Creditor.net

Nice summary by Eric Jantszen:

Bribery in third world countries goes on under the table, behind closed doors, hidden from nosy journalists. In the U.S. bribery of public officials occurs in broad daylight, paid out as speaker’s fees and advisor’s compensation.

I know, I know. You don’t want to hear this. The crisis passed. Green shoots and all that. Jon Stewart’s dressing down of Jim Cramer? Dismissed. The assertion by Bill Black, the senior federal savings and loan regulator during the S&L crisis, to Bill Moyers that the current banking crisis is “1000 times worse, perhaps, certainly 100 times worse, than the Savings and Loan crisis” yet no one has been prosecuted? Forgotten. The revelation from Simon Johnson, Director of the Research Department at the IMF and Sloan School of Management at MIT Professor of Entrepreneurship, that the U.S. is not run by either Republican or Democratic parties but by a American bank oligarchs?

Senator Dick Durbin, who has used his inside information to trade the market, has publicly stated the truth on the matter

“And the banks — hard to believe in a time when we’re facing a banking crisis that many of the banks created — are still the most powerful lobby on Capitol Hill. And they frankly own the place.”

Anytime you trade, you are trading against this inside info and corruption. When you lose you lose. When you win you get taxed, and your funds still end up in the hands of the corrupt bankers and investment firms like Goldman Sachs.

It’s better than the third world. Up until the point it isn’t!

Barry Ritholtz highlighted a great downloadable PDF from Jeremy Grantham of GMO titled The Last Hurrah and Seven Lean Years

It is well worth a read, but here are a few great highlights from it

• “Debt is accounting, not reality. Real economies are much more resilient than they are given credit for.”
• Attempts at economic stimulation tends to stimulate the stock market more than the economy because it trades off momentum & a multiplier effect.
• “Since 1932, in the third year of the Presidential Cycle, the average S&P 500 return (from October 1 to October 1) is 22 percentage points ahead of the average of years one and two! And this is statistical noise? Year three is the time when, driven by politics, financial stimulus and moral hazard are applied so that the economy – particularly increases in employment – can be a little stronger in the run-up to the election in year four.”

I was chatting with a friend yesterday and he said:

“Once I saw the PPIC from Geithner, I decided to channel my anger, and I bought a bunch of bank stocks. So now I can be happy knowing that the govt is stealing money FOR ME, instead of just FROM me”

He really captures the spirit of our free market capitalism.

As far back as 2004 the F.B.I warned of an epidemic of mortgage fraud and yet boosters were promoting the real estate industry through 2008 with rosy predictions that proved false. Some of those same boosters (who want you to believe you are immoral if you default on a loan) have decided to walk away from their homes. Based on their own actions they have zero moral authority over your actions:

The government is heavily invested in seeing the banks get the better end of this situation (of their own making!) even if it impoverishes you in the process. Only you, in consultation with an attorney and CPA, can make a business decision on whether to attempt to renegotiate and/or walk away - that is, what the best business decision is for you - and only you. Make that decision not based on the bleating claims of morality among those who either intentionally misled you or sat silently while firms and individuals over whom they had regulatory authority did so, but rather strictly as a business decision. After all - they both did a few years ago and are again - here and now - today.

This William K. Black interview does a nice job of explaining the modern system of banking fraud.

Recently Mexico said they will be launching tariffs some products from the US because the United States canceled a program that allowed Mexican trucks to transfer goods throughout the US

The Mexican government said Monday it would slap tariffs on 90 U.S. industrial and agricultural products, in a trade dispute that underscored the difficulties facing President Barack Obama as he tries to assure business and global allies that he favors free trade.

Mexico said the tariffs were in retaliation for the cancellation of a pilot program allowing Mexican trucks to transport cargo throughout the U.S.

Unions have for years fought to keep Mexican trucks off U.S. highways, despite longstanding agreements by the two countries to eventually allow their passage. Legislation killing the pilot program was included in a $410 billion spending bill Mr. Obama signed last week.

Currency, as a type of good, is also being heavily manipulated, with countries around the globe trying to out-inflate each other to make their exports cheaper to foreign consumers. Even the Swiss have recently intervened.

The Chinese warned the US against printing too much currency. But the US federal government deficit could easily hit 2 trillion Dollars this year, and the Federal Reserve is buying up hundreds of billions of dollars in bonds across the yield curve to try to push down interest rates.

The Federal Reserve ramped up its efforts to resuscitate the sagging economy, saying it would purchase up to $300 billion of long-term U.S. Treasury securities in the next few months and hundreds of billions of dollars more in mortgage-backed securities.

By buying long-term government bonds and mortgage-backed securities, officials hope to push up their prices and bring down their yields, and thereby energize the economy. Interest rates on many corporate bonds and consumer loans are benchmarked to U.S. Treasury debt.

Deflation has begun receding, and if/when inflation appears it may force the Federal Reserve to slow down the U.S. economy again.

Feb CPI rose .4% headline, .1% more than expected and rose .2% core, also .1% more than estimated. The y/o/y gain is .2% up from flat in Jan, the lowest since 1955, led by energy. The core rate is up 1.8% y/o/y. With oil prices bottoming out as are food prices, which I believe is for good in this cycle, inflation #’s are starting to reverse to the upside. The degree of course will determine the Fed’s next conundrum.

