Bear Market


Whose Recovery?

March 30, 2012 by · Leave a Comment 

By Robert Reich, Robert Reich

Luxury retailers are smiling. So are the owners of high-end restaurants, sellers of upscale cars, vacation planners, financial advisors, and personal coaches. For them and their customers and clients the recession is over. The recovery is now full speed.

But the rest of America isn’t enjoying an economic recovery. It’s still sick. Many Americans remain in critical condition.

The Commerce Department reported Thursday that the economy grew at a 3 percent annual rate last quarter (far better than the measly 1.8 percent third quarter growth). Personal income also jumped. Americans raked in over $13 trillion, $3.3 billion more than previously thought.

Yet it’s almost a certainly that all the gains went to the top 10 percent, and the lion’s share to the top 1 percent. Over a third of the gains went to 15,600 super-rich households in the top one-tenth of one percent.

We don’t know this for sure because all the data aren’t in for 2011. But this is what happened in 2010, the most recent year for which we have reliable data, and there’s no reason to believe the trajectory changed in 2011 or that it will change this year.

In fact, recoveries are becoming more and more lopsided.

The top 1 percent got 45 percent of Clinton-era economic growth, and 65 percent of the economic growth during the Bush era.

According to an analysis of tax returns by Emmanuel Saez and Thomas Pikkety, the top 1 percent pocketed 93 percent of the gains in 2010. 37 percent of the gains went to the top one-tenth of one percent. No one below the richest 10 percent saw any gain at all.

In fact, most of the bottom 90 percent have lost ground. Their average adjusted gross income was $29,840 in 2010. That’s down $127 from 2009, and down $4,843 from 2000 (all adjusted for inflation).

Meanwhile, employer-provided benefits continue to decline among the bottom 90 percent, according to the Commerce Department. The share of people with health insurance from their employers dropped from 59.8 percent in 2007 to 55.3 percent in 2010. And the share of private-sector workers with retirement plans dropped from 42 percent in 2007 to 39.5 percent in 2010.

If you’re among the richest 10 percent, a big chunk of your savings are in the stock market where you’ve had nice gains over the last two years. The value of financial assets held by Americans surged by $1.46 trillion in the fourth quarter of 2011.

But if you’re in the bottom 90 percent, you own few if any shares of stock. Your biggest asset is your home. Home prices are down over a third from their 2006 peak, and they’re still dropping. The median house price in February was 6.2 percent lower than a year ago.

Official Washington doesn’t want to talk about this lopsided recovery. The Obama administration is touting the recovery, period, without mentioning how narrow it is.

Republicans would rather not talk about widening inequality to begin with. The reverse-Robin Hood budget plan just announced by Paul Ryan and House Republicans (and endorsed by Mitt Romney) would make the lopsidedness far worse – dramatically cutting taxes on the rich and slashing public services everyone else depends on.

Fed Chief Ben Bernanke – who doesn’t have to face voters on Election Day – says the U.S. economy needs to grow faster if it’s to produce enough jobs to bring down unemployment. But he leaves out the critical point.

We can’t possibly grow faster if the vast majority of Americans, who are still losing ground, don’t have the money to buy more of the things American workers produce. There’s no way spending by the richest 10 percent – the only ones gaining ground – will be enough to get the economy out of first gear.

More articles from Robert Reich….

Break Up The Big Banks, Says the Dallas Fed

March 30, 2012 by · Leave a Comment 

By Robert Reich, Robert Reich

As the Supreme Court shows every sign of throwing out “Obamacare” and leaving 30 million Americans without health insurance, another drama is being played out in the quiet corridors of the Federal Reserve system that may affect even more of us.

Taxpayers will be on the hook for another giant Wall Street bailout, and the economy won’t be mended, unless the nation’s biggest banks are broken up.

That’s not just me talking, or the Occupier movement, or that wayward executive who resigned from Goldman Sachs a few weeks ago. It’s the conclusion of the Dallas Federal Reserve, one of the most conservative of the Fed’s regional banks.

The lead essay in its just released annual report says a cartel of giant banks continues to hobble the recovery and poses an ongoing danger to the economy.

Wall Street’s increasing power remains “difficult to control because they have the lawyers and the money to resist the pressures of federal regulation.” The Dodd-Frank act that was supposed to control Wall Street “leaves TBTF [too big to fail] entrenched.”

The Dallas Fed goes on to argue that the Fed’s easy money policy can’t be much help to the U.S. economy as long as Wall Street is “still clogged with toxic assets accumulated in the boom years.”

So what’s the answer, according to the Dallas Fed? It’s “breaking up the nation’s biggest banks into smaller units.”

Thud. That’s the sound the report hitting the desks of Wall Street executives. They and their Washington lobbyists are doing what they can to make sure this report is discredited and buried. 

