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HomeAn Insider’s Indictment of the Financial and Political Fortress
Posted by Larry Doyle on July 6th, 2009 11:02 AM |
Simon Johnson
Why is the public at large so suspect of politicians and bankers? Why has the general media taken an enormous hit for not more fully exposing the holes in our economic foundation?
There is nothing like a 40% selloff across a wide array of assets to bring out cries for transparency and integrity. In that spirit, thankfully we have a former ‘insider’ within the financial and political fortress motivated to shed some real light on these pressing issues.
The Financial Times recently interviewed Simon Johnson, former chief economist at the IMF and currently a professor at the MIT Sloan School of Management (along with being a fellow contributing author at Wall Street Pit), and published Why Hopes of a Fast Recovery Have Been Much Exaggerated.
Johnson comments on the constraints he experienced at the IMF:
“I was trying to speak out while I was at the IMF,” he recalls, “but certain constraints come with position, and I found it was time to speak more bluntly than I could as an official.” (LD’s highlight)
While the economy and markets are screaming for transparency and integrity, Johnson succinctly puts forth what many have long held true–don’t believe any of what you hear from a politician or a banker, and only half of what you see.
Johnson does not stop there as he boldly further implicates the power base both on Wall Street and Washington:
And blunt he was in a recent article in The Atlantic entitled, The Quiet Coup, in which he noted a disturbing similarity between emerging market failures and the US. “Elite business interests – financiers in the case of the US – have played a central role in creating the crisis,” wrote Mr Johnson, “making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse.”
What he finds even more unnerving is that these special interests “are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.”
This theme of an incestuous, coordinated relationship between our financial and political industries is one I have worked to highlight often. I appreciate Johnson doing the same. While Johnson gives Washington some credit for utilizing a variety of tools to combat our economic troubles, he simultaneously indicts the Obama administration for being far too generous to the banks: (more…)
Is Uncle Sam Manipulating the Equity Markets?
Part II
Posted by Larry Doyle on July 6th, 2009 7:47 AM |
Who does not like a good summer read? Well, combine money with espionage and we have all the makings of a fascinating story.
The other day I wrote a post, “Is Uncle Sam Manipulating the Equity Markets?”, highlighting allegations by Joe Saluzzi of Themis Trading of highly suspect trading activities on the NYSE. Another chapter in this fast moving intrigue unfolded over the weekend. Thanks to kbdabear for sharing a Reuters news release, “A Goldman Trading Scandal?”, which adds significant fuel to the fire. Let’s review in a rational fashion. Reuters reports:
Did someone try to steal Goldman Sachs’ secret sauce?
While most in the US were celebrating the 4th of July, a Russian immigrant living in New Jersey was being held on federal charges of stealing top-secret computer trading codes from a major New York-based financial institution—that sources say is none other than Goldman Sachs.
The allegations, if true, are big news because the codes the accused man, Sergey Aleynikov, tried to steal is the secret code to unlocking Goldman’s automated stocks and commodities trading businesses. Federal authorities allege the computer codes and related-trading files that Aleynikov uploaded to a German-based website help this major “financial institution” generate millions of dollars in profits each year.
Who is this individual, Aleynikov? (more…)
Financial Cooking
Posted by Larry Doyle on July 5th, 2009 8:46 AM |
When business operations make money, it is due to the brains and intellect of management, correct? When business operations lose money, it is some sort of nefarious measure at work in the marketplace which can be ‘corrected’ by changing the rules, correct? The implementation of the relaxation of the FASB’s (Federal Accounting Standard Board’s) mark-to-market utilizes that thought process. Make no mistake, it is flawed and simply allows financial institutions to ‘manage earnings,’ otherwise known as “cook the books.”
We receive a whiff of this recipe in a report by the Wall Street Journal, Home Loan Banks See Net Income Decline 51%. I have maintained that the basic business model of the FHLBs is flawed and we see evidence of this in the fact that outstanding advances (loans) by the FHLBs to their member banks actually decreased in the 1st quarter of this year:
Total advances outstanding from the banks declined to $817.41 billion as of March 31 from $928.64 billion three months earlier. After surging in 2007 and early 2008, demand for those advances has slackened, partly because of the recession and partly because the federal government has offered alternative funding programs for commercial banks.
