May 30, 2014

Economists: The U.S. Economy Shrank In Q1, But Better Days Are Just Around The Corner

During the first three months of this year, the U.S. economy contracted at a 1 percent annual rate.  Despite this, mainstream economists flooded the mainstream media with assurances that much better days are just around the corner on Thursday.  In fact, many of them boldly predicted that U.S. GDP would grow at a 3 or 4 percent annual rate in the second quarter.  None of them seem the least bit concerned that another major recession is rapidly approaching.  Instead, they just blamed the bad number for the first quarter on a "severe winter", and the financial markets responded to the GDP news quite cheerfully.  In fact, the S&P 500 soared to another brand new record high.  No matter how bad the numbers get, almost everyone in the financial world seems quite optimistic.  But is there actually good reason to have such optimism?

As Zero Hedge has pointed out, if it wasn't for dramatically increased healthcare spending due to the implementation of Obamacare, U.S. GDP would have actually dropped at a 2 percent annual rate during the first quarter of 2014.

That would have been an absolutely disastrous number.

But within a very short time of the revised U.S. GDP number being released, the mainstream media was inundated with positive stories about the news.

For example, CNN published a story entitled "U.S. economy shrinks, but it's not a big deal" and CNBC released a survey of nine prominent economists that showed that their consensus forecast for the second quarter of 2014 is GDP growth at a 3.74 percent annual rate.

It just seems like almost everyone wants to forget about what happened during the first quarter and wants to look ahead to a great number for quarter two.

Joseph Lavorgna, the chief U.S. economist at Deutsche Bank, is boldly forecasting a 4 percent growth rate for the second quarter.  So is Jim O'Sullivan.  In fact, it is hard to find any "expert" in the mainstream media that does not expect rip-roaring economic growth this quarter.

For example, just check out these quotes...

-Stuart Hoffman, the chief economist for PNC Bank: "The first quarter was disappointing, but rather than view that as an omen of a recession or the first of a down leg in the economy, I see the seeds of a big bounce back in spring."

-Paul Ashworth of Capital Economics: "For those worried about a recession, it's worth remembering that employment increased by nearly 300,000 in April."

-The Bank of Tokyo's Chris Rupkey: "2Q growth seen at nearly 4%... Weak 1Q is stone cold dead as an indicator of where the economy is headed."

-Jan Hatzius of Goldman Sachs: "Because of weaker inventory investment in Q1, we increased our Q2 GDP tracking estimate by two-tenths to 3.9%."

-Dun & Bradstreet Credibility Corp. CEO Jeffrey Stibel: "Using an alternative model for projecting job growth, we see an entirely different scenario, one in which the U.S. unemployment rate will fall below 5 percent by no later than the middle of next year."

Hopefully they are right.

Hopefully we are not heading into another recession.

But as I discussed in an article earlier this week, evidence continues to mount that another recession has already begun for much of the country.

And there was another number that was released today that seems to confirm this.  According to CNBC, there was a 6 percent drop in exports in the first quarter of 2014 when compared to the first quarter of 2013...
The U.S. economic reversal was led by a 6 percent drop in exports year over year, until recently hailed as a key driver of the U.S. recovery, and which had risen 9.5 percent in the last three months of 2013. 
The slackening of trade has spread to the developing world, where emerging economies are seeing less demand from the U.S., Europe and China for raw materials and other exports.
We saw a similar decline happen in mid-2008 as the U.S. economy plunged into recession.

And Bloomberg's Consumer Comfort index has fallen to the lowest level that we have seen in six months.  U.S. consumers are increasingly tapped out, and the ongoing "retail apocalypse" is evidence of that fact.

A declining middle class simply cannot support the massive retail infrastructure that America has developed.  As the middle class has fallen to pieces, it was just a matter of time before big trouble started erupting for the retail industry.  This is something that David Stockman recently wrote about...
It does not take much analysis to see that these bell ringers do not represent sustainable prosperity unfolding across the land. For example, around 1990 real median income was $56k per household and now, 25 years later, its just $51k—-meaning that main street living standards have plunged by about 9% during the last quarter century. But what has not dropped is the opportunity for Americans to drop shopping: square footage per capita during the same period more than doubled, rising from 19 square feet per capita at the earlier date to 47 at present. 
This complete contradiction—declining real living standards and soaring investment in retail space—did not occur due to some embedded irrational impulse in America to speculate in real estate, or because capitalism has an inherent tendency to go off the deep-end. The fact that in equally “prosperous” Germany today there is only 12 square feet of retail space per capita is an obvious tip-off, and this is not a teutonic aberration. America’s prize-winning number of 47 square feet of retail space per capita is 3-8X higher than anywhere else in the developed world!
Without middle class jobs, you can't have a middle class.  That is why our employment crisis is at the very heart of our economic problems.  Even using the government's highly manipulated unemployment figures, there are still quite a few cities out there that have official unemployment rates in the double digits...
The unemployment rate in Yuma, Ariz., is 23.8%. In El Centro, Calif., it is 21.6%. El Centro sits in an area of California in which unemployment in many metro areas is double the national average. In Merced the figure is 14.3%, in Yuba City the figure is 14.5%, in Hanford it is 13.1% and in Visalia it is 13.4%. In several metros close to these, the figure is above 10%. Most of them are inland from San Francisco and the area just south of it, which also happens to be among the nation’s most drought-plagued regions. This means jobs recovery is highly unlikely.
But of course the truth is that if the government actually used honest numbers, the unemployment rate for the entire nation would be in double digits.

And as I like to remind people, according to the government's own numbers approximately 20 percent of the families in the entire nation do not have a single member that is employed.

So how is it possible that the "unemployment rate" is just a little above 6 percent?
It is a giant sham.

But that is what they want.

They want us feeling good and thinking that everything is going to be okay.

Unfortunately, they used the same approach back in 2007 and 2008, and we all remember how that turned out.

May 29, 2014

Capitalism, Worth Fighting For?

Capitalism is worth fighting for – it is a force for good ... Capitalism must have a social purpose and be used to the long-term benefit of companies and their employees ... The workplace is a crucial arena for individual progress, where the meritocracy that sustains every democracy is most often played out ... Capitalism is certainly far from perfect, but most of us believe that – like democracy – it's better than the alternatives. However, that doesn't mean we have to accept it as is: indeed, The Conference on Inclusive Capitalism (held on Tuesday in London) is taking place because many of us believe we need to do something about the current state of capitalism for it to survive, let alone thrive. This is an important debate because the progress of society depends on capitalism being effective and inclusive. For that to be the case, capitalism has to have social purpose. – UK Telegraph 

Dominant Social Theme: Capitalism is a good system, but it could be improved ... and needs to be. 

Free-Market Analysis: There is apparently consternation among those who define the West's dominant social themes. Keynesian economics is clearly not working and needs a reset (or so we are told), as we analyzed in yesterday's article. 

And now we can see clearly in the above excerpt that capitalism itself is apparently in need of a tune up. 

 In fact, as predicted, it is the Internet Era itself that is blowing up elite memes. 

And the establishment is apparently fighting back by trying to reconfigure these dominant social themes. Suggestions are being made for a more inclusive and "moral" economics. Now the same approach is being planned for "capitalism." 

Here's more from the article excerpted above: 

On average, an employed person will spend more of their waking hours at work than in any other activity. The workplace is therefore a crucial arena for individual progress. It's where the meritocracy that sustains every democracy is most often played out. 

The promise that individuals can determine their destiny through their own efforts doesn't guarantee success, nor that life is equal or even fair. But for capitalism to be inclusive, the workplace must be a vector for social mobility. That's its social purpose. 

Technology has spurred human progress in the workplace for millennia. Its effect has been overwhelmingly positive in everything from agriculture and health through to transport and communications. This provides grounds for considerable optimism about the future. However, there are signs that technology might now be weakening the effectiveness of the workplace when it comes to social mobility. ...

For some people, technology greatly enhances their contribution. For others it may replace their once-valued roles. The numbers provide the evidence. There has been a dramatic increase in demand for higher skilled, technology-enabled roles. Employers are crying out for more designers, more engineers, more architects. In the UK alone there are 2.3m more of these kinds of jobs available today than there were 20 years ago. ... 

The last time we saw such shifts was at the start of the 20th century. Technology transformed productivity during the Industrial Revolution. Globalisation, then in the form of colonialism, expanded the market dramatically. Wealth became increasingly concentrated in the hands of a few and, by the early 1900s, inequality in the UK, and most Western economies, was greater than at any point in history. 

Two world wars, the Great Depression, progressive taxation and hyper-inflation combined to reduce inequality to the lowest level seen in modern times, by around 1950. Since then it has risen and, in the past few years, inequality has once again reached the levels of the early 20th century. 

This time, as last, technology and globalisation have played key roles. It may be unpalatable, but the momentum behind this means that inequality is almost certain to increase, and with it the risk to capitalism. 

This perspective sounds authoritative but it leaves out a lot. Capitalism is a system that relies on state power for its creation and maintenance. Specifically, judicial decisions authorizing corporate personhood and legislative acts enabling central banking in the US and the West generally have created modern capitalism. 

In other words, it is state force that creates and supports what is commonly called capitalism in the modern era. 

Capitalism is commonly conflated with free markets, but they are two different entities. A free-market system implies a competitive paradigm that does not rely on government for its implementation. Capitalism is ultimately, in many ways, a creature of the state. 

This article certainly seems to mis-analyze capitalism and provides questionable solutions as well. The way to make capitalism more relevant and attractive is to "rethink" it. Education must support it and capitalism itself must encourage a "greater plurality of ownership." 

The article suggests, for instance, that there must be collaboration at every level "between our schools, academic institutions and business, on a scale that makes a real difference to attainment, careers, competitiveness and social mobility." 

Regarding inclusivity, the article cites Spedan Lewis who developed the concept of the employee-owned business. The idea here is that if employees have an ownership stake, they will feel less alienated. 

These suggestions are being provided within the context of capitalism as something "worth fighting for – a force for good and for social mobility." But is it? Why declare that a system created and buttressed by state force is necessarily good? 

If it were so good, why does it need the twin pillars of state enforced monopoly central banking and corporate personhood to sustain it? 

The alternative to capitalism within a competitive milieu is a free-market system that is not shaped by state power. In such a system, people and their enterprises would relate to each other within a framework of enlightened self-interest as has often occurred throughout history – and continues to occur at a non-corporate level. 

Capitalism, in fact, can surely be referred to as corporatism. It is a system that encourages massive industrial entities that are supported by the forced money-printing of central banks. The combination of central bank business cycles and the regular boom/bust economic swings have created today's system – and situation. 

The reason capitalism is in a crisis is because it supports neither egalitarianism nor social mobility, nor was it likely designed to. Capitalism as it is currently structured is apparently designed to destabilize economies on a regular basis, thus providing opportunities for more centralization of power and money on an expanding scale. 

The ultimate goal seems to be aggressive internationalization and consolidation, a system conducive to the power of a few but not much else. 

Today's capitalism is expanding stock market valuations aggressively, but this is merely a prelude to another collapse, and thus we offer an alternative to recreating capitalism in a kinder and gentler manner (which really can't be done). 

Instead, one must contemplate benefiting from business cycles as they occur, making appropriate investments at the correct times and then attempting to reduce exposure before the inevitable implosion. Currently people have an opportunity to exercise this approach via what we have called the Wall Street Party, but it is certainly not something that is going to last forever. 

Of course, other opportunities will come along as well once the current environment begins to fail, specifically the further decline of the dollar against gold and silver. We would suggest that a personal campaign to benefit from capitalism's inequities and distortions is preferable to participation in an effort to "change" capitalism. 

