Great Depression 2.0 to be Released Soon

Paul Farrell, writing for Marketwatch, has been stirring around that festering brew that is our financial system and with every ladle he picks up more toil and more trouble. But as so many financial news outlets seem unable to deprogramme themselves from their bullish delusion, it is good to see the occasional doom-monger express the same views as so many of the general public, or at least those that post on news forums. The really depressing thing is that stacking all the problems up in one big pile shows how completely rudderless this current financial ship is - it could be argued that a sinking ship has no need of a rudder, just lots and lots of life-boats. Anybody who is still naive enough to think that the big boys at the top know what they are doing is likely to be sold a cut price life jacket that has been slipped through quality control and which won't work when you need it.

With two major crashes in quick succession there is little to be hopeful about. Farrell lays the blame fairly and squarely at the doors of those free-market ideologues who publicly pushed their "liberal" laissez faire propaganda whilst in private being fully aware of what could go wrong... and of how horrific it could be. The big shocker came from the new Treasury secretary two years before the meltdown: Bloomberg News reports that shortly after leaving Wall Street as Goldman Sachs' CEO, Henry Paulson was at Camp David warning the president and his staff of "over-the-counter derivatives as an example of financial innovation that could, under certain circumstances, blow up in Wall Street's face and affect the whole economy." Not surprisingly Paulson wants to quit before he can be prosecuted.

But as these people have no regard whatsoever for the wider population, why are people so feeble in their response, so powerless to somehow return the disdain. These free market magicians are of a very black hue, and as we can witness every day they will do whatever it takes to keep your money flowing in their direction. Even if it isn't your money, it will be soon as taxes will go up and jobs will be lost.

The doomsday list has 30 items on it - and probably rising. You can read the full article at Marketwatch, I just wanted to highlight a few of the more nefarious deeds.

America's credit rating may soon be downgraded below AAA. I have been waiting for this but the huge political threats emanating from the USA have, for the time being, saved it from the ignominy of being downgraded. The idea that Treasuries are a "flight to safety" seems laughable given the pathetic interest rates on offer. Indeed the Japanese Yen has continued to climb with respect to the US Dollar at a time when Sterling and Euro are getting clattered. The theory that this recent Dollar rise is due to repatriation of wealth by American companies sounds far more plausible. At some point, the family silver will all have been sold off and the dreaded thought of having to sell all the land and homes comes starkly into view. Also, as unemployment rises so tax returns to government fall off. At some point, the mechanism of paying off credit with more credit will fail at the government level, just as it is failing at the corporate and personal one.

Fed refusal to disclose $2 trillion loans, now the new "shadow banking system". Although listed as a separate item, this actually goes hand in hand with Congress has no oversight of $700 billion, and Paulson's Wall Street Trojan Horse. Taken together, they are further proof that the Federal Reserve is following its own agenda that may, or may not, have anything to do with the public interest, not even for Americans. To see who really benefits from government one just has to look at how Government policy is dictated by 42,000 myopic, highly paid, greedy lobbyists. Elections are just inconvenient exercises to preserve the facade of democracy. The media enjoys whipping up partisan feelings so as to avoid real debate. It is quite astonishing how little informed debate has been taking place within the corporate media. The internet has played an important role in this last US election but the power it can wield is still in the testing phase. Many forum discussions are actually led by the corporate media agenda, rather than leading it.

The article ends on an even gloomier note, "At a recent Reuters Global Finance Summit former Goldman Sachs chairman John Whitehead was interviewed. He was also Ronald Reagan's Deputy Secretary of State and a former chairman of the N.Y. Fed. He says America's problems will take years and will burn trillions.

He sees "nothing but large increases in the deficit ... I think it would be worse than the depression. ... Before I go to sleep at night, I wonder if tomorrow is the day Moody's and S&P will announce a downgrade of U.S. government bonds." It'll get worse because "the public is not prepared to increase taxes. Both parties were for reducing taxes, reducing income to government, and both parties favored a number of new programs, all very costly and all done by the government.""

So what can the individual do? This blog is not really about political activism or lifestyle management, but it is about trying to take responsibility for one's own finances, and especially one's investments. If there is one lesson from these two recent bubbles, is that there is absolutely nobody you can trust to tell you what to do. Learning to look at the numbers and ignore the media is a valuable step forward.

Are we in the middle of a 20-year flat market?

We all love to have our opinions - or prejudices - confirmed by others. The latest Mark Hulbert commentary on Marketwatch does just that. Irrational exuberance redux, or how stocks now lag Treasury bills for the past dozen years, puts some flesh on what I have been saying that stocks have seriously underperformed. Of course, we can all see the disasters that are global stock markets. The important question is whether the pundit mantra that stocks are better in the long run still holds true, and what does "in the long run" actually mean?

"Consider data compiled by Jeremy Siegel, a finance professor at the Wharton School of the University of Pennsylvania. In his famous book "Stocks For The Long Run," Siegel reports the percentage of time from 1802 through 2001 in which stocks failed to beat T-Bills. Not surprisingly, this percentage falls as holding period increases.

But what is perhaps even more surprising: This holding period has to grow to well more than a decade in order for the percentage to drop to below 10%."

After 10 years there is still about a 20% chance that treasuries will beat stocks, whereas at 20 years this drops to just 5.5%. So only after 20 years does the buy stocks mantra come true with any certainty - that's a long time to be chanting.

