Friday, April 30, 2010

The BIS on sovereign debt

“Since the start of the financial crisis, industrial country public debt levels have increased dramatically. And they are set to continue rising for the foreseeable future.”

“First, fiscal problems confronting industrial economies are bigger than suggested by official debt figures…As frightening as it is to consider public debt increasing to more than 100% of GDP, an even greater danger arises from a rapidly ageing population. The related unfunded liabilities are large and growing...In the aftermath of the financial crisis, the path of future output is likely to be permanently below where we thought it would be just several years ago. As a result, government revenues will be lower and expenditures higher, making consolidation even more difficult…

Second, large public debts have significant financial and real consequences. The recent sharp rise in risk premia on long-term bonds issued by several industrial countries suggests that markets no longer consider sovereign debt low-risk…

Third, we note the risk that persistently high levels of public debt will drive down capital accumulation, productivity growth and long-term potential growth…

Finally, looming long-term fiscal imbalances pose significant risk to the prospects for future monetary stability...unstable debt dynamics could lead to higher inflation: direct debt monetisation, and the temptation to reduce the real value of government debt through higher inflation.”

The Bank for International Settlements (BIS) is the highest authority on international finance. Which is why as a contrarian, I was shocked they are firing the same warning shots on sovereign debt that I've been ranting on for years. Perhaps the debt problems have become so severe and apparent that even the blind can see what faces us.

Is a Magic Weight-Loss Pill Just Around the Corner?

According to the Centers for Disease Control and Prevention (CDC):
"American society has become 'obesogenic,' characterized by environments that promote increased food intake, nonhealthful foods, and physical inactivity. Policy and environmental change initiatives that make healthy choices in nutrition and physical activity available, affordable, and easy will likely prove most effective in combating obesity."

The obesity entry in Wikipedia states the following:
"Obesity is a medical condition in which excess body fat has accumulated to the extent that it may have an adverse effect on health, leading to reduced life expectancy. Body mass index (BMI), which compares weight and height, is used to define a person as overweight (pre-obese) when their BMI is between 25 kg/m2 and 30 kg/m2 and obese when it is greater than 30 kg/m2.

Obesity is associated with many diseases, particularly heart disease, type 2 diabetes, breathing difficulties during sleep, certain types of cancer, and osteoarthritis. Obesity is most commonly caused by a combination of excessive dietary calories, lack of physical activity, and genetic susceptibility, though a limited number of cases are due solely to genetics, medical reasons or psychiatric illness.

Obesity is a leading preventable cause of death worldwide, with increasing prevalence in adults and children, and authorities view it as one of the most serious public health problems of the 21st century."

With that backdrop, it is clear that treating obesity is a high priority among healthcare officials. Treating obesity will reduce the occurrence of many other diseases. One out of every third American is obese, while up to two out of three Americans are overweight. That's almost 100 million obese Americans, and almost 200 million overweight Americans. With healthcare reform and reducing healthcare costs national priorities, treatment and prevention of obesity has wide implications economically as well.

There are at least three investigational drug companies attempting to treat obesity therapeutically.


Vivus (symbol "VVUS"), a Mountain View, CA-based biopharmaceutical company, released impressive top-line results for weight loss among clinically obese patients. According to their September 9, 2009 press release:

"Patients taking Qnexa, on average, reduced their weight by up to 14.7 percent in one trial, while the drug also prompted improvement in blood pressure and diabetes risk factors. A second study showed weight loss of about 13.2 percent. In both studies, patients taking placebo lost less than 3 percent of their weight."

Clearly, Qnexa exceeded its primary end points for weight loss, and have applied for Federal Drug Administration (FDA) approval. Shares of VVUS surged as a result. But questions of tolerability and safety remain. Qnexa is a combination of two generic compounds: phentermine and topiramate ("Topamax"). Both are FDA-approved compounds: phentermine is an appetite suppressant of the amphetamine class, while Topamax is used to prevent seizures and migraine headaches.

However, both compounds carry adverse side effects--some serious, and accompanying warning labels. Topamax side effects include: numbness and tingling, fatigue, taste change, nausea, diarrhea, and difficulties with cognitive function, including loss of memory and concentration.

Phentermine common side effects include: bad taste in mouth, changes in sex drive, constipation, diarrhea, insomnia, dizziness, dry mouth, exaggerated sense of well being, headache, impotence, nervousness, overstimulation, restlessness, sleeplessness, upset stomach. Serious adverse side effects include: severe allergic reactions (rash, hives, itching, difficulty breathing, tightness in the chest, swelling of the mouth, face, lips, or tongue), bizarre behavior, chest pain, fainting, fast heartbeat, pounding in the chest, shortness of breath, swelling of the legs and feet, tremor.

For these reasons, the exclusion criteria for patients was vast, and hence, limited the number of patients able to participate in Qnexa clinical trials. Patients with the following conditions could not participate in Qnexa clinical trials, according to

"Exclusion Criteria:

Stroke/MI/unstable cardiovascular disease within 6 months
Clinically significant renal, hepatic or psychiatric disease
Unstable thyroid disease or replacement therapy
Obesity of known genetic or endocrine origin
Participation in a formal weight loss program or lifestyle intervention
History of glaucoma or intraocular pressure
Pregnancy or breastfeeding
Alcohol abuse
Smoking cessation within previous 3 months or plans to quit smoking during study
Eating disorders
Cholelithiasis within past 6 months
Excluded medications
Type 2 diabetes
Previous bariatric surgery
History of bipolar disorder or psychosis"

In other words, Qnexa was efficacious in inducing weight loss in patients, but due to the safety and tolerability profiles of phentermine and topiramate, the market potential may be limited should Qnexa achieve FDA approval.

VVUS submitted their New Drug Application (NDA) for Qnexa on December 28, 2009, and the FDA accepted the NDA on March 1, 2010. The Endocrinologic and Metabolic Drugs Advisory Committee (AC) will review the Qnexa NDA on July 15, 2010 to provide independent expert advice to the FDA on safety and efficacy. A full FDA review is targeted for October 28, 2010.

Orexigen Therapeutics

Another investigational drug company seeking FDA approval for a weight loss drug is Orexigen Therapeutics (symbol "OREX"), based in San Diego, CA. OREX also announced pivotal Phase III top-line results for Contrave, a combination of generic compounds bupropion and naltrexone. Bupropion is an anti-depressant and anti-smoking drug, while naltrexone is used to treat alcoholism and opiate addiction.

In their July 20, 2009 press release:
"In the two trials with non-diabetes patients, Orexigen said 48 percent and 56.3 percent of patients, respectively, reported weight loss of at least 5 percent. That compared to 16.4 percent and 17.1 percent for the placebo patients. That more than met FDA testing guidelines that require at least a third of patients must lose at least five percent of their body weight. At least twice as many patients must reach the 5 percent goal compared with those who take a placebo.

In those trials, the Contrave patients had mean weight loss of 8.1 percent and 8.2 percent, or 17.6 pounds and 17.5 pounds. In the diabetes trial, 44.5 percent of patients lost at least 5 percent of their weight after 56 weeks, compared to 18.9 percent of patients who took a placebo. Contrave patients reduced their blood sugar by 0.6 percent, compared to 0.1 percent for the placebo group."

Once again, efficacy for weight loss among Contrave-active patients was enough to be FDA-approvable, but questions of adverse side effects arise as well. Common bupropion side effects include: agitation, constipation, headaches, nausea, vomiting, dizziness, increased sweating, tremors, blurred vision, rapid heart beat, confusion, hostility, arrhythmias, hearing changes, menstrual problems, hypertension, palpitations, indigestion, arthritis, anxiety, decreased libido, impotence, taste changes, and fainting.

Naltrexone common side effects include: anxiety, chills, constipation, delayed ejaculation, diarrhea, dizziness, drowsiness, headache, increased thirst, irritability, joint and muscle pain, low energy, nausea, nervousness, sleeplessness, stomach pain/cramps, and vomiting. Serious adverse side effects include: severe allergic reactions (rash; hives; itching; difficulty breathing; tightness in the chest; swelling of the mouth, face, lips, or tongue); abdominal or stomach pain; cramping; dark urine; depression; suicidal thoughts or behaviors; unusual tiredness or weakness; vomiting; white bowel movements; yellowing of the skin or eyes.

