By MIKE WHITNEY
Michael Hudson is a former Wall Street economist specializing in the balance of payments and real estate at the Chase Manhattan Bank (now JP Morgan Chase & Co.), Arthur Anderson, and later at the Hudson Institute (no relation). In 1990 he helped established the world’s first sovereign debt fund for Scudder Stevens & Clark. Dr. Hudson was Dennis Kucinich’s Chief Economic Advisor in the recent Democratic primary presidential campaign, and has advised the U.S., Canadian, Mexican and Latvian governments, as well as the United Nations Institute for Training and Research (UNITAR). A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002.
Mike Whitney: On Friday afternoon the government announced plans to place the two mortgage giants, Fannie Mae and Freddie Mac, under “conservatorship.” Shareholders will be virtually wiped out (their stock already had plunged by over 90 per cent) but the US Treasury will step in to protect the companies’ debt. To some extent it also will protect their preferred shares, which Morgan-Chase have marked down only by half.
This seems to be the most sweeping government intervention into the financial markets in American history. If these two companies are nationalized, it will add $5.3 trillion dollars to the nation's balance sheet. So my first question is, why is the Treasury bailing out bondholders and other investors in their mortgage IOUs? What is the public interest in all this?
Hudson: The Treasury emphasized that it was under a Sunday afternoon deadline to finalize the takeover details before the Asian markets opened for trading. This concern reflects the balance-of-payments and hence military dimension to the bailout. The central banks of China, Japan and Korea are major holders of these securities, precisely because of the large size of Fannie Mae and Freddie Mac – their $5.3 trillion in mortgage-backed debt that you mention, and the $11 trillion overall U.S. mortgage market.
When you look at the balance sheet of U.S. assets available for foreign central banks to buy with the $2.5 to $3.5 trillion of surplus dollars they hold, real estate is the only asset category large enough to absorb the balance-of-payments outflows that U.S. military spending, foreign trade and investment-capital flight are throwing off. When the U.S. military spends money abroad to fight the New Cold War, these dollars are recycled increasingly into U.S. mortgage-backed securities, because there is no other market large enough to absorb the sums involved. Remember, we do not permit foreigners – especially Asians – to buy high-tech, “national security” or key infrastructure. The government would prefer to see them buy harmless real estate trophies such as Rockefeller Center, or minority shares in banks with negative equity such as Citibank shares sold to the Saudis and Bahrainis.
But there is a limit on how nakedly the U.S. Government can exploit foreign central banks. It does need to keep dollar recycling going, in order to prevent a sharp dollar depreciation. The Treasury therefore has given informal assurances to foreign governments that they will guarantee at least the dollar value of the money their central banks are recycling. (These governments still will lose as the dollar plunges against hard currencies – just about every currency except the dollar these days.) A failure to provide investment guarantees to foreigners would thwart the continuation of U.S. overseas military spending! And once foreigners are bailed out, the Treasury has to bail out domestic American investors as well, simply for political reasons.
Fannie and Freddie have been loading up on risky mortgages for ages, under-stating the risks largely to increase their stock price so that their CEOs can pay themselves tens of millions of dollars in salary and stock options. Now they are essentially insolvent, as the principal itself is in question. There was widespread criticism of this year after year after year. Why was nothing done?
Hudson: Fannie and Freddie were notorious for their heavy Washington lobbying. They bought the support of Congressmen and Senators who managed to get onto the financial oversight committees so that they would be in a position to collect campaign financing from Wall Street that wanted to make sure that no real regulation would take place.
On the broadest level, Treasury Secretary Paulson has said that these companies are being taken over in order to reflate the real estate market. Fannie and Freddie were almost single-handedly supporting the junk mortgage market that was making Wall Street rich.
The CEOs claimed to pay themselves for “innovation.” In today’s Orwellian vocabulary financial “innovation” means the creation of special rent-extracting privilege. The privilege was being able to get the proverbial “free ride” (that is, economic rent) by borrowing at low-interest government rates to buy and repackage mortgages to sell at a high-interest markup. Their “innovation” lies in the ambiguity that enabled them to pose as public-sector borrowers when they wanted to borrow at low rates, and private-sector arbitrageurs when they wanted to get a rake-off from higher margins.
The government’s auditors are now finding out that their other innovation was to cook the accounting books, Enron-style. As mortgage arrears and defaults mounted up, Fannie and Freddie did not mark down their mortgage holdings to realistic prices. They said they would do this in a year or so – by 2009, after the Bush Administration’s deregulators have left office. The idea was to blame it all on Obama when they finally failed.
But at the deepest level of all, the “innovation” that created a rent-extracting loophole was the deception that making more and more bad-mortgage loans could continue for a prolonged period of time. The reality is that no exponential rise in debt ever has been able to be paid for more than a few years, because no economy ever has been able to produce a surplus fast enough to keep pace with the “magic of compound interest.” That phrase is itself a synonym for the exponential growth of debt.
The Road to Debt Peonage
In an earlier interview you said: “The economy has reached its debt limit and is entering its insolvency phase. We are not in a cycle but the end of an era. The old world of debt pyramiding to a fraudulent degree cannot be restored.” Would you expand on this in view of today’s developments?
Hudson: How long more and more money can be pumped into the real estate market, while disposable personal income is not growing by enough to pay these debts? How can people pay mortgages in excess of the rental value of their property? Where is the “market demand” to come from? Speculators already withdrew from the real estate market by late 2006 – and in that year they represented about a sixth of all purchases.
The best that this weekend’s bailout can do is to postpone the losses on bad mortgage debts. But this is a far cry from actually restoring the ability of debtors to pay. Mr. Paulson talks about more lending to support real estate prices. But this will prevent housing from falling to levels that people can afford without running deeper and deeper into mortgage debt. Housing prices are still way, way above the traditional definition of equilibrium – prices whose carrying charges are just about equal to what it would cost to rent over time.
The Treasury’s aim is to revive Fannie and Freddie as lenders – and hence as vehicles for the U.S. economy to borrow from the foreign central banks and large institutional investors that I mentioned above. More lending is supposed to support real estate prices from falling quite so far as they otherwise would – and in fact, the aim is to keep the debt pyramid growing. The only way to do this is to lend mortgage debtors enough to pay the interest and amortization charges on the existing volume of debt they have been loaded down with. And since most people aren’t really earning any more – and in fact are finding their budgets squeezed – the only basis for borrowing more is to inflate the price of real estate that is being pledged as collateral for mortgage refinancing.
It is pure hypocrisy for Wall Street’s Hank Paulson to claim that all this is being done to “help home owners.” They are vehicles off whom to make money, not the beneficiaries. They are at the bottom of an increasingly carnivorous and extractive financial food chain.
Nearly all real estate experts are in agreement that for the next year or two, many of today’s homeowners will find themselves locked into where they are now living. Their situation is much like medieval serfs were tied to their land. They can’t sell, because the market price won’t cover the mortgage they owe, and they don’t have the savings to pay the difference.
Matters are aggravated by the fact that interest rates are scheduled to reset at higher non-teaser rates for the rest of this next year and 2010, increasing the financial burden. You may remember that Alan Greenspan recommended that homebuyers take out adjustable-rate mortgages (ARMs) because the average American moves every three years. By the time the mortgage interest rate jumped, he explained, they could sell to a new buyer in this game of musical chairs – presumably with more and more chairs being added all the times, and plusher ones to boot.
But homeowners can’t move today, so they find themselves stuck with rising interest charges on top of their rising fuel and heating and electricity charges, transportation charges, food costs, health insurance and even property taxes as these begin to catch up with the rise in Bubble Prices.
The government has carefully avoided nationalizing the companies and thereby taking them onto its own balance sheet. It has created a “conservatorship” (a word that my spellchecker does not recognize). So the bailout of Fannie and Freddie looks like the Republicans are trying to play the financial just-pretend game simply until they leave office in February, after which time they can blame the failure of the “miracle of compound debt interest” on the incoming Democratic Congress.
So it’s politics as usual: play for the short run. In the long run – even next year – the real estate market will continue to drift down.
The economic news keeps getting grimmer and grimmer, but you’d never know it by listening to the politicians at the Republican Convention. The only time the economy was brought up at all was in the context of praise for free markets and globalization. The housing crash and credit market meltdown were not mentioned. Could you tell us what you think the rising unemployment numbers, falling consumer demand, skyrocketing foreclosures and ongoing troubles in the credit markets mean for America’s future? Is this just a blip on the radar or are we in the middle of a major retrenchment that will result in falling living standards and a deep, protracted recession?
Hudson: The Republicans prefer to distract attention from how the Bush regime has failed over the past eight years. If attention can be focused on Iraq and terrorism, on personalities and style, serious discussion of such matters may be crowded out. That’s what the news media are for.
When politicians do talk about the economy, the basic strategy is to fight the November election over who has the nicest dream for what people would like to believe. Amazing as it seems, a large number of Americans actually expect to have a good chance of becoming millionaires. They’re simply not looking at the debt side of the balance sheet.
The most striking economic dynamic today is polarization between those who live off the returns to wealth (finance and property extracting interest and rent, plus capital gains as asset prices are inflated) and those who live off what they can earn, struggling to pay the taxes and debts they are taking on. The national income and product accounts – GNP and national income – don’t say anything about the polarization of property, and doesn’t include capital gains, which are how most wealth is being achieved these days, not by actual direct investment to increase the means of production as lobbyists for trickle-down economic theory claim.
Here’s how things look today: The richest 1 per cent of the population receive 57.5 per cent of all the income generated by wealth – that is, payment for privilege, most of it inherited. These returns – interest, rent and capital gains – are not primarily a return for enterprise. They are pure inertia, weighing down markets. They do not “free” markets, except by providing a free lunch to the wealthiest families. The richest 20 per cent of the population receives some 86 per cent of all this income – that is, what actually is increasing household balance sheets.
What people still view as an economic democracy is turning into a financial oligarchy. Politicians are looking for campaign support mainly from this oligarchy because that is where the money is. So they talk about a happy-face economy to appeal to American optimism, while being quite pragmatic in knowing who to serve if they want to get ahead and not be blackballed.
During the 1990s the bottom 90 per cent of the population tried to catch up by going into debt to buy homes and other property. What they didn’t see was that an insatiable growth in debt is needed to keep a real estate and finance bubble expanding. All this credit imposes financial charges, which have been largely responsible for polarizing wealth ownership so sharply in recent decades.
These debt charges have grown so heavy that debtors are able to pay only by borrowing the interest that is falling due. They have been able to borrow for the past few years by pledging real estate or other collateral whose prices are being inflated by Federal Reserve policy. The Treasury also contributes by giving tax favoritism, un-taxing property and finance. This forces labor and tangible industrial capital to pick up the fiscal slack, even as they are being forced to carry a heavier debt burden.
Homeowners do not gain by this higher market “equilibrium” price for housing. Higher prices simply mean more debt overhead. Rising price/rent and price/earnings ratios for debt-financed properties, stocks and bonds oblige wage earners to go deeper and deeper into debt, devoting more and more years of their working life to pay for housing and to buy income-yielding stocks and bonds for their retirement.
Debt expansion to buy property seems self-justifying as long as asset prices are rising. This asset-price inflation is euphemized as “wealth creation” by focusing on real estate, stock and bond prices – even as disposable personal income and living and working conditions are eroded.
So to come back to your broad question, I don’t see consumer demand rising much, except by foreign tourists coming over and spending their money as the dollar falls. Here in New York, foreign buyers are supporting the real estate market. The Wall Street downturn already has forced the city to postpone its promised property tax cuts and its subway expansion. My wife and I just got our condo tax bill this week. There was an explanatory note telling us that the only tax cuts will be for commercial property owners. Residential property tax rates rise.
It gets worse. Without better transportation, wage earners will be squeezed across the country. Higher gas prices, electricity, health care and food are crowding out spending on output and forcing people into even more debt. That’s why arrears and defaults are rising. Even rents are rising, despite falling real estate prices. This is because houses under foreclosure can’t be rented out, so millions of houses may be taken off the market.
What exactly do you mean by “modern debt peonage”?
Hudson: This is what happens when wage earners are obliged to turn over all their income above basic subsistence needs to the FIRE sector – mainly for debt service but also to pay for compulsory insurance and, most recently, the tax burden that finance and property have shifted off themselves.
The distinguishing feature about peonage is its lack of choice. It is the antithesis of free markets. As I mentioned above, many families today find themselves locked into homes that have negative equity. Their mortgage debt exceeds the market price. These homes can’t be sold – unless the family can pay the difference to the banker who has made the bad mortgage loan. The gap may exceed all the income the family earns in an entire year – just as it was making on paper a price gain larger than its annual take-home pay.
But what did all this matter, in retrospect, if the house was for living, not for buying and selling? This dimension of use value was left out of account by focusing on paper wealth.
In a nutshell, debt peonage is the other side of the coin in a rentier economy. The negative equity we are seeing today is a key component of debt peonage. It forces debt peons to spend their lives trying to work their way out of debt. The more desperate they get, the more risks they take, and the deeper they end up. In Kansas City, one of my students wrote his class paper on how the immediate cause of many mortgage defaults is gambling debt. Missouri has a lot of fundamentalist Christians who think of God as watching carefully over them. Being good people, they want to give God a chance to reward them for living an honest life. So they go to the gambling boats that are moored along the river. But the odds are against them, and it looks like Einstein was wrong when he said that God doesn’t play dice. Gambling – and much financial speculation – is all about probability, and the odds are as much against gamblers as they are against debtors. Being laws of nature, the laws of probability are like the privilege of land ownership: a gambling license provides the house with an opportunity to rake economic rent off the top.
Debt deflation and the tax shift off finance and property onto labor
In the short run it looks like slow growth and deflation will be bigger problems than inflation. Commodities, including gold and oil, are tumbling almost daily, while bank assets are being steadily downgraded, foreclosures are soaring and the stock market is reeling. The financial crisis that began in the real estate market has triggered a boycott of structured products and is now rippling through the broader economy.
The Federal Reserve has already dropped interest rates by 3.5 per cent and has used up half its balance sheet ($450 billion) to shore up the faltering banking system. But the situation keeps getting worse. The banks have curtailed their lending, and consumer spending is off in nearly every area. It looks like the Fed is out of ammo. Is it time to consider fiscal alternatives to the present downturn, such as cutting payroll taxes to give families more money to increase demand, or initiating massive infrastructure projects?
Hudson: By “deflation” I assume you mean debt deflation – draining purchasing power as a result of rising debt service and compulsory insurance, plus the wage squeeze that the government praises for “raising productivity” to “create wealth” for the CEOs who pay themselves what they have cut back from labor’s paycheck. There will be less consumer spending – but even so, consumer prices may not come down if the dollar resumes its fall, especially if monopoly pricing continues to be permitted.
Your solution is indeed what is needed, and Mr. Obama has promised to raise the wage and salary limit subject to FICA withholding. I think that an even better idea would be to go back to the original 1913 income tax and exempt wages that merely cover subsistence. I would restore a cut-off point at $102,000 in today’s dollars, matching the terms of America’s 1913 income tax. People earning less would not have to file an income-tax return at all.
This truly conservative idea would free income to be spent on improving living standards. Instead, high income brackets and property are being un-taxed today, and their tax savings are being spent mainly in making loans that are used to bid up the price of wealth and luxury goods.
This is what the classical economists warned against, yet the tax shift off property onto labor is being done hypocritically in their name. To get the kind of free markets they advocated, taxes should fall on the FIRE sector (finance, insurance and real estate) and monopolies, not wages or bona fide industrial profits stemming from tangible capital investment and employment.
