Ponzi World (Over 3 Billion NOT Served)

It was good (for some) while it lasted

2012-01-27T21:20:00.000-08:00

What follows is an updated version of my very first post from late 2006, based on conditions that I find to be eerily reminiscent from that time period. Clearly, in hindsight, the events that followed that original post during 2007/2008 were bad, but did not collapse the global Ponzi Scheme. The market has a way of testing us to separate the truly greedy and stupid from those who have learned their lesson. That's what I believe 2008 was - a test. It was a wake up call, and a last chance for all of us to accept reality. For those who heeded the warning and otherwise changed their ways by paying down debt and adopting a more sustainable lifestyle, then likely they will survive what comes next. For those who did not heed the warning, i.e. those still worshipping at the altar of greed or otherwise "bought in" to the status quo, they are going to be what we referred to in 2001 as - "FC.com". The most important point is that the over-leveraged structure and incentives of the Global Financial Ponzi have not been mitigated even one iota, except to become ever more leveraged than before; therefore, the Idiocracy of the day can't complain that they had no advance warning that a collapse could happen...because one already occurred and they simply ignored it.

There are many indicators at this juncture signalling a dangerous top in the market - overbought oscillators, put/call options ratios, sentiment surveys, mass complacency, reach for yield. It's no coincidence that this latest move up in the markets started exactly when the ECB intervened in the markets in mid December, adding liquidity (printing money) and thereby driving a short-term rally in risk assets. The final piece of evidence though is this picture of the bellwether stock of our time - Apple. As they say, a picture is worth a thousand words:

[Original Post, December, 2006]
The global Ponzi Scheme is on the verge of coming unravelled. The first leg down was from 2000-2002, and the second leg down was 2008, but that was just a minor taste of what is yet to come. I am compelled to write now to describe the coming phase for two reasons: 1) because I think the pieces are now in place for an imminent decline 2) In case there is anyone, even one person, who reads this and benefits from the conclusions.

Today is January 27, 2012. The latest issue of Barrons indicates that all however-many financial commentators in their "big money" poll are relatively sanguine on the outlook for stocks for 2012. They are still looking for ways to profit from the the collapse of the middle class...The stock market has been rallying strongly and unrelentingly since early October and got a real dose of mojo in December when the ECB pulled out its "bazooka", propelling all indexes back up near multi-year highs. Unfortunately, history is replete with examples where the indexes spike to new highs just before turning down. Look at a chart of the early 1970s DJIA to see what I am talking about.

From a longer-term perspective, the U.S. economy peaked in the late 1960s and early 1970s in terms of industrial output (manufacturing), real median wages, and innovation. This trend was very apparent during the 1970s, but since the early '80s has been obscured by the massive "blowoff top" the Elliot Wave folks call a fifth wave. Unable to rely upon innovation and manufacturing capability, starting with Reagan, the U.S. has been financing the last 30+ years' prosperity with debt. Debt at all levels (personal/household, local government, federal government), relative to income levels, is at the highest levels in recorded history.

The party looked to be stalling out in 2000-2001, but the Fed engineered another "recovery" by taking interest rates down to 1% (lowest level in history) and encouraging consumers to borrow yet more money to finance the current pseudo-recovery. The latest 3 year Obama economic illusion is a pseudo-recovery, because it is not self-sustaining. How else to explain that in the 3rd year of an economic "expansion" government deficits equate to 10% of GDP? All of this debt, used to finance consumption, the Bush tax for the ultra wealthy, two wars etc. etc. severely limit the Fed's ability to stimulate the economy. Apparently very few economists, let alone people, comprehend how debt shifts consumption from the future to the present. Only debt that is spent to build/buy productive assets will enhance the growth of the economy. Debt spent to finance consumption is a burden on the future economy.

Meanwhile, the global 'economy' resembles a classic Ponzi (pyramid) scheme, in that a lucky few at the top are prospering at the expense of the majority at the bottom. In order to continue however, a Ponzi pyramid requires unrelenting growth. Meanwhile, the short-sighted wealthy sponsors of this Ponzi scheme are eagerly commoditizing every factor of production and job function so that they can package and sell the income streams and move the money to offshore cash accounts. This year, even as the minimum wage stands at a mere $$7.25/hr and is lower (inflation adjusted) than it was in 1973, Wall Street is still taking home massive bonuses, despite almost collapsing the global economy back in 2008 ! Meanwhile the jobs of the majority at the bottom are being commoditized and rationalized, both through outsourcing and automation. Land fills are topping up with cheap junk and destroying the physical environment, while developing nations are competing to see who can offer the lowest wages and worst working conditions, in their bid to get a ticket to this insane lottery. Don't get me wrong, I understand that economic rationalization is a crucial part of capitalism, and I am not against private enterprise, however all levels of government have been induced to look the other way to ensure high returns on capital at the expense of returns on labor. This is classic 'Supply Side' economics aka. 'favour the employer over the wage earner'.

All of the above last point is moot, however, because all Ponzi schemes eventually fail. They fail because there are diminishing marginal returns to growth. Also, the scheme requires ever-increasing numbers of low income workers to expand the bottom of the pyramid. This constant flow of low wage workers into the world economy has increased profit margins to the highest levels in history, as high income workers in developed countries are swapped out for low income workers in developing countries. Beleaguered American workers, in a bid to maintain their lifestyles, have turned to debt in all forms. It's becoming ever more apparent that this strategy has now reached its predictable bad ending/ Once we fall off that cliff into the depression, Dr. Bernanke won't have the tools to rescuscitate the patient. The American consumer will be dead on arrival.

Here is what happens next:

The stock market (S&P 500) has been in a bearish rising wedge since October 2011, starting with a spike in October, followed by a relentless rise higher with no significant pullbacks in 3 months. This is a dangerous market, because volatility is near recent years' lows and most investors are lulled into a false sense of security. Once the move to the downside begins, it will go far lower, far faster than the vast majority predict. My ability to time the market leaves something to be desired, but I honestly believe this major reversal could occur within a matter of days or weeks.

Once the stock market tanks, the economy will stall out and fall into severe depression, accompanied with massive layoffs. The Fed is now out of ammo, therefore prices of all risk assets are set to decline, including stocks, corporate bonds, commodities and precious metals. The Fed will eventually panic because their credibility is spent. Bennie Bernank's approval rating is 70% going into this debacle, but he will soon be the number one blamegoat for this fiasco. Monetary policy is without doubt the biggest ponzi scheme ever invented and it's shelf life is quickly dwindling. The Fed will likely eventually resort to printing and distributing hard currency, meanwhile governments worldwide are already engaging in competitive debasement of their currencies. Therefore, beyond the initial deflationary credit collapse, I will eventually be looking to be a buyer of gold and silver (via CEF - Central fund of Canada) or GLD.

Looking out further, people will lose their homes and jobs en masse and discontent will rise to levels last seen in the Great Depression. The major difference however, is that Depression-era people were hardy folk with useful manual labor skills. Also there were still a large proportion of family farms and farm jobs that were largely self-sustaining. Today's population of software developers (Me), accountants and Starbucks baristas won't have any useful skills to fall back on in a basic survival-based economy. Therefore, crime and violence will sky-rocket and personal security will become a high priority for everyone.

Looking out a couple of years:

1) The U.S. will abandon Iraq and Afghanistan to the terrorists

2) The Middle-East will descend into chaos beyond anything heretofore imagined

My strategy:

1) Avoid the stock market, invest in short-term Treasuries

2) Look for a large pullback in gold/silver and then start averaging in to CEF/GLD

3) Invest in personal security

Have a great ~~2007~~ 2012!

The Idiocracy Swings

2012-01-11T19:25:00.000-08:00

To fully gauge the Zeitgeist of the Idiocracy, just mash-up Wikipedia with South Park. It's phony knowledge a mile wide and an inch deep, married with a crass cynicism that can't get out of it's own fucking way.

Daily we are pounded with contradicting messages, dulling the mind and senses. Nihilism and subjectivity are the orders of the day.

Attenuation

The (very) temporary lessening in volatility. I talked about it here. Since then, the risk markets have ground higher, giving us this latent cluster fuck:

As you see, I moved the green "2" to the right. Elliot Wave purists may disagree with this labelling, but the conclusion is the same - a low volume rally, wedging higher, with no underlying support. Look at volume in the bottom pane - no conviction. These are hedge funds that missed their year last year, and have to make up for it this year. The general consensus is go "all in" now, because if you don't, you may lose your investors, whereas if if the market tanks, you have 11 months to make up the losses. Like I said, a hedge fund is a giant call option - heads they win, tails you lose.

The low volume backs up the fact that the average (real) investor no longer trust the market, hence mutual fund outflows for multiple months in a row now.

Meanwhile, we have geopolitical risk at its highest level in history - across the globe, a tinderbox. We have politicians who lie non-stop and a general public that desperately wants to be lied to, about the future, the economy, the environment - basically anything requiring effort to fix. You see, the Baby Boomers are in their final approach to retirement, and they don't want anything, including reality, to delay their golden years. Meanwhile, the latest economic theories have been duly reconfigured to advise us that printing money really is the best way to fix the economy. I guess the Founding Fathers forgot to mention - "Fellow Americans, when in doubt, print more currency...the Constitution is hereby complete". Sounds really stupid, until you realize that it's what the Fucktards of the day have been doing and are now looking to increase.

Riskiest time in human history, bar none.

Yet for all that, Barry Ritholtz, tells all of us ("apocalyptic") bearish forecasters to stop blogging - we are too repetitive and more importantly it's a new bonus cycle i.e. time for Barry and his hedge fund brethren to Tebow another fat pay check. Therefore, all of us ~~realists~~ doomers, need to settle down and get with the program. Barry's claim to fame is riding around the Hampton's checking out all of the stores firsthand to see how the American economy is faring. It's hard to see how this guy could be out of touch with reality.

Ok Barry, I will make this deal - I will stop blogging until my market prediction bears out and the Ponzi collapses like a cheap tent. After which, I fully expect you and all of the other bloated 1% Comfort Seekers to run and hide away and shut the fuck up for good. Whether you want to, or not...

2012 - The Year of Living Dangerously

2012-01-01T07:26:00.000-08:00

I should start by saying Happy Holidays, but I know that most working Americans (i.e. the ones in retail) no longer get holidays. They work before, during and after each holiday. But as long as the top 1-10% can take time off without working, then I guess it all makes sense...???

Meanwhile, I am starting to think the Mayans got it right. Coincidentally, I was at a Mayan temple on Wednesday last week, during a family cruise vacation (yes, I suppose I am in the 10%...). According to our taxi driver, most of the indigenous Mayans believe the 2012 prophecy, so I have to evince sympathy for the typical five year old Mayan who is told this will be his/her last year to live. In any event, it was certainly eerie to be in and around the temples a week after the beginning of Mayan 2012.

The cruise itself was a microcosm of the global economy that I so endearingly liken to a late stage Ponzi Scheme. There were several thousand bloated Westerners having every whim attended to by legions of underpaid slaves from the Third World. "Budi" our cabin attendant from Indonesia works 8 months on and 2 months off. He gets zero time off during the 8 working months. Each cruise is back to back, Saturday to Saturday and each day is a 12 hour shift. Like me, Budi has 3 kids, except he sees his about once a year. It's a no win situation - either to work like a slave and make a "decent" sum (by Indonesian standards) but only see his family once a year - or, live locally and subsist, at best. What a great economic model we've evolved to at this modern age of 2012. The robber barons of old had nothing on the current economic fiasco we call the global economy.

Meanwhile, I have never seen so many fat fucking lumbering elephants in my life as were on this cruise. Fat kids, fat teenagers, fat 20-somethings and fat every other age. Human toxic waste dumps. One "fat back" even had a toxic waste symbol tattooed in the middle of his back, so I had to give him points for at least being honest. Each of these mammoths would eat in one sitting what the average African villager would eat in 3 weeks - then wash it all down with gallons of alcohol. If I could some way chart the obesity epidemic, the chart would be going parabolic.

Speaking of stocks, to no big surprise, Wall Street finished the year without major collapse, ensuring once again decent bonus pay packets for the banksters and speculators. Bizarrely, the market (S&P 500) finished at exactly the same level as last year i.e. it was flat year over year. And for those calling for my resignation for having been too bearish this past year (and the one before), you can forget about it. The market is still at a level it first passed in 1999, so it's been 13 years to nowhere. At this rate, I can just keep going on huffing and puffing, because at best the market just gyrates up and down going nowhere - and at worst it will eventually conform to my expectations and drill for China. In other words, contrary to the copious optimists of the day, time is on my side, not on their side.

The Emperor Has No Clothes
I also admit that I never thought that the Fed and ECB would openly print money/monetize debt in broad daylight without the credit markets having a major conniption (i.e. sovereign interest rates have remained sanguine). This is the ultimate case of the Emperor having no clothes and no one wanting to openly admit it. As I have said many times before, everyone is in extend and pretend mode - politicians, banksters, investors, media, economists. Those few who are not in extend/pretend mode, apparently can't do basic math.

Like all Ponzi schemes, this one will eventually collapse. Will we be sitting here 5 years from now still printing money to propagate the illusion of an economy ? It seems improbable. Like all Ponzi schemes, this one has the same attributes, it's neither sustainable nor scalable. It's dependent upon an insane transfer of wealth from developing (aka. poor) nations to the wealthier nations - which are now consuming 110% of their own GDP. The scheme is dependent upon the illusion of future prosperity for the poor at the bottom of the pyramid who dream of one day attaining a better way of life. But that illusion is already frayed, and is fraying more with each passing day. We are in overtime.

My predictions for 2012:

1) Final collapse of the Euro currency leading to unprecedented global economic turmoil

2) Deep credit deflation, price deflation, economic deflation

3) Gold/silver/commodity collapse

4) Flight to U.S. dollars/U.S. Treasuries (invest at your own risk)

5) Global unrest/anarchy - no place to hide

Advice: Follow the ZeroHedge/Anonymous Survival Guide

Happy New Year.

Stock Market Casino

2011-12-23T11:16:00.000-08:00

Las Vegas gambling is chump change compared to Wall Street. Even the high rolling "whales" in Vegas -guys who will gamble $50k on one hand, are pikers compared to the action going on every day in the stock, option and futures markets. Just this week it was announced that one of John Paulson's funds, the multi-billion dollar Advantage Plus Fund has lost over 50% of its value year to date i.e. several billions lost (I couldn't track down the exact dollar amount). Paulson is one of the guys who made billions betting against the subprime market by buying overwritten insurance contracts (CDOs) on the mortgage industry i.e. insurance contracts constructed to Paulson's specs, packaged by Goldman, insured by AIG and paid by the U.S. tax payer. This dealio was the basis of my diatribe against Goldman Sachs for ignoring their fiduciary duty, a quaint concept at this illusory and transitory point in history.

Now consider this ludicrous factoid - according to this interview with John Bogle, the cumulative value of all stock transactions in one year is $40 trillion !!! To put that in perspective, that is roughly 6 times the value of the stock market itself i.e. when you add up all of the transactions, the entire market turns over 6 times per year. Or put it this way, it's about 200 times the amount of *new* equity capital raised for companies. In other words one part real value to the economy, v.s. 199 parts of pure speculation.

And it's all just a zero sum game. As Bogle points out in the above article, not one dollar of added value to the economy from all of that speculation. Average pay on Wall Street is still ~$140k , which is 3x what the average family makes in the U.S. And that $140k average masks huge deviations between secretaries and admin workers making well under the average v.s. many "top" traders making several million dollars a year.

And as the same article points out, all of that money attracts the nation's "top talent" from the best schools to go to Wall Street to trade pieces of paper back and forth with each other - extracting millions of dollars in bonuses (each), for absolutely zero economic benefit.

Hedge funds have other treats and delights not available to us average citizens. Carried interest is the special tax treatment by which hedge fund managers pay half the tax rate as all other professionals (i.e. 20% v.s. 40%). Carried interest is just a fancy term for meaning treating income as capital gains, even though its still paid out on an annual basis. "Soft dollars" are the industry's other dirty little secret. Most hedge funds operate under the "2 and 20" model which means they take 2% fee of total asset value and 20% of the profits. The 2% is supposed to cover the fund's operating costs while the 20% is the incentive fee. As if this arrangement is not already lucrative enough, many hedge funds, particularly the larger ones have found a way of turning the 2% (which on $1 billion is $20 million) into part of their incentive bonus. What they do, is run their expenses through their broker (Goldman Sachs/Morgan Stanley). Goldman then charges the fund back by plumping up the stock trading commissions it charges the hedge fund. These commissions are paid directly from the fund itself, bypassing the 2/20 structure i.e. it's a highly profitable scheme. Next, you have the fact that most hedge funds are incorporated outside of the U.S. in tax havens like the Cayman Islands, Bermuda, Bahamas etc. I am not a tax lawyer, but I assume there is some advantage from that strategy...

And I have no doubt that when the Idiocracy eventually wakes up from its semi-lucid coma and goes bonkers once again, that all of these rent seeking shenanigans will be duly scrutinized. Of course, it will be a day late and many dollars short. Even now, I hear people every day questioning the Occupy Wall Street movement - "what do they want?" "what's their goal?". All these skeptics still have their jobs obviously so to them, OWS is just an inconvenient nuisance to be trivialized. Yet, not one of these skeptical morons could go two weeks sans pay check without being bankrupt. Meaning, as they say, every dog will have its day...

As I have said before and as the Paulson example illustrates, hedge funds are just very large call options on the U.S. economy, as in - heads, I win - tails, I walk away, leaving the fund's investors holding the bag. No one (least me) is going to cry about a bunch of 1%ers losing billions to a hedge fund, but as usual, the cost of these "call options" (aka. hedge funds) all collapsing at the same time, will once again be borne across the entire (real) economy.

It's no secret that most of these hedge funds are basically following the same general strategy of either "risk on" or "risk off" which has led to the highest risk asset correlations in decades; therefore, it's only a question of time before the herd panics and heads straight for the cliff.

The Country Club Still Thrives

2011-12-22T06:13:00.000-08:00

At this juncture we are still inundated with constant reminders of the greed, malfeasance and corruption that continues to this day, leading us to yet another inevitable tipping point.

As I have said before, the Real Point of Recognition is when the Idiocracy wakes up to the fact that we are absolutely 100% leaderless - in Government, in Business, in Economics, in the Media which is supposed to be holding everyone accountable. Every time I hear of a another newspaper or periodical endorsing a political candidate, I cringe. Yet another stark reminder that objectivity is dead and along with it went honesty and accountability.

Yesterday, Bank of America (Countrywide unit), settled the largest discriminatory lending law suit in U.S. history. The settlement was for discriminatory lending that took place by Countrywide before it was owned by BofA, at the height of the housing bubble. This settlement adds to the roughly $40 billion of losses that BofA has incurred since it acquired Countrywide for $4b in 2008.

The Countrywide steaming turd was not the only piece of shite BofA CEO Ken Lewis bought back in the day. The other steaming turd was Merrill Lynch, which BofA bought at the height of the crisis in 2008 just after Lehman collapsed. Apparently, it seemed like a good idea at the time - to buy out ML at a 70% premium to market value in the midst of a market meltdown ?? - and of course the company was another black hole of losses that forced BofA to seek a government bailout to the tune of $97 billion to back loan losses.

So, in the event, everyone lost money on these bad deals except for the country club executives who made these ludicrously bad deals at a time when the subprime problems were well known by everyone. BofA, Countrywide and Merrill Lynch are still tied together like 3 rocks sinking to the bottom of the ocean. The current stock price is $5 down from $55 in 2007.

The 3 CEOs who built this ball of crap have all long since exited with golden parachutes:

1) Angelo Mozillo, the Countrywide founder, received $110 million in severance pay on top of his previous stock sales at the height of the housing bubble. His current net worth is $600 million which includes a $67.5 million settlement with the SEC for fraud i.e. a slap on the wrist that barely dented his overall worth.

2) John Thain, the former Merrill Lynch CEO who dumped that steaming pile on BofA and U.S. taxpayers was paid $83 million for less than one year of work

3) Ken Lewis, was paid $125 million for tying this lump of worthless rot together and handing it to tax payers

What did Obama "change" since he gained office? Nothing. Not one fucking thing. The political system has become a total farce.

As long as the system is rewarding country club morons with insane pay packages to dismember their own country, even as 45 million Americans get by on food stamps, things are not going to get one bit better - despite what the fools in the lamestream media keep trying to tell us.

No one can say they are surprised the next time the bottom falls out.

Brown Swan Event

2011-12-19T14:26:00.000-08:00

Every time the markets have crashed these recent past times ('97, '98, '00, '01, '02, '07,'08...), the self-nominated "experts" at large scratch their heads and say "No one saw that coming". Therefore, based on the current level of complacency, I highly suspect that will be the case again this time, so we may as well get a jump on things and consider what types of excuses will emanate from the Idiocracy.

It was Nassim Taleb, in "Fooled by Randomness", who introduced the concept of a "Black Swan Event" i.e. a rare and "unpredictable" event that can only be rationalized in hindsight as having been predictable. According to Taleb, anyone who analyzes these events in hindsight and explains them in simplistic terms, is Monday morning quarterbacking. If you read the book you soon realize that there is only one person with the true gift of foresight and that is Taleb himself. Apparently, that is why he wrote the book - to share his uncommon wisdom with us fortunate commoners. And, what you ask, does Taleb say about those other few individuals who actually predict these events before the fact? Well of course, those people are either the one in a million who would randomly make up such an event and thereby got lucky on timing OR they are perma-bears constantly predicting economic chaos and hence not requiring any specific timing in order to be deemed right, after the fact.

The End of the World Only Comes Once and You Can't Make Any Money Off of It

No surprise, Taleb's book and attendant Black Swan theory was a huge hit on Wall Street, because it put all of the doomsayers and their gloomy predictions in the dustbin where they belong. Equally, the theory gave full license to any and all sorts of speculative behaviours that heretofore would have been deemed reckless. After all, the great Taleb said that no one can predict the future and therefore reality and cause/effect had conveniently been suspended. Statistics and statisticians wouldn't lie, would they ?

Brown Swan Event

As you can tell by my sarcasm, I don't buy an ounce of that "Black Swan" bullshit. The fact that the term was "coined" by a Ph.D solely for the purposes of selling books and hence minting more "coin" (bad pun), is all we need to know to realize that it's pure academic nonsense. So, I came up with a term of my own, which I call the "Brown Swan Event". Simply put, a brown swan event is a highly predictable (inevitable) event that everyone "knows" could happen, but assumes it won't happen in their lifetime.

The analogy of the Brown Swan is of someone bent over with his head in the sand while a white swan flies straight up his ass - it's messy, but that's how brown swans are made...

Below I make my best attempt to predict the top reasons people will once again give for being clueless that the economy/market was vulnerable to yet another crash:

Excuse #1: I thought the U.S. would be the first country in history to outsource the entire economy and borrow it's way to prosperity

Excuse #2: I was watching CNN and Faux News and therefore had no idea what was happening in the real world

Excuse #3: I expected Ben Bernanke to print enough money to keep the economy afloat indefinitely

Excuse #4: I knew Europe had a debt problem, but Faux News told me that they are lazy socialists and therefore we are immune to their problems

Excuse #5: I was too busy driving my children across 5 States to a soccer tournament

Excuse #6: It's only been 3 years since the last crash and my financial planner told me not to worry, because that was a once in a lifetime event

Excuse #7: I trusted the politicians to fix the economy (although I was a bit suspicious when I noticed that they were campaigning non-stop and otherwise couldn't manage their way out of a paper bag)

Excuse # 8: I figured Wall Street had learned its lesson the last time we bailed them out with all that free money

Excuse #9: I'm not good with math, like addition and subtraction

Excuse #10: I read Taleb's book and he said that no one can predict when the next crisis will occur, so I just ignored everyone who said it could happen again

WTF?