Long-term it seems like hyperinflation is a no brainer bet, but in the meantime the house is using your money to bet against you, propping up whatever they can. How far will they take it?

Yesterday I got the book Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse. I read it from cover to cover in a single sitting, as it is a short 158 page book. The book looks at money, bubbles, and the business cycle through the eyes of an Austrian school economist.

I rate the book 9 out of 10…would have liked a few more pages, but it is a great book. Here are my notes from it…

Government spending often mis-directs capital flow (and thus resources) from effective portions of the economy toward wasteful ineffective business interests, in many cases creating bubbles. But the government rarely, if ever, blames itself for its errors (unless it is passing the blame to competing political parties).

Political ideology is irrelevant: both political parties in the United States claim to be for the betterment of different groups (or, all of us, through different ways), but both take money from the same special interests, and promote the same programs.

Forced lending expansion generally occurs though lending to loan candidates that were generally seen as unworthy in prior evaluations. Much of the housing price bubble came from pushing “affordable housing” and after the home price bubble popped now the government wants to waste capital on propping up the prices of those same assets, promoting losing trading positions on both sides of the same trade!

Interest rates, when not controlled by a central body, help provide a signal to business owners to help coordinate production over time. But when they are controlled by a central body they create artificial demand and signal resources beyond the scope of available. A central body artificially lowering interest rates shifts capital toward long-term capital intensive projects. In many cases these projects never get completed as the cost of credit changes abruptly in the middle of the project due not to market forces, but through the judgement of the federal reserve. Monetary policy manipulation creates the business cycles, and recessions are a necessary part of them.

Businesses that are the most capital intensive are most heavily influenced by interest rate changes. Mining > Manufacturing > Wholesale > Retail > Services

Artificial booms/bubbles increase costs for both legitimate and illigitimate businesses, as the legitimate businesses must compete against the illigitimate businesses for resources in an environment with higher costs inputs in complementary factors of production.

Pushing for deregulation while insuring losses via taxpayers is not actually pushing for deregulation. The Federal Reserve bailing out huge screw ups encourages moral hazard, and mis-allocates resources from the competent to the incompetent. The Greenspan put is a popular economic phrase used to describe the Fed’s repeated loosening of monetary policy to artificially hold up asset prices.

Tax payers were lied to in order to ram through sleazy and unjust banking bailouts. Research from a Federal Reserve study proves this. To this day tax payers do not know where all the money is going…just that it is going somewhere. Gerald O’Driscoll, a former vice president at the Federal Reserve Bank of Dallas, said “Nontransparency in government programs is always associated with corruption in other countries, so I don’t see why it wouldn’t be here.”

Scattered (unpredictable) bailouts make businesses hold back on large investments AND liquidation of toxic assets due to uncertainty.

Many larger businesses actually like the additional of new marketplace regulations like Sarbanes Oxley if they make it prohibitively expensive for newer and smaller competitors to compete.

“Government intervention in banking does not mean a more sensible, more responsible approach to lending will replace the wild risks of recent years. Wild risks will still be taken, except with the beneficiaries being selected more deliberately from amongst the ranks of politicians’ friends and various favored constituencies.”

Short sellers help set market floor values, separate the good from the bad, and thus help regulate markets. James Chanos had the financial self-interest to dig into Enron’s books and find the fraud.

Consumer prices can stay flat during inflation if there is an increase in goods and services available…in many cases inflation will first show up within a specific asset bubble. Even if prices are flat, inflation can still rob us of quality of life that would have been gained through lower prices (and increased purchasing power). Deflation is not a bad thing, especially since it helps retain the value of currency and encourage savings. Many past periods of deflation, like the 1870’s, were economically prosperous.

WWII economics data in the US is mostly smoke and mirrors. Ludwig Von Mises said “war prosperity is like the prosperity that an earthquake or a plague brings.”

School children are lied to and told that Hoover was a laissez faire capitalist, when FDR’s running mate said that Hoover was “running the country down the path to socialism.”

Describing the creation of the Federal Reserve: “Now we can either believe that this is the first and only time in history in which an interest group drafted legislation aimed more at the public good than their own benefit, or we can consider the possibility that its intent was to entrench special privileges for one particular industry at the expense of the rest of society.”

Fiat money is parasitic to an existing currency based on a commodity (or collection of commodities), used to confiscate wealth and pass it on to friends of the government. Commodity based money increases personal freedom by limiting the government’s ability to confiscate wealth.

When the government increases the money supply it goes to the politically connected organization first, whereas the average consumer sees the inflation before seeing any additional income through a raise. You or I have to offer something of value to have money to spend, but the politically connected organization waters down the currency value because they are given fresh new money without first providing any goods or services.

Production, not consumption, drives real wealth creation and lasting economic growth.

Like the side effects of many recreational drugs, the long-term effects of central monetary policy are often the opposite of the acute effects they are trying to promote.

