Bill Gross.. Unleashed

Bill Gross is the co-CEO of the gigantic investment firm Pacific Investment Management Co, otherwise known as PIMCO. This company is about as big as any bank in America. Bill Gross himself is a very intelligent, very soft spoken guy who is very careful what he says when microphones are near. Last May, when Greece was going under, Bill described Greece's financial position as "challenging", when most were using terms like bankrupt, basketcase, hopeless etc.

Thus the letter he released yesterday was utterly shocking. It appears that Herr Gross just had his "Jerry McGuire Moment", empty flask and all. It's a long letter, aimed mostly at the worthless politicians we elect; I'll just post some of the more interesting comments: "We are being conned, folks.. by Republican and Democrat alike. Shame on them and of course shame on us. We're getting what we deserve. Vote NO in November.. no to both parties. Vote NO to a two party system that trades promises for dollars and hope for power, and leaves the American people high and dry". A little further down: "We are, as even some Fed Governors admit, in a 'liquidity trap' where interest rates or trillions in QE2 asset purchases may not stimulate borrowing or lending. Escaping from this liquidity trap might be impossible, much light trapped in a black hole". A tad further down another shocker: "Check writing in the trillions is not a bondholder's friend, it is in fact inflationary, and truth be told, somewhat of a Ponzi scheme. Public debt, actually, has always had a ponzi-like characteristic. Now, however, with growth in doubt, it seems the Fed has taken Charles Ponzi one step further. The Fed is, in effect, telling the markets not to worry about our fiscal deficits because it will be the buyer of first and perhaps last resort. There is no need.. as with Charles Ponzi.. to find an increasing amount of future gullibles. We'll just print the money and write the checks ourselves. I ask you.. has there ever been a Ponzi scheme so brazen ? I call it the Sammy scheme, in honor of Uncle Sam and the politicians that we elect every two years" Lastly, he shoots us a prediction: "The Fed wants to buy, so come on Ben Bernanke, show us your best and perhaps last moves on Wednesday next. You are doing what you have to do, and it may or may not work. Either way, it will likely signify the end of a Great 30 year Bond Bull Market"

Remember, PIMCO manages nearly two trillion dollars in wealth. Imagine if the CEO of Citibank had stood up and said such things, or Goldman's CEO. They'd be run out of Wall Street by way of a swank rehab clinic confessing sins alongside Charlie Sheen. Probably a good thing Bill's company is located in California. In that last comment, what he's saying is that the interest rates the US Government pays on its Bonds will have to rise, and perhaps precipitously.

In other news, Jon Hilsenrath of the WSJ (otherwise known as Bernanke's publicist) came out with an article today suggesting that QE2 might actually disappoint.. in the $200 billion neighborhood. If this is so, why even bother ? I don't believe this. If Bernanke is going to go thru the hassle (and the expected public flailing) of doing more money printing, he's going to do it right. I still look for another trillion. If it is indeed a trillion or more, I look for the ten year US Bond to go south of 2%. with mortgage rates headed near 3% even. In yet more commentary from people of note, Peter Orszag, Obama's former OMB Chief, had this to say about Bernanke's upcoming PrintaPalooza: "by perpetuating an artificially low 10 year government bond rate, the Fed maybe delaying the very fiscal policy action that the nation most needs while doing little to boost an economy who's primary problem is not high long term interest rates"

Ben's friends are becoming fewer and fewer in number. But how much of this is his fault ? He's charged with inducing an economic recovery.. at the same time that the US Government needs to borrow one dollar out of every three it spends.. and at a very low rate.. to keep itself solvent. Ben does not have the power to take a chainsaw to the budget, recall troops home from abroad, slice entitlements or lower the capitol gains taxes, all of which he has in the past told Congress it desperately needs to do. The US Gov't simply spends money like a drunken sailor and tell Ben to fix it all. If he was'nt making a bazillion dollars a year, I myself would pity Mr.Bernanke.