According to, exclusion criteria for Contrave include:

"Exclusion Criteria:

Obesity of known endocrine origin (e.g., untreated hypothyroidism, Cushing's syndrome)
Serious medical condition or medical condition that limits participation in the prescribed exercise program:
(e.g. unstable cardiovascular disease including congestive heart failure, angina pectoris, and myocardial infarction; stroke; claudication; acute limb ischemia; acute renal or hepatic disorder; renal, hepatic or respiratory insufficiency)

Active malignancy or history of malignancy (other than non-melanoma skin cancer or surgically cured cervical cancer) within 5 years of enrollment
Serious psychiatric condition (e.g., any history of bipolar disorder, psychosis, suicidal attempt or post-partum depression; a history of major depression, suicidal ideation or antidepressant use within 1 year)
Type I or Type II diabetes mellitus requiring pharmacotherapy
Excluded concomitant medications: anorectic agents; weight loss agents; dietary supplements to promote muscle building, enhance mood, or reduce appetite; adrenergic blockers; beta blockers; anti-psychotic agents; clonidine; theophylline; cimetidine; oral corticosteroids; anti-depressant; topiramate; Depo-Provera®, smoking cessation agents; frequent, known use of opioid or opioid-like analgesics
History of surgical intervention for obesity
History of seizure disorder or predisposition to seizures (e.g., history of cerebrovascular accident, significant head trauma, brain surgery, skull fracture, subdural hematoma, or febrile seizures)
History of bulimia or anorexia nervosa
History of drug or alcohol abuse within 5 years
History of treatment with bupropion, or naltrexone within 12 months
History of hypersensitivity to bupropion, or naltrexone
Use of drugs, herbs, or dietary supplements known to significantly affect body weight within one month of baseline
Use of investigational drug, device or procedure within 90 days
Participation in any previous clinical trial conducted by Orexigen Therapeutics
Any condition which in the opinion of the investigator makes the subject unsuitable for inclusion in this study"

Due to the high number of exclusion criteria, my assessment is that Contrave will address the extremely obese with few other indications, which will also limit the available market for the drug. This assumes Contrave will attain FDA approval.

OREX announced their submission of their NDA for Contrave on April 1, 2010. A Prescription Drug User Fee Act (PDUFA) date is expected in the first quarter of 2011.

Arena Pharmaceuticals

The third candidate for weight management is Lorcaserin hydrochloride, a novel single agent developed by Arena Pharmaceuticals (symbol "ARNA"), based in San Diego, CA. Lorcaserin is the only agent developed specifically for weight loss, among Contrave and Qnexa. In other words, it is not a combination of generic compounds which were developed for other indications. Hence, advantages include strong patent protection until at least 2023, reduced risk of contraindications from not combining compounds, and reduced adverse side effect profile.

A brief glimpse into the checkered history of the weight loss sector is instructive. Fen-phen, a compound of fenfluramine and phentermine, was a blockbuster anti-obesity drug in 1997. However, due to fatal pulmonary hypertension and cardiac valvulopathy problems, fen-phen was quickly withdrawn. Over $21 billion of class action lawsuit payments have been paid by Wyeth as a result. Since that time, the FDA has been deservedly very conservative in approving weight management drugs. Many anti-obesity drug candidates have failed, including compounds by big pharmaceutical giants by Merck, Sanofi-Aventis, and Pfizer. The two existing approved drugs, Orlistat and Sibutramine, are marginally effective, and carry significant adverse side effects--including liver damage, which limits their market penetration and duration of usage. Thus, an estimated $10 billion market for weight management is largely unmet.

In addition to efficacy (i.e. statistically significant weight loss), safety is even more important to the FDA, given the fen-phen disaster. First-year medical students understand "Primum non nocere," Latin for "First, do no harm." VVUS, OREX, and ARNA hope to capitalize on past failures from other pharmaceutical companies. The worldwide market (Europe is second in size behind the US) can support more than one treatment, but safety and efficacy will determine FDA approval and commercialization success.

Lorcaserin is unique because of its specificity to the G-protein coupled receptor (GPCR) 5-HT2C, located in the hypothalamus. Fenfluramine caused valvular lesions because it also was an agonist for the 5-HT2B subtype, which impacts cardiac valves. Hence, fen-phen caused irreversible valvular regurgitation.

Lorcaserin, on the other hand, only activates the seratonin 5-HT2C receptor, which controls satiety. Cardiac valves are unaffected. Echocardiograms during clinical trials showed no valvular irregularities in the Lorcaserin-active group above the placebo-control group. Weight loss from Lorcaserin was quick and more likely to encourage patients to continue compliance. Adverse side effects like headaches, dizziness, and nausea were transient and mild. In fact, more patients on placebo dropped out than patients from the Lorcaserin group.

Here is the list of exclusion criteria for BLOOM, one of the pivotal Phase III trials, according to
"Exclusion Criteria:

History of heart valve disease
Serious or unstable current or past medical conditions"
Two other Phase III clinical trials included diabetics and patients with heart valve diseases (see BLOOM-DM and BLOSSOM below), so Lorcaserin appears to be safe for many obese patients.

On March 30, 2009, ARNA announced top-line results for BLOOM, the first of two pivotal Phase III trials, for categorical and average mean weight loss above placebo:

"Primary Endpoint Analysis

The hierarchically ordered endpoints were the proportion of patients achieving 5% or greater weight loss after 12 months, the difference in mean weight loss compared to placebo after 12 months, and the proportion of patients achieving 10% or greater weight loss after 12 months. Compared to placebo, using an intent-to-treat last observation carried forward (ITT-LOCF) analysis, treatment with lorcaserin was associated with highly statistically significant (p<0.0001) categorical and average weight loss from baseline after 12 months:

-- 47.5% of lorcaserin patients lost greater than or equal to 5% of their
body weight from baseline compared to 20.3% in the placebo group. This
result satisfies the efficacy benchmark in the most recent FDA draft

-- Average weight loss of 5.8% of body weight, or 12.7 pounds, was achieved
in the lorcaserin group, compared to 2.2% of body weight, or 4.7 pounds,
in the placebo group. Statistical separation from placebo was observed

by Week 2, the first post-baseline measurement.

-- 22.6% of lorcaserin patients lost greater than or equal to 10% of their
body weight from baseline, compared to 7.7% in the placebo group."

Many Wall Street analysts misinterpreted the data, believing the weight loss was insufficient for FDA approval. They did not understand that FDA guidances for weight loss required only one of the first two primary end points to be met.

The FDA website lists the following efficacy benchmarks for weight loss, published in 2007:
"In general, a product can be considered effective for weight management if after 1 year of treatment either of the following occurs:

• The difference in mean weight loss between the active-product and placebo-treated groups is at least 5 percent and the difference is statistically significant
• The proportion of subjects who lose greater than or equal to 5 percent of baseline body weight in the active-product group is at least 35 percent, is approximately double the proportion in the placebo-treated group, and the difference between groups is statistically significant"

Clearly, Lorcaserin met the 2nd primary efficacy end point, based on ITT-LOCF analysis, which the FDA uses in order to reduce clinical trial bias. By exceeding FDA weight loss guidances and satisfying general safety assessments, Lorcaserin appears to be FDA-approvable.

