Now, I don’t care who makes what. That’s between bosses and their worker bees. But I do get a little peeved when Uncle Sam tries to tell some worker he can’t get paid per his contract.

Before you go shouting about how Washington saved Wall Street and therefore we, as taxpayers, get a say over pay, let me ask you this. Does your mortgage company tell you what color to paint little Johnnie’s room? Does your car loan provider tell you how fast to drive? Does your health insurance provider tell control your diet?

Didn’t think so.

If some congressman came barging in this office right now, demanding I slash my pay, his goons would have to hold me back as I try to kick the lunatic’s shins. But if the owner of the company came with the same request, I’d have no choice but to open my wallet (and possibly refresh my resume).

But that’s the way business works. The guys that own the joint make the decisions, not the banks and certainly not government. If the workers don’t like it, they leave. It’s supply and demand and nothing else.

As taxpayers, if we want to be angry about anything, we should be angry that our government used our money to cover somebody else’s dangerous bets.

But now that Goldman shareholders are asking the company’s top brass to reduce the size of the corporate bonus pool and pass the money onto shareholders, the company had better act. If not, the free markets are going to take charge.

Shareholders are going to hit the sell button. Prices will drop. Capital will be reduced. And Goldman executives will be in pinch once again.

That’s the way the business world really works, no matter what Nancy Pelosi and Barney Frank want.

When Obama was knocking on the door, Goldman said go away. But now that Mr. Common Shareholder is on the line, next Friday’s paychecks will have a few less zeroes.

Doesn’t that make you feel good? Capitalism is still alive.

***I have my eye on China and its quickly growing, yet fragile, economy.

Earlier today, I wrote a piece for TodaysFinancialNews.com that helps illustrate the potential of the Chinese markets. Instead of nervously awaiting every bit of economic data to hit the Street, savvy international investors are racking up big gains.

Here’s a bit of what I wrote:

You could say it is the tale of two economies. The best of times in Asia, the worst of times here in the States.

While domestic investors wonder when some rogue piece of data will kick out the wobbly legs supporting the top-heavy equities market, savvy Chinese investors are raking in gains from an economy soaring ahead a 7% per year clip.

Where would you rather have your money?

A look at two of today’s winning stocks will help you decide.

Zumiez is a sports-related retailer based in Everett, Washington. With 343 stores in over 30 states, its operations are as exposed to the nation’s economy as it gets. A look at the company’s third-quarter results prove how low our expectations have gotten.

Over the past three months, the $375 million company racked up profits of $5.1 million, down from last year’s corresponding figure of $6.8 million. The earnings-per-share figure of $0.17 beat expectations of $0.15, which helps explain why shares are up by over 10% so far today.

But that’s the only reason investors have to celebrate.

The company’s fourth-quarter expectations leave little room for joy. After booking revenues of $113 million last quarter, the company expects sales of just $122 million to $126 million over the next three months, which include the critical holiday shopping period. Last year’s Q4 was worth sales of $125.

Analysts, which were expecting a figure closer to $131 million, have plenty of reasons to feel disappointed with the news.

Of course, Zumiez is not the only retailer worried about a slower-than-expected fourth quarter. Keep reading here.

*** Finally, I cannot help but smile when I see the Associated Press reporting that gas prices have fallen by more than 15% so far this month. Here’s a hot tip for their reporters: It ain’t over yet!

As you probably know, over at TFN Strategic Trader, we’ve been all over this story. In fact, just yesterday we took profits on one of our four gas-related plays. But we didn’t dump it all. Instead, we sold half of our position, locking in gains of 400%.

Now we’re playing with the house’s money.

Want to know the move that led to these massive gains? Easy… read all about it here.

Bill Bonner (The Daily Reckoning, UK):

Poor Goldman Sachs. Everyone is on its case. Criticizing. Carping. Jealous. Envious.

So, today we rise in defense of the Wall Street giant. Yes, the Goldmen may be shysters. But they are honest shysters…

Besides, it was another slow day on Wall Street. Investors are still mulling the news. As we all know, the recession is over. But… what kind of strange recovery is this?

A survey showed that only 1 in 10 workers says his income is going up. This is the lowest reading since 1946.

Meanwhile, the news two days ago was that homebuilding took a dive in October. Work began on 11% fewer houses than the month before. On multi-family dwellings, the figures were worse – down 35%.

Why would homebuilding go down when the economy is supposedly gathering strength? Well, builders were wondering what would happen when they finished the houses. The new house tax credit was due to expire; they weren’t sure the politicians would be witless enough to renew it.

They need not have worried. Give the politicos a chance to do something stupid and they will come through every time. Since the end of October, Congress passed and President Obama signed an extension of the housing credit. Until next April, at least, first time buyers will get an $8,000 credit.

You’d think that would have revived animal spirits a bit in the residential construction industry. But today’s news tells us that mortgage applications are falling – even with lower interest rates.

How come interest rates are falling? Well, here again, we see the heavy hand of the feds. The “quantitative easing” has come to a halt… that is, the Fed is no longer buying US Treasury debt (it doesn’t need to). But its buying of mortgage backed securities continues. That program will last until March of next year.

Still… housing is not cooperating.

This news hasn’t had much impact on Wall Street. All that can be said is that investors have seemed to hesitate for the last couple of days.

Stocks fell softly yesterday, with the Dow down only 11 points. Oil stayed at $79. Gold rose to $1,141. And the euro remained at $1.49.

Investors must still believe in what the Washington Post calls a “lukewarm recovery.” It is like finding a body on the street. You feel for a pulse and discover that it has not quite reached room temperature. It is tepid… Not quite alive. Not quite dead.

Too close to the quick to bury… too close to the grave to boogaloo.

Click here to read the rest of Mr. Bonner’s commentary at The Daily Reckoning, UK edition.