This June you wrote a groundbreaking paper for a recent Post-Keynesian conference at the University of Missouri in Kansas City, where you’re an economics professor. Its title was “How the Real Estate Bubble drives Home buyers into Debt Peonage.” You earlier wrote a now famous May 2006 Harpers cover story on debt peonage. Your Kansas City paper produces charts showing how tax favoritism for real estate and other clients for the banking and financial sector stimulates asset-inflation, leading to massive equity bubbles like the one we are currently experiencing in the housing market. Would you give us a brief summary of your thesis?
Hudson: My paper explained how the money the tax collector gives up is “freed” to be paid to banks as interest. This is the motto of real estate investors: “Rent is for paying interest.” The FIRE sector has adopted a populist rhetoric to persuade homeowners to believe that lowering the property tax will end up giving them more money. It seems at first blush that this would happen. But in practice, new buyers – and speculators – come into the market and pledge the tax cuts to bid up housing prices all the more. The winner in this new anti-tax marketplace is the buyer who pledges to pay the tax cut to the banks as interest on a mortgage loan to buy the property.
As my paper describes:
“Tax favoritism for real estate, corporate raiders and ultimately for bankers has freed income to be pledged to carry more and more debt, which has been used to fuel asset-price inflation that raises the price of home ownership, corporate stocks and bonds – but not to increase production and output. ... Shaping the marketplace to favor finance and property over industry and labor does not create a ‘free market.’ It favors the debt-leveraged buying and selling of real estate, stocks and bonds, distorting markets in ways that de-industrialize the economy. [And] shifting taxes off property and finance is more a distortion than a virtue, unless debt leveraging is deemed virtuous.
"This is the tragedy of our economy today. Credit creation, saving and investment are not being mobilized to increase new direct investment or raise living standards, but to bid up prices for real estate and other assets already in place and for financial securities (stocks and bonds) already issued. This loads down the economy with debt without putting in place the means to pay it off, except by further and even more rapid asset-price inflation.
This is largely the result of relinquishing planning and the structuring of markets to large banks and other financial institutions, political lobbyists have rewritten most of today’s tax laws and sponsored general public deregulation of the checks and balances that were being put in place by the late 19th century. At that time, just over a hundred years ago, it seemed that wealth – and banking – were being industrialized, while landed wealth and monopolies would become more socialized and their rents fully taxed. Instead of real estate prices rising, the rental ‘free lunch’ would provide the basic source of public finance. Technology and productivity would increase industrial capital formation and raise labor’s living standards. These policies would free markets from rent extraction and also from taxes as the fiscal burden was shifted back onto property.
But this is not what has occurred. The financial system has used its power to extract fiscal favors for real estate and to press for deregulation of monopolies as the major source of its interest and collateral for its loans.”
What do you think the positive effects would be of taxing property rather than income and industrial profit?
Hudson: It would have two major positive effects. First, it would free labor and industry from the tax burden. And by the same token, it would require the economic rent currently used to pay interest and depreciation to be paid instead as a property rent tax. This would free an equivalent sum from having to be raised in the form of income and sales tax. That was the classical idea of free markets. As matters stand today, the tax subsidy for real estate and finance leaves more net rental income to be capitalized into bank loans. This is a travesty of the “free markets” that lobbyists for the banks and the wealthy in general claim to advocate.
Replacing income and sales taxes by a land-rent “free lunch” tax would make real estate prices more affordable, because the interest now “free” to be paid to banks to support a high debt overhead would instead be collected and used to lower the tax burden on labor and industry. This would reduce the cost of production and living, I estimate by about 16 percent of national income.
Homeowners and renters would pay the same amount as they now do, but the public sector would recapture the expense of building transportation and other basic infrastructure out of the higher rental value this spending creates. The tax system would be based on user fees for property, falling on owners in a way that collects the rising value of their property resulting from the rent of location, enhanced by public transportation and other infrastructure, and from the general level of prosperity, for which landlords are not responsible but merely are the passive beneficiaries under current practice.
A Neo-Progressive fiscal policy would aim at recapturing the land’s site value created by public infrastructure spending, schooling and the general level of prosperity. The debt pyramid would be much smaller, and savings could take the form of equity investment once again. Slower growth of debt, housing and office prices, and lower taxes on income and sales would make the economy more competitive internationally.
I’d like to expand on what you have said in your article and you can correct me if I’ve got it wrong. You say that today’s tax code poses an obstacle to progressive political change, and puts more and more power in the hands of bankers and speculators who profit from “boom and bust” cycles. In other words, reworking the tax system has to be the cornerstone of any progressive platform? Is this the bigger point you are trying to make?
Hudson: It’s certainly the tax point I want to make. But I think that my most important point is the analysis of how the mathematics of compound interest intrudes increasingly into the economy. The fiscal link is that as finance strips more and more wealth, Wall Street converts its economic power into political power. Its main aim is to free itself from taxation – by shifting the burden onto labor.
One way to achieve this tax shift has been to re-define taxes as a “user fee.” This is what the Greenspan Commission did in 1983 when it imposed heavy regressive taxation on labor via FICA wage withholding for Social Security and Medicare instead of funding these programs out of the general budget, to be paid for largely by the higher brackets. The Social Security Trust Fund generated a heavy tax surplus, which was used to cut tax rates on the upper wealth brackets.
The tax code’s “small print” made commercial real estate free of having to pay income tax by pretending that landlords were losing money on their property as buildings depreciated – as if the land’s rising site value did not more than compensate. Most important, interest was treated as a tax-deductible expense. This encouraged debt leveraging rather than equity investment, creating an enormous market for bankers creating credit and collecting interest on it.
You say in your article that there’s “a symbiosis between finance, insurance and real estate” which is at the core of the Bubble Economy. And that this creates a “a feedback between bank credit and asset prices. The quickest and easiest path to wealth is not to earn profits by investing in industry, but to go into debt to ride the wave of asset-price inflation. The result is a shift of wealth seeking away from industry to financial maneuvering on credit to ride the wave of asset-price inflation.”
Is this financialization trend irreversible, or is there a way we can revitalize America’s industrial base? Should we consider nationalizing the failing auto industry and putting people to work while we build vehicles for the future?
Hudson: Nationalization may not be the answer as long as financial interests have replaced the government as society’s new central planners. I fear that nationalization under today’s political conditions would mean “socializing the losses,” having the government bear them and then sell off the companies at the usual give-away price to new buyers on credit, all to the benefit of Wall Street.
If there is any sector to be nationalized, it should be the FIRE sector – finance, insurance and industry – along with taking basic infrastructure back into the public domain by de-privatizing it. The Progressive Era’s plan that made America so rich and dominant a nation was for the government to supply basic services such as railroads, phone systems, the post office and roads or canals at cost or at a subsidy. This lowered the price structure across the economic spectrum, enabling the United States to undersell and out-produce other economies.
We are now in Year 2 of the so-called credit crisis, what Bloomberg News calls “the worst financial crisis since the Depression.” More and more pundits are pointing at the Fed’s monetary policies as the source of the troubles. Surprisingly, even the New York Times has joined in the finger pointing by admitting that Greenspan played a central role in the housing bubble.
Here’s what The New York Times recently said: “Who’s to blame? In the estimation of many economists, it starts with the Federal Reserve. The central bank lowered interest rates following the calamitous end of the technology bubble in 2000, lowered them more after the terrorist attacks of Sept. 11, 2001, and then kept them low, even as speculators began to trade homes like dot-com stocks. Meanwhile, the Fed sat back and watched as Wall Street’s financial wizards engineered diabolically complicated investments linked to mortgages, generating huge amounts of speculative capital that turned real estate into a conflagration.”
How would you characterize Greenspan's part in the present crisis?
Hudson: He was its cheerleader, with backup from the University of Chicago and a slew of right-wing think tanks. Mr. Greenspan gave all this trickle-down economics a patina of rationale and also a rhetoric pretending that the financial bubble was helping homeowners rather than mortgage lenders and Wall Street. His role was to translate Ayn Rand propaganda into populist euphemism.
The role of a financial cheerleader is to confuse the economic issues, above all by depicting running into debt as “debt leverage” to accelerate “wealth creation.” Looking backward, we now can see that this was really debt creation. When Mr. Greenspan spoke about wealth, he didn’t mean the kind that Adam Smith referred to in The Wealth of Nations – tangible means of production. Mr. Greenspan meant balance-sheet financial claims on this wealth in the form of stocks, bonds and property claims. Adam Smith said that to count these monetary forms of wealth alongside the actual land and capital of Britain would be double counting. For Greenspan, the liabilities side of the economy’s balance sheet – what its producers owed to financial and property owners – became the only kind of wealth he really cared about.
This inside-out perspective was largely responsible for de-industrializing, downsizing and outsourcing the U.S. economy. Mr. Greenspan’s idea of “free markets” was simply to deregulate them – covertly, to be sure, by appointing non-regulators to the government’s key regulatory positions. This resulted in asset stripping, which created some conspicuous billionaires (corporate raiders, re-christened as “shareholder activists” these days) and hence won the praise of Mr. Greenspan for ostensibly playing a positive role in “wealth creation.”
The bottom line is that the economic vocabulary was turned into double-think.
The Political dimension
I have no background in economics, and never had any particular interest in the topic. My frustration with the direction of the country – particularly the Iraq war and the dismantling of civil liberties – led me to search for answers in places that I never otherwise would have looked. Now I am convinced that the war in Iraq and the rapid shift towards a police state here in America are logical corollaries of the economic polarization that has its root in policies that are fundamentally flawed and serve the narrow interests of corporatists, bankers and other vested interests.
Hudson: With regard to your abhorrence of economics, some of my best students at the New School withdrew from the discipline as they found that it wasn’t addressing the problems they were most concerned about. The field has been sterilized by more than a generation of Chicago School intolerance.
The economics profession does not seem to be amenable to reform along the lines that would get you interested in it. It has become mainly a rhetorical gloss to depict financial oligarchy as if it were populist economic democracy. Many people have tried to expand its scope, and have failed. Thorstein Veblen made an attempt a century ago, his analysis – basically, classical political economy – was exiled to the academic sub-basement of sociology. Economists preferred to put on blinders when it came to looking at wealth distribution and the classical distinction between “earned” and unearned” (that is, parasitic) income. Just while sex was becoming un-repressed, wealth distribution became the new politically incorrect topic to discuss.
In the old movies about invaders from outer space such as The Thing, there usually was a near-sighted scientist who said, “Let’s try to reason with it. It’s smarter than we are, because it’s come in a flying saucer with all that great technology.” The monster from outer space then would simply whack the man aside, killing him brutally.
It’s much like the Terminator from the future. “It doesn’t feel compassion. It doesn’t feel pain. You can’t reason with it,” says the movie’s hero. “All it does is kill.”
This is the task the Chicago Boys have taken on in their defense of financialized markets as being “free.” You can’t reason with them. Reason is not their job. They are not there to be fair.
But to achieve its censorial role, today’s economic orthodoxy pretends that markets work in a fair way to provide everyone with opportunity – something like a sperm with a chance to inherit a billion dollars from a Russian kleptocrat or American real estate magnate or Wall Street operator. To promote this worldview, one needs to craft a rhetoric pretending that markets are “free,” not leading to serfdom. One has to pretend that is government regulation of the kleptocrats that is leading to serfdom rather than protecting the population from predatory finance.
Regarding your concern with the police state and, ultimately military aggression that is required to promote “free markets” at gunpoint, Pinochet-style, empire building always has gone hand in hand with impoverishing the population of the imperial center as well as its periphery. For starters, empires and wars don’t pay, at least not in modern times. At best, it is like the war in Iraq – a vehicle for the Bush administration to channel billions of “missing” dollars to its campaign supporters, to recycle back into new Republican campaign funding. The economy at large is taxed as imperialism turns into asset stripping.
A second and more purely political dimension of imperial warfare is to distract the attention of voters away from economic issues, by appealing to their nationalism and chauvinism.
Hobson’s theory of imperialism was that the domestic population lacked the income to consume what it produced, so that producers had to seek out foreign markets. This led to war. But today, the “postindustrial” mode of imperialism is more about recycling wealth to produce capital gains, mainly by globalizing and privatizing the Bubble Economy. The most important markets for “wealth creation” are not for goods and services, but for real estate and financial assets. So we are brought back to your initial questions today, about how Fannie Mae and Freddie Mac will sponsor more sales of mortgage-backed securities.
I think your article offers a straightforward way to avoid disaster and to transform society by changing the tax code so that it strengthens the middle class and levels the playing field between “the haves and the have-nots.” But how can this be achieved without breaking your ideas into snappy sound-bytes and building a broad-based grassroots movement devoted to working class issues and economic justice? Is there a way to make these transformative social changes without starting a third political party; an American Labor Party perhaps?
Hudson: If the incoming Democratic administration proves to be more of the same, pressure will indeed arise to create a new party. More often economic reform has come from the top, but I don’t see it from the Republicans, given their corruption. Within the Democratic Party the question is whether the Wall Street Democratic Leadership Committee (who gave us Gore and Lieberman after the Clintons) will continue to impose its stranglehold.
Any real improvement will need an educational campaign to prepare the ground for making economic reform the centerpiece of major elections. This educational role often has been filled by third parties. In the 1890s, for instance, the main Progressive Era campaigning occurred outside of the Democrats and largely outside of the Republicans as well.
Michael Hudson is a former Wall Street economist specializing in the balance of payments and real estate at the Chase Manhattan Bank (now JP Morgan Chase & Co.), Arthur Anderson, and later at the Hudson Institute (no relation). In 1990 he helped established the world’s first sovereign debt fund for Scudder Stevens & Clark. Dr. Hudson was Dennis Kucinich’s Chief Economic Advisor in the recent Democratic primary presidential campaign, and has advised the U.S., Canadian, Mexican and Latvian governments, as well as the United Nations Institute for Training and Research (UNITAR). A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002. He can be reached via his website, mh@michael-hudson.com
9 September 2008
Kicking the Debt Habit Cold Turkey
by Kurt Kasun September 03, 2008
Kurt Kasun is a contributing writer to GreenFaucet.com. The following is excerpted from the 08/10/08 Global MegaTrends Portofolio's Newsletter:
Things are about to get really bad. Rotating bubbles are now becoming rotating sector recessions as the positive feedback loops, created as money and credit growth ballooned over the last 25 years, have reversed and are now becoming negative feedback loops. I expect to see those 25 years of excesses to dramatically unwind over the course of the next few years. The evaporation of paper wealth will be breathtaking. A "buy on the dips" mentality has been replaced by "sell on the rallies." Declining house values will further hinder the finance sector which will impede the real economy, causing asset prices to further plunge. The tipping point for debt creation's positive impact has been reached and we can expect economic convulsions similar to what a drug addict experiences after kicking the habit "cold turkey."
"The credit crunch is morphing from an American-centered financial crisis into a global economic crisis," according to David Bowers of Absolutely Strategy. The policy of creating more money than could be put to productive use in the real economy that allowed rising asset prices would more than compensate for a lack of ‘real' wage gains in the real economy and for consumers to continue to borrow and spend more than they earn at an accelerating pace failed once the excess money began to flow to commodities rather than to real estate or stock prices.
