Frederick J. Sheehan: July, 27, 1924 - June 27, 2013

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (Aucontrarian.com, 2009)

The dedication in Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession:

     To my father, who helped and encouraged me to write this book,

                                    Even when it seemed futile. My confidence and stamina

                                                       Often flagged; his never did.

Frederick J. Sheehan, 88, former state official

By Bryan Marquard |  Globe Staff 
June 30, 2013  

Fred Sheehan was a World War II veteran who received a
Purple Heart and a Bronze Star for his service in Europe.

As an Army staff sergeant, Fred Sheehan was crossing a field in France during World War II when a bullet felled his best friend, who had been running next to him, stride for stride, until that moment.

They were near Herrlisheim and in the January 1945 battle that took place there a bullet found Mr. Sheehan, too. In that frigid winter, he didn't discover the wound until the next day because he was so frostbitten when the round pierced his leg.

One night, between the day his friend was killed and the battle when he was shot, Mr. Sheehan was patrolling a warehouse when a mortar shell crashed through the roof and landed next to him.

"It was a dud," said his son Mike, "and I swear from that moment on he knew God was taking care of him, and he was going to repay that. And he did, every day of his life."

Mr. Sheehan, an estate lawyer who formerly was state comptroller and chairman of the Massachusetts Alcoholic Beverages Control Commission, died of a brain tumor Thursday in his Hingham home, where he had moved recently after living nearly his entire life in Weymouth. He was 88.

Guided by deep faith, Mr. Sheehan was a seminarian briefly after the war, before deciding he wasn't cut out to be a priest. Yet when he opened a family law office, his professional choices set a personal example.

"I remember him telling me he wouldn't handle divorces," said his son, who lives in Norwell and is chairman of the advertising firm Hill Holliday. "When someone came to him with an estate and said they wanted to divide it among their children unequally, he would say, 'You might want to see another attorney for that.'"

Mr. Sheehan knew he would face the family rift when such a client died, "and he hated to see families ripped apart like that," his son said. "He was absolutely adamant about equal shares among children. It bothered him morally that one child might be loved more than another."

A son of Irish immigrants, Frederick J. Sheehan grew up in North Weymouth during the Depression, one of three children whose father commuted by public transportation to a job repairing buses for the Eastern Massachusetts Street Railway.

"His mother kept a firm hand on the house and they both just set terrific examples for my father," Mr. Sheehan's son said. "It was all hard work and it was all integrity."

The starting first baseman for Weymouth High School's baseball team, Mr. Sheehan played well enough to land a tryout with the Boston Braves. As he left the field, manager Casey Stengel called out: "Nice glove, kid."

A few months later, Mr. Sheehan enlisted in the Army and was sent to Europe. He was awarded a Bronze Star for his actions during the battle of Herrlisheim.

The Army "wanted him to stay and go to officer school," his son said, "but when he came home on leave, his father said, 'Fred, I think you've had enough.' My grandfather was a man of very few words. My father said that when he spoke, you listened, so he took that advice."

While working in a job his father helped him land at Eastern Mass. railway, Mr. Sheehan used the GI Bill to graduate from Boston University. He also received a law degree from Boston College Law School in 1950 and, in 1978, a master's in business administration from Babson College.

A family friend suggested he might make a good federal agent, so after law school Mr. Sheehan spent a year with the FBI in Virginia and West Virginia, "mostly chasing moonshiners," his son said.

"Dad was an extremely gentle person," he added. "He was not born to be a law enforcement official. He told me many times that he'd go in and say, 'Why don't you guys break up this still and when I come back it'll be gone. What do you say?'"

Mr. Sheehan left the FBI and entered St. John's Seminary in Brighton. Returning home to Weymouth in the summer after his first year, clad in his black robe, he was telling his family about his priesthood studies "and again his father said, 'Fred, I think you've had enough,'" Mr. Sheehan's son said. "And again he took it to heart, and he opened his law practice in Quincy."

Through the years, Mr. Sheehan also served in several state posts, including comptroller, general attorney for the Metropolitan Transit Authority, and chairman of the state Alcoholic Beverages Control Commission.

Early on, during the lean years of his private practice, a young woman volunteered to be a typist in his office. Claire O'Brien was 10 years his junior and had grown up down the street in Weymouth.