Presidential Holiday

I generally try and stay away from politics on this blog unless something really torque's me wrong, but today is one of those days. I came across an article today gave some of the details of Obama's upcoming trip to India. During a time of economic Depression for most of us, the details of this simply boggle the mind: "To ensure fool-proof security, the President’s team has booked the entire the Taj Mahal Hotel, including 570 rooms, all banquets and restaurants. Since his security contingent and staff will comprise a huge number, 125 rooms at Taj President have also been booked, apart from 80 to 90 rooms each in Grand Hyatt and The Oberoi hotels. The NCPA, where the President is expected to meet representatives from the business community, has also been entirely booked. The officer said, “Obama’s contingent is huge. There are two jumbo jets coming along with Air Force One, which will be flanked by security jets. There will be 30 to 40 secret service agents, who will arrive before him. The President’s convoy has 45 cars, including the Lincoln Continental in which the President travels.” Since Obama will stay in a hotel that is on sea front, elaborate coastal security arrangements have been made by the US Navy in consonance with the Indian Navy and the Coast Guard. “There will be US naval ships, along with Indian vessels , patrolling the sea till about 330-km from the shore. This is to negate the possibility of a missile being fired from a distance,” the officer said"

Now I understand the need for security, but really ? Could'nt they have simply arranged a meeting between trade officials in a hotel in downtrodden Detroit ? After a little digging, I came across a list of Obama's vacations this year:

-Full family Christmas and New Years in Hawaii.

-March spring break-first lady Michelle Obama, mom Marian Robinson, and both daughters hit Broadway.

-Memorial Day in Chicago with the family.

-Three days in July in Maine, primarily tony Bar Harbor.

-Last week, the president traveled to Chicago for a birthday party with Oprah and others.

-Michelle and Sasha spent much of last week on Spain's southern coast, ending it with a trip to Majorca to meet the king and queen of Spain.

-Florida this weekend for a night on the Gulf Coast.

-August 19-29 on Martha's Vineyard.

The Obama's are also known to throw large, elaborate celebrations at the White House, mostly for personal friends, sports legends and the like. He also does a lot of golfing as I understand it. To say that these vacations are both exorbitant and in poor taste is the height of understatement. I dare say that most Americans would resent the hell out of this very Regal Presidency in the face of such misery on Main Street. It's not a Democratic thing; Truman was frugal to the point of fault, whereas Reagan was also quite elaborate, as were the Clintons. Geo W Bush nearly always went home to his ranch in Crawford. The difference is, these were not times of Depression. Real unemployment (U6 measurement) is near 17%. The Federal deficit is (again) north of $1.4 trillion. To my mind, it has to do with the man's ego and the lifestyle he believes he deserves at a time when the nation can ill afford it. How about we balance the budget, not indebt my grand children.. then talk about vacations ?

Frazier-Lemke II

In the midst of the Depression, North Dakota Senator Lynn Frazier and North Dakota Rep William Lemke, with the blessing of FDR, introduced the "Frazier-Lemke Farm Bankruptcy Act" which was passed on 28 June 1934. This act effectively delayed the banks right to repossess a farmer's land for five years, though the farmers did have to pay the banks rent, with the amount determined by a judge. It was extended until 1949. Other measures adopted by individual states and the creation of the Home Owners Loan Corp eventually prevented about 90% of all foreclosures from 1934 onwards. For many banks, this was a crushing blow, though it must be said that this act did provide societal stability, which was under far more stress than most of us realize. The Nebraska state capitol was stormed by angry farmers. 25,000 famished war veterans camped in front of the US Capitol were charged with naked sabres by the US 5th Cavalry.. led by one George Patton. Repossessing a home took a lot of courage; many such repo agents were shot; in many cases, the local police refused to help the agent. Banks had shut down in most states; most states in the deep South could'nt pay teachers. In the Depression, a very large part of the nation's food was produced by small farmers, and a decent portion of the population was indeed rural. In many ways, Frazier-Lemke was in large part responsible for keeping the nation from falling apart, which Eleanor Roosevelt fully believed would happen.

Here in the Great Recession {Depression if you are not on Wall Street or Government employees} something has arisen in the last week or so that could lead to the passage of something akin to Frazier-Lemke. The first is the forclosure clusterf*ck, which I explained in my last post. Second is the impending QE2 (Print to Infinity), which promises to, in one way or another, destroy the value of the US currency. The banks, in their haste to foreclose and sign bad mortgages, left some pretty serious errors in the paperwork. Some of it is outright fraud.