When I spoke with one of the Street’s major defenders in the Capitol this morning he snorted “Dallas represents small regional banks that are jealous of Wall Street.” When I reminded him the Dallas Fed was about the most conservative of the regional banks and knew first-hand about the dangers of under-regulated banks — the Savings and Loan crisis ripped through Texas like nowhere else — he said “Dallas doesn’t know its [backside] from a prairie gopher hole.”

So as Republicans make the repeal of “Obamacare” their primary objective (and Alito, Scalia, Thomas, Roberts, and perhaps Kennedy sharpen their knives) another drama is taking place at the Fed. The question is whether Bernanke and company in Washington will heed the warnings coming from its Dallas branch, and amplify the message.

More articles from Robert Reich….

The Phony "Economic Recovery," Stress and "Losing It"

March 30, 2012 by · Leave a Comment 

By Charles Hugh Smith, OFTWOMINDS


Derealization leads to chronic stress, which then disrupts our ability to make rational decisions and follow plans.


We have all experienced the disorientation and “brain freeze” that stress triggers. It seems these symptoms of stress have become normalized in countries where the authorities keep promoting phony “economic recoveries.” The disconnect between what the authorities are claiming and what people are actually experiencing is widening, and that leads to stress. No wonder more and more people are “losing it” in public as their neural circuitry melts down under the strain of synthesizing what they experience (austerity) and what they’re told (official spin about the “recovery”).
In Survival+ I call this process derealization as lived experience is derealized by official spin and propaganda.
Recent research is illuminating how stress disrupts the default hierarchy of the brain. In the absence of stress, the neocortex-rational-mind functions suppress the more primitive subconscious signals of aggression, hunger, sex drive, etc. in order to concentrate our effort to complete some planned activity.
Everyday Stress Can Shut Down the Brain’s Chief Command Center. Neural circuits responsible for conscious self-control are highly vulnerable to even mild stress. When they shut down, primal impulses go unchecked and mental paralysis sets in. (Scientific American; subscription required, hopefully your local library has a copy)
This helps explain the natural “fight or flight” response we feel when suddenly confronted with danger or potential danger, but more importantly it illuminates how we lose the ability to analyze circumstances rationally when we are “stressed out.” Once our rational analytic abilities are shut down, we are prone to making a series of ill-informed and rash decisions.
This has the potential to set up a destructive positive feedback loop: the more stressed out we become, the lower the quality of our decision-making, which then generates poor results that then stress us out even more, further degrading our already-impaired rational processes. This feedback loop quickly leads to “losing it completely.”
Doesn’t this describe our increasingly dysfunctional and disconnected-from-reality legislative process?
In pondering human development over the past 20,000 years of the transition from hunter-gatherer groups to modern life, it seems self-evident that stress was likely to be resolved in relatively short order in the hunter-gatherer lifestyle: everyone was known to everyone else, conflicts had to be resolved simply because the group survival depended on it, and most threats could be fended off with vigilance, weapons or left behind by a few hours of fast walking.
Contrast the environment that selected for this stress/conscious self-control feedback with modern life: in the modern urban life and work environment, stress is more or less constant and our ability to resolve stressful situations is limited.
This helps explain the increasing prevalence of people “losing it” in public when they encounter a rather typical frustration such as the inability to cash a check at a credit union. Just last week I saw a middle-aged man “lose it” at our local credit union, swearing and raging against employees who were simply following CU guidelines on check cashing. As the finances of many enterprises and households comes under further stress, then self-control degrades and people are more likely to “lose it.”
Though this particular article focuses on short-term stress, there is growing body of evidence that chronic stress has a number of subtle and destructive consequences. In addition to the common-sense connection between chronic stress and hypertension, there is evidence that obesity is also related to stress-caused conditions such as inadequate sleep and chronic inflammation. This makes sense as the stress hormones erode the immune system’s responsiveness.
Behaviorally, stress breaks down self-control, so it is no surprise that stress leads to bingeing, addictive behavior, impluse buying, etc.–all “knock-on” effects with negative consequences.
Chronic stress permanently degrades our ability to rationally analyze and plan, and so we act irrationally or erratically, as we are no longer able to stick to a conscious plan of coherent action. With the rational mind and self-control centers permanently suppressed, we are prone to “zombie” passivity, “sleepwalking” though life. This may help explain Americans’ remarkable passivity as their civil liberties are taken away and their financial insecurity increases.
Many of the features of post-traumatic stress disorder (PTSD) are visible in “everyday Americans,” and an understanding of how stress erodes rational thought and self-control helps explain why.
We have three ways to counter the destructive consequences of stress:
1) Develop positive physical and mental responses via discipline and practice (for example, yoga, martial arts, etc.)
2) Turn off the mainstream media
3) Stay focused on our plans. The simpler and more positive the plan, the more likely it is we can stay focused on it in stressful circumstances.
This entry is drawn from Musings Report 13. The Musings Reports are sent weekly to subscribers and major contributors. 
Thank you, Ralph M. ($5/mo), for your wondrously generous subscription to this site–I am greatly honored by your support and readership. Thank you, Deborah R. ($5/mo), for your splendidly generous subscription to this site–I am greatly honored by your support and readership.

