So, your stock market is heading south for the summer and you need to lift it north? No problem. Just watch the following video to see how to do it right.

Karl Denninger narrates as we watch our very own SPX index manipulated higher over the night of July4th-5th.

As an aside, I found nothing in the new finance reform that would correct this kind of crap. Then again, it is already against the law. Like Denninger is often saying: Where are the cops?

(edit: Look HERE for background info on the title of this post.)

So What The Heck Does That Mean To You?

(disclaimer) I am a voting Republican citizen of North Carolina.

North Carolina senators Hagan and Burr both voted to squash the amendment which would have banned naked short sales in financial markets. What does this mean to the residents of the Tar Heel State? It means that once again, the senator we’ve had for too long wants to let the big banks keep fleecing us like lambs.

How long is too long? He was elected in 2004… how has that worked out for you and the folks you know? Are you better off now than you were 6 years ago?

Naked Shorts

To understand how this latest vote betrays you to the banks, you need to understand exactly what a short sale is. From Wikipedia:

In finance, short selling (also known as shorting or going short) is the practice of selling assets, usually securities, that have been borrowed from a third party (usually a broker) with the intention of buying identical assets back at a later date to return to the lender. The short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase, as the seller will pay less to buy the assets than the seller received on selling them. Conversely, the short seller will incur a loss if the price of the assets rises. Other costs of shorting may include a fee for borrowing the assets and payment of any dividends paid on the borrowed assets. Shorting and going short also refer to entering into any derivative or other contract under which the investor profits from a fall in the value of an asset.

Naked short selling has an insidious twist:

Naked short selling, or naked shorting, is the practice of short-selling a financial instrument without first borrowing the security or ensuring that the security can be borrowed, as is conventionally done in a short sale. When the seller does not obtain the shares within the required time frame, the result is known as a “fail to deliver”. The transaction generally remains open until the shares are acquired by the seller, or the seller’s broker, allowing the trade to be settled.[1] Naked short selling can be used to fraudulently manipulate the price of securities by driving their price down, and its use in this way is illegal.

Did you get that? Short sellers are required to borrow the shares sold within a certain time frame (usually about 3 days). Until this time passes, it’s just a short trade. Once the seller fails to borrow the shares, it’s considered a “fail to deliver”, but the transaction is not cancelled. The seller is still allowed to ’sell’ shares that don’t even exist.

How can something that doesn’t exist ever be sold at all? The standard stupidity says that it’s okay – when the shares are bought back at the end of the trade, it’s mathematically the same as destroying those nonexistent stocks, so the net sum is a zero. But this ignores the fact that, for as long as those ‘nonexistent’ stocks are in fact, counted as REAL, the price of that stock IS manipulated downward.

Let’s see how this works in a simplified market.

Paper Beats Rock

Assume I have 10 special rocks, and the value of them all together is 10 bucks. If I sell them, the value of each is a dollar. If someone comes along and says there are really 20 special rocks and he has 10 of them for sale at half price, then the value of each of my rocks will go down by 50%, EVEN IF NOBODY BUYS THEM. My rocks haven’t changed, but the perception now is that since there’s so many rocks they shouldn’t be worth that much, and this guy over here says he’ll sell them for 50 cents. My net worth based on rocks has just gone down by 50 percent, due to some lying asshat who wanted to take my stuff.

Now, let’s further assume that this jerk actually sold some of his rocks, constituting a short sale in the special rock market. The buyers expect delivery of said rocks. (Remember, this guy doesn’t have any real rocks.) The only place that rock can come from is me. What happens if I won’t sell any rocks?

Think about that and then think about the ‘freeze’ in the credit markets in 2008. If rocks were dollars, the same thing would happen in my little story. The whole rock economy would tumble and fall. The reason is simple: So many non-existent rocks exist, and so many people have bought them. The real rocks aren’t for sale anymore, so there’s literally NO WAY anybody will get any part of what they’ve paid for. So many bought what they thought were rocks, but all they got were paper promises.

That’s what Dylan asks, and I’d like to have that answer myself.

It will be interesting to see how this all works itself out, considering how firmly ensconced is the Goldman Sachs influence over our federal government.

Except when it isn’t. Which it almost never is.

