A Peek Inside the Bloom Box

If you haven't heard of the Bloom Box, you will. Whether or not this device can deliver on its promise or not, the future of energy is just now being written and thirty years from now things will look very different than they do today. It is innovation such as this that keeps me optimistic about the future, despite the tremendous difficulties we currently face.

Scott Dauenhauer CFP, MSFP, AIF

Prechter: Biggest Bubble in History

I'm fully aware of the doom that is being put forth in this video, its not my intention to scare, simply to show some other viewpoints. I'm cloudy as to Prechter's actual record, he defends it while his detractors look at him the way I look at Jim Cramer (as a loon). Regardless, much of what he is saying makes sense. While a year ago I was a staunch believer that we were in for major inflation (which I do believe will happen at some point) it is now entirely possible that deflation will be the order of the day. How else could one explain Bernanke's continued program of zero interest rates during an economic recovery. Either we are recovering and rates needs to be raised or Bernanke doesn't believe we are recovering, but won't say that publicly - thus the zero interest rates.

Combine this with the coming wave of foreclosure's from Option ARM's, commercial real estate write downs, sovereign and municipal defaults and you get a recipe for a bunker mentality and deflation (which actually might be good, but Bernanke won't allow it).

All I'm saying is that two years ago I would have dismissed this guy as a crank, today I don't. It doesn't mean I buy into what he says as if its gospel, but no longer do I dismiss him outright. Neither should you.

Scott Dauenhauer CFP, MSFP, AIF

The Nation: An Update on Goldman/Fed Crony Friedman

I posted on this after the Wall Street Journal article came out last year and again in a Fed Independence post. Essentially Stephen Friedman, a Goldman board member was also on the board of the New York Fed as the "public" representative, of course when Goldman became a bank holding company it was suddenly under the New York Fed's oversight. Friedman was a board member of the overseer and the overseen.....something that is a conflict of interest and not allowed. So what did the upstanding Friedman do? Did he do the right thing and resign or sell his Goldman shares? No, he stayed on with the Fed, sought an exemption and bought more Goldman stock with what could only be insider information.

Great job to the Nation for keeping this story alive.

Scott Dauenhauer CFP, MSFP, AIF

The Biggest Story That Is Being Completely Ignored

Basically, It's Over
A parable about how one nation came to financial ruin.

Click on the title to this post to go to the parable referenced above. This is the most important parable you will read in 2010. Just who is the author of this parable? Before I reveal his name please know that on almost any given day you can find articles saying similar things, sometimes by people who deserve respect, sometimes by those who don't.

This article however was written by Charlie Munger. Many of you may not know Charlie, but I'm willing to bet you know his counterpart....Warren Buffett. Charlie Munger is the Vice-Chairman of Berkshire Hathaway and is arguably one of the greatest investor minds in history, you can visit his Wikipedia page here.

It is because of WHO Charlie Munger is that this parable is so important. Charlie was born in 1924, he is an investment genius and understands economics better than most everyone on Wall Street and all politicians. Thus this parable about the demise of Basicland, AKA America is so powerful and such a big story. Imagine if Michael Jordan came out and said that the NBA was no longer the most competitive basketball league and in fact if it didn't change dramatically soon would be ruined. This would be a huge story, yet the Michael Jordan of finance has penned a parable saying "It's Over" and nobody noticed. Its not even a busy newsweek, yet nobody is talking about Charlie Munger's parable and its implications for our future. Does it not bother anyone that he mentions a year, 2012.

Munger uses the parable to strongly support another old schooler, a gentleman by the name of Paul Volcker - he refers to him as "Benfranklin Leekwanyou Vokker". I've supported the Volcker reforms and it feels good to know that I'm in good company.

I urge you to read this parable and pass it on to everyone you know.

Scott Dauenhauer CFP, MSFP, AIF

Simon Johnson: The Doomsday Cycle

A great article detailing why we are stuck in a boom-bust-boom cycle and what needs to be done to stop it.

Scott Dauenhauer CFP, MSFP, AIF

Bloomberg: America Tied Up By Record Debt

A great illustration of our current debt problems, Bloomberg has been doing some really nice reporting with visualizations that make the concepts easy to understand, click above.