"He thought that was great, and finally his mother said, 'Fred, I think she might like you. People don't volunteer to work for free,'" Mr. Sheehan's son said. "He was very earnest, very sincere, and he finally took the hint. That is classic Dad. They were married on Memorial Day in 1955."

In addition to his wife and son, Mr. Sheehan leaves another son, Fred Jr. of Braintree; two daughters, Kathleen Speredelozzi of North Weymouth and Mariclaire Buckley of Hingham; a sister, Catherine Flaherty of Braintree; a brother, Jack, of South Weymouth; and 10 grandchildren.

A funeral Mass will be said at 10 a.m. Monday in St. Jerome Church in North Weymouth. Burial will be in the town's Old North Cemetery .

"He had his beliefs and he never wavered," his son said, "and he loved being around people."

Mr. Sheehan served on Weymouth's Board of Public Works. He also had been on the investment board of South Shore Bank and chaired the board of the Cardinal Cushing Centers in Hanover.  In retirement, he used the French he learned during World War II and the Latin he studied in seminary to teach languages as a volunteer at St. Jerome Elementary School in North Weymouth.

"He made an impression wherever he went without being bombastic or ever needing the spotlight. Everyone I met would say, 'I love your father,'" his son said. "He led by example. That's the gift he gave all of us."

Bryan Marquard can be reached at bmarquard@globe.com.

Numbers and Prices

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (Aucontrarian.com, 2009)

            The Federal Reserve is fully committed to its asset-propping strategy: It will raise the economy by lifting asset numbers.

            This is where it is important to remember the Federal Reserve does not care about economics. The economists at the Fed are central planners. It's not that they don't like economics, they simply are not interested in, so ignore, economics. Those of us not so inclined think of asset numbers as prices, be they shares in the S&P 500 or wheat germ. But the Fed operates in an abstract world; humanity is a distraction.

            At the moment, the Fed's asset-lifting model deigns that the economy, which is a derivative of asset-lifting, will pass muster when the S&P 500 rises another 500 points and house prices rise another 11%.

            These numbers have been typed into the Fed's model. It summons variables to achieve those levels. One supposes the waning influence of QE (looking at the increasing units of QE needed to lift stocks or houses to a specific number) demands a higher level of QE.

            The Fed is currently buying $85 billion of Treasuries and mortgages each month. This will remove about $1 trillion of securities from the market in 2013 (85 x 12). The effort should be aiding its residential real-estate goal, since a large part of the U.S. mortgage market is moving onto the Fed's balance sheet.

            Yet, there are reasons to think the house-lifting program is waning. One of the more interesting developments is the widely reported tactic of house builders holding inventory off the market, or not building houses, to raise prices. Whether true or not (or, whether it matters or not), there seems to have been no reaction. What would Eric Holder's Once-in-Awhile Justice Department do if Big Oil or Big Pharma announced it was doing the same? This is another (supposed, in this case) example of tolerated flim-flammery in the Crony Capitalist growth model.

            The Fed has not boosted, nor talked beyond, its $85 billion a month asset-absorption (and money-printing), since, in April 2013, the Bank of Japan commenced its $80 billion a month of magic wand waving. That is $165 billion of magic money emitted each month by the central banks of the U.S. and Japan. They are not alone: "ECB Says Bond-buying Program is Unlimited" (Reuters, June 9, 2013)

The Japanese experiment is not working as planned, maybe it's early, or maybe another $80 billion a month will be introduced. Some recent headlines: "Yen Drops After Abe Adviser Says BOJ Can Do More" (Bloomberg, May 28, 2013) "BOJ Beat: Mortgage Rates Rise" (Wall Street Journal, June 1, 2013) "Bond Fund Smack-down as 10-Year Treasury Yield Surges" (Reuters, May 29, 2013) For the callous observer, watching everything Chairman Bernanke taught, wrote, and preached turn into its opposite is a delight.