You see, when the Fed creates a dollar, it doesn’t even exist until somebody, somewhere borrows that dollar. Then a bank writes the loan, creating the dollar in question. Immediately the dollar is worth more than 100 pennies, due to the interest being generated by the loan. If the loan has a 5% interest rate, then each dollar in the loan is worth 105 pennies (to the economy).

But it doesn’t stop there. That dollar is left as a tip on a restaurant table and is spent by someone else, perhaps to pay a bill or buy some drugs. Then whoever owns the dollar spends it again and so on, on down the line until the dollar is eventually destroyed for one reason or another.

Generally speaking, a healthy economy’s dollars will always be worth more than 100 pennies, because in a healthy economy that dollar moves around, being used over and over by different folks. That’s called velocity.

Deflation occurs when the value of a dollar added to the economy produces less than a dollar’s worth of wealth. It seems impossible for this to occur, but it is indeed possible and is one of the things the Federal Reserve Bank tracks very carefully. Below is their chart of M1, the multiplier effect of a dollar in the US economy. (As an aside, notice when the M1 started it’s downward journey? That’s the effect of one man: Alan Greenspan.)

When M1 drops below 1, for every dollar added into the economy, we lose a few cents.

M1 can decline for many reasons, the most obvious one being too much debt in the system. When there’s too much debt, loans get scarce. Without loans, those ‘billions of dollars’ in stimulus don’t exist yet, and so those dollars cannot be spent by all those folks who would have been spending it.

So money gets more scarce, and the same folks who just a few years before were eating out every night are starting to buy dried beans in bulk. Instead of a latte they drive past Starbucks sipping on the travel cup they brought from home. Whether they’re hoarding their cash or just don’t have it anymore doesn’t matter. The fact that matters is that the cash is not being moved around. The velocity has ground to a halt.

Double Dive

Same thing happened a long time ago. There was a time in US history called The Roaring 20s – remember that? The movies all paint it up to be a time of unbridled economic prosperity, but the truth of it is slightly different.

What actually happened was that the economy took a dive between 1917 and 1920, and the Federal Reserve, then only 7 years old, opened the floodgates to the money supply. They dropped interest rates to practically nothing and credit skyrocketed. Similar to the easy credit so rampant over the past 20 years or so, by 1929 all you needed was a non-verified signature and the loan was yours.

We know how that turned out. The market dived in 1929 and then dived again in 1933.

The chart below shows the economic supercycle for the US over the past 100 years or so. The parallels between the 1920s-1930s and now is uncanny. Noting that the cycle touches the bottom of the chart only twice (roughly 1920 and 1981), and trying to account for the lengthening of the time spans between intermediate reversals (real recessions), it still seems to me that we should’ve crashed much worse after 1999.

See the Roaring 20s? That was all excessive debt building up in the system. Now look at 1981...

Hubris

That we didn’t suffer a worse crash in 1999 is most likely the result of actions by the Fed. They jumped straight into the ‘exceptionally low” interest rate scheme and we’ve been there ever since. In the early part of the last decade(2002, I think) Greenspan stood on a stage with Bernanke and announced that the Fed’s goal was to “blow a bubble in housing”.

Well, they did that and more. To blow the bubble in housing they had to blow a bubble in credit, and when the the credit bubble burst, it took the housing bubble with it. And why did the credit bubble burst? Because fraud was inherent, built right into the bubble. Look at the facts: AIG, Lehman, Goldman, BofA.

You might agree with what they’ve done. You may believe, like they do, that the mathematics behind finance and economics can be controlled.

You may, indeed, be captive to such hubris.

Just remember one thing. What goes up, does indeed come down.

Unless it goes up with a velocity strong enough to overcome the natural forces of nature. And then it’s gone.

April Fools?

Check out this mess over at Seeking Alpha (my emphasis):

Seen on a recent Citibank (C) statement: “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.”

[...]

I called Citi about it and they said the warning applies only to customers in Texas and that the notification had been mistakenly included on statements nationwide. Whatever the explanation, it doesn’t exactly inspire confidence in Citi. I’ve got nothing against Citi as a general matter — I have friends who work there, and know some account holders who are generally satisfied customers. But it’s hard to believe a bank would be sending out a notice like that on its statements.

A Citibank rep responded in the comments:

Received by email:
I saw your post on Citibank and wanted to get you some additional information. At issue is Reg D, which requires that in order for a NOW account to be eligible to earn interest or receive promotions, a bank must reserve the right to require seven days advance notice before permitting a withdrawal.

