Vigilant Investor

“The trouble about man is twofold. He cannot learn truths that are too complicated; he forgets truths that are too simple.”
– Rebecca West

John Crudele has a fine article updating folks on recent news making the rounds (Wall Street Journal: ) that new Treasury Secretary and former Goldman Sachs CEO, Henry Paulson, is ratcheting up the day to day operations at the shadowy Working Group on Financial Markets (referred to often as just “the Working Group”). Created by an executive order from Ronald Reagan in 1988 in response to the massive and sharp plunge of the U.S. equity markets in 1987, it is dubbed by critics as the “Plunge Protection Team” (PPT). The stated goal of the order was to “enhance the integrity, efficiency, orderliness, and competitiveness of our Nation’s financial markets” as well as “maintaining investor confidence.” As best can be discerned from the shadowy group is that the PPT every now and then deems it necessary to intervene in the open market to correct the fallibility of market emotion. Traders in the trenches often talk about mysteriously large and loud “Hail Mary trades” that appear in the options markets providing support at key levels for the various indexes. Many chalk a few of these up to the PPT.

Well, we’re told by the Wall Street Journal that Paulson wants the PPT to meet every six weeks instead of its ordinary every couple of months. He’s stressed that he wants the team to expand its work on global competitiveness of the US markets. Easing the absurd regulation is not a bad thing, although one might question why this is not a matter for a less secretive part of the administration that handles the economy.

But the WSJ also points out the real kicker: “Mr. Paulson is having the Working Group look at the systemic risk posed by hedge funds and derivatives, and the government’s ability to respond to a financial crisis, officials said… He has ordered his chief of staff, Jim Wilkinson, to oversee the creation of a Treasury command center to track markets world-wide and serve as an operations base in a crisis. The center would revive a market-monitoring room closed in a 2003 budget cut. Mr. Wilkinson has relevant experience: A former spokesman for the U.S. in Iraq, he was a White House aide during the Sept. 11, 2001, terrorist attacks.”

Woahhohhhoahhh!

Get that right? A “command center” for intervening in global markets? What is it that they’re fearing that were not being told about? How will they go about doing what they do and who will be in charge and why? Don’t forget, higher ups in the Federal Reserve supported intervention in the markets to fix problems back in the day when the PPT was created. From where do you think the purchasing power to save the market and the economy – all of us, from all our imperfections — will come? As G. Edward Griffin points out in his book, The Creature from Jekyll Island (the insidious details of Federal Reserve and Central Banking), the preordained name of the game is bailout!

Skeptics point out that the collapse that started in 2000 proves there is no PPT or, for that matter, its sibling, the “Greenspan Put”. But defenders point out that such intervention never has the power to totally halt a market hell-bent on making a downward move, but it can shore up a market that is thinking about it. But once the dam breaks, then you really have to look out.

Are you taking note?

You can read Crudel here.

You can read the WSJ article here: Paulson Pulls for U.S. Markets

It seems that the idea that the dollar may not be all it’s cracked up to be is entering mainstream conversation, at least outside of the largely overconfident U.S. perception vacuum. Der Spiegel, one of Germany’s largest news outlets, published an October 25 piece titled “America and the Dollar Illusion.”  Says the Spiegel, “The extent of this self-delusion can be read in the balance sheets of the banks: Almost no one is saving money in the United States today. The US foreign debt grows by about $1.5 billion every weekday and has now reached about $3 trillion. Private household debt, both at home and abroad, has reached $9 trillion — and 40 percent of these debts has been incurred since 2001. The Americans are enjoying the present at the cost of selling off ever larger chunks of their future. Arguably, the imminent economic crisis is the most thoroughly predicted one in recent history. Rather than refuting the crisis, the current US economic boom merely heralds it.”

That’s just the tip of the iceberg. Give it a read.

