The post garnered a remarkable number of comments, the majority of which agreed strongly with the view I expressed. Just one thing disturbed me, however, which was the number of people who assumed I was taking a partisan position. To remind you: the article argued strongly for a full and open enquiry into the Fast and Furious affair. I guess a lot of people reasoned as follows, ‘The Republicans are bashing the Democrats over this enquiry, this guy Feierstein wants an enquiry, so he must be a Republican.’

I don’t blame people for making these assumptions. Our whole country has become infected with this kind of logic. Our entire political debate has caught the virus. Yet it makes no sense. No sense at all. Here are two facts and one conclusion. Fact One: A federal agent has been shot dead. Fact Two: there are allegations — which may be true or false — that the gun used to shoot him was in circulation only because of an ineptly managed operation conducted by the Bureau of Alcohol, Firearms and Tobacco. Conclusion: These allegations are serious enough to deserve an open investigation, period. Partisan bickering and political spin is simply a diversion from the action that a dead federal agent deserves — and the truth that the American people require.

I say all this because I’m about to call attention to another government department. That department is the Bureau of Labor Statistics. Now I know that Republicans are currently bashing President Obama over his jobs record. I know that Obama is bashing back. But, people, the issue at stake is the creation of jobs in America and the way those things are being recorded and reported. The issues I’m about to address were present under George W. Bush. They haven’t changed under Barack Obama. The depression which struck this country in the wake of financial crisis might have peaked under a Democrat, but it was born in a Republican era. If you yourself are so partisan that you want to make fine distinctions about these things, you should go ahead and make them. Me: I see two peas in a pod.

Good. Preamble over. Here’s the issue. The number of jobs created in America stood at 80,000 in June. That wasn’t nearly enough to budge the jobless rate, which remains stuck at a high 8.2%. (Mitt Romney’s comment: ‘another kick in the gut to middle-class families.’ Barack Obama’s rejoinder: ‘a step in the right direction’ whilst he acknowledged, ‘it’s still tough out there.’)

But let’s put the partisan spin-factory to one side, and instead have a think about the number of jobs being reported. Businesses are born and businesses die. When a business is occupied with either of those processes, it has better things to do than call up the BLS and discuss hires and fires. The BLS therefore estimates the net impact on the joblessness figures of the birth and death of businesses. You can read its full discussion here, but the key line says:

‘There is an unavoidable lag between an establishment opening for business and its appearing on the sample frame and being available for sampling. Because new firm births generate a portion of employment growth each month, non-sampling methods must be used to estimate this growth.’

A non-sampling method: that’s geek-speak for ‘guess.’ We don’t know how many new jobs are being created or lost by business churn, so we’ve got to guess. And you want to know the BLS’s estimate for the number of such jobs ‘created’ (net of losses) in June? Answer: 124,000. In May, the answer was over 200,000.

So, in crude terms, the net jobs growth reported by the BLS — the same one being lambasted by Romney and praised by Obama — is only in positive territory at all because of some number that’s simply a guess. A smart guess probably. One made by intelligent statisticians… but still. In this economy? With Europe in turmoil, China slowing, the country heading for a fiscal cliff which could thrust us back into recession, plus massive uncertainty over the path of healthcare costs per employee? The BLS has never been in this position before, because the economy hasn’t been. And after all, who in their right minds would be hiring new staff given these conditions? Most savvy businesspeople will be watching, waiting… deferring spending and hiring.

The truth is employment in the U.S. might be growing or shrinking. We just plain don’t know. What we do know is that if you add together the unemployed, workers discouraged from seeking work, plus those working part-time when they’d prefer to be working full time… you have an ‘underemployment’ rate of at least 15% — while our labor force participation rates are kicking around decade long-lows. These things are terrible economic news, but they’re terrible on a human scale too. Let’s consider the graduates looking to repay the more than $1 trillion in government-guaranteed student loans. These graduates are America’s future. Those BLS data points represent human lives, human potential. And the outlook is grim.

