Current Thesis Advisory:
2011 Thesis: "Beggar-Thy-Neighbor"
Reading the right books?
We have analyzed & included
Current Thesis Advisory:
2011 Thesis: "Beggar-Thy-Neighbor"
Reading the right books?
We have analyzed & included
Excerpted from May 2011 - Global Macro Tipping Points
Former Fed Chairman Alan Greenspan wrote an Op-Ed piece for the UK based Financial Times on March 30th, 2011. The article caused quite a ruckus since it could best be described as a full frontal assault on the Frank Dodd Act.
Congressman (D) MA Barney Frank must not have got any sleep drafting his scathing Financial Times rebuttal. The gloves were off and it was time to pick sides.
Well, this mild mannered economist came down squarely on the fence. Not that I couldn't decide who was right, but rather because both are so blatantly wrong and so mired in 'obligations' that they no longer can discuss reality.
Greenspan's message was that, "the Frank-Dodd Act may create the largest regulatory-induced market distortion since America's ill-fated imposition of wage and price controls of 1971". He argued that the financial systems today are too complex to be effectively regulated. There are just too many inconsistencies.
The former Fed Chairman felt that today, Adam Smith's 'Invisible Hand' was unredeemable opaque.
Greenspan's view is that Frank Dodd was a broad set of principles that are now to be drafted into a couple hundred regulations by government regulators and as such is doomed. The Frank Dodd premise being that excesses could be addressed by statute.
As proof of his argument he delivers theGreenspan: "TIP'S OF THE ICEBERG" which point out the already realized problems with a Frank-Dodd Act implementation.
The question Greenspan poses to his readers is:
His point here being that our high standard of living is a direct result of financial innovation and by regulating it you will only hinder it, potentially impact standards of living and will no doubt have serious and detrimental unintended consequences.
Greenspan demonstrates the essence of the problem.
First he is right that Frank Dodd is a farce. Second he is right that Frank-Dodd cannot be written in a manner to prevent 'too big to fail' financial disasters from happening.
He is however equally wrong that financial innovation has elevated the US standard of living. I am unsure which planet he is living on because we have:
The more important point is that the banks should have been forced to go through the capitalist system way to resolve such situations, which is proven and tested. It is called Bankruptcy Court. Minimally the debt holders in the banks should have been forced to take equity positions or a combination of both.
None of these options occurred because it was more profitable to have the public foot the bill than have the influential senior secured debt holders take those kinds of losses.
The public has the misconception that bankruptcy necessarily means the banks are shut down, ATM's don't work and loans are no longer given out. This is exactly what the senior secured debt holders want you to believe. it is only through this mistaken belief that they can protect their enormous holdings.
The bankruptcy option was discounted because the bank backed liberal media argued that public option would not support "Nationalization" of the banks. This was how DIP was camouflaged.
Effectively, we nationalize the banking debt not the banks themselves.
What bankruptcy would have meant in the US is that the US government would have acted as DIP (Debtor-in-Possession), similar to General Motors, and the banks would have been kept open. The banks would have been broken up, speculative risk elements sold-off, a possible public retail 'utility created and the tax payer would have been whole.
The debt holders would have lost everything to keep tax payers whole or forced to take serious haircuts. Possibly the debt holders would have been forced to accept equity for debt. It would have been about how bad the debt holders were hurt - not the US tax payer.
Wall Street, Banks Press to Shape Dodd-Frank Rules
REPUBLICAN CONGRESSMAN PAUL RYAN'S BUDGET - $6.5 Trillion in Savings
As part of an April Fool's surprise, Republican Congressman delivered a budget proposal claiming in headline numbers that it would cut the budget by $6.5 Trillion.
The shocking headline grabbing number was supported by the following chart in the April 1st edition of the Wall Street Journal. Now this was an April Fool's joke that no one could possibly get away with! But they did. The public and media ate it up.
Presto, we have a solution to the US debt mess.
My, unfortunate problem is that I both learned to read and mastered public school arithmetic. Therefore when I actually reading the details, I discovered some amazing things about political budgeting.
First, you must decide what the political number is that you want.
Second, you use simply arithmetic based on either magical or obscured assumptions.
Thirdly, you don't touch any sacred cows that may prompt people to read any further than the headlines.
So what did the master of deception Ryan do?
First, he needed a number so big the newspapers and nightly news would salivate over it. That required a number of over $4 Trillion (it was rumored Obama had this number in his mind for an announcement in the first two weeks of April). So a little over 50% more than Obama's required $6.5 Trillion to be the magic political number.
Secondly, if he told us to assume we can get the US expenses down to 20% of GDP over 10 years. Presto, we have $4.4 Trillion alone. Sprinkle some out year cuts that no one will worry about today and we have our number.
Thirdly, so we don't cause any backlash and ensure we don't have anything do to until after the next election we make sure all the cuts are more than two years away and will require 60% congressional approval. That effectively 'kicks the can down the road' but is seen to solve the problem.
After a 15 second sound bite on the evening news the public suddenly feels things are being attended to by the newly elected Republican House and quickly returns to DWS.
The only thing close to being difficult is cutting the deficit to $1 Trillion in 2012 from $1.67 Trillion. But that is next year's problem and next year who will remember this budget anyway?
To create extra fairy dust Congressman Ryan sprinkled the following into the budget:
|Reduce Corporate Income Tax to 25%||GIVE AWAY|
|Does not raise taxes||GIVE AWAY|
|Makes permanent the 2001 & 2003 tax laws||GIVE AWAY|
|Cuts taxes and reforms the tax system||GIVE AWAY|
|Death Tax is appealed||GIVE AWAY|
|Capital Gains and Dividends to be Taxed at 15%||GIVE AWAY|
|Generous Standard and Personal exemptions||GIVE AWAY|
|Repeals Capital Gains Tax through 2010 for all taxpayers||GIVE AWAY|
|Ensures no cuts to Social Security, Medicare nor Medicaid||GIVE AWAY|
If you really believe any of this is realistic, then you my friend deserve what is going to happen when reality arrives and the tooth fairy is exposed.