Today, a couple in Simi Valley,CA.. Jim and Danielle Earl, upon advice of their lawyer, forcibly repossessed their foreclosed home, which had already been resold to another buyer. The police, stumped as to what was actually legal, went about their business of eating doughnuts and watched helplessly, especially after the lawyer called in the local media. This comes on the heels of Bank of America's announcement to halt all foreclosures, with JP Morgan, Ally and Wells Fargo doing so in about half the states. On Fox News Sunday, US Rep Debbie Wasserman-Schultz (D-FL) went on to advocate a complete ban on foreclosures on a family's primary residence. Increasing numbers of articles are coming out advocating this foreclosure ban as well. For millions of Americans, such a ban would seem to be a Godsend. The momentum is building; if it keeps building, it's going to get proposed in a bill in Congress. Something in the same vein as Frazier-Lemke, whereby people would simply be ordered to pay a percentage (say 35%) of their take home pay to avoid foreclosure on their homesteaded property. All second homes and vacation cabins would be, however, fair game for repossession. President Obama, already under severe pressure due to the economy and from his own party, would almost have to support it. The Republicans, usually on the side of big business, would likely oppose the deal.

The problem is, today's banking system and mortgage markets are vastly different than they were in the 1930s. In the 1930s, the bank loaned you the money (usually you would need 20% down) to get the home and you paid the bank back. Today, the "right to be paid back" on the mortgages are rolled up into what are known as Mortgage Backed Securities, which are packaged and sold by companies such as Goldman Sachs, JP Morgan and Wells Fargo, and then sold to investors.. including these very same institutions. The MBS market is in the trillions of dollars in size. Worse, these same banks wrote Credit Default Swaps on these MBS.. and these CDS's also amount to many trillions. If something similar to Frazier-Lemke were to pass, these MBS's would become nearly worthless as they no longer entail the "right to be repaid". The financial tsunami this would unleash could very well crash the entire financial system.

My bet: Frazier-Lemke II is not enacted due to the incoming Republican House majority; Obama thrashes the Repubs for being "pro-business" and it's quietly buried. But there is the possibility that it's actually passed before the Repubs take office, despite the howls from Wall Street. Many Republican Congressmen are from states like Nevada, California and Florida where foreclosures are highest. In such states, opposing Frazier II would be political suicide.. and they might simply sit this one out, allowing it's passage. The Senate would be a tougher nut, but it is in Democratic hands and there are a few liberal Repub Senators. If it gets past both houses of Congress and arrives at Obama's desk, he will have the most painful of choices.. help his constituents and possibly crash the system or commit political suicide and veto it. The pressure is building to "do something" about foreclosures. Interesting times indeed.

Foreclosure Clusterf*ck

Over the last week or so, there has been a huge mess brewing in the foreclosure processes; Rep. Alan Greyson (D-FL) has called for Congressional inquiries. On Wednesday, Florida halted all foreclosures. Today it got a lot worse: California Attorney General (and gubernatorial candidate) Jerry Brown called for a similar moratorium in California and said he was in talks with a slew of big banks: Wells Fargo, JP Morgan and Bank of America amongst them. New Mexico's AG called for the same.

The following is from one Janet Tavakoli, a noted financial expert and author, on why: "This is the biggest fraud in the history of the capital markets. And it’s not something that happened last week. It happened when these loans were originated, in some cases years ago. Loans have representations and warranties that have to be met. In the past, you had a certain period of time, 60 to 90 days, where you sort through these loans and, if they’re bad, you kick them back. If the documentation wasn’t correct, you’d kick it back. If you found the incomes of the buyers had been overstated, or the houses had been appraised at twice their worth, you’d kick it back. But that didn’t happen here. And it turned out there were loan files that were missing required documentation. Part of putting the deal together is that the securitization professional, and in this case that’s banks like Goldman Sachs and JP Morgan, has to watch for this stuff. It’s called perfecting the security interest, and it’s not optional"

Just how bad is this ? It could be very, very bad for big banks.. and thus taxpayers. Zerohedge's prediction which, at the current rate of decline and given the propensity of Americans to sue, might just come about: "We predict that within a week, all banks will halt every foreclosure currently in process. Within a month, all foreclosures executed within the past 2-3 years will be retried, and millions of existing home sales will be put in jeopardy."

This would be a big blow to banks who are big in mortgages; Wells Fargo and Bank of America in particular; their very survival will certainly come into question as it's my guess that to solve this, the foreclosed owners would be granted a tidy sum by these banks.. tens of thousands each in damages.. for millions upon millions of people, perhaps reaching a couple hundred billion dollars in total. In the end, I believe the banks, with an assist from Big Ben Bernanke, will survive, but with a gaping hole in their portfolios. If these banks no longer want to do mortgages, others will step up into the gap. Perhaps they'll even get it right and not defraud people.

