A reader asked the following question in response to my post yesterday about Richard Posner’s adoption of Keynsianism that I think opens up an interesting discussion: “Do you think he’s converting because it finally made sense to him at 70? Maybe he was a great marketer of himself all those other years.”

I would like to think less cynically about Posner’s choice to finally read Keynes at this point in his life. One of my favorite Supreme Court Justices in terms of both significance and legal reasoning is William Brennan. As the legend, myth or story goes, upon appointment to the Bench, Brennan reviewed the entirety of his old law school textbooks and as a result, completely reformed his legal philosophy. It took a catalyst–his nomination to the Supreme Court–in order to make this change. I would like to think that Posner, upon witnessing a major economic collapse, used that event as a catalyst to trigger a reanalysis of his personal economic philosophy.

I think think there is a lesson to learn from Posner and that is the following: People get extremely caught up in group-think when they become a part of something larger than they are. As part of the Chicago School, Posner completely bought into their doctrine and in the group-oriented narrow-mindedness, he never even READ Keynes. To think one can have an informed opinion on a major theoretician through secondhand analysis should have struck such an intellectual instantly as impossible. Yet that’s a hard trap to avoid when everyone around you reaffirms and hammers home those ideas. In many respects this highlights the troubles in the financial sector–everyone was invested in the same assets with the same risk-management models. Little did they think that correlation in and of itself was one of the PRIMARY risks. Never did these risk managers consider group-think as a risk in and of itself.

Too many people buy into the stigma that a move away from a a longstanding viewpoint or position is a bad thing in and of itself (think back to the “flip-flopper” issue in 2004). It is one thing to have conviction, it is another to stick with your guns even when proven wrong. The more time people spend with self-reflection the more likely they are to have a realistic and comfortable viewpoint about their philosophies (whether they be legal, economic or trading). All of the best traders I know take time to reflect on both what they did wrong AND what they did right. They want to familiarize their consciousness with all thoughts both patent and latent that play into their decision-making on a daily basis. As you become more knowledgeable about your inner thoughts you are less vulnerable to succumb to the pitfalls of group-think and more adept at discovering the sources and consistencies in your own personal thoughts.

One of the more thoughtful and interesting trading bloggers, Tim Knight over at the Slope of Hope, recently conducted a thorough self-reflexive critique that led him to the belief that he needed some sort of change in his trading approach. I urge all to read this analysis as a guideline through which people need to reflect. Please don’t read it from the perspective of: “oh he was just wrong for being bearish.” Rather, try and gain some insight in how he pursued this self-reflexive endeavor in order to better position himself for the future. Some of these lessons apply directly to traders losing money short this market and blaming everything from computers to outlandish conspiracy theories that Brandon highlighted in his post this afternoon (these conspiracy theories are so outlandish that I think people miss the most obvious theory…that is a conversation for another day though, so remember to ask me if you’re interested).

Personally, I try to spend at least a few minutes of every week thinking about how I am. One particularly self-reflexive moment happened around a State of the Union address and to myself, I started demanding my “State of the Elliot Address” on a consistent basis (please don’t make fun of me too much for that one…). Every trader owes it to themselves to do the same.

Most importantly, watch how the leaders–AAPL, AMZN, GS, FCX, X for starters–handle this digestion. The market has given us NUMEROUS breakouts that we have timed very well over the last push higher. Take a walk down memory lane and look through some of our recent setups and where they went.

We do a lot of work for you over here and on the Virtual Trading Floor, now this is the time for you to do some research and reflect on how you handled the trade. The best way to move forward as a trader is to learn from both your mistakes AND your successes (this second part is what many often forget). Take this digestion moment in the broader market and constructively critique your performance in order to better prepare for the next break in the market.

Traders, be sure to check out the web’s first-and-only Virtual Trading Floor, offering unparalleled access into T3 Capital Management’s elite Alpha Fund trading floor!

The Market Ticker

I am constantly amused by those people who claim there is some vast “conspiracy” in this country when it comes to banks, balance sheets, and fraudulent lending and accounting.

There is no conspiracy.

It is, in fact, “in your face” fraud.

The FDIC does us the courtesy of explaining it virtually every Friday night, right on their web page.

I am simply going to take last night’s bank closures, which numbered four. One of them has no “deposit insurance fund” estimated loss available, because they didn’t find someone to take the assets – they’re just mailing checks. But the other three do.

