China export rebound continues

Exports in February surge 45.7 on 2009, showing the fastest growth in three years.

Guest Post: No One’s Issuing Credit—Why Are Auerback and Parenteau?

By John Ryskamp, an attorney and author of The Eminent Domain Revolt

Why, in their article on Latvia’s austerity budget, are Marshall Auerback and Robert Parenteau giving Latvia credit for warm, fuzzy feelings? Especially in the context of Draconian cuts? It’s because Auerback and Parenteau don’t know what they want—their emotions are not grounded in any articulated policies. So they sound friendly. But are they friendly?

Let’s take a look. Maybe they just haven’t got their terms straight. For example, they say: “Mainstream economics insists that one path to full employment is via lower wages.” No, that’s not mainstream economics—that’s police state economics. That’s simply liquidation. They seem blithely unaware that since the power structure in America decided the suburbanization binge was over—that our suburban cow had ceased to be a profit center and had turned into a cash guzzler—America is no longer a paying proposition. So power is taking its flunkey, Uncle Sam, out of government.

That’s liquidation: power is withdrawing government from American society—and right on cue, the rest of the world is following suit, including Latvia.

Memories are short—and sometimes, even truncated. Just because World War II cut short Mellonesque liquidation, don’t for a minute buy the argument that somehow it wasn’t still policy right through the Roosevelt Administration—or that it isn’t always waiting in the wings, asserting itself all the time against countervailing forces (we shall return to those forces).

Liquidation is what is going on in Latvia. There is no attempt to achieve full employment or any other level of employment. Check out liquidation’s repertoire of techniques:

1. monetization
2. cartelization
3. currency race to the bottom gambits
4. credit contraction
5. induced supply chain collapse

and that’s just a very few of them—including, of course, shrinking the budget. The problem is that we don’t have a SINGLE academic study of liquidation as a sociopathology. When and why is each technique picked up and put down by liquidation? We just don’t know. Indeed, according to a supply chain management professor in the UK, to whom I put this question, there is no academic study of supply chain deterioration.

Power goes to power. Power is the assumption AND deduction of power. Power is the means AND the end of power. So Andrew Mellon would have had us believe, and when the going gets tough guess what? We believe it. They seem to have swallowed it in Latvia, and in the United States. I see no evidence of tax strikes, uprisings or any organization revolutionary movement, calling liquidation what it is. The protests are as vague and helpless as the implied protests of Auerback and Parenteau. We must toughen our minds.

Look what Auerback and Parenteau say is the motive of the powerful in Latvia (and their superiors elsewhere). They say the policy of power is to “internally deflate.” This is imprecise. Latvia is liquidating, but also somehow the policy is to maintain full employment. Huh? For them, Latvia is acting “under the mistaken assumption that the [currency peg] was inviolable,” and then they go on to cite the numerous problems with a currency peg.

But it’s not a problem if liquidation is your goal, and looting the population is one way you go about it. I don’t think the powerful in Latvia were under any assumption, mistaken or otherwise, about a currency peg. It is a liquidation technique, a technique for looting—it is not tenable to believe it is invoked without knowing why it exists and what it does.

They call a “hidden assumption”—unknown to the powers in Latvia which provoked collapsing labor costs and prices—the idea that “a debt deflation spiral does not do the host country in as domestic private incomes are deflated.” It is not credible that anyone in a position to invoke a collapse in income, demand and prices, does not know the point of these gambits. It is liquidation. Nor do Auerback and Parenteau show any evidence that the powerful in Latvia share their concerns and are simply naïve, or wrongheaded.

Look at the other thoughts they put in the heads of the powerful in Latvia: “Policy makers have tied both their hands and their feet behind their backs so that markets could work their self-adjusting magic.” Where is the evidence that the powerful in Latvia believe there is such a thing as a market, much less that it is self-adjusting? There is none. Indeed, all the evidence Auerback and Parenteau put forward is that the powerful in Latvia are putting forward all the liquidationist tricks put forward under any police state, Mussolini, Hitler, Stalin—you name it.

There is nothing magical, and no mystery, about a police state. What is mysterious is constantly imputing benign motives to people when the evidence shows they are carrying out police state acts.

Here’s another one: “In each of these nations, if the private sector is retrenching already, and the public sector tries to retrench on top of that, unless a massive swing in foreign trade can be accomplished, policy makers are unwittingly inviting falling private nominal incomes and private debt distress into the picture as they reverse fiscal stimulus.” Perhaps the problem with this notion is that Auerback and Parenteau regard as stimulus, bailing out bankrupt Ponzi schemes. Co-conspiring is stimulus? A new definition of the word “stimulus,” to quote the guy in Rules of the Game. But then, I guess if you believe it isn’t, then the logical conclusion is that those who promote “stimulus” are capable of doing things “unwittingly.”

