In From the Network

[I get fascinating feedback. Here is an example. Worth thinking about the IntercontinentalExchange (ICE) and whether the oil price manipulations were part of an intentional hit. Cui Bono? Who benefits from the demise of the US auto companies and dealership network? – CAF]

Catherine:

Thank you for your reply. Yes, we need to use our brain power for more than greed and power on Wall Street.

For me, the ESSENTIAL Document that informs the Inquirer/Taxpayer/Citizen, about the crux of the situation is the Report from the Office of the Controller of the Currency, an institution founded during the Civil War in 1863:

OCC’s Quarterly Report on Trading and Derivatives Activities Fourth Quarter 2008

Today, I met an Investment Banker again that I speak with periodically over the months at a particular downtown Oakland Starbucks. I had sent him an e-mail a few weeks ago with financial links showing doubts about the Federal Reserve balance sheets. This was a concern because the Fed had purchased Treasury Notes, just as the Bank of England was buying Gilts. This process was done because of dramatic stoppage of foreign purchases of our debt via our Treasury notes, particularly by China.

The question was when would the Federal Reserve run out of money to keep propping up the national debt? That could help us to determine the timing of major economic events such as devaluation and a return to inflation.

We know that the TARP funds are almost out and we know that if Treasury returns to ask the government for more money to continue bailing out the insolvent banks, this time they will have significant resistance and constituent outrage.

It may be that the Federal Reserve has been trying to take up the slack.

Today he told me that he had doubts about all the published Federal Reserve balance sheet information.

He referred to the following embarrassing report:

May 08, 2009 Federal Reserve $9 Trillion Off-Balance Sheet Transactions a Complete Surprise to Inspector General The inspector general tasked with overseeing and auditing the Federal Reserve knows pretty much nothing about what the Fed is doing. That’s the conclusion that comes from watching the exchange Tuesday between Rep. Alan Grayson (D-Fla.) and inspector general Elizabeth A. Coleman. See the YouTube video.

Nobody (in the visible public arena) at the Federal Reserve, including the Inspector General, was keeping track of the balance sheets!

I am upset that Manufacturing now constitutes less than 12% of our GDP. I am upset that the Financial Sector is somewhere in the 35-40% of GDP These are dismal circumstances and lead me to question our ability to survive easily.

What is coming will likely be worse than during the Great Depression because Americans are an independent people who wish to live apart from their families, what with the divisive fragmentary nature of sexually active and divorce culture, abuse and multiple step children. Those who cannot move back to their families, will be on the streets. In most Third World countries, unless tribal, the family unit is still intact. Perhaps this crisis will re-construct the family unit? Individual expenses are cheaper within a family unit.

In the Argentina default crisis of December 2001, the unemployment rate rose rapidly for the general population, but it was much higher for people under age 35. Once it reached a critical point, say 30 percent unemployment there was a critical mass flashpoint that escalated to mass political unrest and riots in the streets. So as a stabilization indicator, we need to watch youth below 35.

I highly recommend viewing the movie about the Argentina crisis called “The Take” by Naomi Klein

Also see the Argentina Crisis of 2001 at Wikipedia.

The Argentines had skills toward manufacturing that we currently lack. So our crisis will likely be worse.

Now to fuel your paranoia, we are told to be alert for a recurrence of Swine Flu this fall. This Swine Flu specifically targets young people as opposed to what most epidemics over the ages do by mortally killing only the weak, such as children and older adults. The fact that there is a higher death rate among the strong, young people, is highly suspicious as to the artificiality of the virus and since they are the active population in riots and protests, are therefore “coincidently” targeted. I am just saying.

I was talking with my niece here yesterday who spent the fall and winter living in Russia in an exchange program with her college. During her travels to non-western countries, she felt that the United States of America can learn much about survival in the marginal countries. We do not need many things and could easily cut back. We do not need to be spending thousands on Vet bills for our pets, etc. She felt that even with the dire financial prognosis ahead, that many of the people in the countries she visited would gladly trade places with any of us. We should therefore appreciate the challenges that lay ahead.

Earlier in the day I sent out most of the following to the Investment Banker:

Regarding ICE.

Last summer their name came up relating to the unprecedented record high fuel prices ostensibly attributed to “Peak Oil” as well as veracious consumption by China. I struggled with the DOE websites for data about fuel storage because I knew that in order for prices to remain higher someone had to be taking delivery on their futures contracts.

I knew from my internet searches that ICE kept coming up regularly. I then went to their website. I was able to go everywhere on it except the actual Trading sections which required subscription and membership. ICE came up many times in the summer 2008 Congressional Hearings. About a month later, I tried to go back onto the ICE website, but by then I was limited to access only on the front pages and that was it. They were closing up outside access, a sign that they were not acting in good faith.

