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Why the blog is getting fewer updates...

Monday, October 20, 2008, 2:02 PM

Things will continue to be a little slower than normal on this blog as I enter the home stretch on Chapter 20. I am very close to completion, perhaps another day or two.

As always, this chapter has proven to be harder and more complicated than I thought.  Suffice it to say, it could be an entire course all by itself, but I feel compelled to keep it to no more than ~15 minutes. 

After this part is done, I will breath a huge sigh of relief, drink some champagne, and immediately begin wondering about where I take my efforts next.

I am considering the thought of producing more such chapters but on much narrower topics - say inflation vs. deflation, or my thoughts on gold, or going into greater detail on the key points of preparation raised by Chapter 20.

One thing is certain, I am committed to spending more time delivering value to the subscribers to this site, so more frequent Martenson Reports are a certainty.

I'd love to hear your thoughts on the matter.

Best,
Chris

» Read more

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The "must read" article of the day - The Confidence Game

Monday, October 20, 2008, 8:07 AM

James Grant writes a keeper. I highly recommend you read the whole thing.

The Confidence Game

Quote:
In disclosing plans to buy a quarter-trillion dollars of bank stock in the name of the American taxpayer, Treasury Secretary Hank Paulson harped on confidence. "Today, there is a lack of confidence in our financial system, a lack of confidence that must be conquered," he said on Tuesday.

What Mr. Paulson did not get around to mentioning was the excess of confidence that preceded the shortfall. Under the spell of soaring house prices (and before that, of stock prices), Americans trusted the things they ought to have doubted. But markets are cyclical, and there is always a new day. In compensating fashion, people will eventually doubt the things they ought to have trusted. Investment opportunity follows disillusionment. It's complacency that precedes bear markets.

» Read more

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Money stampeding out of the market

Saturday, October 18, 2008, 11:56 AM

While the myth is that the stock market is a discounting machine, the reality is that it is mostly a liquidity measuring device.

What I mean by this is that the gigantic machinery of Wall Street, which includes all the people working at brokerages, as well as all of the buildings and infrastructure involved in operating a market, are not cheap, and the money to operate all of that has to come from somewhere.

It is safe to say that just keeping the machinery well-oiled requires several billions of new money each month to keep it fed at a subsistence level (for the pin-stripe crowd, I mean).

Yes, we could look at stock's p/e ratios and scrutinize annual reports, but the sad truth is that if more money is leaving the market than entering it, prices will fall.

It's very simple: » Read more

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US losing influence, housing starts, and the next Iceland

Friday, October 17, 2008, 4:00 PM

Here are some interesting stories I collected this week.

US surrenders power to appoint World Bank president
The US is to lose its power to appoint the president of the World Bank after the UK's development secretary, Douglas Alexander, brokered a deal to throw open the post to candidates from any country.

Backed by European governments and developing countries, Alexander overcame resistance from the US and Japan to secure a reform he described last night as "a significant step forward".

My Comment:  This may not seem like much, but symbolically it is huge.  The World Bank wields enormous influence, and for Europe, et al., to demand, and receive, the right to fill the post speaks volumes about US prestige and power at this time.   » Read more

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New Martenson Report Ready

Friday, October 17, 2008, 2:15 PM

One of the most emailed stories at the NYT website today is an Op-Ed piece by Warren Buffet entitled Buy American. I Am.


I think this piece deserves some closer attention because Warren Buffet
is so influential in the world of money. Let's examine his ideas
closely.

Link:  Warren's Risky Play

Note:  This report is for subscribers only.

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The real economy - manufacturing and sales are off ... way off.

Thursday, October 16, 2008, 1:15 PM

As the US government and Federal Reserve work tirelessly to assure that the engines of a debt-based economy (the banks and lending institutions) remain well-supplied with capital and liquidity, the wheels are falling off.

First, retail sales and store traffic suffered some of the most pronounced drops on record in September, indicating that a consumer-led recession is upon us - which would make this the first one since 1991.

...the number of people in U.S. malls and department stores declined 9.3% year over year in September. The U.S. Commerce Department this morning reported that retail sales fell 1.2% in September, marking the biggest decline in three years.

Next, a measure of manufacturing activity in the Philadelphia and NY regions and a different measure of nationwide manufacturing capacity utilization both took very sharp turns for the worse:

WASHINGTON (MarketWatch) -- Turmoil in the credit markets has spilled over with a vengeance into the factory sector in the Philadelphia region, the Philadelphia Federal Reserve said Thursday.
The Philly Fed index plunged to a reading of negative 37.5 in October from a positive 3.8 in September. It was the sharpest one-month decline on record and marked the lowest level for the gauge in 18 years. On Wednesday, the New York Fed reported that factory activity in the Empire State region also fell sharply.

In addition, about 43% said the recent turmoil had forced them to scale back their capital-spending plans.

The region's manufacturing executives expect no growth over the next six months. The index of future activity fell to negative 4.2 from 30.8 in the previous month.

Earlier Thursday, the Federal Reserve reported a stunning 2.6% drop in industrial production in September, the biggest one-month drop in 34 years.

The data "make clear that the factory sector has taken a powerful turn for the worse," Action Economics said in a note to clients. "In total, since August, the economy has shifted from a profile of remarkable resilience to one of freefall at a pace that is consistent with a sizable, rather than mild, recession," Action Economics said. » Read more

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Punishing the Prudent

Wednesday, October 15, 2008, 7:29 AM

One of the dominant myths of America is that we practice one of the
freest forms of capitalism on the face of the planet. Hard work and
prudence are rewarded, while Schumpeter's 'creative destruction' quickly cleans out the mistakes.

Unlike most myths, this one apparently lacks a kernel of truth at the core.

As the details emerge over the various bailouts and market distortions,
it is becoming clearer that moral hazard has been increased, not
lessened, and that those who behaved prudently during the credit bubble
insanity are going to be punished.

Some are getting angry:

Quote:
Community banking executives around the country responded
with anger yesterday to the Bush administration's strategy of investing
$250 billion in financial firms, saying they don't need the money,
resent the intrusion and feel it's unfair to rescue companies from
their own mistakes.

And in offices around the country, bankers simmered.

Peter Fitzgerald, chairman of Chain Bridge Bank in McLean, said he was "much
chagrined that we will be punished for behaving prudently by now having
to face reckless competitors who all of a sudden are subsidized by the
federal government.
"

At Evergreen Federal Bank in Grants Pass, Ore., chief executive Brady
Adams said he has more than 2,000 loans outstanding and only three
borrowers behind on payments. "We
don't need a bailout, and if other banks had run their banks like we
ran our bank, they wouldn't have needed a bailout, either,
" Adams said.

» Read more

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The FDIC expansion explained

Tuesday, October 14, 2008, 12:56 PM

Regarding the expansion of the FDIC powers to include guaranteeing the senior debt of banks and their holding companies...in reviewing the details, I think I figured it out.

Here's the text:

The Secretary of the Treasury, in consultation with the President and upon the recommendation of the Boards of the FDIC and the Federal Reserve, has invoked the systemic risk exception of the FDIC Improvement Act of 1991. [Edit: love the name]

This action will provide the FDIC with flexibility to provide a 100 percent guarantee for newly-issued senior unsecured debt and non-interest bearing transaction deposit accounts at FDIC insured institutions subject to the terms outlined below.

Scope of Eligible Entities

Eligible institutions would include: 1) FDIC-insured depository institutions, 2) U.S. bank holding companies, 3) U.S. financial holding companies, and 4) U.S. savings and loan holding companies that engage only in activities that are permissible for financial holding companies to conduct under section 4(k) of the Bank Holding Company Act ("Eligible Entities").

Not all companies are eligible, but "bank holding companies" are eligible.  

