial purchase price. Not too shabby. But we didn't.

Wednesday, January 23, 2008

Grand Jury Abuse

"The lawyer for Texas Supreme Court Justice David Medina asked a judge Friday to sanction two grand jurors for discussing their secret proceedings, saying the two men brought about the indictment of Medina and his wife to embarass [DA] Chuck Rosenthal ... But in October, the fire marshall's lead investigator on the case described the blaze as 'very suspicious' and told the Chronicle that a dog detected an accelerant at the scene", Houston Chronicle, 19 January 2008.

This case looks worse every minute. It appears a corrupt DA squashed an indictment to protect a powerful judge despite there being substantial evidence the judge and his wife committed a crime. All you need to sustain an indictment is "reasonable or probable cause". I see plenty of it. I would not trust anything done by any judge, prosecutor or police agency in this case from here on out. Let's see if Judge Jim Wallace calls in the Texas Rangers to investigate the DA's office for obstructing justice.

Oil Update

"Oil prices have disconnected from demand in rich countries, showing how the global oil market has become unmoored from some of the factors that steered it in the past. ... But now, oil prices are hovering around record highs even though demand is declining in the world's top industrialized countries", WSJ, 15 January 2008.

"Output from the world's exisitng oil fields is declining at a rate of about 4.5% a year, a new study concludes, meaning oil producers will have to find new production of 3.8 million barrels a day this year just to stay even. ... Yet the study's authors, Boston-based Cambridge Energy Research Associates [CERA], argue that their assessment supports a generally rosy view of the industry's future, given that new projects in the works will make up for the decline. ... The study strikes a more optimistic tone that do many heavy hitters in the industry", WSJ, 17 January 2008.

I think the CERA decline estimate optimistic. Time will tell. Oil's future demand growth will largely come from India and China.

Tuesday, January 22, 2008

Harris County's Mike Nifong

"Harris County District Attorney [DA] Chuck Rosenthal [CR] said he will dismiss an indictment returned Thursday against Texas Supreme Court Justice David Medina and his wife in connection with the fire that destroyed their home in Spring last summer. A grand jury handed up the indictments despite objections from [CR's] office. In a rare move for a body that typically operates in secrecy, two grand jury members Thursday publicly denounced [CR's] unwillingness to prosecute as politically motivated. ... Foreman Robert Ryan and assistant foreman Jeffrey Dorrell said that the [DA's] office made it clear, even before the grand jury started considering the case, that it was vigorously opposed to Medina being indicted. ... 'This is ludicrous. This is not right. This is a miscarriage of justice,' said Ryan, 63 a Republican who has been foreman of at least four grand juries. 'If this was David Medina, comma, truck driver, comma, Baytown, Texas, he would have been indicted three months ago.' ... 'I've never seen anything like the vigor with which these two defendants were defended by the Harris County [DA's] Office,' Dorrell said. 'It was the theater of the absurd. We knew before we handed the indictment down the that the [DA] was going to refuse to prosecute, but we did it anyway.' ... It is possible that [CR] could seek criminal sanctions against grand jurors for speaking while they are in session", Houston Chronicle, 18 January 2008.

"The whole grand jury process was subverted by [CR's] political maneuvering, according to the grand jury foreman and assistant foreman. ... If the indictments are dismissed, Ryan said, grand jurors may try to re-indict. It's unfortunate when a panel must go to such lengths to carry out justice. It's worse if the [DA] has gone to such lengths to obstruct it", Lisa Falkenberg at the Houston Chronicle, 18 January 2008.

Does CR think he is Mike Nifong of the "Durham Three" case, or Steve Cooley of Los Angeles County who won't indict Cardinal Roger Mahoney for hundreds of cases of accessory after the fact to sexual battery on a child? See my 5 December 2007 post. For that matter, who is David Medina (DM)? DM was Governor Rick Perry's General Counsel. Is he today's Alberto Gonzalez? An affirmative action Texas Supreme Court Justice?

Is justice is just blind? Or deaf and dumb too? I remember the "Rocky Flats" case involving Rockwell International (RI) which a grand jury made public, much to the (In)Justice Department's chagrin. Phew! Did the (In)Justice Department protect RI? It looked that way to me. RI paid an $18.5 million fine in lieu of $982 million in clean up expenses.

CR's actions are Kafkaesque. They remind me of Joseph K who waited at the door of the law, in Before the Law, 1920, yet was never admitted to The Law. Who will indict CR for obstruction of justice?

Sol Wachtler (SW), former Chief Justice of New York's Court of Appeals said, "district attorneys now have so much influence on grand juries that 'by and large' they could get them to 'indict a ham sandwich",, 15 July 2004. SW supposedly said that to Marcia Kramer and Frank Lombardi of the NY Daily News on 31 January 1985. Why couldn't CR "control" this grand jury? Did the grand jury see the facts and refused to be intimidated by what appears to be another gangster masquerading as a "civil servant"?


I heard at 8:02 AM Houston time that the Fed reduced the discount and funds rates 75 basis points. Helicopter Ben's clients must be terrified. "Clients"? The banks. Got gold? Get more!

Chinese Land Rush

"Once known for drab, government-controlled housing and ancient courtyard homes, China has become a land of multimillion-dollar apartments and soaring property values. And foreigners are trying to get in on the action. ... Many investors say they have done well. Patty Chen, 53, an American living in Shanghai, says she sold one of her first apartments in the city-a 1,829-square-foot luxury unit downtown--for $600,000 in 2005, almost three times what she paid for it in 2000. ...'New York [real estate] is so high, I missed it,' says Brett Aaron, [Yellowstar Capital LLC] co-founder, a native of New York's Long Island who has lived in Asia for many years. ... Ms. Kalifa of Jones Lang LaSalle says 'People are looking for investment options, and housing is a no-brainer", WSJ, 18 January.

Kalifa said it all. Chinese real estate looks like Los Angeles in 2005, or Hawaii in 1990. Closer to a top than a bottom. The Hawaii story is interesting because Japanese investors began buying Hawaii properties at close to the top of the market.

