- Penitence for a Ponzi scheme
- The scam that makes Madoff look like a piker… and you’re a victim
- So much for “normal” economic growth in 2015
- Bernanke “throws Yellen under the bus,” says Jim Rickards
- Lehman’s Dick Fuld crawls out from the ooze… Stockman calls BS about “crumbling infrastructure”… why Greece won’t leave the European Union… and more!
“The guilt, embarrassment and humiliation have become part of my DNA,” David Kugel told a federal judge on Wednesday. “In my mind, I’ve gone from being an American success story to being an American tragedy.”
That was enough contrition for Kugel — an accountant for the notorious Bernie Madoff — to avoid a prison term. Undoubtedly, it helped that he narced on five others who took part in Madoff’s epic Ponzi scheme.
Kugel originally faced charges worth 85 years in prison. Instead, he’ll do 10 months home detention.
Madoff’s investors were cheated out of $20 billion once the scheme finally fell apart in late 2008. A court-appointed trustee has recovered about half that figure. Madoff is six years into a 150-year sentence.
Volumes have been written about how supposedly smart people — Madoff’s victims ran the gamut from investment banks to university endowments to Steven Spielberg — could be taken in so readily. How could they not question the consistent 12% returns year after year?
“I couldn’t believe this person I’d spent time with was capable of this criminal act,” says our income specialist Zach Scheidt — channeling a similar sentiment.
Zach speaks of one Robert Duncan — sentenced in 2011 to a four-year prison term for a Ponzi scheme that cheated investors out of $3.8 million. Zach was not among the victims… but Zach’s boss and mentor at an Atlanta-based hedge fund was.
The promise was much the same as Madoff’s — a low-risk strategy with reliable returns.
“From what the investigators could determine,” Zach recalls, “Robert took a small loss one month but was too embarrassed to report the loss to his investors. So he fudged the monthly figures and promised himself to make up the difference the next month.
“But that didn’t happen. Instead, Robert lost more money and had to tell a bigger lie the following month. When one investor decided to pull a small amount of cash out of the fund, Robert used contributions from a new investor to make the payment.”
Which worked fine until Zach’s boss wanted to pull a large amount of cash out of the fund. The money wasn’t there.
“This particular Ponzi scheme hit close to home for me because, as I said, I knew Robert personally. But as sobering as that was, it pales in comparison to another Ponzi scheme most of us have been suckered into.
“The American Social Security system is a Ponzi scheme putting Robert Duncan’s to shame,” says Zach.
Even Madoff looks like a piker in comparison — heh.
“This year,” Zach tells us, “Americans are being taxed at 12.4% of their income to fund Social Security. But instead of going into a personal account, these taxes are used to pay benefits to other citizens drawing Social Security benefits today.” Benefits to the tune of $863 billion during 2014, we might add.
“Unfortunately,” he goes on, “the payments streaming into the program don’t cover the cash being paid out of it. In fact, the Social Security fund has been shrinking in size since it began running a cash deficit in 2010.
“Analysts in charge of the Social Security fund have admitted the cash will run out in 2033. But a new study from researchers at Harvard and Dartmouth suggests these figures may be too optimistic. They say Social Security will run out of money in 2029, four years earlier.
“I find it very interesting (and quite ironic) that Robert Duncan went to jail for four years for his Ponzi scheme while the U.S. government operates a very similar program — which is mandatory for you to participate in — and nobody in the government’s going to jail.
“In contrast, the Canada Pension Plan is light-years ahead of the U.S. Social Security program,” Zach declares.
As he pointed out in this space a week ago today, Canada is investing its Pension Plan capital into the free market… and the balance is growing, not shrinking.
“The difference,” Zach says, “has everything to do with what the two programs invest in.” Social Security invests in government IOUs. Look at the pitiful long-term return it generates compared with a traditional “60-40” portfolio. We even skewed the numbers to include the stock market crash of 1929 and exclude the dot-com bubble…
“Investing in a free market,” Zach says, “gives us the ability to benefit from competition… from creativity… from motivated entrepreneurs growing their businesses… and from economic growth around the world. That’s exactly what the Canada Pension Plan is tapping into with its free market investment program.”
Zach is showing thousands of his readers how to “piggyback” the Canada Pension Plan — and collect up to $4,700 a month. No Canadian residency required. And you can start collecting “benefits,” as it were, at any age.
Curious? Zach walks you through it — no long video to watch — when you follow this link.
Stocks are sliding as the holiday-shortened week stumbles to a close. As we write, most of the major indexes are down about three-quarters of a percent. The Dow is back below 18,000. Small caps are holding up best, the Russell 2000 down about a half-percent at 1,247.
The greenback has weakened a bit in the last 24 hours, the dollar index a shade below 97. That’s allowed gold to firm to $1,192. Crude is rallying — up 2.5%, to $59.13.
The U.S. economy is set for a seventh straight year of mediocre growth — or so we conclude from the Commerce Department’s latest estimate of GDP for the first quarter of 2015.
The first guess, issued a month ago, registered growth of an annualized 0.2%. The latest guess, issued this morning, registered shrinkage of 0.7%.
So much for any hope of “normal” 3% expansion during 2015. If the Federal Reserve is looking for a reason to raise the fed funds rate sooner rather than later, it’s not here.
