"Going Commando" Index to Gauge Economy

Want to figure out where the economy stands? Look no further than men's underwear.

How is the economy doing? Look in your underwear drawer
(Bruce Watson, 9/29/09 Daily Finance at AOL)

"It looks like 2009 was a bad year for men's underwear. Mintel, a consumer research firm, says that sales of men's skivvies dropped 2.3 percent from 2008. Meanwhile, NPD Group, another firm, argues that the decline was more on the order of 12 percent. Either way, it's a fair bet that many underwear drawers are looking a bit ragged.

"Some analysts refer to this economic measure as the "underwear index." While seasonal outerwear, flashy luxury clothes, and women's lingerie are often tied to seasons or holidays, men's undies tend to be pretty straightforward. They are replaced as needed, which means that their sales should remain relatively constant.

"In this context, 2009's drop in the sales of men's underwear means that many men are walking around with busted elastic, fabric that has worn thin, or a much-reduced stock of spare BVDs. Given the difficulty of getting a few extra months out of a pair of boxers, it suggests that many men are reaching the end of their easily-absorbed cutbacks. After all, while eating out less or taking fewer trips can be a minor annoyance, wearing tired underwear or -- worse yet -- going commando suggests that consumers are truly caught on the horns of a financial dilemma."

Don't laugh. The underwear index is a favorite of Alan Greenspan.

"While an unusual measure of the economy, the underwear index is reportedly one of Alan Greenspan's favorite statistics to consult. Part of its significance probably lies in the possibility that, for many men, buying underwear is largely unconscious. When asked about the state of his underclothes, one consumer (who chose to remain nameless) stated, "Actually, I'm running out. I don't know how it happened." He went on to note that he has been cutting back on some expenses. As the drop in underwear sales continues, it seems to be shifting from an unconscious to a conscious trend; in the process, it is becoming increasingly significant, as consumers deliberately sacrifice comfort for cash."

The article continues. You can read the rest of the article by clicking the link above.

According to the writer, the underwear index, like the unemployment rate, is a lagging indicator. If one examine the index components, there seems to be a subtle shift from boxers to briefs (briefs sales up 0.6% against boxers sales), indicating cash-strapped consumers seeking more bang for the money. The article cites a 7-pack of BVDs costing the same as a 2-pack of boxers at Hanes.

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Nobel Peace Prize for ... Election Campaign??

John Nichols at The Nation thinks so.

Obama's Campaign Merits a Peace Prize (John Nichols, 10/10/09 The Nation)

Mr. Nichols starts the article by saying how he is not satisfied with President Obama's policies and actions since he took office. But then,

"So why not join the chorus of critics on the right and the left who object to the Nobel committee's decision to award a freshman president what remains the most important international recognition of individual accomplishment?

"Because, much as I might like to pen a piece with a snappy headline like Guardian writer Michael White's "I Hope Nobel Members Feel Pleased With Themselves, The Smug Idiots," I can't."

Why not? The answer is given in the second half of the article:

"I may have plenty of complaints about the man and his presidency. But I believe that Barack Obama did something that merits his selection as the recipient of the 2009 Nobel Peace Prize.

"I am not talking here about an official act taken since he replaced the lamentable George Bush – although an argument can be made that replacing Bush's reign of error is sufficient accomplishment. What I'm talking about is actually something Obama did before his election – in fact, before his nomination as the Democratic Party's 2008 standard-bearer."

Specifically,

"In the July, 2007, "YouTube Debate," the Democratic candidates were asked if they would be willing to meet "with leaders of Syria, Iran, Venezuela" during their first term. Obama responded that, yes, he would be willing to do so. He explained that "the notion that somehow not talking to countries is punishment to them -- which has been the guiding diplomatic principle of this (Bush) administration -- is ridiculous.""

His concluding paragraph:

"Obama is being honored for what he did as a contender for the presidency -- a contender whose winning run charged the political debate in a party and a country that desperately needed to take a new direction. As such, he is not merely worthy. Barack Obama, the candidate, is the right recipient of the Nobel Prize for Peace."

This takes the cake so far.

So, for this writer, putting the diplomacy in front of escalating armed conflicts during the party nomination campaign and successive presidential campaign was enough to win Obama the Nobel Peace Prize. Never mind that he started bombing an ally (Pakistan), is about to further increase manpower poured into Afghanistan, continues to arm and train Georgians and a host of other nations in volatile central Asia. As long as he meant well during the campaign, it was good enough.

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U.S. Telecom Companies Are Part of Government

according to the Justice Department.

I used to read the Wired magazine in the 1990s, back when the Internet was still treated as curious niche. I liked reading about new gadgets of all sorts, as I was one of those people who had to have "it", whatever it was, as long as it had never existed before. Buggy? So what? I'd boldly go where no one had gone before. Something like that.

So, it is rather shocking for me to see the headline like this on the Wired's site. Probably the magazine has always covered technology and its social and political impact, and I didn't notice or care when I was a subscriber.

Telephone Company Is Arm of Government, Feds Admit in Spy Suit (Ryan Singel, 10/8/09 Wired)

"The Department of Justice has finally admitted it in court papers: The nation’s telecom companies are an arm of the government — at least when it comes to secret spying.

"Fortunately, a judge says that relationship isn’t enough to squash a rights group’s open records request for communications between the nation’s telecoms and the feds.

"The Electronic Frontier Foundation wanted to see what role telecom lobbying of Justice Department played when the government began its year-long, and ultimately successful, push to win retroactive immunity for AT&T and others being sued for unlawfully spying on American citizens.

