september 2011 forest & trees report

8/4/2019 September 2011 Forest & Trees Report

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Forest & Treesreport

September, 2011

BeckerAdvisory Services Issue 4

BeckerAdvisory.com 1

What is it?

Making a molehill out of a mountain - me

If you read the papers or watch the talking heads on business news stationsone would think that things are not so bad. Let me start by saying, bynature, I am not a doom and gloom person. But, the current environment

leaves me with no other emotion other than concern. Keep in mind myconcerns cross many levels. My first level of concern is for my kids futures,followed by my clients, myself and all Americans. Here is a list ofparaphrased headlines in the last few weeks:

Food stamp use in US reaches record high of 43 million people (14%of population)

Greece on the verge of actual default

Euro zone being torn apart at the seems

Big banks paying record bonuses

Unemployment still stubbornly at 9.1%

Interest rates to remain low until 2013

China (rest of emerging world) fighting price inflation Switzerland pegs their currency to Euro

Economy growing at anemic levels

Money supply has exploded 300% in three years

External US debt is larger than any other country that has defaulted

US Congress at loggerheads over budget deficit

US consumer confidence at lows

Housing still a disaster

Corporate leverage is at pre-Lehman Brothers collapse highs

So, when I read an article or hear a talking head shining the light on a dayor multi-day move in stocks I cannot help but think about a molehill is being made out of a mountain of bad news. In my mind it is of absoluteimportance to not forget that the US economy and the European economy isin worse shape than it was in 2008. All the while western governments areloading more debt on top of bad debt in the midst of growing moralhazards. Lets call a mountain a mountain. Lets call a bust country a bustcountry. And, for Petes sake lets bury the dead banks they are just stinkingup the joint now.

In this issue:

FORESTWhat is it?Liar or stupidCharting the Forest

TREESCartelFire insuranceCharting the Trees

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LIAR OR STUPID

As I watched the republican debate recently I was struck by the exceedingly uninformed comments by

Mitt Romney and Herman Cain about the Federal Reserve.

...We recognize that we need to have a Fed. Why do I say that? Because if we dont have a Fed whos gonna runthe currency? Congress, I am not in favor of that. - Mitt Romney

For many, many decades the Fed did its job when it was singularly focused on sound money. -Herman Cain

I contend that both are either liars or to stupid to know the truth. The sad reality is most politicians agreewith Romney and Cain. They must try to understand that the Fed is the problem; they create inflationand we (Americans) ask them to fix the very problems they create. Below I will outline why we do notneed a Fed.

Here is Fed Chairman Bernankes answer to the question of whether the Feds policies have reducedAmericans standard of living?

First, I should start by saying that the Secretary of the Treasury, of course, is the spokesperson for U.S. policy on

the dollar and Secretary Geithner had some words yesterday. Let me just add to what he said, first, by saying that

the Federal Reserve believes that a strong and stable dollar is both in American interest and in the interest of the

global economy. There are many factors that cause the dollar to move up and down over short periods of time. But

over the medium term, where our policy is aimed, were doing two things. First, we are trying to maintain low and

stable inflation by our definition of price stability by maintaining the purchasing value of the dollar, keeping

inflation low.

Have a peek at the charts on the following page and tell me if you think Dr. Bernanke is lying or toostupid to know what is happening. I do not think Dr. Bernanke is stupid. It is quite clear from thecharts below that the Fed is not providing for a strong dollar, low inflation or price stability. Below is aquote from Murray Rothbards brilliant book The Case Against the Fed.

The Fed and the banks are not part of the solution to inflation; they are instead part of the problem. In fact, they are

the problem. The American economy has suffered from chronic inflation, and from destructive booms and busts,

because that inflation has been invariably generated by the Fed itself. That role, in fact, is the very purpose of its

existence: to cartelize the private commercial banks, and to help them inflate money and credit together, pumping in

reserves to the banks, and bailing them out if they get into trouble. When the Fed was imposed upon the public by

the cartel of big banks and their hired economists, they told us that the Fed was needed to provide needed stability to

the economic system. After the Fed was founded, during the 1920s, the Establishment economists and bankers

proclaimed that the American economy was now in a marvelous New Era, an era in which the Fed, employing itsmodern scientific tools, would stabilize the monetary system and eliminate any future business cycles. The result: it

is undeniable that, ever since the Fed was visited upon us in 1914, our inflations have been more intense, and our

depressions far deeper, than ever before.

Not much more I can add beyond Mr. Rothbards comments. Well, I can add the charts below that provethe Fed has neither controlled inflation, rather created it and has not maintained the dollars value.




