Not even I, dear reader, chained by love twelve, fourteen, and more hours a day to my magical window to the world, a cyborg of mind and machine, can keep up with all of the stupidities, deliberate destruction, insider deals, power plays, empire-building, and redistribution of wealth into the hands of the least able and most corrupt going on in Washington, Chicago, New York, the “great” banking houses, new additions to the slime pool, and foreign capitals, so I cannot put my finger on a sponsor or a bill number at this time.

I know only that there will be another Smoot-Hawley because there must be a new round of high tariffs and protectionism. This is one of the universal decrees of history and only the details change, and then only slightly.

Those of you who keep in the loop with the Whiskey Bar’s Ranch Correspondent–particularly through private and group correspondence–know that more and more I am to be found in Philosopher mood than Analyst fervor these days; analysis tells us what is wrong and what may come to pass. Philosophy tells us why it is wrong and how it is wrong, and offers faint possibilities of identifying key factors which can skew the classic equations of oppressors occasionally.

Why must there be another Smoot-Hawley, an action that seems devastating to the point of suicidal in a nation that has destroyed its industrial base through catering to the prophets of Baal, Unions, and crooked politicians? Because that is the last major source of rapine and manipulation left to the in-crowd around classics such as debasing the currency, setting the Sheriff of Nottingham on the people, and King John conspiring with the nobles. They have mortgaged the future, devoured the stored goods of the past, turned much of the seed corn into Ethanol, and are busy reducing as many as possible to the sick concept of “economic justice” where no man may have more than another–except the elite, of course. Forget good King Richard; he isn’t around this time, and neither is Richard of Locksley or even an Ivanhoe.

If you are surprised…why? I told you months ago what must come to be because it is the same war we fought 160 years ago for the same reason. Beneath what may have appeared to be colorful banter I was quite, quite serious, my dears. It is quite bad enough being Designated Cassandra without being dull about it, too, but I never joke about the evil loose in our world again.

In the late Eighteen Fifties, as now, politicians faced the same problems (of their own making) and had the same limited range of solutions. Congress was–as is usually the case–under the control of the power brokers and opportunists. As usual, it had been too free-handed with tax revenues. As usual, the true producers had ignored the snares set to bind them. “We’ll just work a little harder.” “They’ll never pass that; the people won’t stand for it.” “Any Johnny Reb can whup six to ten Yankees.” Sure, kids, you keep on thinking that and think about how more heavily we are taxed, millions of pages of restrictions that cause our businesses to fail, and how worthless our beleaguered fiat currency is.

There were only two solutions: close the United States out at the Mississippi and rape those in captivity at their leisure, or inflate their way out of the problem. The latter course was chosen, as it always is, because it offers more opportunities for enrichment. The immediate problem was to raise revenue to maintain control and line pockets further, and our founding fathers, in their great wisdom, had limited fund-raising to taxes and tariffs on goods. Life is far simpler for King John these days. In that halcyon time Uncle Sugar was not able to impound over a third of a man’s wages before they were handed over. A man’s wages could not be touched at all. Consequently, the “solution” was to raise import and export duties, thus robbing those who wished to sell products in the USA and those whose livelihoods depended upon exporting crops.

Do not be naive and bleat about “the industrialized North;” there are always little “arrangements” to be made, the kind that are expressed these days as “excepting corporations doing business in American Samoa,” so that Nancy Pelosi’s power base of the Star Kist empire is not subject to inconvenience and sees the wisdom of supporting her always, or the special favors being arranged for Monsanto, the connection there being how Representative Rosa DeLauro’s husband keeps Kobe beef on the table, and guarantee enormous bonuses slipped quietly in a budget bill so that politicians can rail against them dramatically later–and courts agree they must be paid. The fuss over raw milk–far, far safer and more nutritious than the odd fluids hawked by Borden–is designed to ensure that you either buy milk and other products from Agribiz or you do without; it is to deny you the right to possess your own cow…and your own garden…and your own chickens, beef, and sheep. The sheer cruelty and audacity takes my breath away, the concept of denying as basic a right as ever existed, that to hunt, gather, and engage in agriculture, and doing it in the name of “safety.” Starving to death is a very unsafe activity. The trick is that the restrictions will not harm the big fellows at all but will make it impossible for small farms and individuals to sell or even use what they raise.