In other news, today's unemployment report was brutal.. sort of. It was intended to be that way; it opens up the door for Bernanke to announce his QEII on the day after the election. The FX, commodities and stock markets have already priced this one in, and they will not be disappointed. Us serfs, on the other hand, might not like the rising prices at the store and gas pump. But then again, nobody really cares about serfs; America's top to bottom, trickle down theory isn't reaching those at the bottom anymore.. and neither will this upcoming action. This has, over the last week or so as the FX markets have taken this in, set off a mini currency war, with Big Ben and China on one side and the rest of the globe on the other. Brazil, Korea, Peru, Japan, and a few other smaller nations have taken steps to halt the rise in their currencies. The ECB will also not sit idly by forever. "Beggar Thy Neighbor" might be in the early stages: http://themeanoldinvestor.blogspot.com/2009/11/beggar-thy-neighbor.html

Peak Oil

One of the most important {if not the most important} issue facing not only the world's economy but it's ability to feed itself is the issue of Peak Oil. Oil is not a renewable resource; there is a finite supply of the black gold. Peak Oil is a theory whereby the demand for oil begins to outstrip the supply. It's not a question of if; everyone knows this day is coming. The question is when, and what we're going to do about it.

A video produced last year by Michael Ruppert called "Collapse" brought this issue to my attention; it was a deeply disturbing movie with apocalyptic predictions regarding the end of what he calls The Age of Oil. But is it really all that bad and how soon will it actually hit ? Recent studies by the German military, the US military, Honda, Lloyds of London and a host of others are suggesting that at current rates, this inflection point will be reached in 5-10 years.

Why so serious ? Simply put, oil is used for nearly everything. All grains produced in the US {and most of the world} are planted, sown and harvested with gasoline engine machines, riding on tires made partly of oil, using gasoline powered airplanes which spray oil based pesticides on the crops. It's then trucked from destination to destination by diesel rigs and perhaps to other nations using gasoline propelled ships. Plastic is an oil based material.

In my opinion, a large part of the reason the US invaded Iraq was for the oil; there was a task force set up by then VP Dick Cheney which detailed all of Iraq's oil facilities and possible new oilfields months before the troops were sent in. China today is entering into production arrangements with a number of African nations to secure their future supply.

How bad and serious is this ? Is it as bad as Ruppert suggests ? While I think the change will be drastic and difficult, I do believe it's something that can indeed be overcome.. if wars over the stuff don't destroy us all.

First off, much of it is being used wastefully; all the plastic bags we now use could be scratched. We import grapes and other needless luxuries from all over the world, which must be shipped and transported to market. Things like plastic plates and other toys are not needed. The list is endless; I believe that this wasteful usage will come to an end; wooden plate sets, paper bags and other such things will replace them, eliminating perhaps 10%-15% of all oil usage.

The biggest single use of oil today is for engines, car engines in particular. But this year.. in fact this month I believe.. Nissan is introducing the Leaf, an electric car. GM is countering this with the Volt. I believe that these are just the beginning, though these advanced batteries use rare metals in their production. The Prius and other hybrid cars will further the cause. I believe that between ending these needless luxuries and the advances made in electric cars will cushion the impact of Peak Oil long before we are forced to curb food production.

Ruppert's video also made mention of the two most recent examples we have of when the oil stops flowing: Cuba and North Korea. With the collapse of the Soviet Union, these two nations, utterly dependent on the Russians for oil, had to learn to live without the black gold. North Korea, as we have seen, was utterly unable to make the adjustment; millions perished in famines. But Cuba did not.. they began a program encouraging all citizens to plant vegetables and other crops anywhere they could.. even rooftops. After a few lean years, Cuba survived and even prospered. Of all of Fidel's actions, it was this single program that saved his nation from becoming Ethiopia. In showing us the way forward, Fidel might unknowingly have given us hope for our own future.

Unfortunately, in a world competing for a decreasing resource, my fear is that countries like the US and China that have the financial might will use it to force poorer nations to simply do without. We might have a situation whereby we here still buy plastic toys for our kids but simple farmers in Africa are forced to give up their gas powered plows and shackle oxen once more. Not all nations are blessed with abundant farming lands.. not all nations can become Cuba; the transportation and production of food might become more expensive.. too expensive for some nations. In short, we might see a situation whereby large areas of the globe are literally starving in order to supply the richer nations with toys. I hope to never see such a day, but as I take a look at our current state of affairs, I fear this gruesome day nears.