Saturday, October 30, 2010



Friday, October 29, 2010


Sisyhus was a Greek (how fitting) king with a hubristic belief that his cleverness surpassed Zeus. The story has all the elements of any modern story ... so let's cut to the chase.  As a punishment from the gods for his deceit, trickery and boundless hubris was compelled to roll a huge rock up a steep hill ... but before he could reach the summit, the rock would always roll back down again.  Similar to Bill Murray's character, weatherman Phil Connors each year as he sets off for Punxsutawney, Pennsylvania, to cover the annual Groundhog Day festival.  Phil begrudgingly (not sure Bernanke begrudgingly is repeating the QE) prepare's and heads off for his assignment. What Phil doesn't prepare for is a bizarre time warp that forces him to relive the same day --- Groundhog Day --- over and over again!  As Phil tries to figure oujt his unbelievable predicament, he begins to realize that this daily curse may actually turn out to be a blessing in disguise!

It has been widely noted this week, including here and also again here, that Bill Gross is on record as describing US current monetary policy as having all of the characteristics of a Ponzi scheme. At the same time Gross also proposes that Chairman Bernanke has really no other options than to implement such a scheme, as he has run out of all other viable policy weapons.

But what about the argument that he could/should do nothing and wean the US economy off a diet of endless asset purchases? In essence the flaw in this argument is that he may not have the option of curtailing QE and, in an ironic sense, this would go a step further in exonerating the Fed Chairman.
Looked at from the perspective of the US government's finances, although the unintended consequences of QE are highly undesirable - e.g. a weaker US dollar, friction with other global trading partners, creation of asset bubbles in emerging markets, booming commodity prices etc. - the US economy is most likely now addicted to QE in the same way that happens in any Ponzi scheme.
There's an old saying that a "rolling loan gathers no loss" and if government's simply roll forward expiring debt with new debt in moderation this does not pose systemic risk. However when the magnitude of the expiring debt is so colossal, and where there is clear evidence that, were it not for the stated aim of the Fed that it is effectively backstopping the Treasury market, non US government buyers (e.g. PIMCO, pension funds, PBOC, BOJ etc) may not participate (at least not at current historically low coupon rates).
There is much talk about the Fed's exit strategy but if the Ponzi scheme is as voracious as it appears to be, due to the over-commitments of US federal debt obligations, it looks as though the Fed is trapped. Not only will it be the lender of last resort it may ultimately become the only lender. Unless the Fed continues to reassure other market players such as other sovereign buyers, banks and pension funds, that they - and this includes PIMCO as well - can turn over their inventory quickly to the Fed if the market becomes illiquid, the absence of bids will create that very same illiquidity and systemic risk.
For many private investors, and this may well include PIMCO, it is not their intention to hold a 10 year bond to maturity. Rather they wish to avail themselves of easy exit possibilities from an accommodating central banker running a public buyback program. This "easy exit" is especially true should interest rates be rising and the value of the bond is declining. Usually it is only very long term asset managers such as pension funds that are committed to such buy and hold strategies - with all of the interest rate risk and duration difficulties that comes along with such an extended holding horizon.
More typically for many private investors their typical holding period may be weeks/months where they are looking to unload the bonds at higher prices each time the Fed steps in with more QE.
If the Fed terminates QE just how easy will it be to keep the Ponzi scheme afloat?
In a nutshell, this is why Chairman Bernanke is "boxed in" and why not only Mr. Gross is turning bearish on US bonds but also so are other major holders such as the People's Bank of China.




