Posts Tagged ‘Goldman Sachs’

Looks Like A Classical Pump&Dump Setup

In Financial Engeneering, Financial Markets, High Frequency Trading, International Econnomic Politics, Law & Regulations, National Economic Politics, Quantitative Finance, Technology, Views, commentaries and opinions on 14.01.11 at 22:04

The global stocks markets are reaching for new highs, sending the benchmarks to the highest level since August 2008. Once again it’s the financials that’s leading the race after Wells Fargo raised its rating for large banks on prospects for higher dividends, JPMorgan Chase says it will use some of its reserves to boost earnings and Morgan Stanley says banks and insurance companies will be winners in the stock market this year. Well, it sounds like the same old song and dance routine to me, just like we’ve seen it over and over again for the last two years – a classical pump & dump scheme.

“Companies are sitting on tons of cash. Corporate earnings are coming in very strong. I see a gain of 10 percent to 15 percent for stocks in 2011.”

Philip Dow

Personally, I don’t think there’s many investors who actually believe a word of what the bankers and their stock pushers are saying. But that’s not the point. The point is, however, that the big financials are setting up another stock market rally so they can cash in a couple of billion dollar more before the new regulations takes effect and prohibit them from trading with their own money, shutting down their most lucrative area of business.

This may very well be the biggest opportunity investors will get in 2011. The financial shares have, more or less, controlled the stock market over the last two years – pushing the average prices up, then pulling them down again.

But this is no game for amateurs. You never know when the big players turn around, stop buying and dump the load right in your face. The so-called “swing trade,” where the goal is to figure out exactly when the market turns, is one of the most difficult investment strategies there is. It can also be the most rewarding.

But remember; there is nothing – I emphasize; nothing – that indicates that the problems are over for financial firms. On the contrary; several signs points to more trouble ahead.

The greatest factor of uncertain right now is the European debt crisis. Even if it’s the national governments that is about to go bankrupt, it is the financial industry who’ll get the punch when countries starts to default.

Something the credit market investors have figured out a long time ago.

(Read also: Smart Money Is Not Stupid (Or Is It?))

The second bomb about to detonate is the dodgy foreclosure case.

At the moment, the banks are allowed to accrue interest on non-performing mortgages  until the actual foreclosure takes place, which on average takes about 16 months.

This “phantom interest” is not actually collected, but still it’s booked as income until the actual act of foreclosure.

As a resullt, many bank financial statements actually look much better than they actually are.

This means that Bank of America, Citigroup, JP Morgan and Wells Fargo, and hundreds of other smaller institutions, can report interest due to them, but not paid, on an estimated $1.4 trillion of face value mortgages on the 7 million homes that are in the process of being foreclosed, according to Forbes.

“Ultimately, these banks face a potential loss of $1 trillion on nonperforming loans,” says Madeleine Schnapp, director of macro-economic research at Trim-Tabs, an economic consulting firm 24.5% owned by Goldman Sachs.

However, the central banks, and the governments will be pumping money into the financial markets as long as they can in order to keep the financial system running. And they might be able to do that for a year or two more (maybe even longer).

“The markets can stay irrational longer than you can stay solvent.”

(John Maynard Keynes)


Anyway – who gives a shit?

The KBW Bank Index, which tracks 24 US financial companies, was up 13% in the four weeks through Jan. 5, three times the gains of the Standard & Poor’s 500.

And there’s also a third landmine in store for US banks.

According to Forbes, investors are now betting that the GOP-controlled Congress will water down the financial-services overhaul, and the great Wall Street reform will be just a joke, as many have feared.

On paper, the Dodd-Frank financial-services overhaul bill looks like a bank-stock killer.

It restricts how banks can trade for their own accounts, it raises capital requirements and it tightens supervision. By some estimates it will cut big bank profits by $22 billion annually—what the industry makes in a decent quarter.

Yet, bank stocks is rallying like it’s 2009.

Investors are banking that House Republicans will modify the new law, says Terry Haines, a senior analyst Potomac Research Group: “Back in July 2010, when Dodd-Frank became law, investors expected the quick imposition of rules with an immediate impact on the financial sector. But a lot of the key components of Dodd-Frank have not yet been implemented. And now there is a more favorable and moderate political environment as well.”

Note that any statement of just how much of the Dodd-Frank law will be changed by House Republicans is only speculation.

Investors may be overestimating the GOP‘s nimbleness.  The regulatory agencies could, in fact, begin to implement rules before the House Financial Services Committee holds any hearings on the matter, and the republicans may be distracted by efforts to reform the congressionally chartered mortgage giants Fannie Mae and Freddie Mac.

And some of the new regulations will simply not go away by themselves.

Banks will have to adhere to higher capital of some kind – the same goes for liquidity requirements – and the banks’ cost of deposit insurance and regulatory compliance are sure to increase significantly, regardless of what the GOP may accomplish.

“Every page of the law has something that impacts the bottom line,” banking lawyer Thomas Vartanian points out.

(The law is 848 pages long!)

Terry Haines points out that  the  regulators charged with writing regulations under the act will be scrutinized by the House Appropriations Committee as well as the Financial Services Committee.

“The Appropriations committee could limit the funding of controversial regulatory initiatives under Dodd-Frank, or even defund them entirely,” Haines says .

Perhaps. But the republicans could also easily be “Stewartized” into submission (mocked by the Daily Show’s John Stewart). And the general public is still quite upset over the fact that the hot-shots responsible for wrecking the economy still have their jobs and their bonuses, while about 8.5 million American workers lost theirs.

Something is going to hit the banking industry – whatever it will be…

“The people who took a political gamble on the sector in December most likely are traders who will take their money and run at the first sign of wavering by the House GOP,” Forbes writes.

If that’s the truth – the sector is set up for a classic pump and dump scheme.

Bank and life insurer stocks should see the biggest gains in 2011, according to a team of Morgan Stanley analysts. The team says its call is based on low valuations in the sectors, as well as increasing clarity about regulation that has weighed on the shares. An improving economy and the company’s increased capital deployment should drive return on equity.

Property and casualty insurers should also get a boost late in the underwriting cycle.

Morgan Stanley says its favorite names are Bank of America, Comerica and TD, for large cap, mid cap, and Canadian  banks, respectively.

In insurance, Prudential is the team’s pick for life insurers, with Axis Capital as a standout in P&C.

“Bank dividends and M&A activity signal the economy is transitioning from recovery to expansion,” says Philip Dow, director of equity strategy at RBC Wealth Management in a market comment at

“Companies are sitting on tons of cash. Corporate earnings are coming in very strong. I see a gain of 10 percent to 15 percent for stocks in 2011.”

That’s right! Pump, baby. Pump!


Blogger Templates

Select Your Language:

English * Arabic * Chinese * Danish * French * German * Hebrew * Italian * Japanese * Norwegian * Portuguese * Russian * Spanish * Swedish * Turkish


So, You Think You Can Blog? (Econotwist’s Greatest Hits 2010)

In Financial Engeneering, Financial Markets, Health and Environment, High Frequency Trading, International Econnomic Politics, Law & Regulations, Learning, National Economic Politics, Natural science, Philosophy, Quantitative Finance, Technology, Trading software, Views, commentaries and opinions on 09.01.11 at 20:40

Every serious blog is presenting their top lists for 2010 these days, so I better get my lists out there too. Frankly, I’m quite surprised by the response I’ve got. After all this was my first year as a full-time blogger. By summer last year, the econotwist’s blogs – mainly The Swapper and The Econotwist’s – reached 20.000 unique visitors per month. Some articles was also republished by other blogs, or featured on the publishing sites like Scribd. I estimate the top articles of Econotwist’s in 2010 was read by at least 200.000 people. And as usual I managed, completely unintended, to make some people a little bit angry.

“That article is about as credible as me writing about nuclear technology. Off-balance sheet transactions? SPEs? Interest Rate and Currency Swaps? Has that idiot even looked at an Annual report for BP?”

Reader’s response

The quote above was in response to the July 2 post – “So, You Thought BP Was An OIL Company?” I haven’t got that much pepper since I described DnB NOR‘s subsidiary in the Baltic region as at “financial lab rat”. Anyway, I see all feedback, good or bad, as extremely valuable. I have not been able to reply to all comments or requests. For that I apologize, and promise I’ll spend more time on your responses in 2011. As for themes I will be focusing on the technological side of the financial markets in addition to my other specialties – the relations between economy and ecology.

And I will have a couple of new prominent contributors joining in, as well as some other surprises…

But right now I want to give my sincere thanks to all of you who’s been cheering me on this year, making my first year as a blogger a definitive success.

To quote one of my favorite artists, (Keith Richards): GOLD RINGS TO YOU ALL !

And here is a summary of the most popular posts and publications by The Econotwist’s Blogs in 2010.