• Waterford Bank, Germantown MD: $155.6 million in assets, $156.4 in insured deposits. They were “underwater” by $800,000, right? Wrong: Estimated loss, $51 million. That is, the assets of $155.6 million were overvalued by approximately 30% at the time of seizure.
• Bank of Illinois, Normal IL: $211.7 million in assets, $198.5 million in deposits. They were “underwater” by $13.2 million (which is why they were seized), right? Wrong: Estimated loss $53.7 million. That is, the the assets of $211.7 million were overvalued by more than 25% at the time of seizure.
• Sun American Bank, Boca Raton FL: $535.7 million in assets (so they claimed anyway), $443.5 million in total deposits. Heh, why did you seize them – they have more assets than liabilities? Oh wait: Estimated loss: $103.8 million, so the actual assets are worth $443.5 – $103.8, or $339.7 million. That is, the assets of $535.7 million were overvalued by a whopping 37% at the time of seizure.

This isn’t new, by the way. In August of 2009 I went through Colonial Bank’s failure based on BB&T’s presentation to its shareholders on the “merger” – and gift it was given by the FDIC. It too showed that Colonial had been carrying assets on their books at a ridiculous 37% above where BB&T ultimately marked them as a whole.

Folks, your bank is being assessed deposit insurance premiums to pay for these losses. You are paying these losses through increased fees and interest expense on your credit cards and all other manner of borrowing.

You are paying for outrageous, pernicious and endemic balance sheet fraud.

There is no conspiracy. It is right under your nose. One of these three banks, based on their balance sheet, wasn’t even underwater – it was “to the good” by nearly $100 million dollars.

The balance sheet was a flat, bald-faced lie.

You want to sit for this?

Why should you?

Now let’s ask the inconvenient question:

Are the big banks – specifically, Citibank, Bank of America, Wells Fargo and JP Morgan – all similarly overvaluing their assets?

Why should we believe they are not? You can go through more than a year’s worth of FDIC bank seizure information and in essentially every single case you will find that overvaluations of somewhere from 20-50% have in fact occurred, yet not one indictment for book-cooking has issued.

So let’s be generous and assume that the “big banks” are over-valuing their assets by 25% – the lower end of the range of what the FDIC says is, through actual experience, what’s going on, and add it all up.

Bank of America shows $2.25 trillion in assets.

Citibank shows $1.89 trillion in assets.

JP Morgan/Chase shows $2.04 trillion in assets.

And Wells Fargo shows $1.31 trillion in assets.

This totals $7.49 trillion smackers.

The FDIC’s experience with seizing banks thus far suggests quite strongly that all four of these entities are lying about these valuations, and that were they to be seized the loss embedded in them (and for which you, the taxpayer would be responsible) is somewhere between $1.49 and $2.99 trillion dollars.

Incidentally, neither the FDIC or Treasury happens to have either $1.49 or $2.99 trillion laying around, and it is highly questionable if they could raise it, should that become necessary.

Now of course neither you or I can prove this is correct. However, we can look at the FDIC’s own published bank closing statements, and derive from them a pattern stretching back more than a year now that has disclosed that in essentially each and every case the banks in question have overvalued their assets by anywhere from 20-40%, and that as of the day of the seizure such an overvaluation was in fact a continuing and ongoing practice.

Back in the beginning of 2009 we had people argue that “mark to market” was invalid – that in fact the market-based pricing losses that were being claimed were ridiculous and would never happen. One of the claimants was the Federal Home Loan Bank of Seattle, which said that the $300 million in mark-to-market losses would not actually happen – that the real loss was only going to be $12 million dollars.

FHLB Seattle recently filed suit against the bundlers of this trash, claiming, surprise-surprise, that the real loss is not $12 million, not $300 million, but $311 million – on that bundle of trash alone. In all they are seeking $2 billion in damages.

We have now learned, a year into this “experiment” with mark-to-model promulgated at gunpoint by Congress that:

1. The banks indeed have been lying about asset valuation and the proof comes in the form of the FDIC seizures, which in essentially case have documented massive and outrageous overvaluation of assets on bank balance sheets.
2. The claimed “mark to model” losses, which were tiny compared to the market-price losses, were in fact fictions, to the point that the poster child of the “mark to model” argument is now suing the purveyors of the instruments supposedly not to be marked to the market for losses that exceed what the market-based loss was back in March of 2009.

If you wish to argue that the economy and banking system are recovering their health, you must deal with this. If indeed large bank balance sheets are concealing a deficiency of somewhere between $1.5 and $3 trillion in losses not only will the economy and lending environment not recover it can’t as the large banks all know the truth.

I believe this is why those very same banks are hoarding cash. I believe they know that at some point in the future – a point not under their control – the truth may come out and if it does an instantaneous run would occur – not just on their bank, but on all banks. Such an event could be defended against only with a huge cash hoard – a hoard that, if they lend out said cash, would not be available to them.