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CHARTING THE FOREST




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CARTEL

Cartel - a combination of independent commercial enterprises designed to limitcompetition or fix prices

More and more it is hard for me to not think that we no longer live in a democracy but perhaps in aCartocracy which is my made up word for (Cartel - Democracy). I will give you a glaring example of amassive cartel that operates in the United States - The Fed. To understand the Feds cartel nature we haveto visit history.

The Federal Reserve Act of December 23, 1913, was part and parcel of the wave of Progressive legislation, on local,

state, and federal levels of government, that began about 1900. Progressivism was a bipartisan movement which, in

the course of the first two decades of the twentieth century, transformed the American economy and society from one

of roughly laissez-faire to one of centralized statism. -Murray Rothbard - The Origins of the Federal Reserve

Until the 1960s most people believed that Progressivism (what ushered in many government agencies inthe early 1900s) was rooted in an uprising of workers who were led by selfless leaders with the goal oftoppling the ever expanding monopolistic big businesses. Wrong! In fact, that is how it was sold but inreality it did just the opposite of the sales pitch. What really happened was big businesses were growingweary of failed attempts to create cartels. The failures were due to competition from below. The first runat cartels was in the railroads then again in big industry. Big businesses quickly figured out they neededsome help in establishing a cartel economy in order to retain dominance and high profits. That helpwould come from the powers of government. But, how could businesses get the laissez-faire centeredAmerican public to go along? Simple, regulatory commissions were lobbied for and staffed by big-business men from the regulated industries in the name of controlling the big business monopolies.

The banking system of the United States after 1865 was between free and central banking. Banking wassupported and controlled by a handful of large Wall Street banks. There was no governmental, centralbank to act as the lender of last resort. The banks could inflate the money supply, but when they got intotrouble the booms turned into recessions. The banks were forced to contract the money supply or deflateto save themselves.

Lets turn our attention to the world of money in the early 20th century. The early 20th century politicaleconomy was driven by the JP Morgan group and the Rockefellers. Although the Morgans andRockefellers were on different sides of the political isle they agreed that they both wanted monetaryreform in particular a central bank. Both claimed to want to be able to increase the elasticity of moneymeaning expanding money and credit especially during recessions. The call for reform got louder after

the Financial Panic of 1907. The question was how to get the public on board with the idea of a centralbank. In the following years the country was groomed with speeches and articles about the need for acentral bank. On September 22, 1909 the Wall Street Journal ran a 14 part series called a Central Bank ofIssue. Only problem with the articles was that they were penned by Charles A. Conant a leadinggovernment propagandist with the National Monetary Commission (NMC). The speeches and writingcontinued and the propaganda heated up to be complete with polls being presented by Paul M. Warburg(a partner at the then powerful New York Banking house of Kuhn, Loeb & Co.) that showed ...60% ofthe nations bankers favored a central bank provided it was not controlled by Wall Street or any other monopolistic

interest.




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Warburg was a tireless cheerleader for a Central Reserve Bank like the one in Germany at the time. Thekey for Warburg was that the reserve bank should have a monopoly on all note issues (dollars). To obtainthe notes (dollars) the banks would have to keep their reserves at the Central Reserve Bank.

The Fed is coming

Rhode Island Senator Nelson Aldrich was father-in-law of John D. Rockefeller. Aldrich was Rockefellersman in the senate and was the man in government that made the final and successful push for a central bank. Nelson surrounded himself with the whos who of finance of the day from both the Rockefellercamp and Morgan camp. Back to Rothbards The Origin of the Federal Reserve:

On November 22, 1910, Senator Aldrich, with a handful of companions, set forth in a privately chartered railroad

car from Hoboken, New Jersey to the coast of Georgia, where they sailed to an exclusive retreat, the Jekyll Island

Club. Facilities for their meeting were arranged by club member and co-owner J. P. Morgan. The cover story released

to the press was that this was a simple duck-hunting expedition, and the conferees took elaborate precautions on the

trips there and back to preserve their secrecy. Thus, the attendees addressed each other only by first name, and the

railroad car was kept dark and closed off from reporters or other travelers on the train. One reporter apparentlycaught on to the purpose of the meeting, but was in some way persuaded by Henry P. Davison to maintain silence.

The conferees worked for a solid week at Jekyll Island to hammer out the draft of the Federal Reserve bill. In addition

to Aldrich, the conferees included Henry P. Davison, Morgan partner; Paul Warburg; Frank A. Vanderlip, vice

president of the National City Bank of New York; and finally, A. Piatt Andrew, head of the NMC staff, who had

recently been made assistant secretary of the treasury by President Taft.

