Saturday, August 29, 2009

The American Way - Rewarded for Failure

It was "business as usual" for Wall Street Banksters this week as President Obama reappointed Wall Street's best friend, Ben Bernanke, as chairman of the Federal Reserve.

It looks like rewarding someone for short-run success, no matter how fleeting, has become the American way. This is true with regard to Wall Street bonuses and is apparently true with regard to the Federal Reserve chairman. Apparently Mr. Bernanke is being rewarded for continuing to give the "money addicts" on Wall Street all the money they need, no matter how many trillions of dollars it is.

No one seems to care anymore about what the consequences will be 5 or 10 or 20 years down the road of poorly thought actions. Apparently most Americans just live from episode to episode of their favorite "reality" program and ignore actual reality. Reminds me of how the Roman emperors kept the masses happy with bread and circuses.

The Federal Reserve under Ben Bernanke has made numerous mistakes. Ome mistake is to focus solely on inflation as measured by the Consumer Price Index or CPI which is "adjusted" by the government. The Fed has completely ignored the truly dangerous type of inflation - asset price inflation.

Housing and stock prices earlier this decade were rising too far, too fast and the rise was all due to borrowed money. But the Fed ignored it - apparently the Fed believed the debt would never have too be repaid.

In another example of Mr. Bernanke's muddled thinking, he has also put the entire blame for the financial crisis not on Wall Street and/or Washington, but elsewhere.

Mr. Bernanke puts the blame for the financial crisis squarely on the "global savings glut." It wasn't the US financial system which caused the problem, but savers around the world which caused the problem.

Yep, it wasn't United States that is to blame, it was some poor farmers in rural China who are saving meager amounts for their families' futures who caused all this financial chaos. Amazing!

And Mr. Bernanke continues making mistakes. What he is doing by monetizing massive amounts of US Treasury debt (and hiding it) will have dire consequences for the US Dollar and the economy down the road.

Here is the latest "game" being played by Ben Bernake and the Federal Reserve:

1) Foreign central banks sell US government agency debt out of their account.

2) The Federal Reserve buys those US government agency bonds with "funny money" created out of thin air.

3) Foreign central banks then use that very same "funny money" to buy US Treasuries at the next government auction.

4) Then the Fed and the financial media proclaim to everyone - "Look, all is well - look at the tremendous global demand for US Treasuries at the auction!

The numbers for global demand at US Treasuries auctions is as phony as a $3 bill. But it "looks" good and so Wall Street plays along and kicks the problem down the road.

Is it any wonder that both the Fed and Treasury secretary Tim Geithner are so dead-set against having a public audit of the Fed's books. Who knows what else will be discovered?

Tuesday, August 25, 2009

Obama's Idea of Change - Bernanke Reappointed

For a President who was voted in promising change, it sure looks like business as usual for the Wall Street banksters and their cronies, when it comes to the Obama Administration. It was "more of the same" today as President Obama announced he was reappointing Ben "Helicopter" Bernanke as chairman of the Federal Reserve.

What this country needed was a return to the "good old days" of the Federal Reserve when it was headed by William McChesney Martin, the longest serving chairman of the Federal Reserve. He believed that the job of the Fed was to take away the punchbowl just as the party gets going.

This is stark contrast to the Federal Reserve under Alan Greenspan and Ben Bernanke, who believe in always keeping the punchbowl full, no matter how "drunk" people get at the party and how dangerous their behavior becomes toward society at large.

The curious thing to me is how little or no debate took place over such a dramatic change in Federal Reserve policy. This shift in policy coincided with the replacement in the monetary policymaking process of old-style, market-savvy central bankers (often without formal economic training) with academics like Ben Bernanke.

By the way, William McChesney Martin was a career stockbroker who graduated from Yale in English, not Economics!

This new breed of economists in central banks have little real-life financial markets experience. And they are wedded to the crazy idea that markets are efficent, despite the recurrence of bubbles throughout history - a phenomenon that makes nonsense of this belief. Kind of like still believing that the Earth is flat.

On top of that, these acadmic central bank economists keep their focus solely on consumer prices and the phony CPI index. And they completely ignore the truly dangerous type of inflation - asset price inflation.