Scott Dauenhauer CFP, MSFP, AIF

More Proof of Bank Insolvency / Mark-to-Market Reality

Last May I wrote a piece theorizing the market rally was started and was due to the change in accounting rules. The article is below. I also have argued for the past two years that the banking system is effectively insolvent and this has been hidden by the loosening of accounting rules. If the above linked to Bloomberg article isn't further proof, I don't know what is. Mark-to-Fantasy lives so that banks can appear profitable when in fact they are losing enormous amounts of money. Viva La Bankers!

Meridian: Mark-to-Market Rally

Scott Dauenhauer CFP, MSFP, AIF

Warren Buffets Berkshire Letters - A Complete History Link

You can read all the books you want (and I encourage you to do so), but I promise is you read these letters you will learn more than any book, while being entertained and enlightened.

Scott Dauenhauer CFP, MSFP, AIF

A Good Primer on Treasury Auctions

Citibank: Proof Positive of Idiocracy in Management

Here is the latest from those brilliant thinkers over at Citibank, the mother of all zombie banks:

“Effective April 1, 2010, we reserve the right to require (7) days advance notice before permitting a withdrawal from all checking accounts. While we do not currently exercise this right and have not exercised it in the past, we are required by law to notify you of this change,”

If you want to start a bank run, here is a good way to do it - tell your clients they may not be able to get their money out starting in about 30 days (okay, they may have to wait up to 7 days).

Not only is this a foolish thing to say, it turns out that it was a mistake in the first place. Evidently it was only to go out to Texas customers, but somehow made it to everyone.....further proof positive of the idiots running this bank.

Chuck Schumer started a run on IndyMac Bank not so long ago with less frightening words than the ones spoken above.

Furthermore, given that the taxpayers own north of 30% of this bank and that the government has been heavily involved in keeping it looking solvent (it isn't even close) you would think that this might be the safest bank to put your money. Of course you would be wrong and now they are telling you that if you favor daily liquidity maybe you should look elsewhere - not exactly confidence inspiring.

Why this bank isn't broken up and put out of its misery is a mystery to me, of course the deposit holders just might make that a reality.

Scott Dauenhauer CFP, MSFP, AIF

P.S. For the record, I have not done any research into what other banks may already have this provision, so it is entirely possible that this post, rather than being insightful is just...well...incitefull and populist in nature (not really my style, but either way I can't stand Citibank).

President, Congress, Treasury and Fed Fail to Learn Lessons of Crisis

John Hussman has a great piece (dated 1/25/2010) which he titles "A Blueprint for Financial Reform". The first item on the agenda is as follows:

"1) Immediately vest the FDIC (or other regulator that has a strict consumer-protection mandate) with the authority to take receivership / conservatorship of distressed bank and non-bank financial institutions, including bank holding companies, in the event of insolvency.

It is essential for the public and policymakers to understand that the "failure" of a financial institution does not generally imply losses to customers or counterparties, but only to its stock and bondholders. The FDIC efficiently handles scores of bank "failures" annually by taking receivership or conservatorship of the whole bank, typically selling its assets and non-bondholder liabilities as a single going concern (which can then be recapitalized), wiping out stockholder equity, and providing partial recovery to bondholders with any residual. This receivership process works.

Bank failure through the receivership process - even involving major banks - does not create economic harm or even loss to depositors. Witness the seamless and almost forgettable receivership of Washington Mutual two years ago, which was the largest bank "failure" in history. We should not be devoting public funds to bail out such failures, outside of the receivership process. What should, and must be avoided are disorganized Lehman-style failures requiring piecemeal liquidation of going entities. This distinction is crucial. The disruption created by Lehman's disorganized failure need not have occurred if the FDIC had been vested with authority to take the going concern into receivership and to provide partial recovery to bondholders with the proceeds of Lehman's intact transfer."

The original failure happened after Bear Stearns. Paulson, Geithner and Bernanke knew that a disorganized failure would cause major disruptions, yet they did not push for such resolution authority in Congress - then Lehman hit and exposed even further the need for such authority. Now congress and president are aware of the issue and have been since the Lehman failure, yet there has not been any progress on this most important front. Both parties are likely to blame the other, but at the end of the day both parties are derelict in their duty to the American people by not coming together on a narrow piece of legislation that everyone agrees is needed.

I encourage you to read the remainder of Hussman's blueprint.

Scott Dauenhauer CFP, MSFP, AIF

FDIC Rebuts Viral IndyMac Video - Still Not Being Honest

The FDIC has issued a press release rebutting the video that is making its way around the internet (and posted on this blog). Yet the rebuttal isn't entirely convincing. While it appears there may be some inaccuracies or rather some things left out about the IndyMac loss sharing agreements, on the whole it does appear that OneWest has big incentives to NOT work out loans.