The Federal Reserve knows this too. I believe this is why there is nearly $1 trillion of “excess reserves” sitting at The Fed, up from nearly zero prior to the crisis – it is these large banks’ “backstop” against a potential run should the truth of their balance sheets reach public conscience.

The political and regulatory bottom line is simple: As I have repeatedly maintained for nearly three years, we now have the facts from our own government agencies, most particularly the FDIC: The banks have been and still are cooking their books in a manner that intentionally overstates their asset valuations – an act that is exactly identical to that which brought down ENRON.

Something to think about on this fine weekend.

Commodities are a TAX.  They are the worst kind of tax because they flatly (not progressively) charge every man woman and child in this country more money for the same food, fuel, shelter and clothing that they had to have last week in order to live.  It doesn’t matter if those people are trying to save or trying to tighten their belts or trying to get out of debt – high commodity prices are a shake-down that rips money out of the pockets of the middle class and funnels it to the very, very small class of commodity producers, commodity speculators and the people who finance them and collect the fees.

Over 99% of the people in this country do not own mines or oil wells (and I’m not counting small farmers because they are literally raped by speculators and bankers, often leaving them worse-off than the consumers) or huge plantations and they do not buy futures contracts on margin with cash they borrow at prime plus 0.5% nor do they own tankers filled with 2M barrels of crude that they arbitrage along the crack spread, looking for an opportune moment to deliver their goods (hopefully during a crisis) at a maximum profit.

So 99% of the people in this country don’t even own a commodity ETF – they have no way to profit from high commodity prices and they need to eat, and they need to buy clothing and have shelter and they need fuel to heat or cool their homes and go from place to place.  There is a word for people like that, at the bottom end of a transaction they have no control over – VICTIMS!

The American people are the victims of a $2.5Tn commodity scam - 50 times bigger than the Madoff scandal, pretty much one Madoff PER WEEK yet they sit there and take it because those same commodity pushers are major advertisers in the media – so there are no stories about it and the commodity pushers are massive campaign contributors with armies of lobbyists so our Government does nothing about it other than show up to parties and go on junkets.  In fact, do you know who the single largest hoarder of oil was in the last decade?  It was the US Government as George the Second purchased 240 MILLION barrels of oil AT ANY PRICE, creating a spike in demand that averaged 2.5M barrels per month for all 8 years of his term (over 10% of US consumption) that enriched OPEC and the Saudis on a level not seen since Reagan/Bush/Bush/Quail (1978-1990).

Those are inflation-adjusted prices, of course.  Filling and releasing oil from the SPR isn’t the only reason oil goes up and down in price but, WOW – I’d say there’s a pretty strong correlation, wouldn’t you?  Both Clinton and Bush I effectively used the SPR to crush speculators and depress oil prices, putting more money back into the pockets of the American people than any tax refund possibly could.  We also have our little global incidents that drive up the price of oil from time to time and here’s a chart illustrating that effect since WWII:

When the US consumes 18Mb of oil per day and the President of the US orders and EXTRA 2.5Mb per day to stick in the ground (and pays for it with YOUR money), what would we think would happen to the price of fuel?  What if that same President declares a war and sends 200,000 troops and 200,000 support people overseas with tanks and planes and helicopters and jeeps and aircraft carriers and destroyers that use, as a group, over 1Mb of additional oil per day (also at your expense)?  What if that same President declared a war on one of the World’s top producers of oil and knocks over 1Mbd off their production numbers?  You can see where these little things can add up…

The math is easy.  The average driver drives 15,000 miles a year and gets 20 miles per gallon so they use 750 gallons of gas a year.  The average family has 2 cars so 1,500 gallons of gas per American family per year.  At $30 a barrel, we have $1 gas.  At $70 a barrel, we have $3 gas (refining and speculative markups multiply the effect).  So we’re looking at the difference between a family spending $1,500 a year or $4,500 a year on gasoline alone – depending on how we manage our oil prices.

But it doesn’t stop there, oil is the basis of a supply chain that flows through most of our industrial society so that 200% increase in your family’s spending on gasoline also increases everything from the price of grains and cattle to the toys that are delivered for Christmas and the plastic they are made out of to the electricity that lights the tree and the gas that heats the home.  Oil is the basis for a massive inflationary surge that attacks the consumer over and over and over – hitting them in both their discretionary and non-discretionary spending – there is no escape, only endless suffering as prices climb higher.