Go to my main site at www.oftwominds.com/blog.html
for the full posts and archives.

More articles from Charles Hugh Smith….

Why BHP Should Be Bracing Itself For a China Slowdown

March 30, 2012 by · Leave a Comment 

The Daily Reckoning

There’s trouble brewing over at the Big Australian – BHP. Investors are now starting to turn on the once impregnable company. Blackrock, BHP’s single biggest shareholder, recently sold a third of its holding.

Blackrock’s worried that BHP is investing too much money, from which returns won’t surface for many years. According to today’s Financial Review, BHP plans to invest around $100 billion between now and 2020. This is more than the company has invested in the past 20 years.

BHP currently generates a ‘return on capital employed’ of around 25 per cent. To maintain this rate of profitability, the company must add $25 billion in operational earnings by 2020. Given the long lead times between making investments and seeing return on them, this is not going to happen.

And that’s what investors are nervous about. It is likely that BHP’s profitability will drop in the years to come as it invests capital and patiently awaits returns. But just what those returns will turn out to be in a post-China boom world is also a source of concern.

For a capital-intensive resource company, BHP’s returns on capital and equity over the past five years or so have been exceptional. That’s largely thanks to the iron ore division. In the six months to 31 December, BHP’s iron ore operations produced an EBIT (earnings before interest and tax) margin of 65 per cent. And according to the 2011 annual report, the division generated a return on capital of nearly 100 per cent!

Remember, this is a bulk commodity. Granted, it’s some of the highest quality iron ore in the world. But is such a high return on its production sustainable?

No way. And as we’ve said many times before it’s all a result of China’s fixed-asset investment boom. The lending boom in China created a profitability boom in Australian iron ore production. In the coming decade those returns will revert to the mean.

Part of the reason China’s slowdown has not yet hit the iron ore price in a big way is because China doesn’t act like a capitalist economy. That is, it doesn’t respond to price signals the way private entrepreneurs do.

We’ll give you an example. China’s steel factories are churning out an excessive amount of steel. There’s excess production. Angang Steel, the country’s second largest steel producer made a loss of around US$340 million in 2011. In 2010, a boom year for production, it managed to generate a miserable return on equity (equity is another word for shareholders’ funds) of just 3.5 per cent.

The country’s largest steel producer, Baosteel, is struggling too. Its parent company, concerned at the lack of profits in the steel industry has diversified into other industries in recent years. Now, around 50 per cent of its profits come from non-steel activities.

The state is the majority owner of both of these companies. The state owns and runs most of China’s output. The state’s focus is not on profit and profitability…it’s on social stability. Keeping people employed and subservient is the number one priority of China’s ruling class. That way they can go on gaming the system.

As one steel mill manager recently told China’s business magazine, Caijing:

“We’re under a lot of operating pressure right now. Because it’s related to employment, we cannot just cut production. We’re now in a situation where we lose several hundred yuan on a ton of steel.”

That’s right, China produces steel at a loss to maintain employment. Hardly a sustainable state of affairs…although, to be fair, China’s ‘system’ can sustain abnormal economic behaviour probably longer than any other.

But this has important implications for Australia’s resources industry – and especially the bulk commodity producers of iron ore and coal. If demand and prices are the result of uneconomic decisions, then they are unsustainable. When the price structure finally reflects this, expect share prices to fall.

To some extent, investors have anticipated this. Check out BHP’s share price performance since mid-2009. It’s virtually gone nowhere. We asked Slipstream Trader Murray Dawes what he thought of the price action…and the reply wasn’t reassuring.

BHP is teetering on the edge of a massive support level. The last time BHP broke under $34 in a long-term downtrend was in late 2008. Back then it fell around $14 in a matter of months. Also, it must be remembered that at $34 there is about three years’ worth of buying in BHP that is out of the money. When they capitulate you will see a mass exodus out of BHP, which could cause a similar move to the one we saw in 2008.

Thanks for the cheerful prognosis Muz!

BHP Billiton – Teetering on the Edge

BHP Billiton - Teetering on the Edge

Yet it looks ‘cheap’…which we suspect is the reason why so many investors stick to the story. Based on 2013 earnings forecasts, BHP trades on a price-to-earnings ratio of around 7.6 times. Clearly the market does not believe BHP will meet the earnings forecasts. And we don’t blame it. Betting on continued 100 per cent returns on investment in iron ore is not one we’d like to make.

