Posted By thestatedtruth.com on March 2, 2010

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Posted By thestatedtruth.com on March 2, 2010

On this day (-1) in 1917, markets were roiled by news about Mexico.  The news also helped to decide World War I (or so some think).  Now don’t get upset you little historian, you.  We know that you know that America had not yet even entered the war (or even officially picked a side).  But that’s what today was all about.

As you recall, World War I was rather a mess even for a war.  The European powers had spent nearly four years pummeling each other and bankrupting themselves.  The net result was millions of soldiers and civilians dead but no winners….nobody even had a clear lead.

So, bloodied, bruised and frustrated, both sides looked toward the U.S. – rich in resources, factories and ambulatory young men (draft bait).  They figured whoever could get American productivity (and maybe manpower) on their side could win.  Thus, the games began.

The Germans set up plans for dummy U.S. corporations to buy up various strategic materials.  They even thought about setting up a major defense plant…..under an America style name…..“General” this or that…..then taking huge orders (and money) from the French and British and then either not delivering….or….shipping sabotaged armaments.

The Brits staged mass propaganda efforts, blaming every accident or problem in America on German espionage.  The Germans tried to foil the Brits by performing actual espionage.  It worked well.  Even after the sinking of the Lusitania and the explosion at Black Tom, the U.S. remained neutral.  (At the time, German was the most frequently spoken second language of much of America, very much like Spanish today.)

So the Brits shifted to high gear.  They leaked to the Germans (anonymously) that America was leaning British.  The Germans bought.  The German Foreign Secretary, Arthur Zimmerman sent a cable to their Washington Embassy suggesting that if America budged, the Germans should offer Mexico lots of money and….post victory….offer the return of New Mexico, Arizona, Texas, California, etc.  The Washington office sent a confidential telegram to their Mexican Consulate, suggesting the offer.

The Brits decoded the message but obviously couldn’t give it to the U.S. without revealing that they had broken the German code.  So….the Brits contrived a way to claim they found the note.  President Wilson was outraged and on this day he released the secret German message.  But the public thought it was just a British setup.  That is…until two days later….when Western Union broke 60 years of tradition and released the telegram to Mexico.  The public was outraged…America joined the war….and the rest is history.

Art Cashin…..CASHIN’S COMMENTS

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Posted By thestatedtruth.com on March 2, 2010

March 1, 2010 | 1703 GMT

By George Friedman

The United States apparently has reached the point where it must either accept that Iran will develop nuclear weapons at some point if it wishes, or take military action to prevent this. There is a third strategy, however: Washington can seek to redefine the Iranian question.

As we have no idea what leaders on either side are thinking, exploring this represents an exercise in geopolitical theory. Let’s begin with the two apparent stark choices.

Diplomacy vs. the Military Option

The diplomatic approach consists of creating a broad coalition prepared to impose what have been called crippling sanctions on Iran. Effective sanctions must be so painful that they compel the target to change its behavior. In Tehran’s case, this could only consist of blocking Iran’s imports of gasoline. Iran imports 35 percent of the gasoline it consumes. It is not clear that a gasoline embargo would be crippling, but it is the only embargo that might work. All other forms of sanctions against Iran would be mere gestures designed to give the impression that something is being done.

The Chinese will not participate in any gasoline embargo. Beijing gets 11 percent of its oil from Iran, and it has made it clear it will continue to deliver gasoline to Iran. Moscow’s position is that Russia might consider sanctions down the road, but it hasn’t specified when, and it hasn’t specified what. The Russians are more than content seeing the U.S. bogged down in the Middle East and so are not inclined to solve American problems in the region. With the Chinese and Russians unlikely to embargo gasoline, these sanctions won’t create significant pain for Iran. Since all other sanctions are gestures, the diplomatic approach is therefore unlikely to work.

The military option has its own risks. First, its success depends on the quality of intelligence on Iran’s nuclear facilities and on the degree of hardening of those targets. Second, it requires successful air attacks. Third, it requires battle damage assessments that tell the attacker whether the strike succeeded. Fourth, it requires follow-on raids to destroy facilities that remain functional. And fifth, attacks must do more than simply set back Iran’s program a few months or even years: If the risk of a nuclear Iran is great enough to justify the risks of war, the outcome must be decisive.

Each point in this process is a potential failure point. Given the multiplicity of these points — which includes others not mentioned — failure may not be an option, but it is certainly possible.

But even if the attacks succeed, the question of what would happen the day after the attacks remains. Iran has its own counters. It has a superbly effective terrorist organization, Hezbollah, at its disposal. It has sufficient influence in Iraq to destabilize that country and force the United States to keep forces in Iraq badly needed elsewhere. And it has the ability to use mines and missiles to attempt to close the Strait of Hormuz and the Persian Gulf shipping lanes for some period — driving global oil prices through the roof while the global economy is struggling to stabilize itself. Iran’s position on its nuclear program is rooted in the awareness that while it might not have assured options in the event of a military strike, it has counters that create complex and unacceptable risks. Iran therefore does not believe the United States will strike or permit Israel to strike, as the consequences would be unacceptable.

To recap, the United States either can accept a nuclear Iran or risk an attack that might fail outright, impose only a minor delay on Iran’s nuclear program or trigger extremely painful responses even if it succeeds. When neither choice is acceptable, it is necessary to find a third choice.

Redefining the Iranian Problem

As long as the problem of Iran is defined in terms of its nuclear program, the United States is in an impossible place. Therefore, the Iranian problem must be redefined. One attempt at redefinition involves hope for an uprising against the current regime. We will not repeat our views on this in depth, but in short, we do not regard these demonstrations to be a serious threat to the regime. Tehran has handily crushed them, and even if they did succeed, we do not believe they would produce a regime any more accommodating toward the United States. The idea of waiting for a revolution is more useful as a justification for inaction — and accepting a nuclear Iran — than it is as a strategic alternative.

At this moment, Iran is the most powerful regional military force in the Persian Gulf. Unless the United States permanently stations substantial military forces in the region, there is no military force able to block Iran. Turkey is more powerful than Iran, but it is far from the Persian Gulf and focused on other matters at the moment, and it doesn’t want to take on Iran militarily — at least not for a very long time. At the very least, this means the United States cannot withdraw from Iraq. Baghdad is too weak to block Iran from the Arabian Peninsula, and the Iraqi government has elements friendly toward Iran.

Historically, regional stability depended on the Iraqi-Iranian balance of power. When it tottered in 1990, the result was the Iraqi invasion of Kuwait. The United States did not push into Iraq in 1991 because it did not want to upset the regional balance of power by creating a vacuum in Iraq. Rather, U.S. strategy was to re-establish the Iranian-Iraqi balance of power to the greatest extent possible, as the alternative was basing large numbers of U.S. troops in the region.

The decision to invade Iraq in 2003 assumed that once the Baathist regime was destroyed the United States would rapidly create a strong Iraqi government that would balance Iran. The core mistake in this thinking lay in failing to recognize that the new Iraqi government would be filled with Shiites, many of whom regarded Iran as a friendly power. Rather than balancing Iran, Iraq could well become an Iranian satellite. The Iranians strongly encouraged the American invasion precisely because they wanted to create a situation where Iraq moved toward Iran’s orbit. When this in fact began happening, the Americans had no choice but an extended occupation of Iraq, a trap both the Bush and Obama administrations have sought to escape.

It is difficult to define Iran’s influence in Iraq at this point. But at a minimum, while Iran may not be able to impose a pro-Iranian state on Iraq, it has sufficient influence to block the creation of any strong Iraqi government either through direct influence in the government or by creating destabilizing violence in Iraq. In other words, Iran can prevent Iraq from emerging as a counterweight to Iran, and Iran has every reason to do this. Indeed, it is doing just this.

The Fundamental U.S.-Iranian Issue

Iraq, not nuclear weapons, is the fundamental issue between Iran and the United States. Iran wants to see a U.S. withdrawal from Iraq so Iran can assume its place as the dominant military power in the Persian Gulf. The United States wants to withdraw from Iraq because it faces challenges in Afghanistan — where it will also need Iranian cooperation — and elsewhere. Committing forces to Iraq for an extended period of time while fighting in Afghanistan leaves the United States exposed globally. Events involving China or Russia — such as the 2008 war in Georgia — would see the United States without a counter. The alternative would be a withdrawal from Afghanistan or a massive increase in U.S. armed forces. The former is not going to happen any time soon, and the latter is an economic impossibility.

Therefore, the United States must find a way to counterbalance Iran without an open-ended deployment in Iraq and without expecting the re-emergence of Iraqi power, because Iran is not going to allow the latter to happen. The nuclear issue is simply an element of this broader geopolitical problem, as it adds another element to the Iranian tool kit. It is not a stand-alone issue.

The United States has an interesting strategy in redefining problems that involves creating extraordinarily alliances with mortal ideological and geopolitical enemies to achieve strategic U.S. goals. First consider Franklin Roosevelt’s alliance with Stalinist Russia to block Nazi Germany. He pursued this alliance despite massive political outrage not only from isolationists but also from institutions like the Roman Catholic Church that regarded the Soviets as the epitome of evil.

Now consider Richard Nixon’s decision to align with China at a time when the Chinese were supplying weapons to North Vietnam that were killing American troops. Moreover, Mao — who had said he did not fear nuclear war as China could absorb a few hundred million deaths — was considered, with reason, quite mad. Nevertheless, Nixon, as anti-Communist and anti-Chinese a figure as existed in American politics, understood that an alliance (and despite the lack of a formal treaty, alliance it was) with China was essential to counterbalance the Soviet Union at a time when American power was still being sapped in Vietnam.