Capitalism is not an evolution of business and industry but a specifically structured system designed to accomplish certain tasks that are often not conducive to middle class prosperity. 

Those not in the position to reap the rewards of the current system ought to pursue what free-market economists call "human action" by taking advantage of knowledge about the way capitalism really works in order to create personal prosperity that can benefit friends, families and even the larger community. 

This is a program that makes sense within capitalism's current constraints. Participation in a wider campaign to remake capitalism inevitably runs into the reality that modern capitalism serves the purposes of the Western power elite, which will refute any fundamental changes. 

Current emergent campaigns, then, to reconfigure economics or capitalism are, in a sense, no more than dominant social themes, designed to appeal to people's sentiments rather than to address fundamental inequities. 

 Conclusion The fairest system is one that is structured by individuals rather than the state. People must look to their own affairs and personal relationships for wealth building opportunities whenever possible. To rely on others – even the larger system of "capitalism" – increasingly is not a sensible option. 


May 28, 2014

Ukraine: The Real Energy Crisis Starts in June

Ukraine has a new president, or at least someone, Petro Poroshenko, who claims to be. One of the first things to come out of his mouth was that he doesn’t recognize Crimea as being a part of Russia. Still, the good listener knows there were no Ukraine presidential elections in Crimea either on Sunday. So Crimea is supposedly still a part of Ukraine, despite a referendum in which 89% of Crimeans chose not to be, and they get no vote in who gets to be their president either? What does all that mean? 
Poroshenko also vowed to bring peace to east Ukraine, something he aims to achieve through violence, as yesterday’s 100 deaths can bear silent witness to. Ukraine has a new president and the first thing he orders, even before being inaugurated, is the killing of more of his own citizens. Petro P. had lofty words about wanting a good working relationship with Russia, but those were only words; why, or even how, would Moscow want to talk to someone who has not even officially been elected yet but already wants to kill ethnic Russians who happen to live just across the border from Russia because of a map redrawn pretty much at random 60 years ago? What about that map permits Ukrainians in one part of the country to kill fellow Ukrainians who live in another part? 
If Russia would withdraw its troops, chances are there would be a massacre, if not a genocide. That it cannot do. It cannot allow it either. So what is Poroshenko’s idea? That if he can kill enough eastern Ukrainians the rest will submit to anything he wants? And that Putin will let him? Neither seems even remotely likely, and the president-to-be knows it. What then is behind this? Is he even his own man?
By Robert Bensh, an energy and energy security expert with over 13 years of experience leading oil and gas companies in Ukraine. He has been involved in various roles in finance, capital markets, mergers and acquisitions and government for the past 25 years and is currently the Managing Director and partner with Pelicourt LLC, a private equity firm focused on energy and natural resources in Ukraine. Cross posted from OilPrice

Kiev is feeling emboldened by the successful election of a new Ukrainian president and a bloody surge against separatists in the east, but in just a few days, Russia says it will twist the gas spigot, and there’s very little Kiev can do to stop that.

On June 3, Russia plans to reduce the gas supply to Ukraine — and hence, to Europe — if Kiev has failed to pay in advance for next month’s gas deliveries, the price for which has been doubled as a result of the political crisis.

Interim Ukrainian Prime Minister Arseniy Yatsenyuk is trying to play hardball with Moscow, suggesting that gas talks cannot move forward until Russia addresses the issue of $1 billion in gas it stole when it annexed Crimea.

Yatsenyuk may be riding high on the sense of stability the recent presidential election has brought, not to mention the unleashing of the Ukrainian military on pro-Russian separatists in Donetsk, but the “stolen gas” gambit is a losing one—a bunch of bluster that certainly won’t make Moscow go away.

Ukraine owes $500 million just for May gas deliveries, on top of a whopping $3.5 billion in outstanding gas debt (according to Moscow). If at least part of this debt is not paid, there won’t be any negotiating over price. Gazprom says Ukraine had agreed to pay $2 billion of its debt this week, but Kiev is instead talking about stolen Crimea gas.

What is promising in all of this is the election of Petro Poroshenko as Ukraine’s new president, by a wide margin and with more than 60 percent voter turnout. Ukraine has new, legitimate leadership that Russia, the United States and the European Union have all agreed to recognize.

The new president immediately pledged to deal with the separatists in Donetsk and Lugansk, establish a working relationship with Russia and hold early parliamentary elections, which undoubtedly is an attempt to capitalize on the current political good will and further weaken a parliament dominated by former Regions politicians, Fatherland and business interests.

What the presidential elections give Kiev is a bit more strength and a more united force to deal with its energy crisis, as well as with Moscow.

In the coming days, Russia will recognise Poroshenko’s legitimacy and remind him that June 3 is right around the corner. By next week, we could see the disruption of gas supplies to Europe, Russia’s largest and most profitable market.

If this happens, an acute energy crisis in Ukraine is all but certain. Ukraine stockpiles its gas supply for the winter heating months during the summer. With current low supplies and higher prices expected for this summer, Russia will walk all over Kiev.

Short of handing Gazprom a cashier’s check, there is no way to avoid the present crisis.

In the medium-to-long term, however, some hard decisions are going to have to be made—decisions that former Ukrainain vice prime minister and energy minister Yuri Boyko would have liked to make some time ago. These include selling off the state-run gas companies, Ukrnafta and Ukrgasproduction.

So we find ourselves reliving 2006 and 2009, when Russia cut off gas supplies to Ukraine and Europe. And if Ukraine hopes to stop reliving these desperate years over and over again, it’s going to have to start selling off assets and rolling out the transparency.

The trick will be for Poroshenko and a newly appointed energy minister to work with both Russia and Europe to secure new pricing and to foster energy independence while at the same time being mindful of one very important fact: Ukraine’s westward drift toward the EU is what led Russia to annex Crimea in the first place.

Russia will continue to use Russian nationalist movements in eastern Ukraine to stir discontent and to sow chaos, striving to keep Kiev off balance as Moscow works to use gas as a weapon to ensure a compliant Europe. It’s a hard balance to maintain, especially as some Central European countries are seeing the light at the end of the independence tunnel.