When Citibank moved to unlimited FDIC coverage in 2009, we had to reclassify many checking accounts to allow for immediate withdrawals in order to ensure all customers qualified for the additional coverage. When we moved back to standard FDIC coverage with most major banks in 2010, Citibank decided to reclassify those accounts back to make them eligible again for promotional incentives. To do so, Federal Reserve Reg D requires these accounts, called NOW accounts, to reserve the right to require a 7-day notice of withdrawal. We recently communicated this technical requirement to our customers. However, we have never exercised this right and have no plans to do so in the future.

Robert Julavits
Citi Public Affairs

Regular checking accounts are DDA accounts, normally. That means “Demand Deposit Account“. Simply explained, a DDA means that the bank acts as a custodian of your money. Your money in a DDA is NOT there to be loaned out to others. The money is supposed to be there at the exact time you demand it.

There is a type of “checking account” that is not DDA – it’s called a NOW account (Negotiable Order of Withdrawal) – which normally may require some amount of notice to the bank prior to withdrawal. These accounts generally offer some benefit, such as the ability for your cash to earn interest, in exchange for the stricter requirements.

Citi Lied

When I first read about this new Citibank risk, I took them at their word, that it was a simple mistake. Then I found this:

You may need to click the image to read the text. Look at the highlighted text. Especially read the last highlighted item.

“We reserve the right to require seven (7) days advance notice before permitting a withdrawal from all checking, savings and money market accounts.”

In essence, they’re saying that there are no DDA accounts available at Citi, period. At any point in time, they can simply deny your check or refuse to hand over your cash. This makes the response by Robert Julavits look like so much steaming crap in a field of green. Denninger explains it well (emphasis in original):

Now most banks will not allow you to walk in and demand $50,000 in cash at any instant, mostly because they don’t have it, or if they do have it allowing that would severely deplete their cash amount on hand and they would not be able to transact routine amounts for other people. After all, it takes time (even if only a few hours) to order up an armored truck full of $100s and $20s.

But “withdraw” is not limited to cash.

You can get a counter (bank) check for the entire balance, you can write a check on your account (and give it to someone or deposit it somewhere else) and you can wire or ACH money in or out of the account. All are “withdrawals.”

“NOW” (negotiable order of withdrawal) accounts are a different sort of animal. Those pay interest, and on those accounts the bank reserves the right (and always has) to require notice. Same with saving-linked sweeps (which, by the way, is what Alan Greenspan wildly expanded the authorization for early in his tenure as Fed Chairman, essentially destroying bank reserve requirements as this was instantaneously gamed to reduce actual held reserves almost to zero.)

What this “quiet” little change means is that Citibank has changed the character of all of its checking accounts. They no longer offer a “DDA” account, whether they did before or not.

The importance of this cannot be overstated. Without a “DDA” account the bank could at its sole discretion dishonor any check at any time, thereby hitting you with an overdraft fee as you didn’t give them the requisite seven days notice. It could also prevent you from removing your funds to a more appropriate (for you) institution for that seven days, entirely at their whim and sole discretion.

ALL time deposits (savings accounts included, which have always contained this requirement) effectively are a loan of funds from you to the bank. That is, you don’t “deposit” money there, you loan it to the bank which then charges other people to borrow it. This relationship isn’t taught in our Goebbels Government Education System (not even in college!) but it is nonetheless true.

However, essentially all banks have maintained one type of account – a Demand Deposit Account – which in fact operates differently. A DDA account is an appointment of the bank as a custodian of your funds, not as a borrower of your funds. Said account never pays interest (per Federal Reserve rules – and common sense) yet it allows immediate, unrestricted access to your funds because you are not lending them to the bank, you are appointing them as a custodian of them.

DDA accounts are essential for the ordinary flow of commerce. There must be an option available to consumers and businesses alike in which they can place custody of funds they may need, up to the entire balance of that account, at any point in time without prior notice. Without this ability you are literally at the mercy of the financial institution in question, which can cause you to incur hideous “bounced check” and other similar charges as well as potentially exposing you to criminal liability for “uttering” (writing bad checks.)