In the end the financial elites of the day were successful in driving through the Federal Reserve System toestablish a cartel that would allow the national banks to inflate the money supply in a coordinatedfashion. Also, it protected banks from depositors demanding cash when the money supply wasexpanded too far (read as bank runs). The side affects were also the control the money supply, minimize

competition from state banks and to ultimately bring the state banks under control.

Take away

Seems to me that by definition the Fed is a banking cartel as they control the money supply for a group ofindependent commercial enterprises. As for elasticity of the money supply we have not seen that. Theonly thing the Fed knows how to do is inflate the money supply. Bernanke himself has taken the countryto the steps of hell to avoid deflating the money supply. Finally, the Fed was supposed to usher instability of the money supply and limit the expansion of the money supply by member banks. Insteadwhat we have realized is the Fed creates inflation and has wrecked the currency. The lesson I take awayfrom this small exercise in governmental entities is that they are all set to serve a purpose other thansociety or the greater good. In fact, they are set up to maintain cartels for big business.




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FIRE INSURANCE

Moral hazard is still running wild all around us. One of the worst of those hazards come in the form ofcredit default swaps (CDS). A CDS is moral hazard at its finest. These highly destructive instruments

were conceived of and developed by none other than JP Morgan Co. in the 1990s. Worse yet they wereconceived of and developed by a woman named Blythe Masters who just so happens to be the head ofGlobal Commodities for JP Morgan. Recall that JP Morgan is the single largest entity manipulating themetals market. Any one seeing a pattern of evil spewing from JP Morgan?

CDS defined

A credit default swap is similar to a typical insurance policy in that it obliges the seller to pay the buyer inthe event of a loan default. The only significant difference between a CDS and a typical insurance policyis that the buyer does not have to have an insurable interest in the loan. This difference is where CDScan and are exploited.

CDS in the real world

Lets say the fictitious Greedman Bank (GB) is our example. Greece comes looking for a loan from GB.GB goes over the books and notes that the country is swimming in debt and is not really credit worthy.So, instead of turning them away GB creates some clever ways to hide the debt which makes Greeceappear to be credit worthy. GB then offers up some credit to Greece. Other lenders are no dummies theyknow that Greece is less than credit worthy so they buy CDSs to make some money in the event of aGreek default. Worse than that GB buys CDSs to insure their loan.

From this we can see that GB has an insurable interest since they made the loan but all the other bankshave no interest in the transaction other than profit. The really egregious act comes from GB who knewthat Greece was a bad risk and the likelihood of default was high and the likelihood got even higher the

more credit they extended to Greece. This is like blowing up a balloon; the more air you put in the closerto an explosion. To add insult to injury GB insures two times the amount lent. So, GB would profit fromGreeces failure. Remember anyone can buy a CDS against Greece. If you buy a CDS against Greecesdefault you are hoping for the default.

So, as you can see these unregulated, shadowed investment products create a moral hazard the likes ofwhich the world does not need. One expert in the area has been quoted as saying a CDSs are like buyingfire insurance on your neighbors house.

Why

It is a certainty that if you control a countrys debt and or money you control the country. When you areowed money you are in control of the debtors finances up to the amount they owe you. So, if you lend tosomeone up to the level of their assets then you can control their assets or take their assets. Is it anysurprise that Greece is being asked to sell national assets to settle up their debts? Also, do you think thecreditors did not have this in mind when they loaned a bankrupt country more money?




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CHARTING THE TREES - A little humor this time around. At this point we need it.




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DISCLAIMERS

Investing involves substantial risk. Becker Advisory Services (BAS) makes no guarantee or other promiseas to any results that may be obtained from their views.

No reader should make any investment decision without first consulting his or her own personalfinancial advisor and conducting his or her own research and due diligence, including carefullyreviewing the prospectus and other public filings of the issuer.

To the maximum extent permitted by law, BAS disclaims any and all liability in the event anyinformation, commentary, analysis, opinions, advice and/or recommendations in the update prove to beinaccurate, incomplete or unreliable, or result in any investment or other losses.

The information provided in the report is obtained from sources which BAS believes to be reliable.However, BAS has not independently verified or otherwise investigated all such information. BAS doesnot guarantees the accuracy or completeness of any such information. The commentary, analysis,opinions, advice and recommendations represent the personal and subjective views of the BAS, and aresubject to change at any time without notice.

The report is not a solicitation or offer to buy or sell any securities.



september 2011 forest & trees report

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