Here’s another interesting chart related to China. It shows the performance of the Shanghai Stock Exchange (red line) versus the All Ordinaries Index over the last year. There’s been a marked divergence in recent days. Shanghai has gone south, while Sydney has turned north.

Sydney and Shanghai – Going Separate Ways

Sydney and Shanghai - Going Separate Ways

Source: Stockcharts

We don’t know what it means, but rarely have the two exchanges parted company for an extended period of time.

Regards,

Greg Canavan
for The Daily Reckoning Australia

From the Archives…

Gold Money: A Once-in-a-Generation Buying Opportunity
2012-03-23 – Greg Canavan

A Question Australia Might Have to Answer
2012-03-22 – Joel Bowman

Australian Tax: Running Government at a Profit
2012-03-21 – Nick Hubble

China: Why All Feasts Must Come to An End
2012-03-20 – Satyajit Das

Similar Posts:

More articles from The Daily Reckoning….

Your Feedback on Gold and Silver

March 30, 2012 by · Leave a Comment 

The Daily Reckoning

Last week we took Ben Bernanke to task for his dim university lecture on the gold standard. Soon after, a few readers took us to task for our own apparent dimness and for ‘promoting’ gold.

Sorry Greg,

I really have to take exception to the myths you are promoting – gold is a commodity and a store of “wealth” in relation to the money supply of a society, but it is definitely not “money” – certainly not the quintessential essence necessary to create a supply of “MONEY TICKETS”, whose principle purpose is to facilitate trade.

The purpose of “Money” is to provide a convenient and flexible medium of exchange, and even though gold has been used for this purpose in the past, it really has no bearing on the number of “money tickets” needed for a growing economy. The real criteria is the productive capacity of an economy that can serve the consumption demands of that economy. There is absolutely no purpose in producing anything if it is not going to be consumed.

We would argue that credit facilitates trade more than money – and credit and money are distinctly different. The provision of credit, without some sort of monetary anchor (like gold) can go on ad infinitum and completely dwarf the productive capacity of an economy. Which is exactly what has happened in the past 40 years.

G’day,

You mention the parabolic rise in AAPL (Apple), look at a chart for gold for a comparison, also rose in a parabolic fashion, as did silver, followed by a decline. Many other shares and commodities have risen in similar fashion, AAPL is no exception, singling them out is unfair unless comparing to other similar rises, including gold and silver which you promote the investment in.

There is a major difference between gold and Apple. Since bottoming in 2001, gold in US dollar terms has increased by around 550 per cent. Since bottoming in 2003, Apple’s share price has increased…more than 8,000 per cent! And half of that gain has been delivered since June 2011.

But no one is talking about a bubble in Apple. That’s when you know it probably is one.

When Bernanke and his coterie of world improvers thoroughly destroy peoples’ trust and faith in the currencies they manage, sending gold and silver prices to absurd levels, we hope we have the courage and foresight to know it’s a bubble and tell you all about it.

But we think it will be quite a few years before we get there.

Regards,

Greg Canavan
for The Daily Reckoning Australia

From the Archives…

Gold Money: A Once-in-a-Generation Buying Opportunity
2012-03-23 – Greg Canavan

A Question Australia Might Have to Answer
2012-03-22 – Joel Bowman

Australian Tax: Running Government at a Profit
2012-03-21 – Nick Hubble

China: Why All Feasts Must Come to An End
2012-03-20 – Satyajit Das

Similar Posts:

More articles from The Daily Reckoning….

Bashing Warren Buffett…Once Again With Feeling

March 30, 2012 by · Leave a Comment 

The Daily Reckoning

“Right now bonds should come with a warning label,” opines Warren Buffett in this year’s letter to Berkshire Hathaway shareholders. That seems like a reasonable idea, but why stop there? Why not slap a warning label on each one of Buffett’s public pronouncements as well?

The warning would go something like this: This pronouncement may or may not express my honest opinions, but it will almost certainly advance a hidden political agenda that enables me to gain access to preferential treatment from elected officials and various agencies of the federal government.

Buffett knows investing, no doubt about it. He’s an expert’s expert. But Buffett also knows how to make sure the government’s butter lands on at least one side of his bread, if not both. He’s an expert’s expert.

Both activities are perfectly legal, but only one of them is perfectly disgusting.

“Stop Coddling the Super-Rich,” Buffett pleaded last summer in an infamous op-ed piece for the New York Times. “Our leaders have asked for ‘shared sacrifice.’ But when they did the asking, they spared me. I checked with my mega-rich friends to learn what pain they were expecting. They, too, were left untouched…

“Last year,” Buffett continued, “my federal tax bill – the income tax I paid, as well as payroll taxes paid by me and on my behalf – was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income – and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.”

