Sunday, November 28, 2010

The Tipping Point

I spent some time over the holiday weekend pondering what has brought me to this place, what prompted my "great awakening". Though there were many contributing factors, one of the salient events took place on Sunday, March 14, 2010. Not an event in the traditional sense, this one was simply me, in front of a TV.

After twenty years as a participant in the financial services "game", for some reason I began to feel unease with my profession in 2006. The feeling grew through 2008 as the entire world nearly melted down. It became a queasiness in 2009 as I watched Wall Street attempt to spin and deceive it's way back to credibility. It coalesced on 3/14/10 as I watched the following interview. If you have some time today, and if you can endure the Lipitor commercials that precede them, please take time to watch both parts. If you're near a bookstore, pick up a copy of "The Big Short", too. It's a great read.;housing

For me, all the dots finally connected and the mental image I'd created of an "industry" that was, in the end, honest and beneficial came crashing down. The examples of corruption are nearly endless and I'll examine more in the days to come but, for now, let's just choose one, in ten simple steps.

1) Major TBTF bank insolvent due to overwhelming amount of underperforming and/or worthless debt.
2) Congress pressures FASB to change accounting standards thereby allowing said bank to reclassify worthless securities and loans as having some notional value.
3) Bank allowed to borrow unlimited/infinite amount of money at Fed discount window at 0.0025%.
4) Bank takes borrowed dollars and buys US Treasury bonds paying 3.0%.
5) Bank keeps spread from risk-less transaction and books this as profit.
6) Bank employees pay themselves huge bonuses commensurate with their brilliant minds.
7) CNBS begins non-stop parade of sell-side analysts who exclaim that the bank common shares are "undervalued" based upon cash flow and earnings.
8) Unwitting investors bid up shares of the still insolvent bank, perpetuating the illusion of financial health.
9) Bank "insiders" unload millions of personal shares and options to duped public.
10) Responsibility and wealth transferred. Bank executives, management and traders wealth is preserved at the expense (and loss) of the average, regular, hard-working investor.

Oh, and along the way, the Fed/Treasury benefitted, too. The insolvent bank participated in a stealth form of quantitative easing. By using borrowed money from the Fed to buy treasuries, the TBTF banks create a synthetic demand for those bonds and notes, thereby keeping rates artificially low, consistent with stated Fed policy. Pretty slick, huh?

At any rate, I'll check in again later this evening, once the metals begin trading again on the Globex. Enjoy one more day of relaxation. This next week promises to be a doozy.


  1. I always enjoy your articles. Another fine read today.

    For me, somewhere after the recession of 2000, my industry never returned to feeling right. That, combined with some personal experiences in anti-family court (where the opposite of truth prevails) convinced me that things were seriously wrong with our society. When I found out the truth about fiat currency it all clicked. Corruption has grown like a virus... become rampant and even accepted at high levels.

    I think either we face a quick domino type debt collapse world-wide or a slow hyperinflation nightmare. I pray every day - I prefer the quick collapse. It's a better outcome - for all of us. Because then, we can rebuild.

  2. Good work!

    I figured 1st time that something was wrong as I began to see the difference in interest rate between private consumer credit and central bank interest. If you're a consumer you pay 5-6%, but only if you can ensure that you would earn the very same amount in the next year anyway (proving thereby that you actually don't need the money). If, on the other side, you're a bank able to borrow for 1% you don't have these nasty creditworthiness stuff, all you need (here in Germany) is an academic degree in economy, 5 million Euros and "financial experience" demonstrated by having been part of the higher management of an existing bank.
    I am much more creditworthy than most investment banks out there, but they get bailed out after having burned their cheap money, while poor Ottonormalb├╝rger (J6P) has to hand over the first 4-5% of interest to the bank.
    This also means that if you have less than 5 million, your money stays your money, while if you have more than 5 million, you have 10 times your money due to fractional reserve banking.

