Archive for August, 2013

Syria and the Markets and Our Own Bad Government

136 | By Shah Gilani

Let’s talk about Syria and how what’s happening there is affecting the markets.

I see oil rising to two-year highs. I see gold rising to three-month highs. Let’s see, what else is being affected? Oh, that would be nothing.

And today we find out that, with a touch of some levers somewhere, U.S. GDP growth wasn’t really 1.7% in the second quarter, it was really 2.5%.

Let’s talk about the GDP growth revision and how that’s affecting the markets.

I see oil coming off its Syria-inspired spike and gold giving up some recent gains. Let’s see, what else is being affected? Oh, that would be nothing. Well, maybe bonds just a bit.

Let’s talk about the U.S. government – the government of the most powerful nation on earth – and how its incompetence and interference and manipulation are affecting the markets.

Right this way…

I’ve seen bonds rise and yields collapse, and now some backing-up on both fronts. I’ve seen stocks rise because bonds rose and interest rates collapsed. I’ve seen the headline unemployment number fall because a lot of people are being hired part-time and a heck of a lot more people have given up looking for careers, jobs, or hamburger-flipping gigs.

I’ve seen a lot of banks pay a lot of money… where does all that money go, anyway?… in fines levied for civil “crimes” they never say they are guilty of, because it’s a pay-to-play game and the House is always collecting from the suckers in the grand casino.

What does it all mean? It means that manipulation is a zero-sum game. Stuff is taken from some people and given to others. It doesn’t have to be that way. If only the free markets were allowed to be free, one plus one wouldn’t equal one, it would equal two or three or…

Let’s talk about Syria, or Iraq, for that matter, or Iran, or Saudi Arabia, heck, let’s talk about all of them and how they’re affecting markets.

They’re only affecting markets and the rest of the world because they are in the Middle East. But the Middle East would be neither here nor there, just some place in the middle, if it wasn’t for oil.

The conflicts in the Middle East are mostly based on religion, mostly the same religion. Most of the conflicts are about how to follow Islam, which from Arabic translates to “submission.” Al Qaeda, which translated means “The Way,” is a movement by a bunch of radical Islamists to force their version of Islam, their meaning of submission, on everybody else’s version of Islam. And when Westerners took sides with the governments of the other Islamists who controlled their people, which most Westerners don’t care about as long as the oil is flowing, The Way became a war against Westerners.

But here’s the thing. If the United States was self-sufficient in oil and energy production, which it always could have been, the Middle East would be some place in the middle of that giant continent and only important because we have an ally smack dab on the precipice of the Middle East. But I’m not going there.

The U.S. government likes to meddle in other people’s business when our supposed business interests are at stake. But those interests are increasingly the interests of the oil companies and the war machinery that’s the business of defense contractors.

So, while markets aren’t doing a whole lot, just waiting in limbo to see if the U.S. fires some Tomahawks or cruise missiles at some safe-houses or storage dumps or runways, we might want to ask our government what they are going to do in Syria after they pockmark it.

Are they going to do there what they did in Afghanistan after they armed the Mujahideen with Stinger missiles to oust the Soviets and then abandon them to the Taliban and their rivals promising The Way? Are they going to do what they did in Iraq and hold back the forces of civil war long enough to claim victory over the evil Saddam Hussein, whom the U.S. backed when they wanted Saddam to fight a border war with Iran for 20 years and watch a million men die? Or are they going to do what they did to Egypt and support a Hosni Mubarak with aircraft and money and then abandon him when a popular and democratically elected Muslim Brotherhood regime worked its way into power, only to stand by and watch the military claw back the reins over their people?

The markets want to know. They’re waiting to see how this will affect oil and gold and stocks and the perpetuation of interference and war and wasted American lives.

Let Syria be. There’s no proof that Assad used chemical weapons any more than there was proof Saddam had WMDs. There’s evidence that someone used chemical weapons, but it could have been the opposition. Or some interested party who will benefit by regime change could have unloaded the chemicals. Think about it, have we seen any pictures of opposition combatants dead and dying from the supposed chemical attacks? If Assad used them, why would he use them on civilian non-combatants, the women and children we see on our T.V. sets? All I’m saying is, why are we rushing into a situation we can’t control any more than we could control Afghanistan, or Pakistan, or Iraq, or Iran?

That brings me to managing GDP growth. By the same hand that purports to know how to resolve religious and civil conflicts halfway around the world, are we to believe that hand can successfully manage the free will and entrepreneurship of the American people?

I hate bad government, and that’s what we’ve got, a bad government. This government can’t manage the economy any more than it can manage strife in the Middle East. It ceded economic control to the Fed, which it hides behind when things go wrong. This government interferes to make our economy constipated and 1,000 times worse when it should be on a self-correcting path.

I’m sick and tired of America’s natural potential being sold up the river by our government to banks and oil companies and warmongers for their profit and patronage.

We have to free ourselves of this bad government, which acts like a Venus flytrap.

We have to free our free markets and let the forces of creative destruction clear out unproductive and insolvent institutions, like the big banks that keep getting propped up time and time again, even after they bring the nation to its knees with their fraudulent schemes.

We have to free ourselves of the oligarchs that make the economy a zero-sum game by taking from the population what is hard earned by hardworking people.

That’s what’s affecting the markets…


How to Stop Worrying and Win No Matter What the Markets Do Next

9 | By Shah Gilani

Besides the “indictments” levied here on a regular basis, offering market “insights” is part of what we’re all about. And today it’s time for a little insight.

The markets have been on a tear.

Where are they going next?

Looking in the rearview mirror, we see a 150% move up from the 2009 lows. On a compounded basis, stocks have risen at about a 23% annualized appreciation rate over the post-crisis period. That’s phenomenal.

Putting aside the Fed’s stimulus efforts for a moment, the appreciation on corporate earnings gains – which have risen 32% in the same period (albeit from exceptionally knocked-down 2008-2009 crisis levels) – looks really good.

But “Houston, we have a problem.”

Here’s the “problem” I see and exactly what you can do about it…

First of all, the market rising 150% while earnings have risen only 32% is a mismatch.

It’s hard to justify the overall market’s appreciation rate on an annualized basis and the total appreciation of earnings. Don’t forget, the market is supposed to be a forward discount modeling vehicle. So, it’s saying it expects earnings to continue growing to fill the gap.

The problem with the mismatch and the market’s expectation that earnings will continue to grow robustly is glaringly apparent when you view these earnings we are looking at (since 2009) through the prism of the Fed’s stimulus programs – namely quantitative easing.

The best analysis I’ve seen regarding the Fed’s impact on earnings comes from Robbert van Batenburg, director of market strategy at Newedge USA LLC. Basically, his work attempts to strip out the Fed’s influence by looking at what impact their quantitative easing efforts (to lower interest rates) has had on earnings.

He estimates that the lower cost of capital enjoyed by corporations in the S&P 500 accounted for 47% of the S&P’s earnings growth since 2009.

If you look at the end of 2009, corporate earnings averaged $20 per share per quarter, and corporate interest expenses amounted to about $4 per share. Today, earnings are $26.70 per a share on a quarterly basis, and their corresponding interest expense is down to $1.50 per share. That’s a whole heck of a lot of savings.

That’s why talk about the Fed tapering their binge bond-buying program is worrying markets.

