Friday, April 29, 2011

Downsizing Defense

Col. Douglas Macgregor (ret.),

"A Radical Plan for Cutting the Defense Budget
and Reconfiguring the U.S. Military"


"Why does America need all these facilities? The original Cold War goal of protecting European and Asian societies from communist threats and internal subversion has long ago been met, and many overseas U.S. bases are now redundant. What better time than now, when the United States faces fiscal calamity but few real military threats, to judiciously sort those that are truly needed from those the Pentagon can live without? It's time to declare victory and go home."

Total savings: $279.5 billion annually

Complete commentary at

Thursday, April 28, 2011

Incredible Shrinking GDP Growth Rate

From Zero Hedge:

[click to enlarge]

The Commerce Department is reporting this morning that gross domestic product in the United States grew at an annual rate of 1.8% during the first quarter of 2011. This is down from the 3.1% pace of the prior quarter--and less than the 3%-plus growth forecast by Fed Chairman Ben Bernanke for all of 2011. More than half of the measured growth for Q1 came from the build-up of unsold inventories. Ex inventories, the rate would have come in at +0.8%, a ridiculously anemic figure given all the monetary stimulus thrown at the economy by the Federal Reserve during the past six months.

Bernanke suggested in a press conference yesterday that the economy would benefit from an improving labor market in the coming quarters. But the Labor Department has just reported that initial claims for unemployment benefits jumped last week to 429,000, the highest in three months. And earlier this week, Standard & Poor's released an update of the Case Shiller housing index, which tracks home prices in 20 metro markets. Prices in February were down 1.1% from the month before and 3.3% from the year before. In other words, the double dip is accelerating.

Wednesday, April 27, 2011

Tuesday, April 26, 2011

Channeling Malthus

Jeremy Grantham,

"Time To Wake Up:
Days of Abundant Resources and Falling Prices
Are Over Forever"


"Any improvement at all in lifestyle for our grandchildren will take much more thoughtful behavior from political leaders and more restraint from everyone. Rapid growth is not ours by divine right; it is not even mathematically possible over a sustained period. Our goal should be to get everyone out of abject poverty, even if it necessitates some income redistribution. Because we have way overstepped sustainable levels, the greatest challenge will be in redesigning lifestyles to emphasize quality of life while quantitatively reducing our demand levels."

Quarterly investment letter viewable here.

Sunday, April 24, 2011

Quote for the Week, Apr. 24-30, 2011

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. . . . The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
--John Maynard Keynes

Monday, April 18, 2011

A Small Minority Lives Large in the U.S.

Joseph E. Stiglitz,

"Of the 1%, By the 1%, For the 1%"


"The upper 1 percent of Americans are now taking in nearly a quarter of the nation’s income every year. In terms of wealth rather than income, the top 1 percent control 40 percent. Their lot in life has improved considerably... All the growth in recent decades—and more—has gone to those at the top. In terms of income equality, America lags behind any country in the old, ossified Europe that President George W. Bush used to deride. Among our closest counterparts are Russia with its oligarchs and Iran. While many of the old centers of inequality in Latin America, such as Brazil, have been striving in recent years, rather successfully, to improve the plight of the poor and reduce gaps in income, America has allowed inequality to grow."

Complete commentary viewable at

Quote for the Week, Apr. 17-23, 2011

More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray we have the wisdom to choose correctly.
--Woody Allen

Wednesday, April 13, 2011

Spending Cuts? You Gotta Be Kidding!

David Stockman,


The $39 billion spending-cut deal reached by Washington last Friday night...fairly oozes with cynicism, gimmicks and voodoo accounting...[and] boils down to the following pathetic truth: The US government is currently borrowing 43 cents on every dollar it spends, meaning that it is issuing about $6 billion of new Treasury debt every single business day. During the balance of FY 2011, this allegedly largest spending cut in history will not eliminate one day’s worth of new national debt!...

The trillions in new bonds issued by Uncle Sam in recent years have not been financed honestly out of the peoples’ savings -- either here or abroad. Instead, they have been absorbed by the Fed and its chain of monetary roach motels: foreign central banks where the bonds go in, but never come out. In fact, upwards of $4.5 trillion, or 50%, of all the publicly held debt every issued by the US treasury is now held by central banks and has been bought and paid for with printing-press money.

Complete commentary viewable here.

Tuesday, April 12, 2011

Secessionists Take Fort Sumter

"Of all the trials I have had since I came here," Abraham Lincoln wrote to a friend during his first term as President, "none begin to compare with those I had between the inauguration and the fall of Fort Sumpter [sic]. They were so great that could I have anticipated them, I would not have believed it possible to survive them."

Lincoln got the bad news the morning after his inauguration. There was no Oval Office in 1861, no West Wing. The President's office was just down the hall from his second-floor bedroom in the White House. Settling in for his first day on the job, Lincoln found on his desk a letter from Major Robert Anderson, reporting from Fort Sumter in Charleston Harbor that his garrison was running out of supplies. Attached to the letter was a gloomy appraisal from the General-in-Chief, Winfield Scott, who saw "no alternative but a surrender." Lincoln might have been forgiven for wanting to go back to bed.

Scott's assessment carried considerable weight, as did his massive 6-foot-5-inch frame. Nicknamed "Old Fuss and Feathers," Scott [right] had a dossier a mile long. His Army service dated back to the War 0f 1812. For all kinds of trouble, he had gotten the call. President Andrew Jackson dispatched him (with "my carte blanche") to Charleston the first time South Carolina threatened to secede, during the Nullification Crisis of 1832-3. Scott had commands in the Black Hawk and Second Seminole Wars. In 1838 he was the guy in charge of rounding up every last Cherokee in Georgia, Tennessee, and Alabama and marching the whole nation on the "Trail of Tears" to the far side of the Mississippi River. The year after that, he resolved a border dispute between Maine and New Brunswick in the so-called Aroostook War. During the Mexican-American War, he replicated the march of the 16th-century conquistador, Hernán Cortés, on Mexico City. He was nominated for President in 1852. He had been, like, everywhere.

Scott had implored Lincoln's predecessor, James Buchanan, to reinforce Fort Sumter--to no avail. Now it appeared too late, as the new Confederate Army was methodically positioning gun batteries along nearby shores for a possible attack. An early-January attempt to relieve Fort Sumter had already been turned away. The garrison was even more vulnerable now, surrounded by its very own Ring of Fire, than it had been then.

[click to enlarge]

As Lincoln considered Anderson's letter, literally hundreds of people were lined up in the hall, down the stairs, and out the White House doors. Most were waiting for a chance to speak to the President, to ask for a government job either here in Washington or back home in the local post office. Lincoln felt duty-bound to hear each one out. During the days and weeks ahead, he would be criticized for allotting time to the dispensation of patronage while more pressing matters waited. The New York Times editorialized that the President had better things to do "than to fritter away the priceless opportunities of the Presidency in listening to the appeals of competing office-hunters."

Also worried about the President's priorities was his Secretary of State, William Henry Seward. As the congressional leader of the Republican Party during Buchanan's last months in office, Seward had tactfully managed the secession crisis in Lincoln's absence. As much as anyone, he knew of the delicate work still to be done. But Lincoln's focus was drifting. He was bogged down micromanaging insignificant details, Seward told Massachusetts congressman Charles Francis Adams, with "little application to great ideas." Adams heard the same complaint from Seward's nemesis, Senator Charles Sumner, the self-appointed conscience of the Republican Party. Lincoln, Adams wrote back to Sumner, needed help. "The man is not equal to the hour."

Lincoln was still an unknown quantity in Washington. Many pundits (yes, they had those back then) wondered if it was Seward, and not Lincoln, who was really running the show. Seward's predecessor at the State Department, Pennsylvania's Jeremiah Black, suspected as much. Lincoln himself was, in Black's view, "very small potatoes and few in a hill." We need not consult with spud-farm folk in Aroostook County to confirm that Black's remark was not a compliment.

Seward considered Fort Sumter a no-brainer. He and General Scott were of one mind: evacuate. True, Northern hardliners would not be happy with the concession. But Seward was confident that public opinion would eventually blame Buchanan, not Lincoln, who merely inherited the problem. Better to cut losses now. The political cost would be negligible; even Sumner was resigned. Besides, there was still one other Southern fort in federal hands. Fort Pickens, off the Gulf coast of Florida, could be more easily reinforced and defended. It seemed the logical choice for making a political statement.