Vangelia Pandeva Dimitrova

To repeat, I’m not making a partisan point here. I’m making a bigger one. The American economy is in deep trouble. The reported data we have is unreliable. What we do know is that we have too much debt, too much money printing, a culture of total irresponsibility on Wall Street and consequently an absence of credibility in the financial and political promises that underpin our economy. All this, plus a political culture which is not addressing these things in a mature and responsible way.

This country’s in a mess. And partisan bickering will never pull us out of it. We all need to change our mindsets. I voted for change in the last election and I believe that today’s DC landscape is the most polarized in my lifetime. Are things better? Are we going to be offered a real choice in this election year? And where can I get a refund?

I published this article in today’s Huffington Post.

But although the horizons are red with fire and every new day brings news and rumours of further catastrophe, you need to realise that we’re on the brink of something bad. We’re not actually in it.

So what comes next? It’s a question that you may reasonably ask (worried about job, savings, wages, inflation). But it’s also the question which is being asked across Europe: in the governments of Greece and Spain, those of France and Germany, by the central banks, by the banking industry – and indeed, by every private sector entity which touches those things, which is to say absolutely everyone and everything.

Expect a messy exit: A paint-spattered protester outside the European Central Bank

And no one knows. Or, to be precise, no one knows the exact way events will unfold, but there are some broad predictions which we can make with some confidence.

Prediction One: Greece will leave the euro. The ‘bailout’ offered by the EU was help of absolutely the worst sort. It was generous enough (just!) to prompt a beleaguered government to accept it. But the terms were so parsimonious that it left Greece still just inches from the financial disaster zone. It was as if the EU saw a starving man and chose to give that man just enough food to keep him from death, but not enough to permit recovery. If the Greek people are rebelling against the terms they were offered, they have my sympathy. I think they’re right.

Prediction Two: as Greece falls, the other weak countries of the Eurozone will come under intense pressure – worse than anything we saw even in the dark days of last autumn. Ireland (with its fundamentally strong, flexible and low-tax economy) will probably be OK. But the countries of southern Europe face some terrifying problems: weak growth, a woeful lack of flexibility, dodgy banks, and no fiscal room for anything except more austerity.

And the thing is, if you take a reasonably decent economy – Ireland, Britain, Germany – and impose austerity, it’ll be painful (it always is) but you know that the economy will, sooner or later, spring back into growth. The situation in the south of Europe isn’t like that at all. Italy, despite years of easy money, grew by just 2.5 per cent between 2000 and 2010. That’s not 2.5 per cent a year, it’s 2.5 per cent a decade.

The storm clouds are gathering: Greece’s departure from the Euro will place Spain and Italy under intense pressure

Or take Spain. Spanish growth looked good, but it was boosted by an utterly unrealistic reliance on construction – an industry which accounted for one sixth of the entire economy at its peak. Since Spain is now grossly overbuilt, that one-sixth is now pretty much dead and will never come back. Toss some brutal austerity measures onto these horrible starting conditions along with massive unemployment and it’s little wonder that the bond markets are nakedly terrified that they won’t get their money back. (Oh, and if you read that sentence and think, “serves the damn bankers right”, you might just want to remember that your pension fund is probably invested in those markets.)

Prediction Three, then: the failure of the euro won’t stop at Greece. It’s hard to say from here which country will be first to follow its lead, but I personally wouldn’t buy Spanish, Italian, or Portuguese bonds at anything more than 20-30 per cent of face value. (And that’s being nice: Greek bonds have lost much more than that.)

French President Francois Hollande was elected on an anti-austerity platform – but may struggle to keep his promises

Thus far, my predictions would be fairly widely shared among financial experts. Thereafter, it’s hard to read the future. Take, for example, the ‘simple’ question about what happens if Greece quits the Euro. Any business (and any bank) will have its liabilities denominated in euros, not drachma. Foreign creditors won’t want to be repaid in devalued drachma instead of the promised euros, so a wave of bankruptcies seems likely. Not just the government, but probably all of the banks, and countless businesses too. Naturally the Greek government will want to pass laws that reconstitute those businesses in double-quick time, but the scale of the task is Herculean. And the Greek government isn’t exactly noted for economic and administrative prowess.