Baltimore – (TFN): All eyes and ears are on the Fed this week. With Bernanke in New York discussing potential new bubbles and the New York Fed getting heat for overpaying AIG’s many creditors, investors are having a tough time knowing exactly who to follow.

For those of you who hold up the “Fire the Fed” signs, move over. I am thinking about joining your camp.

First, the real bad stuff. According to Neil Barofsky, TARP’s special inspector general, New York’s Fed (under the leadership of Tim Geithner) failed to use its leverage as the top-banking regulator to tell AIG’s lenders to take less than they were owed.

Instead of taking an across-the-board “haircut” as Obama and Pelosi told us we all should, finance giants like Goldman Sachs, Merrill Lynch and Societe Generale said they want 100% of what they were owed.

The only holdout, UBS, said it would be willing to take 98%. But after tough looks from the guys from across the table, that offer was quickly rescinded.

According to Barofsky, the move cost the country billions of dollars and much, much more in confidence for the nation’s banking cops.

Thanks, Tim!

With that bit of news in today’s headlines, it is tough to find the confidence in some of the Fed’s latest plans to help pull the country from financial failure.

As the nation slowly recovers from last fall’s economic collapse, Bernanke and his troops at the Fed are now facing the difficult task of unwinding massive expansionary policies.

One trick discussed today is shortening the length of emergency loans from 90 days to just 24 days starting in January. It’s a pretty mundane move that will have little tangible effect on the markets.

But what could have a much larger impact, with much less transparency, is Bernanke’s recent discussion of paying interest on the reserves banks place with the Fed.

A popular move with many overseas central banks, the interest rates paid on reserves helps to establish a rate floor that regulators can gradually increase without raising overall interest rates.

Essentially, the move is a way of mopping up excessive liquidity without draining or lowering the water in a much larger pool of lending capital.

Like many things, the idea sounds great on paper, but so did letting the Fed negotiate with AIG’s trading partners and we now know how much that cost us.

Let’s face it. The markets like transparency and predictability. Anything less gives us what Friedrich Hayek called “malinvestment.”

As the Fed gets more and more creative in its efforts to boost the economy without creating deadly bubbles, transparency will go out the window.

Toss in growing political pressure from the folks from Washington and one thing is certain.

Anything the Fed does will cost you and I more money.

The momentum behind China’s economy is staggering.

“China is increasingly becoming a responsible citizen in the global community,” economist Allen Sinai of Decision Economics told The Associated Press. “No longer lawless, no longer difficult to deal with, much more responsible. It is now a powerhouse among economies and finance. And it’s a rich country.”

In just the past few weeks, two of the world’s key global institutions – the World Bank and the Organization for Economic Cooperation and Development (OECD) – and a large swath of investment banks raised their 2009 and 2010 growth estimates for China’s economy.

The OECD said it now expects China’s economy to grow by 7.7% this year and the World Bank boosted its projection to 7.2% growth.  GDP will expand by 9.3% in 2010, according to OECD estimates.

BNP Paribas SA (OTC: BNPQY), Barclays Capital, Goldman Sachs Group Inc. (NYSE: GS), JPMorgan Chase & Co. (NYSE: JPM), UBS AG (NYSE:UBS), Morgan Stanley (MS), Standard Chartered Bank, and RBC Capital Markets all raised their forecasts for China’s economy as well.

So far, BNP Paribas SA is the most bullish on China’s prospective growth, as it boosted its prediction to 8.2% this year. That would top Beijing’s 8% target.  Barclays Capital, Goldman Sachs, and JPMorgan all raised their 2009 forecasts to 7.8% growth.

“The strong acceleration in underlying economic activity is now unmistakable,” Goldman Sachs economist Yu Song told TIME magazine.

China’s Homegrown Growth

China’s $585 billion (4 trillion yuan) stimulus package gave the economy a big kick in the first half of the year, spurring bank lending and driving fixed asset investment. It even stimulated the oft-maligned Chinese consumer, boosting domestic demand while the market for exports remained dormant.

Chinese banks lent about $1.08 trillion (7.37 trillion yuan) in the first half of the year, nearly double the total loans extended throughout all of 2008.  And even though the economy is clearly on the road to recovery, it’s not likely lending will let up for the rest of the year.

BNP Paribas chief economist Chen Xingdong told Bloomberg thathe expects new loans will reach 9.5 trillion yuan by the end of 2009.

“The growth recovery has been even stronger than our anticipation,” Chen said.  “Strong fixed-asset investment growth and retail sales have started to generate real demand for industrial production.”

Fixed-asset investment rose 33.5% in the first half year to $1.34 trillion (9.132 trillion yuan), according to the National Bureau of Statistics (NBS). Investment in infrastructure rose 57.4% year-over-year, with spending on railways up 126.5% and highway spending up 54.7%. Property sales were up 53% in the first six months from a year earlier.

Of course, fixed-asset investment has been consistently strong in China for the past decade. The real turnaround in the past six months has been that the frugal Chinese consumer has begun to spend more liberally.

China’s retail sales in the first half of the year rose 15% to $859.6 billion (5.87 trillion yuan).  Retail sales in June also rose 15% from May, said NBS spokesman Li Xiaochao.

“There were two highlights in promoting domestic demand: commercial apartments sales rose by 31.7% in the first half year from the same period last year; automobile sales expanded by 17.7% year on year,” Li said.

Auto sales reached 6.1 million vehicles in the first six months, helping China to supplant the United States as the world’s largest automarket. Sales could easily surpass 12 million this year.

“The rebound has been driven by the domestic economy,” Jing Ulrich JPMorgan Chase & Co.’s Chinese equities strategist told Fortunemagazine. “The consumer proved resilient – and the government acted as a catalyst.”

“China can still achieve 8% growth,” she said. “Everything is happening very fast there.”