"The feds argued that the documents showing consultation over the controversial telecom immunity proposal weren’t subject to the Freedom of Information Act since they were protected as “intra-agency” records:

"“The communications between the agencies and telecommunications companies regarding the immunity provisions of the proposed legislation have been regarded as intra-agency because the government and the companies have a common interest in the defense of the pending litigation and the communications regarding the immunity provisions concerned that common interest.”" [emphasis is mine]

Get this? The government is saying, as the Wired writer (or editor) summarizes in the title, that the telecom companies are part of government agencies. Information exchange between the federal government (in this case the Justice Department) and the telecom companies are "intra-agency" information. 'Intra' means 'within'.

In other words, it's information WITHIN THE SAME AGENCY.

The Justice Department and its intradepartmental subordinate, the telecom companies, continue the practice of warrantless wire-tapping of US citizens.

How nothing has changed.

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More on Obama's Nobel Peace Prize

The most magnanimous gesture President Obama could have given that would have won many fans (instead of derision) was to decline the Nobel Prize, saying his job, to put America on the right track (even though what is "right" is highly debatable), first and foremost, has barely started, appreciate your gesture, but no thank you, there are more worthy candidates than me.

(Unless of course the Nobel Committee was awarding the prize for his community organizing days.)

Or as some say, he hasn't killed enough yet. Here's one from Antiwar.com's Justin Raimondo:

Bizarro Peace Prize Awarded to Obama
(Justin Raimondo, 10/9/09 Antiwar.com)

"Let’s say you’re the President of the United States — okay? And you’re on the brink of escalating what promises to be a wider, more intense war than that which George W. Bush launched in Iraq. You’ve already sent in reinforcements, but you’re undecided about just how many more troops you’re going to send to Afghanistan – could be 20,000, could be 40,000, or even 60,000. But, in any case, you’ve ruled out withdrawal and diplomacy: the only option you have left is more war.

"In addition, you’re moving – slowly but surely – toward full-scale involvement in Pakistan, where your drones are daily wreaking death and destruction on innocent civilians, and destabilizing a government that is increasingly hostile to your machinations – even though you’re bribing them with billions that never reach their ostensible beneficiaries and only serve to fatten the purses of your Pakistani sock-puppets.

"On top of that, you’ve just told the Palestinians that they must live with Israeli “settlements” and forced the UN to ignore an official report detailing the killing of thousands of innocent men, women, and children by IDF forces armed by the US.

"On top of that, you’re pushing through Congress a record military spending bill that keeps the US spending more than the top 45 nations on earth combined on weapons and methods of war.
So, naturally, as a reward for all your strenuous efforts on behalf of keeping the world a place that is less safe, less stable, and less worth living in than at any time since the outbreak of World War II, you are bestowed with – yes, that’s right, the Nobel Peace Prize. This, however, isn’t just any Nobel Peace Prize – oh no It’s a Bizarro Peace Prize – the natural result of us having slipped through a crack in the space-time continuum, and landed in a world where up is down, right is left, and war is peace – Bizarro World!"

The article continues. You can read the rest by following the link to the article above.

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Obama Gets Nobel Peace Prize

Deeply humbled, says the president.

Uh-hum.

His nomination came on the 12th day of his office, on February 1, which is the deadline set by the 1-man, 4-women Nobel Committee.

Who nominated the president before his work hardly started? (Or did someone nominate him for his work as a community organizer in Chicago?)

According to the Committee's website, you can nominate a person for consideration if you fall into any of these categories:

1. Members of national assemblies and governments, and members of the Inter-Parliamentary Union
2. Members of the Permanent Court of Arbitration at the Hague and of the International Court of Justice at the Hague
3. Members of Institut de Droit International
4. University professors of history, political science, philosophy, law and theology, and university presidents and directors of peace research institutes and institutes of international affairs
5. Former Nobel Peace Prize Laureates and board members of institutions that have previously been awarded the Nobel Peace Prize
6. Present and past members of the Norwegian Nobel Committee
7. Former permanent advisers to the Norwegian Nobel Institute

I know from several past Nobel Prize winners' remarks that winning the Prize involves intense lobbying, sometimes over several years if not longer.

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Ron Paul & Alan Grayson to Chris Dodd: No Bernanke Confirmation Until...

... the Federal Reserve releases documents of their activities ...

Ron Paul and Alan Grayson Want the Answers
(10/8/09 Lewrockwell.com)

Congress of the United States
Washington, DC 20515
10/7/09

Chairman Chris DoddUS Senate Committee on Banking, Housing, and Urban Affairs
534 Dirksen Senate Office Building
Washington, DC 20551

Dear Chairman Dodd and members of the Banking Committee,

We are writing to ask you to postpone the confirmation of Ben Bernanke until the Federal Reserve releases documentation that will allow the public and the Senate to have a full understanding of the commitments that the Federal Reserve has made on our behalf. Without such an understanding, it is impossible to know whether Chairman Bernanke is fit to serve another term and fulfill the Federal Reserve’s dual mandate to ensure price stability and full employment. A list of said documentation is enumerated below.

Since 2007, the Federal Reserve has expanded its balance sheet by $1.2 trillion and taken on substantial credit, interest-rate and foreign exchange risk. It has lent immense sums to some financial institutions against overvalued collateral, while refusing to lend to others with no clear standards as to who was rescued and who was not. It has set up holding companies using no-bid contracts, and guaranteed substantial liabilities of Citigroup, all the while keeping information about its actions secret from the public and Congress. This is in stark contrast to the analogous period in the 1930’s, when the Reconstruction Finance Corporation fully disclosed loans and collateral to Congress.