  1. So, You Thought BP Was An OIL Company?
  2. Mother Earth On Crack
  3. Volcano Ash Can Send The Earth Into “Deep Freeze”
  4. The Worlds Most Contagious Countries – Here’s The List
  5. Cyber Criminals Attack Critical Water, Oil and Gas Systems
  6. More Mysterious “Monster Fish” Comes To Surface
  7. The Ultimate Trading Weapon
  8. Norwegian Day Traders Convicted Of Market Manipulation
  9. Goldman Sachs: “Damn American Bastards!”
  10. Flight to Mystery
  11. The Sun Is Speaking!
  12. Here’s The REAL Norwegian PIIGS Exposure



  1. Goldman Sachs: Global Economics Weekly. June 2010.
  2. Non Performing Loans, Europe June 2010. PriceWaterhouseCoopers
  3. Letter From Geithner
  4. SULTANS OF SWAP: BP Potentially More Devastating than Lehman!
  5. Speech by Mr Ben S Bernanke, Chairman of the Board of Governors of the US Federal Reserve System, at Princeton. 09242010.
  6. Goldman Sachs: “On The Eve of The Bank StressTests”
  7. Tudor Investments Letter October 2010
  8. Saxo Bank. Quarterly Outlook. Q3 2010.
  9. BP Annual Report and Accounts 2009
  10. Bank of International Settlement. Quarterly Report. June 2010
  11. Oslo District Court. Final Verdict In The Case of Market Manipulation by Day Traders. 10122010.
  12. Fitch. Special Report. “CDS Spreads and Default Risk – Interpreting the Signals”- October 2010.


Econotwisted T-Shirt (Limited Edition)




The Greatest Conspiracy


The Dark Side of The White House


Trade Hard - Mega Hard





#1. “Nobody Lnpws The Bubbles I’ve Seen” (By


#2. “It’s Beginning To Look A Lot More RiskLess” (By



No matter what happens in 2011 – don’t forget to have some fun!

All The Best

Bailing Out Ireland – The Inside Story

In Financial Markets, Health and Environment, International Econnomic Politics, National Economic Politics, Quantitative Finance, Uncategorized, Views, commentaries and opinions on 19.11.10 at 15:54

A financial aid plan to help Ireland cope with its battered banks will be unveiled next week, EU sources says on Friday, but experts warns that a rescue may not be enough to prevent contagion in the single currency bloc. Still, the Irish government is hesitating.

“As long as the fundamentals don’t improve, the pressure will continue on other countries too.”

Daniel Gros

The euro rose and the risk premium investors demand to buy Irish and other peripheral euro zone debt – instead of benchmark German bonds – narrowed Friday as a sign of optimism that an aid deal for Dublin will be sealed soon.

But a poll of participants at a high-level banking congress in Frankfurt showed that nearly three-quarters believed the crisis that has shaken the euro zone for a full year would rage on even after an Irish rescue and ensnare other financially weak countries such as Portugal. Reuters reports.

“As long as the fundamentals don’t improve, the pressure will continue on other countries too,” Daniel Gros, heads of the Center of European Policy Studies, says in an interview with Reuters Insider TV.

“The problem is that no problems are currently being solved. Many believe that the euro zone is just moving from one crisis to the next.”

Ireland’s central bank chief has acknowledged that the country needs a loan running into the tens of billions of euros to shore up an extremely fragile banking sector that has grown dependent on ECB funds.

Time Is NOT On Your Side

Reflecting concerns among other euro zone periphery countries that Ireland’s financial troubles could spread, Greece’s finance minister, George Papaconstantinou. is  pushing Dublin to move fast.

“We are now at a point where decisions have to be taken,” he told bankers at a congress in Frankfurt. “Time is of the essence.”

Sources tell Reuters that Ireland may need assistance of between 45 billion and 90 billion euros, depending on whether it needs help only for its banks or for public debt as well.

So why is the Irish government dragging its feet? Is it so embarrassed or fearful of risking sovereign control?

Or – is Ireland in fact in a position to reject an aid package from the EU or is it simply buying time?

Al Jazeera have just released this report, talking to Jim Rogers, among others:



Fitch Comments On Irish Crisis

“As previously stated, Fitch Ratings says that its current Ireland sovereign rating of ‘A+’ with a Negative Outlook is premised on the Irish government’s commitment to fiscal consolidation, its strong liquidity position, improving external accounts and the measures it had taken to restructure the Irish banking system,” the agency writes in a statement.

Adding: “However, it is now evident that the actions taken in September have not succeeded in restoring confidence in the banking sector. Despite substantial injections of public capital into Irish banks and the extension of the issuance window for bank guarantees, Irish banks have been struggling to secure market funding and rollover existing debt, rendering them almost wholly reliant on ECB and Central Bank of Ireland liquidity support – some EUR130 billion and EUR35 billion respectively according to the latest available figures.”

While losses from commercial real estate lending appear to have been fully recognised with the transfer of related assets to NAMA (National Asset Management Agency) and additional capital injections into Irish banks announced on the 30 September, there is considerable uncertainty over the potential for further bank losses on other assets, including from residential mortgage lending, Fitch points out.

Official estimates suggest around 10% of residential mortgages are either in arrears or have rescheduled and continue to rise, though more positively, repossession rates remain relatively low.

To underpin continuing financial support for the banking sector and further measures to restore confidence, the Irish government is expected to agree an external financial support package with the EU and IMF in the near future.

“Fitch will review Ireland’s sovereign ratings in the light of any package agreed with the IMF and EU. The outcome of such a review will be influenced, amongst other factors, by the financial terms of any assistance provided and their fiscal implications; the agreed policy programme; and the likelihood that it would allow Irish banks and in particular the government to regain access to market funding at an affordable cost,” David Riley, Fitch’s Group Managing Director, writes.


Related by The Swapper:

The Precious Irish Bondholders – Here’s The Full List

In Financial Markets, International Econnomic Politics, Law & Regulations, National Economic Politics, Quantitative Finance, Views, commentaries and opinions on 17.11.10 at 15:45

The players in the European credit market are scared senseless by the proposal of channeling some of the losses in the financial sector over to them,  a so-called “Bail-In”.  The element of haircut for bondholders is particular relevant for Ireland who’s banking industry is the main problem. Well, here’s some examples of poor Irish bondholders: Goldman Sachs, HSBC, Deutsche Bank (Asset Management), Alianz, AXA, BNP Paribas, Royal Bank of Scotland, Barclays, Credit Suisse, just to mention a few… You’ll find the full list below.

“Every child in Ireland is being bequeathed a huge debt at birth to protect the interests of foreign, mainly German, bondholders – why?”

Guy Fawkes‘ Blog

BIG BANKERS: Lloyd Blankfein, Kenneth Irvine Chenault, Kenneth Lewis and Edward Yingling.

Anglo-Irish Bank do hardly represent a serious systemic risk to the Irish economy, certainly not to the same degree as AIB or the Bank of Ireland. And if it had been allowed to follow Lehman Brothers,  the shareholders and bondholders would probably have been the only ones to lose money.  However, the Irish government is seeking a way to protect their precious bondholders.

“Every child in Ireland is being bequeathed a huge debt at birth to protect the interests of foreign, mainly German, bondholders – why?”

This interesting question is raised in a recent post at the Guy Fawkes’ Blog.

The Irish state stepped in and nationalised a bank that was basically run by “crooks lending to property speculators,” the blogger writes.

Pointing out that the Irish people are taking the losses that rightfully should have been on the shoulders of the bondholders.

Once upon a time it sometimes happened that  a bond issuer defaulted. And it was seemed as a natural part of the risks investors take.

Yeah, well, times have obviously changed.

One can only wonder why Dublin’s political establishment is so keen to protect foreign investors at the expense of future generations.

The list below of foreign Anglo-Irish bondholders was originally obtained by an Irish bond trader, updated per November 15, and first published at the Guy Fawkes’ Blog.

These are the people whom Dublin’s politicians really seem to care so deeply about – I guess the names are somewhat familiar?

(h/t: Guy Fawkes’ blog)

Related by The Swapper:

Even Goldman Sachs Is Confused About Irish Economy

In Financial Markets, High Frequency Trading, International Econnomic Politics, National Economic Politics, Quantitative Finance, Views, commentaries and opinions on 14.11.10 at 21:54

Goldman Sachs‘s European analyst, Erik Nielsen,  is back in London’s prominent Chiswick with an updated view on the regions partly messed up economies. He is, however, confused over Ireland. But he’s not alone. The  whole European financial market were left in a state, described as of “unusual uncertainty” after close on Friday. The main problem is that no one seem to know what’s going on in Ireland. Erik Nielsen at Goldman Sachs is most worried about the contagion effects, thou.

“Whether (or when – if before early summer) the Irish government seeks financial help from the EU and IMF is a purely political decision on the back of an assessment of the broader risk of the spread levels to economic and financial stability.”

Erik Nielsen

Chiswick - Dublin

“To recoup:  the Irish government is fully funded – with no borrowing needs at all – until mid-2011.  They are in the midst of budget negotiations which should be done by December 7.  If they were to breakdown before then, pressure on Irish spreads would surely widen further, putting the country further at risk,” Nielsen writes in a note to clients.

With courtesy of, here’s the latest economic update on Europe from Goldman Sachs’ London-based European analyst, Erik Nielsen:

Happy Sunday,

* I’m back in my beloved Chiswick after having been on the road most of this past week; and what a week it was!  Here’s the way I see it all:

* It’s been a week of scary spread widening for the periphery mostly due to the uncertainties stemming from the stated policy initiative to include private sector participation in future debt workouts.