Roosevelt and Nixon both faced impossible strategic situations unless they were prepared to redefine the strategic equation dramatically and accept the need for alliance with countries that had previously been regarded as strategic and moral threats. American history is filled with opportunistic alliances designed to solve impossible strategic dilemmas. The Stalin and Mao cases represent stunning alliances with prior enemies designed to block a third power seen as more dangerous.

It is said that Ahmadinejad is crazy. It was also said that Mao and Stalin were crazy, in both cases with much justification. Ahmadinejad has said many strange things and issued numerous threats. But when Roosevelt ignored what Stalin said and Nixon ignored what Mao said, they each discovered that Stalin’s and Mao’s actions were far more rational and predictable than their rhetoric. Similarly, what the Iranians say and what they do are quite different.

U.S. vs. Iranian Interests

Consider the American interest. First, it must maintain the flow of oil through the Strait of Hormuz. The United States cannot tolerate interruptions, and that limits the risks it can take. Second, it must try to keep any one power from controlling all of the oil in the Persian Gulf, as that would give such a country too much long-term power within the global system. Third, while the United States is involved in a war with elements of the Sunni Muslim world, it must reduce the forces devoted to that war. Fourth, it must deal with the Iranian problem directly. Europe will go as far as sanctions but no further, while the Russians and Chinese won’t even go that far yet. Fifth, it must prevent an Israeli strike on Iran for the same reasons it must avoid a strike itself, as the day after any Israeli strike will be left to the United States to manage.

Now consider the Iranian interest. First, it must guarantee regime survival. It sees the United States as dangerous and unpredictable. In less than 10 years, it has found itself with American troops on both its eastern and western borders. Second, it must guarantee that Iraq will never again be a threat to Iran. Third, it must increase its authority within the Muslim world against Sunni Muslims, whom it regards as rivals and sometimes as threats.

Now consider the overlaps. The United States is in a war against some (not all) Sunnis. These are Iran’s enemies, too. Iran does not want U.S. troops along its eastern and western borders. In point of fact, the United States does not want this either. The United States does not want any interruption of oil flow through Hormuz. Iran much prefers profiting from those flows to interrupting them. Finally, the Iranians understand that it is the United States alone that is Iran’s existential threat. If Iran can solve the American problem its regime survival is assured. The United States understands, or should, that resurrecting the Iraqi counterweight to Iran is not an option: It is either U.S. forces in Iraq or accepting Iran’s unconstrained role.

Therefore, as an exercise in geopolitical theory, consider the following. Washington’s current options are unacceptable. By redefining the issue in terms of dealing with the consequences of the 2003 invasion of Iraq, there are three areas of mutual interest. First, both powers have serious quarrels with Sunni Islam. Second, both powers want to see a reduction in U.S. forces in the region. Third, both countries have an interest in assuring the flow of oil, one to use the oil, the other to profit from it to increase its regional power.

The strategic problem is, of course, Iranian power in the Persian Gulf. The Chinese model is worth considering here. China issued bellicose rhetoric before and after Nixon’s and Kissinger’s visits. But whatever it did internally, it was not a major risk-taker in its foreign policy. China’s relationship with the United States was of critical importance to China. Beijing fully understood the value of this relationship, and while it might continue to rail about imperialism, it was exceedingly careful not to undermine this core interest.

The major risk of the third strategy is that Iran will overstep its bounds and seek to occupy the oil-producing countries of the Persian Gulf. Certainly, this would be tempting, but it would bring a rapid American intervention. The United States would not block indirect Iranian influence, however, from financial participation in regional projects to more significant roles for the Shia in Arabian states. Washington’s limits for Iranian power are readily defined and enforced when exceeded.

The great losers in the third strategy, of course, would be the Sunnis in the Arabian Peninsula. But Iraq aside, they are incapable of defending themselves, and the United States has no long-term interest in their economic and political relations. So long as the oil flows, and no single power directly controls the entire region, the United States does not have a stake in this issue.

Israel would also be enraged. It sees ongoing American-Iranian hostility as a given. And it wants the United States to eliminate the Iranian nuclear threat. But eliminating this threat is not an option given the risks, so the choice is a nuclear Iran outside some structured relationship with the United States or within it. The choice that Israel might want, a U.S.-Iranian conflict, is unlikely. Israel can no more drive American strategy than can Saudi Arabia.

From the American standpoint, an understanding with Iran would have the advantage of solving an increasingly knotty problem. In the long run, it would also have the advantage of being a self-containing relationship. Turkey is much more powerful than Iran and is emerging from its century-long shell. Its relations with the United States are delicate. The United States would infuriate the Turks by doing this deal, forcing them to become more active faster. They would thus emerge in Iraq as a counterbalance to Iran. But Turkey’s anger at the United States would serve U.S. interests. The Iranian position in Iraq would be temporary, and the United States would not have to break its word as Turkey eventually would eliminate Iranian influence in Iraq.

Ultimately, the greatest shock of such a maneuver on both sides would be political. The U.S.-Soviet agreement shocked Americans deeply, the Soviets less so because Stalin’s pact with Hitler had already stunned them. The Nixon-Mao entente shocked all sides. It was utterly unthinkable at the time, but once people on both sides thought about it, it was manageable.

Such a maneuver would be particularly difficult for U.S. President Barack Obama, as it would be widely interpreted as another example of weakness rather than as a ruthless and cunning move. A military strike would enhance his political standing, while an apparently cynical deal would undermine it. Ahmadinejad could sell such a deal domestically much more easily. In any event, the choices now are a nuclear Iran, extended airstrikes with all their attendant consequences, or something else. This is what something else might look like and how it would fit in with American strategic tradition.

Reprinting or republication of this report on websites is authorized by prominently displaying the following sentence at the beginning or end of the report, including the hyperlink to STRATFOR:

“This report is republished with permission of STRATFOR“

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Posted By thestatedtruth.com on March 1, 2010

One of the most-anticipated reactions of the Vancouver Games appears to have taken off.

Russian President Dmitry Medvedev has demanded the country’s sports officials resign following Russia’s disappointing performance in the Winter Olympics. In a televised statement, Medvedev told officials to resign before the government would force them out.

“Those who bear the responsibility for Olympics preparations should carry that responsibility. It’s totally clear,” Medvedev said. “I think that the individuals responsible, or several of them, who answer for these preparations, should take the courageous decision to hand in their notice. If we don’t see such decisiveness, we will help them.”

Medvedev’s reaction was somewhat expected considering Russia’s reputation as a Winter Olympics power. Russian officials were hoping to win 30 medals at the Vancouver Games. Instead, the country took home 15, including three gold medals, to finish sixth in the medal count — its lowest ranking in post-Soviet history.

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Posted By thestatedtruth.com on March 1, 2010

March 1 (Bloomberg) — Senate Democrats unveiled a $150 billion plan to reinstate unemployment benefits that expired yesterday as part of lawmakers’ second major effort this year to boost the economy.

The bill would spend $81 billion to extend unemployment benefits, including so-called Cobra subsidies to help the jobless buy health insurance, for the rest of this year. It also would send $25 billion to states to help prevent layoffs.

Extended jobless benefits for thousands of Americans expired yesterday after Senator Jim Bunning, a Kentucky Republican, blocked a one-month continuation designed to keep unemployment checks from being interrupted while lawmakers debate the legislation announced today. He contended Congress should pay for the $10 billion cost instead of adding it to the budget deficit.

Today’s measure includes provisions unrelated to job creation, including a $7 billion plan to prevent for seven months a 21 percent scheduled cut in Medicare reimbursements to doctors. The bill also would extend a group of tax cuts that expired last year.

Last month, the Senate approved a $15 billion jobs bill that would offer companies a payroll tax break for hiring workers who have been out of work for at least 60 days.

House Majority Leader Steny Hoyer, a Maryland Democrat, said today lawmakers in his chamber hope to pass the Senate plan this week. House Democrats earlier had complained that the measure included too many tax cuts, gave too much highway spending to too few states and violated their anti-deficit pay- as-you-go rules.

http://www.bloomberg.com/apps/news?pid=20601110&sid=aSVhknrpOvAs

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Posted By thestatedtruth.com on March 1, 2010

A Crash Course in Historic Market Crashes  Â
Ron Coby  MAR 01, 2010 9:10 AM Â
	            Today’s market peak looks eerily similar to the ones in 1929, 1930, 1987, and 2007.         Â	Â

Talking head after talking head appear on the TV daily telling everyone who will listen “the worst is behind” and excellent returns are still ahead for investors. These well-intentioned gurus and famous politicians are like shepherds leading a flock of gullible investors right to a financial slaughter house. From both a fundamental and technical perspective, it would appear that multiple market crashes are setting up all across the globe. I don’t hear anyone on TV mentioning that even as a remote possibility. Yet, an ominous chart pattern is now slowly developing in US equity markets similar to ones that preceded some of the most famous of market crashes. Let’s take a quick crash course on past market crashes so you can clearly see today’s market peak looks eerily similar to the ones in 1929, 1930, 1987, and 2007.