Today, big banks are being bailed out and have a substantially lower cost of capital through an implicit government backstop even as Americans themselves are seeing their pay cut. This lower cost of capital – at government expense – coupled with increased scarcity of credit is resulting in the banks recapitalizing by charging American consumers higher credit costs, including record overdraft fees and much higher credit card rates.

As you know, the Federal Reserve has a chartered mandate of both price stability and "full" employment. Since 2002, the Bernanke joined the Federal Reserve board has aligned himself with Alan Greenspan’s activities, the incomes of Americans have actually declined in absolute terms, with incomes projected to decline a further 5% in 2009. One quarter of all mortgage holders owe more than they own, with that number projected to rise to nearly 50% by 2010. Consumer asset prices, most importantly housing, continue to fall, and unemployment continues to rise. This raises real questions about Bernanke’s tenure as Federal Reserve chairman, and about where trillions of dollars have gone.

Federal Reserve secrecy must be understood in the context of an intellectual dogma which Alan Greenspan inculcated into the fabric of the Federal Reserve and the economic profession, and which has severely harmed ordinary Americans. Bernanke’s "Great Moderation" speech in 2004 didn’t even consider the idea that the economy was becoming more unstable, even as risks were being built into the system by the politics he encouraged. He ignored evidence of a crisis, saying in 2007 that the turmoil was contained to subprime mortgages, ignoring the bankruptcy of over 100 mortgage originators, and the clear evidence the crisis would spread. Now, even as the crisis is said to be subsiding, we still do not have credit markets that are able to function without substantial government support, we have not addressed institutions that are "too big to fail" which the Fed oversees, bank credit availability is again shrinking (posing risk of further increasing already high unemployment), and toxic assets in the system on the books of both private banks and the Federal Reserve have still not seen price discovery.


Chairman Bernanke’s policy-making errors might be chalked up to errors of judgment, and it’s possible to argue that he has been chastened by the last few years of turmoil. What is more disturbing is how the Federal Reserve has refused to disclose the details of its commitments to the bankers who came close to destroying the economy. The Bernanke Fed’s execution of its dual mandate cannot be judged without consideration of those commitments, which would require the Fed to disclose documents which it still contends the public has no right to see. Specifically, we ask that you postpone the confirmation of the Chairman until after the Federal Reserve discloses:

(1) Information that Bloomberg reporter Mark Pittman has requested via a Freedom of Information Act Request on the Bear Stearns rescue and that the Federal Reserve is contesting in the courts,* and which Manhattan Chief US District Judge Loretta Preska has ordered be turned over by the Federal Reserve.

(2) Information that Rep. Grayson requested in February at a hearing and the follow-up letter on which institutions received the $1.2 trillion added to the Federal Reserve’s balance sheet, how much each institution received, and what was promised in return.

(3) All Federal Reserve documents that went to Attorney General Andrew Cuomo’s office relating to the Bank of America/Merrill Lynch merger in which potentially illegal and coercive activity might have occurred, as well as all Federal Reserve documents relating to the lawsuit pursued by the Merrill Lynch shareholders in the US District court for the Southern District of New York.

(4) Transcripts of all Open Market Meeting Minutes up to and including that of June 2009, transcripts of which are normally withheld from the public for five years.

(5) Full disclosure of all terms and conditions of all off-balance sheet Fed Transactions in the past three years.

The Federal Reserve must become transparent and open with Congress and the public about its behavior during the financial crisis. Thank you for your consideration of this matter.

Best,

Alan Grayson, Member of Congress
Ron Paul, Member of Congress

Cc: Richard C. Shelby Tim Johnson Robert F. Bennett Jack Reed Jim Bunning Charles E. Schumer Mike Crapo Evan Bayh Mel Martinez Robert Menendez Bob Corker Daniel K. Akaka Jim DeMint Sherrod Brown David Vitter Jon Tester Mike Johanns Herb Kohl Kay Bailey Hutchinson Mark Warner Jeff Merkley Michael Bennet

*For all securities posted between April 4, 2008 and May 20, 2008 as collateral to the Primary Dealer Credit Facility, the discount window, the Term Securities Lending Facility, the Term Auction Facility (the "Relevant Securities"), we request copies of:

1. All forms of other documents submitted to the party posting the Relevant Securities as part of the application for the loan;
2. All receipts and other documents given to the party posting the Relevant Securities as part of the application for the loan;
3. Records sufficient to show the names of the Relevant Securities;
4. Records sufficient to show the dates that the Relevant Securities were accepted and the dates that the Relevant Securities were redeemed;
5. Records sufficient to show the amount of borrowing permitted as compared to the face value, also known as the "haircut";
6. Records sufficient to describe whether valuations or "haircuts" for the Relevant Securities changed over time;
7. Records sufficient to show the terms of the loans and rates that the borrower must pay;
8. Records Sufficient to show the amount that the Federal Reserve has accepted of each of the Relevant Securities;
9. Records sufficient to show which, if any Relevant Securities have been rejected as collateral and the reasons for the rejection;
10. All databases and spreadsheets that list or summarize the Relevant Securities; and
11. Records, including contracts with outside entities, that show the employees or entities being used to price the Relevant Securities and the conduct the process of lending.

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Sneak Attack on U.S. Dollar?

or is it the result of an on-going process that started back in March?

Politico thinks this is a "sneak attack" on U.S. dollar this week.

People at Politico are not stock market or forex traders, that's for sure. Current U.S. dollar decline is mild, compared to what has transpired since March this year.