Monday, January 21, 2008

Howard Katz Speaks

"The newspapers say that you have decided to fight a pre-emptive war against recession. Your method of doing this will be to stimulate demand by running a budget deficit. ... If someone thinks that a recession threatens, then he has to ask himself why, all of a sudden, should an entire country start to get poorer. A country, of course, consists of millions of people, almost all of them trying to get richer. ... Anybody who studies the law of large numbers would expect that at any given time some people would be getting richer, some people would be getting poorer and most people would be staying the same. To have sudden shifts from economic growth to recession would be like the cold half of the air molecules going over to one side of the room and the warm half to the other--for no discernable reason. In fact, what is mistakenly called a recession is a credit contraction. ... It is thus the paper aristocracy (which benefits from the credit expansion) which suffers. To call credit contractions recessions is propaganda. ...The purpose of the Bush program is to 'stimulate demand'. ... The fact, however is, demand is not wealth. ... It is the creation of goods and services (which satisfy demand) which constitute wealth. ... The assertion of the paper aristocracy that recessions exist is simply propaganda. Since they benefit by creating money, they have decided to use 'consumer demand' as a euphemism for money. When they say, 'an economic stimulus package is needed soon' (to stimulate demand), they mean, 'allow us to create money'," my emphasis, Howard Katz (HK) at, 14 January 2008.

Way to go, HK! See also my 26 November and 15 and 24 December 2007 posts. I have made the oxygen, not air, molecule analogy myself many times.

Commercial Real Estate

"The credit crunch that roared through the residential real-estate market is starting to bite commerical projects too. Yesterday, Ian Bruce Eichner, the developer of a twin-tower casino resort in the heart of Las Vegas, defaulted on a $760 million loan from Deutsche Bank AG after he failed to get refinancing. ...Moody's Investors Service warned last week that the corporate default rate for the construction and building industry could reach 12% this year and predicted a 6% default rate in the hotel, gaming and leisure industries. ... The Cosmpolitan includes 2,184 'condo hotel' units, which are condominiums that typically get rented out as hotel rooms. During the housing boom, speculators in cities such as Las Vegas, Miami and San Diego snapped up these units because they promised to rise in value while also producing rental income", WSJ, 17 January 2008.

Now Moody's tells us. Who needs 'em? I remember when I first saw a "condo hotel" deal thinking, "this is being offered because the hotel manager can't finance the property acquisition more cheaply. This is being offered to ignoramuses at the top of the market".

Sunday, January 20, 2008

Harvard MBA Indicator-2008 Update

"In short, there are fewer bank tellers and back-office clerks and more M.B.A.s, Ph.D.s and even M.D.s on Wall Street. In the 1960s and 1970s graduates of Harvard University were much more likely to be lawyers, doctors and academics than to head for Wall Street. ... About 15% of men who graduated from Harvard around 1990 were working in finance 15 years after graduation, compared with about 5% of those who graduated around 1970. Among Harvard women, the share employed in finance increased to 3.4% from 2.3%. ... The lure is obvious. It's the money. Comparing graduates with similar SAT scores, grade-point averages, gender, age, occupation and everything else they can measure, [Lawrence Katz and Claudia Goldin] find Harvard grads who work in finance earn 195% of the pay of those who work elsewhere", David Wessel (DW) at the WSJ, 17 January 2008.

DW erred. He meant to write, "195% more" as he says the finance people make "nearly three times as much" as their classmates. There is no industry as full of overpaid incompetants as finance. See also my 25 October 2007 post.

Land Speculation in China

"Even as its cooling efforts in the property market show signs of paying off, China is rolling out further measures to rein in the still-growing sector, taking aim this time at developers who snap up and hoard vacant parcels. ... [D]evelopers and investment funds from overseas have ... [bought] real estate [to] hang onto it, sometimes for years before building on it. ... The tax, of 20% of the land's purchase price, kicks in after a year; after two years, local governments can seize the land without compensating the developer. ... If the measure works as planned, it could push more supply into the residential market", WSJ, 9 January 2008.

In effect, China increased developers' interest rate by 20%, as opposed to increasing all interest rates. I expect this will cause Chinese land prices to fall.

Credit Default Swaps

Yves Smith has a nice post at, 18 January 2008 about a WSJ article about credit default swaps and ACA Financial. I have nothing to add to Smith's post.

Saturday, January 19, 2008

Bankrupt California

"Here on the Left Coast, we have seen the Mexifornia future and it doesn't work. An economy built on the 'cheap' labor of millions of illegal aliens who are kept afloat by billions of tax dollars in welfare is not a viable system. California's deepening budget hole from bezerk spending simply cannot be papered over any longer. The massive costs of supporting a massive unskilled foreign population now threatens basic services. ... Apparently the Democratic legislature hopes the public's response will be 'Tax me, please!' .... You may remember Governor Arnold Schwartznegger got into office because of the similar financial mismangement of his predecessor, Gray Davis, who was removed via a celebrated recall election. ... As recently as early January, the Governor was said to be considering ... universal health care for citizens and illegal aliens. ... But free medical care for foreigners would be the mother of all illegal alien magnets. After a year or so after implementation, there would not be a single sick child left in Mexico, and to a lesser extent beyond. ... 'Twenty five percent of all welfare and food stamps benefits is going directly to children of illegal aliens'," Brenda Walker at, 17 January 2008.

People respond to incentives. California wants to import illegal aliens, so has about 4-5 million of them. Does anyone still buy California municipal bonds? You cruel, heartless malefactor of great wealth, you oppressor of the people. "Stealing" illegal alien children's healthcare. How could you?

Of Planks and Specks

"A former PricewaterhouseCoopers LLP auditor profited from trading on inside information that he obtained from a co-worker at the Big Four accounting firm's San Francisco office, the [SEC] said yesterday. ... The SEC said Mr. [Gregory] Raben, of Louisville, Ky., will turn over nearly $24,000 of allegedly illegal profits and pay a fine of equal size. Mr. [William] Borchard, of Chicago, will pay a fine of more than $20,000 and be barred from public-company accounting for at least three years", WSJ, 16 January 2008.