Why then, is controlling the price of oil through use of the SPR, development of alternate energy sources and conservation not THE MOST IMPORTANT ISSUE that we have in this country?  Giving America’s 200M drivers a $1 per gallon break on gas prices amounts to $150Bn a year in direct savings and another $150Bn a year in other commodity savings.  That’s $300Bn a year or 6M $50,000 jobs!  That is cash money that is taken out of US consumers pockets every single day with a large portion of it funneled overseas with Billions of those dollars ending up in the very hands of the people who are funding the other side of the wars we are fighting.  They are killing us with our own money!  How is this allowed to happen?

Video here.

You know, it’s not so much the fact that our politicians CAN be bought that bothers me, it’s HOW CHEAPLY they can be bought that makes me mad.  In the past 20 years, the oil industry has given ”just’ $185M to Republicans along with $60M to Democrats and that has been enough to derail this country’s energy policy away from a sensible mix of conservation and alternate energy towards empty sloganism like “drill baby, drill” – which follows the same logic as helping a fat person to get healthy by finding them more food.

Do you remember when Vice-President Al Gore wanted to have a 4.3-cent per gallon gas tax to be used for funding public transportation and investing in alternative energy in 1993 and the Republicans went insane, claiming that a 4.3-cent per gallon increase in gas (then under $1) would cripple the American consumer?  Well, we are 50 4.3-cent increases up from that point – where is the concern for the American consumer now?  According to the studies done at the time, each penny of tax generates $1.7Bn in revenues.  $1.7Bn was a lot of money in 1993 – today it’s 1/10th of the bonus pool that Goldman Sachs alone gave out to the 36,000 employees who work so hard all year long to create the commodity nightmare that is destroying this country, costing US consumers over $600Bn last year and $3Tn globally.

That is $3Tn EXTRA - over and above the fair value of the commodities so middle men like GS, JPM, MS, CS, C, BCS et al can skim their $16Bn each.  On the whole, it would be cheaper if we just gave the damn money to them - that way they wouldn’t have to play these silly games, funneling 5% of our GDP out of the country, creating huge trade imbalances and driving the country and it’s people further and further into debt – all so they can skim their cut off the top.  The used to call it treason, now they are just called “the smartest guys in the room” by the lap-dog media they’ve co-opted.

How is it that the American people have allowed ourselves to get this distracted about an issue that affects every single on of us for over a decade?  Of course we, in the top 10%, don’t sweat an extra $6,000 a year spent on food and fuel – maybe we take one less vacation or fly coach or something but not enough to get upset over.  It’s the stupefaction of the masses that I don’t understand.  $6,000 is a lot of money to the average American family that makes $48,000 yet Joe 6-pack and Joe the Plummer will go out and rally to support the very same people who sold them out to OPEC in exchange for a few shekels of their own.

More oil is not the answer to using too much oil.  The best case scenario for ANWR is 6 months worth of US consumption.  Perhaps if we go after every drop around the continental US we could find about 6 years worth of oil.  It is thought that, at the current rate of global production (32Bn barrels a year), there is enough oil in the World to last 40 years so whether we take it out now or in 2050, it’s going to be the same 6 months worth.  If, however, we were to cut our consumption of oil by 50%, then we would have enough oil to last us until 2090.  As Ben Franklin once observed - A penny saved is truly a penny earned!

That would give us a little more time to develop alternate energy sources and, also, it would IMMEDIATELY cut the amount of money we spend on oil in half.  Even if you are to assume that Goldman, JPM and the usual suspects make their OPEC pals happy and keep oil prices at $80, despite our cutting back 1/2 of our consumption – we’d still be buying 1/2 as much gas per year.  In reality, if we conserve and knock just 8Mbd off of global consumption – that would be a 10% reduction in oil demand globally, very likely leading to lower prices and freeing up all those Trillions of dollars to be spent on other consumer goods – preferably ones we don’t destroy on the first use that will leave a lasting value for our well-spent GDP dollars.

Do I actually have a plan?

That all sounds great but how do we get from here (200M US cars that average 20 mpg) to there (200M US cars that average 40 mpg)?  It’s really very simple other than step one, which is put me in charge and declare Marshall Law so I don’t have to waste time with Congress.  Once we get that done, the rest is quite easy:

Step 1) An immediate .50 per gallon tax on gas and a .50 per gallon equivalent tax on all fuel – Revenues $170Bn a year.

We were spending $4 last year and now it’s $2.50 so $3 isn’t going to kill anyone and, hopefully, it will encourage you to use 20% less fuel and drive down the price.

Step 2) If you buy a car that gets less than 30 mpg, you get a penalty.  If you buy a car that gets more than 30 mpg, you get a bonus.