Not to be deterred by the lack of perspective, however, Politico sets to find out...

Whodunit? Sneak attack on U.S. dollar (Eamon Javers, 10/8/09 Politico)

"It’s the biggest mystery in global finance right now: Who conducted a sneak attack on the U.S. dollar this week?

"It began with a thinly sourced but highly explosive report Monday in a British newspaper: Arab oil sheiks are conspiring with the Russians and Chinese to quit using the dollar to set the value of oil trades — a direct threat to the global supremacy of the greenback.

"Is it true? Everyone from the head of the Saudi central bank to U.S. officials scrambled to undercut the story, but no matter.

"With the U.S. economy on the ropes and America by far the world’s biggest debtor, investors aren’t feeling as secure about the dollar as they used to. And the notion of second-tier economies ganging up on Uncle Sam didn’t sound so far-fetched.

"For American officials, the possibility of the dollar losing its long-term dominance in global commerce is a nightmare scenario because it would likely mean sharply higher interest rates at home and a declining ability to finance the U.S. debt. No one believes it could really happen right now, but stories like the British report this week make it seem incrementally more likely."

While trying to undermine the Independent story by casting doubt on Robert Fisk (a highly respected veteran journalist, in my opinion), the writer concludes:

Whodunit? "No one knows."

I think I have a suspect, or an event that may have contributed to the rapid decline of the U.S. dollar. Not the decline of U.S. dollar this week, but since its recent peak back in March when the U.S. dollar index was near 90.

The U.S. Federal Reserve.

It is probably just a coincidence, but it's a little more interesting answer than "no one knows".



Take a look at this chart. This is a year-to-date daily chart of the U.S. dollar index (DXY). Red arrows on the chart indicate big negative flows out of the Fed's central bank liquidity swaps, as shown on their balance sheet. The weekly change of the swaps is shown in the table, with numbers in red corresponding to the arrows in the chart. The location of the arrows is approximate, as we don't know exactly which day of the week the Fed unwound the swap.

That's foreign currencies going back to the foreign central banks, and U.S. dollar coming back to the Federal Reserve. The Fed is not saying which central banks got how much, or what foreign currencies the Fed was and is still holding.

Where did those returning dollars go? My guess is they went to agency bonds and agency-backed MBS, thus preventing the decrease in the accommodative balance sheet. It could have gone to Treasuries to support the auction.

The dollar decline coincides very well with the stock market advance since March low. In fact, right after a sizeable chunk (over $50 billion) of dollars came back, the stock market bottomed and started the furious ascent as U.S. dollar cratered (the left-most arrow in the chart).

For fun, here's another set of charts - the top is the above DXY-Fed swap chart, vertically flipped, and the bottom is S&P 500 index.

Where is the Federal Reserve buying those agency bonds and MBS from? They are not saying. It's a trade secret. Again, my wild guess is from foreign central banks and U.S. financial institutions who get to dump them on the Fed at face value. (Well, that's how the Fed accounts for them, at face value.)

In the beginning of March, the foreign currency swap balance on the Fed's balance sheet was $375 billion. In the October 8th balance sheet, it was down to $50 billion, with about $7 billion U.S. dollar swapped back. That's a significant size for the past 2 months, and sure enough, U.S. dollar resumed the descent.

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Debt Limit Is Fast Approaching

as the U.S. dollar continues to decline and the 30-year bond auction meets tepid result today.

The debt limit is currently set at $12,104 billion.

The tiny widget on the left top corner of this blog is ticking away, and it is now at $11,949 billion.

Mere $155 billion, and the limit will be reached. That's less than one-month issue of Treasury notes and bonds these days, which averages around $180 billion for the last 3 months.

The stock market gave up a chunk of gains for the day (still positive) on the announcement of the 30-year bond auction result.

But what caught my eyes was the sale of $10 billion 16-day Cash Management Bill (CMB). It matures on October 29, and pays the same interest as 4-week bill. That's where the Primary Dealers put their money today, not 30-year bond. (For details of today's auction, please go to my site on Treasury auctions, here.)

CMB is usually used to fill temporary shortfalls in the government budget so that the government can continue to operate (=to spend more). 16 days to tide them over until Congress approves yet another debt limit increase, as Treasury Secretary Timmy Geithner requested back in August.

The U.S. government has temporary short falls in the budget permanently.

The debt limit was raised twice in the 2009 fiscal year. The second one was when the so-called stimulus bill was passed in February. Now that the Senate passed the defense bill that will cost $636 billion, the debt limit increase is a foregone conclusion.

Sea of debt, as far as eyes can see. Lovely.

The U.S. dollar index went down to 75.76 intraday, lowest in 14 months. Long-term (20-year) support at 80 has been long gone. There is a slight support around 75, a better support at 72. Below that, it's an uncharted territory. Literally.

Take a look at my post from May. Back then, the dollar index was still at the support, at 80. And that seemed dangerously low back then.

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OT: Wim Hof, the Iceman

From BBC's Outlook program.

He can withstand extreme cold. A full marathon in the arctic circle with only shorts and sandals, bath in ice cubes, climbing Mt. Everest in shorts and without oxygen. He will be doing another marathon, this time in Sahara, without water, and he thinks what matters most is the will power.


(I think he is a direct descendant of Neanderthals.)

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Regulators Want to Regulate Derivatives.. Good Luck with That

If career bankers don't understand complex financial products of their own creation (see my previous post), do you think politicians and bureaucrats understand?