In the clinical practictioner world, prescribing doctors also evaluate per protocol efficacy, which only includes compliant patients--those who complete the clinical trials. On June 6, 2009, ARNA announced per protocol efficacy for Lorcaserin in BLOOM trials:

"In addition to supporting the previously announced results on all three co-primary endpoints on an intent-to-treat, last observation carried forward (ITT-LOCF) basis, the data presented today demonstrated strong efficacy in patients who completed one year of treatment according to the trial's protocol. In the per protocol population, nearly two-thirds (66.4%) of lorcaserin patients lost at least 5% of their weight compared to 32.1% of patients on placebo (p < 0.0001), and over one-third (36.2%) of lorcaserin patients lost at least 10% of their weight compared to 13.6% for placebo (p less than 0.0001). The average weight loss in this population was 17.9 pounds in the lorcaserin group, compared to 7.4 pounds in the placebo group. Patients randomized to remain on lorcaserin for Year 2 maintained a significantly greater amount of weight loss compared to the lorcaserin patients who switched to placebo at Week 52 in both the ITT-LOCF and per protocol populations."

This data was even more encouraging, as it suggests that patients who stay on Lorcaserin not only lose weight, they keep it off. Even though the FDA only looks at ITT-LOCF in the approval process, per protocol efficacy is what prescribing doctors will also assess, which ultimately determines commercialization success.

In addition, secondary benefits were also realized by Lorcaserin-active patients:

"Secondary Endpoint Analysis

New data demonstrate that treatment with lorcaserin over one year was associated with highly significant improvements compared to placebo in multiple secondary endpoints associated with cardiovascular risk, including:

-- Blood Pressure: systolic blood pressure, diastolic blood pressure and
heart rate

-- Lipids: total cholesterol, LDL cholesterol and triglycerides

-- Glycemic Parameters: fasting glucose, fasting insulin and insulin

-- Inflammatory Markers of Cardiovascular Risk: high-sensitivity CRP and

Quality of Life, as assessed by the Impact of Weight Questionnaire - Lite, also improved to a significantly greater extent in the lorcaserin group than the placebo group at Week 52."

ARNA also announced top-line results for BLOSSOM, the second of two pivotal phase III clinical trials on September 18, 2009 with the following results.
"Our BLOSSOM trial confirmed the BLOOM results and completed the lorcaserin pivotal Phase 3 clinical trial program of 7,190 patients evaluated for up to two years.

In BLOSSOM, lorcaserin met all primary efficacy and safety endpoints, and lorcaserin patients achieved highly statistically significant categorical and absolute weight loss. Treatment with lorcaserin also resulted in statistically significant improvements as compared to placebo in multiple secondary endpoints associated with cardiovascular risk. Lorcaserin was very well tolerated, did not result in increased risk of depression or suicidal ideation and was not associated with the development of cardiac valvular insufficiency.


Patients treated with 10 mg of lorcaserin dosed twice daily who completed the one-year trial according to the trial’s protocol demonstrated the benefits of long-term treatment with lorcaserin:

* 63.2% of lorcaserin patients lost at least 5% of their body weight, compared to 34.9% for placebo.
* 35.1% of lorcaserin patients lost at least 10% of their body weight, compared to 16.1% for placebo.
* Lorcaserin patients achieved an average weight loss of 7.9%, or 17.0 pounds, compared to 3.9%, or 8.7 pounds, for placebo.
* The quartile of lorcaserin patients with the greatest weight loss lost an average of 35.1 pounds, or 16.3% of their body weight.

Measurements of efficacy using an intent-to-treat last observation carried forward, or ITT-LOCF, analysis showed that lorcaserin met all primary endpoints. Patients treated with 10 mg of lorcaserin dosed twice daily achieved highly statistically significant categorical and average weight loss after one year:

* 47.2% of lorcaserin patients lost at least 5% of their body weight, compared to 25.0% for placebo. As with BLOOM, this result satisfies one of two alternate efficacy benchmarks in the most recent FDA draft guidance, which provides that a weight-management product can be considered effective if after one year of treatment the proportion of subjects who lose greater than or equal to 5% of baseline body weight in the active-product group is at least 35%, is approximately double the proportion in the placebo-treated group, and the difference between groups is statistically significant.
* Lorcaserin patients achieved an average weight loss of 5.9%, or 12.7 pounds, compared to 2.8%, or 6.3 pounds, for placebo.

Safety and Tolerability Profile

Treatment with lorcaserin was very well tolerated, resulting in few adverse events with greater frequency than the placebo group. The most frequent adverse events and their rates for lorcaserin twice daily and placebo patients, respectively, were as follows: headache (15.6% vs. 9.2%), upper respiratory tract infection (12.7% vs. 12.6%), nasopharyngitis (12.5% vs. 12.0%), nausea (9.1% vs. 5.3%) and dizziness (8.7% vs. 3.9%). Adverse events of depression, anxiety and suicidal ideation were infrequent and were reported at a similar rate in each treatment group.

Echocardiographic evaluations showed no association between lorcaserin and the development of heart valve insufficiency. Rates of new FDA-defined valvulopathy in BLOSSOM at Week 52 were as follows: lorcaserin 10 mg twice daily (2.0%), 10 mg once daily (1.4%) and placebo (2.0%).

Secondary Endpoints

Treatment with lorcaserin over one year was associated with statistically significant improvements or favorable trends compared to placebo in multiple secondary endpoints, including blood pressure and lipids."

Clearly, BLOSSOM results confirmed BLOOM trials. One difference is that BLOSSOM included patients with pre-existing valvulopathy, while the BLOOM clinical trial did not.

BLOOM-DM, another Phase III clinical trial, includes diabetics. Blinded data suggests weight loss among diabetics reduces or eliminates medications for other indications. This will be attractive to healthcare providers and insurers seeking reduced healthcare costs. BLOOM-DM (Diabetes Mellitus) is not a pivotal trial, but data will be submitted as a supplement to Lorcaserin's NDA.

ARNA is well-financed after a series of equity offerings and warrant issuances. They have enough cash to last until the expected Prescription Drug User Fee Act (PDUFA) event late next year. They also own their own manufacturing facilities in Switzerland. Hence, while they seek a marketing partner, they have contingency plans in place to market Lorcaserin independently. Senior management and the Board of Directors have vast experience in the FDA approval process, and the ability to attract financing in difficult credit markets. Recent insider buying by six of eight Directors indicate bullishness. There is heavy institutional ownership, indicating long-term shareholder value. There is high insider ownership, and high short interest, approximately 20% of the float at last count. Shares have been manipulated down, a common occurrence for microcap biotech companies. The smart money has accumulated shares at lower prices. Should shares continue to rise above the moving averages, shorts will cover, potentially causing a short squeeze.

ARNA submitted an NDA for Lorcaserin on December 22, 2009, and was accepted by the FDA on February 24, 2010. An Advisory Committee review is expected in September, with the PDUFA date assigned for October 22, 2010.

Conclusion: Due to ARNA's Lorcaserin positive safety and tolerability profile, the novel single agent has a high probability of FDA approval for weight management. Lorcaserin's efficacy meets FDA draft guidances for statistically significant weight loss. By meeting primary end points for weight loss efficacy and safety, and also demonstrating improvements in multiple secondary end points associated with cardiovascular and diabetes risks, Lorcaserin is a potential game-changing, block-buster drug which addresses a $10 billion weight management market.

Disclaimer: These are my opinions and not recommendations. This article contains forward-looking statements that involve risk and market uncertainties. Actual results and events may materially differ from the article's expectations. Please do your own due diligence.

Disclosure: I am long ARNA shares.

State deficits

To my friends who insist we are in an economic recovery, I submit this piece:

Especially poignant, and illustrative of the madness of fractional reserve financial systems:

"States can’t go into bankruptcy. They are not included in the bankruptcy code," he says.

Today’s outlook is different from the city's fiscal crisis of the 1970s when the state couldn't find any lenders. Instead, he says, bankers are circling Albany with tempting offers.

"The financial community is ready to lend the state all kinds of money. They have 20-odd schemes they are suggesting about how the state can borrow money," Ravitch says.

But New York has to be careful; borrowing would dig the state even deeper into fiscal trouble. Ravitch says New York is not alone: all 50 states are facing a total of $350 billion in deficits and more than $2 trillion in unfunded pension liabilities.

