The Legal Ponzi Scheme

The 14th Amendment reads, "The validity of the public debt of the United States, authorized by law ... shall not be questioned."

What happens when Congress fails to make new laws to keep the Ponzi scheme going (raising the debt ceiling) as is now being threatened? You need to understand the definition of this scam to to think about it, so I present the definition of the fraud made famous by Charles Ponzi back in 1910, with some tweaks by yours truly to bring it up to this century:

A Ponzi scheme is a fraudulent government budget investment operation that pays returns to Wall Street, Banks, Medicaid, Medicare, Social Security, Defense, Federal employees, Congress, Unions, Special interests, Welfare, Food Stamps, Grants, Student Loans, separate investors, not from any actual current generation's taxes profit
earned by the organization, but from their own money or money paid by subsequent generations investors. The congressional budget Ponzi scheme usually buys votes to stay in power or gain office entices new investors by offering returns other people that actually have to pay for it
investments cannot guarantee, in the form of outrageous salaries, pensions, perks, promises, programs short-term returns that are either abnormally high or unusually consistent. The perpetuation of the returns that our government a Ponzi scheme advertises and pays requires an ever-increasing flow of money from the banking oligarchy comprised of privately held central banks disguised as legitimate government entities with names like "Federal Reserve" who print the money out of thin air and charge us interest on it investors to keep the scheme going.

The system is destined to collapse because the earnings of the present generation earnings, if any, are less than the spending and promises of past generations payments to investors .

If the White House were to declare the debt ceiling unconstitutional, it could continue to meet its financial obligations. However, "Obama would have a hard time justifying issuing new debt to pay old debt" according to George Bush's former Office of Legal Council head Steve Bradbury.
A hard time? Extending fraud that is punishable by prison time in the real world would be "hard"? Well, I guess that's why Congress has quietly raised the debt ceiling 10 times in the last 12 years. If it's LEGAL via Congress, it's OK. Otherwise, you get the Madoff Treatment. Fear not, citizens. Our tireless leaders will find a "compromise" somehow, someway. Otherwise, the reality that as a country we are already in default and can't possibly pay off our debts or even meet our current obligations would surface. That cannot be allowed. Is it just me or does that can not go quite as far when you kick it these days?

It's almost too QEasy

When I last updated it was March of 2011 and the Bernak was dutifully manipulating markets "higher than they otherwise would be" via Quantitative Easing 2. Not unlike Microsoft Windows these things need to be updated constantly to kick the can further keep up with the times. Versions 1 and 1.5 didn't do it, so 2.0 was unveiled in August of 2010.In March the Smart money was just starting to move out of the market as seen in the above chart, and I made my calculations...

The Bernak has tried to make investing "so easy a caveman can do it" FED QE. You buy long. so I decided to chart how far $2.1 Trillion buys you in SP-500 points in the last post. Please reference the math in that if you'd like but the nuts and bolts was a close below SP1295 (it actually hit 1249. Darn Tsunamis). Then, a vertical gap-reversing non-stop march to new highs with a target of 1385. Kind of like this one that went to the rally high of 1370. QE2 Ends in June, just 8 trading days and a paltry $30-50 billion of Market Manipulatin' goodness left.
So where does that leave us? Now that EVERYONE knows how the game works, the time-trusted practices of statistical analysis, mean reversion, FUNDAMENTALS (what the hell are those?) that have been rendered mute by the Bernak will re-emerge, however briefly. How briefly? Glad you asked. David Tepper, manager of the Appaloosa Hedge Fund, famously called the QE2 rally spot on. The money quote when asked "what's going to go up?" "EVERYTHING". And how. Since last August gas has doubled, corn has quadrupled, cotton is up 50%, wheat is up 70%, oh crap wait that's not because of the FED. Ben said so, and he wouldn't lie. The SP-500 went up another 35%. THAT was because of the FED. None of the other stuff. Got it?