            Continuing in that vein, asset exuberance is slowing down. A new issuance of Rwanda bonds would probably not pass muster today.  (See: "Big Money") Some recent headlines show the change in tone: "Apple Wows Market with $17 Billion Bond Deal" (Reuters, May 1, 2013) "Rising Mortgage Rates, Home Prices a Lethal Brew" (Yahoo, May 29, 2013) "U.S. Bond Funds Suffer Second-biggest Withdrawal Since 1992" (Bloomberg, June 7, 2013) "This is Increasingly Looking Like an Emerging Market Meltdown" (Business Insider, June 11, 2013) "Global Sell-off Hits U.S. High-yield Market (TD Waterhouse, June 11, 2013) "Apple Bonds Lose 9% in Six Weeks" (CNBC, June 12, 2013) "Rising Mortgage Rates Elicit Fears They Could Hurt Recovery" (Washington Post, June 18, 2013) "Mortgage-bond Failures Reach Most in 2013 as Prices Drop" (Bloomberg, June 20, 2013) "Fed Chairman Bernanke Optimistic About the Economy" CBN News, June 20, 2013) "Drunken Ben Bernanke Tells Everyone at Neighborhood Bar How Screwed Up the Economy Is" (The Onion, August 3, 2011)

            Central planning is failing. This means we will get more of the same. After that, the central banks plan to hand out money. Gold fell below $1,300 and silver below $20 on June 20, 2013. Get it while it's cold. 

When the Scales Fall

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (Aucontrarian.com, 2009)

            The U.S. government is losing credibility. That is both an obvious and a useless observation without a sense of the consequences. Maybe, there are none. Maybe, the accumulating doubt concerning Benghazi, IRS intrusions, and NSA confiscation of privacy are wearing thin. If the latter proves correct, how will the people express their disillusion: "Voting with their feet," so to speak? A glaring vulnerability is the gap between falling income and inflation. The government's numbers are propaganda, and seem to have worked. The Fed, Bureau of Labor Statistics, reporters, and the academics who are paid to polish Goebbelism into a scholastic veneer, state that annual price inflation is short of 2%. John Williams, proprietor of Shadow Stats, estimates that if the Bureau of Labor Statistics used the same methodology for calculating the CPI as in 1980, the monthly figure released and disseminated to the public would be 9.4% (as of November, 2012).  

            There comes a point when a widely held view loses its grip on popular opinion. The move is often swift, though tendencies had been moving to the revised standard for a long time. In March 2013, Richard McGregor at the Financial Times wrote of such an instance: "It is remarkable to remember that only a year ago, when Barrack Obama came out in favor of gay marriage, it seemed he had been bounced into the position by unscripted comments from his deputy, Joe Biden. Now, it is all but inconceivable that the president, or any Democrat running for national office, could be against same-sex unions."

Parenthetically, this subservience to fashion defines the hollow men and women who get elected today. Is it possible that all Democrats running for national office changed their own minds during the interim? Roman galley slaves acted with more gumption. The American people know this all too well by now; even if the acknowledgement lies below the body politics' conscience. The disposal of the has-beens would be greeted, where not by relief, with indifference.

            A dramatic event is not necessary for such a change, although that does happen. Even then, there may be a period of reevaluation before minds accept that long-held premises were wrong. Such might be true of Cyprus. "Of" Cyprus, since the assumptions were as true in North Carolina as Nicosia, but have only superficially changed investor behavior - so far. The precipitating event was the discovery that bank depositors did not own their deposits. This has been true for centuries, but in a similar vein, new books about the years 1913 and 1914 record a wide belief that war was passé. In 1913: In Search of the World Before the Great War by Charles Emmerson, the author records the majority view of the people, that view aligning with a long period of the same: "Thank God for Now! .... [T]hese present times are the greatest and the best the world has ever seen."

            For several years now, there has been a flock of laws and regulations restricting and redirecting the actions of investors and savers. This has spread throughout the west, particularly since 2008, a demarcation of sorts, since which the suicidal mutations decreed by central banks and governments of western nation-states have demanded more control over the wealth and pocket change of the people.

            There is the perpetually ticking chance that deranged markets - which are no longer markets in any real sense - will break down. Absent that, what is described as an ebbing confidence in markets, but might also be expressed as a growing sense of Us against Them, will find resonance in the real problems of the 99% who are consumed by price inflation.

            Every day, a discreditable twist is adjoined to official malarkey. "Inflation is the Wild Card for the Fed," in the June 14, 2013, Wall Street Journal, fits. Early on, the article notes: "The Fed has a 2% inflation goal and doesn't want consumer prices to veer too much above or too much below that number over time." There are several misrepresentations, impossibilities, non sequiturs, and clear violations of the job entrusted to the Federal Reserve in that one sentence.

