Tag Archives: inflation

The greatest Ponzi scheme of all time

My oldest son, Bert, is learning to drive. Every day, he drives to school and drives home, with old Enrico riding shotgun.

One thing I have continued to repeat to Bert to the point I am sure of nausea on his part is this: Assume everyone on the road is in a conspiracy to collide with you, but to make it look like an accident. Suspect everyone of waiting for an opportunity to run into you, or to make you run into them.

I have been spending a lot of time investing in small start-ups recently. I begin each due diligence with an assumption similar to the one I urge on Bert: I assume that the CEO is a liar, a thief, a fraudster, until proven otherwise. I take on the persona of an insane PI with an irrational grudge against the CEO: can I PROVE he’s a liar? Can I demonstrate that he’s a thief?

This is why I don’t get the people who were taken in by Bernie Madoff. He claimed to run the old split strike conversion option strategy, where you buy a given stock, and, for example, sell an out of the money call and buy an out of the money put. But simple math based on the huge quantities of money he was managing would have instantly revealed that this simply could not be true: the volume of options actually traded, at least publicly, were a tiny fraction of the volume that Madoff alone would have generated. Who could have been the counterparties on all these options trades? This would have been the very first question I would have asked.

Even without an answer from Bernie, one could have easily come up with the answer oneself: there could not possibly be any counterparties. You can’t slosh around that quantity of options without it showing up somewhere. Someone would be staffing gigantic teams of quants to crunch the numbers on the options trading, and these people have wives, husbands, boyfriends, girlfriends, homes, cars, condos in Manhattan, sewage, and bank accounts. This would be like me claiming to have 55 million barrels of oil stored in a big tank under my modest abode here in the Memorial Villages. Really, Enrico? What did you do with all the dirt you excavated?

Of course, it was a gigantic lie. There were no options. It was just a huge, long-running, incredibly successful pyramid scheme.

This kind of makes me cheerful. Here is yet another group of people voluntary setting their piles of cash on fire. We need all the asset destruction we can stand to stave off the hellish inflation we’re otherwise due for.

How will we know when it is over?

The great unwinding can’t be fully realized without a lot of bloodletting. In the long run, the agony will produce new growth and new prosperity. But it ain’t going to be any picnic.

It appears to me that GM is going to be forced to declare bankruptcy within 30 days. It will be a big mistake for the fedgov to try to prevent this from happening. Does President Obama want to try his hand at running GM? God, I hope he isn’t that stupid. I frankly don’t know whether McCain is that stupid, he has a tendency to come out with some outlandish stances on things.

But, to channel John the Divine a little bit, I think the demise of GM and Ford will be one of the signs that the hellish nightmare is starting to end. When CNBC is off the air and that same place on the dial hosts a channel all about how to convert dryer lint into overalls, and the best way to get your rutabagas to pollenate, that will be one of the signs that the unwinding has reached at least the halfway point.

Man, there’s going to be a lot of unemployment! This is going to greatly befuddle the ratsocrats, because the big corps won’t be the agents of increasing employment. They’ll be forced to liberally fertilize small business, or start their own WPA.

If they go with a WPA, I have a couple of pet projects: we need a new national power grid, and we need a nuke plant for every half million people. We could also have a go at building that 40 square miles of PVs in the Utah desert.

I have been pounding the table about inflation, the money supply, and the evilness of fiat currencies. I am starting to wonder, I confess, whether the fierce scale of asset destruction might actually be enough to soak up the invented cash. Some smart people think we’re going to have deflation. I horselaughed this, but i have tried and tried, and i just can’t find any meaningful way to analyze it. You can get pretty good data about money supply growth, but gauging the wiping out of assets i have found to be impossible.

I think the timescale of the great unwinding is measured in decades. Japan’s torture commenced in the 80s, and they’re still suffering.

Credit crisis begins its European Tour

Enrico has long maintained that the credit crisis would eventually infect Europe as well. This is certainly coming true. Ireland has had to proclaim that all private bank deposits would be guaranteed by the government to forestall runs on its banks. Today, Germany has followed suit, to try to stave off runs on its banks. The Danish government has also, at this very moment of writing, which is early Monday morning in Denmark, guaranteed all Danish bank deposits.

Sportsfans, this is going to get uglier still, and no significant economy is going to be immune.

France, Germany, the UK, and Italy are all lining up to make it clear that they will not allow any of their banks to fail.

Belgium is in the tank, too, trying right now desperately to deal with the failure of Fortis. Iceland’s banks are under pressure, and the government there is trying to shore up liquidity and quell panic withdrawals which would inevitably lead to the failure of its banks.