The SEC just restored integrity to the capital markets. All hail the SEC. "Why do you look at the speck of sawdust in your brother's eye and pay no attention to the plank in your own eye? How can you say to your brother, 'Let me take the speck out of your eye,' when all the time there is a plank in your own eye? You hypocrite, first take the plank out of your own eye, and then you will see clearly to remove the speck from your brother's eye", Matthew 7:3-5 (NIV). SEC, apply the Blankfein test. Ignore Raben and Borchard.

Coal in Asia

"Vast coal reserves in Asia are gaining attention as major energy consumers such as China and India grapple with the reality of oil prices around $100 a barrel and the risks they pose to their economies. ... Coal prices would have to rise nearly fivefold to match current oil prices on a unit-of-energy basis, [Jim Brock of Cambridge Energy Research Associates] said, and the difference between the cost of the commodities is 'actually widening'. ... Asia has a third of the world's proven coal reserves, which stood at 909.06 billion metric tons", WSJ, 4 January 2008.

Either oil will fall, or coal will rise in price.

Friday, January 18, 2008

The Charms of TIPS

"Unlce Sam's inflation-linked bonds, known as Treasury inflation-protected securities or TIPS, are extremely safe, low-yielding investments, which shield holders from the eroding effects of inflation, and are much favored by long-term investors, such as pension funds. ... On Friday, the yield on the 10-year TIPS note stood at 1.56%, while the 10-year fixed-rate, or nominal, Treasury bond was 3.82%. The difference between the two, 2.26 percentage points, equates roughly to the market's expectation for the average annual rise in inflation over the next 10 years", Matthew Cowley (MC) at Barron's, 14 January 2008.

"When they fear inflation, bond buyers typically seek higher yields to protect the value of their investment. ... But sharply lower yields [since 10 January] overall are hardly a symptom of rampant inflation anxiety", Mark Gonloff at the WSJ, 16 January 2008.

MC and I live in alternative worlds. "TIPS ... shield holders from the eroding effects of inflation" he claims. What? Holding TIPS guarantees you will lose to inflation! I used MC's title for this post. The only one "charmed" by TIPS, is Uncle Sam, the issuer. See also my 5 October 2007 post.

Tax, Avoidance or Evasion?

"Senate investigators, stepping up scrutiny of tax-cutting maneuvers, are examining whether Wall Street firms improperly structured transactions that helped hedge funds sidestep dividend taxes, say people familiar with the situation. ... The new Senate probe is significant because it lifts scrutiny of the area to a higher and more public level. ... At stake is more than $1 billion in withholding taxes on U.S. stock dividends that are sidestepped by such trades, accountants say", WSJ, 15 January 2008.

Did the CPAs which "audit" the financial institutions being subpoenaed, Citigroup, Lehman Brothers, Morgan Stanley and UBS find these transactions? If not, why not?

California Real Estate Update-2

"San Diego County housing prices last month tumbled 13.1 percent from those in December 2006, the biggest drop in 20 years of record keeping, DataQuick Information Systems reported Monday. The overall median price for all homes stood at $430,000 in December, $10,000 less than the price in November and $65,000 less than it was in December 2006. The latest price represented a 16.9 percent drop from the county's all-time peak of $517,500 in November 2005 and the lowest since March 2004", San Diego Union-Tribune, 14 January 2008.

San Diego real estate prices peaked 25 months ago. This isn't over.

Thursday, January 17, 2008

Do Rating Agencies Do Anything?

"MBIA, whose triple-A rating is under threat of downgrade by rating agencies, could squeak by with a clean bill of health after privately placing $1 billion of bonds in a debt issue last week that MBIA says was oversubscribed--perhaps because of the 14% yield MBIA agreed to pay. A lack of investor confidence is evident in the 14% yield MBIA agreed to pay on its $1 billion double-A-rated bond issue last week, more than double the average of similarly rated U.S. corporate bonds", Karen Richardson at the WSJ, 15 January 2008.

"There may be another wave of credit-rating downgrades of subprime-mortgage securities. [S&P] yesterday sharply raised its projected losses for subprime mortgages made in 2006 to 19% from 14%, as loan deliquencies are rising", WSJ, 16 January 2008.

What do the rating agencies do? MBIA sells 14% debt rated AA, while MBIA's stock is rated AAA. What madness. AA corporate debt yields less than half of 14%.

Justice Department Extortion Racket?

"The Justice Department said it is considering issuing guidelines to govern the selection of monitors appointed to track companies that enter into deferred-prosecution agreements. ... Several Democratic lawmakers in New Jersey raised questions about the selection of monitors after the top federal prosecutor there selected several former Justice Department colleagues and the company of his former boss, former Attorney General John Ashcroft, to monitor five surgical-implant companies that had been investigated in a federal probe. ... [O]ne of the companies, Zimmer Holdings ... revealed in securities filings that hiring Mr. Ashcroft's company for monitoring would cost as much as $52 million over 18 months", WSJ, 11 January 2008.

Deferred-prosecution agreements look like another racket. Instead of the miscreant facing criminal charges, it pays off "former" Justice Department employees. How neat.

Wednesday, January 16, 2008

Countrywide's Questionable Practices

"More federal bankruptcy judges are calling into question the business practices of Countrywide Financial Corp. as Bank of America Corp. prepares to buy the ailing mortgage lender", WSJ, 14 January 2008.

Yves Smith has a nice 14 January 2008 post on this at Countrywide is a first class mess.

Avoiding a hollow force

"Why else would the chairman of the Joint Chiefs of Staff and the chief of staff of the Air Force call for spending at least 4 percent of our gross domestic product (GDP) on defense, and two members of Congress introduce a joint resolution to that effect? ... The warning signs are there. ... The U.S. Air Force has some 2,500 fewer aircraft today than in the late 1980s, and the U.S. Navy fleet has less than half the number of ships it did then. Many of our weapons and systems are worn out or, worse, obsolete. ... The 'peace dividend' of the 1990s, coupled with the intense wear-and-tear on equipment, is creating a perfect storm. We're paying today's military bills at the expense of tomorrow's readiness. ... But unless Congress keeps the money flowing, our military could degenerate into a hollow force. ... Choices have to be made. ... The 3.9 percent of GDP we now spend on the core defense budget is far lower than during the Cold War and almost a full percentage point below defense spending in 1950", Kim Holmes and Mackenzie Eaglen at, 28 December 2007.