Thursday, October 28, 2010


A presidency heading for a fiscal train wreck

By Nouriel Roubini
Published: October 28 2010 20:48 | Last updated: October 28 2010 20:48
What has been the fiscal performance of President Barack Obama? He inherited the worst economic crisis since the Great Depression, as well as a budget deficit that – after much needed bail-outs and a series of reckless tax cuts – was already close to $1,000bn. His stimulus package, together with a backstop of the financial system, low rates and quantitative easing from the Federal Reserve, prevented another depression. Mr Obama also deserves credit that the US, alone among advanced economies, currently supports a “growth now”, rather than an “austerity now” path.
But this is but one half of the picture; we must also judge his first two years on his ability to anticipate what the economy will need tomorrow. Here the picture is much less positive. Given the likely path of fiscal policy after next Tuesday’s election – with the expiration of existing stimulus and transfer payments, and even with most of the 2001-03 tax cuts being kept – the US economy will soon experience serious fiscal drag just when it needs a further boost. Problematically, the administration’s failures leave it relying on the Fed, which is bent on further QE, likely to be announced next Wednesday. But studies show this will have little effect on US growth in 2011, so fiscal policy should be doing some of the lifting to prevent a double dip recession.
In an ideal world Mr Obama would also have been able to move towards reforming and reducing entitlement spending, with commitments to measures that could be phased in over the next few years, therefore avoiding short-term fiscal pain. He would also have committed to increase, gradually over the next few years, less distortionary taxes such as a VAT and a carbon tax. This would have reduced the fiscal deficit, and created a climate in which no investor would worry about additional stimulus.
Sadly, this has not happened. In fact the opposite will now take place. The term stimulus is already a dirty word, even within the Obama administration. After the Republicans make significant electoral gains further stimulus is even less likely. Medium-term consolidation, meanwhile, will be all but impossible as the 2012 presidential election begins to loom large.
In truth the only window of opportunity is 2011. Here the president deserves credit for setting up a bipartisan debt commission, which is most likely to propose a sensible combination of entitlement spending cuts and increases in taxes. But sadly the chance that these recommendations will be implemented in 2011 is close to zero. Republicans will veto any tax increase, while Democrats will resist unpopular entitlement reform.
The upshot is that the current gridlock in Congress will soon get much worse. Of course, Mr Obama cannot entirely be blamed for his limited progress, when the Republicans take that Leninist approach of “the worse the better”, and offer no co-operation on any issue. That they now see Mr Obama as a one-term president will soon mean the worst open warfare inside the Beltway in 30 years.
The coming stalemate will only be made worse by the lack of a reason to act on the deficit. The bond vigilantes are asleep, while borrowing rates remain unusually low. Near zero rates will continue as long as growth and inflation are low (and getting lower) and repeated bouts of global risk aversion – as with this spring’s Greek crisis – will push more investors to safe dollars and US debt. China’s massive interventions to stop renminbi appreciation will mean purchasing yet more treasuries too. In short, kicking the can down the road will be the political path of least resistance.
The risk, however, is that something on the fiscal side will snap, and the bond vigilantes will wake up. The trigger could be a debt rollover crisis in a major US state government, or perhaps even the realisation that congressional gridlock means bipartisan solutions to our medium-term fiscal crisis is mission impossible. Only then will our politicians suddenly remember that, on top of our federal debt, the US suffers from unfunded social security and Medicare liabilities, state and local government debt, and public pension bills that add up to many multiples of US GDP.
A bond market shock is thus the only thing likely to break the impasse. Mr Obama may take some comfort from the fact that the worst of the coming fiscal train wreck will be prevented by the Fed’s easing. But the risk is he will then preside not over a bout of inflation but a Japanese style stagnation, where growth is barely positive, and deflationary pressures and high unemployment linger.
The Obama administration did the right thing early, and avoided another depression. He is still doing the right thing now in pointing out the risks of early austerity. And he is limited by an unco-operative Republican party trapped in a belief in voodoo economics, the economic equivalent of creationism. Even so, he and his party have been unwilling to tackle long-term entitlement spending. Two years in, and this means the US remains on an unsustainable fiscal course.
The result will soon be the worst of all worlds: neither short-term stimulus nor medium-term fiscal sustainability. Fiscally the only light at the end of the tunnel may be that which causes the upcoming crisis. With two years of gridlock in prospect, it will fall to the next president in 2013 – whoever he or she may be – to start fixing America’s fiscal mess. Whether that is Mr Obama or not, that he may leave this challenge may become the worst of his legacy.

The writer is chairman of Roubini Global Economics, Professor at the Stern School of Business, NYU and co-author of Crisis Economics.


Federal Reserve Inspector General Elizabeth Coleman Doesnt Have A Clue What Happend to Trillions of Your Dollars.

