The Big Week

In thinking about what I was going to post this morning, the two obvious hot topics came up: the US mid term elections and Ben's upcoming QE2 on Wednesday, both of which I'll cover below. But as I looked at the morning's financial news, something so astounding and right jumped out at me. The Governor of the Bank of England, Mervyn King, has proposed changes so astounding that it quite obviously made my headline. The good Governor has proposed four reforms:

1. Forcing the riskiest banks to hold capital "several times the magnitude" of requirements at present.

2. The Volcker Rule: enforcing the breakups of banks into standard and speculative arms.

3. The Kotlikoff Rule: forcing banks to match each pool of risks with an adequate reserve of capital and preventing losses in one arm from spilling over into another one.

and the duzzy:

4. "Eliminating Fractional Reserve Banking explicitly recognizes that the pretense that risk free deposits can be supported by risky investments is alchemy. If there is a need for genuinely safe deposits the only they can be provided, while ensuring that cost and benefits are fully aligned, is to ensure that such deposits do not coexist with with risky assets"

To wit: In the current system we all have, for every dollar deposited in a bank, the bank is entitled to loan out 10 dollars. This produces what's known as a 10-1 leverage ratio. If the bank therefore loses 1/10th of their loan portfolio, the bank is toast. In Europe, this figure approaches 40 and 50-1. In bigger US banks, the ratio is about 25-1. This system is how we hopelessly indebted ourselves. King's proposal would eliminate this.. for every dollar in the bank, the bank can loan out only that dollar.

Back here in the US, Ben Bernanke has talked about going the exact opposite direction: "The Federal Reserve believes that it's possible that, ultimately, it's operating framework will allow the elimination of minimum reserve requirements, which impose cost and distortions on the banking system"

My belief is, quite obviously, that fractional reserve banking must end, as do all leveraged transactions. It's these two things that blew up Wall Street.. and the problems are still there. The current system allowed our nation to hopelessly indebt itself. King's solution, if imposed, would make it impossible to so indebt ourselves. For even suggesting these things, I believe Her Majesty should Knight Mervyn King. He probably recieved an ugly text message from Ben this morning.

Which brings us to Wednesday morning.. Ben Unleashed. The question of the day.. how much. Ben's idea is to do it BIG TIME. But according to his mouthpiece {Jon Hilsenrath of the WSJ} he seems to be running into some serious resistance from the other Fed Governors and possibly China, who owns over $2 trillion in USD denominated assets and would'nt like to see then depreciated by 10% just this week. So.. my fearless prediction: $600 billion over the next six months, with a note attached saying that more maybe necessary. Look for Japan and others to either pick up the pace of money printing to keep up or impose yet more capitol controls. At the end of the day, this money has to go somewhere.. and the stock markets are the likely recipients. But none of this will actually trickle down here to us serfs. For us, the price of gas and food will continue to creep northwards and the unemployment rate will remain stubbornly high. For us, there is no recovery. For Wall Street and Government, however, the recovery is going splendidly.. bonuses and benefits have never been better.

Now onto the last hot topic.. the US elections. It's known here in the States that the Republicans will body slam Obama and the Democrats; it's a near certainty that the US House of Reps will go over to the Republicans, with a slim chance of the Senate going over as well. I fully believe this as well.. the House will flip, but the Dems will maintain a slim majority in the Senate. This will bring about a few changes: first, there will be no more stimulus or bailouts. Second, Tim Geithner is likely going to be sacrificed, and rightly so. There is also the chance that ObamaCare will begin to be hacked down piece by piece.

Can we make Mervyn King our King ?

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 ?