So Lt. Governor Richard Ravitch believes banks offering "20-odd schemes" of lending the state more money is beneficial? Could these "schemes" include derivatives and interest rate swaps, which have managed to destroy cities, states, and whole sovereign countries (see Greece)? I also like the following editorial comment,

But New York has to be careful; borrowing would dig the state even deeper into fiscal trouble.

Really? That's brilliant insight right there. Welcome to the world of comedic tragedy.

Look, no one says the nation's GDP isn't recovering--it is. But we are bouncing off the bottom. And due to systemic rot in a financial system full of off-balance, unaccounted-for toxic assets, no amount of window dressing of economic data or financial "reform" will result in sustainable economic recovery.

Lawsuits flying

With any credit bust, scandal and lawsuits inevitably follow according to script.

Goldman Sachs CEO Lloyd Blankfein's now infamous quote of doing "God's work" is about to be tested in courts.


Remember, since the U.S. went off the gold standard in 1971, the dollar has lost over 97% of its purchasing power. Yet today, an ounce of gold will buy the same amount of oil, and other goods and services, as it did in 1971. In fact, in Benjamin Franklin’s day, an ounce of gold would outfit a gentleman from head to foot. It still will today.
- Kevin Drost, Asset Strategies 5.3.10

The total value of all the gold ever mined is only about $4.4 trillion, for example. The US is still the largest holder... but it has only 8,133 tonnes of the stuff... for a total value of $240 billion. So, if we did the math right, the Chinese could buy up all the entire US gold reserve and have about $1.2 trillion left to spend.
- The Right Side 1.5.09

"If you don't trust gold, do you trust the logic of taking a pine tree, worth $4,000 to $5,000, cutting it up, turning it into pulp, putting some ink on it and then calling it one billion dollars?"
- Kenneth Gerbino commenting on the whole concept of paper currencies.

"Governments lie; bankers lie; even auditors sometimes lie; gold tells the truth"
- Lord William Rees Mogg, Economist and former editor of The Times

"You have to choose, as a voter, between trusting to the natural stability of gold and natural stability and intelligence of the government. And with due respect to these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold"
- George Bernard Shaw, Philosopher and Playwright

Matt Taibbi on Goldman;kw=[3351,136554]?RS_show_page=0

Many of us have read Taibbi's hard-hitting articles on Wall Street's fraudsters. But what intrigued me the most were his anecdotal comments on Wall Street's other crimes-in-progress.

"There is more fraud out there, and everyone knows it: front-running, manipulation of the commodities markets, trading ahead of interest-rate moves, hidden losses, Enron-esque accounting, Ponzi schemes in the precious-metals markets, you name it. We gave these people nearly a trillion bailout dollars, and no one knows what service they actually provide beyond fraud, gross self-indulgence and the occasional transparently insincere public apology."
[ed. bold emphasis is mine]

When and if the story on precious metals price suppression breaks, the emperor will be exposed as naked, in more ways than one.

Thursday, April 29, 2010

Kreditanstalt of Vienna

The combined results were catastrophic. Highly respected banks failed, first among them the great Kreditanstalt of Vienna, which collapsed in May 1931. The Bank of England, at that time, was losing gold at the rate of £2.5 million a day. Everywhere, industrial production fell: by 40 percent in Germany, 14 percent in Britain, and 29 percent in France.
- from Encyclopedia Brittanica History of Europe: The Impact of the Slump

Something strange in the precious metals pits

COMEX gold declined a small amount, but silver prices are surging today. This bifurcation is unusual, as these precious metals usually move in tandem. I've posted numerous blogs on the dual utility of silver as an investment and industrial metal--and how the price suppression by bullion banks in London and New York is exacerbating the shortage in physical inventory. Eventually, the price of the futures markets becomes disconnected from the physical markets, as industrial buyers scramble to find supply.

Unlike retail consumers who are typically price-sensitive (i.e. retail gold jewelry buyers are priced out when when prices rise), industrial buyers must find physical supply wherever they can in order to keep their production lines humming, so they will bid up prices in tight markets. For instance, a buyer of a Bill of Materials does not want to be in the critical path of the supply chain for Apple's popular IPad, because delays translate to millions in losses. There is silver content in products as diverse as electronics, solar panels, disinfectants, antibiotics, mirrors, optics, silverware--in addition to jewelry.

A run on physical silver will eventually spill over into the paper futures market where most contracts are settled via cash. However, if longs (buyers) insist on physical delivery, there would be a deeper run on silver, causing a huge short squeeze and soaring prices. Both longs and shorts scrambling to cover their shorts will intensify buying pressure. With naked shorting prevalent in precious metals futures markets, the COMEX could experience a default, where futures contracts are undeliverable. Longs expecting delivery would be defrauded.

That's why taking physical possession is so crucial in the event of a default.

Please see disclaimers in the sidebar.

Disclosure: long physical gold and silver, long mining shares.

FDA approves Provenge

Shares of Dendreon (symbol "DNDN") surged today after the FDA approved Provenge for treatment of advanced prostate cancer. Search DNDN in this blog or Google "Deep Capture Dendreon." It's a fascinating story. It includes an analyst who predicted DNDN shares would tank to $1. Jim Cramer and much of Wall Street were negative on the company when it was trading around $3. Today, it hovers above $45, before trading was halted. Laugh out LOUD!

The company has had a tough, arduous, long road, with many opponents--some crooked, including the FDA, short hedge funds, market makers, investment banks, regulators, analysts, and captured journalists--even organized crime syndicates according to conspiracy theorists. But in the end, the white hats won, and many lives will be saved.

This is not a profit-making celebration--this is a confirmation that patience and conviction are sometimes rewarded. Many long investors suffered for years; using luck and some skill (along with courage), I was able to time the trade so I would only be exposed to regulatory risk for one year.

This rollercoaster is not for the faint-hearted.

See disclaimer on side bar.

Disclosure: entry points for DNDN between $4 - $7 in April 14, 2009. Planning to exit a percentage of position at approximately $45 on April 29, 2010.

Edit: after resumption of trading, DNDN is now trading at $52!

Edit 2: Disclosure: another tranche sold at $57.55 on April 30, 2010, purchased at $7.28 on April 14, 2009.

Greece, currencies, gold

I've been warning of sovereign debt problems for 2 years, advocating gold and silver for years, and sounding the alarm bells of Dubai, Greece, and the Club Med Euro countries for months. Don't follow the puck--anticipate where it's headed. See the objects in the waters ahead in the UK, Japan, and the US for what they are: icebergs, not lifeboats.

Eric King: This statement from Alex Barrett says it all, “Gold in Euros is at record highs and I think that people not just in Europe but across the world are losing faith in a lot of the fiat currencies and are actually heading towards real assets.” This is exactly the kind of thing you would expect to see in phase II of this secular bull market in gold. Big money flows into hard assets including gold and silver and also more institutional involvement. Contrarians may worry that gold is getting on more investors radar screens but this is simply the nature of bull markets.

Phase II of secular bull markets are longer than phase I so it will most likely go on for years before the manic phase III begins. Alex Barrett also remarked about the flow of funds, “...and that’s going to continue until we see this loose monetary policy start to get tightened up, so until then just keep investing.” Well there you are, we do not expect tight monetary policy just jawboning so the flow of money into both gold and silver should continue and accelerate for years which is supportive of a long phase II leading into the final crescendo of phase III.

If you understand the 3 stages of a secular bull market it makes it much easier to hold on during the reactions or shakeouts. Seasoned investors always look to accumulate during major corrections inside of secular bull markets because the wind is at their backs longer-term. For those who have a hard time buying during the major drawdowns they can simply use James Turks advice which is to dollar cost average by making purchases each month. This is sound advice from James and it helps remove emotion for some investors. The most effective way to make money in bull markets is simply to buy and hold, this is a fact but it requires tremendous patience.

See disclaimers in the side bar.

Disclosure: long gold and silver, long mining shares.

Galbraith vs. Schiff

Dr. James Galbraith believes US debt levels are the subject of "fear-monguering", and "capital markets are not worried." Peter Schiff believes the debt levels will lead to "disaster."

