Bear Market

Stocks and Risky Currencies Fall, Gold Jumps on PBOC Rumors, Moody`s Comments

August 31, 2010 by · Leave a Comment 

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By Michael Trinkle, ForexTraders

Yesterday’s Asian session saw a lot of activity and was generally dominated by sales, but the American market seems to have found some floor on somewhat positive confidence and home sales data. The market seems to be rowing against the currents, however, because the positive nature of the releases is only on the surface.

Among today’s news, neither the report about better than expected industrial production rates (0.3% vs. -0.4%)in Japan in August, nor data on growth of retail sales have done much to help Japanese stocks. Nikkei was down by more than 3 percent, and most Asian stock markets registered losses, even as currencies remain strong against the USD. In U.S. better than expected home sales data for June failed to make any impact since we already possess disastrous numbers for July.

Moody’s warns about Chinese banks

Apart from uncertainty caused by Japanese inaction,pessimism about Asia was boosted today on a report by Moody’s, via the Telegraph, about the unsustainability of the current lending practices in mainland China, where the government is risking future stability by supporting bank lending through debt (i.e. higher leverage).

“Moody’s said China Investment Corporation (CIC), the country’s sovereign wealth fund, borrowed $8bn last week to recapitalise three state-owned banks, using debt rather than genuine equity to boost bank capital.

The agency said that beefing up the banks by this method is “credit negative” for China as a whole: “The increases in assets and equity are artificial and without real economic substance. The increase in reported equity enables the banks to lend more and effectively leverages up the system.”

  • Weird rumors about Zhou Xiao Quan defecting leads to early Asian sell-off

    Testimony to the degree of nervousness that exists in the markets about China right now, Asian session saw major a sell-off upon claims that the PBOC Head, Zhou XiaoQuan, who had not been visible for a while in the media, had defected fearing punishment for large losses of about $430 billion suffered in consequence of his team’s FX management strategies.

    China may be a strange place in many ways, but it is not North Korea. One has to look a long way back to the past, to the times of the Zhao Ziyang, for example, to find the kind of ostracism that might conceivably compel an official to leave the country. The fact that rumors like this can find credibility is nothing more than a sign of how skeptical many people have become about the multiple Chinese bubbles, but even with all the problems in the country, the head of the central bank defecting because he fears punishment is just too outlandish to be believed.

Israel says Iran may attack a Middle-East nation, Iran threatens to bomb Dimona

The problems between Iran and Israel are not new, but the intensity of rhetoric has been increasing for the past three months or so. In yet another step of escalation, an Iranian official is quoted as saying that the country will bomb Dimona Nuclear Reactor if it gets attacked, as Israeli minister Dan Meridor, in a question and answer session on Israeli radio in Farisi, expressed his fear that Iran would attack a Middle Eastern nation.

What he means is probably that the Iranians will respond to American bombing of their reactors by attacking Israel, which is, in his thinking, a third party not involved in hostilities. We suspect that this type of comment reflects the desire of Israelis to leave the military attack to the US due to their frontline status, and the greater risks they would face in the face of an Iranian counterattack. That also speaks against a unilateral, pre-emptive Israeli attack on Iranian installations.

It is of course difficult to reach conclusions on the basis of isolated statements such as these, but given the importance of the Gulf Area in maintaining global economic stability, traders must keep an eye on the region even if matters appear to progress (almost) smoothly at the moment.

CFTC withdraws reform proposals, leaving retail forex clients free to (almost) suicide at 100:1 leverage

The CFTC had made some sensible and suitable proposals for reforming the FX market a while ago, but those proposals appear to have been withdrawn in the face intense opposition from lawyers, dealers, and some speculators. The most crucial piece of contention is maximum leverage, naturally, since it is a major cause of the frequently large losses suffered by traders, and the huge profits reaped by brokers.

The CFTC had proposed a regulation capping leverage at 10:1, at just one tenth of the currently available level at 100:1 in the U.S. At the moment, in the EU and the UK even higher leverage is possible, which explains why so many brokers prefer to base their operations in European or British centers. The calculation is simple,:while returns for the trader are often disappointing, the broker makes ten times as much money from the spread at 100:1 leverage than he would at 10:1.

Among other things, according to the statement at the CFTC website, the new, diluted rules will require “the registration of counterparties offering retail foreign currency contracts as either futures commission merchants (FCMs) or retail foreign exchange dealers (RFEDs), a new category of registrant. Persons who solicit orders, exercise discretionary trading authority or operate pools with respect to retail forex also will be required to register, either as introducing brokers, commodity trading advisors, commodity pool operators (as appropriate) or as associated persons of such entities. “Otherwise regulated” entities, such as United States financial institutions and SEC-registered brokers or dealers, remain able to serve as counterparties in such transactions under the oversight of their primary regulators.

In other words, the CFTC is aiming to streamline regulation, and end the chaotic state of the retail forex market by establishing straightforward regulatory categories.


“FCMs and RFEDs are required to maintain net capital of $20 million plus 5 percent of the amount, if any, by which liabilities to retail forex customers exceed $10 million. Leverage in retail forex customer accounts will be subject to a security deposit requirement to be set by the National Futures Association within limits provided by the Commission. All retail forex counterparties and intermediaries will be required to distribute forex-specific risk disclosure statements to customers and comply with comprehensive recordkeeping and reporting requirements. “

On the whole, pretty much of a disappointment, after we have seen how miserable the consequences of letting an industry regulate itself are in the subprime crisis. The CFTC is letting the NFA determine leverage limits, which means that the brokerage business will get away with whatever limit (or lack of it) serves its interests best.

In sum, we note gold’s powerful rally today, and, in agreement with others, anticipate the breaking of new records in the coming weeks. In other respects, we continue to expect a significant deterioration in global economic stability largely as a consequence of major upheaval in China and the rest of the Asian region. We believe that this phase of the economic downturn lasting since 2007 will reach its climax in Asia, and Europe in the next two years.

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The Best Way to Bet on America

August 31, 2010 by · Leave a Comment 

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The Daily Reckoning

There is lots of ugly economic news out there, but one key bright spot is world trade. In the US, one particular industry will enjoy windfall profits from exports this year. That industry is agriculture.

In 2009, world trade took a big hit in the wake of the financial crisis. Global exports fell 12%. Governments tried to protect their home teams and a wave of tariffs and other protectionist measures followed. This was what happened during the Great Depression, too, as the Smoot-Hawley Tariff Act raised tariffs on more than 900 goods.

As a result, world trade sank by 25% during the early years of the Great Depression. But that hasn’t happened this time around. In fact, the emerging economies of the world are already exporting and importing more than they were before the 2008 crisis.

In the US, a big winner is agriculture. US farmers are looking at record exports of $14 billion this year. The heat wave frying European crops (in particular Russian crops) helps that. But even before the drought, in just the first four months of the year, the US enjoyed a $4 billion trade surplus in agriculture. For years, the US has been the world’s largest exporter of corn, wheat and soybeans. It is a leading exporter of many other agricultural goods.

Today, US farmers are cashing in on demand from emerging markets, particularly Asia. China has been trying to build self-sufficiency in food. But it has a long list of hurdles, chiefly a shrinking supply of arable land and water shortages. Also, the median Chinese farm is less than one acre. This hinders the economies of scale that come from big farms.

In any event, US farmers are sending more and more goods to the Far East. So perhaps it is no surprise that first US grain export depot built in 25 years is not on the rim of the Gulf of Mexico, but on the Columbus River in Washington state, about 60 miles from the Pacific Ocean. The new Port of Longview grain terminal will handle 8 million tonnes a year. (The Port of Louisiana is the still the top grain export hub in North America, although California recently passed Louisiana as the top point of departure for US cotton.)