That’s the market’s primary concern. But certainly not its only concern.

Most of the companies in the S&P 500 get an increasingly disproportionate share of their earnings from overseas sales. Those earnings have been helped by stimulus efforts in China, Europe, and across emerging markets.

We’re seeing some capital flight from several emerging markets. A good amount of that capital is finding its way into the euro in anticipation that Europe is on the mend and corporate shares there are a value proposition. And some of that flight capital is coming into the dollar. That’s because the U.S. remains the cleanest dirty shirt in the laundry.

What concerns me is that the market discounting model has run too far ahead of realities.

Fed tapering will cause rates to rise, if only on account of the expectation that they will rise. But rates may not rise too much… for a lot of bad reasons.

If capital flight accelerates out of emerging markets and if Europe doesn’t bounce convincingly, and if U.S. GDP growth doesn’t get above 3% and stay there, we’re probably in for a rude awakening as markets will correct and the “flight to quality” trade will be a support for slipping bond prices and put a lid on rising rates.

We’re in theoretical land. We don’t know what the world is capable of if the market support provided the Fed – and it’s been a global support net first initiated by the Fed then actively followed by every other central bank – is ratcheted down.

The big worry I have is what would happen if the global economy double-dips on account of slowing growth compounding the perception that central banks are running out of blankets to warm tepid growth everywhere.

Without the free market’s ability to freely deleverage from excesses and let capital find its natural course into productive endeavors, we’re going to remain hostages to artificial government papering-over of the real dislocations still hampering economies across the globe.

That’s what we have to worry about.

But as the old Mad Magazine character Alfred E. Neuman used to say, “What, me worry?”

There’s a difference between being worried and being worried to the point of inaction.

It’s possible the markets can continue to move higher. Just because there are serious worries out there doesn’t mean investors should be on the sidelines. There’s no money on the sidelines. That’s no-man’s land.

At my Capital Wave Forecast trading service, we’re pretty fully invested. We’re putting on more defensive positions for sure, including two brand-new ones on Friday. But we’ve enjoyed a great run running with the bulls. We don’t worry about what we can’t control, we just see it and talk about it.

One thing we do that works beautifully is to make sure we have stops on our positions. And they’re trailing stops, so of course we keep raising them as we accrue more profits. I recommend everyone do the same.

So back to the original question… Are the markets going down?

I don’t know, but I do worry about that.

That’s why I have the Capital Wave portfolio set up this way. We can’t lose.

If the market corrects, we’ll get stopped out and be sitting on plenty of profits in the form of dry capital. And our defensive plays will kick in, and we’ll make money on the way down.

If the markets go higher, we’ll get stopped out on our defensive positions and take our small “insurance premium” losses and watch our long positions appreciate. And we’ll raise our stops higher as our positions appreciate to make money on the way up.

Worrying is a good thing. But not as good as being in the market and having a plan to not have to worry about all the worrisome things that plague sidelined investors.


P.S. If you want to see the full Capital Wave Forecast portfolio, just click here.

We Just Got a Glimpse Inside Wall Street’s Con Game

14 | By Shah Gilani

On Tuesday morning, Goldman Sachs let its computers run; too bad for Goldman they got out of the corral and ran wild.

Some kind of programming error triggered unintended option orders. And within 17 minutes after the markets opened, the damage was done.

By some estimates, Goldman could lose up to $100 million.

So what caused it?

It could have been a fat-finger… or it could have been a “ghost in the machine”… or it could have been a window into the reality of high-frequency game theory and its application.

I say it was the latter.

Couldn’t have been a fat finger. There are too many lean and mean traders and pointy people in general at Goldman for that. The only thing that’s fat over at Goldman are their bonus checks.

A ghost in the machine? Nah. When your existence is overseen by “spooks” (that’s the name insiders call CIA operatives, and once a spook always a spook), it’s impossible to not have ghosts in the machines, in the hallways, in the underground offices protecting their building and operatives worldwide (and watching who threatens the Death Star). You can’t have a ghost in the machine when the machine is a ghost. It’s a Zen thing. But Tuesday morning wasn’t Zen-like.

Here’s everything you need to know…

The Events

Goldman’s computers sent “expressions of interest” – that’s what the Financial Times called them, based on its interviews – down to the exchanges. (I’ll come back to expressions of interest and you’ll see them for what they really are.) However, the expressions of interest weren’t what was transmitted. What got fired instead were real orders.

The orders were to buy and sell options.

Of the estimated 400,000 contracts on 51 different stocks that got executed, and of the 500 biggest orders, 405 orders were sent down on targeted stocks whose tickers start with the letter H, I, J, K, or L. Of those 405 orders, some 130 orders were for 1,000 or more contract lots each.

In other words, this was some type of “program.”

The Outcome

The options prices at which Goldman ended up buying and selling were so far outside where the options were actually trading that they lost a lot of funny money… maybe 100 million shekels.

For example: At the open on Tuesday, some iShares Russell 2000 ETF options were changing hands at $3.32; Goldman came in two minutes later and sold a chunk of those options at $1.00; a minute later they were back trading at $3.32. Now, that’s a trade I wish I was on the opposite side of. Imagine buying 1,000 options contracts at $1.00 (thank you Goldilocks) and selling them in a few seconds for $3.32!

So, you can see how the outcome for Goldman was such a huge loss on the day.

And of course, Goldman knows how much $100 million a day is.

Why just back a couple of years ago, after the crisis, in 2010, Goldman earned at least $100 million a day from its trading division on 116 out of 194 trading days through the end of September. The firm lost money on just one day during the three-month period ending in September, federal regulatory filings showed. So a $100 million losing day? SHOCKING!

The Aftermath

Who cares? You’ll read about it, and it will be what it will be.

Goldman will get a bunch of the errant trades it lost money on cancelled. It will lose money on others.

The final body count – in terms of whether it will affect one or five employees’ year-end bonuses at the trading behemoth – depends on whether Goldman will be held responsible for its errant trades, or how many of them will be cancelled, or whether they might have to make other traders whole for the black hole they dug for them. Maybe they’ll have to figure out how to compensate traders who took the other side of their errant trades and then hedged their positions, which would end up being open positions on their own and subject to risk, which they wouldn’t have entered into if they hadn’t made their maiden trades with Goldman.

What matters, what is hugely important, is this…

You just got to see through a ghost.

Let’s talk about that “expression of interest” thing. That is a ridiculously insulting way of characterizing the bids and offers Goldman sent out. What they were doing was sending fake bids and offers or pinging the markets to get market-makers and traders to move their quotes to trigger trades.

It’s about program trading in the high-freakquency trading universe.

It’s game theory in action. And it’s a dangerous game.

Why on earth would Goldman send an order to sell the iShares Russell options for $1.00 when it’s trading at $3.35? Of course they wouldn’t! They never meant to send real orders. They were supposed to be sending expressions of interest, or manipulative bids and offers, to shake out free-money trades. How else do you make $100 million a day for almost 116 days in a row?

For Heaven’s sake, I’ve been screaming about this for years. I’ve written about it to you readers here and at Money Morning innumerable times, for Forbes, over at the Wall Street Journal’s MarketWatch. I talked about it on TV as recently as Tuesday on Fox’s Varney & Co.

Goldman isn’t the only ghost out there. There are a lot of them rising up from the graveyard we used to call our capital markets, our former free markets, our once shining city on the hill.