Growth is now demonstrably slowing in all parts of the world. Central Banks around the world will be embarking on a campaign of lowering their interest rates. Participants in the US stock market, fresh off an artificially trumped up GDP restatement (trumped up due to the stimulus package and severe understatement of the GDP deflator), will take a while to realize that gains in the dollar are due to relative underperformance of other currencies and a massive liquidity contraction. The gains will be short-lived and will result in pain and agony as those investors are lured into another bear trap that will reveal itself once much of the sidelined money comes back into the market.
The fall in commodity prices will be wrongly interpreted as a reason for the economy to rebound and for stocks to rally. While the dollar will likely continue to rise over the short term it is ultimately destined to suffer the same disastrous fate as the other fiat currencies of the world. After the sucker's rally has run its course over the next few weeks or so, the reality of an unserviceable and un-payable debt overhang will set in and the second wave of financial calamity will ensue. This time around it will be the result of the effects emanating from the negative feedback loop coming from the real economy.
Scott Bugie of Standard & Poor's writes that the second phase of credit crunch could be severe: "The credit crunch is entering a second, 'post-subprime' phase where banks' loan books deteriorate more rapidly and capital-raising efforts might become harder, says Scott Bugie, credit analyst at Standard & Poor's. Loan book deterioration is starting to hit a wider array of financial institutions, as credit losses migrate from subprime into other sectors of household finance, such as credit cards, Alt-A and prime mortgages, and auto loans well into 2009,' he says.
Other mainstream economists are have also been sounding the warning trumpets: "The US is not out of the woods. I think the financial crisis is at the halfway point, perhaps. I would even go further to say the worst is to come," according to Professor Ken Rogoff who was chief economist at the IMF from 2001 to 2004 and who now teaches at Harvard. He goes on to say, "We're not just going to see mid-sized banks go under in the next few months, we're going to see a whopper, we're going to see a big one - one of the big investment banks or big banks."
In 2002 Dr. Marc Faber, author of the GloomBoomDoom Report and highly-sought guest for CNBC and Bloomberg TV, wrote a book titled, Tomorrow's Gold-Asia's Age of Discovery. Those who read the book and followed Faber's investment advice to invest in commodities and Asian and other emerging market equities have significantly outperformed those who primarily invested in US stocks (tech, consumer and financials). But Faber had recently cautioned against this "short dollar trade" as it had become stretched and crowded. He presciently warned investors late last year. More recently, referring to commodities, he said "Prices have made a peak...Whether that is a final peak or an intermediate peak followed by higher prices, we don't know yet. It could go lower."
He echoed similar sentiments in a Bloomberg TV interview this morning. I found his most recent market commentary, issued on August 20, 2008 titled, "Contracting Global Liquidity," quite compelling. He uses several charts to demonstrate how liquidity is contracting, the dollar is strengthening, commodities are declining, and what the relationships that exist between them predict for the future. He writes:
"In sum, credit growth and liquidity are contracting, a vicious economic downturn is about to unfold ( China could surprise on the downside and put additional pressure on commodity prices) and asset markets are still high by historical standards and, therefore, remain vulnerable. I would use equity rallies as a selling opportunity and further weakness in gold as a buying opportunity for long term holders with significant cash and cash flows."
Faber has an enviable track record over the long, intermediate and shorter term. Not many investment strategists can boast of getting the market right over these three terms. He is an open-minded contrarian who is not afraid to change his views. He was way in front of the investment community predicting the rise of China and commodity prices six years ago. He correctly wrote that the US currency and stock markets would relatively outperform others last year. And he got the April-May S&P 500 rally to 1440 right also.
The one longer-term trend Faber appears to have the most confidence in is the "long gold/short the DJIA" trade that has been working, despite the recent pullback, since 2001. Over the intermediate term he is a looking for what can be described as nothing less than a US stock market crash, perhaps by the end of this year.
Rather than the US markets leading the rest of the world higher, the evidence points toward the rest of the world leading US markets lower. The global slowdown had begun in earnest. The US is now more dependent on world growth than the world is reliant upon the US. This is especially true since the US consumer is seeing his credit cut off and US banks and financial institutions suffer the effects of the second wave of the credit crunch. Once the relief rally has run its course and investors see that the US economic rebound has not staying power and only worn out consumers trying to pay off 25 years of accumulated debt, the dollar will rejoin the ranks of the other fiat currencies and resume its decline versus the price of gold.
Kurt Kasun is a contributing writer to GreenFaucet.com. The following is excerpted from the 08/10/08 Global MegaTrends Portofolio's Newsletter:
Things are about to get really bad. Rotating bubbles are now becoming rotating sector recessions as the positive feedback loops, created as money and credit growth ballooned over the last 25 years, have reversed and are now becoming negative feedback loops. I expect to see those 25 years of excesses to dramatically unwind over the course of the next few years. The evaporation of paper wealth will be breathtaking. A "buy on the dips" mentality has been replaced by "sell on the rallies." Declining house values will further hinder the finance sector which will impede the real economy, causing asset prices to further plunge. The tipping point for debt creation's positive impact has been reached and we can expect economic convulsions similar to what a drug addict experiences after kicking the habit "cold turkey."
"The credit crunch is morphing from an American-centered financial crisis into a global economic crisis," according to David Bowers of Absolutely Strategy. The policy of creating more money than could be put to productive use in the real economy that allowed rising asset prices would more than compensate for a lack of ‘real' wage gains in the real economy and for consumers to continue to borrow and spend more than they earn at an accelerating pace failed once the excess money began to flow to commodities rather than to real estate or stock prices.
Growth is now demonstrably slowing in all parts of the world. Central Banks around the world will be embarking on a campaign of lowering their interest rates. Participants in the US stock market, fresh off an artificially trumped up GDP restatement (trumped up due to the stimulus package and severe understatement of the GDP deflator), will take a while to realize that gains in the dollar are due to relative underperformance of other currencies and a massive liquidity contraction. The gains will be short-lived and will result in pain and agony as those investors are lured into another bear trap that will reveal itself once much of the sidelined money comes back into the market.
The fall in commodity prices will be wrongly interpreted as a reason for the economy to rebound and for stocks to rally. While the dollar will likely continue to rise over the short term it is ultimately destined to suffer the same disastrous fate as the other fiat currencies of the world. After the sucker's rally has run its course over the next few weeks or so, the reality of an unserviceable and un-payable debt overhang will set in and the second wave of financial calamity will ensue. This time around it will be the result of the effects emanating from the negative feedback loop coming from the real economy.
Scott Bugie of Standard & Poor's writes that the second phase of credit crunch could be severe: "The credit crunch is entering a second, 'post-subprime' phase where banks' loan books deteriorate more rapidly and capital-raising efforts might become harder, says Scott Bugie, credit analyst at Standard & Poor's. Loan book deterioration is starting to hit a wider array of financial institutions, as credit losses migrate from subprime into other sectors of household finance, such as credit cards, Alt-A and prime mortgages, and auto loans well into 2009,' he says.
Other mainstream economists are have also been sounding the warning trumpets: "The US is not out of the woods. I think the financial crisis is at the halfway point, perhaps. I would even go further to say the worst is to come," according to Professor Ken Rogoff who was chief economist at the IMF from 2001 to 2004 and who now teaches at Harvard. He goes on to say, "We're not just going to see mid-sized banks go under in the next few months, we're going to see a whopper, we're going to see a big one - one of the big investment banks or big banks."
In 2002 Dr. Marc Faber, author of the GloomBoomDoom Report and highly-sought guest for CNBC and Bloomberg TV, wrote a book titled, Tomorrow's Gold-Asia's Age of Discovery. Those who read the book and followed Faber's investment advice to invest in commodities and Asian and other emerging market equities have significantly outperformed those who primarily invested in US stocks (tech, consumer and financials). But Faber had recently cautioned against this "short dollar trade" as it had become stretched and crowded. He presciently warned investors late last year. More recently, referring to commodities, he said "Prices have made a peak...Whether that is a final peak or an intermediate peak followed by higher prices, we don't know yet. It could go lower."
He echoed similar sentiments in a Bloomberg TV interview this morning. I found his most recent market commentary, issued on August 20, 2008 titled, "Contracting Global Liquidity," quite compelling. He uses several charts to demonstrate how liquidity is contracting, the dollar is strengthening, commodities are declining, and what the relationships that exist between them predict for the future. He writes:
"In sum, credit growth and liquidity are contracting, a vicious economic downturn is about to unfold ( China could surprise on the downside and put additional pressure on commodity prices) and asset markets are still high by historical standards and, therefore, remain vulnerable. I would use equity rallies as a selling opportunity and further weakness in gold as a buying opportunity for long term holders with significant cash and cash flows."
Faber has an enviable track record over the long, intermediate and shorter term. Not many investment strategists can boast of getting the market right over these three terms. He is an open-minded contrarian who is not afraid to change his views. He was way in front of the investment community predicting the rise of China and commodity prices six years ago. He correctly wrote that the US currency and stock markets would relatively outperform others last year. And he got the April-May S&P 500 rally to 1440 right also.
The one longer-term trend Faber appears to have the most confidence in is the "long gold/short the DJIA" trade that has been working, despite the recent pullback, since 2001. Over the intermediate term he is a looking for what can be described as nothing less than a US stock market crash, perhaps by the end of this year.
Rather than the US markets leading the rest of the world higher, the evidence points toward the rest of the world leading US markets lower. The global slowdown had begun in earnest. The US is now more dependent on world growth than the world is reliant upon the US. This is especially true since the US consumer is seeing his credit cut off and US banks and financial institutions suffer the effects of the second wave of the credit crunch. Once the relief rally has run its course and investors see that the US economic rebound has not staying power and only worn out consumers trying to pay off 25 years of accumulated debt, the dollar will rejoin the ranks of the other fiat currencies and resume its decline versus the price of gold.
8 September 2008
Palin likes sacking librarians ~ she is a monster
Alaskans Speak (In A Frightened Whisper): Palin Is “Racist, Sexist, Vindictive And Mean.”
“So Sambo beat the bitch!”
This is how Republican Vice Presidential nominee Sarah Palin described Barack Obama’s win over Hillary Clinton to political colleagues in a restaurant a few days after Obama locked up the Democratic Party presidential nomination.
According to Lucille, the waitress serving her table at the time and who asked that her last name not be used, Gov. Palin was eating lunch with five or six people when the subject of the Democrat’s primary battle came up. The governor, seemingly not caring that people at nearby tables would likely hear her, uttered the slur and then laughed loudly as her meal mates joined in appreciatively.
“It was kind of disgusting,” Lucille, who is part Aboriginal, said in a phone interview after admitting that she is frightened of being discovered telling folks in the “lower 48” about life near the North Pole.
Then, almost with a sigh, she added, “But that’s just Alaska.”
Racial and ethnic slurs may be “just Alaska” and, clearly, they are common, everyday chatter for Palin.
Besides insulting Obama with a Step-N’-Fetch-It, “darkie musical” swipe, people who know her say she refers regularly to Alaska’s aboriginal people as “Artic Arabs” – how efficient, lumping two apparently undesirable groups into one ugly description – as well as the more colourful “mukluks” along with the totally unimaginative “fucking Eskimo’s,” according to a number of Alaskans and Wasillians interviewed for this article.
But being openly racist is only the tip of the Palin iceberg. According to Alaskans interviewed for this article, she is also vindictive and mean. We’re talking Rove mean and Nixon vindictive.
No wonder the vast sea of white, cheering faces at the Republican Convention went wild for Sarah: They adore the type, it’s in their genetic code. So much for McCain’s pledge of a “high road” campaign; Palin is incapable of being part of one.
< –––– >
It’s not easy getting people in the 49th state to speak critically about Palin – especially people in Wasilla, where she was mayor. For one thing, with every journalist in the world calling, phone lines into Alaska have been mostly jammed since Friday; as often as not, a recording told me that “all circuits are busy” or numbers just wouldn’t ring. I should think a state that’s been made richer than God by oil could afford telephone lines and cell towers for everyone.
On a more practical level, many people in Alaska, and particularly Wasilla, are reluctant to speak or be quoted by name because they’re afraid of her as well as the state Republican Party machine. Apparently, the power elite are as mean as the winters.
“The GOP is kind of like organized crime up here,” an insurance agent in Anchorage who knows the Palin family, explained. “It’s corrupt and arrogant. They’re all rich because they do private sweetheart deals with the oil companies, and they can destroy anyone. And they will, if they have to.
“Once Palin became mayor,” he continued, “She became part of that inner circle.”
Like most other people interviewed, he didn’t want his name used out of fear of retribution. Maybe it’s the long winter nights where you don’t see the sun for months that makes people feel as if they’re under constant danger from “the authorities.” As I interviewed residents it began sounding as if living in Alaska controlled by the state Republican Party is like living in the old Soviet Union: See nothing that’s happening, say nothing offensive, and the political commissars leave you alone. But speak out and you get disappeared into a gulag north of the Arctic Circle for who-knows-how-long.
Alright, that’s an exaggeration brought on by my getting too little sleep and building too much anger as I worked this article. But there’s ample evidence of Palin’s vindictive willingness to destroy people she sees as opponents. Just ask the Wasilla town administrator she hired before firing him because he rebelled against the way Palin demanded he do his job, or the town librarian who refused to hold the book burning Walpurgisnach Mayor Palin demanded.
Ironically, Palin was pushed into hiring the administrator by the party poo-bah’s who helped get her elected after she got herself into trouble over a number of precipitous firings which gave rise to a recall campaign.
“People who fought her attempt to oust the librarian are on her enemies list to this day,” states Anne Kilkenny, a Wasilla resident and one of the few Alaskans willing to speak on-the-record, for attribution, about Palin. In fact, Kilkenny actually circulated an e-mail letter about Palin that was verified and printed by The Nation.
For good measure, Palin booted the Wasilla police chief from office because, she told a local newspaper, he “intimidated” her.
< –––– >
Sarah Palin drew early attention from state GOP apparatchiks when, during her first mayoral campaign, she ran on an anti-abortion platform. Normally, political parties do not get involved in Alaskan municipal elections because they are non-partisan. But once word of her extreme fringe evangelical views made its way to Juneau, the state capitol, state Republicans tossed some money behind her campaign.
Once in office, Palin set out to build a machine that chewed up anyone who got in her way. The good, Godly Christian turns out to be anything but.
“She's doesn’t like different opinions and she refuses to compromise,” Kilkenny notes. “When she was Mayor, she fought ideas that weren't hers. Worse, ideas weren't evaluated on their merits but on the basis of who proposed them.”
Sound familiar? Palin may well be Dick Cheney’s reincarnate.
Something else has a familiar Republican ring to it: Her tax policies, and a “refund surpluses but borrow for the future” attitude.
According to Kilkenny and others in Wasilla as well as Juneau, Palin reduced progressive property taxes for businesses while mayor and increased a regressive sales tax which even hits necessities such as food. The tax cuts she promoted in her St. Paul speech actually benefited large corporate property owners far more than they benefited residents. Indeed, Kilkenny insists that many Wasilla home owners actually saw their tax bill skyrocket to make up for the shortfall. Two other Wasillian’s with whom I spoke said property taxes on their modest, three bedroom homes rose during the Palin regime.
To an outsider, it would seem hard to do, but an oil-rich town with zero debt on the day she was inaugurated mayor was left saddled with $22-million of debt by the time she moved away to become governor – especially since nothing was spent on things such as improving the city’s infrastructure or building a much-needed sewage treatment plant. So what did Mayor Palin spend the taxpayer’s money on, if not fixing streets and scrubbing sewage?
For starters, she modelled her office. Several times over, as a matter of fact.
