Tuesday, December 21, 2010

WikiLeaks, A Semi-Alternative Take

To be honest, I haven't followed the Wikileaks situation very closely, but Naj, my friend over at Iran Facts, got out her 3,000 mile long cattle prod and zapped me into writing about it. No doubt she knows more about the particulars, but I'd best not let that stop me. Cattle prods hurt! (As they say, Naj, be careful what you wish for.) First off, on leaks, an old Secretary of State once said something like, "Anybody thinks they can keep a secret in this town is nuts." To which I say, "Anybody thinks they can keep a secret in this internet architecture is nuts." 

By thinking its own communications so inviolate, the US government was exposed as being both a loon and its own worst security risk. For this effrontery, the streets must now run with human blood, the open internet must be destroyed, demons are being summoned from their crypts in McLean, Virginia, and diplomacy is...well, I'll stop quoting the current Secretary of State for a minute. Seriously, it's worth noting that the US will now start actively aiding and abetting industry efforts to tame the internet as we've known it, get those peer-to-peer free song downloads done while you can, and we can expect a rapid escalation in censorship policies based around shutting down internet provider servers. Again, those steps won't work very well, but it's the best strategy they've got.

Good spycraft and reportage count on a variety of human urges to leak, particularly on lucky combinations of them. Remember the FBI agent who leaked Watergate details to Woodward and Bernstein? I don't either, but he became charmingly known as Deep Throat, and his primary motivation for leaking was that he was passed over for promotion. He was pretty pissed. His secondary motivation, however, was an offended sensibility which bordered on a good conscience, and it was probably this latter quality that tipped the scales of an embittered man towards action and risk.

There's a reason for dwelling on emotional states and revelation, and I'll preface it by unequivocally stating I'm ecstatic WikiLeaks exists, and think it's greater than Brylcreem and pre-sliced loaves of bread; we are likely entering an age when our sins will increasingly, as Jesus said, be shouted from the housetops; it's great that imitators like OpenLeaks are being spawned; it's great that the MSM has its undies in yet another twist; it's great that mere taxpaying mortals can directly view the often petty, weak-minded drivel they're funding. Also, Julian Assange is one gangsta S.O.B. and it's pathetically obvious the US is trumping up whatever charges it can to detain him. And now, unfortunately, I have some questions about the source(s) of this particular material.

Whoever leaked the Pentagon-State cables was no low-level signals intelligence officer feeling some pangs of guilt and disgust, as was apparently the case with the Iraq papers. I don't have detailed knowledge of Pentagon security procedures, only rudimentary knowledge of general security for online systems, but given the breadth and content of the material, it seems very unlikely this leak was conducted by a single low-ranking, low-cleared individual, and far less likely that it was conducted by multiple leakers acting in concert. Only a high-level administrator or bureaucrat with a lot of knowledge, free access, and time on their hands fits the profile of someone who could pull this off. The Pentagon Papers era is long gone, when one Daniel Ellsburg could simply take a microfiche copy of a classified report and drop it into the lap of The New York Times, or surely when any newspaper published such papers in full without heavy deliberation and editing. Point being, even back then very few people besides Ellsburg had a high enough security clearance to get those papers.

Yes, I'm making the dangerous assumption that the Pentagon and State Department have security procedures and follow them to some extent, but all that money they've gone through has probably been spent on something and paranoia has institutional tendencies. More importantly, any such person or group looking to leak would have to be really, really motivated. Like motivated enough to be executed for violating the State Secrets Act. Motivated enough to face the ongoing scrutiny of a withering internal investigation and polygraph tests. And this in order to merely provide proof of what we in The West already knew with excruciating, repetitive clarity, that many of our emissaries and generals are first-order twits? Sorry, something just isn't adding up for me yet.

There's no doubt the US government is conducting a cyberwar against WikiLeaks, no matter how Man of La Mancha, hypocritical, and technically ignorant that may be. It's a predictable response that will rain repercussions like canned hams down on us all in terms of constrained liberties and commerce. But maybe this really wasn't a leak at all. It lacks the classic, targeted earmarks of a leak and looks more like a well-planned intelligence operation intended to embarrass the West. This looks like the famously dreaded Fuck You Flourish. Penetration could have been gained via patient internal sleeper personnel or a back door, possibly with the former activating the latter. It may have been nothing more than a neat crime of opportunity, but along with the polygraph tests, the Pentagon might want to carefully review its list of network vendors.

So much for Obama's harping on the Chinese about greater transparency. This is like being at a formal dinner in the South, listening to your hosts happily extol the benefits of racial equality after the Civil Rights Act and how thankful they are those bad old days are finally behind them. Then a group of young kids straight out of To Kill A Mockingbird run inside yelling that Tom Robinson just raped Mayella Ewell, the Klan is rounding up to lynch him, and your host grabs a long white robe out of a closet and bolts out of the the house. You can perceive a real democracy by how it welcomes the currency of clear information. This is not that.

Friday, December 17, 2010

Does The Republic Still Stand? Part Three: Not Really

If by "Republic," you mean Goldman Sachs, then yes it's doing really really well, so well that "still standing" is more like "surveying the world in a towering, thrustingly Brobdingnagian manner." Patient and perceptive Phil over at Perils of Caffeine in the Evening asked in the comments section of Part Two of this series, seems about a month ago (it is), "Does this mean I should buy Goldman's new 50-year bonds?" That's a great question, Phil. Let's share a virtual martini before I advise you to sell out your entire Berkshire Hathaways position.

Goldman's first $1.3 Bill bond issue, originally priced at 6.25%, was so oversubscribed that the final yield went down to 6.125% and the instruments sold out in about 5 minutes. So for practical purposes the question now becomes, will Goldman issue more? Either way, it's important to supplicate the Beast, one bond issue being neither here nor there, so I recommend setting up a large and handsome altar in your front yard, erecting an imposing and permanent Buddha statue not less than 8 feet high with burning incense and shiny flags sticking out at trapezoidally proper angles, and a laminated picture of patron saint Hank Paulson's face lovingly hung over Buddha's. If that's too much for you, a stopgap for the holiday season would be flashing lights that say "WELCOME, GOLDMAN! SACHS TOO!" hung in your front window instead of the outmoded "MERRY CHRISTMAS."

Now that we've had that virtually refreshing pause, I am about to channel the Ghosts of Stock Markets Past in trading floor lingua fracas, circa 1989. One of my mentors, or more accurately a guide through hell, happened to be a 32nd-degree Master Mahan of Fuck-Speak, a true virtuoso and the only person I've met who used "infuckitively" as a word. Forgive me in advance, though I'll censor out the dirty stuff:

"Phil-Phil! I hear you wanna buy those big swingin' Goldmans! C'mon, though, a measly 50 year term? You *%(#*#@ kiddin' me? If Goldman Sucks wanted to really tell the other banks to go $#$^ their grandmothers, those pompinos woulda gone with 100-year bonds straight outta the *&^# and paid, I dunno, let's say 6.66%. HahahaHAAA!! {Grand Master playfully punches you in left shoulder, making you nearly fall down.}Well I say *%(# 'em, buncha friggin finocchies playin' widdemselves, only sold, what, like rat shit, $1.3 bill last month? Whaddathey, *%(#^*&@^ Germany? *%(#^*%&* Switzerland? Goddammit, this is America! My Aunt Mary coulda made more than that blowin' sailors! Ya never know, maybe the *&$(%&(#%^s find the #^*&^s to ante up, so me personally, I'm gonna hold out for those big 100-year marangas and go in-fucking-finite. {Grand Master holds two cupped hands up and well out in front of his chest, indicating sign language for gigantic firm female breasts, and makes corresponding antic gestures.} But with that ass-raping 5-year call on the 50s? They can %*(% the $%(* outta my @##*&@^&$%^& @#%$^&$#!"
Emerson once wrote, "A man must be clothed in society, or he shall feel a certain bareness and poverty." One must naturally incline to agree whilst endeavoring to be more than a mere collection of personal vices, but on a trading floor everyone,  your friends most of all, attempts to rip that social clothing off and lay you bare. Reasons for doing so are the usual boredom, depravity and sadism, of course, but it's also because the sharp point of a market is a deeply cynical place, and your only real purpose for being there is to make money. A market is a collection of arguments over value, and real fistfights are apt to break out at any time. I've seen them, and once saw a grown man fake a heart attack to avoid being physically attacked. I've also seen a real heart attack, sex in the bathroom, suspiciously white nostrils, a famous trader taken from the floor in handcuffs by Giuliani's goons, and a close-up video of a female broker giving birth played from every TV on the floor. The last one made everybody stop what they were doing and more than one man in my presence had to wipe tears from his face, and another said "Dat's da most byootiful ting I eva seen!" Markets are like Geiger counters for emotion.