Rep. Alan Grayson asks the PIGGLY WIGGLY (The Fed) Inspector General Elizabeth Coleman about the trillions of dollars lent out by the Federal Reserve Bank.  You have to listen to her complete ignorance to get a full picture of how fraudulent the PIGGLY WIGGLY (Federal Reserve) Bank really is.  If this makes you angry then I suggest you contact your congressman and demand answers.

Elizabeth A. Coleman
Elizabeth A. Coleman was appointed Inspector General for the Federal Reserve Board effective May 6, 2007. Pursuant to the Inspector General Act of 1978, as amended, Ms. Coleman leads a staff responsible for promoting economy, efficiency, and effectiveness within Board programs and operations. The Office of Inspector General (OIG) is also responsible for preventing and detecting waste, fraud, and abuse at the Board, among other duties. The OIG achieves its legislative mandate through audits, evaluations, investigations, and legislative reviews, and by keeping the Chairman of the Board and Congress fully informed.
Ms. Coleman joined the Board's OIG in 1989 as a senior auditor. She was promoted to program manager in 1999 and to senior program manager in 2001. She was appointed to the official staff in 2004, as the Assistant Inspector General for Communications and Quality Assurance. Over the last ten years, Ms. Coleman has worked closely with the Council of the Inspectors General on Integrity and Efficiency (CIGIE), a professional organization comprised of about sixty statutory Inspectors General who were formerly members of the President's Council on Integrity and Efficiency and the Executive Council on Integrity and Efficiency (ECIE). Collectively, the members of the CIGIE help improve government programs and operations.
Prior to joining the Board's staff, Ms.Coleman was employed by the Government Accountability Office. Ms. Coleman has a BBA from James Madison University and is a graduate of the Stonier Graduate School of Banking, Georgetown University. She also attended the Federal Reserve System's Trailblazers Leadership Conference. Ms. Coleman is a Certified Information Systems Auditor.



Wednesday, October 27, 2010

«You Thought California State Pensions Were Out Of Control? Wait Until You See This List From Illinois »

UPDATE:  Since we published this story yesterday it has been picked up byGlenn Beck, Business Insider,, and several other sources.  As of 5 AM this morning it has been seen by 322,000 unique visitors.  Keep it going!
Meet Neil Codell an Illinois educator with a $26 million state pension
Just to drive the point further -- if Obama gets his way on his proposed state bailout, you will be paying a portion of Mr. Codell's pension.  'Codell, Neil C.' is 4th from the top of the list.  His estimated career pension is $26,661,604.  That's almost $27 million for a single administrator within just one local Illinois school system (Niles, to be exact).
Obama has requested a $50 billion bailout, this time for states.  We've covered it before, in a general sense, here, here and here.  Certain states are broke for one reason -- Public Employee Pensions.
Rather than require that certain bloated, mis-managed states cut pensions, Obama is trying to sell Congress another bailout -- this one for bankrupt mini-Greece fiefdoms that are politically important to Democrats -- California, New York, Illinois and Michigan.
More detail:  Source
While the California teachers' unions are effectively destroying one school system after another, an alert commenter pointed me to some even more shocking news from Illinois. Their pension system for educators is -- if you can believe it -- even farther off the reservation.

Using actuarial calculations from the Teachers' Retirement System (TRS), Champion News reports that the total estimated pension liability for the top 100 retirees will equal...

Click the table to see a larger version. 
Make sure you're sitting down.



You read this right. The top 100 retirees, by themselves, will cost Illinois taxpayers nearly one billion dollars.