            "Inflation is the Wild Card" reminds us the Fed - that is, Chairman Bernanke, since his is the only view that matters - does not care about price inflation as such. It is consumer price inflation expectations that are pursued, better for them since mind games are intangible. At present, according to the article: "Fed officials haven't been too worried since expectations of future inflation were [sic] stable."

            The article does not say why the Fed believes consumers are fat, dumb, and happy. It is on-the-fly speculation by authors Victoria McGrane and the ceaseless Hilsenrath. We read how "Fed officials could feel," and "if [Fed officials] thought," and the Fed "may not be too worried."  

Running with the bull, a measure often cited is the University of Michigan survey of consumers' inflation expectations. At the starting gate, real people do not think about percentage price changes across the panoply of hair-dos to dishwashers. Leaving that aside, we can be sure that, should the University of Michigan Survey interfere with Fed jumbo, it will crush the dissonance.

            We know this because that is what it did in 2011: "According to the Thomson Reuters/University of Michigan survey of consumers, households currently expect inflation to average about 4½% over the next year, up noticeably from 3% at the end of 2010." This is from the May 2011 Federal Reserve Bank of San Francisco Economic Letter. Bharat Trehan, a research advisor in the Economic Research Department at the San Francisco Fed, shoved consumers, and their expectations, into some glutton-free receptacle. Trehan explained: "Since commodity price shocks have occurred relatively often in recent years, this excessive sensitivity has meant that household inflation expectations have performed quite badly as forecasts of future inflation.... However, the increase in expected inflation likely reflects the excess sensitivity of consumers to food and energy prices." Let them eat cake, or not eat cake, in the instance of Trehan's hit-and-run job.

            Junk research, such as Trehan's may be losing credibility. Part of the problem is a lack of competition. These Ph.D's, taught by Bernanke and other lifers, have been free to write for themselves, with no questions asked. "Inflation is the Wild Card for the Fed" is not a promising comeuppance, but guest speakers from government satraps have looked foolish at recent Congressional inquisitions. Most recently, Eric Holder has no credibility. That guy from the NSA may be the worst travel poster for the federal government since Las Vegas attracted tourists to watch nuclear detonations from hotel rooftops.

            The trend in dubious federal testimony was discussed here in " Crony Bureaucrat" and "Eating the Fed for Lunch." Shortly after Chairman Bernanke's discredited excuses, a U.S. Treasury official was shish-kabobbed by a Senate committee. He sounded like an arrogant idiot, which he probably is not, but many years of telling the politicians anything, with inept cross-examination, has attracted and imbedded a sloppiness that neglects, at the very least, an appearance of diligence and care at the Federal Reserve, the Treasury department, Eric Holder (head of the Sometimes Department of Justice), and that iHead from the NSA.

Peggy Noonan wrote in the June 15, 2013, Wall Street Journal: ""[T]he surveillance state will in time encourage an air of subtle oppression, and encourage too a sense of paranoia that may in time-not next week, but in time, as the years unfold-loosen and disrupt the ties the people of America feel to our country. "They spy on you here and will abuse the information they get from spying on you here. I don't like 'here.'""

Food prices rising at a 10% annual rate with work weeks cut from 35 to 32 hours may telescope Noonan's anticipated lag.

TO RESURRECT A MORE ELEVATING STORY, the widely read Ambrose Evans-Pritchard devoted his June 16, 2013, Daily Telegraph column to the latest warnings by Charlene Chu ("Fitch Says China Credit Bubble Unprecedented in Modern World History"). Chu told the Telegraph that China's "credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem, and potentially into a Japanese-style deflation.... There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is, and this undermines signaling..."

Chu's straight talk was the topic of  " 'A' for Conduct. 'F' for Guts." Albert Edwards, the widely followed, no-nonsense, Global Strategist at Societe General, titled his June 4, 2013, Global Strategy Weekly "If UK Chancellor George Osborne is a Moron, Fitch's Charlene Chu is a Heroine." Edwards writes: "[A] seething anger has been bubbling within me since UK Chancellor George Osborne's March budget.... By contrast Fitch's Charlene Chu deserves a medal of honor for her stark warnings about the Chinese credit bubble."