We’ll need more depots like the new Port of Longview. American infrastructure has had a hard time keeping up with surging ag exports. Outside of Seattle, for instance, 80 rail cars filled with dried peas sat for three weeks on the train tracks waiting for a ship to unload them.

It’s not an isolated example. A soybean exporter in, say, Minnesota, could normally ship 40 tons of beans to Malaysia in 15-20 days. With recent bottlenecks, it took 60 days. There are plenty of stories of everything from hazelnuts to soybeans tied up in shipping bottlenecks for weeks.

The US isn’t used to such export strength. As The Wall Street Journal noted, “America’s trading infrastructure grew imbalanced, with a huge capacity to import goods but an attenuated capacity to export them. Loads of grain or corrugated paper leaving the US took a back seat to the DVDs and toys coming in.”

That’s the problem. For too long, the US economy has been all about overindulged consumers. There were too many stores selling too much junk, too many houses people couldn’t afford and too much debt on all of it. This part of the economy grew to grotesque proportions, stimulated by easy credit.

But underneath it all, there is still the old world of making things. In my last issue of Capital & Crisis, I wrote about the surprising strength of American manufacturing. American agriculture is also a bright star in the US firmament and an appealing place to invest.

The future of American agriculture is very bright indeed, as a recent report from the FAO makes very clear. You can find the report, entitled “How to Feed the World in 2050,” right here.

This excerpt from the report sums up the investment case:

Even if total demand for food and feed grows more slowly [over the next 40 years], just satisfying the expected food and feed demand will require a substantial increase of global food production of 70% by 2050, involving an additional quantity of nearly 1 billion tonnes of cereals and 200 million tons of meat.

In addition to the usual assortment of resource issues such as water and soil and climate change, there are some topics you wouldn’t think of otherwise, such as biodiversity. Take a look at this:

The gene pool in plant and animal genetic resources and in the natural ecosystems which breeders need as options for future selection is diminishing rapidly. A dozen species of animals provide 90% of the animal protein consumed globally and just four crop species provide half of plant-based calories in the human diet.

I won’t highlight too much of this report, because I’d be repeating myself. If you’ve read my observations for the last year or so, you know all you need to know about what’s happening in the world’s market for food. Still, if you need an overview, the FAO’s report covers most of the issues.

Farmers with windfall profits will have more money to expand production next year. That’s more money for things such as seed and tractors and fertilizers. As long as its export markets remain open, US farmers should have a great year.

As a long-term investment, Lindsay (NYSE:LNN) should benefit as farmers spend some of that money on irrigation equipment. The economics are attractive, as the machinery significantly boosts yields and makes more efficient use of water.

I also like the non-US ag plays, because high crop prices and the rising demand for food bode well for agriculture around the globe. In Canada, Viterra (TSX:VT) is a good long-term holding. It should rebound after excessive rains in Western Canada hurt grain production. In China, Migao (TSX:MGO), makes fertilizers for high-end crops such as fruits, vegetables and tobacco. It’s growing capacity, and as the financials reflect the additions, it should report good earnings.

Those are just a few. There are plenty more. The business of producing food should continue be a good one.

Chris Mayer
for The Daily Reckoning Australia

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Healthy Correction or Ailing Recovery?

August 31, 2010 by · Leave a Comment 

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The Daily Reckoning

Bad day for stocks, yesterday. A bad day. Not a terrible day. Not a crash day. Just a bad day.

The Dow fell 140 points. This was baaaad…because it shows that the stock market does not really buy Bernanke’s storyline.

You’ll recall that when we left off last week, Ben Bernanke assured the world that while the recovery was not exactly what he had hoped for, he nevertheless had the situation in hand. He said he had the tools necessary to fix the problem and would do whatever was required.

The initial reaction was positive. The Dow rose more than 160 points on Friday. Some analysts thought the market’s downward trend had been broken. But it needed follow-through on Monday. Instead, the market fell.

The fact is, there is no recovery…and no recovery is possible…and investors are beginning to realize it.

Then what is going on? A “Great Recession,” say some analysts. A “depression,” say others.

There is a good article in The Financial Times that helps understand what is really going on. It’s by Ken Rogoff and Carmen Reinhart; you’ve heard of them before, dear reader. They are the ones who researched dozens of episodes of financial crisis and sovereign default throughout history.

Today, they write in the FT about what happens after a financial crisis. Well, what do you think? Do you think you get a “recovery”? Do things go back to normal? Is the recession over quickly and painlessly?

Not at all. Instead, there is rarely anything you would recognize as a “recovery.” Things do not go back to normal because they weren’t normal before the crisis. Crises are caused by abnormal conditions – usually too much credit, too much debt, too much spending and too much speculating. Then, when the bubble blows up, it typically takes a long time for the economy to get back on its feet.

Over the following ten years, unemployment usually stays higher than it was before the crisis.

Growth rates are usually lower.

And ten years after a blow-up in real estate house prices are still usually BELOW where they were when the crisis hit.

But what if the feds really get on the ball and try to turn things around? Then, watch out!

We read an article on dying yesterday. Here’s a question for you, dear reader. Would you rather live in a recessionary economy or die in a booming one? We’ll take the recession. Probably most people would. Heck, make it a depression.

There are a lot of illnesses for which there are no cures. Still, people will spend a fortune…and endure unspeakable treatments…in the hopes that they will be the one in a thousand who survives.

So too are people ready to believe that Dr. Bernanke can cure what ails the US economy. We don’t think so. Because we don’t think the economy is “sick.” We think it is healthy…and finally correcting the mistakes of the Bubble Epoque.

Leading economists and the feds have believed, for example, that there was some problem of “liquidity” that was temporarily blocking the flow of cash and credit. They believed the problem could be solved by making more money available. That was why the Fed bought an extra $1.4 trillion of the banking sector’s suspicious “assets.” They wanted to make sure the banks had money to lend.

Well, now the banks have plenty of cash. Businesses too have record holdings of cash. Even households are rebuilding their cash accounts.

But who’s borrowing? Who’s spending? Who’s buying new houses, for example? (New house sales are currently taking place at the slowest rate ever measured.)

CNN: “Credit if finally available, but no one wants it.”

And more thoughts…

Why don’t people borrow?

Because it’s not a liquidity problem. It’s a debt problem. A solvency problem. And it won’t go away by making more cash and credit available. Instead, all those bad decisions, bad loans, and bad investments have to be cleaned up. And that takes time. And while the economy is de- leveraging, people are becoming more cautious…more risk-averse…more modest in their expectations.

What do Rogoff and Reinhart say about governments’ efforts to fix these problems? What does history show?

They say the feds often make the situation worse.

Not only do governments typically pour bad money after good, they also disrupt the process of correction. Insolvent banks are kept alive. Big businesses that ought to go broke and be sold off are instead propped up…the lights are kept on by government subsidies, preventing new competitors from occupying the space. Consumers and investors keep waiting for the promised “recovery”…for the cure…for the fix. Instead of quickly adjusting to the new circumstances, they delay…they hesitate…they postpone unpleasant changes.

They might quickly sell a house at a loss, for example. They could then go on with their lives. But when they hear the feds tell them they have a new program in the works…or a new stimulus bill in Congress…or new action by the Fed…what are they supposed to think?

“Maybe I should wait and see if this new effort does the trick…” they say to themselves. “I’ll feel like a real fool if I sell now and then the feds get a new bull market going.” “Maybe I should wait before accepting a job at a lower salary; it says in the paper that the economy should recover by summer…”

The economic setbacks of the 19th century were sharp, but fairly short, affairs. The contribution of modern economics has been to stretch them out and make them worse.

