Wednesday, April 28, 2010


28 April & 15 May 2010

I wish to comment only briefly on this topic.

The US Securities and Exchange Commission (SEC) is charged with regulatory oversight of the US financial system.

For the entire 1982-2007 bull run in US stocks, the SEC did essentially nothing to safeguard investors, who have been massively exploited throughout the entire period. Among its more notable failings, the SEC failed to blow the whistle on the lax and indulgent practices of the ratings agencies (Moody's, Standard and Poors, etc.). "Tape painting" (buying stocks in your mutual fund or other portfolio at end of month and end of quarter closing to run up performance numbers) was never touched.

The only real action taken by the SEC was to target short sellers, who have a critical role in balancing the financial system. Let's be honest, the US market was far more justifiably sold short than long, particularly during the latter years of the 26-year over-hyped bull market. So the SEC tried to take down the only honest guys on Wall Street while acting as cheerleaders for the so-called bull market.

So long as fraud and mismanagement resulted in stocks going up, the SEC did nothing.

In fact, the SEC is one of the primary culprits - along with the Federal Reserve and US elected representatives - in indulging the 26-year feeding frenzy on Wall Street which was conducted at the expense of hapless and unwary mainstream investors.

As an enforcer of the law, is not the SEC utilizing tactics more familiar to the KGB in its assault on Goldman Sachs?

Others have analyzed the issues better than I, but suffice it to say that Goldman Sachs had far less to do with causing the financial meltdown than did the SEC itself. In essence, by tackling Goldman Sachs as its "fall guy," the SEC has trained its sights on the last man standing, in order to divert attention from its own culpability!

I would be better persuaded as to the sincerity of the SEC's mission if it first of all addressed its own regulatory missteps and outright complicity during one of the greatest and most irresponsible multi-bubble periods in human financial history.

Imagine this... if the tables were turned, and the largely quite competent managers at Goldman were instead grilling the members of the SEC, then far more truth would be told than will ever be revealed through the current diversion.

My call, in brief: SEC = felony, Goldman Sachs = misdemeanour (at worst).

Let's keep the story in perspective as the media circus unfolds... down at the Coliseum!

And, if you want to invest where the sharks won't eat you alive, consider the gold and precious metals sector rather than the still overvalued stock and bond markets. Most everything else is potentially hazardous to your financial health, in large part because of agencies such as the SEC, who did not do their job when action was needed, and are failing to do it now, by targeting their action against the shrewd financial managers at Goldman Sachs - the individuals who were best able to game the system that the SEC itself had helped to rig!

Not only is gold the best investment category in today's world of Alice in Wonderland finance, it is presently in a renewed positive phase, so those who buy now will very likely be rewarded sooner rather than later:

The above chart is available for subscribers to The Aden Forecast. I strongly recommend that you subscribe, and will add that their (annual) rates are quite reasonable!

And from Mark Lundeen - a little more of what is actually going on:

Due to policies promulgated by US elected representatives and the Federal Reserve, and fostered by the SEC, debt and money printing have grown out of hand - like Topsy!

So let's all focus on Goldman while the charts above (of US debt expansion and the correlated US dollar gold price) climb to the sky....

Once again, by the way, David Shvartsman at Finance Trends Matter has covered this topic as thoroughly as can be imagined, with links to comments by such as Peter Schiff and Marc Faber. Suffice it to say that the contrarian community has comments on the topic which coincide well with my own perspective on the matter.

15 May 2010: Here's a nice (brief) critique of the SEC decision from The Business Insider. It is reported that one SEC commissioner stated, "I have serious doubts about the evidence of fraud." Two of five SEC commissioners voted in opposition to the obviously politically-motivated decision to proceed against Goldman. You might want to consider the SEC a "perpetrator protection" agency. This story also links to more detailed coverage in the WSJ (you must be a subscriber to view this story).

Friday, April 16, 2010


16 April, 10 May & 10 June 2010

Read carefully. The title of this piece is NOT "Reaganomics," but "Renegonomics."

I came across this interesting snippet from Bill Fleckenstein today, who refers to "the hidden benefits of debt repudiation and forbearance by the banking system, all of which have been created by the government's easy money and bank bailouts."

What are we talking about here?