Later: "Credit rating agencies came in for a lot of criticism in the aftermath of the financial crisis but Chu stands out from the conspiracy of complacency on China warning loud and clear that China is nearing an abyss. The well known China commentator Michael Pettis calls Chu 'the only analyst who understands what is happening in the Chinese banking system.'"

In a world short of role models, an American credit analyst in Beijing is no match for superheroes and celebrities, but maybe, at least one graduate from our best and brightest institutions could be inspired to pursue the truth, no matter the consequences.

"A" for Conduct. "F" for Guts.

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (Aucontrarian.com, 2009)

"You are lucky, if I may say so, that I'm the one who's standing here and not the ghost of Sen. Carter Glass. One hesitates to speak for the dead, but I am reasonably sure that the Virginia Democrat, who regarded himself as father of the Fed, would skewer you."

-James Grant, addressing the staff of the New York Federal Reserve, March 12, 2012

            Once upon a time (but not so long ago), the New York paper-pushers who deem which textbooks public-school children will read fell upon a history book that posited some fashionable minority had broken bread during an important historical event. It was pointed out there was no evidence of such, to which the paper-pushers agreed: "We know they weren't there, but it's a good idea."

            In this spirit, Craig Torres at Bloomberg wrote, or was handed, a historical account of the Fed's founding that is a "good idea," according to the Fed. (See: " Fed's 100-year Roots Grew From Virginia Congressman.")

            The article is wrong throughout, although, the first sentence may be true: "As Carter Glass began to sketch out plans for a central bank in 1913, all the U.S. representative from Virginia had to do was read his mail to know he had nationwide support." The gist of Torres' reconstruction is the mailbag in Carter Glass' office, from which the little people (a converter of cotton goods, a hardware proprietor, a butcher, and a candlestick maker) urged the Senator to pass a currency reform bill. The Federal Reserve Act became law on December 22, 1913.

            Skipping over Torres' study of why we needed the Fed ("America's strong growth potential was hobbled by a banking system that Glass called 'a rank panic breeder'"), one is left thinking Senator Glass went to his grave pleased with his accomplishment. Towards the end of the reporter's interpretation, we read: "For his part, Glass continued to defend the Fed during its early years. Speaking in the Senate, where he represented Virginia from 1920 to his death in 1946, he assailed the old system as 'bank reserve evil' and called the rigid currency and lack of flexible reserves 'the Siamese Twins of disorder.'"

            "Early years" may be taken to mean 1946, still early, from the vantage point of 2013. By 1917, Senator Glass was distressed with Fed's unaccountable usurpation.

The Federal Reserve Act of 1913 did not permit the bank to buy or hold government securities. The Federal Reserve Bank was formed to serve the needs of its constituent commercial banks. Commercial banks dealt in commercial receivables. Economists were not needed.

            H. Parker Willis was Senator Glass' aide-de-camp when the Act was negotiated. In 1936, he wrote The Theory and Practice of Central Banking. Willis fumed: "Central banks will do wisely to lay aside their inexpert ventures in half-baked monetary theory, meretricious statistical measures of trade, and hasty grindings of the axes of speculative interests with their suggestion that by doing so they are achieving some sort of 'vague' stabilization, that will, in the long run be for the better good."

            Torres writes the Federal Reserve System would "provide backup currency and credit - in effect creating a liquid market for the assets held by banks when they needed money." The system of semi-autonomous regional banks was funneled into a national bureaucracy. The centralized, open-market operations of the 1920s spawned the illiquid banking system of the early 1930s. Willis (1936) explained the inevitable consequence of having turned commercial banks into casinos. In the words of James Grant: "The idea of liquidity, too, had a hard time of it in the 1920s. A liquid asset, as Willis and his peers defined it, was a short dated commercial IOU - a money-good industrial purchase order, for example. Banks had no business owning any asset that did not, upon its maturity, generate a cash payment. Leave bonds, mortgages, and other long-lived capital instruments to the savings banks and insurance companies, Willis preached. Commercial banks were put on this earth to facilitate the exchange of goods, not to 'create' credit or finance speculation."