*** How about China? Won’t growth in China and the other BRICs lead the whole world out of its funk?

We wouldn’t count on it.

First, the Chinese economy has been growing at near double-digit rates for the last ten years. It didn’t stop the crisis and so far it hasn’t helped the developed nations – at least the US – get out of it.

More important, China is probably getting itself into a big mess too. All we know is what we read in the paper on the subject. But what we read is that the spectacular growth China has enjoyed so far was made possible by freeing the private sector. But now the Chinese government is muscling the entrepreneurs out of the way.

“Now…it is state-run Chinese companies that are on the march,” says The New York Times.

Railroads, mining, airlines, manufacturing, hotels, yogurt… The Chinese government either owns it, controls it, or invests in it.

And if you think private investors make mistakes, you should see what the government does!

A Daily Reckoning dictum: people make mistakes all the time; but if you want to make a real mess of things, you need taxpayer support.


Bill Bonner
for The Daily Reckoning Australia

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FDIC survey shows best quarter for banks in nearly three years – News

August 31, 2010 by · Leave a Comment 

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By Chris Carey, Bailout Sleuth

The nation’s banks had an aggregate profit of $21.6 billion in the second quarter, a vast improvement from the $4.4 billion net loss the sector had at this point a year ago, the Federal Deposit Insurance Corp. reported in its quarterly banking profile released Tuesday.

The quarter’s earnings were the highest since the third quarter of 2007.

The FDIC also reported that noncurrent loans and leases had a year-to-year decline for the first time since the fourth quarter of 2006. Institutions charged off $49 billion in uncollectible loans in the second quarter, compared to $214 million in charge-offs the previous year.

More good news: Only 20 percent of institutions suffered a net loss in the quarter, an improvement over the 29 percent with losses a year ago.

“This is the best quarterly profit for the banking sector in almost three years,” FDIC Chairman Sheila Bair said in a statement. “Nearly two out of every three banks are reporting better year-over-year earnings. As long as economic conditions remain supportive, most institutions should maintain profitability and increase their capacity to lend.”

Bair conceded that the industry “still faces challenges.” Earnings are still low by historical standards, and the number of failed and problem banks remains high. She also said that although small banks are gradually recovering, they are doing so at a slower rate than their larger counterparts.

The FDIC attributed the improvements in earnings to reduced provisions for loan losses. Those amounted to $40.3 billion in the second quarter of 2010, more than 40 percent below the total from a year ago.

Still, there were troubling figures in the report. The number of institutions on the FDIC’s super-secret list of “problem” banks rose from 775 to 829, the highest number since 1993. But the collective assets of those institutions, $431 billion, was down 7 percent from a year ago.

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California TARP recipient agrees to buyout – News

August 31, 2010 by · Leave a Comment 

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By Chris Carey, Bailout Sleuth

California Oaks State Bank, which received $3.3 million in TARP aid early last year, is being acquired by California United Bank in a deal valued at $17.3 million.

The deal is expected to close in the fourth quarter, California Oaks officials said in a statement.

John Nerland, president and chief executive of California Oaks, told BailoutSleuth that the deal is subject to the bank returning the taxpayer money it received through the Troubled Asset Relief Program. “We have not applied for payback as of yet, but it on the list of things to do.”

California United Bank has four branches in Los Angeles County. The move will help it expand westward to Ventura County, where California Oaks’ two branches are located.

Half the acqusition will be paid in cash, with the remainder to be paid in California United common stock.

“The combination is expected to create one of the largest banks headquartered in the San Fernando Valley and presents significant prospects for our communities and shareholders,” California United’s president and CEO, David Rainer, said in a statement.

Earlier this year, California Oaks announced plans to sell up to 8 million shares of common stock at a target price of $12.50 per share.

It had planned to use some of that money to help it exit TARP, increase its asset portfolio, and acquire the assets of failed banks. Those amibitous plans were unusual because they came as the bank was suffering losses and heavy nonperforming loans.

But on Aug. 5, California Oaks announced that it was shelving those plans. Bank offiicials said the offering was put on hold because they could not find enough investors willing to abide by a requirement that at least a third of the newly issued stock be held for at least three years.

California Oaks is barely profitable. It recently announced that it had net income of $8,456 in the first half of 2010, compared to $64,384 in the first half of 2009.

Still, the bank is growing. Its total assets of $136.7 million are up 7.7 percent from a year ago, and total deposits of $114 million are up 23 percent from a year ago.

More articles from the Bailout Sleuth….

Michael Pento Says Fed Will Buy Stocks And Real Estate In Its Next Attempt To Create Inflation

August 31, 2010 by · Leave a Comment 

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Zero Hedge

As part of the Fed’s latest QE iteration, it has already been made clear that despite initial disclosures that the Fed would stay in the 2-10 Year bound of Treasurys, Ben Bernanke is now also gobbling up the very long end of the curve. For all those who are, therefore, still confused why bonds continue to surge to record levels, don’t be: when there is a guaranteed bidder just below you in the face of the Fed, and who you can turn around and sell to at will, there is no pricing risk. The problem, from a bigger stand point, is what happens when the Fed is actively buying up 30 Year bonds with impunity and the much desired (by the Fed) inflation still does not appear? Well, the Fed then, in Michael Pento’s opinion, will begin to purchase stocks and real estate. And as all those who enjoy comparing the US to Japan can attest, outright purchases of securities by the Japanese government is a long-honored tradition in the ongoing fight with deflation in Japan. However, and as the recent BOJ (lack of) intervention demonstrated, Japan never could do anything with the required resolve, and bidding up one stock here and there would never achieve anything. Which is why in this interview with Eric King, Michael Pento makes the case that as opposed to the occasional market intervention via the President’s Working Group, Bernanke will soon make stock purchases an outright policy of the Federal Reserve as its last ditch attempt to engender inflation before the hundreds of billions of Commercial Real Estate and other bank debt start maturing in 2011/2012. Bernanke is running out of time and he knows it. And once the Fed becomes the bidder of last resort in stocks, all bets are off, as the Central Bank will become the defacto only market in virtually every risky category. And the only safe vehicle, once the market then begins to price in Fed driven asset-price hyperinflation, will be gold.

Pento also provides some perspectives on the Fed’s balance sheet, which he anticipates will expand in a “great fashion”, but a much bigger concern to the recent Euro Pacific Capital addition, is the possible surge in M2: “That base money can expand, M2 which is currently running around 8.5 trillion all the way up to nearly 25 to 30 trillion dollars of money supply and that’s enough obviously to send prices through the roof.” All Bernanke needs to do is light the “alternative asset purchasing” match and all those who wonder what left field hyperinflation could come out of, will get their answer.

Of course, it wouldn’t be a Pento interview without a requisite smack-down, in this case of Dennis Gartman, whose call to sell gold denominated in euros at the very bottom of the recent gold correction needs no further commentary: EUR-denom gold has jumped well over 10% since Gartman said to get out. Pento adds the following: “There is so much misinformation out there, Dennis Gartman was out there saying gold has lost its inflation hedging properties: this is just ludicrous and insane. I can tell you that gold will never lose its inflation lure, and that’s precisely why I’ve stepped up my purchases of gold., I see what the monetary base is doing, I can clearly see Bernanke’s next step to vastly increase the size of the balance sheet and the monetary base. So for me, it’s 100% an inflation hedge.”

Pento also goes into explaining why housing is facing a “deflationary depression,” and a further collapse in pricing, why inflation benefits only those closest to the money, i.e., the banks and the military complex, why it destroys the middle class (we are sure Buffett ca. 2003 could say something about that too… the current, far more senile and captured Uncle Warren, not so much), the impact on discretionary purchases, on unemployment, real incomes, and all other items which tend to “follow the money.”