Schiff correctly called the subprime mortgage crisis and housing bubble 5 years ago. Galbraith teaches business students. You be the judge.

US debt bomb

Keep clicking on the chart to enlarge. That's what Ben Bernanke keeps doing--clicking on his computer keystroke, creating trillions in debt each time.

That's $60 trillion in debt and unfunded promises. US GDP is $14 trillion.

This is why our financial system is in trouble. It is not just Greece that is getting "greeked."

Wednesday, April 28, 2010

IMF gold

Along the way, both GATA and Sprott suggested we ask the IMF some questions that the fund has avoided answering in the past. So we did. They were:

* What are the incentives for the IMF not to sell gold on the open market or to investors, be it institutional or retail?
* What are the designated depositories for gold?
* Did gold physically change hands with the banks you have sold to so far or was the transaction basically bookkeeping stuff (the IMF still holds the physical gold in this case)?
* Are there available records on the actual serial numbers of bullion? How is the gold at the IMF tracked and accounted for?
* When the IMF says it will "phase out" the sal of available gold, could you be more specific? What amount of gold in regard to what amount of time?
* Does IMF support a need for total transparency in the sale of gold despite the effects it could have on various markets?

The official response from Alistair Thomson, the IMF's media guy, was:

"I looked through your message; we don’t have anything more for you on this."

A cynical view on the SEC vs. Goldman Sachs case

Commentators are debating whether the Justice Department will be able to prove its civil fraud case against Goldman Sachs. Unfortunately, they're missing the point. The Justice Department didn't bring its suit with the aim of proving that the company committed fraud. It brought its suit to get a massive amount of money for the federal government in a pretrial settlement of the case.

Here's how the racket works. The government knows that its litigation will cost Goldman Sachs millions of dollars in litigation costs, including attorney's fees, deposition expenses, bad public relations, and loss of revenues. So, the government calculates that the company will be willing to settle for a large amount of money to save itself from all that aggravation. The government accepts the settlement. The Justice Department lawyers celebrate that they've "won" the case. Federal officials, ever more desperate for more revenues to pay for their out-of-control spending, are exultant over the "free" monies that have been deposited into the government's coffers.

The feds aren't going after Goldman Sachs on criminal charges of fraud, which would fall within the ambit of proper governmental powers. Instead, they're only going after the company on civil charges of fraud. They're seeking money, not jail time.

What's that all about? If investors have been defrauded, why can't they sue for their damages? Why shouldn't they, not the government, receive the money for damages they've allegedly suffered? What business does the government have suing for civil damages? It hasn't suffered any injury.

It's all about money. As the deficit becomes larger and larger, we can expect to see the federal government desperately looking for more ways to extract money from private businesses.

The real fraud is the whole idea of a regulated economy. When public officials assumed the power to regulate economic activity many decades ago, they expressly represented that it would protect people from bad things happening to them. That representation was false and fraudulent. Regulations and regulators don't protect people. They simply lull people into thinking that the government is taking care of them. The regulated economy simply provides the government with another means of legally stealing or extorting money from the private sector to satisfy the ever-voracious financial needs of a bankrupt government.

BioCryst announces upbeat first quarter

See disclaimers in side bar.

Disclosure: long BCRX shares.

S & P downgrades Greece, Portugal, and Spain

The contagion spreads. Folks, as I have posited many times, this is only the beginning.

1999 gold short squeeze

We looked into the abyss if the gold price rose further . A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The U.S. Fed was very active in getting the gold price down. So was the U.K.

- Edward A. J. George, Governor of the Bank of England and a director of the Bank of International Settlements, 1999

The price of gold was $253 at the time. It is now $1160/oz. today. Yet the strain on physical inventory is more acute than ever, as resources are depleted.

Disclosure: long physical gold and silver, and long mining shares.

Bernanke warns of budget deficits

Ben Bernanke is finally talking some sense. Too bad it's too little, too late.

Federal Reserve Chairman Ben S. Bernanke said a failure to reduce the federal budget deficit may push up interest rates over time and impair economic growth, putting the recovery at risk.

“Achieving long-term fiscal sustainability will be difficult, but the costs of failing to do so could be very high,” Bernanke said in a speech today to a White House commission on the budget deficit. “Increasing levels of government debt relative to the size of the economy can lead to higher interest rates, which inhibit capital formation and productivity growth — and might even put the current economic recovery at risk.”

Budget deficits may eventually erode the confidence of bond investors in the management of U.S. fiscal policy, driving yields higher on Treasury borrowing, raising the cost of lending in the economy and slowing economic growth, Bernanke said.

He must be reading the blogosphere.

Credit default swaps on muni bonds rise

The risk of default on municipal and state bonds is rising, resulting in higher prices for credit default swaps, which insure against bond defaults. This will undoubtedly increase the borrowing costs of states and municipalities, exacerbating their already tenuous fiscal conditions.

Tuesday, April 27, 2010

Ohio police cuts and firearms sales

With due respect to my good friend, I wasn't being an alarmist two years ago.

Murray Pollitt commentary

Malthusian: of or relating to Malthus or to his theory that population tends to increase at a faster rate than its means of subsistence and that unless it is checked by moral restraint or disaster (as disease, famine, or war) widespread poverty and degradation inevitably result. - Merriam-Webster

King Canute:

Expats renouncing US citizenship

Expatriates renouncing their US citizenship will be a growing trend.

Amid mounting frustration over taxation and banking problems, small but growing numbers of overseas Americans are taking the weighty step of renouncing their citizenship.

Anecdotally, frustrations over tax and banking questions, not political considerations, appear to be the main drivers of the surge. Expat advocates say that as it becomes more difficult for Americans to live and work abroad, it will become harder for American companies to compete.

American expats have long complained that the United States is the only industrialized country to tax citizens on income earned abroad, even when they are taxed in their country of residence, though they are allowed to exclude their first $91,400 in foreign-earned income.

As usual, Congress has it wrong in questioning Goldman

Congress rightfully accuses Goldman Sachs of wrongdoing on betting against their own clients on mortgage-backed securities, but instead of interrogating Goldman Sachs--who will only deny the allegations, why doesn't Congress invite Goldman's burned clients to testify on their own behalf?

The reason is that Congress and the Obama Administration can't cut off the hand that feeds Capitol Hill--they only need to appear to lecture Wall Street to appease the angry masses. Most former and present Goldman Sachs executives will walk free and clear, much like most of Wall Street.

Also, John McCain missed a great opportunity to really stick it to Goldman Sachs CEO Lloyd Blankfein. Sure, he got Blankfein to admit he received a $9 million bonus last year, but he didn't bring up Blankfein making $68 million in bonuses in 2007--from illusory profits from the mortgage-backed securities which were later proven toxic.

The window dressing continues.

Jim Rickards on rigged markets

Jim Rickards can rant much better than I can, plus his resume is much more impressive than mine. Having said that, our brief correspondence confirms he and I share the same views on the economy and the rot in our financial systems.

Marc Faber pulling no punches

How the Fed creates money

Since it was so easy to create $1.3 trillion to buy toxic mortgage bonds, why don't we just create $10 trillion out of thin air while we're at it. Surely, that's good for the economy.

The Fear trade

Most pundits believe the USDollar and the price of gold (priced in dollars) have an inverse relationship. As the USDollar weakens, the price of gold rises--with the inference that it takes more dollars to buy that same ounce of gold. Likewise, as the USDollar gains strength, the price of gold should naturally decline. Hence, gold is an apt hedge against a weakening dollar--and rising price inflation. Gold keeps its monetary value even while paper currencies decline. We're seeing that in Europe and the United Kingdom, as the Euro is sinking faster than the USDollar, due to the spreading fiscal problems in Greece, Portugal, Spain, and other European countries. Priced in the sterling pound and the Euro, gold prices are at an all-time high (priced in USDollars, gold is currently 5% below it's all-time peak).

Generally, in normal times, this gold/USDollar inverse relationship is intact.