In a good economy, the US sells 15M new cars a year, lately it’s been 10M.  Currently our fleet gets 20 mpg while Europe’s gets 35 mpg.  Why do they get 35 mpg?  BECAUSE GAS IS $6 per gallon over there!  So we’re not going to MAKE you buy an economy car – that would be un-American.  What we will do is tax you $1,000 for every mile under 30 mpg your new car purchase gets and we will bonus you $1,000 for every mile over.  Suddenly we are penalizing 15 mpg gas-guzzlers $15,000 while people buying hybrids that get 45 mpg will get $15,000 towards the purchase.

Can I pay for it?

How do we fund the program?  In step 1 we collected $170Bn – that’s enough money to hand out $11,333 on 15M cars.  At that rate it will take us just 7 years to flip the whole US fleet to double the mileage (and, each year, we are 15% closer to our goal, saving +1MBd/year).  As a bonus, we revitalize the auto industry with our perpetual “cash for clunkers” - type program(which we already know works).  Of course I will ramp up the penalties each year and raise the bar for mileage as we try to nudge everyone away from gas guzzlers.  Since our incentives will skew the demand curve towards high-mileage cars, it will be in the interest of auto-makers to crank them out.

Any unused funds will go to funding alternate energy research and fuel conservation programs.  A $10Bn program will be set up to foster a national competition for individuals, businesses and universities to come up with the best energy-saving solutions with $100M prizes given out in all 50 states  ($2M per month and a $50M grand prize each year).  With a $100M monthly National prize for the solution that saves the most fuel and a $1Bn grand prize to the best energy-saving idea of the year.  Having monthly competitions (televised) will keep energy efficiency on everyone’s mind and give schools and businesses constant motivation to think green.

Our goal is to develop solutions that will create jobs with new American energy products that can be exported to an energy-hungry planet.  A constant, significant incentive to drive our country back towards research and development while encouraging kids to get back into the sciences is going to be $10Bn a year very well spent!

We will add 10 more cents a year more to the tax until it’s $2 per gallon.  By then people should be using 50% less fuel and we will be funneling more and more money into alternate energy research, working to get homes and businesses off the grid with wind and solar solutions.  To the extent that this is able to put off the estimated $3Tn upgrade we need to make to the energy grid in the near future – that program will pay for itself many times over.  Notice all this money is essentially INTERCEPTED – it WAS going to go to OPEC and the Banksters - now it is being recycled in our own country - putting the Auto Industry back to work.  We will be funding a new American Alternative Energy Initiative that plays off both our entrepreneurial spirit AND our love of game shows with big prizes!

****

“If I kill all markets cartoon” courtesy of Elaine Supkis at Culture of Life News.

On Monday, March 8th, Scott “RedDog” Redler will come full circle on CNBC and go back to where it all began–on Squawk Box. Scott will be on air at 9:25 a.m., be sure not to miss it! He first called the imminent pain faced by the stock market on Squawk Box in 2008, the buyable area in March of 2009 and declared gold the play of the year in 2009.

For those new to T3Live community (or those who want to relive the memories) here are some of those videos.

Traders, be sure to check out the web’s first-and-only Virtual Trading Floor, offering unparalleled access into T3 Capital Management’s elite Alpha Fund trading floor!

US debt levels are actually higher than Greece or Portugal. So why aren’t we in similar trouble?

Simple, says Gluskin-Sheff’s Davied Rosenberg, the US has a lot of room to raise taxes.

Greece here, Portugal there. Did you know that the structural deficit-to-GDP ratio is actually higher in the U.S. (7.8%) and the U.K. (7.6%) than it is in Greece (6.1%) and Spain (5.8%)?  Of course, what makes the U.S. different is that it has a revenue-to-GDP ratio of only 30%, which is at the very low end of the OECD rates which hover close to 40% or above. So America certainly has much more taxing capacity than anyone else does (and undoubtedly will have to use it because cutting back on health care is going to be a tough task ahead looking at the future demographic trends).  It is with this taxing power in mind perhaps that Congress is now busy preparing for another $100+ billion budget bill (Jim Bunning finally relented) that will revive popular tax goodies and extend jobless benefits through to year-end (when undoubtedly they will get extended again). Canada seems pristine with just a 2.5% structural budget deficit and a debt ratio that is also below the U.S.  However, when you tack on Ontario’s dilapidated fiscal situation, we still look okay comparatively speaking but it’s still somewhat of a dire budgetary landscape.

If you are looking for countries with low primary deficits and low government debt ratios then what fits that bill are Australia, New Zealand, Switzerland, Korea, Norway, the Netherlands and Sweden.