Ah shucks!… Gee whiz!… and Golly gosh! Mr. Buffett must feel just awful about this injustice. If only he had discovered it earlier, he could have paid tens of billions of dollars more in taxes during his lifetime. And, gee willickers, he could have told all his mega-rich friends about his great discovery so that they, too, could have paid tens of billions of dollars more in taxes.

Golly gee, isn’t that just the way life is? You always discover the best stuff after it’s too late to do anything about it. It’s just too darn bad that Buffett and his mega-rich friends had already amassed their mega-billions of dollars during the “unfair” tax regime of the last two or three decades before Buffett discovered how unfair it was.

But, shucks, you can’t turn back the clock. So despite Buffett’s profound regret, he will simply have to keep all those billions of dollars that the IRS did not permit him to contribute to the US government.

Gee whiz…life just ain’t fair sometimes. You try to be magnanimous with the US government and the IRS just won’t let you. Hey, but at least you can publicly proscribe for others the identical high-tax regime that you methodically and assiduously avoided throughout a career spanning several decades.

And fortunately for the US government, there is a brand-new generation of folks who aspire to become billionaires like Buffett, or perhaps merely millionaires. And as Buffett astutely observes, it’s not too late to tax them.

At this point, a few Dear Readers may be saying to themselves, “Well, okay, but even if Buffett should have said something earlier, at least he said something now… and that means that he would start paying higher taxes now.

False.

Implementing a higher income tax would barely move the needle on Buffett’s annual tax bill, as the nearby chart illustrates.

Tax Fairness, Buffett-style

Buffett paid $6.9 million in taxes on his 2010 personal income of $39.9 million dollars – or 17.4%. But he paid zero personal taxes on his portion – $2.9 billion – of Berkshire Hathaway’s net income. (Of course Berkshire paid corporate tax, but that fact is not germane to the discussion of personal taxes that Buffett addressed in his article last year).

In other words, even if you bumped the personal income tax all the way up to 100%, and literally confiscated every cent of Buffett’s direct personal income, the effective tax rate on the totality of his increased wealth in 2010 would have been only 1.4%!

So you see how easy it is to be a do-gooding, “fair-share-paying” billionaire?

Buffett’s “tax fairness” ideas – focusing as they do on personal income, dividends and capital gains taxes – would leave Buffett, himself, virtually unscathed. That’s because:

1) His personal income represents less than 2% of his annual wealth accumulation;

2) Berkshire Hathaway has never paid a dividend in its history;

3) Buffett, himself, has no intention of generating any capital gains because he has no intention of selling a single share of Berkshire Hathaway.

Tellingly, Buffett’s proposals exclude any mention of estate taxes or of disallowing certain deductions for those he calls the “mega – rich.” These exclusions are no accident.

When disclosing his multi-billion-dollar gift to the Bill and Melinda Gates foundation in 2006, Buffett established three conditions, the second of which was that the foundation “must continue to satisfy legal requirements qualifying my gift as charitable and not subject to gift or other taxes.”

More recently, Buffett defended the tax-deductibility of corporate jets and urged Berkshire Hathaway shareholders at the 2010 shareholder meeting to “follow my tax dodging example.”

Unfortunately, dear reader, Buffett’s hypocrisy on this topic does not end there. It merely begins. In fact, the story just goes on and on, ad nauseum. Buffett, the tax crusader, is also Buffett, the IRS litigant. Yes that’s right, just a few months after complaining to the nation that rich folks aren’t paying their fair share of taxes, this particular rich folk filed a lawsuit against the IRS asserting an unfairly large tax bill.

“Last November,” Bloomberg News reports, “NetJets, the private-plane company owned by Warren Buffett’s Berkshire Hathaway Inc. (BRK/A), sued the US, saying the federal government had wrongly imposed taxes, interest and penalties totaling more than $642.7 million.

“Claiming the federal Internal Revenue Service wrongfully assessed a so-called ticket tax – an excise tax on payments made in exchange for air transportation – to private aircraft owners maintaining their own planes, the Columbus, Ohio-based company demanded refunds and abatements.”

A few weeks ago, the federal government countersued – asserting that, not only does the IRS owe no money to NetJets, but also that NetJets owes an additional $366 million in taxes and penalties.

Certainly, Warren Buffett has a fiduciary responsibility to NetJets shareholders to advance their interests. So if, in fact, the IRS is trying to take funds from NetJets that it does not legally deserve, so be it.

But in light of the fact that Buffett publicly laments his inability to pay more taxes, the do-gooding billionaire would seem to be passing up a golden opportunity. Why not, for example, allow NetJets to battle the IRS, while simultaneously, and very publicly, agreeing to pay the disputed taxes out of his own pocket?