The situation only appears to have changed due to FICA and a host of “taxing authorities,” fees, fines, sales taxes, federal and state income taxes, head taxes, and so forth. Funds have dried up significantly (tax revenues were down 17% earlier this month and I anticipate on the order of 22% losses by January) in a time when both New York and California are openly bankrupt and most other states are teetering on the edge of being unable to meet unfunded mandates and deliberate vote-buying schemes and graft. The system is floating momentarily on a flood of fiat money not even the government pretends to believe is other than very transitory. Timmy Geithner’s ugly product isn’t quite “use it once and throw it away,” but the gilt comes off each new issue very quickly and reduces the value once stored in older currency. The “Bernanke” ($100 bill) of today does not buy what an Andrew Jackson did a quarter of a century ago.

We are gearing up for the Tax and Tariff War Between The States all over again, with precisely the same causes and actions. No, of course I do not know if some portion(s) of these “united” states will attempt to withdraw from a contract that benefits only one side, although quite a few are rattling the Tenth Amendment. I do not recommend it, because this time all of the troops are under the control of Washington, as well as control of communications, utilities, transportation, the courts, the media, and the treasury. Open rebellion, no matter how justified intellectually and under the Constitution, would very probably end as Pancho Villa’s final irregular cavalry charge into a nest of the new Thompson machine guns did.

The great “moral” camouflage fluff this time is socialized medicine, amnesty, racism, domestic “terrorists” and the machinations of foreigners turning out “man-made disasters,” and the general moral degeneracy of producers. Same old war, same old issues, same old outcome, and time to hide the smoked hams and plow horses because this time the March to the Sea will be a matter of closing the interstates. Starve those rebels into submission and destroy everything under the slogan of “Never again!” Dictatorship will prevent the threat to freedom posed by “dissidents,” Obama and Janet Napolitano are the ones who define dissidence and “civil unrest,” and the Supreme Court just ruled that those who rebel against the USA are stripped of basic rights (“torture being an accepted part of…”) and “personhood.” You will have neither rights nor Constitutional protections if you protest if Washington declares there is a war, martial law, or that you are guilty of sedition.

What happens when people are forced to act to their own detriment? Eventually they go out of business, move, or are crushed. How does gpvermemt stop them? Close the borders. (Penalties for investing currency outside the nation, penalties for emigrating, literal demands that anyone seeking to leave must have a Passport–a “privilege,” not a “right”–or a “Trusted Traveler Document.”) You mandate an annihilatingly expensive new “health care” program with fines and jail sentences. By what economic insanity can having some portion of medical expenses paid ever be considered worth as much as 20% of a family’s income? I am forced to pay for Medicare, and in this, the year I have been most ill in my life, the actual outlay for my “free” medical insurance is still $400/office visit plus a co-pay. I would be far better off simply paying the doctor $100 in the first place, but that option is denied to me. Those who are old or have chronic conditions may need coverage against myriad problems, but the average family neither needs nor can afford any such thing. We may insure against our car needing a new motor, but we do not seek insurance to cover fill-ups and oil changes. Socialized medicine is not about “health,” it is simply a very imaginative grab for power and funds to keep the national socialists in power.  Announce a host of new taxes and increase fees, fines, and requirements for “stamps.” The outrage over the Stamp Act wasn’t against raising postage; it was about requiring the sort revenue stamps which seal my cigarettes and bottles of Maker’s Mark.

What will be the outcome of increasing taxes and government “giveaways” in a time of falling employment and expansion of the “entitled class,” in a similarly foolish and shakey world eager to destroy our fairy gold and exploit our dependence upon foreign goods? Gloom, desolation, and increasing loss of liberty culminating in a world of food shortages and repressions. All the while those who grow rich shrieking “climate change” labor relentlessly to finish bleeding out the corpse of America for the “benefit” of third world nations and tax us relentlessly to force a 17% reduction in our standard of living lest the dreaded Carbon Footprint Monster destroy the polar ice caps, a much bigger piece of nonsense than asserting the existance of the Yeti and the Little People. Al Gore is the Abominable Snowman, and it pays very, very well. Today here are many new devices of economic depression and a population brain-washed by “free” public schools and the MSM, but Smoot-Hawley, whatever it is called at any given time, is a tried and true method of putting the hands of some into the pockets of others to the detriment of those not filling their coffers or increasing their power. It will prove irresistible.