Poroshenko is a highly pragmatic businessman, which is what Ukraine needs. But neither he nor those around him know energy, or Russia. From the energy crisis standpoint, it is the appointment of a new energy minister that will change the real balance of power.

There are very few figures in Ukraine who know the West, Russia and enough about energy to do what needs to be done. Because of that, Poroshenko’s pick for energy minister should be the smartest choice, not the most popular one.

May 27, 2014

Federal Reserve Admits Truth In Internal Memo: "Prices Continue To Rise Between 3% And 33%"

We are confused: on one hand the Fed is injecting hundreds of billions of liquidity into the market, boosting the S&P to all time highs and making the rich richer (Piketty taking Excel lessons from Rogoff notwithstanding) while the economy remains stagnant because, according to the BLS, inflation is too low, and as everyone knows the biggest lament of the impoverished middle class is that "the value of my dollar isn't being destroyed fast enough for me to feel confident about the future." On the other hand, the very same Federal Reserve Bank (of Chicago), just announced that as a result of "prices continuing to increase between 3% and 33%" (!), beginning May 27 it is hiking the prices in its cafeteria. So, clearly prices are rising at a 33% clip due to, how does the IMF put it, lowflation, right? Oh, and harsh weather.

From the Chicago Fed, highlights ours
Subject: Reserve Center Cafe changes coming

Reserve CenterTM Tenants,

Due to rising product prices in the past several years, The Reserve Center will increase its prices in the cafeteria effective May 27.

Over the past five years, many of you may have experience product price increases in grocery stores. Prices continue to rise between 3% – 33%.  For the past eight years, The Reserve Center has been absorbing these increases. The last overall price increase in The Reserve Center cafeteria took place in 2006, followed by a limited increase on sugar-based products in 2012.

For the upcoming price increase, a thorough review of café items was conducted and, while some prices will remain flat, others will increase to recognize these market increases. The price increase will help The Reserve Center cafeteria continue to maintain high standards and service levels by providing quality products.

Another change includes the introduction of new menu program changes to provide greater variety as we continue to refresh the cafeteria menu offerings.  In the following months, we will be distributing a survey to obtain feedback on these new menu changes, as well as your food preferences so that we can continue to tailor menu offerings based on input we receive from our customers.

Lastly, we've reviewed feedback and in response The Reserve Center cafeteria will now close at 1:30 p.m. on Fridays. However, July 11 tahrough Aug. 29 we will close at 1 p.m. as the traffic is lighter due to vacations.

Thank you for your continued support of The Reserve Center cafeteria.

Federal Reserve Bank of Chicago
* * *

The good news (for Fed employees): as we reported last year, the average annual increase in the salaries of Federal Reserve workers over the past year has been around 13%, so a price hike should be bearable.


May 26, 2014

JPMorgan Lied To Fed, Did Not Report Losing Trades Whistleblower Charges

Long before Virtu was forced to pull its IPO due to the backlash against HFT frontrunners in party due to being stupid enough to post its perfect trading record of 1 trading day loss in 5 years which could only be the result of a grossly rigged market, we pointed out that another entity, one having little in common with your garden variety HFT parastie, namely JPMorgan, had a 2013 trading record which could be summed up on one word only: perfection.

Yet while one could simply attribute the same kind of market rigging to JPM as one can (and should) to the average hi-freak, it seems there may be more here than meets the eye so used to seeing manipulation everywhere it looks.

According to Australia's Sydney Morning Herald, "a technical support person who worked for JP Morgan in Australia claims the bank regularly misled its New York parent and the US Federal Reserve by failing to report losing trades."

If nothing else, and if the whistleblower's allegations are proven true, it will certainly explain JPM's trading perfection: because when one excludes the "losing trades" from one trading record, it is rather easy to end up with nothing but trading wins.

SMH reports that the "explosive" allegations are contained in a submission by the person to the Senate inquiry into the performance of the Australian Securities and Investments Commission.

It certainly wouldn't be the first time a disgruntled whistleblower has spoken up against his former employer (especially with a delay as substantial as this one), but in this case this may be more than just someone seeking to recoup compensation from an untimely termination: "Business Day has met the person and agreed to allow him to remain anonymous. He appears to be credible. The person complained to ASIC and later went to work for the regulator, but he said the regulator failed to investigate his claims."

Credible or not, JPM promptly denied everything:
A spokesman for JP Morgan denied the allegations. "The claims are false and misleading," he said.
Or, as Jamie Dimon would call it, a "tempest in a teapot.  Some more from SMH on just how JPM was violating regulations, and of course, the law:
In his submission, published by the inquiry, the person said he was employed at the Sydney office of JP Morgan between 2004 and 2007. He worked for a team involved in the post-trade management of the bank's OTC (over the counter) equity derivative business for the Asia-Pacific region.

In 2007, before the global financial crisis, he became increasingly concerned by "certain practices that appeared to circumvent regulatory commitments and risk management expectations," he said.

These included:
  • Misleading reports being provided to head office and the Federal Reserve Bank of New York on the number of outstanding trades.
  • Trades not being booked into the system until they were ''in-the-money''.
  • Trades not booked into systems and only being tracked by paper-based legal agreements, which would be ''torn up'' if required, thereby leaving no trace.
  • Bypassing or attempting to bypass the opinions of in-house lawyers to complete work faster, even if this resulted in incorrect legal agreements being signed by the traders and sent to other major banks as final confirmation of the terms of the trade.
It is here that the case gets a little hazy, because it becomes clear that the "person" may have had a conflict of interest and a bone to pick with JPM, which dilutes some of his/her claims no matter how truthful they may be:
The person said he sought to discuss his concerns with lower and middle management but was warned that ''front office would get rid of me if I persisted''. ''JP Morgan's 'Worldwide Rules of Conduct' state: 'The most important rule is also the most general: never sacrifice integrity, or give the impression you have, even if you think that it would help JP Morgan Chase's business'.