Then Palin spent $1-million on an unnecessary, new park that no one other than the contractors and Palin seemed to want. Next, Sarah doled out more than $15-million of taxpayer money for a sports complex that she shoved through even though the city did not own clear title to the land; now, seven years later, the matter is still in litigation and lawyer fees are said to be close to at least half of the original estimated price of the facility.
She also worked hard to get voters approval of a $5.5-million bond proposal for roads that could have been built without borrowing. Anchorage may not be the center of the financial universe but, like good Republicans everywhere, Sarah Palin knows how to please Alaskan bankers and bond dealers.
For good measure, she turned Wasilla into a wasteland of big box stores and disconnected parking lots.
< –––– >
En route to the governor’s igloo, Palin managed to land what Anne Kilkenny says is the plumb political appointment in the state: Chair of Alaska’s Oil and Gas Conservation Commission (OGCC), a $122,400 per year patronage slot with no real authority to do anything other than hold meetings. She took the job despite having no background in energy issues and, as it turned out, not liking the work.
“She hated the job,” an OGCC staff member who is not authorized to speak with the news media told me. “She hated the hours and she hated what little work there was to do. But she couldn’t figure out a way to get out of the thing without offending Gov. Murkowski” and the state Republican Party regulars, some of whom were pissed off they didn’t get appointed.
But ever the opportunist, Palin quickly concocted a way. First, she waged a campaign with the local news media claiming that the position was overpaid and should be abolished – despite the fact that she lobbied Murkowski hard to get it. Then, mounting what she saw as a white horse, Palin raised a cloud of dust by resigning from the OGCC and riding away with an undeserved reputation as a “reformer.”
But when a local reporter dared to suggest that the reformer Empress has no clothes, Palin tried to get her fired.
“She came at me like I was trying to steal her kids,” said the targeted reporter, who now works for an oil company in Anchorage. “I heard she had a wild temper and vicious mean streak but it’s nothing like you can imagine until she turns it on you.”
Not surprising since some of her high school classmates still openly call her “Sarah Barracuda,” Kilkenny insists.
Still, as a Republican Party hack Palin managed to get herself elected running under the false flag of a “reformer.”
And what did she bring to the job? No legislative experience other than a city council of a village of 5,000 people, which is smaller than some high schools in Chicago. Little hands-on supervisory or managerial experience; after all, she needed to hire a city administrator to run Wasilla. No executive experience, except for almost being recalled as mayor. A philosophy of setting public policy based on one word: No.
And what has she done since winning the job?
According to Kilkenny, nothing. Well, nothing other than suggesting the state’s multi-multi-million dollar, oil-generated surplus be distributed to residents and finance future state needs by borrowing money. Gee, doesn’t that sound precisely what George Bush did with the surplus he inherited from Bill Clinton in 2001 and we all know in what great shape Bush’s economic policies left the nation.
It may explain why, when asked by reporters including me what she thought about Palin being picked to be McCain’s running mate, her mother-in-law replied with a sardonic, “What has Sarah done to qualify her to be vice president?” Of course, when the woman – said by many I spoke with to be well-respected in Wasilla – was running to succeed Palin as mayor, Sarah refused to endorse her so that may explain the family tension.
As Governor, Palin gave the legislature no direction and budget guidelines, according to the chair of a legislative committee. But then she staged a huge grandstand play of line-item vetoing countless projects, calling them pork. “They were restored because of public outcry and legislative action,” the aide said. “She vetoed them mostly because she had no idea what they were or why they were important.”
But it was enough to get the McCain, who is mostly unobservant of the world around him anyway, to think Palin has a reputation as being "anti-pork".
In fact, Juneau observers note that Palin kept her hand stuck out as far as anyone for pork ladled out by indicted Sen. Ted Stevens. She only opposed the "bridge to nowhere" after it became clear that it would be politically unwise to keep supporting it, these same insiders assert. Then, Palin fell back on her old habits and publicly humiliated him for pork-barrel politics.
As for being “ready on day one” to be commander in chief, despite the repeated public claims she’s made, the Alaska National Guard commander said that, “she has made no command decisions, other than sending some troops to help fight a few brush fires and march in parades at county fairs.”
< –––– >
“Palin is a conniving, manipulative, asshole,” someone who thinks these are positive traits in a governor told me, summing up Palin’s tenure in Alaska state and local politics.
“She’s a bigot, a racist and a liar,” is the more blunt assessment of Arnold Gerstheimer who lived in Alaska until two years ago and is now a businessman in Idaho.
“Juneau is a small town, everybody knows everyone else,” he adds. “These stories about what she calls blacks and Eskimos, well, anyone not white and good looking actually, were around long before she became a glint in John McCain’s rheumy eyes. Why do I know they’re true? Because everyone who isn’t aboriginal or Indian in Alaska talks that way.”
“Sambo beat the bitch” may be everyday language up in the bush. Whether it – and the outlook, politics and worldview Palin reflects when she says such things in public – should be part of a presidential campaign is another thing altogether. The comment says as much about McCain as it does about Palin, and it says a lot of things about Americans who overlook such statements (as well as her record) and vote anyway for McCain.
“So Sambo beat the bitch!”
This is how Republican Vice Presidential nominee Sarah Palin described Barack Obama’s win over Hillary Clinton to political colleagues in a restaurant a few days after Obama locked up the Democratic Party presidential nomination.
According to Lucille, the waitress serving her table at the time and who asked that her last name not be used, Gov. Palin was eating lunch with five or six people when the subject of the Democrat’s primary battle came up. The governor, seemingly not caring that people at nearby tables would likely hear her, uttered the slur and then laughed loudly as her meal mates joined in appreciatively.
“It was kind of disgusting,” Lucille, who is part Aboriginal, said in a phone interview after admitting that she is frightened of being discovered telling folks in the “lower 48” about life near the North Pole.
Then, almost with a sigh, she added, “But that’s just Alaska.”
Racial and ethnic slurs may be “just Alaska” and, clearly, they are common, everyday chatter for Palin.
Besides insulting Obama with a Step-N’-Fetch-It, “darkie musical” swipe, people who know her say she refers regularly to Alaska’s aboriginal people as “Artic Arabs” – how efficient, lumping two apparently undesirable groups into one ugly description – as well as the more colourful “mukluks” along with the totally unimaginative “fucking Eskimo’s,” according to a number of Alaskans and Wasillians interviewed for this article.
But being openly racist is only the tip of the Palin iceberg. According to Alaskans interviewed for this article, she is also vindictive and mean. We’re talking Rove mean and Nixon vindictive.
No wonder the vast sea of white, cheering faces at the Republican Convention went wild for Sarah: They adore the type, it’s in their genetic code. So much for McCain’s pledge of a “high road” campaign; Palin is incapable of being part of one.
< –––– >
It’s not easy getting people in the 49th state to speak critically about Palin – especially people in Wasilla, where she was mayor. For one thing, with every journalist in the world calling, phone lines into Alaska have been mostly jammed since Friday; as often as not, a recording told me that “all circuits are busy” or numbers just wouldn’t ring. I should think a state that’s been made richer than God by oil could afford telephone lines and cell towers for everyone.
On a more practical level, many people in Alaska, and particularly Wasilla, are reluctant to speak or be quoted by name because they’re afraid of her as well as the state Republican Party machine. Apparently, the power elite are as mean as the winters.
“The GOP is kind of like organized crime up here,” an insurance agent in Anchorage who knows the Palin family, explained. “It’s corrupt and arrogant. They’re all rich because they do private sweetheart deals with the oil companies, and they can destroy anyone. And they will, if they have to.
“Once Palin became mayor,” he continued, “She became part of that inner circle.”
Like most other people interviewed, he didn’t want his name used out of fear of retribution. Maybe it’s the long winter nights where you don’t see the sun for months that makes people feel as if they’re under constant danger from “the authorities.” As I interviewed residents it began sounding as if living in Alaska controlled by the state Republican Party is like living in the old Soviet Union: See nothing that’s happening, say nothing offensive, and the political commissars leave you alone. But speak out and you get disappeared into a gulag north of the Arctic Circle for who-knows-how-long.
Alright, that’s an exaggeration brought on by my getting too little sleep and building too much anger as I worked this article. But there’s ample evidence of Palin’s vindictive willingness to destroy people she sees as opponents. Just ask the Wasilla town administrator she hired before firing him because he rebelled against the way Palin demanded he do his job, or the town librarian who refused to hold the book burning Walpurgisnach Mayor Palin demanded.
Ironically, Palin was pushed into hiring the administrator by the party poo-bah’s who helped get her elected after she got herself into trouble over a number of precipitous firings which gave rise to a recall campaign.
“People who fought her attempt to oust the librarian are on her enemies list to this day,” states Anne Kilkenny, a Wasilla resident and one of the few Alaskans willing to speak on-the-record, for attribution, about Palin. In fact, Kilkenny actually circulated an e-mail letter about Palin that was verified and printed by The Nation.
For good measure, Palin booted the Wasilla police chief from office because, she told a local newspaper, he “intimidated” her.
< –––– >
Sarah Palin drew early attention from state GOP apparatchiks when, during her first mayoral campaign, she ran on an anti-abortion platform. Normally, political parties do not get involved in Alaskan municipal elections because they are non-partisan. But once word of her extreme fringe evangelical views made its way to Juneau, the state capitol, state Republicans tossed some money behind her campaign.
Once in office, Palin set out to build a machine that chewed up anyone who got in her way. The good, Godly Christian turns out to be anything but.
“She's doesn’t like different opinions and she refuses to compromise,” Kilkenny notes. “When she was Mayor, she fought ideas that weren't hers. Worse, ideas weren't evaluated on their merits but on the basis of who proposed them.”
Sound familiar? Palin may well be Dick Cheney’s reincarnate.
Something else has a familiar Republican ring to it: Her tax policies, and a “refund surpluses but borrow for the future” attitude.
According to Kilkenny and others in Wasilla as well as Juneau, Palin reduced progressive property taxes for businesses while mayor and increased a regressive sales tax which even hits necessities such as food. The tax cuts she promoted in her St. Paul speech actually benefited large corporate property owners far more than they benefited residents. Indeed, Kilkenny insists that many Wasilla home owners actually saw their tax bill skyrocket to make up for the shortfall. Two other Wasillian’s with whom I spoke said property taxes on their modest, three bedroom homes rose during the Palin regime.
To an outsider, it would seem hard to do, but an oil-rich town with zero debt on the day she was inaugurated mayor was left saddled with $22-million of debt by the time she moved away to become governor – especially since nothing was spent on things such as improving the city’s infrastructure or building a much-needed sewage treatment plant. So what did Mayor Palin spend the taxpayer’s money on, if not fixing streets and scrubbing sewage?
For starters, she modelled her office. Several times over, as a matter of fact.
Then Palin spent $1-million on an unnecessary, new park that no one other than the contractors and Palin seemed to want. Next, Sarah doled out more than $15-million of taxpayer money for a sports complex that she shoved through even though the city did not own clear title to the land; now, seven years later, the matter is still in litigation and lawyer fees are said to be close to at least half of the original estimated price of the facility.
She also worked hard to get voters approval of a $5.5-million bond proposal for roads that could have been built without borrowing. Anchorage may not be the center of the financial universe but, like good Republicans everywhere, Sarah Palin knows how to please Alaskan bankers and bond dealers.
For good measure, she turned Wasilla into a wasteland of big box stores and disconnected parking lots.
< –––– >
En route to the governor’s igloo, Palin managed to land what Anne Kilkenny says is the plumb political appointment in the state: Chair of Alaska’s Oil and Gas Conservation Commission (OGCC), a $122,400 per year patronage slot with no real authority to do anything other than hold meetings. She took the job despite having no background in energy issues and, as it turned out, not liking the work.
“She hated the job,” an OGCC staff member who is not authorized to speak with the news media told me. “She hated the hours and she hated what little work there was to do. But she couldn’t figure out a way to get out of the thing without offending Gov. Murkowski” and the state Republican Party regulars, some of whom were pissed off they didn’t get appointed.
But ever the opportunist, Palin quickly concocted a way. First, she waged a campaign with the local news media claiming that the position was overpaid and should be abolished – despite the fact that she lobbied Murkowski hard to get it. Then, mounting what she saw as a white horse, Palin raised a cloud of dust by resigning from the OGCC and riding away with an undeserved reputation as a “reformer.”
But when a local reporter dared to suggest that the reformer Empress has no clothes, Palin tried to get her fired.
“She came at me like I was trying to steal her kids,” said the targeted reporter, who now works for an oil company in Anchorage. “I heard she had a wild temper and vicious mean streak but it’s nothing like you can imagine until she turns it on you.”
Not surprising since some of her high school classmates still openly call her “Sarah Barracuda,” Kilkenny insists.
Still, as a Republican Party hack Palin managed to get herself elected running under the false flag of a “reformer.”
And what did she bring to the job? No legislative experience other than a city council of a village of 5,000 people, which is smaller than some high schools in Chicago. Little hands-on supervisory or managerial experience; after all, she needed to hire a city administrator to run Wasilla. No executive experience, except for almost being recalled as mayor. A philosophy of setting public policy based on one word: No.
And what has she done since winning the job?
According to Kilkenny, nothing. Well, nothing other than suggesting the state’s multi-multi-million dollar, oil-generated surplus be distributed to residents and finance future state needs by borrowing money. Gee, doesn’t that sound precisely what George Bush did with the surplus he inherited from Bill Clinton in 2001 and we all know in what great shape Bush’s economic policies left the nation.
It may explain why, when asked by reporters including me what she thought about Palin being picked to be McCain’s running mate, her mother-in-law replied with a sardonic, “What has Sarah done to qualify her to be vice president?” Of course, when the woman – said by many I spoke with to be well-respected in Wasilla – was running to succeed Palin as mayor, Sarah refused to endorse her so that may explain the family tension.
As Governor, Palin gave the legislature no direction and budget guidelines, according to the chair of a legislative committee. But then she staged a huge grandstand play of line-item vetoing countless projects, calling them pork. “They were restored because of public outcry and legislative action,” the aide said. “She vetoed them mostly because she had no idea what they were or why they were important.”
But it was enough to get the McCain, who is mostly unobservant of the world around him anyway, to think Palin has a reputation as being "anti-pork".
In fact, Juneau observers note that Palin kept her hand stuck out as far as anyone for pork ladled out by indicted Sen. Ted Stevens. She only opposed the "bridge to nowhere" after it became clear that it would be politically unwise to keep supporting it, these same insiders assert. Then, Palin fell back on her old habits and publicly humiliated him for pork-barrel politics.
As for being “ready on day one” to be commander in chief, despite the repeated public claims she’s made, the Alaska National Guard commander said that, “she has made no command decisions, other than sending some troops to help fight a few brush fires and march in parades at county fairs.”
< –––– >
“Palin is a conniving, manipulative, asshole,” someone who thinks these are positive traits in a governor told me, summing up Palin’s tenure in Alaska state and local politics.
“She’s a bigot, a racist and a liar,” is the more blunt assessment of Arnold Gerstheimer who lived in Alaska until two years ago and is now a businessman in Idaho.
“Juneau is a small town, everybody knows everyone else,” he adds. “These stories about what she calls blacks and Eskimos, well, anyone not white and good looking actually, were around long before she became a glint in John McCain’s rheumy eyes. Why do I know they’re true? Because everyone who isn’t aboriginal or Indian in Alaska talks that way.”