Hmmmm...seems that I recently heard something about somebody switching from being an investment bank to a bank holding company recently...who was that?  Oh.  Here it is.

On Sept. 21, in a move that fundamentally changed the shape of Wall Street, Goldman and Morgan Stanley, the last major American investment banks, asked the Federal Reserve to change their status to bank holding companies.

Goldman would now look much like a commercial bank, with significantly tighter regulations and much closer supervision by bank examiners from several government agencies.

Yes, I remember being confused by this move at the time as it made no sense.  At least the explanations did not smell right.  We were told that GS and MS "asked" to be placed under "significantly tighter regulations and much closer supervision by bank examiners from several government agencies."

That would have been a first.

It is now clear to me what happened.  The government guarantee of all senior debt was already in the works some time ago, and GS and MS hopped on that gravy train.  At every turn, GS has been there with a slightly better seat at the table and better inside information than its competitors.  The Treasury Secretary happens to be a former GS CEO. Just an unfortunate coincidence, I'm sure.

As always, in this never-ending looting operation, the rules are bent and modified willy-nilly to support a favored class of institutions and individuals.

We now have an openly two-tiered system. » Read more

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Bailout package details emerging and a stunning expansion of FDIC coverage

Tuesday, October 14, 2008, 11:55 AM

As several have commented on the posting below, there is now more detail on the bailout package details.

I'm not sure how much value there is in analyzing all these moves and wrinkles, in part because I think the whole situation is just too complicated to predict, and partly because I doubt we are being entrusted with the whole truth.

Still, there's some interesting stuff here.

Joint Statement by Treasury, Federal Reserve and FDIC

Today we are taking decisive actions to protect the U.S. economy, to strengthen public confidence in our financial institutions, and to foster the robust functioning of our credit markets. These steps will ensure that the U.S. financial system performs its vital role of providing credit to households and businesses and protecting savings and investments in a manner that promotes strong economic growth in the U.S. and around the world. The overwhelming majority of banks in the United States are strong and well-capitalized. These actions will bolster public confidence in our system to restore and stabilize liquidity necessary to support economic growth

Translation:  Boilerplate all the way. Nothing interesting here, except that it reveals a bias that economic growth will return once "liquidity is stabilized."   I hold a different view.  I happen to think that we were living on borrowed money and borrowed time.  I do not believe that we can return to "the way it was" by simply restoring liquidity.

Last week, the President's Working Group on Financial Markets announced that the U.S. government would deploy all of our tools in a strategic and collaborative manner to address the current instability in our financial markets and mitigate the risks that instability poses for broader economic growth. This past weekend, we and our G7 colleagues committed to a comprehensive global strategy to provide liquidity to markets, to strengthen financial institutions, to prevent failures that pose systemic risk, to protect savers, and to enforce investor protections.

Translation:  Okay, this is positively Orwellian in some places.  I would dare say that "protecting savers" would include not forcing them to bailout rich Wall Street banks with direct subsidies and future inflation.  Further, savers would certainly enjoy some free market interest rates (lots higher than the Fed's fictitious rates) that are higher than inflation.  Allowing savers a positive return would be the best way to "protect savers," while negative rates would reward banks and speculators.  Virtually everything done by the Fed and the Treasury to date has been at the pronounced deficit of savers. 

And the part about "enforcing investor protections" is thoroughly duplicitous, given the recent mid-flight rule changes that the SEC has dropped on the market lately (e.g. shorting rules).  And I won't even mention the options backdating scandal and other well-documented abuses that were never investigated or concluded. 
(more) » Read more

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Handouts to Wall Street Announced

Monday, October 13, 2008, 8:00 PM

Once again, the "will of the people" was overridden by Congress in their haste to respond to an "emergency," and, once again, it turns out the people's instincts were right.

Remember the initial $250 billion that was going to be used to buy troubled assets which "we had to do right away!" because otherwise there would have been untold misery and millions of jobs lost?

Turns out we don't need to buy any of those assets right away after all.

Who knew? » Read more