''In support of this policy, I lodged a complaint with senior management fully expecting to be able to discuss all my concerns and receive guidance from the relevant departments, including legal and compliance. This did not occur and instead I immediately stopped being paid.''

He said his inquiries resulted in him being threatened that his employment would be terminated because of the complaint. The person was employed by an agency. ''I was informed that I would not be paid my outstanding salary and any future salary until I signed a new employment contract reducing my notice period from one month to one week,'' he said.

''My contract was terminated shortly after for 'economic reasons'.

''I had no contact with senior management or legal and compliance and no opportunity was provided.'' The person lodged a complaint with the Fair Work Ombudsman and said he authorised and urged the agency to contact ASIC but that it declined to pursue the matter.

The person formally reported his claims of misconduct to ASIC on November 27, 2008. He subsequently met two ASIC employees on January 5, 2009, at the regulator's Martin Place offices. He claimed the officers displayed little understanding of the matters raised and asked why he had made a misconduct report.

''The interviewers were surprised and somewhat incredulous by my response that I believed it was the right thing to do,'' he said.

''The overall feeling that the interview conveyed was that ASIC was unprepared to accept reports of misconduct and had no skills to manage such matters. The meeting ended and, though I advised I was ready to provide further assistance, I was not contacted by ASIC. As far as I am aware ASIC never contacted the Fair Work Ombudsman.''

On May 16, 2012, the person addressed an online inquiry to ASIC (attached to his Senate submission) regarding the whistleblower protections in the Corporations Act. He said the regulator declined to afford him whistleblower protection. A report from the Senate inquiry is due on Friday but is likely to be delayed.
Being fired for daring to blow the whistle against the bank with the "fortress" balance sheet? Hardly surprising, especially if it took place long before JPM accrued some $25 billion in litigation reserves. If this had happened now, probably nobody would care: after all, except for Tim Geithner, nobody has any doubt that in the New Normal, banks are nothing short of the new organized crime cartel, where rampant breach of the law is encouraged by the very (bribed) regulators who are supposed to be keeping it in check.

That said, we wonder if and when the Fed were to take the whistleblower's allegations seriously and demands a rerun trading blotter by JPM, this time without all the losing trade fabrications, just how many trading losses JPM would have in 2013. Because one thing is certain: one doesn't need a whisteblower stepping up to know that having zero trading day losses in an entire year can only be achieved through market manipulation and/or breaching the rules: two things we now know that JPM is quite proficient at.

May 23, 2014

Credit Suisse’s Guilty Plea: The WSJ Uses the Right Adjective to Modify the Wrong Noun

The Wall Street Journal has editorialized about Credit Suisse’s guilty plea in a piece entitled “If Credit Suisse really is a criminal, why protect it from regulators?”  More precisely, and confusingly, the full title is:

“Holder Convicts Switzerland
If Credit Suisse really is a criminal, why protect it from regulators?”

The U.S. Saved Switzerland and Its Banks

I’ll begin by responding to the WSJ’s weird claims about Switzerland.  Far from “convict[ing] Switzerland,” the U.S. Fed bailed out the Swiss Central Bank at the acute phase of the crisis (by making large unsecured loans to it in dollars) so that it in turn could provide dollars to its two massive, insolvent, and fraudulent banks (UBS and Credit Suisse).  The Treasury, with the support of Secretaries Paulson and Geithner, used AIG to secretly bail out not only Goldman Sachs but also UBS (to the tune of $5 billion).  The unconscionable deal was so toxic that the heads of each of the three U.S. financial regulatory agencies involved (Treasury, the Fed, and the NY Fed) deny that they had any involvement in the decision – it’s the Virgin Bailout.

UBS was contemporaneously negotiating a deal with the U.S. to pay a fine of $780 million to settle its criminal liability for aiding and abetting tax fraud by wealthy U.S. tax cheats – so we, in economic substance, paid their entire fine and added a bonus of $4.22 billion that rewarded the frauds.  As always, the fine was assessed solely on UBS, not the controlling officers who grew wealthy through UBS’ frauds, so the senior officers got even wealthier through the massive tax fraud and the secret AIG bailout and they overwhelmingly got to keep their jobs and bonuses that their frauds and our bailouts maximized.  (The secret U.S. bailout of UBS is considerably larger than the fines assessed to UBS and now Credit Suisse – combined – so the claim of U.S. hostility to Switzerland that the WSJ is pushing on their editorial pages is refuted by the facts.)

That secret Treasury bailout via AIG was in addition to the Fed bailout that kept UBS and Credit Suisse from collapsing in 2008.  Herr Dr. Hummler, the head of Switzerland’s oldest private bank – the man who propagated the claim throughout Europe that the financial crisis was caused by making home loans to black Americans – bragged in my presence at a conference in Switzerland that the only reason his bank existed was to aid tax evasion by wealthy U.S. citizens.  His bank, being small and unprotected by “too big to prosecute” was eliminated by U.S. criminal sanctions.  He was up front about the fact that Switzerland’s fundamental strategy was to encourage and aid and abet the wealthiest people in the world evading their nations’ tax laws.

UBS and Credit Suisse’s idea of how to repay the U.S. for saving them and the Swiss economy was to continue to aid and abet wealthy U.S. tax cheats’ crimes and to lie about it to our investigators while working behind the scenes to try to get the Swiss government to derail the U.S. investigations and prosecutions.  Far from being vigorous, Attorney General Holder was rightly excoriated by Senate investigators for his unwillingness to prosecute clear violations of U.S. law even when Credit Suisse stone walled U.S. investigators.