First, last week was a wild ride on Wall Street as volatility surged and then it retreated to where all the US markets essentially closed flat on Friday. Often times increased volatility like this is an indication of a trend change, or in this case, the sign of a top. Friday’s quiet market session felt like the calm before a coming market storm. On a recent Minyanville video, I talked about the powerful forces of deflation that are being strongly combated by the unlimited power of Ben Bernanke to print money and manage the prices of multiple (probably all) asset classes. Two weeks ago I did a video discussing how the Greek fiscal crisis looks to be building into a full-fledged European debt crisis, with many foreign markets building giant tops and possible “black cross” crashes. The biggest concern today is the rising prospect for a global fiscal debt crisis; a growing panic feeding into a crisis that could make its way to US shores the way the Asian crisis did in 1997 or the Russian crisis in 1998. As we all know, the US government is aggressively piling up enormous debts and deficits leading America down a very dangerous path of fiscal financial ruin. This could be coming sooner than anyone thinks, especially if the European contagion intensifies and spreads.

Here’s why we could soon set up for a market crash here in America when looking at the US economic fundamentals. The plunging consumer confidence numbers last week must be a concern even for the pompom-waiving bulls on TV because consumer spending accounts for 70% of the US economy. There’s the real possibility of a double-dip recession as Main Street continues struggling to stay solvent. Also, the Current Conditions Sub-Index fell to a 27-year low, which is further reason the markets could soon price in the risk of a further-weakening economy. Right now the market is pricing in the prospects of a coming Fed-induced liquidity-driven boom. Finally, the real estate market is still in very bad shape. Mortgage applications, new-homes sales, and existing-home sales are all weakening again. This is happening in spite of the fact that mortgage payments are at incredibly low levels. These are some serious signs that deflation is spreading in the real economy even as the Federal Reserve continues to spread monetary inflation into the paper economy (the stock market).

From the perspective of a market technician, there’s the very real possibility of a coming market crash. The Dow Jones Industrial Average now hovers just below the 55-day moving average so don’t be surprised to see the market move lower directly from here. It’s more likely the market will instead continue to oscillate above and below this critical moving average and then move into “compression” on our Lamson Grail Timing indicator. Once the market is fully compressed, look out below because a giant market plunge will soon be coming.

Stock trading is about probabilities and risk versus reward. At this moment in time, the risk is quite high for the market to get smashed while the potential reward on the long side is minimal. This technical setup now forming is eerily similar to many other periods of time that preceded a major drop in the stock market. Below are charts detailing the technical setup going into some of the biggest crashes in market history. These charts aren’t exact in terms of time between pivots, but simply very similar to the pattern forming today. The chart pattern starts with a sharp break under the 55 DMA after having a long and powerful uptrend. Next, a reflex rally back to or slightly above the 55 DMA takes place. Finally after moving into a fully compressed state, a breakdown to substantial new lows follows. However, if the market rallies from its present level, above the number-four pivot, then you’ll know that today will not be like these other crash market time frames. It’s above this pivot where buy stops on short positions must be placed.

Let’s take a look back to history and compare events to today. In 1929, the bulls roaring ’20s party came to a very abrupt ending. It seems that 2008 repeated that famous 1929 crash but in very slow motion. Today’s market top is reminiscent to the one in 1930. This is because the 1930 crash happened after a powerful 48% market rally that followed the famous 1929 crash. 2009 had a very similar multi-month rally and it, too, retraced about half of what it lost in the previous crash. Today, like 1930, the President of the United States says the worst is behind. Wall Street then, like now, rejoiced in confidence that “happy days are here again.” Today, almost every talking head on TV is singing the same bullish song. In early 1930, after the powerful stock market rally, the worst was straight ahead as the Great Depression spread in 1931 and 1932.

In summary, even as the bulls are paraded all over the TV, shades of 1929, 1930, 1987, and 2007 clearly exist. The following chart patterns all point to a market crash dead ahead, yet all we see are bulls cheering on the new bull market. However, here on the cutting edge Minyanville website, clear comparisons will be shown to why today’s market is on a crash course to repeat history.

Here are the charts:

1929

Click to enlarge

1930

Click to enlarge

1987

Click to enlarge

  

Click to enlarge

 No positions in stocks mentioned.

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Posted By thestatedtruth.com on February 27, 2010

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Posted By thestatedtruth.com on February 27, 2010

www.ingerletter.com

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Posted By thestatedtruth.com on February 27, 2010

Bad seats, hey buddy….or Freddie as the case may be!

 

www.ingerletter.com

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Posted By thestatedtruth.com on February 27, 2010

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Posted By thestatedtruth.com on February 27, 2010

Bernanke is now joining Rosenberg, Ferguson and Faber, Edwards, Grice and many others in warning that the debt crisis rearing its head in Greece may spread to America, causing  U.S. interest rates to climb.

As the Washington Times wrote yesterday:

With uncharacteristic bluntness, Federal Reserve Chairman Ben S. Bernanke warned Congress on Wednesday that the United States could soon face a debt crisis like the one in Greece, and declared that the central bank will not help legislators by printing money to pay for the ballooning federal debt.

Recent events in Europe, where Greece and other nations with large, unsustainable deficits like the United States are having increasing trouble selling their debt to investors, show that the U.S. is vulnerable to a sudden reversal of fortunes that would force taxpayers to pay higher interest rates on the debt, Mr. Bernanke said.

 

“It’s not something that is 10 years away. It affects the markets currently,” he told the House Financial Services Committee. “It is possible that bond markets will become worried about the sustainability [of yearly deficits over $1 trillion], and we may find ourselves facing higher interest rates even today.”

Yes, massive debt overhangs do matter.

www.zerohedge.com

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Posted By thestatedtruth.com on February 27, 2010

“By increasing the volume of their government securities and loans and by lowering Member Bank legal reserve requirements, the Reserve Banks can encourage an increase in the supply of money and bank deposits. They can encourage but, without taking drastic action, they cannot compel. For in the middle of a deep depression just when we want Reserve policy to be most effective, the Member Banks are likely to be timid about buying new investments or making loans. If the Reserve authorities buy government bonds in the open market and thereby swell bank reserves, the banks will not put these funds to work but will simply hold reserves. Result: no 5 for 1, ‘no nothing,’ simply a substitution on the bank’s balance sheet of idle cash for old government bonds.”

–(Samuelson 1948, pp. 353–354)

And that is what has happened. And all those mortgage bonds and other assets the Federal Reserve has purchased? They have been put right back into the Fed by the banks. There has been no money multiplier. In fact, the money multiplier, as measured by the ratio of MO to M1 growth is at its lowest level ever. Look at the graph below:

What this graph shows, astonishingly, is that a dollar added to the monetary base now has a NEGATIVE multiplier effect. Without showing yet another chart, bank lending has fallen percentagewise the most in 67 years. The actual amount of bank loans is falling each and every quarter, with no signs of a bottom. Consumers are reducing their debt and leverage. Bank loans are being written off at staggering rates. Over 700 banks (I think that is the figure I saw) are officially on watch by the FDIC, with more banks being closed each week.

There is at least $300-400 billion in losses on commercial real estate waiting to be written down. Housing foreclosures are rising and hundreds of billions have yet to be written off. As more families fall into unemployment or underemployment, there will be more writedowns. Is it any wonder that banks are having to shore up their balance sheets and make fewer loans?

With capacity utilization just off all-time lows, why should we expect businesses to borrow to increase capacity? Inventory levels are much lower than two years ago. Businesses no longer need to finance as much inventory. They simply need less.

Dennis Gartman writes:

“Effectively the Fed had become a cash machine rather than a monetary expansion machine. At the end of last year, the multiplier had actually fallen to less than 1.0 and the trend remains downward. If anyone had told us five years ago that the money multiplier would be down to 1.0 we would have laughed. The laugh, however, would have been upon us, for it is there and it is still falling. Hard it shall be to sponsor strong economic growth when no one really wants to take a loan or when few banks want to make a loan. The “game” of banking has been turned upon its head, and the strength of the economy suffers while inflationary pressures (at least for now) remain virtually non-existent.”

John Mauldin
John@FrontLineThoughts.com

 Copyright 2010 John Mauldin. All Rights Reserved http://www.frontlinethoughts.com/learnmore

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Posted By thestatedtruth.com on February 26, 2010

February 26, 2010 

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Posted By thestatedtruth.com on February 25, 2010

The divergence has accelerated as the recession has deepened!

Unfortunately, the employment trends depicted in the nearby chart are not the trends that typically produce national prosperity. If government employment were to continue rising while private sector employment fell, the economy would become less productive…at least that would be our guess. (Picture the post office operating every McDonald’s in the land).

Thus, the recession may be ending for Wall Street economists and government workers, but not for anyone else. Adult male workers, to name just one conspicuously under-employed group of Americans, are hurting big-time…

“Male employment (aged 25 to 54 years old) plunged 114,000 in January and is back to levels last seen in June 1996,” observes David A. Rosenberg, an economist who toils neither for Wall Street nor Washington. “Almost 10% of what was once considered the ‘breadwinner’ part of the workforce has been extinguished during this recession. How could anyone realistically be excited about recovery prospects knowing this?”

Furthermore, Rosenberg notes, “the average duration of unemployment rose to a record 30.2 weeks from 29.1 weeks in December; and for the first time ever, we have more than 6.3 million Americans (up from 6.1 million in December) who have been looking for a job with no luck for at least six months. That is an unprecedented 41.2% share of the pool of unemployment… The level of unemployment today, at 129.5 million, is the exact same level it was in 1999.”