DEMOCRATIC PRESIDENT BARRACK OBAMA'S BUDGET PROPOSAL - $4.0 Trillion in Savings
President Obama had his work cut out for him to out 'sound bite' the republicans after the Paul Ryan budget. The republican lambasting of the President's fiscal plan went like this:
"Under the president's current plan, spending will top $4 trillion this year alone, and consume 28.5% of our nation's economy. His plan would mean a $1 trillion increase to the already unsustainable spending growth of our nation's entitlement programs -- including a "down payment" toward government-controlled health care and education; a $1.5 trillion tax increase to further shackle the small businesses and investors we rely on to create jobs; a massive increase in energy costs for families via cap and trade. This would result in an exploding deficit, a doubling of the nation's debt in five years, and an increase of that debt to more than 82% of our nation's GDP by the last year of the budget. This approach will double the debt in five years, and triple it in 10 years, ultimately debasing our currency and reducing the living standards of the American people." WSJ
Mr. Obama charged out the gate April 13th with his proposal that would cut federal budget deficits by a cumulative $4 trillion over 12 years, compared with a deficit reduction of $4.4 trillion over 10 years in the Republican plan.
The president offered he would use starkly different means, rejecting the fundamental changes to Medicare and Medicaid proposed by Republicans and relying in part on tax increases on affluent Americans. The president framed his proposal as a balanced alternative to the Republican plan.
“There’s nothing serious about a plan that claims to reduce the deficit by spending a trillion dollars on tax cuts for millionaires and billionaires,” the president suggested.
Mr. Obama said he would meet his $4 trillion deficit-reduction target by cutting spending across a range of government programs, from farm subsidies to federal pension insurance. He called for cutting $400 billion more in military spending — twice what his defense secretary, Robert M. Gates, told Congress was the largest cut he could recommend.
Mr. Obama said his plan would contain a trigger to require across-the-board spending cuts if, by 2014, the federal debt was still projected to be rising as a percentage of the total economy. The trigger would apply not only to spending but also to what the administration calls “tax expenditures” — essentially payments to taxpayers for deductions for charitable donations or home mortgages. The use of the phrase “tax expenditures” allows the administration to lump tax-related issues into the spending category.
Neither party knows how to solve the problem without massive reductions to national security (Military, Home Land, CIA, NSA, Black Ops) or social entitlements programs.
Both parties have avoided any possibilities of addressing either subject:
.... whichever occurs first.
Why The Fed Must End QE2 On April 27th
Move aims to reduce threat of exposure to US debt and inflation
BEIJING - The central bank is planning new investment funds to diversify holdings in the nation's $3 trillion foreign exchange reserves, to hedge against depreciation and inflation risks, according to a news report.
The proposed funds will invest some of the foreign reserves in energy and precious metal markets, the New Century Weekly said on Monday, citing unnamed sources close to the People's Bank of China.
However, the report did not disclose the size of the proposed funds, their operation methods or the timing of their possible launch. The central bank was not available for comment.
Foreign exchange reserves jumped by $197 billion to $3.04 trillion in the first quarter, marking the second-biggest increase on record, central bank statistics show.
That fueled concern over devaluation risks and over-exposure to US debt.
"This is a positive way to diversify investment risk, especially as China holds such large amounts of US debt," Xu Hongcai, a finance professor at the China Center for International Economic Exchanges, told China Daily.
US debt, once considered gilt-edged, is becoming increasingly risky.
Credit agency Standard and Poor's downgraded America's credit outlook in April from stable to negative for the first time in history, implying that the US has been put on notice that it faces losing its AAA credit rating unless it gets on top of its yawning debt and deficit.
Earlier this month, Zhou Xiaochuan, the central bank governor, said China's foreign exchange reserves had exceeded a "reasonable" level and the management and diversification of the holdings should be improved.
The central bank's plan to set up new funds will diversify risk by creating new investment bodies, said Xu.
Currently, China Investment Corp (CIC), the country's sovereign wealth fund, is mainly responsible for the overseas investment of China's swelling foreign reserves. Established in 2007, CIC is now waiting for a capital boost plan from the State Council.
Diversifying reserves through investment agencies, such as CIC, is a possibility, Zhou said on April 18, after a speech at Tsinghua University, and also highlighted a possible option.
"One option is to consider some new types of investment agencies which focus on new investment areas."
Xu said he believes another way to reduce risk to the foreign exchange reserves is to transfer some funds to commercial banks as long- and medium-term time deposits, so private enterprises can get them when exploring overseas markets.
"That should be a win-win deal, as the central bank can also secure a yield higher than US debt," said Xu.
According to the New Century Weekly, the central bank is also considering a fund that could intervene in the foreign exchange market to stabilize exchange rates on behalf of the central bank.
The growth in foreign exchange reserves may affect efforts to curb inflation.
Yi Gang, deputy governor of the central bank and head of the State Administration of Foreign Exchange, said earlier that to keep the exchange rate stable the central bank had to roll out nearly 20 trillion yuan ($3.04 trillion) last year, thereby fueling inflation.
2009 2010 2011
-2.6 2.9 1.8 (Q1)
0.8 x Inventory Build
3.4-3.9 Fed January Forecast
FED SLASHES FORECAST
In those major metros where prices soared the most during the housing bubble, homeowners who have strategically defaulted share three essential assumptions: