Our Heritage is at Risk

Our country's Constitution is under attack and unfortunately most Americans are either too busy with their own lives to give the issue any attention or have become complacent with a false belief that the elected officials in Washington will fix our problems. The current crises that our nation faces is without a doubt the single most important issue this country has faced since the Great Depression. The collapse of our financial system has not come about because of policies enacted in the past few years. We are in this situation because of decisions and policies our government made starting in 1977. It would be very easy to place blame on one political party but that would be the furthest from the truth. It may seem odd to many that the Bush administration and the Democrats are both in agreement on passage of the Paulson plan and yet House Republicans are against the bill. It is no accident. Understanding the motivations of each group may clear up some of the confusions. The link below is a start but does not reveal all the motivations behind this bogus bailout package.

http://www.youtube.com/watch?v=H5tZc8oH--o

The blame does not all point to the Democrats. The Republicans share in this mess as well. The current Treasury Secretary Hank Paulson was CEO at Goldman Sachs during the housing boom and was richly rewarded( to the tune of $700 million) for crafting many of the mortgage backed securities that are now imploding. Goldman Sachs benefited greatly by the cheap money and easy lending policies that helped create the housing bubble. Incidentally the Treasury Secretary under Clinton's presidency was Robert Rubin another Goldman Sachs top executive. It should be evident that Goldman Sachs helped contribute to the housing bubble and Hank Paulson is desperately trying to cover the current mess up with a bogus bailout proposal. A proposal that will do nothing other than transfer the burden from financial institutions onto the taxpayers.

The link I provided shows why the Democrats would be eager to pass this plan. Their policies on affordable housing failed and enriched a small segment of our population. Wall Street certainly provided the cheap loans when congressional legislation provided the incentive. But it doesn't end there.

The Federal Reserve also played its part. Most Americans falsely believe the FED is a branch of our government. Hardly the truth. Google Federal Reserve and you will find how the central bank has ties to the wealthiest families in Europe and in America. One family that was part of the original members was none other than an ancestor to our current President, George W. The Federal Reserve is a central bank made up of member banks. It serves the interest of its members - not US taxpayers. The FED is motivated to see this proposal pass because it is selfishly looking out for its member banks. This is the same FED that lowered the Fed Funds rate to 1.5% under Greenspan( Bernanke was a voting member) and created the cheap money. Its member banks are now holding a lot of mortgages that are not performing and they do not want to take a loss and have their balance sheets impaired. Unfortunately the FED is also not doing its job as regulator of its member banks. The FED should be a proponent of complete transparency yet it has allowed Enron-type accounting, thus creating uncertainty surrounding the health of the overall financial system. The latest failure of Washington Mutual, and JP Morgan taking over is very troubling. The too- big-to-fail condition is getting worse by this action, not better. It is creating more risk - not less! This underscores the problem that insurance giant AIG just had.

Each group is motivated by self interests to pass this legislation. They may claim how they are looking out for the taxpayer but they are not. Our country, our Constitution, and our way of life are under attack. This is no longer about Democrats and Republicans. This about our nation and those who make policy. We as a society had better get involved NOW......our future is at stake.

"A little group of willful men, representing no opinion but their own, have rendered the great government of the United States helpless and contemptible."
-Woodrow Wilson after signing the Federal Reserve Act of 1913 (after realizing the full effect of the Act)

Pimco's Bill Gross calls for a backstop

U.S. Must Buy Assets to Prevent `Tsunami,' Gross Says

I can appreciate what Bill Gross is calling for on the surface. The credit markets are freezing up and somehow liquidity must be restored for our capital markets to function properly. But that's not what Bill Gross is asking for. He is really asking the Treasury(the US taxpayer) to bail out investments he made in Mortgage Backed Securities.

His comments about the private market unwilling to commit its own capital, while true, is a smoke screen. He is using the obvious market shortcomings as a veil to hide behind.

``There is an increasing reluctance on the part of the private market to risk any more of its own capital,'' Gross said. ``Liquidity is drying up; risk appetites are anorexic; asset prices, despite a temporarily resurgent stock market, are mainly going down; now even oil and commodity prices are drowning.''

A quick glance at Pimco's holdings brings light to the situation Bill Gross finds himself in.

About 61 percent of the holdings of Gross's Pimco Total Return Fund were mortgage-backed securities as of June 30, mostly debt guaranteed by Fannie, Freddie or Ginnie Mae, according to data on Pimco's Web site.

He is concerned about the spreads on those securities widening. That would become a large problem very quickly. His funds balance sheet would come under severe pressure. What Bill Gross is banking on is for you and I to pick up the tab and narrow those spreads.

Treasury should support not only mortgage finance providers Fannie Mae and Freddie Mac, but also ``Mom and Pop on Main Street U.S.A.,'' by subsidizing rates on home loans guaranteed by the Federal Housing Administration and other government institutions, Gross said.

It doesn't stop their -

Unless ``new balance sheets'' emerge, prices of almost all assets will drop, even those of ``impeccable'' quality, he said.

He is calling for the Treasury to step so "new balance sheets" can emerge at which time Pimco has raised $5 Billion to invest. That's right, he has capital available now to invest but is not willing to unless you and I take all the bad debt.