Lastly, Pento concludes with an analysis of what would have happened had the government allowed the deflationary depression to occur two years ago, without the tens of trillions in bank bailouts. We protracted, and elongated the depression. But instead of having the benefit of falling prices, you have rising prices.” And if Pento is right, the price rise has only just begun.

Full King World News interview here.

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Magna Cum Laude?

August 31, 2010 by · Leave a Comment 

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Zero Hedge

Via Pension Pulse.

CBC News reports, Magna, Stronach deal to go ahead:

International said Tuesday it will move ahead with a deal worth nearly
$1 billion to have founder Frank Stronach give up control over the
auto parts giant.


Dissident shareholders opposed to the plan have
notified the Aurora, Ont.-based company that they do not intend
further legal appeals, Magna said in a release.


A day earlier, the Ontario Divisional Court upheld a lower-court ruling approving the proposal.


dissident shareholders included the Canada Pension Plan Investment
Board, Ontario Teachers’ Pension Plan, OMERS, the Alberta Investment
Management Corp. and British Columbia Investment Management Corp.


had opposed the size of the premium over the present value of the
company’s shares — about 18-fold — to be paid to the Stronach family
trust, and argued it would set a dangerous precedent for similar,
future deals in terms of the loss of shareholder value.


The deal
provides for Stronach to receive $300 million US in cash, $120 million
in consulting fees over the next four years, nine million single-vote
shares of Magna and control over a new joint venture focused on
electric vehicles.


Shares Rise


Magna shares closed up $3.43, or 4.3 per cent, to $83.04 Tuesday on the Toronto Stock Exchange.


Magna said it planned to implement the change after the close of markets Tuesday.


are very pleased with the court’s decision and that we are finally in a
position to close the arrangement, which has received strong support
from Magna’s shareholders,” Magna CFO Vince Galifi said.


the transaction completed, we can refocus on pursuing our long-term
growth strategy, including further investments in both innovation and
emerging markets, in order to continue to serve our customers around
the world.”

If you read the comments on this article posted on the CBC website, they range from “what a crook!” to “he deserves his payday”. Let me go over a couple of comments below. The first one blasts institutional shareholders:

institutional shareholders obviously don’t like the plan that was
approved by 75% of shareholders. This makes them minority shareholders,
and they have a tried-and-true recourse – sell their shares and move
their money elsewhere. They simply seem bitter that the “big guns” of
the giant pension plan don’t control what happens to this company. As
long as Frank Stronach remains in control, they never will be. The
irony is that after Stronach is gone, CPP, Omers, Teachers and the rest
can work on buying a majority of shares. If they do that, you can bet
the farm they will not be worried about what minority shareholders

Personally, we need more companies run by individuals.
Investment corporations don’t care what they invest in – they only care
about the money. They sell RIM in droves because record profits
weren’t high enough, they sell Tim Horton’s because the gain from one
year to the next was not big enough. We need Carnegies and Fords and
Gateses, who care about the company they started and don’t run for
greener pastures at the drop of a hat.

I take issue with this statement because pension funds are by far more
long-term in their investment approach than mutual funds or hedge funds.
If anything, you’d want to have more pension funds as shareholders to
take decisions that are in the best interest of long-term shareholders.

True, it’s
individuals who start companies and grow them, but once they pass a
certain critical mass, these companies become behemoths and there is
nothing that suggests to me that pension funds do not act in the best
interest of all shareholders. In fact, it’s quite the opposite.

To highlight this point, the second comment that struck me on CBC’s website took issue with Canada’s dual voting shares:

of shareholders voted in favour of the deal”. Does that include
Frank’s votes which are worth 51% of all shareholder votes? Democracy
in action…

By far the simplest solution would have been for
the Canadian securities regulators to outlaw dual voting shares, as is
the case in most other civilized financial constituencies. Why does
Canada permit this abusive malpractice?

Opposition to
dual-class shares has been growing in recent years. In August 2005, Tara
Gry of the Canadian Library of Parliament wrote an excellent comment on
dual-class shares and best practices in corporate governance.

More recently, the Ontario Teachers’ Pension Plan posted a highly critical analysis of the Magna-style dual share collapses, asking whether class B shares are worth $863 million (click on images to enlarge):

Class B shares have not traded publicly since 2007. One proxy for
their value could be the price the company paid in 2007 to repurchase
all Class B shares from holders other than Mr. Stronach in a complex
deal involving Russian billionaire Oleg Deripaska.


In that
transaction, the Class B shares were valued at $114 each, representing a
30% premium over the trading value of the Class A shares at the time.
(Teachers’ was a vocal critic of the 2007 transaction as one that was
too rich and unfair to the Class A shareholders.) A 30% premium over
the pre-announcement trading price of the Class A shares on May 6,
2010, (approximately $64) would be roughly $83 per Class B share, or
$63 million in total, far below the proposed payment of US$863 million.


better proxy may be the historical relative market prices of the Magna
Class A and B shares from 2001 until 2007 (when the Class B shares
ceased trading publicly). It is interesting to note that the average
price premium from 2001 to 2007 of the Class Bs over the Class As was
just 4.2%. This can be taken as a clear signal from the market that the
value of the Class B shares during that period was effectively the same
as the Class A shares. We ask ourselves, what has changed since 2007
to justify such a massive premium?


these comparisons in mind, it is difficult to understand the basis for
the US$863 million payment Magna proposes for Mr. Stronach. We
found nothing in the management information circular in the way of a
detailed rationale for the proposed payment. We consider this to be
especially important given the current value of Magna’s Class A shares
(which the Class B shares used to track closely) and the precedent
transactions where no premium was paid to holders of multiple voting
shares when dual class share structures were eliminated.

In the end, despite opposition from several large Canadian public pension funds, Frank Stronach’s $1-billion payday arrived:

all, the payout is valued at roughly $1-billion – an unprecedented
1,800% premium and dilution compared to other conversion deals.


Canada Pension Plan Investment Board, and other shareholders, like the
Ontario Teachers Pension Plan, have fought the plan of arrangement
before an Ontario Securities Commission hearing in June, as well as
before Ontario Superior Court of Justice earlier this month, and the
Divisional Court last week.


They argued the payout to Mr. Stronach was “abusive” and would set a dangerous precedent for other conversion deals.


however, the three-judge Divisional Court panel ruled late Monday that
it was satisfied that the plan of arrangement met the court’s “fair
and balanced” test, and should be allowed to proceed. They agreed with
the lower court that a shareholder vote, in which 75% of Magna’s common
shareholders approved the plan, should be given significant weight.


Sims, CPPIB spokeswoman, said the country’s largest pension plan was
“disappointed” by the outcome, but would not appeal the decision.


an ongoing shareholder of Magna, we intend to engage with the company
on its governance structure and practices under the revised ownership
arrangement,” she said in an email.

Was the payout to Frank Stronach “abusive”? Any reasonable analysis
would suggest so, but this battle was lost. While recognizing and
appreciating that entrepreneurs like Mr. Stronach are the backbone of
our economy, founding companies that generate lots of jobs while taking
on enormous personal financial risks (see video below), I also share the concerns of institutional investors who feel this decision will set a dangerous precedent for other conversion deals.

More articles from Zero Hedge….

What If “It” Doesn’t End With a Bang But With a Whimper? Mind Games – Chapter One of Two

August 31, 2010 by · Leave a Comment 

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Zero Hedge

What If “It” Doesn’t End With a Bang But With a Whimper?