In short, Auerback and Parenteau impute good faith where all the evidence shows there is only liquidation. Why? Because they’re soft on rights. Almost everyone else is, too. The day we gave the political system near absolute power over facts (we did it here in 1937 with West Coast Hotel v. Parrish), and thereby denied ourselves any rights, we let the political system define all the terms. In return for a middle class existence, we surrendered our right to find out the facts. It’s called “health and welfare.” We let the political system decide that. We are not allowed to intervene as individuals.

So we haven’t really inquired into the facts, and we’ve sort of lost the ability to inquire into the facts. Auerback and Parenteau are examples of this. It sounds like their approach tolerates “some” liquidation, “some” level of unemployment. They don’t really understand that the countervailing force to power, is rights. For example, the authors of the U.S. Constitution see only two forces. They see the police state (which wanted to hang them all), and important facts.

Important facts are unchanging facts of human experience, facts which history has demonstrated, are robust and resilient in the face of attempts to affect them. For the Founders, these facts included protected speech. For us—or at any rate, for those of us who have persisted in factual investigations—these facts also include housing, liberty, maintenance, education and medical care.

When important facts are defended, power weakens; when important facts are not defended, power strengthens. That’s the sum total of the Constitution. How can you defend important facts against assault, when you can’t provide the evidence that they are important, because you don’t know that the issue is importance?

Police states know perfectly what important facts are—and they hate them. Does that put you, reader, in the crosshairs? Gee, d’ya think?

It would clarify the thinking of Auerback and Parenteau, and clarify our response to what they write, if they could tell us with regard to two facts they consider so important in their article—income and employment—whether they think those are important facts as defined above.

I think they are indicia or aspects of maintenance, and I think maintenance turns back attacks by interrelating maintenance with income and employment—and also with housing! And also with protected speech! The maintenance of important facts—which, according to this analysis, is what the law does, and only what it does—is a complex, ongoing venture which requires vigilance—political, and intellectual and observational vigilance.

If you practice this vigilance, you really see what Latvia is doing, even according to the generous (naïve?) interpretation of Auerback and Parenteau. It is saying that income and employment are goals, not facts. It is saying that income is maintained by destroying income, and employment is maintained by destroying income. In short, complete nonsense. The evidence shows that income and employment ARE facts, are important facts, not goals, and not policy.

This is why I say that the only response to liquidation, is individually enforceable rights. And that’s why I wrote the New Bill of Rights. It says:

No individual shall be involuntarily deprived of liberty;
No individual shall be involuntarily deprived of housing;
No individual shall be involuntarily deprived of maintenance;
No individual shall be involuntarily deprived of medical care;
No individual shall be involuntarily deprived of education.

If this was the law in Latvia, could the cuts described by Auerback and Parenteau, occur? No.

Is this a laundry list of worthy goals, a grab bag of ideals? No. It is the progress we have made—exercising the individually enforceable rights we have—toward investigating the facts of human experience. We have pretty conclusively demonstrated, with regard to the facts above, that they are important facts.

You only have to understand the issue, to find that this process of evaluation is continually going on. For example, is property an important fact. It may interest you to know that the investigation is inconclusive so far. Also, we are revisiting the settled principle that an exercise of religion is an important fact. Who knew?

If you want to see a perfect example of this investigation going on with respect to a fact—from an initial point of view that it should be left to politics, to a point of view that individuals have control over it—look at the new right to education in the state of New Jersey. I suggest you go to www.edlawcenter.org, to understand the exacting—but exactly vital—process we have to go through, in order to fight liquidation.

Are Capital Restrictions On Their Way to Becoming Respectable in Some Circles?

We’ve had (depending on when you define the starting point) at least two decades of a concerted push by the US towards more open capital markets (no doubt based not simply on the belief that the Anglo/Saxon model was superior, but also on the notion that US financial firms would come out on top).

Many orthodox economists will concede that restrictions on capital flows and trade can be beneficial for developing economies, but would not endorse them for mature ones. Yet the Panglossian faith in wide open capital markets airbrushes out a few inconvenient considerations. One is that the extensive historical dataset constructed by Carmen Reinhard and Kenneth Rogoff shows a strong correlation between high levels of cross border capital flows and bank crises. Two is that high levels of international money flows poses more than a wee problem of national sovereignity. How do nationaly based financial regimes regulate firms with global operations?