Tonight 9:00 p.m. EST we’ll be interviewing infamous blogger, 24-year-old Casey Serin, of I Am Facing Foreclosure.com. We’ll be discussing how Casey got himself into a situation where he was given $2.4 million for eight housing purchases, all with no money down. Today he’s upside down in the five remaining homes he owns, and is facing foreclosure. More importantly, we’ll spend most of the show discussing the systematic problem to the U.S. banking system that enabled Casey’s situation to exist.

For information on listening to the show, chatting among other listeners, or asking questions of our hosts and guests, click the talkshoe icon below.

At Vigilant Investor, we like to say that we help our readers connect the dots in order to get the bigger picture. That’s important, we believe, because many of the structural problems facing the U.S. economy are being either ignored or too indifferently dismissed as of little concern, including many issues that 25 years ago would have sent shudders through the markets. Granted, these changes have not happened overnight; they’ve emerged glacially, albeit methodically over the last 90 years with the shift of gears into a full-blown debt-dependent, fiat-currency economy.

Wall Street and most economists are largely nonplussed by the numerous economic dislocations and distortions we talk about on a near daily basis here at Vigilant Investor. To quantify such sentiment, we like Anais Nin’s observation on relativity: “We do not see things as they are; we see them as we are.” You see, if you’re falling from the top of an 80 story building, just because you haven’t hit the ground doesn’t mean you don’t have a serious problem as you pass floor number 40. Of course, in real terms our problem is made worse by the refusal of most players to even acknowledge the relevancy of dislocations and distortions — that the floors are passing us by. These issues have not yet presented a problem despite all the doom-and-gloomers warning of calamity, so we have grown accustomed to them. We are to conclude in this new era of high-end fancy finance that they’ll never present a problem. So just comfortably ignore them as they pass by.

Naked Shorting: Clearly Fraud

But we digress. Among the many potential economic concerns we speak of that ought to be monitored is that of the practice called “Naked Short Sales”, which takes place in the netherworld between security traders’ accounts and the back-office system that settles trades, transferring securities and cash between the markets’ brokerages, from buyers to sellers. Continue Reading »

It appears that the derivatives that measure the housing market are saying things are about to get much worse. Bloomberg has a decent article discussing these futures as indicators for the housing market. We discussed their predictive value a few days back, but so far, so good.

That’s in Dallas, according to the Dallas News… just another major metro area feeling the housing bubble fall apart. Says the article, “fueling the foreclosures are interest rate hikes, rising living expenses and consumer debt, and aggressive lending practices.”

Just as we said they probably would. Don’t go betting on a bottom any time soon.

“… – in sum, to remind central bankers themselves of what they are wont to warn others about: excesses of zeal and confidence. Among other things, I found myself reminding my fellow conferees that history provided little support for the simple proposition that the creation of a central bank, in and of itself, would provide much assurance against inflation. Nor was there much evidence that we could look towards any simple rule book to determine when to ease or when to tighten, and the unknowns could only multiply in less developed economies with poorly functioning economies.We sometimes forget that central banking, as we know it today, is, in fact, largely an invention of the past hundred years or so, even though a few central banks can trace their ancestry back to the early nineteenth century or before. It is a sobering fact that the prominence of central banks in this century has coincided with a general tendency towards more inflation, not less. By and large, if the overriding objective is price stability, we did better with the nineteenth-century gold standard and passive central banks, with currency boards or even “free banking”. The truly unique power of a central bank, after all, is the power to create money, and ultimately the power to create is the power to destroy. …

– Former Federal Reserve Chairman, Paul Volcker, July 1994, in an address to a group of central bankers.

Our interview with G. Edward Griffin unfortunately had to be rescheduled. Our show was still an interesting discussion between hosts Johannes and Stephan Ernharth about the nature of the economy, recent market developments, and the credit bubble.   Download it at Talkshoe.com.