The PIGGLY-WIGGLY (Federal Reserve) is close to embarking on another round of monetary stimulus next week, against the backdrop of a weak economy and low inflation—and despite doubts about the wisdom and efficacy of the policy among economists and some of the PIGGLY WIGGLY's own decision makers.
The Fed is close to embarking on a new round of monetary stimulus next week despite doubts among economists and some Fed decision makers. Jon Hilsenrath discusses. Also, John W. Miller discusses Europe's tougher line on trade with China, as the EU focuses on China's process for bidding on contracts.
The Piggly-Wiggly (central bank) is likely to unveil a program of U.S. Treasury bond purchases worth a few hundred billion dollars over several months, a measured approach in contrast to purchases of nearly $2 trillion it unveiled during the financial crisis. The announcement is expected to be made at the conclusion of a two-day meeting of its policy-making committee next Wednesday.
Piggly-Wiggly's aim is to drive up the prices of long-term bonds, which in turn would push down long-term interest rates. It hopes that would spur more investment and spending and liven up the recovery. But officials want to avoid the "shock and awe" style used during the crisis in favor of an approach that allows them to adjust their policy, and possibly add to their purchases, over time as the recovery unfolds.
Piggly-Wiggly Chairman Ben Bernanke's push to restart the bond-buying program—a form of monetary stimulus known as quantitative easing—has been greeted with deep skepticism among some of his colleagues.
In some of his strongest words yet, Thomas Hoenig, president of the Piggly-Wiggly Bank of Kansas City, said Monday that more expansive monetary policy was a "bargain with the devil."
In the next few months, internal opposition to Mr. Bernanke's approach could intensify as presidents of three regional Piggly Wiggly banks who have expressed skepticism about the plan—Narayana Kocherlakota of Minneapolis, Richard Fisher of Dallas and Charles Plosser of Philadelphia—take voting positions on the Piggly Wiggly's policy-making body. There are 12 regional Piggly Wiggly banks, and five voting seats on the Piggly Wiggly Open Market Committee rotate among them every year, with New York always keeping one.
Getty Images
Ben Bernanke
Investors already expect Piggly Wiggly action. Stock prices have rallied since Mr. Bernanke broached the idea of bond buying in late August. But investors and analysts are divided on whether the gambit will work.
In normal times, the Piggly Wiggly reduces short-term interest rates when it wants to spur growth. But the central bank already cut short-term rates to near zero in 2008, so it is turning to an unconventional measure.
Some Piggly Wiggly officials argue the economy is going through long-term changes that the central bank can't rush, and worry a large bond-buying program might only stoke future inflation or a new asset bubble.
Though details remain to be being sorted out internally, the broad outlines have taken shape.But the view likely to prevail at the Nov. 2-3 meeting is that the economy is falling short on two fronts: Unemployment, at 9.6%, means the Piggly Wiggly is falling short of its legal mandate to maximize employment. Inflation, which is running a bit above 1% so far this year, is below the Piggly Wiggly's informal objective of about 2%, and runs the risk of falling even lower. With so much unused capacity and spare labor, many officials contend, the Piggly Wiggly is unlikely to stoke a worrisome amount of inflation.
Unlike in March 2009, when the Piggly Wiggly laid out a program to buy $1.75 trillion worth of Treasury and mortgage bonds over six to nine months, officials this time want flexibility as they assess if the program is working.
Mr. Bernanke has used the analogy of a golfer with a new putter: Unsure how it will work, he finds best strategy is to tap lightly at first and keep tapping until the golfer figures out how best to use the putter. [MAYBE A TIGER WOODS ANALOGY WOULD BE MORE EXCITING AND MORE TO THE POINT!]
The Piggly Wiggly could leave open the possibility of more purchases in the future, particularly if inflation is projected to remain below 2% and the unemployment outlook remains high, which is currently the expectation of many officials. Or it could halt the program if the economy or inflation surprisingly take off, officials have said. [JUST HOW DEEP WILL PIGGLY WIGGLY DIG THE HOLE?]
Piggly Wiggly officials will update their forecasts for growth, unemployment and inflation through 2013 at the upcoming meeting.
Some investors are on edge about how the Piggly Wiggly will proceed. On the one hand, the Dow Jones Industrial Average has risen 12% since Mr. Bernanke began hinting about buying more bonds two months ago, a welcome rise inside the Piggly Wiggly.
But commodities prices are also soaring, with copper, gold and oil prices rising 16%, 8.1% and 13% respectively. That could portend more inflation than the Piggly Wiggly wants. At the same time, the dollar has slid nearly 10% against the euro; that could help U.S. exports, but it creates tensions with trading partners. A sharp drop in the dollar could give Piggly Wiggly officials pause.
The main aim of a bond buying program would be to drive down long-term interest rates by pushing up the price of Treasury bonds and thus driving down their yields. From nearly 4% in April, the yield on the 10-year Treasury note has already tumbled to about 2.6%, in part because investors expect the Piggly Wiggly to be in the market buying bonds. Mortgage rates, closely tied to the 10-year note yield, have fallen to their lowest levels in more than four decades.
Some investors say the Piggly Wiggly doesn't have much margin for error next week. Too modest a move could disappoint those who say the economy needs aggressive Piggly Wiggly action, but an overly muscular approach could prompt concerns the Piggly Wiggly is overreacting. "There is room on either side for a negative surprise," said Mike Ryan, chief investment officer for UBS Wealth Management Americas.
A Wall Street Journal survey of private sector economists in early October found that the Piggly Wiggly is expected to purchase about $250 billion of Treasury bonds per quarter and continue until mid-2011, amounting to about $750 billion in all.
New York Piggly Wiggly president William Dudley put forward one key benchmark in a speech earlier this month. He noted that $500 billion worth of purchases had the same impact on the economy as a reduction of the Piggly Wiggly funds rate by one-half to three-quarters of a percentage point.
In speeches this week, Mr. Dudley repeated he found the economy's weak state "unacceptable" and said "further Piggly Wiggly action was likely to be warranted."
The bond-buying program is likely to focus on Treasury bonds with maturities mostly between 2-years and 10-years, according to interviews with some officials. The Piggly Wiggly could buy even longer-term bonds, though some officials are reluctant to do that aggressively because it could expose them to long-term losses without much added benefit.