Mind Games – Chapter One of Two


“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” – Mark Twain


One new trick this old dog has learned is elegantly simple. The more certain I am that I’m right, the greater the probability I’m wrong. Before we dismiss this concept as simplistic or nonsensical (because we’re absolutely certain we’re right) why don’t we take a closer look at the underlying supposition and then apply what we learn to “The Crash” meme that’s widely held among a clear majority of Zero Hedge posters, contributors and commentators, including myself. It never hurts to check our math, right?

For those readers looking for an in-depth analysis of the current sociopolitical and economic climate, stop right here because this isn’t what you’re looking for. Other people can, and have, covered that ground better than I could. This is a collective self examination of how we arrive at our beliefs using denial and how this can lead us astray, especially when something’s “obvious”. I wish to swim a bit upstream of the contrary waters, which is not the same thing as taking a dip in the consensus reality pool.

When talking to family and friends about the greater probability of being wrong when we’re absolutely certain we’re right, the initial reaction I get is usually an assumption on their part that I’m applying a high probability of being incorrect. This isn’t the case. For something to be greater, all it needs to be is a bit more than the baseline measure. Often our biggest mistakes materialize when we assume something (because it’s obvious, right?) when more often than we care to admit, our assumptions couldn’t be further from the truth.

Mispricing Risk and Reality

For the sake of this discussion, let’s say there’s normally a 10% chance I’m wrong and a greater chance is defined as 15%. While we might brush this away as minor and immaterial, if you knew the next time you got behind the wheel of your car you had a 10% chance of getting into an accident, would you call that minor? I don’t think so. More to the point, we all have a tendency to minimize risks we’re familiar with and maximize risks we don’t understand or that push our buttons. Since we’re intimately familiar with our own thinking, it stands to reason we don’t recognize the real risk of being wrong.

I suspect we’ve all seen articles or news stories that highlight the public’s misperception of risk in our daily lives. For example, many people consider the risk of being attacked by a shark while swimming to be greater (there’s that term again) than of being hit by a bus or lightening. Of course, none of these risks are even a tiny fraction of 1%. But try telling that to someone after watching the movie Jaws, walking across a bus filled street or playing golf during a lightening storm. Proximity has a lot to do with our perception of risk. For this reason and more, we “misprice” risk in all facets of our lives, especially when developing and maintaining our worldview.

When it comes to our own decision making thought process, our so called inner dialogue, we rarely recognize this variable nor do we properly incorporate it into the conclusions we reach. And I deliberately use the term “inner dialogue” here because when we’re thinking or contemplating, the vast majority of us believe we’re all alone and “talking” to ourselves. Even when we’re conversing with others, either in real time by phone or in person or with a delay via letters, email or blogging, for the most part we believe it’s “us” that’s doing the talking and writing. Why wouldn’t we think this? Who else could it be?

For those who’ve been reading me for awhile, this is an old theme that I’d like to freshen up a bit. Our ego is always present and often front and center. Most people consider their ego to be an inseparable part of themselves and give little thought to what’s really going on in the background. Much of our day to day activity, be it physical, intellectual or emotional, is either ego driven or on “ego” auto pilot. I call it that because when we’re not consciously engaged, it’s still the same body being flown by someone or something other than our conscious awareness. If you think about it, that something’s the ego, though we think of it more like instinct or training.

Our Ego Maniac

Our ego is quite insecure and overly sensitive to being ignored or rejected. It’s assumed that the primary purpose of our ego is to take command of the ship of state during times of stress or emergency and to do whatever it takes to pull our butt out of harm’s way.

What’s tragically misunderstood by most is that the ego considers itself to be a separate and sovereign entity and not a part of the “self”, thus not answerable to or affected by “our” decisions or (in) actions in the same way you or I perceive “being affected”. It helps if we view our ego as a parasite or virus rather than a friend or companion because the ego considers you and me to be nothing more than the host.

For all intents and purposes, we’re living the life of someone with a dual personality. But we’ve been seduced into believing there’s only one person, the “self” or “I” we refer to when speaking about our personal being. The ego doesn’t share this perception, which means there’s an entity involved in our day to day affairs that doesn’t have “our” best interest in “mind”. Consider this concept carefully for a moment because its eye opening. A potentially malicious stranger is permanently living within my house. Do I leave him unattended or ignore his motives and actions?

Our ego is an ego maniac (no pun intended) that possesses (or should I say is) a severe sociopathic personality disorder. It seems our ego will go so far as to create disaster in our lives, in effect sabotage us in order to be needed, wanted and paid attention to. That’s the very definition of an ego maniac and the sociopathic personality. While this self destructive impulse varies from person to person, it’s there in everyone and must be recognized in order to deal with it.

The world’s most disturbed human beings aren’t dropped off on Earth by visiting space aliens nor do they grow on trees. They spring from within and the potential seed of their insanity can be found in all of us. This is why I endlessly repeat that in order to understand why people do certain things, one must look inside oneself. It can be shocking to realize that the raw material of these personality types resides in us all.

Our ego is seamlessly integrated into our lives and society, to the point where its influence is rarely understood by the vast majority of us. The more direct control we cede to our ego, something our narcissistic naval gazing entertain-me-now consumer culture tells us is desirable (which in turn feeds the ego) the more out of control our lives become. A severe side effect of this ego centric life is how it turns us into walking talking intellectual and emotional trip wires that can be, and often are, triggered for a variety of reasons. And this triggering almost always occurs without us being consciously aware of what’s going on or why.

Trip Wires and Mine Fields

Let’s examine a small but commonly shared example of egoic response to outside stimuli. How many times have we read a (Zero Hedge) article or comment and before we’re even finished, we’ve hit the reply button and are pounding away at the keyboard. We leave a caustic or snide reply, or even a heartfelt opinion, and then we move down to the next comment. Ten minutes later, we check back and the next response below ours doesn’t make any sense or isn’t what we expected. “What the hell’s wrong with that idiot? That’s not what I’m talking about.”

When we go back and re-read what we originally responded to, we find that somehow we completely missed what the person was saying. We’ve all had those “I don’t remember reading that” moments where it feels as if we’re absorbing something for the first time, not the second or third. This foolish “error” of ours is sometimes so obvious that we thank God no one knows who the hell we really are.

And this happens more often than we care to admit. It’s almost as if we didn’t read that particular comment but an entirely different one instead. What the hell just happened? You see it all the time in the comment section, to the point where you really don’t pay much attention since it all blends into the back ground noise and shouting.

You really only notice when it happens to you. And even then, you might deny it and blame it on the other person. Then there are times when the comment section degenerates into nothing but shouting and ego responses, where no one listens and everyone’s right.

If we pursue some quiet reflection on the matter we discover that somehow we missed nearly everything except a word or phrase that’s a hot button or trigger for us. Once we’re triggered, it’s usually game over and nothing else is making its way into our central processing unit except how to crush that fool who just triggered us. This is why I talk about reading everything twice, once to feed the egoic trip wires and the second to absorb the information into our conscious awareness. And maybe even a third time just for the joy of it.

While on the surface it might appear that it was “me” who responded, in fact it was most likely my ego. And as I said before, they aren’t the same thing. In today’s fast paced world, it’s our ego that’s often interacting with everything in our personal universe. Only we don’t recognize it because we see little or no difference between our conscious mind and the ego.

A careful reading of centuries of history shows us that while our ego has always been a major influence in our daily lives, our present day ADD need for constant stimuli and entertainment has mostly blurred the dividing line between our inner consciousness, our inner “spirituality” (to use a trigger word) and our ego. In a world where our collective and individual ego has run riot and the ego is nearly always front and center, is it really that surprising we live in an insane world?