P.S. If Goldman Sachs can lose $100 million in a matter of minutes on account of its computers misfiring, is that a sign of things to come? Or is it proof we’re already there?

I think you don’t have to look further than today’s Nasdaq Exchange embarrassment for the answer to that…

Why the JPMorgan Criminal Case Matters to You

15 | By Shah Gilani

Something very important is going to come out of these new criminal charges just filed against two ex-JPMorgan traders… at least, I hope it does.

It’s not about who did what to contribute to the London Whale’s billions in losses. Frankly, who did what in this case is worthless news, unimportant, and a sideshow. Of course, the public will be riveted all the same, and prosecutors can’t wait to ascend their microphoned podium and tell the world, “We got the banksters.”

But I don’t think they will be found guilty. If they are found guilty, it will be because prosecutors prove “intent” and blur the technicalities, which will be mindboggling.

The reason I don’t think they will be found guilty is because the technicalities will likely prove to be such a moving target that the defense lawyers will claim, and rightly so, that they did nothing wrong, because as far as their intent, what they did is being done all the time, and regulators know it.

For heaven’s sake, the regulators gave the banks the leeway to do it.

This is dangerous for all of us…

Bruno Iskil was called the London Whale on account of the size of the positions he amassed. Those positions later cost JPMorgan $6.2 billion. Mr. Iskil is not being charged with any crime. That’s because there’s no crime in losing money.

But it is criminal to falsify books and records, and that’s what the government is saying that Javier Martin-Artajo (49) and Julien Grout (35) did. Allegedly Mr. Martin-Aratajo pressured Mr. Grout to “mismark” derivatives trades to hide mounting losses on the Whale’s growing tail risk.

Let’s assume that Mr. Grout marked the trades where Mr. Martin-Artajo told him to.
The problem with proving intent is proving that the marks were so egregious that the only purpose of marking them where they were marked was to obviously hide the losses.

Now, here’s the rub, sometimes that’s easy to prove. However, in the case of derivatives, especially in this case, that may be impossible to prove, barring emails that literally say, word for word, “mismark the trades to hide our losses.”

In the stock trading world, the practice of “painting the tape” has long been practiced.
Painting the tape, which is kind of what the JPM boys are being accused of, is illegal.

Which, of course, doesn’t mean it isn’t done all the time…

Painting the tape works like this.

Suppose you’re a big trader and you have a bunch of big positions that you bought and it’s the end of the quarter and how much money you’ve made will determine your next bonus. At the end of the trading day today, your positions will be “marked,” which means valued, at the last price that your stocks closed at. It’s in your interest to see those stocks close at the highest price possible at the close. Why? Because the higher the price, the better your profit looks when the books are closed out.

In order to make the prices higher, you buy shares into the close, or maybe you put down some orders to buy a bunch of stock on the close; whatever your plan is, you are trying to get the price to end the day as high as you can drive it.

That’s painting the tape.

At the end of the day, everyone knows what the closing price is because stocks are traded on an exchange and all those prices are determined and publically disseminated.

That’s not the case with derivatives.

Derivatives, which are what the London desk was dabbling in, are priced, or marked, based on bids and offers and sometimes your own made-up numbers.

The convention is generally to get a few quotes on the derivatives you want to (or have to) mark, then price them at the midpoint between the average of the bids and offers. If I call around to a couple of dealers or brokers to get a quote on my CDX N.A. IG9 derivative position (which is what the London Whale was betting big on), maybe the average bid price (what someone will bid or pay to buy the CDX from me) is 102 and the average offer price (what someone is offering to sell me more CDX at) is 106. The midpoint of that spread is 104. Since I own a big position in the CDX, which means I want it to go higher in price, I’d rather mark my position at 106 than the midpoint of 104, and I certainly don’t want to mark my position at 102.

Here’s where technicalities will come into play. It may be the convention to mark at the midpoint, but it isn’t the law.

Here’s why. First of all, the blokes who give me the quotes don’t necessarily have to honor them. If I say to the dealer who gave me a 102-106 quote, “Okay, I want to sell you a bunch of CDX at the 102 you bid,” he could say, “I’ll buy a little there, then I’ll have to get back to you with a new price.” Or the person could just drop his bid price to see how desperate I am to sell my big position.

If I’m smart, I’m not going to tell him how much of this CDX I have to sell. I don’t want him to lower his price. But now I know there isn’t really a lot of interest in him buying any of my stuff at 102.

So I keep calling around. I call brokers who call around to other dealers and get back to me with bids and offers. But say I’m the London Whale and I’ve bought so much CDX and the blokes who sold it to me figured out I own a ton of it, in fact, I practically own all of it.

How big were the London desk’s positions? In the first quarter of 2012 they added – “added” – $390 billion worth of derivatives. Certainly not all of them were CDX. But their positions were huge by any and every measure. And other traders knew it.

Now, if I’ve sold a few billion dollars of CDX to the Whale and I know that he has a giant position and I know who else sold him more CDX, what’s to prevent me from trying to profit by seeing if I can drive the price down and force the Whale to sell and really knock the price down? Nothing. Why would I do that? So I can buy back what I sold him a lot cheaper and make a ton. Oh, and by the way, maybe I’ll call some of the other blokes I know who sold Bruno some CDX.

What do you think is going to happen when Bruno then calls around for quotes? I’d say, “Hey Bruno, how you doing today, it’s a beautiful day isn’t it? My bid on CDX is 95, got any to sell?” And if Bruno and Javier and Julien call around and they get 95 bids, then 93, then 89, don’t you think they know they are being gamed and that if they sell they’re screwed? Of course they know it. Everyone knows it.

But they aren’t selling. They just want a quote to mark their books.

Now what do you do? Now how do you mark your position? Are you supposed to mark it at such a huge loss just because the traders on the other side of your trade are out for blood? And you haven’t even sold anything to them. What if your bet turns around and you start making money? You’ll be a hero. But not if you have to sell at these depressed prices and take a giant hit.

There’s a lot more to the complexities of marking derivatives. That’s why this case will be such a nightmare.

Prosecutors will say that there were real trades being done and they should have marked their positions there. But defense lawyers will argue that they were too small to count, because after all, the Whale didn’t have to sell his positions, and they came to realize that they were being gamed on the quotes.

Should it be self-fulfilling that other traders can force you to mark down your positions so you show big losses and then the whole world knows it, and they can really kill you?

What’s at issue here, what’s important here, is how should derivatives be marked and how often.

Banks have been given leeway to mark their “risk assets” to models they construct. They can get quotes and sometimes they can mark-to-model their positions. If you don’t think marking to your own model isn’t fraught with self-serving painting gone wild, check yourself into Betty Ford, you’re hallucinating.

The entire system of pricing risk assets, tradable assets, is a hodgepodge of giveaways that regulators gave to banks because Congress was lobbied to give them massive wiggle room… precisely because they take massive positions.

And as you see from the London Whale story, when you take massive positions, bad things can happen, including your competitors forcing bad things on you.

But, of course, there’s more. Imagine (you don’t have to; it happened in 2008) a bunch of giant banks are all on the same side of the wrong side of a massive bet on something. Imagine they all need to keep the marks on their positions high enough to hide the truth (oh, they did that too) and they’re allowed to do that. Which they are.