The One Potential Hurdle for China’s Economy

There’s no question that China’s stimulus package has been an unequivocal success. In fact, the only problem may be that it is working a bit too well.

In the United States concern about inflation prompted Federal Reserve Chairman Ben S. Bernanke to outline an “exit strategy” for the withdrawal of liquidity from the financial system. Similarly, China’s biggest challenge going forward will be clamping down on lending to keep potentially hazardous bubbles from growing in its economy.

Inflation is a particular concern, as rising commodity prices have crept into imports.

“Commodity markets around the world have bottomed and are rebounding, raising imported inflation pressures,” the People’s Bank of China (BOC) said in a report analyzing second-quarter economic trends, issued by its Financial Survey and Statistics Department. “At the same time, domestic demand continues to rebound, liquidity remains flush and inflation expectations are surfacing.”

However, as in the United States, policymakers in Beijing have said they will remain committed to “proactive fiscal policy” until it is certain a recovery is underway. In fact, some analysts don’t expect to see a significant change in policy until November, when leaders and regulators meet for their annual conference on the economy.

“We must see that the economic recovery is not on a solid foundation, and the negative impacts from the international crisis have not eased,” said Chinese Premier Wen Jiabao. “An improvement in the economy does not mean the difficult period is over.”

Indeed, stimulus must be maintained until China’s all-important export sector has recovered. And while Chinese exports climbed 7.5% from May to June, they were still down 21.4% from a year ago.

Of course that doesn’t mean Beijing will just sit back and wait for lending to reach excessive levels.

“China has achieved impressive results in reviving economic activities,” Gao Shanwen, chief economist with Essence Securities, told Reuters. “The basic tone of the appropriately loose monetary policy is unlikely to change, but there will be fine-tuning.”

The BOC has traditionally used a quota system to control lending, telling banks not to exceed specific ceilings. It may continue to do so if the central bank does not see a sufficient drop in lending. It may also choose to provide banks with a less stringent lending guidance, or range, rather than an outright ceiling.

“The banks are highly responsive to government policy,” Ha Jiming, of China International Capital Corp. Ltd. (CICC), the nation’s largest investment bank, told The Financial Times.

Punitive bill issuances are another tool in the central bank’s toolkit. In September, the BOC will require banks to buy $15 billion (100 billion yuan) in special bills. The bills will be issued at punitively low interest rates and reduce the amount of money banks have on hand to lend out.

Regardless of what methods it chooses, the BOC is clearly ready to act. But it won’t jeopardize a recovery in a preemptive assault on inflation.

The central bank “will unswervingly continue to apply appropriately loose monetary policy and consolidate the economic recovery momentum,” said Su Ning, vice governor of the People’s Bank of China.

Source: With Its Economy Ignited by Stimulus Spending, China Is Leading the Global Recovery

It brings back the question, which has loomed dimly at the margins of America’s collective consciousness, as to whether we can get through the long emergency ahead without going through a wringer of domestic political convulsion. At this rate, sooner or later, anything identified with wealth could become a target for the wrath of the unemployed and foreclosed. The first rock that flies through an East Hampton window, or the first firebomb tossed into the lobby of Goldman Sachs Manhattan headquarters could ignite a chain of events that shoves all economic policy out of the political arena and quickly divides everyone at the center of power into armies out for blood.

What the nation — including President Obama — can’t seem to get through its head is that the USA has entered a period of epochal economic contraction. Instead of growth, as measured in conventional econometrics, we can only expect (in the best case) transformation to a different economy within the limits of real contraction. The president has got to stop promising renewed growth. While this would affect the perceived “standard-of-living” as measured in things like shopping mall sales and vehicle miles driven, it would not necessarily mean diminished “quality-of-life.” It would mean different ways-of-life for a lot of people — for instance, young adults who had expected lifetime employment as corporate executives but who, instead, find themselves ten years from now working at farming. We have an awful lot to get real about.

A genuine reorganization of the US economy seems beyond the ken not just of all US politicians but of the entire US news media and business leadership. A wonderful example a couple of weeks back was the idiotic press conference by General Motors marketing chief, Bob Lutz, who thinks he can revive the American Dream with electric cars. (By the way, this is pretty much the same thinking I encountered at the Aspen Environmental Forum among the Green celebrities.)

From a purely practical standpoint, the electric car is absurd. If they were produced on a mass basis, they would crash the electric grid — assuming that the masses could afford to buy them, which assumes a lot. We simply don’t have the electric generating capacity to run even one-quarter of the current car fleet on volts, and building the necessary nuclear or coal-fired power plants in five years is also an absurdity. (Don’t expect wind, solar, biomass, or anything else to pick up the slack.) If electric cars were produced as just a niche product for the elite (e.g. Goldman Sachs employees), they would soon provoke the resentment of the non-elite left to the mercy of the oil markets.

Anyway, America’s motoring dilemma has gone beyond the issue of how we power the cars — and even beyond the insanity of blindly maintaining our extreme car dependency per se. The continuation of Happy Motoring now hinges on two other big quandaries: 1. the likelihood that there will be far less capital available for car loans, and 2.) the likelihood that there will be far less government money for road maintenance. The problem of Peak Oil — and the prospect of price-jackings and shortages — is just the cherry on top.

By the way, for practical purposes Bob Lutz of GM is an employee of the US taxpayers now, since the US owns 60 percent of the “new” General Motors, so he must be considered a spokesman for national policy. Since a transformation of the US car fleet to electric vehicles is absurd, what would be an appropriate response to profound economic contraction? How about walkable communities connected by public transit? Why is that not a focus of the “new” General Motors? In 1941 the company made the transformation from cars to armaments in a matter of months; why can’t it produce the rolling stock for a renewed passenger rail system? Or trams? Is this not enough of a crisis? The answer is that there is no leadership in this direction. If President Obama declared this to be a policy objective, and stuck to it for more than one business day, he could drag the sleepwalking American public in this direction, and the rest of national leadership in government, business, and media with it.