In effect, Uncle Sam has been "running out the mill" for years. That we do not use accrual accounting conceals actual military expenses.

Helicopter Ben as The Wizard of Oz

"I knew something was wrong. I was right, as I soon learned: Total Fed Credit exploded by $18.2 billion last week! Wow! Big Move! ... Of course, there are many other things that you can say about the [Fed], all of them uncomplimentary, and all of them said by me at one time or another. ... $30 billion of new money every two weeks? $780 billion more money and credit jammed into the economy in a year? Wow! We're so freaking doomed! Not surprisingly, 'The Fed announcement indicated that the auction process it began last month has been successful in providing a source of loans for cash-strapped banks.' Hahaha! Free money is popular? Hahaha! who knew? Hahaha! Popular? ... So tragically that they failed to provide 'stable prices', meaning zero inflation, that 97% of the original dollar's buying power of 1913 (when the Fed was created) is gone! ... To be fair, gold is not gaining value as much as the dollar is losing purchasing power, as is obvious if you look at gold when priced in barrels of oil, or bushels of wheat, or any of the tastier pork products or pizzas containing them, which hurts most of all", The Mogambu Guru (TMG) at, 11 January 2008.

Amen TMG, welcome aboard. We should adopt the "pizza standard", see my 7 January 2008 post. In about 1979, I concluded the notion of Fed "success" at anything was absurd, "Why won't the Fed lend me $5 billion at the Fed funds rate? I will put the proceeds in T-bills and return the difference to the Fed in a year". I can use cheap money. Why not? I'm a US citizen? Should I not have the same rights as say, Citigroup an artificial entity? Why can't all Americans borrow from the Fed? I estimate US prices are about 36X their 1913 level, indicating a 97.2% reduction in the dollar's value. TMG is in my ballpark! The official CPI is 21X its 1913 level, implying compound inflation of 4.3% annually for 73 years, my estimate is 5.1%, 0.8% more. However, more detailed analysis shows my excess arose after World War II. For example, the official 2007 CPI is 7.4X 1957's CPI, indicating a 4.1% compound inflation rate for the last 50 years. I estimate 2007 prices are 13X 1957 prices on average, a 5.3% average inflation rate, 1.2% more than the official CPI. Buy long-term bonds? Hahaha!

American's desire for free, or at least cheap money is old news. It's not well known, but Frank Baum's The Wizard of Oz, 1900, was an allegory on 1896's election. Dorothy was the American public; Oz, represented the gold ounce; the wizard was William McKinley; Dorothy's slippers were not made of ruby as in 1939's movie, but of silver; the American public was asked to follow the "yellow brick road", i.e., the gold standard; William Jennings Bryan was the cowardly lion; the Emerald City represented Washington DC and green paper money, and the Wicked Witch of the East stood for New York banking interests. "Political Interpretations of The Wonderful Wizard of Oz" at, explains the political significance of the book in detail.

Tuesday, January 15, 2008

Cheap Oil No More

"Matt Simmons ... lays out the case quite persuasively that global [oil] production peaked in 2005 at 74,298,000 barrels a day and now is a couple million below that, while daily consumption has continued to climb and is rapidly approaching 88 million barrels. To fill the gap, he reports, various sources are being tapped, all of which share one quality--they're not sustainable", Alan Abelson at Barron's, 7 January 2008.

I agree with Simmons, the era of cheap oil is over.

A Man is Presumed

"If you were sick and needed a kidney transplant, you would soon find out that there is a waiting line--and that there are 70,000 people ahead of you, 4,000 of whom will die within a year. But this exchange of value for value is precisely what today's law forbids. ... But if our politicians' goal is to eliminate the irrational policies leading to innocent people's deaths, they should legalize not only 'paired' exchanges but all voluntary trades in organs. ... Those who would object to a free market in organs would deny this father the right to act on his judgment. Poor people, they imply, are incapable of making rational choices and must be protected from themselves. The fact is, however, that human beings (poor or rich) have the capacity to reason, and should be free to exercise it", David Holchberg at, 12 January 2008.

Waiting line? Invoking Milton Friedman's spirit, that means a price is suppressed! Ignore the rhetoric and look at the consequences. Congress prefers 4,000 people a year die to parties willingly exchanging money for goods. You may object that "Congress prefers". It is a legal principle that "A man is presumed to intend that natural and probable consequences of his acts". I read an 1896 Supreme Court case to this effect. No, Congress, I do not let you off my hook. I find you guilty of second degree murder by showing "depraved indifference to human life". We run a drug war that costs about $80 billion a year, instead of legalizing drugs and imposing an excise tax on their sale. See also my 13 November 2007 post.

Monday, January 14, 2008

Inverted Roosa Bonds

"Mexico, Colombia and Turkey [MC&T] sold a combined $3.5 billion of dollar bonds in international markets, locking in borrowing costs on concern that a U.S. economic slump may crimp demand for higher-yielding securities in coming months. ... Mexico sold $1.5 billion of bonds maturing in 2040 to yield 6.055 percent or 1.7 percentage points above U.S. Treasuries of comparable maturity. Colombia sold $650 million of dollar bonds due in 2017 to yield 6 percent and $350 million of dollar bonds due in 2037 to yield 6.6 percent. Turkey issued $1 billion of bonds due 2018 to yield 6.3 percent, according to a filing with the U.S. [SEC]. ... The spread, or extra yield, investors demand to own emerging-market bonds instead of U.S. Treasuries has dropped 16 basis points from a two-year high of 2.66 percentage points reached on Nov. 27, according to J.P. Morgan Chase", Valerie Rota at, 9 January 2008.