The most immediate action you can take is to inspect your portfolio carefully and analyse your business needs. Are there duties/taxes/tariffs which could be levied which would make your business more expensive to conduct? Can you stock amply parts made abroad? Are there political costs which could damage the ability of an investment to remain perceived as profitable? Current P/E values are such that I can’t think of a single traditional sector–commodities do not count in this area–where any company is likely to provide a genuine ROI. Just as silver is valued, traditionally, at between 16:1 and 30:1, making it a magnificent choice at 65:1, just so we do not buy shares in companies that at best will return a tiny fraction of the cost in the best of years.

If you can’t eat it, store dense amounts of current value in it, or protect yourself with it in some way or another, don’t buy it. Not for your stockmarket portfolio, and not in your personal lives.

What you snatch from the spreading fires may have to last you a very long time.

Regards,
Linda Brady Traynham

December 29, 2009

Smoot-Hawley Must Ride Again was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The Financial Accounting Standards Board’s headquarters quakes down to its foundation as Congress bullies it toward sweeping rule changes. Those changes govern the balance sheet values of those very pesky loans and derivatives that started us on this road to crisis in the first place. And the rule overhaul could strike as early as this week.

Right now, the FASB recommends a mark-to-market practice for a majority of financial assets. But Congress wants to mark to model — because that’s what ailing banks want. To see what marking to model looks like, let me give an example of how that would work for your 401(k) quarterly report.

Each quarter, instead of finding out your current account value, you’d get a figure derived from a series of equations using various probabilities for what the value of your fund might be at your target date for retirement. In my case, something like 2045.

Of course, I don’t think I’ll be living in the same America in 2045 — even if I never move overseas. And that’s the problem. As the mortgage-back securities blowup taught us, these models — especially those developed by and for the banks — didn’t price things correctly in the first place.

Sure, we all have moments when we think the market’s current valuations are crazy. Maybe because we know the industry better than anyone, or we have a friend who’s found some old land on the books, or we’ve seen the heights of a cycle and expect it to return. If stocks are at the mercy of the market — and its potential for misinformation — shouldn’t we hold other assets to the same standard?

This mark-to-market accounting rule change isn’t the Change the president was after. As a step toward further protectionism of Frankenstein financials, it’s more of the same. Switching over to a mark-to-model system is like a college student who must present her dorm room for inspection. What’s to be done? The floor has a throw rug on it, so she lifts up a corner and swishes all the dust bunnies, dried vomit, spare change, and other detritus under the carpet.

Bloomberg offers the take from former Lehman Bros. managing director, Robert Willens:

“By letting banks use internal models, instead of market prices, and allowing them to take into account the cash flow of securities, FASB’s change could boost bank industry earnings by 20%.”

We note that the April 2 changes will apply to first-quarter financial statements. So I’m assuming that means all the recent earnings announcements will head back to the SEC for restatements in the hopes of attracting new suckers…I mean shareholders. Such a ruling would allow Citigroup to cut losses by 50-70%. Of course, this rule change threat has been afoot since late 2007, but the rush is on as our can-do Congress takes control.

It’s all about swinging those net losses into net gain territory come hell or high water. (Fargo, N.D., for one, is drowning under the Red River as I write).

The industry rhetoric always ends in a rousing “just say no to fire-sale prices.” Funny, I thought Wall Street had an awfully large conflagration going upon which Congress and Treasury are eager to throw more cash. (Well, I’d rather they burn through decimal places than burn books, I guess. But I don’t see the FASB quenching these flames.)

How March 12 Changed Everything

On March 12, the House Financial Services subcommittee called FASB chairman Robert Herz to the stand. His statement blames the underlying financial conditions — and not the standards — for the write-downs banks are having to suck up. He also says that capital adequacy “is beyond the purview of the FASB.” He makes it clear that the FASB exists to protect investors’ right to information.

However, House Financial Services berated him, belittled him, and told Herz he couldn’t make the rules anymore. Last I checked, the FASB was actually an independent private sector organization. But that’s not so important anymore. Check out this exchange:

“Chairman Rep. Paul Kanjorski (D-PA): You do understand the message that we’re sending?