            Putting oneself in Craig Torres' shoes, what might he write in an unauthorized, Fed Centennial piece? It might not be much different. Where would he look? The current "literature" (per Ben S. Bernanke, ad nauseam) of economic "science" (BB, ad etc.) has blotted history. In Federal Reserve Chairman Ben S. Bernanke's Essays on the Great Depression, neither Glass' nor Willis' names are in the index. This is quite a feat, given that Carter Glass was co-author of the Glass-Steagall Act of 1933. The World's Greatest Authority on the Great Depression missed the most important bank reform of the Great Depression. Banking is central to his blunderbuss theories.

Bernanke is not atypical. The seventh-grade spelling bee champion from South Carolina undoubtedly received an "A" in conduct from romper room until he received Stanley Fischer's thumbs-up at M.I.T. It is not an accident that almost all Bernanke's academic references (the 'literature") are post-1980 academic papers written in the sandbox of such power-seekers as Professor Stanley Fischer, who has since gone on to destabilize banks and central banks on two continents. (Now heading the Israeli central bank, he is buying up the U.S. stock market.)

            It might not be literally incorrect, but worth extrapolating the proposition, that Ben S. Bernanke has never asked a question in his life. He may have asked if he could go the bathroom or if he could decant extra-credit projects at Harvard, but he would never put one of his betters on the spot. He pontificates among a generation of economists who all received an "A" in conduct. (What is worse, so an insider informs, the next generation of students that has studied under Bernanke is even more faint-hearted. They are now filling the Fed and Berkeley faculty ranks.)

            This is the way of the world, spinning east, now, to the People's Republic of China. On the same day Torres' history lesson was released, Bloomberg published: "China Credit-Bubble Call Pits Fitch's Chu Against S&P." Charlene Chu, at Fitch Ratings in Beijing, had the nerve to publish some unseemly ratios. Total lending from Chinese banks and financial institutions rose from 125% of GDP in 2008 to 198% in 2012.

Chu explained: "You just don't see that magnitude of increase" in the ratio of credit to GDP. "It's usually one of the most reliable predictors for a financial crisis." To ensure there was no question of her forecast, Chu told an interviewer: "There is just no way to grow out of a debt problem when credit is already twice as large as GDP and growing nearly twice as fast"

S&P and Moody's do not, and will not, mention "no way out" assessments for U.S. Treasury bonds. Until they default, that is. Even then, they hedge and haw, the unvarying unlanguage within large bureaucracies. (A sample: March 14, 2008 (Bloomberg) - "Bear Stearns Cos.'s credit rating was reduced three levels to BBB [still investment grade - FJS] by Standard & Poor's after the securities firm was forced to seek emergency financing from JPMorgan Chase & Co. and the New York Federal Reserve.... 'Although we view the liquidity support to Bear as positive, we consider it a short-term solution to a longer term issue,' S&P analyst Diane Hinton said.") [My bold - FJS]

Other headlines drummed home the presumptuousness of Fitch's analyst: "A China Credit crisis? Yes, Says a Lonely Fitch analyst" "Fitch Defies S&P on China's Credit Bubble" [My italics - FJS] Channels that fear losing government "access" bear the state's message. There is Hilsenrath at the Wall Street Journal. America's most notable business-news channel suspends appearances by analysts who are unconscionably bearish. Hitler was asked when he would nationalize industries. Herr Schicklgruber responded he had no intention of doing so; He would nationalize the people instead.

Bloomberg TV interviewed S&P's leading light on Chinese credit: concerning Chinese banks, the pop-eyed fellow earned an "A" in conduct: "This is a good story unfolding here." When he was asked about Charlene Chu's forecast, the rising star at S&P spoke with the timidity we've come to expect from government-aligned corporations: "We will not be the one who will be giving those scare signals."

Shifting continents, a May 25, 2013, Economist editorial certainly went down well in Brussels and Strasbourg, but did its readers no good. It should be remembered the European media operates under the fist of ECB President Mario Draghi, a good reason to find a "good story unfolding here," no matter how improbable.

The opening paragraph of the Economist's latest Euro assessment: "You may have missed it, but the European Union held a summit this week. Taking in a nutritious working lunch, Europe's prime ministers, presidents and chancellors devoted half of Wednesday to weighty issues of energy and taxation. Gone are the panic-stricken sessions of last year, dogged by talk of the euro's imminent failure. Today, Europe's leaders note, reform is under way across most of the euro zone and some southern European countries are regaining their competitiveness. The government-debt market is back in its box, where it belongs. And over the past year share prices are up by a quarter. Nobody could pretend that life is easy; Europeans understand that hard work and sacrifices lie ahead. But the worst of the crisis is now safely in the past."