Again, to quote Mr. Fleckenstein (literally no one could say it better): "People who aren't making home payments; or those who are participating in short sales on homes they can actually afford -- in other words, the folks who in essence reneged on mortgages that were under water and did so because they could -- have extra money to spend that they wouldn't have if they'd been making payments."

How much money are we talking about?

According to Mr. Fleckenstein, "I've seen recent estimates as high as $2 trillion being available, which is a lot of extra juice for the economy, especially with that extra juice hitting the skinnied-down state that the world came to in the wake of the (2008) financial crisis."

What was that again?

The US economy is booming because people who don't pay their mortgages have experienced a windfall.... In essence, rather than paying their mortgages, these underwater homeowners are directing their extra cash on hand into the marketplace, providing an unlikely boost to the consumer economy!

Those who renege on their mortgage payments - with the full blessings of the state - have a lot of free cash on their hands - as much as $2 trillion in unpaid mortgages - and it is feeding the US economy (while US government bail-out programs soak up the damage to the lenders who aren't getting paid by the deadbeat mortgage holders).

Mr. Fleckenstein explains it as follows: "Think about the entire U.S. economy as, in essence, a company. While the balance sheet has become astronomically worse -- in the form of current (though postponed) debts, as well as future obligations -- the income statement has been boosted recently: Those folks who are upside-down in real estate have been given a reprieve, and the real-estate market itself has been given a shot in the arm by tax credits (think: extend and pretend). So, the income statement for now looks okay, as does the economy. In sum, company USA is 'worth' a lot less than it used to be, but for the moment its operations are okay, at least on the surface."

So, you may ask, what's the problem? Sounds pretty good. The folks underwater on their mortgages are powering the economy, and the US government is rescuing the unpaid lenders. Should we not applaud the mortgage non-payers (and the US government that is enabling them) as the source of our current salvation?

According to Mr. Fleckenstein, here is the conundrum: "The prudent have been asked to bail out the reckless -- and it won't work over time. The 'do-over' that the world was given during the financial crisis, courtesy of the printing press (read: government bailouts), will be 'paid for' with higher inflation and ultimately higher interest rates. But that's getting ahead of ourselves. The only people more upset than those handful of prudent types are liable to be the deflationists, who haven't yet realized that their best chance of victory has come and gone, at least until the printing press is taken away."

That is, we are setting ourselves up for runaway inflation. So far, the collapse of the real estate bubble has masked the rampant inflation brewing beneath the surface (check out the annual increases in the cost of a can of beans at Wal-Mart over the past 5 years if you doubt me).

2005 - 52 cents
2006 - 58 cents
2007 - 62 cents
2008 - 68 cents
2009 - 78 cents
2010 - 82 cents

Pamela and Mary Ann Aden report that the yield on the 30-year US government treasury bond has now broken out to the upside for the first time in 29 years. This signals big-time inflation and long-time inflation - perhaps decades of gradually escalating, increasingly pervasive, and eventually, possibly runaway cost increases.

In other words, the US economy is now literally at the last ditch - running on fumes if you will - or rather, "renegonomics." When the economic boost provided by mortgage non-payment works its way through the system - there will not be another rescue package.

If you like, this is the wall, and we have seen it. Renegonomics is fuelling the present economic fires. And let me tell you, we won't have much more to burn after this fire goes out!

For more information on the topic of "strategic default" (that is, not paying your mortgage even if you can) on mortgage payments, click here for Dr. Housing Bubble's commentary.

Or check Karl Denninger's April 14, 2010 post: "Oh, So the Recovery Is About Delinquency?" He summarizes the core issues as follows: "The essential conundrum is this: Eventually, one way or another, these families will have to start making payments toward housing again. They may make those payments via their mortgage or they may be evicted and become renters but the money currently being blown on frivolities that is "propping up the economy" and leading to "strong consumer sales" is showing up there only because people are literally getting a free ride on their shelter costs. The perversions at play here are outrageous - not only are these "homeowners" living effectively for free (and since most mortgages have escrow accounts for property taxes, those aren't being paid either!) but in addition the banks, by not foreclosing, are holding defaulted loan paper on their books at dramatically above recovery value, thereby presenting a false view of their financial health."