Contemplation and Reflection

It’s only during quiet reflective times (some call this meditation, others deep thought) where we deliberately box off and isolate outside distractions and diversions while also restraining the constant chatter of our inner voice (our ego) can we begin to find, and then reinforce, that dividing line. Most of us believe that the inner voice we “hear” is “us” when in fact it’s most often our ego. This misidentification of who and what we are, along with being manipulated by our own ego and the control system, is in my opinion the primary source of many of our personal and social woes.

We’ve been separated for so long from our genuine inner self, our true consciousness, that for many in today’s world being reacquainted is a frightening experience to be avoided at all costs. The control system feeds this fear in order to maintain order and control and we go along because we’ve been told it’s all a part of modern life. The average person flips on the radio or TV as soon as they enter their home or get in their car. It’s all just the back ground noise of the control system and for most people; it’s a shock when it’s gone.

At first I thought this accelerating fusion of the ego and our consciousness appeared only to be affecting the younger generation, mostly I assumed because they quickly assimilated the newest entertainment technology. But over the past decade its spread and I’ve noticed in the general population that there’s almost a quiet desperation never to be alone for long with one’s thoughts. I’ve written in depth about “why” in other essays so I won’t dwell on it here.

A few years ago, while riding my motorcycle solo along a popular mountain ridge with spectacular views and exhilarating switch backs, I pulled into a rest area for a break. In the back corner of the parking lot was a large group of fellow riders. While their ages varied from what looked like the early 20’s to the late 60’s, everyone was riding two up. Most of the riders had communication devices that allowed them to talk to each other or at a minimum MP3 players plugged into their helmets or ears. Here they were, in the heart of Mother Nature, and still they required distraction and communication within the collective.

After exchanging pleasantries and while surrounded by those who came over to look at my bike, one middle aged lady asked me the most remarkable question. She observed I was riding alone and then asked “How can you ride alone? Aren’t you lonely? Don’t you get bored?” I could tell it was a sincere question and she was genuinely perplexed. Immediately the small talk within the group hushed as everyone waited for my response. It kind of surprised me that they would care to hear what I had to say. I soon understood why.

Without thinking I quickly said “No, not at all. In fact, I consider myself quite good company. I love riding alone because it gives me time to think. I’m never bored.” The group just stared at this strange man from another world and then quickly broke up and remounted. I remember seeing combinations of surprise, confusion and even fear in people’s faces and eyes.

From their point of view they were trying to avoid exactly what I was trying to achieve, communication with the inner sanctum. For many years I’d thought the growing lack of quiet reflection among the general population was just distractions and busy lives, but now I see it as overt avoidance and even fear. People are running from themselves and the control system is encouraging this with its constant “me me” consumer meme. We’re becoming passive beginning with ourselves.

It’s All About the Drugs

When examining information for the purpose of forming opinions, we often overlook our own unavoidable but correctable confirmation bias. Ironically our confirmation bias gains considerable strength in part from making “correct” choices in our day to day decision making process. Remember that proximity affects our perception and often being correct in the small daily tasks of life seduces us into believing we’re extremely capable in our decision making process.

During our waking hours, we make hundreds of small decisions that are immediately confirmed as “correct”, at least in our minds. This, along with other influences, encourages us to believe our analytical process is efficient and nearly foolproof, particularly if we’re already influenced by emotional confirmation bias and ego triggers.

We, or more accurately our ego, positively love to be correct. And each time our brilliance is confirmed, even if only in our imagination, our brain floods our body with powerful endorphins such as dopamine, a natural drug that’s dozens of times more powerful and much more subtle than crack or heroin. This biological process has evolved over millions of years and was, and still is to some extent, essential to our survival.

But modern society, or should I say society’s control systems, have distorted this natural mechanism. One only need study psychological warfare techniques or even the advertising, entertainment and official (government) and unofficial (corporate news) propaganda industry to see how our own natural biological responses are being used against us on a daily basis. Because we’re totally immersed within our own world, for those who don’t or won’t pay attention, it’s nearly impossible to see these influences for what they are. After a while, few wish to wake from wonderland, especially when it morphs into hell.

Biologically speaking if we’re doing something “right” it might be in our best interest to continue to be “right” if we wish to survive a while longer. But we need proper incentive beyond just survival to ensure we replicate the survival behavior. Cue that wonderfully delicious feeling we get when we’re “right” on the money. In fact, that natural high we feel is the dopamine drug rush. It’s only a matter of time before we find a way to induce that high on command. And confirmation bias and denial are sure fire ways to that Rocky Mountain high.

(Biased) Junkies Are Us

In effect we’ve become evolutionary dopamine junkies, craving the natural high we get when we’re rewarded for being right, even if it’s all in our mind. It’s better than sex, lasts longer and is infinitely repeatable. Jesus, talk about being biased. Does a super high quality drug factory located inside our brains count as biased when we control the dopamine dispenser?

Is it any wonder we accept transparent lies from those we love or those who lead? We shouldn’t be surprised when we practice deep denial and self deception in order to keep ourselves drugged with dopamine. Not only are we getting off on the (self) love endorphins (which are also triggered by nationalist or patriotic feelings) but we get the confirmation bias endorphins as well in the ultimate two-for-one drug deal from Mother Nature. No wonder we call her Mother since we suckle on her drugs all the time. It’s amazing we get anything done during the day considering we’re all walking around stoned to the eye balls. What a way to go.

This brings to mind old YouTube videos of monkeys or other animals pushing a lever or pecking at a button to solve problems for bits of food or sweets. Or how about those lab rats solving a complicated task for food or a quiet evening of wine and necking with the opposite sex? Does it sound a little like our own rat race?

Of course, even as those images flash in our brains, our ego takes over and tells us “But we’re intelligent human beings who possess reason and logic.” Who exactly are we trying to convince with that little ditty? Just take a look around at the utter insanity we’re currently immersed in and tell me again about the human intellect and logic. Ticks run their lives better than we do. They just lack running water and DirecTV.

Driving to Denial

For a more subtle example of denial, let’s look at my own personal decision making process and the intellectual denial it spawned. While driving to my office I make dozens of decisions that if in error could affect life and limb, particularly mine. Yet I’ve not had an accident in over 16 years and I quite naturally consider myself a good driver. In fact, I’m a great driver. Yet as I’ve aged, I’ve noticed that for some strange reason I drift left and right a bit more and the close calls seem to be occurring with increasing frequency.

So despite the fact that I’m an excellent driver and without ever acknowledging otherwise, I’ve compensated for my aging by slowing down, looking more carefully before changing direction and so on. In other words, at some level I’ve recognized the increasing error rate and I’m compensating, even though I consider myself a superior driver. Or maybe I should say I’m compensating despite being an expert driver that ostensibly would have no need to compensate what-so-ever.

Like walking through a hall of mirrors, we’re never quite sure exactly what we’re seeing. But this doesn’t slow us down one bit. In fact, when facing a conflict, our ego takes over and just barrels on through, pushing aside uncomfortable cognitive dissonances as immaterial, unimportant or just plain silly with little to no conscious thought involved.

Actually, the only reason I’ve slowed down is because it makes sense to be careful, especially considering all the crazy distracted drivers on the road these days. I most certainly didn’t slow down because I needed to change my behavior. It’s them, not me. And even if it were possible that I might have something to do with this, my age has nothing to do with it. At least that’s the cover story I tell myself.

The above illustration might seem ridiculous to some and there’s no doubt I used exaggeration to push the point home. But we’ve all been there and to say otherwise isn’t true. Some might even say that at worst all I engaged in was a simple “white lie” or a harmless self deception to make me feel better about getting older. What’s the big deal? Or maybe I was just playing with “semantics” and it’s all of little consequence. But in fact it’s a wide open window into the mechanism of denial and well worth our time to explore precisely because it’s so insidious and seductive.