But the President was taking his time thinking it over. Scott was asked what it would take to reinforce Fort Sumter. The general came back with an estimate of 25,000 troops, most of them volunteers yet to be recruited, plus a hefty flotilla to get them in. It would take at least six months to put the pieces together. Anderson had provisions for no more than six weeks. Planning for Operation Palmetto Storm should have begun under Old Buck's watch.

Seward was not about to let an eighty-man garrison foil his efforts to hold the remaining 27 states together. It was likely Seward who leaked the latest intel to Illinois Senator Stephen Douglas [left]. This was the same Stephen Douglas who had fought back Lincoln's challenge for his Senate seat in 1858--and the man who might now have been President had the Democratic Party not split the year before. Douglas shared Seward's fervent desire that the Union be preserved at almost any cost. The two were often linked in growing speculation about a new party, composed of moderate Democrats and Republicans, that might guide the country between ideological extremes.

On March 6, Douglas took the Senate floor to applaud Lincoln's inaugural address, which he construed as a "peace offering" to the Southern states. The next day he remarked that the likely evacuation of Fort Sumter would help further relieve tensions. The other Senators pricked up their ears. Say again? Douglas later denied that he had any inside information, only that he was putting two and two together. In fact Lincoln had yet to decide what to do about Fort Sumter. It would be another week before he would poll his Cabinet on the issue.

When he did so, on March 15, almost all in the Cabinet favored evacuation. Seward thought it was a done deal and began working his Southern contacts. Among those were delegates to Virginia's secession convention, which had been deliberating for the past month. Seward figured that news of a federal stand-down in Charleston would help unionists to prevail in Richmond. At the same time he gave a back-channel signal to the new Confederate government in Montgomery, Alabama, that Fort Sumter was to be evacuated within five days. There would be no need for the Confederate army to apply force. So cool your jets.

Seward was doing all this on his own. He had been forbidden by Lincoln from communicating directly with the three Confederate commissioners who had arrived in Washington earlier in the month to negotiate several issues, the disposition of Forts Sumter and Pickens among them. Lincoln did not then, nor would he ever, recognize the Confederacy as a separate nation. Jefferson Davis and his minions were rebels, pure and simple. With formal diplomacy out of the question, Seward enlisted a Supreme Court justice, John Campbell of Alabama, as a go-between. Somehow, Seward would keep talks alive. Talking was what he did best. The man could talk the hind legs off a mule, and he was determined to mediate a peaceful solution.

But he could not budge Lincoln, who seemed strangely paralyzed. More information was needed. Lincoln sent three emissaries to Charleston, one to sound out Major Anderson discreetly about a possible relief effort, one to sweet-talk Governor Francis Pickens about a possible evacuation, and one (Stephen Hurlbut, a Charleston native) just to hang with the local folks to take their temperature. The report back was not encouraging. "Separate nationality is a fixed fact," Hurlbut advised. Forget reunification anytime soon.

The stress was getting to Lincoln. There were sleepless nights, uncharacteristic outbursts of temper, and migraines that laid him flat. Even the unflappable Seward was starting to feel it. In a letter to his wife back home in Auburn, New York, Seward complained that he was "the only
hopeful, calm, conciliatory person...Mad men North, and mad men South, are working together to produce a dissolution of the Union, by civil war." On April 1 Seward penned a bizarre memo to Lincoln suggesting that the U.S. provoke a war with a European nation, say Spain or France. A common enemy just might restore the American brotherhood.

Unionists in Virginia were still holding out for brotherhood. On April 4 the Richmond convention rejected by 88 to 45 a motion to proceed with a popular secession vote. Virginia was still in, but her loyalty was about to be tested. Regarding Fort Sumter, Lincoln had finally settled on a half-measure, mindless of the Confederate conviction that one could be no more half-evacuated than half-pregnant. He would neither evacuate Fort Sumter nor reinforce it. He merely wished to feed the troops already there. He even sent a heads-up to Governor Pickens that a peaceful relief mission would soon be on its way to Charleston Harbor. No harm, no foul. Seward, whose credibility with the Confederates was now compromised by Lincoln's decision, telegraphed Judge Campbell: "Faith as to Sumner fully kept; wait and see..."