I worked for one of the largest companies in the USA for over a decade until the March layoff. Last summer I was on a field assignment for almost a year. There I met a worker who came from the petro-chemical industry. One day we had lunch and he discussed the projects he had been working upon for the past decade. He had been in that industry for 25 years. He said that for his first ten or more years, he was working upon Oil Refinery designs and capacity expansions. Then, about ten years ago, that work dried up and so all he did was Tank Farms. I asked him if they were for the major Oil companies. He said “No”. I asked him if they were for private firms. He said “yes”. I asked him if he would care to tell me the names of the firms. He said no, that was confidential. Realize that we are discussing this in August, just after the major fuel prices were falling. I asked him where these tank farms were located. He said places like Butte, Montana and across the Midwest. I asked him if there were sufficient capacity in these tank farms to absorb storage of fuel to cause the significant rise in fuel prices. He said absolutely. I asked him if the fuel had a shelf life. He said no, not until the final ingredients are added when loaded onto tanker trucks.

While I was investigating the unprecedented fuel price spike last summer, there was publicity about an Oregon investigator who was also tracing the artificial market fuel spikes:

Robert McCullough Research, 6123 SE Reed College Pl, Portland, Oregon

Current Research Reports in Adobe Acrobat format.

Specific Research about the 2008 Fuel Price Spike.

Now per our discussion, here is the Risk Analytics site describing the topic of ICE and Wall Street banks per our discussion:

Kabuki on the Potomac: Reforming Credit Default Swaps and OTC Derivatives May 18, 2009.

Excerpt:

If the NYSE and CME were to trade derivatives, the big banks knew they would not be able to control their fees or capture the profits from clearing. Therefore, they sold The Clearing Corp. to the Intercontinental Exchange, or ICE, a recent start-up in the OTC derivatives business which had been funded with money originally provided by, you guessed it, the banks.

In the deal with ICE, the banks receive half the profit of all trades cleared through the company. And the large OTC dealer banks made sure, through their connections wi th officials at the Fed and Treasury, that ICE was the winner chosen over the NYSE and CME offerings. That’s right, we hear that Tim Geithner personally intervened to make sure that ICE won over the NYSE=2 0and CME clearing units.

Note that the FRBNY forced the approval of ICE through as “bank,” another obvious power grab (include it with the insurance companies, etc). Some internal Board staff argued that this closed, Sell-Side counterparty was not the optimal market solution, but instead allowed the preservation of the dealer oligopoly in CDS. For the dealers, it was the least bad solution that gave Geithner, FRBNY OTC market risk honcho Theo Lubke and the staff of the FRBNY something they could tout as progress. But what it has done is taken too-big-to-fail banks (which aren’t) and bound them together in a too-big-to fail central counterparty for CDS!.

Why is ICE styled as a NY state bank again? The Fed waived bank capital requirements. In fact, this “special” bank doesn’t even have to report the ratios to the Fed as do other banks, an amazing concession which allows everything to be kept secret. If ICE didn’t want to be a bank, it shouldn’t have asked for a bank charter, but the Fed’s accommodation of ICE and the dealers that control it should forever put to rest the notion that the Fed board is able to act independently when it comes to safety and soundness regulation.

If this new central counterparty is so transparent, when are I CE and the dealers going to publish the margin methodology and the central guarantee fund methodology? We understand that each counterparty uses the same portfolio (parametric) VaR method to calculate required margin. The same VaR calculation at a somewhat higher=2 0confidence then gives the guarantee fund contribution requirements.

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In my opinion…

I spent hundreds of hours back in 2000 and 2001 researching the California Energy Crisis. I learned that the deregulation process was “gamed” against the consumer, just as many of the crisis since then as well as the current overwhelming crisis.

Back then I made a huge spreadsheet totaling up all the power plants in California, during the peak of their energy crisis and noted that the total gigawatts were ample to supply the state. The state therefore had no problems meeting energy requirements when run by the former two giant power companies. But when these two giant power companies were divided up and the power plants sold off individually, due to deregulation, somehow the state didn’t have enough power.

Certain unscrupulous Wall Street investors purchased power plants (suspiciously above market price for each powerplant) and taking advantage of the new rules regarding higher prices for emergency power, took many of their plants offline, so as to raise the energy prices to unprecedented levels due to emergency market pricing. It wasn’t just Enron, they were merely the fall guys. California before then was the 6th largest economy in the world, after the energy crisis they became the 8th largest economy in the world. Competition for the top economies in the world are a zero sum game. When one economy goes down, another goes up.

Our company was later hired to build powerplants to make up for the shortfall. I worked on some of those powerplant projects. However many of the powerplants actually weren’t needed in the end and many powerplant builders had big financial problems as a result. This waste was caused by market distortions that exaggerated shortages.

Essentially Wall Street entities, brokers, traders, dealers positioned themselves between Production and the Consumers, like Toll Bridges on major arterial highways, each adding fees, slowing down the movement of goods and inflating underlying commodity prices to cover gate costs. Since no value is added to the underlying product, if government had done this, it would have been called Taxation without representation. Somehow it’s OK for the private sector to charge fees that are essentially taxes, while adding no value, without representation.