This is NOT a trivial change in terms. I would never do business with an institution for my business or personal checking accounts that did not offer a true demand account, and you should not either. This sort of change is outrageously destructive to your rights as the funds you have on deposit in a checking account are not intended to be loaned to the bank to do with as they wish, but rather to be held for your immediate (if necessary or desired) use.

Do you know what kind of checking account you have at your current bank or credit union? Here’s a quick somewhat reliable test: Ask yourself one question – does my checking account have interest applied to it? If you are accruing interest on the funds in your account, then you do not have a DDA account. DDA accounts, per federal law, cannot accrue interest.

Maybe you think that you need that interest? Wow, how much do you have in that checking account anyway? And if interest is your thing, what is your cash doing in a checking account anyway? Face it, for the few dollars per year you get in interest, you’re allowing someone else ultimate control over your cash. I’d be willing to bet that one bounced check charge would wipe all that interest away.

And with a policy like the Citibank policy, that could happen even if you have funds in the account. Check yourself, check your bank. This is, after all, your money.

For more on CitiRisk at Wordout:
The Citibank Risk
More Citibank Risk
Citibank Risk 3 – Another WTF Bailout

Tricks And Traps

“For years, Wall Street CEOs have thrown away customer trust like so much worthless trash.

Banks and brokers have sold deceptive mortgages for more than a decade. Financial wizards made billions by packaging and repackaging those loans into securities. And federal regulators played the role of lookout at a bank robbery, holding back anyone who tried to stop the massive looting from middle-class families. When they weren’t selling deceptive mortgages, Wall Street invented new credit card tricks and clever overdraft fees.

[...]

So far, Wall Street CEOs seem determined to stop any kind of watchdog. They seem to think that they can run their businesses forever without our trust. This is a bad calculation.

It’s a bad calculation because shareholders suffer enormously from the long-term cost of the boom-and-bust cycles that accompany a poorly regulated market. J.P. Morgan CEO Jamie Dimon recently explained this brave new world, saying that crises should be expected ‘every five to seven years.’

He is wrong.”

~Elizabeth Warren, stating the case for a new Consumer Financial Protection Agency in the Wall Street Journal

From the description over at YouTube.

This video should make people think twice about listening to anything that Chairmen of the Fed Ben Bernanke says. It’s a compilation of statements he’s made from 2005-2007 that will have you 100% certain America is doomed if we continue to value what this moron says.

And a comment from the YouTube viewer toppermost1:

Is he an idiot or is he wilfully obtuse? Goldman Sachs and JP Morgan have done alright by Uncle Ben. I think he knows exactly what he’s doing – leech main street dry and give it all to his wall street buddies. Just like Bush’s administration were full of people that were invested in oil, defence and construction - and hence profited from the Iraq war, Obama’s administration is full of wall street people – who have profited from the cheap fed money and the bailouts.

Thanks to Barry over at TheBigPicture.

Don’t Use The ‘D’ Word

Down below you’ll see the press release from the Fed.

Predictably, they avoid the use of the ‘D’ word (D as in DEFLATION) like it had cooties or something. I guess they don’t want to scare us.

Strange thing is, I’m more leery about folks with that much power who are afraid to use the correct words when telling us what they’re doing and why.

You know – liars in power.

In any case, here’s what the jerks are saying now:

Sigh…

It’s hard to write while I’m taking this medication, so allow TheFly to tell you pretty much exactly how I’m viewing this:

and if you need more, Jesse adds the rest of it:

Discalimer: As you all should know by now, I am not recommending any buys or sells. My investing philosophy doesn’t allow me to play in rigged markets.

…

On a related note, gun sales are up.

From one moment to the next, I am still Jon.

Flow Of Funds Report

Each fiscal quarter the Federal Reserve releases a report with the title “Flow of Funds Accounts of the United States”. On the 1st page of the current report we find the following:

This tells us that 1)generally, household net worth dropped by about 20% in 2008 and 2) half of THAT was lost in just the last three months of 2008. In a memo sent to clients, JPMorgan estimates consumers have lost another $2.5 Trillion dollars since the new year began.

Thanks to John Jansen at Across The Curve:

Here is an interesting excerpt from a note JPMorgan economists sent to clients on the Federal Reserve Flow of Funds data for Q4. It describes in gory detail the loss of wealth in the household sector.

Enjoy the rally while it lasts folks. The bottom is not in yet.

I am Jon, sliding down the slippery slope with you, and you, and you and you…