Seward's idea of a half-measure was to keep Fort Pickens and let Fort Sumter go. With Lincoln's blessing, Seward began making the arrangements to relieve Fort Pickens. He requisitioned the Powhatan, a sidewheel steam frigate manned by 300 sailors and armed with heavy guns. Concerned about security, Seward withheld details of the operation from Secretary of the Navy Gideon Welles. Trouble was, Welles was counting on the Powhatan to cover the tugboats bringing supplies to Fort Sumter. In fact, the President had already signed orders for that deployment. When Seward brought the orders for the Pensacola mission, Lincoln signed those, too. The Powhatan now had the unenviable duty of being in two places at once.

Maybe Lincoln thought he was robo-signing paychecks. In any event, the Powhatan was on its way to Florida before the slip-up was discovered. Lincoln decided to have the vessel rerouted to Charleston. Seward made one last pitch to prioritize Fort Pickens, but Lincoln was adamant. Soon the Powhatan was overtaken and the change-order handed to the ship's commander, Lt. David Porter. But the telegram had been signed by Seward, not Lincoln. Since his original orders had been signed by Lincoln, Porter figured that he had better obey the bigger boss. He put Charleston in his rearview, leaving Major Anderson to wonder, Who's on first?

Up until now Fort Sumter had been allowed deliveries from the mainland of both mail and fresh food. But once Governor Pickens got Lincoln's message, those were cut off. The Confederate Cabinet in Montgomery debated its next move. The new Secretary of State, Robert Toombs of Georgia, cautioned against force. An attack on Fort Sumter would be "suicide, murder, and will lose us every friend at the North...It is unnecessary; it puts us in the wrong; it is fatal." Ignoring the warning, President Davis sent orders to the on-site commander, General P.G.T. Beauregard, to issue an ultimatum to the federal garrison.

On April 11 Major Anderson refused a demand to surrender. Game face on, Governor Pickens rallied the home folks for the looming confrontation. "We will meet the invader," Pickens promised, "and the God of Battle must decide the issue between the hirelings of Abolition hate and Northern tyranny, and the people of South Carolina defending their freedom and their homes." At 4:30 a.m. on the 12th, the bombardment of Fort Sumter began. The beseiged garrison began returning fire after daybreak.

The fort's greatest weakness proved to be not the outer masonry walls, but the wooden structures within, the barracks and officer quarters. They were soon targeted by Confederate batteries with "hot shot," cannonballs that had been zapped in the microwave prior to discharge. These incendiary bombs were more dangerous than the explosive artillery shells, as the fires they started threatened to set off gunpowder magazines. Smoke from the fires impaired visibility and nearly asphyxiated the defenders.

After a bombardment lasting 34 hours, Anderson had had enough. He agreed to a ceasefire, relieved that he had not lost any of his men. Even that small consolation would soon evaporate. Prior to taking down the American flag, Anderson ordered a 100-cannon salute. Calamity struck halfway through, as often happens when boys play with matches, especially big boys with big matches. A premature discharge of round #47 sent a spark into a pile of cartridges, blasting loose masonry in all directions. One soldier died on the spot, another of his wounds three days later. Overwhelmed by the utter futility, Anderson halted the proceedings after fifty rounds.

If it had been Lincoln in charge, maybe we would have gotten the whole hundred.

The federals were allowed to take their flag and embark for home, while the locals watched from the waterfront. "The whole shore rang with the glad shouts of thousands," reported the Mercury. For Charleston, it was a monumental release after months of foreplay. Ever since the November election, the city had relished a continuous festival of gatherings, parades, speeches, salutes, toasts, banners and bonfires, the showing of arms and the raising of flags. London Times correspondent William Russell now observed "crowds of armed men singing and promenading the streets. The battle-blood running through their veins--that hot oxygen which is called 'the flush of victory' on the cheek; restaurants full, reveling in barrooms, club-rooms crowded, orgies and carousing..."

Wait, stop the orgies. This was a time for one more speech, and Governor Pickens gave it. "We have humbled the flag of the United States before the Palmetto and the Confederate," crowed Pickens. "There is no power on this earth shall ever lower from that fortress those flags, unless they be lowered and trailed in a sea of blood." Or, in later parlance, Bring it on.