2011-12-17T14:03:00.000-08:00

As a Canadian, the Harper Government's rejection of the Kyoto Treaty this week made me ashamed. Yet one more comfort-seeking half-man in leadership who can't make a difficult choice. Big surprise.

Knowing that Stephen Harper is from Alberta and a Fundamentalist pseudo-Christian, is all anyone really needed to know to predict this could happen. Alberta is the energy producing capital of Canada and home of the infamous oil-producing tar sands which are the largest single source of carbon emissions in Canada. Meanwhile, Alberta is also the most right-wing of Canadian provinces, so from a Canadian standpoint, that makes Harper's type about the closest one can get to being bonafide Canadian Taliban. How he became Prime Minister is still (somewhat of) a mystery to me.

This time, I will spare my usual diatribe against the climate change denialists, because there is nothing I can do to punish the denialist morons, that reality itself won't dish out x 10, in due course. In fact, it will be the very prevalence of climate change denialism that makes the ultimate outcome to the energy saga that much more devastating. Expending all efforts on denial and obfuscation has merely served to delay the inevitable, and thereby ensure the ultimate impacts will be many times worse, while at the same time suspending any investments that would have otherwise dealt with the problem in the meantime. For the archaeologists of the future who dig through a mile of rubble to read this archive: understand that climate change denialism is just an artifact from the zeitgeist of the Idiocracy i.e. as a society, we have become a 400 pound fat man who can't get out of his own way.

Regardless of mankind's ongoing need to ignore the obvious and inevitable, fortunately nature has a set of built-in safeguards (aka. resource scarcity) to limit the damage humans can do to ourselves and other species. Will resource scarcity be enough to save ourselves from ourselves? Now that is a debate for real men and another time.

Whereas the climate change debate is fraught with projections and uncertainty, making it highly prone to manipulation and obfuscation, underlying that asinine debate is a set of far more concrete facts which are far less easily discarded. In fact the below facts are hardy, durable and largely immune to manipulation even by the knuckle-dragging set. By analogy, imagine the morons of the day debating the size of the hole in the hull (or indeed if a hole even exists) while the Titanic is already keeled over and diving to the bottom.

Following, I lay out the set of events and circumstances that will inevitably wean the human race off of hydrocarbons for good, without requiring us to convince one demented hillbilly, SUV owner, Prime Minister or combination thereof.

If we really wanted to curb the use of oil sooner rather than later, here is what we ~~should do~~ have done:

1) First, deplete the vast amount of crude available in the nations that consume the most oil, thereby making them highly dependent upon imports and stable/affordable oil prices

STATUS: 95% COMPLETE. The U.S., Europe and China are the world's largest consumers all highly dependent upon oil imports

2) Massively deplete the world's remaining large oil fields and then obfuscate about how much oil is left, giving everyone a false sense of complacency so that we overconsume the remaining oil and underinvest in new sources of energy i.e. create a cartel called OPEC and make output quotas dependent upon "stated" oil reserves, thereby giving every nation an incentive to obfuscate and over-inflate their oil reserves.

As an example, the Ghawar field in Saudi Arabia is still the world's largest in terms of output, and yet production from that field started back in the 1950s. One needs no other piece of evidence to know that field is near the end of its production life. Still, they lie...

3) Price oil on world markets based upon how much oil is coming out of the ground v.s. how much is remaining in the ground i.e. systematically underprice oil and hence facilitate over-consumption and further delay the migration to sustainable energy.

The supply side of oil futures pricing is based upon how much crude is coming onto the market in a given time (term) structure. The spot price is likewise based upon how much is currently being offered and has no relationship to how much is left in the ground.

As an example, if a country, let's call it Russia, were to forcibly amplify its oil production by injecting sea water into its wells, then it would cause production supply to increase in the short-term while impairing the long-term output potential of its wells. Short-term, that tactic would cause world oil prices to fall and hence over-stimulate demand, while laying the ground for an eventual asymmetric dropoff in supply in the future.

4) Leave the remaining sources of oil deep underground/undersea and/or in unstable nations that are overtly hostile to the West. In other words, make the continuous supply chain as tenuous as possible.

As I reiterated recently, among the top 15 oil producing nations are: Saudi Arabia, Iran, Iraq, Venezuela, Mexico, Russia and Nigeria. Incidentally Canada's oil sands currently produce roughly 1.3 million barrels per day as against global annual consumption of ~83 million barrels per day i.e. it's a drop in the bucket.

5) Create legacy infrastructure and transportation links highly dependent upon cheap oil and create a food industry highly dependent upon an ongoing cheap supply of energy

Watch the movie Collapse for more detail on the fragility of the supply chain and our over-dependence upon (cheap) oil in our food supply. Be sure to have a change of underwear handy.

7) Create suburbs and cities that are widely dispersed and require cars to do anything or go "anywhere"

This is one of the central themes of Kunstler's blog - that we have created suburbs and exurbs that are totally disconnected from sustainable reality because they are fundamentally reliant upon a steady stream of cheap and abundant oil.

8) Over-invest in legacy automative technology (aka. internal combustion), requiring massive capital infusion at a time when capital is about to become extremely scarce.

Think way back to 2007 when oil hit $147/barrel and filling up the average SUV cost $100. Now double or triple those figures. Also recall, the mad scramble to trade in many of those behemoths at a time when there were absolutely no buyers to be found. Rinse and repeat.

9) Lastly, create a global economic depression that will drive the price into the ground, eliminate long-term capital available for investment and otherwise take Harper's oil sands offline

Sadly but predictably, investments in sustainable energy are highly correlated with the price of oil, due to the substitution effect i.e. why "go green" when oil is so cheap. That in turn will lead to underinvestment in not just green energy but also oil exploration, similar to what happened in the late '80s and '90s.

Underinvestment will constrain supply, which will amplify the oil price increases emanating from an expanding economy, should such an economy ever exist again. This means that every attempt to revive the economy will meet with skyrocketing oil prices similar (but on a magnified scale) to when oil ran from ~$12/bbl in 1999 to $147/bbl in 2007. These high oil prices will drain the economy and eventually send oil prices crashing again. Rinse and repeat...

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In summary, subsidizing (by not taxing) the consumption of imported energy for these past decades ranks as one of the gravest mistakes our serially inept policy-makers have made. The economic consequences of decades of over-consumption of hydrocarbons and resulting over-reliance, will be devastating, leaving aside the less predictable but likely equally devastating environmental impacts. As always, nature will be the final arbiter, by selecting against those societies that choose the path of short-term gratification at the expense of their own longer term self interest. Basically, we have now become a society too stupid to realize how stupid we are, which is what you would expect in a nascent Dark Age.

Thought Leaderless

2011-12-15T06:23:00.000-08:00

One of my recurring themes has been the total lack of thought leadership that attends this ultimate age of greed, gluttony and nihilism. It should come as no surprise to historians (but it does), that denialism and disinformation would be highly prevalent at a time when "extend and pretend" has become the de facto economic strategy of the day.

Today, I almost fell off my chair when I read Doug Kass's "10 More Reasons to Buy American", which I reproduced below with my comments. He is not advocating to buy American products (are there any left?), he is advocating to buy American stocks for the 1% who still have capital available for said purposes. (Doug's text is highlighted in white. My comments follow each point).

Once again, you can't make up this bullshit. Here we are already well into the greatest economic breakdown in U.S. history, and yet fat and happy 1%ers still abound to tell us why everything is basically A-ok. Overall, I can summarize Doug's entire pseudo-patriotic call for the status quo as "Let them Eat Cake":

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Doug Kass: Below are 10 reasons for my optimism.

Kass: U.S. relative and absolute economic growth is superior to global growth. The U.S. economy, though sluggish in recovery relative to past expansions, is superior to most of the world's economies (with the exception of some emerging markets) in terms of diversity of end markets, quality of global franchises, management expertise, operating execution and financial foundations.

Me: I already addressed this nascent "de-coupling" fantasy just recently here. First off, the U.S. is now borrowing 10% of its economy on an ongoing basis and that is just at the Federal level. Moreover, the U.S. is highly integrated in the global supply chain and requires an ongoing flow of funds from the rest of the world to ensure continuous operations. Europe and the rest of the world cannot fall into recession without dragging the U.S. into the abyss. In any case, the U.S. is equally as insolvent as Europe and would be just as bad off if not for having the reserve currency (see below), so this entire point is ludicrous.

Kass: U.S. banks are well-capitalized, liquid and deposit-funded. Our banking industry's health, which is the foundation of credit and growth, is far better off than the rest of the world in terms of liquidity and capital. Our largest financial institutions raised capital in 2008-2009, a full three years ahead of the rest of the world. As an example, eurozone banks continue to delay the inevitability of their necessary capital raises. Importantly, our banking system is deposit-funded, while Europe's banking system is wholesale-funded (and far more dependent on confidence).

Me: Again, this entire point is garbage logic. Bank of America currently trades for $5/share and the vector is towards zero. U.S. banks have a high degree of exposure to Europe, both directly and indirectly - the recent implosion of MF Global being the canary in the coal mine. So far in 2011, 90 banks have failed and the fun hasn't even started yet. Meanwhile, The FDIC Deposit Insurance Fund which backs all bank deposits, went negative for 7 quarters and only recently returned to positive. The goal is to get the fund back to 1.18% reserve ratio i.e. the FDIC's ultimate goal is to eventually back 1 cent for each dollar deposited. Wow, what a great fucking system, Doug !

Kass: U.S. corporations boast strong balance sheets and healthy margins/profits.Our corporations are better positioned than the rest of the world. Through aggressive cost-cutting, productivity gains, external acquisitions, (internal) capital expenditures and the absence of a reliance on debt markets -- most have opportunistically rolled over their higher-cost debt -- U.S. corporations are rock-solid operationally and financially. Even throughout the 2008-2009 recession, most solidified their global franchises that serve increasingly diverse end markets and geographies.

Me: U.S. Corporations are sitting on huge amounts of cash, because they would rather lay off employees and outsource to China, thereby further bolstering record profit margins, rather than to invest in the U.S. economy and create jobs. Meanwhile, as I pointed out recently, only a moron assumes that the every company can cut costs at the same time without destroying the economy...

Kass: The U.S. consumer is more liquid and stable. An aggressive Fed (through its extended time frame of zero interest rate policy) has resulted in an American consumer that has re-liquefied more than individuals that live in most of the other areas in the world. (Debt service and household debt is down dramatically relative to income.)

Me: Wow, what a timely day for Doug to tell us how well off the (jobless) "U.S. consumer" is relative to the rest of the world. Just today, headline news "Half of U.S. is poor or low income".

Ayn Rand herself couldn't publish something this callous, if she was alive today.

Kass: The U.S. is politically stable. After watching regime after regime fall in Europe in recent weeks (and given the instability of other rulers throughout the Middle East), it should be clear that the U.S. is more secure politically and from a defense standpoint than most other regions of the world. Our democracy, despite all its inadequacies, has resulted in civil discourse, relatively balanced legislation, smooth regime changes and law that has contributed to social stability and a sense of overall order.

Me: We've gone Full Retard in politics, and the Idiocrats of the day who campaign non-stop have no clue how to fix any of the current set of problems. As far as Doug's defense "security" assertion, the current level of perceived security is just an extremely expensive and totally unsustainable illusion. Worse, the illusion is sponsored by trade flows between the U.S. and those very countries that represent the greatest potential threat (aka. China).

Kass: The U.S. has a solid and transparent corporate reporting system. Our regulatory and reporting standards are among the strongest in the world. Compare, for example, the opaque reporting and absence of regulatory oversight in China vs. the U.S. (It is beyond compare.)

Me: I agree to the extent of transparency, but the level of regulation has become another key factor in this intractable cluster fuck. Too many special interest groups driving policy and regulation. Too many lawyers in the process at all levels of government. Would you ask a barber if you need a haircut? No. Then why would we ask packs of lawyers if we need yet another law to help justify their profession?

Kass: The U.S. is rich in resources.

Me: Oil is the most important and yet least secure of U.S. resources. The U.S. became a net importer of oil way back in 1970 and in the intervening 40 years has yet to adopt a consistent energy policy to reduce ever increasing reliance on energy imports. Contrary to what Faux News would tell us, "Drill, drill, drill" is not a viable energy policy, when the marginal amount of oil available in the U.S. pales compared to U.S. daily consumption. Meanwhile, among the current top 15 exporters of oil globally are: Saudi Arabia, Iran, Iraq, Venezuela, Nigeria, Mexico and Russia. Relying on this set of countries to ensure a continuous supply of affordable oil, is a latent disaster.

Kass: The U.S. has a functioning and forward-looking central bank that is aggressive in policy (when necessary!) and capable of acting during crisis.

Me: Paraphrasing what Doug is really saying: "We have a Central Bank that won't hesitate to dilute the money supply, generate inflation and otherwise bankrupt the Middle Class via higher food and energy costs, all the while stimulating asset markets to the benefit of the 1%. "

Kass: The U.S. dollar is (still) the world's reserve currency that is far more solid than the euro.

Me: True, in a, wow what cynically fucked up logic, kind of way. In retrospect, having a reserve currency will be viewed as a curse because it has allowed U.S. policy-makers to accumulate debt and future liabilities far beyond what any other country could achieve. It has also allowed the Federal Reserve to pursue Quantitative Easing (money printing) with relative impunity. Therefore, the ultimate collapse will be that much more devastating, because it will reveal that the underlying economy has become an empty shell supported by short-term financing.

Kass: The U.S. is a magnet for immigrants seeking a better life. This and other factors have contributed to a better demographic profile in our country that has led to consistent population growth and formation of households. (Demographic trends in the U.S. are particularly more favorable for growth than those population trends in the Far East.)

Me: Let's get the house in order, so this can continue to be the case

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Ponzi Supernova

2011-12-07T14:54:00.001-08:00

The global Ponzi scheme is now going All In.

The definition of Ponzi Borrowing is borrowing the interest to pay back existing debt. This is what dozens of sovereign nations (including the U.S.) have been doing for the past several years. Due to the paradox of thrift, none of these nations could stop spending and borrowing, because austerity would mean economic collapse. Therefore a complicit compact was formed between borrower and lender to propagate the illusion of solvency as long as possible (or at least until bonus time). Why would lenders be willing to throw good money after bad? Because the alternative was immediate default and 100% loss on their portfolios of shit debt. So it was better to buy time by attending the recurring debt auctions and keeping interest rates under control (i.e. facilitating the auctions by buying more debt). All that started to unravel over this past summer in Europe, because yields (interest rates) on various nations' debt started to rise above levels considered commensurate with solvency.

Hence, like the U.S. Federal Reserve before it, the European Central Bank stepped into the open debt markets and became the marginal buyer of otherwise worthless debt, to keep interest rates low and keep the illusion of solvency alive. Bear in mind that both Central Banks used FRESHLY PRINTED money to buy up this sovereign debt, thereby levying an implicit tax on all of us, given that there are now that much more dollars/euros now in circulation. Did we give the Bennie Bernank taxing authority? I wasn't aware of that. Getting back to the story - in becoming the marginal buyer of debt, the ECB went ALL IN and showed its hand - snake eyes - nothing, nada, zilch - because now everyone knows that the normal debt market is not functioning and everyone who owns said worthless debt has to get out ASAP.

At that point, the clock started ticking on the Global Financial Ponzi's ultimate collapse i.e. when, not if. Yet, bonus payout is a mere 3 weeks from now, so financial markets need to maintain calm at all costs. Therefore, it was by no small coincidence that global central banks (including the Federal Reserve) entered the markets on a coordinated basis last week to calm the credit markets. The stock market was up 6.4% in 3 days because apparently a fortunate few insiders were leaked the information early. Just think, 6.4% is over half of the historical average annual return for the stock market - in just 3 days. Imagine with short-term call options - 10 years of return in 3 days - NICE ! And imagine the brass you have as the Bennie Bernank, to take overt action to support markets during the same week that it was revealed that the Fed lent no less than $7.7 trillion (half of U.S. annual GDP) to banks during 2008, all in secret. Now that is true brass, and a big middle finger to the U.S. general public - latest proof that the Bernank is Wall Street's most loyal water boy.

So now the markets are already back at the trough waiting for the really big feed bag from the ECB, because the clock is ticking and they have to get out before someone blinks and heads for the exits early. What they need is for the ECB to pull out the "bazooka" and agree to monetize trillions in debt - essentially a blank check - one that will stimulate the risk markets through Dec. 31 bonus time AND let them unload the shit debt on the general public. And by all accounts the big bazooka (if it comes) should cause one hell of a parabolic rally as speculators front run (buy up) any and all risk assets. You see, those big funds that hold all of that worthless debt are going to unload it on the ECB and then they will take those freshly minted Euros and buy anything that is not nailed down. But don't worry about hyperinflation, because not one dime of that money is ever going to trickle down the middle class. Just as when the Fed was monetizing debt (QE'n'), inflation will be constrained to commodities (gas, food) and therefore further impoverish the average citizen.

Bear in mind, that anything short of the big bazooka will cause the Global Ponzi scheme to collapse immediately. Don't pass GO. Don't collect $200.

Why the Bazooka will Fail Regardless

Here is why the Big Bazooka (ECB debt buyback) is GUARANTEED TO fail. Any fund manager who is holding on to insolvent debt will sell that debt back to the ECB. It will start with Greek debt, then Italian, Spanish, Portuguese, Irish - you get the idea. Why? Because they know for 100% certain this is the last chance to unload that worthless shit, and therefore it will all come to market. Therefore, according to the law of unintended consequences, the ECB will essentially kill the very same credit markets they are trying to save. In other words, going forward, who is going to be the marginal buyer of Greek/Italian/Spanish debt? The answer is no one. Markets are not stupid. This will be the biggest pump and dump in world history. Furthermore, none of this bond buying solves the underlying solvency issue. In fact in exchange for the big bazooka, rumour has it that the ECB will require even more austerity from these struggling nations, which would further undermine their ability to service their debt. In addition, while the ECB will buy the debt and hence bail out the existing lenders, the ECB will not forgive/retire the debt therefore, let's be clear, this would be yet another bailout of the 1% at the expense of the general public who will continue to be burdened by the debt until their economies collapse irrevocably.

GLOBAL PONZI COLLAPSE - CHAIN OF EVENTS

All it takes for the Global Ponzi to collapse now is for ONE sovereign debt rollover auction to fail. Once that auction fails, then that country will be in DEFAULT. It's debt will become worthless on bank balance sheets and in the various funds that hold that debt. The losses will destroy equity, and trigger various credit covenants which require a certain level of quality of debt and equity to be maintained, which will lead to wholesale shedding of the next lower quality country's debt, so forth and so on. Meaning it will be a race for quality and out of risk assets i.e. everyone trying to get out the same door at the same time.

Compounding this stampede is the fact that the dollar will go parabolic, mostly because, in his infinite wisdom, the Wizard-of-Bernank has created the largest carry trade in the history of the planet by taking interest rates to 0%. i.e. Everyone borrowed in U.S. dollars and leveraged up to buy assets around the world - free money after all. So when the stampede occurs, all of that money will come back to the U.S. like a fucking Tsunami, causing massive hedge fund losses in the process.

But Europe Doesn't Matter, right?

Now we hear the Fucktards in the Idiocracy telling us that it's no big deal if Europe goes belly up, because exports to Europe are only a small part of U.S. GDP. Unfortunately, exports are not the problem.

Let's review: Back in 1997, there was a run on the Thai Bhat of all currencies (who cares about Thailand, right?). The Thai currency collapse quickly spread across Asia: Korea, Singapore, Philippines etc. decimating those risk markets. Next thing you know, you had a near collapse of the global financial system which in the event had to be stabilized by the IMF. Fast-forward one year and you had the echo collapse of just ONE highly leveraged macro hedge fund, LTCM, that had big investments in Russia that were affected by the Thai Baht implosion. Due to the amount of leverage, that one fund's collapse, managed to trigger another global financial crisis/collapse/cluster fuck and required the Federal Reserve to take actions to forestall complete collapse. Meanwhile, I would hope some of the amnesiacs extending the Europe-doesn't-matter thesis at least remember 2008 when the failure of just two investment banks in the U.S. (Bear Stearns and Lehman) caused the worst collapse since the 1930s.

Ok, so now picture THIS impending scenario:

- MULTIPLE countries in Europe defaulting in sequence

- Dozens if not hundreds of banks failing globally

- Dozens if not hundreds of hedge funds failing

- ALL of the remaining investment banks failing
- The Bennie Bernank afraid to show his face in public ever again, much less bail out any financial institutions

ALL at the same time.

So the clock is ticking, and the only question on the table is whether Wall Street is going to make it to Dec. 31st bonus time and leave the general public as the bag holder, yet again.

Or not...

Another Glance Into the Abyss

2011-12-05T13:23:00.001-08:00

What would you do?

The dreaded question I get from my poor Mom after she has been staying with me a while and enduring all of my ranting diatribes (I try to hold back, but can't really help myself).

Like most people she is familiar with most of the issues and has heard most of the facts and data, but also like most people she wants to conclude that things are going to be more or less the same in the future with some fine tuning.

For my part I first explain that the vaunted political system is not the answer, it's the problem. Voting for one of two (or three) political parties that serve the same special interest groups is the fundamental problem with the system. This is why, unlike most Libertarians, I am not a stark raving Ron Paul fanatic, because he has deluded himself into thinking that once he becomes President he can change the system from within i.e. change the Washington and Wall Street "Machine". Yeah right. Unfortunately old Ron would be eaten alive by the Borg, if not neutered and lobotomized. His ideas would be stillborn. Even in the best case scenario, if he took over with a Republican majority in both chambers, Ron Paul has absolutely no plan for getting us from Point A where we are, on the edge of the cliff, to Point B, where we need to get to on the other side of the valley. Between those two points is the beckoning economic abyss that will put to lie any notion that a 76 year-old codger can lead us through this mess. The fact that he is willing to stand on that stage campaigning with a pack of sociopathic lying buffoons is another huge problem. All of these politicians are campaigning v.s. doing, which is at the heart of the problem with the current political system. Campaigning is rent seeking and a dead weight loss to society and a zero sum game. So while I would gladly like to jump on the Ron Paul train, I can't buy that fantasy.

As you can tell by from this blog, my party is the Anarchy Party, not by choice, but by lack of alternative. The Anarchy Party, has no leader, no campaign, and no funding. It doesn't need any of that bullshit. It has only one constituent - a constituent which is far more powerful than anyone on this planet: aka. Reality. If reality has its way (and it always does, it's just a matter of time), then the Anarchy Party will be duly elected in the foreseeable future.