“Entrepreneurial judgment cannot be bought on the market. The entrepreneurial idea that carries on and brings profit is precisely that idea which did not occur to the majority. It is not correct foresight as such that yields profits, but foresight better than that of the rest. The prize goes only to the dissenters, who do not let themselves be misled by the errors accepted by the multitude. What makes profits emerge is the provision for future needs for which others have neglected to make adequate provision.”–Ludwig Von Mises, Human Action

Today’s news from the Commerce Department noted that housing starts were up by 5,9% in September. While that was good news compared to August, compared to a year ago the numbers were down dramatically — 18%. Still, the index of homebuilder confidence rose for the first time in a year.

Two points worth considering:

The recent drop in mortgage rates over the past few months may have boosted the housing starts as folks raced for one last dose of low rate building.

In credit bubble environments like we have, the number to focus on is the 18% drop. Apologists will tell you the market is still chugging along above 1.5 million starts on an annualized basis. What’s there to worry about with housing? From an economic standpoint, the 18% drop in related economic activity that will NOT be there this year.

All said, this figure is just one of many to watch. Separately, data from the Mortgage Banker’s Association showed that mortgage applications are down 11.4% from last year. In the last week alone, apps dropped for buyers by .40% and for refinances — crucial for the adjustable rate reset market — down by 5.3%. This shows a reversal in the refi boom over the last two months in the face of rising Treasury rates.

Current Mortgage Rates

Source: Bankrate.com

Tucked into the Financial Times yesterday was a small piece titled “SEC set to relax margin rules in effort to cut trading costs.”

Says the article,

“The move removes a key barrier to the competitiveness of the US capital markets as similar margin rules already exist in Europe, attracting increasing numbers of hedge funds to London….Grace Vogel, executive vice-president of member firm regulation at the NYSE, said the new account would use a margining system developed by the Options Clearing Corporation, a clearing house for the six US options exchanges. It would take into account when an investor’s exposure to one asset, such as an IBM stock, was already being offset by a position in another, such as an option on IBM stock.”

In some cases, Ms. Vogel notes, margin could be reduced to 15% if the recommendation is put into effect.

Offsetting positions as noted above seems harmless enough, but we are talking about leverage here — borrowing on credit. The problem with credit is that everyone likes to give it out when the sun is shining, but not when it starts to storm. Should a the storm be very severe, a few things could break and the already highly leveraged up system that we have globally could result in an ignition of a series of cascading defaults through the derivatives markets, the highly complex financial instruments Warren Buffet refers to as “financial weapons of mass destruction.”

Talk of a locking of the credit markets might come across as worrying in the extreme, but it should not be forgotten that in 1998 a single hedge fund, Long Term Capital Management, nearly ignited just such a scenario. The recent collapse of the hedge fund Amaranth, in September, was a fraction of size of the LTCM blow up, but indicates to us that these problems are lurking not too far down in the markets. That is the risk of fractional reserve banking systems and credit markets — lenders don’t have on hand the cash deposits of their clients because they’ve lent it all out in order to earn interest on it.

Through that lens, we worry that 15% margin requirements into an already highly indebted U.S., with an already highly leveraged market system, is just adding fuel to the fire.

“[Regarding] the level of asset prices in the United States, an additional comment is probably needed. Normally, the money for asset purchases comes from the savings out of current income. In the U.S. economy, with savings in negative territory, all asset purchases essentially depend on available domestic credit and capital inflows. Buying assets on credit used to be the exception. In America today, it is the rule. For good reasons, the Fed is fearful to make money truly tight; it would crush the markets.”
– Dr. Kurt Richebächer

On our next show host Johannes Ernharth will be interviewing American political commentator, writer and documentary filmmaker, G. Edward Griffin, perhaps best known for his book The Creature from Jekyll Island – a scathing expose of The Federal Reserve, and the international Central Banking Cartel . Mr. Griffin is the President of American Media, a publishing and video production company in Southern California, and as the founder and creator of the website Reality Zone. He has been involved as a founder of and leader of a number of organizations in health, media, and politics of which the most prominent is American Media and Freedom Force International.

Don’t miss the show, and be sure to call in with your questions! Wednesday October 18, 2006, 9:00 p.m.

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