Not surprisingly, therefore, your average American laborer is noticeably less optimistic than your average Wall Street economist. The Conference Board’s Consumer Confidence Index plummeted from 56.5 in January to 46 this month. Even more telling, the “present conditions” component of the index dropped more than 20% from January, to its lowest reading since 1983. At the same time, the “business is good” component of the index dropped to its lowest reading in the 43-year history of the Consumer Confidence Index.

If these are the signs of recovery, it is a very strange recovery indeed.

Eric Fry…..www.dailyreckoning.com

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Posted By thestatedtruth.com on February 25, 2010

Tracy Residents Now Have To Pay For 911 Calls

Posted     February 25,2010
Tracy, California residents will now have to pay every time they call 9-1-1 for a medical emergency.

But there are a couple of options. Residents can pay a $48 voluntary fee for the year which allows them to call 9-1-1 as many times as necessary.

Or, there’s the option of not signing up for the annual fee. Instead, they will be charged $300 if they make a call for help.

“A $300 fee and you don’t even want to be thinking about that when somebody is in need of assistance,” said Tracy resident Greg Bidlack.

Residents will soon receive the form in the mail where they’ll be able to make their selection. No date has been set for when the charges will go into effect.

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Posted By thestatedtruth.com on February 24, 2010

From the floor of the New York Stock Exchange, Art Cashin talks about early week comments from Ex Fed Chairman Alan Greenspan and SF Fed President Janet Yellen……….Not good, to say the least!  

  WASHINGTON — Former Federal Reserve Chairman Alan Greenspan said on Tuesday the U.S. economic recovery was “extremely unbalanced,” driven largely by high earners benefiting from recovering stock markets and large corporations.

Small businesses and the jobless are still suffering from the aftermath of a credit crunch that was “by far the greatest financial crisis, globally, ever” – including the 1930s Great Depression, said Mr. Greenspan in an address to a Credit Union National Association conference.

“It’s really an extraordinarily unbalanced system because we’re dealing with small businesses who are doing badly, small banks in trouble, and of course there is an extraordinarily large proportion of the unemployed in this country who have been out of work for more than six months and many more than a year,” said Mr. Greenspan, who headed the Fed from 1987 to 2006.

With both housing starts and auto sales “dead in the water,” he said he thought it would be difficult to make the case that the economy is poised for a strong rebound.

Traders were struck by Mr. G’s assertion that the financial crisis was worse than that of the Great Depression.  Wow!

Doubts From Yellen – In a speech Monday, Janet Yellen of the San Francisco Fed also sounded a bit downbeat on the economic rebound.  Here’s a key part of that speech:

Unfortunately, I’m not at all convinced that a V-shaped recovery is in the cards. That fourth-quarter leap in GDP overstates the underlying momentum of the economy. Much of it was due to a slowdown in the pace at which businesses were drawing down inventory stocks compared with earlier in the year. Less than half of the fourth-quarter growth reflected higher sales to customers. Those sales did grow, but at a lackluster 2.2 percent. It appears that businesses are getting their inventories closer in line with sales, which is a good thing. But such inventory adjustments can be a potent source of growth only for a few quarters. I’d feel much more confident about the prospect for a sustained robust recovery if I saw evidence of more vigorous growth in actual sales.

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Posted By thestatedtruth.com on February 24, 2010

It is hard to even comprehend that breakfast sales accounted for $57 billion in revenue.  However, with more people out of work many are skipping breakfast or eating at home.  On my early morning drives I will always see cars pulling up to McDonalds or Starbucks for that early morning purchase.  The lines seemed a lot shorter and looking at the data it is part of the new frugality that Americans are having to deal with:

Source:  Washington Post

www.mybudget360.com

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Posted By thestatedtruth.com on February 24, 2010

WASHINGTON—U.S. new-home sales unexpectedly fell in January, setting a record low and erasing all gains made in the market during the past year as the economy recovers from recession.

Demand for single-family homes fell 11.2% from the previous month to a seasonally adjusted annual rate of 309,000, the Commerce Department said Wednesday.

Economists surveyed by Dow Jones Newswires had estimated sales would rise 3.8%, to 355,000.

The 11.2% decrease carried sales to their lowest ever. Records began in 1963. Sales fell below the level of 329,000 in January 2009 that analysts had considered the bottom for the market. Over the past year, sales had climbed, albeit slowly and unevenly, because of low prices, low mortgage rates, and tax incentives. But Wednesday’s report wiped out the advance and showed, year over year, sales were 6.1% down from January 2009.

From www.thewallstreetjournal.www

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Posted By thestatedtruth.com on February 24, 2010

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Posted By thestatedtruth.com on February 24, 2010

Feb. 24 (Bloomberg) — China’s economic growth will plunge to as low as 2 percent following the collapse of a debt- fueled bubble within 10 years, sparking a regional recession, according to Harvard University Professor Kenneth Rogoff.

“You’re not going to go a decade without having a bump in the business cycle, Rogoff, former chief economist at the International Monetary Fund, said in an interview in Tokyo yesterday. We would learn just how important China is when that happens. It would cause a recession everywhere surrounding the country, including Japan and South Korea, and be horrible for Latin American commodity exporters, he said.

China, set to surpass Japan as the second-largest economy this year, has helped pull the world out of its deepest postwar slump. Record lending, soaring property values and accelerating economic growth prompted the government to begin retracting stimulus measures implemented during the global recession.

“Their response to the latest financial crisis clearly raised the risk that they have a debt-fueled bubble in the economy said Rogoff, who in 2008 predicted the failure of big American banks.

In 2008, China cut interest rates, started rolling out a 4 trillion yuan ($586 billion) spending package and scrapped quotas limiting lending by banks to counter slumping exports.

While Rogoff said he isn’t sure what will cause China’s bubble to pop, he said land is the best bet as it is the most common source of crises. Real estate values in Shanghai and Beijing have taken a departure from reality,said the economist.  China, the world’s fastest-growing major economy, expanded 10.7 percent from a year earlier last quarter. The World Bank forecasts a 9 percent expansion in 2010.

China may provide more than a third of global growth in this year, according to Nomura Holdings Inc., Japan’s biggest broker. The country’s policy makers aim for a minimum of 8 percent growth annually to create jobs and avoid social unrest.

The global financial crisis left 20 million Chinese migrant laborers unemployed and more than 7 million college graduates seeking work by March last year. In February 2009, a clash between police and about 1,000 protesting workers from a textile factory in Sichuan province injured six demonstrators, rights group Chinese Human Rights Defenders reported.

World exporters are increasingly relying on China as consumers in the U.S. and Europe retrench.

Chinese policy makers are trying to cool lending that helped property prices in 70 cities climb at the fastest pace in 21 months in January. The government aims to reduce new loans to 7.5 trillion yuan this year from a record 9.59 trillion yuan in 2009. The People’s Bank of China raised the proportion of deposits that lenders must set aside as reserves twice this year to cool the economy.

“If there’s a this-time-is-different story in the world right now, it’s China, Rogoff said in the speech at a forum hosted by CLSA Asia-Pacific Markets, a unit of Credit Agricole SA, France’s largest retail bank.

People say China won’t have a financial crisis because there’s central planning, because there’s a high savings rate, because there’s a large pool of labor, blah blah, he added. I say of course China will have a financial crisis one day.

More at http://www.bloomberg.com/apps/news?pid=20601087&sid=a4MydrE5VOEM&pos=4

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Posted By thestatedtruth.com on February 23, 2010

Sometimes A Picture Says A Thousand Words

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Posted By thestatedtruth.com on February 23, 2010

FDIC Hits Record “Default” Level As Deposit Insurance Fund Plunges By $12.7 Billion To NEGATIVE 20.9 Billion

From Dow Jones:

The U.S. banking industry continued to struggle in the fourth quarter, as the number of banks on the brink of failure continued
to rise and the government’s fund to protect deposits fell sharply into the red.

The Federal Deposit Insurance Corp. said Tuesday that its deposit-insurance fund fell to $20.9 billion at the end of 2009, a $12.6 billion drop in the final three months of the year, as bank failures continued at a pace not seen since the savings and loan crisis. The fund’s reserve ratio was -0.39% at the end of the quarter, the lowest on record for the combined bank and thrift fund.

The deposit insurance fund is unlikely to soon see a respite from a decline in the number of failing banks: The FDIC said the number of banks on its “problem” list climbed to 702 at the end of 2009 from 552 at the end of September and 252 at the end of 2008. The number of banks on the list, which have combined assets of $402.8 billion, is the highest since June 1993.

“The continued rise in loan losses and troubled assets points to further pressure on earnings,” FDIC Chairman Sheila Bair said in a statement. “The growth in the numbers and assets of institutions on our ‘Problem List’ points to a likely rise in the number of failures.”

Industry indicators deteriorated nearly across the board. The FDIC said loan losses for U.S. banks climbed for the 12th straight quarter, while the total loan balances for U.S. banks continued to fall. The agency said the quarterly net charge-off rate and the total number of loans at least three months past due both were at the highest level ever recorded in the 26 years the data have been collected.

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Posted By thestatedtruth.com on February 23, 2010

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Posted By thestatedtruth.com on February 23, 2010

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Posted By thestatedtruth.com on February 23, 2010

www.ingerletter.com

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Posted By thestatedtruth.com on February 23, 2010

Dan Denning, Reporting From Melbourne, Australia…

Recently we claimed that borrowing your way to national prosperity is a sure-fire way to servitude and political instability. Today, we aim to prove it. To do so, we cite this article from Reuters. It suggests that China is using or should use its large holdings of US Treasury bonds as a cudgel with which to bludgeon the United States, its strategic adversary/indispensable economic partner.

