Here We Go Again

We are back to the insanity of 2008/9 multiplied by 500% for what was essentially a global shutdown orchestrated by the elites, ie; those at most fear of loosing their lives, billionaires, politicians and the like, while around 6 billion people are left loosing their businesses, livelihoods and putting about 20% of these right back into poverty, reversing the well orchestrated false lifting of the bulk of them out of poverty over the last 30 years... My thoughts are below:

I have been thinking of the last 2 years where our "front line" emergency response people around the country were steadily being supplied Naloxone to keep overdose cases alive and rubber gloves to prevent any skin exposure to the chemicals they ingested that if improperly handled could kill a first responder... Yea, 75,000+ OD's a year by 2018 with a small decrease in 2019 mostly to the emergency response being able to jolt people back in the world of the living... Very little mention of the 70.000 alcohol related deaths ever made the press or the 35,000 gun related deaths 60% self inflicted, ie; suicide.  Oh, then there is the health epidemic where millions suffer digestive issues, diabetes, hypertension etc. directly related to the guinea pig effect of Americans being subjected to the worst quality food on the planet.  The "drug" industry has exploded in riches providing "solutions" to these "diseases".  Hell I get back to the US and see Narcolepsy ads on TV!  Narcolepsy!

Anyway, what is going on now with all that?  We are all chasing a virus that fortunately for most is mildly deadly.  We have shut down the global economy on a dime as the billionaires, global elite and politically powerful run scared and pull all the stops to keep from getting it, putting the livelihood of billions of people at risk.  I just read that it is likely roughly 500,000,000 people will fall back into poverty immediately, yea 1/2 billion people drop to impoverished to save the 1%... We are in dire straights but not from the virus.  We are in dire straits because the US was the only developed nation on the planet that tried for less then 2 years to normalize the Fed balance sheet and bring interest rates back to market levels in a global overly leveraged universe.  But they failed miserably.  By September 2019 the "swaps" market froze.  Underlying interest rates spiked more then during the financial crises and the Fed reversed course on a dime and cut rates rapidly and pumped $500,000,000 into the "financial system" to effectively bail out hedge funds that had been playing a game with increasing leverage to scrape a few pennies out of a system that had to low interest rates for to long and when things went the other way they got caught flat footed and had to be bailed out.  This all happened behind the scenes and almost nobody knows about it.  All they know is from that point forward all the money printing went directly to the stock market which reached all time highs by February.  Stock buyback's by corporations reached nearly $ 1 trillion a year for the last 3 years (following years of records preceding) further pumping up stock prices to enrich the CEO's and "investors" in these companies debt.  Any company could sell debt there was so much money chasing any yield above the Central Bank manipulated low rates that went on for far to long.  Investment was sluggish, regular wages stagnant and we were told there was no inflation.  All the inflation was in asset prices and for average wage earners, "health care", "education" and "rents", which by government accounts are under appreciated.

Why am I mentioning this?  Well because the debt accumulated to buy back that stock and the "off balance sheet" debt accumulated by the Private Equity / Hedge Fund Industry gambling in that same debt dwarfs that which existed in 2008 before the last financial crises and was looming over our economy BEFORE this current crises.  What has been the reaction?  US gov creates over $2 Trillion in additional taxpayer debt (10% increase in total debt in one bill) to further bail out a heavily leveraged corporate world.  Yea the couple hundred billion doled out in checks to citizens takes front and center in the mass media which is desperate to convince Americans "this time is different".

NOTE: Just like the heavy media campaign to glorify the military after 911, glorify entrepreneurs after 2009 and now glorify health care workers after this latest crises, each time no one is held to account, not the military and it's near $10 trillion in pointless wars against people in mud huts since 911, not questioning or convicting any financial firm for the 2009 crises and not one mass media person questioning why in a "developed nation" where more people go into bankruptcy over medical bills and nowhere does any human civilization spend more on medical care then the US with no positive metrics to show for it but wealthy "health care" intermediaries, billionaire CEO's and executives, wealthy on the backs of the American Citizenry.
Yet the Government has to step in to quell a crises!, the same government that claims any interference in the desperately broken health care system is some kind of a socialist... where we have laws on our books that even stop the government from bargaining for medicine and supplies in that they in the end pay for at huge markeup with taxpayer money (debt).

But in reality the Fed is also increasing it's balance sheet by $2.3 trillion immediately on as part of it's 10x leverage of $440 billion handed to them to "replace the banking system" as the banks have all but ceased ALL LENDING outside of the new government programs and they will expand to over $4 trillion over the next 9 months to "re capitalize" already over-levered corporations... Really?  Who is on the hook for all this money printing?  Taxpayers.  Who created the crises?  Billionaires and Elites.  Who gets ultimately crushed, billions of people, including billions who "social distancing" is a joke cause they live on top of each other already! 

You have to watch the short video in this link:

https://www.cnbc.com/2020/04/09/chamath-palihapitiya-us-needs-to-let-hedge-funds-billionaires-fail.html?__source=twitter%7Cmain

It's the part where the answer to the CNBC anchor's question is "yes' when answering whether airlines should be allowed to fail.  Think about what he says... Who is getting bailed out here AGAIN.  This whole thing is as bad.  Capitalism has built an entire set of rules and ways to deal with the natural loss of value during a crises.  Those who hold the debt, those who old the equity, they loose.  That is called risk.  It is how things operate.  As of now, the Fed has jumped in, buying corporate debt directly and through ETF's etc.  They are basically funding credit markets, mortgage markets, off balance sheet debt markets and businesses that have no revenue and who have used all their reserves and taken on incredible amounts of debt to enrich those debt and equity holders over the last decade, since the last crises.  They paid each other back to the tune of trillions, further enriching themselves and stratifying the global income / wealth divide to levels never seen before in human history.  And WE ARE BAILING THEM OUT AGAIN!

Depression? Mental Illness? The US is the most medicated, unhealthy, over levered and overly financialized nation on the planet (well China and Japan and Europe all are competing for who can be the most in debt).  We were already on the edge.  This virus has become nothing more then an excuse to "reset" the debt, extend it further out to the future and to print money to buy votes.  I am so incensed by this whole thing I don't know what to do... I can't believe what I see happening every day to prop up an already failed economic system.. I went back to college to learn more and perhaps gain a voice.  I learned more, but what I learned is they were still teaching late 19th and early 20th century theory that has long become obsolete as the economic system has become several degrees separated from any theory emulating at that time.  We have no models any more.  We most definitely have no model for what to do to rescue an economy that stops on a dime, let alone a simple thing like letting interest rates rise.  Now we have stopped on a dime and we are throwing 20-30% of the population of a "developed" nation into immediate unemployment (look what can happen in less fortunate nations).  Where there is NO cash flow to pay all that debt, none. What are the effects 6 months from now, 1 year from now? The money has to be printed, to re-capitalize.  Just like in 2008, bailouts to re-capitalize all the cash that was taken out of the system, evaporated overnight?  One could do some simple math and see how about $3 trillion was removed from the financial system from 1999-2008 after the deregulation of the banking sector.  It went directly into the hands of the players in the gambling game of financial markets.  It was the largest transfer of wealth since the tech bubble of 1998 and that the largest transfer of wealth since the bond bubble in 1988 and you can trace that back to the international debt crises brewed from the oil shock in 1973 forward.  Where we are now is no-mans land.  God help us.

If you think what I write here is in the right direction, write your congress person / senator and tell them, "All the capitalist system to work as it was designed and stop bankrupting our future.  The money printing  experiment of the last 10 years proves irrevocably, it does not work.

Credit Default Swaps on US Government Debt

OK, correct me if I am wrong but the US currently has over $7 Trillion in debt floating around out there. Now, those are no small potatoes.

Correct me also if I am wrong, but our current financial mess, including the bailout of AIG, greatly owes it’s thanks to the CDS market.

A quick Wikipedia definition is in order here:

A credit default swap (CDS) is a swap contract in which the buyer of the CDS makes a series of payments to the seller and, in exchange, receives a payoff if a credit instrument - typically a bond or loan - goes into default (fails to pay). Less commonly, the credit event that triggers the payoff can be a company undergoing restructuring, bankruptcy or even just having its credit rating downgraded. Credit Default Swaps can be bought by any (relatively sophisticated) investor; it is not necessary for the buyer to own the underlying credit instrument.

Now can someone explain to me exactly WHO has the ability to guarantee or pay off $10 Million in US Government debt (the usual denomination for a CDS) multiplied by millions if the US Government actually defaulted on it’s debt?

Isn’t this what got us into much of the mess we are in? Idiots actually sold Credit Default Swap contracts on debt securities backed by garbage mortgages, car loans, credit card loans, personal loans, loans for leveraged buyout firms, loans to hedge funds and others taken out to buy yet more debt securities in a kind of vicious circle / pyramid scheme, loans issues by banks to firms they created to buy their own garbage securities so they would not exist on their over-leveraged balance sheets…

Come on now. Help me out. Why in the Hell hasn’t the CDS market been shut down? I am completely baffled by the fact that anyone is crazy enough to issue, buy or trade CDS’s right now since it has become painfully clear that the sellers of the shit have for years not had the collateral to back their issuance and this has been proven over and over again. These are “insurance” products that require no regulated capital to guarantee payment in case the debt they are written against actually defaults.

So why is this stuff floating around guaranteeing US Government debt? And why in the HELL is Geithner calling on the unregulated Hedge Fund industry to take $1 Trillion in new government money to buy more garbage debt from the defunct credit markets? Help me out here? I read an article this week that claimed the price of insuring $10 Million in US Debt had risen to $90,000 per year. Brilliant. Now who in the hell is going to pay the $10 Million if or when the US Government defaults? Isn’t the idea that there ended up layers of these “insurance” products valued at something like $70 Trillion that contributed greatly to the “credit crises” we now face? The idiots who originated the “insurance” products bankrupt their companies and to this day, the US Government is bailing out institutions like AIG with tax payer money so they can continue shoveling the cash to the counterparties of these instruments.

On top of that, the firms and the government agencies involved in the bailouts refuse to tell us who those counterparties are or why they don’t just force a settlement of these contracts and for all parties to take their losses and walk. Instead, our future tax dollars (cause none of this is today’s money, it is all being borrowed for us to pay tomorrow) are going directly into the coffers of God knows whose buddies and they are getting downright rich off of it.

I have completely had it. Our legislators are ignorant impotent pushovers. The people running the treasury are bailing out their buddies and the Fed is going to go bankrupt trying to “be” the credit market. The dollar, or the confidence in it, is in real long-term trouble. What in the hell is going on here?

If the Chinese were worried about US Government debt a year ago they should have bought ALL the CDS’s people were ignorant enough to write. Hell they could have bought US Government protection for $40,000 per $10 Million and be cashing out here at over 100% profit on the CDS contracts alone not to mention still collecting interest on the underlying debt.

Have I said enough? Shut down the CDS markets. Force settlements of all outstanding contracts and regulate the hedge fund industry TODAY.

Little Video on Crises

I got this link from a friend today who is in the financial world as a career. It is a cartoon explaining the credit crises in part. Here it is

This one is not bad. I have seen worse. They missed one of the key elements in the whole thing and what actually has exasperated the problem. That is the investors actually used his earlier example of leverage to buy the CDO's, not just mortgages, to increase their returns. They did this by borrowing from the very banks that were selling them the CDO's and when the value of the CDO falls, the "investors" have to put up more collateral to keep their thin slice of equity in the game. The problem arises when they cannot any longer borrow or renew already borrowed money (usually short term borrowings to buy long term investments) and they all try to sell the CDO's at the same time creating a crash in the market which by the way was completely non transparent, hence the exorbitant profits made selling the junk.

Secondly, they failed to demonstrate how the agencies that gave ratings screwed up.

Third, they failed to demonstrate the role of "insurance" (CDS's) have played in the crises and caused bankruptcies.

Fourth, they fail to demonstrate the way Wall Street made most of their profits by not only buying mortgages but actually buying mortgage companies so they made money all the way up the food chain from the origination to the credit derivative and insurance products on the debt (I think there are at LEAST 5 layers of profit on each loan)

Fifth, they fail to demonstrate how all of this "mortgage" based debt was purchased by money market and other short term investment funds even though they were technically long term debt and how when the market for these products dried up we had near collapse of several money market funds and how the money market funds provided liquidity to the rest of the consumer credit cycle and how this collapse has effected "main street".

Sixth they failed to demonstrate how banks got into the game by creating Structured Investment Vehicles to buy mortgages off of themselves so they could make money off of themselves instead of lending it to outside investors and how this was nothing more than Enron financing (off balance sheet) that they had ultimately to bring back on balance sheets basically making them insolvent as the funds they absorbed.

I could go on and on and on. These are all not that difficult to insert in here. No cartoon video I have seen does more than a 25% job explaining any of this but at least this one gets the first part right and makes some simple concepts visual for people.

Perhaps they could go into the Trillions of dollars borrowed short term by private equity to consume ever more companies with the same debt and leverage ratios. They will be imploding as their companies fail to generate the cash flow in this weak economy to pay back the debts they took out. Some of these companies employ north of 200,000 people with a mix of companies. One of the key reasons I am still a MAJOR bear on the stock market and think after a crazy near term fall then bounce we will have a blood bath going into late spring and beyond, is these private equity guys have been off the radar but when there is a major collapse (like Cerberus from the Chrysler fiasco) of a private equity fund, the market will really tank.

Finally an "Authority" Advocates Re-regulation

I was in University in the late 1980's and early 1990's studying economics at the University of Maryland when I was faced with two options, grow the company I started or pursue my masters in Economics with my thesis being the need for an international financial regulatory authority. At the time I had lofty ideas of becoming a global economic guru who would advocate the abandonment of the archaic, inefficient, unfair, and destructive way economics was dealt with on an international level. Human beings had managed to create highly sophisticated financial "systems" and global financial "markets" that were rapidly evolving but unfortunately the perspective of human beings was Neanderthalistic.

I had the benefit of studying Economics during the collapse of the S&L industry in the US along with a real estate bust, junk bond market implosion and fairly severe recession. I also was a "student" of economics and finance through real world experience and investing from 1981 which allowed me to experience the severe 1982 recession in the US, the Latin American debt crises, gold price explosion and implosion, oil price implosion and the first destructive false economic "growth" experiment of supply side economics by the Reagan Administration (accompanied by military welfare spending and enemy creation) and brilliantly orchestrated junk bond bubble and accompanying corporate buy out craze.

It was obvious to me during my studies we had a systematically flawed economic model functioning on a national and global scale and there were no way the idiots with ass backwards motivations who ran this model and all of its intuitions would be able to do anything that would be a net benefit to humanity. The same holds true today.

So I had the absolute pleasure of reading this article today on Marketwatch about what Henry Kaufman thinks of the global mess we are in.

Notably his statement:

A: The expectation certainly has to be that the banks are undercapitalized, quite a number of them. There are still probably some additional write-offs to be taken. The value of assets are not down yet to what they are supposed to be marked down to. This would seem to me to be an ongoing problem until we see some improvement in economic activity.

There are further issues facing the banking system. There will have to be a re-regulation of the financial system.

My recommendation has been the centralization of the supervision of the financial markets. Let there be one major oversight institution over markets and institutions. The head of that oversight group should sit as a vice-chairman of the Federal Reserve Board. The chairman of the Fed and the head of this oversight group [should] render an annual report to Congress showing what the financial health is of, say, the 25 largest financial institutions of the U.S. And that body should also provide a credit rating for each of those 25 institutions.

And his further remarks:

A: The Federal Reserve has admitted that the deregulation that has occurred has been a mistake. The Fed will support some re-regulation. It has not indicated what the magnitude of that re-regulation will be. Neither will the U.S. Treasury.

The Federal Reserve and the Treasury over the last two decades have let the financial markets be on a deregulated basis. We did not supervise financial institutions tightly. The assumption by the authorities, the kind of belief by the Treasury and the Federal Reserve was that those who do well will prosper in the financial markets, those who do poorly will fail. That of course was not allowed to happen because we just don't allow big institutions to fail because of the systemic risks they pose to the entire world and the system at large in the U.S.

As a result, financial markets were allowed to end up in all sorts of risky ventures, and this contributed to the mishaps that we have today.

We live in global financial markets. We have institutions that operate on a global basis. Therefore, we should have an international oversight group over major financial institutions regardless of whether they're in London, New York, Paris or Tokyo. They should come under one major supervisory authority. That authority should set requirements for capital should set rulings for types of leverage that the institution can undertake, should set training practices for the major markets.
If we do not have a unified supervision, the business will flow to those markets that are most liberal. And those markets will then create havoc for the rest of the international financial groups.

I think there's more support coming for that now than when I first wrote about this 15, 20 years ago because I see France pushing in that direction. The Europeans on the Continent are pushing in that direction. The only ones I haven't heard from on this are the Federal Reserve and the U.S. Treasury.

Yes it pleases me greatly to know I was thinking ahead of this smart man. In fact what his article brings to mind were the few (far to few when I think back) conversations I had when I took the liberty of knocking on the door of one of my professors from time to time to ask their opinion of what was happening in the "real economic world" outside of the somewhat antiquated textbooks I had to study with.

If I had a chance to do it all over again I am still not sure I would have taken the path of furthering my economics education instead of pursuing my business. I was very turned off by the bureaucratic and pathetic "counseling" at the state university. When I initially inquired about the masters program they looked at my completed transcripts and suggested I had 2 semesters of classes that were required just to apply (I was like, why in the hell didn't you spell that out when I started my major, idiot?) and the fact that the University of Maryland for all it's efforts was basically churning out graduates to fill a cube at the Department of Labor crunching boring ass stats for yet more bureaucrats. Economics was going through it's "mathematicization" phase and I did not see the subject in the same light.

Perhaps this has something to do with the mess we are in now. Not unlike the "magic" of any idiot being able to create an impressive business plan and financial projection with the wider use of computers and the newly accessible spreadsheet programs in the 1980's that in my view had a great impression on the flow of money then, the movement of Economics by people determined to make it more of a "science" through the use of statistics, mathematics and computer models totally devalued what I saw as the beauty of economics as a social science that could have better application using some of the emerging technologies but not for those technologies to "take over" the discipline in entirety.

I strongly believe the current crises once again came greatly by application of sophisticated mathematics and technology in the creation of financial products that on paper made "investors" believe anything and any return was possible if you could "hedge", "buy protection for" and or otherwise "remove responsibility for losses" through securitization which resulted in the explosion of credit and unbelievably cheap prices.

I have been saying for more than three years now that all of this "protection" was nothing but a house of cards, not to mention the "false" profits created in the sale of the products themselves and it would not last longer than early 2008. Well here we are. We are nowhere near bottom and finally some "smart" people who did stay in the wonderful discipline of Economics, and who shared my views, are being listened to. God bless them...