I digress. The market will not be making new highs without Mr. Ponzi or "the Ponz" as I like to call him making another apperance in the form of QE3. The bottom 90% of America has only been participating in the "Recovery" by massive defaults on nearly every form of debt, not earning more money. They're getting really pissed about all those price increases in food, fuel, basic necessities and everyfuckingthing except their paycheck that the Bernak is NOT responsible for. (On that note Ben says that without wage inflation, there is no inflation, if that makes you feel any better.) The "political will" isn't there for another "stimulus". Ben famously referenced Milton Freidman's "dropping money from helicopters" in regards to helping the economy and earned the moniker "helicopter Ben". In the interests of logistical honesty let's call him B-52 Ben because how in the hell would you fit $2.2 trillion in choppers?. B-52 Ben has had to close the money-bomb bay doors for a time to let things cool off. While this goes on, the SP-500 will fall. Why? The classroom rule the Bernak has instituted FED QE. YOU BUY LONG. has predictably created the inverse rule as well in the real world FED NO QE. YOU NO BUY LONG. What else would you expect when asset prices are, in Bernake's own words, "higher than they otherwise would be"? This result seems painfully obvious even beforehand to anyone that didn't grow up in the vacuum of academia, but seems to elude the Bernak, at least publicly. In his world, only good things (stocks up) come from printing money. Must be nice (if you're getting the money).

Here is the current SP-500 with the 50% Fibonacci retrace of the QE rallies. David Tepper was on CNBC recently and was asked when (not if) there would there be QE3. He said a 200 point-ish drop in the SP-500 ought to do it. When David speaks, Ben listens. At 1295 today, 200 points would drop us right onto the 38% Fib retrace at 1090, with the technical brick-wall 50% retrace below that at 1020. David Tepper doesn't say things on CNBC flippantly, so it's no coincidence the technical levels are right there at the "200-point-ish" range. Expect QE3 when the SP-500 gets to this range. I'd say late in the year October/November right when Wall Street bonus season kicks off. Get folks feeling "wealthy" for Christmas. Then short the ultrashort ETF's until 2-3 months before QE3 is scheduled to end. So easy a caveman can do it, right GEICO?

Addendum: As the market has been going the down in anticipation of no more free money for a few months, Bloomberg pointed out today (6/27/11)that while QE2 is ending, QE 2.5 is only just beginning.
Fed to buy $25 billion a month in Treasuries after QE2

Ponzi ON!

The market is, predictably, up nearly 1.5% on this news. Expect it to behave exactly like QE1.5 (the period between QE 1 ending and QE 2 beginning where the FED did the same thing). High volatility, frequent gaps (usually upwards for no apparent reason) and essentially a suicide environment for shorts and short term trades. Longer term, the market will be going nowhere, fast and mostly overnight. If you value your depreciated cash, you'll wait for QE3 like the big boys. After all...we know it's coming.
Addendum 10/26/11
Markets at 85% Correlation an 80 year high

FED up with trading?

For those of you weary (like me) of a market that defies decades of proven tactics and makes anyone with a Cramer mentality (BUYBUYBUY!) and some cash deployed long an "expert" via a market that only goes up, I have some help. The Bernak has decreed that stocks will not fall on his watch. He has tethered his money-printing Quantitative Easing to unemployment, which is largely unaffected by the stock market rising. The Market is up about 100% from the March 2009 lows. Unemployment, if you believe the BLS data, is down about 1.5% from it's peak and stands at 9%. Please ignore the fact that 15% of the population (44 Million) is on food stamps but unemployment is only 9%.

The important thing here is the Bernak believes printing money and giving it to the big banks outright via the discount window for .025% interest (free) or buying treasuries outright (QE1 and QE2) will, by allowing the top 10 % of the population that own 85% of all equities to make outrageous returns via currency devaluation, create jobs. The "trickle-down" wealth effect. He has said numerous times he'll do "whatever it takes" (read: print more cash) to get unemployment down.