* On Thursday, European finance ministers – finally – clarified that this initiative will not apply to existing debt, but whether this is enough to put the genie back in the bottle remains to be seen.

* It is being reported that Ireland has started informal talks with Brussels on a rescue package, but so far there has been no formal request.  I summarise my view on how it may all play out.

* French PM Fillon submitted his resignation yesterday; a cabinet reshuffle is likely later today or tomorrow.

* On the data front it was a quiet week generally lending support to our constructive pan-European views.

* Tuesday-Wednesday will see the Eurogroup and Ecofin meetings; an opportunity to express support for the periphery, if that has not happened before then, but formal agreement on a package will take longer.  Also look out for politics in Italy.

* On the data front we’ll get inflation and trade numbers out of the Euro-zone this coming week; not that exciting although we’ll be hitting the ECB’s target of 1.9%.

* The UK also prints inflation this week along with labour market and retail numbers.  And we’ll get the MPC minutes – and loads of MPC talk.

And Switzerland prints inflation – and trade – data this week.

-1     What started as confusion among investors about a sentence in Merkel and Sarkozy’s communiqué from Deauville in mid-October referring to the participation of private creditors in future debt workouts (after the Treaty has been changed by 2013) escalated to real market worries after the Council approved this language in late October.  It was clearly a grand political statement of intentions rather than a concrete proposal taking into considerations the umpteen legal and practical issues involved in marrying such an approach with the need to keep the process orderly, but it spooked the market and raised a lot of unnecessary uncertainty.  I am sure that this problem was being conveyed to the policymakers from many sides.  On Wednesday, I had a piece in the FT highlighting some of the complexities, concluding that “the sooner Van Rompuy and his team – and the rest of the political leadership – clarify these complex practical and legal issues, the sooner premiums on peripheral sovereign issuance will evaporate.  Otherwise the peripheral countries could see their borrowing costs hit levels not seen since the Greek rescue, in effect, shutting them off from commercial borrowing – hence forcing them to rely on the existing rescue facilities.”  When LCH.Clearnet imposed substantial margins on Irish bonds things turned outright scary because of the possible effects of the sovereign spread-widening onto the financial sector.

-3     Ireland is reported to have started informal conversations with the Commission on a support program, and an unnamed German official is quoted today saying that Germany is encouraging Ireland to tap the facility to help further calm markets.  I apologise for not being able to take very many calls (or answer the many emails) Thursday-Friday when I was travelling, but my views on how all this may play out has not changed the last few weeks (i.e. after I realised that our original view on Ireland was too optimistic.)  To recoup:  the Irish government is fully funded – with no borrowing needs at all – until mid-2011.  They are in the midst of budget negotiations which should be done by December 7.  If they were to breakdown before then, pressure on Irish spreads would surely widen further, putting the country further at risk. If the budget gets through, then I suspect the original Irish game-plan was to spend the next couple of months convincing markets that things are back on track before they restart the government borrowing sometime late winter/early spring.  This could include the involvement of some of their domestic resources, but I tend to doubt it.  Given its own strong cash position, the spread widening has no immediate or direct effect on the government, but the part of the private sector with financing needs will be hurt, of course, and this degree of market stress will increase the risk for the financial system as a whole (well beyond the benefits stemming from the weaker euro.)  And it may be fuelling the spread widening for other countries as well.  In other words, whether (or when – if before early summer) the Irish government seeks financial help from the EU and IMF is a purely political decision on the back of an assessment of the broader risk of the spread levels to economic and financial stability.

-3     Ireland is reported to have started informal conversations with the Commission on a support program, and an unnamed German official is quoted today saying that Germany is encouraging Ireland to tap the facility to help further calm markets.  I apologise for not being able to take very many calls (or answer the many emails) Thursday-Friday when I was travelling, but my views on how all this may play out has not changed the last few weeks (i.e. after I realised that our original view on Ireland was too optimistic.)  To recoup:  the Irish government is fully funded – with no borrowing needs at all – until mid-2011.  They are in the midst of budget negotiations which should be done by December 7.  If they were to breakdown before then, pressure on Irish spreads would surely widen further, putting the country further at risk. If the budget gets through, then I suspect the original Irish game-plan was to spend the next couple of months convincing markets that things are back on track before they restart the government borrowing sometime late winter/early spring.  This could include the involvement of some of their domestic resources, but I tend to doubt it.  Given its own strong cash position, the spread widening has no immediate or direct effect on the government, but the part of the private sector with financing needs will be hurt, of course, and this degree of market stress will increase the risk for the financial system as a whole (well beyond the benefits stemming from the weaker euro.)  And it may be fuelling the spread widening for other countries as well.  In other words, whether (or when – if before early summer) the Irish government seeks financial help from the EU and IMF is a purely political decision on the back of an assessment of the broader risk of the spread levels to economic and financial stability.

-4     There has been no official request for help so far, but if the Irish want it, there can be no question that they’ll get it without much trouble; i.e. no need for long negotiations on conditionality.  As I have argued throughout this year, their policy adjustments have been impressive, and apart from the valuations of assets transferred to Nama (which triggered the beginning of the sell-off – but was that really bad for the government balance sheets?), I am not really aware of any material macro or political news that would justify the present spreads.  But that said, if investors are running for the door out of fear of being the last one left behind, then there’ll be a liquidity crisis (as there would be for anyone with a financing need), and they’ll need help. In my book, this is not a solvency crisis, and the government’s policies are surely not far off what the Commission and the IMF would demand in return for a loan (which would eliminate the need for private funding for the next 2-3 years.)  The Commission – and fellow Euro-zone members – will surely ask the Irish to raise their corporate tax rate, but the Irish will resist, although they may end up with some sort of “gentlemen’s agreement” to move in that direction over the medium term.  IMF programs (and surely EU-IMF programs as well) do not set specific detailed fiscal policy measures, but more general frameworks.  That said, the Euro-zone will need towards greater tax harmonization, and while Ireland has fought this for a long time, the power is naturally now shifting to those providing the bail-out.  Importantly, with or without a facility to include private creditors in a debt workout in the future, this would not apply to a liquidity crisis like the Irish.

-5     Portugal is quite different from Ireland.  The 2011 budget is further ahead (and the deficit is smaller), but their financing needs are more acute, and they are facing some significant amortizations in April and June (two times €4.5-5.0bn) which will require measurable borrowings before then (Portugal does not publish their cash holdings, so we don’t know their exact needs.)  Like for Ireland, a decision to ask for help is a political one, but given their ongoing borrowing needs, the present spreads hurt the budget process directly.  Also, if they were to ask for help, negotiations on the underlying policy conditionality would likely be more complicated than for Ireland because of the need for much more wide-reaching structural reforms in Portugal (but do-able, of course.)  While I haven’t seen any reports on it, I rather suspect that the Commission is reaching out to Lisbon this weekend to encourage a more detailed discussion of a Plan B on Tuesday. In spite of their differences, if (when) Ireland or Portugal officially seeks help, it can only be in everyone’s interest to start the process for the other country at the same time.

-6     Following months of speculation and hints, yesterday French PM Fillon submitted his resignation to president Sarkozy.  A cabinet reshuffle is likely to be announced later today or tomorrow.  The key objective will be for Sarkozy to re-energise his government for the last 15 months of his presidency and create a stronger platform for himself from which to run for re-election in 2012.  We do not think it’ll have material impact on domestic policies relevant for investors.  A number of commentators have suggested that Fillon may be re-appointed as the safe pair of hands he is on the domestic front, leaving Sarkozy the necessary time to roam on the global stage as chairman of G20.  Lagarde has been mentioned as a possible new foreign minister, unless she stays in her present position.

-7     In terms of data, this past week was dominated by the key Euro-zone GDP numbers for Q3, coming in at the expected +0.4%qoq (non-annualised), driven largely by Germany (+0.7%), while Spain delivered a respectful flat number.  The German locomotive helped several others perform well; the Czech Republic and Hungary reported Q3 GDP growth of 1.1% qoq, non-annualised, and 0.8%, respectively.  We also got industrial production numbers for September, and for this volatile series, the third quarter ended relatively poorly for the Euro-zone, erasing much of the strong gains in previous months, bringing us back to our estimated trend-line.  Quarter-on-quarter, IP was up 0.4% (non-annualised.)  As I discussed last week, the early indicators for Q4 are looking good, suggesting some (moderate) upside risk to our +0.3% Q4 GDP forecast; +0.3% Q4 growth would give us our full-year 1.7% growth number (which I was laughed out of the room on on more than one occasion when we launched it earlier this year – Dirk Schumacher discussed these numbers in greater detail in Thursday’s European Weekly Analyst, and we’ll publish revised 2011 and new 2012 forecasts in early December.)