However, upon taking control, the Anarchy Party will be quickly challenged by the neo-Fascist Party that does not exist yet, but that will rise up out of the Tea Party base with the goal to eliminate the Anarchy as quickly as possible. And via various police-state measures, the Fascist Party will eventually win out, although it's not going to be pretty, I can assure you that. Recent efforts by Occupy Wall Street to recruit returning Iraqi war veterans to their cause were duly successful and forebode poorly for the future. Go figure - young people who have been sitting around at home for the last 3 years Facebooking with their friends/family in Iraq, still have a lot in common with their brothers, sisters, cousins and high school buddies who are just getting out of the service only to find they too have no job. So, the first thing the neo-Fascist party will do is look to re-employ as many returned veterans as possible in the nascent police state. After all, you can't have too many well trained machine gunners running loose in Militia-Land. This sets up an Arab Spring scenario in which armed forces are essentially turned on their own populace. Will they fight and do the bidding of the establishment or will they join the rebellion? Too early to know...

So let's say all that plays out and by some grace of God some of us survive the next 5-10 years, ok now I can answer my Mom's question "then, what would you do?". Most of what I would do at that juncture does derive from the Ron Paul Libertarian guide book, but with my own twist:

1) Elevate the constitution and make it inviolable by any branch of government

2) Reform campaign finance

- Limited donations from all donors

- Complete transparency on "soft" donations

3) Implement a hard money currency w/a 3rd currency for trading w/other nations

- One currency for domestic transactions and savings

- A "3rd" currency for trading with other nations that trades independently of the domestic currency

4) Balance of trade policy with all trading partners

5) Balanced budget policy

- Budget needs to be balanced in year of election when averaged over previous 4 years or budget cap is automatically applied

6) Greatly reduced level of regulation and laws

- This would be the hardest to implement given the decades of accumulated junk legislation

- Ideally we would move to a system of regulation by exception not by rule

7) Flat tax w/reverse flat tax for working poor

- All tax code changes need to be approved by the electorate via referendum

8) Make it a lot harder to go to war

In other words apply common sense and most importantly, keep the self-nominated "elites" out of the cookie jar.

The above list would be a good start and take us 95% of the way towards fixing the underlying problems that got us into this situation; however, like I said before, it's all pure fantasy until the Special Interest Groups are obliterated. Neither Ron Paul nor Abraham Lincoln can fix the system as long as the SIGs are still fully in charge and empowered. They represent the status quo and will do everything in their considerable powers to retain control over the political and economic system so that they can continue to ass rape the general public and otherwise reach into the register whenever they feel like it.

So, apart from being inevitable, the only benefit I see from turmoil and anarchy is that the SIGs and their 1% sponsor will be in for one hell of a ground and pound that hopefully will dislodge them for good.

Unfortunately, we will all be in the ring at the same time.

Borrowed Time

2011-12-05T08:07:00.000-08:00

[Dec. 5, 2011] I got the Elliot Wave numbering wrong (reversed 1s and 2s) on the original version of the chart below; so this is a re-posting.

[Original Post Nov. 30, 2011]
Another day, another hope-filled parabolic stock rally based on desperation, wishful thinking and Central Bank machinations. This time it's an overnight China rate cut combined with a better-than-expected ADP jobs forecast on top of globally coordinated Central Bank interventions in credit markets. Regardless, it's just more of the same "elixirs" that have at best just kicked the can down the road a bit and at worst are the root cause behind this ongoing economic fiasco. I am not talking about the good jobs number which is always a welcome sign, I am speaking of the ongoing monetary policy manipulation that so obviously is meant to fuel the markets and otherwise perpetuate the illusion of recovery for yet another few hours or days.

I have mentioned before the concept of attenuation - a series of lower highs in the stock/risk markets, each of shorter and shorter duration. The trend actually started in 2000, but even since 2007, as indicated in the chart below, the downtrend is acutely apparent. The 2007 high was followed by a collapse to 666 (I know) in the S&P 500 market index. The 2009/2010 rally retraced 77% of the former high, culminating in a high this past May. The 3 week rally in October retraced 74% of the May high and this latest spike is now at ~67% of the October high and running on fumes as I write. These steep upward retracements have a way of lulling everyone into a sense of complacency. It's a truly diabolical market with a goal to lock in as many greedy fools and fools' dollars as possible. By all accounts it's succeeding mightily.

The coloured 1s and 2s, starting with blue on the left, are Elliot Wave notation indicating degrees of trend and wave structure. If this labeling is correct or near correct, then we are heading for a 3rd wave down at multiple degrees of trend, euphemistically known as "The Point of Recognition" - a very rare occurrence, and likely portending the largest collapse in risk assets, in U.S. history. In any case, you don't have to be a market technician or an Elliot Wave believer, to see that we are in a downtrend and the market is losing upside momentum, not withstanding Bernanke flailing around like a cub bear playing with his dink.

About those Fundamentals

Despite today's improved ADP report, which is inherently volatile, there is no reason whatsoever to believe that the fundamentals of the economy are improving. While watching CNBC the other day, it struck me that Wall Street, having ass raped the rest of the world, has finally gotten around to screwing itself. In one segment, there was a discussion by James Altucher the most clueless 1%er this side of Kudlow, talking about "record high profit margins", only to segue directly into another segment as to why revenue growth is so anemic, and likely will be for the foreseeable future. The connection between these two seemingly incompatible occurrences is called the "paradox of thrift", which means that if one person saves more money he becomes wealthier, whereas if we all try to save more money, the economy tanks. As usual, you can't make this shit up - imagine being an overpaid MBA consultant out there telling your umpteenth client that by cutting costs, you can grow your business; wouldn't you eventually have some sort of epiphany that in aggregate the strategy is not going to work?

Likewise, one of my favourite anecdotes is of Henry Ford parading through one of hist newest plants ~70 years ago... he stops at one point to embarass the one union leader in attendance, by pointing at the nearest assembly line and saying: "See those people working over there? Eventually, they will all be replaced by machines". To which the union leader, not skipping a beat, says "Sure, but then who will buy your cars?". In the end they were clearly both right, yet I have a sense that old Henry was rolling over in his grave when his company's stock traded for the cost of a $1 Oh Henry! bar at the nadir two years ago. Nor would he be consoled to know that neither machines nor underpaid foreigners buy his cars, therefore the stock will likely be trading back below the candy bar level in the not-too-distant future.

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That leaves the most important question of all i.e. who the hell will lead us out of this mess, and rebuild the economy?

Is it a President who spends 50% of his time campaigning and otherwise has no business experience whatsoever? A Congress that likewise campaigns non-stop and otherwise spent us into this fiasco ? A Federal Reserve that keeps trying to lower the cost of borrowing so we can pile up ever more debt? Or the 1% self-nominated "best and brightest" country club who outsourced all of the jobs and yet can't figure out why profits are so high and revenue growth so low ? The fact is that none of the fools who got us into this mess, will be the ones who can get us out.

Let's face it, the real "Point of Recognition" will not just be when Wall Street shits another brick and gets pink slips instead of bonuses in the Christmas stocking this year - it will come when everyone finally realizes that today's "best and brightest" are neither.

Zero Unemployment In Sight

2011-12-04T06:37:00.001-08:00

Good news ! Unemployment will soon be at zero for the first time in U.S. history.

Allow me to explain...

On Friday, the Government announced that 120,000 net new jobs had been created and that the unemployment rate (U3) had dropped from 9% to 8.6% - so far, so good.

Unfortunately, the primary reason that the unemployment rate dropped to 8.6% is that 487,000 people decided to quit looking for work. In other words, for every one person who found a job, four people gave up looking.

Now, I have no idea what these 487,000 people are doing to get by right now, and part of me doesn't even want to know. Suffice to say, we can expect a lot more ad hoc meth labs and volunteers to the French Foreign Legion to crop up in the coming months.

Also, don't ask me by what fucked up math the Government arrives at a reduced jobless rate when people give up looking for work. Suffice to say, someone in the Idiocracy decided that as the unemployment situation goes from bad to worse, that the unemployment rate should go down instead of up. And everyone just went along with the *new* math, especially the Lamestream media which is always fully on board with printing the (U3) number in the headline as good news.

The real story is that given all of the discouraged job seekers, the labor force participation rate - at 64% - has dropped to a level last seen in 1984, back when there were a lot fewer women in the workplace. So, it's Back to the Future to Mr. Mom, I suppose. If I had to stay at home and watch my kids I would jump off the nearest bridge - one less seditious blogger for the Government to fret about...

The real unemployment rate (U6) which gets buried at the back of the report is 15.6%, reflecting the reality of the current situation i.e. not what Big Brother wants us to dwell upon.

So back to my main point, extrapolating that 4:1 ratio above into the future, I will give it about 2 more years until unemployment, as indicated by the headline (U3) statistic, goes to zero. Watch the lamestream media spin masters start scratching their heads like Chimpanzees as the unemployment rate drops like a stone while the streets burn like it's the Fourth of July.

You read it here first.

Goodnight Moon II - Fiscal Policy Fiasco

2011-12-02T05:28:00.001-08:00

Continuing the archaeological "how the hell did this happen" series, we now turn to that other Oz-like lever in the grand illusion formerly-known-as-the-economy: Fiscal Policy.

Unlike Monetary Policy which subsidized the accumulation of debt by ALL constituents, Fiscal Policy has specifically elevated Federal Government debt to now out-of-control levels.

The (Other) Biggest Lie Ever Sold

The biggest lies are never the conspiracies or the ones no one know about. The biggest lies are the ones squarely in front of our face that no one wants to acknowledge. The 800 lb elephant in the room.

In this case, the biggest lie is that the economy is in recovery when in fact it's still in a major recession.

The fucked up logic of the day is that no matter how much money the government borrows, as long as the economy is growing sequentially, then we must be in recovery. This ignoring of the deficit logic puts Spinal Tap's "This one goes to 11" seem intelligent by comparison. Yet somehow almost every economist, financial pundit and politician is onboard with pretending that the economy is out of recession and recovering.

Put it this way, if the Federal Government was an average person, it would be a guy who lost a well paying job of say $75k a year. He now has a part-time job paying $25k a year and has worked his way through his life savings and retirement savings. He tells himself that he can catch back up on his retirement savings later, even though he is already 58. Having worked through his savings, he now props up his lifestyle back to previous levels by tapping a line of credit on his home. Yet, like the Fed, when people ask about his job situation, he tells them he has a new job and has "recovered" from his setback, albeit he is behind on his savings...

Obviously any honest depiction of a recovery would adjust for increased borrowings, yet not one economist of note seems to make this simplistic calculation.

The numbers are frightening:

GDP for 2008, the year the recession started was: $14.27 trillion

GDP for 2009, was $14.01 trillion indicating the year-over-year recession

GDP for 2010 was back up to $14.55 trillion, giving everyone the false comfort that the economy was recovering, because GDP in 2010 was now $281 billion higher than 2008. That is the standard story that is propagated to the masses.

But the key (missing) question is what happened to the deficit (borrowing) during those 3 years?

The deficit in 2008 was $458 billion

By 2010, the deficit was at $1,455 billion

Therefore, even though GDP was $281 billion higher in 2010 than 2008, net new borrowings had increased by $997 billion ! i.e. if not for new borrowing, 2010 GDP would have been $13.55 trillion (assuming 1:1 multiplier), which is 6.8% lower than the reported amount. That's the new math baby, just borrow your way to prosperity !!!

Meanwhile, these figures don't take into account inflation over those two years, which further deflates these figures by roughly 4% over those two years.

Lastly, adjust for immigration, because the U.S. had almost 5 million more people in 2010 than in 2008, so adjusted for the number of people, and GDP is further reduced.

Wow, what a great recovery. To think that we pay these idiots to lie to us constantly. Which came first, them lying to us, or us needing to be lied to? One begins to wonder...

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FWIW, I still like Treasury bonds (invest at your own risk) as the ultimate safe haven, not withstanding these massive deficits. I own them knowing that the Federal Reserve will always come along and buy them from me in some future iteration of QE "n". And when that inevitable moment comes and we are staring into the economic abyss, the streets en fuego - there will be nary a Tea Partyer to stand in the way.

Goodnight Moon - A Brief History of Monetary Policy (Failure)

2011-11-30T17:34:00.001-08:00

Under my favourite archaeological theme of "what the fuck happened" (to this once thriving society), for all future Indiana Jones' I am penning my own allegory to document how Monetary Policy failed and destroyed the U.S. economy in the process.

My goal in concocting this basic analogy is not to mock everyone's intelligence, it's to illuminate the specious construct upon which Monetary Policy is based and call to account our so-called Thought Leaders for attempting to replace a once thriving real economy with financial alchemy. Clearly, upon reading this analogous story, any 5 year old could have predicted that Monetary Policy was doomed to fail and collapse the economy:

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Imagine you are out on a camping trip with a bunch of your friends. You all decide to build a fire. There are quite a few of you and you are all hard workers by nature so you gather up a ton of really good fire wood. The fire you build is massive. It's the biggest fire around. People from all of the other camp sites come to your camp site to see and enjoy the camp fire. They want to be part of your camp.

You gathered a lot of wood so the excellent camp fire burns long and strong, yet everyone is enjoying the warmth of the fire and the party atmosphere a bit too much, so much so that no one wants to get any more firewood. So, naturally the wood pile dwindles - at first slowly but then alarmingly quickly. Eventually a fight breaks out over who will get more wood, because now no one wants to be the guy out there in the cold darkness gathering wood, even though just the night before you were all out there happily gathering wood...

Along comes a guy that I will call Bob Byrne. Bob says stop fighting guys, no one needs to gather more wood, because I have some gasoline we can pour on the fire. Everyone is very skeptical, but Bob goes to his truck and comes back with a gallon of gas that he pours on the fire. All of a sudden the fire erupts. Flames shoot higher and the fire becomes bigger and stronger than ever before. Everyone cheers and thanks Bob profusely.

Eventually of course the fire burns down again, this time quite quickly. Everyone looks around nervously, what will we do this time? Don't worry, says Bob, this time he comes back with two gallons of gasoline which he pours on the fire. Again, the flames leap higher and everyone is happy and festive once again.

This time the good times are even shorter, so in desperation, Bob backs up his truck, takes out a fire hose and literally sprays gasoline directly on the fire continuously to keep it burning.

Alas, due to the lack of underlying firewood, even as new gas is poured on the fire, it continues to die down. Now everyone is getting really worried, because even Bob's gas can't keep the fire burning. So Jim points at Bob and says "what the hell is going on, why isn't your gas keeping the fire burning?"

Bob says to Jim, "well, gas can't keep a fire burning forever, eventually you need to add new firewood. My goal of spraying gas on the fire was just to keep it going long enough for you to get more wood."

"What? says Jim. You never told us that. We never got more wood. Not only that, we sold all of our axes, because we didn't think we needed them anymore".

Bob shrugs his shoulders, "Oh, I guess I should have made it clear that the gas trick is just temporary and that you still need firewood to build a sustainable fire. Looks like you are shit out of luck now. Sorry !". He then hops into his truck and drives off into the sunset, never to be seen again.

THE END

I hope you enjoyed my stupid story, because guess what, as stupid as it is, "we" as a society all bought into it hook, line, and sinker. Imagine losing your house, your job and your savings all over the biggest line of bullshit ever told. Now that, is sad.

One (last) Degree to South Park

2011-11-18T20:30:00.001-08:00

The Idiocracy has its own 6 degrees of Kevin Bacon - it's the one degree to South Park game. Every topic of any consequence or gravity boiled down to a crass South Park episode. All of history reduced to a cartoon and spoon fed to the Idiocracy so they know their exact glib lines when someone inconveniently changes the subject to reality. Irrefutable proof of the nihilism and cynicism pervasive in this transitory and totally fucked up age. The Unbearable (and yet all-too-fleeting) Lightness of Being for a generation of spoiled Westerners who desperately assume others in the Third World can die needlessly every day by the thousands for a want of a few dollars of food or medicine, but it can't happen here.

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A massive Tsunami looms on the horizon, bearing down relentlessly. A few lonely discarded voices warn from the high ground - we lonely and pathetic cassandras and pessimists, buzz-kills, really.

See the beach dwellers - fully ensconced, like shiny beached whales, sur la plage. What is that in the distance anyway? Is that a massive wave? "...let's surf - I'm not afraid to surf this place - we'll surf this whole fucking place !"

Occupy Wall Street? What do those loser bums want anyway? Fuck all of them. Don't they know there is a new episode of Dancing with the Lost Star of the Modern American Breaking Bad Family Idol?

I am sure those doughnut plugged 50-something cops getting-ready-to-retire will take care of those hippies and their PTSD soldier buddies. What? Another 50,000 20-somethings coming back from Iraq ? Time to dial up a new war up in here.

9 Large Pizzas with 9 Toppings for $9 dollars ! Vote for me. I can fix all of this...

FULL RETARD

2011-11-11T09:31:00.001-08:00

Republican Debate

Candidate 1: "When I get into office, I am going to cut spending and implement a flat tax, because I feel that the 1% who run this country (and finance my campaign) are paying too large a share of the tax burden. We need to get the 50% of free-loading Americans (i.e. the ones whose jobs we outsourced), to start paying their fair share. [TREMENDOUS APPLAUSE FROM ASSEMBLED IDIOCRACY]

Candidate 2: "That's nothing. When I get into office, I am going to cut taxes and eliminate three Government departments - I just can't remember which ones...I am pretty sure one of them is Education..."
[TREMENDOUS APPLAUSE FROM ASSEMBLED IDIOCRACY]

Ron Paul: "That's nothing. I will eliminate five departments in the Federal Government, abolish the Federal Reserve and restore the Gold Standard. Eventually I will eliminate the entire Federal Government - at which time I will set up my one-man office in the parking lot at WalMart".
"Folks, I would sincerely like to implement a more effective and efficient Federal Government, but my ideology prevents me from believing that such a thing even exists".
[TREMENDOUS APPLAUSE FROM ASSEMBLED IDIOCRACY]

Candidate 4: "That's nothing. I have been in government for twenty years and I was on the 315 House Subcommittees aimed at reducing regulation, cutting taxes, and downsizing government. It all went nowhere of course, but it was a super duper experience and qualifies me to be the next bullshit-artist in chief."
[TREMENDOUS APPLAUSE FROM ASSEMBLED IDIOCRACY]

Candidate 5: "I am a pizza maker and I promise to reduce all taxes to 9% across the board. I also promise 9 toppings on 9 large pizzas for 9 dollars" [TREMENDOUS APPLAUSE FROM ASSEMBLED IDIOCRACY]

Candidate 6: "That's nothing. I will reduce all taxes to 0% which will free up the economy to grow, grow, grow which will eventually increase tax revenues back above where they are currently. It worked for Reagan, and it can work again !"
[TREMENDOUS APPLAUSE FROM THE IDIOCRACY].

Candidate 7: "As you can clearly ascertain, I am not anything like these tea party nut jobs. I am the quintessential Wall Street Insider. I made my fortune in Private Equity disemboweling American companies and selling their carcasses to foreigners. Unbeknownst to you, I was already handed the Repulican nomination by my 1% Associates who run this country, during a private meeting last year. After all, I can raise more money with one phone call, than the rest of these morons can raise in a year. My assignment is to endure this charade for the next few months, to propagate the illusion of democracy for the benefit of the Idiocracy. Short of finding pictures of me partying with Jerry Sandusky, thanks to the odd jobs here on stage, I can't lose this nomination."
[CONFUSED APPLAUSE FROM THE IDIOCRACY].

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Hello, this is President Barack Obama: "Like these perma-smiliing salesmen, I was elected by making a lot of promises I knew would never see the light of day. When I got to Washington things were even more fucked up than I could have imagined. As a result, I have continued to propagate all of George Bush's moronic policies, because the Special Interest groups who run the U.S. won't allow me to do otherwise. Any time I try to do anything, I am branded a dangerous radical and Faux News starts looking into my immigration status. I eventually implemented a Medical Care bill which was the most bloated and bastardized piece of legislation ever rammed through Congress- which is no small feat ! Unfortunately, I have more than used up all of the "Change/Hope" political capital that got me elected, so here I am a sitting duck for this coming year as the Republicans decide which Simple Jack will take me out in the next election. Actually, I was recently told by my sponsors that they now favour their other candidate Mitt Romney over me, even though I have done everything they have asked me to do...after all, the new Medical Care bill is going to make the Insurance companies a ton of money.

Let me finish by saying God Bless America (because if I don't I will be branded an Islamist atheist)".

Depression 2.0

2011-11-06T18:35:00.000-08:00

Time for a reality check on my original Depression prediction to see where we are relative to the various factors I argued pointed to unavoidable depression. Granted, the full scale depression I predicted is taking longer to manifest itself than I had guessed at the time, but nevertheless, the overall fundamentals continue to deteriorate, not withstanding the unprecedented levels of government intervention in the economy. In other words, reality is rapidly catching up with delusion and will soon take the lead, obviating the need for blogs like this one to keep reiterating the undeniable.

My original list of factors borrowed heavily from Paul Kennedy's Rise and Fall of the Great Powers, which was published over 20 years ago and is the quintessential guide book for how empires "change" over time. I also added some contemporary factors:

1) Peak Debt:
My original post discussed the unprecedented overall debt levels and cited the subprime crisis which was yesterday's version of today's sovereign debt crisis. And while the subprime debt crisis was widely discussed and analyzed well before the Lehman collapse in 2008, clearly that knowledge did not prevent the inevitable crash from occurring. Fast forward to today and in addition to still having near-record high levels of household debt, sovereign debt has also reached similarly insane proportions due to two well known factors 1) the global bailouts of the lenders/banks 2) massive fiscal deficits which are still propping up global economies and propagating the illusion of solvency. And so while we are all getting tired of the Greek debt drama (pun intended), the reality is that Greece is only somewhat ahead of the curve in its debt problem than most Western nations which have similar or in some cases higher levels of debt and/or deficit. Every time I turn on CNBC (before can hit mute), and hear stunted infotainers deriding the profligate Europeans, I just have to laugh at the hubris of it all. Be patient ! Every dog will have it's day. Actually, this guy said it best.

2) Real Estate Meltdown
Been there done that. The only major countries that have yet to experience a full fledged real estate meltdown are China, Canada and Australia. No surprise, these countries are all inextricably linked via their trades ties and more specifically commodities - Australia and Canada being two of the world's largest commodities producers, and China being the world's largest commodity consumer. Throughout China's long economic expansion, the Chinese have traded investments in real estate in exchange for commodities - which matches precisely the story in Canada and Aussie, where the marginal real estate buyer is Asian. So unlike ROW (the Rest of the World), after the 2008 meltdown, citizens in these 3 countries continued to over-invest in real estate under the general presumption that while real estate can collapse in every other part of the world, "it can't happen here". Unfortunately, I can't have sympathy for my Canadian brethren who apparently eschew reality for realty.

3) China Trade aka. Mercantilism aka. "Beggar thy Neighbour" policy
This is actually the most egregious aspect of this ongoing fiasco and the one that will have the most lasting deleterious impact on the American economy, of all these factors listed. As I have reiterated many times, the U.S. didn't just outsource its jobs, it outsourced entire industries and the associated knowledge and expertise. Intellectual capital and excellence in engineering and manufacturing does not manifest itself overnight - it accumulates over decades. And yet this current generation sold it off to Asia in exchange for what will amount to some short-term consumption loans. Some now say that the U.S. is not good at manufacturing and should not try to compete due to cost disadvantages. This is a loser's mentality. Japan and Germany both have structurally higher wage costs than the U.S. and they still compete very successfully in manufacturing. Ultimately, the American 1%ers of the day decided it was cheaper and much more profitable (short-term) to liquidate the manufacturing sector and hand the keys to Asia; meanwhile, the corrupt and addled policy-makers and economists who should have known better, looked the other way, or even worse endorsed the strategy.