A big reason for all the undressing is that the most dangerous and expensive commodity in a market is bullshit so credible it makes you lose all your money. Most of the people working the floor around me grew up on the corners of Bedlam and Squalor and heaped derision and scorn much like a patellar reflex because it correlated with financial survival. They would never have failed to take notice that Goldman Sachs has started acting like a sovereign nation, and my real mentor, the last independent floor trader on either exchange at the time, would easily have seen the intention behind these Goldman Longs, as well as significance and likely consequences. On the surface, a bond yielding 6.125% over 50 years looks pretty damned attractive, sorta like Nicolette Sheridan did in that red bikini top and sarong in which she played The Sure Thing. Hubba hubba! But when I first read about these 50s they're dipping a toe into the water with, I asked myself, "Why would they borrow money for 6% per year when they can get it for free from the Window, and already drew upwards of $600 Bill last year?"

That's on top of getting completely bailed out on $160 Bill of bad AIG bets. And wouldn't the ability to front-run every Fed bond auction be enough for even Gordon Gecko? Issuing these mid-range vehicles begs immediate you-and-me-sense, and it may be unprecedented unless your bankers happen to be Hoares (the world's oldest surviving investment bank, and pun intended). Come to think of it, the 484 rolls of toilet paper I've already stacked in the Zombie Bunker are unprecedented too; I figure we might be down there for awhile, and what if we ran out? One thing is sure. Goldman felt October was time to test the market for these long bonds, and that was right when they were hearing, ahead of everyone else, what the Fed's plans were for Quantitative Easing Two. (The bar chart above shows Treasury holdings in November 2010, when the Fed became the largest owner of US debt.)

To roll with a metaphor in the previous paragraph, this 50-year issue is the equivalent of Goldman getting up in the middle of a movie and loudly announcing it has to drain its main vein. It proceeds out past the exit sign, sets the garbage can ablaze then leans back in and starts screaming FIRE! Just as any modern investment banking MBAs will do when they feel well positioned, their incentives are aligned and pointing straight at that next Christmas bonus. Goldman Banksters have been paying close attention and correctly and finally responded to global retail investor desire for yields between where so much scared money flew down to, (i.e., out of retail equity and mutual funds and into Treasuries paying well below real inflation), and to where so much hedge fund money flew up into (to corporate junk bond packages yielding between 7 and 13 percent, where there hasn't been enough product to satisfy appetite). The Banksters saw the blips going into commodities, which have made moonshots as the monetary base went pure vertical. They saw the housing sector resume its slide, banks hoarding cash and not making loans, and they saw a municipal bond market obviously about to go bidless sometime this Fall or Winter. They drew a few conclusions: Treasuries Will Tank. We Can Become As Gods. And Rule Humanity From Our Ranches In Costa Rica.

There was a yawning yield vacuum, and Goldman, having effectively taken over the US government's fiscal and monetary policies two years ago along with its Treasury and central bank, can step in to fill it with vast, practically infinite amounts of free capital and serve as the pricing benchmark for a whole new market in mid-yield bonds. Current investor sentiment will price Goldman's debt more favorably than almost any other country's (whoops, Freudian slip). Goldman is kinda like a doctor who admits himself into the Emergency Room with a broken leg in order to take over the entire hospital. At its sole discretion, it took over $600 Bill of the first $3.3 Trill in 2008 bail-out electrons. It has taken more since then and given an accounting of where it's put the money to nobody. 6.125% per year on $1.3 Bill over 50 years is indeed rat shit to them. So what's the point? Is there a deeper agenda? You can count on me to think so.

