Tuesday, May 25, 2010

Depression 2.0

The future will be better tomorrow.
-- Dan Quayle (1947 - )

Those of you who are buying into the recovery underway may want to re-think your plans. As has been mentioned here numerous times, there will be no recovery. We have been heading into a prolonged period of hyperdeflation, deflation or depression, depending upon whether it is you or your neighbor who is suffering the most.
A perfect example of the spin that has been spun was the announcement by GM part 2, that the automaker has paid back its TARP loans after reporting better sales. What was left out of that announcement was the fact that the payback was coming from another TARP account. That same game is played on Canal Street corners with shells and peas.

The economic corruption, often created by political corruption, is now so pervasive that some do not worry about a “Black Swan.” It is a White Swan for some economists. Meaning, that all of the signs were obvious for the dot.com bust as well as the 2008 Lehman disaster, and that the big Kahuna is already on the horizon for all to see.

We have the U.S. debt cost approaching 93% of GDP, an expiring $8,000 home-buying credit, the only mortgages being written by Fanny Mae (which is on life-support and in conservatorship) super-welfare in the name of extended-extended unemployment, and numerous States that are bleeding money. California is actually in worse shape than Greece with New Jersey and New York not far behind (New York’s projected deficit is $15 Billion for next year). If Wall Street is really a prognosticator of the future 6-12 months out, it sees an oncoming train in the tunnel.

New York City is about to experience severe budget cuts. The Town of Southampton is still relatively clueless and has done nothing to reign in the bloated employee roster. While the Police have always been sacrosanct as regards budget cuts in the Hamptons, if that same methodology continues, there will be plenty of cops and no teachers. The U.S. itself is in serious trouble. One of the few states that depend upon taxpayers to support civil service pensions that are not fully funded, New York, will soon come to terms with an impossible situation. It’s like the Social Security System, which is broken – except New York can’t print money and the problem is not many years away but immediate.
While everyone has gotten used to looking to real estate and its associated taxes to cover the shortfalls, that particular party is over. Property values are still dropping as fast as they can increase the tax rate and homeowners with good credit are starting to walk away from insupportable values that are underwater. Fully 14% of all properties in this country are either in default or foreclosure.
As one reader-observer wrote:

“The govt. bailing out lenders, wall street, banks, car companies, insurance companies and paying bond holders 100% on the dollar while throwing it on top of the taxpayers back was the greatest heist of wealth in the history of the world.

consult a lawyer first. Non Recourse vs. Recourse is important too. You will be able to save some money before you leave. Rent in the same area for 1/2 of what you pay for a mortgage.

Get a secured credit card, keep inquiries low, open a small dollar car loan, pay off on time...build your credit back up. you will be able to get that loan in 2 years, Fannie in 4 or less.

Don't let them fool you, there is no shame. Corporations do it all the time. Morgan Stanley just walked away from 1.3 billion loan....The shame comes from rewarding failure and horrible regulation antics of the SEC, FCC, FED, Treasury, Congress etc....”

This brings us to some causes and few solutions. Goldman Sachs, the Grinch of Wall Street, is indicative of the actual greed that still takes $100 million a day out of the market in profits. They do this by virtue of “frontrunning” – essentially, by “seeing” an order coming in and both buying and then selling the trade to the incoming buyer at a profit in a nanosecond – with high-speed computers that are physically closer to the exchange computers. Mayor Motz of Quogue got 8 years in Federal prison for what Goldman Sachs does thousands of times a day.
This is a company that is one of many Wall Street vultures, like JPMorgan Chase, which has essentially destabilized countries (like Greece). Across this country, Villages, Towns, Counties and States have been devastated by the accounting maneuvers and credit default swaps associated with pension funds and financial instruments used to shore up bloated budgets. The same is true for their “expertise” which was exported around the world. The Eurozone is now experiencing this and is heading into a downward spiral of debt via stimulus plans and printing money just as the U.S. has done.

It will not work.

Stimulus plans are predicated upon creating money out of nothing. No new assets are created which serve as the basis for money that is printed. And, the “full faith and credit” of the U.S. government is rapidly fading. We have phony money, which is inflationary, chasing ballooning deficits – because we want to continue on as before. That must end – and it will – badly.

So far, $1.3 Trillion has been removed from available credit – used by small business and individuals – to continue to operate. Another $1.3 Trillion may soon vanish. And, if the banking reform is on track as planned, credit card companies will no longer be permitted to charge rate for credit cards and personal loans based upon where their main office is (the main reason why Citibank moved to South Dakota, for example). If banks can only charge the rates permitted by each individual state, instead of the rate permitted by the state where they are located, they will stop lending in states that have low interest-rate ceilings. If that happens, available credit will be further reduced.

All of this matters because small businesses are in big trouble. And, small business employs 65% of the workers in this country – employment that enables them to pay mortgages and buy goods.

Simultaneously, with the Libor rate rising (which some mortgages are tied to) due to the cost of credit, many interest-only Alt-A loans reset this year and in 2011 and 2012.

Put all of this together.