However, in periods of financial crisis, when trust in government finances is low, the relationship between gold and the USDollar can be linear. In other words, even though the USDollar can gain in strength (as measured by the USDollar Index), gold can also rise in tandem, as both may be considered safe harbors for scared capital.

However, the inverse relationship may return if fear in the USDollar returns, which would be even more bullish for gold. Markets remain nervous and tenuous, and currently, markets are betting on a worldwide economic recovery. Increasing risk exposure (and attempting to increase returns) is back in vogue. Hence, the carry trade (borrowing USDollars, investing the proceeds in higher-risk trades) will have a dampening effect on the dollar, which is bullish for precious metals.

But the next crisis-triggering event will cause a return flight to the dollar, which could temporarily put a damper on gold's rally. But once cooler heads prevail, gold will resume its rightful place as a hedge against not only inflation, but also against financial crisis and currency debasement. We saw this in late 2008, after the Lehman blow up, when gold and silver prices collapsed briefly, but have both resumed their decade-long rally ever since.

See disclaimers on sidebar.

Disclosure: long physical gold and silver, and long gold and silver mining shares.

Pension fund reforms looming

One of the reasons I started this blog is because I was getting tired of being bashed by my own friends and family for being the messenger of bad news, and to be honest--I got tired of my own redundancy. The news coming out of the mainstream press today includes material I was harping about months and years ago. Mutual funds, pension funds, and even money market funds are at risk (see this blog on money market redemptions). Many blogs included actionable items, from a personal finance standpoint.

In regards to our public finances, we are teetering past the point of no return, with debt levels unsustainably high, and the threat of our financial systems collapsing at its highest point since the Great Depression. Pending financial reforms do not remove this systemic risk--they are backward-looking band-aids which do little to eliminate the toxicity of a $1 quadrillion derivatives market, in light of the fact that worldwide GDP is less than $60 trillion.

Our government and Wall Street haven't removed the iceberg(s); they're merely draining the Titanic one bucketful of water at a time--with high seas on the horizon. And the financial press is re-arranging the deck chairs in order to numb the masses into believing all is well, through manipulation of data and outright lies about unemployment and inflation numbers.

Excessive leverage from places as disparate as Iceland to Palm Springs created credit bubbles and the subsequent bursting. In many regions of the developed world, the process of de-levering is still in place, aided by zero-interest rate policies, quantitative easing, and fraudulent accounting endorsed by government authorities. The Fed's easy-money lending to banks is meant to recapitalize their broken balance sheets, but Main Street is still credit-starved--banks aren't lending. In the process, the Fed's balance sheet has ballooned, including the gigantic inventory of toxic mortgage-backed securities, with a market value of pennies on the dollar. The massive debt monetization incurred by the bailouts will dampen any semblance of a sustainable recovery.

But the USDollar carry trade marches on, where arbitrageurs (including hedge funds and banks) borrow dollars at 0% and speculate elsewhere with the unintended consequences of creating additional asset bubbles. Meanwhile, accusations of the Chinese manipulating the yuan artificially low are ridiculous, considering the Chinese central bank merely pegs the yuan to the USDollar. If we are to believe the US stance on a "strong USDollar policy", then logic would dictate the yuan would also be a "strong" currency. The yuan is sinking because the USDollar is sinking, and while we're at it, so is the Euro. It's a race to the bottom in an attempt to stimulate exports.

In the paper chase to zero, I am holding on to something tangible.

Monday, April 26, 2010

Investors believe gold prices will fall
In an online poll of a sample size of 21,600 respondents selected from across the globe, 93% or 20,100 of the total sample size had opined that there would be a fall in gold prices due to a recent upbeat mood in the global equity markets, while only 1400 respondents contradicted the stand, while 0.46% did not comment on either side. This showed that most of the respondents believed that there would be a fall in gold prices in near future due to recovery in global equity markets.

If 93% of investors believe the price of gold will fall, I believe they will rise.

See disclaimers on side bar.

Disclosure: long gold and silver mining shares.

Sprott on sovereign debt

Cities and States need bailouts,0,3466570.story

Crank up the printing presses again. At least readers of this blog know what to do to protect their purchasing power.

Bail out of other PIIG countries imminent

Western currencies: a war of ugly sisters

The U.S., Britain and some European countries are similar in that they all have big budget deficits that will require higher taxes and public spending cutbacks, King said. He said the advantage for the U.S. is that it can exploit demand for the dollar to fund its “enormous” borrowing.

Creditors of the U.S. will eventually sour on that arrangement, and may raise demands for other American assets or move away from the greenback as the world reserve currency, King said. He said the U.S.’s practice is similar to the Catholic church’s sale of indulgences in medieval times.

“You’re making a promise to people not for a wonderful afterlife, so to speak, but making a promise in this case that U.S. taxpayers in the future will pay you back,” he said. “The chances of that promise being met are actually quite low. And the difficulty with this is that eventually the creditor nations will begin to realize that buying IOUs from the U.S. is ultimately not in their interest.”

There is one currency which has kept its value for over 6000 years.

Frederic Bastiat

When plunder becomes a way of life for a group of men in a society, over the course of time they create for themselves a legal system that authorizes it and a moral code that glorifies it.

–Frederic Bastiat, French political economist (1801 - 1850)

Bob Farrell's 10 rules of investing

How wars start

According to the Christian Science Monitor, military wars start with sanctions and naval blockades. Unfortunately, that's the path we are taking with Iran.

SEC vs. Goldman Sachs revisited

A blog on senior SEC officials spending an inordinate amount of their work hours looking at porn during work hours was entered last week:

My cynical take was that Goldman Sachs, the accused in the SEC's fraud case, leaked these findings to the press, in order to discredit the SEC (which doesn't need it, given their horrific track record of being asleep at the switch).

I also blogged this entry, hinting at a clever strategy of how a company can profit from its own share price collapsing.

This is my speculation on the recent events. It's a false choice of two black hats.

The SEC, for all its ineptitude, filed fraud charges against Goldman Sachs last Friday. Their private investigators and captured journalists probably went into overtime to find the dirt on the normally shiftless, asleep-at-the-wheel SEC.

Goldman Sachs may have profited from the announcement of the lawsuit. $1,000 turned into $140,000 in less than a minute Friday when the out-of-the-money put options went deep into the money--on the day which those March put options expired. Coincidence?

Let's continue the speculation. Someone within the SEC could have tipped off someone at Goldman Sachs, so Goldman's cronies could place bets on the shares of Goldman Sachs tanking. The volume on Goldman puts options leading up to last Friday's options expiry was suspicious. In other words, Goldman could have bet on their own shares tanking--and made a huge profit in the process when it did tank upon news of the fraud case being filed by the SEC.

But the SEC is too stupid or too corrupt to chase its own tail. And they also picked the weakest case to prosecute. This case is about one smart investor (hedge fund manager John Paulson) betting on the obvious (shorting subprime mortgage bonds) and monkeys taking the other side of the bet. But it makes Obama look like he's fighting the banker fat cats on Wall St. to appease the populist anger among the masses. Again, the public doesn't understand the parasitic relationship between Wall Street and K Street.

Goldman Sachs CEO Lloyd Blankfein has been at the White House four times times since Obama has taken office, and Goldman was the second largest donor to his campaign. Goldman is a staunch supporter of the Democratic party, given their long history of placing executives in Democratic Administrations (Robert Rubin being the most prominent). It's one thing to publicly admonish big bankers gone wild publicly; it's another thing to make back room deals behind closed doors. If there are dismissals at Goldman, expect golden parachutes for their executives.

I'm surprised Jamie Dimon hasn't been targeted. JPMorgan Chase has allegedly manipulated markets with impunity and there is nary a whisper from the regulators. There is a long list of potential targets among the big banks. Let's see where that leads us to. I'm betting on misguided regulation after the fact, which will only hurt the small businesses so crucial in economic growth. They are the growth engine of America--not bankers profiting from rigged markets.

The financial system was robbed of tens of trillions of dollars on derivatives of hundreds of trillions of dollars, and all the SEC can come up is to scapegoat one 31-year old trader? Reform is an illusory ideal, as the rot in our financial system still exists.