Since the imminent failure of Spain and Italy would create problems far larger in magnitude, the ripple effect could be enormous. In fact, can you scratch that term ‘ripple effect’. There are no ripples here, only tsunamis. Just think for example, how France would be affected by the collapse of Spain and Italy. The French economy is deeply entwined with those two and their failure would bring the financial storms right to the steps of the Quai D’Orsay. Francois Hollande may have been elected on a no-austerity platform, but he might as well promise an end to gravity. So, Prediction Four: the French are about to endure a savage austerity programme of their own. And bonne chance in explaining that one, Monsieur.

Thereafter, what to say? The central banks won’t take any blame for creating more than a decade and a half of loose money and massively inflated asset prices. Politicians will continue to prefer comforting lies to brutal truths. No bankers will go to jail, even though they’ve done more than anyone else to create this mess. Germany will be fine. Britain too, in the long run, though it’ll be a long, slow slog: longer and slower than any of the official forecasts had predicted. And when even Ed Balls is still mulling the possibility of a British referendum on Europe, who knows how far the whole European project might yet unravel?

But these are big questions and perhaps distant ones. What about you? Your job, your savings, your pension? Well, I honestly hope and pray you’ll be OK. These are rough waters we’re entering. We ain’t seen nothing yet.

My article was published in todays Daily Mail

Trouble is, though, constant repetition of a theme gets boring after a while. Yes, fuel prices are up. Yes, asset prices are crazy.Yes, food and utility bills are weirdly expensive these days. But, same-old-same-old. So what’s Rihanna wearing these days?

But listen up. I’ve got a new illustration for you. What does €1 trillion buy you these days? Answer: it buys peace and quiet … for about six weeks. That’s how much money the ECB had lent out to weak Eurozone banks by the end of February – and six weeks is about how long the subsequent period of calm has lasted. And because inflation spirals upwards, nobody now thinks that another trillion euros will do much to ease the panic. Would a trillion euros now buy another four weeks, even? I doubt it.

Dark Times: Spain’s Minister of Treasury and Civil Services Cristobal Montoro Romero unveils Spain’s budget for 2012

And that’s the point really. There’s a difference between a circle and a death-spiral. If you’re in an infinite loop, you can in principle go on for ever. The death-spiral might look the same to begin with – the same old scenery coming round time after time – but oh boy, the ending is different.

What we saw this week might look like more of the same. A government bond auction in suddencrisis (Spain’s in this instance, though Italy’s auction was pretty ugly too.) Billions wiped from world stock markets. The euro shaking again. Global leaders saying confidently that no bailout would be needed. (Just as the bailout wasn’t needed in Greece. Until it was. Or Portugal. Or Ireland. Just as Greece could never default on its debts, until it did just that.) And a hopium rally may just follow this chatter.

And now we’re starting to talk dominoes again. If Spain falls, then what about Italy? If Italy falls, what about France? And those aren’t speculative questions. If Spain falls, neither France nor Italy could possibly survive as things stand.

Yet please don’t think of this as just another loop of the merry-go-round. It’s more than that; much more. The event which spooked the markets this week was the Spanish government’s dismally unsuccessful auction of €2.6 billion worth of bonds. That sounds like a lot of money, but Spain needs to raise €200 billion this year alone. Then again for year after year after year.

Death spiral: The Eurozone is resolute in its reality avoidance. But the nature of reality is that you can’t avoid its arrival

If the country’s finances were under control and the economy was reasonably strong, those things could be manageable. Germany also has a lot of debt – more as a proportion of its income than Spain – but the economy is strong and the government not desperately addicted to spending more than it raises. Spain, unfortunately, has a government deficit which is out of control and an economy forecast to shrink. (Forecasts which will probably turn out to be way too optimistic, by the way. The Greek economy hasn’t shrunk. It’s collapsed.)