Without even maintaining the level of advances, the FHLB system is coming under increasing pressure to generate earnings in the face of increasing delinquencies, defaults, and foreclosures on all of their holdings–advances, mortgage originations, and mortgage-backed securities purchased from Wall Street. (more…)
NoQuarter Radio’s Sense on Cents with Larry Doyle
Posted by Larry Doyle on July 4th, 2009 7:15 PM |
UPDATE: The show has concluded, but you can listen to a recording in its entirety by clicking the Play button on the audio player below. Once the playback has started, you can fast forward or rewind to any portion of the show by clicking at any point along the play bar.
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There is no doubt in my mind that we are in the early stages of significant structural changes throughout our economy and our country. How will our nation adapt to these structural changes? How long will it take for various sectors of our economy to fully appreciate this reality? The landscape on Wall Street has dramatically changed. While many financial executives would tell us it is “business as usual” and are fighting tooth and nail to pick up the pieces and return to that reality, the world of Wall Street is forever changed.
Please join me Sunday evening from 8-9 p.m. ET for NoQuarter Radio’s Sense on Cents with Larry Doyle. I am honored to have Shawn Matthews, the CEO of Cantor, Fitzgerald and Co. to discuss the past, the present, and the future for Wall Street. Cantor, Fitzgerald has a storied history on Wall Street and this firm is aggressively redefining the Wall Street landscape. Bloomberg recently wrote Cantor Plans to Hire Up to 100 for European Fixed-Income Unit:
Cantor Fitzgerald plans to hire as many as 100 staff in fixed income in Europe in the coming year as it builds high-yield and distressed-debt businesses, said Chief Executive Officer Shawn Matthews.
The closely held New York-based securities firm will approach the business “from a trading perspective,” Matthews said in an interview today. As a “longer-term goal,” Cantor plans to build a “small merchant-banking operation,” he said.
Cantor, which is organized as a partnership, is seeking to take advantage of the “disarray” that has struck larger rivals such as Morgan Stanley, Citigroup Inc. and UBS AG amid losses and writedowns by lenders worldwide of almost $1.5 trillion, Matthews said.
What does Shaun Matthews see on the global financial landscape and why is Cantor moving so aggressively to increase its footprint?
“Our clients say they are looking for more-relevant counterparties now that the big investment banks have reduced the level of capital and their commitment to trading,” Matthews said.
Cantor, which expects to hire at least 50 people in Europe the next 12 months, is also seeking to add 25 to 30 staff in Asia, he said. The company also plans to build structured-debt, investment-grade and rates businesses outside the U.S., Matthews said.
The default rate may go as high as 25 percent “by the time the crisis is over,” Matthews said. “The world is in a bad place.”
As we move along into the Brave New World of the Uncle Sam Economy, please join me Sunday evening for what promises to be a riveting discussion with Shawn Matthews. Please share your questions and thoughts by calling in to (347) 677-0792, and also join our live chat room, which I’ll start up about 10 minutes before the show begins. Many thanks to Larry Johnson and the rest of the team at NoQuarterUSA blog for providing such a vibrant vehicle as NoQuarter Radio. I look forward to having you join me Sunday evening as we collectively navigate the economic landscape!!
LD
God Bless America!!!
Posted by Larry Doyle on July 2nd, 2009 12:59 PM |
I love this blog and the people who come here. Why? Freedom….liberty…pursuit of happiness…
The freedom of speech is one of our greatest liberties. Let us never forget, though, that freedom is not free.
To all those who have served our country, I salute you.
To all those who currently serve our nation as loyal sons and daughters, I commend you.
To all those who cherish the values and principles our founding fathers held dear, I want to walk with you.
As we embark upon the weekend of our nation’s birthday, stay strong and continue to defend our nation as a parent, a son, a daughter, a citizen!!
Our nation has faced economic challenges in the past and survived. The spirit of truly great Americans has been the driving force that has carried us during good and bad times. Now we are called to embrace and personify that spirit. If we let our challenges get the better of us, we will be letting down both past and future generations. Let us collectively make sure to fight the fight that made this country great.
God Bless America!!
LD
Unemployment Report July 2, 2009
Posted by Larry Doyle on July 2nd, 2009 9:02 AM |
The widely anticipated July Unemployment Report covering the month of June was just released. Let’s dive right in and take a look at the numbers . . .
Unemployment Rate
April 8.5%
May 8.9%
June: 9.4%
July: 9.5%
> LD’s comment: consensus forecast was for the rate to move to 9.6%. However, it is now widely regarded that this rate will not only go into double digits soon, but then stay there. Why? The workforce is going to grow as individuals who would have retired stay employed or look to reenter the workforce.