Figures in the People’s Liberation Army want the financiers to sell US bonds as a way of punishing Washington for selling arms to Taiwan. Mind you this might not seem like such a good idea if the bond selling triggers a run on the dollar and swift devaluation in China’s forex reserves. But maybe China’s arsenal of US bonds is like a pile of bullets – they’re no good unless you fire them.

Of course what we’re suggesting is that China accumulated US debt as both a by-product and a weapon. The huge stock of US government securities was a by-product of China’s trade strategy. That strategy was to keep its currency low and gain global manufacturing market share through low labour and production costs. The result was a blizzard of US dollar trade surpluses that were reinvested into US bonds.

You could say it’s China that’s paid for the wars in Afghanistan and Iraq.

But why is this bundle of bonds now a weapon? We think China’s export- driven growth strategy is on its last legs. Labor unions in Europe and America – given today’s political climate and high unemployment – will have the ear of politicians. And they will be saying something like this, “Make the Chinese pay!”

What they’ll mean is that China will be pressured to give up its main economic weapon – currency manipulation. This has kept Chinese exports cheap all over the world and led to the gutting of American manufacturing jobs. It’s made it pretty tough on exporters in Europe too. As a result of China’s dollar peg, European exporters suffered doubly from a weaker US dollar. American goods were cheaper in Europe. But European goods were not cheaper in China.

So the unions and the politicians will probably not tolerate another leg of the global recession in which China gains more market share by keeping the currency peg and exporting its way to more growth (if growth is to be had). It brings us to the end-game of China’s export- driven development.

It also brings us back to one of the great monetary questions of the day: when will China de-peg? The answer has always been simple: when it is in China’s interests to do. To us, that means China will de-peg when the benefits of increased purchasing power in the currency are more important that dwindling export profits.

In other words, we think China is close to a new phase of growth that’s driven by consumer demand, domestic consumption, and more mature Chinese capital markets open to foreign investment. A de-pegging of the currency would see a much stronger yuan. This would give Chinese savers a lot of spending power on global markets. They would also be able to buy more Chinese goods, which might lead to higher wages in China too (and more stoking of consumer demand).

This is all a theory, of course. And we could be way wrong. But there will come a day when Chinese customers are worth more to Chinese producers than American customers. De-pegging the currency will bring that day forward. And it could be sooner than you think.

This means that the accumulation of forex reserves was never really meant to protect China from external trade shocks, although they would be handy in that event. It means they were a side effect of a trade strategy whose ultimate objective was to gain as much global manufacturing market share as possible.

Now, you might wonder why China would damage its own interests by “punishing” the United States and selling bonds. But it depends on what China’s interests are. If China’s interests are in fundamentally weakening an economic competitor and strategic adversary, then selling US bonds is in China’s interests.

China’s ultimate interests are in regaining Taiwan. And we’d suggest it try and use its bond leverage to weaken US resolve about defending Taiwan. And selling US bonds or crashing the dollar wouldn’t just weaken US resolve. It would expose the loss of strategic influence that occurs when you are a chronic debtor nation.

Mind you the US still has a lot of aircraft carriers, strategic bombers, and nuclear weapons. It’s not like it is bereft of tools of persuasion. But the basis of all those tools has always been a strong economy, a strong industrial base, and sound finances.

The question now is, if the base of military strength has been eroded, how long will the US maintain its military advantage? Can America afford it? And when push comes to shove, will American voters demand that an American President defend Taiwan? Hmmn…

www.dailyreckoning.com

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Posted By thestatedtruth.com on February 23, 2010

Feb. 23 (Bloomberg) — Stabilization in U.S. home prices that may lay the foundation for a sustained recovery in the housing market is tied to government incentives to bolster the industry that precipitated the worst recession since the 1930s, said economist Robert Shiller.

“The rebound in the housing market since April seems to be related to these efforts that include a homebuyer tax credit and Federal Reserve purchases of mortgage-backed securities designed to hold down borrowing costs, Shiller, co-creator of the S&P/Case-Shiller home-price index, said in a Bloomberg Television interview.

The previous housing slump, in the early 1990s, coincided with an economic downturn and did not rely on government intervention to spur home prices, economists said. This time around, homes are becoming more affordable in part because of government programs, while the U.S. struggles to create jobs as it emerges from the worst recession since the 1930s.

“The recovery, to the extent that we see it, is still nascent and is absolutely being supported by the tax credit, said Susan Wachter, a real estate professor at the University of Pennsylvania’s Wharton School in Philadelphia. The housing recovery really does depend on the speed of recovery in the overall economy.

A sustained rise in home prices faces hurdles that include a weak labor market and the expiration of government programs in the first half of the year. Rising foreclosures, many stemming from owners who have lost their jobs, also pose a threat to the housing market because more delinquencies may discourage some builders from beginning construction.

“The recoveries we’ve seen before in housing have occurred coincidentally with rises in employment, Wachter said.In this recovery, stabilization is occurring prior to the peak in unemployment, so that’s a big difference.

To help ensure the housing market doesn’t weaken again, President Barack Obama in November extended a tax credit of as much as $8,000 for first-time homebuyers and expanded the program to include some current owners for contracts signed by April 30.

“It’s really hard to use historical precedent, especially now, to predict what’s coming, Shiller, whose index has data going back to 1987, said on a conference call with reporters after today’s report. It’s really ambiguous right now as to where this market is heading.

More at….http://www.bloomberg.com/apps/news?pid=20601110&sid=anVuVl_umVFQ

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Posted By thestatedtruth.com on February 23, 2010

Feb. 23 (Bloomberg) — The U.S. isn’t prepared for a massive attack on its computer networks by another country, a former top intelligence official said.

“If the nation went to war today, in a cyber war, we would lose, former Director of National Intelligence Michael McConnell told a Senate panel today.

McConnell joined a number of former government officials who have warned of cyber vulnerability.

“We’re going to have a catastrophic event before Americans are prompted to action, McConnell told the Senate Commerce, Science and Transportation Committee. The country is more vulnerable than other nations because a greater share of U.S. businesses and government agencies rely on the Internet, McConnell said and the U.S. also has more trade secrets that other countries want to steal, he said.

McConnell said the government needs to get more involved in dictating security standards on the Internet.

Several cyber-security measures being considered by Congress would give the government a greater role which may include new legislation.

More at…. http://www.bloomberg.com/apps/news?pid=20601110&sid=aBfzD779UZQg

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Posted By thestatedtruth.com on February 23, 2010

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Posted By thestatedtruth.com on February 23, 2010

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Posted By thestatedtruth.com on February 22, 2010

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Posted By thestatedtruth.com on February 22, 2010

Quantitative Easing and the Electronic Money Printing Machine – Saying Goodbye to Historically Low Mortgage Interest Rates. Federal Reserve 95 Percent Complete on Buying $1.25 Trillion in Mortgage Backed Securities.

Posted    02-22-2010

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Posted By thestatedtruth.com on February 22, 2010

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Posted By thestatedtruth.com on February 22, 2010