But the WSJ Does, Almost, Ask the Right Question

Once we get past the faux U.S. war on Switzerland meme, the WSJ does manage to ask a question that uses the correct word.  Unfortunately, it uses it to modify the wrong nouns.  The second part of the WSJ article’s title asks:  “If Credit Suisse really is a criminal, why protect it from regulators?”  “Really” is exactly the right word, but the accurate title would have been:
If the agency leaders were really regulators and DOJ’s leaders were really prosecutors why would they be protecting the senior bankers who led the frauds that caused the financial crisis from prosecution?
The answer to the question would also be obvious – they aren’t really regulators and prosecutors.  They do not represent the interests of the banks; they represent the interests of the controlling bankers.  Credit Suisse’s tax frauds enriched both the banks and the bankers, but the faux U.S. regulators and prosecutors fail to act against the controlling officers even when they grow wealthy by looting “their” banks.  The guilty plea continues DOJ’s shameful practices.

None of what we are seeing is being done to protect the “banks” (as opposed to the controlling bankers).  DOJ could have always prosecuted, and the banking regulatory agencies could have sanctioned, the bankers responsible for the crimes.  That would have posed zero risk to the banks.  Instead, the sole sanction is to the banks – the CEO (who was the COO and General Counsel during Credit Suisse’s pervasive criminal strategy of aiding and abetting tax fraud by wealthy Americans) keeps his job and his bonuses that were largely funded by our bailouts and Credit Suisse’s tax fraud strategy.  (The low-level UBS officer committing some of their tax frauds has the distinction of both being imprisoned for his/UBS’ crimes – and receiving $104 million as a whistleblower.  Some low-level Credit Suisse staffers have pleaded guilty.)

The WSJ as Criminal Defense Lawyer for Wall Street (and Bankers Everywhere)

The WSJ cannot be condemned for home town biases in this editorial – it loves all bankers – worldwide.  It turns out that in addition to the Virgin Bailout the WSJ is peddling the idea that this is the first U.S. financial crisis in modern history that is a Virgin Crisis conceived without sin in the C-suites.
The problem is that indicting individuals requires finding actual criminal intent and behavior and then proving it to a jury when so much of what happened during the financial crisis was simply bad judgment.
Yes, the difficulty of proving fraud against elite defendants is typically demonstrating their intent because they are so good at hiding their intent behind pretense.  The WSJ’s “so much” phrase becomes a way of assuming away fraud.  I will not repeat my many columns demonstrating that the financial crisis was driven by fraudulent bankers and that their crimes could be prosecuted effectively as we did during the S&L debacle and as others did in response to the Enron-era accounting control frauds.  If our regulators today (and under Clinton and Bush II) had “really” been regulators and made the criminal referrals essential to prosecuting the elite bankers leading the frauds and if our prosecutors were “really” prosecutors there would have been thousands of senior bankers convicted and the crisis could have been prevented.  Note that the WSJ never seeks to refute the evidence that the three most financially destructive epidemics of accounting control fraud drove the current crisis.  If they were “really” regulators and prosecutors they would be demonstrating this point on a daily basis through their criminal referrals, enforcement actions, and criminal prosecutions of the elite bank officers that led the frauds.

The WSJ Proposes that Businesses Be Immune from Prosecution

The WSJ also has an interesting standard for prosecuting businesses:  it is “appropriate only if … the entire bank is a criminal enterprise.”  So, if there are any honest operations at a massive bank one cannot prosecute it.  Yes, the WSJ just called for making it impossible to prosecute any bank.  It didn’t have the courage to write that openly, of course, but that’s the effect of its proposed standard for prosecuting a bank (or any other business entity).  Seeming legitimacy will grant the firm total immunity from being sanctioned criminally.

Indeed, because, as the WSJ correctly states it is impossible that the Department of Justice (DOJ) could have believed that Credit Suisse was “entire[ly] … a criminal enterprise” it follows logically (?) that DOJ’s prosecution of Credit Suisse must be “political.”   The possibility that DOJ might not agree with the WSJ that businesses should not be immune from prosecution unless every aspect of their operations is criminal (which would require the rejection of well over a century of U.S. legal doctrine) does not enter the WSJ’s analytical process.

May 22, 2014

Europe's Unraveling Is Not Political but Technological

Europe's centre crumbles as Socialists immolate themselves on altar of EMU ... Francois Hollande must be willing to rock the European Project to its foundations, and even to risk a rupture of the euro. This he cannot bring himself to do The ECB is once again sitting on its hands, trifling with deflation ... By a horrible twist of fate, Europe's political Left has become the enforcer of reactionary economic policies. The great socialist parties of the post-war era have been trapped by the corrosive dynamics of monetary union, apologists for mass unemployment and a 1930s deflationary regime that subtly favour the interests of elites. – UK Telegraph Dominant 

Social Theme: What is going on in Europe makes no sense. 

Free-Market Analysis: This article in the UK Telegraph points out succinctly the problems faced by the EU but spends a good deal of time wondering why European leaders like Francois Hollande are pursuing policies that are giving rise to extreme opposition and further damaging economies. 

Basically, the article, like others by this author – Ambrose Evans-Pritchard – suggests that what is necessary to cure European economies is a great deal of money printing. In this sense, Evans-Pritchard reveals himself as an ordinary Keynesian despite his twisting and turnings in past articles. He doesn't want to be known as Keynesian, though he is. 

He wants to be considered as something else – it is not clear what – but articles like this one provide us with a perfectly straightforward Keynesian analysis. He is incredulous that various governments, especially Hollande's, are not printing money in abundance and equally astonished that they have adopted the concept of "austerity" that further starves the economy of currency. 

Here's more: 

One by one, they are paying the price. The Dutch Labour Party that fathered the "Polder Model" and ran Holland for half a century has lost its bastions of Amsterdam, Rotterdam and Utrecht, its support dwindling to 10pc as it meekly ratifies austerity policies that have led to debt deflation and left 25pc of mortgages in negative equity. Contractionary policies are poisonous for countries leveraged to the hilt. ... 

"The Socialist Party has never believed in the euro and we don't believe in it now. We must therefore stop offering up ever more sacrifices in order to maintain it," said Dennis de Jong, the party's leader in Strasbourg. He calls for a "Plan B" to dismantle the currency union in an orderly fashion, with capital controls if need be. Each country is sui generis. 