Actually, if you look at a long term chart of, say, the Dow back to 1920 you can clearly see what appear to be 20-year cycles. There are 20 years of rapid growth followed by 20 years of going nowhere. The periods from about 1940 to 1960 and then 1980 to 2000 saw huge stock bull markets. What we are seeing now, scaled in percentage levels, looks horribly similar to the market of the 1970's which saw its 1975 value being lower than its 1965 one. Good to see that someone has done the number crunching to back up this purely visual feel.

What this means is that we could well be in the middle of the current 20-year flat cycle. In such a market the buy-and-hold investor is going to be treated very poorly. The only options are either to adopt a market timing strategy, or to change the stocks to bonds weighting dramatically, or both. This also means that in spite of all the bullish media talk, investors may have to keep chanting for a long time to come.

Don't Believe The Pundits - Leave Stocks Alone For Now

Don't you get a touch irritated when you see pundits trying desperately to talk up stocks as you watch their prices sink ever lower? At what point do you just stop believing them? There are many situations in life where it pays to look at what people do, not what they say. Investments are a perfect example.

The FTSE recently failed to even bang its head on the 100-day moving average, never mind reaching for the stratospheric 200DMA. It has since come down to break the SAR and MACD looking red.

S&P 500 looks even worse. If anything, this is time for another round of shorts.

For the stock investor, this is absolutely not the time to do anything other than gamble. If you find a company chart that looks positive, then go for it, but remember not to buy anything from broker recommendations - before you even read the review or hear the interview the price will have moved already.

This is why my aim here is to show how some fairly simple indicators can be your friend, even for people who see themselves as investors rather than traders. I will not be giving daily advice but slowly going through how to apply indicators to investment strategies. The last 10 years have seen virtually no returns from the world's stock markets. Compare this to holding bonds, or even compounding a deposit account.

The really big indicator that we are very much in a bear market is the 200DMA. For the FTSE this is around 5200 and for the S&P at about 1250, and we are well below both of these. We've just gone through a few weeks in which markets have desperately tried to bounce off the last lows, but looks as if we are going to retest them.

Don't believe those people who keep calling "bottom" every time we hit a new low. Of course, they will be right, eventually, just that nobody knows when, which is as useless as not having read the advice in the first place. Trying to call a bottom is often seen as trying to catch a falling knife. A better strategy is trying to catch it off the first bounce. I haven't written much recently but am coming back on stream, so to speak, so let's watch closely what happens this time.

Bloomberg Files Lawsuit Against Federal Reserve Over Failure To Disclose Loans

The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn't require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.

Bloomberg News has requested details of the Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit Nov. 7 seeking to force disclosure.

The Fed made the loans under terms of 11 programs, eight of them created in the past 15 months, in the midst of the biggest financial crisis since the Great Depression.

``It's your money; it's not the Fed's money,'' said billionaire Ted Forstmann, senior partner of Forstmann Little & Co. in New York. ``Of course there should be transparency.''

The Bloomberg lawsuit is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).
(Bloomberg)

This is precisely what many feared. Firstly, that $700 bn was nowhere near enough, and secondly, that without a precise protocol about what transparency means the Fed will hide behind smokescreens of its own making. In September, both Bernanke and Paulson testified that they wanted the whole process to be transparent, like children promising they could look after the party food without eating it.

Now, the Federal Reserve, with what seems like the obvious complicity of the Treasury, are defaulting on their promises. These are not just promises to Congress, they are also promises to the American people and, because of the scale of the problem, to the world at large. This is yet another indication that people should never trust bankers and governments. The primary aim of governments is to keep control, with the supposed will of the people being a subsidiary concern once the electoral begging season is over. The primary aim of central banks is to keep control of money and to make profits for their owners. The US government is a client of the Federal Reserve. If that government either does not or cannot extract the information they need, or they can and do but are just not telling anybody else, then they are negligent in their office. Remember that Congress was bounced into the bailout bill be apocalyptic visions from both Bernanke and Paulson. Because of all the arm-twisting that was necessary just to get the bill passed, the oversight rules were big on words and small on specifics.

The corporate media is also complicit in this propaganda. However, occasionally one hears the odd independent analyst make some good points. Yesterday there was one talking head trying to talk up Goldman Sachs stock, for no good reason other than that the price is now so low. But as we are seeing, stock prices can quickly go to zero. Anyway, our bullish advisor was then contradicted by a fund manager who said in his opinion Goldman Sachs was vulnerable to changes in staff at the Treasury and Fed. It is well-known that Henry Paulson and many others are all fully signed up members of Goldmans and that more than a helping hand has been given to this bank compared to others that were fed to the lions. Nobody yet knows what changes the new president will make and whether he too has been brought into the fold, but such uncertainty is precisely what worries investors.

The defenders of secrecy - as the Fed are not answering the phone - claim that disclosing every loan or agreement could signal to the markets that the companies involved may have greater problems than anticipated and could lead to further market volatility. But the main reason for all this largesse was precisely to bring back market confidence. The fact that professional investors and fund managers are worried means that everybody else should be too. This slow motion crash is nowhere near over and any pundit seen talking up stocks is doing it for their own interest rather than the investor's.

As is often the case with these big decisions taken with public money, the individual feels powerless to do anything. The huge public outcry at the bailout bill was fended away and after all the emails and phonecalls and huffing and puffing the house of fiat money is still standing. I still think there is one protest that the public can still do. Take your money out of the banks and put it into credit unions. They operate under different rules to commercial banks and are not exposed to the credit crisis because their rules stopped them from ever participating in either fractional banking or leveraged financial products.