Another factor in this picture is rental rates. I'm writing as a Canadian commenting on the US housing market, and I'm short on direct experience. However, my understanding is that US rental rates are also dropping in many markets (though also rising in some). Tenants whose rents are falling also have more free cash flow, and thus more money to spend. So perhaps declining rents are also helping to fuel the US economic recovery, this time at the expense of landlords - many of whom, of course, may also be mortgage holders.

As of October 11, 2009, the Real Estate Bloggers website published the following:

"The U.S. vacancy rate reached 7.8%, a 23-year high, according to Reis Inc., a New York real-estate research firm that tracks vacancies and rents in the top 79 U.S. markets. The rate is expected to climb further in the fall and winter, when rental demand is weaker, pushing vacancies to the highest levels since Reis began its count in 1980. Meanwhile, the air leaving the market is driving rents down, most sharply in markets that had been chugging along until a year ago, when unemployment accelerated, including Tacoma; San Jose, California; and Orange County, California."


Though I have used the term in this article, those who don't pay mortgages because they are "under water" are not necessarily "deadbeats."

Why? They are not in violation of contract law, as the mortgagee (the entity who provides the funds for the mortgage) has in most cases asked for a minimal down-payment if any at all, requiring only the house (now typically worth hundreds of thousands of dollars less than its originally appraised value) as collateral. This is neither predatory lending by the bank (or the "synthetic entity" making the loan available) nor unethical behaviour on the part of the mortgagor (the homebuyer), as the contract clearly stipulates that a loan is being exchanged for a home as collateral.

The cause was clearly the housing bubble itself, which in turn was a consequence of "excess liquidity" (that is, the central bank throwing money around - with the permission of elected representatives - trying to prevent the economy from following its normal though unpleasant up-and-down business cycle). An anonymous contributor on Mr. Fleckenstein's site seems to have clarified the issue of "deadbeat borrowers" almost perfectly, as follows:

"I did credit analysis and have been a senior financial executive for several years, so I have quite a bit of experience with lending, borrowing and contract law. I also spent way more time than I like studying MBS/CDO pricing. People need to make a distinction between those who committed fraud on a mortgage application and people who did not, and consider embedded options.

"Options to walk away from or prepay a mortgage are freely granted by lenders. It's part of what borrowers pay for in the interest rate and fees. Whether or not lenders properly priced those options is their responsibility. It appears that they placed ZERO probability (therefore ZERO value) on the walk-away option.

"GENERALLY, no fraud is committed when a borrower exercises those options, any more than if a stock put option holder exercises it when it's in-the-money.

"Lenders agreed to accept these exposures on the basis of credit evaluation AND their own business decision. If someone lies about their credit on loan docs, the lender can and should say, 'I would not have made this loan but for your lie(s).' That's fraud. Those people are crooks.

"However, many lenders threw credit analysis out the window or sold mortgages too cheaply, too easily to get business during the bubble. For them to cry wolf now - or to call those borrowers 'deadbeats' who profited from this (without fraud) - is disingenuous. Everyone was a big boy (or girl) here.

"Regular folks who DID NOT lie have every right to exercise the option they paid for and the lender has absolutely NO RIGHT to expect otherwise. This is a sound business decision akin to a trade. Perhaps they made poor buying decisions in the first place, but they are no more 'reckless' or 'deadbeat' than people who lose money on a bad trade or business venture.

"The rightful rage at being asked to bail out all comers (that I share - the whopping tax bill doesn't help) is more properly directed at the party forcing the bailout - Big Government."

What to do in the case of such an inflationary scenario? No surprise. You've heard it here before. Exchange your currencies for gold as a store of value in inflationary times.

And... thanks to David Shvartsman for linking this post here (at Finance Trends Matter).

5 May 2010: Dr. Housing Bubble has done it again, by compiling the ultimate analysis of strategic default. Read here for a scrupulous analysis of the issue I have just touched on here.

10 May 2010: This just in. Last night, the US television program 60 Minutes apparently ran a feature on strategic defaults. The CBS website states: "It's estimated that one million Americans walked away from homes 'underwater' or worth less than their mortgages even though they could afford the payments. Morley Safer reports on this trend, called strategic default, that threatens the economic recovery."

What happened next? Google was flooded with search requests, presumably by viewers of the program, who want to know how to do it! This story was picked up by the Business Insider here. And there is a guide for how to default, which the Business Insider published in January 2010: click here. (In fact, it was the surge in visits to the guide which caused the Business Insider to become alerted to the phenomenon.)