Never before have we had such crystal-clear insanity from our monetary masters, and the market reflects this new dynamic. It goes up. And up. And up. There is no fear, because the Bernak has stated he will print some more money if things don't improve. Or stocks go down. Either one. Wall Street is all to happy to play along, hence you get 93% win percentages out of the big hedge funds (JPM and Goldman Sachs) every quarter we have QE. "Just win, baby!" as Al Davis says. The only quarter they didn't do the (previously) statistically impossible? Q2 2010, when the Bernak had the audacity to let QE1 end in April. Alright enough talk here's the setup. The numbers on the chart are defined below. I simply calculated how much the FED monetized and what the market did and is doing as a result.

1-4. The FED announces various and sundry "Mortgage-backed security" buybacks where they agree to buy all the crappy loans from the big banks. On number 4, they announce the "Nuclear" option of buying another 1.25 Trillion. The fix is in, the top 10% knows it, and it's game on.

SM-The market, making only a few quick reversals to screw the bejezzus out of any shorts that try to play goes straight to 1150. Here we get a 9% correction exactly 3 months before the scheduled end of QE1. The Smart Money is taking some money off the table.

5. QE1 ends, and without free money from the FED everyone takes their ball and goes home. At the same time. FLASH CRASH and the Dow is down 1000 points in a day in May 2010, bounces, the market loses 17%, breaks key support, gets all the surviving bears on board and then...

6. QE2 Baby! The Bernak puts in the bottom in August with QE2 hints. Fry some shorts in hot oil and away we go again...until

SM. Smart Money seems to be pulling cash in mid-February 2011 with a mild correction...3.5 months before the scheduled end of QE2. Weird. So weird I thought I'd do the math. Here it is.

QE1 = 1500 billion = 83% rise in SP-500(March 2009 low of 666 to April 2010 high of 1220) The 666 bottom until first real correction at 1150 was a move of 72%.

We know how much the FED monetized (1.5 trillion), when they started (March of 2009) and when they ended (April 2010). We also see the market now stops going down when the Bernak fires up the printing press, and stops going up when he turns it off, and 1.5 Trillion buys you 83% higher SP-500. Enter QE2:

6. QE2 announced in August 2010, official in November. 600 billion. QE2 is 40% of QE1. The non-stop flight from 6. to the "Smart Money" correction should be 40% of QE1. QE1 went 72% so 40% of that is 28.8% . The February correction started at 1344.

1344 is 29.2% higher than 1040, the August "QE2" speech low. Cool.

The QE1 correction was 9%. 40% of that is 3.6%. Take 3.6% from 1344 and you get a correction target of 1295 on the SP-500. It hit a low of 1294.26 on February 24th. Cool again. Now, if QE2 continues to rhyme with Qe1 we'll have some sort of "event" to knock SP back down near that 1295 level, where the 50-day lurks. It will likely close below that, suck in some bears, and then gap-reverse /short squeeze it's way to new highs. This has been the pattern since March 2009. 40% of an 83% move would be 33.2%. Add that to the 1040 QE2 start point in August and you get a 1385 target for SP-500. Assuming QE3 isn't announced before QE2 ends (Bernake's already hinting, but he'll have a hard time convincing everyone $3.50 gas isn't his fault. On the other hand, maybe not Fed's lockhart says higher oil prices might lead to QE3). The fix is in...trade accordingly. The smart money's moving out now and won't be back til QE3 though...

Easy Money

For those of you frustrated by the stratospheric .025 % CD or Money Market returns available to the Average Joe courtesy of the Bernak, da Wall Street boyz have got a sure-fire path to higher returns. For them, that is.

Reverse Convertibles are short-term bonds generally marketed to individuals that convert into stock if a company’s share price plummets.
Banks sold more than $6 billion of bonds linked to the performance of stocks last year, promising returns of as much as 64 percent at a time when interest rates were at historic lows.