Which is what Abraham Lincoln decided to do. On April 15 he sent out the call for 75,000 volunteers to serve 90-day enlistments, mission to be accomplished by summer's end. Virginia's soldiers reported for duty, but to the wrong side. Kentucky's, including the sons and grandsons of Senator John Crittenden, the would-be Compromiser, split up and reported to both sides. The fratricide had begun.

The Union's ranking professional, General Scott, was less sanguine than Lincoln. He figured that a civil war would take at least three years and 300,000 men. Physically unfit to command on a battlefield, Scott offered that duty to Robert E. Lee on April 17, but lost his man when Lee's home state of Virginia seceded on that very same day. Scott, unable to wring an instant victory from raw recruits, was put out to pasture, and Lincoln put away his jumpsuit. There would be no quick celebration, no media event. What lay ahead for the troops were four years of concentration camps, doomed frontal assaults, and summary executions. Followed by the political bloodletting and lynchings of Reconstruction. To no satisfactory end.

Sunday, April 10, 2011

Quote for the Week, Apr. 10-16, 2011

The rate of profit is always highest in the countries that are going fastest to ruin.
--Adam Smith

Tuesday, April 5, 2011

Bank of America Prodded (Again) by Regulators

BofA CEO Brian Moynihan tries to contain the damage.

Yesterday brought to light correspondence between the Securities and Exchange Commission and Bank of America regarding the latter's level of disclosure to investors of potential risks arising from defective home-mortgage loans made by the company in the go-go aughts. After reviewing the company's 10-K filing for 2009 and all of its 10-Q's for 2010, the SEC suggested in a series of letters that BofA was underestimating its exposure to possible "putbacks" and that it needed to sharpen its pencil in future filings. In January the company said that resolving the disputes might cost another $7 to $10 billion. Some industry analysts put the liabilities in the tens of billions.

Excerpt from an SEC letter to BofA:

we [staff at the SEC] note that for all recent historical periods, you [Bank of America] have increased the amount of the repurchase obligation for probable losses, including specifically for the GSEs, and that your chief executive officer [Moynihan] has made remarks in your third quarter conference call about the level of “normalized” expense for this obligation. Based on these factors, it would appear that there is a reasonable possibility that there will be losses in excess of the amounts accrued and that you have the ability to estimate amount, at least for some of your counterparties. Please tell us and revise your disclosure in future filings to provide the range of reasonably possible losses for all counterparties for which this disclosure is possible. [emphasis added]

In its response, BofA pleads the Fifth:

We [Bank of America] have reviewed our disclosure regarding the aggregate range of possible losses in excess of the accrued liability (if any) related to those matters where an estimate is possible. In particular, we have considered, as requested by the Staff, what additional information could be provided that would further enhance the understandability of the quantified information provided. We believe our existing disclosure appropriately addresses the requirements of applicable accounting and disclosure rules. We remain concerned that providing information in certain matters can be prejudicial to existing litigation. [emphasis added]

CEO Brain Moynihan brushed off the regulator's concerns when he boldly predicted on March 8 a return to "normalized" pre-tax earnings of $35 to $40 billion a year, possibly as soon as 2013. Moynihan's boast goosed his company's stock price by almost 5% on the day he made it (notice the second candlestick from the left in the chart below). But some analysts are skeptical. The stock has since given back 10%:

Will the bank ever see "normal" again? Patiently waiting to find out, the Maine Public Employees Retirement System continues to hold 2.5 million shares. I suggest that MainePERS portfolio managers review BofA's 2010 10-K, filed with the SEC in late February. Pay particular attention to pages 8-19, cataloging all the risks plaguing the company, as well as to pages 33-35, where management discusses risks stemming from its failing home-mortgage business. Then tell me again why we should be owning this company.

Monday, April 4, 2011

Where Are the Handcuffs?

CBS News catches up to mortgage fraud. Finally.

Sunday, April 3, 2011

Quote for the Week, Apr. 3-9, 2011

The rate of profit is always highest in the countries that are going fastest to ruin.
--Adam Smith

Friday, April 1, 2011