Karl Denninger: America Is Running Out of Rope

http://market-ticker.denninger.net/archives/1364-America-Is-Running-Out-Of-Rope.html

Oh no, we don't cheat:

Goldman Sachs Group Inc. research analyst Marc Irizarry's published rating on mutual-fund manager Janus Capital Group Inc. was a lackluster "neutral" in early April 2008. But at an internal meeting that month, the analyst told dozens of Goldman's traders the stock was likely to head higher, company documents show.

Nothing like selling bonds out the front door and shorting them on your prop desk, right? Oh wait, Goldman did that too!

Securities laws require firms like Goldman to engage in "fair dealing with customers," and prohibit analysts from issuing opinions that are at odds with their true beliefs about a stock. Steven Strongin, Goldman's stock research chief, says no one gains an unfair advantage from its trading huddles, and that the short-term-trading ideas are not contrary to the longer-term stock forecasts in its written research.

Riiiight. And I'm the Easter Bunny.

The tips usually go to top clients who have expressed interest in having the information and have short-term investment horizons, he says. Goldman doesn't want to overload other clients with information that isn't relevant to them, he says. "We are not in the business of serving thousands of retail customers," he says.

Let me guess: They also go to the proprietary (inside) traders that are gambling with the firm's money (and your "liquidity guarantee" as a taxpayer, since they're a BANK now.) Am I right?

Research-department employees prepare telephone scripts, then call top clients, typically several hours after the meeting has ended. Goldman says its in-house traders are prohibited from trading on the tips until after they've been relayed to clients.

Documents reviewed by the Journal indicate that anywhere from six to 60 clients are contacted, depending on the investment.

Oh, its even better. Let's see, we have a computer program that's engaged in a bit of "high frequency trading", and we have the guys that run our own trading (which includes that) that are in on the recommendations and they even know when these recommendations go out to the "select customers"!

There's nothing wrong with this, right? Nothing wrong with having a "slight edge' in knowing up front what's going to be said to these "good" (read: they have and swing around lots of money) customers?

Pull the other one boys.

Last year, the Financial Industry Regulatory Authority, the industry's self-regulatory body, proposed new rules meant to clarify existing disclosure obligations under the rule requiring "fair dealing" with all clients. Firms could issue contradictory ratings as long as clients were told that such inconsistencies were possible.

Yeah, ok. Shall we hire some more foxes to guard that henhouse?

What sort of scheme-laced system do we have here? These institutions have sold securities out the front door they're shorting out the back (subprime mortgage bonds), they're disseminating "short-term opinions" that differ from their published research reports, and even better, their own proprietary trading desks are in on the latter, so if and when the move starts they can get in on the action with their "high frequency trading" too!

You won't hear CNBS talking about this, I'll wager. Nor will you hear them talk about their parent company discuss their lobbying expenditures - the highest of any company in the first quarter at a mind-blowing $7.2 million dollars. Zerohedge has provided a copy of the disclosure form, which reads like a who's who of "how to screw the consumer", including issues such as the Credit Card Bill of Rights, the disapproval resolution on the second half of TARP, proposed TARP reform and accountability, the mortgage reform and anti-predatory lending bill and more.

It's long so I recommend clicking the above link to read the whole piece. It's time to wake up sheeple.

Want a Sustainable Economy? Pay Your Employees Better.

This chart speaks volumes. Last I posted it was on the story of incomes for the top 1% surging while the bottom 90% went nowhere. Here is a follow up to that story. I submit this chart to you. The chart on the top shows the % of income for the top 1% and the top 1/10,000%. You'll notice something quite staggering. In 1928/1928 the income inequality was at its peak. Well, we all know what happened then and that is a little thing called the great depression. Now look at the income as of 2007. We all now see what is happening now.

Now look at the chart below which is the % for the bottom 90%. Look at where it was in 1928/1929 and look where it is now.

People if this one chart is not proof enough that without a middle class the rich will not stay rich long then I'm not sure what I can do to convince you. Henry Ford understood this fully when he paid his employees. He is quoted as saying the following "There is one rule for the industrialist and that is: Make the best quality of goods possible at the lowest cost possible, paying the highest wages possible." You see Henry Ford understood that when you pay your employees well it's those same employees who will now have the money to come buy your products. Today though that mindset is lost, just as it was in the "roaring 20s"

In the end these two charts prove that without a middle class there can be no sustainable economy. Credit bubbles as we have just seen does not create prosperity, instead it creates a whole hell of a lot of problems. I hope this whole ordeal teaches our society a lesson and that lesson is as follows...

It's ok to make money. In fact it's ok to make LOTS of money. But when you make all of this money at the expense of the people who work for you and the products you produce then chances are you will not keep all of your money long. People need money to buy the goods and services that are being produced. If we have a nation of slaves then who the hell will have the money to buy those goods? Is there a magic number? No, but I will say that 400x your average employee's wages is obsurd and just greedy. I think the ruling class of our coporate world need to show a little more class in how their employees are paid. It is not only good for our economy and it's sustainability, but it also shows a little character. I think a little character is something our society of today could use.

Income inequality in the United States is at an all-time high

Income inequality in the United States is at an all-time high, surpassing even levels seen during the Great Depression, according to a recently updated paper by University of California, Berkeley Professor Emmanuel Saez. The paper, which covers data through 2007, points to a staggering, unprecedented disparity in American incomes. On his blog, Nobel prize-winning economist and New York Times columnist Paul Krugman called the numbers "truly amazing."

Though income inequality has been growing for some time, the paper paints a stark, disturbing portrait of wealth distribution in America. Saez calculates that in 2007 the top .01 percent of American earners took home 6 percent of total U.S. wages, a figure that has nearly doubled since 2000.

As of 2007, the top decile of American earners, Saez writes, pulled in 49.7 percent of total wages, a level that's "higher than any other year since 1917 and even surpasses 1928, the peak of stock market bubble in the 'roaring" 1920s.'"

Beginning in the economic expansion of the early 1990s, Saez argues, the economy began to favor the top tiers American earners, but much of the country missed was left behind. "The top 1 percent incomes captured half of the overall economic growth over the period 1993-2007," Saes writes.

Despite a rising stock market, largely growing employment and a historic housing boom things were not nearly so rosy for the rest of U.S. workers. This trend, according to Saez, only accelerated during the George W. Bush's tenure as President:

"...while the bottom 99 percent of incomes grew at a solid pace of 2.7 percent per year from 1993-2000, these incomes grew only 1.3 percent per year from 2002-2007. As a result, in the economic expansion of 2002-2007, the top 1 percent captured two thirds of income growth."

Not promoting class warfare but will point out as long as the working/middle class keeps getting their ass kicked prospects for the top earners will shrink also. As Henry Ford said it quite well " I pay my people well because I know it will be those same people who come back and buy my products." This mentality is out the door anymore and if the middle class does not get up and running you can kiss ANY recovery from happening good bye.

I Have Hope For America.....

With all that is going on in America today I think one thing is clear and that is there are some major disagreements on the direction of our nation. There are many views of what this nation should and could be and we are finally getting them all out in the open. These town hall meetings in my opinion are the greatest thing to happen to America in a long time. This is how America USED to do business. We used to gather everyone in our little towns and hash out our differences just like we are doing now. Yes there is some yelling and yes there are some people who are considered "rude" but this is exactly how America used to do it's business.

Think about the founding fathers when they were locked in the convention trying to write the future for our country do you think they agreed on everything? Do you not think that they too were in some yelling matches and pissing contests? I mean lets face it these were some of the most prominent men in the country and they all had their views on where our country should be. It seems anymore however major legislation is rammed though congress and sent right to the president with no real debate amongst the people or real dialogue to hash out differences. It's mostly done in secret meetings in Washington and then when they reach their agreements they ram the legislation through, most of the time without reading the bill they vote for. These town hall meetings give me hope for the future of America. I wish these meetings were allowed to happen during the banking bailouts and before the stimulus passing but I'll take the debate on health care.

In final I really hope this isn't a one time thing. I think major legislation should be debated amongst the people just like we are doing now since at the end of the day its us and our families who will be paying for these bills. I don't think having a particular view makes you a terrorist or un American, I think having your view and expressing makes you more American than anyone sitting on their butts and watching So You Think You Can Dance. I also think these town hall meetings are bringing more people into the mix, more people actually involved in politics and the future of our country. We need people involved. We need people to turn off the American Idol, put down their beer, and get over to these meetings and inform themselves. We need an informed society and an involved society. This was the hope of America. This was what America was truly founded on and that is a government for the people by the people and these town hall meetings really are a hallmark of these ideals.

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