Turning to this coming week:

-8     In the Euro-zone, the highlight will be the Eurogroup meeting on Tuesday, followed by the Ecofin on Wednesday.  It’ll obviously be an excellent opportunity to express support and solidarity with the crisis-hit periphery, if they don’t do so even before Tuesday, but I rather doubt it’ll be more than that.  As discussed above, I think we are still some way away from a formal announcement of official financing being launched – but this is, of course, pure guessing on my part because, the Irish government does not need the money for several months so its all a political decision.  Also on the political side, it’ll be important to keep an eye on Italy.  Last Thursday Future and Liberty Party head Fini refused to a proposed cabinet reshuffle without Berlusconi first resigning and an aid to Fini then said that the Future and Liberty Party will pull out of the coalition this coming week; the press reports that the resignation letters are already on his desk.  The crisis may lead to either a reshuffle of the cabinet or it could lead to early elections.  Either way, we do not think it’ll impact the 2011 budget process or outcome.

-9     In terms of data releases, it’ll be an extremely light week in the Euro-zone.  We’ll start Monday with September trade data.  They have an EMEA-relevance score of zero, so our interest is more in terms of the growth rates for exports and imports.  The shift in Q2 from Euro-zone growth being primarily export driven to primarily domestic demand driven was accompanied by stronger import growth (than export growth), opening up a (still small) trade deficit, so it’ll be interesting to see if that remained the case as Q3 closed.  Then on Tuesday we’ll get the full inflation report for October; the flash estimate showed an increase in headline inflation to 1.9%yoy (from 1.8%), so the news will relate to the underlying components, specifically core inflation which we think has remained stable at 1.0% before moving gradually higher towards the end of the year.  On a normal reaction function, the ECB should already be well into its exit, but – like other central banks – normal reaction functions seem a curiosity of the past these days, so it’ll come slowly during 2011’H1, we think.  Finally, Eurostat is set to publish 2009 Greek deficit and debt figures on Monday, and the Troika will discuss the Greek loan program – I’m sure this will attract considerable attention, comments and questions, but we are nowhere near a place where the program is in trouble.

-10     In the UK, we are heading into a week of CPI inflation (Tuesday), unemployment and wages (Wednesday) and retail sales (Thursday).  We expect inflation to have eased to 3.0%yoy in October (from 3.1%) mostly due to base effects, although food and energy prices moved higher in October (and a major provider has just announced a big jump in retail gas prices in November), so one shouldn’t get carried away here; these elevated inflation levels seem likely to be around for a long time.  We are in line on unemployment and earnings growth (7.7% and 2.3% respectively) and slightly above on retail sales (0.5%mom versus 0.2%).  Wednesday also sees the release of the minutes of the MPC’s November meeting.  The consensus expectation is for an 8-1 vote in favour of unchanged policy; we’d be surprised if Adam Posen reversed his vote for more QE after only one meeting.  In any event, as Ben Broadbent has pointed out, it’ll be more important to watch for any shift in the general tone of the minutes, in particular, to see whether the sentence depicting the dovish bias of the Committee – “some members felt the likelihood that further monetary stimulus would become necessary had risen in recent months” – is retained.  Released alongside the minutes are the monthly Agents’ survey and, as is usual a week after the Inflation Report, the detailed numbers behind the MPC’s latest set of forecasts.  It’s also usual to see a spate of MPC speeches after the purdah of the quarterly forecasting round and we get three – Weale on Monday, Posen on Thursday, Tucker on Friday.  Tucker and Dale also give evidence to the House of Lords Economic Affairs Committee on Tuesday afternoon.

-11     In Switzerland, we’ll get producer and import price inflation for October on Monday and trade data (also for October) on Thursday.  We expect the headline Supply Price Index to jump to 0.8%yoy (from 0.3%) on the back of a massive base effect.  The key component to watch will be import prices, for any evidence of further disinflation as a result of CHF appreciation.  The trade data will be important to watch in case the trend line (in a volatile series) for exports were to continue its softening into the end of the year.

… and that’s the way it all looks to me on this lovely mid-November day in Chiswick.  I somehow feel that I’ll be writing more emails to you this coming week, but for now I’ll be heading to the High Street for my (belated) morning coffee.


Erik F. Nielsen
Chief European Economist

Related by The Swapper:

HCA To Sell $1,5bn of Junk Bonds To Pay Shareholders Dividend

In Financial Markets, Health and Environment, National Economic Politics on 09.11.10 at 23:38

Hospital operator HCA Inc. says Tuesday it plans to sell $1.525 billion of junk bonds and put proceeds toward a $2 billion dividend payment to its private-equity owners. The offering of senior unsecured notes due 2021 is being handled by joint bookrunners Citigroup, Bank of America Merrill Lynch, J.P. Morgan Chase & Co, Barclays PLC, Credit Suisse Group, Deutsche Bank AG, Goldman Sachs Group, Morgan Stanley and Wells Fargo & Co.

“They’ve wiped out all the debt repayment that they’ve accomplished in two years and they’ve wiped out their cash flow.”

Vicki Bryan

Who? Me?

Price guidance is in the area of 7.75%, according to a person familiar with the deal, and books close at end of business Tuesday, with pricing expected Wednesday morning, Dow Jones Newswire reports.

Hospital Corporation of America (HCA) says its third-quarter profit rose 24% to $243 million from $196 million a year earlier, while revenue increased 1.5% to $7.6 billion as its bad-debt provisions fell 21%.

Moody’s Investors Service assigned a Caa1 rating to the bonds, deep in speculative-grade, or junk, territory, but confirmed its existing corporate ratings for HCA at B2 and revised its ratings outlook to positive. Moody’s says that HCA is adding incremental debt but has been able to offset industry pressures, such as increasing bad-debt expense and weak volumes, and realize solid earnings growth.

But Vicki Bryan, analyst at bond research firm Gimme Credit, says the improvements in uncompensated care and bad-debt provisions are due to changes in HCA’s accounting methodology–changes that the company will no longer benefit from next year.

Bryan also noted that it was the third dividend HCA will pay to its owners this year, following a $1.75 billion dividend in February and a $500 million dividend in May.

“They’ve taken $4.25 billion in dividends in a year at the expense of bondholders,” Bryan says.

“They’ve wiped out all the debt repayment that they’ve accomplished in two years and they’ve wiped out their cash flow.”

An HCA spokesman didn’t immediately return a phone call seeking comment.

HCA was taken private in 2006 in a $31 billion leveraged buyout by a private-equity consortium led by Bain Capital, Kohlberg Kravis & Roberts, Merrill Lynch, and Thomas Frist Jr., HCA’s co-founder.

The new notes will be sold through a newly minted parent company, HCA Holdings Inc. That company had been created recently as a subsidiary but will be converted into a parent company as part of a proposed corporate reorganization.

Moody’s credit analysts described the bond offering as covenant-lite, meaning it lacks certain customary bondholders protections that prevent the company from making restricted payments or incurring additional debt.

Since its LBO, HCA has taken periodic steps to refinance portions of its resulting debt burden, including selling $1.4 billion of bonds in March to pay down bank debt while pushing out the maturity on another $2 billion of bank debt to 2017 from 2013. The notes it sold then, which were secured bonds, also came with a 10.5-year maturity and yielded 7.375%.

HCA filed IPO plans earlier this year, projecting the sale of up to an estimated $4.6 billion of stock.

The large offering from HCA was one of several junk bond deals expected Tuesday, but secondary market prices didn’t weaken in the face of a deluge of supply, Dow Jones Newswire writes.

“In high yield, when you see a $1.5 billion new dividend deal, you think you’d see some pushback,” says Scott Grzankowski, analyst at KDP Investment Advisors. “But even though equities are down, overall the high yield market is firm.”

The Fight Against Currency War

In Financial Markets, High Frequency Trading, International Econnomic Politics, Law & Regulations, National Economic Politics, Quantitative Finance, Views, commentaries and opinions on 25.10.10 at 15:34

G20 pledges to avoid weakening currencies to boost exports and to let markets increasingly set foreign exchange values, after the weekend summit. The risk of a of currency war seems to have abated somewhat, and the USD is now at a 15-year low.

“The terms on currency policy are relatively vague and may be interpreted differently by each country. It remains to be seen whether actual practises will be changed.”

Camilla Viland

As expected, currencies were discussed at the G20 meeting over the weekend. The finance ministers of the group now pledges to avoid further weakening of currencies, to boost exports and to let markets increasingly set foreign exchange values. This could be interesting…

First of all; there was no decision on the US proposal for current account targets, and this debate will be continued at next months G20 meeting in Seoul.

And second; the terms on currency policy are relatively vague and may be interpreted differently by each country. It remains to be seen whether actual practises will be changed.

“However, it is very positive that they have come up with a joint statement on currencies,” analyst Camilla Viland at DnB NOR Markets writes in Monday’s Morning Report.

Previously this has been avoided in fear of alienating China, she points out.

USD At 15-Year Low

The USD weakened after the G20 meeting, as the risk of tensions in the currency market has abated, according to DnB NOR Markets.

Camilla Viland

“The dollar has, among others, weakened versus Asian currencies on the prospect nations in the region will refrain from intervening in foreign exchange markets,” Ms. Viland  writes.

Expectations of the Federal Reserve announcing another round of quantitative easing next week also helps in bringing the dollar down.

Another currency which has weakened over the weekend is the Swiss franc.