The book ends off with a killer quote from Mencken “The truth, indeed, is something that mankind, for some mysterious reason, instinctively dislikes. Every man who tries to tell it is unpopular, and even when, by the sheer strength of his case, he prevails, he is put down as a scoundrel.”

We paint recessions as being a bad thing, but rarely do we talk negatively about credit expansion. Market Ticker explains why recessions are a mathematically necessity in any banking system that uses fractional reserve lending:

As the “spread” between production and net interest expense rises, the economy falters. A higher and higher percentage of the loans ultimately cannot be paid back, even productive loans, because the net interest expense over time exceeds the productive gain of the person who takes them out. The presence of this ever-widening spread, which is inherently part and parcel of fractional reserve banking, means that recessions are necessary and more importantly, some people who have taken out loans and some people who made loans must, during those recessions, go bankrupt.

That is the purpose of a recession - to clear out the excess indebtedness along with excess capacity, resetting downward the “spread” between net interest expense and gross output (GDP).

While many unfit enterprises go bankrupt, forced entrepreneurs create the next wave of innovation that will rebuild the economic system, but failure and time are needed to clear out the underbrush before the next forest is built. If we prevent failure we prevent success by debauching currency and stealing from the winners to pay for the continued failure of the losers.

I just got done reading Howard Lindzon’s The Wallstrip Advantage book on my new Amazon Kindle 2. His basic philosophy of investing is to reduce clutter and noise and to ride trends you find on the all time highs list.

He reminds that most news outlets are selling old news (with the bias toward being newsworthy) which clouds your vision and judgement, over-representing trends that already exist or are on their down slope.

Major news and events create trends that shift capital flows and thus underlying stock prices, but you have to think beyond the obvious (everyone already knows the obvious and the market is trying to price that in).

Stocks at or near all time highs are more likely to outperform the markets than beaten down stocks…

• stocks are a game of supply and demand and price appreciation occurs in part due to underlying value, but also in part to an imbalance of supply and demand
• the stock market exhibits power law characteristics where the few top performers significantly beat the average
• growth stocks are the hardest to value (so have a great likelihood of being undervalued, especially if you feel you understand and resonate with the growth story)
• they have momentum behind them
• they are what smart money is betting on (giving you free access to their work)
• the longer they have been trading sideways before breaking out the more upside potential there may be in the trend

Set personal boundaries to minimize risk (ie: give an IPO 6 months before investing in it and only invest in stocks that are at or near all time highs). Take profits as a stock appreciates to lower your risk profile and allow you to ride out the remaining portion longer.

Set a stop limit like a 10 average true range (ATR) to force yourself out of losing trades early, and winning trades that start heading south. you can also set a trailing stop limit of something like 10% on stocks.

Look at macrotrends worth investing in

• information - market makers and web native companies have excellent growth prospects
• sins/vice
• war
• health/wellness/vanity

In down markets buy brands at a discount that exist in strong lasting growth trends, but avoid spending too much on them in up markets.

Some killer quotes from the book

• “Never let trades turn into investments, but be willing to let investments become trades.”
• “The best thing about this information trend is how difficult it is to value. Information leads to knowledge, which leads to wealth. This leads to new power structures.”
• “While it has never been cheaper to produce content or distribute content, it has never been more difficult to build an audience.”

Some recommended sites from the book

• Wallstrip
• Howard Lindzon
• Investor’s Business Daily
• Jeff Matthews
• IPO Home
• MyTrade
• Fred Wilson
• Brad Feld

Overall I think this book was pretty good stuff…it helped explain why the winning stocks tend to keep winning while losing stocks tend not to be a great value, despite the psychological trap of looking for a deal.

centralize and bankrupt
here there is nothing left to corrupt
grand ambitions and broken dreams
but we must serve our master

born into it
time to get a loan that pays
bigger faster better
I need more

McMansions and happy meals make not a man rich
in health or spirits or wealth
someday somebody is going to pay for this
but who?

print enough to get through the day
kick the can
call it a plan
and who could have saw any harm in saving the day

trade away the future
just keep borrowing, consuming
one day it will all be ok
everyone will get ahead

except that raghead
we dropped a bomb on his head
mass murder beats socialism
in a democratic free capital society

regulate and subsidize
surprise surpirse
the math works out
move some digits and say its free

ignore inflation
we will tax the rich
they will fix the systemic risk
financial terrorists are our friends

if I can borrow a moment and a dollar, please let me pledge a trillion
have full faith, I have bought my way, and a will make you pay
not for service or goods or value
but simply for existing in perpetual serfdom

One of the biggest things that separates amateur investors from professional investors is the idea that money always needs to be at work or you risk missing out and losing to inflation. Most every organization in the financial and investing community benefits from ignorant money coming to the table and betting against them. But fewer and wiser trades built off from greater confidence are a better strategy for the average investor.

It’s a luscious mix of words and tricks
That let us bet when you know we should fold
- The Shins

Another big thing that separates amateurs from professionals is stop losses. Nobody is right 100% of the time, and a big part of growing wealth is minimizing losses. Tight stop-losses help you maintain gains and prevent losses.

Rule No.1: Never lose money. Rule No.2: Never forget rule No.1. - Warren Buffett