Wednesday, March 18, 2009


"There is no means of avoiding the final collapse of a boom brought by credit expansion" - Ludwig Von Mises

In my post from just two days ago, I indicated that the Fed would soon start buying Federal Treasuries, which is tantamount to "printing money". It appears that soon just got here, as the Fed announced today that they are going to start buying Federal Treasuries in order to drive interest rates down across the entire credit market.

In the long-term of course, this won't do anything to derail the deflationary economic collapse, however, in the short-term this is very significant and indicates that the Fed is now "All in" in its bid to stop deflation. Essentially what the Fed is trying to do is to induce the capital markets to take on more risk by making the "risk free" yield (i.e. U.S. Treasuries) relatively low and unattractive. Of course, the stock market took off on this news and rightly so, as stocks should be one of the primary beneficiaries of this historic policy (as far as I can ascertain, the U.S. Government has never monetized its debt on a significant basis). Therefore, I think the stock market could have a significant multi-month rally back to the 200 day moving average which is an important demarcation line that stymied all of the rally attempts during the last bear market (2000-2003). We have yet to have a rally back to the 200 DMA in this bear market, so we are long overdue. In percentage points from here, based on the S&P 500 (currently 800) and depending on the trajectory of the rally, I would hazard a range between 900-1000 (~12-25%) is possible sometime between now and the summer. Bearing in mind that the market is already up 20% off of last week's lows (!), so a pullback is due any time now. As always, take all stock market predictions with a grain of salt...

As I mentioned however, in the grander scheme of things, this monetization policy will not alter the deteriorating economic fundamentals. Think of it as similar to pouring gasoline on a dying fire - yes there is a great, seemingly impressive burst of flame, but then almost as quickly as it started, the fire burns down, as there is no underlying "fuel" to keep it burning. Similarly here, stocks will rally and become more expensive, and then everyone will realize that there are no underlying fundamentals (aka. profits) to support the higher valuations. Households will still be massively in debt (and falling further behind every day), and there will be no long-term driver for economic growth. As I wrote recently, the (latest) stimulus package is a joke relative to the size of the overall economy and the magnitude of this crisis. Last year's stimulus package didn't do anything, and yet they apparently think we are stupid enough to believe that this time will be different. It's starting to feel a lot like Ground Hog Day around here...

Event Risk
There is one major risk to the near-term rally scenario, and that is event risk. The specific event I have in mind is a looming global currency crisis that will most likely begin in Eastern Europe and then spread worldwide from there. I don't think it's a question of if there is a crisis, only when. And while short-term the market typically trades off of technical supply/demand factors (moving averages, overbought/oversold indicators etc.). Should we see some sort of "black swan" (unpredicted, though far from unpredictable) currency event, then whatever "up trend" (if any) is in place, will surely be curtailed. Suffice to say a truncated rally at this juncture would be EXTREMELY bearish to this economy and the markets, as the Fed has now played its last card. This is it, as I said at the beginning, we are ALL IN now, and if the casino (market) calls the Fed's bluff, it will be panic time...

Fortunately, and contrary to Bernanke's wishes, I see this Fed program to buy Treasuries as a good thing for those who prefer to ride out this crisis in "risk free" assets. After all, basically what the Fed is doing is to put a floor underneath Treasury prices which even further reduces risk for those who want to hide out in Treasuries and leave the short-term stock market speculation to the gamblers...Imagine an asset class (Treasury bonds) that won't go down, because the Government is the buyer of last resort and yet has upside potential in the event of an "adverse event" and ensuing safe haven buying. Sounds like a great idea to me...

What of Gold?
Despite today's historic decision to monetize the debt, on top of the $7+ trillion the Government has thrown at this economic fiasco to date, gold still is lower today ($940) than it was in January 2008 (albeit not by much). Suffice to say if gold can't decisively break $1000 and stay above $1000 on this (supposedly hyperinflationary) news, then it has a long way to fall...

Position your assets accordingly...