“The currency is normally seen as a safe haven in the currency market and the weakening may be a result of lower risk of a currency war,” the Norwegian analyst says.


Biggest Strauss Kahn Statement – Ever?

Dominique Strauss Kahn

The G20 financial leaders also decided that Europe will surrender two seats in the IMF’s executive board to emerging nations, like China, India and Brazil with the intent to give these countries more power.

IMF-chief Dominique Strauss Kahn said that this was the “biggest IMF reform ever.”

Yeah, right!

Mr. Strauss Kahn is about to get a reputation for distributing pompous – and not very well founded – statements.

See also: In The Brigh Minds Of IMF


German Economy Still Flying

The German IFO index rose from 106.8 in September to 107.6 in October.

German Economy Recover

This is the highest outcome since May 2007, and better than consensus’ estimate of 106.5 and the outcome signals solid growth for the locomotive of European economy.

However, it is worth noting that this month’s improvement was not only due to better current conditions, but also due to a rise in business expectations.

“The latest developments in the German economy have been positive. However, we do not expect this to last. Due to sluggish international growth and a strong euro, growth will abate going forward. Fiscal tightening will also weigh on German growth,” Camilla Viland at DnB NOR Markets writes.

And Now; The US Housing Market

From the US, figures for existing home sales in September will be released Monday.

The Pending home sales index, which is an indicator for actual home sales, has risen over the last two months.

Mr. Housing Market

And we may see a rise in existing home sales this month, too. (Consensus expects 4.3 million houses to have been sold in September, up from 4.1 million sales in August.)

“Such an outcome is positive. Nevertheless, the levels of monthly house sales are very low seen in a historical context,” Camilla Viland notes.

And yet to come; the impact of the foreclosure scandal…

Scandic Updates

Here in Scandinavia several important events are on the agenda this week.

In the Norwegian, Norges Bank‘s interest rate meeting and the release of a new monetary policy report, will probably get most attention.

“Both we and consensus expect the interest rate to be left on hold at this meeting,” Ms. Viland writes.

In fact, a survey by the financial news agency, TDN Finans, shows that out of 17 participating analysts, no one expects the Norwegian Central Bank to rise its key rate.

(But wouldn’t it be fun if governor Svein Gjedrem pulled one last stunt before he retires in December?)

Anyway – the central banks new interest rate path (a prediction of the key rate level going forward) will probably be the most interesting thing for Mr. Gjedrem & Co.

The interest path rate has been lowered a few times already this year, and the interest rate is currently set to be raised around New Year.

“Given the latest developments we do not see this as likely. Foreign swap rates have fallen markedly since the previous report was released in June and inflation has been lower than anticipated. This indicates that the interest rate path will be lowered,” DnB NOR Markets says.

Adding: “We expect that the new interest rate path will indicate that the next rate hike will not be until March or May 2011.”

Also the Swedish Riksbank meets this week, holding their monetary policy meeting on Tuesday.

“The Swedish economy has performed strongly lately and this is one reason why the Riksbank has raises rates by 50 bps since the bottom. The Riksbank has signalled that more is to come and both we and consensus expect them to raise the interest rate by 25 basis points, to 1.00%, at tomorrows meeting,” the Norwegian money market specialist says.

More from DnB NOR Markets:

OSE Share recommendations. 25 – 29 October 2010.

Weekly FX Update.

Select Your Language:

Arabic * Chinese * Danish * English * French * German * Hebrew * Italian * Japanese * Norwegian * Portuguese * Russian * Spanish * Swedish * Turkish

Blogger Censored By Google?

In Financial Markets, International Econnomic Politics, Law & Regulations, Technology, Views, commentaries and opinions on 19.10.10 at 21:23

I have just received the following newsletter from the founder and manager of the independent investment firm, SmartknowledgeU, JS Kim. The message is kinda disturbing, as it seems like one of the most popular articles ever written by Mr. Kim – “The Death of Capitalism” – have been removed, or made inaccessible, by major search engines like Google. If that’s the case, we’re looking at a serious violation of human rights, and the freedom of speech.

“Is Google censoring the information I’m trying to get out to the people in my articles? I’m not really sure, and maybe it’s just an innocent glitch, but it sure seems that way.”

JS Kim

“I’m not sure if I’m being censored here by Google but it sure seems like that is what is going on,” JS Kim at SmartknowledgeU writes in a newsletter posted about three hours ago.

JS Kim, who is a highly respected author, blogger and commentator with frequent appearances in major media like The Wall Street Journal, Reuters and Financial Times, tells about a rather disturbing discover he just made.
It seems like one his most read articles (“The Death of Capitalism”) has vanished from both Earth and cyberspace.
This is what he writes:
Recently one of my friends asked me to send me the link to one of the most popular articles I’ve ever posted on Zero Hedge called “The Death of Capitalism.”
So to find the link, I googled “Death of Capitalism, Zero Hedge” and the search engine returned zero results.
Okay, I thought, let me search “Capitalism, the Underground Investor (the name of my blog where the article is also posted).
Still nothing.
What makes this so odd is that when I first posted the article on Zero Hedge many months ago, the article eventually received nearly a hundred comments and more than 8,960 reads.
Because of the fair amount of attention my article received, I googled it to see who else had reprinted the article on their site.
I recall from this google search that the search returned the article not only on my blog and on the Zero Hedge blog, but also on dozens of other sites that had reprinted this article.
In fact, if memory serves me correct, there were about FIVE PAGES of returns for this search.
But today?
Google seems to have erased and purged all five pages of returns from their search engines.
So is Google censoring the information I’m trying to get out to the people in my articles? I’m not really sure, and maybe it’s just an innocent glitch, but it sure seems that way.
In any event, if you wish to read my latest article on Zero Hedge titled “Inside the Illusory Empire of the Banking Commodity Con Game,”
I consider this article to be on par with my article “The Death of Capitalism” in terms of importance to the future financial health of all investors.

Too Crazy To Be True?

Here at The Swapper we’re not quite sure to belive.
There’s a saying that goes; “If something seems too good to be true, it probably is”.
Well, that works both ways, I guess, if something seems too crazy to be true, it probably is, too…
However, I’ll wait a few hours to see if any Google representatives will make a comment, or someone comes up with another plausible explanation.
If not, we’ll contact the Google-people ourself.
By the way; when I was looking for an illustration to this post I googled “blogger censored by google” (picture mood) and, among others, the pic on the right came up as a thumbnail on the list.
But when I tried to open the original file at the original site, my internet connection fell out!?
It was impossible to download using Google with my Firefox browser.
The same happened with a several other “anti-google-pictures”.
Anyway – not too big of a problem, thou…
Meanwhile, here’s the full transcript of JS Kim’s article; “The Death of Capitalism”.
Let’s see if this one disappears too.

The Death of Capitalism

Bankers are destroying Capitalism. Unfortunately, most Westerners won’t realize this until five years from now, when the middle class has been forcibly relegated to the ranks of the poor. And this isn’t just a situation that will afflict America but it will likely afflict Japan and many countries in the EU such as the UK, Spain, and Greece just to name a few.  But for the purposes of this essay, let’s examine how bankers have destroyed capitalism in the USA.

In 2009, when almost every major US bank manufactured profits out of thin air and declared themselves financially healthy by (1) changing their regular reporting periods to exclude months in which huge losses occurred; (2) changing their definitions of bad debt, and (3) by revaluing their assets courtesy of FASB, particularly their commercial real estate portfolios, at fantasy land valuations that they will never receive in the open market, these events all marked the continuation of the Enronization of America that is ushering in the death of capitalism. The systemic injection of fraud and deceit into nearly every aspect of American life, has been unfolding for decades, even prior to the Enron scandal itself.  In 2009, Bank of America CEO Ken Lewis testified that former US Treasury Secretary and ex-Goldman Sachs CEO Hank Paulson instructed him to disobey securities law and conceal material losses in the Merrill Lynch merger from investors. Lewis additionally testified that Paulson threatened to fire him and his entire board if he tried to back out of the Merrill deal. These kinds of activities, devoid of all morals and ethics, have been occurring regularly within the financial industry for decades. It only seems as if such transgressions are more numerous today because of the recent attention given them in the media, but in reality, they have neither proliferated in frequency nor in expanded in their level of egregiousness.

Anyone that has ever worked for a Wall Street firm is well aware of the danger an analyst brings upon himself if he refuses to tow the official corporate party line regarding stock ratings for a company that is simultaneously closing a financially significant deal with another division of his firm.  Even though this atmosphere of “unspoken coercion” of inflated stock ratings existed for decades, when the bull was strong on Wall Street, very few journalists found this story newsworthy. Even though regulatory laws were passed many years ago to separate investment banking interests from securities interests within the same firm, the percent of US stocks covered by Wall Street firms rated as a “buy or hold” actually increased from 89% (2003) to 93% (2007) after the passage of new laws that were supposed to discourage firms from granting inflated stock ratings. Who in their right mind would ever believe that 93% of all stocks covered by Wall Street should be rated a “buy or hold” and that only 7% should be rated a “sell”? Of course, in Wall Street parlance, insiders know that “hold” really means “sell” but still, this is a level of deceit nonetheless.