Regulators seek tighter oversight of derivatives
(10/7/09 AP via Yahoo Finance)

"WASHINGTON (AP) -- As two federal regulators asked a House panel to tighten proposed legislation imposing new oversight on derivatives, Republican lawmakers contended the measure already could eliminate jobs and stifle companies' ability to manage risks.

"A potent new coalition of about 170 companies that use derivatives -- including Boeing Co., Caterpillar Inc., Ford Motor Co., General Electric Co. and Shell Oil Co. -- is lobbying Congress to make the case that legislative proposals to regulate the complex financial instruments could severely increase costs for corporate America.

""The end-user community has been constantly knocking on my door," Rep. Frank Lucas, an Oklahoma Republican, said Wednesday at a Financial Services Committee hearing.

"Companies of all kinds use derivatives to hedge against risks -- airlines ensuring against spikes in fuel prices, for example. At the same time, the complex products have become a growing vehicle for financial speculation and ballooned into a $600 trillion global trade. Regulators say they pose a threat to the stability of the financial system."

(You can read the rest of the article by clicking on the link above.)

Opponents contend that the proposed regulation would raise the cost of capital by requiring large collateral from companies that use the derivatives for their operations.

I see a problem from a slightly different angle.

What would the government regulators do when the counterparties renege on the derivative contracts, and those counterparties happen to be foreign entities? Or worse, foreign government entities? How do they enforce the regulation across the border? Do they have jurisdiction? (Short answer is No.)

Chinese government-sponsored corporations come to mind. They are threatening to default on commodity derivatives now, and they already defaulted on the forex derivatives last year (see this post from Tavakoli Structured Finance, Inc., link was from Jesse's Cafe Americain).

And their counterparties? I read somewhere long time ago that 10 biggest players in the world in derivatives trading get 90% of the business. It's not hard to guess who, and many of them are U.S. banks.

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John Thain: No One Understood CDOs

including himself. Should have said that clearly years ago. This from the Business Insider:

John Thain Admits He Didn't Understand Merrill's Risks
(John Carney, 10/7/09 The Business Insider)

"The bankers and traders dealing in CDOs didn't understand what they were doing, John Thain said in a recent speech.

"“To model correctly one tranche of one CDO took about three hours on one of the fastest computers in the United States. There is no chance that pretty much anybody understood what they were doing with these securities. Creating things that you don’t understand is really not a good idea no matter who owns it,” the former Merrill Lynch chief executive said in a speech this month, according to Financial News."

To be fair, as the writer points out, Thain, former CEO of New York Stock Exchange before he landed on Merrill Lynch, seemed to be clueless to begin with, without saying so explicitly. In his January 2008 conference call, as quoted in the article, Thain said:

It’s very hard to get much more detail to that other than -- unless you actually run the individual positions. The only thing I would say is we believe that we are being conservative on these marks and we think that at the levels that they are marked, we will in fact be able to sell them and/or that they represent value at where they are marked.

Translation: I haven't a clue but I do believe these marks are good enough and we can sell them to equally clueless suckers, umm, buyers.

The Business Insider article concludes:

"We think it's good news that Thain is now emphasizing the knowledge problem when it came to banking--highly paid, well-educated people at the top of their field just didn't understand the credit derivative products they were buying and selling. This is important as much of our financial reform seems to ignore this problem, focusing instead on fixing incentives in compensation."

Good news? They are still buying and selling. Not just that, securitization is back again, assembling legacy CDOs of dubious quality and slapping some form of insurance on the assemblage, and voila, AAA-rated debt security is reborn (read the article about Morgan Stanley's new old effort). So what changed? Not much.

The new buyers - big institutional buyers - (probably they were old buyers, too) must know that they are buying things that they don't quite understand, as Thain says, and that they are risky. But most importantly, they now know there's always a backstop somewhere (the Federal Reserve anyone?), some mechanism to dump their losses on to the least organized stakeholders, i.e. taxpayers who get the privilege to pay for the mistakes but zero chance of participating on the upside.

(Sure, some banks returned TARP money with interest, but was that money refunded to the taxpayers, however small? Noooo.)

"It also undermines the idea that the Fed--or any other regulator--will be able to properly assess the risk of these kinds of derivatives."

They won't be able to. That's why they are fixating on compensation. They cannot even address incentives, because it's their very policy of easy money that distorts incentives. Add the various government backstops ("too big to fail", loan guarantees, etc.) to that, and the government regulators (so called) are just as guilty and complicit as the bankers in creating the mess we're in.

So who DID understand CDOs? Anyone?

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ABC: Is the U.S. Preparing to Bomb Iran?

According to ABC News, Pentagon seems to be getting ready to bomb Iran, with bunker-busting bomb on accelerated development and procurement.

Is the U.S. Preparing to Bomb Iran? (10/6/09 ABC News)

"Is the U.S. stepping up preparations for a possible attack on Iran's nuclear facilities?

"The Pentagon is always making plans, but based on a little-noticed funding request recently sent to Congress, the answer to that question appears to be yes.

"First, some background: Back in October 2007, ABC News reported that the Pentagon had asked Congress for $88 million in the emergency Iraq/Afghanistan war funding request to develop a gargantuan bunker-busting bomb called the Massive Ordnance Penetrator (MOP). It's a 30,000-pound bomb designed to hit targets buried 200 feet below ground. Back then, the Pentagon cited an "urgent operational need" for the new weapon.

"Now the Pentagon is shifting spending from other programs to fast forward the development and procurement of the Massive Ordnance Penetrator. The Pentagon comptroller sent a request to shift the funds to the House and Senate Appropriations and Armed Services Committees over the summer.