Click the link to read the NY TImes story.

Scott Dauenhauer CFP, MSFP, AIF

Deflation vs Inflation & The New Inflation Propaganda Machine

I've linked to two articles that appeared this morning, one across the pond that is sensible and one from Paul Krugman's NY Times blog that feels like ghosts from the past. Embedded in this post is a film produced in the 1930's depression that was basically inflation propaganda - an attempt by the government to get people to spend their money and to embrace Inflation.

In the Financial Times article we see the error of decades of forced inflation, in the NY Times article we see a new round of Inflation Propaganda taking root. Paul Krugman is firing the opening salvo in what will likely be an all out assault to convince the American people that inflation should be embraced, not feared. Like my previous post about Richard Koo - the failed economic ideas of the ghosts of our distant past are being embraced and re-introduced so that politicians of all stripes will have politic cover when they allow even greater deficits and inflation. The irony of course is that there is a possibility that neither will happen (deficits and inflation), though given the world's love affair with the Dollar we just might see a stronger Dollar coupled with higher deficits and inflation - a truly odd scenario (which can only last for so long). This is why I tell people that even though I am extremely concerned about investing in stocks I don't discount another boom. P/E ratios are historically high, but we saw that they can go even higher when their is euphoria. Given the housing market's woes, commercial real estate and sovereign default possibilities - this time might not be so easy to climb the wall of worry.



Why we should not fear the spectre of deflation

The Case For Higher Inflation

The Koo Coup is Koo Koo - A Modern Day Keynes Arises Just In Time To Save Us All

John Maynard Keynes lives (as if he ever died) - he has been reincarnated to the nth degree in Richard Koo, the politicians new savior.

The Great Depression brought us Keynes, rather it gave politicians a reason to spend as much money as they wanted. The new depression is about to bring us our modern day Keynes, a man named Koo. Richard Koo has a message for the world and it makes the Keynesian message seem dull and outdated, yet his message will change the world and he will soon be the politician's best friend in one last round of massive bubble stimulus. The Koo Coup is making its way to America and the message is, well, koo koo.

An article appeared today on The Big Picture blog - it attempted to skewer those politicians who have become deficit hawks by pointing out that they certainly didn't care about the deficit when they were in power. I'll give Mr. Ritholz credit (the blogger of Big Picture), he is absolutely right about all these politicians who freely spent our money and created massive deficits only to now find religion. But Mr. Ritholz takes it a step further, promoting the Keynesian...now Kooian idea of massive government spending to get us out of the depression. You can link to his article here. Now Mr. Ritholz doesn't exactly endorse the idea, but he isn't bringing it up so that you will forget about it.

We are beginning to see the rise of the "Koo Koo" and its dangerous. Many of you think our current crop of economists are a little coo-coo and of course they are - but the newest crop of economists will be the Koo-Koo's and they will be stars. Politicians will love them, the media will love them - and why wouldn't they? The Koo-Koo solution is really just the Ben Bernanke solution - drop money from helicopters to fund any and everything that moves.

Get ready for the Koo-Koo's, they are coming.

Scott Dauenhauer

Ferguson: A Greek Crisis Coming To America

A very interesting article by well known author Niall Ferguson, a few tidbits:

"It began in Athens. It is spreading to Lisbon and Madrid. But it would be a grave mistake to assume that the sovereign debt crisis that is unfolding will remain confined to the weaker eurozone economies. For this is more than just a Mediterranean problem with a farmyard acronym. It is a fiscal crisis of the western world. Its ramifications are far more profound than most investors currently appreciate."

"What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch. Deficits did not “save” us half so much as monetary policy – zero interest rates plus quantitative easing – did. First, the impact of government spending (the hallowed “multiplier”) has been much less than the proponents of stimulus hoped. Second, there is a good deal of “leakage” from open economies in a globalised world. Last, crucially, explosions of public debt incur bills that fall due much sooner than we expect."

"Although the US household savings rate has risen since the Great Recession began, it has not risen enough to absorb a trillion dollars of net Treasury issuance a year. Only two things have thus far stood between the US and higher bond yields: purchases of Treasuries (and mortgage-backed securities, which many sellers essentially swapped for Treasuries) by the Federal Reserve and reserve accumulation by the Chinese monetary authorities."