When regulations are enforced through self-monitoring and self-policing as is too often the situation, and when all financial regulatory agencies are themselves lacking in integrity and transparency, new regulations can be enacted every day without effect. Self-regulations and regulations imposed by morally bankrupt people within a broken and corrupt system have never been effective. That’s why I have zero expectations about the efficacy of any new regulations being proposed today beyond their efficacy as a highly efficient smokescreen for politicians to hide behind. How quickly we forget that in 2002, UBS Paine Webber financial consultant Chang Wu was fired by branch manager Patrick Mendenhall no more than several hours after Enron executive Aaron Brown complained to Mr. Mendenhall about an email Mr. Wu had sent to his clients. In the email that Mr. Brown found “extremely disturbing”, Mr. Wu had advised all of his clients to sell Enron stock due to massive liquidity problems he had uncovered, even though UBS Paine Webber had rated it a strong buy. (Source:  CNN, “Financial Adviser Fired Over Enron Advice”, 26 March 2002).  After Mendenhall fired Wu, UBS sent an email to their clients retracting Mr. Wu’s statement, informing them that Enron stock was “likely heading higher than lower from here on out.” (Source: New York Post, 4 October 2006).  Of course, we all know that just several months later, Enron went bankrupt.

We should be cognizant that in light of the Enron scandal, this level of fraud has not been a recent development. In 2001-2002, a partial list of companies that had to re-declare earnings due to erroneous information contained in previous publicly released earnings announcements included the following companies: Adelphia, AOL Time Warner, Arthur Anderson, Bristol-Meyers, Squibb, Freddie Mac, ImClone, Citigroup, General Electric, JP Morgan, Tyco, Worldcom, Dynergy, Enron, General Motors, AIG and Hyundai.  Many of the company names on this list are the same companies that have been exposed as withholding material information from their investors about their financial health either in this year or in recent years. And let us not forget that in the early 2000’s, JP Morgan, Morgan Stanley, Goldman Sachs, Credit Suisse First Boston, Lehman Brothers, UBS Warburg,  and US Bankcorp Piper Jaffray all paid fines between $32,5000,000 and $400,000,000 for engaging in deceptive and unethical behavior (Source: PBS Frontline, “The Global Settlement, an Overview”, 28 April 2003).

In regard to such systemic fraud, unfortunately, little has changed today.  With the blessings of FASB and our current administration, almost every major bank in the US is cooking their books today (i.e. consider that, of $4.2 billion of Bank of America’s declared earnings during one quarter last year, $1.9 billion was attributable to a non-recurring event, the sale of China Construction Bank shares, and $2.2 billion was attributable to a fantasy-land valuation of Merrill Lynch structured notes).  As I previously stated, though the Enronization of America did not start with the Enron scandal, the consequences of systemic duplicity have finally caught up to its perpetrators and have now reached its tipping point today. If we take a moment to dwell on what aspects of our financial system have been infiltrated by fraud, it would include our financial ratings system led by Standard & Poors and Moodys, our mortgage system, our banking system, our equities analysts and financial analysts, our accounting system, our regulatory agencies including FASB, the SEC and the CFTC, our media, our politicians, our corporate executives, and lastly and most significantly, our monetary system. In fact, though the current media focus seems to be on morally bankrupt financial executives and institutions, the fact is that this scenario could not have proliferated over the past several decades if the problem did not run much deeper than just our financial infrastructure.  If other integral aspects of our society were uncompromised, they would have flushed out the dishonesty so prevalent in our financial industry many years ago. So the real question that needs to be examined is  the following – How exactly did fraud in America become so systemic?

The Fraud of our Legal System

The first phase of the Enronization of America occurred through our legal system. Most of us make the grave mistake of equating our legal system with morality, but law and morality are creatures that often reside at opposite ends of the spectrum under our current legal system.  Since those that make our laws are also the same immoral people that control our financial system, often our laws have very little concern with governing morality and much more focus on ensuring that the very elements that hold power maintain or expand their power.  Most Americans automatically equate a behavior as right or wrong depending on whether a law defines such behavior as legal or illegal without any critical thought, and this is a mistake. The fact is that today, many laws have nothing to do with morality.  In fact, our legal system is laden with such hypocrisy at times that it allows for the very same behavior to be defined as legal if a financial elite is engaging in the behavior but illegal if a  “regular Joe” is engaging in it.

Consider that Richard Strong, CEO of the former Strong Mutual Funds, admitted to skimming $1.8 million from his clients’ accounts that essentially was the equivalent of stealing, yet under the auspices of our current legal system, Mr. Strong was not sentenced to spend a single day in jail (Source: Washington Post, 23 June 2004). Yet there is little question that if a hungry, unemployed man steals food equivalent to a fraction of the money Richard Strong stole, he will go to jail if caught. How is this possible? It is possible because very little honor is left in our legal system. Stealing $1.8 million may be legal under our current legal system, but it certainly is not moral. In 2005 and 2006, CEOs from the 11 largest firms in America paid themselves $865,000,000 in salary even though their “leadership” caused a loss of $64,000,000,000 of market capitalization in their firms during the same equivalent time period (Source: BBC News, 22 June 2006).  Yet, if an employee of this firm performed as miserably as did their CEOs, their reward would almost certainly be a pink slip, not millions upon millions in bonuses, salaries and perks. Paying oneself hundreds of millions in salaries and hundreds of millions more in bonuses despite contributing to unemployment and the substantial loss of shareholder wealth is certainly unethical, yet it will always remain 100% legal. All you have to do is review the financial payouts from last year to know that not a single iota of decency has been injected into our financial system. When firms like Merrill Lynch went bankrupt and then took money from US taxpayers to pay their executives more than $4 billion of bonuses, this only added insult to the injury their bankruptcy inflicted upon many American families.

Were our legal system truly to regulate morality, the executive suites of America’s largest financial corporations would transform into ghost towns as a great percentage of these executives would be jailed. There are numerous actions that are considered “legal” today that would be illegal if moral and righteous men were making our laws, and even a handful of “illegal” behaviors that would be re-categorized as legal. Suffice it to say, if our legal system has been Enronized, our regulatory agencies by default, have also been Enronized. The Enronization of our Securities and Exchange Commission (SEC) was never more apparent in their failure to shut down Bernard Madoff and protect American families even though hedge fund manager Harry Markopoulos informed the SEC both in writing and by phone of the fraudulent nature of Madoff’s fund for nine years. During Congressional testimony regarding this matter, Mr. Markopoulos testified that when the SEC repeatedly ignored his warnings about the fraudulent nature of Madoff’s practices, that he feared for his, as well as his family’s safety, a damning indictment of not only the SEC’s abject failure to regulate, but also of their propensity to protect powerful men in the financial industry whether they are breaking the law or not. The continuing failure of other regulatory agencies such as the CFTC to act in the interests of American people is also apparent in their recent approval of financial products such as the E-mini Gold and Silver futures contracts introduced on April 19th, 2009 that settle strictly in cash. Futures contracts that specifically prohibit the delivery of the underlying commodity explicitly allow its participants to naked short a commodity with zero intention of every purchasing or holding the underlying physical asset in their possession and thus establishing a fraudulent market for a commodity that can never resemble the free market dynamics of its physical market.  The lesson here is this – if you are a small player, the regulatory agencies will still prosecute criminal activity, but if your rank is among the financial elites, they will do nothing.

The Fraud of our Media

The second phase of America’s Enronization has occurred through the mass media.  Ben Bagdikian, the author of the seminal work on media mergers and consolidation titled The Media Monopoly, has noted that almost all major media in the US is now under the control of five major conglomerates – Time Warner, Disney, Murdoch’s News Corporation, Bertelsmann of Germany, and Viacom.  To be fair and objective in this matter, there are a handful of major news organizations not controlled by the “big five”, including The New York Times, The Washington Post, The Chicago Tribune and Los Angeles Times. However, Badgikian’s basic premise that the problem with our media is “not one of universal evil among the corporations or their leaders” nor one of “a general practice of constant suppression and close monitoring of the content of their media companies”, but one of a contradiction between the values of free enterprise and the interests of giant conglomerates, is still valid. Today, many important news stories are reported on the internet by bloggers well before they attract the necessary viral proliferation to draw the attention of major media outlets.  Today, a strong case can be made for the argument that one will find a greater level of truth and integrity in internet reporting than through major information distribution channels such as CNBC.

The Destruction of Our Critical Thinking Skills

The fraud of our media has evolved into the fraud of our educational system. Though this is a topic that commands the devotion of an entirely separate article, the financial elites have heavily influenced the curriculum taught at leading American educational institutions for decades now. For example, over the last century, the Rockefeller family has donated millions upon millions of dollars to leading economic schools such as the University of Chicago and Harvard Business School. Perhaps it is the monetary influence of financial elites such as the Rockefellers that is largely responsible for erroneous economic beliefs about inflation and our monetary system that persist today. To squelch much of the skepticism that may arise around the suggestion that the financial elites would utilize their money to alter the educational curriculum of leading educational institutions in America, recall that in 2002, David Rockefeller stated in his own autobiographical memoirs the following:

“For more than a century ideological extremists at either end of the political spectrum have seized upon well-publicized incidents such as my encounter with Castro to attack the Rockefeller family for the inordinate influence they claim we wield over American political and economic institutions. Some even believe we are part of a secret cabal working against the best interests of the United States, characterizing my family and me as “internationalists” and of conspiring with others around the world to build a more integrated global political and economic structure – one world, if you will. If that’s the charge, I stand guilty, and I am proud of it.”