Have I reiterated the "wisdom" of borrowing from the Chinese to build weapon systems designed to fight the Chinese? That was my point in this posting. Who is the Simple Jack at the Pentagon war gaming that strategy? I think they need to get together with the accounting department. Clearly the Chinese have that scenario covered - it's called stop buying U.S. dollars and watch the U.S. economy go tits up for good. No need to launch one missile, just wait for the Idiocracy to go into Clockwork Orange mode.

4) Energy Shortage
Not much to add here, other than to reiterate the obvious that relatively cheap and abundant energy is paramount to economic growth and vitality. With each passing day, the U.S. surrenders more control of its energy supply to unstable regimes in the Middle East, and for all that, even now the U.S. is not one step closer to adopting a coherent long term plan for reducing its dependence on ever-dwindling and more expensive fossil fuels. It's been 40 years since the U.S. became a net importer of energy - and still no plan ! Major strategic mistake. Picture having to negotiate with the Taliban one day to buy oil...

5) Financial Derivatives/Hedge Funds/High Frequency Trading - All that Crap
No change here. Still the tail wagging the dog, as Wall Street's financial WMDs continue to dictate terms to the global economy. Economically it's said to be a zero sum game (my loss is your gain), but it's actually a massive lesion on the world economy, one that leaks tens of billions of bonus profits for the privileged few rent seekers who command insider access. Worse yet, it's a massively leveraged out-of-control latent catastrophe that should have been dismantled in 2008, but has since been allowed to continue to grow in size and complexity. The Federal Reserve went all in during 2008/2009 to save the Machine, and in doing so, squandered their assets and their credibility, so who will save the system this time?

6) Fiscal and Monetary Policy - "this one goes to 11"
What can I say about a plan to borrow our way out of a debt crisis? We've had 0% interest rates for three years. Who exactly is the marginal buyer at these rates? Is it someone who just came out of a fucking coma for three years and now wants a new Suburban? How about some more QE (printed money) Bennie? What round are we on - is it QE3? ..I've lost track now. How about we just jump to QE11, I am sure that will be 8 notches better...

And on the fiscal side, what are we at: borrowing ~40% of the U.S. federal budget now? Who are we fooling at this point. Let's forget about taxes, because apparently paying $.60 on the dollar is too much for Republicans. Let's cut to the chase and borrow the Fully Monty !

At $1.3 trillion, the current U.S. deficit is enough to create 13 million new jobs each paying $100k/year. And yet, for all that, the number of new jobs added in October was a mere 88k ! Fiscal policy is DOA - no return on investment.

On a related note, we hear all the time that Wall Street paid back its bailout money...really? That is pure bullshit of course. The trillions in QE money used to juice the stock market, is still out there and sitting on the Fed's balance sheet. The likelihood of that money ever getting paid back is 0. And the $4.5 trillion in deficits that have stacked up since the 2008 meltdown? Never getting paid back. Who benefited from all of that deficit spending? As indicated above, wages and jobs are still well below 2007 levels. Corporate profits - ALL TIME HIGH BABY !!! Now, what do those hippy Occupy Wall Street types want again?

7) Complacency and Mass Delusion - Never go Full Retard...
Ah yes, the Idiocracy, my favourite subject. Here we are, every other TV show is now a cartoon - not targeted at kids mind you, but for Xbox addled Boy-men living in their parents basement and wondering what they will be when they grow up. Just the thought of my grandfather in his middle age watching a cartoon is unthinkable and ludicrous.

Ultimately successful countries unravel and fail because the population at large becomes overfed and complacent and can no longer stand to delay consumption gratification to make long term investments in infrastructure, education and R&D. That's the ultimate root cause of this fiasco and the root cause of every once-great nation that has failed.

The Last Bull Market

2011-10-29T21:39:00.000-07:00

According to Jim Cramer, there is always a bull market in something, somewhere. Instinctively, I typically hew to the polar opposite view from Cramer, but in this case I have to agree, we are in the mother-of-all-bull markets - that is for BULLSHIT. 24/7 we are relentlessly bombarded by glassy-eyed bullshit purveyors who are too bought-in to the status quo to imagine anything different. let alone reality.

Meanwhile, as I mentioned in my last post, we were potentially setting up for a down up sequence, which has now played out in spades. As you can see in the chart further below, the S&P undercut its August low, bottomed out on Oct. 4th at 1075 and has since ramped ~225 points in 3 weeks or about 19% in absolute percentage terms - that's ~1800% when compounded annually. The steepest full month rally since 1974 and for its timeframe of 3 weeks, the steepest rally I can find for any time frame - in history.

But like Dotcoms, real estate, silver, gold, oil etc. etc. trees don't grow to the sky. This rally was brought to you by hedge fund short covering and by equity mutual funds desperate to make up for losses prior to their fiscal year-end which for most mutual funds is 10/31 i.e. 2 days from now. Coincidence? Sure.

Meanwhile, simmering unrest continues to spread globally and here in the U.S. with the nascent Occupy Wall Street movement, which is just a playful version of what is to come. Bloated comfort seekers across the Lamestream Media continually ask, what do these young troublemakers want anyway? It's a mystery! Here's a hint - how about a job, a future and relief from the debt burden accumulated by these self same jackasses who question the goals of these protests. Let's start there and see where that takes us. Every time I hear one of these tone deaf idiots say this movement has no goals, I just laugh and think - give it time, it's coming - reality knows where you live, Faux News Retard.

Miraculously, those looking to protect themselves financially get one more shot, right now. Although these vertical rallies have a way of convincing everyone that once again everything is A-OK. As EWI just indicated, once we start the next move down, these levels in the stock market, first reached in 1998, will not be seen again for another age - years, if not decades.

Fortunately the Treasury bond play continues to massively outperform every other asset class this year. Long-dated Treasuries as indicated by the TLT ETF exceeded even my bullish expectations, running to 125. They have since backed off to ~111 which is a 38.2% retracement of the entire run - a perfectly normal retracement level. The outsized move in Treasuries was compliments of the copious fools who had shorted Treasuries and then subsequently got their faces ripped off. Suffice to say, the Zero Hedge/Peter Schiff/Marc Faber/Nassim Taleb/Jim Rogers hyper-ventilated hyperinflation trades (long gold/emerging markets/short treasuries) are once AGAIN leading to the downside, this time for good. It's been a who's- who of fools on this crowded ship.

These were the ones who told us that the Debt Ceiling debacle would kill Treasuries - Treasuries rallied. Then the U.S. debt downgrade was going to kill Treasuries - again they rallied. Then the Fed. ending QE2 and not initiating QE3 was the death knell - so Treasuries responded by going parabolic. All of which merely augurs for a persistent and deep deflation of unprecedented proportions. Come to find out, it will be ok to gain 0% on your money when prices for everything are soon-to-be falling 10% year over year and the Euro is collapsing like a cheap tent.

Below is the current disposition of the again artificially levitated market, courtesy of short covering and the reach for end-of-year performance. Bear in mind that while most Mutual Funds have a 10/31 year-end, most hedge funds have a 12/31 year-end. So the HF 1%ers desperately need to keep this party going for another 2 months ! Anything is possible, but given the vertical disposition of the chart below, one has to assume that some HFers will be edging out of the door sooner, trying to gain advantage on the rest. Given the unspoken herding nature of the HF community, one can see early exit yielding to stampede and then to panic...

The reason for being ultra-bearish at this juncture is not short-term stock market manipulation - that's standard practice, it's the position of the stock market on a long-term basis, as indicated by technical analysis and Elliot Wave Theory. I am not a hardcore adherent of EWT, but I do find it very useful as a broad frame of reference and as way of understanding and evaluating potential scenarios - scenarios far outside the boundaries of most stock market prognosticators. For those who prefer a more fundamentals/economics based view, in any case, nothing has changed in the past 3 weeks to all of a sudden warrant or sustain higher markets. That's evident even by reading the local newspaper.

Turning to the technical/EWT set-up, what makes this situation highly critical, is the fact that market is attenuating - with each rally of shorter and shorter duration. That sets up what is called a Third Wave event i.e. alignment of third waves at all degrees of trend (timeframes). Third (out of a possible five) waves are always the strongest waves and when they align at all degrees of trend it means retracement failure at all degrees of trend. Picture the far right side of that rally pictured above, who is the marginal buyer? Those who bought the market since the March 2009 low were fat and happy until they were scorned at the August top shown above i.e. they were in the money for max. ~2.5 years and they never reached the prior 2007 high of 1575. Those who bought the most recent bottom (Oct. 4th) have been right for about 3 weeks. Technically speaking, we are making lower highs (downtrending) with each rally attempt of shorter duration. That in a nutshell is attenuation and indicates that the bulls are running out of firepower and headroom.

EWI went ALL IN bearish last Friday, and I strongly concur.

Position Accordingly.

Class Warfare - The 10,000 Day War

2011-08-28T18:00:00.000-07:00

Excellent article on the true state of affairs in America - that is, for the subset of humanity that still cares about facts, data and reality:

http://www.huffingtonpost.com/larry-womack/30-years-of-real-class-warfare_b_932279.html

I therefore don't expect the glassy-eyed Tea Party Ayn Randers to assimilate any of these facts. They are too busy buying gold, excoriating Bernanke (can't say I disagree on that point), and otherwise dreaming of the imminent return to Little House on the Prairie.

Dude, where's my Economy?

The new Tea Party vernacular is to speak in terms of the top % of Americans as the job creators v.s. all the rest of us, lowly and unworthy job holders. Unfortunately, facts and reality dictate that the country club class have destroyed far more jobs than they could ever hope to create. Capital in the digital age moves at the speed of light to wherever it can gain the highest return, totally oblivious to any notion of patriotism. Likewise plants and manufacturing facilities uproot and move from one sweatshop third world locale to another in the mere prospect of squeezing pennies from ludicrously low wages.

The true story is that through pervasive and relentless outsourcing these "job creators" liquidated the American middle class. And they didn't just outsource the jobs, they outsourced entire industries. Firms such as Nike for example, do not make shoes. They design, market and sell shoes, leaving the manufacturing to firms in other countries. It was the path of least resistance, and the path of highest profits to swap out $15/hour labour in the U.S. for $.50/hour labour in China. Likewise for just about every other manufacturing-based industry in America. The Nikes of the world take a product that costs $7 to manufacture and turn around and sell it for $70, reaping a massive windfall profit. That makes firms like Nike, Starbucks, Apple etc. mere middle-men between the ultimate producer and the ultimate consumer. In other words, instead of slapping a swoosh on the side of that shoe, the manufacturers can just slap a generic white bar on the side and cut costs by 80% - voila, welcome to the new new economy. Once the new era of consumer thrift fully takes hold and consumers balk at paying $70 for over-hyped shoes that are no better than those in the bargain bin, expect S&P profits to fall off a fucking cliff, taking millions of redundant middle management jobs along with them. And yet, the Great Bernank is constantly scratching his head, saying he does not know why so few jobs are being created - really, you have no idea? Can someone with three degrees really be so oblivious to the fact that we just outsourced the entire fucking economy?

Speaking of which, not withstanding the advice of Goldman Sachs, at last week's annual Fed Jackson Hole Circle Jerk, Bernanke capitulated to the fanatical gold bugs and Tea Partiers by foregoing the much anticipated launch of yet another round of market manipulation aka. QE3. It turns out that leading Republican candidate Rick Perry's accusing Bernanke of treason and indicating he should be hanged if he launches QE3, made the Bernank somewhat circumspect. And as I have said before, the only thing gold bugs fear more than QE3, is no QE3 i.e. without further monetization of debt their entire thesis of hyperinflation goes out the window, along with their rationale for piling into gold. Let's see how the yellow metal holds up in the face of a long overdue dollar rally...What was really odd about Friday, is that gold, stocks and Treasuries all rallied after the QE3 non-news was announced, meaning there were a lot of hedges unwinding causing traditional correlations to break down. Longer term (i.e. coming weeks), someone is going to be on the losing side of this monetary policy capitulation and (full disclosure) my money is on gold and stocks to be the real losers once the smoke clears from Friday's massive unwind.

The Elliot Waves indicated that we are likely going to see at least one more decent sized tanking in the stock market in coming weeks before we see any major counter-trend rally. That counter-trend rally, if it occurs, will be the last chance to sell stocks anywhere near recent highs, prior to all hell breaking loose.

MELTDOWN

2011-08-04T14:46:00.000-07:00

The long anticipated financial meltdown is now underway.

This leg down is Primary 3 that will draw prices well below the 2008 crash low, as depicted below (off by a few months, but the overall trend is clear):

What is truly amazing is that as you can see in the chart below, we are already well into this crash and yet the average pundit is still in denial as to whether or not we are even in a bear market ! There is also debate as to whether or not we are in recession. This is deja vu of 2008 when these moronic debates were occurring even as the markets were signalling economic collapse.

Current market position: S&P @ 1200:

Further market rationalizers tell us that we are told that the market is deeply "oversold" by several measures and due to bounce back at any time - code word for opportunity to sell on a bounce and cut their losses. Unfortunately, as we saw for the past two years, markets can remain irrational far longer than many investors can remain solvent. So while betting against the trend was a fool's game on the upside these past two years, now it's equally likely that betting against the trend will be a fool's game on the downside. What is even more amazing about this latest selloff is that the options measures of investor anxiety are still relatively sanguine. To wit, the volatility index (.VIX) is just today at the level (~32) it reached in March during the Japanese Tsunami, but well below the level (47) that it reached at last year's flash crash in May 2010. Moreover, VIX futures are almost as flat as a pancake indicating that investors expect short-term volatility but are not concerned enough to hedge longer term. Meanwhile the put/call options ratios are well below where they were in mid-June when the market had a minor sell-off !!!

Meanwhile, gold which has also been had a great rally to-date, reversed down today on massive volume, similar to the reversal in silver back in April. As I have said, these trades are "risk on" trades highly correlated to Bernanke's QE2 program which ended this past June. Speaking of QE2, it's only been a month since it ended and yet the Greedbots on Wall Street are already begging the Fed for a dose of QE3 ! And wasn't the end of QE2 (bond purchasing) going to lead to much higher interest rates and lower Treasury prices? Well, as it turns out, bonds have had their sharpest rally since 2008 these past couple of weeks - go figure.

Unfortunately, the vast majority are too young, naive or otherwise oblivious to history to understand credit deflation. Credit deflation means the money supply is shrinking as risk assets collapse and loans are liquidated via default. All risk assets denominated in dollars will eventually fall in a credit deflation scenario. Fortunately, we now know with 100% certainty that the debt ceiling self-induced fiasco was all just a political game and a giant head fake to get people to sell Treasuries. Too bad, since as expected Treasuries are turning out to be the only safe haven. Constantly I hear from the inflationists such as Ron Paul, that hyperinflation is around the corner and the U.S. is the Weimar Republic reincarnate. Unfortunately that is the uninformed view of history, because the Weimar hyperinflation occurred in 1923 - a full 5 years after the end of World War 1. And what conditions transpired in the intervening 5 years? Crushing debt-induced deflation - as the reparation conditions from the Versailles Treaty decimated the economy. In other words, Weimar hyperinflation wasn't the problem, it was the solution, because it allowed the currency to inflate relative to the fixed cost of the debt, it also induced the Allies to renegotiate the terms of the reparations. Not to say I welcome hyperinflation, only to say that even the Austrian School economists who are the ultimate advocates of hard money admit that:

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

Yet, derided as the "boy who cried wolf", us "perma bears" have repeated our warnings often enough that the average comfort seeking denialist has convinced himself that nothing untoward can happen - certainly nowhere near as bad as 2008 which is constantly labelled a "once in a lifetime event". They are happy to assume that because we doomsayers have been wrong so far, that we will never be right. Which explains a lot as to why no one predicted the intensity of this selloff and more to the point why no one is panicking...yet.

Moral Depravity

2011-07-21T20:43:00.000-07:00

It's hard in words to depict the total moral depravity of Western Society at this juncture.

Daily now we are bombarded with the faux angst surrounding the Democratic/Republican self-imposed cluster fuck over the debt ceiling. This debate is so pointless that it makes every politician involved look foolish, including Ron Paul. This is not about taxes or even fiscal responsibility - the government already borrows almost half its annual budget ! Basic math indicates not one dime of debt will ever get paid back. There is no point whatsoever in defaulting on any spending obligation when interest rates on U.S. debt are at 3% (i.e. ridiculously low by historical standards). No one involved in this, including the Tea Party hypocrites is willing to give up the smallest amount of spending or contribute any additional taxes, let alone give up 10% of GDP or touch Social Security, Medicare or Defence.

Meanwhile, two totally unrelated articles appeared this week in the Economist, illustrating the stark dichotomy facing various constituents in the have/have not economy. These two scenarios are so bizarrely incongruous, that one can hardly believe these two scenarios pertain to the same country:

The one article focused on the ongoing fiasco of the most expensive military project in world history.

Key facts:

1) This fighter was intended to be low cost

2) The project is 6 years late

3) The U.S. is planning to buy 2,443 at a cost of $382 billion i.e. $156 million apiece

4) The long-term cost of supporting the aircraft will be $1 trillion

5) The plane may well be technologically obsolete only a few years after entering service !

6) It only carries 2 missiles and does not have adequate range to allow carriers to standoff at safe distance from latest generation Chinese surface-to-surface missiles

I have no doubt that there are many ageing Cold Warriors who believe that having the latest and greatest fighter jet is a sign of strength and military prowess. Unfortunately, it's not, it's a sign of weakness - one that America's de facto and potential enemies will not overlook. It's weak financially, that's obvious - half of strength in warfare is strength and sustainability of resources. It's also weak with respect to the complexity and limited capabilities of the platform and it crowds out other more basic and cost effective technologies, something pointed out in the article.

Juxtapose that article with another regarding the rising use of food stamps in the same country:

1) The program costs $65 billion a year, which is less than 10% of the annual defence budget

2) It feeds 45m people per month, half of whom are children

3) Average "benefit" is $133/month

4) Many of the people on the program have exhausted their unemployment benefits and can't find a job
- There are currently 14 million "officially" unemployed (many more in reality), of which 6 million have already lost their unemployment benefits and by the end of the year a staggering 4 million more will lose their benefits.

Of course, Godless Republicans posing as Christians, want to cut the program, because it's "unsustainable", unlike a fucking Joint Strike Fighter costing $156 million/per aircraft that can be shot down with a well placed .50 caliber bullet, costing $10.

As usual, it's a false dilemma, debated by elitist fools, because there is no long-term option to not feed the poor and impoverished. History dictates that you either give them what they need, or they rise up and take what they want.

Batten down the hatches.

Reality Check 2011

2011-07-14T18:18:00.000-07:00

(Barely) time for one more reality check.

The days of extend and pretend are dwindling, with the point of recognition near at hand. Peak Debt and Peak Stupidity are reaching their apex at the exact same time, although I believe Peak Stupidity will reinflate itself rather quickly and soar to all new highs as the Idiocracy goes into Clockwork Orange meltdown mode. As for Peak Debt, when that ends, it will mark the end of borrowing and lending for generations.

If you ask "when" I say who knows exactly, but tomorrow is as good a time as any. Maybe we play charades for more weeks and months, but of this I am certain - 99.99% of people alive today will be overwhelmingly affected by what happens next. So, unless you are someone who is 100 years old and on life support, then you are in the fallout zone.

So while the Idiocrats play parlour games with the debt ceiling, it's time to make an honest assessment of the magnitude of the economic crater that is about to be created.

To be sure, this is no game, the vast majority of Americans (and Westerners in general), will lose their job, their house and their retirement savings all at the same time.

My central thesis has been, and continues to be that the economy is only now supported by overwhelmingly MASSIVE and unprecedented doses of Fiscal and Monetary policy. Moreover, both these policies are running out of jet fuel and are now running on fumes, which means the spaceship U.S. economy is about to fall back to earth.

On the monetary side, monetary policy is still being applied at near full throttle with interest rates at 0%, however there are already abundant signs that it is losing momentum i.e. the latest unemployment report, bank lending reports etc. We have reached the quintessential definition of a liquidity trap in which no one is willing to lend and no one is willing to borrow. Who would have thought that following two years of injecting almost $3 trillion of new money into the economy via two rounds of quantitative easing, that inflation would be contained? Back in the 1970s we had inflation rates in the teens at a time when Fed interest rates were much higher (less stimulatory) than they are now (at 0%), and Quantitative Easing was never even suggested, much less attempted. There was no $3 trillion of new money back then. So any thought that monetary policy is moving the needle anymore is sheer bullshit. The Fed is boxed in and can no longer encourage borrowing to solve a debt problem.

Fiscal policy meanwhile has gone totally parabolic in the past few years to $1.6m, now comprising 10% of the entire U.S. economy. It has reached ludicrous proportions that were unthinkable 8 years ago, let alone 30 years ago when the deficit first became an issue. For a glimpse into the U.S. future, cast an eye to Europe as multiple sovereigns teeter on the precipice and interest rates ratchet ever higher. No one today honestly believes that the U.S. will be saved from the same default/bankruptcy fate, yet few ponder the magnitude of the economic impact from such an event. 10% of the fucking economy ! Gone, overnight.

Life after heroin

Herein I attempt to quantify the economic impact that will result as a result of both fiscal and monetary policy failing over the course of the next few months, years:

First the baseline and assumptions - the official unemployment rate is 9.2%, while the unofficial rate is 16%, so to be conservative, I will use 10% as a baseline. I will also assume that each 1% drop in GDP, translates into roughly 1% drop in employment which is more or less consistent with past recessions, if not slightly conservative.

First take out the deficit which as indicated above equals 10% of the economy.

Now on the monetary side, imagine a run on the banks and resultant liquidity crisis culminating in a "cash only" economy in which all payments are made in cash. Credit is the lifeblood of the economy, so imagine a situation where businesses can no longer borrow to expand. Where consumers can't/won't borrow to buy a car, a fridge a house. How much will that take out of GDP? I will say very conservatively for the sake of argument, 10%, although it is likely much higher.

Now increase the savings rate, because the first thing consumers do is retrench and stop spending. Conservatively, that could take another 5% out of the economy.

All told, that equals a 25% reduction in GDP, assuming a 1:1 economic multiplier i.e. no downstream ripple effects. Generally when a $1 of income is added or subtracted exogenously to an economy, there is a multiplier effect as that dollar gets spent and then the receiver of the dollar spends it again etc.

So, under the above relatively conservative scenario, GDP is reduced by at least 25%, leading to a total unemployment of (10+25) = 35%, which definitely gets us to the no job, no house, no retirement scenario for the vast majority. Don't worry about Social Security and Medicare, they will be obliterated. This is No Country for Old Men.

Not a Game

My point in doing this exercise was not to scare the hell out of everyone, although I am sure I did. The point is that this is not a game. The consequences of this current economic fiasco will be devastating to the majority of us, in our lifetimes. Clearly the goal is to survive, not to thrive. This blog is not intended to show the way to undiminished riches while we watch neighbour chilren eating out of our garbage cans, as we stand in the comfort of our well guarded castles. There are plenty of blogs around telling us how to mint coin while everyone else is going bankrupt, however, I question the veracity of their claims let alone their motives.

And the goal here is not to plan out the next 30 years, but to literally survive the next 5 years, because for most that will be the critical make or break period of time. Those wiped out early will not "survive" economically to get to the other side of this fiasco where one could arguably begin to prosper again. The economic consequences and fallout - health, family etc. will be far too devastating.