Goldman has become far more than just an investment bank in a globally securitized world. They are the First Bank of the New World Order. The geniuses Goldman employs out of the finest MBA schools and physics departments, the thousand-yard-stare boys willing to work 90 hour weeks to play grab-ass with each other, have determined that sovereign interest rates must go way above 6 or 7 percent, bailouts be damned. Fortunately it took them a couple years for this play to completely dawn on their cocaine-starched white collars and minds, because long-term bond plays are very dangerous investments. Fortunately my mantra position of huddling under the office desk with my AK, loaded banana clips going snik-snik-click as I check them in turn while watching It's A Wonderful Life as I munch away on Costco-sized bags of Cheetos pulled from long-term food storage no longer seems entirely paranoid. At least to me. Inflation could easily send long-term bond yields up by 3%. Or 5%. Or 15%. Pick a number. 

Here's the one thing markets really suck at: properly discounting adverse long-term risk. The less recent volatility, the more presumption of stability. Just because aliens haven't landed on the White House lawn to meet with President Obama doesn't mean they're not going to. Or that they haven't had more private consultation. But even under more imaginable scenarios, such as a mere 3% increase in long-term yields due to a mild inflationary frisson (and the 10-year Treasury yield has already risen from 2.3% to over 3% in just the past two months despite the Fed's cunning plans to keep it low), then the face value of those pristine Goldman 50-year bets would fall by about 33%. How's that for capital preservation?
Ah, volatility. She whom age cannot wither nor custom stale. The European Union is imploding (more on that next time) and markets have already priced various sovereign debenture yields up over 10%. An alleged European Central Bank and the IM-effing-F are riding in to save bondholders with taxpayer money, and to unleash austerity programs which have about as much chance of succeeding as my plans to own Magritte's "Use of Language" (I've built a backlit frame!). Put simply: Goldman Sachs is betting on dollar hyperinflation, a plethora of imitators have lined up to dangle bait, and that's how market vacuums get filled, often with nasty stuff sucked up loose from floors. 

There is every reason to think this new class of bonds is why the Fed is having so much trouble selling its 10-year Treasuries. Mexico has just issued dollar-denominated 100-year bonds. Venezuela and Brazil are issuing similar instruments. Investors are gobbling up recent 50-year issues from Norfolk Southern, the Netherland's Rabobank, GDF Suez and, umm, I'm having a little trouble typing this last one out, I t a l y (aaagggg, swallowing my tongue... the seizures hit again...hey, those Mexican Centominos are starting to look pretty good!). This long bond gravy train is on motion lotion and it's got biscuits for wheels.

If you think the dollar is going to hyperinflate, it makes perfect sense for you to sell as much debt as you can and convert it into something of real value. Then you pay off with cheap-o dollars in the future. This is a really great time for anyone besides the US Treasury to be issuing bonds, and it's just the tip of the iceberg. It's also a great time to take credit card companies up on those 0% for 15 month offers and buy RonCo products. US Treasuries aren't priced anywhere close to reflecting their true default risk. So the Fed has become that chap so sought-after by Wall Street professionals, the Fool in the Market, and its Chairman is too stupid to even have seen the vacuum much less recognize it as his own creation. Treasuries are someday, maybe in 2011, going to look a lot like the average American Muni bond: gangrenous. Anyhow, a violent market argument has started and it's not too hard to see who's going to get the beat-down. The US will next attempt to force various countries to buy its Treasury bonds at the barrel of a gun, or its sudden absence. There's no other way to keep selling them for long.

What are the chances the sovereign states of Goldman Sachs, Mexico, Venezuela and Brazil are going to stick around for the next lifetime and pay off? Doesn't matter, not relevant. The new market has been created, is swelling, and the music blaring in it is rock and roll, so you don't have to wait for salvation. It's right here. I recognize my future masters, and I want in. After all, you can still buy really neat stuff with dollars and my bonds will be backed with high-grade toilet paper and Cheetos, and they will yield 6.3%. 6.5% if you get in right now. When Goldman Sachs buys Nebraska and people are fighting each other to become indentured servants on its farms, it'll be even more obvious who's running this country. So to finally answer the question, Phil, I would wait for the inflation wave to crest, wipe out the face values of the extra-long bonds, and then step in and buy a basket of some that aren't defaulting.