"The notification was tucked inside a 93-page "reprogramming" request that included a couple hundred other more mundane items.

"Why now? The notification says simply, "The Department has an Urgent Operational Need (UON) for the capability to strike hard and deeply buried targets in high threat environments. The MOP is the weapon of choice to meet the requirements of the UON." It further states that the request is endorsed by Pacific Command (which has responsibility over North Korea) and Central Command (which has responsibility over Iran). "

By the way, the Senate passed the $636 billion defense bill today, with 1 Democratic Senator (Feingold) and 6 Republican Senators (including John McCain) opposing. With troop increase in Afghanistan increasingly likely, the war planning of the U.S. government is shifting into high gear.

(A kiss of death to the stock market rally since March, or will the "irrational" market jump up on the news?)

Senate Passes $636 Billion Military Bill (10/6/09 Antiwar.com)

"The Senate today voted 93-7 in favor of the $636 billion defense appropriations bill to provide funding to the US military over the fiscal year beginning this month.

"The bill includes $128.2 billion in funding for the wars in Iraq and Afghanistan and bars President Obama from transferring any of the suspects at Guantanamo Bay to the US for trials.

"Two of the Senators voting against the bill, Sens. McCain and Feingold, objected to the $2.5 billion in continued funding for C-17 military aircraft. The Pentagon has said it doesn’t want the aircraft, and the Obama Administration has sought to cancel the funding for them.

"Sen. Feingold was the only Democrat to vote against the bill. The six Republicans included Sens. McCain, Enzi, Coburn, Demint, Barrasso, and Graham."

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Australia Shines

The sun is shining bright on "Down Under".

The country didn't go into recession in the current global downturn; its stock market is hitting the 14-month high, its currency is also hitting the 14-month high after the central bank RAISED the interest rate. Businesses are bullish on the future growth, and consumers are spending. Unlike EU and the U.S., real estate values have INCREASED this year.

That's what a healthy, growing economy does, I think.

Australia Helped by Rate Increase as Stocks Advance
(10/7/09 Bloomberg)

"Oct. 7 (Bloomberg) -- Mining companies and brewers are benefiting from an Australian economy that is growing so fast the central bank suddenly raised interest rates, buoying the currency and giving global investors another reason to favor Down Under among the world’s hottest markets.

"“If you bought stocks that you thought were exposed to economic growth, you can feel more confident that you made the right decision,” said Matlock, manager of the International Equity Fund at Huntington, which oversees $15 billion. “What the Australian central bank is tacitly saying is we’re pretty confident our economy is on firm-enough footing to withstand an increase in rates.”

"Australia raised its benchmark rate yesterday, becoming the first country in the so-called Group of 20 nations to boost borrowing costs since the start of the credit crisis, after it avoided a recession and Reserve Bank Governor Glenn Stevens said the “risk of serious economic contraction” had passed. Gross domestic product will rise 0.7 percent this year, bucking the 3.4 percent slide for advanced economies, the International Monetary Fund said last week."

Analysts and fund managers there think Australia has both the growing domestic industry that supplies to increasingly confident consumers and the export industry that produces what people in the growth region (mostly China and Asia) wants.

There are those, as featured in the Bloomberg article, who think the central bank raised the rate too soon with the economy still not on a sound footing. However, as many traders of stock markets know, it's the reaction to the news that matters, at least for now. Judging by the reaction of the Australian stock market to both the rate hike and the strength of Australian dollar, they like what they see down there.

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Officials Deny UK Independent Report

Officials denied the Independent's report (see my yesterday's post) that the Gulf states, along with China, Japan, Russia and France, will phase out the pricing of oil in US dollars over the next 9 years and substitute with the basket of currencies and gold.

Officials deny UK media report on move from dollar
(10/6/09 AP via Yahoo Finance)

"LONDON (AP) -- The dollar fell Tuesday towards year lows against the euro and the yen after a report that Arab states and other countries were contemplating an end to the U.S. currency's role in the pricing oil.

"The selling was stoked by an article in Britain's "Independent" newspaper that said secret meetings were taking place between Arab states, China, Russia, Japan and France, to end dollar dealings for oil and moving instead to a basket of currencies, including the euro, the yen and the Chinese yuan.

"Officials in several of the countries either denied talks or said they had no knowledge."

"Kuwait's oil minister, Sheik Ahmed Al Abdullah Al Sabah, said there have been no talks on the topic among Gulf oil ministers. "At our level, no," he said. "I didn't even dream about it."

"And the head of the United Arab Emirates' central bank, Sultan Nasser al-Suweidi, said the Gulf nation has no plans to stop pricing oil in dollars. "There has been no meeting ... whatsoever," he told The Associated Press, adding that the dollar "will continue as the price for oil.""

"At our level"? That's interesting.

The Independent's story could be false, although Robert Fisk is a highly respected journalist.

Regardless, U.S. dollar took the beating overnight in London, and the weakness continues in the U.S. forex market. The U.S. dollar index (DXY) now stands at 76.33 at 1:59 PM EST, recovering from the day's low at 76.103 after the London forex went offline at 12:00PM EST. Right now, only New York is open for forex trading.

We will find out how Sydney and Tokyo treat U.S. dollar when they come online at 5:00 PM EST and 7:00 PM EST respectively.

In the meantime, gold shot up $26 to a new high of $1,043. It's currently trading at $1,036, on the recovering US dollar.

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UK Independent: The demise of the dollar

Following up on my previous post, here's the article by Robert Fisk at U.K. Independent:

The demise of the dollar (Robert Fisk, 10/6/09 Independent)

"In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

"Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

"The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years."