Instead of reaping such extraordinary gains, reverse convertibles, as the products are known, lost 1 percent on average.

Those were the lucky ones. Here's some of the unlucky ones: Click on the charts for a larger picture.

Royal Bank of Scotland Group Plc sold $1.15 million in three-month notes tied to Eastman Kodak Co. on June 10 that paid 24 percent annualized interest. That’s 24 times the average rate on one-year certificates of deposit.
Buyers couldn’t lose money unless shares of the camera maker fell to below $3.54 from $5.06. Kodak dropped to $3.50 on Aug. 31 in New York trading. RBS converted the bonds into stock and investors lost about 18 percent even with the high interest rate.

Sheeeiitt. Can you believe it? 3.54 was the stop, and it made it to 3.49 for one day only, kicking all those poor investors in the balls and converting their bonds into Kodak shares at multi- year lows. It's at 5.74 now. Curse the luck!

On May 11, JPMorgan sold $800,000 of reverse convertibles linked to TiVo Inc. that paid 64 percent a year in interest. 64%? Woo-Hoo! I'm gonna be rich!


Three days later, TIVO dropped 42 percent after an adverse court ruling. Investors ended up losing 42 percent, including interest. The bank charged 1.75 percent in commission on the two-month notes.

Now, that's just darned unlucky in my opinion. Want to see how unlucky? Check out the chart....
Hmmm. TIVO's puttering around $10 per share, then somebody decides it's worth A LOT more on March 4th. JP Morgan sells 800K worth of Reverse Convertibles in May. Then darned if we don't get the old adverse court ruling and it's right back down again.



Curious. No one thought TIVO was worth more than $12 a share for 6 years. Then in one day it goes to $18. JPM sells some convertibles, then a 42% gap-down three days later. Now it's back to the old range. Weird.

Word to the wise, if anyone promises 64% returns, even someone as forthright and trustworthy as JP Morgan Chase, you might want to think twice. Mom and Pop traders can't gap stocks 40% in both directions, or manipulate prices just far enough to hit paydirt. The largest Hedge Fund/Too Big To Fail Casinos can though. And they do. Every day. When you see those 2010 Wall Street bonuses roll in at all-time highs try not to be the one whose paying them.

On Money Printing...

Ben Bernake swung by Jacksonville to drop some enlightenment on our future printing press operators economists. One of his statements had me waxing nostalgic for Ace Ventura's response when presented with
"dubious" information. "Re-he-he-heaalllly?"
Bernake speaks in Jacksonville
"Bernanke defended the Fed's decision earlier this week to buy $600 billion in government bonds to push interest rates even lower. Some critics worry that the move will be inflationary."
"Sometimes you hear the Fed is printing money. That's not happening," he said.
So... we just had $600 billion laying around in reserve for a rainy day? Just like we had $1.7 trillion laying around in March of 2009? Hmmm. To quote Desi Arnaz Ben, "Lucy, you've got some splainin' to do!" The world bank chief is calling for a new gold standard based currency, as nations are losing faith in the U.S.peso dollar.
"Gold briefly hit a record high of $1,398.35 an ounce in early trade on Monday on concerns of a continued weakening dollar trend after the U.S. Federal Reserve last week acted to resume buying Treasuries.

SUMMIT ACRIMONY?
That policy has fed acrimony among leading economies in the Group of 20 in the run-up to their summit in Seoul on Wednesday and Thursday.
China and Germany, major exporting nations, have both decried the Fed's quantitative easing -- effectively printing money -- which is weakening the dollar."
China, Russia slam Fed move
Washington has frequently criticized China, saying it deliberately undervalues its currency to boost exports.
China says the United States, via the Fed, is engaged in the same thing that it stands accused of, and some emerging nations have already acted to curb their currencies' rise.
Resentment abroad stems from worry that Fed pump-priming will hasten the U.S. dollar's slide and cause their currencies to shoot up in value, setting the stage for asset bubbles and making a future burst of inflation more likely.
"As a major reserve currency issuer, for the United States to launch a second round of quantitative easing at this time, we feel that it did not recognize its responsibility to stabilize global markets and did not think about the impact of excessive liquidity on emerging markets," Chinese Finance Vice Minister Zhu Guangyao said on Monday.
The Fed's quantitative easing policy was unveiled last week to jeers from emerging market powerhouses from Latin America to Asia. Russia renewed its assault on Monday.

