Dreaming of Fed Sugar Plums

The stock market is rallying hard. The basis, as far as there is one, is that the Fed is going to “do something,” a conclusion reached from both poor economic data and yesterday’s released Fed meeting minutes. Of course, it is expected that whatever they do will both support asset prices and speculation while damaging the underlying economy.

The economy being a problem for another day, it is time to party on the prospect of free money. After all, it was September last year  when the Fed last found that the economy was sagging when artificial propping was removed, and of course they “did something.”

Risk On Or Risk Off?

The stock market has clearly separated itself from the other asset classes, going full “risk on” while the bond market, for example, is clearly “risk off.” The economic data flow, such as this morning’s decade low in consumer confidence (consumers not so dumb), clearly supports the “risk off” case. How far can the stock market go on its own, thanks to the support of the Hackers Fleecing Traders community?

The economy is going back into recession and may, in fact, be there already but we won’t know for sure until the question is purely academic. Guys like Rosenberg, Grantham and Hussman concur that the stock market is highly overpriced at these levels. The Hackers can turn on a dime, so I suspect that the adjustment, when it comes, will not favor the stock market and will be fast and furious. But then I’ve thought that before, and the can has promptly been kicked down the road by the Fed. Can it do this September what it did last September?

Bank Cover Up

The administration is trying desperately to cover up the deceptive and fraudulent behavior of many banks involved in the mortgage business. A settlement is being negotiated without investigation of the claims of fraud, because such an investigation would unavoidably result in disclosure of how high and how deep the rot runs. Thankfully, New York AG Schneiderman is not falling into line, so the administration’s strategy is now to pressure and marginalize him.

Here’s a recent example of the kind of behavior that the administration is willing to tolerate in return for the continued flow of campaign money to the Obama re-election effort.

Once you read the allegations in the cases included in this post, I strongly suspect you will agree that the “ruining lives” in the headline is not an exaggeration. And as important, these two cases, with very similar fact sets, also suggest that these abuses are not mere “mistakes”. These are clearly well established practices that Chase can’t be bothered to clean up, since cleaning them up costs money and letting them continue is more profitable.

Banking used to be a respectable business. But then they started hiring MBAs.

Making Hay While The Sun Shines

Michelle Obama apparently gave up her plans to stay longer on vacation and returned to Washington with her husband. Maybe she is getting the message that taxpayers are looking askance at her free-spending ways.

Judicial Watch is investigating the total cost of the trip to the taxpayers in the face of a ballooning federal debt and a sinking economy. As stated in an analysis by White House Dossier (the blog of White House reporter Keith Koffer, who writes for CongressDaily, National Journal, Roll Call and Politico), the cost to taxpayers for the C-32 was $430,000 alone. This cost is based on an estimated charge of $12,723 an hour, which is what the Department of Defense charges other federal agencies for use of the aircraft. If a military cargo plane was included – which typically accompanies a First Lady – the cost of transportation could have escalated by another $200,000.

I guess she figures she might as well – her bumbling husband is unlikely to be re-elected, despite his Chicago-style electioneering.

Hacking The Market

Zero Hedge documents a case this afternoon where quote stuffing – a denial of service attack based on overloading the exchange’s network to exclude other traffic – was used to push the stock market higher.

Sure enough, at just after 3:19 pm we saw an epic spike in empty packets on the NYSE, which set off red flags and immediately prompted us to observe the move in ES, which naturally confirmed that an HFT driven coordinated buy order (no block) was going through and pushing the ES well on its way to VWAP. Market manipulation no longer needs anything more than a coordinated packet stuffing dump, as what happened on May 19.

Basically, the quote stuffing hack was used to deny access to the exchange to anyone else while the hacker took all the offers and drove prices higher. In this way the hacker (HFT) could pick a time when there were a limited number of offers (sellers) and take them without having to absorb additional offers which would interfere in the process of driving the price up.

Since the SEC is just lawyers, there is no hope that they will grasp this simple hack or understand how poisonous and illegal it is.

B of A Bailout

Markets are all agog this morning because Warren Buffett announced his intention to purchase $5 billion of preferred shares in B of A. All very well, but this is an admission from B of A that, despite all public protestations to the contrary, it did need to raise capital and was forced to do a private deal because the public markets were out of the question.

B of A is not the only sick bank. All the big ones have been looted and are now sitting on piles of low quality paper. We’ll see.

Campaign Finance, Chicago Style

New York AG Eric Schneiderman is the last holdout on signing a sweetheart deal with the banks that will allow them to pay a pittance and be excused for their part in the housing market collapse, past, present and future. The administration is apparently applying the full court press to get Schneiderman to agree to the deal. Matt Tabibi speculates, very plausibly, that the quid pro quo is the banks’ funding of Obama’s re-election campaign.

In Schneiderman we have at least one honest investigator who doesn’t agree, which is to his great credit. But everyone else is on Wylde’s side now. The Times story claims that HUD Secretary Shaun Donovan and various Justice Department officials have been leaning on the New York AG to cave, which tells you that reining in this last rogue cop is now an urgent priority for Barack Obama.

Why? My theory is that the Obama administration is trying to secure its 2012 campaign war chest with this settlement deal. If he can make this foreclosure thing go away for the banks, you can bet he’ll win the contributions battle against the Republicans next summer. Which is good for him, I guess, but it seems to me that it might be time to wonder if is this the most disappointing president we’ve ever had.

Les Folies Bernanke

The audience is sitting around waiting for the show, when Chairman Bernanke at the Jackson Hole conference will or will not announce QE3, his third effort at resuscitating the U.S. and world economies by printing money. It is bizarre to think that this man, who believes in strange and wonderful ideas of economics, some disproven over 150 years ago, has been given such unchecked power.

Yet here we sit. Of course the failure of the economy to grow is visible to anyone. Less visible is the parlous condition of banking systems around the world, which were the recipients of more than a trillion dollars of handouts from the Fed and waivers of accounting principles that would reveal their true condition. The irresponsible and probably illegal behaviors of these banks are threatening to bring them down, despite the Fed’s best efforts. Bank of America, the largest U.S. bank by deposits, is twisting in the wind as a result of its ill-advised (by the administration) acquisition of Countrywide. Are we facing another Lehman-style crisis? It is far from impossible.

In any event, the consequences of a QE3 are pretty well understood at this point, as we have seen QE1 and QE2. Stock and commodity prices will rise, bond prices will fall and interest rates will rise, there will be a temporary improvement in economic data, followed by a rapid slide when QE3 ends and we are waiting for QE4. What little strength the economy has will be further dissipated and living standards – real wages – will decline. And so it goes.

This situation arises primarily from years of similar monetary abuse by the Fed. What will it take to stop this?

The Keynesian FAIL

Apparently either Paul Krugman or someone pretending to be Paul Krugman commented that “People on twitter might be joking, but in all seriousness, we would see a bigger boost in spending and hence economic growth if the earthquake had done more damage.” Even if it wasn’t Paul Krugman, that’s exactly the kind of thing he has been advocating.

The Krugmanites – neo-Keynesians – have been blaming the lack of growth in the economy on the “Tea Party” and its austerity program. Of course, this is an utter lie because none of the cuts advocated by the Tea Party have gone into effect, and even when they do, in 2012, they amount to $21 billion and are cuts in planned increases only. No actual spending reductions are planned or even envisaged by either party, we’re only talking about (slightly) slowing the rate of growth. The problem is that government spending is ruining the private economy that is the only generator of value and wealth. As Jim Quinn points out:

The Keynesians had their chance. They controlled the Presidency and both houses of Congress. A Keynesian runs the Federal Reserve. They implemented everything they proposed. The $862 billion porkulus program, the $700 billion TARP program, home buyer tax credits, energy efficiency credits, loan modification programs, zero interest rates, QE1 and QE2. They increased social welfare transfers for Social Security, Unemployment Compensation, food stamps, Medicare, Medicaid, and Veterans by $600 billion since 2007, a 35% increase in four years. No one has foiled their plans. The Tea Party didn’t really exist until 2010. They didn’t lose the House until November 2010. They cannot blame the Tea Party extremists, but they do.