Spain’s banks are sure to come under pressure. It is Spain which has perhaps the worst real estate and real estate lending crisis in Europe, and I just can’t believe its major banks are going to survive without massive infusions of invented cash. That word really is “invented.” All these nations have fiat currencies, and they have all apparently decided that they will print whatever quantities of currency are needed.

There is no place to hide. All currencies are worthless, all currencies depend on the faith of the community. Pay no attention to the man behind the curtain.


What will Trichet do? He will have to cut his rates, as the aroma of panic quenches all economic activity. No one will lend, no one will borrow, everyone will hoard his worthless pile of currency in desperate fear of the morrow.

Uhh, Bob? Can I have a word?

Enrico has to be Bob Brinker’s biggest fan. He is well nigh infallible. Enrico was commuting to his client location on Wall Street one Monday morning in January 2000, having just flown into New York, and his cell phone rang. It was Gladys! Enrico will always remember that moment, riding in the limo on the FDR, passing by the fish shops in utter lower Manhattan, when Gladys told Enrico that a missive had been received in the mail from Bob Brinker, alerting us to SELL EVERYTHING!

It was a sell signal. Bob’s signals of any kind are few and far between. Enrico had been following Bob for a long time, and he was ready to act instantly on Bob’s advice. Right there, in the limo, Enrico dialed up all of his brokers and sold everything.

Bob was absolutely right, albeit a little early. The market went sideways for quite a while in 2000, but ultimately, by late 2000, it was crystal clear that a horrible disaster was afoot.

Then, in March 2003, Bob issued a “buy” signal. This signal was totally uncanny, he bizarrely issued the signal on the VERY DAY of the ABSOLUTE LOW in the S&P 500.

Of course, Enrico robotically followed his advice.

Enrico is far, far wealthier today than he would have been had he not followed Bob’s advice on these two occasions. Enrico avoided most of the carnage of the meltdown that commenced in 2000, and was johnny-on-the-spot to profit from the rally that commenced in March 2003.

So, Enrico is very troubled right now to be forced to differ with Bob on his current outlook on the stock market.

Frankly, Enrico is not even too sure what Bob’s outlook IS right now. Enrico just got a bulletin from Bob recommending a dollar-cost averaging approach for new money, but, previously, Bob has focused in his discussion on the virtue of buying the broad market at some specific low price on the S&P 500. Enrico can’t remember exactly what this number was, but for his purposes it doesn’t matter, because Enrico has no intention of buying the broad market right now under any circumstances.

So, Bob’s latest bulletin is a bearish pullback, granted, because he has stopped talking about buying at some theoretically bargain price.

Here’s the problem: inflation. The money supply of USD is expanding at an annual rate of something like 20 to 30%. The true rate of inflation has got to be at least 15% annually. It is hard to analyze because the offset against the massive redhot printing press is the rampant destruction of financial assets represented by events such as the knock-down price of Merrill, and the execution of Lehmann. It is hard to get a firm handle on the quantity of the bonfire of USD represented by these kinds of events. What will the value of Merrill’s holdings ultimately be in the hands of the Skank of America? No one knows.

Bob claims to have a financial model which drives his market timing calls. He has something, for sure, because his track record is publicly verifiable. I think, though, that he is using the bogus official inflation numbers in his model. If he has a model which considers that inflation is about 4 or 5%, that model yields a dramatically different answer than a model which considers that inflation is 15%.

I think Bob accepts the official inflation numbers, because he frequently admonishes callers to his weekend radio show that so far, there is no evidence of high inflation.

I have heard him have the following conversation with callers:

caller: Bob, I’m worried about the collapse in the dollar. The dollar is worth half what it was worth in terms of the Euro compared to seven years ago.

Bob: And, uh, in what currency do you earn and spend your money?

caller: the US Dollar.

Bob: So, why do you care about the value of the dollar against the Euro?

I cannot note the caller’s response to this rhetorical question. I don’t know what it typically is, because i am always yelling so loud at Bob when I hear this response that I never hear the caller’s answer.

This answer doesn’t work for me. Pretending that we’re not having inflation because of the fedgov’s bizarre transparent manipulation of the official inflation figures is a bizarre stance.

I am listening to Bob’s radio show right now, and he is even right now rabidly poo-pooing the notion that we’re going to have inflation.

How not, Bob?

I can answer that for him: there has to be enough asset destruction and enough economic contraction to offset the printing press. How can anyone be sanguine that this is the case? And, if it is, how can one calmly buy the broad market?

Bob, can i have a word?