Survival Strategies (Invest at your own risk)

There are no guaranteed safe assets at this juncture. I have written in detail about my preference for U.S. Treasuries, so I won't elaborate here, but suffice to say that during the deflationary phase, I still believe Treasuries to be the safest investment. I am not advocating a buy and hold approach to any asset class, so while Treasuries may work for a while (months? years?) at some point they will fail catastrophically. For those, who say my above default thesis is inconsistent with holding Treasuries, I say it's about a question of timing and surely making the wrong move at the wrong time could be fatal.

Holding plain hard cash is a good option, but is not viable in large quantities or to protect retirement assets and it's risky from a storage standpoint. Some amount though makes sense.

For those who want to hedge against the stock market, one must consider counter-party risk; however, a long term put option against the stock market or ETF (e.g. QQQ) can be a good way to hedge large amounts of assets. The counter-party risk of an option is the options clearinghouse (e.g. CME), not the moron who sold you the put option. Just hope that the CME does not go bust. You also need a brokerage account to trade options.

A way to hedge 401k retirement accounts is to use inverse ETFs (QID, BGZ etc.), although these reset constantly, so in back and forth volatile markets, over long periods of time you can actually lose money, even while being directionally correct. This phenomenon is called beta slippage.

A very good strategy for maintaining short exposure is to use leveraged ETFs in tandem e.g. 60% long QID (ultra short) and 40% long QLD (ultra long), this gives you 20% net double short exposure. The advantage v.s. owning 20% QID and 80% cash, is that the 60:40 strategy has convexity around the buy price meaning that gains compound positively while losses compound negatively. This is a fancy way of saying you can make a lot and only lose very little. With this strategy, you should rebalance 60:40 after big moves, otherwise you will give up much of your gains on retracements.

Same thing for buying a put option - when you are in the money, you need to sell, as bear market rallies can erase gains very quickly leaving options worthless.

As for gold, always some is advisable. The easiest way to play is buying GLD or one of the other gold ETFs.

Don't forget a multi week supply of food, as there could come a time when store shelves are empty and the supply chain breaks down; although I believe shortages will be intermittent.

Good luck, we all need it.

Fiddling While Rome Burns

2011-07-08T20:58:00.000-07:00

No surprise, today's jobs report for the month of June came in at only 18k against Wall Street expectations for jobs north of 100k. The stock market puked on the news, yet remains near multi-month highs, as the billionaire jet set continue to turn a blind eye to the total disintegration of the Middle Class. Despite all of the hyperbole though, stocks remain at levels first achieved back in January, 1999, 12 years ago. Ho hum, what's new - anyone heard from the Backstreet Boys lately?

Meanwhile, in other news, the Wizard of Bernank recently declared victory for Monetary policy and wrapped up Quantitative Easing (v2.0) as of June 30th. Unfortunately, as indicated by the punk job number, the economy is now sliding back into recession, giving lie to the assertion that "Quantitative Easing" did anything other than shaft the Middle Class, further enrich Wall Street, and otherwise propagate the illusion of bank solvency for the past two years. At this juncture, short of dropping cash from helicopters, monetary policy is essentially out of ammo and more importantly out of credibility, considering that interest rates at 0% for two years straight and two rounds of money printing have culminated in a net 18,000 new jobs for June. More than any other policy measure, Monetary Policy is the catalyst for renewed economic collapse, following 40 years of monetary expansion, leading to an accumulation of debt to 4xGDP when summed across all constituents in the U.S. economy. Mission Accomplished.

Over in fiscal policy fantasy land, the Idiocrats of the day continue to rearrange deck chairs on the Titanic as Democrats and Republicans pretend to care about the size of the debt and deficit. No one is really paying attention to this latest drama, least of all the Treasury market which is holding its own, albeit off recent highs (low interest rates), yet only slightly above historic lows in interest rates. No one really believes these prostitute politicians will stop borrowing money to pay their special interest groups, much less fuck around with Wall Street by raising the "risk free rate" which would tank the stock market and obliterate mortgage interest rates. Given that the debt ceiling has been raised 74 times since 1962, one gains some perspective around this latest theater of the absurd. Obama is toastie toast for 2012, as 18k jobs is his death knell, a la Bush Senior circa 1992. There are 7 million fewer jobs now than there were in 2007 ! That sets up an any-Republican-who-can-fog-a-mirror scenario, giving the right-wing base full leeway to turf the genteel Mitt Romney's of the field and go with a more "extreme" candidate. Think about it.

Over in Euroland things only get progressively worse, despite Greece receiving its Bailout v2.0. Reminiscent of last year, now Portugal is next in line for yet another bailout. Meanwhile credit insurance (credit default swaps) for all of the debt-impaired Euro zone nations remain at record highs, meaning the market is calling the bluff on Europe's extend and pretend bailout strategy of throwing good money after bad.

Yet, for all that, apparently we are now on the verge of a new "super bubble" . This article perfectly captures the zeitgeist of the moment, especially for the Greedbots on Wall Street. Cody admits that the economy is in shambles, current policies will be a disaster in the long run, and the average household is essentially a non-performing asset, yet dammit there is still a ton o'money to be made ! Apparently, these disconnects from reality can go on for quarters, years, ney decades! (Let's ignore the fact that there has been a disconnect from reality for years already). So this GenX former hedge fund manager says to the 2% of Americans who still have any discretionary capital available - get out there and take full advantage of this fucked up situation! Or, in his words, current conditions are "WILDLY BULLISH" for the stock market. Unfortunately, he does not elaborate on any sort of exit strategy, but that is assumed to be a detail. Nor does he quite explain how the 5th generation of iPhones will bring about the next Tech bubble a la Nasdaq 2000, but aside from that, one is to assume it's a plausible scenario...?

Unfortunately, the only bubble right now is in greed, stupidity, and denial, and yes it is the Mother of All Bubbles (MOAB).

Deflation is Dead, Long Live Deflation

2011-06-22T18:46:00.000-07:00

Today was the Federal Reserve's scheduled meeting to set interest rate policy. The meeting itself was largely a non-event i.e. interest rates will remain at 0% indefinitely - same as the past 2 years. With respect to Quantitative Easing aka. printing new money without an exit strategy, the Fed stood firm on winding down QE2 at the end of this June. Bear in mind that all of the assets that the Fed purchased during QE1 and QE2 will remain on the Fed's Balance sheet indefinitely (forever).

Much more important was the Wizard-of-Bernank's Press Release following the formal meeting, during which he stated that "we no longer have a deflation risk" (i.e. thanks to QE2).

There you have it, the ultimate capitulation - the Fed is giving in to the Tea Party Inflationist Gold Bugs who are convinced that hyperinflation is imminent. This is a political capitulation, because from an economic standpoint, by its own admission, the Fed has no clue when or if the weakening economy will recover and also admits that the Housing sector is in renewed decline ! How do they then reconcile these two view points, that the economy and key sector is weakening and yet that deflation has been averted ? It's logically impossible to maintain these two beliefs simultaneously. More importantly, in stating this position, the Fed is saying "Mission Accomplished" and hence ensuring that the extraordinary measures taken to avert deflation (QE1 and QE2) will not be repeated. This is a major nail in the coffin for the economy, for housing and for the risk markets.

Unfortunately, not withstanding the Great Wizard, the three generations since the Great Depression have forgotten the risks of too much debt and the inevitable deflationary consequences. There is absolutely no exit strategy for a debt laden economy in which total debt has reached a multiple of GDP, as it has for most of the Western nations (U.S., Canada, Europe, Japan etc.), other than via liquidation, bankruptcy, foreclosure and default. All of our accumulated debt represents years of inflated consumption and hence inflated GDP giving us all a sense of financial well being that is totally unsustainable. And of course, beyond Peak Credit at the point of recognition, the economy will revert back to its sustainable level which will be many percentage points lower than it was at the apex of spending and debt accumulation. Adding in the devastating effects of outsourcing and the liquidation of locally owned businesses, and any transition strategy becomes even more unattainable.

Up until now, all Central Bank machinations - interest rate manipulations, various lending programs, asset-buying programs etc. have had one goal which was to save the credit markets and prevent lenders from pulling back from the markets. However, the global credit market is roughly $50 trillion in magnitude and therefore well beyond the scope of any Central Bank to manipulate indefinitely.

In the age of "Wrong is Right and Right is Wrong", therefore, we need to invert the Wizard-of-Bernank's statement to understand its true meaning, that deflation has not been averted, and is in fact already underway.

Zero Clue

2011-06-08T06:43:00.000-07:00

With each passing day, more and more news sources and blogs become subjectively biased. I blame Google Ad Sense, which allows any blogger to morph into an ideological whore in the pursuit of the almighty dollar. The placement of ads by Google is linked to the content of the blog thereby giving incentive to increase readership and more importantly to concentrate readership on a specific theme or topic that can be milked for all it's worth.

I have a serious issue with reading various blogs and news sources where they advocate one type of investment in their purportedly objective posts, while displaying ads for the same investment all throughout their blog. Not so long ago, and for the time before that (i.e. the past 5,000 years), that would be deemed unambiguous corruption.

I have been an avid reader of Zero Hedge, but I have found their hysterical, obsessive coverage of the silver and gold markets - both into and after this latest spike - to be very unseemly and borderline delusional. Of course, there have been myriad posts decrying the great government conspiracy to keep silver prices down. ZH claims that the reason why silver futures exchanges raised margin requirements multiple times during silver's parabolic rise, was to force speculators (i.e. their customers) out of the market. What ZH never mentions is that even after having raised margin requirements all those times, the inherent maximum leverage ratio is still 12:1 ! Yes, you read that right, for every dollar you put down, you can control $12 in silver. Contrast that to the stock market where maximum leverage on the best stocks is ~4:1. Consider that at 12:1 leverage, a mere 8% move in silver wipes out your equity in your position. And yet, by ZH reckoning despite silver prices increasing 160% from last August through this May, it was a government conspiracy that prompted exchanges to protect exchange capital (which is what is at stake when these dumbfuck speculators blow themselves up), from a surely unwarranted if not unthinkable decline of 8%...i.e. this entire line of thinking is denialism and bullshit at its very best.

Clearly, while I have railed away frequently at the age 55+ Baby Boomer comfort seekers, for having led us to this unavoidable economic cliff, there can be no doubt that their GenX progeny exhibit equal if not far greater proclivity towards economic prostitution. Ironically, Zero Hedge passes itself off as the anti-establishment news source, while at the same time finding its own way of selling out its own ideals.

As indicated above, this type of conflict of interest can lead to some very convoluted and delusional stances on issues. Take the Quantitative Easing programs as another example. With the wind down of QE2 imminent (mid-June), inquiring minds want to know whether or not to expect a QE3. Not withstanding the Wizard-of-Bernank's assertions, the unimpeachable data indicate 100% correlation between the implementation of QE2 and the levitation of investement assets throughout the past year. (Side message for Bernank: You don't need a degree in Biology to know shit stinks nor a PHd in Economics to see asset correlation). Back to the topic at hand: how then can one trust a blogger's opinion on this subject (i.e. probability and impacts of QE3) in a situation where their professed ideological leanings are anti-QE3, yet their financial incentives are pro QE3? Therefore, not surprisingly, Zero Hedge's position on QE3 is that (1) it is inevitable (2) it will obviously benefit silver (3) it's morally wrong ! In other words, the trifecta - Readers of ZH can not only expect to be made extremely rich from their silver investments, they will have the schadenfreude of watching their clueless neighbours bankrupted by hyperinflation, and all the while feel morally superior for having been anti-government and anti deficit !!!

Why do I think that this situation is not going to turn out quite as swimmingly as these neo-Comfort Seekers masquerading as bad asses, seem to conclude ?

Clearly the XBox-addled, South-Park watching GenX Boy-men have picked up the mantle of Idiocratic leadership from the prior generation and are leading us full steam ahead into anarchic oblivion.

My stance on QE3 and where we go next is this:

1) A hard financial crash is still imminent which will put all talk of deficits on the back burner, indefinitely. The crash will wipe out all risk assets - stocks, commodities, high risk bonds

2) After a crash, QE3+ is likely inevitable, but each iteration of "QE" will have less and less economic and markets impact, and the ultimate effect will be to buy up excess Treasuries and keep the Government (aka. Social Security, Medicare, Military Industrial Complex) running

3) Despite the U.S. government's de facto insolvency - which has apparent for some time now - U.S. Treasuries will be the only liquid safe haven through the impending deflationary era. Recent political statements threatening to default on the U.S. debt are strictly political propaganda. Neither Democrats nor Republicans are willing to stop serving their Wall Street and Military Industrial Complex special interest groups which live off of the deficit. Also, no politician will go on record having voted for default which would lead to an immediate economic depresssion, as 10% or more of the economy would evaporate overnight.

DEFLATION IS INEVITABLE

Clowns to the Left, Jokers to the Right

2011-04-27T13:17:00.000-07:00

Anyone who for a moment doubts my overall Collapse thesis, is in COMPLETE denial. One need only look at the assembled corrupt morons running the U.S. these days to realize the depth of the looming abyss. The salesman-in-chief Obama spent the day running around with his birth certificate trying to prove that he really is American. And these Birther morons never stop to think of the outward impression given of a country that is hell bent on proving their own duly elected leader is a foreigner. Imagine if he were impeached for being foreign, after having served an entire term as President - there is absolutely no upside in that scenario for anyone, not even a fucking banjo playing, hill billy, slave owner. The Taliban would take one look at the U.S. and say ok, the American Idiocracy has collapsed, time to sack Rome.

Speaking of Birthers, the mere fact that Donald Trump is now the front-runner for the Republican Presidential nomination is a sad testament to the dearth of leadership talent at hand. No one has bankrupted more businesses than this self-promoting, wind bag dilettante.

As far as total incompetence and corruption, no one can beat the Federal Reserve and its bullshit-spewing Chairman, Bernanke. Today he gave a press conference during which he declared that Quantitative Easing (Monetization of Debt) has been an unmitigated success. After that, reporters threw softball questions at him, assiduously avoiding any question that would definitively prove that the Chairman is either a liar, a moron, or likely both. As proof of the success of QE2, Bernanke did not offer any benefit to the economy itself, only saying that the stock market had gone up. You mean to say that the stock market benefited from interest-free loans made available for short-term financial speculation? Who would have guessed? He also expressly denied any connection between QE2 and commodity prices - in other words the Chairman of the Federal Reserve claims no practical knowledge of supply/demand and futures arbitrage. The most mind-boggling thing the Bernank said though is that he won't raise interest rates until wages start going up i.e. He is ok with the cost of living going up, but dammit, once the Middle Class starts making more money, then the party is over !!! What a jackass. And of course everyone in the room just nodded in agreement with the Great Bernank - not one person questioned his contorted logic.

Based on their lack of basic financial literacy, one must assume that the media in this country are equally incompetent or dimwitted for not holding these corrupt Idiocrats accountable. So here are a few graphs to illustrate poignantly just how badly QE2 has damaged the real economy and the average Middle Class taxpayer.

All of these graphs illustrate the net price change since QE2 was announced in late August, 2010 including the subsequent period when it was implemented in November, 2010.

Crude Oil:

Gasoline:

Interest Rates (Including Mortages which are tied to Treasury yields)

Food:

So by his own admission, the only thing not allowed to go up in Bernanke-Land, is wages.

Monetary Policy has systematically destroyed the Middle Class, by inflating asset bubbles and encouraging debt accumulation. Case closed. Bernanke is just another Wall Street Bukkake whore, and the media are the chimps watching the show.

Geopolitical Anarchy and Strife Surging

2011-04-22T18:34:00.000-07:00

As the financial markets ratchet ever higher powered by high risk leveraged carry trades and sponsored by Fed liquidity, the real game for the moment isn't the markets or economy (yet), it's on the geopolitical side where things are really heating up. Here I thought it would take the Mother of All Crashes (MOAC) to bring on geopolitical anarchy, but now it looks like the reverse - geopolitical anarchy will spark the MOAC.

Let's see, turmoil across the Middle East - most notably Yemen, Bahrain, Syria. The Palestinians and Israel are going at it again - ok, that's not really news. Let's not forget Iraq and Afghanistan, though they seldom appear in the news anymore (Mission Accomplished). And yet, 2010 was the bloodiest year in the past decade in Afghanistan. In a sign of how the geopolitical deck is getting reshuffled, Iran just sent warships through the Suez Canal for the first time in 30 years, to rendezvous in Syria.

North Africa has seen major uprisings and "regime change" in Tunisia, Algeria, Egypt and of course Libya.

Nuclear armed Pakistan is an UNMITIGATED DISASTER and arguably the most dangerous country on the planet. An estimated 30,000 people have died in the past four years due to terrorism. That's the equivalent of ten 9/11s for that country...

What's going on with North Korea these days? They shelled South Korea last Fall but lately they've been so quiet...

Today we can add in Chinese food riots, blocking Shanghai's main shipping port...

Mexico has devolved into an ultra-violent narco-state with new victims and killing fields springing up daily.

Japan, amazingly, despite its triple disaster, seems to be calm, cool and collected for the moment. As much as I respect the Japanese for their stoicism, I think in some ways they are too complacent, as the handling of this nuclear disaster has been an unmitigated fiasco. No surprise, the Paid-to-be-Optimistic Industry "experts" have been consistently wrong in underestimating the severity of the crisis. I can't imagine what it's like to live in Tokyo only 250km from four out-of-control nuclear reactors. Comfort Seekers, no less than 8,800 km away in California, were shitting their pants and loading up on iodine. Unfortunately, the stoic Japanese are like frogs in boiling water, and as the British would say, the water is "hotting up".

I know, there are plenty of other skirmishes going on in other parts of the world, but these are the highlights. Taken in isolation, any one of these issues, might not be so bad, however, what we are witnessing in real time is the inevitable global trend towards increasing anarchy and strife as the Globalized Ponzi Scheme begins to unravel.

Unfortunately, most of these peoples and countries vying for regime change have no experience with implementing or maintaining a stable democracy and its corresponding institutions. Which likely means many will be soon overrun by military strongmen, religious fanatics, violent anarchists or some Frankenstein's hybrid of all three.

The interconnected globalized supply chain has only made this geopolitical dry tinder box that much more lethal. It used to be that food supply and distribution were localized and jobs were less specialized - most people had a variety of skills that were conducive to basic survival. Not any more. It's hard to imagine how the average urban/suburban dweller will deal with multi-day, multi-week potential disruptions in the food supply.

Despite the Idiocracy's prevailing sentiment of oblivious complacency ("where's the remote?"), we have entered the most dangerous time in human history. But you don't have to take my word for it, because the signs are everywhere. Lest we think our policy-makers can handle what is coming, one need only recall the anarchy that ensued after Hurricane Katrina and then magnify by 1000.

Humpty Dumpty - Reality Delayed, Not Denied

2011-04-20T07:00:00.000-07:00

Via Quantitative Easing (Monetization of Debt) the Federal Reserve has continued to delay the inevitable Deflationary Collapse. Every week, the Fed enters the market to buy Treasury bonds and thereby incentivize speculators to take more short-term risk. Bernanke is the prototypical Baby Boomer - willing to propagate any mechanism of instant gratification, regardless of longer-term consequences and inevitable consequences.

Welcome to the Hotel California

Similar to the Nasdaq in 2000, Housing in 2005 and Commodities in 2007, the additional Fed liquidity is funding speculation, which by definition disconnects prices from their underlying fundamentals. Any time the price of an asset, financial or tangible is inflated beyond its intrinsic value, then the day of price "re-adjustment" becomes inevitable. The Fed has absolutely no exit strategy for all of this liquidity. When the inevitable moment arrives when the last fool has bought the last share, then everyone will be exiting out the same door at the same time in a stampede to take "Risk Off". Hedge funds don't care, because their incentive is to take risk with other people's money. They don't get paid to sit in "cash" earning 0% interest.

Echo Bubble

The latest manifestation of speculation is in precious metals - gold and silver - as gold is at a historic high and as I write, silver is closing in on its $50 all time high (~$44 currently). Some commodities have also hit new all time highs (e.g. cotton), but most are below their 2008 highs, when they were also driven by speculation and loose monetary policy. Amazingly, crude oil (WTI) is still well below its 2008 high of $147/barrel despite spreading unrest in the Middle East and ever-tightening supply/demand dynamics that become progressively worse over time. Last week, the Saudis announced they are cutting oil output and the price of oil DROPPED on the news - showing the huge disconnect between supply/demand fundamentals. Essentially, the Saudis were calling the market's bluff and the market folded. i.e. due to futures arbitrage there is a tsunami of crude waiting to come onto the spot market. Of course stocks (S&P 500), in their own mini echo bubble - and despite all of the CNBS hyperbole, are still only at prices first crossed 12 years ago back in April 1999.

Deja Vu

We already know how this all ends, because we've been through several iterations. The cycle of stupidity is repeating in an ever-tightening noose - each iteration shorter and shorter in duration.

Current events are eerily similar to the events leading up to the 2007 market peak and 2008 crash.

Back then, I said that the inevitable credit/price deflation was temporarily pre-empted by a bout of stagflation. Then as now, Federal Reserve machinations had caused a spike in commodities and interest rates that was strangling the Middle Class:

"It seems that my Liquidity Trap scenario has already been preempted by a transitory Stagflation scenario, which has rendered the Fed's latest round of rate cuts impotent..."

...

"These higher borrowing costs in combination with higher costs for food, energy, clothing, medicine, tuition...i.e. everything, is putting the squeeze on already highly leveraged consumers."

...
"As a post script, I would add, don't worry about this recent bout of stagflation. The deflationary spiral will soon enough obliterate commodities and any other bloated remnants of the great credit bubble."

Hindsight being 20/20, we now know the economy was already well into recession. We also know that inflation/stagflation was as indicated, very much transitory soon to be followed by the hyper-deflationary 2008 credit collapse.

I expect the exact same sequence of events this time around, except the Fed will not be able to re-instantiate the illusion of solvency i.e. banks and brokerages will be obliterated with no attendant bailouts.

Road Map Revisited

A few months ago I published my roadmap for Deflationary collapse. This model is still very much intact. Below is an updated version showing our progress to date we are at step (3), as interest rates have indeed risen, albeit nowhere near the extent to which one would have expected:

So the next likely set of events is a wave of sovereign defaults, as interest rates across Europe continue to rise, increasing the debt burden on struggling economies (Greece, Ireland, Portugal etc.). This wave of defaults will make 2008's credit crisis seem like a picnic.

Contrary to my prior concerns, I now see the prospects for an outright U.S. debt default to be essentially zero. These newly minted Tea Party politicians have now proven they cannot even cut $60 billion out of a $3.7 trillion budget i.e. a mere 1.6% ! Outright default means foregoing that portion of the budget (~$1 trillion) funded by the deficit i.e. 30%. How the hell are these politicians going to part with 30% of their beloved Special Interest feed bag (aka. budget) when they can't even scrape together 1.6%?
All of this budget hand wringing is strictly political posturing. The continued Fiscal Stimulus paired with Quantitative Easing is in place for the foreseeable future, especially when the "Big One" takes us back into the realm of Extreme Deflation, as indicated on the roadmap above.