If Buffett genuinely wished to hand more money to Uncle Sam, the solution would be relatively simple: “Just write a cheque and shut up,” as New Jersey Governor, Chris Christie put it succinctly.

But don’t hold your breath waiting for Buffett to write any charity checks to the government, or even to write any op-eds about forms of “tax fairness” that would cost him much more per year than the cost of his vacations on Martha’s Vineyard with President Obama.

Warren Buffett has not become a latter-day tax crusader so that he can pay his “fair share”; he has become a crusader so that he can continue plundering his unfair share of tax receipts and crony favouritism. By lending his reputation to the “tax fairness” crusade, Buffett legitimizes the progressive/socialist agendas that tickle the fancy of so many political leaders. As a result, Buffett endears himself to those with the power to advance his financial interests.

Fanning class warfare is good business, assuming you don’t mind the whole dishonest, hypocritical part of it. This tactic added billions of dollars to his personal wealth during the credit crisis of 2008- 9, while also saving Berkshire Hathaway from a near-certain demise.

During the depths of the 2008 Credit Crisis and stock market selloff, “Wall Street was on fire,” recalls Peter Schweizer in his expose, Throw Them All Out. “[But] Buffett was running toward the flames…with the expectation that the fire department (that is, the federal government) was right behind him with buckets of bailout money…Indeed, Buffett needed the bailout…Beyond Goldman Sachs, Buffett was heavily invested in several other banks that were at risk and in need of federal cash. He began immediately to campaign for the $700 billion TARP rescue plan that was being hammered together in Washington.”

“As the political debates surrounding the proposed $700 billion Troubled Asset Relief Program (TARP) bailout bill heated up,” recalls blogger, Pat Dollard, “Buffett maintained an appearance of naiveté, an ‘aw shucks’ shtick that deferred to the judgment of politicians. ‘I’m not brave enough to try to influence the Congress,’ Buffett told the New York Times.

“Behind closed doors, however, Buffett had become a shrewd political entrepreneur,” Dollard continues. “The billionaire exerted his considerable political influence in a private conference call with then-Speaker of the House Nancy Pelosi and House Democrats. During the meeting, Buffett strongly urged Democratic members to pass the $700 billion TARP bill to avert what he warned would otherwise be ‘the biggest financial meltdown in American history.’ “

“If the bailout went through,” Schweizer correctly observes, “it would be a windfall for Goldman. If it failed, it would be disastrous for Berkshire Hathaway.”

Buffett’s “hard work” paid off.

“In all, Berkshire Hathaway firms received $95 billion in bailout cash from the Troubled Asset Relief Program (TARP). Berkshire held stock in the Wells Fargo, Bank of America, American Express, and Goldman Sachs, which received not only TARP money but also $130 billion in FDIC backing for their debt. All told, TARP-assisted companies constituted a whopping 30% of its entire company disclosed stock portfolio.”

But these billions of dollars represented only the most visible portions of the bailout funds that flowed to Berkshire’s companies. Wells Fargo, for example, received “only” $25 billion of TARP funding, but it also received another $45 billion at the same time from the Federal Reserve’s Term Auction Facility (TAF).

Crony Capitalism at Work

Incredibly, Wells Fargo’s borrowings paled alongside those of Goldman Sachs. Throughout the crisis, Goldman gorged itself at every available government trough. The morally challenged investment bank borrowed only $10 billion from the TARP. But at the same time Goldman was griping about “being forced” to take the $10 billion TARP loan, the company was borrowing tens of billions of dollars more from obscure government lending programs with acronyms like: CPFF, PDCF and TSLF.

And that’s not all!

Amidst much fanfare and self-congratulatory press releases, Goldman repaid its TARP loan in June 2009, but only after securing $25 billion of government capital at a different trough. As we observed in a December 15, 2010 edition of The Daily Reckoning:

On June 17, 2009…thanks to some timely, undisclosed assistance from the Federal Reserve, Goldman repaid its $10 billion TARP loan. But just six days before this announcement, Goldman sold $11 billion of mortgage-backed securities (MBS) to the Fed. In other words, Goldman “repaid” the Treasury by secretly selling illiquid assets to the Fed.

One month later, Goldman’s CEO Lloyd Blankfein beamed, “We are grateful for the government efforts and are pleased that [the monies we repaid] can be used by the government to revitalize the economy, a priority in which we all have a common stake.”

the high cost of doing God's work

As it turns out, the government continued to “revitalize” that small sliver of the economy known as Goldman Sachs. During the three months following Goldman’s re-payment of its $10 billion TARP loan, the Fed purchased $27 billion of MBS from Goldman. In all, the Fed would purchase more than $100 billion of MBS from Goldman during the 12 months that followed Goldman’s TARP re-payment.