This kind of thing is what prompts casual observers to wonder if the president is a cynical shill for business as usual, or a victim of the worst conventional thinking with no real vision, or just another clueless sleepwalking bozo with a charming veneer.

In circles that pass for “progressive” these days, the natives are getting restless. Their agitation seems pretty inchoate for the moment — still resting on vague, poorly-defined wishes for “change.” These vague promptings need to be focused on specific action that is realistic within the context of comprehensive contraction and transformation. A big piece of this would be the recognition that our suburban sprawl economy is dying, and that we now have to bend our efforts to reorganizing American life on the most fundamental physical terms. We have to inhabit the landscape differently, move around it differently, generate food out of it differently, and make things on it again. Whatever remaining real capital there is in the system can’t be squandered on cash bonuses for Wall Street employees.

Source: Wobble Time

[Note: For more of Mr. Kunstler’s inexhaustible work, including art, articles and links to his books, be sure to check out his webpage here.]

About six months ago, Goldman itself was on its hands and knees looking to get a part of Hank Paulson’s $700 billion TARP fund. Back then, Goldman posed a “systematic risk” to the system. Handily, the firm’s former CEO happened to be Treasury Secretary. And Goldman was granted bank holding status and TARP rescue money lickety-split.

Back in the last depression, the Pecora Commission went straight for bankers’ gonads. Examples were set. Bigwigs were forced to resign. And landmark legislation was put in place (think Glass-Steagall) to keep the “banksters” in their place.

These days are different. Washington seems less keen to go after their pals on Wall Street or ask too many awkward questions. Instead, the pols are rejoicing in Goldman’s record profits and desperately trying to forget about all those billions in tax dollars they recently handed over to the nation’s top bankers.

Of course, not all bankers are created equal. And former Goldman Sachs CEO and then Treasury Secretary Hank Paulson had no intention of extending your hard-won tax dollars to just any old bank.

Goldman’s competitor Lehman Brothers needed cash too. It had earlier claimed to be “too big to fail” and a “systematic risk.” But the feds were having none of it. Bank holding company status was withheld. And Lehman brothers, like Humpty Dumpty, “had a great fall.”

(Oddly, or perhaps not oddly at all, considering the established close ties between Goldman Sachs and Washington, Lehman’s demise has greatly helped Goldman. The reduction in competition has greatly benefitted Goldman’s bottom line.)

So what is Goldman doing with the money? Well, we hate to break it to you, folks, but it’s not saving it for a rainy day. According to Barron’s, having saved roughly $600 million by issuing FDIC-backed debt with yields reflecting the government’s guarantee, Goldman has managed to set aside some $11.4 billion for compensation in this year’s first half. This works out to an annualized $770,000 “for each chief, cook and bottle-washer at the firm.”

Of course, saving for a rainy day is something a bank might do if it knew that it couldn’t rely on its connections in the upper echelons of government (and taxpayers’ generosity) should things get a little hairy again down the line. Or as Bill puts it less prosaically: “like a welfare queen in a pink Cadillac, it spends every penny, confident that it can lean on the feds next month as well as the last.”

But surely, some would say, Goldman’s bumper quarters mean the banking crisis and the economic crisis are over. Surely it’s now time to rush back into stocks, switch on Cramer and let the money start rolling in again. Perhaps, dear reader, perhaps. But as always, things aren’t quite what they seem. This from Bill in yesterday’s Daily Reckoning:

But now, look. After all our whining and complaining about the bailouts – they must be working, right? The big banks are making money again… big money. And that must mean the economy is on the mend. They’re lending… they’re speculating… they’re rolling the dice and… hallelujah… a pair of boxcars!But wait. Ken Lewis of Bank of America says, “Profitability in the second half of the year will be much tougher than the first half…”How come?

Because the banks’ core business is actually getting worse! The core business of banking is lending to people who are capable of paying it back – out of earnings. If the borrower is counting on higher house prices…or higher stock prices… to allow him to refinance on better terms, the lender is asking for trouble. Prices may go up… or they may go down. And if they go down, down goes the lender’s collateral too… and his hope of getting repaid.

The banks made big mistakes in the bubble years. And now they’re paying the price. But so far, they’ve only made the first installment payment. Subprime loans started going bad two years ago. Then, people began losing their jobs… and loans of all sorts were in trouble.

There is no sign that this process is over. Instead, it is merely proceeding in good order… just as you’d expect.

California lost another 65,000 jobs in June. And in Pennsylvania, 17,800 people are running out of jobless benefits. This group is on the cutting edge of a huge new trend – people not only unemployed, but out of unemployment benefits. One estimate says there will be more than half a million of them nationwide by the end of September. You think they were cutting back on spending last month? Let’s see what they do in October. And let’s see what happens to their debt… those Alt-A, jumbo, and prime mortgage loan…

… and let’s see what happens to credit card debt…and to commercial loans too. There’s a report that New York commercial properties are running up towards a 23% vacancy rate… Shoppers not shopping… stores and restaurants closing their doors… unemployment going up – sounds like the depression might not be over yet…

Fenster: They treat me like a criminal. I’ll end up a criminal.
Hockney: You are a criminal.
Fenster: Why you gotta go and do that? I’m trying to make a point.
– The Usual Suspects (1994)

Ah, Goldman Sachs, how we despise thee. Let us count the ways.

First there is the matter of jaw-dropping compensation. As The New York Times reported last week:

Goldman posted the richest quarterly profit in its 140-year history and, to the envy of its rivals, announced that it had earmarked $11.4 billion so far this year to compensate its workers.