Non-Farm Payroll (click here for definition of this term)
April: loss of 663k (revised from -663k to -616k and back to -652)
May: loss of 539k (revised from -539k to -519k…thanks AK!!)
June: loss of 345k (revised to -322k…thanks AK!!)
July: loss of 467k
> LD’s comment: this number is decidedly worse than the forecast of a loss of 365k jobs. Revisions to prior months were mildly positive adding 8k jobs. Overall assessment of this number is ‘no green shoots’ here.
Average Hourly Earnings
April: +.2
May : +.1
June: +.1%
July: — (i.e unchanged)
> LD’s comment: no surprise that there is little wage pressure …the annual increase in wages of 2.7% is the lowest in 4 years.
Average Hourly Workweek
April : 33.2 hours
May: 33.2 hours
June: 33.1 hours
July: 33.0 hours
> LD’s comment: this number is a big deal!! The 33.0 hour workweek is the shortest workweek since 1964!!! What does this mean? An indication of no pickup in orders or inventory pickup. This number combined with the hourly earnings is an indication that retail sales will remain weak as consumers continue to be constrained and insecure about their future.
Further Color: The auto industry lost 27k jobs last month. The industry has lost 335k jobs in total, a full third of the total employment in the industry. Manufacturing lost 136k jobs, professional and business lost 118k jobs, construction lost 79k jobs.
Long term unemployed, that is individuals out of work more than 27 weeks, now represents 30% of overall unemployed. This is very troubling. Bloomberg reports,
Unemployment will “remain painfully high for several more years,” Federal Reserve Bank of San Francisco President Janet Yellen said this week.
Market Reaction: equity futures have sold off sharply on this weak report. The futures were down approximately .2 right before the report’s release and are now down more than 1.5%. Interest rates have moved lower by 3 -4 basis points led by the front end of the curve. The dollar got hit marginally after the report as well.
I view this report as a “reality check.” What do I mean? The economy is in the process of adjusting to the lack of credit provided by the shadow banking system and that credit is not returning anytime soon.
In this economic environment, I believe unemployment is a leading indicator and thus I view this report as a sign that delinquencies, defaults, and foreclosures will continue to increase across all classes of debt.
Please track our work here at Sense on Cents via Twitter, Facebook, RSS feeds, or e-mail subscription. Visit and comment often!!
LD
Is Uncle Sam Manipulating the Equity Markets?
Posted by Larry Doyle on July 1st, 2009 8:41 PM |
I have been increasingly suspicious of the price action in our equity markets over the last few months. I have highlighted how the markets are dominated by technical flows rather than fundamental analysis.
I have tried to highlight these themes in posts including “The Greater Fool Theory” and “What’s Driving the Market?”
My jaw dropped upon watching a Bloomberg interview yesterday in which Joe Saluzzi of Themis Trading left nothing to the imagination. Please take the time to watch this clip and ponder exactly what Mr. Saluzzi is sharing. The entire video is outstanding but it gets very interesting at the 4:20 mark. Compare his assertions with the points I have raised in my aforementioned posts. (Hat tip to Zero Hedge for locating the video.)
The risks of playing in these markets remain extraordinarily high.
LD
Uncle Sam Just Winked at Citi’s Credit Card Rate Increase
Posted by Larry Doyle on July 1st, 2009 3:57 PM |
Did Citigroup just pull a fast one?
An issue impacting more Americans than their monthly mortgage payment is their monthly credit card payment. Obama has proposed legislation to limit banks’ ability to increase these rates. That legislation is not scheduled to be implemented until 2010.
In the interim, Obama is working on implementing a Consumer Financial Literacy Program to protect consumers from usurious type behaviors by financial institutions. An example of this behavior is reported by the Financial Times, Citi Raises Card Rates on Millions:
Citigroup has sharply increased interest rates on up to 15m US credit card accounts just months before curbs on such rises come into effect, in a move that could fuel political anger at the treatment of consumers by bailed-out banks.
People close to the situation said that Citi, which is about to cede a 34 per cent stake to the US government as part of its latest rescue, had upped rates on between 13m and 15m credit cards it co-brands with retailers such as Sears.