Is it any wonder that Buffett’s $5 billion “investment” in Goldman Sachs succeeded so nicely?

“Later, astonishingly,” recalls Peter Schweizer, “Buffett would publicly complain about the bailouts in his annual letter to Berkshire investors, claiming that government subsidies put Berkshire at a disadvantage…”

“It takes chutzpah to lobby for bailouts,” observes Reuters journalist, Rolfe Winkler, “make trades seeking to profit from them, and then complain that those doing put you at a disadvantage.”

Yes indeed, chutzpah and a wee dose of hypocrisy. Please don’t misunderstand us dear reader; the only difference between our hypocrisy and Warren Buffett’s is the number of dollars that flow from it. But that’s a meaningful difference. Our hypocrisy does not divert hundreds of billions of dollars from the government coffers into our pockets, while masquerading as folksy, good old-fashion “fairness.”

Let’s start printing those warning labels!

Eric Fry
for The Daily Reckoning Australia

Eric Fry is the Editorial Director of Agora Financial.

This article originally appeared in The Daily Reckoning USA.

From the Archives…

Gold Money: A Once-in-a-Generation Buying Opportunity
2012-03-23 – Greg Canavan

A Question Australia Might Have to Answer
2012-03-22 – Joel Bowman

Australian Tax: Running Government at a Profit
2012-03-21 – Nick Hubble

China: Why All Feasts Must Come to An End
2012-03-20 – Satyajit Das

Similar Posts:

More articles from The Daily Reckoning….

Seasonally adjusted data and the Anti-Christ

March 30, 2012 by · Leave a Comment 

Zero Hedge


About seasonal adjustment: the good, the bad and the ugly

Seasonal adjustment can ‘distort’ data. But, for the most part, if you know how it works, you can get some idea what sort of distortion certain circumstances might introduce. It is bad to ignore regular seasonal patterns when they occur because you can miss short terms shifts in trends that are important and that would more easily appear if data were adjusted. Economists use this form of data for a reason (hunker down for the criticism landslide here). If you ignore seasonally adjustment altogether you do not SOLVE most of the problems people blame seasonal adjusted for creating. In fact you introduce a whole new kind of error by making clumsy and stupid comparison. Seasonal adjusted is not perfect but it is good where the data go over the statistical hurdle for it to be applied. When it is workable, it is bad to ignore it or not use. To ignore it can produce some ugly results. Yes when you use seasonal adjustment the ‘seasonal factor’ kicks everything that happens whether it is seasonal or not and therein lies the potential for distortion. But unless you think we are being ‘shocked’ all the time, that is a small price to pay for a more stable and meaningful data-series.
Ignoring seasonal adjustment can be ugly- There are things that are ‘seasonal’ but that defy the calendar. For example, Easter is on the lunar calendar schedule not the Gregorian calendar. It pops up all over the Gregorian calendar more than Kurt Vonnegut’s Billy Pilgrim pops in out as he gets unstuck in time. If you were to compare the ‘same’ calendar week to the calendar week in the prior years, just previous to Easter, at Easter, and post Easter you would get distorted garbage.
Moreover, many of the people who rant about seasonally adjusted data claim that the weather is distorting the data today. The approach of looking at NSA data (Not Seasonally Adjusted) does NOTHING to alter that. Having a warmer, colder drier or wetter (spring, winter, summer or fall) is a factor to contend with whether data are seasonally adjusted or not. It is a problem that is independent of how the data are presented.
Also it’s leap year this year.
How do you account for that? What is the comparable ‘week’ for last year when there was no leap day? Seasonal adjustment takes account of that; NSA data do not.
When you RESTRICT yourself to ‘NSA’ data you can only look at Yr/Yr trends and you run the risk of missing the boat when trends turn. You cannot look at six month or even three month growth rates. And… picking the proper ‘analog week’ for last year is not nearly as straight forward as it seems…The week that lies 52 weeks ago may not be the best comparison…
There are 14 different ‘types of years’. They can start with any day of the week (7) then each can be or not be, leap years (14). Then we can multiply that by noting the holidays that move around… to create many, many, more ‘types’ of years. Easter alone roams over a very wide range (look it up; there is a good internet site on Easter and how it aligns with the Gregorian calendar- it’s a mess!)
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Seasonal adjustment programs have their problems; but we know what the methods are and can think about how the process might distort the data under certain circumstances.
Ignoring seasonal adjustment takes us back to the stone-age ( stoned-age ,dude?).
No thank you.
There is nothing highbrow or insightful about eschewing seasonally adjusted data. Zinging seasonally adjusted methodology because it is not perfect is throwing the baby out with the bathwater. Many people love to be critical of what they cannot – or refuse to- understand.
Don’t be one of those. Of course if you do not LIKE or WANT TO ACCEPT the message in the ‘SA’ data, the NSA data may provide a refuge for the naysayer. And I suppose that is its true purpose more than people thinking seasonal adjustment is done by the anti-Christ or something.