At that rate, Goldman employees could, on average, earn roughly $770,000 each this year – or nearly what they did at the height of the boom.

Senior Goldman executives and bankers would be paid considerably more…

The unofficial party line from Goldman is, “Don’t hate us because we’re smart.” (Or in the street vernacular, “Don’t hate the player, hate the game.”)

To get rich in a capitalist system you need three things – hard work, smarts and luck. America, rightly, bears little or no ill will when fortunes are made through the combination of these three. Take the Google guys, for example… or Warren Buffett… or any other number of big winners in our (quasi) free market system.

Heck, America even goes one better than that. In the United States, you can make ridiculous sums of money that no one even remotely thinks you deserve, and most folks won’t begrudge your good fortune.

If a ne’er do well CEO convinces his shareholders to pay him a bonus worth tens of millions for doing diddly-squat, that might be a shame… but it’s the shareholders’ money, free to be wasted as they wish.

Or if an athlete signs on to a professional sports team for tens of millions and then, say, gets into a nightclub shooting, wilts under pressure, or otherwise turns out to be a total flop, well… c’est la vie. A contract is a contract.

Point being, private financial exchanges are akin to what happens in the privacy of a home. The result may be weird or goofy or stupid or obscene, but as long as consenting adults are involved, the public doesn’t really care.

Where Goldman (and others) crossed the line is in the source of their gains…

Taxpayer Largesse

First, an interesting tidbit. Goldman’s take of $770,000 per employee is stunning enough. But as it turns out, Goldman may have actually used a subtle accounting trick to make that number smaller, so as to tone down some of the spotlight glare.

Various Wall Street sources have reported to Dealbook that “in a footnote to its financial results… Goldman said that for the first time it was including consultants and temporary staff in its overall employee figures. This had the result of increasing its official staffing levels by 2,000 jobs or so in both the first and second quarters.”

By spreading the haul over a bigger head count, you see, the gaudy top line number – average profit per employee – is reduced.

So by throwing in consultants and temps and, who knows, maybe even janitors and deli delivery boys, Goldman can practice its own peculiar brand of modesty in at least keeping the profit per head below a million bucks.

Again, the reason for gall is not because Goldman’s traders are “smart.” It is because this pound of flesh was extracted directly from taxpayer’s hides.

On one level the chain of events is simple:

• Goldman Sachs takes huge, multibillion-dollar taxpayer cash infusion from the government.
• Goldman uses these funds to make an absolute killing.
• Goldman says “Gee thanks!” and pays back the money with minimal (i.e. zero) penalty attached.

But actually it’s a lot murkier and uglier than that.

Thanks a Billion, Hank

To really get a bead on how stinky this whole situation is, consider why 2009 has proven so profitable for Goldman Sachs. Two reasons stand out. First, half its competition has been crippled or killed off. Second, AIG (a major Goldman Sachs counterparty) was specifically kept afloat.

If you’ll recall, the previous Treasury Secretary was Hank Paulson, a.k.a. “Hammerin’ Hank,” the ex-CEO of Goldman Sachs. (Paulson was recently back in the news defending his tough-guy leanings in the whole Bank of America/Merrill Lynch fiasco.)

Taipan Daily is not one to promote irresponsible conspiracy theories. But nor do we shy away from putting two and two together. So with that in mind, let’s look back at the dark days of September 2008.

During Paulson’s time at Treasury, there was no question who was top dog (in terms of the relationship between the Treasury and the Federal Reserve). Hammerin’ Hank was everywhere. Bernanke was a shrinking violet in comparison.

Now the uncomfortable questions…

On that fateful weekend in question when Lehman Brothers collapsed, who stood to benefit (in the long run) from the disappearance of a major Wall Street competitor? Goldman Sachs.

Coincidence? Maybe. But then note what happened just a few days later. Within 72 hours of Lehman Brothers’ collapse, Paulson announced that AIG would be saved… at an outrageous opening bid of $85 billion. (The taxpayer tab would eventually run much, much higher – and it’s still running.)

Again, using the old Latin phrase “cui bono” (Who benefits?) as our guide, one has to ask… who was one of the major beneficiaries, if not THE major beneficiary, in seeing AIG survive?

Goldman Sachs.

This is true because AIG played the role of busted bookie, having made tens of billions worth of dumb bets with other investment houses on the street. Normally when a gambling house folds, the gamblers waiting to be made whole are SOL – a technical acronym which means “out of luck.”

But when the gamblers are high rollers it’s a different story. In part, Paulson and Bernanke saved AIG, flooding it with tens of billions in taxpayer cash, so that those very same funds could be kicked right back out to other players on the street. In its death throes AIG served as a “beard”… a convenient one-stop money laundering shop, used by the Treasury and the Fed to avoid the political inconvenience of writing big checks out in the open.

As a result of AIG’s last-minute bailout, and the discreet transfer operation outlined above, Goldman walked away with a cool $13 billion or so… profits on AIG-backed contracts that would not have paid off had Hammerin’ Hank – the ex Goldman CEO – not saved the day.

Rotten Egg Insurance

There is yet another amusing question that must be asked. It would be a small miracle if Congress figures out the importance of this question, but who knows – they may eventually get around to it.

That question has to do with the morality, or even the legality, of buying rotten egg insurance on the very eggs one is selling.

Put it this way… suppose I set myself up in the fly-by-night homebuilding business. You decide to trust me, and soon move your family into a beautiful new 3,000 square foot home built by my construction firm.

In time you discover the home is a disaster. The drywall is rotted and mildewed… the electrical wiring is a fire hazard… the foundation is cracked… the generic insulation is asbestos-prone… a residential nightmare through and through.

Naturally you would want restitution on this disaster of a house. You might get some money back, but nowhere near enough. On top of that, the emotional anguish (and headache and hassle) could never be repaid.