    To summarize, once you have a bank, you have actually multiplied you money by factor 10 and may arb on stupid non-banks.
    If there weren't so many artificial obstacles for founding a bank, game theory predicts that everybody would found his own bank in due time and contribute thereby to a quick system failure.

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  4. Whenever destroyers appear among men, they start by destroying money, for money is mens' protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it bounces, marked: 'Account overdrawn'.

    Francisco d'Anconia

  5. One of the best articles of the last few years was Lewis's 'The End of Wall Street' in Portfolio magazine. Well worth a read for anyone who missed it:

  6. Thank you all for your comments.
    If you haven't seen this yet on ZeroHedge, please take a moment to read it. It could have been written by Turd himself.

  7. Narcolepzzzzzz, thanks for the link! Really interesting read!

  8. I want to thank you for this blog and all of your comments at Zerohedge. I have really learned a lot in my "Crash course" in economics.
    I'm on disability and can only invest a little bit of money compared to most folks, but I get silver every month.

  9. "I have really learned a lot in my "Crash course" in economics."

    It is not called the "dismal science" science for nothing. But in all honesty, learning economics from Zerohedge is like learning medicine from The National Enquirer.

  10. Since I didn't go to college and went into the Army and learned the truism if it's stupid an it works it ain't stupid. I have been ahead of every crash becuase of a little history knowledge, a little physics and getting the snot beat out of me. I made $30,000 out of flipping a house right before the market tanked. It would have been great if I relised I could become 100% disabled and planned for that as well. I didn't instead of a $34,000 profit I paid my bills kept my home and paid off my parents that helped me out.
    Bubbles if you have better websites than Zerohedge for trends and info. Or if you are better than Turd at calling the metals or any market please give me a site and a history of how right you are at calling the markets. I'm sure you will get many followers since you are always right and so much smarter than I am.

  11. I'm learning I admit that. I think I'm fairly intelligent, and I know I don't know enough. Yet I bought a house for $64 grand sold it for $99 grand. I'm not underwater on my house. I'm in an urban area yet protected by an Historic district designation. I'm 6 blocks from grocery stores my credit union and the local pawn shop. He sells silver and guns and ammo. If he is raided he really thinks there will be a flood and fire in his store. That would be terrible, and quite possible he is next to a canal.
    Turd can defend himself easily by his record. I don't have to defend myself since I'm a disabled vet.well armed have 3 years of food and probly more silver than you thought.
    But go ahead bubbles and make a call....

  12. Adventures in Self Reliance, the problem is one of semantics and breadth. You think flipping a house for a profit is "economics". It is not. Neither is being ahead of every crash. Economics is much more than that. A little knowledge is a dangerous thing, just like knowing how to apply a band aid doesn't make you a doctor. I will not give you other websites, those you can find on your own, but since you have already have a little history and physics knowledge, perhaps now you can continue to hone your analytical skills with some philosophy, psychology, literature, languages, etc. You see, it's not about flipping property, that's what got is in this mess to begin with; it's about being better human beings.

  13. Damn bubbles i thought all I was doing was being smart and protecting myself. I didn't know I was supposed to save the whole damn world. I guess that is above my pay grade. I'll leave saving the world to you bubbles.

  14. Nice bubbles attack me and my comments who is learning instead of turd. That's okay I got food, silver and guns. I can defend myself what you got?

  15. Adventures in Self Reliance, you can protect yourself and be a better person making informed decisions. One does not exclude the other.

  16. Well Bubbles since you are so much smarter than I am what's your bet for making money? I'm still learning. I'm sure many want to know your money maker. Perhaps you will want to quantify "informed descions". Since I am to dumb and misinformed to understand what that means. I'm just learning and I'm sure that you are smart enough to explain it to me
    I'll never have to rely on zerohedge or the turd for info cause you are better than them at the markets.

  17. Let's see bubbles I have a house, property, food, guns and ammo a bit of silver, So exactly what informed decisions should I make?