>> Bernanke Created Half of 234 Years’ Worth of Money Supply

From the BigPicture:

“The U.S. turned 234 years old yesterday, and yet over half of the nation’s money supply was created since Helicopter Ben took over the flight controls four years ago. No wonder gold is in a full fledged bull market . . .”

-David A. Rosenberg Chief Economist & Strategist
Gluskin Sheff + Associates Inc.

>> Roubini: A Crash Course in the Future of Finance

>> Economic Recovery & Small Businesses

Small Business Economic Trends
The NFIB recently released its Small Business Economic Trends Survey Report for April 2010. The outlook for small business is still not good.

The Index of Small Business Optimism lost 1.2 points, falling to 86.8. The persistence of Index readings below 90 is unprecedented in survey history.

From the Report (highlights by yours truly in bold):
... While news about the economy has been positive for two or three quarters, small business owners remain quite pessimistic about the future for the economy.
...
Since small firms produce half the private sector GDP, it is hard to envision a sustained recovery without their participation.
...
Capital spending is on the sidelines as is the demand for loans to finance these activities. A revival of capital spending will require a significantly improved business outlook and some support from reluctant customers. Plans to make capital expenditures over the next few months were unchanged at 20 percent, four points above the 35 year record low.
...
The news about the economy and financial markets has been positive for some time, so the source of this pessimism must be found elsewhere such as Washington D.C., the source of most business uncertainty, but also facts on the ground: 34 percent said weak sales are their top business problem and that is what business is all about.


In Pictures: What Recovery? - Small Business Still Hurting













About the NFIB
The National Federation of Independent Business foundation is one of the leading sources of information about small business in the United States. The foundation conducts research about policy-related issues as well as the business practices and economic impact of small firms through its Small Business Economic Trends reports and other economic research studies.

Further reading:

• SBET April 2010 Report: here
  

>> Greenspan's $900Billion Survival Formula

Most people are familiar with the sub-prime mortgage crisis. Reader's of this blog have had a humorous look in previous posts:

• >> Dogbert the CEO : Risky Mortgages & Ponzi Schemes

• >> Subprime Mortgage Primer in Pictures

For a more serious look, see this previous post about Bear Stearn's collapse:

• >> Crash Chronicle : The Fall of Bear Stearns

One the problem started, the finger pointing followed not too long after. Lets take a look into a brief history and the solution proposed by Alan Greenspan, who many believe was the chief architect of this crisis.

The Greenspan Put
Once the subprime mortgage meltdown started, there was a lot of "passing the buck" about who was at fault. Greenspan soon became the person most blamed for the crisis:

- Greenspan legacy: erosion of US financial strength , key comments:

• Since Alan Greenspan took office as Fed chairman, it has taken an average of $3.60 of debt growth to generate $1 of nominal gross domestic product growth versus a long-term average of approximately $1.5 to $1.
  

- Reid: It's Greenspan's Fault , key comments:

• Reid's office pointed out that the Fed started to see deterioration in the credit market back in 2003 and 2004, but didn't warn lenders off using the "non traditional mortgages" seen as precursors of what is now a credit crisis until December of 2005, shortly before Greenspan resigned.

But isnt this really a what the Greenspan's put has been all about?
[ Note: The Greenspan put really means that the Fed's monetary policy allowed higher risk taking, becoming a form of privitazing profits and socializing losses ]

For more discussion about Greenspan's "contribution" to the real estate bust such as this chart below, see here:




Greenspan's 1500 word article in the Wall St. Journal

Greenspan, the former Chairman of the Federal Reserve for 19 years, finally spoke out:
- Greenspan's 1500 word op-ed piece in the Wall St. Journal in March 2009: The Fed Didn't Cause the Housing Bubble . Key comments:

• Alan says "Accelerating the path of monetary tightening that the Fed pursued in 2004-2005 could not have "prevented" the housing bubble."
• Its all China's fault! Alan says"As I noted on this page in December 2007, the presumptive cause of the world-wide decline in long-term rates was the tectonic shift in the early 1990s by much of the developing world from heavy emphasis on central planning to increasingly dynamic, export-led market competition. The result was a surge in growth in China and a large number of other emerging market economies that led to an excess of global intended savings relative to intended capital investment. That ex ante excess of savings propelled global long-term interest rates progressively lower between early 2000 and 2005."
  

Greenspan's $900 Billion Survival Formula @ Financial Crisis Inquiry Commission
The Financial Crisis Inquiry Commission (FCIC) is a ten-member commission appointed by the United States government with the goal of investigating the causes of the financial crisis of 2007–2010.

Quoting Greenspan from his testimony to the FCIC on 7th April 2010"
- "I believe that during the past 18 months, there were very few instances of serial default and contagion that could have not been contained by adequate risk-based capital and liquidity. I presume, for example, that with 15% tangible equity capital, neither Bear Stearns nor Lehman Brothers would have been in trouble"

[ Tangible common equity is defined as total shareholder equity minus preferred stock, goodwill and other intangibles.]

Rolfe Winkler explains how this will help: "A bigger equity cushion not only buffers bank creditors from losses — preventing cascading bank runs — it by definition would reduce frothy lending that inflates bubbles in the first place."

Extrapolating the 15% TCE requirement to major US Banks, $869 billion would need to raised:

Nearly $900 billion more to be raised is certainly not feasible. Greenspan also explains why 15% TCE would not be too popular:"Increased capital, I might add parenthetically, would also likely result in smaller executive compensation packages, since more capital would have to be retained in undistributed earnings."

In other words, smaller bonuses.

Credits / Further Reading:
- TCE shortfall Image courtesy Rolfe Winkler at Reuters
- Greenspan's testimony to FCIC available here
- Video of Greenspan's testimony available here

>> Part 2 - Banking Cartels Engineered Financial Crisis Endgame

Jul 11, 2009 - 07:06 AM; By: DeepCaster_LLC

We issue a word of caution to our readers. So long as The Cartel is in a very active interventional mode (e.g. as in taking down the price of Gold and Silver) do not be lured into thinking that the periodic up spikes in the prices of Gold and Silver necessarily present a "breakout" or a buying opportunity. As a practical matter, technical breakouts are sometimes a lure designed to suck in more "longs" prior to a subsequent deeper Takedown.

Nonetheless, it is essential to study the Fundamentals and Technicals even though the Interventionals can override the Fundamentals and Technicals. One must study the Fundamentals not only for all the usual reasons but also because Fundamentals somewhat constrain the timing and effectiveness of Interventions by The Cartel.

Continue reading here

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Probable? Possible? Or hogwash? Please post your comments on what you think about this article.

>> Part 1 - Banking Cartels Engineered Financial Crisis Endgame

Jul 11, 2009 - 06:36 AM; By: DeepCaster_LLC

“…what is the reason for this “seemingly random monetary mess that multiplies its momentum every day? The answer, in one word, control. The elite/insiders already have control of the financial system, but they wanted more, much more…and it was not random, it was planned.” (emphasis added)

“How will all the above manifest itself in your life? The answer: “All you own will shrink...your income, assets, net worth, will shrink year after year in real terms inflation adjusted and possibly also nominally.” - HS Letter, April 27, 2008.

Continue reading here

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Probable? Possible? Or hogwash? Please post your comments on what you think about this article.

>> Bernanke about the Great Depression - We did it

Here are the words of Ben Bernanke at the Conference to Honor Milton Friedman at University of Chicago, Chicago, Illinois on November 8, 2002:

" Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again. "

Thats right. Bernanke himself said that the Fed indeed "created" the great depression.

Continue reading here

>> Gold Update

A friend had asked for an update on gold (http://aprioritrader.blogspot.com/2009/01/gold-makes-move-short-term-trade.html#7475612474474657231) , so here it comes :) - 

(I) $GOLD Elliot Wave Preview (Daily Chart)

Above is the slightly long-term chart of the gold continuous contract (courtesy stockcharts.com), and it seems that are in the middle of the 3rd wave of the 5th. Gold has had a nice long period of consolidation before that, and looks to be gearing to run up. $1000 will be a strong resistance, expect a correction back to $920 levels.

(II) Updated on 06/07 - Inverse H&S On Weekly Chart

Enjoy :-)

>> Great Depression is here? - A picture is worth a 1000 Words

First 14 months of Depression job losses v/s 14 months of job losses so far in this recession:


Job losses in the last 6 recessions:


And finally, payroll employment data from the last 6 recessions and the 1 depression:


Conclusion: The rate and the extent of job losses now is nowhere near the 1930s.

Source:
- NBER numbers on non-agricultural establishments during those years
- NBER's Macrohistory Database
- Charts courtesy Curious Capitalist @ Time.com

[ Yes, I am too lazy to make my own charts from data :) ]

>> NBER study on Recessions & Depressions

---- Abstract -----

Long-term data for 25 countries up to 2006 reveal 195 stock-market crashes (multi-year real returns of -25% or less) and 84 depressions (multi-year macroeconomic declines of 10% or more), with 58 of the cases matched by timing. The United States has two of the matched events--the Great Depression 1929-33 and the post-WWI years 1917-21, likely driven by the Great Influenza Epidemic. 45% of the matched cases are associated with war, and the two world wars are prominent. Conditional on a stock-market crash, the probability of a minor depression (macroeconomic decline of at least 10%) is 30% and of a major depression (at least 25%) is 11%. In a non-war environment, these probabilities are lower but still substantial--20% for a minor depression and 3% for a major depression. Thus, the stock-market crashes of 2008-09 in the United States and other countries provide ample reason for concern about depression. In reverse, the probability of a stock-market crash is 69%, conditional on a depression of 10% or more, and 91% for 25% or more. Thus, the largest depressions are particularly likely to be accompanied by stock-market crashes, and this finding applies equally to non-war and war events. We allow for flexible timing between stock-market crashes and depressions for the 58 matched cases to compute the covariance between stock returns and an asset-pricing factor, which depends on the proportionate decline of consumption during a depression. If we assume a coefficient of relative risk aversion around 3.5, this covariance is large enough to account in a familiar looking asset-pricing formula for the observed average (levered) equity premium of 7% per year. This finding complements previous analysis that were based on the probability and size distribution of macroeconomic disasters but did not consider explicitly the covariance between macroeconomic declines and stock returns.

Emphasis mine. Continue reading here

>> Crash Chronicle : The Fall of Bear Stearns

Recap of Bear Stearns' history and the crisis it faced

Bear Stearns, founded in 1923, had been an aggressive player in the financial markets for many years. One of the pioneers of mortgage-backed securities in the 1980s, Bear was heavily involved in the packaging of sub-prime mortgages during the housing boom. As the prices of these securities slipped in 2007, Bear bought not only for its own account but also for its hedge funds that it established for its wealthy investors. Bear's purchases were financed with short-term borrowings that were collateralized against these securities. But as the market continued to tumble, lenders demanded more cash to secure their loans. When Bear knew it would not have enough cash to cover the margin, it went to JPMorgan, one of its lenders. Both then turned to the Fed to arrange a $30 billion dollar loan guarantee against Bear's assets to prevent the firm from going bankrupt.

From $172 a share to an almost a 98.4% wipeout for investors
Bear sold for $172 a share at the end of 2007, once valuing the firm at over $20 billion. The Fed agreed-on price on March 16 '08 was $2, about $250 million, which represents a 98.4% wipeout for investors. The higher price agreed to a week later ($10/share) actually reduced the Fed's exposure to Bear's troubled assets.

Lets take a peek at Bear Stearns chart:


Where does the blame lie for Bear Stearns collapse?
William D. Cohan’s new book, House of Cards, provides a gripping narrative of the company’s downfall, largely in the protagonists’ own words, which has the side benefit of making vivid the vain, combative, materialistic, and male-dominated culture of the firm.

The behind-the-scenes actions of long time Bear CEO Jimmy Cayne, as well the the replacement CEO Alan Schwartz, only two months after replacing Cayne as CEO was missing in action at an annual Bear Stearns media conference in Palm Beach, Fla., during the March panic that would force the company into JPMorgan’s grasp days later.

You can read a few interesting excerpts from the book here

How is the Bear Stearns purchase working out for JP Morgan?
At the time the deal was announced, the banks said it expected Bear to generate roughly $1 billion in after-tax earnings over the next 12 to 18 months.

It's uncertain if Chase will be able to live up to that promise considering that Bear Stearns' appetite for risky assets trailed only that of Lehman Brothers and Merrill Lynch.

But most analysts agree that if the Bear deal were going to lead to massive writedowns for Chase, as was the case with Bank of America after its 11th-hour purchase of Merrill Lynch last September, it would have happened already.

Continue reading more here

Related articles / Credits :

• Jeremy Siegel's article from which I borrowed about Bear's history and wipeout, here
  
• JP Morgan one year after Bear Stearns
• Bear Stearns chart courtesy TheStreet.com

>> The electronic $550 Billion run on the US Banks

Rep. Paul Kanjorski of Pennsylvania is the chair of the subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises. The subcommittee reviews laws and programs related to the U.S. capital markets, the securities industry, the insurance industry generally (except for health care), and government-sponsored enterprises.

He was on C-SPAN's Washington Journal on January 27th, and explains how the Federal Reserve told Congress members about a "tremendous draw-down of money market accounts in the United States, to the tune of $550 billion dollars." According to Kanjorski, this electronic transfer occurred over the period of an hour or two.

Its debatable whether this electronic money market run nearly destroyed the US Economy, as is claimed by various articles on the internet. However its worth listening to what he exactly had to say.

Here is a brief transcript of what Kanjorski says (I am paraphrasing to an extent here):

"On Thursday Sept 15, 2008 at roughly 11 AM The Federal Reserve noticed a tremendous draw down of money market accounts in the USA to the tune of $550 Billion dollars in a matter of an hour or two.

Money was being removed electronically. The treasury tried to help with $150 Billion. But could not stem the tide. It was an electronic run on the banks

The treasury intervened but had they not closed down the accounts they estimated that by 2 PM that afternoon. Within 3 hours $5.5 Trillion would have been withdrawn and within 24 hours the world economy would have collapsed."





Source:
- Liveleak : Rep. Kanjorski: $550 Billion Disappeared in "Electronic Run On the Banks"
- YouTube : CSPAN Rep Paul Kanjorski Reviews the Bailout Situation
- C-SPAN Video : Rep. Paul Kanjorski (D-PA), Chairman of the Capitol Markets Subcmte

>> The $596 Trillion derivatives problem

Yes, you read that right. $596 Trillion. Thats a Trillion, with a T. [ Lets name this number RBN (Really Big Number) :) ]. Now that I have your attention, lets get to the details -

- This is the size of the derivatives market, as reported in the recent report by the Bank for International Settlements , the numbers are thus thus as on Dec '07.
- This $596 Trillion represents the notional value of outstanding derivatives in all categories
- $393 Trillion by volume = 2/3rd of RBN => represents interest rate derivatives
- $58 Trillion by volume => represents credit default swaps
- $56 Trillion by volume => Currency derivatives
Long and short derivatives should, in an ideal world, net out each other. Note:
- BIS assesses the net "risk" as $14.5 Trillion, this represents the gross market value of all contracts
- the gross credit exposure is a now-small-sounding $3.256 Trillion

Key things to remember ::
- This number is too big to be "taken care of" in case of an un-orderly unwinding
- Counterparty risk is going to be a problem
- Most of these contracts could be hiding under off-balance-sheet vehicles

( Image Information:
- The Bubble Nebula, as captured by Hubble
- Image credits : NASA, Donald Walter (South Carolina State University), Paul Scowen and Brian Moore (Arizona State University).
- Image details here )

>> Lessons from 124 banking blowups : IMF Working Paper

The International Monetary Fund has recently published working paper which counts 124 banking crises in the last 27 years, in countries like Japan, Argentina and Britain. It introduces and describes a dataset on banking crises, with detailed information about the type of policy responses employed to resolve crises in different countries.

Read the paper here