That would be bad enough on its own but Spain had a real estate bubble even worse than our own. Even worse than the American one. And the losses stacked up in that boom are still lurking in Spain’s many small savings banks, each of which is like an undetonated bomb. A bomb, whose fuse is ticking every closer to the detonator.

There are different ways you can respond to all this. If you have any savings or investments, you’ll be thinking about how to protect your cash. Just what do you do, when you can’t trust governments to repay their debts? What’s left? What’s safe?

There’s also a human response. Just stop to think a moment about the human tragedy implied by Spain’s worse than 50% youth unemployment. What a heart-breaking statistic that is! It reminds you that behind the cold financial stats, young people’s lives are being ruined by awful decisions made by their political masters. Worse still, those scars may never heal. Economists have found that the ‘earnings scar’ left by a bout of prolonged unemployment is visible for literally decades afterwards. And that’s just to talk about money. What about the injury to self-esteem? To pride and self-fulfilment?

Which brings one, I suppose, to a political response: the place where these considerations need to end. Politicians created this mess because they forgot the basic rule of capitalism: if you win, you win; if you lose, you lose.

Capitalism, of the sort that’s operated across Planet Ponzi these last decade or two, has played by different rules. The winners win. The losers … well, their losses get shuffled away. They get magicked away by Wall Street. They get bailed out by governments. They get printed away by the money presses of the world’s central banks.

Britain is tiptoeing uncertainly away from that awful politics right now. America hasn’t yet woken up. The Eurozone is resolute in its reality avoidance. But the nature of reality is that you can’t avoid its arrival. Clickety-clickety-click – is that dominoes I hear?

This was published in todays  Daily Mail.

CHARLES Ponzi, an Italian, landed in Boston in 1903 with $2.50 in cash. He died in in poverty in a charity hospital in Rio de Janeiro, but he left a legacy – the Ponzi scheme.

Desperate to get rich, Ponzi discovered that Italian prepaid stamps – the sort used to facilitate the return of mailed goods – sold at four times their price in the USA. So he sent for stock to sell in the USA, expecting profits of hundreds of percent.

Unfortunately, it was much more complicated than he expected, but that didn’t stop him telling others about his scheme and inviting them to invest with him. He promised to double their money in 90 days, and they came in droves. Ponzi paid out the profits after 90 days, despite never having bought any prepaid stamps ever again.

How did he do it? He simply paid out investors with funds taken in from new investors. As long as investors got paid, there were many new investors excited to get an effective 1 500% per annum when interest rates elsewhere where 5%. Charles Ponzi lived in grandeur as money flowed into his fund.

The problem was the liability side of the balance sheet. Effectively, every 45 days the liability increased by 50% while Ponzi raided the asset side.

It all had to end when investors could not be paid out, because new investors could not be found fast enough. It ended in tragedy for all those left in the scheme, losing all their money and often their homes as well.

And the Ponzi scheme was born. It has been repeated many times since with Bernie Madoff being the most recent, high profile example. All Ponzi schemes have the same structure which makes them very easy to spot. They have rapidly mounting debt and non-existent or inadequate assets.

They have deceitful or non-existent accounting, and exist where there is weak or toothless regulation. They thrive in a get-rich-quick culture combined with ignorant, lazy investors who can’t be bothered to do their homework on their investments. The greedier the investors the better, and they should also have a good capacity for self-delusion.

Feierstein is hardly concerned with the cheap little crooks like Ponzi and Madoff, who only stole a few billion – his interest is the big guys who use the same format schemes to cripple entire industries and even entire economies. The chief culprits are governments of large developed countries and bankers.

Feierstein is no conspiracy theorist, he is a very successful hedge fund manager and his book is based on sound research and statistics from completely credible sources, all cited and all accessible to the reader: the Federal Reserve Bank of the US; the OECD’s research findings; S&P data; the Financial Times; the Economist’s research; McKinsey Global Institute, and many more.

His focus is the US and Europe, with passing references to Australia (pretty clean,) Korea, China and South American countries.

Why should a South African read this book? Two reasons: the world economy is fully integrated and what happens to our trading partners will affect us very quickly, and we have lessons to learn for our country and our investments.