Threading the needle

There are NO 100% SAFE INVESTMENTS at this juncture. There is no guaranteed store of value. The dollar as we know is worthless paper that can be printed at will. Gold and silver have whatever value the next fool is willing to pay for them - they have no intrinsic value or utility (silver has some industrial use, but not enough to justify current valuations). I see silver and gold being the new Nasdaq, circa 2000 i.e. we don't know when they will crash, only that they WILL crash and that most greed-addled speculators will lose their money. If/when hyperinflation becomes a true concern, then gold and silver will be key assets for wealth preservation, however, per the model above, we first need to dispense with all of this debt (via credit deflation) because it is weighing down the economy and making sustained hyperinflation essentially impossible. Farm land, assuming you know how to farm (I don't), has perhaps the best enduring value, but that does not mean its price can't fluctuate wildly, or that you want all of your money tied up in an illiquid asset, or that you want to live in the sticks surrounded by demented hillbilly Militia Men.

Treasuries are the nearest form of cash short of dollars buried in your backyard
Treasuries which also can be printed in seemingly "infinite" supply are still the most liquid investment, and in a credit deflation, liquidity and nimbleness will be critical. From an institutional standpoint, U.S. treasuries are still the only viable safe investment. Institutions cannot "go to cash", because taking $400 at a time from an ATM machine is not an option. Most people who think they are "in cash" in their retirement accounts are actually holding Money Market funds which consist of a variety of short-term credit instruments, many of which have inherent, if not acknowledged, default risk. There is no option to hold physical cash in a brokerage account i.e. no stash of dollars sitting in a vault with your name on them.

Full Retard

2011-03-08T19:11:00.000-08:00

We are now going Full Retard across the board - the economy, the ecology, science, geopolitics - all in...

The epidemic of comfort-seeking denialism continues to spread out of control. Forget about silver, gold and oil, the market for denialism and bullshit is levitating to the sky and beyond. Amazingly, the purveyors of denialism cover the socioeconomic spectrum - from the "blue haired" ladies of conservative lore, to the 35 year old Xbox addled boy-men, too soft to face their own pathetic circumstances, much less anything going on around them. And my favorite variant- the self-consumed Baby Boomer nihilists that come in two equally repugnant flavours: the drug addled hippy turned limousine liberal or the drug addled Born Again Neocon hypocrite - take your pick. Even more frightening, is the all too common occurrence of the over-educated moron - people with not one but two or three degrees, who despite (or as a result of) their lofty education, can't seem to find their ass with both hands. I guess this list covers about all of us...

Too many Westerners live in a fuzzy cocoon, insulated from the harsh everyday reality facing the majority on this planet. A cocoon built wholly upon illusion and temporary circumstance, propagated solely by wishful thinking and sponsored by the dying vestiges of a once strong economy; an economy now in final liquidation by a generation of salesmen.

"You want the truth? You can't handle the truth"

The greatest irony is the fact that never before in the history of mankind have we had so much information and data at our disposal. The advent of the internet and the digital age has put unprecedented volumes of information at our fingertips, far beyond what any other society has enjoyed. Clearly, it's not just the quantity of data that matters, but also the quality of data and the way in which that data is processed.

In commonsense terms, the progression of usable intelligence requires that facts and data become constantly refined into ever greater quality. The first step is the distillation of various facts and data into knowledge. From knowledge, judgement is required to appropriately discern possibility from probability. Finally, discipline is needed to take what is learned and put it into practice.

The weak link in this daisy chain seems to be judgement. All too easily, judgement is derailed by subjectivity, greed, fear and delusion - all modes of thinking that today are commonly accepted, when they should be roundly derided. Similarly, discipline is easily derailed by laziness and inertia i.e. I know exercising is good for me, but...

According to this commonsense-based model of intelligence, discipline is the highest form of intelligence and the one least commonly attained. Without discipline, all forms of higher level theorizing are just mental masturbation - academic parlour games, in the end pointless.

Never Go Full Retard...

The range of issues currently in denial covers a broad spectrum. I don't pretend to be a scientific expert on each of these subjects and yet I am constantly amazed by the 1+1=3 conclusions drawn by many of those deemed to be experts in their field. In many cases this is a function of the direct financial incentives provided to lure scientists from reality and truth to propagate obfuscating opinions. Although, it's usually just a comfort-seeker far too afraid to stare into the abyss, so he pretends the cliff is 1000 miles away rather than next to his feet.

1) Peak Oil

Peak oil doesn't mean we will run out of oil tomorrow. It means that the marginal cost of oil will continue to rise as discoveries of oil become smaller and harder to obtain. It also means that ever-increasing demand combined with exhausted supplies will outstrip the rate of new discoveries. Eventually we will hit a wall at which there is no supply "buffer" and the price of oil will become extremely volatile. Thirdly, the supply of oil has shifted to geopolitically unstable regimes that cannot be counted on to sponsor the Western consumption-oriented fantasy propagated by low oil prices. Fourth, the cost of capital to support drilling projects that take years to develop, may not remain artificially low indefinitely.

Lastly, my primary assertion is that oil has been and continues to be under-priced. Supply of oil in today's lexicon refers to daily production rates i.e. the size of the straw. Whereas, supply with respect to pricing should take into account the reserves of oil in the ground i.e. the size of the milkshake...

2) Peak Credit

The basic notion that we can't continue to borrow our way to prosperity. In their infinite wisdom our so called leaders shifted the debt burden from the foundering financial sector to the general public (government) sector. This propagated the illusion of solvency and allowed creditors to avoid losses on their ill advised investments, shifting all losses to the Middle Class Taxpayer. One gets a sense, that should "something" untoward cause this Ponzi-based economy to come unglued again, another shifting of liabilities will not obtain politically...

3) Peak Pollution/Environmental Degradation

80 Million barrels of oil per day going into the atmosphere... Fortunately, Faux News tells me man made Climate Change is a big hoax propagated by Al Gore. Ok then, back to American Idol. Such is the level of thinking of today's average comfort-seeker, far too lazy to face their own self-inflicted personal issues (diet, health, financial etc.), let alone anything on a global scale. We as a society have become a 400 pound fat man who can't get out of his own fucking way.

On the bright side, I see Peak Oil doing battle with Global Warming to put an end to over consumption of fossil fuels - Godzilla v.s. King Kong. Of course if Peak Oil wins, it will only because we will be living in caves, fighting the Taliban with sticks and rocks, so careful what you wish for...

The cold hard reality is that our consumption oriented lifestyle enjoyed by the 20% of the world's population who are consuming 5x as much resources as the rest of the world, is coming to an end sooner rather than later, whether we can handle that fact or not.

4) Peak Military/Geopolitical Illusion of Stability

We live with the illusion of security sponsored by hundreds of global military bases, a dozen aircraft carrier groups, two ongoing wars of occupation and a military budget that at $700+ billion is more than the combined budgets of every other country on the planet !

That is all well and good, except that the return on investment from all that spending is extremely low and heading negative in terms of long-term security that we obtain i.e. The Middle East is not getting any safer these days. Moreover, that rate of expenditure is totally unsustainable. The U.S. Federal Government now borrows $.30 of every dollar it spends. Under QE2, the Federal Reserve now prints (monetizes) $.20 of those borrowed dollars. Quickly doing the Ponzi math in my head...nevermind, I was wrong, it looks like we just need to print another $.10 on the dollar and everything will be A-Fucking OK ! It just makes me wonder why the Founding Fathers of the U.S. never thought of "Quantitative Easing" (printing money) ?

5) Peak Bullshit

The endgame is Peak Bullshit and it's here big time. Objectivity is as dead as a door nail. It's bad enough when you lie to someone else, but when you start lying to yourself, it's game over man...

---------------------------------------------------------------------------------
Ironically you could argue that my above argument itself is polemic and therefore largely unsubstantiated by hard data. Granted the raving lunatic diatribe is one of my guilty pleasures, however, I feel no more moved to cite sources for the above imminent realities than to cite a scientific finding on the olfactory properties of manure when I assert that "shit stinks". Lack of valid citations are a necessary, but not sufficient condition to prove an argument false. For my part, as always, I am more than happy to let history and reality be the final arbiter. I write this blog simply as a time capsule to the future - a time when archaeologists will dig down through 10,000 feet of debris to find the remains of our collapsed civilization and wonder - "what the fuck were they thinking?".

Ship of Fools

2011-02-25T21:00:00.000-08:00

Time Tripping
Let's time travel back 25 years to when the Idiocracy was still in its infancy. In 1986, the year I graduated from High School, who would have predicted:

1) The U.S. deficit would reach over 10% of the U.S. economy WHILE the economy was deemed to be in "expansion"

Meanwhile, who would think we could find so many moron economists having the audacity to attest to an "expanding" economy while the U.S. was still borrowing 10% of said economy to maintain such illusion?

i.e. With a 2% growth rate, an honest man would have to say we are in an 8% recession saved only by the fact of massive Federal borrowing.

2) Who would predict Corporate profits would be at record highs, yet unemployment would be above 9% "officially" and much higher in reality?

In other words, all that money the Federal Government is borrowing is falling straight to the Corporate bottom line, bypassing the real economy and Middle Class entirely.

Yet, who gets stuck with the fucking tab for all that debt? The Middle Class.

3) Who would predict the U.S. would be monetizing 2/3 of its unprecedented deficit and yet interest rates on 10 year Treasury bond would still be at only 3.5% and core inflation would be quiescent.

A decent car still costs about $15-$20k. Prices of tv sets have collapsed. Housing prices are in renewed decline.

I bought a brand new Honda CRX in 1988 and paid $13k (on the road). I can go out right now and buy a new Honda Coupe starting at $15.5k!!! Not exactly what I would call heavy duty inflation, thanks to 23 years of relentless outsourcing.

i.e. the burgeoning signs of deflation are all around us, but silver/gold speculators are so blinded by greed that all we hear about is inflation. Who doesn't think this precious metals bubble isn't going to end badly, like the last dozen bubbles? i.e. when everyone finally figures out Ben Bernanke is just the fucking Wizard of Oz.

4) Who would predict the U.S. would be monetizing deficits, gold would be at an all time high, half the Middle East would be in revolutionary turmoil, the U.S. would STILL be fighting two multi-year wars in the region and yet oil while breaching $100, would be lower than it was 3 years earlier !!!

i.e. more nascent deflation. When oil rises, it's not inflationary, it's deflationary, because it sucks money out of the U.S. economy. The price of oil goes up, the price of everything else goes down.

5) Who would predict that despite all of the above, the stock market would be within a few % of a multi-year high and the "risk trade" would be on in full force?

- Well, given Wall Street's short-term oriented obsession with greed and Bernanke's QE2 feed bag still dangling in front of them, I guess we could have put even money on that one.

Half of Europe is teetering on imminent sovereign default. All it would take is for one failed debt auction to trigger investor panic and default. One default will fell the rest like dominoes: Portugal->Spain->Greece->Ireland->Italy->Hungary...etc. Wall Street is oblivious.

Speaking of stock market lunacy, Dick Arms (creator of the Arms Index/Trin) put out a great report this week at TheStreet.com discussing how the current stock market conditions are very similar to those attending the Crash of 1987 and this past April's "Flash Crash"...except that current conditions are even more precarious...

The financial panic of 2008 was a trivial event compared to what is about to come. That crisis should have been a wake up call to our dithering policy makers. And yet, in the meantime not one policy of substance has been changed. To the contrary, risks have only been amplified substantially, and shifted from the financial sector to the sovereign national level, putting the entire global economic system at risk.

-----------------------------------------------------------------------
In line with my time tripping theme, I was downloading some new iTunes music last night and came across this forgotten gem from my grad year that is most appropriate at this juncture.

This is dedicated to the late Ayn Rand and all of her godless, greed worshipping Neo Con acolytes. History will not be kind, nor will the gathering mob...

SHIP OF FOOLS [World Party]
We're setting sail
To the place on the map from which no one has ever returned
Torn by the promise of the joker and the fool
By the light of the crosses that burn
Torn by the promise of the women and the lace
And the gold and the cotton and pearls
It's the place where they keep all the darkness you meet
You sail away from the light of the world on this trip

You will pay tomorrow
You're gonna pay tomorrow
You will pay tomorrow

Save me, save me from tomorrow
I don't want to sail with this ship of fools, no no
Oh, save me, save me from tomorrow
I don't want to sail with this ship of fools, no no
I want to run and hide
Right now

Avarice and greed are gonna drive you over the endless sea
They will leave you drifting in the shallows
Drowning in the oceans of history
Travellin' the world, you're in search of no good
But I'm sure you'll build your Sodom like I knew you would
Using all the good people for your galley slaves
As your little boat struggles through the warning waves

But you will pay, you will pay tomorrow
You're gonna pay tomorrow
You're gonna pay tomorrow

Save me, save me from tomorrow
I don't want to sail with this ship of fools, no
Oh, save me, save me from tomorrow
I don't want to sail with this ship of fools, no
Where's it comin' from or where's it goin' to?
It's just a - it's just a ship of fools

All Aboard now

-------------------------------------------------------

World Party: Wallinger, Karl

Just a Wafer Thin Mint, Sir

2011-02-15T12:53:00.000-08:00

Here is an apt skit, in which John Cleese plays the role of Bernanke and Mr. Creosote plays the role of any number of Wall Street's fat cats:

http://www.youtube.com/watch?v=BlK62rjQWLk

Bottom line, the the boyz on Wall Street pulled off yet another successful bonus season, ass raping the American public.

The only question now is who will be the bagholder this time? Many a pundit thinks this rally won't end until the small investor gets sucked in for the umpteenth time this decade just in time for Wall Street to offload its merchandise in one more pump and dump.

I wouldn't be so sure about that. Except for a month here and a month there, outflows from stock mutual funds have been relatively steady since the March 2009 low. Also, that's some serious wishful thinking to believe there is a always going to be a greater fool ready to show up and buy your overpriced stock. For those playing the greater fool game, I would be careful to look in the mirror once in a while and ask if the greatest fool isn't looking you in the eye already.

Bernanke's latest Middle Class Shaft-o-Rama

Still, I acknowledge, owing to Bernanke - the greatest market manipulator in the history of the planet - the relentless stock rally continues apace as all that fresh printed QE2 money finds its way into stocks, commodities, gold and silver, while totally bypassing the real economy.

QE2 was announced in late August at the aptly named "Jackson Hole" Fed Circle Jerk. Ostensibly, the purpose of QE2 was to lower borrowing costs to allow households to further gorge themselves on debt and wrap the noose tighter around their necks. Unfortunately, that has not been the case, since from that exact date, unacknowledged by Bernanke, borrowing costs (which are abitraged to Treasury interest rates) have grown inexorably higher since that date. No surprise, the easily duped "The Economist" was along for the ride and just this week (January 1st-7th), "Proceed with caution" (page 11), tells us with straight face that the goal of QE2 was "buying bonds with newly created money in order to push down long-term interest rates and stimulate lending". Ok, so much for the marketing literature, the chart below is the reality: In red and green ("It's Christmas!") are Wall Street's goodies, i.e. the higher stock market. In purple, is Main Street's lump of coal i.e. higher interest rates (.TYX) ) (aka. Long bond)

So, for anyone with half a fucking brain or an ounce of honesty, QE2 has done the exact opposite of what it advertised for several months now i.e. raised borrowing rates since the day of inception. In fairness, QE "Quantitative Easing" is aptly named i.e. a new easing lubricant with which to shaft the Middle Class, in the name of Bernanke, Wall Street's greatest Bukkake whore, ever. I suggest "The Economist" starting printing in 4-ply, so I can wipe my ass with it and feel that I am getting something near par value. The current glossy version isn't giving me enough "traction", if you know what I mean.

Suffice to say if us little guys don't show up soon to throw what little worth we have left at this market, things could get quite interesting. You see, usually when the little guy shows up, the institutions take full advantage of increased buying volume to unload their positions - a process called distribution. It's a relatively orderly process of parcelling out a steaming turd from the big hand to many smaller hands. However, in the event the beleaguered small guy doesn't show up this time, well that would have big guys falling all over each other to get out the same door into a bidless market. Suffice to say when piranhas start turning on each other, things can get a tad bloody.

When, not If

To some, those of us who are cautious at this juncture are like the Boy Who Cried Wolf - continually sounding the same alarm. And yet, not withstanding the early warnings, when the wolf came it ate everyone. Likewise, anyone owning stocks in this artificially inflated market, attending an eroding or at best bottom-dragging economy, is either delusional or trading on the :15 minute boundary.

Booyah Skidaddy !!!

Faux News in a Nutshell

2011-01-31T10:56:00.001-08:00

News by morons, for morons:

http://www.zerohedge.com/article/adventures-cartography-fox

DEJA VU

2010-12-17T10:49:00.000-08:00

There is no better example of the complete corruption and failure of U.S. leadership, than events of the past few weeks.

Like the stock market, the cycles of decision making stupidity are attenuating. The time it takes from the inception of a bad decision until realization of the bad outcome is now becoming inescapably immediate. Obama commissioned the Bipartisan Deficit Reduction Commission and yet before the ink was dry he had already completely ignored the recommendation. Meanwhile, Republicans who still pretend to be fiscal conservatives after decades of Supply Side profligacy, by no surprise, completely ignored the same findings and fully endorsed extension of the Bush tax cuts and the additional payroll tax cut. The Commission recommended a combination of reducing spending and raising taxes. So, what did the Government do, just days later? They passed a new bill to increase spending and lower taxes !!!

Welcome to the era of the Dumbest Generation. You can't make this shit up.

All the while, European countries such as Germany, often derided in the U.S. as "socialist", have exhibited far greater fiscal discipline for the past decade and to a stark degree since the financial debacle. So much for all of the "capitalist" propaganda and hollow sloganeering by Faux News.

While other countries are taking the bitter pill and undertaking BOTH fiscal and monetary belt tightening to remove the excesses leading up to the financial crisis, the U.S. is doing the exact opposite - raising spending, lowering taxes AND increasing monetary leverage (QE2) to ensure even more hot money is in the hands of short-term speculators. What a great fucking strategy; the U.S. economic Dreamliner is losing power and crashing towards earth, so the Morons of the Day just nosed down to increase the angle of attack. Why crash small time, when you can drill a fucking crater ?

Cynics would say that the U.S. Dealers (aka. Leaders) already have figured out what I explained recently, that the U.S. is already beyond the point of no return debt-wise, so why not just party-on a while longer. So either they are morons with bad math skills, or liars who understand the gravity of the situation and are just propagating the illusion of solvency - either way, the situation is not good.

What Else is Not New?
Since Bernanke's Fed enacted QE2 in November, the program of further "easing" borrowing costs has had the exact opposite effect. Over the past 5 weeks, the 30 year mortgage rate has risen from 4.17% to 4.83%. In addition, oil prices have increased, as have food prices. Meanwhile, core CPI has been stagnant and or falling. Core CPI tracks very closely to wages. Therefore, what has happened since QE2 was launched is that wages have stagnated, whereas the real cost of living has increased across every major dimension - food, energy and housing. This is by far the worst of all possible worlds for the U.S. economy (outside of Wall Street). This is Deja Vu, because we had the exact same scenario back in early 2008, as I wrote here. The Fed back then was a on a rate cutting bonanza to bailout banks and fund speculators all at the expense of average Americans. We all remember how that worked out.

Market Update
1)Prechter & Co got back on board the all-out bearish bus this week with the latest EWT. (After a brief flirt with bullish lunacy...)
2) The Arms Index (Trin), reached its most overbought reading in its 50 year history, despite the market still being 20% below its all time peak and unemployment at 10% !!!
3) Silver and Gold look to have put in a solid reversal on extremely high volume.
4) The Euro is impulsing lower.
5) Long-term treasury bonds look to have put in a decent bottom on a five wave impulse and massive volume.
6) Various other sentiment indicators ISEE/II/AAII at multi-year extremes; mutual fund cash balances at decade lows etc...

So...the risk trade is slowly but surely "coming off". Let's see if the Big Money boyz make it to 12/31, bonus time this year before the wheels come off for good, it's going to be very close...

In a Nutshell

2010-12-09T10:00:00.000-08:00

Here is a guy telling it like it is:
http://www.youtube.com/watch?v=koY6kXhQDQo&feature=player_embedded

This gent raises some good points around who did and did not benefit from this ongoing fiasco. Apologists for the status quo (ardent crony capitalists, CNBS infotainers etc.) tell us that homeowners are equally responsible for having leveraged their homes to the maximum and otherwise taken too much risk.

All along these same jackass disinformers have been extolling the virtues of the (supply side) capitalist model based on incentives. So I find it a tad hypocritical to blame homeowners for taking advantage of cheap and abundantly available credit which at the height of things was shoved down their throats 24x7. No sooner did they respond to these "incentives" than the entire scheme started unravelling. In any other market, we are told that it is normal behaviour for consumers to respond to low prices by increasing their consumption i.e. the demand curve. Yet, in the case of capital demand, when the price (interest rate) was lowered substantially, we are told that households were foolish for having consumed more debt ! Is the average household now supposed to be a macroeconomic forecaster, able to predict the overall trend in housing prices and interest rates? Meanwhile, I have no doubt that the average economist has lost money via stocks or real estate during this fiasco.

Gut check. Let's review the distribution of impacts so far:

1) Government/Regulators:
Role in fiasco:
-Failure to regulate
-Easing of regulations to accomodate banksters (Glass Steagall repeal)
-Overlooking ongoing deficits and trade imbalances
Retribution: None - business as usual

2) Banksters:
Role in fiasco:
-Extension of credit to those who could not afford it;
-Outright fraud while securitizing garbage loans;
-Over-leveraging of banks
-Insider Trading on a pervasive scale
-Collapsed investment funds, leaving investors holding the bag
-Leading entire economy to brink of disaster
Retribution:
- Massive $10 trillion+ Industry bail out courtesy of Turbo Flat Tax
- Massive bonuses before, during ("retention" bonuses), and after crisis
i.e. business as usual

3) Federal Reserve:

Role in fiasco:

-Lowered interest rates to engineer bogus "recovery" and create incentives for households to borrow way beyond their means;

-Provide leverage to speculators, under-regulate banks

-Turn blind eye to securitization frauds;

-Allow banks to become "too big to fail", requiring massive taxpayer bailouts

Retribution: None. No oversight whatsoever; now via Quantitative Easing finding new ways to increase systemic leverage

4) "Irresponsible" households:
Role in fiasco: Overconsumption, overleverage on housing and other forms of debt
Retribution:
- Foreclosure/loss of personal residence
- Bankruptcy (divorce)
- Fund taxpayer bailout of banksters
- Top Ramen for Christmas dinner

Is this a great fucking system or what?

Dr. Bernanke or: How I Learned to Stop Worrying and Love the Bust

2010-12-03T16:57:00.000-08:00

This week I observed a very rare Double Top fractal at three degrees of trend. A fractal is a repeating pattern - in this case a double-top. Each of these double tops attends extreme bullish sentiment towards the stock market and an inverted head and shoulders (triple) bottom between the tops:

The graph below shows the numbered red lines indicating each double-top. Red up arrows show the head and shoulder bottoms (I only show the largest two fractal bottoms).

Extreme sentiment refers to the AAII and II sentiment surveys which are at similar extremes reached in October 2007 and April of this year. As well, the ISEE call/put ratio printed 183 yesterday, the highest level since April 15th (just prior to the top).

The below close up view of this year's action shows the (2) and (3) fractals:

To summarize, the first double-top rally (from 2003-2007) took ~5 years to reach extreme sentiment and a peak. The rally from March 2009 to April 2010 lasted just over one year and reached a similar extreme in sentiment and a market peak. The rally from the low this past August to this November's high, lasted 2.5 months, peaked, triple-bottomed earlier this week and is now straight vertical, having already again reached an extreme in sentiment.