Japanese sovereign debt soaring

Previous blogs rang the alarm bells on Japan's growing debt problems, while all the attention was focused on Dubai and Greece.

The financial news media is finally catching up to the massive debt levels in the US and Japan.

However, the article misses some major points. What will happen going forward? How is the Japanese central bank able to issue debt at such artificially low interest rates, when their solvency is in question? Why haven't the bond vigilantes punished the bonds by bidding up higher yields? Who has been buying these Japanese government bonds, and creating the huge demand required of zero-interest rate policies from an essentially insolvent government (one would think investors would demand higher yields from a bankrupt country)? For bond investors, it is a bad bet to tie up your savings for years with little to no return on investment. Yet, buyers have stepped up to the fixed-income window for 20 years.

The answer is two-fold. Firstly, the Japanese have had competitive export industries, despite equities and real estate markets collapsing since 1990. Corporate profits have been vibrant, keeping the overall economy afloat (which, by the way, is a trait the US economy isn't fortunate enough to share, as our economy is 70% consumer-based).

Secondly, Japanese citizens in the past, have been big savers. They have for years methodically saved at least double-figures of their annual incomes, so the Japanese government had a willing citizenry to buy Japanese bonds for their retirements.

But the head winds are forming, and the aging Japanese population is not saving as much as they have in the past. They are becoming more "American-like" in this aspect, although a large portion of this non-saving trend is due to demographics. This pool of savers is disappearing, so Japanese bond auctions will experience a dearth of buyers. This can only mean higher yields, as buyers will demand higher returns to take on the increased risk of funding a government which is no longer creditworthy. And this will ultimately lead to a death (debt) spiral, as new debt is issued to pay off rolled-over old debt.

This will either result in a technical default (which is a rapid debasement of the yen caused by hyperinflation of the printing press), or actual default, where the government declares they cannot make payment on their obligations. When the world's biggest economies declare default, the effects on the financial systems will be catastrophic, as credit markets will seize up. Liquidity in capital markets will collapse, as counterparty risk intensifies.

We saw this happen in 2008, but now the risk of sovereign default is much higher, as toxic derivative assets were transferred from banks to government balance sheets. In other words, the Fed bailed out banks, auto companies, government agencies when they went belly up. Who will bail out the Fed? The level of non-performing assets and debt will eventually overwhelm most developed countries, as it has already Iceland and Greece, and the contagion will spread across Europe as debt levels grow to unsustainable levels.

All central banks, including the Fed, and the IMF will print even more currency in an attempt to stave off defaults, but this will only exacerbate the debt problems, eventually resulting in a currency crisis.

Sunday, April 25, 2010

Obama's proposed budget cuts are minuscule

Thanks to my friend Brian for this snippet. Obama is counting on the inability of the American public to grasp scale when it comes to numbers. He'll be successful.

Friday, April 23, 2010

SEC officials watching porn on taxpayer's dime

The investigation, which was conducted by the SEC's internal watchdog at the request of Sen. Chuck Grassley, R-Iowa, found 31 serious offenders during the past two and a half years. That's less than 1 percent of the agency's 3,500 employees but 17 of the alleged offenders were senior SEC officers whose salaries ranged from $100,000 to $222,000 per year.

One senior attorney at SEC headquarters in Washington spent up to eight hours a day accessing Internet porn, according to the report, which has yet to be released. When he filled all the space on his government computer with pornographic images, he downloaded more to CDs and DVDs that accumulated in boxes in his offices.

An SEC accountant attempted to access porn websites 1,800 times in a two-week period and had 600 pornographic images on her computer hard drive.

Meanwhile, crooks like Bernie Madoff and "Sir" Allen Stanford were ripping off billions from unsuspecting "investors". The SEC also managed to look the other way, while big banks were committing hari kari on the nation's retirement and pension funds.

Government dollars: hard at work. No pun intended.

By the way, even if there are truths in the allegations, this is no doubt a smear campaign against the SEC, probably instigated by the very firms who are being charged with fraud, which will go unnamed. Connect the dots, dear readers. This is a false choice between the bad guys and the bad guys.

Thursday, April 22, 2010

Anti-dumping sanctions

I've posited this hierarchy for a while: first trade imbalances between sovereign countries, then sanctions and tariffs, then trade wars, and finally military conflict. Let's hope cooler heads prevail.

Food prices soar

Food and energy prices soared last month, but since the Labor Department doesn't consider these items important in a household budget (sarcasm intended), it conveniently ignores these items when calculating the Consumer Price Index (CPI). The official reason for the omissions is price volatility. I'm thinking there are other reasons.

Good debate on markets

Dr. Doom Marc Faber and Michael Yoshikami debate about what happens next and timeframes.

The trend is your friend

According to Ned Davis research, when 90% of companies trade above their 50-day moving averages, it's a bullish sign.

He suggests this powerful equities rally since March, 2009 could have some upside left, climbing the wall of worry. I have my own opinions on long-term secular trends, but wouldn't doubt it if the SP 500 may rise further in the short-term. Having said that, investors should keep an eye on the exits and be ready to push the sell button if another black swan event occurs.

See disclaimers in the side bar.

Disclosure: long select energy, precious metals, biotech, and technology shares.

Market sentiment: we all go to zero eventually.

Havenstein's choice

Rudolf Havenstein was President of the Reichsbank, Germany's central bank during the hyperinflationary Weimar Republic.

This paper examines inflationory and deflationary forces and their effect on gold prices. Some of the conclusions are rather surprising, some aren't.

Financial reform

At this time last year, in this blog entry, people in the know thought I was in left field when I suggested OTC derivative trading should be brought out of the shadow banking system and on to an exchange to increase transparency and reduce opacity. This eliminates the side bets between parties and improves the price discovery mechanism of free markets. The reason why my skeptics thought my suggestions would never occur is because it would be like trying to change the stripes of a tiger--trading is what banks do to increase profits. That's another discussion: the role of banks as customer service centers--or casinos gambling via their own proprietary trading desks--under the implicit understanding that they will be bailed out by taxpayers if their bets turn sour.

Lo and behold, a year later, the Obama Administration and both Houses are advocating such reforms, but this is not an exercise in self-aggrandizement on my part. Why? Because these reforms won't prevent fraud. While these reform proposals may indeed create more fluid markets, reducing spreads and transactional costs, and more importantly, level the playing field to some extent, it has consistently been proven that our financial market exchanges are rigged by malcreant players, including the big banks, hedge funds and our complicit government agencies themselves. In other words, this won't curb fraud and thugster market manipulation. Business as usual...

Record US debt

The message is by now not astonishing, but the source is a bit surprising. Robert Altman, a former deputy US Treasury secretary under President Clinton--which makes him a Democrat, comments on the disastrous US deficits and debt levels.

Contrarian natural gas call

Disclosure: long shares of natural gas pipeline MLP's


"Orwellian" describes the situation, idea, or societal condition that George Orwell identified as being destructive to the welfare of a free society. It connotes an attitude and a policy of control by propaganda, surveillance, misinformation, denial of truth, and manipulation of the past, including the "unperson" — a person whose past existence is expunged from the public record and memory, practiced by modern repressive governments. Often, this includes the circumstances depicted in his novels, particularly Nineteen Eighty-Four.

Orwell's ideas about personal freedom and state authority developed when he was a British colonial administrator in Burma. He was fascinated by the effect of colonialism on the individual person, requiring acceptance of the idea that the colonialist oppressor exists only for the good of the oppressed person and people.

Now read this:

“Federal agencies write laws called regulations or rules,” the contest’s information guidelines states. “When Congress writes a statute and the President signs it, it usually doesn’t have enough detail for it to be put into effect. So, federal agencies fill in the details by issuing regulations.”

The videos must also remind viewers that regulations are the law and that they actually outnumber laws passed by Congress on the order of 10-1.

“Regulations have the power of law. Breaking them can result in fines and even jail time. Regulations outnumber Congressional statutes. For every statute passed by Congress and signed into law by the President, federal agencies create about 10 regulations, each of which have the force of law.”