Expect more of the same -- horrendous monetary policy, blowing larger and larger bubbles (can you say Treasury market bubble?). The consequences will indeed be dire for the future of the United States.

Friday, August 21, 2009

The Coming Oil Crisis

The world may be headed for a catastrophic energy crunch that could cripple a global economic recovery because most of the major oil fields in the world have passed their peak production.

The scenario may come true according to Dr. Fatih Birol, the chief energy economist at the respected International Energy Agency (IEA). The IEA is charged with the task of assessing future global energy supplies by countries of the OECD – the Organization for Economic Cooperation and Development.

Recently, the IEA conducted a study of the global energy situation. The IEA study concluded that the global energy system was at a crossroads and that the era of cheap oil was over. Dr. Birol said that both the public and global governments seem oblivious to the fact that oil is running out faster than previously thought.

The study was the first-ever assessment of the world's major 800 oil fields, which cover three quarters of global reserves. The IEA found that most of the biggest fields have already peaked and that the rate of decline in oil production is now running at nearly twice the pace as calculated just two years ago (6.7% versus 3.7%).

One example of a major oil field in decline is Mexico's Cantartell oil field. In June, Mexico's oil production fell 11.1% to 2.52 million barrels of oil per day. This was the first time since 1990 that Mexico's production has fallen below the 2.6 million barrel per day mark. Mexico is a major exporter of oil to the United States, but estimates are that within a couple years, Mexico will become an importer of oil.

On top of this, there is a problem of chronic under-investment by both oil companies and oil-producing countries. This problem has only been exacerbated by the financial crisis and the credit crunch. The IEA reckons that the credit crunch led to the cancellation of $170 BILLION worth of oil and energy projects worldwide. Thanks, Wall Street!

Dr. Birol is warning that global oil production is likely to peak in about ten years, much earlier than most governments had estimated. He also said that we may see an “oil crunch” within five years. This “crunch” will be caused not only by decreased production of oil but also by lower exports of oil from oil producing countries.

Much more of the oil produced, for example, by the emerging countries in the Middle East, the Near East and Africa will be required to meet the needs of their own booming economies.

And speaking of demand, let's look at China. In July, China imported a record 4.6 million barrels of oil per day, up 42% from last July. This amount is the equivalent of half of Saudi Arabia's daily output.

This amount is well above the previous record of 4.1 million barrels of oil per day set in the spring of 2008. Remember? That figure was fluffed off by Wall Street and the American media as "only" China stockpiling oil ahead of the Olympics. Wrong again, Wall Street!

Dr. Birol estimates that even if demand remained steady, the world would have to find the equivalent of four Saudi Arabias to maintain production, and six Saudi Arabias if it is to keep up with the expected increase in demand between now and 2030.

It's not a pretty picture. But what really strikes me is the lack of response by the media, the financial markets, and the policy makers. All of them seem to be sleeping blissfully, unaware of the problem.

Tuesday, August 18, 2009

China, Commodities and the Financial Media

The financial media here in the United States, bought and paid for by Wall Street, continues to bamboozle the investing public. They continue to perpetuate the "global recession means lower demand for commodities" fairy tale among others.

The investing public for the most part has believed this story much as a small child will believe fairy tales. Investors have to realize that the United States is no longer THE economic superpower as the US once was 50 years ago.

In fact, when it comes to most commodities, the United States is a rather insignificant player. The demand for commodities is coming mainly from the emerging economies of the world - China, India, Brazil,etc.

Let's look at China. China's coal imports are nearly three times higher this year than they were last year. China's iron ore imports are up 32% from a year ago as Chinese steel production surged to all-time high.

And let's not forget about oil. In July, China imported 4.6 million barrels of oil per day, up 42% from last July. This figure is a new record and equivalent to half of Saudi Arabia's daily output. This figure is well above the previous high of 4.1 million barrels of oil per day which was set back in March 2008.

You remember that, right? The US financial media at that time fluffed off those figures as merely China stockpiling oil ahead of the Olympics. After all, China really isn't growing... They would never dare to challenge us in the US.

In July, China also imported a record 4.82 million tons of soybeans. Yes, Wall Street, people around the world do not want to live in mud huts and eat dirt just to please the arrogant, greedy "Masters of the Universe" on Wall Street.