The Panhellenic Socialist Movement (PASOK) that steered Greece to democracy after the colonels is down to 5.5pc, a dead shell displaced by the hot-headed Syriza party of Alexis Tsipras, now leading at 25pc with vows to tear up Greece's EU-IMF Troika Memorandum and stiff creditors. PASOK deserves its annihilation. It conspired in the backroom coup of November 2011, agreeing to EU demands to overthrow its own prime Europe's centre crumbles as Socialists immolate themselves on altar of EMU 

The mystery is why a French Socialist president with a parliamentary majority should so passively submit to policies that are sapping the lifeblood of the French economy and destroying his presidency. Francois Hollande won the presidency two years ago on a growth ticket, vowing to lead an EMU-wide reflation drive that would lift Europe out of slump. He promised to veto the EU Fiscal Compact. 

He asked to be judged on his record in "bending the curve of unemployment", and to his chagrin the people are holding him to his word. The jobless rate has risen from 10.1pc to 10.4pc (Eurostat) since he took office. The economy shed a further 23,600 jobs in the first quarter as GDP growth fell back to zero. ... 

The French socialists thought they had nothing to fear from the rise of the Front National, the one party prepared to tap into the welling fury of La France Profonde, pledging to restore French sovereign control over all that matters in the nation, and ditch the euro as the first order of duty. They thought the Front would peel off votes from the Gaullistes and split the Right. It is ripping into their own working class strongholds with near equal force. 

They underestimated Marine Le Pen, now leading the Euro polls at 24pc. The socialists have slipped to third place. She has outflanked them with her brand of "Left Le Penisme" – or the Left-leaning side of Charles de Gaulle, as she once old me – a tooth and claw defence of the welfare state and the sacred Modèle Français. They have no answer to her attacks on "senseless austerity" and the "mad monetary policies of the ECB" that are hollowing out the industrial core of France, or to her taunt that the EMU project has become coterminous with mass unemployment, because they are all true. 

From the author's point of view, the policies being followed across Europe are ones that are spawning a "rightist" movement. Indeed, this is standard fare. Whenever economic issues loom large in Europe the old right wing monster is released into the pages of the mainstream media. 

It matters not whether the organizations in question are "fascist" or right wing; they will be portrayed that way. And ironically, the real fascism is already rooted in Brussels where titanic corporations work hand-in-hand with EU officialdom to spawn ever more authoritarian regulations. 

The reason Evans-Pritchard is puzzled by the actions of Hollande and others in Europe is because the power probably does not lie with them but lies in the City of London and elsewhere where the global elite first created the EU and then foisted the euro on it to ensure that further consolidation would be necessary as a reaction to euro chaos. Well ... chaos 

Europe has had in full measure. But the political union seems to us to have made scant headway. This is in large part because people are already aware of their manipulation thanks to the modern Internet era and want little more of the centralization that is responsible for so many troubles already. That's surely one reason why the euro and even the EU itself are increasingly unpopular throughout Europe. 

Nonetheless, the meme continues to carve itself into the mainstream media discussion about Europe. The various parties now being created in Europe as a reaction to the economic disaster are anti-euro and anti-EU but are painted inevitably as racist and intolerant. This they may or may not be, but the media will portray them that way no matter what. 

We also know that at least some of these parties are actually supported by the power elite that stands behind Brussels and a greater Europe. If one creates a bogeyman, it can place the current power structure in a better light. 

Not that the current structure deserves it. It's made up of political and financial hacks that are devoted to a centralized Europe not for the greater good of the many but to benefit their own pockets and careers.

Ultimately, the EU and the euro are facilities of globalism and those globalists that have pursued the project for so long are loath to let it die. It is important, even integral to their plans for worldwide political and socio-economic control. 

This is the real reason that Hollande and other leaders do not break away from Brussells's destructive policies. They don't because they cannot. They are not, in fact, representing their citizens but are evidently beholden to the same tiny elite that created the EU to begin with. 

Presumably, Evans-Pritchard knows this but can't or won't present this reality in its baldest terms. Nonetheless, the increasing decline in EU's economies bodes ill for the longevity of the EU experiment. 

It is the Internet itself that is making it difficult for the power elite to control the narrative the way it did in the 20th century. And this is dangerous to the current social stability, what is left of it, not only in Europe but throughout the West. 

Conclusion For citizens, savers and investors, this has profound implications – as we often point out.


May 21, 2014

27 Huge Red Flags For The U.S. Economy

If you believe that the U.S. economy is heading in the right direction, you really need to read this article.  As we look toward the second half of 2014, there are economic red flags all over the place.  Industrial production is down.  Home sales are way down.  Retail stores are closing at the fastest pace since the collapse of Lehman Brothers.  U.S. household debt is up substantially, and in 20 percent of all U.S. families everyone is unemployed.  In so many ways, what we are witnessing right now is so similar to what we experienced during the build up to the last great financial crisis.  We are making so many of the very same mistakes that we made the last time, and yet our "leaders" seem completely oblivious to what is happening.  But the warning signs are very clear.  All you have to do is open your eyes and look at them.  The following are 27 huge red flags for the U.S. economy...

#1 Despite endless assurances from the Obama administration that we are in an "economic recovery", the number one concern for U.S. voters is "Unemployment/Jobs" according to a recent Gallup survey.

#2 Historically, sales for construction equipment manufacturer Caterpillar have been a pretty good indicator of where the global economy is heading next.  Unfortunately, sales were down 13 percent last month and have now experienced year over year declines for 17 months in a row.

#3 During the first quarter of 2014, profits at office supply giant Staples fell by 43.5 percent.

#4 Foot traffic at Wal-Mart stores fell by 1.4 percent during the first quarter of 2014.  Analysts seem puzzled as to why Wal-Mart is "underperforming".  Perhaps it is because the U.S. middle class is being steadily destroyed and U.S. consumers are tapped out at this point.