What's really happening? MC&T are short-selling dollars! In a perverse historical inversion, MC&T are issuing their own version of Roosa Bonds, see my 8 November 2007 post. There are two ways to look at the narrowing "spread" between US Treasuries and other bonds. Think about it. Thank you W.C. Varones for bringing this to my attention, at, 9 January 2008.

Wal-Mart's Leaky Tax Shelter

"A North Carolina state-court judge ruled against Wal-Mart Stores Inc. in a closely watched tax-shelter case involving an arrangement in which the retailer essentially paid rent to itself and then deducted the amount from its taxes. ... The judge dismissed Wal-Mart's suit, in which it sought a refund of $33.5 million in taxes, interest and penalties that it paid after state tax authorities determined that it had underpaid by that amount. ... 'Plaintiffs do not deny the facts demonstrating the circular journey taken by the "rents" paid by these plaintiffs, but contend that on each leg of the journey plaintiffs were only taking advantage of a lawful deduction afforded them by then-existing tax law,' wrote Judge [Clarence] Horton. 'Such a piecemeal approach exalts form over substance, however'," WSJ, 5 January 2008.

Francine McKenna has a nice post on this at, 5 January 2008. Ernst & Young (E&Y) is apparently another Big Four firm with an incomplete accounting library. I read somewhere that CPAs should respect "substance over the form". Apparently, E&Y must be made aware of this. See also my 24 October 2007 post on Wal-Mart.

Sunday, January 13, 2008

WSJ Sees Some Light

"The business model for the big U.S. banks is broken. Let us count the ways. ... Change the incentives. An outfit that makes a loan should have to bear some of the risk that the borrower won't repay it. The same goes for everyone along the chain as mortgages are packaged into securities. ... No more 'structured investment vehicles' . ... No more banks pretending they aren't backstopping these entities and thus don't have to maintain a captial cushion against that lending. ... New and improved rules for global governments to monitor banks. ... But the fault also lies with government which enshrined the rating firms' role in law and limited competition among them. ... As with accounting firms following the corporate scandals of the 1990s, rating companies must change to recover credibility. ... And find a better way to pay the firms", David Wessel (DW) in the WSJ, 10 January 2008.

I agree in part with DW. I would not create "new and improved rules for global governments to monitor banks". Any such monitoring will be evaded. Period! Let some big banks fail. End the category of banks which are "too big to fail", see my 12 December 2007 post. Also stop telling the public that isn't Fed policy. Helicopter Ben, no one believes you. As for the rating agencies, see my 28 December 2007 post.

Trust Uncle Sam?!

"The people who are a deadweight loss to the economy are getting higher wages, so they can increase their spending and increase the prices of goods and services for everybody! Hahaha! Idiots! ... In fact, Jim Willie of the Hat Trick Letter says: 'Since 2003, the average price adjusted wage in the [US] has fallen by 4% to 5%, depending upon men or women. If one properly adjusts for inflation, the fall is more like 25% in real wage decay!!!' ... '[T]he Supreme Court [SC] in (as I recall) 1934 said that money did NOT have to be gold and silver, as literally required by the constitution, and that [SC] infamously said that the damnable FDR and his federal government could impose a paper, intrinsically worthless, fiat money on the country, despite what the consitution says! And every damned, stinking [SC] since then has refused to overturn that despicable, traitorious action, including the despicable traitorous trash that is currently sitting on the [SC]. ... The beauty of a gold-as-money economic system is that inflation in prices is all but impossible under a gold standard. ... [H]ere comes this John Roberts lowlife in the news, crying out piteously to Congress to please, please, please raise the salaries of federal judges, not mentioning that these other federal judges are also complicit in this unconstitutional fiat currency scam", The Mogambu Guru (TMG) at, 7 January 2008.

I agree with TMG and note the SC decided the "gold clause" cases in 1935. Consider, US prices were about the same in 1913 as in 1792 and are by my estimate, 36X what they were in 1913! The Fed was founded in 1913. Coincidence? I don't think so. See also my 18 November 2007 post. Buy TIPS? Hahaha! Buy long-term bonds? Hahaha! Put money in a Roth IRA? Hahaha!

Saturday, January 12, 2008

Let Them Eat Cake

"At first sight, the resemblances across 130 years may not seem obvious. ... This is the story of how an over-extended empire sought to cope with an external debt crisis by selling off revenue streams to foreign investors. The empire that suffered these setbacks in the 1870s was the Ottoman empire. Today it is the US. Yet we need to recognize that these 'capital injections' represent a transfer of the revenues from the US financial services industry into the hands of foreign governments. This is happening at a time when the gap between eastern and western incomes is narrowing at an unprecedented pace. ... It remains to be seen how quickly today's financial shift will be followed by a comparable geopolitical shift in favor of the new export and energy empires of the east. ... Although many people will be surprised by the figures, Americans have long complained that average incomes have been stagnant in their country", Niall Ferguson at, 1 January 2008.

"Tata Motors' emergence as front-runner to buy Jaguar and land Rover from the ailing Fod brings one question uppermost to a commentator sitting at a wealthy Western desk: Precisely which economic sectors can be relied upon in the future to provide jobs for Westerners at wages higher than are obtainable in the Third World" ... Since the majority of location-dependent jobs in Western countries are low-skill it therefore follows that if governments wish to protect local living standards, they need to discourage low-skill immigration. Except in Japan, they have not been doing so; both in the EU and the United States low-skill immigration, frequently illegal immigration, has gotten completely out of control and is immiserating the working class. ... From the summary above, it is pretty clear that income levels in the West are converging with those in the more competently run emerging markets. The bad news is that in the years ahead this is likely to happen through an absolute decline in Western living standards. ... By 2030, it is possible that the median real income in the United States and Western Europe may be no more than 50-60% of its level today", Martin Hutchinson (MH) at, 7 January 2008.

I think the average American male's earnings have fallen 35% since 1973, putting me at odds with official US statistics.