“Sambo beat the bitch” may be everyday language up in the bush. Whether it – and the outlook, politics and worldview Palin reflects when she says such things in public – should be part of a presidential campaign is another thing altogether. The comment says as much about McCain as it does about Palin, and it says a lot of things about Americans who overlook such statements (as well as her record) and vote anyway for McCain.
The Mortgage Option
It's a case where market psychology became more important than the fundamentals, and that's why they had to act. There's no immediate crisis. It's not like they're going to run out of money tomorrow or Monday. It's a decision that the market is simply not going to accept the status quo. Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee.
Is it just me or do others notice how often unwanted changes in market prices (or, in this case, difficulties in clearing) are attributed to "psychology" or "speculation." The same chaps who cheered the rapid ascent of US equity prices during the 90s as a sign of US superiority (no psychology or speculation driving that!) now decry the rise in oil prices as speculatively driven and argue, as per the above, that with housing values falling and unemployment rising, international investor fears of GSE Mortgage Bonds defaulting is just psychological.
Evacuating a city before a hurricane hits is, under that head, psychological too. After all, my house isn't flooded or blown over....yet.
I suspect, now that Fannie and Freddie have been nationalized, (yes, I know the powers that be would prefer a different term, and they might benefit from a read of Shakespeare's views on the smell of rose by any other name) the good Senator is about to learn that the fundamentals of US housing finance are unsound.
After all, if the fundamentals were solid, surely at least a few SWFs who have been so eager to purchase equity stakes in major financial institutions (like Citi, UBS and ML, to name a few) would be willing to inject some capital into the GSEs.
OK, enough ranting. Let's take a look at the policy.
According to RGE Monitor:
Key features of government intervention (final deal to be announced before Asian markets open):
1) Fannie and Freddie and their combined $1.6 trillion investment portfolio business financed through agency bond issuance will be taken under a government-run conservatorship for an orderly restructuring process--> new housing law says that under a conservatorship, the authorities would aim to preserve Fannie and Freddie assets, rather than dispose of them.
2) The value of the companies' common stock would be diluted but not wiped out, while the holdings of other securities, including company debt and preferred shares likely to be protected by the government. (Washington Post)
3) taxpayer backstop for combined $5.3 trillion F&F owned or guaranteed debt: taxpayer funds will be used to pay any cash-flow shortfalls (e.g. due to borrower defaults) on mortgages F&F own or guarantee;
4) capital infusions to F&F in conservatorship on a quarterly basis depending on reported results instead of large capital infusion upfront;
5) Fire CEOs and replace the board
Points 3 and 4 are the keys to assessing the impact of this policy on US public sector finance, and consequently, US Bonds and the US$, inter alia.
Unlike the last US mortgage industry bail-out, which was financed by a combination of direct Treasury appropriations ($55.9B) and RefCorp Bond sales ($30.1B), this bail-out will not require a large upfront capital infusion, perhaps because, as the NYTimes avers, It is not possible to calculate the cost of any government bailout.
What makes calculation so difficult? The nature of a mortgage contract is a good place to start.
As Michael Lewis described so humorously in Liar's Poker, "no trader or investor wanted to poke around suburbs to find whether the homeowner to whom he had just lent money was creditworthy." Additionally, "[mortgage owners] couldn't be certain how long the loan lasted." If interest rates fell, people refinanced and that sweet 9% per annum investment turned back into cash, which could no longer be invested at 9%.
Default on one side and refinancing on the other makes analysis of mortgage cash flows more option like than bond like (admittedly, other bonds can default or be refinanced, but this is more the exception than the rule- to wit, there isn't a refinance index for corporate of government bonds, as there is in the mortgage industry).
Ever clever mortgage investors, however, found a way to hedge refinance induced discontinuities, they bought US bonds, with leverage. In that way, when interest rates declined and refinancing increased, mortgage investors had, in a sense, already invested the cash received at higher rates.
Alas, declining interest rate induced refinancing is not what ails the US mortgage market, rather it is defaults caused by rising rates (and inflation in general). The hedge which worked so well in the case of falling rates, came at the cost of increased risk under opposite conditions.
Who would'a thunk it?
It seems worth noting that one of the factors which kept US Gov't Bond rates so low while the mortgage machine was humming along was the leveraged hedge.
But, I digress. Let's try to get some sense of the risk of default, applied to the scale of the problem.
Unlike refinancing, which at least leaves investors with principal, in the form of cash, intact, default turns bond holders into real estate investors, in a falling market. I suspect neither China nor Japan is keen on owning large tracts of US suburbia, which may partially explain the attractiveness of the new policy.
As noted earlier, rising defaults seem to be a function of a combination of rising rates, particularly in the case of the ARMs promoted by Mr. Greenspan a few years ago, rising prices in general and stagnant wages. If we wanted to get technical a first stab might be f (i, cpi, w) = default rate where i = change in interest rate, cpi = actual inflation rate, and w = % change in wages for a certain term and type of mortgage.
So long as i and cpi were rising faster than w the default rate would, I assume, rise.
This, it seems to me, presents policy makers, having opted to guarantee some $5.3T of mortgages, with a very difficult scenario given the effect wage arbitrage has had on restraining US incomes. Keeping inflation down might require higher interest rates, which, assuming stagnant wages, might actually raise the default rate.
Rising defaults, by virtue of the need to guarantee, increases the fiscal deficit which will eventually push rates higher still, perhaps pushing more mortgages into default and the cycle begins again.
The key, it seems to me, is keeping inflation down. If oil prices continue their climb (despite the recent sharp decline oil prices are still up 35-40% y/y), and interest rate increases are needed, the cost of this bail-out could easily be in the 100s of billions with a trillion not out of the question.
An alternative method of keeping a lid of inflation is a strong US$, which, it seems to me, has been a focus of recent Central Bank activity.
If the powers that be can keep the US$ stable without igniting a more globalized inflation (which, I suspect, will prove quite difficult) the effects of this bail-out might not be catastrophic.
If, however, the US$ starts to fall and oil, and other prices begin to rise again...well let's just call that US$ doomsday.
On that note, have you read the news about Hurricane Ike?
Is it just me or do others notice how often unwanted changes in market prices (or, in this case, difficulties in clearing) are attributed to "psychology" or "speculation." The same chaps who cheered the rapid ascent of US equity prices during the 90s as a sign of US superiority (no psychology or speculation driving that!) now decry the rise in oil prices as speculatively driven and argue, as per the above, that with housing values falling and unemployment rising, international investor fears of GSE Mortgage Bonds defaulting is just psychological.
Evacuating a city before a hurricane hits is, under that head, psychological too. After all, my house isn't flooded or blown over....yet.
I suspect, now that Fannie and Freddie have been nationalized, (yes, I know the powers that be would prefer a different term, and they might benefit from a read of Shakespeare's views on the smell of rose by any other name) the good Senator is about to learn that the fundamentals of US housing finance are unsound.
After all, if the fundamentals were solid, surely at least a few SWFs who have been so eager to purchase equity stakes in major financial institutions (like Citi, UBS and ML, to name a few) would be willing to inject some capital into the GSEs.
OK, enough ranting. Let's take a look at the policy.
According to RGE Monitor:
Key features of government intervention (final deal to be announced before Asian markets open):
1) Fannie and Freddie and their combined $1.6 trillion investment portfolio business financed through agency bond issuance will be taken under a government-run conservatorship for an orderly restructuring process--> new housing law says that under a conservatorship, the authorities would aim to preserve Fannie and Freddie assets, rather than dispose of them.
2) The value of the companies' common stock would be diluted but not wiped out, while the holdings of other securities, including company debt and preferred shares likely to be protected by the government. (Washington Post)
3) taxpayer backstop for combined $5.3 trillion F&F owned or guaranteed debt: taxpayer funds will be used to pay any cash-flow shortfalls (e.g. due to borrower defaults) on mortgages F&F own or guarantee;
4) capital infusions to F&F in conservatorship on a quarterly basis depending on reported results instead of large capital infusion upfront;
5) Fire CEOs and replace the board
Points 3 and 4 are the keys to assessing the impact of this policy on US public sector finance, and consequently, US Bonds and the US$, inter alia.
Unlike the last US mortgage industry bail-out, which was financed by a combination of direct Treasury appropriations ($55.9B) and RefCorp Bond sales ($30.1B), this bail-out will not require a large upfront capital infusion, perhaps because, as the NYTimes avers, It is not possible to calculate the cost of any government bailout.
What makes calculation so difficult? The nature of a mortgage contract is a good place to start.
As Michael Lewis described so humorously in Liar's Poker, "no trader or investor wanted to poke around suburbs to find whether the homeowner to whom he had just lent money was creditworthy." Additionally, "[mortgage owners] couldn't be certain how long the loan lasted." If interest rates fell, people refinanced and that sweet 9% per annum investment turned back into cash, which could no longer be invested at 9%.
Default on one side and refinancing on the other makes analysis of mortgage cash flows more option like than bond like (admittedly, other bonds can default or be refinanced, but this is more the exception than the rule- to wit, there isn't a refinance index for corporate of government bonds, as there is in the mortgage industry).
Ever clever mortgage investors, however, found a way to hedge refinance induced discontinuities, they bought US bonds, with leverage. In that way, when interest rates declined and refinancing increased, mortgage investors had, in a sense, already invested the cash received at higher rates.
Alas, declining interest rate induced refinancing is not what ails the US mortgage market, rather it is defaults caused by rising rates (and inflation in general). The hedge which worked so well in the case of falling rates, came at the cost of increased risk under opposite conditions.
Who would'a thunk it?
It seems worth noting that one of the factors which kept US Gov't Bond rates so low while the mortgage machine was humming along was the leveraged hedge.
But, I digress. Let's try to get some sense of the risk of default, applied to the scale of the problem.
Unlike refinancing, which at least leaves investors with principal, in the form of cash, intact, default turns bond holders into real estate investors, in a falling market. I suspect neither China nor Japan is keen on owning large tracts of US suburbia, which may partially explain the attractiveness of the new policy.
As noted earlier, rising defaults seem to be a function of a combination of rising rates, particularly in the case of the ARMs promoted by Mr. Greenspan a few years ago, rising prices in general and stagnant wages. If we wanted to get technical a first stab might be f (i, cpi, w) = default rate where i = change in interest rate, cpi = actual inflation rate, and w = % change in wages for a certain term and type of mortgage.
So long as i and cpi were rising faster than w the default rate would, I assume, rise.
This, it seems to me, presents policy makers, having opted to guarantee some $5.3T of mortgages, with a very difficult scenario given the effect wage arbitrage has had on restraining US incomes. Keeping inflation down might require higher interest rates, which, assuming stagnant wages, might actually raise the default rate.
Rising defaults, by virtue of the need to guarantee, increases the fiscal deficit which will eventually push rates higher still, perhaps pushing more mortgages into default and the cycle begins again.
The key, it seems to me, is keeping inflation down. If oil prices continue their climb (despite the recent sharp decline oil prices are still up 35-40% y/y), and interest rate increases are needed, the cost of this bail-out could easily be in the 100s of billions with a trillion not out of the question.
An alternative method of keeping a lid of inflation is a strong US$, which, it seems to me, has been a focus of recent Central Bank activity.
If the powers that be can keep the US$ stable without igniting a more globalized inflation (which, I suspect, will prove quite difficult) the effects of this bail-out might not be catastrophic.
If, however, the US$ starts to fall and oil, and other prices begin to rise again...well let's just call that US$ doomsday.
On that note, have you read the news about Hurricane Ike?
Last chance to buy Gold and producer stocks
Even after declining for nearly eleven months, most investors remain thoroughly complacent toward the possibility that U.S. equities will suffer an additional substantial pullback. Both VXO and VIX, the two most historically reliable gauges of fear, show no more concern today about a significant decline than had existed when the U.S. stock market was close to its seven-year peak in the second half of 2007.
A continued lack of fear in a falling market is the most dangerous scenario of all. The stock market has never completed any major bottom until the majority of investors were frightened enough to sell their stocks and to move their money into the safety of money-market funds and similar safe time deposits.
In confirmation of this outlook, the only insider buying by top executives has occurred in the most undervalued sectors, with continued selling in most industries.
While U.S. Treasuries have rallied to their highest levels since March, the spread between low-grade corporate bonds and U.S. Treasuries is at its highest point since early 2003. Fixed-income traders include very few emotional amateurs or novices, and are therefore generally more knowledgeable than the average equity investor. When the smartest participants have intentionally fled to the safety of U.S. Treasuries and have shown a marked aversion to low-grade corporate debt, this can only mean that the U.S. economy will soon go into a true recession.
You can forget about all those decoupling myths. Whenever the U.S. economy is weak, the rest of the world has proven to be even weaker. Emerging-market equities and commodities have slumped more in percentage terms than U.S. equity indices.
Whenever the U.S. government announces one plan of action or another, the stock market enjoys a sharp one-day rally. Friday's announcement about nationalizing Fannie Mae and Freddie Mac could lead to a sharp move higher for U.S. equities on Monday morning.
But one-day rallies have never been a feature of a healthy market. During the entire bull market from October 10, 2002 through October 11, 2007, there was not a single day when the Dow Jones Industrial Average rose 300 points or more. However, during the bear market from early 2000 through October 10, 2002, there were twelve such days--and six just since November 2007. Sharp one-day rebounds define a market which still has much farther to decline.
The steepest part of any correction almost always occurs in the final weeks, and even in the final days. It's not going to be a pretty picture. The U.S. stock market is going to reach an incredibly deep low in October 2008 that will be accompanied by three-year and even four-year bottoms for most U.S. equity indices.
BUY GOLD MINING SHARES AND FUNDS (September 7, 2008): One sector which has become severely oversold is gold mining shares. On Friday, September 5, 2008, GDX--the most popular fund of gold mining shares--touched a new all-time low of 31.65. [GDX had its debut on May 23, 2006.] This was slightly below its previous bottom of 31.82 from June 13, 2006. If you look at the ratio of gold mining shares to the price of gold, they were only this undervalued on one other occasion--when they completed a historic nadir in November 2000.
As central banks around the world are forced to cut interest rates to respond to a global economic contraction, this will prove to be strongly supportive of precious metals shares even as the U.S. dollar generally continues its rally for another half year or so.
Therefore, I have increased my holding in GDX to 10.5% of my total net worth (see my total asset allocation below), and will continue to gradually accumulate GDX and ASA on all dips over the next several weeks.
I have updated my outlook on gold mining shares, as my target price of 295 for HUI was finally achieved.
A continued lack of fear in a falling market is the most dangerous scenario of all. The stock market has never completed any major bottom until the majority of investors were frightened enough to sell their stocks and to move their money into the safety of money-market funds and similar safe time deposits.
In confirmation of this outlook, the only insider buying by top executives has occurred in the most undervalued sectors, with continued selling in most industries.
While U.S. Treasuries have rallied to their highest levels since March, the spread between low-grade corporate bonds and U.S. Treasuries is at its highest point since early 2003. Fixed-income traders include very few emotional amateurs or novices, and are therefore generally more knowledgeable than the average equity investor. When the smartest participants have intentionally fled to the safety of U.S. Treasuries and have shown a marked aversion to low-grade corporate debt, this can only mean that the U.S. economy will soon go into a true recession.
You can forget about all those decoupling myths. Whenever the U.S. economy is weak, the rest of the world has proven to be even weaker. Emerging-market equities and commodities have slumped more in percentage terms than U.S. equity indices.
Whenever the U.S. government announces one plan of action or another, the stock market enjoys a sharp one-day rally. Friday's announcement about nationalizing Fannie Mae and Freddie Mac could lead to a sharp move higher for U.S. equities on Monday morning.