"On reflection, it is appropriate that the fiscal crisis of the west has begun in Greece, the birthplace of western civilization. Soon it will cross the channel to Britain. But the key question is when that crisis will reach the last bastion of western power, on the other side of the Atlantic."

Scott Dauenhauer CFP, MSFP, AIF

IndyMac Debacle - Thank You FDIC

I've written nice things about Sheila Bair in the past, but at this point it is clear she's in over her head. She may have been a voice of reason, but her actions have left Americans worse off. Sheila Bair at the FDIC must go. I recently posted a link to an article about mortgages she obtained that didn't exactly have an ethical feel to them, now the final straw has been heaped on the camel with the revelations in the following video about loss-sharing agreements the FDIC negotiated with what is essentially a hedge fund owned by George Soros, John Paulson and Michael Dell. This video is shocking and it explains a lot. Turns out Principal Reductions on mortgages are taking place - but only for the hedge funds buying up the mortgages - there is no deal for the homeowner. If this video is true (and my experience says it is) than there needs to be a federal investigation, a resignation and finally a re-structuring of this deal (and others). You'll soon learn why we have a foreclosure crisis that won't abate.

Naked Capitalism....The Real Emperor With No Clothes

I don't usually like to get into it with bloggers, but this above linked too piece is just plain stupid.

The author makes the case that the Federal Budget is not like a Household budget - he is what I would term a "Forever Deficit Apologist", or an FDA for short. Put aside the notion that one can be an FDA regardless of political persuasion (I challenge anyone to name ten elected congresspeople of any party since the 70's that wouldn't fall into the FDA definition by either endorsement or action).

A couple of my favorites are that because the United States won't die, like households eventually do, the piper never needs to be paid.....perhaps somebody should tell that to our friends over in Greece who seem to be suffering a stroke right now.

Or maybe the line that we've been in debt for 173 years and we're still alive and ticking (notice I didn't say kicking). To believe this you must ignore all of the rest of history, not an easy thing to do - but a requirement if you're an FDA. The author also fails to mention that the increase in our debt has been accompanied by a decrease in our purchasing power - something on the order of 95% since the creation of the fed.

The government has the power to tax is another arguement (households don't)...this of course ignores the affects of that taxation on growth and behavior.

Without saying it, the FDA's will use trickery, like the above linked too post in order to make you believe that Deficits Don't Matter.

Deficits Do Matter.

As for the Federal Government Budget being different than a Household Budget - I agree that they are different in the short term - we (the household) must deal in reality, the government can put that off for a long time, but not forever. Just like with a household budget, a day of reckoning will come. Perhaps its not one day of reckoning, but a series of long, drawn out needle pricks that slowly devalue the debt and with it the purchasing power of all Americans.....you gotta face up to your bad habits, one way or another they will catch up with you (mind you, my bad habits will never catch up with me because I'm one of the Wobegon's).

The real problem we are facing is the justification of the FDA's, this must stop.

Scott Dauenhauer CFP, MSFP, AIF

Will The Real Keynes Please Stand Up?

Fortune has a great article that talks about what John Maynard Keynes actually believed, versus what has been credited to him by today's politicians. My previous post was basically a response to the misunderstanding of Keynesian by Krugman and Reich, this article does a great job of explaining what Keynes really thought, its a great read. Click link above.

Scott Dauenhauer CFP, MSFP, AIF

Note To Krugman and Reich: Deficits Matter and Its Not Political

I talk to a lot of people. Some are clients, others are pension committee members, some work for brokerage firms, news organizations, mutual fund companies and some run their own businesses. These people are Republicans, Democrats, Independents, Conservatives and Liberals. There is one thing that has seemingly united them, though you wouldn't know by today's opinion pieces in the New York Times (Krugman) and the Wall Street Journal (Reich) - its the deficits.

You see, most people I talk too realize that you can't spend money you don't have or generally agree that burdening future generations with this generations debt is wrong. These people are concerned. They are concerned about our massive deficits and our massive national debt. Yet today both Paul Krugman and Robert Reich in a Dick Cheney moment (yes, the irony is striking) both essentially said that deficits don't matter and what is needed is more spending in order to pull us out of our financial crisis.....which was caused by overspending and too much leverage. Really?