I have been saying things like MH for about 25 years. MH's position has significant implications for our educational establishment, i.e., we don't need most of it. Bertolt Brecht wrote "The Solution". It says in part, "Would it not be easier In that case for the government To dissolve the people And elect another?" It seems that's what Uncle Sam is doing.

Bankers' Pay

Yves Smith (YS) at, 8 January 2008, has a good post about an article on investment bankers' pay at, 8 January 2008. I agree with YS except his position on Joseph Jett. I mention Jett in my 12 September 2007 post and think he was done a grave injustice.

Friday, January 11, 2008

(In)Justice Department at Work

"A man described as one of the nation's most prolific e-mail spammers was among 11 people accused in an indictment unsealed Thursday of defrauding people by manipulating Chinese stock prices. Alan Ralsky 52, of suburban West Bloomfield Township, made about $3 million through the scheme in summer 2005 alone, U.S. Attorney Stephen Murphy said", Houston Chronicle, 4 January 2008.

"I also want to address the issue of protecting telecom companies from lawsuits. It's critical that Congress provide retroactive liability protection for telecommunications companies, as a bipartisan bill from the Senate Intelligence Committee does. ... The amounts of these claims ... are enough to send any company into bankruptcy. ... Not only is the litigation itself costly, but the companies also may suffer significant business and reputational harm as the result of the allegations against them. ... to which they cannot publicly respond, because they are not allowed to confirm or deny whether. and to what extent, they provided classified assistance to the Government", Attorney General Michael Mukasey at the WSJ, 4 January 2008.

"A couple of years ago, Michael T. Arnold landed at the Los Angeles International Airport after a 20-hour flight from the Phillipines. He had his laptop with him and a customs officer took a look at what was on his hard drive. Clicking on the folders called 'Kodak picktures' and 'Kodak memories,' the officer found child pornography", Adam Liptak at, 7 January 2008.

Only $3 million, quash this indictment under the Blankfein test. Get out your crying towel for the telecoms, "business and reputational harm". Boo hoo.

Don't you feel safe now? A laptop with child pornography on it was seized and its owner may get indicted. Immunity for the telecoms and imprisonment for a nobody.

Putin for president ... of the United States

"Politicians prevailed during the past generation by flattering American complacency. Precisely the opposite is needed. Putin has the requisite tough-mindedness, with only one important deficiency: he is a nasty piece of work. ... But Putin's personal nastiness is beside the point, Washington has willfully misunderstood Russia's most basic requirement (What they didn't say at Kennebunkport, July 3, 2007). No Russian leader could survive without doing more or less what Putin has done. ... The Americans, meanwhile, have met the enemy, and it is them. America has coasted on a quarter-century of prosperity since president Reagan won the Cold War and restarted the American economy. ... So compelling were American capital markets that by the late 1990s, almost all the free savings of the world sought an American home. ... Americans no longer had to face a strategic challenge; after the death of the Soviet Union, so Washington believed, America need only export its self-image. Of all the great illusions of the post-Cold War era, this has turned out to be the most pernicious. ... The Americans are poorer at the end of 2007 than they were a year ago, and at the end of 2008 they will be much poorer still. They will be beholden to the Gulf States, Singapore, China, Russia or whomever can recapitalize a banking system that already may be technically insolvent. They will import less and the Asian economies will suffer. ... The first occasion in which nothing happened was the tech-stock bubble of 1997-2000. Americans engaged in a collective delusion according to which infinite wealth would be created on the Internet through shopping and salacious entertainment. ... The banks and credit rating agencies declared that basket of very risky assets could be turned into a very safe asset, by selling off the part of the risk to speculators. This exercise turned out to fall somewhere between the delusional and the fraudulent. ... By endorsing the Islamists in Turkey as a force for democracy, Washington has earned the contempt of the Islamists, as well as the emnity of the secularists who feel betrayed. ... But the single most stupid and destructive act of American diplomacy in the past seven years has been the Orange Revolution in the Ukraine, for it persuaded Putin never to trust the West under any circumstances, ever again. ... Working from a position of weakness, Russia's president is the closest the modern world comes to the insidious strategic genius of a Cardinal Richelieu. That is the sort of strategic thinking America needs. So my endorsement for the next president of the United States goes to Vladimir Putin", Spengler at, 7 January 2008.

I love Spengler, here he is a little late. I endorsed Putin for US president in 2004, when Bush ran for reelection. Still Spengler, welcome aboard. Spengler even compares Putin to Richelieu. Wow. Like Gomez Addams in the "Addams Family", 1964-66, who said, "Tish! I just love it when you speak French", I love it when Richelieu comes up. Where is the Cardinal now that we need him?

Thursday, January 10, 2008

With Apologies to: Ayn Rand

"The last six months have brought American finance to the edge of the abyss. ... Either structured finance [SF] will recoil from the abyss and find its own-most soul, or else it will simply collapse back into the feudal regime known as corporate finance [CF]. ... The transition from corporate into [SF] is analogous to prior revolutions; it cannot be accomplished without a painful re-adjustment, in this case to the dynamic framework essential to a proper understanding of [SF] as opposed to the static model at the heart of [CF]. ... On the contrary, they are a formal liberation of the creative powers that lie concealed at the root of any commercial endeavor. Far from the problem it is now thought to represent, [SF] is rather a solution to the apparently unsolvable dilemma pitting borrowers against lenders since time immemorial. ... The power unleashed by the dynamics of [SF] is like any other force. Properly handled, which only means understood, it can only lead to prosperity and countless blessings to the common man. Mishandled as it has thus far been, it can wreak havoc on a monumental scale, at the very moment we thought it was safe to go back to the trading floor, How we move forward from here onwards is how others will judge our character. ... We are now standing on the surface of the atomic sphere, forced into a decision point, a choice that must irretrievably determine the future of American finance for its own sake, i.e., for the sake of deal making. So far, we have chosen not to choose, but time is quickly running out on our self-determination. Soon, someone will choose for us, and we won't like it for sure", Sylvain Raynes (SR) at, 31 December 2007.