10 June 2010: Not all economists agree that strategic defaults could have this large an impact on the consumer economy. In a dissenting view, Bill Conerly has argued that tax cuts may play a greater role in boosting consumer spending than mortgage defaults. Bill's recent post can be found here.

Thursday, April 01, 2010

Meditations on April Fool's Day from Doug Casey

1 April 2010

A few thoughts on April Fool's Day, taken from Doug Casey's daily newsletter. Sign up here.

Mr. Casey was wondering about the origins of April Fool's Day after friends rearranged the keys on his computer keyboard. He writes today:

The most plausible explanation I could find was that in 1582, Pope Gregory XIII ordered a new calendar (the Gregorian calendar) to replace the old Julian calendar. The new calendar called for New Year’s Day to be celebrated January 1. That year, France adopted the reformed calendar and shifted New Year’s Day to January 1. According to a popular explanation, many people either refused to accept the new date, or did not learn about it, and continued to celebrate New Year’s Day on April 1. Others began to make fun of these traditionalists, sending them on “fool’s errands” or trying to trick them into believing something false. Eventually, the practice spread throughout Europe.

According to an article I found on, however, there are at least two difficulties with this explanation. The first is that it doesn’t fully account for the spread of April Fools’ Day to other European countries. The Gregorian calendar was not adopted by England until 1752, for example, but April Fools’ Day was already well established there by that point. The second is that we have no direct historical evidence for this explanation, only conjecture, and that conjecture appears to have been made more recently.

So, maybe we’ll never know the day’s true origins. I’d still like to share a few famous April Fools’ pranks from around the world before we move on. (Note: These pranks were pulled from The Museum of Hoaxes website.)

The Swiss Spaghetti Harvest, 1957: The respected BBC news show Panorama announced that thanks to a very mild winter and the virtual elimination of the dreaded spaghetti weevil, Swiss farmers were enjoying a bumper spaghetti crop. It accompanied this announcement with footage of Swiss peasants pulling strands of spaghetti down from trees. Huge numbers of viewers were taken in. Many called the BBC wanting to know how they could grow their own spaghetti tree. To this the BBC diplomatically replied, "Place a sprig of spaghetti in a tin of tomato sauce and hope for the best."

Planetary Alignment Decreases Gravity, 1976: The British astronomer Patrick Moore announced on BBC Radio 2 that at 9:47 AM a once-in-a-lifetime astronomical event was going to occur that listeners could experience in their very own homes. The planet Pluto would pass behind Jupiter, temporarily causing a gravitational alignment that would counteract and lessen the Earth's own gravity. Moore told his listeners that if they jumped in the air at the exact moment that this planetary alignment occurred, they would experience a strange floating sensation. When 9:47 AM arrived, BBC2 began to receive hundreds of phone calls from listeners claiming to have felt the sensation. One woman even reported that she and her eleven friends had risen from their chairs and floated around the room.

Sidd Finch, 1985: Sports Illustrated published a story about a new rookie pitcher who planned to play for the Mets. His name was Sidd Finch, and he could reportedly throw a baseball at 168 mph with pinpoint accuracy. This was 65 mph faster than the previous record. Surprisingly, Sidd Finch had never even played the game before. Instead, he had mastered the "art of the pitch" in a Tibetan monastery under the guidance of the "great poet-saint Lama Milaraspa." Mets fans celebrated their teams' amazing luck at having found such a gifted player, and Sports Illustrated was flooded with requests for more information. In reality this legendary player only existed in the imagination of the author of the article, George Plimpton.

Hotheaded Naked Ice Borers, 1995: Discover Magazine reported that the highly respected wildlife biologist Dr. Aprile Pazzo had found a new species in Antarctica: the hotheaded naked ice borer. These fascinating creatures had bony plates on their heads that, fed by numerous blood vessels, could become burning hot, allowing the animals to bore through ice at high speeds. They used this ability to hunt penguins, melting the ice beneath the penguins and causing them to sink downwards into the resulting slush where the hotheads consumed them. After much research, Dr. Pazzo theorized that the hotheads might have been responsible for the mysterious disappearance of noted Antarctic explorer Philippe Poisson in 1837. "To the ice borers, he would have looked like a penguin," the article quoted her as saying. Discover received more mail in response to this article than they had received for any other article in their history.