Speaking of the Fed and a rate increase…
“In my conversation with Bernanke in Korea,” tweets our Jim Rickards, “he threw Yellen under the bus on timing of rate increase.”
Jim was the co-headliner at an event in Seoul. The other was former Fed chief Ben Bernanke. “Bernanke warmly inscribed my copy of his book on the Great Depression. Good segue to an interesting convo on gold and money.”
Alas, Jim is still in transit… so we’re unable to press him for further details. We’re sure it was an “interesting” conversation indeed — considering how Jim says the Fed’s models are thoroughly fouled up and central bankers as a collective “have no idea what they’re doing.”
Jim promises his Strategic Intelligence readers will get the scoop before anyone else.
Being Dick Fuld means never having to say you’re sorry.
Fuld was the CEO at Lehman Bros. — the power elite’s sacrificial lamb during the Panic of 2008, the one investment bank that was allowed to go belly up. He has stayed out of the public eye since testifying to the government’s Financial Crisis Inquiry Commission five years ago.
Until yesterday, when he spoke at a conference in New York. “It’s very easy to look back,” he said. “I missed the violence of the market and how it spread from one asset class to the next.”
But was he to blame for his firm’s big bets and high leverage and ultimate failure? Hell no. It was the government. It was the Fed. It was irresponsible borrowers. Everyone but him.
Our Chris Mayer — who knows banking inside out — begs to differ…
“My mother still loves me,” Fuld added. “She’s 96.”
Funny, David Kugel — with whom we began today’s episode — also has a 96-year-old mother. He said during his sentencing Wednesday he can’t look her in the eye. Just sayin’…
[For your edu-tainment pleasure: We direct your attention to Chris Mayer’s lively Twitter feed. Among the gems he’s posted only today: “Bill Gross is weird and his investment outlooks aren’t any good.” And he furnishes a link with ample proof. Chris also doesn’t shy away from salty language when called for. Take a look.]
“This is what comes of giving the newly minted currency to bankers,” a reader writes after Jim Rickards’ observations yesterday about all the cash sloshing around the global financial system. “The bankers don’t know what to do with it other than play games.
“If the money had been fed out through the consumer system, the recession (depression) wouldn’t have happened.
“If Washington, London and Frankfurt had let the bankers reap the rewards of their folly and fed the billions out to those injured by the crash, the bankers might have learned something.
“I had put out the following suggestion, but no one heard it: Washington offer all local, state and national agencies a 60% subsidy on any and all infrastructure projects, payable as costs were incurred. The money would have been put to good use, not just feeding the Wall Street crap game.”
The 5: Hmmm… We’ve observed in the past that the New Deal, for all its problems, gave us a few tangible benefits, like bridges and dams.
In contrast, the public works portion of the Obama stimulus went to resurfacing interstate highways that didn’t need it and building interchanges few drivers demanded.
“There were simply few ‘shovel ready’ and necessary projects to fund,” writes our friend David Stockman — whose varied career was highlighted by a stint as Reagan’s first budget director.
Stockman has no patience for mainstream bleating about “crumbling” public works. “The overwhelming share of the nation’s infrastructure is not obsolete or dangerous; is not being starved for dollars; and has virtually nothing to do with the dramatic trend line of decline in Main Street growth, investment, good jobs and real living standards.”
In addition, he writes, “98% of U.S. infrastructure is either the responsibility of the private business system or state and local government.” The other 2% is the aforementioned interstate highway system, which is in reasonably good shape.
But as far as bankers playing games… we stand with you 100%.
“Mr. Rickards has stated he doesn’t see Greece leaving the European Union,” writes another reader, “How does he think the Greeks will make their bond payments? They raided what little was left in the pension funds to raise $700 million.
“I am just one of many who are trying to understand how Greece can afford to stay in the EU. Thank you.”
The 5: Jim’s still out of pocket, but we’re familiar with his thinking here: The question isn’t whether Greece can afford to stay in the EU, it’s whether the EU can afford to kick Greece out. Heck, it’s whether the global financial system can afford for the EU to kick Greece out.
“If Greece left the euro, it would be a complete catastrophe, there’d be no bottom to markets,” Jim told Bloomberg TV in February.
Traders would wonder who might be next to leave. The panic would be worse than during Lehman Bros. and 2008.
“All the [central bank] balance sheets are bigger now — the People’s Bank of China, the Federal Reserve, the ECB. All those balance sheets are bigger now than they were in 2008. There’s more leverage in the system. The biggest banks are bigger. The whole thing that was too big to fail then is bigger and more complex today.”
In other words, global elites know a Greek exit from the EU would be a disaster. And because they know it, they won’t allow it to happen.
Everything else — including how Greece’s debts will be papered over — is mere detail to be worked out.
Have a good weekend,
The 5 Min. Forecast
P.S. No, Greece won’t take down the global financial system. Something else will.
On Thursday, June 18, Jim will unveil his new “House of Cards” thesis… in person… to a select group of our readers. And he’ll lay out a strategy to survive and thrive during the turmoil.
In time, he’ll reveal this strategy to his full readership… but if you want the first-mover advantage, we urge you to join us for what might be the most important event you’ll ever attend. Details here.