And China is putting those natural resources to good use. For example, China has spent $50 billion this year on high-speed rail systems in China, creating over 100,000 jobs. They will spend another $250 billion over the next decade. By 2020, China will have laid nearly 16,000 miles of high-speed track. By comparison, America has only 457 miles of high-speed track.

You won't see that data appear anywhere in the US financial media. After all, China is just a bubble, right?

Friday, August 14, 2009

Wall Street's Newest Casino Game

The casino operators on Wall Street have found a new way, called High Frequency Trading, to skim more of the cream off the top of US economic activity. It is part of the reason Goldman Sachs was able to have 46 "$100 million trading days" last quarter.

High frequency trading uses the speed of supercomputers to trade faster than a human trader ever could. Owners of supercomputers, such as Goldman Sachs, program them to take advantage of information milliseconds faster than other computers and whole seconds faster than human traders.

This a major recent development. High Frequency Trading now accounts for about 70 PERCENT of ALL the trading volume in the US stock market. This is another reason I personally do not believe the recent rally in stock prices.

High Frequency Trading computers are able to beat other computers because they are actually located AT the exchanges. These computers take advantage of the finite speed of light and switching systems to FRONT-RUN the market. This is supposed to be ILLEGAL. They also gain information on orders and market movements sooner than the market as a whole.

This becomes a bit technical but there are several ways that High Frequency Traders make out like bandits:

1) Some of the traders take advantage of volume rebates of about 0.25 cents per share offered by the exchanges to brokers who post orders and provide liquidity. When the traders spot a large order, they fill part of it, then re-offer the shares at the same price, collecting the exchange fees along the way.

2) Some of the programmed trading systems take advantage of the institutional computers that chop up large orders into many small orders. They make the institutional trader, such as pension funds, bid up the price of shares by fooling its computer, by placing small buy orders which they then withdraw.

3) These programs also automatically "ping" stocks to identify large orders by issuing an order and then very quickly withdrawing it. Once this information is obtained, they buy the shares themselves and sell them on to the institutional buyers (suckers) at a higher price.

4) Program traders can buy large numbers of stocks at the same time to fool institutional computers and triggering very large buy orders. By doing this, program traders like Goldman Sachs can trigger sharply higher market moves.

The bottom line for us ordinary market participants is that insiders are using supercomputers to game the system, extracting billions of dollars from the rest of the market.

In effect, they are trading on insider knowledge about market order flow. Yet, government regulators look away and let them get away with it.

Tuesday, August 11, 2009

World's Top Brands Set to Rise in the East

Forget all the "bubble" talk about the emerging markets from the US financial media. They are just trying to get more money into the US casino known as Wall Street, instead of having people invest into a great place for their hard-earned money - into areas that have true long-term growth, the emerging markets.

There were two recent and very interesting studies conducted by consultants Wolff Olins and US-based Bain & Co. One study estimated that one-third of the FT Global 500 companies will come from the emerging markets by 2015.

A partner with Bain & Co. said that established western consumer brands were being forced to "battle it out" with emerging market brands as they moved eastwards to take advantage of rising demand for branded products. Many western firms are buying prominent local brands. Others are either taking stakes in or forming joint ventures with local brands.

An example of the joint venture approach is SABMiller's joint venture with China Resource Enterprise to brew Snow Beer in China. Snow Beer is the world's best-selling beer with more than 6.1 billion kiloliters sold in 2008, up 19.1% from 2007

A strategist at Wolff Olins hit the nail on the head and stated "It used to be possible to be a global brand by dominating the US market. That's changing rapidly. Now you have to be number one in Asia."

Wolff Olins believes that the world's next top global consumer brands are set to rise in the east. They named five fruit and drink brands from emerging markets that they believe are ready to become global brands:

ChangYu, China's biggest wine producer; United Spirits, India's largest liquor group; Almarai, a Saudi dairy and fruit juice company; Patchi, a Lebanese boutique chocolate chain; and Juan Valdez Cafe, a Columbian coffee chain.

I don't know how well their picks will fare but I do know that investors looking for profitable long-term investments should look toward the emerging markets that are home to the vast majority of the world's consumers.

Friday, August 7, 2009

The Culture of Greed on Wall Street

As sure as the sun rises in the east and sets in the west every day, the Greed culture continues unabated on Wall Street.