The Financial Times reports on a move afoot in the EU that will restrict investors in the EU from putting funds in private equity firms outside the EU, and also restricting the ability of foreign investors to buy European companies (frankly, as someone who has worked on more than a few cross border deals, a good business generally has no trouble finding domestic buyers. If local/regional players, who presumably have an information advantage by knowing the local market, won’t stump up for a particularly business, why should an offshore investor do better? Yes, there are always exceptions, but one needs to be plenty wary).

Reader Swedish Lex noted:

In parallel with the Greece/Goldman/default swaps/hedge fund vampire night dinners, etc., the EU is slowly advancing on the proposal to regulate hedge funds and private equity firms (and their managers).

The industry has spent vast recources over the past year in trying to water down the draft legislation, which was not entirely brilliant to start with. What seems to elude the industry is that all the bad press feeds back into the legislative process. Most of the 736 Members of the European Parliament had a vague understanding of this aspect of the financial industry to start with and, probably, believe that it has significantly contributed to the financial crisis. The very bad PR for hedge funds and over-leveraged and job slashing PE firms over the past weeks are hardly helping the industry.

What I find silly is that the Industry, in its efforts to convince the Parlamentarians, and the other relevant EU Institutions, are using the same bad old arguments like if you regulate in Europe, it will scare off investment and the pensions of ordinary people are jeopardized. Well yes, the EU does not welcome trashy short-term cancerogenus cash spreading from Cayman funds run by math nerds that design real nukes one day and their financial equivalent the next.

There will be a compromise in the end, but it is too early to say what it will be. Greece etc. could continue to have an interesting influence on the debate.

From the Financial Times:

Europe risks building a protectionist wall between itself and the global private equity industry if plans for a sweeping overhaul of regulation in the sector go ahead, some of the world’s biggest institutional investors have warned.

The warning from the International Limited Partners Association, representing 220 of the biggest pension funds, endowments and sovereign wealth funds, comes at a sensitive time with European Union lawmakers and member states close to agreeing new rules

Investors based in the EU could be barred from investing in private equity funds based outside the 27-country bloc, said the ILPA, whose members have more than $1,000bn (£667bn) invested in private equity worldwide.

In addition, the proposed regulation could “severely disturb” many of the world’s biggest private equity groups by depriving them of access to EU investors, while in turn reducing foreign investment into EU companies.

“Not only will EU investors have reduced access to non-EU private equity managers, there exists a real concern that the proposal will effectively close Europe off from the capital solutions . . . that comprise the global private equity industry,” it said.

Yves here. The chutzpah is breathtaking. Foreign firms are trying to bully EU officials? This is a great way to win friends and influence people. So what if they are severely disturbed? Europe functioned before there ever was a PE industry, and from what I can tell, its hotbed of innovation, the German Mittelstand, does not have much traffic with PE investors.

The idea that what is good for the private equity industry may not be good for the average citizen appears not to have occurred to these operators. Tone-deaf behavior like this ILPA letter is only good to feed the already high suspicions of about whether financiers have any social conscience.

The fake stress tests

A post by Edward Harrison

About a month ago I wrote a post called “The coming wave of second mortgage writedowns” the gist of which was that the big four banks (Citi, JP, BofA, and Wells) had a shed load of exposure to now worthless second mortgages. With many first mortgages now hopelessly underwater, it stands to reason that second mortgages on those same properties have zero value.

The big four are certainly well aware of this problem and are looking for ways to extend the wherewithal of underwater borrowers and pretend they don’t need to take losses on these loans. On paper, these companies are very well capitalized. However, in the real world, the likely losses they must eventually take on loans already on their books would probably render them insolvent. This is what I hinted yesterday in my post on the stress tests.

I said:

I would say the stress tests were a mock exercise to instil confidence in the capital markets. This was important first and foremost because it would induce private investors to pay for bank recapitalization instead of taxpayers. But it was also important for the economy as a whole as the sick banking sector was dragging the whole economy down. The key, however, is that the tests were a mock exercise. Despite the additional capital, banks are still hiding hundreds of billions of dollars in losses in level three, hold to maturity, and off balance sheet asset pools. If asset prices fall and/or the economy weakens, all of this subterfuge would be for nought.

-Geithner: jusqu’ici tout va bien

And when I use the phrase ‘mock exercise,’ by mock, I mean fake. Mike Konczal has done a remarkable job of putting these two concepts – the worthless second mortgages and the stress tests – together.