A Five-Step Guide to Contagion By Todd Harrison Feb 10, 2010 7:35 am Why European debt matters to the United States Times are tough and those struggling to make ends meet have focused their efforts close to home. That’s a natural instinct but it doesn’t change the fact that problems on the other side of the world affect us all. To fully understand the depth and complexity of our current conundrum, we must appreciate how we got here. It is widely accepted that grieving arrives in five stages: denial, anger, bargaining, sadness, and acceptance. If we apply that psychological continuum to the financial market construct, it offers a valuable lens with which to view this evolving crisis. Denial In April 2007, policymakers assured an unsuspecting public that housing and sub-prime mortgage concerns were “well contained.” Minyanville took the other side of that trade and argued that the nascent contagion extended all the way around the world.(Read more in Well Contained?) In August 2007, as the Dow Jones Industrial Average traded near an all-time high, Canadian officials told investors it would “provide liquidity to support the stability of the Canadian financial system and the continued functioning of the financial markets” before systemic contagion ensued. (See also�The Credit Card) In March 2008, Alan Schwartz, CEO of Bear Stearns appeared on CNBC to assuage concerns that his firm was facing a liquidity crisis. “Some people could speculate that Bear Stearns might have some problems since we’re a significant player in the mortgage business,” he said, “None of those speculations are true.” On January 28 of this year, Greek Prime Minister George Papandreou offered that Greece was being victimized by rumors in the financial markets and denied seeking aid from European partners to finance the country’s budget deficit, according to Bloomberg. As we know, European issues are now staking claim as the next phase of the financial crisis. Anger Two of my Ten Themes for 2010 are relevant to this discussion. The first is the “tricky trifecta,” or the migration from societal acrimony to social unrest to geopolitical conflict. Populist uprising, the rejection of wealth, and an emerging class war are symptomatic of this dynamic, as is the unfortunate fact economic hardship traditionally serves as a precursor to war. The other theme is the notion of “European Disunion,” as I wrote in early January: The European Union is committed to the regional and economic integration of 27 member states, with sixteen countries sharing a common currency. That was a fine idea when it was first founded but the economic fallout of the financial crisis will put loyalties to the test. Look for the Union to adopt more stringent guidelines in the coming year, including but not limited to distancing itself from the weaker links such as Greece and Ireland. Sovereign defaults, as a whole, should jockey for mind-share. This could conceivably spark a rally in the US Dollar, which could have ominous implications for the crowded carry trade. European discontent continues to simmer with labor strikes and social strife as efforts are made to map an amenable plan before �20 billion ($28 billion) in Greek debt comes due in April and May. While that amount is far smaller than what financial firms faced in September 2008, the dynamic is eerily reminiscent. (Read also Pirate’s Booty) Bargaining By the time it was evident sub-prime mortgage woes weren’t contained, the damage already occurred. Our government reactively responded to the crisis by consuming the cancer in an attempt to stave off a car crash. (See also Shock & Awe) As the European Union and International Monetary Fund wrestle with how to address the sovereign mess, our financial fate can be drilled down to one very simple question: Will we see contagion, as we did with Fannie Mae (FNM), Freddie Mac (FRE), AIG (AIG), Bear Stearns and Lehman Brothers, or will the current congestion be contained in the context of an evolving globalization? The bulls will offer that corrections must feel sinister if they’re to be truly effective. They’re right, of course, but I will remind you of a salient point made by Professor Peter Atwater on Minyanville. If sovereign lifeguards saved corporations when the financial crisis first hit, who is left to save the lifeguards? Over the last few weeks, we’ve seen significant widening in overseas credit spreads, including Hong Kong, Switzerland, Indonesia, Malaysia, Portugal, and New Zealand. As markets are fluid and policy takes time, the lag must be factored into the fragile equation, particularly as the European Union is structurally interlinked. Sadness We can talk about how the capital market construct forever changed, how our constitutional rights have been challenged or how the lifestyles of the rich conflict with the struggle to exist. While those dynamics remain in play, they miss an entirely more relevant point for purposes of this discussion. (See The Declaration of Interdependence) Social mood and risk appetites shape financial markets. One of the greatest misperceptions of all time was that The Crash caused The Great Depression when The Great Depression actually caused The Crash. It’s been a full year since Minyanville fingered Eastern Europe as a modern day incarnation of a sub-prime borrower. The question is therefore begged, what if Greece is Fannie Mae, Portugal is Freddie Mac, Spain is AIG, Argentina is Wachovia Bank, and Ireland is Lehman Brothers? (Also read Eastern Europe, Subprime Borrower) Contagion, by definition, arrives in phases and we must remember that Greece is a symptom of the problem, not the problem itself. Regardless of what IMF or Euro Zone “cross border solution” we see, it’ll simply buy time, much like the bearded nationalization of Fannie and Freddie pushed risk out on the time continuum. Given the trending direction of social mood and the discounting mechanism that is the market, the perception that defines our financial reality must remain front and center in the mainstream mindset. Acceptance In September 2008, we offered that the government invented fingers to plug the multitude of holes that sprang open in the financial dike. That imagery would again apply if there were viable fingers attached to a healthy and able arm. While many dismiss the notion that Greece or Portugal “matter” in the global financial construct, I’ll explain why they might. Concerns in the Euro zone could manifest through a “flight to quality” in the US Dollar, as it has to the tune of 8% in the dollar index (DXY) since the December low. Those hoping for a stronger greenback should be careful for what they wish, much like the “lower crude will be equity positive” crowd learned in 2008. In an “asset class deflation vs. dollar devaluation” environment, a weak currency is a necessary precursor to — but no guarantor of — higher asset class prices. (Se Hyperinflation vs. Deflation) The hedge fund community currently has the carry trade on in size. If the greenback continues to strengthen, the specter of an unwind increases in kind. Should that occur, asset class positions financed with borrowed dollars would come for sale across the board. The point of recognition will eventually arrive that our debt issues are cumulative; when that happens, the contagion will no longer be contained. In the meantime, as we edge from here to there, be on the lookout for the unintended consequences of European austerity initiatives, including but not limited to social unrest and the abatement of risk appetites. Risk management over reward chasing as we together find our way.

John F. Mauldin johnmauldin@investorsinsight.com

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Posted By thestatedtruth.com on February 22, 2010

 Dr Joe Duarte
February 22, 2010

 How Derivative Magic Can Turn Into A Black Hole

 
The Euro rallied for a period overnight, as rumors of a bailout package from Germany aimed at Greece surfaced. But a denial from the German Ministry of Finance knocked the European currency below Friday’s close. That’s the scenario with which trading will open in the U.S. on Monday.

The situation in Greece isn’t going away. In fact, if history is any guide, just as the subprime mortgage crisis was a big effect on the global financial markets for months, so is Greece likely to have some sort of effect for some time to come. There are some differences to be sure, as the subprime mortgage meltdown was a bigger problem from a tangible standpoint. Yet, Greece, even though it’s a small country, is at the very least a symbol of what could eventually cause major problems for the Euroepan Union.

It’s widely known and accepted now that Greece’s problems started in 2001, when Goldman Sachs engineered a currency swap with the country that allowed it to take significant liabilities off their books by pushing them forward via the swap agreement, which is a derivative. The central tenet of the swap, though, was that Greece’s public transportation revenue was used to pay for the swap, which means that money that was supposed to go into the Greek treasury, instead went into paying for the swap, and that left a whole in the Greek books.

Now, investors are starting to wonder if there are other small European countries that have significant surprises to reveal, as they too may have used derivatives to make their books look better than they were in order to meet the criteria to join the EU.

In fact, it’s more accurate to say that the news media has made it its business to reveal what the European nations have been doing for years, hiding their complex “sometimes in secret” deals according to The Wall Street Journal that were designed “to hide the true size of their debts and deficits” so that they could show that “cap debt levels at 60% of their gross domestic product and their annual budget deficits to no more than 3%.” In other words, European nations, unlike the United States at least to the same degree, have been hiding the awful state of their books making the Euro a potential reserve currency for the world that may have been based to a significant degree on smoke, mirrors, and complex derivatives.

The Europeans have in fact been running a wild one past the markets for years. According to The Journal: “To try to meet the targets, which were aimed at building trust in the stability of the euro, governments over the years have sold state assets, bundled expected future payments into securities to hawk and even, in the case of Greece, insisted to the Eurostat statistics authority that large portions of its military spending were “confidential” and thus excluded from deficit calculations. In 2000, Greece reported that it spent €828 million ($1.13 billion) on the military—about a fourth of the €3.17 billion it later said it spent. Greece admitted to underreporting military spending by €8.7 billion between 1997 and 2003.”

For example, according to The Journal: “Portugal classified subsidies to the Lisbon subway and other state enterprises as equity purchases. After learning that, Eurostat made Portugal redo its accounting in 2002. The country revised its 2001 deficit from €2.76 billion, or 2.2% of GDP, to €5.09 billion, or 4.1%—well over the limit.” But they were not alone as “France arranged a deal with the soon-to-be privatized France Telecom in 1997 under which the company paid the government a lump sum of more than €5 billion. In return, France agreed to assume pension liabilities for France Telecom workers. The billions from France Telecom helped narrow France’s budget gap to around €40 billion in 1997; it reported a deficit for that year of 3% of GDP—right on the target, and helping it to join the euro.”

And Germany “Europe’s largest economy, tried to reappraise gold reserves for a fast fix in 1997, though it backed off after resistance from the country’s central bank.”

In fact, European countries, until 2008 were allowed to do these swap transactions and to use derivatives to hedge the risks, which means that there could lots of other such problems that pop up in the future, if the countries can’t meet their obligations to counterparties involved. According to The Wall Street Journal “In some cases, governments undertook numerous such transactions, often without publicly disclosing them, making it difficult for investors to gauge the impact on a country’s finances.”

The Journal reports that Goldman Sachs did 12 swaps for Greece from 1998 to 2001, while Credit Suisse also helped Athens with at least one swap during the same period. To be sure, some swaps are part of normal business. According to The Journal “Deutsche Bank executed currency swaps on behalf of Portugal between 1998 and 2003” which according to Deutsche Bank spokesman Roland Weichert ‘were within the “framework of sovereign-debt management,”‘ and “intended to hide Portugal’s national debt position.” For its part, Portugal declined comment only to say that “Portugal only uses financial instruments that comply with EU rules.”

The bottom line is that this is not a new problem. In fact it’s been brewing for nearly a decade. According to The Journal: “Eurostat tried for years to change the rules on use of swaps. European finance ministries in 2000 overruled Eurostat, arguing that they needed as much flexibility as possible to manage debt loads.”

Swaps are a two edged sword. On one side, they let the country that uses it lock in a future exchange rate. That’s the good part as it lends the current books some stability. The problems is that stability is cosmetic as any drop in the Euro, despite what the books showed would be a negative in the real world, which means that at some point, the real price of the transaction would have to be faced.

In many ways, swaps act like adjustable rate mortgages, which means that you can live in a million dollar house for $450 a month for a few months or a few years. But at some point, the real rent, maybe $4500 per month will come knocking at the door. And that’s why investors are particularly nervous about Greece and other nations in the EU. No one really knows what the real rent is going to be when it comes due.

Conclusion

Derivatives, by definition, are takeoffs on reality. Their outcome is derived from current events, but are placed into the future. And while they take away the pain in the present, they are just a way to store the pain for later examination.

In a perfect world, at least in the eyes of politicians, and other folks who don’t want to live within their means, they hope that when one derivative expires, they can just buy another one and thus continue to put off the pain indefinitely. You can play that game for a while but at some point, something will happen which makes the game expensive and dangerous. In Greece’s case, it wasn’t even worth the trouble, especially the trouble that it’s caused.