Feierstein describes a fictional character, Joe Schmoe, who has a job, some savings and gets married. He needs $10 000 to buy a house, but only has $2 000. He goes to his local bank for a loan. The bank manager investigates Joe’s work record, the stability of his employer and Joe’s character.

Based on this information and judgement he makes the loan. For his trouble and the risk he takes that Joe could turn bad, or his company fail, he charges interest on the loan. If all goes well, the bank makes a respectable profit and Joe has a home.

But that was then and this is now. Joe’s grandson, Joey, is unemployed and lives with his girlfriend in a rented trailer in a trailer park. Over a joint one evening Fat Boy, his neighbour, tells him that he has been given a 105% loan from the bank to buy his trailer and Joey should do the same.

The bank doesn’t care that they don’t have jobs or what they do with the extra 5% of the loan (in this case they are smoking it).

How can a bank afford to do this? First, bundle a whole lot of Joeys and Fat Boys together with others and “disperse” the risk by the “securitisation process” and on-sell it to others who again do some bundling and on-sell.

Then, create SIVs out of this and on-sell based on a AAA rating by a respected agency to be packaged in a structure called a CDO, which can then be bundled into a CDO-cubed, which can be insured against credit risk and default by a CSO.

Joey’s grandfather’s banker would be puzzled by this – after all, risk is risk and if you don’t know the strength of the collateral (Joey and Fat Boy’s character and career stability) all you have “dispersed” is your common sense.

I picked this example from the book only because the context is so well known and therefore easy to describe. There are many, many more examples in the book, ranging from pension funds to medical insurance.

This is a case book Ponzi scheme of gargantuan proportions, as described above, and like all Ponzi schemes has no happy ending.

And then there are government Ponzi schemes. The US government has run up huge debts bailing out delinquent banks, fighting non-essential wars, supporting spurious causes locally and in other countries. The US Federal debt is fast approaching $18 trillion – a sum so big it means nothing at all.

So what could you buy with it? All of the following: the world’s oil production for 2011; all the farms in the US; the sovereign debt of Spain, Portugal, Greece and Ireland; Apple, Microsoft, IBM and Google; all America’s military hardware; all the real estate of Manhattan and Washington – and you would still have change of around $16.5 trillion.

How does a country pay off its national debt? Only really by tax collection, or you can fake it by printing money.

The American government can’t collect nearly enough taxes in a weak economy, with too many of their companies of GE and Exxon Mobil size given breaks so they pay hardly any tax, and the richest 1% paying a smaller proportion of their earnings in taxes than do their secretaries.

This is not an American anomaly; most of the largest European countries and a cohort of others are just smaller imitations. Welcome to Planet Ponzi!

Why read this book? We are all in serious trouble, all of us on this interconnected Planet Ponzi. There will be no happy ending – there never is for Ponzi schemes.

The best we can do is to understand what is inevitably coming and take thoughtful, painful decisions that will give us some protection as a nation and as individuals. Ponzi schemes thrive on self-deception and this book is a good start to avoiding that.

This was reprinted from News24.com  in South Africa and may be found here: http://www.fin24.com/Opinion/Ponzi-schemes-20120318

It wasn’t hard to understand that decline. Wall Street was bust. General Motors was bust. AIG was bust. All but a handful of Main Street banks would have been bust too, had it not been for an extraordinarily vigorous response by both federal government and the Federal Reserve.

“We have repaid all of our loans in full, with interest and ahead of time”, really Ed?

The panic of that winter of 2008-09 may now be a distant memory, but the problems facing the country have hardly gone away. Europe continues to tremble on the edge of crisis. In the housing market, there are still huge levels of foreclosures, distressed selling and a scarily large stock of shadow inventory, waiting to be sold. Yes, joblessness is beginning to edge down, but it’s still at very high levels — and, worse still, the percentage rate of unemployment needs to be looked at skeptically in view of the more than one million dispirited workers who have exited the jobs market altogether.

