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Archive for October, 2009: Financial Conservation
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Archive for October, 2009

The Cheerleaders vs. The Chicken Littles

October 30th, 2009 at 04:32 pm

There are those cheerleading type experts with the perpetual, frozen smiles who maintain that the necessary measures have been taken to deal with the financial crisis, the economy is now showing signs of recovery, all is under control and we're back on track with the market in rally mode since March leading the way. Then there are those labeled by the smiling ones as the Chicken Littles who are speaking up and saying, not so fast, it's not quite that simple.

Several posts back I provided a link to the PBS Frontline documentary,
"The Warning." The piece focuses on a woman named Brooksley Born who was the head of the Commodity Futures Trading Commission in the mid-90s. Ms. Born courageously raised major red flags to the Clinton administration and congress about the need to regulate financial instruments known as over the counter derivatives. As the documentary points out in detail, she was quickly labeled a Chicken Little and thrown under the bus by the big boys. This lack of regulation ultimately led to the crash of the derivatives market, and helped to trigger the financial crisis.

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It's interesting to note, going back to 1987, that some of the same power players and their proteges who are the stars of "The Warning" have remained in key economic positions in both the Republican and Democratic administrations that have followed to this very day.

The financial crisis literally froze the engine of our economy. Once an engine freezes up, it's not as simple as adding oil (read government stimulus racking up more taxpayer debt) and you're on your merry way. It has to be taken apart and rebuilt, which in the case of our economy will take a lot more time and digging beneath the surface than the cheerleaders are willing to admit.

Part of the process of rebuilding the engine of our economy will be to seriously question certain metrics and long-standing fashion trends in thinking that may no longer apply. For example, we continue to hear from the cheerleading experts the same old mantras chanted over and over again like the following: "A Jobless Recovery." With unemployment on the rise as the stock market rallies, this is like Wall Street sticking its big thumb -- that it has on the scales of the economy -- in the eye of Mr. and Ms. America on Main Street saying, "We're ok, you're on your own." Also, I'm trying to reconcile in my own mind how this fits with an economy that the same experts have to admit is based 70% on the consumer. If people are losing their jobs or know those who are, where's the incentive to keep the consumer engine revving at high RPMs? "The stock market is a leading indicator of the economy." Is this metric still accurate or reliable in a market where the controlling mindset has clearly had a generational shift away from the stability of long-term investing based on real productivity to one that is predominated by short-term, grab-and-run speculation that drives cycles of over-inflated "paper asset appreciation" -- think bubbles -- creating a volatile and unstable economic environment?

My personal favorite from the cheerful ones was when the latest bubble was exploding, they were broadcasting to the masses, "When your statement arrives, don't open it -- don't even go near your mailbox until we tell you the coast is clear."

The economy remains on thin ice and our margin for error is as slim as it has ever been.

In "The Warning" there is an interview with Michael Greenberger. Mr. Greenberger served as director of the Division of Trading and Markets at the Commodity Futures Trading Commission from 1997 to 1999. He currently heads the University of Maryland's Center for Health and Homeland Security and teaches the class Futures, Options and Derivatives at the University of Maryland School of Law. Following are some excerpts of that interview that was conducted on July 14, 2009:

"When I first walk in the door, Brooksley said to me, 'This is a $13 trillion market.' ... By the time in May 1998 that we actually try to do something about it, it is a $27 trillion market. By the time Congress in December of 2000 deregulates it, it's an $80 trillion market. As we sit here today, the market has dropped from above $600 trillion to $592 trillion notional value. It's dropped because of the meltdown. ...

And obviously, it went from $13 to $27 to $80 to $600 trillion because nobody's watching the market.

Brooksley had the conception that she wasn't worried about the rest of the administration. She was worried about the financial services industry, that we were effectively now going to say swaps are futures, the dirty words, and that this would meet a lot of resistance.


Because it meant that this multitrillion-dollar market would now have to be traded transparently with capital reserves, with fraud and manipulation requirements, with the regulation of intermediaries, and on organized exchanges rather than this private little gamesmanship where it was. ...

We aren't going to take it over. It's not going to be government-run, but it's got to be done transparently. Everybody needs to know what's happening. It's got to be overseen by a regulator who ensures that fraud and manipulation are not conducted within those markets. We've got to make sure that when people make commitments, they have the capital to back those commitments up.

...and we see the template -- crisis, worry, threatened reform, pull back from the crisis, 24/7 lobbying, all is forgotten.

Right now, all I can tell you is that the battle is evenly matched. You would think after everything we've been through there shouldn't be a battle; it should be understood. No, no, the financial services industry has organized itself and will pitch very, very hard for continuing to have these markets be unobserved by anybody outside of the banking system or their customers. No capital requirements, no fraud controls, no manipulation controls and no regulation of the intermediaries. It's going to be a close-fought battle."