The videos must also explain to viewers how regulations affect the everyday lives of Americans, showing just what the government does that has a “direct impact” on the lives of “every American citizen.”

Regulations have a direct impact on your life and the life of every American citizen,” the information packet says.

Wednesday, April 21, 2010

Jim Rogers on currencies

Tax grab bag

This will likely be the beginning of a big tax grab bag as states are going broke and looking to raise tax revenue.

Strange bedfellows

Lloyd Blankfein (Goldman Sachs CEO), Jamie Dimon (JP Morgan Chase CEO), Robert Rubin (former Citi and Goldman Sachs Chairman) are all staunch Democrats, dispelling the notion that Wall Street's big banking institutions are pro-Republican.

Now we have this:

Tuesday, April 20, 2010

The CNBC contrarian indicator

CNBC's Carl Quintanilla interviews the smug Allen Stanford on what it's like to be a billionaire--months before "Sir" Allen was imprisoned for running an $8 billion Ponzi scheme.

A few years ago, CNBC did a documentary on venture capital investing in the booming and promising country of Iceland. In 2008, Iceland went bankrupt in a horrific collapse almost overnight.

Now Quintanilla is gearing up to do a special report on carbon credit trading. Guess what's going to happen next in that industry?

US Treasury demand

Zhu Min, the Deputy Governor of the Chinese Central Bank:
"the world hasn’t enough money to buy any more US Treasury bonds."

Bloodbath in wine country

To intervene or not to intervene

That is, the story leads with the ECB's acknowledgement that it traded 35.5 tonnes of gold for dollars in 2009 in the name of "liquidity, security, and return."

Then the story quotes the bank as having "also confirmed it had not intervened in currency markets in 2009."

But whenever a central bank exchanges gold for a currency, that is by definition a currency market intervention.

Nuclear power on Saturday Night Live

An oldie, but goodie submitted by one of my college friends:

Computer security

Bookmark these two websites to determine whether a web page or program poses a security threat.

For web pages:
For programs:

These sites will help determine whether the particular page or program one enters displays malicious behavior.

Here's an article on the researchers at the Computer Security Group at UCSB, my alma mater.

Monday, April 19, 2010

Goldman puts soared Friday

$1000 worth of Goldman put options soared to $400,000 by the end of the day. There was heavy put volume leading up to expiration day. Ya think someone got tipped off that the US Government was going to charge Goldman Sachs with securities fraud?

China strengthens ties with Saudi Arabia

Congressman Hank Johnson on Guam

It seems Congressman Johnson (D-Georgia) has trouble with basic geometry, physics and geography, but is an expert on the environment and global warming.

Austrian School of Economics

The Austrian School of Economics is gaining popularity because it accurately predicts market cycles, despite suppression by mainstream Keynesian economists and politicians, who desire political and financial power.

Austrian school economists understand the common-sense principle that nations – like people – build wealth from savings and investment and not from borrowing and spending.

Arguing that big-government arguments for intervention in the marketplace would not really replace laissez-faire chaos, von Mises’ logical critique of state planning was withering against socialism and fascism/Keynesianism. Von Mises wrote in Human Action, “The alternative is not plan or no plan. The question is whose planning? Should each member of society plan for himself, or should a benevolent government alone plan for them all? The issue is freedom versus government omnipotence.” Von Mises explains that “laissez faire does not mean: Let soulless mechanical forces operate. It means: Let each individual choose how he wants to cooperate in the social division of labor; let the consumers determine what the entrepreneurs should produce. Planning means: Let the government alone choose and enforce its rulings by the apparatus of coercion and compulsion.”

Volcanic ash

These are links to publicly available information. Perform your own due diligence.

Sunday, April 18, 2010

Bank bashing is coming from both sides of the aisle

The normally liberal New York Times is joining forces with the right on bashing bank bailouts.

Jim Sinclair on bank bailouts and bonuses

Jim Sinclair’s Commentary

Who paid the bonuses for Wall Street and how it worked:

1. FASB capitulates and allows holders of OTC derivatives to value them at whatever they wish.
2. International investment firms begin strong mark up policies towards their crap inventory.
3. Profits from the mark up of crap OTC derivatives by the international investment firms is recognized as trading income.
4. Tarp money comes into the firms and goes out as bonuses to the management, trading department and general employees at obscene levels.
5. Stock and bond issues are made to pay back tarp funds.
6. Therefore the money bonuses out by the international investment firms were TARP funds, not real earnings, but false FASB permitted mark up paper earnings through the trading department and declared as trading income.
7. The TARP money was paid back through the issue of stocks and bonds to the public, therefore the public paid the TARP back, not the financial institutions.
8. The obscene level of bonuses is because this game of convert false paper profit into cash into the bank account of the banksters and their merry crew is now game over. It was the last dip at the well of public funds laundered via TARP of the caved in FASB.
9. In the final analysis the public paid those obscene bonuses that were in truth, unearned.

China buying more gold

Clinton throws Rubin and Summers under the bus

Former President Clinton finally throws Rubin and Summers under the bus for leveraging up our financial systems with toxic derivatives.

Saturday, April 17, 2010

Everlast song - "Ends"

The lyrics are pretty depressing, but appropriate in today's world.

It's interesting to note the CD was released in 1998, during the height of the internet boom. Either the poverty underlying the false prosperity was evident then, or the band Everlast was prescient.

LA going bankrupt

Los Angeles isn't the only municipality or state about to go bankrupt. The financial media needs to stop focusing on Europe's problems and start examining our own fiscal problems.

Riordan says he doesn't "believe the city will ever get those sorts of concessions from its unions. It would take tremendous guts on everyone's part. We're not seeing any evidence of that, and we're probably not going to because everybody negotiating for the city was elected with the unions' support." Bankruptcy, he adds, would allow a judge to do what city officials can't or won't: fundamentally restructure the city's labor agreements. As Riordan puts it: "Who wants to live in a city without decent police or fire protection or libraries or parks? Unless we get these pension costs under control, we won't be able to afford any of those things."

Carr would put that question differently: If a bankruptcy judge were allowed to decide whether or how L.A. would meet its obligations to its employees and creditors, "we'd need to ask ourselves, who wants to live in a city that doesn't keep its word?"

The Art of (currency) Wars

I had a feeling the Chinese wouldn't just roll over due to allegations by Geithner, Obama, and Congress of currency manipulation . My take is that they don't want a weaker dollar because they own trillions of our US Treasuries. Duh.

Add to the fact a weaker yuan stimulates their huge export industries. Millions of Chinese jobs are at stake. How plausible is it to think the Chinese government will sacrifice their own workers because of some threats from a debtor nation?

Sure, they'll let the yuan appreciate slowly--but on their terms, not ours.

How ironic that Chinese central bank adviser Li Daokui has a PhD in Economics from Harvard University.

We cannot enter into alliances until we are acquainted with the designs of our neighbors.

- Sun Tzu, The Art of War

Real estate in the sand states

The shell game

For those without a subscription, here is an excerpt:


Major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, according to data from the Federal Reserve Bank of New York.

A group of 18 banks—which includes Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc.—understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods, the data show. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters.

Excessive borrowing by banks was one of the major causes of the financial crisis, leading to catastrophic bank runs in 2008 at firms including Bear Stearns Cos. and Lehman Brothers. Since then, banks have become more sensitive about showing high levels of debt and risk, worried that their stocks and credit ratings could be punished.

That practice, while legal, can give investors a skewed impression of the level of risk that financial firms are taking the vast majority of the time.

Major banks masked their risk levels during the most recent five quarters by lowering debt levels just before announcing quarterly earnings, according to data from the New York Federal Reserve Bank.

"You want your leverage to look better at quarter-end than it actually was during the quarter, to suggest that you're taking less risk," says William Tanona, a former Goldman analyst who now heads U.S. financials research at Collins Stewart, a U.K. investment bank.

Cooking the books is LEGAL?