According to The Journal: “In exchange for the good deal on rates, Greece had to pay Goldman. The amount wasn’t revealed. A payment would count against Greece’s deficit, so Goldman and Greece came up with another twist. Goldman effectively loaned Greece the money for the payment, and Greece repaid that loan over time. But the two sides structured the loan as another kind of swap. Treated as a swap, the deal didn’t add to Greece’s debt under EU rules. All told, the marginal benefits were small. Greece’s total debt as a percentage of GDP fell from 105.3% to 103.7%, and its 2001 deficit was reduced by a tenth of a percentage point in GDP terms, according to people close to Goldman.”

Two things here have become increasingly important, aside from the fact that Greece got duped. One is that the world is flooded with dollars and euros. The other is that central banks want to mop up that excess liquidity. So far, China, the U.S. and Australia have begun to tighten, in varying degrees. At some point, tightening will spread elsewhere and easy money will be gone for a long time.

That’s when the stinky stuff will really hit the fan. What we’re saying is that if Greece and others who have been clever for a long time think they have problems now, wait about six to twelve months when China and the U.S. are both raising interest rates in tandem. And that’s when the cleverness can turn into despair, just as what happened in Fantasia when the apprentice’s magic tricks went all wrong.

One final thought: “Greece’s remaining exposure to the complicated arrangement remains unclear.” From a trading standpoint, until proven otherwise, the dollar remains a solid long trade.

http://www.joe-duarte.com

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Posted By thestatedtruth.com on February 22, 2010

February 22, 2010

 

By George Friedman

The apparent Israeli assassination of a Hamas operative in the United Arab Emirates turned into a bizarre event replete with numerous fraudulent passports, alleged Israeli operatives caught on videotape and international outrage (much of it feigned), more over the use of fraudulent passports than over the operative’s death. If we are to believe the media, it took nearly 20 people and an international incident to kill him.

STRATFOR has written on the details of the killing as we have learned of them, but we see this as an occasion to address a broader question: the role of assassination in international politics.

Defining Assassination

We should begin by defining what we mean by assassination. It is the killing of a particular individual for political purposes. It differs from the killing of a spouse’s lover because it is political. It differs from the killing of a soldier on the battlefield in that the soldier is anonymous and is not killed because of who he is but because of the army he is serving in.

The question of assassination, in the current jargon “targeted killing,” raises the issue of its purpose. Apart from malice and revenge, as in Abraham Lincoln’s assassination, the purpose of assassination is to achieve a particular political end by weakening an enemy in some way. Thus, the killing of Adm. Isoroku Yamamoto by the Americans in World War II was a targeted killing, an assassination. His movements were known, and the Americans had the opportunity to kill him. Killing an incompetent commander would be counterproductive, but Yamamoto was a superb strategist, without peer in the Japanese navy. Killing him would weaken Japan’s war effort, or at least have a reasonable chance of doing so. With all the others dying around him in the midst of war, the moral choice did not seem complex then, nor does it seem complex now.

Such occasions rarely occur on the battlefield. There are few commanders who could not readily be replaced, and perhaps even replaced by someone more able. In any event, it is difficult to locate enemy commanders, meaning the opportunity to kill them rarely arises. And as commanders ask their troops to risk their lives, they have no moral claim to immunity from danger.

Now, take another case. Assume that the leader of a country were singular and irreplaceable, something very few are. But think of Fidel Castro, whose central role in the Cuban government was undeniable. Assume that he is the enemy of another country like the United States. It is an unofficial hostility — no war has been declared — but a very real one nonetheless. Is it illegitimate to try to kill such a leader in a bid to destroy his regime? Let’s move that question to Adolph Hitler, the gold standard of evil. Would it be inappropriate to have sought to kill him in 1938 based on the type of regime he had created and what he said that he would do with it?

If the position is that killing Hitler would have been immoral, then we have a serious question about the moral standards being used. The more complex case is Castro. He is certainly no Hitler, but neither is he the romantic democratic revolutionary some have painted him as being. But if it is legitimate to kill Castro, then where is the line drawn? Who is it not legitimate to kill?

As with Yamamoto, the number of instances in which killing a political leader would make a difference in policy or in the regime’s strength is extremely limited. In most cases, the argument against assassination is not moral but practical: It would make no difference if the target in question lives or dies. But where it would make a difference, the moral argument becomes difficult. If we establish that Hitler was a legitimate target, than we have established that there is not an absolute ban on political assassination. The question is what the threshold must be.

All of this is a preface to the killing in the United Arab Emirates, because that represents a third case. Since the rise of the modern intelligence apparatus, covert arms have frequently been attached to them. The nation-states of the 20th century all had intelligence organizations. These organizations carried out a range of clandestine operations beyond collecting intelligence, from supplying weapons to friendly political groups in foreign countries to overthrowing regimes to underwriting terrorist operations.

During the latter half of the century, nonstate-based covert organizations were developed. As European empires collapsed, political movements wishing to take control created covert warfare apparatuses to force the Europeans out or defeat political competitors. Israel’s state-based intelligence system emerged from one created before the Jewish state’s independence. The various Palestinian factions created their own. Beyond this, of course, groups like al Qaeda created their own covert capabilities, against which the United States has arrayed its own massive covert capability.

Assassinations Today

The contemporary reality is not a battlefield on which a Yamamoto might be singled out or a charismatic political leader whose death might destroy his regime. Rather, a great deal of contemporary international politics and warfare is built around these covert capabilities. In the case of Hamas, the mission of these covert operations is to secure the resources necessary for Hamas to engage Israeli forces on terms favorable to them, from terror to rocket attacks. For Israel, covert operations exist to shut off resources to Hamas (and other groups), leaving them unable to engage or resist Israel.

Expressed this way, covert warfare makes sense, particularly for the Israelis when they engage the clandestine efforts of Hamas. Hamas is moving covertly to secure resources. Its game is to evade the Israelis. The Israeli goal is to identify and eliminate the covert capability. Hamas is the hunted, Israel the hunter here. Apparently the hunter and hunted met in the United Arab Emirates, and the hunted was killed.

But there are complexities here. First, in warfare, the goal is to render the enemy incapable of resisting. Killing just any group of enemy soldiers is not the point. Indeed, diverting resources to engage the enemy on the margins, leaving the center of gravity of the enemy force untouched, harms far more than it helps. Covert warfare is different from conventional warfare, but the essential question stands: Is the target you are destroying essential to the enemy’s ability to fight? And even more important, as the end of all war is political, does defeating this enemy bring you closer to your political goals?

Covert organizations, like armies, are designed to survive attrition. It is expected that operatives will be detected and killed; the system is designed to survive that. The goal of covert warfare is either to penetrate the enemy so deeply, or destroy one or more people so essential to the operation of the group, that the covert organization stops functioning. All covert organizations are designed to stop this from happening.

They achieve this through redundancy and regeneration. After the massacre at the Munich Olympics in 1972, the Israelis mounted an intense covert operation to identify, penetrate and destroy the movement — called Black September — that mounted the attack. Black September was not simply a separate movement but a front for various Palestinian factions. Killing those involved with Munich would not paralyze Black September, and destroying Black September did not destroy the Palestinian movement. That movement had redundancy — the ability to shift new capable people into the roles of those killed — and therefore could regenerate, training and deploying fresh operatives.

The mission was successfully carried out, but the mission was poorly designed. Like a general using overwhelming force to destroy a marginal element of the enemy army, the Israelis focused their covert capability to destroy elements whose destruction would not give the Israelis what they wanted — the destruction of the various Palestinian covert capabilities. It might have been politically necessary for the Israeli public, it might have been emotionally satisfying, but the Israeli’s enemies weren’t broken. Consider that Entebbe occurred in 1976. If Israel’s goal in targeting Black September was the suppression of terrorism by Palestinian groups, the assault on one group did not end the threat from other groups.

Therefore, the political ends the Israelis sought were not achieved. The Palestinians did not become weaker. The year 1972 was not the high point of the Palestinian movement politically. It became stronger over time, gaining substantial international legitimacy. If the mission was to break the Palestinian covert apparatus to weaken the Palestinian capability and weaken its political power, the covert war of eliminating specific individuals identified as enemy operatives failed. The operatives very often were killed, but the operation did not yield the desired outcome.

And here lies the real dilemma of assassination. It is extraordinarily rare to identify a person whose death would materially weaken a substantial political movement in some definitive sense — i.e., where if the person died, then the movement would be finished. This is particularly true for nationalist movements that can draw on a very large pool of people and talent. It is equally hard to reduce a movement quickly enough to destroy the organization’s redundancy and regenerative capability. Doing so requires extraordinary intelligence penetration as well as a massive covert effort, so such an effort quickly reveals the penetration and identifies your own operatives.

A single swift, global blow is what is dreamt of. Covert war actually works as a battle of attrition, involving the slow accumulation of intelligence, the organization of the strike, the assassination. At that point, one man is dead, a man whose replacement is undoubtedly already trained. Others are killed, but the critical mass is never reached, and there is no one target who if killed would cause everything to change.

In war there is a terrible tension between the emotions of the public and the cold logic that must drive the general. In covert warfare, there is tremendous emotional satisfaction to the country when it is revealed that someone it regards as not only an enemy, but someone responsible for the deaths of their countryman, has been killed. But the generals or directors of intelligence can’t afford this satisfaction. They have limited resources, which must be devoted to achieving their country’s political goals and assuring its safety. Those resources have to be used effectively.