Consider also that competitive economies around the world have had decades to send their generations to American universities and they have closely studied our innovation and formulas for success -- and, more recently, our formulas for failure. These competitors are now in a far stronger position than ever before to beat us at our own game.

The tentacles of this predicament that were carefully hidden from the general public eye have been taking hold and spreading throughout the system for decades. Naturally, those who were the architects and engineers of this deeply implanted structural rigging of taking risks with no skin in the game, what has been referred to as the "socialization of risks and privatization of gains", and who have profited greatly from their handy work, would prefer -- and will fight tooth and nail -- to essentially maintain the status quo. And as public scrutiny bears down, we, of course, are having to sit patiently and watch as the Cheerleaders put on display their standard unctuously dismissive attitudes, denial of personal responsibility and prepared spin as to how forces beyond their control brought us to the edge of economic meltdown. Not a problem, we know this movie by heart, and it won't be the last time we see it.

However, this time around, things are different. The Chicken Littles aren't going away with their feathers tucked between their legs. Public awareness is on a steady drum beat and growing. People from all sides of the political and social spectrums, from low to high-profiles, are uniting in their understanding of what and how much is at stake here. It took time to get into this mess and it will take time to reestablish ourselves in a healthier direction.

As Michael Greenberger put it, the battle is on and the template of crisis that some are counting on --worry, threatened reform, pull back from the crisis, 24/7 lobbying, all is forgotten -- is now facing challenges that are as formidable as the crisis calls for.

In any event, one thing is for certain: we cannot expect political will to take the lead until our non-partisan cultural will has first been established. This is what is meant by the old saying, "Great leaders follow."

The Rage of Anxiety

October 30th, 2009 at 02:53 pm

"But I can't help thinking that both the victim and the alleged killer are casualties of a treacherous economy, which continues to batter the ordinary American while the experts proclaim recovery is upon us."

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PIMCO's Bill Gross: Assets Are $15 Trillion Overvalued...Keep The Fantasy Alive

October 28th, 2009 at 05:16 pm

"PIMCO's Bill Gross with a great monthly letter. Here are the key points:

- Over the past 30 years, paper asset prices rose 2X as much as they should have based on economic fundamentals

- This was the result of leverage

-The asset price rise in turn pumped up the economy's fundamentals (Soros's reflexivity)

-The government wants to restore the "old normal" (2007) not the 'new normal' (slower growth as asset prices return to trend)

-Therefore... The Fed will keep rates at 0% for at least 18 months into sustained 4% growth

-Next year, when the inventory restocking effect wears off, 4% will be tough

Bill Gross:

In a New Normal economy (1) almost all assets appear to be overvalued on a long-term basis, and, therefore, (2) policymakers need to maintain artificially low interest rates and supportive easing measures in order to keep economies on the 'right side of the grass.'

Let me start out by summarizing a long-standing PIMCO thesis: The U.S. and most other G-7 economies have been significantly and artificially influenced by asset price appreciation for decades. Stock and home prices went up - then consumers liquefied and spent the capital gains either by borrowing against them or selling outright. Growth, in other words, was influenced on the upside by leverage, securitization, and the belief that wealth creation was a function of asset appreciation as opposed to the production of goods and services...

My point: Asset prices are embedded not only in our psyche, but the actual growth rate of our economy. If they don't go up - economies don't do well, and when they go down, the economy can be horrid.

To some this might seem like a chicken and egg conundrum because they naturally move together... if long term profits match nominal GDP growth then theoretically stock prices should too.

Not so. What has happened is that our 'paper asset' economy has driven not only stock prices, but all asset prices higher than the economic growth required to justify them..."

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Legalize It: Insider Trading Is a Victimless Crime...

October 27th, 2009 at 07:24 pm

"But of course, there's a reason why it's not legal. Allowing insider trading would annihilate the concept of a level playing field in the market. Altucher says hogwash. That's just an illusion. 'There's already no level playing field,' he says. This problem of insider trading is 'so widespread' retail investors are already at a disadvantage."

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America on a "Shaky Bridge Over a Volcano"

October 26th, 2009 at 04:28 pm

"A year after the financial collapse of 2008, indeed some firms are reigning in risky behavior.

'But, the rest of the financial industry does not warrant as much optimism,' says Leo Tilman, president of L.M. Tilman & Co. and author of 'Financial Darwinism: Create Value or Self-Destruct in a World of Risk.' 'We're seeing a lot of very similar behaviors that have led to the previous crisis.'