Each rally is of shorter and shorter duration than the last yet attends the same level of investor enthusiasm. Why are investors equally bullish as October 2007 when the market is 20% lower? Why are they equally bullish as last April when the market has gone nowhere?

This effect is called attenuation, the same concept used in electrical engineering to describe a loss of signal. Or the term used in cardiology to denote the heart's pattern immediately prior to a heart attack...

By the way, for those who do not subscribe to EWI (literally or figuratively), their most recent "December Financial Forecast" sees as the most likely scenario higher prices going into year end, leading to a final top above current levels. For the most bearish of all published forecasters to have now switched from being full on bearish since April expecting the market to top out imminently, to now being bullish (at least intermediate) term, I regard that as capitulation. Maybe they will be right this time, but since they have been wrongly bearish for the better part of a year, I am not betting that they will now get it right. More likely they will be the last fools sucked in at the top, too focused on their ever-changing wave counts and ignoring all other flashing indicators including their own capitulation. Given that they alter their wave counts continuously after-the-fact, we can be confident they will be "right" eventually, that's guaranteed.

Dr. Bernanke in the house: When all you have is a hammer, everything starts to look like a nail

Meanwhile, in other news, today's jobs report was far worse than "expected". With 39,000 net new jobs created v.s. 150,000 expected and 250,000 minimum needed to offset new entrants to the labour force.

Copious disinformers still abound to support Bernanke's QE2 (Money printing) scheme, which has done nothing for the real economy to date (hence the v.2 nomenclature, soon to be 3,4,5...) Those supporting this scheme tend to be of the Wall Street ilk and thereby the primary beneficiaries of being able to borrow at 0% and lend at 4%, risk free - via the various carry trades enabled by this "policy" of basically giving out free money to select wealthy investors at the public expense. As we have seen before, all of this extra financial leverage makes for extremely spectacular busts when these carry trades are unwound.

Speaking of which, we learned this week that the Fed extended a total of $9 trillion in loans to the banks during the banking crisis - $9 fucking trillion ! Do you remember all of the hand wringing, Tea Partying, letters to Congressmen that abounded when the Treasury initiated the TARP program in Sept. 2008? Yet, for all that, the $700 billion TARP was less than 10% of what the Fed doled out - it was chump change. The Fed on the other hand, faced absolutely zero oversight or intervention while extending the U.S. balance sheet several times beyond historic levels.

2008 was a tremor, next comes the earthquake
What has the Fed done in the meantime to correct the imbalances and mal-incentives that led to the 2008 financial crisis? All they have done is to further leverage the system by inventing new ways (Quantitative Easing) to put money in the hands of leveraged speculators and thereby kicked the can a few yards down the road towards the next much larger catastrophe. The odds that the Fed can kickstart the economy and engineer a successful exit strategy by applying even more of the same easy money that caused the first crisis, is exactly fucking zero.
The Fed is run by a bunch of overeducated moronic stooges toiling feverishly at the behest of their moneyed puppetmasters on Wall Street. Harvard and the University of Chicago do not teach any courses on judgement and commonsense, which is why there are so many fucking morons in high places pissing all over themselves while the fire burns out of control.

The stock market chart below illustrates the only true beneficiaries of Monetary Policy. On the far left, Greenspan's 1% interest rate policy [June 25th, '03] (at the time, the lowest in U.S. history), that propelled the 2003 "Mission Accomplished" rally and led to the parabolic housing boom that is still negatively impacting a large number of households. On the right side, Bernanke's Moon Shot showing Stage 1 [QE1], Stage 2 [QE2] and our current juxtaposition, once again in Outer Space. Oddly, charts like this don't make me optimistic:

The other beneficiaries of Bernanke's doomed munificence are silver and gold investors, who will ride that bullet train until it crashes and burns:

So, do you feel lucky, punk?

These silver investors are seeking shelter from "inflation" even as the core CPI prints its lowest reading ever (since data collecting started in 1957). Check out this chart. Wow, that's inflation all right ! Silver investors tell us that core CPI is inaccurate and does not reflect true costs of commodities and precious metals.

Let's see, inflation is "going up", so buy silver. Silver is going up, therefore inflation is going up ! Buy more silver!

Hi Ho Silver, Away !!!!

;-)

Point of no Return

2010-11-27T07:51:00.000-08:00

This week's edition of the The Economist featured an article on Japan and its demographic (ageing) crisis.

Voodoo Economics

Not surprisingly, the article missed out on by far the most important point regarding Japan and a key point that is instructive for all nations currently running deficits. The point is that once a country starts running structural deficits to fund operating expenditures, it soon becomes mathematically and politically impossible to ever pay off the debt. Economists like to point to the ability of countries to "out grow" their debt and deficits via Supply Side Economics. A third grader is smart enough not to believe such a load of rubbish, but not so today's average economist/politician/bankster.

One can easily construct a financial model to indicate the impact to the Japanese economy were it to even attempt to start paying down its debt.

Assumptions:

- Current Federal debt at 200% of GDP (which it is)

- Average Duration of debt: 30 years (this is a VERY generous assumption)

- Average interest rate on debt: 1% (The rate on JGBs fluctuates, but is currently very low)

Now we see why it was so easy to ignore this problem in Japan for so long. With interest rates at 1%, the conventional wisdom is that "Debt Service Costs" are extremely low, so there is no harm in taking on more debt. Unfortunately for the purveyors of this "load", there is more to debt service than simply the current interest i.e. principal.

Plug the above figures into Excel and now assume that all of this debt needs to be paid off in 30 years time. In this model, we are solving for the Payment (a blend of principle + interest) i.e. the true debt service cost and the one that would have saved "The Economist" from devoting a lengthly article to evading the simple truth.

Over 30 years, as a percent of GDP, the payment is: 8% !!!

Wait, it gets worse. Obviously in order to pay down debt, a country needs to first stop accruing new debt i.e. first eliminate the annual recurring deficit. Japan's fiscal deficit for 2010? 10%

The Bottom Line for Japan:

In order for Japan to START paying down its current level of debt over a 30 year period it would have to incur a 16% hit to GDP immediately and that figure will only grow into the future. (NOTE: 2% of GDP is interest and already included in the deficit).

U.S. Example:

Variables for the U.S.:

- Current Federal debt at 100% of GDP

- Average Duration of debt: 20 years (average duration is currently 5 years, so this is very generous)

- Average interest rate on debt: 3%

- Current annualized deficit for 2010: 10%

Level of GDP that would be removed by paying off debt over 20 years:

[Ongoing debt service cost, amortized over 20 years: 6.7% of GDP]

Including 10% Deficit: ~14% (after taking out the 3% interest due to double-counting)

Keep in mind, both countries are applying unprecedented fiscal and monetary stimulus at this juncture and yet there is minimal growth in either country i.e. no sign whatsoever that either country could possibly remove the bulk of stimulus while at same time maintaining a positive economic growth rate MUCH LESS pay down a $1 of debt.

Definition of Recession is Totally Bogus
Officially, according to NBER, the U.S. is out of recession, and has been since June 2009. Of course, that is totally bogus because the "official" definition of recession does not take into account fiscal deficits, so it is meaningless. Whether, the deficit was at 0% or 10% of GDP (as it is now), the U.S. would still be deemed to be out of recession. Currently, as I write, GDP growth is running at ~2% year over year, so in reality, the true economy is running at a negative 8%. When a country can borrow 10% of its GDP and then declare that the economy is "growing" at 2%, that's the trifecta - bad math, denialism and stupidity all rolled into one.

Legacy of the Baby Boomers
That 14% represents the hole in the economy left behind by the most greed-addled, self-indulgent generation in world history. Not only are the Boomers spending the wealth inherited from their parents, they've underfunded and raided their own 401k retirement funds, bankrupted Medicare and Social Security, and on top of all that left A GAPING 14% SMOKING CRATER where the economy used to be, for their children and grandchildren to inherit.

As I have said before, GAME OVER, MAN. We just need Wall Street and the morons with the fancy degrees to wake up and smell the fucking napalm.

Roadmap for Collapse Part II

2010-11-20T13:05:00.000-08:00

In the first installment of the Roadmap, I discussed the market implications of the collapse. With this installment, I gaze further into the abyss to discuss the potential economic outcomes of the collapse. For this purpose, I created the hypothetical decision model (below).

As you see, I divided the map into three main areas: reflation (economic normalcy), deflation (price, asset, economic), hyperinflation (mainly price).

As far as assumptions, I suppose the fundamental assumption is that without Government stimulus (fiscal/monetary) the economy is not self-sustaining and therefore would quickly succumb to the deflationary forces of the total debt burden.

Therefore, the pollyanna scenario of a self-sustaining economy without ongoing fiscal and monetary intervention is not represented in this model, and I assume anyone reading this blog in the first place, gets that.

Most likely scenario: Deflation then Hyperinflation
As depicted by the blue lines and as described vividly throughout my posts, I expect another even stronger market event than the one we experienced in 2008, which would be extremely deflationary. Those who believe it would not be deflationary, forget that both oil and gold tanked during the turmoil two years ago. Where I indicate that a policy is "blocked", I mean politically blocked. Given the newly elected Republican-dominated Congress, the likelihood of either the Gov't or the Fed continuing to add "stimulus" unfettered, is highly unlikely.

As you see, I have represented a "Default" scenario under which the U.S. Gov't repudiates its debts, as a potential scenario, given the new political backdrop - a scenario I thought highly unlikely until recently. I still think that an outright default is unlikely, making the "middle scenario" of MASSIVE fiscal stimulus combined with massive monetization, essentially devolving into de facto currency printing (via FDIC payouts, stimulus checks etc.), as the most likely scenario.

Less likely scenario: "Status Quo", leading directly to Hyperinflation
This is a very popular scenario these days, causing the big run up in gold. In order to believe this chain of events, you must make certain unlikely assumptions:
1) Assumes no adverse market "event" similar to 2008, which as indicated was extremely deflationary
2) Assumes that an inevitable backup in interest rates, would itself not cause the economy to stall and the markets to collapse
3) Assumes there would be no political intervention in the current stimulus trajectory and that fiscal and monetary stimulus would continue unfettered (seems very unlikely)

Pollyanna (impossible) scenario: Self-sustaining economy and removal of all stimulus
This scenario is extremely unlikely, given:
1) Overall magnitude of Government stimulus, now baselined into GDP
2) No sign of sustainable economic growth, especially in a low/no leverage environment
3) Massive outsourcing which has caused long-term secular unemployment and removed entire industries and skillsets from the U.S. economy i.e. the unemployed have skills that are no longer in demand in the U.S.
4) Massive debt overhang that will continue to put deflationary pressure on the economy
5) Unresolved Social Security and Medicare deficits

Threading the Needle->All paths lead to hyperinflation...Eventually
While, as indicated in the model, all paths lead to hyperinflation, it could take some time to get there. Keep in mind, there are a whole lot (most) of other countries that will go bust before the U.S., which in the "short-term " will increase deflationary pressures and demand for U.S. dollars as a safe haven. Any country that does not issue debt in its own currency (i.e. entire Euro area and Eastern Europe) will highly likely default.
A U.S. default, were it to eventually occur would "collapse" the U.S. dollar - relative to what, is the question i.e. other currencies would be similarly debased. Relative to gold and silver is the likely answer. Inevitably, what is left of the already-weakened banking system would be obliterated. That part of the economy supported by borrowing and lending would be gone, along with a substantial negative economic multiplier. Residual private debts and fixed contracts would be a crushing weight on the economy and likely lead to the "Weimar" scenario of printing currency to eliminate the residual debt burden. I do not believe any Government on the planet has the will power to keep from printing its way out of a deflationary depression on the order of magnitude we will face, while confronting mass social unrest on an unprecedented scale.
Printing and distributing enough physical currency to even partially offset the amount of derivative "money" in the credit-based system, will not be a trivial ordeal...As one would expect in our Fractional Reserve Banking Model, physical currency currently represents only about 10% of the total "money supply" (M3). So imagine a world where (even temporarily) the majority of money in circulation, is eliminated i.e. a cash-only economy - the Euro too, long since having been abandoned. In this scenario, inflation would build over time, likely very slowly initially and then accelerating.

Timing is Everything
All of this is highly speculative, as the scale of monetary collapse described above will be unprecedented and accompanied by substantial geopolitical strife and domestic anarchy. Sequence is hard enough, timing is impossible to predict accurately, however, I see the overall scale of the model below in the 3-5 year range, perhaps ten years maximum. Some things will likely occur faster than expected, whereas other phases will likely drag out much longer than expected.

Invest at your Own Risk

Therefore, given all of the potential paths and scenarios, it's not at all clear how one would successfully navigate a crisis of this magnitude. Surely some amount of hard cash, gold, rice and ammunition is in order. For the time being, I still like U.S. Treasuries (all durations) here. I would also view a (large) pullback in gold as an initial buying opportunity with the goal of scaling in to a substantial position eventually...

For those in Canada, I like 3+ year duration Government of Canada bonds, which you can buy through a brokerage account (NOT Canada Savings Bonds, which are totally illiquid - can't be traded).

Waiting for Godot, in the Pet Sematary

2010-11-19T20:59:00.000-08:00

"Clowns to the left, and jokers to the right...Stuck in the Middle with you"- Stealers Wheel

Ho Hum, just another week in the markets:

- Just another European economy on the brink of insolvency
- Just another brawl between Central Bankers regarding Mercantilist policies
- Yet again, the same fucktard Fed, excoriating U.S. Gov't deficits, while at the same time financing these deficits by printing more U.S. dollars. That is like a crack dealer telling his customer he has a drug problem.
- The Chinese angry at the U.S. over the fact that inflation is running between 4-10% (depending on who you believe), yet continuing to peg the Yuan to the U.S. dollar to ensure ongoing trade imbalances (guaranteeing inflation).
- And note the accompanying asinine comment from Faber, telling us that the underlying issue is [beleaguered] American consumers borrowing too much, even as their jobs and incomes are systematically being eliminated i.e. nothing to do with China's currency policy !

I could not make up this much self-contradicting stupidity if I sat down for hours and tried...
-----------------------------------------------------------------------------------------------
Overall, on the "left", we have the usual Tools and Fools trying to propagate the illusion of recovery via yet another Fed prop, QE2. We have had umpteen Fed actions these past few years now: interest rates at 0%, monetization of mortgage debt (MBS), no less than three rounds of monetizing public debt - QE1 was round 1, then the Fed started rolling MBS security repayments into Treasuries starting this past August, now another $600 billion just in time for Wall Street bonus season, what a coincidence! Nothing but desperate fools thinking that more cheap money can solve a debt problem brought on by cheap money. Let's see, if we can only make crack cocaine cheaper, then we could solve the drug problem...that's the ticket !!! Anyone who defends Monetary policy at this point is an Intellectually bankrupt jackass . Book smart morons, indicative of the comfort seeking class of Baby Boomers (not all, surely) who lack the intellectual honesty and courage to face reality, much less gaze into the fucking abyss.

On the right - well, you know, Palin & Co's. demented hillbillies, hellbent on creating the new Fascist state, that surely-be-to-God will rise from the ashes. An American Taliban that will dispense with the liberal nihilists and Limousine liberals with a sweep of the hand.

Wait for it! Be patient, it's coming....Rome was not burned in a day...

According to the latest EWT, the markets are at a sentiment extreme exceeding the 2007 high, despite being 20% lower in price and attending a punk, Pet Sematary version of the "Goldilocks" economy, that is rolling over by the minute...

Stuck in the Middle With You.

Roadmap for Collapse Part I

2010-11-14T17:36:00.000-08:00

[Last Update: 11/14/2010]

The Global Ponzi Scheme is Going SUPER NOVA
Under "QE2", The Bernanke Fed has committed an additional $600 billion to buy up Treasury bonds and further leverage the system. With each purchase, the Fed pushes investors further and further out on the risk curve. To that point, risk markets around the world - stocks, bonds, commodities, gold - went parabolic this week. The Hang Seng (Hong Kong) is gapping up vertically ! We are reaching end game. Like a dying sun, the global credit-based Ponzi Scheme is actually accelerating, as it goes SUPER NOVA, first expanding outward in one last gasp of frenzied speculation, only to ultimately collapse inward upon itself. It will be a crash heard around the world, as investors wake up to the fact that they are all on the same side of the boat holding too much risk.

Fool me Six Times, Shame on Me...
We have all seen this movie before - Nasdaq 2000, the post-9/11 boom/bust (~2002/2003), the Housing market debacle (2005/2006), the Commodities melt-up/melt-down (2007), the Lehman/subprime fiasco (2008). Each of these debacles, was aided and abetted by trade imbalances and cheap money (Fed policy). In the aftermath of each crash, the Fed was able to rescue the economy by applying even more monetary stimulus than the last time (in conjunction with ever increasing government spending). Therefore, investors have been lulled into a sense of confidence that the Fed is infallible and can fix any economic problem. Yet, only a total fool would assume that they can keep the Ponzi pyramid intact forever. Applying additional monetary easing to solve a debt problem is like drinking to solve an alcohol addiction.
One should bear in mind that the vast majority of money managers are not concerned with the Fed's exit strategy. Their only concern is what happens between now and 12/31 bonus time. As for individual investors, everyone rides the market bullet train thinking they can be the first off before it crashes. Amazingly, even Bill Gross, Manager of the world's largest bond fund, admitted this week that the Fed's policies are "somewhat of a Ponzi Scheme !!!"

Why Bernanke is either really stupid, a Tool for Wall Street, or most likely both...
The Fed's hopeless goal right now is to propagate the illusion of recovery long enough for a real economic recovery to take hold, essentially the game plan for every recession since WWII. After all, when the stock market is going up, that gives the illusion of recovery. Aided and abetted by 30 years of outsourcing and globalization, the Fed has long been able to manipulate interest rates to encourage consumption and debt, without generating hyperinflation. Back in the 1950s total debt levels were at 50% of GDP, now total debt is at 360% of GDP i.e. 7 times higher. Unlike all of those previous economic recoveries we are now post facto millions of jobs having been outsourced while having overall debt levels at 360% of GDP, so this time, there is no underlying economic fuel (new businesses, jobs) to sustain the economy. Essentially, the Fed is just pouring gasoline on a dying fire. Yes, there is a short-term burst of monetary "stimulus" that juices the stock market, but the real economy just keeps rolling over. Only a delusional optimist assumes that the debt pyramid will continue to grow and that lenders will accept new debt for repayment of old debt (aka. Ponzi borrowing) indefinitely, into an imploding economy. When confidence collapses and lenders realize that the goal is return of capital (principal) not return on capital (interest), then the markets will collapse, DEFLATION will take hold BIG TIME, and the Fed will be totally impotent.

The Financial Liquidators (America's "Best and Brightest")
Beyond the failed monetary and fiscal policy contributions to this ongoing fiasco, the deeper underlying root cause is apparently something no one wants to discuss let alone confront. Over the past ~30 years, a new culture of financial "liquidators" took control in the U.S. and securitized/monetized all aspects of the Supply Chain from design and engineering through manufacturing. These financiers who became ubiquitous not only on Wall Street but in every major Corporation, displaced the predominant culture of engineers and scientists who had presided over the ascendancy of the U.S. as a manufacturing and engineering powerhouse. The Financial Liquidators have neither the training nor the inclination to design, build or create anything. Instead they have presided over the fevered process of selling off the entire U.S. manufacturing base and the Middle Class along with it. Schooled (and willfully ignorant) in the Anglo/American pollyanna bullshit of Ricardian comparative advantage, and therefore conveniently naive with respect to export mercantilism, they were fully empowered by the fiat currency regime imposed by Richard Nixon and Milton Friedman. What would have happened had the gold standard been maintained, is that the recurring trade deficits would have brought about a run on gold reserves, thus preventing the Idiocracy of the day from outsourcing their entire fucking country. These were the key reasons - to accommodate ongoing trade imbalances, as well as to enable Friedman's Monetary policy to become the Ponzi scheme of choice - why the gold standard was dropped in 1971.

Essentially these short-sighted greedbots were not willing to accept lower returns on capital for even one millisecond to allow U.S. manufacturing to retool vis-a-vis foreign competitors. Leveraged buyouts, securitization, outsourcing, offshoring, union busting are the tools of the trade for the liquidators. A class of salesmen, and speculators v.s. engineers and investors. Self-nominated "dealers" of industry who have inevitably created a self-cannibilizing economic pyramid scheme. A pyramid scheme that has foolishly liquidated its own customer base. Clearly, America's current cohort of "Best and Brightest" are neither the best nor the brightest, nor have they been for quite some time. The self-aggrandizing schools that are spawning these newly minted jackasses need to be held accountable, to say nothing of the entire economics profession which is morally, intellectually, and soon-to-be, quite literally bankrupt.

Of course, this is what the average person in America already knows, so all we are doing is standing around waiting for Wall Street to realize the party is over. Will they make it to 12/31 bonus day before the day of reckoning? They did last year, but as we've been told - Past performance is no guarantee of future results...

For those looking to protect their assets through a deflationary credit collapse. I still recommend Treasuries, as explained here (invest at your own risk):

The Treasury ETFs:

SHY: 1-3 year maturities ("safest" with respect to interest rate movements)
IEI: 3-7 year - probably the best compromise between long and short-term
IEF: 7-10 year - these are the bonds the Fed is buying :-)
TLT: 20+ year - most volatile/speculative, but most upside if yields fall (i.e. deflation)

-------------------------MARKET SUMMARY ------------------------------

Key fundamental Risks:

Fiscal AND monetary stimulus starting to wear off:

- The economy is slowing despite unprecedented Fiscal and Monetary intervention

- Fiscal and Monetary policy are now one and the same i.e. the Treasury writes a check and the Federal Reserve prints the money. There is no longer any difference between these two policy approaches.

- Yet despite all of this unprecedented "stimulus" the economy is still heading lower which can mean only one thing - the Ponzi scheme is ending.

Key technical risks:

1) Mutual fund cash levels at historic lows

2) Excessive speculation in Emerging Markets (Bombay Sensex), Metals (Silver/gold) and growth stocks Apple, Baidu, Netflix, TravelZoo...all in vertical blowoff mode

3) Market at most overbought level since October 2007 top (Based on the "Open Trin")

- Open Trin is a smoothed moving average of the Trin (ARMS Index)

4) Bullish investor sentiment (AAII) at highest level since October, 2007 all-time top

5) Stocks having highest correlation since 1987 (not a good time to be buying stocks)

6) Bifurcated market i.e. some stocks making new highs, many making new lows

7) "Safe" haven bonds uptrending (yields falling) - indicating flight to safety and liquidity

- 2 year Treasury yields at lowest level ever...

------------------------------------------------------------------------------

The below chart indicates the market's position from a long-term Elliot Wave standpoint. According to EW Theory, the market is viewed to be correcting the past ~80 years of rally since the 1932 low. Corrections generally take an a-b-c pattern. The "a" wave is the first wave down, in this case the decline from 2000-2003. The "b" wave is a correction of the "a" wave, in this case the rally that lasted from 2003-2007. Note it is very unusual for a "b" wave to actually retrace an entire "a" wave, however, when that occurs it is deemed to be particularly bearish for the "c" wave which as one would expect, comes as major surprise to those who believe that the worst is over. We are now in wave "c", which itself will be comprised of 5 wave segments (wave "a" and "b" were also comprised of 5 segments). Therefore, wave "1" down was the decline from 2007 that lasted through the Lehman crisis and bottomed in March 2009. Wave 2 is just now completing, as we see with a parabolic spike higher ~1200. That will bring to bear the third wave of wave "c" which will be the strongest wave of the entire secular bear market and eventually bring the market back down to multi-decade lows. After wave "c" a new stock market rally can begin.