Read the rest of the article by clicking on the link above.

That sudden jump in price of gold, silver, and natural gas in early September was indeed telling us something. Maybe.

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Oil Is to Stop Being Priced in US Dollar??

Drudge Report headline (4:00pm PST):

ARAB STATES LAUNCH SECRET MOVES WITH CHINA, RUSSIA, FRANCE TO STOP USING DOLLAR FOR OIL TRADING... DEVELOPING...

Rick Santelli of CNBC apparently broke the news earlier, and I found the video (around 1:30 mark). Santelli is saying the UK's Independent will break the news tomorrow.

Now, on Sunday I posted this about IMF: "IMF the De Facto Global Central Bank Printing Fiat Money". The power that be seems to have planned everything.

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OT: Saturday Night Live Does Obama

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McDonald's Does the Louvre

McDonald's restaurant and McCafe will open in the Louvre museum in Paris, France, next month. The horror, the horror... the French are livid.

McDonald's restaurants to open at the Louvre (10/4/09 Telegraph UK)

"Lovers of France's two great symbols of cultural exception – its haute cuisine and fine art – are aghast at plans to open a McDonald's restaurant and McCafé in the Louvre museum next month.

"America's fast food temple is celebrating its 30th anniversary in France with a coup -the opening of its 1,142nd Gallic outlet a few yards from the entrance to the country's Mecca of high art and the world's most visited museum.

""This is the last straw," said one art historian working at the Louvre, who declined to be named. "This is the pinnacle of exhausting consumerism, deficient gastronomy and very unpleasant odours in the context of a museum," he told the Daily Telegraph.

"Didier Rykner, head of The Art Tribune website found the idea "shocking".

""I'm not against eating in a museum but McDonald's is hardly the height of gastronomy," he said, adding that it was a worrying mixture of art and consumerism. "Today McDonald's, tomorrow low-cost clothes shops," he said."

To the French horror, Starbucks opened a cafe near the museum last year. And now McDonald's. What is the world coming to?!

What's really amusing, against these protestations from the cultured French, is that France is the biggest market for McDonald's outside the U.S.:

"However, even if there were a last-minute u-turn at the Louvre, statistics suggest the battle of Le Big Macs has already been lost. France has become McDonald's biggest market in the world outside of the US, according to the chain. While business in traditional brasseries and bistros is in freefall, the fast food group opened 30 new outlets last year in France and welcomed 450 million customers – up 11 per cent on the previous year."

The French are free not to patronize McDonald's or Starbucks if they so detest. I don't like Starbucks coffee myself. It just tastes like burnt coffee. I used to frequent McDonald's in European cities when I was there, not as a place to eat but as a convenient bathroom stop.

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Mark Twain: October and the Stock Market

"October. This is one of the peculiarly dangerous months to speculate in stocks. Others are November, December, January, February, March, April, May, June, July, August, and September." - Mark Twain (in Pudd'nhead Wilson's Calendar For 1894 October entry)

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IMF the De Facto Global Central Bank Printing Fiat Money

that's the SDR (Special Drawing Right).

THE IMF CATAPULTS FROM SHUNNED AGENCY TO GLOBAL CENTRAL BANK (Ellen Brown, 10/1/09 Web ot Debt)

“A year ago,” said law professor Ross Buckley on Australia’s ABC News last week, “nobody wanted to know the International Monetary Fund. Now it’s the organiser for the international stimulus package which has been sold as a stimulus package for poor countries.”

"The IMF may have catapulted to a more exalted status than that. According to Jim Rickards, director of market intelligence for scientific consulting firm Omnis, the unannounced purpose of last week’s G20 Summit in Pittsburgh was that “the IMF is being anointed as the global central bank.” In a CNBC interview on September 25, Rickards said, “They’ve issued debt for the first time in history. They’re issuing SDRs. The last SDRs came out around 1980 or ’81, $30 billion. Now they’re issuing $300 billion. When I say issuing, it’s printing money; there’s nothing behind these SDRs.”

IMF is doing WHAT? Issuing the SDRs backed by... nothing?

So I looked and found the following article from no other than IMF itself. And I learned that the SDRs are not only backed by nothing (it's nothing more than a "concept"), but IMF is giving them away for free.

IMF Injecting $283 Billion in SDRs into Global Economy, Boosting Reserves (Glenn Gottselig, 8/28/09 IMF Survey Online)

"With much of the world still mired in recession, the IMF took action to bolster its members’ reserves through an allocation of SDRs, or Special Drawing Rights.

"The allocation, equivalent to $250 billion, was made on August 28 and will be followed by an additional, albeit much smaller, allocation of $33 billion on September 9. With the two allocations totaling roughly $283 billion, the outstanding stock of SDRs would increase nearly ten-fold to total about $316 billion.

"There are no notes or coins denominated in SDRs, nonetheless the SDR does play a role as an interest-bearing international reserve asset. The allocation of SDRs by the IMF boosts member countries’ reserves because SDRs can be turned into usable currencies. Once the SDRs have been added to a member country’s official reserves, the country can voluntarily exchange its SDRs for hard currencies, such as the U.S. dollar, euro, yen, or pound sterling, through voluntary trading arrangements with other IMF member countries."

What is the SDR? IMF explains as follows:

"The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members."

In other words, it's a form of debt, which allows the holder to lay a claim on the "freely usable currencies of IMF members". Much like the U.S. Treasury debt, which is backed by nothing but the government's promise to give the holder a claim on the future money that the U.S. government will collect from hapless taxpayers. The value of the SDR is currently determined by a basket of four currencies, Euro, British Pound, Japanese Yen, and U.S. Dollar, and the SDR pays interest at 0.25%.