What would happen if there was no turnaround on their positions and no one (none of the regulators) knew who was in trouble because they all lied on their marks?

This case shouldn’t be about whether there was intent to mismark trades. This should be about establishing that there is a problem with the process, and how banks hide their liabilities because they can.

By bringing it to light, we are our own fools if we don’t figure out how to get banks to price everything on their balance sheets to reality.

So we can see how dangerous their mammoth size really is.

And because if they aren’t broken up, the coming reality – and it is coming – won’t be as pretty as the last little crash.


What’s Really Going on Inside a Big Bank

21 | By Shah Gilani

Here’s a bit of inside information for you.

It’s about how things really work on the inside of a bank.

Any big bank – any big bank with an incentive to make money, which of course would be all of them.

This is one lesson you won’t ever forget…

Banks have “assets,” otherwise less technically defined as “stuff.”

The stuffing in the stuff banks own (meaning they have a position, or are the beneficiaries of a stream of income) is stuff like loans, like real mortgages, like mortgage-backed securities, like derivatives.

Let’s talk about derivatives.

Why? Because they amount to a huge pile of stuff banks own.

Why? Because derivatives aren’t exchange-traded, for one thing. And that’s where I’m going to be going in a second, so stay with me.

Banks can create derivatives to do pretty much anything they want them to do. After a while, all the banks end up copying each other’s good derivatives “product” ideas, so though they are far from standardized, they are close enough to be traded between them all with a mutual level of confidence as to what they are. And they are created to be amped-up proxies for other stuff, like default insurance on corporate bonds or government bonds, and a ton of other things.

The purpose of creating these derivative things is to give banks stuff to bet on, and bet on in a big way.

Derivatives offer “exposure” to some banks, meaning they want risk exposure to, say, the direction of prices of mortgages, or leveraged loans, or government bonds, or sovereign country exposure. Exposure means they want to bet on it. And sometimes banks use derivatives to hedge against other bets they have on when they are exposed to potential losses.

Here’s the thing about that. It’s a lesson you won’t forget. If you take a position in something, anything, for instance, Microsoft stock, and you think it’s going to go against you, you’d probably just sell it and be done with it.

But what if you bought so much Microsoft stock that if you alone were going to sell all your stock, your action alone would force the price down because of how much stock you have to sell?

Instead of selling your stock, you might want to hedge it. A hedge is another position that you take that will make you money at the same time your Microsoft stock position is losing money. The thing is, now you have two “risk” positions on, not one. Kinda wish you were just able to sell the stock and be done with it, right?

That’s what happens with banks. They have to hedge because the size of the positions they take. The economies of scale they have and all the money they have to play with and all the leverage they can apply to that money (including our money, our deposits are at their disposal) forces them to make giant bets. And of course, when they fear their giant bets are going to go against them, they make a giant hedge, which, if you’re following me, amounts to another giant bet.

Now they have two giant bets.

That’s what happened over at JPMorgan Chase’s London office, the one where “the Whale got harpooned. The bank had huge exposure on a few giant derivatives positions and decided to hedge those positions with some other positions.

Here’s what happened next, and what you’re reading about in the news now, which is that two London traders are being sued criminally for “fraud.” The original bets were so huge that JPM had essentially all the marbles in its vault. Needless to say, other traders knew that, because those other traders were the ones selling JPM their bets, their exposure.

The big trades weren’t going so swimmingly. The problem now was that the positions were so massive (like your giant Microsoft position) they couldn’t just start selling those positions off. The traders on the other side of them, the blokes who sold JPM the positions in the first place, weren’t interested in buying them back.

Why? Duh, because they’re the ones who sold them, but not really. In reality they “shorted” them by selling JPM stuff they didn’t own but made up to sell to JPM. (I told you banks can make up derivatives.)

That’s right; the traders on the other side of JPM’s trades were short. Being short means you want the price of the thing you’re short to drop, so you can buy it back at a much lower price.

Now that it can’t sell, JPM wants to hedge. But the cat is out of the bag. It then starts to put on some hedges, which are trades, and who is taking the other side of JPM’s hedge trades? Why, a lot of the same traders who sold them their big position. They quickly realize JPM is in trouble with their big position, can’t sell it, and is trying to hedge it.

So what do they do? They stop selling them any hedge positions and start trying to knock down the price of JPM’s big positions, to get JPM to cry “Uncle!” and sell their positions, which would crash the price and give the short-sellers a huge profit when they could buy back their positions from JPM at bargain basement prices.

Now, here’s where it all comes together.

Because JPM’s positions were too big to be effectively hedged, and too big to sell, as the price was falling and they were losing money (on paper) on their big exposure, the trading desk couldn’t let on how big the losses were.

One reason, and big one, is that they didn’t want other traders to know how much they were losing.

And just as important, in order to hide their mounting losses from their bosses (who I have to believe knew about them) and not have the losses hit the bank’s P&L (profit and loss statement), which would signal to other traders that losses were mounting at JPM and if they got bad enough the bank’s managers might say, “Sell the position, get out!” And that would be a windfall for the blokes who shorted derivatives to JPM.

Interestingly, and conveniently, derivatives aren’t exchange traded. (I told you I’d get to that.) The prices at which they trade are determined by the people trading them. Sometimes they don’t trade at all.

So, how do you price them? If you have a huge position and you want to know if you’re making or losing money (in JPM’s case it was losing big time) you have to “mark” your positions – you have to price them.

If you’re losing big time and you don’t want anyone to know, not your bosses and not the traders trying to destroy you to enrich themselves, and there are no exchange prices because these things aren’t exchanged traded, you make up the prices yourself.

About the bosses knowing or not knowing… Think about this a second. If you are a boss and you know the score and it’s your bonus and your job on the line too, mightn’t you want to go along with traders marking their positions to not make things look so bad, so maybe you could buy some time and trade out of a lot of the losses? Just throwing that out there.

Anyway, Javier Martin-Artajo and Julien Grout of JPM’s London trading office are being called out for allegedly “fraudulently” mismarking the desk’s huge positions to mask the huge losses ($6.2 billion) they would eventually take.

A lot of talk will be wasted over who was responsible, who knew, how did the book of trades get priced, how were numbers manipulated, by who, for how long, and on and on and on. It’s going to be a good show. But it’s a sideshow.

The only question worth asking is: Why in God’s name would we ever let get banks get so big that they can and have to make such giant bets to make money for their bonus pools?

The marking thing is a problem. It didn’t just happen here in this instance. It happens all the time. It is why banks trade derivatives. Because they can. Because they can manipulate prices to their advantage, which is how they get around capital ratios and measures like those that are supposed to tell us about how safe a banks is.

Oh, it gets better.

On Monday I’m going to tell you how what happened at JPM is happening all over the place and why we all should be scared when the banks say, as Morgan Stanley, for one, just said, they have a 99.9% certainty they know how much they can lose on any given day.

Newsflash! That’s what they all said back in 2008. Only all their value at risk (VaR) models blew up in their faces.

You don’t think that’s still happening? Boy, have I got news for you!



Why I’ll Take the Free Market Over Government Programs Any Day

40 | By Shah Gilani

On Saturday I was researching a new article for Money Morning (it’s coming out tomorrow) about the effects of stimulus (or lack thereof) on the job market.

That’s when I Googled “list government jobs programs in the past five years.”