But one-day rallies have never been a feature of a healthy market. During the entire bull market from October 10, 2002 through October 11, 2007, there was not a single day when the Dow Jones Industrial Average rose 300 points or more. However, during the bear market from early 2000 through October 10, 2002, there were twelve such days--and six just since November 2007. Sharp one-day rebounds define a market which still has much farther to decline.
The steepest part of any correction almost always occurs in the final weeks, and even in the final days. It's not going to be a pretty picture. The U.S. stock market is going to reach an incredibly deep low in October 2008 that will be accompanied by three-year and even four-year bottoms for most U.S. equity indices.
BUY GOLD MINING SHARES AND FUNDS (September 7, 2008): One sector which has become severely oversold is gold mining shares. On Friday, September 5, 2008, GDX--the most popular fund of gold mining shares--touched a new all-time low of 31.65. [GDX had its debut on May 23, 2006.] This was slightly below its previous bottom of 31.82 from June 13, 2006. If you look at the ratio of gold mining shares to the price of gold, they were only this undervalued on one other occasion--when they completed a historic nadir in November 2000.
As central banks around the world are forced to cut interest rates to respond to a global economic contraction, this will prove to be strongly supportive of precious metals shares even as the U.S. dollar generally continues its rally for another half year or so.
Therefore, I have increased my holding in GDX to 10.5% of my total net worth (see my total asset allocation below), and will continue to gradually accumulate GDX and ASA on all dips over the next several weeks.
I have updated my outlook on gold mining shares, as my target price of 295 for HUI was finally achieved.
Recipe for a Depression (1920s vs today)
Being that history is said to rhyme, this 20-page study argues the presence of many similarities back then, as compared to today. "Recipe for a Depression: A Re-interpretation of Economics in the 1920s" concludes with the following summary. Paper is by Stephen J. Church, President - Piscataqua Research, Inc.
Author's Note
This is a study of the causes of the Great Depression. I became interested in Federal Reserve monetary policy in the Great Depression because of an article that discussed policy conflicts at the Federal Reserve during the 1920s. The article implied that recent Federal Reserve policy questions were similar to policy issues during the 1920s and 1930s. I found the implications intriguing.
Concluding excerpt
"Low interest rates encouraged exceptional investment levels in plant and equipment, structures and housing. The growth of income made debt-based investing a nearly riskless opportunity. The extended period of increasingly high profits caused by an accelerated investment process seemed to justify expectations of future earnings growth.
Eventually, the negative real interest rates had their expected effect. Credit expansion began to exceed economic growth by a substantial margin. Shortly thereafter, asset prices began to rise at an excessive rate. Finally, borrowing to purchase risky assets on the expectation of price appreciation proliferated into every asset category.
The 1920s ended when the productivity-enhancing investment opportunity set began to diminish and the Federal Reserve determined to do something about the excessive credit expansion. The asset price deflation process morphed into an income deflation process. Price deflation accelerated during the normal economic slowing. Profits declined quickly. Incomes declined quickly. Consumption declined rapidly.
Ulitmately, the Great Depression resulted from the excessively low real interest rates maintained by the Federal Reserve during a time of high levels of productivity-enhancing investments. The low real interest rates encouraged over-investment and excessive debt creation. When the Federal Reserve tried to slow the process, the underlying economic weakness was exposed."
-END-
Eerie comparisons relative to today's economic environment. And the "carry trade" process back then is just as applicable today, only Japan is the facilitator:
Interactions between the Real and Financial Economies
"The interactions between the real and the financial economies progressed as would be expected in an era of high investment opportunity and expansionary monetary policy. The process was simple and predictable.
Excessive monetary expansion through low absolute and real interest rates has predictable side effects. The side effects are increased economic investment activity coupled with increased financial investment activity. The financial investment activity starts as debt investments and morphs into equity investments as economic investments generate growth and profits.
The final phase is usually debt-financed equity investments and maturity arbitrage with short-term debt financing long-term debt investments. The final phase is known as the carry trade where current returns on investments more than cover the currently low cost of short-term borrowings...
The carry trade was...based on the profit growth from economic investment expectations and the current financing costs of low real interest rates. The predictable result of carry-trade financed equity issuance occurred. Since the capital used for the most recent economic investments was virtually costless, the investments produced excess capacity and stock dilution. Profits began to decline dramatically. The carry trade was forced to unwind as the market violently lowered stock prices."
Author's Note
This is a study of the causes of the Great Depression. I became interested in Federal Reserve monetary policy in the Great Depression because of an article that discussed policy conflicts at the Federal Reserve during the 1920s. The article implied that recent Federal Reserve policy questions were similar to policy issues during the 1920s and 1930s. I found the implications intriguing.
Concluding excerpt
"Low interest rates encouraged exceptional investment levels in plant and equipment, structures and housing. The growth of income made debt-based investing a nearly riskless opportunity. The extended period of increasingly high profits caused by an accelerated investment process seemed to justify expectations of future earnings growth.
Eventually, the negative real interest rates had their expected effect. Credit expansion began to exceed economic growth by a substantial margin. Shortly thereafter, asset prices began to rise at an excessive rate. Finally, borrowing to purchase risky assets on the expectation of price appreciation proliferated into every asset category.
The 1920s ended when the productivity-enhancing investment opportunity set began to diminish and the Federal Reserve determined to do something about the excessive credit expansion. The asset price deflation process morphed into an income deflation process. Price deflation accelerated during the normal economic slowing. Profits declined quickly. Incomes declined quickly. Consumption declined rapidly.
Ulitmately, the Great Depression resulted from the excessively low real interest rates maintained by the Federal Reserve during a time of high levels of productivity-enhancing investments. The low real interest rates encouraged over-investment and excessive debt creation. When the Federal Reserve tried to slow the process, the underlying economic weakness was exposed."
-END-
Eerie comparisons relative to today's economic environment. And the "carry trade" process back then is just as applicable today, only Japan is the facilitator:
Interactions between the Real and Financial Economies
"The interactions between the real and the financial economies progressed as would be expected in an era of high investment opportunity and expansionary monetary policy. The process was simple and predictable.
Excessive monetary expansion through low absolute and real interest rates has predictable side effects. The side effects are increased economic investment activity coupled with increased financial investment activity. The financial investment activity starts as debt investments and morphs into equity investments as economic investments generate growth and profits.
The final phase is usually debt-financed equity investments and maturity arbitrage with short-term debt financing long-term debt investments. The final phase is known as the carry trade where current returns on investments more than cover the currently low cost of short-term borrowings...
The carry trade was...based on the profit growth from economic investment expectations and the current financing costs of low real interest rates. The predictable result of carry-trade financed equity issuance occurred. Since the capital used for the most recent economic investments was virtually costless, the investments produced excess capacity and stock dilution. Profits began to decline dramatically. The carry trade was forced to unwind as the market violently lowered stock prices."
Tradertalk - everything is going down
Gary_Fullett joined.
Gary_Fullett Good evening
Gary_Fullett i beat amos im surprised
Derek joined.
Amos joined.
Amos Hi
Gary_Fullett good morning amos..
Trevor hi amos
oly hello
rich joined.
Peter good morning Amos, good evening everyone else
Amos GE. Not every night I have to compete with a Sarah. she will win
Gary_Fullett but you are cuter
Amos tonight is not an easy one. Some things have been etched in the sand and otoh , from a trading point of view- they are harder. So I will present both sides-- and you decide
Amos The first chart is the dollar.
Art we don't care if your pregnant
Amos I hope she nocks them up
Art lol
Amos One of the most important aspects of technical analysis is the comparison of things--phases, volume, ranges, strangth and weakness, duration... you name it.
Amos So the dollar took out the last high before the low, made higher semi, penetrated the momtnly 21 ma and MOST importantly-- closed the previous monthly bar-- of August AT THE HIGH --thus making it almost
Amos certain that we will make a higher high in Sept. We did. Now what?
Amos We can say rather safely that it is NOT A BEAR and more-- so it can be a range or a bull.
Amos If we look at the previous rally during 2005-- it took about 11 months. Note that that rally took 11 months just to penetrate the previous high and here we did it in 6 months-- so a little stronger here.
Amos But we are coming from much lower levels-- so a rally here , in terms of percents-- is smaller. All we know is that the market had a strong month, validated it with higher high-- which means that at the moment DEMAND is strong enough to continue the rally.
Amos How far?
Amos well this is where it is harder-- because we do not know at what time frame the CM is looking right now. We can only guess. So first I defined two extreme phases: the last one from 92 to 70 -last 2-1/2 years and the 50% of that is 8160
Amos and the large one from 120 to 70 which I do not show.. I thought I did...ooops, I did it in the Dow Transport. Forget it-- I do not know where that 50% goes-- so I retract. The next resistance is the 55 ma
ScottB joined.
Amos which is around the 8300 depending WHEN we get there.
Amos We also have the ICE of the previous low at 80--which is definitely an important land mark since it was the low of 1995-- and is a very large benchmark for world finance.
Amos The question is how long we are going to stay in this rally-- --if the last one took 11 months-- then we have a small measuring stick-- if this is really an IMPORTANT BOTTOM in the dollar-- then the next rally will be
Amos longer than 112 months. If not-- then I do not know. I also do not know the shape of that rally-- we started with 4 months small "stopping range" and broke out of it-- and once the first phase will be over-- we will start a reaction
Amos of that large rally which can go back to the 75 area or who knows.
Amos This is going to be tough. and anyone who tells you they know-- is hot telling truth. The likelihood that spetember will be as big as august-- is slim-- rarely does a market start a move with two very large bars
Amos it is likely to be a narrower range. so I would say that the 80 should be the first resistance.
mr_steve_Atlanta_GA What graph are we watching?
Amos what will it do then? have no idea
Gary_Fullett the charts were posted on the site steve
mr_steve_Atlanta_GA I have them, what one are we talking about?
Amos For that perhaps it is worthwhile to look at the BP and the euro and maybe we will get a clearer picture
Amos The next chart- is the quarterly bp
Amos This one is rather unique. The last time we had such a strong move was when Soros made his famous billion dollars-- in 1992 and it is almost out of the chart-- in 2 quarters most of the trading world
Amos which does NOT have more than 15 years back data-- will NOT remember, or know what transpired then-- at any rate-- this is a HUGE quarter. this is NOT done by speclators. This is done by forces that KNOW!
Amos The chance that this decline is going to stop abruptly and reverse to the upside-- is VERY SLIM> Something is indeed very wrong weth the queen and the market is DISCOUNTING this.
mr_steve_Atlanta_GA My first time visiting, could you please give me a symbol of the chart we are looking at so I could fallow along with the class?
Amos How far can we go? the obvious chart point of 170 is clear to all technicians
Amos Steve of Atlan ta-- We are at the second chart of today's letter-- the British Pound, quarterly
Art British pound Steve
LarryG joined.
Amos But the strong declint from 200 to 176-- is one of those times that you must admit that technical analysis-- is NOT the modus operendi-- . Such a strong decline is something that is engineered
Amos by forces that could not careless about technical analysys-- by the same token that during the Soros decline-- anyone who tried to stand in front of that avalanche-- died
Amos The only way to cope with this-- if you want to guess a counter move-- is TO WAIT until the storm is over-- look to the left and see that after the bp reached the b ottom at 140-- it stayed 8 years in a range besween 140 and 170 and came back to SPRING that area 10 years later
Amos before it started the big move from 140 to 200-- this is a very "organizeds" trip. I do not know how to trade the bp-- unless you are scalping it for very small moves- that can be "read" on the chart
Amos but the important point is to realize that the way this quartely looks, unless something phenomenal happens between now and end of September-- then something is very rotten in England.
Amos So this part of the dollar index- is weak
Amos I did not mention this- but since we are in september-- we have first the FRIDAY expiration of the currency options-- 9/5 and then we have the contract expiration around the 15 of the month and we have the
Amos quartely chart painting and we have the tripple expiration of the indexes-- so a large part of september will be options and expiration games.
tradinginhandles joined.
tradinginhandles ge
Amos The only sure thing you can say about the bp is this: THERE IS NOT ONE LONG WITH PROFIT here-- so if they want to squeeze the longs towards expiration of the Sept contract-- THEY CAN DO IT WITH EASE!
Amos The next chart is the euro which is basicall the mirror of the dollar. while the dollar PENETRATED the Semi chart-- the euro is still holding. The crucial point if the 14355 or in the forex side which is generally more accuarte-- but since we are close
Amos to expiration-- then the difference between cash and futures is very small-- the points are 14365 and 14309 which is the last low before the high- on the monthly chart- and was made during dec 2007.
Amos However----unless we get a very strong rally in the very near future-- the chart is not strong. Again in the euro too- there is hardly any long with profits- so the Sept expiration may be a squeeze. It is important
Amos to understand that in the larger scheme of things-- cme volume is a small fraction of the FOREX volume-- so squeezing perhaps 300 million out of 2 trillion may not be so important-- once in a while-- they do abide
Amos the poor futures sister and let them have their squeeze victory. Add to this that we actually finished 13 semi annual bars-- then we are entitled to more than one bar correction-. The euro chart
tt joined.
Amos presents a small problem in that we do not have a reversal-- and there is still a chance that because we closed the previous semi at the high-- this one will require further testing-- that meanst that it is probable that during 2009 we will come
C joined.
Amos back one more time to test the 160-- I have no way to tell if that will happen-- but it is plausible. In that case we are into 1-2 years of RANGE. same as we spent at the bottom in 2000-2002. why not?
. joined.
Amos The fact that the euro is holding that elusice 14355--may be a secret signal they are sending each other-- that perhaps after the expiration game is over-- we WILL start an important rally- is a diestinct possibility
bradc joined.
Amos our role as traders is to GLEAN ALL THAT INFORMATION and ge AWARE OF IT-- then we can better judge the next move.
Amos By the same token that the dollar gave some skewness signlas a month ago-- it may be giving such signal during september, mainly becuase it is such an important month-- from the mechanics of
Amos trading point of view.
Amos What to do between now and expiration? I have no advice except-- trying to identify small time frames suopport and resistance but by NO MEANS trying to be brave and stay too long on any side-- we have done most
Amos of the move and we , most likely , be biding for time!
Amos What i mean by that is trying to look for small models that have higher probabilitiy of working- like KR on the 60 minutes etc.
Amos Again, I recommend to go WITH the thrust (15 min at least) than trying to GUESS points of support and resistance-- because when the market is in the business of PUNISHING the wrongs-- which in this case
Amos are the longs-- --those obvious points of support and resistance-- can be laughed at.
Amos To sum up the currencies-- the likelihood that the dollar has bottomed for at least antoher 6 months (to equate with the last rally of 11 months) is high. How we shall form this
Amos rally-- I have no idea
Amos The next chart is the dow transport. THe qurterly.
Amos I see an OKR followed by a thrust. If this model is correct-- then we are in front of multi year decline in this index. we also have the double top at 500 which can project to 2500
Amos if this happens-- that will be a real contraction in world economics. I have no idea if it will happen or not but going back to 2004 levels should NOT be out of the question.
Amos So many things are happening in the world-- I have no idea which will be the leading factor. Is it the political uncertainy in russia?
Amos will it be the slow down after the olympics?
Amos will it be the cost of fuel and people travelling less?
Amos will it be a cascading rolling stones of one thing leading to another-- starting with the real estate squeeze?