The only difference today is that the cabal working against the best interests of the US and all American families is no longer secret, but well documented and well known.  Since the above statement is sure to stir up cries of conspiracy regardless of the fact that it is directly attributable to a member of the financial oligarchy, let us take a minute to consider the disappearance of our critical thinking skills. Why do those with a keen interest in suppressing the truth about the origins and nature of our current global financial crisis have great success in doing so merely by simply using the word “conspiracy” to marginalize the well-constructed arguments of others? Why do the people that attempt to discredit these truthful revelations never offer more than flimsy verbal accusations devoid of any evidence to validate their accusations?  And why do we rarely, if ever, challenge the fact that the vast preponderance of people that provide the strongest opposition to the dissemination of truth are those whose personal wealth depend upon delusional beliefs about the health of our stock markets and the soundness of our financial institutions and monetary system? Today, the fraud of our institutional education system has dulled our aptitude of critical thinking to such a degree that we now look to others to do our thinking for us. Instead of challenging the propaganda that makes zero sense, we are all too willing to be duped into believing erroneous concepts just because they are written in a textbook or a newspaper.

As a prime example of this, consider over the past decade, the propensity of Central Banks and the IMF to pre-announce massive gold sales that they rarely execute. From a purely logical standpoint, can anyone well versed in logic truly argue one beneficial reason for doing so?  In 1999, when now UK Prime Minister pre-announced the sale of 400 tonnes, or more than half of the Bank of England’s gold reserves, his announcement promptly caused gold to plummet to $250 an ounce, the lowest price in the last decade. For an institution interested in making profits, it is a foregone conclusion that pre-announced large sales of gold reserves will significantly depress prices; thus what is the reason behind such an announcement other than to purposefully depress prices? Yet, when skeptics are presented with such evidence and can offer no valid counter-argument, instead of intelligently considering the validity of another’s viewpoint, too often they shut off their brains and repeat beliefs that have been repeatedly rammed down their throats.

In the seminal book about warfare, The Book of Five Rings, legendary samurai Miyamoto Musashi wrote, “true enlightenment can be seen by what a person has done, not by what he says. Those who have missed the mark may chatter all day long about this and that, but they have never done anything. Anyone can make a good argument, but few can show good results.”  If we as Americans wish to prevent the death of capitalism and to reinstitute our rights of self-determination and our Constitutional rights to a sound monetary system that are paramount to a free society, we must judge people not by what they say but by what they do. We must listen not to those that present hollow arguments and that can demonstrate no positive track record of results, but rather focus on the thoughtful arguments of the few that have been able to illustrate the intelligence and validity of their views because their predictions have been vetted over time.

As a nation, we have become Enronized because we too often focus on the false arguments of those that are well versed in the art of persuasion yet persistently demonstrate a poor track record when it comes to results.  As a prime example, consider this Congressional testimony where former US Treasury Secretary Hank Paulson disingenuously claims that he advocates greater transparency in US markets when in fact, Goldman Sachs, under his direct leadership, aggressively lobbied to repeal laws that granted financial markets transparency. We are much too apt to accept the words of people rather than to take the more intelligent approach of analyzing their actions to judge the validity of their words.

The Fraud of Our Leaders

The final phase of the Enronization of America has occurred through our power structure and politics. The financial oligarchs that wish to suppress the truth about their role in this crisis have been very opportunistic in forming close relationships with the highest echelons of government and then using this inordinate power to polarize the masses and further consolidate their power.  The revolving door among Central Banks (i.e the Bank of Italy, the Bank of England, the US Federal Reserve), Goldman Sachs, the US Treasury, JP Morgan, and Citigroup has been well documented so I won’t  repeat the prolific work of others here. However, using politics or nationalism as a divisive maneuver is often a favored tactic of the financial elites, so we must remain vigilant against immoral attempts to deflect our attention away from the true causes of this crisis, such as the scapegoating of immigrants or other shameless tactics. In a recent outlook for 2010 that I sent to my paying subscribers, I stated:

“Though bankers and politicians tried to sell 2009 as a year of recovery, this is nothing more than massive deception of the worst kind and hot air. What they delivered to you was not recovery but a big deception.”

I further stated:

If the S&P 500 breaks the support level [of 1126-1128] and remains below it for several days or heavily breaks below it on a single day [on higher volume], then look for a downtrend reversal pattern to follow.”

The above indeed happened and triggered a two-day, 4%+ slide in the S&P 500 last week. I’ve informed my subscribers of the other indicators they must follow to know if this is just a correction or the beginning of a long-term slide.  However, with such rampant fraud in all major stock markets last year perpetrated by politicians and bankers, a big crash is inevitable in the world’s major stock markets and is a matter of “when” and not “if”.  It’s a little early to determine if what happened at the end of last week is the beginning of a long-term slide though initial appearances seem to project that right now. A long-term slide will manifest in time, whether now or later. When obfuscation of fact and misinformation systemically replace transparency and integrity as they have in our modern society, we have little chance of producing a favorable outcome to this current crisis. More than 140 US banks failed in 2009, and every single bank failure announcement occurred on a Friday afternoon after market close so that the revelations of these bank failures could not adversely affect markets while they were still open. Additionally, such announcements were timed to grant investors two weekend days to forget about these failures. America has been Enronized over the past several decades not because of Democrats and not because of Republicans, but because of the financial oligarchs that have ruled and continue to rule our country. The Enronization of America has happened under President Clinton’s watch, under President Bush’s watch and it is now progressing under President Obama’s watch.  If you think there has been a marked difference in monetary and fiscal policy in America during the last 20 years, then you do not truly understund our monetary and fiscal policy.

It amazes me that people still foolishly follow the words of this administration and not its actions. It amazes me that I still hear people praising Obama’s proposed plan (proposed being the key word here) to impose limits on the size and trading activities of the nation’s largest banks without awaiting the resultant actions from such talk. I read one financial journalist that stated high praise for this proposal as he inferred that banks have become too big and that a freeze on mergers and acquisitions in the US banking industry would be welcomed. Did this journalist even consider that the biggest consolidation of power on Wall Street in the last couple of decades just happened within the past two years when Goldman Sachs and JP Morgan virtually eliminated all of their competition and the US Federal Reserve utilized the very crisis they created to seize even more power? Did this journalist even pause to consider that this administration’s cabinet and advisory boards consist of more Wall Street executives than any administration in the last several decades? Did this journalist consider that the greatest theft of American taxpayer money occurred under this adminstration’s watch with the $850 billion bailout plan that is now morphing into trillions of dollars? Did this journalist bother to note that the Senate Finance Committee is now seeking to increase the debt ceiling by a radical $1.9 trillion after just approving a $290 billion increase at the end of last year that was necessary to avoid an unprecedented default on US Treasury bonds? And did this journalist miss the CFTC hearings regarding the imposition of position limits on energy commodities and somehow miss that the true nature of discourse during these hearings was not to ban speculators from creating and bursting bubbles in the commodity markets but only to ensure, in a round-about-manner, that Wall Street can continue this speculation?

And after all this, if this journalist still believes Obama’s comical statement that “the financial system is far stronger today than it was one year ago”, this is exactly what is wrong with our media today.  Because the deceit, lies and the shady accounting practices that cover up the true health of all banks in the Western hemisphere are far stronger today than they were a year ago, the people’s confidence in the US financial industry may be much stronger today than it was a year ago. But confidence and reality are two different animals, especially in today’s chaotic world. If true Glass-Steagall like reforms are indeed implemented, then I will be the first to commend this administration for acting differently than any administration in recent history when it comes to reining in financial greed and fraud. Furthermore, I am much too familiar with the political game of very public tough talk that often is granted the greatest media publicity that eventually morphs into a greatly watered down, very different-looking piece of legislation that somehow escapes the critical lens of the media. So forgive me if I always reserve my judgment regarding such tough talk until I see the final iteration of the legislation that passes into law. My skepticism of this process originates from the fact that administrations have spoken the same tough game in public for decades while continuing to sleep with the enemy behind closed doors.

Until we wake up and correct many of the flaws in our thinking and in our justice system, capitalism has zero chance of survival and any discussion of reviving free markets is moot. Arthur Shopenhauer, a noted German philosopher, once stated,

“All truth passes through three stages.  First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.”

We have already passed through the first stage where truth has been ridiculed. For several decades, those that attempted to reveal the price suppressions schemes executed by governments and Central Bankers against gold and silver were ridiculed as conspiracy loonies. Today, the evidence of this manipulation is so overwhelming that men that dwell firmly inside the confines of the mainstream, men that previously would never have dared to publicly state such sentiments just 10 years ago, are now stepping forward and publicly acknowledging the existence of price suppression schemes that interfere with free markets (i.e., Donald Coxe, chairman of Harris Investment Management in Chicago).