There are few Hitlers whose death is morally demanded and might have a practical effect. Most such killings are both morally and practically ambiguous. In covert warfare, even if you concede every moral point about the wickedness of your enemy, you must raise the question as to whether all of your efforts are having any real effect on the enemy in the long run. If they can simply replace the man you killed, while training ten more operatives in the meantime, you have achieved little. If the enemy keeps becoming politically more successful, then the strategy must be re-examined.

We are not writing this as pacifists; we do not believe the killing of enemies is to be avoided. And we certainly do not believe that the morally incoherent strictures of what is called international law should guide any country in protecting itself. What we are addressing here is the effectiveness of assassination in waging covert warfare. Too frequently, it does not, in our mind, represent a successful solution to the military and political threat posed by covert organizations. It might bring an enemy to justice, and it might well disrupt an organization for a while or even render a specific organization untenable. But in the covert wars of the 20th century, the occasions when covert operations — including assassinations — achieved the political ends being pursued were rare. That does not mean they never did. It does mean that the utility of assassination as a main part of covert warfare needs to be considered carefully. Assassination is not without cost, and in war, all actions must be evaluated rigorously in terms of cost versus benefit.

Reprinting or republication of this report on websites is authorized by prominently displaying the following sentence at the beginning or end of the report, including http://www.stratfor.com/

“This report is republished with permission of STRATFOR“

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Posted By thestatedtruth.com on February 21, 2010

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Posted By thestatedtruth.com on February 21, 2010

Feb. 19 (Bloomberg) — Forewarned bankruptcies linked to infrastructure projects from Las Vegas to Harrisburg, Pennsylvania, may prove Warren Buffett’s conclusion that insuring municipal bonds is a dangerous business.

Ambac Financial Group Inc., the second biggest bond insurer, faces as much as $1.2 billion in claims if a judge in Nevada allows Las Vegas Monorail Co., which runs a train connecting the city’s casinos, to reorganize in Chapter 11 bankruptcy. The City Council of Pennsylvania’s state capital shelved a plan to sell taxpayer-owned assets to meet payments on $288 million of debt used for an incinerator funded in part with bonds insured by a unit of Bermuda-based Assured Guaranty Ltd. Harrisburg is weighing a possible bankruptcy filing.

With state tax collections last year through September showing the biggest drop since at least 1963, as measured by the Nelson A. Rockefeller Institute of Government in Albany, New York, local governments are seeking concessions from creditors of public projects, including bond insurers. The moves further threaten companies backing $1.16 trillion of public debt that already face $11.6 billion of claims on collapsed securities backed by mortgages.

“It is a worst-case scenario if the dynamics of the municipal bond market change, said Rob Haines, an analyst who covers the bond insurance business at CreditSights Inc., an independent research firm in New York. The companies have modeled in virtually no losses.

Local governments are struggling with depressed property values and sales, 9.7 percent unemployment and a slowdown in consumer spending that has cut tax revenue.

Last year, 183 tax-exempt issuers defaulted on $6.35 billion of securities, according to Miami Lakes, Florida-based Distressed Debt Securities Newsletter. That’s up from 2008, when 162 municipal borrowers failed to meet obligations on $8.15 billion of debt. In 2007, 31 of them defaulted on $348 million of bonds.

“In the past, things had a way of getting worked out,said Jim Ryan, an insurance analyst with Morningstar Inc. in Chicago. States might have stepped up and helped out, but bottom line is that the states are in trouble.

Ambac sold the industry’s first insurance policy on municipal debt in 1971, for a $650,000 bond of the Greater Juneau Borough Medical Arts Building in Alaska. The business thrived, with a handful of companies obtaining the top AAA credit rating needed to guarantee debt of state and local governments and their agencies that seldom defaulted. About 8.5 percent of the market for new municipal debt was insured in 2009, down from 55 percent in 2005, according to Thomson Reuters.

For more than three decades bond insurers paid few claims, allowing them to back bond payments that were 140 times their assets. Insurers described their business as one of zero-loss underwriting, meaning that each guarantee was expected to result in no claims under the worst probable scenario envisioned by their models.

That track record was shattered when credit markets seized up during the worst credit crunch since the Great Depression. After rating companies warned they might strip bond insurers of their top rankings in late 2007, some companies averted a takeover by regulators by tearing up contracts on their worst- performing structured finance securities and freeing up reserves against those contracts.

Rising municipal claims may deplete the remaining regulatory capital of some bond insurers and speed intervention by regulators, said Haines of CreditSights.

Any regulatory takeover may trigger termination payments on billions of dollars of credit default contracts written by the bond insurers, a scenario that forced a government bailout of American International Group Inc. in September 2008.

Battles over debt payments were anticipated by Buffett, chairman of Berkshire Hathaway Inc. The billionaire investor set up a municipal bond insurance company in December 2007, as competitors were being threatened with the loss of their top ratings.

In early 2008, Omaha, Nebraska-based Berkshire Hathaway’s bid to take over $800 billion in municipal debt guarantees from the three biggest bond insurers, including Ambac, was rejected by the companies.

A year later, he reversed course, telling shareholders in his annual letter that municipal bond insurance has the look today of a dangerous business.

“If a few communities stiff their creditors and get away with it, the chance that others will follow in their footsteps will grow, Buffett wrote. What mayor or city council is going to choose pain to local citizens in the form of major tax increases over pain to a far away bond insurer?

“One of the unspoken benefits the bond insurers provided to the municipal bond market was access to capital to refinance bond issues that were threatening to default, Ciccarone said.

That strategy isn’t being used now.

Last Updated: February 19, 2010 16:35 EST

www.bloomberg.com

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Posted By thestatedtruth.com on February 21, 2010

Feb. 21 (Bloomberg) — California Governor Arnold Schwarzenegger said the economy shows signs of a comeback.

“I believe that the worst is over, the Republican governor said on ABC’s This Week program. But it’s very clear that the comeback is not going to be as quick as we’ve seen in the past.

www.bloomberg.com

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Posted By thestatedtruth.com on February 21, 2010

IF YOU WANT CREDITABLE SOLUTIONS ……to our nation’s fiscal problems, go to a creditable source. Indiana Gov. Mitch Daniels gives his ideas for restoring our economy — which can be done, he says, without tax increases.

1. Daniels is a man of deep thought and bold action. His state has one of the strongest balance sheets in the country, largely because of his stewardship. Most states have huge deficits; Indiana has none. Daniels eradicated a $1 billion shortfall, beginning in 2005 and built up an even bigger rainy-day fund — $1.3 billion. He pared government spending, sold a toll road to private investors at an enormous profit, and attracted new business to the state. Revenues are off steeply, so he will use $300 million of the surplus in fiscal 2010 so that taxes won’t rise in a recession.  Revenues, which are below 2007 levels, aren’t expected to recover soon.  Could Mitch Daniels cure America’s deficit problem, as he did Indiana’s?
2. Unlike Indiana, the federal government can’t rely on cuts alone to achieve meaningful deficit reduction because the hole, at 10% of GDP, is too deep, says Daniels, a Republican who served as President George W. Bush’s head of Office of Management and Budget for two years. Lawmakers must help maximize economic growth, he says.
3. The administration and Congress immediately should cancel the TARP program aiding troubled financial institutions and return both this money and the unexpended portion of last year’s $787 billion fiscal stimulus to the Treasury, “as a demonstration that we as a country are serious about deficit reduction,” he says. This will help to keep interest rates low.
4. Then the administration should reform the Social Security system. This would be “the single, best, first step” towards achieving higher rates of long-term growth, Daniels says. “We need a new compact that preserves all of the old promises, but makes a newer, affordable compact with younger citizens,” he says.
5. A health-care fix would come next and focus on individual responsibility, not the creation of a huge federal bureaucracy. “We won’t have cost containment until all of us are cost containers,” says Daniels. He would provide individuals with a tax credit for purchasing health insurance, putting them on the hook for lifestyle and coverage decisions.
6. To trim more money from the budget, Daniels proposes a full examination of the nation’s international commitments, including defense. They should be replaced with a more forward-looking, affordable strategy.
7. He applauds Obama’s decision to subsidize new nuclear plants. However, he thinks the administration should be bolder and promote all sources of domestic energy, including offshore oil and gas. “This is a matter of survivability. We are paying the worst persons in the world for their oil and gas,” he observes.
8. The governor embraces “green power” and boasts that Indiana leads the U.S. in the growth of wind energy and ethanol production: “But do the arithmetic. These two sources of power are at the edges of what we need.”
9. Daniels says that curbing entitlement spending by Congress is a pipe dream. One solution would be for Congress to restore the power of impoundment to the President, a power Daniels has in Indiana. Simply put, the chief executive isn’t required to authorize the Treasury to transfer every cent appropriated to various agencies by the legislature. Had Daniels not applied impoundment in his current budget, increased spending would have eaten the state’s reserves by the end of this fiscal year. Congress scrapped impoundment in the wake of the Watergate scandal, angry that Nixon had used it to block $12 billion in spending.
10. Tax simplification would boost growth, he says. He is attracted to Wisconsin Republican Rep. Paul Ryan’s revival of an old GOP idea — giving taxpayers a choice between the current filing system and a new tax form simple enough to fit on a post card. “That would remove a lot of loopholes,” he says. He also views Ryan’s proposal to replace corporate taxes with an 8.5% consumption tax as pro-growth. And, as for the President’s deficit reduction commission, “It’s worth a try.”

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