Amos I stink when it comes to interpreation of world events and their economic impact--but one thing is obvious-- we had quite a bubble in THIRD WORLD MARKETS-- the biggest in their history where
Amos marketst such as sapin, peru, mexico, portugal... you name it- exploded. Usually after such a bubble it takes a few years of PUNCTURING. so--if the dow transport is telling a TRUE story- then we arenow in year 2 of a big top and the closse of september will have an important
Amos story-- because if this quarter will closes near the low-- it is highly likely that the thrust after OKR model will kick in in force and we shall start a serious decline. If it closes near the middle or higher in the next 3 weeks-- that will ber another pircuture-- and the market
Amos may want to wait another quarter-- perhapse to see who wins between biden and Sarah.
Amos Again, sorry for being so vague-- but when you have a clear model-- it is SILLY to try to force you view upon it-- it is MUCH BETTER to let it RESOLVE ITSELF because the KNOWLEDGE embedded in the model is
Amos so DEEP and has a meaning for much longer period into the future- that it is , again, silly to try to even anticipate-- but rather-- let it unfold and then FOLLOW!!!
Amos The next one is the russel-- since we are following it recently- the NR-7 on the monthly chart is done. We are not in NR-8 . last month closed in the middle-- and september opened with a rather unique action--GAP OPEN that reversed itself immeidately.
Amos This brings into focus another important model that may be acting right now-- that is the OPENING RANGE- the Steinghardt model-- looking at the FIRST DAY OF THE MONTH-- as a trading range and going
Amos with the break out.
Amos We traded lower today than the first day of the month. On its surface it is a sell signal.
Amos However if you look at the last 2 months action- of the s and p or the nasdaq-- it is HARD to tell that one side is the obvious loser-- so from a poinot of view of tripple expiration-- i cannot tell which way market
Amos has to go. Perhpas this time-- the options sellers are the big winner s and the market should expire with the 1275 or so strike price being squeezed to zero-- because that is the biggest open interest of puts and calls
tom joined.
Amos I do not know. From the monthly chart point of view of the russel-- we are at the higher part of the range that is still confined withing that huge JANUARY range-- and we are much closer to its END than to its beginning
Amos I can promise you that we are in front of a rather large directional move- and I am betting on the down side because of the larger time frame picture-- but we may have to wait until that infamous tripple witching expiration
Amos The next chart is one we never spoke about-- but it is interesting
Amos Gary keeps asking me about the bonds ever so often-- and I keep responding that I cannot read the bonds chart. the Utilities , quite regularly are positively correlated with the bonds--- this time the chart looks different
Amos I hope I am not seeing ghosts-- but it seems that the monthly chart is forming a nice head and shoulders. we also have a large kr followed by a thrust. we also have first penetration of 5 ma over the 21 ma (which is normally only FIRST WARNING --not REAL START OF MOVE)
Amos but the picture of the head and shoulders is rather tempting
Amos the fact that we made a lower low of that big range during August- is important-- I am sure that once we take out the lows of august-- there will be big sell off.
Amos It is trut that we are still above the highs of 1999 and 2005-- and this whole "head and shoulders" is nothing but a range and tripple back to the ice---but considering the thrust of the semi in the DOW, the double top in the s and p
Amos and the weakness of the SXC= the options index-- the chance that this is only a continuation pattern is slim.
Amos What will happen if the Utilities break?
Amos I do not know--I do not know what it means from an economic point of view-- that people will use less electricity? I have no idea-- but if the "SOLID" utilities will join a break-- that can only amplify a decline in other sectors
Amos The next chart is the quartely DJU
Amos I tried to see what kind of correction we can get
Amos so I drew fibo retracment from the 2002 lows to all time high and 50% gives about 3550
Amos and I took the projection of the potentil "head and shoulders" the distance from the head to the shoulder and multiplied it-- in case this works- and I got 3600 or so-- so there are two potential targets which seem to converge
Amos many times when you get similar targets from different views of the chart and from different time frames-- you get some kind of synnergy which lends a little more confidence to your assumptions.
Amos they are still ASS-umptions.
Amos but the qurterly chart is showing someting else which is interesting
Amos the CLOSE
Amos since 2006 every quarterly bar-- closed at the high/ the first time we had a weaker close-- we got the first thrust during the thris quarter of 2007. followed by a rally which closed above the middle
Amos then we have a reversal which close AT THE LOW- and that was IMPORTANT SIGNAL the next rally was INSIDE BAR and now we alreayd made a lower low!. If we close this qurter near the low-- the chance for a much weaker next quarter
Amos will be large-- because we had TWO QUARTES in the last year that CLOSED AT THE LOW--That is IMPORTANT!!!!! it is an internal signal of the CM!
Amos I cannot prove it to you-- but I see it more and more
Amos Next chart is the crb quartely
Amos Like the euro it has a large OKR on the quarterly-- but the semi is still showing higher low.
Amos This is the largest bar in human history-- the fact that we are witnessing a MEGA YEAR stopping action is WITHOUT QUESTION!
Amos how long it will take-- is one big question.
Amos At any rate-- anyone who is dreaming in the next few years of higher commodities prices than we saw last 6 months-- is just dreaming.
Amos Such huge bar is mor often than not-- a WATER MARK of Gustav proportions.
Amos If we take out the semi annual low too between now and december-- that will also creat a reversal on the yearly chart-- which, of course, is a MEGA SIGN!
Amos I do not know how to use this information in the individual commodities-- pork bellies had recently 40 cents move up and down in a few days. have no idea why. perhaps it is so thin ( I heard 300 cointracts per day) that it means nothing--
Amos lumber may rally. Cocoa-- who knows. WHeat is slowly coming back to earth.
tradinginhandles left.
Amos remember a while ago I was discussing the simple fact that nothing can sell at 3 times cost of production for too long. Not crude, not corn, not beans not silver not nothing.
Amos We have been in a huge bubble- and at such times-- rationla thinking-- is out the door-- but we are slowly coming back to more normal behavior.
Amos From a trading point of view it simply means that the big FREND FUNDS are going to give back some of their huge profits-- and that poople who came to the business in the last 3 years-- are going to be grinded to pulp-- becausse they will continue to dream
Amos of the previous move and only buy and hold-- the next few years belong to traders and, of course,. to premium sellers.
Amos Premium selling in the next few years-- will be important--that is why watching options prices will be important too. This is my view. i have been saying this for a long time-- and it is ever so slowly materializing.
Amos the last chart is the Eurodollar
Amos I have mentioned it a few months ago and I said- we have come to a SCREECHING HALT and it is important to watch it
Amos you can see that we indded stopped moving.
Amos Since this is the MAJOR HEDGING TOOL of most large bannks-- this is important.
Amos In the last few years-- many pundits were shouting that instead of the FED leading the markets-- the market is leading or guiding the FED.
Amos Most of the breakoutf of the ED occured MONTHS before the FED started acting-- these guys KNEW!
Amos Now these guys are Sitting on their hands and NOT VOTING.
Amos Again, if there is any one amongst you, folks, who understands the fundamental meaning of this-- please ENLIGHTEN US-- I have NO IDEA what it means-- I only know that when we break out of thise range-- there weill be , again a strong move of 1-3 percentage poiunts in the prime
Amos and this will have some meaning to, at least stock market trading
Amos notice that once the ED stopped moving-- the s and p and the nasdaq also CONVERGED into a tighter trading range-- still giving nice scalping
Amos possibilities-- but NOT large moves.
Amos the ED is a "LEADING INDICATOR" as they come (there is NO such thing as LEI-it is a joke, of course)
Amos I do suggest-- we do not veer our eyes off this indicator-- it may give us a small edge
Amos Beyond this-- I am open to questions and comments--
Derek left.
Peter good timing, Sarah's about to start :)
Amos LOL
mr_steve_Atlanta_GA My first visit, nice job Amos
bradc lol
Amos Thank you steve
Gary_Fullett i thought steve from Georgia
Amos Ok folks lets go watch a real hockey mom. Hope she emasulates some of the lefti machos
Gary_Fullett russia attacke dgeorgia
Gary_Fullett georgia
Amos Again- September is not going to be easy-- but it should be a trading affair at least uintil th 16th
Peter thank you Amos, more food for thought. One comment, the 7880 area in the dollar is a key Monthly pivot on my chart
Amos Sarah was a mother. she gave birth at 90
Gary_Fullett isnt sept and oct weakness for stocks?
Gary_Fullett and abraham at 99
bradc seasonally weakness in grains
Amos Yes peter-- the whole 80 area is huge ice
Gary_Fullett because of harvest brad?
bradc y
Amos Yes gary- that is the convention
Amos ok folks have a good evening see you next time
Peter yes definitly, and broken ice usually gets a reaction the first time retested
Peter Amos, have a great trading week
Amos left.
Gary_Fullett okay great lecture amos
Gary_Fullett heck its like 4 30 am there
Gary_Fullett so as amos metnioned we are some critcal junctures
Gary_Fullett the end of sept is the end of the 3rd quarter
ScottB kind of kills Zack's strategy
Gary_Fullett he isnt here its okay lol
ScottB i.e., buy and hold metals
bradc well, him and amos have different thoughts on the direction of price it looks like
Peter the only buy and hold that seems to work in Amos's set of models is the US dollar
bradc just for the record, corn is not at 3x the cost of production
ScottB yep
Gary_Fullett where is it brad ?
bradc 1.5-1.7
bradc 1.5 prolly close
bradc does amos mess w/commods much?
bradc assuming avg yields
Gary_Fullett yes he looks at them
Gary_Fullett doesnt trade em as much as the finacials as well as other markets
ScottB I just read that it cost $10K in sulfuric acid to make $20K worth of Ni - than there is a bunch of other costs like energy, labor, etc.
ScottB at present price Ni produces are losing money
bradc Ni?
bradc nitrogen?
ScottB N = nitrogen.....Ni = nickel
Peter Northern Island or Nickle :)
bradc ok
ScottB actually "nude island"
mr_steve_Atlanta_GA left.
bradc that's what i thought but i was talking farm so wasn't sure
tom left.
Gary_Fullett tommorow for those that are new here will have a topic
Gary_Fullett and then we will discuss stocks
bradc time to put hoss to bed - have a great evening everyone
Gary_Fullett night brad ty
Peter good night Brad,
bradc left.
Gary_Fullett so any questions or comments?
Gary_Fullett too late to have a topic for tongith
ScottB cubs lost
Gary_Fullett and I am sure many of u wnat to see palin speak it is a 40 m in speach
Gary_Fullett 4-0
ScottB Amos makes it sound like there is nothing to buy....short everything
Gary_Fullett well after the recent breask
Gary_Fullett eh feels a turn occurred
Gary_Fullett to his models
Peter Thank you Gary; dinner time, then Palin DVR & chart time, good night every one
ScottB he is starting to make sense....handwriting is in the prices
Gary_Fullett well price and volume
ScottB night,,,,,Gary --- I should have bought a kumquat farm
Gary_Fullett okay I am goijg to start charts early
Gary_Fullett i will see u all tommorw night
Gary_Fullett or tommorw during to the day
Gary_Fullett night all ty
ScottB left.
Gary_Fullett steve will pribably be here tommorw
Gary_Fullett for stock talk
Gary_Fullett nibghtb all
Gary_Fullett left. Tradertalk
Gary_Fullett Good evening
Gary_Fullett i beat amos im surprised
Derek joined.
Amos joined.
Amos Hi
Gary_Fullett good morning amos..
Trevor hi amos
oly hello
rich joined.
Peter good morning Amos, good evening everyone else
Amos GE. Not every night I have to compete with a Sarah. she will win
Gary_Fullett but you are cuter
Amos tonight is not an easy one. Some things have been etched in the sand and otoh , from a trading point of view- they are harder. So I will present both sides-- and you decide
Amos The first chart is the dollar.
Art we don't care if your pregnant
Amos I hope she nocks them up
Art lol
Amos One of the most important aspects of technical analysis is the comparison of things--phases, volume, ranges, strangth and weakness, duration... you name it.
Amos So the dollar took out the last high before the low, made higher semi, penetrated the momtnly 21 ma and MOST importantly-- closed the previous monthly bar-- of August AT THE HIGH --thus making it almost
Amos certain that we will make a higher high in Sept. We did. Now what?
Amos We can say rather safely that it is NOT A BEAR and more-- so it can be a range or a bull.
Amos If we look at the previous rally during 2005-- it took about 11 months. Note that that rally took 11 months just to penetrate the previous high and here we did it in 6 months-- so a little stronger here.
Amos But we are coming from much lower levels-- so a rally here , in terms of percents-- is smaller. All we know is that the market had a strong month, validated it with higher high-- which means that at the moment DEMAND is strong enough to continue the rally.
Amos How far?
Amos well this is where it is harder-- because we do not know at what time frame the CM is looking right now. We can only guess. So first I defined two extreme phases: the last one from 92 to 70 -last 2-1/2 years and the 50% of that is 8160
Amos and the large one from 120 to 70 which I do not show.. I thought I did...ooops, I did it in the Dow Transport. Forget it-- I do not know where that 50% goes-- so I retract. The next resistance is the 55 ma
ScottB joined.
Amos which is around the 8300 depending WHEN we get there.
Amos We also have the ICE of the previous low at 80--which is definitely an important land mark since it was the low of 1995-- and is a very large benchmark for world finance.
Amos The question is how long we are going to stay in this rally-- --if the last one took 11 months-- then we have a small measuring stick-- if this is really an IMPORTANT BOTTOM in the dollar-- then the next rally will be
Amos longer than 112 months. If not-- then I do not know. I also do not know the shape of that rally-- we started with 4 months small "stopping range" and broke out of it-- and once the first phase will be over-- we will start a reaction
Amos of that large rally which can go back to the 75 area or who knows.
Amos This is going to be tough. and anyone who tells you they know-- is hot telling truth. The likelihood that spetember will be as big as august-- is slim-- rarely does a market start a move with two very large bars
Amos it is likely to be a narrower range. so I would say that the 80 should be the first resistance.
mr_steve_Atlanta_GA What graph are we watching?
Amos what will it do then? have no idea
Gary_Fullett the charts were posted on the site steve
mr_steve_Atlanta_GA I have them, what one are we talking about?
Amos For that perhaps it is worthwhile to look at the BP and the euro and maybe we will get a clearer picture
Amos The next chart- is the quarterly bp
Amos This one is rather unique. The last time we had such a strong move was when Soros made his famous billion dollars-- in 1992 and it is almost out of the chart-- in 2 quarters most of the trading world
Amos which does NOT have more than 15 years back data-- will NOT remember, or know what transpired then-- at any rate-- this is a HUGE quarter. this is NOT done by speclators. This is done by forces that KNOW!
Amos The chance that this decline is going to stop abruptly and reverse to the upside-- is VERY SLIM> Something is indeed very wrong weth the queen and the market is DISCOUNTING this.
mr_steve_Atlanta_GA My first time visiting, could you please give me a symbol of the chart we are looking at so I could fallow along with the class?
Amos How far can we go? the obvious chart point of 170 is clear to all technicians
Amos Steve of Atlan ta-- We are at the second chart of today's letter-- the British Pound, quarterly
Art British pound Steve
LarryG joined.