And there, on the very top of the page that had only 943,000,000 results, was the link to a page called “Government is Good – The Forgotten Achievements of Government.”

OMG (text-talk for “Oh My God!”), I thought to myself when I found the site, this is going to be funny!

It’s not.

Government is Good is “A web project of Douglas J. Amy, Professor of Politics at Mount Holyoke College.”

The professor cites 18 government “programs” that we are all better off because of. Some you can agree with; others can be opened and bled with an objective-edged scalpel, or a dull butter knife.

But it’s the first and most encompassing “program” he cites – that in fact isn’t a program at all but more of a pogrom – that deserves a swift slicing and dicing into reality.

The Professor should stick to politics, which is the art of doubletalk. When he’s talking about economics, markets, and business cycles, he’s in my house. And there ain’t no B.S. allowed in my house.

Let’s set him straight

Direct quote from Professor Amy here:

Regulation of the Business Cycle. Until the financial crisis that began in 2008, most of us had forgotten how dependent we are on the federal government to prevent economic depressions. Since the 1930s, the government has used a variety of monetary and fiscal policies to limit the natural boom and bust cycles of the economy. Before government took on this responsibility, severe depressions were a routine and recurring problem in this country – occurring in 1819, 1837, 1857, 1873, 1893, 1907, and 1929. Thanks to government intervention, we have been able to avoid the enormous amount of human suffering caused by these massive economic meltdowns – the widespread joblessness, the destitution, the rampant hunger, the disease, the riots, the hopelessness and the despair. By any measure, eliminating these depressions and this misery has been one of the greatest – and often unheralded – achievements of our federal government.

Before I tear this blathering rubbish into shreds with an objective dose of iodine, let me present the real, sharp facts about what caused and worsened the “panics” and “crashes” of the past 200 years (I’ve cut and pasted liberally from Wikipedia):

  • The Panic of 1819 was compounded by excessive speculation in public lands, fueled by the unrestrained issue of paper money from banks and business concerns.
  • The Panic of 1837 was a financial crisis that touched off a recession. From mid-1834 to mid-1836, prices of land, cotton, and slaves rose sharply. Speculative lending practices in western states, a sharp decline in cotton prices, and a collapsing land bubble wiped out profiteering banks and led to restrictive lending policies that deepened the recession.
  • The Panic of 1857 was a financial panic caused by the declining international economy and over-expansion of the domestic economy. The years immediately preceding this were prosperous. Many banks, merchants, and farmers had seized the opportunity to take risks with their investments and as soon as market prices began to fall, they quickly began to experience the effects of financial panic.
  • The Panic of 1873 was triggered when Jay Cooke & Co., a major component of the United States banking establishment, was unable to sell million of dollars in Northern Pacific Railway bonds. The failure of the Cooke bank set off a chain reaction of bank failures and temporarily closed the New York stock market. Factories began to lay off workers as the United States slipped into depression. The effects of the panic were quickly felt in New York, and more slowly in the rest of the country.
  • The Panic of 1893 started with the bankruptcy of the Philadelphia and Reading Railroad, which had greatly overextended itself. It was marked by the collapse of overbuilt railroads proliferating on shaky financing and resulted in a series of bank failures. Compounding market overbuilding and the railroad bubble was a run on the gold supply.
  • The Panic of 1907 was triggered by the failed attempt in October 1907 to corner the market on stock of the United Copper Co. When the corner failed, banks that had lent money to the cornering schemers suffered runs that later spread to affiliated banks and trusts, leading a week later to the downfall of the Knickerbocker Trust Co. – New York City’s third-largest trust. The collapse of the Knickerbocker spread fear throughout the city’s trusts as regional banks withdrew reserves from New York City banks. Panic extended across the nation as vast numbers of people withdrew deposits from their regional banks.
  • The Crash of 1929 resulted from a crescendo of stock-exchange speculation that had led hundreds of thousands of Americans to invest heavily in the market. A significant number of them were borrowing money to buy more stocks. By August 1929, brokers were routinely lending small investors more than two-thirds of the face value of the stocks they were buying. Over $8.5 billion was out on loan – more than the entire amount of currency circulating in the U.S. at the time. When stocks started to slip, margin calls forced panic selling and stock prices crashed.

So, what’s the common denominator?

Excessive lending by banks and lending institutions, like trusts, brokerages, and businesses, getting into the financing game, and stuff like “easy money” and credit led to speculation in schemes and the shares of companies that presumably would reap the benefits of flushed-out growth.

Recessions and depressions did not lead to market sell-offs. Panicked stock plunger sell-offs led to recessions and depressions when overextended banks and lenders failed and general monetary and fiscal tightening followed.

That’s how recessions reach the whole country.

But wait! Professor Amy says, “Since the 1930s, the government has used a variety of monetary and fiscal policies to limit the natural boom and bust cycles of the economy.”

As if government programs can or should dictate free-market business cycles! We are supposed to have free market capitalism, aren’t we?

The so-called programs since the 1930s that yielded a calm series of decades, which abruptly ended in 2008, had NOTHING to do with governments [using] a variety of monetary and fiscal policies to limit the natural boom and bust cycles of the economy.

It had to do with the realization in the 1930s that the 1929 crash and all the previous market panics had led to recessions and that banks running wild (someone needs to make a video) were the problem, not free market business cycles ebbing and flowing gently, as they will do without stimulus fertilizer being pumped into our vast economic waterways.

It was Glass-Steagall that bridled the out-of-control banks and saddled up commercial banks and investment banks with different riders going in different directions so they wouldn’t crash into each other and crash the economy. And that “program” worked.

Well, it did until 1999, anyway, when the last vestiges of the warm flame of prudence were snuffed out. Banks became monsters and spewed their steroid-laced wastewater everywhere. Then the rapid extension of credit fostered speculation on speculation, or, as they might call it in the derivatives world, synthetic speculation squared.

What resulted? A pogrom that forced people from their homes, out of their livelihoods, onto the streets across the country and across the world, like sheep shorn bare by the greedy handlers who raise them only for their prosperous fleecing.

If by good government programs, that’s what we have to thank government for, I’ll take the old free market business cycle any day.

It’s the same old story. Banks are the problem, not the solution. If banks can be relegated to benign “utilities” status and not allowed to commandeer business cycles for their own profit purposes, the free market will foster gently flowing business cycles and steady economic growth.

We don’t need more government programs. We need short, no-nonsense, no loophole-laden laws enforced by the public, upon whom the branding irons of greedy banks always fall.

What do you think? Are you with me? Or do you think Professor Douglas Amy got it right?


P.S. As far as the other programs Professor Amy cites, I agree with you, sir, on the GI Bill. You can see his full website right here.

Why Congress Is Still the Best Club in the World

19 | By Shah Gilani

Oh, to be a Washington insider… armed with what anyone with half a brain would call “material information,” the kind that moves markets.

Not, of course, that anybody in Congress would ever use their positions as crafty, I mean crafters, of laws, or disseminators of dollars, to make a wager on the roll of the dice they have marked up in their sweaty little hands.

No way!

Those illustrious lawmakers and budget breakers, no doubt by accident or by mistake, tried that for as long as they could get away with it. But once they got wrist-slapped, they have, I am sure, sworn stock plunging off their daily routines. Or at least they swear they have.

No, they didn’t swear off insider trading on their own. Inside the “club,” anything goes.