The Slippery Slope

Consider that on the physical level I’m compensating for an obvious degradation of my driving skills in order to live a little longer, thus fulfilling my basic survival instincts. Of course I acted this way. Why wouldn’t any sane and prudent person do the same?

However, at the same time I’m maintaining the mental and emotional illusion that few driving skills have degraded or been lost. In fact I use the continuing streak of accident free driving, accomplished in great part because I’ve slowed down and I’m more careful, to support the illusion that I’m still an excellent driver. I’m engaging in a self deception in order to soothe and placate an ego I don’t consciously recognize as material. Why am I stroking my ego to begin with? Isn’t it enough just to survive longer?

As with all lying and self deception, the key to continuing is to rationalize and justify past deceptions in order to continue in the future. To do this successfully, first we deny there’s a problem (even if we fix it) then we deny we ever denied there was a problem in the first place. Then, in the ultimate intellectual coup, we forget we ever indulged in denial what-so-ever. In the closed loop isolated environment of our mind, we create our own reality along with the proofs needed to affirm that reality. We’re masters of our own universe and we make the rules where we rule.

We should recognize that we can still be engaged in denial even if we agree with or recognize some facts or information. It’s how we deal with it that matters, not if we deal with it. We bargain with ourselves all the time to avoid what we don’t wish to see. There’s a great deal of subtlety and subterfuge employed in day to day denial. When juggling reality and fantasy while avoiding the ugly monsters, we determine what’s important and what’s not. So we can play games of all kinds to bury what bothers us.

If denial and self deception is present in such a mundane task as driving to work, wouldn’t it be an act of denial itself to claim that denial doesn’t affect our thought process when considering items of much greater importance, such as the end of the economic world as we know it? From a survival point of view, might we need to concede the possibility that we’re not considering all pieces of information at our disposal when coming to conclusions as to what’s going to happen as well as when where and why?

Tricks of the Denial Trade

One of the tricks we employ when trading in denial is to dismiss (deny) contrary information as quickly as it comes in the front door. This way we rarely experience an uncomfortable cognitive backup that might nag us for attention and create an emotional crisis if left unattended. If one is to self deceive on any scale, out of necessity one must become efficient self deceivers if we’re to live comfortably with ourselves in our insane world.

I’ve often thought that the job of the professional therapist is to untangle the dissonant log jams and get them moving towards the saw mill, not to actually deal with the dissonant logs themselves. Or maybe I should say they deal with just enough of them to get things moving again so the patient can happily remount their hamster wheel. After all, in our society, the measure of sanity is how well we’re coping with our insane world, not how “sane” we are.

In fact, people who in my opinion are declaring their sanity by unplugging and walking away from financially lucrative but morally or emotionally stressful jobs are considered by society to be crazy. When the only goal offered and rewarded by society is to ascend the ladder of “success”, how else would society treat those who chose to descend that very ladder but with disdain? Society tells us “Here is the only reality that exists, now fit in, shut up and be happy” rather than “Here is the raw material, now go forth and create your own happiness and self worth.”

Faced with no real substantial choice other than to fit in and confronted by a society, aka the control system, that shuns and ostracizes those who go against the flow and think and act too far outside the small box, is it really surprising we engage in massive self deception in order to kill the pain and go with the flow? And wouldn’t the control system encourage this self deception in order to keep the hamsters on the wheel? God forbid you think for yourself because left to your own devices, who would remain to fleece investors with another helping of CDO on rye or serve up coffee and cardboard muffins at McSlop’s?

To remain emotionally safe and “happy” on the hamster wheel, we increase our denial efficiency by creating mental rules of judgment, sometimes called rules of thumb or the smell test or ideology or simply assumptions. There are dozens of names and terms to describe this process. The beauty of this intellectual shorthand is that we don’t need to participate in the complicated process of outright denial each time. Once we’ve denied something for whatever reason, we give ourselves permission to do the same with every other piece that’s similar or that we wish to believe is similar.

And we don’t process denial in big pieces but in tiny little bites. We remove the more easily refutable parts and discard the rest. Then we wall these parts off and isolate them from corroborating evidence and context that would disturb the denial process. We use a form of “a priori” to make sweeping generalizations that key off other denials, half truths and outright lies we keep ready for instant deployment and presto, the problem is gone

In the world of denial, all we need is reasonable doubt to deny and we determine what reasonable doubt is. But we demand rock solid proof when defending our denial and any proof offered can always be refuted because we determine what’s valid and what’s not. We can’t lose using these rules of evidence and we never do unless we chose to.

In the ultimate twist, we then use these subsequent denials as further proof that our initial denial was correct. Faulty handling and processing of information (aka denial) is used to deny something as incorrect. Then additional denials are used to buttress the initial denial, thus strengthening our resolve to deny similar future information. We come to the denial party with guns load. That my friend is a closed loop circular logic positive reinforcement mind game taken to the nth degree and it’s the staple of basic long term denial. And it all happens in seconds and it’s almost exclusively handled by our ego auto pilot.

In Chapter Two, we shall continue down the rabbit hole and see what Alice has to say about “The Crash”.



Cognitive Dissonance



More articles from Zero Hedge….

Nic Lenoir’s Market Close Observations

August 31, 2010 by · Leave a Comment 

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Zero Hedge

From Nic Lenoir of ICAP

Since I just got back today after 5 days away, I will say little since I need to reflect a bit more on the price action.

Until I send a more complete market overview tomorrow, there are a few things I want to point out: The market data is atrocious and yet we fail to accelerate lower. I have highlighted the past two weeks how the 1,040/1,050 are should provide strong support here and so ar so good. We remain core short from 1,126 but feel rather pleased to be out of tactical positions so the chopping around the lows does not give us any headaches. I still believe we should see 1,085/1,100 at the minimum before selling off more aggressively.

Beyond noting the daily support for the S&P and concurrent support for the DAX tested and held today, the intraday volume and month end activity into tonight’s close is worth noting: 200,000 ESU0 (mini S&P) futures traded in the last 10 minutes. Even this may very well be simple month end activity, expect most algos out there to take good note of the volume spike on the uptick. The market kept trading strong in after hours and more could be expected on the back of this. Should this play out it could give the momentum necessary for us to go kiss 1,100 goodbye before moving lower. In terms of economic data the work my friends Julian Brigden and Jonas Thulin were kind enough to share with me more than comforted my very doom outlook for the next 2/3 quarters, so we will be looking at reloading tactical shorts into the rally should it materialize.

Good luck trading,


More articles from Zero Hedge….

The Market Ticker – FOMC Minutes For August 10th

August 31, 2010 by · Leave a Comment 

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By Karl Denninger, The Market Ticker

As is my usual practice…..

Developments in Financial Markets and the Federal Reserve’s Balance Sheet
The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets during the period since the Committee met on June 22-23, 2010. He also reported on System open market operations during the intermeeting period, noting that the Desk at the Federal Reserve Bank of New York had engaged in coupon swap transactions in agency mortgage-backed securities (MBS) to substantially reduce the number of the Committee’s earlier agency MBS purchases that remained to be settled.

We made sure that those who sold us things they didn’t have didn’t get called on it.  Isn’t that grand?  (PS: What do you call selling something you don’t actually own – and can’t acquire?)

In addition, the Manager briefed the Committee on the System’s progress in developing tools for possible future reserve draining operations. The Federal Reserve successfully conducted two more small-value auctions of term deposits to confirm operational readiness for such auctions at the Federal Reserve and at the depository institutions that chose to participate.

Who were those that "chose to participate"?  Oh yeah, that’s right, we dont’t get actual minutes – what we get is another fraudulently-claimed load of bilge.

There were no open market operations in foreign currencies for the System’s account over the intermeeting period.