With a meaningful economic recovery facing an uphill battle, Tilman says it may require another bubble before serious financial reform takes hold. 'I'm thinking about the current environment. Unfortunately it's this shaky bridge over a volcano,' he says.

Meanwhile, Tilman points to three big themes:

- The timing of the next bubble will depend on the U.S. economy and the dollar.
- Economic signs point to extreme caution by mid-2010.
- Ultimately, we still need the right kind of transparency among financial institutions for true financial reform."

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Nouriel Roubini: Big Crash Coming

October 26th, 2009 at 01:20 pm

"Dr. Nouriel Roubini, professor of economics and international business at the Stern School of Business at NYU and chairman of RGE Monitor, is perhaps best known for his prescient predictions of the financial market collapse in 2005.

Index Universe ( You've said that you're worried we're already sowing the seeds of the next crisis. Where do you see that most directly?

Dr. Nouriel Roubini (Roubini): Well in commodities, I look at oil prices. They fell from $145 last summer, came down to $30 earlier this year and now they're back close to $80. But if I look at the fundamentals of demand and supply, demand is down to 2005 levels, supply and inventories are at all-time highs. In my view, the movement in oil prices is not fully justified by the fundamentals.

There are improving fundamentals. There is a global recovery. But that justifies oil going from $30 to maybe $50. I think the other $30 is all speculative demand feeding on it -- speculators and herding behavior. Last year, when oil was at $145, that killed the global economy. I worry that oil is going to go up above $100 for reasons that have nothing to do with the fundamentals of supply and demand. Oil at $100 would have the same negative effects on the global economy as oil did at $145 last year.

Last year, when oil was at $145, the global economy was still growing. Right now it has collapsed, and is recovering. Oil pushing above $100 would have nasty, negative real trade effects and real disposable-income effects on all importing countries:U.S., Europe, Japan, China, India; all the countries that were hit by the oil shock last year. So that's an element that is in my view totally speculative, and dangerous to the global economy."

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PBS Frontline - "The Warning"

October 21st, 2009 at 05:45 pm

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Time to start thinking Financial Conservation!

An infinite amount of time and resources are spent in making the language of conservation universal in its reach. As a result, the basic necessity of mindfully conserving and not wasting our natural resources has been firmly established. The Green Message is Everywhere. And we have seen how this message is truly effective when directed at the grassroots individual level.

It would be a small step, not a great leap, to apply this pervasive awareness of the core principles of conservation to our individual financial resources that are finite and equally important to our basic survival and quality of life on this planet. In so doing, we will provide a more reliable foundation as well as the example necessary to help ensure that current and future generations are prepared and equipped to Stay in Step with the Life Cycles.

It cannot be determined by anyone with certainty ahead of time how the timing of the markets -- up phase or down phase -- in any asset class will stack up against the timing of an individual's unalterable life cycles and the various levels of life responsibilities and obligations that kick in at each stage. Consider Core Asset Conservation whereby you first distinguish your core financial assets -- those assets necessary to keep you in step with the life cycles -- from non-core financial assets. Place core financial assets in financial vehicles that guarantee -- up front -- Safety of Principal and Locked-In Gains as achieved. Diversification of risks is a concept best applied to remaining non-core financial assets.

Granted this is not an approach suited for everyone, but neither was the much touted notion of "diversifying risks" of all of an individual's assets -- both core and non-core -- through the popular asset allocation models that lead many to believe they were protected and would have the money they were relying on to meet their various life needs as they arrived at the later stages of life. This obviously turned out not to be the case on a massive scale and a great number of people reaching across generations have been severely and, in many cases, unalterably damaged.

It is the trader/speculator mindset that created and dominates the current as well all other volatile economic environments of the past. Since we can't expect the historic profits now flowing to the savviest of the trader/speculator type to act as a disincentive to this type of behavior, it's anyone's guess as to when some kind of equilibrium will be restored to the markets. In the meantime, for financial journalist and the main stream media outlets they work for to continue telling the average investor in today's highly volatile and unstable economic environment that they are just going to have to run faster and do a better job of diversifying risks to keep up with the trader/speculators who had them "outgunned" from the start is flagrantly misleading and irresponsible.

All power and good luck to those who think they are well suited for big casino action; however, for the great many who are not so inclined or equipped and whose time and efforts for the greater good of everyone are devoted to making the real economy actually function, the playing field is not level and they remain at a distinct disadvantage.

In good faith and good conscience, more focus and attention in the mainstream media needs to be brought to this ongoing disconnect between Wall Street and Main Street.

Housing Better But Has Not Bottomed

October 14th, 2009 at 04:21 pm

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The Next Big Bailout? FHA Facing "Cataclysmic" Default Rates

October 13th, 2009 at 05:12 pm

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