Wow! Where do I begin? This post was excerpted from "Structured Finance: the Unknown Ideal", which title I assume was borrowed from Ayn Rand's Capitalism: the Unknown Ideal, 1966. "[F]ind its own-most soul ... collapse back into the feudal regime known as [CF]", what does that mean? J. Robert Oppenheimer said on 16 July 1945 upon seeing the Almogordo, NM, Trinity test, "We knew the world would not be the same. A few people laughed, a few people cried, most were just silent. I remembered the line from the Hindu scripture, the Bhagavad-Gita, ... 'Now I am become Death, the destroyer of worlds'." That's demonstrating power. "Properly handled [SF] can only lead to prosperity and countless blesssings to the common man". Wow. SF is now at least as important as the discovery of fire.

As serious revolutionaries, we study the masters, "To take such an attitude is to seek truth from facts. 'Facts' are all things that exist objectively, 'truth' means their internal relations, that is the laws governing them, and 'to seek,' means to study. We should proceed from their actual conditions inside and outside the country, the province, county or district, and derive from them, as our guide to action, laws that are inherent in them and not imaginary, that is, we should find the internal relations of the events occurring around us. And in order to do that we must not rely on subjective imagination, not on momentary enthusiasm, not on lifeless books, but on facts that exist objectively; we must appropriate the material in detail and, guided by the general principles of Marxism-Leninism, draw correct conclusions from it", Mao Zedong, Little Red Book, Chapter 23. "Idealism and metaphysics are the easiest things in the world, because people can talk as much nonsense as they like without basing it on objective reality or having it tested against reality. Materialism and dialectics, on the other hand, need effort. They must be based on and tested by objective reality. Unless one makes the effort one is liable to slip into idealism and metaphysics. ... The way these comrades look at problems is wrong. They do not look at the essential or main aspects but emphasize the non-essential or minor ones. It should be pointed out that these non-essential or minor aspects must not be overlooked and must be dealt with one by one. But they should not be taken as the essential or main aspects, or we will lose our bearings", Chapter 22. My opinion: the SF community should seek the Chairman's wisdom. Alternatively, we will have to send them all to reeducation camps.

As good revolutionairies, we study "painful re-adjustment". "You can't make an omelet without breaking a few eggs", Lenin. "Break eggs? I can help break eggs", Stalin. What are SF's "broken eggs"? Countrywide, Citigroup, the US dollar ... ? "All right, I can see the broken eggs. Where's this omelette of yours"?, Panait Istrati, a Romanian writer, and supposed "Trotskyist" on visiting the USSR in 1928-29.

"Mishandled as it has thus far been, it can wreak havoc on a monumental scale", says SR. Yes, SR, read the Brezhnev-era joke at my 10 November post about the three economists.

Counterfeit Nation-2

"In a 'Nation of Counterfeiters' ... Stephen Mihm takes us back to the screwball days between the American Revolution and the Civil War, when the dollar did not exist. No U.S. dollar? That's right, at least not as we know it, in the form of paper money. America's currency, such as it was, was issued by hundreds of private banks. ... But 19th-century America abounded in phony banks issuing bogus notes. And often even the chartered banks circulated paper way beyond what they could even partly back up, acting as legal counterfeiters. ... 'Bills could function whether counterfeit or not', the author writes. It was literally confidence money. ... Moneymakers had to find realms other than the currency in which to flourish, like Ponzi schemes and, more recently, sliced and diced mortgages", Steven Kotkin's review of A Nation of Counterfeiters, at, 6 January 2008.

The only thing new is now we centralize counterfeiting at the Fed. Instead of issuing phony bank notes, the "counterfeiters" issue overvalued CDOs. Many years ago, John Exter, founder of Ceylon's Central Bank, wrote about the "inverted pyramid of debt". Antal Fekete describes the operation of Exter's pyramid at, 28 September 2007. See also my 24 August post.

Wednesday, January 9, 2008

Real Estate Update

"U.S. house prices 'likely would have to fall considerably' to return to a normal relationship with rents says a study by one former and two current [Fed] economists. The study, which doesn't necessarily reflect the views of Fed policy makers, suggests prices would have to fall 15% over five years, assuming rents rose 4% a year. House prices would have to fall further if the adjustment took place more quickly. ... Of course, the link between house prices and rents can remain out of whack for years", WSJ, 3 January 2008.

"For the first time in four years, the national vacancy rate for office buildings rose in the fourth quarter, as an unusually large amount of new space came on the market and tenants shied away from signing new leases. ... Only last summer, commerical brokers were warning tenants that they needed to sign leases quickly at top rents because space was scarce", WSJ, 7 January 2008.

The rental-sale ratio indicated California real estate was overvalued. Over about the last 500 years, house prices have averaged about 110-120 months rent. At its peak, Southern California's ratio was 210. It was like buying technology stocks at 100X earnings. A likely way to lose money. Posts worth reading on these items are at on 2 and 6 January 2008. In a 29 Ocotber 2007 post, I referred to an article by Jeremy Siegal, a Wharton professor, about the dangers of buying high PE stocks. Similarly, it's dangerous to buy "high PE" real estate.

Oil Experts

"Economists, Wall Street commodities traders and even seasoned energy executives were caught flat-footed by oil's dizzying rise. ... The march to $100 seemed unlikely 10 years ago. A glut of oil began to form in the first few weeks of 1998. ... Burned by price crashes in 1986 and 1998, the industry was wary of investing too heavily in new production. ... 'The insensitivity of oil demand vis-a-vis prices has been startling,' says longtime oil observer John Olson [JO], co-manager of Houston Energy Partners, a hedge fund affiliated with Sanders Morris Harris Group", WSJ, 3 January 2008.

Oil's price increase did not surprise me. The majors erred by not increasing exploration expenses when oil was cheap. JO's surprise at oil's demand inelasticity indicates he forgot the economics he learned at Wharton, MBA 1966.