The pump-and-dumpers in Congress were actually straight-jacketed by a law they themselves came out with after some public outrage over a “60 Minutes” investigation put them in the hot seat.

The legislation was called the STOCK Act, or more formerly the Stop Trading on Congressional Knowledge Act. It was passed in 2012 to make sure the laws they said they weren’t breaking (because they don’t apply to them) weren’t going to be broken again, by them. It was designed to prevent insider trading among lawmakers and government officials by requiring them to post disclosures of their financial transactions online.

Any guesses on how well that worked…?

Not that it matters – because what I’m going to tell you next isn’t part of where I’m going with this story – but, merely for your information or vomiting pleasure, the meat of the STOCK Act was repealed this past April. Government officials and their aides and confidents will still have to file disclosures of trades over $1,000 within 45 days. But as a result of the repeal, they no longer have to file them “in a searchable database to be easily accessible to the public.”

That makes sense. You don’t get it? You will once you hear the reasoning for the repeal.

You see, the National Academy of Public Administration, a nonprofit group, funded by you’ll never guess who (if you can’t guess: the Academy boasts it has over 700 Fellows-including former cabinet officers, Members of Congress, governors, mayors, and state legislators, as well as prominent scholars, business executives, and public administrators, they left out lobbyists, but whatever), found that publishing the information would create an “unwarranted risk to national security and law enforcement, as well as threaten agency missions, individual safety and privacy.”

They suggested that the online posting requirements should be suspended indefinitely. And so it came to pass… the repeal, that is.

But I digress.

It turns out that last week federal investigators who were probing how a change in U.S. healthcare policy got leaked to some Wall Street traders before it was publically announced, questioned the healthcare aide to Sen. Charles Grassley for four hours.

But don’t worry. The aide, Rodney Whitlock, didn’t have to answer a lot of the investigators’ probing questions. That’s because his boss’s staff was conducting a parallel investigation, and of course you just can’t interfere in a senator’s investigation.

That’s a neat little trick.

And even if that parallel interference pass wasn’t enough to intercept investigators irritating questioning and probing, Congress perps, I mean peeps (as in people), and their close cronies have a constitutional privilege known as the Speech or Debate Clause. The Clause essentially protects them from civil and criminal lawsuits.

According to Wikipedia, “the clause states that members of both Houses of Congress… shall in all Cases, except Treason, Felony, and Breach of the Peace, be privileged from Arrest during their attendance at the Session of their Respective Houses, and in going to and from the same; and for any Speech or Debate in either House, they shall not be questioned in any other Place. The intended purpose is to prevent a President or other officials of the executive branch from having members arrested on a pretext to prevent them from voting a certain way or otherwise taking actions with which the President might disagree.”

Somehow, that which made constitutional sense as the country was being formed has been expanded by bandits in Congress to protect themselves and their aides and staffers from… investigations.

Whitlock’s peeps invoked the Speech or Debate Clause in his defense of his position that he didn’t have to tell anyone about what position he had put himself in.

The problem for investigators looking into stuff like insider trading by the people the STOCK Act was supposed to prevent from insider trading, is that an outfit with its own subpoena powers, like say the Justice Department, has to get around the Speech or Debate Clause protections to get answers to questions about things they are investigating.

And guess what. The full Senate has to vote to give approval to end around the Clause protections afforded senators, congressmen their aides, which by the good graces of Congress now extends to former lawmakers and aides, too.

Now that’s my idea of a club!


Why Obamacare Is Bad Medicine

66 | By Shah Gilani

My good friend Mark Kot is the real Hamptons Doctor. He doesn’t make house calls because his Southampton Urgent Medical Care facility is where everyone goes for the best medical care in the Hamptons.

I asked him for his take on Obamacare. Yesterday he sent me the little ditty below, and I need to share it with you today.

He got it off the Internet. Which means it’s true. No, I’m not kidding. Well, at least this time I’m not kidding. This Internet ditty is true.

Before I share it with you, let me tell you why it is so true and so frightening…

Dr. Kot used to be an emergency room doctor at the local hospital, but he saw too many things there that weren’t in patients’ best interest. He saw long waits for people who needed immediate attention. He saw people getting billed huge amounts just because they had good insurance that would pay the tabs. He saw inefficiencies in the layers of bureaucracy that envelop hospitals. He saw a lot of things that needed changing, but he couldn’t change what he wasn’t able to control.

So in 2003, he went into private practice. He’s the only doctor in his stylish and beautifully appointed facility. His welcoming room – you just can’t call it a “waiting room” – is like a Hamptons house living room. He employs (as in created jobs, very good-paying jobs) 18 people at the year-round office.

No one waits more than a handful of minutes to get in. Everyone gets the best care for what they need and no “add-ons” or bill-padding, ever. Not that hospitals would ever do that (except for the ones that have been caught doing that).

They take some insurance, they have to. But most folks pay “out-of-pocket,” whether it’s the TV anchor paying by check, an area waitress paying with cash, or a poor-wee-bugger scraping along in life that Mark doesn’t charge.

What that does, Mark tells me, is make his office more efficient. He doesn’t have to wait long periods for reimbursements. He can manage his extensive payroll and other expenses more efficiently, which means he charges his patients less and he can pay his people more and run a better medical care facility.

That’s why his reputation and the facility’s reputation are renowned in the Hamptons.

Only there’s a problem.

Obamacare may put him out of business.

Why? He’s lectured me on what Obamacare will eventually create, and frankly I don’t understand all the nuances he’s explained, but he’s board certified and been a practicing doctor for 26 years. He knows his business.

So, rather than explain it all to me again, he sent me this little ditty.

Obamacare is going to screw up the already screwed-up American medical care industry because:

    We’re being “gifted” with a health care plan we are forced to purchase and fined if we don’t, which purportedly covers at least ten million more people, without adding a single new doctor, but provides for 16,000 new IRS agents, who have recently demonstrated their objective and professional integrity, written by a committee whose chairman says he doesn’t understand it, passed by a Congress that didn’t read it but exempted themselves from it, and signed by a President who smokes, with funding administered by a treasury chief who didn’t pay his taxes, for which we’ll be taxed for four years before any benefits take effect, by a government which has already bankrupted Social Security and Medicare, Fannie Mae and Freddie Mac, and the Post Office all to be overseen by a surgeon general who is obese, and financed by a country that’s broke!!!!!

    What the hell could possibly go wrong?

It’s not that the local hospital isn’t a good facility; it’s just that no one goes there anymore, it’s too crowded. And the insurance companies want it that way. Eventually they will raise premiums to pay for all the care that people are going to get, because everyone has to pay for the whole scheme.

And as far as creating good full-time jobs goes, you can count that out. Part-time help will be cheaper for employers who can’t afford the added costs they’ll have to pay. I’ve already heard anecdotes of workers who are getting their hours slashed in anticipation of the new laws taking effect.

There’s a lot wrong with Obamacare. There’s a lot wrong with the way it was shoved down our throats.

We’re being told it might taste bad going down, but it’s going to help us.

That’s not true. It’s just bad medicine.

Get ready for January 1, 2014.


Q&A: August 2013

9 | By Shah Gilani

Got some really good questions about trading and investing this month. I want to answer them first today.

First, a precious metals question.