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Time for iQE Rumors: Selloff Accelerates As Apple Drops Under $600

March 30, 2012 by · Leave a Comment 

Zero Hedge


The S&P 500 has turned red led by Technology stocks as Apple drops below $600 once again. Chatter is the report posted here yesterday is doing the rounds and bringing doubt to Apple’s omnipotence. Perhaps, just perhaps, it is time for the NASDAPPLE to consider an amicable reweighing? It must be time for more iQE soon, surely. Despite all the media propaganda, perhaps yesterday’s FOXCONN news was less than uberbullish after all.

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The Insanity Of The Sarkozy Carry-Trade’s Contagion Risk In 3 Charts

March 30, 2012 by · Leave a Comment 

Zero Hedge


The last month has seen a considerable amount of the post-LTRO gains in Italian and Spanish Sovereign and Financial credit markets (and stocks for the latter) given back. The stigma priced into LTRO-encumbered banks has also surged to post LTRO record wides – more than double its best levels now. This is hardly surprising – while the LTRO was nothing but a thinly-veiled QE printfest, it is the action that was taken with that newly printed money that has created dramatially more contagion risk and sovereign-financial dependence as an unintended consequence. The collosal (relative and absolute) size of the reach-around Sarkozy carry-trade buying in local sovereign debt for Italy and even more so Spain is highlighted dramatically in these 3 charts for BNP, most notably the increase in banks’ holdings of sovereign debt compared to their share of Eurozone sovereign debt – i.e. the banks in Italy, and more so Spain, are hugely more exposed to their sovereign’s performance and with Spain’s massive budget cuts – a vicious cycle of austerity to growth-compression to credit-contraction to Greece (firewall or not) is leaking into their bond markets, even with an active ECB doing SMP although inflation-constrained from LTRO3 perhaps.

Italian and Spanish banks went on a buying spree…

In the three months to February there was a huge increase in Italian and Spanish banks’ holdings of sovereign debt. February data also showed a large rise in Portuguese banks’ holdings

But the scale of Spanish bank purchases is striking compared to the size of outstanding government debt…

Slovenia, Italy, Portugal and Slovakia also saw large increases in this context

And compared to Spain’s share of Eurozone government debt, Spanish bank buying is incredible…

 

The increase in Spain is also exceptionally high in relation to its share of eurozone government debt. The reverse is true for Germany and France.

 

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Chicago PMI Misses As Survey Respondents Warn Oil Price Shock "Tipping Point Fast Approaching"

March 30, 2012 by · Leave a Comment 

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As expected, the latest economic data point, ahead of what we now believe will be an NFP miss, the Chicago March PMI, has come and gone and it was merely the latest in a long series of misses. While the headline disappointment was modest, printing at 62.2, below expectations of 63.0 and down from 64.0, it was at the subcomponents that the pain was most acute: New Orders dropped from 69.2 to 63.3, Prices Paid soared from 65.6 to 70.1, the highest since August, any growth focusing again on inventory build up – hence hollow – from 49.6 to 57.4, the largest gain since December 2010 as the restocking continues furiously in what appears forever, but most importantly, the Employment Index which slid from 64.2 to 56.3, the biggest drop since February 2009, and virtually all job gains in 2012 have now been given up. Yet the biggest caution was not anywhere in the indices, but in one of the survey responses: “Tipping point for oil pricing and impact on raw materials and Total Cost of Operations (TCO) is fast approaching.” Once the tipping point for oil comes and passes, that’s the ballgame, and the only option for the Fed will be to create another Lehman-like deflationary collapse.

PMI Employment Index:

And discrete responses:

  1. The last few weeks our orders are up compared to previous months, hope this is a good sign for months to come.
  2. We have a big issue as related to available capacity in the foundries. The availability of trained machinists is still a serious issue.
  3. Our business isn’t bad but we are not booming.
  4. Real estate lending remains weak. C&I lending beginning to improve but is very competitive. Small businesses remain weak.
  5. High oil prices are having a negative impact on most chemicals and on freight costs. Major commodities are costing more because of higher fuel prices.
  6. Some key suppliers are quoting shorter lead times because of their decreasing backlogs.
  7. New orders were very light this month but our backlog may have discouraged some of those looking for short lead times.
  8. Tipping point for oil pricing and impact on raw materials and Total Cost of Operations (TCO) is fast approaching.
  9. Aluminum lead times have jumped.

Full report link.

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