Kevin Phillips writings on Bad Money, demonstrates that the government and the Fed have lied to the nation about inflation rates, pretending that inflation was lower than actual and thus concealing from the public, the inflation caused by commodity price distortions stemming from unprecedented high fuel prices, etc.

What we have become, with dominance of the financial sector , is a nation of middlemen, choking the economic movement and flow of goods in the marketplaces. Quick profits are made by wedging gatekeepers between source and destination of goods and services. Profits are made that slow down efficient movement of goods and services in the overall economy and inflating the prices of goods. Essentially this is a parasitic relationship and does not add value to the consumer. We have reached a point where the financial parasite arrogantly believes greater importance than the underlying product or goods.

Internationally the countries that manufacture goods imported to the United States have more control over the price and supply of goods used to make components used in the manufacture of their finished goods. However our own country not only contends with higher labor costs and Unions, but middlemen who distort the prices of component goods and services in ways that do not exist in other countries, preventing us from competing globally in manufacturing.

I have come to believe that commodity trading should be limited to mostly those trading the underlying good or service rather than outsiders. I believe that Airlines hedging Jet Fuel, or Mass Transit Authorities hedging fuel prices should be given priority, as they actually use the underlying product. Outsiders who do not take delivery should be restricted so as to not distort and destabilize markets. However with the advent of advanced trading platforms I know that trading profits can be made from destabilized markets. Though this is true, it hinders useful real world products that use these commodities to create and manufacture, and therefore actual underlying product users cannot thrive in this unpredictable environment.

I have worked at various manufacturers, from Freightliner to the most advanced Semiconductor facilities in the world. Keeping a steady flow of component parts to manufacture finished goods is already a daunting task, what with existing supply and market unpredictability, labor unrest, transportation, weather disasters, etc. Adding gatekeeper middlemen who add price and supply volatility to products and components is the kill shot to manufacturing.

I say this because as one with Engineering abilities, I have my own ideas on new products to introduce into the world markets and I find that Traders, Brokers, who are not adding value, but merely playing in the sandbox like children while seeking only profits, are ruining the prospects for the creation of new beneficial manufactured goods and products.

Another good aspect of the current crisis,…

One good thing, that I can see about what is coming….

Last fall I learned that manufacturing in the United States of America had been reduced to roughly 12% of our GDP. I was shocked. This isn’t a survivable level, perhaps. I then learned that the artificial Financial Sector had bloated to roughly 40% of our GDP. We now know that the Financial sector must shrink, that these levels are unhealthy.

Investors are now happy with single digit investment returns, a temporary condition, as the stages of economic decline wind their way out. When I was living in Oregon’s Central Oregon Redmond-Bend area back in the early 1990s, I was constantly aware that manufacturing operations only made single digit returns. The same as true of farmers.

As a sidelight, the single digit returns on manufacturing were glaring to us then when our Arizona based factory representative (salesmen) worked only a few hours a day, drove top of the line BMW sedans and spent their afternoons at the local fairways and they made roughly 30% markup on each of our products. We stayed up nights and worked through weekends trying to juggle parts inventories, solve Engineering/production problems while these guys nearly effortlessly made three times what we made on each product.

America is a land of middle men. Everyone wants to be a middleman, no one wants to build anything anymore, just broker for parts and products for other people, as the effort is much less and the gains are much greater. That lazy mindset is what is dooming America now. We need manufacturing and farming to not only raise our own standard of living, but also to provide balance of trade exports.

When Investors expect double digit returns they ignore manufacturing and farming, the bedrock of our economic influence. When they do manufacturing and farming, expecting double digit returns, it is outsourced overseas for cheap labor, in order to insure the double digit returns, remarkably even when including the shipping costs.

Perhaps now that investors are happy with single digit investment returns, that manufacturing and farming will return to the United States of America again.

The Investment Banker said that he was traveling to Iceland soon, so I told him about Norway.

Economic Doomsday site with current emphasis on Global Soybeans (remember the German firm Bunge?)

I also asked him about some claims that a cataclysmic economic event would happen this fall in September/October. I told him that virtually every cataclysmic financial event and even some major political ones tended to occur in September/October. We discussed possible scenarios as to why this is the case. He reviewed the past 120 years of financial history and how the major crashes tended to happen at that time in the Autumn. I told him that this timing was always a mystery to me, that I wanted to construct a financial calender to see if there are dates when events coalesce around specific times by taking down the dates when Bonds are issued, when financial reports for various countries are issued, etc. I told him that political events tended to happen around those dates because the underlying causes are, despite the political rhetoric, caused by financial issues, such as coup d’etat to replace Junta leaders who failed to make their agreed International loan or commodity payments. In International finance these events are done casually in the same way that cars are repossessed for payment failure.

BUSINESS MAY 5, 2009 401(k)s Hit by Withdrawal Freezes Investors Cry Foul as Some Funds Close Exits; Perils of Distressed Market
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NYT Article about Norway:

Thriving Norway Provides an Economics Lesson By LANDON THOMAS Jr. Published: May 13, 2009 OSLO

– A Solari blog reader