Read that again. Uncle Sam has a 34% stake in Citigroup. Suffice it to say without Uncle Sam’s bailout, Citigroup would be nonexistent. Uncle Sam is clearly the major shareholder in Citi. As such, management can not make any substantial decisions without Uncle Sam’s blessing. (more…)
Barney Frank: “…Now They’re Starting to Hate Me…”
Posted by Larry Doyle on July 1st, 2009 12:21 PM |
U.S. Rep. Barney Frank (D-MA), House Financial Services Committee Chairman
Barney Frank should not be so presumptuous to think that it is just “now” that a large percentage of America is starting to hate him. The displeasure, if not the contempt, for Barney and his minions who have run our country into the ground over the last twenty years is soaring!!
As the Wall Street Journal reports this morning, Finance Lobby Cuts Spending as Feds Targeted Wall Street:
Wall Street’s spending on efforts to influence policy making diminished at the start of this year as the image of financial institutions has suffered with lawmakers and the public. Some of the sector’s major advocate groups lost funding and staff. Their spending declined just as the administration was hammering out its proposal for the biggest reorganization of financial-market oversight since the 1930s, details of which the White House released last month.
Industry lobbyists met last week to craft a response to the White House’s draft regulatory overhaul, particularly its creation of a consumer-oriented regulator for financial products, which could force major changes in how financial instruments are created and marketed. Whether or not the industry can influence this top administration priority, now that the plan is in the hands of Congress, will be a big test of its remaining clout.
The gig is up!! (more…)
June 2009 Market Review
Posted by Larry Doyle on July 1st, 2009 8:52 AM |
A cursory review of market returns for June indicates no dramatic shifts, so let’s go to the sports pages, right? No, don’t do that! In the Brave New World of the Uncle Sam economy, every day, week, and month provides historic developments both above and below the surface. How does one possibly navigate the hills and valleys of the markets and economic landscape? Welcome to Sense on Cents!
I had forecasted in the Sense on Cents May 2009 Market Review:
Add it all up and I think the following will occur:
– equity markets will now move sideways in range bound fashion;
– the bond market will move lower in price, higher in rates;
– the dollar will gradually decline;
– our economy will be filled with more stops than starts.
Let’s review the stat sheet, assess our May calls, and forecast what we see on the horizon. As we move along, let’s continually remember the largest player in our markets – both literally and figuratively – is none other than Uncle Sam himself.
Pimco’s Bill Gross said a few month’s back, “you should keep the big uncle in clear sight and without back turned.” The Wall Street Journal reported just yesterday in Inflation Fears Seem to Be, Well, Inflated:
Given the Fed’s heavy and unpredictable hand in the market lately…
Yes, Uncle Sam is casting an ever larger shadow across our economy and markets. Let’s navigate . . .
Market Returns:
Equities: the major market averages (the DJIA and S&P 500 especially) ended the month largely unchanged. In fact, the S&P 500 ended the month exactly unchanged. That said, the markets had an overall range of approximately 6%-7%. Why so volatile? Primarily a continuation of technical flows of funds, while the economic fundamentals remain decidedly mixed.
The tech heavy Nasdaq continued to outperform given some positive earnings developments (e.g Oracle) and lessened debt burdens. Given the Nasdaq’s dramatic outperformance, I would be reluctant to add exposure to this sector.
Sense on Cents’ self-assessment of May call: very solid
Bonds: while the 10yr Treasury ended largely unchanged on the month, it experienced a major selloff and actually broke above the 4% level for a short stretch mid-month. The upward pressure in rates, about which Sense on Cents wrote extensively, raised major concerns about potential inflation, economic recovery, and the equity markets.
Rates came back down over the last week. Cooler heads prevailed, right? Or did that “heavy and unpredictable hand of the Fed” go to work? Sense on Cents feels strongly that the Fed managed to move rates lower via quantitative easing and working with Treasury which had redefined indirect buying in Treasury auctions (“Turbo-Tim Takes ‘Indirect’ to a Whole New Level”).
While the government bond sector did post slightly negative returns for the month, the credit sensitive sectors of the bond market (corporates, high yield, municipals, and mortgages) did post low single digit returns. What is driving cash into these sectors? The fact that the Fed and banking system at large are holding short term rates (including savings rates and CDs) at near zero or marginally above is literally compelling both consumers and investors to seek some degree of return elsewhere. That money is flowing into these bond funds as investors remain extremely concerned about the economy and equity markets.
Are investors being lured into a potential trap by investing in bonds? I believe they are. I do not see the pressure of global government deficits along with refinancing pressures throughout the economy abating anytime soon.
Sense on Cents’ self-assessment of May call: fair (more…)