Tuesday, January 8, 2008

The Blankfein Test

"A former Goldman Sachs Group Inc. [GS] fixed-income research associate was sentenced to more than four years in prison after pleading guilty last year to criminal charges in a series of Wall Street insider-trading schemes that prosecutors said netted more that $6 million in illicit profits. ... Judge Richard J. Hollwell ... also ordered Mr. [Eugene] Plotkin to pay a $10,000 fine and to forfeit the $6.7 million. ... Prosecutors have alleged that Mr. Plotkin and David Pajcin, a former analyst in [GS's] fixed-income division, orchestrated an insider-trading ring that generated at least $6.7 million in illegal proceeds", WSJ, 4 January 2008.

"Waste Management Inc. [WMI] former Chief Financial Officer James E. Koenig will have to pay more than $4 million in disgorgement, prejudment interest and civil penalties, according to the final judgment entered against him in a high-profile corporate-fraud case. ... [WMI] restated its earnings by $1.7 billion in 1997 after new mangement took over. The restatement caused a $6 billion decline in the value of company shares", WSJ, 4 January 2008.

$6.7 million? That's 10% of Lloyd Blankfein's $67.9 million 2007 bonus, see my 21 December 2007 post. Therefore I advocate our (In)Justice Department adopt a new test to determine when it will forgo prosecuting a securities fraud case. My new test is simpler than a balancing test judges use when deciding to admit evidence, i.e., does the "prejudice exceed the probative value"? It's the Blankfein test: does the fraud involve at least $6.8 million? If not, decline prosecution. Hey Mike Garcia (MG), how about it? Dismiss the charges against the "Goldman Sachs two". Free the Goldman Sachs two! Hey MG, write up the Blankfein test and try to have it inserted in the US Attorneys' Manual. Why not?

$4 million in disgorgement for engaging in a scheme which overstated WMI's earnings by $1.7 billion? I invoke the spirit of Jesse Jackson again, see my 31 October 2007 post.

National Intelligence?

"A couple of weeks ago, I wrote a column for WorldNetDaily questioning both the content and the timing of the National Intelligence Estimate that concluded, 'with high confidence' that Iran had suspended its nuclear program in 2003. But there is something about the NIE report that doesn't add up. It all but destroyed four years of foreign policy effort and handed Tehran what amounted to a blank check for its nuclear program. As I wrote then: 'There is but one alternative explanation. Either some kind of a U.S. deal with Iran has already been struck, or one is so close that maintaining the coalition is no longer deemed necessary.' ... So why the sudden change is our assessment of Iran's Iraqi involvment? How could we reliably verify such changes in only 30 days? It appears to me that this new 'rosy' assessment is based on 'faith in what a backroom deal will produce in the future.' ... Two weeks after the NIE report, Petreus' official spokesman was using words like 'excellence' to describe Tehran's cooperation with the [US] war effort. ... This new NIE report virtually betrays our only reliable ally in the war on terror in the Middle East-Israel. ... For the [US] the question is whether we learn nothing from repeated, inescapable lessons that placing democratization on top of our foreign policy priorities is high-order folly. ... Israeli intelligence is completely at odds with the NIE's conclusions, saying it not only believes that Iran has not abandoned its quest for nuclear weapons, but that it believes Iran will 'cross the nuclear threshold' within six months and will have a working nuclear weapon by the end of 2009. ... It is worth remembering that Washington had no inkling that Syria was seeking nuclear weapons--until the Israeli Air Force hit a Syrian nuclear bomb assembly plant last September. Washington was also totally surprised by Pakistan's entrance into the World Nuclear Club. ... If we made a deal with Tehran that temporarily protects our forces in Iraq by giving them a free hand with developing nuclear weapons, have we really gained anything in the long run?" Hal Lindsey at, 4 January 2008.

We must accept the NIE not as an objective, dispassionate fact analysis, but a propaganda piece to help the Bush administration proclaim the Iraq War a success, to aid Republican 2008 election prospects. No one should take any government report at face value. Does anyone believe "our" official inflation statistics, for example?

Mish on Real Estate

Mike Shedlock has a fine post on the current state of the world's real estate markets, at, 6 January 2008. Thumbs up Mish

Monday, January 7, 2008

Oil and the Dollar

"But perhaps the biggest factor has been largely overlooked: the decline in the value of the dollar. Since 2001 the dollar price of oil and gold have run in almost perfect tandem. ... The gold price has risen 239% since 2001, while oil has risen 267% This means that if the dollar had remained 'as good as gold' since 2001, oil today would be selling at about $30 a barrel, not $99. Gold has traditionally been a rough proxy for the price level, so the decline of the dollar against gold and oil suggests a U.S. monetary that is supplying too many dollars", WSJ, 4 January 2008.

Amen. "Oil and the Dollar" was the WSJ's title for its editorial. See also my 24 October and 8 November 2007 posts. We can look at other "staples" price changes since 1957. I present some 1957 and current prices, and their percentage of 1957 prices so we can see what's happened:

Superman comic book, $0.10; $2.29; percentage of 1957 price: 2290.
Hostess cup cake, $0.10; $1.39; 1390.
Pizza slice, $0.15; $2.75; 1833.
Gold, $35, $863; 2466.
Gasoline regular gallon, $0.24, $2.97; 1238.
Candy bar, $0.05; $0.75; 1500.
Newspaper, $0.05; $0.75; 1500.
House, $14,000; $225,000; 1607.
Small paperback book, $0.35; $6.99; 1997.
Silver ounce, $0.90; $15.30; 1700.
Copper pound, $0.29; $3.12; 1076.
NYC subway ride, $0.15; $2.00; 1333.
Crude oil, $3.06; $99.42; 3249.
Postage stamp-letter, $0.03; $0.41; 1367.
Wheat, $2.01; $9.31; 463.
Corn, $1.11; $4.48; 404.
Hot dog, $0.20; $3.00; 1500.

While oil may seem high to us and is 32.49 times its 1957 dollar price, it is only 2.17 times (3249 / 1500) its 1957 hot dog price, or 2.38 (3249 / 1367) times its 1957 postage stamp price, etc.. Suddenly oil's "price" doesn't look that high. We only think oil is "high" because we have been conditioned to think in dollars as opposed to say: pizza slices or hostess twinkies! See also my 19 November post.