And why not? If something goes wrong, Uncle Sam will force taxpayers to bail them out.

New York Attorney General Andrew Cuomo recently issued a scathing report on Wall Street bonuses. He said employee pay "has become unmoored from the banks' financial performance."

No kidding.

Here are some examples of banks which received billions in TARP money from US taxpayers last year and the enormous bonuses they paid to employees: JP Morgan Chase earned $5.6 billion and paid $8.69 billion in bonuses, while Morgan Stanley earned $1.7 billion and paid $4.475 billion in bonuses.

Here are two even more outrageous examples: While Citigroup and Merill Lynch (bought by Bank of America)lost more than $27 billion each, Citigroup paid $5.33 billion in bonuses and Merill Lynch paid $3.6 billion in bonuses. The two banks combined received over $55 billion in taxpayer-funded TARP money.

Attorney General Cuomo summed it up nicely stating "When the banks did well, their employees were paid well. When the banks did poorly, their employees were paid well. And when the banks did very poorly, they were bailed out by taxpayers and their employees were still paid well."

Amazing - huge money paid for failure. Only in America and only on Wall Street.


The poster child for greed and what is wrong with economic policies in this country has to be Goldman Sachs.

In my previous article - "Goldman Sach(s) America" - I spoke about the company's trading programs which I believe are nothing more than what is called in the industry "frontrunning" and which is illegal.

The "saching" by Goldman continues unabated, aided and abetted by the US government. Not only did the government save Goldman from possible bankruptcy with TARP money and the AIG bailout, but they are intentionally ignoring possible illicit behavior.

Goldman Sachs' trading activity numbers from the 2nd quarter were beyond belief. In the 2nd quarter, Goldman Sachs made over $100 MILLION on 46 of the 65 trading days, 70% of the total! Goldman made over $50 MILLION on 58 of the 65 trading days, 89.2% of the total! And they only had 2 trading days where they lost money!

Sorry, but fair markets do NOT work that way and no one is that good at trading. Not without a lot of "help" - like having the government look away while you are frontrunning the Federal Reserve in the bond market and frontrunning stock trades from large pension funds like Calpers (with the help of the stock exchanges)using your software trading program.

Heck, you don't even see baseball players hitting .700 with the extra "help" of steroids and other illicit drugs!

But I guess that is the type of markets you get when Goldman Sachs alumni have been in the halls of government for decades running economic policy.

Tuesday, August 4, 2009

Americans Have 'China Envy'

I can't take it any more! Over the past several months, all I see are articles about how China will fail and how China is in a bubble. Most of the articles are written by people who know nothing about China and little about financial markets in general.

Chinese markets, like most other stock markets, are high right now and I'm sure will have a decent correction. But that does not mean the China story is over. Not by a long shot.

Many of the articles I've read are just a bunch of immature jingoistic rubbish. It looks to me like a bad case of 'China envy' - "Our American economy is bigger and better than your economy, China!"

Many of these article writers are the same people who completely missed the Credit Bubble, the Housing Bubble, the Stock Market Bubble and are currently ignoring the Treasury Bubble.

I have a question to ask these people. Following the sort of "advice" you are giving made you how much money in the past decade? Oh, that's right - you probably lost a bundle. I suspect the same will hold true in the next decade too.

Let's look at some facts - China and India have a combined population of nearly 2.5 billion people. Per capita consumption in these countries remains far below the worldwide average and is extremely small compared to the US.

These countries can (and will) maintain a high rate of economic growth for many years to come before their markets become saturated with consumer products that even poor Americans take for granted.

The middle class in China already has reached a total of 330 million people - greater than the entire population of the United States. And it continues growing rapidly.

Just one example of the growth of consumer demand in these countries came from Coca-Cola's latest report - volume growth in China was 14% and volume growth in India was 33%.

And here is an important point about Coke's sales in China. Coke pointed out that there had been a geographical shift in demand away from the coastal cities to the center and west of the country.

Wall Street isn't even aware of that part of China - they still think China is a few large coastal cities totally dependent on US exports. Meantime the majority of the growing consumer demand in China is coming from the center and west of the country. What a surprise - Wall Street is again asleep and missing a major investment theme!

My advice to the doubters about China is to get informed and if you want to make money going forward - grow up and get over your 'China envy.'