The Dollar has the had the same trajectory as the Titanic post-iceberg since 1985, losing a whopping 55% of it's value, with two huge downdrafts in March of 2009 ($1.7 Trillion in "reserves") and August 2010 (We still have at least $500 billion in "reserves" Jackson Hole speech). Every finance minister from sea to shining sea is blasting the Fed for printing money. Ben says he's not printing money. Hmmmmmm...

Addendum: 12/9/10
Hey don't take my word for it...take BEN's word for it! (Thanks John Stewart!)

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
The Big Bank Theory
http://www.thedailyshow.com/
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“The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”
—John Maynard Keynes

d

Currency Wars

While the majority of people are focused on the November 2 elections, the stock market is focused on one thing only: 2:15 PM Eastern time November 3rd. Why? That's when Printin' Ben Bernake announces the size of the latest "Quantitative Easing". Our monetary masters prefer the fancy term for printing money the same way your neighborhood garbage man prefers "Sanitation Engineer".
Problem is, the rest of the world isn't planning on letting us print our way out of this mess. ECB to respond in kind as FED weakens dollar On Nov. 3 at about 2:15 p.m. in Washington, the Fed will release its policy decision. About 18 hours later, at noon in London (8 a.m. in New York and Washington), the U.K. central bank will announce its move. The ECB will go public with its decision 45 minutes later, at 1:45 p.m. in Frankfurt (8:45 a.m. in New York). The Bank of Japan concludes its talks on Nov. 5 at about noon local time (11 p.m. in New York).

They have printers too and by golly they're prepared to use them...not to help unemployment as Ben says but simply to offset the Fed. Check and Mate. The losers in this will, of course, be anyone who doesn't make enormous amounts of money (the bottom 90% of society) as central banks flush their paper currencies down the toilet. Maybe Printin' Ben is due for a new nickname. The Trillionator. Hasta la Vista, dollar.

Currency War escalates
Dollar drops most in 4 weeks on Fed move
U.S. Dollar Index breaks long-term support
Spend and Pretend strategy pummelled by G20

Nov 8th Addendum: The stock market reaction to Ben's widely expected and anticipated move on Wednesday was...nothing. The market closed marginally up on Wednesday. You usually get a "sell the news" reaction to such an anticipated event...everyone knew it was coming. What everyone DIDN'T know was the reactions of all the foreign central banks. By Thursay morning, the verdict was in and no other central banks were firing up the presses...yet. I believe this is why you had the tremendous gap up Thursday and technical breakout. "They ARE going to let us print our way out of this!" thinks Mr. Market. We shall see. Ponzi on for now, Wayne. I also found this excellent article by Andy Xie on the inevitable end-game of currency wars:

TO HELL THROUGH QE

Death of the Tea Party

I truly dislike Partisan politics. Here is why. Take a good idea, something the vast majority of Americans need to understand and would gladly embrace. Throw in partisans, in this case the Republican right. This alienates the independents (and majority) as well as energizes the Democratic left. The morons in the Republican right give endless ammunition to the morons in the Democratic left, who launch assualts across all media outlets. Next thing you know, no one remembers what the original intent of what was a very good idea (the Tea Party) and plan was. Mission accomplished, as both parties are tools of the Banking Oligarchy that really run our country. What started as a legitimate third party opportunity has been emasculated by BOTH parties, neither of whom wants to see said third party exist. America, in turn, loses. Please watch these two videos in order, and recognize what an expert military DISINFORMATION campaign looks like.