He writes in a recent post:

Let’s talk specifics: Last June I made a DIY Stress Test, using values reversed-engineered from the public documents, where you could play around with the values online or download an excel spreadsheet yourself (it’s still one of my favorite blogging items). The backbone of the overview of results, page 9 from the Federal Reserve’s document, looks like this:

I’m going to isolate the four largest banks Frank questioned about second-liens, along with their loses as they’ve legally sworn to being accurate during the stress test:

Again, this is data as reported to the government by the major banks during the stress test of 2009. So what’s going on here? The four major banks have about $477 billion in junior liens, either in the form of a second mortgage or a home equity line of credit. If you go to the Fed Funds data online, you’d see that there’s about a trillion dollars of 2nd/Juniors out there, so the four major players have about half the market.

The four major players each report that they expect to have a 13-14% loss on these items under an “adverse scenario”, with Citi reporting a 20% loss under an adverse scenario. That means of the $477bn, $68.4 bn is junk that’ll never be collected on. This, combined with all the other expected losses (see the link to the stress test for the rest) meant that the four biggest players needed around $53bn to be raised.

Notice how Frank’s letter, and pretty much anyone you’d speak to who isn’t working for the four largest banks, assume that second liens in the country aren’t worth 86% of their value (for a 14% loss). You see in Frank’s letter “no economic value.” Huh. Well, that’s a problem.

Let’s look at these values again, assuming that the expected total loss would be 40%, and then 60%.

So the original loss from second-liens, as reported by the stress tests, was $68.4 billion for the four largest banks. If you look at those numbers again, and assume a loss of 40% to 60%, numbers that are not absurd by any means, you suddenly are talking a loss of between $190 billion and $285 billion. Which means if the stress tests were done with terrible 2nd lien performance in mind, there would have been an extra $150 billion dollar hole in the balance sheet of the four largest banks. Major action would have been taken against the four largest banks if this was the case.

See what I mean by fake?  The point is this whole charade is transparent to anyone who actually runs the numbers. Yet, you have people like John Cassidy spreading disinformation in the New Yorker, writing puff pieces of zero negative value with drivel like this:

Other critics dismissed the tests as a sham, arguing that the economic assumptions underpinning them were too benign. As the tests unfolded, however, it became evident that the government’s loss projections were quite high, and that many banks would be forced to raise considerable sums of money—in some cases, more than ten billion dollars.

Baloney. Run the numbers like Mike did, John; and then you wouldn’t make such asinine comments. Of course the stress tests were a sham.  They were a confidence trick to raise more capital and buy time for the banks to earn yet more still. The point was to allow the banks to ease into their losses. And that’s exactly what’s been happening for the past year.

The problem with the stress tests, however, is they gave the banks a way to get from under the yoke of the government’s TARP program. The banks said, “look, we are now well-capitalized even in the worst case scenario of the stress test. We want out of TARP.”

This is bad for three reasons.

• The big banks all paid back $25 billion in TARP funds. Smaller banks like Northern Trust paid back $10 billion or less. That’s hundreds of billions of capital that they all could have as a buffer against losses. Some of them raised additional capital to replenish the coffers. Nevertheless, net-net, we had less banking capital in the system after the repayments than before.
• Banks free of TARP paid out a lot of cash in bonuses that could have gone to shoring up their capital base.  Every dollar paid in cash compensation to staff is a dollar less of capital.  Had these banks been under TARP, they would have been forced to pay lower bonuses – if only for this year.
• The lower capital – and the fact that banks know that having renewed capital problems would mean the end of the line for them – means that banks are less likely to lend freely.  They understand that now is the time to husband capital. Heads would roll if a big bank or super regional which had repaid TARP had another capital shortfall.

The real question is: why is the Obama Administration running victory laps, unrolling the ‘Mission Accomplished’ banner on the credit crisis, as Mike Konczal describes it? I suspect this is just a political stunt to provide cover in the mid-term elections to somehow demonstrate that the Democrats fixed the problem which the Republicans created. 

I think it could backfire if only because the underemployment rate is still 17%. Nobody wants to hear the “I saved the economy routine” when they’re unemployed and losing their home.

Municipal Pensions – Partial Involuntary Bankruptcy Cepersvid-10

The way to solve the financial problems of the nations state and local governments is to enact a law permitting residents to file an involuntary petition in partial bankruptcy, to give the bankrupt…

ID Card for Workers Is at Center of Immigration Plan

Peter Schiff : let s have everybody on Unemployment Benefits if this is how we think we can stimulate the Economy

Schiff report video blog March 9th 2010

Peter Schiff goes into details about the unemployment benefit and the moral hazards of paying people for long periods without having them to work , unlike what some people believe that giving money to the unemployed helps the economy cause they spend it all , if this was true says Peter Schiff then let’s give an unemployment cheque to everybody let’s double it or triple it …the whole thing is a nonsense explains Peter Schiff , having people collecting unemployment cheques and enjoying the added leisure is immoral and undermines the economy….