When interest rates are near zero, there is a direct correlation between yields and maturity because interest rates will eventually go up and lenders have to compensate borrowers to lock-in their capital for longer periods of time.



  1. End of the boomers? Bring on the leeches

     "What's the difference between a retired boomer and a leech? Leeches die quicker!"


    Here's a warning for the boomers. The 2009 Financial Report of the US Government has found that the ageing baby boomer generation and rising health costs are going to drag down the US economy. And debt is simply unsustainable!

    "Simply said, holding revenues constant, required Medicare, Medicaid, and Social Security spending and the related deficit financing costs will far exceed the Government's ability to pay," says the report. "Projections show that by 2070, total Government expenditures are projected to be 50 percent of GDP."

    "If the federal government was a private corporation and the same report came out this morning, our stock would be dropping and there would be talk about whether the company's management and directors needed a major shake-up," said Comptroller General David M. Walker, reports

    What does this mean for boomers and 50-somethings? Simply, that they will start to lose their grip on power, says Paul Farrell at MarketWatch. The lid's been blown off.

    "The generational war's exploding far earlier than the old fogies want. Yet, self-absorbed Aging Boomers remain in denial, ignoring the problems. And it's obvious from the evasive campaign rhetoric that politicians won't touch this killer 'third rail.' They hope a good fairy will wave a magical "deficits don't matter" wand and make the massive entitlement debt quietly disappear. But Millennials are waking up. And wising up. They now see how they're being conned. Soon they'll jar the Aging Boomers out of their denial. Moreover, the $51 trillion Social Security and Medicare debt is only part of the burden. Washington has become notorious at disguising how bad things really are. But add in other debt (government, consumer, mortgage, corporate), plus America's share of the debt hidden inside the $300 trillion in global derivatives, what Pimco's Bill Gross warns is a high-risk 'shadow' banking system, the ultimate time-bomb that could bring down the global economy. Add all that and you see how America's in debt way, way over our heads by more than $100 trillion. We've been living way beyond our means for too long. Today each one of our 300 million citizens is in debt by $330,000."

    Let's fast forward to 2020 and the next President of the US, a gen Xer, launches a stinging attack on the boomers. "They had it better than their kids, and way better than their parents. They are a spoiled generation who had every whim catered for: hippies, yuppies, punks and dinks. And now they want us to support them. Look after them!! Well my fellow Americans, it's not happening. They should have made arrangements for retirement in their time, not ours."

    All this suggests we might be entering an era of intergenerational tensions as Governments wrestle with spending allocations as the population ages. And it will get nasty.