Monday, March 16, 2009

Blind (Deaf, and Dumb) Faith

It was about a year ago that I rendered my assessment here, that the average financial "expert" (i.e. economist, financial advisor) is as dumb as a post and that just about all of the "experts" are wrong in their assessment of the economy. After the fact, it turns out they were wrong, and one can only presume (hope?) that they too were relieved of 30-50% of their wealth along with the general public who trustingly believed their advice. However, far from being contrite, many of these same "experts" are now saying "nobody saw it coming", which besides being an outright lie, conveniently avoids the question as to why didn't they see it coming? Suffice to say, no market is collapsing faster than the market for Wall Street's Ph.D "savants" and who knows, maybe one day in the distant future, common sense will come back into fashion.

Fast forward one year and now we have a new batch of "experts" to help solve our problems, however unfortunately it appears that this current batch is no more intelligent than the last crop. Sadly my only hope at this juncture is to believe that Bernanke, Geithner, Obama, Summers et al. (i.e. the current stewards of this economic debacle), are simply outright lying to the public at this point. After all, there is tremendous pressure on each of them to be as optimistic as possible and hide as much of the facts and reality as possible. The public has little stomach for more truth than is already being crammed down their throats by their own economic realities; meanwhile the infotainers across the Mainstream Media came down on Obama recently for being too negative (i.e. realistic) about his views on the economy, so he recanted and has been pushing "happy talk" ever since. Just last night Ben Bernanke said on "60 Minutes" that he thinks the economy will begin to recover by the end of 2009. Based on what job and business creation fundamentals, he didn't say. But he did say that recovery is conditional upon getting the banking system stabilized. Apparently his plan is to get banks to start lending once again to people who borrowed too much in the first place, then we can get on with the business of borrowing and spending our way out of this mess. That should work. And the public believes this nonsense - the media believes this nonsense - almost everyone believes this nonsense. Somehow, a 30 year borrowing and spending binge is going to resolve itself without any permanent change in our standard of living, virtually in a period of a few months - presto ! The alternative to believing that Bernanke and Co. are "obfuscating", is to simply conclude that they are as dumb as a doorknob not to realize that we can no more borrow and spend our way out of a multi-decade borrowing and spending problem than an alcoholic can drink his way out of a drinking problem.

Let the Flat Tax begin!

This week the British started their campaign of "quantitative easing" aka. monetizing the debt, wherein, one branch of the government (the Central Bank) buys the bonds of another branch of the government (The Treasury) by printing money out of thin air. Bernanke has said recently that the U.S. is going to do the same thing soon - both to drive down long term interest rates and to help liquidate this year's $1.75 trillion deficit. Meanwhile, the Chinese said recently that they "hate" (their words) having to buy U.S. government bonds, but they will likely continue to do so (as it's their best means of devaluing their currency and inducing us to buy their cheap junk). Apparently they deem nothing in the U.S. to be of more value than paper IOUs which are paid for with yet more paper IOUs! Tellingly, despite all of this obstensibly "hyper-inflationary" news, long-term U.S. Treasury bond interest rates (yields) are still near multi-decade lows. So lest you think the U.S. is becoming the new Zimbabwe, bear in mind that the bond market has already voted, and it thinks that Obama & Company don't have a snowball's chance in hell of getting this economy restarted, much less generating any inflation.

What of this nascent stock market rally?

The short answer, is I don't know and neither does anyone else. Last fall's "nascent rally" only lasted a few weeks and then rolled over like a sick turtle. Some believe this current rally has legs and could last a few months. Others even believe that last week was a multi-year low in the market. Anything is possible, but all I know is that the steepness and severity of this stock market decline is on par with the early 1930's market and there are many people just waiting for a rally so that they can sell into it. Meanwhile the economic decline appears to be accelerating with job losses for March expected to approach 1 million ! So, the only way one can believe in an enduring rally is to believe that the economic fundamentals (i.e. job and business formation) are going to improve sometime over the next 6 months. Unfortunately, just like last year's predictions and despite Government's assertions to the contrary, there are no facts upon which to base that fantasy...

As I have said many times since this fiasco started, we are in a relentless deflationary collapse of unprecedented proportions.

And to think, we haven't had any real panic...YET.

Sunday, March 8, 2009

Death of a Salesman

Always the one to be positive, I think the best (only?) good thing that will come out of this economic collapse will be the end of the era of the Salesman.