Peter David Schiff, president of Euro-Pacific Capital, is a Connecticut-based brokerage firm have correctly predicted the U.S. stock-market collapse , the home mortgage meltdown and the credit crunch .
Peter Schiff discusses politics, world economies, and investment strategies and is now running for a Senate Seat in his native Connecticut , Peter Schiff is Author of the Best Seller Crash Proof How to Profit From the Coming Economic Collapse

Guest Post: 6 Theories On Why the Stock Market Has Rallied

Posted by Washington.

There are at least 6 theories about why the stock market has rallied some 70% off its lows a year ago, even though nothing has been done to actually reverse the financial crisis.

What The Dumb Money Believes

The dumb money believes what CNBC and their trusty stock churner … er, broker … says: that the government has fixed the economy but it just has to “kick in” (and that unemployment is just a lagging indicator, nothing important. See this, this, this and this).

Therefore, these folks believe that stocks are hugely undervalued, and that if they buy while most people are still afraid, they’ll make a killing when the market goes to the moon.

(Note: Obviously, I believe this is a bear market rally which will eventually fizzle out. If the bulls are instead right, then that will make me the dumb money. But I think it much more likely that the rally will change direction in the not-too-distant future.)

Temporary Juice

Others believe that it is the quantitative easing, low rates, bank bailouts, stimulus spending, and other portions of the “wall of money” which the feds have thrown at the economy are creating a temporary pump to the stock market.

But they think that – when the spigot is turned off – the market will tank.

The Situation is Inflation

Others believe that – regardless of continued loose monetary and fiscal policy or real stock valuations, we’re in for some serious inflation.

Stocks tend to preform well during inflationary periods.

For more on inflation versus deflation, see this.

Machines Run Amok

Tyler Durden explains that all of the stock market gains have occurred after hours when mystery buyers purchase stock futures in low volume environments (and see this).

Vincent Deluard – a strategist for TrimTabs Investment Research (25% of the top 50 hedge funds in the world use TrimTabs’ research for market timing) – said last month:

We’ve never seen this before – such a huge rally, and the little guy is out.

Some argue that it is high-frequency trading or momentum-chasing trading algorithms doing the buying, and that the market will tank when they change their game.

Fed Futures

Others argue that the government is itself buying stock futures.

Some believe that the Feds aren’t buying, but that they have intentionally showered the big banks with money, and encouraged the banks to buy. In other words, they argue that the Feds are indirectly promoting a stock market rally.

Fraud Central

Karl Denninger believes that the market has rallied due to the systemic, fraudulent overvaluation of assets.

As Denninger wrote yesterday:

[A reader wrote] the FDIC to ask about [allegations of fraudulent valuations]. This was their response:

That’s the value the bank had them on their books on their year-end financials, but the true value is much less. It is similar to someone in Las Vegas saying that their house is worth $300,000 because that’s what they paid for it three years ago, but the reality is, if they had to sell it in today’s market, they’d only get $250,000 for it. The FDIC has to sell assets in today’s market…

Or tomorrow’s market.

The simple fact of the matter is that there it is, right in front of you.

A raw admission that the banks are carrying these loans at dramatically above their actual value.

Yes, this means that essentially all balance sheets must now be considered fraudulent, and thus the valuations assigned by the market to them are also fraudulent.

Extending this to the stock market as a whole you now have a market that is intentionally overvalued as a direct and proximate consequence of fraud, permitted and endorsed by the government, of somewhere between 25-40%.

Now you know why the market rallied off the SPX 666 lows to where it is now. 1139 (where we are now) * .60 (a 40% haircut) = 683.40, or awfully close to that 666 bottom.

Of course this “valuation” expressed in the market can only be maintained for as long as the fraud is. If the ability to maintain that fraud is lost for any reason then values will instantly collapse back to reflect reality.

Leave a comment about why you think the stock market has rallied, and how long you think the rally will continue.

Peter Schiff on State Bailouts and the National Debt North Haven

Republican candidate for US Senator in Connecticut, Peter Schiff, attended a Tea Party meeting in North Haven, CT. where he was peppered with all sorts of questions. The Connecticut Tea Party folk thoroughly vetted Schiff on Saturday, March 6, 2010. All the while, he kept his composure, his focus and his sense of humor.

Janet Tavakoli – Talks About A Global Disaster In The Making