Now these $316 billion newly minted claims on four IMF member currencies have been already distributed throughout the world. It is another wealth transfer, as "$110 billion of the combined allocations will go to emerging market and developing countries, including over $20 billion to low-income countries." (IMF)

Out of nothing, the IMF member countries (just about every country in the world) have been given free claims to four leading currencies that are freely exchanged in the world market. (Here's the table that shows the SDR allocations.)

How could this not be highly inflationary?

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Matt Taibbi: Bad, Bad Goldman Lobbying Against Naked Short-Selling

Matt Taibbi, who wrote "Great American Bubble Machine" for Rolling Stones Magazine in June detailing Goldman Sachs' central role (as he sees it) in the booms and busts since the Great Depression, has another story coming up that will look at the history of Bear Stearns and Lehman Brothers collapses.

One of his focus seems to be naked short-selling, which SEC is now supposedly moving to ban. In the article that appeared in Lewrockwell.com (originally on True/Slant), he attacks naked short-selling as "crime" and lobbying of the Senate by Goldman Sachs against naked short-sale ban "disgraceful" and "hilarious" (borrowing the words probably from the Senate aids who gave him the Goldman's 'fact sheet'.):

An Inside Look at How Goldman Sachs Lobbies the Senate
(Matt Taibbi, 10/3/09 Lewrockwell.com)

After reading his article, several questions popped in my mind. Here, I want to discuss two of them in particular:

Question No.1: Did naked short-selling cause the crash in Bear Stearns and Lehman Brothers share prices?

For that matter, did it cause the huge drop in share prices in companies like Morgan Stanley, Wells Fargo, Citigroup, Bank of America, AIG, GE, and Goldman Sachs over 8 months from September 2008 to March 2009, when the market finally bottomed (for now)?

Andy Kessler wrote a very interesting article that appeared on Wall Street Journal in March. He thinks the bear raids, which caused the financial stocks to plummet and thus brought down the entire stock market, were done not by short-selling (naked or not) but by going naked long on CDS (Credit Default Swaps) that these financial firms held on their CDO and MBS. The article didn't get much publicity, but I think he is right on the money:

Have We Seen the Last of the Bear Raids? (Andy Kessler, 3/26/2009 Wall Street Journal)
"In a typical bear raid, traders short a target stock -- i.e., borrow shares and then sell them, hoping to cover or replace them at a cheaper price. Once short, traders then spread bad news, amplify it, even make it up if they have to, to get a stock to drop so they can cover their short.

"This bear raid was different. Wall Street is short-term financed, mostly through overnight and repurchasing agreements, which was fine when banks were just doing IPOs and trading stocks. But as they began to own things for their own account (MBSs, CDOs) there emerged a huge mismatch between the duration of their holdings (10- and 30-year mortgages and the derivatives based on them) and their overnight funding. When this happens a bear can ride in, undercut a bank's short-term funding, and force it to sell a long-term holding.

"Because these derivatives were part of the banks' reserve calculations, if you could knock down their value, mark-to-market accounting would force the banks to take more write-offs and scramble for capital to replace it. Remember that Citigroup went so far as to set up off-balance-sheet vehicles to own this stuff. So Wall Street got stuck holding the hot potato making them vulnerable to a bear raid.

"You can't just manipulate a $62 trillion market for derivatives. So what did the bears do? They looked and found an asymmetry to exploit in those same credit default swaps. If you bid up the price of swaps, because markets are all linked, the higher likelihood (or at least the perception based on swap prices) of derivative defaults would cause the value of these CDO derivatives to drop, thus triggering banks and financial companies to write off losses and their stocks to plummet." [emphasis is mine]

Question No.2: Does Matt Taibbi really think the purpose of Goldman's lobbying effort is to prevent the lawmakers from enacting the ban on naked short-selling?

I don't think Goldman Sachs cares one way or another if naked short-selling is restricted, because that's not how they maneuver the market. CDS is one very effective and less costly way to manipulate the value of the underlying assets, and thus affecting the share price of a company who holds those assets. More bang for the buck (i.e. leveraged). If politicians' attention is focused on naked short-selling, all the better, as long as there are unregulated, OTC derivatives markets. Have you heard anything going on to regulate the CDS market? There was some talk right after Lehman's collapse and AIG's rescue by the Fed/Treasury, but since then, zero. Zip. Nada.

Also, do you remember the ex-Goldman Sachs employee who was arrested just before the Fourth of July weekened, which burst open the high-frequency trading practiced most successfully by Goldman Sachs? Have we heard anything about it recently? No. Despite the demonstrable injury to small retail investors and professional investors, the talk of regulating or banning the practice died off almost completely. And here we are, making issues with naked short-selling which may or may not have caused the crash?

Goldman's lobbying actually reminds me of the supporters of the Senator Aldrich's bill to establish the Federal Reserve. When that bill died with the change of administration (Taft out, Woodrow Wilson in), a new bill was drawn up by (no other than) Glass that was basically the same as the old Aldrich bill (Owen-Glass bill, which was enacted as Federal Reserve Act in 1913). What did the supporters and co-conspirators of the central bank do? They vehemently opposed the passage of the bill. They lobbied against it. The perception was created that since the bankers were opposing, they must be really afraid of creation of the new powerful regulator (the Fed). The bill was passed, to the great benefit to the member banks, particularly large New York banks.

I smell a similar thing going on with Goldman Sachs lobbying against naked short-selling.

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