Rising debt loads, contraction of small business, reductions in employment, reductions in credit-lines, rising “strategic” defaults on mortgages, mortgage resets, “welfare” mortgages through Fannie Mae and Freddie Mac that are subsidized toxic assets from bankrupt entities, and bread lines of “extended” unemployment – and the collapse of Wall Street.
We are in a brief moment of illusory improvement because it is springtime and seasonal employment as well as spending has blinded us.

So, when do the Villages, Towns, States and Countries get the REALLY good news? Starting now -- and coming to a budget office near you by November. That’s when Depression 2.0 will visit.

Thursday, May 13, 2010

The Flash Crash

Buy on the rumor; sell on the news.
-- Wall Street Proverb

So here’s the deal.

Flash trades basically are handled by “bots” or computerized systems at close to the speed of light.
Buy or sell orders are handled in nanoseconds. In fact, orders are received and transacted faster if the physical location of the computer-generated trade is closer to the servers that exist for the Exchange – wherever that facility is actually located.
If the brokerage house/investment bank is closer to the Exchange, it’s possible to execute a trade faster than a local office of, say, Merrill Lynch, whose office could be in Iowa. The electronic time lag gives the edge to the broker near the Exchange.

Goldman Sachs is known to have been making its money by having its systems closest to the action. Fully 70% of all trading is now flash trading. Goldman is said to account for nearly 48% of these trades and 35% of all trades. Flash trades enable the fastest “gun in the East” to get ahead of other orders and with a few million trades a day, makeing its money by executing in and out before its rivals. Investors who have stop loss orders are sold out and combined losses of hundreds of billions of dollars are estimated. Goldman makes money. In fact, Goldman regularly has $100 million days.

Essentially, flash trades permits Goldman to see an order and choose its execution by inside information that is due to the faster (closer) proximity to the source of the information. The Flash Crash exposed this system.

Mayor Motz of Quogue was prosecuted for this. Only, in his case it was called “Frontrunning.” Either Motz is innocent or Goldman is guilty. You can’t have it both ways. The only difference was speed.

There you have it, folks.

Friday, May 07, 2010

Political Notes 5.7.10

Democracy becomes a government of bullies tempered by editors.
-- Ralph Waldo Emerson (1803 - 1882)

As the economy “improves,” the volatility in financial markets as well as the quality of life continues to deteriorate. The anomaly is not really inexplicable. What is missing is accurate reporting about what is going on. The government is desperate to have us believe that everything is on the mend. Despite the fact that “they are rioting in Africa,” or rather, in Greece, all is well. Except, that all is not well.

The fact is that the VIX, the market volatility index, is spiking and Wall Street had a wild ride on Thursday – down nearly 1000 points intraday.

The dismay sown by the Communists in Greece has risen to the level of a few fatalities. So, while a loan package via the IMF and Germany has been extended, the rest of the PIGS will soon arrive with their collective hands out. That’s when the fun will begin in the Eurozone – and that’s when it will start to really get interesting here in America.

We have Goldman Sachs, an investment bank that took TARP money because it was “too big to fail” unlike Lehman -- which had a hand in bringing down Greece through its “creative accounting” and credit-default swaps. GS is now arguably facing a criminal investigation – which the populace has been calling for, for years. The Eurozone is facing collective bankruptcy or at default on its Sovereign debt and the U.S. is facing the possibility of a double-dip recession. The current improvement in employment numbers may, in fact, be the predicted temporary rise in spring fever/seasonal employment for Small Business. Schiller, the Yale economic guru, has predicted a huge coming increase in foreclosures brought on by Alt-A and Prime loans which will reset this year and have a chilling effect going forward. The fact that nearly one third of all homes in America are worth less that the mortgage is important. Those that bought homes with the $8,000 tax credit have been told that the value of their homes dropped before the ink was dry on the loan documents.
As a backdrop to all of this, local economies from States to Counties, to Cities, to Villages have become the antagonists towards the one source of energy that can help solve the crisis – Small Businesses in America.

With fully 65% of all jobs emanating from this source, it has become the target instead of the savior for every civil service agency from the IRS, to the NY State Tax Department, the NYC Traffic Enforcement Bureau, and the Worker’s Compensation people, ending with Code Enforcement personnel, which initiate fines. The list of antagonists to the energy and drive needed by Small Business owners is growing as the deficits caused by the Wall Street/Banks/Mortgage Broker fiasco plays out.

The credit default swaps and phony mortgage products that were signed off on by unsuspecting borrowers – fueling the CDO’s and SIV’s that were sold off to pension funds, small banks, Countries, Cities, States, Counties and Villages across the country – are now spawning legions of civil service employees looking to make up the losses while creating a justification for them to keep their own jobs. Soon government will have no subjects to collect from and Hannibal Lector will be in charge of the feast.

This is being played out with the same tactics used by the King.

Threaten and tax the people -- who are the victims. Why? It’s easier than going after the banks. It’s cheaper. And, because we can.

But, why are we killing Small Business? It is the real Goose that laid the Golden Egg in America. This is the conundrum which begs a political answer in this country -- if we are to succeed.