You wouldn’t be able to guess any of that from the stock market, however. The S&P celebrated the third birthday of this current bull market by racing up towards 1,400, more than double where it was three years back. Facebook is hoping to launch an IPO that will value it at some $100 billion. Apple is now worth more than $500 billion. General Motors has staggered from bankruptcy to a healthy market value of $40 billion. However, GM shares still are trading well below the price the government (taxpayer) paid for them and well below the IPO price.

Which all raises a question. Did investors panic unduly in 2008-09? Or are financial markets overheating today?

The question matters if you’re an investor, but it matters almost as acutely if you’re not. The economic and financial news you listen to is strongly skewed by the state of the stock market. If stock markets are hitting new highs, if IPOs are being boldly launched, it’s hard to argue that the economy is fundamentally weak — yet the real economy and its financial shadow are two very different things. And it doesn’t help that so many financial commentators either work for the sell-side firms (Goldman Sachs, Morgan Stanley and the rest) or on firms that depend on those companies for their business. To a striking degree, the financial coverage we get from the media reflects the views of Wall Street, not the health of the nation.

The bulls have a fairly simple argument. Yes, they can point to some real strengthening in the economy and the sheer panic which was present three years ago is gone today. But mostly, the bulls rely on an even more basic argument. The prices of all dollar-based financial assets key off the price for U.S. Treasuries. Since the yields on U.S. Treasuries have recently plunged to lows not seen for decades, that means that the prices of U.S. Treasuries are close to their all-time highs. (Remember that bond prices are inversely related to interest rates. So low interest rates are always correlated with high prices.) And since U.S. Treasuries are trotting along at exceptionally high levels, the equity markets are dragged upwards too. It’s not that investors are unaware of the various weaknesses in the economy, just that they can’t help but respond to the massive gravitational force exerted by the bond market.

I’ve been in the financial markets for around 30 years, and for around 27 of those years, I’d have bought that argument too. If the price of one commodity rises then the price of a closely related commodity needs to rise as well, and vice versa.

Only these aren’t normal times. The government bond market has been prey to manipulation on a wholly unprecedented scale. I’m not talking about anything you’re not already aware of. I’m talking about Ben Bernanke’s Quantitative Easing, a process which involves the massive purchase of government bonds by the Federal Reserve. Since the Fed can simply print limitless quantities of money to acquire those bonds, the price for them can’t help but shift. So to justify the current euphoria in the stock market by pointing to the jubilant bond market is simply perverse. It’s using the price of one blatantly mispriced asset to justify the price of another.

Even that might not matter if the rise in the bond market was permanent. But it isn’t and it can’t be. It can’t be because, over the long term, there is an almost one to one relationship between the supply of money and the level of prices. Since the Fed has been printing money like crazy (to buy all those bonds), inflationary pressure on the economy has increased. That pressure may not yet have fully manifested — because firms and consumers are still stressed — but it’s there, biding its time. The 40 percent rise in crude oil may largely be attributed to QE or money printing.

In the longer term, therefore, financial gravity will operate as it always does. U.S. Treasuries will find their own proper level. A level which will reflect a dysfunctional political system, frightening deficits and ever-increasing levels of debt. That repricing will have a calamitous impact on the stock market. It simply can’t play out any other way.

And countless investors know this. Most financial firms have money in the affected securities — stocks and bonds — because they need to park their case someplace, but that doesn’t mean they think those things represent good value. If you want a real indicator of the health of our economy, you need to forget about bonds, and forget about stocks.

And the global Ponzi Scheme which almost buckled in 2008 is once again alive and well. Global growth since 2002 has been 4 percent. According to my own calculations, the global growth in debt has been 12 percent. One would hope that some lessons were learned from the excesses of credit and leverage when the crisis started in 2007. Yet it appears that leverage and credit are being increased by shifting the Ponzi assets to the central banks balance sheets (taxpayer). This leads us to fairly conclude the price of gold gives you a fairer measure. The higher it is, the more scared investors are. The return on your money if you bought gold a decade ago: more than 500 percent. It’s a statistic which says you shouldn’t feel bullish. You should feel terrified.