…. that we’re willing to admit to……

Staff Review of the Economic Situation
The information reviewed at the August 10 meeting indicated that the pace of the economic recovery slowed in recent months and that inflation remained subdued.

Translation: There was no recovery.  Not now, not before, and certainly not on a forward basis.

In addition, revised data for 2007 through 2009 from the Bureau of Economic Analysis showed that the recent recession was deeper than previously thought, and, as a result, the level of real gross domestic product (GDP) at the end of 2009 was noticeably lower than estimated earlier. Private employment increased slowly in June and July, and industrial production was little changed in June after a large increase in May. Consumer spending continued to rise at a modest rate in June, and business outlays for equipment and software moved up further. However, housing activity dropped back, and nonresidential construction remained weak. Additionally, the trade deficit widened sharply in May. A further decline in energy prices and unchanged prices for core goods and services led to a fall in headline consumer prices in June.

The government lied previously, and still is.  We of course used this as an excuse, and still are.

Private nonfarm employment expanded slowly in recent months. The average monthly gain in private payroll employment during the three months ending in July was small, considerably less than the average increase over the preceding three months.

When adding in the population of new entrants to the workforce, employment did not expand at all, it actually FELL.  But we won’t tell you that, because that’s would be "truth", and we’re allergic.  Severely.  Oh, we’re missing our epipens too.

The unemployment rate moved down in June from its level earlier in the year, and was unchanged in July, as declining civilian employment was accompanied by decreases in labor force participation. Initial claims for unemployment insurance remained at an elevated level over the intermeeting period.

We don’t count people who have given up on finding a job as "unemployed."

The output of high-technology items and other business equipment continued to rise.

Yeah, Intel says so too.  Oh wait….

Indicators of household net worth–such as stock prices and house prices–were little changed, on net, over the intermeeting period. Consumer confidence fell back in July, with households expressing greater concern about their personal finances and the outlook for the recovery.

Our lies are not working as well as they used to.

The housing market, which had been supported earlier in the year by activity associated with the homebuyer tax credits, was quite soft for a second consecutive month in June. Sales of new single-family homes rebounded some in June after their sharp drop in May, but they remained at a depressed level. Sales of existing homes fell for a second month in June, and the index of pending home sales suggested another decline in July.

The government cheese ran out.  Damn.

Inflation remained subdued Deflation accelerated in recent months.

Nominal hourly labor compensation–as measured by compensation per hour in the nonfarm business sector and the employment cost index–rose modestly during the year ending in the second quarter. Average hourly earnings of all employees rose slowly over the 12 months ending in July. Output per hour in the nonfarm business sector declined in the second quarter after rising rapidly in the preceding three quarters. On net, unit labor costs remained well below deflated below their level one year earlier.

In the emerging market economies (EMEs), incoming data generally pointed to a moderation of economic growth, albeit to a still-solid pace, with a notable slowing in China in the second quarter.

China has better liars than we do.  They also use bullets on truth-tellers more often.  (Those in the US telling the truth often have "heart attacks."  Funny coincidence, that….)

In contrast, Mexican indicators suggested that economic activity rebounded in the second quarter after contracting in the first quarter.

The Mexican drug gangs are shooting more people, which is leading to a pickup in demand for guns and ammunition.  This is expected to spur economic activity and reduce competition for jobs.

Over the intermeeting period, investors appeared to mark down the path for monetary policy in response to weaker-than-expected economic data releases and Federal Reserve communications that were read as suggesting that policymakers’ concerns about the economic outlook had increased.

Investors are losing confidence in our lies too.

Reflecting the same factors, yields on nominal Treasury coupon securities fell noticeably on net. Treasury auctions were generally well received, with bid-to-cover ratios mostly exceeding historical averages. Yields on investment- and speculative-grade corporate bonds decreased, and their spreads relative to yields on comparable-maturity Treasury securities declined moderately. Secondary-market bid prices on syndicated leveraged loans rose a bit, while bid-asked spreads in that market edged down.

Net-interest margin is collapsing. Incidentally, this is threatening to expose the naked swimmers among our banks – and their insolvency.

Broad U.S. equity price indexes increased slightly, on net, as generally positive corporate earnings news and an easing of investors’ worries about the potential effects of fiscal strains in Europe were partly offset by concerns about the strength of the economic recovery. Most firms in the S&P 500 reported second-quarter earnings that exceeded analysts’ forecasts.

"Work harder, get paid less, or be fired and we’ll send your job to a slave labor camp in China!" – the new mantra of American business.

Gross bond issuance by U.S. investment-grade nonfinancial corporations rebounded in July from relatively subdued levels in May and June.

There’s always a greater fool….

Prices of commercial real estate appeared to have increased in the second quarter, though the number of transactions was small.

One building sold – from Guido to Guido’, for the purpose of establishing a fraudulent mark on the price.

Nonetheless, commercial real estate markets remained under pressure. Delinquency rates for securitized commercial mortgages continued to rise in June, and commercial mortgage debt was estimated to have contracted by a sizable amount again in the second quarter. However, investor demand for high-quality commercial mortgage-backed securities (CMBS) reportedly was robust, although issuance of CMBS remained muted.

Oh crap – we printed three sentences of truth!

Consumer credit contracted again in the second quarter, as revolving credit continued to decline and nonrevolving credit edged down.

Consumers are done with this BS and are choking on debt.  Having been hosed twice in ten years, they’re refusing to do it again.

Commercial banks’ core loans–the sum of commercial and industrial (C&I), real estate, and consumer loans–continued to contract in June and July.

That’s called "default".

Securities holdings by banks increased substantially in recent weeks.

But the banks are buying stocks!  (Ed: are they using depositor funds to do that, or are they using Fed-printed money?  Either is a problem, no?)

Staff Economic Outlook
In the economic forecast prepared for the August FOMC meeting, the staff lowered its projection for the increase in real economic activity during the second half of 2010 but continued to anticipate a moderate strengthening of the expansion in 2011.

See, we still lie!  Are you going to believe us?

Overall inflation deflation was projected to remain subdued increase substantially over the next year and a half.

Fixed it for ‘ya.

Weighing the available information, participants again expected the recovery to continue and to gather strength everything to go to hell and continue toward Lucifer’s cradle in 2011. Nonetheless, most saw the incoming data as indicating that the economy was operating farther below its potential than they had thought, that the pace of recovery had slowed decline had advanced in recent months, and that growth would be more modest during the second half of 2010 Lucifer had been chortling with glee than they had anticipated at the time of the Committee’s June meeting.

Fixed it for ‘ya.


Committee Policy Action
In their discussion of monetary policy for the period ahead, Committee members agreed that it would be appropriate to maintain the target range of 0 to 1/4 percent for the federal funds rate.

I threatened them to get them to all fall in line – as soon as they got to Jackson Hole they started talking though.  Bastards.

Mr. Hoenig dissented because he thought it was not appropriate to indicate that economic and financial conditions were "likely to warrant exceptionally low levels of the federal funds rate for an extended period" or to reinvest principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. Mr. Hoenig felt that the "extended period" expectation could limit the Committee’s flexibility to begin raising rates modestly in a timely fashion, and he believed that the recovery, which had entered its second year and was expected to continue at a moderate pace, did not require support from additional accommodation in monetary policy. Mr. Hoenig was also concerned that these accommodative policy positions could result in the buildup of future financial imbalances and increase the risks to longer-run macroeconomic and financial stability.

Mr. Hoenig has a brain, and what he really expressed is that the economy cannot stabilize until the excess debt is removed, and that can’t happen as long as the FOMC is tampering with the bond market.  Therefore, until rates rise, there will be no recovery.

We don’t dare print that, however.

Yes, this is all tongue-in-cheek. 


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