So how would you feel if you later found out that, even as I sold you the house, I had acted with foresight by loading up on a certain type of disaster insurance… insurance that paid off specifically in the event of a construction-related loss? And what if, let’s further say, you found out that I made an absolute killing on the trade – making more from my side bet than I paid in restitution on our deal?

This is a fair summation of what Goldman Sachs did in relation to the whole toxic asset subprime debacle. It sold rotten eggs – or rotten houses if you like – and protected itself by taking out disaster insurance on the very garbage it was selling.

This is murky legal ground, of course. One can hardly blame an investment bank for looking out for itself. And making bearish bets in the market should hardly be illegal.

At the same time, this dramatic separation between “sell side” and “buy side” is very interesting. What to make of it when an organization that is shoveling toxic-related assets out the door as fast as it can – stuffing its clients like geese until their livers explode – is simultaneously making aggressive downside bets on the very same dreck?

It’s no big deal though… they were just being “smart”…

An Age-Old Pattern

There is yet more… plenty more. We could get into the front-running accusations tied to the stolen Goldman code, or the practices of certain players that look tantamount to stealing $15 billion-$25 billion a year directly from investors’ pockets, or the direct manipulation of certain markets… but that would be overkill. By now the point has hopefully been driven home.

The truth of the matter is that nearly all major banks – not just Goldman Sachs – have exploited their privileged position within the system for decades. Goldman is simply the biggest, most brazen example at this point in the cycle – and one of the few “smart” enough not to have blown itself up.

The crux of the problem is “regulatory capture,” in which the players in an industry amass so much power and influence that they successfully “capture” the watchdogs who are supposedly watching them.

Financial history has seen these episodes play out over and over again. One over-the-top example was the 1980s failure of Continental Illinois Bank and Trust Company – at one time the seventh largest bank in the United States.

When “Conti” finally failed, it was only after an extended comedy of errors, in which the bone-headed bankers running the show repeatedly told the Federal Reserve to shove off and mind its own business. Conti’s ship of fools was piloted by buffoonishly confident captains until the very day it ran aground.

And the Fed, far from being the all powerful regulator and stern disciplinarian it was supposed to be when it came to reining in the big money center banks, was instead cowed and stymied by Conti’s political clout and systemic importance. (Just as it is thoroughly cowed by the likes of Goldman Sachs and JPMorgan today…)

A Bonus Too Far

The reason this kind of thing matters is because now, finally, the big banks may have taken their greedy taxpayer rip-off game “a bonus too far.”

And again, it isn’t just Goldman Sachs. It isn’t even just the United States. In a recent piece titled “The devil’s punchbowl,” The Economist reports:

A new hiring frenzy in the City [London's financial district], with bonuses guaranteed for “only” the first year; investment-banking results for the second quarter likely to top those of the first; an innovative securitisation [sic] by Barclays to get bank loans off its balance sheet. The term “business as usual” normally delights tradesmen and their customers. Applied to the banks that plunged Britain into economic crisis, it strikes fear to the heart.

Surprisingly, there has been a steady drumbeat of public outrage over Goldman Sachs’ latest round of eye-popping profits (rather than the usual obliviousness). It is no longer quite “business as usual” for the most connected player on Wall Street.

The American taxpayer is slowly waking up to the true source of such profits, and the free market travesty such ill-gotten gains represent. If anything, these fat cats are more socialist than capitalist in their smoky back-room domination of a secretive, incestuous, oligarch-infested state.

But with that said, your humble editor doubts it will be outrage alone that derails the big bank gravy train. Politicians love a bit of theater in front of the cameras to please the folks back home, but most of the time it winds down to nothing.

No, what would really wreck the gravy train would be another global banking crisis… a sort of “financial supernova 2.0″ with as much destructive power as the first one (if not more).

And we could see it too… more on that to come.

Source: A Bonus Too Far (Bankers on Borrowed Time)

Two important headlines this morning, both of them fraudulent:

“Chinese economy bounces back,” says one headline in theInternational Herald Tribune.

“JPMorgan profit soars despite downturn,” says another.

The average reader or TV viewer will go no further. “Ah,” he says to himself, “good news; the worst is over. China is a green shoot as big as the Amazon. And JPMorgan is a leader in the financial sector. If the financial sector is doing well, the whole world economy must be doing well.”

But here at The Daily Reckoning, we can’t help ourselves. If we see a silver lining, we look for the cloud. We see garbage…we look for the rat…

We begin with the JPMorgan profit announcement, because it is the most intriguing. Let us set the stage:

In the last half century, credit has expanded faster even than dress sizes. Naturally, this has made the business of hawking credit extremely profitable. Profits in the financial sector soared to 40% of the U.S. total. And every momma wanted her baby to grow up to be an investment banker.

But then, in 2007 & 2008, the bubble in the financial sector popped. Many banks and financial institutions went broke…or had to be bailed out by the government. Instead of being the world’s highest-flying industry…finance became the scene of its biggest crash.

And now, from all we’ve been able to detect, a fundamental shift has occurred. People are no longer eager to go deeper and deeper into debt. Instead, they are eager to pay off debt…that is, to rid themselves of finance…and to get as far away from the financial sector as possible. Savings rates, for example, have gone from zero to 7% in just the last 12 months.

But in the midst of this remarkable and historic change, we get news that at least a couple of the biggest firms in the financial sector – JPMorgan and Goldman Sachs – are making billions in profits:

“Even as it weathers the worst economic downturn in decades, JPMorgan Chase said Thursday that it had made a $2.7 billion second-quarter profit as a result of stellar trading and investment banking results.”

This was essentially the same story we got from Goldman. Neither bank made its money the old fashioned way — by lending to worthy projects; they made their dough by “trading” and “investment banking.” In other words, they made billions from speculation.