Q: In times of uncertainty, gold and silver tend to go up in price. Do you have any idea why they are going the other way now? Is it a market manipulation, or people selling to cover margin calls, or survivalists selling to buy more ammunition, or who knows what? ~ RePete

A: Great question, RePete. I recently sent out two gold recommendations to my Capital Wave Forecast subscribers that were several pages long, explaining why we were buying gold miners now, when almost no one else will touch that sector. While the analysis is straightforward and encompassing, I’ll give you a few snippets here.

Gold can be manipulated. It has been; I have the evidence and proof of that. So, what if short-sellers, or institutions, or governments, or central banks want to own a lot of gold at lower prices? They could manipulate the price down to trigger selling, which triggers margin calls, which triggers more selling, which triggers talk that the gold rally is over and the gold premium is a myth. Then talk heated up that gold was only a good trade when there was the likelihood of inflation, or that currencies were going to be worthless, or that Martians were coming and weren’t interested in cash, they fuel their spaceships with precious metals. Whatever, the talk was that gold and silver were hyped up by fearful idiots. And look at them now. Nice try.

Gold and silver are tradable these days like never before. They are their own asset class and part of more and more institutions and individuals portfolios. The fix was in, the price was manipulated down, and it may not be over, and there will be a rebound.

If you want to get my recommendations, there’s still time. Click here.

Next up is Robert, who doesn’t believe in stop-losses.

Let’s set him straight…

Q: Hedges make sense, it’s like buying insurance. But stops can kill you. When putting a stop on you are making a wild guess about what will happen after you get stopped out. It’s just gambling (not investing) to think you know the stock will keep going down after your stop is hit. Does Warren Buffett use stops? No. ~ Robert

A: I’m not Warren Buffet; I’m not buying companies or control stakes. I’m trading to make money.

Just so you know, Warren doesn’t use stops because Warren says he never sells. Which is B.S. Warren buys puts, Warren buys credit default swaps, Warren dabbles big-time in derivatives; those are Warren’s stops. His positions are too big for stops. I can see it now, Warren’s stop on The Coca-Cola Co. (NYSE:CO) gets hit, and the order is to sell $10 billion worth. Not going to happen.

But for the retail investor, stops make sense.

Stops preserve my capital and force me to continuously look at all my positions, the market, and everything I’m doing. I also use technical analysis to determine where I might want out. However, personally, because I’m always watching the market, I prefer not to put down my stops. I’m there at the ready when they get close and will put down the order to sell when my levels have been breached. While that isn’t always what I wanted, I have a chunk of capital to reapply and that keeps me fresh and trading the constant opportunities that present themselves.

Who says placing a stop is a wild guess about what happens next? In fact, who cares what happens next? The whole idea of a stop is to exit the position to reassess your reason for being in it in the first place. You made a “guess,” as you call it, and you are wrong. How much pain are you willing to take to be proven right? How much capital can you afford to lose? What are the opportunity costs of not applying that capital to another performing position?

I don’t “guess” when I use stops. I look at what level the stock might go to before I question my reason to be long it. I look at the market and know if the whole thing is going down, I’m not stupid enough to fight the tide and believe my stock will go the other way. I use stops because I want to preserve my capital, for the next “guess.” If I get stopped out and the stock falls more, I’m happy I’m out. If it subsequently goes up (I’ll analyze why), I’ll get back in; no big deal.

Now Robert C. questions the ethics of short selling…

Q: I never have understood why it is moral, ethical or even legal to sell something you do not own. How is what you are doing any different than the huckster trying to sell the Brooklyn Bridge? ~ Robert C.

A: There’s nothing amoral or unethical or illegal about short selling. It’s a vice-grips in the financial markets toolbox. Some of the greatest frauds in history were discovered by short-sellers, whose short-selling was their announcement that there was fraud (good for them if they can profit from their analysis). Case in point: ENRON.

Short sellers are selling to someone who is buying and believes the price of the “certificates” they are buying – which represent an equity pro rata share of ownership in a corporation – will be worth more. The short seller borrows shares to deliver to the buyer. The short seller eventually has to replace the shares he borrowed. By law, he has to. Where will he get them? He’ll have to buy them in the open market.

Selling the Brooklyn Bridge isn’t possible, because you’d have to deliver it to the buyer, and you can’t. You also can’t buy the Bridge; it’s not for sale, at least not yet, though I hear the Chinese have put in a bid with Mayor Bloomberg.

Shorting has many beneficial and salutary effects. Try it, it will feel good if you want to make money when things go down.

Q: I am a very small retail investor. I cannot do any options because I do not have the cash to post reserve minimums required by my brokerage. My only possibilities are to buy or sell; or to not buy or not sell. It would be interesting to read an article, if you would, written for all us smaller investors. ~ Dusty

A: I’ll do that, thank you for pointing that out.

Q: [Regarding the FOMC]: What if they announce the end of cash? That would certainly take a weird turn of events, don’t you think? ~ Michael D.

A: The government (not the Fed necessarily) would like to do away with cash, but they can’t, at least not yet.

Electronic money (that includes bill-paying online, all online transactions, swiping your credit card, taking cash out of an ATM, all of it, anything that doesn’t involve cash only changing hands) is always logged into cyberspace, meaning it’s recorded somewhere where it can be traced; therefore there is always a record of transactions and “monies” comings and goings. That’s what the Treasury wants the IRS to tap into; the movement of money, so taxes are paid.

It’s not about money laundering by terrorists (yeah, that is a problem for sure). It’s about Big Brother tightening the noose around our necks to squeeze every dollar it can out of us.

Q: It seems as though the bond market bubble will never burst if they can constantly manipulate the “Free Market.” You tell me how it can possibly come to an end? ~ Terry B.

A: Nothing, no government, no central bank, no one (well, maybe Goldman Sachs and JPMorgan) is bigger than the market. It’s like the mass of water behind the dam. It’s like the Cat 5 hurricane hitting at high tide on a full moon, or a 10 (what the heck, make it a 100) on the Richter scale earthquake in the deepest ocean trench that will create a tsunami that would wash away a continent… it’s a force of nature.

If the market, with its trillions, wants to move, it will. Bond rates will eventually go where they will, where there’s a market-clearing equilibrium that incorporates risk-adjusted lending with demand for credit.

In 2008, we caught a very clear glimpse of what could happen if the market’s nature turns wrathful. Massive, and I mean massive, to the point where few people really know how massive the aiding and abetting of saving the systems and banks and companies and governments was. The facts are out there, if you want to examine them. I have. And the market keeps getting bigger, everyday increasing its leverage over the powers that try to constrain it. (“If it keeps on raining, the levee’s bound to break.” ~ Led Zeppelin)

Q: The general consensus of most economists is that we should have let the banks fail and taken our lumps. Some hard times? Yes, but the recovery would come. Now, it’s felt to be too late. China is planning on doing just that. Yet you speak of it negatively. Why??? ~ Floyd B.

A: There’s a huge difference between letting the banks fail, when all of them were in jeopardy of failing, and letting insolvent ones fail when the system can handle it. In 2008 we had no choice. We shouldn’t have ever been there, which is the Fed’s fault, regulators’ fault, Congress’ fault, but there we were. We can’t rewrite history. The problem I have, and we all have, is the big banks are all markedly bigger! There’s no way any one of them will be allowed to fail. No way. We haven’t solved the puzzle. We are at major risk of another collapse, only the next time will be worse.