OMG 9% YoY

Our hotel on Trinità dei Monti gets Squawkbox. The yammering bohunks are arguing about the PPI number: 9 per cent year over year, if I heard it right.

Well, take it from Enrico, if the rigged official lying headline number is 9, you can bet your gold bullion that the real rate is well into the double digits. Just check the growth in M3. O, wait, you can’t, isn’t that convenient?

A friend of mine is fond of asking, “what was the best performing stock market in 2007 in nominal terms?” The correct rejoinder is “who cares?” I think it was Zimbabwe, up about 1300% in nominal terms. Its performance in real terms? Down a shitload.

Don’t allow anyone to discuss with you the performance of any asset class, or any asset, in nominal terms. It is not information.

Trichet to boost euro interest rates

It is expected that the EU central bank head, Trichet, will today BOOST its key short rate. Trichet is correctly pointing out that massive inflation is on the horizon. Look for further crushing of the dollar, a nominal rally in precious metals, and of course, a spike in nominal oil prices.

I still say that, eventually, Trichet will be forced to competitively devalue the euro. Today’s probable action will make the ultimate reaction all the more theatrical.

It’s Barney Time

Barney Frank, chairman of the House Financial Services Committee, is giving a speech today in Boston.  Will he announce his resignation, out of shame and sympathy with Eliot Spitzer?   Well, the smart money says “no.”

This speech is likely to spell out his full position on the economic crisis, presumably touching on his views on the Bear Stearns execution, and commenting on Helicopter Ben’s performance.  Bernanke began his four year term in January 2006.  It seems likely to me that the new president, whoever he is, will likely replace him at the first opportunity, if not sooner.

Congress has to trot out new legislation.  This is what Congress does.  Barney will most likely outline what he will propose.

In my view, congressional legislation passed in response to an economic crisis is wrong-headed more than half the time, as witness Sarbanes-Oxley, and a lot of the New Deal legislation.  In this case, however, I must reluctantly conclude that a seminal event leading up to this point was the repeal of the Glass-Steagal act.   I think we need to put it back.

At a stroke, the repeal of Glass-Steagal set the stage for the long-running huge inflation of the money supply.  Prior to Glass-Steagal, brokerage assets were not M2, could not be the basis for lending, other than mortgage lending.  Repeal has set the scene for the case now where we are facing bank failures in the next wave, due to their illiquid positions in securities.

Listen carefully to Barney.  Think to yourself:  do you want to amplify his proposals by electing a ratsocrat president?  I don’t pose this facetiously.  Though I kid Barney over his prostitutional ventures, he’s not a stupid guy, and he may sort through this mess and have a useful take.

The Market Oracle

helicopterbensmall.jpgI like this picture so much I am borrowing it from this excellent article.  Be warned, though, don’t read it unless you have a strong stomach.   I have added The Market Oracle to the blogroll.  Thanks to Katarina.

It seems to me inevitable that the US Treasury will eventually formally take ownership of the dodgy derivatives-laced unpriceable mortgage bonds.   This is going to be RTC on more ‘roids than a billion Barry Bonds.

Look for legislation in the next congress to ban the adulteration of securities with derivatives.  Yes, of course, that’s crazy, but that’s never stopped Congress before.

I’m watching Jim Rogers on Bloomberg right now.  This is the guy we all derided as Mr. Bowtie in the 90s.  He was right, but he was early, way too early.  I think he turned bearish in the early 90s and missed the whole party. 

He says the Fed should have let Bear go down, should have stood on the sidelines and let the dominos fall where they may.  He might be right about this.  But Bernanke doesn’t have the stomach for this, just as Volcker’s predecessor didn’t have the stomach to boost the short rate to 15% to drive a stake through inflation’s heart.  Who is going to succeed Bernanke, who is going to give the economy the tough medicine needed to restore the dollar and force the unwinding?

Ugly Economy Part Seven

Here is an excellent article from the London Telegraph about the global economic crisis.   The article points out that last week’s US Treasury auction was a bust, with foreign investors standing aside.  Foreign investors took only 5.8% of the auction, compared to an average share of 25%.  Also, I didn’t know this, but Italy also had a bust of a bond auction last week, a real bust, in which they were unable to place all the bonds they were seeking to sell.

 Folks, this is getting very, very ugly.

 As I have noted in these pages, I am unable to figure out why a foreign investor would lend money to the US government at a rate in the 1s or 2s, when monetary inflation is 20% annually and CLIMBING.  Why would anyone lend any money to any foreign government at such a huge loss?  I don’t get it.  And I think, increasingly, foreign investors won’t get it, either.