European banks are using toilet-trained, beanie babies for collateral, but the magazine wins an "A" for good conduct. Hot off the press, a headline: "Spain's Bankia Decimates Savers As Stock Plummets; Police Officer Stabs Banker Who Sold Him Shares" The story opens: "While investors across the globe applaud Bernanke and other central bankers for pushing stock markets to record highs, retail investors and savers in Spain are facing massive losses. Markets appear to have forgotten Europe's sovereign debt crisis and the woes in Spain." (Forbes)

 

           There are consequences to running a world with the self-appointed best and brightest. 

Interview with Frederick Sheehan, by Lindsey Blumell

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (Aucontrarian.com, 2009)

Please follow the link to a 15-minute interview with Frederick Sheehan by Lindsey Blumell, on Cliff Küle's Notes: Reflections On Our World & Its Money (The Great Confidence Game), May 10, 2013.

Topics ranged from global imbalances, non-stop asset inflating by central banks, the exhausted morality of American institutions that still serve as a forum for Alan Greenspan's irrelevancies, and so much more.  

Click Here for the Interview

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**For those of you who had trouble reaching the interview with David Stockman in Thursday's blog, please CLICK HERE for an updated link.**

Interview with David Stockman, author of The Great Deformation: The Rise of Crony Capitalism in America

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (Aucontrarian.com, 2009)

The reviews I have read of David Stockman's book, The Great Deformation: The Rise of Crony Capitalism in America, have dealt in trivia, clichés, and ignorance. This interview on Sunday, May 19, 2013, with Jim Campbell, provides depth to some of the most important topics.

Please follow the link to the interview by Jim Campbell, “Business Talk with Jim Campbell” is nationally syndicated on the Business Talk Radio Network Sundays 10-11am EST. You can go to BusinessTalkRadio.net to find the station nearest you or to listen on the internet. Also available on Yale Radio – WYBC.com.

Link: "JimCampbell Business Talk with Jim Campbell interview with David A. Stockmanauthor of The Great Deformation: The Rise of Crony Capitalism in America, May19, 2013" 

Mozilla users click here:

Big Money

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (Aucontrarian.com, 2009)

            The difficulties of institutions that need cash for payment have grown acute during the chalk-brained professors' zero-interest-rate pogrom. Insurance companies are one victim, pension plans another. Looking specifically at defined-benefit pension plans, the plan sponsor (corporation, maybe, or municipality) is obligated to pay current and future retirees a specific dollar amount from now until a spouse's death.

            The discrepancy between income received from investments and cash needed to pay beneficiaries of public (state, municipal) pension plans dumbfounds the mathematically inclined. Actuaries make long-term projections of returns on assets and the change in liabilities. The assets on hand to pay benefits in 2025 will not look as susceptible to downgrade if the actuary projects annual investment returns at 8% rather than 3%. Thus, 8% is a typical investment return projected on plan assets today. High-yield bonds are often a sanctuary to justify such assumptions. Now in our fifth year of interest-rate confiscation, such bonds are bought, then bid up for their yields, thus compromising the virtue of such holdings since the higher prices drive the yields lower.

            Investment managers supply what pension funds want. It has been a curiosity that private-equity funds, that do a little bit of everything today, have been buying houses in quantities not seen since the Bolsheviks annexed Moscow. Among others, Texas Pacific Group (TPG Capital Management LP) is planning to buy at least $1 billion of real estate later this year. Others with similar initiatives, who are known better for buying companies, taking them private, then selling them back to the market, are Blackstone Group, Carlyle Group, and KKR. Other than the certainty that most similar organizations, be they private-equity firms or banks, spend more time looking at their competitors than at the investment, thereby misestimating the end of the cycle, why might there be this lurch for houses in 2013?