Anyone who takes this as evidence of a recovering economy should work for the government. Only a government economist or a mental defective (excuse us for being redundant) could believe that genuine prosperity can be built on a foundation of speculating by large financial institutions. You can see why by asking a simple question:whom were they trading against?

Speculating is a zero-sum game. No matter who wins, the economy is not a bit better off; it has not a centime more in resources. Goldman and JPMorgan report earning, together, more than $6 billion. Who was on the other side of that trade?

There is also something fishy about the whole thing. Trading is not only a zero-sum game, it’s a game of chance. Traders lose money about as often as they make it. Of course, normally, the traders at the big banks have an advantage; they are not idiots. They make money by taking it away from the amateur traders, who are idiots. But what amateur traders put up $6 billion?

Our guess: the fix is in. They are taking advantage of the feds’ stimulus programs…and trading against the biggest patsy in the world, the U.S. taxpayer. How? We’ll find out how, later…

Meanwhile, there is the news that China is back in business.

“Government spending pushes GDP growth to 7.9% for 2nd quarter,” reports the IHT, “…fueled by a large economic stimulus package and aggressive bank lending…a surprisingly strong showing during the global economic downturn…

“…while most other major economies are contracting and suffering from the worst economic crisis in decades, China appears to have turned a corner…

“Growth in the second quarter was driven by strong auto and property sales, a rebound in manufacturing and huge infrastructure spending, which was propping up global commodity prices.”

Further investigation reveals that bank lending and property speculation have gone wild. (More on this in today’s essay, below…) And stocks in Shanghai are up 75% so far this year.

Now, let’s try to get this straight. The world is in a slump. China sells stuff to the world. And yet, China is booming.

How could it be? Again, there’s something fishy about it…as if the government were jiving the figures…as if the speculators had taken leave of their senses…and as if the whole thing were just the result of the same kind of misguided ‘stimulus’ that got us into trouble in the first place…

The Richebacher Letter’s Rob Parenteau agrees that something isn’t quite right. “Ask anyone who’s done business there. Keeping a double set of books in China isn’t just common, it’s considered ‘good strategy.’ You’ve also got under-regulated Chinese banks hiding as much as $500 billion in bad debts — China’s own version of ‘subprime’ loans to small businesses and Asian property speculators.

“On top of that, you’ve got a $40 billion tab left over from the Beijing Olympics… and a $140 billion tab for rebuilding Sichuan after their 2008 earthquake.”

Boom…boom…ka-booooom!

Source:  The Zero-Sum Game of Speculation

Here’s what the headline in every paper in the country should read today:

$1,100,000,000,000.00

That’s the record budget deficit the government has accrued on our behalf since the fiscal year began last October. The word “record” really doesn’t even do the number justice… $1.1 trillion is more than double 2008’s all-time high deficit of $454 billion — and as you know, 2009 ain’t over. The CBO currently projects a $1.8 trillion budget deficit for the fiscal year, more than triple last year’s record.

Look at the recent history of the Treasury’s numbers and the trend is obvious. Check out our government’s book-balancing stupor over the last couple years:

That’s the kind of chart that should make a lot of sense to an active investor. What’s the outlook for a volatile stock that’s been making lower highs and lower lows?
But our government’s outrageous deficit isn’t the story du jour… once again, that title goes to Goldman Sachs.The world-famous investment bank reported earnings this morning in line with our sentiment yesterday: Goldman profited $3.4 billion in the second quarter, roughly double the Thomson Reuters forecast of $1.7 billion.
Perhaps even more beneficial for Goldman’s share price — and the market at large – newly famous analyst Meredith Whitney gave GS her first ever financial “buy” rating yesterday.The “buy first, think later” types took this news straight to the market, bumping up GS shares 5% and the S&P over 2%.

But as usual, the drama’s in the details:

“Our more bullish outlook on Goldman Sachs shares,” Whitney wrote, “is deeply rooted in our sustained bearish stance on the U.S. economy and the state of U.S. financials at large. Specifically, we expect a tsunami of debt issuance from federal/sovereign, state and local governments to fund woefully underfunded budget gaps. In addition, we expect corporate debt issuance to be at least 60% as strong as peak cycle levels, reflecting sizable debt maturity rolls. What’s more, given fewer players in the market, not only is GS benefiting from market share gains on these products, but more widely in the derivatives products.”
The market is back to floundering today. Looks like another “buy the rumor, sell the news” trade. Financials and consumer stocks led the way yesterday, and even though Goldman Sachs and Johnson & Johnson beat earnings this morning, both sectors are under pressure today.

As we write the Dow and S&P are still around break-even.
The data patch won’t help stocks today either. Retail sales improved in June for the second month in a row… but increased only 0.6%, and the majority of the rise was due to the 5% jump in gas prices.

And much to the dismay of the Fed, producer price inflation shot up 1.8% in June, double analyst expectations and the biggest jump since November 2007. Like retail sales, higher energy costs led the rise.
Yesterday’s stock rally pushed the dollar index down half a point, to 80 even. The Treasury’s announcement of the biggest budget deficit in the history of fiat money didn’t help the greenback, either.

That puts the pound up a few cents from last week’s low, to $1.63. The Canadian dollar has gotten a nice bump too, from 86 cents Friday to just under 88 cents as we write. At 92, the yen is holding on to its newfound strength.

But in spite of the dollar’s marginal weakness, the euro is no better off. In fact, since peaking around $1.43 in early June, the multination currency has been slowly trending down. This morning, it’s at $1.39.
“Remember that currencies, because they are fiat by nature, are political things,” our currency trader Bill Jenkins reminds us. “While it is the fundamentals that drive them, one of the overarching problems in our market is the absence of reliable fundamental data. It is hard to debate against the fact that governments manipulate what is released.