First we need a 21st-century Glass-Steagall separation of depository institutions from trading banks. Second we need to break up all the too big to fail banks so they can screw themselves without screwing the system and the country. They should be free to fail. And, we should cut back on deposit insurance. That’s a giant part of the scam that banks rely on to do what they do, because they know the depositors at risk will be covered because the government is too chicken to tell them to invest in the banks you trust. Trust? If there was no deposit insurance you better believe I’d only put my money in a bank that didn’t trade, had ridiculously large capital reserves, and wasn’t so greedy that it had to make fat bonuses for its fat executives, but was happy to make a very good living watching out for its customers not its executives. Banks are utilities.

Q: Rio Tinto plc (NYSE:RIO) is looking to maintain capital with corporate bonds. Rio Tinto believes the stock exchange is not a reliable enough place to raise money. What would make them believe that?? Frank

A: “Reliable” to Rio means cost of capital.

Equity capital raised through stock issuance is subject to the market, which is constantly changing, and by the time they want to come to market in a big way, the market may not be conducive to their offering. That would cost them dearly. The bond market, with its low rates, is a more stable place to raise money now. Besides, if their business picks up, they don’t want to dilute their existing shareholders and split the profits between more shareholders. If they are near the bottom of the commodities cycle, you wouldn’t want to sell equity now – that would be expensive in the long run. If you’re profitable, you can more easily refinance your debt or pay it off.

Now for some Obamacare observations…

Q [re: “How Obamacare Will Aggravate an Already Screwed-Up System”]: Keep in mind that this entire bill is and exercise in political gamesmanship. The Republicans refused to play so the Democrats took their super majority and passed this thing. That leaves the Republicans to play the “don’t blame us game” which is exactly the wrong conclusion, but is one that many will come to. ~ Robert

A: It is a mess, to be sure. To me, Obamacare may have been a good idea; fixing the healthcare system is definitely a good idea, it is badly broken. But what happened on the way to some fix is still an unknown. Only time will tell if Obamacare is a help or a travesty of a mockery of a sham.

Q: Looking at this from another perspective. This whole [Obamcare] bill in its entirety only includes medical care. It is not going to change the way the pharmaceutical industry pull strings and controls the medical system as a whole. In fact I would posit this entire plan has little to do with medical care. It is a socialist redistributionist bill and it is using the guise of medical care for all as a way the uninformed public did not decry its passing. ~ Skipper

A: Skipper, you can skipper my boat any time. You are dead on right, sir!

Q [re: “How Big Banks Make Millions Steering Clients into Their Own Funds”]: Stock brokers are primarily salesmen who must meet their annual numbers or else. This necessarily means bringing in new clients and new money under management, as well as retaining existing clients. Each broker must generate a given about of business and fees for the firm or they are soon gone. Consequently, broker turnover is quite high, I have observed. ~ H.C.B.

A: There are a few good men and women out there. Too bad they are so hard to find. Actually, Barron’s lists the best; too bad their minimums are through the roof. The rest of them are riff-raff salesmen who don’t know squat.

Case in point, I was talking to a broker who prides himself in his market knowledge, and all his knowledge for that matter. Only he had never shorted a stock, didn’t understand how it worked and was adamant that his firm (a giant firm) didn’t allow that anyway. I made him call his compliance head, who said, “What are you talking about? Of course your clients can short stock. Do you know how much the firm makes when your clients short stock?” I just laughed. His ignorance frightened me, for the sake of his clients; I hope he learns the business. Not that shorting stock is what he would do for his clients, but if you don’t understand shorting you don’t know how the markets operate.

Q: What really confounds me is the ever rising situations in Europe that are requiring “bail in” of bond holders and depositors without any push backs by the holders of the bonds. Can you explain to your readers why there have been zero stories about the bond holders who have been taking large haircuts and losses of up to 90% without any stories anywhere about who these bondholders and bank depositors are? Have the elites so successfully squelched the press that there are no stories? ~ Larry

A: I’ll look into that, it’s a great question. You’re right, I’ve never seen anything written anywhere about the former folks who let their hair down and are now all sporting crew cuts.

Moving on to the resurrection of Glass Steagall.

Q: Are we kidding? How many of our “elected” will vote against, or do anything to limit the risk-taking or earning-power of the VERY BANKS that keep and hold THEIR MILLIONS (oh, and pay their dividends). Doubt it. ~ Nathan

A: You ask the right question, Nathan. How many will vote to fix the scamming ways of banks? We need to count who votes how and PRESSURE them into resigning by exposing them and back their opponents who vow to vote to save us from the banks.

Q: How many of the TBTF institutions will [this bill] really reach and seriously affect? Who will enforce it… how effective will they be? ~ Brad M.

A: It has to pass first. Then we’ll get to your questions… which will probably be in February, because it will be a cold day in Hell before it ever passes.

On to the Big Banks and their manipulation of electricity trading and aluminum prices and whatever else they’ve got their fingers in right now.

Q: I truly hate to rain on Shah’s parade, or for that matter anyone’s parade, but whether it’s $500 million or $1 billion in fines, for JP Morgan that’s just a licensing fee. This ruling and these fines will change nothing. You want to send a message? Make it $50 billion and throw some of these high level scumbags in jail for 25 years; that might get people’s attention and serve as a deterrent. ~ Harry M.

A: A “licensing fee” that is brilliant. I’m going to use that, do you mind? It’s wickedly on the money!

Q: I have been in the trading game for over 40 years. A saying good through all that time is “You can’t rig an active market.” That did not stop people trying, though they lost overall. BUT, and it is a big but, if a market condition permits any form of subsidy or compensation payment, then that market will be rigged to obtain it. Which seems to be what was happening here. Memo to market rule makers – keep it simple. ~ Ian

A: Well said Ian, I am in total agreement with you.

Q: Why fine the bank’s shareholders? Fine the executives. ~ Thomas F.

A: Exactly!!!

Q: What is your opinion concerning the chances to see the same bunch of banks in court for manipulating the gold, silver, platinum, and palladium markets? ~ Anders W.

A: Slim to none, but much closer to the none, no way, not ever going to happen side.

Q: Goldman-Sachs… has more power than any agency of the U.S. or any other government. Detroit’s bankruptcy will not affect Goldman, nor would the total collapse of the U.S. government be more than a temporary inconvenience. Goldman’s worldwide power and influence will ensure its survival as governments collapse. ~ Robert W.

A: Long live Goldman Sachs, the greatest money making machine ever created.

You guys had some comments on Bernanke’s replacement…

Q [re: “My Vote for the Next Fed Chairman”]: Why don’t the populace demand morally motivated, able and honest people to public office, in sufficient numbers to ensure good and honest governance. Is it because they don’t care, are outgunned by a flawed voting system or just are ignorant? ~ Frank P.

A: It’s because no one listens to the “people” on account of the people in power can’t hear them because they are up to their ears in loot stolen from the people. “Get up, Stand up, Stand up for your rights” Bob Marley Mon.

Q: Forget Summers, forget Geithner. Get a woman to fill the top Federal Reserve position. Women have their heads screwed on tight. Men have lost their way. ~ James

A: I’ll go with that, totally. But it has to be Sheila Bair.

Until next time.


P.S. As always, I encourage you to share your own comments and questions. Just post them below or email them to me at

Posted in Q&A