The Keynesians have successfully increased Federal spending by $1.1 trillion, or 41% since 2007, and are running deficits exceeding 10% of GDP, but they call the Tea Party extremists. Domestic investment is still 9% below 2008 levels as the Federal government has crowded out the small businesses that create the jobs in this country. And now the Keynesians declare we need more stimulus, more programs, more debt, more quantitative easing and lower interest rates. It just wasn’t enough the first time. You have to give the Keynesians credit. Despite the utter absolute failure of every scheme they have implemented, they will worship their models and theories until they successfully collapse our economic system. Then they’ll blame the Tea Party terrorists who foiled their plans.

In any event, thanks to Macro Man, we are able to bring a report from the front, as he vacations in the Greek islands on an Athenian public sector employee’s new yacht. In short, prices have doubled (lobster pasta is 90 euros at the tavernas) while inferior imported products have been substituted for local quality goods. Why am I not surprised? Under austerity, the public sector will still be living it up while the rest of us are getting hammered.

Betting On Bernanke’s Folly

Markets soared this morning after two very poor economic reports, new home sales and the Richmond Fed. Traders are betting that the worse the economic data, the more likely it is that Chairman Bernanke will rush out QE3. Whose main effect will be, as usual for QEs in general, to increase asset prices and trash the economy through higher input prices and interest rates.

Given the track record, one really cannot blame traders for betting that Bernanke is an idiot. It seems like something of a lock, although the Fed prizes surprises and secrecy, so it may come up with some new stupidity. After all, it fought the disclosure of its secret bank loans all the way to the Supreme Court, so who knows what new illegal and nutty idea is making the rounds (or even what they are doing). The over-reach of these covert bank loans cries out for more Fed transparency, as the good doctor Ron has been insisting for years. Kudos to Bloomberg for going to the mat with the Fed on this one.

Bernanke’s cohort Paul Krugman was on television claiming that an alien invasion would solve the nation’s economic problems, forcing the government to spend.

“If we discovered that, you know, space aliens were planning to attack and we needed a massive buildup to counter the space alien threat and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months,” he said. “And then if we discovered, oops, we made a mistake, there aren’t any aliens, we’d be better–”

“We need Orson Welles, is what you’re saying,” Rogoff cut in.

“There was a ‘Twilight Zone’ episode like this in which scientists fake an alien threat in order to achieve world peace,” Krugman said. “Well, this time, we don’t need it, we need it in order to get some fiscal stimulus.”

One blogger that I read wondered why someone like this, who doesn’t even understand the “broken window fallacy” has readers, let alone a pseudo-Nobel prize. The answer, I believe, is credentialing. These guys all have PhD.s and prizes to their name, which are awarded by their peers – who think (if it can be dignified by that word) like they do. So we believe them (the root of credential is the Latin credere – to believe) even though the credential-givers and receivers are both locked in the same incorrect paradigm. Since actual results and outcomes do not influence the belief in the paradigm, we continue to drive off the cliff like a herd of lemmings. As Doug Noland observes:

And the PhDs? They stick steadfastly with their doctrine, not for a minute admitting the experimental and theoretical nature of their policy prescriptions. And I see no willingness on their part to question their view that contemporary monetary management is enlightened and superior to the past. There is an element of hubris that gets in the way of objectivity.

I have for years now referred to this theoretical framework – both from an economic doctrine and policymaking perspective – as little more than a sophisticated version of “inflationism.” And we are increasingly witness to the age-old Scourge of Inflationism. And as we’ve already witnessed recently, the inflationists will warn about the dangers of not being bold – of losing resolve. “Don’t repeat the mistakes of Japan!” As it’s been throughout history, it always seems to be a case of “just one more bout of money printing” and government spending – and then we’ll get monetary religion. Did I really hear and read this week that the remedy for our nation’s problems is to be found with one more economic stimulus package coupled with additional measures ensuring long-term deficit reduction?

Fiscal and monetary policies are rapidly losing credibility. Treasury prices may be inflated, but don’t mistake this for confidence in our system’s “core”. It may exist completely outside of the PhD’s sophisticated framework, but the markets and regular folk are feeling the ill-effects of currency debauchery.