The firm is raising as much as $5 billion to buy mortgage-backed debt that has plunged in value, according to two investors with knowledge of the matter.

That's Capitalism

Ospraie fund to close

Ospraie fund to close after 27 percent August slide

Dwight Anderson in a letter to investors planned to distribute 40 percent of Ospraie Fund's assets to investors by September 30 and an additional 40 percent by year-end.

Anderson said in the letter he was extremely disappointed with the outcome.
"Not only as a portfolio manager, but as one of the largest investors in the Ospraie Fund L.P., I have shared in the losses with you," he wrote. "After nine years of striving to be a good steward of your capital, I am very sorry for this outcome."

Is this funds closing due to Ospraie management and poor risk controls?

This marks the second time in two years that Ospraie Management, which has been a major player in commodities markets, has run into problems. In early 2006 soured bets on copper left the fund down roughly 20 percent before it pared most of those losses by year's end.

Also in 2006 Anderson, who made his name in hedge funds at Tudor Investment Corp. and Tiger Management LLC, closed down his $250 million Ospraie Point fun.

Or is the trend of hedge fund closings just getting started? Are the large hedge funds that have been receiving the lion share of new investment dollars from pension funds and large institutions truly offering non-correlated returns? It would seem doubtful.

"I think it's probably the first of more hedge fund closings to come, given that a significant majority of hedge funds have had negative performance this year," said Chris Orndorff, head of equity strategy at Payden & Rygel in Los Angeles.

Too large to fail? Only a matter of time!

FDIC prepares for more bank failures

Bloomberg reports : FDIC Adds Office Space in Dallas, Ready for More Bank Failures

The Federal Deposit Insurance Corp. is preparing to sign a five-year lease to add five floors of space at its Dallas regional office as the agency prepares to increase scrutiny of failing and troubled U.S. banks.

I guess this may take some time to work through.

That agency will add about 300 staff at the building, including some of the 69 retirees it is bringing back to help handle the increased workload, said spokesman Andrew Gray.

Dallas is the headquarters of the agency's Division of Resolution and Receivership, the unit that handles failed banks. The staff additions would bring the total number employees at that location to about 850, he said.

The market action in the XLF would seem to suggest the credit problems in the banks are behind us.

Debt in the name of Asia

It seems Paulson had more on his mind than helping Americans out with the housing woes.

Here's the story

I think Karl Denninger at Market Ticker sums it up best.

Worst Inflation in 27 years

The Commerce Department released the June personal income and spending report Monday morning showing inflation is growing faster than most economist expected. As reported by MarketWatch, the worst in 27 years. By my calculation that was 1980, when Paul Volcker limited the growth of the money supply, abandoning the previous policy of targeting interest rates.

Nominal spending grew 0.6% on the month, but the increase was all due to higher prices, which spiked 0.8% -- the most for a month since 1981.

Unfortunately the Fed is walking a tightrope hoping inflation expectations do not become elevated. Is the current 2% Fed Funds rate too low? Mondays numbers would suggest so.

The Fed seems committed to keeping its interest-rate target steady at 2%, in an effort to balance the risks of a more severe economic slump against the risks that inflation could get out of hand. The June income and spending report highlights both sets of risks in bold letters.

The Fed's commitment to targeting interest rates may be abandoned; just as Volcker was forced to target inflation.

However, the change in policy contributed to the significant recession the U.S. economy experienced in the early 1980s, which included the highest unemployment levels since the Great Depression, and Volcker's Fed also elicited the strongest political attacks and most wide-spread protests in the history of the Federal Reserve (unlike any protests experienced since 1922), due to the effects of the high interest rates on the construction and farming sectors, culminating in indebted farmers driving their tractors onto C Street and blockading the Eccles Building.

Unemployment has already started to creep into our economy with the rate at 5.7%. One has to wonder if corporations are able to keep employment levels in tack if a worsening slowdown deepens.

One asset class that performed well during that period up until rate increases was Gold. Will history repeat itself?

Shipping costs pinch profits

In Sunday's NY Times front page: Shipping Costs Start to Crimp Globalization

Some excerpts from the story

Many economists argue that globalization will not shift into reverse even if oil prices continue their rising trend. But many see evidence that companies looking to keep prices low will have to move some production closer to consumers.

The cost of shipping a 40-foot container from Shanghai to the United States has risen to $8,000, compared with $3,000 early in the decade, according to a recent study of transportation costs.

The study, published in May by the Canadian investment bank CIBC World Markets, calculates that the recent surge in shipping costs is on average the equivalent of a 9 percent tariff on trade. “The cost of moving goods, not the cost of tariffs, is the largest barrier to global trade today,” the report concluded, and as a result “has effectively offset all the trade liberalization efforts of the last three decades.”

Will Transportation stocks lose their luster?

In a more regionalized trading world, economists say, China would probably end up buying more of the iron ore it needs from Australia and less from Brazil, and farming out an even greater proportion of its manufacturing work to places like Vietnam and Thailand. Similarly, Mexico’s maquiladora sector, the assembly plants concentrated near its border with the United States, would become more attractive to manufacturers with an eye on the American market.

Is it time to look south of the border for opportunities?