#5 It is being projected that Sears will soon close hundreds more stores and will eventually go out of business altogether...
The company said this week that it may sell its 51% stake in Sears Canada, which operates nearly 20% of the company's stores worldwide. It has quietly closed nearly 100 U.S. stores in the last year. Next week, it's expected to announce dismal fiscal first quarter results and possibly yet more store closings. 
"They have too many stores and they're losing a lot of money, burning cash," said John Kernan, an analyst with Cowen. 
Kernan expects the company to close 500 of its 1,980 U.S. stores in a few years and, ultimately, to go out of business. 
"The lights are going off at Sears and Kmart," he said. "There are tumbleweeds blowing through the parking lots at Kmart. They're basically completely irrelevant."
The "retail apocalypse" just continues to roll on, but the mainstream media is treating this like it is not really a big deal.

#6 The labor force participation rate for Americans from the age of 25 to the age of 29 has fallen to an all-time record low.

#7 According to official government numbers, everyone is unemployed in 20 percent of all American families.

#8 As families struggle to pay their bills, many of them are increasingly turning to debt in order to make ends meet.  Earlier this month we learned that total U.S. household debt has increased for three quarters in a row.  And as I noted in one recent article, total consumer credit in the United States has increased by 22 percent over the past three years, and 56 percent of all Americans have "subprime credit" at this point.

#9 Interest rates on student loans are scheduled to increase substantially on July 1st...
As of July 1, federal student loan rates will edge up. Rates overall will be up 0.8% compared to current rates. 
Federal Stafford Loans for undergraduate students will be 4.66% — up from 3.86%. Federal Stafford Loans for graduate students will be 6.21% — up from 5.41%. 
Federal Grad PLUS and Federal Parent PLUS Loans will be at 7.21% — up from 6.41%.
This is going to put even more pressure on the growing student loan debt bubble.

#10 U.S. industrial production fell by 0.6 percent in April.  This should not be happening if the economy truly was "recovering".

#11 Manufacturing job openings in the United States have declined for four months in a row.

#12 Existing home sales have fallen for seven of the last eight months and seem to be repeating a pattern that we witnessed back in 2007 prior to the last financial crash.

#13 In the real estate bubble market of Phoenix, sales in April were down 12 percent year over year, and active inventory was up 49 percent year over year.  In other words, there are tons of homes on the market, but sales are going down.

#14 The homeownership rate in the United States has dropped to the lowest level in 19 years.

#15 Trading revenue at big banks all over the western world is way down...
Late Friday, it was JPMorgan who said trading revenues will be down 20 percent this quarter. Now Barclays says trading revenues in the first three months were down 41 percent. The company cited "challenging trading conditions resulting in subdued client activity." Like JPMorgan, Barclays also warned they were seeing no improvement in trading in the second quarter.
#16 Jan Loeys, JPMorgan's head of global asset allocation, is warning that the Federal Reserve is creating a huge financial bubble which could "push us into a credit crisis"...
Where do we go from here? To this analyst, still very subdued economic growth, both at the US and global level, implies continued easy monetary policy. The risk is that bond yields rise no faster than the forwards. Financial overheating (asset inflation) proceeds much faster than economic overheating (CPI inflation). Before CPI inflation has a chance to emerge, and before monetary policy is truly above neutral, a financial bubble will have popped up somewhere and will have corrected, pushing the economy down. That is what has happened in the past 25 years. The behavior of central banks gives us no confidence that this time will be different: Central banks talk about financial instability, but appear to define this mostly in term of bank leverage. Each successive boom and bust is always in another place. A bubble can emerge without leverage. It is not possible to project exactly where this boom and bust cycle will take place as knowing where it will be would induce evasive actions that should prevent it from occurring. One possible ending, among many, is that ultra-easy rates having induced credit markets to grow much faster than equity markets, combines with reduced market making by banks (many of whom have become like brokers) to create a liquidity crisis when the Fed starts the first set of rate hikes. This could then be bad enough to close primary markets, and thus push us into a credit crisis.
#17 Peter Boockvar, the chief market analyst at the Lindsey Group, is warning that the U.S. stock market could experience a 20 percent decline once quantitative easing completely ends.

#18 A lot of other big names are telling CNBC that they expect a significant stock market "correction" very soon as well...
A bevy of high-profile names have warned lately that the market is on the doorstep of a major move lower. From long-term market bulls such as Piper Jaffray to short-term traders such as Dennis Gartman, expectations are high that the major averages are poised for a big dip, with calls varying from 10 percent or so all the way up to 25 percent.
#19 The number of Americans enrolled in the Social Security disability program exceeds the entire population of the nation of Greece and has just hit another brand new record high.

#20 Poverty continues to grow all over the country, and right now there are 49 million Americans that are dealing with food insecurity.

#21 According to Pew Charitable Trusts, tax revenue in 26 U.S. states is still lower than it was back in 2008 even though tax rates have gone up in many areas since then.

#22 Barack Obama is doing his best to keep his promise to destroy the U.S. coal industry...
The EPA is about to impose a new regulation that will reduce carbon emissions from existing power plants starting June 2 and will become permanent in 2015. The new regulation, according to Politico, is the “most dramatic anti-pollution regulation in a generation.” Because the new regulation will further cripple the coal industry, as coal-burning plants will be severely affected, American power will become more dependent on natural gas, solar and wind.
#23 Climatologists are now saying that the state of Texas is going through the worst period of drought that it has experienced in 500 years.

#24 It is being reported that "dozens of Texas communities" are less than 90 days away from being completely out of water.

#25 It is being projected that the drought in California will cost the agricultural industry 1.7 billion dollars and that approximately 14,500 agricultural workers will lose their jobs.

#26 Due in part to the drought, the price of meat rose at the fastest pace in more than 10 years last month.

#27 According to recent surveys, only about a quarter of all Americans believe that the country is heading in the right direction.