Today we have progressed to the second stage of truth, when truth is violently opposed. Former US Treasury Secretary Hank Paulson testified multiple times in Congress that it is not reality that is important to stock markets, but only what people think they know, even if what they think is wrong. Paulson regularly emphasized the vital importance of consumer confidence to the performance of capital markets.  In the end, confidence levels measure consensus belief and often have very little correlation to the reality of underlying economic fundamentals. In a bear market, such as the one in which we are currently engaged, it is safe to say that rising stock markets serve as a barometer of deceit. The greater the deceit by our leaders, the more likely stock markets will act irrationally and rise when there is no foundation to support the rise, including the most recent rally that we have witnessed in US markets throughout the latter half of 2009 into the very beginning of 2010. But when reality overcomes deceit, watch out below, because we will not see a correction, but a crash.

As long as markets react positively to lies that prevent the masses from understanding the grave situations of our faltering economy and monetary system, our government and financial leaders will continue to prevent people from knowing or understanding the truth. One merely has to acknowledge that last year, FASB conveniently altered mark to market regulations immediately prior to first quarter 2009 earnings season and immediately prior to stress tests that were to be conducted on financial institutions to realize that our current administration is not any more interested in disclosing the truth or increasing transparency than previous administrations. Again, we would be wise to remember Miyamoto’s sage advice to judge someone not by his or her words, but by his or her actions.

The fragility of America’s emotional state regarding the dire economic situations that existed during the last US Presidential campaign left America vulnerable to blindly accepting anybody that promised change, but again we must consider the actions, not the words, of this current administration.  We must look at the men appointed to “solve” this crisis and understand that almost all of these men were handpicked from the same institutions (Citigroup, Goldman Sachs, and JP Morgan) that were largely responsible for creating this crisis. The most efficient way to solve a crisis caused by lack of ethics and morals is not to put the most morally bankrupt people in the nation in charge. It should disturb us all that our current President appointed a man like Paul Volcker to lead a Presidential advisory board when Volcker once stated in reference to rising gold prices in the 1980’s the following:

“That day, the U.S. announced that the dollar would be devalued by 10%. By switching the yen to a floating exchange rate, the Japanese currency appreciated, and a sufficient realignment in exchange rates was realized. Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake.”(Source: Volcker’s memoirs printed in the Nikkei Weekly, November 15, 2004).

Men that clearly state their opposition to free market mechanisms and the reliance on collusion as preferable to transparency and integrity should never be appointed to any position of leadership in our country. Despite the lack of leadership from the financial elites during this crisis, they have made it clear that their agenda of concealing the truth from us will not prevent them from shamelessly pinning us with the blame for their errors by increasing our taxes and devaluing the purchasing power of our dollars. And remember, devaluing major currencies, which no sane person can deny is happening all around the world, is the quickest way to destroy capitalism. It is for this reason that bankers are currently digging capitalism a shallow grave right now.

Though our governments have aided and abetted our global financial crisis which will soon enter its second phase, they have not been the root cause or the prime perpetrators. This honor belongs to the financial oligarchs and the fraudulent monetary system they have instituted. Today, governments have devolved into nothing more than an instrument of execution for the financial oligarchs. The late great John F. Kennedy was the last US President to understand and recognize the massive flaws and immorality of our modern day monetary system. Were the honorable President Kennedy still alive today, but a regular citizen, voicing the exact same displeasures against our current monetary system as he did half-a-century ago, I have little doubt that those in power would have already marginalized his arguments and labeled him as a “conspiracy buff” with a lack of sensibilities.

Can We Save Capitalism?

The lack of transparency and the veil of secrecy that has existed in our financial world for a very long time now have enabled the imminent death of capitalism. Just think about some of the parlance that now is commonplace in our global marketplaces like “dark pools”, where discovery of market prices has become opaque and difficult, yet grotesquely accepted as normal. Furthermore, the misinformation campaigns that the financial elite have engaged upon for decades have further supported and maintained the ignorance of the masses. If one merely focuses on gold and silver markets, one can uncover a mountain of deceit.  Consider that when Central Banks lease gold, they still claim it as an asset on their balance sheets, an obviously fraudulent practice.

In the end, let us not look to the words of our financial and government leaders for truth, but to their actions. If there has ever been another institution in the history of America with a persistently worse track record of accomplishing their stated mission than the US Federal Reserve (that of maintaining price stability), I cannot think of one. Thus, we should permanently shutter institutions that have a track record of utter failure and that have consistently failed to act in the interests of their citizens although they may repeatedly insist that they always act in the nation’s best interest.  We should all want results and supporting actions, not unfulfilled pledges and promises year after year, and decade after decade. Enough is enough. We should also permanently shutter those financial institutions led by corrupt executives that have cumulatively made billions from the purposeful deception and bankrupting of American families.  Finally, if you are a shareholder with voting rights, it is incumbent upon you to exercise your rights at general meetings to oust all corrupt directors and executives at corrupt firms. Because it is near impossible to regulate morality, the only sustainable solution to prevent the death of capitalism is to remove the very institutions and people responsible for this process. As current administrations of major governments all around the world have demonstrated an unwillingness to do so, it is patently clear that this movement must originate from the people.

If we all desire the freedom of self-determination that is impossible with a corrupt monetary system, this change will have to come from the people. If there is one thing about the monetary system that I believe with all my heart, it is this. The monetary system today, as it has been structured by Central Bankers, is immoral. The current monetary system stifles, not encourages free markets. If a free market system facilitated capitalism in the world’s major markets today, the middle class would be healthy and robust, the poor would be transitioning into the middle class, and the rich, while still a healthy component of society, would not increase their proportion of wealth relative to everyone else every year. Instead, in the absence of free markets and capitalism, the rich seize more and more resources every year, the middle class shrinks every year, and the poor become poorer. If every person in this world truly understood how the monetary system operates, whether a Muslim, a Christian, a Hindu, Buddhist, a Catholic, or of any other faith, I am 100% sure that that person would be opposed to our current monetary system based upon his sense of morality provided by the most important tenets of his or her religion. In The Economic Consequences of the Peace, John Maynard Keynes stated the following:

“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

If you don’t understand the above statement, then I urge you to research Central Banks and how they operate until you do. And when you do, you will understand why I claim that no man or woman that calls himself a good Christian, a good Muslim, a good Catholic, or a good Hindu could support our monetary system or work for a bank today in good conscience. If you are skeptical of this comment, as you should be, then I urge you to investigate and understand how the monetary system truly operates before you declare your opposition to this statement. Try to explain in words, to another friend, the complete process of how money comes into existence from the first step of being printed by Central Banks until it ends up in your wallet, along with every party that is charged interest or taxed  along the way during this process (through multiple mechanisms) including the government and the government’s transfer of this “interest tax” to the people.  Until you can verbalize every step of this entire process, one should not claim that he or she understands our monetary system.  But when you can verbalize this entire process, it will become very clear to you why Lenin stated that the best way to destroy Capitalism is to destroy the purchasing power of money. You will understand the extreme hypocrisy of Goldman Sach’s CEO Lloyd Blankfein’s statement that bankers were doing “God’s work” when you realize that our modern monetary system breaks the 8th commandment of “Thou shall not steal.” Furthermore, you will understand that while Goldman Sachs undoubtedly deserved the bulk of criticism levied against it last year,  private banking families that established Central Banks, not Goldman Sachs, have created our fraudulent monetary system. As is the case with other large commercial banks, Goldman Sachs is just an enabler, participant and beneficiary of the corrupt system.

If we all desire free gold and silver markets that are not persistently rigged by the US Treasury, the US Federal Reserve, the Bank of England and the likely usual suspects Goldman Sachs, HSBC, and JP Morgan, then this change will have to come from the people. If we desire free markets of any kind, in any form, this change will have to come from the people. Too many times in the past decade, politicians have promised change only in word but no real change has ever resulted from their actions. This clearly demonstrates that the financial oligarchs are the real power backing all major governments today.  The alternative consequence of our inaction will be the manifestation of Shopenhauer’s third stage of “truth as self-evident” at a not-so-distant time in the future. Unfortunately, however, if truth becomes self-evident, this will undoubtedly mean that the bankers will have succeeded in transforming the middle class of many Western nations into the poor. In reality, if we enter the third stage of monetary truth when truth becomes self-evident, it will be too late for most to take any action that will have any consequence in assisting their families.  The time for action clearly is now – when we are still in Shopenhauer’s second stage of truth  – the stage when all truth is violently opposed. Two movements that provide actionable ideas to implement right now that will help reinstate capitalism and revive capitalism from its deathbed can be found at Move Your Money and Sound Money Now! Instead of just complaining that our lives are being ruined by bankers, all of us would do well to take countermeasures today in an attempt to save capitalism.

JS Kim is the Managing Director and Chief Investment Strategist for SmartKnowledgeU, LLC, a fiercely independent investment education, research, and consulting firm that provides visionary guidance and profitable strategies to deal with the ongoing systemic crisis of our monetary system and capital markets.

Related by The Swapper: