Can anyone here excuse this?  Doesn’t anyone else see a problem with the government pressuring private enterprise to do what they want them to do?

Is anyone really believing this shite?

Faced with sluggish progress in its foreclosure-prevention effort, the Obama administration will spend the coming weeks cracking down on mortgage companies that aren’t doing enough to help borrowers at risk of losing their homes.

Treasury Department officials said Monday they will step up pressure on the 71 companies participating in the government’s $75 billion effort to stem the foreclosure crisis. The will start this week by sending three person “SWAT teams” to monitor the eight largest companies’ work and requesting twice-daily reports on their progress.

This reads straight out of an SS playbook.  Fascism has a singular face, and it is bullying and intimidation!  That’s change we can believe in.

I love it when a plan comes together – A-Team’s Hannibal

Arnold Schwarzenegger has fired off his assessment of where California is today.  In short, we’re screwed.

Declaring that “California’s day of reckoning is here,” Gov. Arnold Schwarzenegger said today the state should turn its dire budget straits into an opportunity to make government more efficient.

Speaking to a rare mid-year joint session of the Legislature and other constitutional officers, Schwarzenegger acknowledged the billions of dollars in spending cuts he has proposed to close a $24.3 billion hole in the budget will be devastating to millions of Californians.

“People come up to me all the time, pleading ‘governor, please don’t cut my program,’” he said. “They tell me how the cuts will affect them and their loved ones. I see the pain in their eyes and hear the fear in their voice. It’s an awful feeling. But we have no choice.

“Our wallet is empty. Our bank is closed. Our credit is dried up.”

There’s still some hope:  Here’s where the cuts are coming from:

Schwarzenegger has proposed a plan that relies partially on accounting maneuvers and borrowing funds from coming fiscal years, but mainly on deep cuts in nearly every program funded by state government.

Those range from cutting spending on K-12 schools, community colleges, the University of California; releasing some non-violent prisoners a year early; cutting pay for most state workers and laying off others; closing 80 percent of the state’s parks, and wiping out or paring back on health and social service programs for California’s neediest residents.

California is broken and needs to be fixed to keep people here.  Maybe that’s not what we want.  Growth for growth’s sake has proven to be an untenable solution for us.  While we mourn the loss of programs, let us be happy for the new found frugality and self-sufficiency.  Maybe some day we can save up in the fat years to prepare for the lean years.

Ladies and gentlemen,

Unfortunately, we have so far failed to comprehend the true scale of the ongoing crisis. But one thing is obvious: the extent of the recession and its scale will largely depend on specific high-precision measures, due to be charted by governments and business communities and on our coordinated and professional efforts. In our opinion, we must first atone for the past and open our cards, so to speak. This means we must assess the real situation and write off all hopeless debts and “bad” assets. True, this will be an extremely painful and unpleasant process. Far from everyone can accept such measures, fearing for their capitalisation, bonuses or reputation. However, we would “conserve” and prolong the crisis, unless we clean up our balance sheets. I believe financial authorities must work out the required mechanism for writing off debts that corresponds to today’s needs. Second. Apart from cleaning up our balance sheets, it is high time we got rid of virtual money, exaggerated reports and dubious ratings. We must not harbour any illusions while assessing the state of the global economy and the real corporate standing, even if such assessments are made by major auditors and analysts.

In effect, our proposal implies that the audit, accounting and ratings system reform must be based on a reversion to the fundamental asset value concept. In other words, assessments of each individual business must be based on its ability to generate added value, rather than on subjective concepts. In our opinion, the economy of the future must become an economy of real values. How to achieve this is not so clear-cut. Let us think about it together.

Third. Excessive dependence on a single reserve currency is dangerous for the global economy. Consequently, it would be sensible to encourage the objective process of creating several strong reserve currencies in the future. It is high time we launched a detailed discussion of methods to facilitate a smooth and irreversible switchover to the new model.

Fourth. Most nations convert their international reserves into foreign currencies and must therefore be convinced that they are reliable. Those issuing reserve and accounting currencies are objectively interested in their use by other states. This highlights mutual interests and interdependence. Consequently, it is important that reserve currency issuers must implement more open monetary policies. Moreover, these nations must pledge to abide by internationally recognised rules of macroeconomic and financial discipline. In our opinion, this demand is not excessive. At the same time, the global financial system is not the only element in need of reforms. We are facing a much broader range of problems. This means that a system based on cooperation between several major centres must replace the obsolete unipolar world concept. We must strengthen the system of global regulators based on international law and a system of multilateral agreements in order to prevent chaos and unpredictability in such a multipolar world. Consequently, it is very important that we reassess the role of leading international organisations and institutions.

If only we could have this kind of leadership in this country.  I was convinced that Obama would not simply revert to politics as usual, and my hopes have been severly dashed.  We are screwed up more than I thought.  You cannot fix free markets with state intervention; our speaker will attest to that.

I’ll start at the beginning. Adam Smith wrote a book called “Wealth of Nations”. At the heart of this book was the concept that individuals attempt to maximize their own personal profit. A lengthy discussion of capital, labor, and revenue conceded that individuals seek to minimize the cost of production and maximize their own personal intakes. This is the reason that we stand today at the brink of quick and painful deflation. (Unless our leaders force us to long, deep, and painful deflation.) However, it is important to remember that Smith was not concerned with money or the use of money. His analysis was only ex post facto considered the defining text for a field of study, economics. Up until that point, trade was only infrequently international and the costs of trade were quite excessive and time-consuming. Modern economists have become so entrenched in the day-to-day predictions of economic output that they often forget to look at the big picture of economics and what it means. Even the most popular “economist” bloggers of today largely ignore basic economic theory and tend to focus more on policy and politics (Paul Krugman comes to mind as a perfect example of this dichotomy as an “economist” but opining almost singularly on political rants and ignoring the motivations of individuals and how the present environment changes them). The only blogger or writer I have found that engages in a realistic discussion of economics is Mish (Mike Shedlock) of Global Economic Analysis. His insights have largely influenced my ideas of the last few years and its application in investing. I applaud his most recent discussion of how Peter Schiff got his hyperinflation call all wrong.

Adam Smith wrote:

What is the species of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him. The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.

This predisposition leads us down the road of what competitive advantage each country has at its disposal.  In the natural progression of industries, whatever component of production is in greatest shortage will grow in cost.  This is considered a shortage.  Everything has a point at which it becomes the bottleneck of production and therefore to employ more of it in production, the price of it will rise to bring additional resources that were engaged in lower-value activities.  In the most recent past, labor within established economies was the choking point and wages increased strongly for many years.  It seemed that these gains were not only here to stay, but would increase in infinity.  Under normal circumstances, these pressures are offset by automation.  By investing capital into additional production machinery, the cost of production can held in check.  In Adam Smith’s world, the “invisible hand” of profit maximization motivation means that this transition is seamless.  In periods of major labor dislocations, investment is “lumpy” meaning that spurts and stops of investment cause labor to be temporarily in shortage or in tight supply.

For the decade of the 90′s, despite a recession, labor demand grew quite steadily.  At the same time, an entirely new labor force for America was being trained on the other side of the world.  Several types of labor were created in India and China; production and information workers.  With India’s long history of British influence and control, they were largely positioned as an alternative to information workers in the United States.  Until the infrastructure was created in the 1990′s to provide real-time support and analysis, the use of place-shifted information workers was largely unheard of.  After the late 90′s, it was a matter of general business in the US.  While the Tech bubble drove up IT costs to insane levels, most companies were planning to offshore as much of the information workers world as they could.  India had done an incredible job of attacking this part of Corporate America, both here (through H1B lobbying) and abroad(through direct outsourcing).  Meanwhile, China was feeding off of the wealth of the West by siphoning off manufacturing jobs.  First, it was manual menial labor, and later, skilled labor of all kinds from jewelry manufacturing to circuit boards.  American’s often now lament that nearly nothing is produced in America.  We, it seems, have priced ourselves out of the labor market.

Which leads us to the outcome.   America has lost the orignal source of its wealth: innovation and manufacturing.  Luckily for us, we own some quite valuable assets; Intellectual Property and real estate. (okay, we’ve got more, but that’s not really what this is about)

While the cost of labor was rapidly declining, and in an environment of tight labor supply (much of the 90′s and this decade), most Americans found high paying jobs such as consulting, sales, and management.  While these are often high paying jobs, they can be quite transitory. Meanwhile, the cost of everything was getting relatively cheaper compared to incomes; food, housing, computers, cars, etc.  Indeed, the loose monetary policies were in a sense combatting this dramatically increased productivity and lower cost labor.  We were digesting it quite well; however right around the corner was indigestion.  This indigestion was where monetary policy was letting us go.  We overheated and the engine of growth stalled.  There was nothing more to milk out when our housing bubble hit.  When  prices of the #1 asset owned by most Americans began to defy logic, reason, and prudence, most took it in stride.  To make up for diminishing household income in real terms, most just extracted the equity of their homes.  Because lending on real assets had proven so effective in the past, investors, cheered on by a FED determined to keep money flowing freely accepted lower and lower restriction on limit, chasing yield.  This chase of yield ended in multiples of leverage beyond human comprehension.  Meanwhile, average Americans could get a piece of their own leverage with low-down or even zero down (and frighteningly negative down 120% loans in some cases).  When prices were normal, this worked as there was little stress on incomes and savings could account for some losses.  Once prices began rising, consumers found little need for savings when their homes were provding them for us.

Which is what led us to the housing bubble popping when noone could afford their own home and noone could continue to pay their mortgage (more or less nearly everyone who “owned a home fit into one of these, if not both in Southern California in 2006-2007).

While we are deleveraging, deflation is setting in.  There is no way to combat this without creating massive amounts of money.  Where that money ends up is no matter when you’re in the storm of deflation.  Right now, 0 interest rates are all that are keeping us from a deflationary depression.  We’ll see what wins out.  Adam Smith’s invisible hand dragged jobs out of America.  Perhaps one of our own “economists” can provide us a way to bring them back.

Which brings me back to a statement I made back in November of 2006:

Historically, strongly inverted yield curves have historically preceded economic depressions… and normal inversions have preceded recessions.

I also agree that we have a “normal inversion” signalling a potential economic recession.

One of the questions that is somewhat debateable is still what makes this time different:
1. There is a lot of liquidity still in the system. China, for instance, has waaaaay too much currency reserves, and heavily weighted towards USD… depressing our rates in treasuries, likely setting off our really low mortgage rates as well. Mortgage rates could snap back due to a variety of situations, not the least of which would be higher defaults. Of course, the cows have already left the barn, the question only remains how fast will lenders close the gates?
2. Lending standards in the mortgage area are likely the lowest they have been in history. Lenders are offering neg-am option-arm, no-doc, teaser rate loans to people one day out of bankruptcy. Best Funding here in L.A. even advertises to this kind of people. I don’t know how you can get any lower than that.
3. Bank reserves are frighteningly low. Why the FED has not yet stepped in to raise reserve rq’s is beyond me. It’s like a drunk asleep at the wheel. I just don’t know when it crashes, but it’s going to. I wonder how much the FDIC designation is going to mean then… I wouldn’t recommend to anyone to exceed those amounts… open more accounts at more banks if you have to, but you dont’ want to take a haircut on cash.
4. The stock market is surprisingly bullish (might be a sucker rally, but I can’t say for sure). Either way, I can sense the tenseness on Wall Street. I am tempted to liquidate everything and hold cash for a while, just because spooked investors can pack the exits at any time.

Some time ago, someone was mentioning stagflation… something which is absolutely garbage. There is no comparison of now to the late 70’s. Still, i might be led to see the uncanny similarities to the ‘72-’73 market.

By your statement, you and I are both asset deflationists, however, the FED can (under pressure) jam the ZIRP pedal and go to infinity with debt monetization to stimulate the economy. It would tank the dollar, but we might actually start producing stuff again. If that doesn’t save us from price deflation, then there is no hope for Keynsian monetary policy in the future.

We’ll see if Keynsian Monetary policy can rescue us here.

Platinum 5 year

Silver 5 Year

Palladium 5 Year

Gold 5 Year

What do you think? Is gold going to fall to meet it’s historical relationship to other metals, or will the other metals rise?

Can you believe that platinum is priced on parity with Gold?

I have a lot of money invested in the stock market, but I have a lot more invested in mine and my children’s future.

See how the 228 voted against the bailout from the New York Times.

We’ve got a full-blown taxpayer revolt on Congress’ hands.  There has been enormous amounts of scaremongering going on today with everything from ranting congresspersons to talking head reporters, and man-on-the-street info from traders on the NYSE floor.

The stock market took one on the chin, and could erode further if bailout proposals are blocked.  My hope is that until some seriously different legislation gets proposed, I will personally oppose this on the SCREBC blog.

And, for today’s reflection, we’ve got to give kudos to Dr. Ron Paul for opposing the bailout:

It’s always blackest before the light. I don’t know exactly when the panic will end, but it always does, just like the euphoric mania that preceded it.