Currently, and for quite some time, the most "successful" and lauded people in the U.S. have been salesmen: business salesmen, political salesmen, religious salesmen, infotainment (media) salesmen - you name it.

In the age of the Salesman, it is far more important how things look than how things are in reality. Whereas, the U.S. economy was once based on small business and then manufacturing, now in past decades, the U.S. economy has become a front-office for goods made in other countries. This means that the most powerful people in every organization are the Sales Men. People who actually get things done have been demoted to the back office, well out of sight.

There are no honest, intelligent, straight talking men to look up to anymore, because they have all been crowded out by smooth talking pretenders. We pick our politicians like we pick our apples, we look for the perfect, shiny waxed ones regardless of their intrinsic quality. It started with electing an aged, Alzheimer afflicted B-rate actor as President. Then it (hopefully) culminated with electing a draft dodging, C student, dilettante to the same office. Yet even, Obama, the "beacon of change", is turning out to just be an exceptionally smooth talking light weight with no real world experience to fall back on.

Turn on your television to any major media station and tell me that you are not being lied to almost non-stop. Obviously I am not talking about bald-faced lies, that are easily verified. The techniques are always subtle and insidious, including obfuscation, spin, bias (one-sided reporting), subjectivity and half-truths - whatever, it's still all nonsense intended to make everyone ignore facts and reality. If I can turn on CNN, Fox News or any other station and know within 30 seconds the political bias of the so-called "reporter" who is delivering the news, then that is not quality, objective journalism - that is propaganda.

When in Rome
The Baby Boomers are The Ultimate Salesman Generation. They have been trained from birth to believe that blind optimism is always the best way forward, the truth not withstanding. The same culture that gave us drug addled Hippies during the '60s, later fanned out both left and right to give us Amway salesmen, Neocons, Limousine Liberals and Born Agains. These glassy eyed sociopaths all have the same traits in common: a strong predilection towards fantasy, denial, self-delusion and hedonism - yes, even those Born Agains, who spend half their lives in Sodom and Gomorrah only to conveniently find Jesus at age 45 (after they are drugged out, sexed out, and burned out) and turn into sanctimonious hypocrites from that day forward.

Mind the Gap
Unfortunately, along with Salesman culture, comes what I call the "credibility gap" i.e. the difference between what we are led to believe will happen v.s. what actually happens. The key goal of Salesmanship of course is to push off the credibility gap discovery process as long as possible, preferably onto one's children's or grand children's generation. Unfortunately, there are times like now, when the future arrives ahead of schedule and the "gap" gets closed like a vise.

Still, in all, despite the economic carnage to date, the charade continues, as the Boomers are a lot like gerbils with a Pez dispenser - trying sadly and desperately to kick start their dying fantasy economy - wanting more stimulus, more bailouts, more government intervention, to forestall the inevitable. And yet, ironically the same salesmen are in place trying to fix this mess who got us into it in the first place. The same "captains of industry", the same "expert economists", the same politicians. And no one is more conned by this sad game than the Boomers themselves !

To most people around the world looking in at the U.S. they are just as misinformed about the current state of affairs as we are. After all, they too have been brainwashed by the U.S. media and U.S. Government to believe that the U.S. is the greatest, strongest country in the world -everything is A-Ok. Most foreigners have no idea how bad things are in this country, because the unvarnished truth and reality never see the light of day.

"You can't handle the truth"
Fortunately or unfortunately, depending upon how you look at it, the credibility gap just keeps on closing. Those Boomers with their undying faith in the market who just lost half of their retirement assets and 30% of their home value, won't possibly admit that the game is over. It's a lot like a gambler who parlays a fortune from nothing, but late in the game his streak turns cold and he loses half his money. Rather than accept his fate and cash in, he just pushes the whole stake back onto the table and doubles down. So it is with the Boomers, they can't walk away, because they can't accept less - it's just not in them to do so. As a generation, they have always gotten their way.

So, in the end they will all be relieved of their homes, their jobs and their retirement savings.

And don't worry about all of the phony salesmen who got us into this mess, because somewhere down the road there is a mob with pitch forks and torches heading in their direction...