U.S. violent crimes jump in first half of 2006: FBI

Interesting article on violent crime. The article underscores my belief that wealth bifurcation is surging in the US. How can the wage of a first year policeman in NYC be 23,000 dollars when there are people making a 100 million? Anyone with a brain will realize that eventually this is going to lead to some serious backlash and violence.

Another good credit article

Everything looks great, but somehow you get that uneasy feeling. When this happens it is always good to check your premises. I think we can all agree that the markets, from stocks to bonds to art work, are riding on a sea of liquidity. So let’s begin checking our premises. First, liquidity can come from two sources: income or borrowing. Real disposable income has actually fallen over the last five years. It is no secret with a negative savings rate and gigantic trade deficit that U.S. consumers are borrowing to consume. A total credit to GDP of 3.6 times (the next highest was 2.9 in 1929 and has averaged maybe 1.5 time over the last decades) the lowest equity levels in homes ever, the highest percentage of disposable income going to service debt ever, government budget deficits of over $300 billion and a public debt figure approaching $9 trillion (not even counting the war costs of $500 billion so far not added in and forgetting about $45 trillion in unfunded liabilities from Medicare and Social Security) etc., all confirm this fact. Few people really understand the ramifications of this or the process by which the bureaucrats in Washington accomplish the harm all this debt will eventually do by creating more of it. A $1 billion REPO by the Fed doesn’t seem like much until you check your premise. The Fed just did a $1.3 billion dollar coupon pass, which is like a permanent REPO. The Fed calls up JP Morgan (JPM) and purchases its bonds with credit, credit created from nothing. They just tell JP Morgan, "we owe you money."JP Morgan now has funds (credit) it can lend out. But because of margin requirements it can lend out much more than $1.3 billion. In fact it lends out about twenty times that amount. So let’s say they call up 20 regional banks and let them borrow $1 billion each. In turn, each regional bank then lends out $5 billion to various mortgage borrowers. These borrowers refinance their house and spend the extra cash while the equity in their home drops. The original $1.3 billion of credit the Fed created yesterday will in a few days turn into $100 billion of money borrowed by consumers. In fact these numbers are born out by the Fed’s activity over the last year. The Fed’s balance sheet has grown by about $30 billion over that time, while total credit market instruments outstanding grew by $3.5 trillion. But that is just traditional pyramiding. Today we have the derivatives markets where JP Morgan can take some of that credit and lever it 100 to one by underwriting derivatives (I don’t mean to pick on JP Morgan, although it is by far the largest derivatives dealer in the world; others like AIG or other large Broker Dealers are doing the same). So of the $1.3 billion, let’s say JP Morgan keeps $300 million and then sells options to customers. It uses that credit as capital to support the trade; the trade itself is $150 billion in notional contingent liabilities. The notional amount of derivatives over the same period of time has grown by a scary $88 trillion. Derivatives are lending on steroids. All this liquidity is driving nominal asset prices higher and higher. And ironically they must in order to keep the borrowing bubble bubbling. But risk is increasing exponentially and threatens our very country’s solvency. The only reason things seem great is because other central banks around the world are willing to keep creating credit themselves and lending it to us. Todd calls this the elasticity of debt: how much debt will the market accept before it can’t take anymore. I don’t know the answer to that, but when it occurs there will be no escape. We are really, really good at creating credit. Are we good at paying it back?

Freeport -PD Update

In response to the Freeport- PD merger, SAC Capital has opposed the takeover. Can copper stay as high as it is now? Only time will tell, but I believe it is a dollar issue more than a demand issue.

Fed Day

As usual the fed did nothing because the global financial system if probably going to collapse so why bother hastening that day. It looks to me like oil and metals will get a bid again and perhaps foreign equities. Here a chart that has me interested and watching.

The markets opened up strong. Its the last week for HF managers and other financial professionals to try and justify the gigantic fees the keep charging. Information arbitrage had a good take on the subject. DE Shaw is struggling and heading into Private Equity. At this point the HF private equity is running on hype and marketing. I dont blame them. I would try and keep the current fee structure in place as long as I could. Nevertheless, investors are going to have some questions to ponder after this year. How can Citadel employ 1000 people and spend 5.5 bln in trading costs and it be a longterm strategy for the future?

EOD Thoughts

The Vix signal I pointed out earlier proved to be false, although volatility did seem to pick up. The dollar was pounded higher because every CB in the entire world is buying US securities still. I'm convinced Asia knows capitalism about as well as they know frech fries. They aren't going to prevent the inevitable from happening as George Soros has said and proved over and over again. Nevertheless, there intervention is making imbalances even worse and regrettably we have passed the point of no return for the global system. At some point cracks will show and risk will be repriced. I don't know this will play out, but they will cause pain for some.

JC recommended BLWD last night and it shot up. I guess this is a pretty big indicator of the kind of speculation going on. Its not that great of a company, but the rumor mill seems to be driving everything.

Bonds moved down for god knows reason why.

VIX update

I've been watching the vix today and it could be a fale alarm, but it looks like a sea change is coming.

I've Figured it Out

I've done a lot of souls searching and have come to the conclusion that central banks around are literally duck taping this entire global financial system together.

1. In the long run how can central banks attempt to out print each other and there be anything other than a financial crisis?

2. If the fed lower rates and the rest of the world keeps accumulating treasuries where will the new bubble form? Faber says possibly grains or asian equities. Good ideas.

3. Keynes says in the long run we are all dead. True.

4. I dont think in the long run you can wrong with metals or farmland. They will test stand the test of time.

5. Janzen, Faber figured out the current monetary system years ago and are ahead of everyone even some of the best HF guys.

6 What is going to hapen to the mortgage market?