Picard’s Ponzi: Madoff Trustee Siphons Off More Than Victims Receive

May 29, 2012

CNBC.com Article: Madoff Case Is Paying Off for Trustee ($850 an Hour)

A look at recent court filings shows Picard has had much more success collecting money for himself and a dozen law firms and consultants than any victim of Bernard L. Madoff’s crime. The New York Times reports.

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Most Disturbing News Not Moving Markets this Morning

May 23, 2012

Totally unsustainable. Should be supportive of gold but Gold/USD may not move much as USD rallies. I’m guessing the sell off in treasuries yesterday was short lived.

CNBC.com Article: Germany Sells 2-Year, 0% Bonds Amid Greek Anxiety

Germany sold 4.56 billion euros ($5.8 billion) of bonds carrying a zero percent coupon on Wednesday, its first-ever sale of debt offering investors no regular return and underscoring its safe-haven appeal at a time of turmoil in the euro currency zone.

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Helicopter Ben Should be Picking Up Dollars, Not Dropping them Down

May 11, 2012

The current economic policy has hinged upon the following equation:


Where P is the amount of productivity in the economy measured by GDP; M is the supply of money often measured by the M2 money supply, and V is the velocity if money (M2) or how often a dollar turns over each year.

In the simplest definition this equation represents the amount of value created by our economy (GDP) is equal to the amount of money in the system (M2) multiplied by how frequently that money “turns over” (V).

The faithful logic is that you can offset a decline in V by raising M to support P. Mathematically this makes sense and would be true if the equation followed only the rules of linear mathematics.

However, the problem is twofold: while M is the only lever that the Federal Reserve has any real control over; V is a value rooted in physics more than math and subject to inertia and indirect responses.

While M follows a linear progression (a $ in = a $ in and a $ out = a $ out) V is subject momentum where the rate of change is neither controllable or linear. The velocity of money tends to follow a trend which is partially fed by the supply of money but which is also fed by human behavior.

Consumption patterns are not linear and we don’t all necessarily start and stop consuming at the same time and the same rates. Moreover, the actions of one group can affect another and positive and negative momentum can drive how much of our paychecks we choose to spend. If our peers appear to be cutting spending we may choose to follow their lead if we presume their caution is correct. Vice versa in the hay days of the late 1980’s/early 1990’s our consumption patterns were heavily influenced by “keeping up with the jones'”.  The chart below illustrates the velocity of M2 in the US since 1950.

Quarterly, Seasonally Adjusted, Updated: 2012-04-27

In theory if V is falling faster and faster, neither a linear increase in nor an imaginable amount of M is going to support P for very long.  At some point the attention needs to move from how we support economic growth to how we arrest the falling velocity of money.

Solving for V, the equation turns to V=P/M.

Turning the equation around, the only method the Fed would have to arrest the current rapid continue decline in money velocity by attempting to make V larger, is actually to reduce M which in the new equation is now in the denominator.

While reducing the supply of money in anathema to growth, the problem is that the issue is no longer solvable until V is stabilized and the only way to stabilize money velocity is to effectively make cash more scarce so that more of the cash available gets used or put to work.  A dogmatic and long term agenda focused on increasing Velocity likely would have its own negative effects, but its clear that focusing on adding more liquidity to an economy awash in liquidity is no longer boosting output and is showing signs of growing impotence.  The best solution would probably at least be to pause on the quantitative easing and let interest rates rise modestly, if nothing else but to give some time for current cash to be circulated more effectively without the anticipation that more is on its way which creates a perception of falling prices.

As interest rates rise the cost of sitting (cost of waiting) on large piles of cash increases as depositors begin to feel the lost opportunity cost of at higher rates or simply consuming the cash.  At the very least it gets people out of the mindset that prices will continually be lower tomorrow and that there is no better alternative to cash.

What the right interest rate would be us as unknown as the grand experiment we are currently in the midst of, nonetheless it seems that our current path beyond being unsustainable may simply be wrong.


Somebody Tell Obama that These States Already Got to Buffets Millionaires

May 10, 2012

I wonder if anyone steadfastly supporting the Buffett Rule has considered the fact that Millionaires and aspiring Millionaires already live in the states with the highest real estate and income taxes. In NYC alone real estate taxes are up 400% since the late 1990’s and does not include the additional and high personal income taxes NYers have been paying for ages.

CNBC.com Article: Memo to Would-Be Members of the 1%: Move to the Northeast or Mid-Atlantic

Reaching for the American dream? Your best chances are probably in New York, New Jersey or Maryland, the New York Times reports.

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It’s Like Taking Candy From A Baby

May 10, 2012

How can a country build popular support for austerity when their governments are leveraging their children’s future to help mitigate the pain and severity of the problems faced by the parents. Why would anyone vote to take a hit in any form if they don’t see or feel the problem.

Popular support for reform in any country unfortunately won’t surface until the crisis is allowed to spill over to “Main Steet”. When that happens, holy cow is this going to be a doozy.

American led capitalism and American style bailouts will be the blame, but the real culprit will have been the global addiction and greedy dogmatic support for globalization. Globalization may work one day, but only at sustainable levels of growth.

Bringing forward a generation of consumption using ungodly sums of debt and calling it growth is neither transparent nor healthy.

Lending money to less worthy borrowers at rates supported by more worthy borrowers is a typical parent-child relationship.

However the current system has parents borrowing from children which is both immoral and unsustainable and it means that many kids today will be living with their parents for a lot longer than they know.

In Europe the situation is even worse as parents in the periphery are effectively borrowing from children in the core.

Ask many who worked at Lehman how 40x leverage works when the music stops.

CNBC.com Article: European Central Bank Leveraged Like Lehman: Author

The European Central Bank is indebted to the hilt and is beginning to look like one of the banks it has done so much to save, according to the author Satyajit Das.

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