Here is the economic rational. John Maynard Keynes is credited (rightly or wrongly) with the idea that government should pick up where consumers and business left off in spending during recessions in order to lessen the recession and put the country back into a growth mode. So when a recession hits and spending drops, the government should borrow or print money to cover the shortfall - then spend that money to keep the economy growing. When things improve that money can be paid back.

Here's the problem with that way of thinking: the money is never paid back, ever. In addition, why does the economy have to grow no matter what? Shouldn't excess be wrung out? Consumer spending was in a bubble, much of the excess was due to money being borrowed on credit cards and from homes, it was unsustainable. If the spending was unsustainable to begin with, why should the government step in to sustain it (furthermore, how does the government know what the right level of spending is?)? How is the consumer going to make a come back to those unsustainable levels - they can't, thus government spending will not be temporary and the deficits will rise not fall and never be paid back.

Deficit spending isn't always bad, but it certainly DOES matter and especially now when our nation has become so over-leveraged. The idea that we aren't spending enough or running large enough deficits, or that we will address the deficits later is so ridiculous as to make one wonder if Krugman and Reich thought they were penning articles for The Onion.

The Bush administration ignored deficits and there was some rational, we had been attacked and were at war, however they went to far and took advantage of it. Republicans spent so much money that the saying "spending like drunken sailors" became obsolete (that is "sailors" was replaced with "congress"). The Democratic congress has been no better. As long as people believe that Deficits Don't Matter we will continue on a collision course with a destiny none of us want to imagine.

It seems to me the people get it, regardless of their political affiliation, class, color or religion - the one's that don't are our politicians and of course Krugman and Reich.

The US can't default on their debt, technically, but continuing on believing that deficits don't matter and that government must always pick up the slack is a recipe for continued boom-bust cycles that end up hurting Americans and eliminating jobs.

I'm not saying balancing the budget will solve our problems, its much deeper than that, but a sound fiscal policy with sound financial institutions is what we need in order to place our nation back on the path to sound growth. We've waited to long to do this and now the pain will be much worse when we finally adjust, but it will be better than living in a country that is chronically in pain.

As for Krugman's belief that the deficit hawks are only about politics and trying to elect Republicans....perhaps he should listen to everyday people, who feel the same way as I do and who are scared to death to elect a Republican or Democrat because they see little difference.

Scott Dauenhauer CFP, MSFP, AIF

Opinion: The Ridiculous Bank Fee

I've linked to a commentary by John Hussman which I hope you will read, it is very similar to my 2010 commentary on financial reforms....but much better. I also encourage you to read Paul Volcker's Op-Ed in the New York Times here.

Now on to my opinion. I want to make clear that I support the proposals more or less that president Obama has put forth via Paul Volcker, though I completely disagree with this bank fee idea. The Wall Street Journal reported the following:

A key Obama administration initiative is a fee aimed at the nation's largest financial institutions, the recipients of some of the most government aid since the start of the financial crisis. Mr. Geithner said the fee will ensure that taxpayers are repaid for their assistance.

This is ludicrous and simply a tax on people who use banking services. Make no mistake, corporations do not pay taxes, people do. This fee will be paid by the big banks that needed government help (whether they needed it or not), but they will simply raise fees or increase spreads to pay for it which simply passes it on to the consumer. Let's not forget that this fee is to compensate taxpayers for the banks causing the failure of our financial system.....at least that is the story. In reality it wasn't just the banks who caused The Great Panic, they certainly played their part but for politicians to absolve themselves (Republicans and Democrats) of any responsibility and demagogue bankers strikes me as the height of hubris and arrogance. After all, what about GM, Chrysler and Fannie and Freddie....or AIG? It is my understanding that none of these entities are subject to the fee, yet weren't they part of the problem? I don't believe anyone should be charged a "fee", instead we should implement real reform and stop thinking that we can continue as if nothing has changed, it has.

If only it were so simple, a boom caused by banks causes a bust, government saves them, then slowly gets repaid over time.....only that is not how it works. Has anyone mentioned the role of the Federal Reserve?

The bank fee is simply a political tool used to divert your attention from the real issues facing our financial system, unfortunately it detracts from the reforms the administration is pushing that could have positive long term affects for our system.

At the end of the day the bank fee is stupid. Of course, if the bank fee is what has to happen in order to get other reforms that are actually needed through the legislative process and into law....I guess I'm willing to accept it, but I won't like it.

Scott Dauenhauer CFP, MSFP, AIF