October 7, 2010

Gallup Finds U.S. Unemployment at 10.1% in September

Underemployment, at 18.8%, is up from 18.6% at the end of August

by Dennis Jacobe, Chief Economist
PRINCETON, NJ -- Unemployment, as measured by Gallup without seasonal adjustment, increased to 10.1% in September -- up sharply from 9.3% in August and 8.9% in July. Much of this increase came during the second half of the month -- the unemployment rate was 9.4% in mid-September -- and therefore is unlikely to be picked up in the government's unemployment report on Friday.
Gallup's U.S. Unemployment Rate, 30-Day Averages, January-September 2010
Certain groups continue to fare worse than the national average. For example, 15.8% of Americans aged 18 to 29 and 13.9% of those with no college education were unemployed in September.
The increase in the unemployment rate component of Gallup's underemployment measure is partially offset by fewer part-time workers, 8.7%, now wanting full-time work, down from 9.3% in August and 9.5% at the end of July.
Percentage of Americans Working Part Time and Wanting Full-Time Work, 30-Day Averages, January-September 2010
As a result, underemployment shows a more modest increase to 18.8% in September from 18.6% in August, though it is up from 18.4% in July. Underemployment peaked at 20.4% in April and has yet to fall below 18.3% this year.
Friday's Unemployment Rate Report Likely to Understate
The government's final unemployment report before the midterm elections is based on job market conditions around mid-September. Gallup's modeling of the unemployment rate is consistent with Tuesday's ADP report of a decline of 39,000 private-sector jobs, and indicates that the government's national unemployment rate in September will be in the 9.6% to 9.8% range. This is based on Gallup's mid-September measurements and the continuing decline Gallup is seeing in the U.S. workforce during 2010.
However, Gallup's monitoring of job market conditions suggests that there was a sharp increase in the unemployment rate during the last couple of weeks of September. It could be that the anticipated slowdown of the overall economy has potential employers even more cautious about hiring. Some of the increase could also be seasonal or temporary.
Further, Gallup's underemployment measure suggests that the percentage of workers employed part time but looking for full-time work is declining as the unemployment rate increases. To some degree, this may reflect a reduced company demand for new part-time employees. For example, employers may be converting some existing part-time workers to full time when they are needed as replacements, but may not in turn be hiring replacement part-time workers. Another explanation may relate to the shrinkage of the workforce, as some employees who have taken part-time work in hopes of getting full-time jobs get discouraged and drop out of the workforce completely -- going back to school to enhance their education, for example, instead of doing part-time work. It is even possible that some workers may find unemployment insurance a better alternative than part-time work with little prospect of going full time.
Regardless, the sharp increase in the unemployment rate during late September does not bode well for the economy during the fourth quarter, or for holiday sales. In this regard, it is essential that the Federal Reserve and other policymakers not be misled by Friday's jobs numbers. The jobs picture could be deteriorating more rapidly than the government's job release suggests. reports results from these indexes in daily, weekly, and monthly averages and in stories. Complete trend data are always available to view and export in the following charts:
Read more about Gallup's economic measures.
Survey Methods
Gallup classifies American workers as underemployed if they are either unemployed or working part time but wanting full-time work. The findings reflect more than 18,000 phone interviews with U.S. adults aged 18 and older in the workforce, collected over a 30-day period. Gallup's results are not seasonally adjusted and tend to be a precursor of government reports by approximately two weeks.
Results are based on telephone interviews conducted as part of Gallup Daily tracking Sept. 1-30, 2010, with a random sample of 18,146 adults, aged 18 and older, living in all 50 U.S. states and the District of Columbia, selected using random-digit-dial sampling.
For results based on the total sample of national adults, one can say with 95% confidence that the maximum margin of sampling error is ±1 percentage point.
Interviews are conducted with respondents on landline telephones and cellular phones, with interviews conducted in Spanish for respondents who are primarily Spanish-speaking. Each daily sample includes a minimum quota of 150 cell phone respondents and 850 landline respondents, with additional minimum quotas among landline respondents for gender within region. Landline respondents are chosen at random within each household on the basis of which member had the most recent birthday.
Samples are weighted by gender, age, race, Hispanic ethnicity, education, region, adults in the household, cell phone-only status, cell phone-mostly status, and phone lines. Demographic weighting targets are based on the March 2009 Current Population Survey figures for the aged 18 and older non-institutionalized population living in U.S. telephone households. All reported margins of sampling error include the computed design effects for weighting and sample design.
In addition to sampling error, question wording and practical difficulties in conducting surveys can introduce error or bias into the findings of public opinion polls.
For more details on Gallup's polling methodology, visit