Amos But the strong declint from 200 to 176-- is one of those times that you must admit that technical analysis-- is NOT the modus operendi-- . Such a strong decline is something that is engineered
Amos by forces that could not careless about technical analysys-- by the same token that during the Soros decline-- anyone who tried to stand in front of that avalanche-- died
Amos The only way to cope with this-- if you want to guess a counter move-- is TO WAIT until the storm is over-- look to the left and see that after the bp reached the b ottom at 140-- it stayed 8 years in a range besween 140 and 170 and came back to SPRING that area 10 years later
Amos before it started the big move from 140 to 200-- this is a very "organizeds" trip. I do not know how to trade the bp-- unless you are scalping it for very small moves- that can be "read" on the chart
Amos but the important point is to realize that the way this quartely looks, unless something phenomenal happens between now and end of September-- then something is very rotten in England.
Amos So this part of the dollar index- is weak
Amos I did not mention this- but since we are in september-- we have first the FRIDAY expiration of the currency options-- 9/5 and then we have the contract expiration around the 15 of the month and we have the
Amos quartely chart painting and we have the tripple expiration of the indexes-- so a large part of september will be options and expiration games.
tradinginhandles joined.
tradinginhandles ge
Amos The only sure thing you can say about the bp is this: THERE IS NOT ONE LONG WITH PROFIT here-- so if they want to squeeze the longs towards expiration of the Sept contract-- THEY CAN DO IT WITH EASE!
Amos The next chart is the euro which is basicall the mirror of the dollar. while the dollar PENETRATED the Semi chart-- the euro is still holding. The crucial point if the 14355 or in the forex side which is generally more accuarte-- but since we are close
Amos to expiration-- then the difference between cash and futures is very small-- the points are 14365 and 14309 which is the last low before the high- on the monthly chart- and was made during dec 2007.
Amos However----unless we get a very strong rally in the very near future-- the chart is not strong. Again in the euro too- there is hardly any long with profits- so the Sept expiration may be a squeeze. It is important
Amos to understand that in the larger scheme of things-- cme volume is a small fraction of the FOREX volume-- so squeezing perhaps 300 million out of 2 trillion may not be so important-- once in a while-- they do abide
Amos the poor futures sister and let them have their squeeze victory. Add to this that we actually finished 13 semi annual bars-- then we are entitled to more than one bar correction-. The euro chart
tt joined.
Amos presents a small problem in that we do not have a reversal-- and there is still a chance that because we closed the previous semi at the high-- this one will require further testing-- that meanst that it is probable that during 2009 we will come
C joined.
Amos back one more time to test the 160-- I have no way to tell if that will happen-- but it is plausible. In that case we are into 1-2 years of RANGE. same as we spent at the bottom in 2000-2002. why not?
. joined.
Amos The fact that the euro is holding that elusice 14355--may be a secret signal they are sending each other-- that perhaps after the expiration game is over-- we WILL start an important rally- is a diestinct possibility
bradc joined.
Amos our role as traders is to GLEAN ALL THAT INFORMATION and ge AWARE OF IT-- then we can better judge the next move.
Amos By the same token that the dollar gave some skewness signlas a month ago-- it may be giving such signal during september, mainly becuase it is such an important month-- from the mechanics of
Amos trading point of view.
Amos What to do between now and expiration? I have no advice except-- trying to identify small time frames suopport and resistance but by NO MEANS trying to be brave and stay too long on any side-- we have done most
Amos of the move and we , most likely , be biding for time!
Amos What i mean by that is trying to look for small models that have higher probabilitiy of working- like KR on the 60 minutes etc.
Amos Again, I recommend to go WITH the thrust (15 min at least) than trying to GUESS points of support and resistance-- because when the market is in the business of PUNISHING the wrongs-- which in this case
Amos are the longs-- --those obvious points of support and resistance-- can be laughed at.
Amos To sum up the currencies-- the likelihood that the dollar has bottomed for at least antoher 6 months (to equate with the last rally of 11 months) is high. How we shall form this
Amos rally-- I have no idea
Amos The next chart is the dow transport. THe qurterly.
Amos I see an OKR followed by a thrust. If this model is correct-- then we are in front of multi year decline in this index. we also have the double top at 500 which can project to 2500
Amos if this happens-- that will be a real contraction in world economics. I have no idea if it will happen or not but going back to 2004 levels should NOT be out of the question.
Amos So many things are happening in the world-- I have no idea which will be the leading factor. Is it the political uncertainy in russia?
Amos will it be the slow down after the olympics?
Amos will it be the cost of fuel and people travelling less?
Amos will it be a cascading rolling stones of one thing leading to another-- starting with the real estate squeeze?
Amos I stink when it comes to interpreation of world events and their economic impact--but one thing is obvious-- we had quite a bubble in THIRD WORLD MARKETS-- the biggest in their history where
Amos marketst such as sapin, peru, mexico, portugal... you name it- exploded. Usually after such a bubble it takes a few years of PUNCTURING. so--if the dow transport is telling a TRUE story- then we arenow in year 2 of a big top and the closse of september will have an important
Amos story-- because if this quarter will closes near the low-- it is highly likely that the thrust after OKR model will kick in in force and we shall start a serious decline. If it closes near the middle or higher in the next 3 weeks-- that will ber another pircuture-- and the market
Amos may want to wait another quarter-- perhapse to see who wins between biden and Sarah.
Amos Again, sorry for being so vague-- but when you have a clear model-- it is SILLY to try to force you view upon it-- it is MUCH BETTER to let it RESOLVE ITSELF because the KNOWLEDGE embedded in the model is
Amos so DEEP and has a meaning for much longer period into the future- that it is , again, silly to try to even anticipate-- but rather-- let it unfold and then FOLLOW!!!
Amos The next one is the russel-- since we are following it recently- the NR-7 on the monthly chart is done. We are not in NR-8 . last month closed in the middle-- and september opened with a rather unique action--GAP OPEN that reversed itself immeidately.
Amos This brings into focus another important model that may be acting right now-- that is the OPENING RANGE- the Steinghardt model-- looking at the FIRST DAY OF THE MONTH-- as a trading range and going
Amos with the break out.
Amos We traded lower today than the first day of the month. On its surface it is a sell signal.
Amos However if you look at the last 2 months action- of the s and p or the nasdaq-- it is HARD to tell that one side is the obvious loser-- so from a poinot of view of tripple expiration-- i cannot tell which way market
Amos has to go. Perhpas this time-- the options sellers are the big winner s and the market should expire with the 1275 or so strike price being squeezed to zero-- because that is the biggest open interest of puts and calls
tom joined.
Amos I do not know. From the monthly chart point of view of the russel-- we are at the higher part of the range that is still confined withing that huge JANUARY range-- and we are much closer to its END than to its beginning
Amos I can promise you that we are in front of a rather large directional move- and I am betting on the down side because of the larger time frame picture-- but we may have to wait until that infamous tripple witching expiration
Amos The next chart is one we never spoke about-- but it is interesting
Amos Gary keeps asking me about the bonds ever so often-- and I keep responding that I cannot read the bonds chart. the Utilities , quite regularly are positively correlated with the bonds--- this time the chart looks different
Amos I hope I am not seeing ghosts-- but it seems that the monthly chart is forming a nice head and shoulders. we also have a large kr followed by a thrust. we also have first penetration of 5 ma over the 21 ma (which is normally only FIRST WARNING --not REAL START OF MOVE)
Amos but the picture of the head and shoulders is rather tempting
Amos the fact that we made a lower low of that big range during August- is important-- I am sure that once we take out the lows of august-- there will be big sell off.
Amos It is trut that we are still above the highs of 1999 and 2005-- and this whole "head and shoulders" is nothing but a range and tripple back to the ice---but considering the thrust of the semi in the DOW, the double top in the s and p
Amos and the weakness of the SXC= the options index-- the chance that this is only a continuation pattern is slim.
Amos What will happen if the Utilities break?
Amos I do not know--I do not know what it means from an economic point of view-- that people will use less electricity? I have no idea-- but if the "SOLID" utilities will join a break-- that can only amplify a decline in other sectors
Amos The next chart is the quartely DJU
Amos I tried to see what kind of correction we can get
Amos so I drew fibo retracment from the 2002 lows to all time high and 50% gives about 3550
Amos and I took the projection of the potentil "head and shoulders" the distance from the head to the shoulder and multiplied it-- in case this works- and I got 3600 or so-- so there are two potential targets which seem to converge
Amos many times when you get similar targets from different views of the chart and from different time frames-- you get some kind of synnergy which lends a little more confidence to your assumptions.
Amos they are still ASS-umptions.
Amos but the qurterly chart is showing someting else which is interesting
Amos the CLOSE
Amos since 2006 every quarterly bar-- closed at the high/ the first time we had a weaker close-- we got the first thrust during the thris quarter of 2007. followed by a rally which closed above the middle
Amos then we have a reversal which close AT THE LOW- and that was IMPORTANT SIGNAL the next rally was INSIDE BAR and now we alreayd made a lower low!. If we close this qurter near the low-- the chance for a much weaker next quarter
Amos will be large-- because we had TWO QUARTES in the last year that CLOSED AT THE LOW--That is IMPORTANT!!!!! it is an internal signal of the CM!
Amos I cannot prove it to you-- but I see it more and more
Amos Next chart is the crb quartely
Amos Like the euro it has a large OKR on the quarterly-- but the semi is still showing higher low.
Amos This is the largest bar in human history-- the fact that we are witnessing a MEGA YEAR stopping action is WITHOUT QUESTION!
Amos how long it will take-- is one big question.
Amos At any rate-- anyone who is dreaming in the next few years of higher commodities prices than we saw last 6 months-- is just dreaming.
Amos Such huge bar is mor often than not-- a WATER MARK of Gustav proportions.
Amos If we take out the semi annual low too between now and december-- that will also creat a reversal on the yearly chart-- which, of course, is a MEGA SIGN!
Amos I do not know how to use this information in the individual commodities-- pork bellies had recently 40 cents move up and down in a few days. have no idea why. perhaps it is so thin ( I heard 300 cointracts per day) that it means nothing--
Amos lumber may rally. Cocoa-- who knows. WHeat is slowly coming back to earth.
tradinginhandles left.
Amos remember a while ago I was discussing the simple fact that nothing can sell at 3 times cost of production for too long. Not crude, not corn, not beans not silver not nothing.
Amos We have been in a huge bubble- and at such times-- rationla thinking-- is out the door-- but we are slowly coming back to more normal behavior.
Amos From a trading point of view it simply means that the big FREND FUNDS are going to give back some of their huge profits-- and that poople who came to the business in the last 3 years-- are going to be grinded to pulp-- becausse they will continue to dream
Amos of the previous move and only buy and hold-- the next few years belong to traders and, of course,. to premium sellers.
Amos Premium selling in the next few years-- will be important--that is why watching options prices will be important too. This is my view. i have been saying this for a long time-- and it is ever so slowly materializing.
Amos the last chart is the Eurodollar
Amos I have mentioned it a few months ago and I said- we have come to a SCREECHING HALT and it is important to watch it
Amos you can see that we indded stopped moving.
Amos Since this is the MAJOR HEDGING TOOL of most large bannks-- this is important.
Amos In the last few years-- many pundits were shouting that instead of the FED leading the markets-- the market is leading or guiding the FED.
Amos Most of the breakoutf of the ED occured MONTHS before the FED started acting-- these guys KNEW!
Amos Now these guys are Sitting on their hands and NOT VOTING.
Amos Again, if there is any one amongst you, folks, who understands the fundamental meaning of this-- please ENLIGHTEN US-- I have NO IDEA what it means-- I only know that when we break out of thise range-- there weill be , again a strong move of 1-3 percentage poiunts in the prime
Amos and this will have some meaning to, at least stock market trading
Amos notice that once the ED stopped moving-- the s and p and the nasdaq also CONVERGED into a tighter trading range-- still giving nice scalping
Amos possibilities-- but NOT large moves.
Amos the ED is a "LEADING INDICATOR" as they come (there is NO such thing as LEI-it is a joke, of course)
Amos I do suggest-- we do not veer our eyes off this indicator-- it may give us a small edge
Amos Beyond this-- I am open to questions and comments--
Derek left.
Peter good timing, Sarah's about to start :)
Amos LOL
mr_steve_Atlanta_GA My first visit, nice job Amos
bradc lol
Amos Thank you steve
Gary_Fullett i thought steve from Georgia
Amos Ok folks lets go watch a real hockey mom. Hope she emasulates some of the lefti machos
Gary_Fullett russia attacke dgeorgia
Gary_Fullett georgia
Amos Again- September is not going to be easy-- but it should be a trading affair at least uintil th 16th
Peter thank you Amos, more food for thought. One comment, the 7880 area in the dollar is a key Monthly pivot on my chart
Amos Sarah was a mother. she gave birth at 90
Gary_Fullett isnt sept and oct weakness for stocks?
Gary_Fullett and abraham at 99
bradc seasonally weakness in grains
Amos Yes peter-- the whole 80 area is huge ice
Gary_Fullett because of harvest brad?
bradc y
Amos Yes gary- that is the convention
Amos ok folks have a good evening see you next time
Peter yes definitly, and broken ice usually gets a reaction the first time retested
Peter Amos, have a great trading week
Amos left.
Gary_Fullett okay great lecture amos
Gary_Fullett heck its like 4 30 am there
Gary_Fullett so as amos metnioned we are some critcal junctures
Gary_Fullett the end of sept is the end of the 3rd quarter
ScottB kind of kills Zack's strategy
Gary_Fullett he isnt here its okay lol
ScottB i.e., buy and hold metals
bradc well, him and amos have different thoughts on the direction of price it looks like
Peter the only buy and hold that seems to work in Amos's set of models is the US dollar
bradc just for the record, corn is not at 3x the cost of production
ScottB yep
Gary_Fullett where is it brad ?
bradc 1.5-1.7
bradc 1.5 prolly close
bradc does amos mess w/commods much?
bradc assuming avg yields
Gary_Fullett yes he looks at them
Gary_Fullett doesnt trade em as much as the finacials as well as other markets
ScottB I just read that it cost $10K in sulfuric acid to make $20K worth of Ni - than there is a bunch of other costs like energy, labor, etc.
ScottB at present price Ni produces are losing money
bradc Ni?
bradc nitrogen?
ScottB N = nitrogen.....Ni = nickel
Peter Northern Island or Nickle :)
bradc ok
ScottB actually "nude island"
mr_steve_Atlanta_GA left.
bradc that's what i thought but i was talking farm so wasn't sure
tom left.
Gary_Fullett tommorow for those that are new here will have a topic
Gary_Fullett and then we will discuss stocks
bradc time to put hoss to bed - have a great evening everyone
Gary_Fullett night brad ty
Peter good night Brad,
bradc left.
Gary_Fullett so any questions or comments?
Gary_Fullett too late to have a topic for tongith
ScottB cubs lost
Gary_Fullett and I am sure many of u wnat to see palin speak it is a 40 m in speach
Gary_Fullett 4-0
ScottB Amos makes it sound like there is nothing to buy....short everything
Gary_Fullett well after the recent breask
Gary_Fullett eh feels a turn occurred
Gary_Fullett to his models
Peter Thank you Gary; dinner time, then Palin DVR & chart time, good night every one
ScottB he is starting to make sense....handwriting is in the prices
Gary_Fullett well price and volume
ScottB night,,,,,Gary --- I should have bought a kumquat farm
Gary_Fullett okay I am goijg to start charts early
Gary_Fullett i will see u all tommorw night
Gary_Fullett or tommorw during to the day
Gary_Fullett night all ty
ScottB left.
Gary_Fullett steve will pribably be here tommorw
Gary_Fullett for stock talk
Gary_Fullett nibghtb all
Gary_Fullett left. Tradertalk
Subscribe to:
Posts (Atom)