“Herz: Yes, I absolutely do, sir.”

So now Herz has to get a new fair-value rule finished by April 2. Technically, it’s the SEC who has the oversight here, not Congress. But that’s not the worst part.

Herz admitted, after his congressional grilling, that the financial industry and their trade groups are doing the heavy lobbying. Not investors.

Who holds political action committee strings? None other than beleaguered Citigroup, and others like the Bank of New York, Mellon, Bank of America and Wells Fargo.

Take a look at what the Federal Election Commission tracked for just one representative’s, Chairman Kanjorski’s, re-election. Citigroup put up $6,500. Bank of America topped that with $7,000, and Wells Fargo offered the most: $13,000. Of course, it was all chump change to them. And we, the chumps, are already down about 50% this year and don’t have the spare change to dump in the House Financial reps’ pockets. Our only influence comes by selling short more bank stock.

Congress Follows Newton’s Sacred Law

Newton’s Third Law: For every action, there is an equal, opposite reaction. Chances are you heard that an awful lot in grade school, and have seen this reality break up many a marriage.

Well, in the case of the FASB, Congress, and the bold new plans coming out of Timothy the Timid (who stood firm as a lion on his recent Meet the Press junket), we are left with a big naught.

You see, the new age of mark to model that Congress asks the FASB to inaugurate runs directly opposite to what Geithner fixes to do for the banks. Geithner wants to allow banks to sweep this trash from their balance sheets (and onto our Treasury’s and those of “private” investors tempted in yenta-like matches — whose prospects may be read in that famous attempted union of Citi and Wachovia. If you’ll recall, Wachovia fled at the altar for Wells Fargo).

But Congress — with the help of the FASB — wants to let these banks keep the stinking assets…every last one. Mark to model will be left up to the bank’s choice of equations plugged into its internal modeling of future market conditions — and not it being made to write these assets down to below “fair market value.” Thus, they won’t be selling these suckers to the Treasury.

Before you think that means we’re home free, that it’ll keep those dollars in the Treasury (or from being printed in the first place), realize that in five years, 10 years…whatever the fixed term…those assets will actually hit the marketplace.

It could send banks swimming with their favorite enemies — the short sharks — all over again. And those sharp-eyed shorts have every right to signal to the market, “Here are the weak fishes — cut the school down to size.”

What the New and Improved “Fair Value” Could Look Like

Right now, fair value is determined by marking these assets to their market price once a quarter. Is that really so much to ask? The sally from the banks is always the same: Some of the banks will hold these assets to maturity, which could be 10 years down the road.

The model, on the other hand, is only the most mathematical guess where the market will be in 10 years. There’s just one flaw. Even holy Goldman doesn’t know the future, and no matter how many ex-execs it puts in public service, we’ve seen it can’t MAKE the future.

When the math guys, fondly called “quants” — short for “quantitative” — modeled these derivatives the first time around, their calculations indicated what would happen 99% of the time, when there would be some measure of profit, and neglected the other 1% of the time, when losses would be catastrophic.

Obviously, Congress would do better by putting a ban on all “black swan” events. But most important of all, some banks could be freed from tapping the government bailout if mark to model rules the day: Wells Fargo, M&T Bank, U.S. Bancorp, and PNC Financial.

For edification, I leave you with a quote from Wells Fargo’s own CEO, John Stumpf:

“If you’re a pessimist, there’s a lot for you to like about 2009.”

He further says that you should look for more bankruptcies; more borrowers in a bind — hence more loan losses — and, icing on this mud pie: higher unemployment… signaling more borrowers underwater and more loan losses.

However, Stumpf sweetly echoes the best politician (or Mr. Pollyanna, Warren Buffett) when he offers:

“We continue to believe in the spirit, ingenuity, work ethic, creativity, and adaptability of American workers. We’re capitalists and proud of it.”

What he really must believe in is the work ethic of folks like Rep. Paul Kanjorski and friends on the House Financial Services Subcommittee. Stumpf should know he’s the one paying for it.

Regards,
Samantha Buker

April 1, 2009

Tomorrow Mark-to-Model Returns with a Vengeance was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.