“But some things are for sure and provide ‘reasonable markers’ to see what a currency is doing. One of my ‘favorites,’ although I hate to call it that, is the ‘civil unrest factor.’

“Across the eurozone, riots and outbreaks of violence have been touched off by escalating economic problems and disagreements between members and neighbors. People involved in civil unrest are a multifold problem. First, they have too much time on their hands because they are not working. Jobless citizens, especially in a heavily socialist culture, are a continual drag on the system.

“Second, it costs money to keep repressing social upheaval — presenting another drag on the system. Additionally, the passions and fears of men being what they are, such activities tend to draw in more normally productive folks as the snowball gains speed and volume.

“Here in the United States, we are not facing such difficulties (yet). This means a more reasonable system of work and distribution of goods and labor. All in all, this is good for a culture, the body politic and the economy. As a result, it also breeds greater confidence in the currency. And when all is said and done, investment money will go where there is a reasonable likelihood of return, even if the return may be lower.

“Longer term, I have to wonder if the euro has what it takes to survive this crisis. I have no doubt that the United States will emerge out the other side with all 50 states still members of the union. I don’t know that such can be said for the European Union.”

Want to make a few bucks while this trend develops? Check out Bill’sMaster FX Options Trader.
Case in point: When American auto supplies got in trouble, their workers picketed. When the same goes down in France, they rig the place with bombs and set a bonfire!

That’s the scene at bankrupt car parts factory New Fabris in Chatellerault. Former workers have rigged the factory with gas canisters and promise to detonate unless the company’s two biggest clients — Renault and Peugeot — pay them off. By their judgment, the automakers got state assistance while they were left to rot. Thus the laid-off employees want 30,000 euro a piece… heh, evidently a payoff worth imminent imprisonment.
Back in the U.S., another slimy bill is slithering its way through the halls of Congress. The latest proposed health care legislation would both eat the rich and introduce another mandatory government program. Oy…

Under the proposed bill, a 1% tax hike on couples earning over $350,000 would raise an estimated $500 billion over the next decade — barely half the total cost of the program. Those taxes would help finance subsidized health care for the lower class, for which enrollment would be mandatory (or risk being fined).

“If you earn less than $350,000,” writes Bill Bonner, “you feel that you are getting something for nothing. But that money — had it not been confiscated — wouldn’t have disappeared. It would have been put to work in one way or another — added to the nation’s capital formation, lent to the government, used to buy a new car or take a vacation. Instead, it is to be sucked out of the benefits of the willing economy and used to give people something they couldn’t afford or didn’t want to pay for themselves.”

“Don’t bet against us,” the president assured us. “We are going to make this thing happen.”
“Convergence is and will continue to be one of the most powerful technological trends of our time,” says our tech adviser, Patrick Cox, happy to change the subject. “I’m referring to the fact that all electronic devices are increasingly overlapping and interoperating. IT is converging into single personalized electronic systems.

“Let me give you a recent example of the convergence between the Web, mobile devices and hearing aids. A new iPhone app, soon to be available on other systems, is downloaded from the Web and turns a mobile phone into a sophisticated hearing aid. Combined with earphones, the app allows users to adjust, using the touch-screen, the device to best pick up whatever frequencies they want to hear best.

“If you miss something, you can easily replay a segment. Eventually — not far off — the spoken words heard will be transcribed into written words automatically — in real-time and in your choice of languages. Real life will be subtitled. Those subtitles, in turn, will be searchable terms.

“Tell me that isn’t cool. I dare you.

“Many of the biggest convergence winners are yet to emerge, however. They are the companies that will solve the interface problems. For most people, sophisticated software is still too complex and confusing — especially when it runs on a small mobile device. This is because software controls are limited by current processor and graphics designs.

“When the next generation of 3-D computing arrives, that changes. The entire world of software will become far, far easier to understand and control. This simple change will catapult a number of companies into financial history books. I’ll be adding some of them to the Breakthrough Technology Alert portfolio in the not-so-distant future.”
“The person commenting on the Illinois prison system really hit the nail on the head,” writes another reader, referring to yesterday’s inbox. “I work in the biggest corrections agency in the country, and I can tell you that public policy went completely in the wrong direction beginning about 20 years ago with stiffer sentencing laws. Those laws sound good to the average American idiot, but are actually counterproductive — the current system doesn’t differentiate between people who we’re actually scared of (like rapists and murderers who can’t be rehabilitated) versus people who we’re just angry at (like people with drug problems, whom it would be much cheaper to rehabilitate). We are spending waaaaay too much money locking up people who don’t need to be locked up, and now we are finally beginning to realize that we can’t afford it. Strangely, it is the people who rail against big government who typically want everyone locked up. But who do you think the guards work for?”
“Once again, Goldman Sachs escapes any real scrutiny, even by you folks,” a reader writes. “Are you aware that the firm was ‘banned’ from making quant trades at the New York Stock Exchange, just last week? Apparently, their geeks found a way to front-run large trades being made by computer at that exchange. Check it out for yourselves.

“How about pounding the table on these blatantly criminal acts! Just more proof that Wall Street has no shame.”

The 5: Heh, shame isn’t one of our principal virtues either, so you may be barking up the wrong tree. (BTW, we haven’t heard that particular story… feel free to send along some details.)

Either way, we won’t blame Goldman for beating the system the same way we avoided taking cheap shots at Bernie Madoff… if they’re willing to sell their souls for “alpha,” that’s between them and God, Allah, Mammon or whoever. Our major gripes with Goldman are their influence in government and this whole “too big to fail” bailout mess.

Two ironic reader mails for Bastille Day, don’t you think?

Cheers,

Ian Mathias
The 5 Min. Forecast

Source: $1.1 Trillion Deficit, Why the Euro is Still Down, Eating the Rich, Tech Convergence and More!