            Art Cashin, at UBS wondered the same, and asked one of the "very smartest" investors he knows. He quoted his informant in the March 15, 2013, "Cashin's Comments":     

"The more headlines I see like this [TPG buying $1 billion of real estate - FJS], the more I think these mega fund managers (KKR, Carlyle, Blackstone, Apollo) are gearing for the next leg of the MACRO economy. My opinion, this aggressive move into real estate is not just allocating capital to take advantage of a distressed sector. Funds managing $50 to 100 billion and more in some cases have determined that there is just not enough hedging product (CDS, options) to offset massive positions in private equity, credit, etc. I believe they have made the bet that economic theory has not changed that much in 500 years and the next leg will be much higher interest rates and consequently inflation. What is the poor fund manager to do when he has been forced to hold largely illiquid securities (private equity, credit)? Find a hedge. With none available at 35,000 feet you move to 70,000 feet. Hard assets combined with LONG term financing. I would guess that these funds are borrowing as much as possible in the debt markets for as long a duration is possible. (Not just funds, Disney and others have 100 year bonds)

"Conclusion, smart money is betting on coming inflation, possibly hyper-inflation. Hard assets and long term borrowing prudent at this point. Thesis supports a bid under real estate, so bubble is not imminent. Buy as much real estate as possible, borrow as much as possible (FIXED RATE), for as long a duration as possible. 

"And of course, stay very nimble with a tip of the hat......"

"The next leg" of inflation is apparent all day long: subway, parking, magazine, soup, sandwich, oil change, groceries: from $3.29 to $3.69, a seven-ounce rather than nine-ounce serving. The collective American mind, having been told otherwise for so long, may, in a flash, think: "it's 1973!" and the concerted efforts to inflate assets ("massive positions in private equity, credit, etc.") will come undone when the real costs of living are hot news.

It is impossible to hedge an entire market. The Smart Investor surmises Big Money is preparing and is buying the least bad alternative (for a company managing $100 billion). They are borrowing at miniscule interest rates, as much as possible, at a FIXED RATE, and buying long-term assets that may get squashed in the short- to middle-term. The squashing is a worst case, not assured, but one the investor should consider. When interest rates rise ("they have made the bet that economic theory has not changed that much in 500 years"), the value of assets, which are priced now for no interest costs, could - surprise a lot of people.

The May 15, 2013, Wall Street Journal published a laundry list under the title: "Private Equity Firms Build Instead of Buy." The heart of such an approach was expressed by David Foley, head of energy investing at Blackstone Group LP: "We always look at our returns as buy and hold forever, because you might."

Blackstone, teaming up with the Aga Khan Development network, built a new dam at the headwaters of the White Nile. The dam produces almost half of Uganda's electricity which Blackstone sells "at rates that ensure profits for Blackstone for years to come."

David Foley may have frowned when reading "ensured," since there are untold contingencies that could disrupt a steady flow of profits. Speculating a bit here, a pension fund may invest in Blackstone's project and be permitted to log an 8% (for example) return-on-investment each-and-every year, for the next 30 years, or, until the dam is sold. Should evil spirits temporarily halt the flow of electricity ("rituals had to be performed to appease spirits.... A feud between two diviners who laid competing claims to remove the spirits went on for two years"), the fund may still be permitted to log an 8% return, given the long-term objective.

The Wall Street Journal story discusses other such projects: "Blackstone is pursuing similar dam projects elsewhere in Uganda, in Tanzania and along Rwanda's border with the Democratic Republic of the Congo. Using its power-plant builder Sithe, the firm has plants under construction in India and the Philippines.... Apollo [Global Management], for its part, is managing the investment of money that small savers put into fixed annuities promising them a steady rate of return.... KKR is developing a tract of houses and apartments in Williston, N.D., for the oil workers pouring into that region.... [KKR] has teamed up with Chesapeake Energy Corp. to drill for oil for years to come."

A similar strategy was described in the May 17, 2013, issue of Grant's Interest Rate Observer. NovaGold (NG) is "nature's own hyper-leveraged option on a much higher gold value expressed in terms of Federal Reserve notes...." In one estimation: "Only a value on the order of $2,000 an ounce would justify the projected outlays..." Tom Kaplan, through his Electrum Group LC, and owner of 86 million NovaGold shares, has done well buying resource companies that do not meet the criteria of the standard institutional investor: "[I]f you're trying to make 100 times on your money, whether or not you're right in 24 months or 60 months, it doesn't matter."