As always, take market predictions with a grain of salt, especially with regards to timing. I am highly confident the above scenario (or something similar) will play out, but the timeframe for each of the declines and counter-trend bounces is highly speculative.

For those who deride Elliot Wave Theory as "financial astrology", I would be careful. Granted, their short-term charting is often too early on calling tops and bottoms, however, their overall thesis for a deflationary credit collapse is spot on and playing out entirely as expected.
In addition, EWI has been correct at anticipating the big picture stock market movements i.e. the "a" wave, the ensuing "b" wave rally and now the "c" wave decline, so far... Moreover, not withstanding the past year's rally, at this juncture, safe, low-yielding money market funds are still outperforming the stock market on a 12 year basis (back to 1998). By the time "c" wave bottoms out, short-term funds will have outperformed on a multi-decade basis.

According to EWI, we are seeing an "All the Same Market" phenomenon similar to 2008 in which ALL risk assets (stocks, Corporate bonds, Municipal bonds, commodities, emerging markets) are becoming highly correlated to the downside, leaving few if any alternatives to U.S. Treasuries.

Citizen Kane on China

2010-10-03T13:23:00.000-07:00

We are constantly bombarded with propaganda regarding the Chinese economic "miracle".  Just last week Bill Gates and Warren Buffett both went to China to tour the "miracle" in person. Also, this week there was an interview in Barron's pleading the case for why the U.S. should NOT impose trade or currency sanctions. If you read between the lines, this article in a nutshell, indicates why the China/U.S. "relationship" is a latent catastrophe, yet most of the "big boys" are too busy counting their millions and billions to notice.

I took the liberty of paraphrasing the interview, both to save time and to cut out all of the extraneous bullshit and get down to the key message. If you want to read the obfuscated (actual) version, it's here.

What you read below is FICTIONAL (Kind of). I changed the name of the interviewee to protect the "innocent"...

Barron's: Mr. CF Kane is an expert in Chinese affairs, having racked up 1.2 million frequent flyer miles observing the economy from 80,000 feet and from the comfort of the First Class Lounge at Shanghai International.

He also teaches at Yale, so he has his head firmly planted up his ass and therefore wears night vision goggles at all times...

Barron's: What is your overall thesis regarding China?

Mr. Kane: China has sucked America dry and now needs to find a new source of demand for its cheap junk

Barron's: A lot of Americans think the U.S. should force China to revalue its currency and/or impose trade sanctions

Mr. Kane: That won't fix anything. The problem for the U.S. is that consumers have too much debt and no jobs

Barron's: If the Yuan is raised and trade sanctions are imposed, won't that protect American jobs?

Mr. Kane: No. All of the jobs have already been outsourced, so that would be closing the barn door after the horses are out. Besides that would hurt "consumers" and WalMart

Barron's: Don't consumers need jobs in order to consume?

Mr. Kane: No. They just need credit cards and a strong inclination towards delusion. Listen, you are changing the subject. The bottom line is that we need to find a new country to buy all of this useless junk from China.

Barron's: Can't the Chinese buy their own junk?

Mr. Kane: Get serious. How stupid do you think they are anyway? Besides, they don't have a Middle Class that can be milked dry

Barron's: But what about those 8% economic growth rates for the past decades, didn't that create a middle class?

Mr. Kane: Of course not. That was 8% overall economic growth. Employment has only grown a measly .5% per year.   China has 350 mega-billionaires and the rest live on 80 cents per day

The Chinese intentionally specialized in manufacturing so that they wouldn't have any labour issues and could swap out workers at will.

Barron's: So wouldn't raising the Yuan actually help the Chinese by increasing workers' purchasing power and helping to create a middle class? At the same time, wouldn't that reduce their reliance on exports and redress the trade imbalances with the U.S.?

Mr. Kane: Well, that's one way of doing it, but I don't endorse that method. After all, that would increase costs for the jobless U.S. consumers I was mentioning earlier, but worse yet, it could lower returns on investment and hence stock market prices. I prefer to hang my hat on this yet undefined and totally fantastical delusion that endogenous (internal) demand will appear out of nowhere.

Barron's: So, if there is no middle class, then why is there so much investment in infrastructure?

Mr. Kane: That's stimulus. After the 2008 debacle, it became clear the U.S. could no longer support the Chinese economy on its own, so the Chinese Government invested its trillions of reserves gained by manipulating its currency, on infrastructure.

You know - bridges to nowhere. repaving new roads. Similar to the Obama stimulus.

Barron's: And what happens when investors realize that there is way too much capacity in commercial and residential property units?

Mr. Kane: As long as no one runs for the exits, everything will be just fine.  At the .5% growth in the labour market that I mentioned previously, it will only take about 25 years to work off the excess capacity, assuming the economy stays strong during that entire time..

Barron's: So remind us again why the U.S. should continue to sponsor the Chinese "miracle"?

Mr. Kane: Obviously, because if sanctions are imposed or the currency is raised, that would lead to the "nuclear' scenario:

1) Everyone will realize that the Chinese economy and the trade relationship with the U.S. is (one of) the biggest Ponzi Schemes ever created

2) The Chinese will stop buying dollars and Treasuries, the dollar will tank, and U.S. markets will collapse

3) Chinese markets will collapse, there will be mass unemployment and China will revert from Fascism back to Communism, which is not one of the "isms" America endorses

The worst part of course is that Wall Street won't get its full 2010 bonus...

Barron's: So basically China has a gun to America's head

Mr. Kane: No. China and America have economic ICBMs pointed at one another with enough delay to ensure Mutual Assured Destruction

Barron's: Is China an environmental catastrophe?

Mr. Kane: It's not as bad as it's made out to be. As long as you wear a fully enclosed gas mask with oxygen tank, a lead radiation shielding suit, eat only imported food, and sleep in a hyperbaric chamber, your chance of contracting severe carcinoma is roughly 45% over 5 years...

Barron's: What about all of these workers at manufacturing plants who are committing suicide. Does that concern you at all?

Mr. Kane: No, not at all. We gave everyone a 20 cents per day raise - which is 25%! Then we had trampolines installed around all of our manufacturing plants, so workers can no longer jump to their deaths. The bonus is that they have something fun to do during their 10 minute lunch break

Barron's: In all of your time in China, what surprised you the most?

Mr. Kane: The thing that surprised me the most was the breadth of the progress...

Barron's: But I thought they don't have a middle class and most people are wage slaves

Mr. Kane: Right. I meant the breadth of progress across the top .1% of wealthy University students

Barron's: So, to wrap up, in a nutshell what you are saying is that the politicians - Obama and company, should continue to ignore the trade and currency imbalances that have been accumulating for years, and pretend that everything will work itself out ok in the end?

Mr. Kane: Well, at least until December 31st, bonus time. I haven't really thought through what should happen after that...

Barron's: Alrighty then. Thanks for your time.

.

A Clockwork Orange

2010-09-27T13:35:00.000-07:00

"...our wisdom, too, is a cheerful and a homely, not a noble and kingly wisdom; and this, observing the numerous misfortunes that attend all conditions, forbids us to grow insolent upon our present enjoyments, or to admire any man's happiness that may yet, in course of time, suffer change. For the uncertain future has yet to come, with every possible variety of fortune..." - Solon

Amazing to believe that this incredibly astute and honest observation was from 2500 years ago. The majority of the "elite" running the present day Idiocracy never stop long enough to question the hubris of their own inane decisions - bad assumptions built on a pyramid of other bad assumptions. Similar to conditions that attended during the Dark Ages after the Fall of Rome, science and culture are now entering secular decline, as subjectivity and theology are on the rise. The only known antidote for anarchy is religion (i.e. mind control), and therefore we will soon receive both (anarchy/theology) in large doses.

We are on the verge of experiencing a monumental transfer of power from the 50+ Baby Boomer generation which has presided over the age of decadence, greed and hedonism that started in the late 1960s. Consider this last forty year period the Age of Greed. What we are now entering is the Age of Fear. What is needed in this new age is a set of tools far different than those found valuable in the prior age. Power in this age will be held by young men between the ages of 18 and 35 who have copious amounts of testosterone, an underdeveloped conscience, and tremendous cardio capacity, attributes amply exhibited in the UFC generation. Historically, these have been the Wild Boys who have ruled (violently) during ages of turmoil, for obvious reasons. The Boomers will quickly yield control albeit unwillingly, having long since grown soft and decadent. These 50-70 year old over-fed comfort seekers raised during the longest stretch of prosperity in human history will be no match for the new younger breed that ironically the Boomers themselves will have raised. In short, the Boomers were raised to believe in the triumph of optimism over reality, "vision" over commonsense. Poor qualities to bring to a knife fight.

Combined with the predilection towards messianism and religion described above, there will be new "Taliban" springing up everywhere across the globe. Be they Muslim, Christian, Sikh or otherwise, they will all exhibit very similar goals and methods. This process is already well underway not just in the Middle East, but here in the U.S. with the burgeoning militia movement.

The bottom line is that some people are prepared for what comes next, others, not so much...

Faux News

2010-09-14T07:31:00.000-07:00

I am constantly amazed by the hypocrisy of all of these hard Right Wingnuts reincarnating themselves as Free Market Libertarians.

From Larry Kudlow, to Michelle Caruso Cabrera, Glenn Beck and all of the hypocritical, wingnut demagogues in-between, these newly minted Libertarians have all put their (very) recent past

behind them to jump on the burgeoning Tea Party bandwagon. Beck, Limbaugh, and the various CNBC propagandists (Kernen, Caruso-Cabrera, Kneale, Kudlow etc.) prove daily that there is nothing quite as rabid as a man (or woman) seeking to protect his own pocketbook regardless of who else may be affected. Granted we should not be surprised in the least to see these newly converted Libertarians wanting to put distance between themselves and their profligate Supply Side past, but their 180 degree about face on spending policy is enough to induce whiplash and takes hypocrisy to all new levels.

To review, the central tenets of the Tea Party are:

1) Fiscal conservatism/Reduced Deficits

2) Return to hard money (gold standard)

- Abolishing the Federal Reserve

3) Smaller government/less regulation

4) International Isolationism

- Downsize U.S. military commitments

5) Dismantling and/or Privatization of Social Programs (e.g. Social Security)

6) Anti-immigration

Some of these are good ideas, which should have never been discarded, that I won't deny. What is galling however, is the fact that the very people who now embrace these newfound ideals are the ones who have been undermining them for the past 30 years.

Take fiscal conservatism as the primary example. It's all well and good to talk about fiscal conservatism when the "other party" is in power. The reality is that up until Obama was elected, these newly minted Libertarians were all ardent "Supply-Siders". For all of the past 30 years, starting with Reagan, the key Supply Side mantra has been "Deficits Don't Matter" (a direct quote from Dick Cheney), and as such they spent accordingly. The Supply Siders have always been closely or directly aligned with the Neo Conservatives (Neo Cons) who advocated for a strong American presence on the International stage - a "Pax Americana", if you will. The Neo Cons were the behind-the-scenes architects of the failed Iraq "Strategy" and the egregious over-commitment of U.S. military resources worldwide. It was an asinine policy that went into overdrive during the Bush Administration leading to two simultaneous wars AND a massive tax cut for the ultra-wealthy. That unsustainable tax cut alone increased the national debt by $2.5 trillion !, yet even as I write this is Congress debating whether or not it should be extended! That's like being bankrupt and debating whether or not to take the annual trip to Club Med. The cost of the two failed wars meanwhile, now exceeds $1 trillion in direct costs. Of course this does not count the coming costs from the downstream fallout as these failed nations turn the entire Middle East into a terrorist safe haven and jeopardize the world oil supply. The bottom line is that as long as the ultra-wealthy and Military Industrial Complex are the primary beneficiaries, then the Right Wingnuts really have had no problem with unlimited Federal Government spending.

Clearly, the Neo Con agenda, supported by most conservatives over the past 30 years is at extreme odds with the Libertarian Tea Party agenda, especially with respect to overseas military commitments and fiscal and monetary conservatism. After all, without the unprecedented fiscal and monetary expansion of the past 30 years, the accompanying military buildup would have never been possible. Ironically, it was another venerated conservative, Milton Friedman who was a key proponent for the U.S. severing the last remaining ties to the gold standard in the early 1970s. That closing of the gold exchange window is what set off the past 30+ years of monetary hyper-expansion culminating in this nascent Deflationary Depression. To a hardcore Libertarian advocating any form of currency other than a gold standard is purely heretical, as indicated by this diatribe against Friedman dating back to 1971. In this battle of ideologies, the Tea Party has the benefit of fiscal sanity and reality working for it, so one can reasonably expect the Neo Con thought dealers to be relegated to the historical dust heap of self-important morons masquerading as intellectuals.

Just as likely, the Neo Cons will merely join their conservative brethren as new born Libertarians. After all, it would not be the first time the Neo Cons reinvented themselves. The fascinating book "They Knew they were Right"Neo Cons starting all the way back in the 1930s when they were Trotskyite Communists (yes, you read that right). Not only that, they opposed U.S. involvement in World War II because it was an "Imperialist War" (whatever that means). You can't make this shit up - somehow the "intellectual" founders of the Neo Con movement migrated from the Far Left to the Far Right over the span of several decades, basically reinventing themselves along the way. Talk about pseudo-intellectualism reduced to basically a meaningless parlour game. The U.S. faces off daily against Taliban fanatics who live in caves, shit in buckets and risk their lives daily for their "cause". Meanwhile, the U.S. side is led by shape shifting thought dealers who change their ideologies like a teen girl changes her hair style.

Objectivity is as dead as a door nail

Before you get the idea that I am some sort of Left Wing Liberal nihilist, I don't regard watching CNN and BBC in one ear and Fox News in the other as some form of moderation. I get it that objective journalism is dead on all sides, which is why traditional media is in a death spiral. As the content of newspapers, television news becomes more degraded and biased, viewership becomes polarized and sectarian, with limited outreach. That in turn feeds back into content cuts leading to more hyperbolic propagandists and even less traditional research and journalism. It now literally takes about only about 5 minutes to read the Wall Street Journal once you skip past the three Opinion/Editorial sections, the Letters to the Editor and the Lifestyle section - basically you are left with about 3 pages of hardcore business content, including the front page.

My overall point is that you can't solve a problem unless you objectively face a problem. Yet, with the overall low quality thought dealership we get from all sides, conveniently reinventing history every four years, and pushing simple answers to complex issues, the U.S. is a LONG WAY from ever finding its way out of this mess.

And lest you think this is a politically motivated diatribe, I do not underestimate the Tea Party movement in the least. They will undoubtedly be the dominant political force for the next decade, if not longer. And either Sarah Palin will be the next President or it will be a demagogue just like her, that is a foregone conclusion.

Those Damn Unions

2010-09-07T19:27:00.000-07:00

The latest manifestation of escalating social acrimony is in the form of union bashing, especially public sector unions. Certain blogs and far right journalists have taken upon themselves to launch a vindictive crusade against a sector of the economy that is the last bastion of the American Middle Class. We've hollowed out the private sector middles class, so why not get to work on the public sector as well? Amazingly and appallingly, these "journalists" (to the extent such a profession still exists) and bloggers who attack the public sector unions are seeking to blame the sorry state of the economy on organized labour.

I am not a union member, never have been in one and do not personally have use for one. That said, to blame the perceived or real union bureaucratic inefficiencies in any way for this current economic debacle is absolute and total disinformation. Basic commonsense indicates that the incidence of some nurses, teachers and police officers earning $100k/year after 25 years of service is not at the root of this economic disaster. I fully understand that state and local governments are de facto bankrupt. After all, I predicted that scenario 3 years ago and I am constantly amazed that so few have officially declared bankruptcy at this juncture. Therefore, I also understand that public sector unions will no doubt bear their share of the economic pain, however, that does not mean that they share a proportionate share of the blame for this ongoing fiasco, nor should we think that adding more job losses and salary cuts is going to fix the economy.

Here are a few facts to correct the purveyors of this line of bullshit:

1) Unions and their members did not create the Subprime/financial debacle

Remember, that was Wall Street and their well heeled minions who on average make as much in a month as the average American family earns in a year. That's a lot of pay for adding exactly zero value to the economy and yet being permitted to fuck it (the economy) up all at the same time. Wall Street made tens of billions securitizing garbage loans of all types and then stuck the American Tax Payer with the clean-up bill of roughly $11 trillion. How much is $11 trillion dollars you ask? Well, it's enough to pay all 6 million teachers in the U.S. $60k per year for the next 30 years ! i.e. according to the union-bashing bloggers, we can't afford to pay teachers, but Wall Street can get the equivalent of 30 years of teacher salary basically overnight. Is this a great system or what ! There are some serial disinformers who think that $11 trillion is way overestimated because it includes all of the "assets" (shitty loans) that the Federal Reserve purchased and will eventually sell back to the markets. Ok, whatever...I happen to own this bridge over here...

2) Public sector union members make more money than the average worker: This became true only very recently, since for most of U.S. history it was the other way around. This "crossover" in pay scales is more a function of declining private sector pay as it is from rising public sector pay.

Total (private/public sector) union membership has declined steadily for the past 60 years from a peak of around 36% in 1945 to where it is now at around 12%. During this time, public sector union membership has actually risen from 10% to 36% i.e. public sector union membership is the last holdout of what's left of the American Middle Class. Those who decry "high" union wages apparently want public sector employees to suffer the same fate as their private sector brethren i.e. outsourcing, relentless job turnover/job insecurity and stagnant or declining wages. Contrary to popular assertions, forcing all Americans to have their pay checks slashed in half is not going to fix the economy. Back in the Roaring '90s when Dot Coms were all the rage and many private sector employees were enjoying the fruits of their stock options and bonuses, I don't recall too many people wanting to become a teacher at a $30k/year starting salary. Now that the shoe is on the other foot, public sector employees who have been steadfastly working with little or no upside relative to the economy will be obliged to share in the economic pain of the private sector i.e. no upside, all downside.

3) Public Sector Unions did not outsource millions of jobs to China and India and otherwise liquidate the private sector middle class.

Remember, that was the country-club salesmen CEOs (at the behest of Wall Street), who knew nothing about engineering or manufacturing and took the easy way out by handing all of this country's IC (Intellectual Capital) to America's competitors.

Now we have official unemployment stuck at 10% (unofficially at 16%) with absolutely no sign whatsoever of robust job creation on the horizon. Total debt equating to 350% of GDP is just too big a burden to offset, despite having thrown unprecedented fiscal and monetary stimulus at the economy - way beyond anything attempted during the Great Depression ! So, you can full well expect that unemployment will only continue to rise inexorably from here.

I have said it before and will say it again, any country that trades openly with nations that do not have a labour or environmental standard, will itself substantially degrade its own labour and environmental standards. That my friends is called industrial arbitrage.

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Again, I personally don't care about unions, but behind these big bad unions are every day people trying to make ends meet, who do not need to be vilified by half-baked bloggers and pseudo-journalists who are just redirecting vast bottomless reservoirs of rage at the last vestige of the middle class.

Are Bonds in a "Bubble"?

2010-08-29T06:02:00.000-07:00

The latest widespread investment thesis is that bonds (fixed income) are in a bubble similar to the Nasdaq stock market in 2000 or commodities in 2007 i.e. an unsustainable price level that sooner or later will collapse.

First off, to lump all fixed income investments together as "bonds" is asinine and reveals an oversimplified bias among the pundits who hold this view. There are a large number of professional investors and amateurs actively shorting the U.S. Treasury market which *may* bias their viewpoint...

Different kinds of bonds

Bonds are delineated based on their level of risk. The "risk free" rate is defined as short-term U.S. Treasury bills (30,60,90 day) which are deemed essentially the closest electronic equivalent to cash (i.e. paper currency). Out from there, you have various maturities of Federal Government bonds up to 30 years. These bonds are deemed equally safe from a default standpoint, however, these carry duration risk also known as purchasing power risk - the risk that inflation (prices) will increase, causing the value of the bond to be reduced and inducing a capital loss. The longer the term of the bond, the more volatile the price, so 30 year bonds are much more volatile than 2 year bonds.

Meanwhile "spread product" are fixed income investments that are deemed to carry default risk, hence they typically have yields that are above Treasury yields of a similar duration hence they have a risk premium aka. "spread" over Treasuries. Spread products include Corporate bonds (both investment grade and junk bonds), Municipal bonds and Mortgage Backed Securities (MBS). To the extent that these risk spreads have been narrowing substantially over the past year, one could argue that "spread products" are in fact overvalued relative to their historic spreads over Treasuries.

This is all very academic, so far. So here is my take on things:

1) Most/all risk bonds (Corporates, Munis, MBS) ARE overvalued although I would not call it a speculative bubble, since investors are hardly frothing at the mouth when envisioning yields of 4% on their bond portfolios i.e. there is no comparison here to the Nasdaq in 2000. The reason, I believe, that these types of bonds are overvalued is because investors are shunning risk after a decade of losses from stocks, housing, commodities and therefore seeking return of capital vs. return on capital. Meanwhile, exacerbating the situation is that the average investor does not fully understand the risk apparent to these types of investments and/or may not have access to Treasury-only investments. Many company 401k (retirement) plans have very limited investment options and offer some sort of "fixed income" option that usually includes a blend of Treasuries, Corporates, Munis and MBSs. Based on my own anecdotal experience at several companies, I doubt the average retirement plan investor has access to a pure Treasury-only bond fund.

Worse yet, many retirement funds offer an enticingly safe "Money market" fund, which we have all been led to believe are cash-like investments. Here again, however, these are short-term funds that typically include a blend of Corporate and Treasury short-term bills. Back in 2008 there was a great panic over the fact that several of these "money market" funds lost money ("broke the buck") wherein the Net Asset Value (NAV) of the fund fell below the benchmark $1/share. The Federal Government stepped in to insure money market funds, to avoid panic withdrawals, however this program had limited funding and has now since expired.

To the extent that these Spread/Risk bonds are overvalued, I still think that these investments are much safer than stocks and commodities; however, in the type of deflationary collapse that I am envisioning, losses on a typical blended "fixed income" fund could exceed 50% depending on the blend of bonds in the portfolio (Treasuries v.s. risk bonds).

Are Treasuries in a Bubble?

When pundits pose the question are bonds in a bubble, they are usually referring specifically to Treasuries, which as we know have been skyrocketing in price of late (yields falling). The answer to this question is again subjective, and depends on whether or not one believes we are heading for pervasive economic/price deflation. During Japan's deflation of the past 20 years, Japanese Government 10-year bonds yields have dipped below 1% several times. By comparison, the U.S. 10-year bond currently yields 2.65% so there is potentially still a lot of room to fall. What about the massive U.S. fiscal deficit and Quantitative Easing (QE)? Here again, it's a question of timing and sequence of events. If Japanese Government bonds can yield less than 1% despite the Japanese debt being ~ 200% of GDP, then surely U.S. Government bonds could hit the same level given that U.S. public debt is "only" ~100% of GDP (depending on whose figures you use...). Meanwhile inflation is quiescent and trending down, despite QE round 1. In addition, in a flight to quality scenario we should expect the dollar to strengthen (as it did in 2008 and has been recently) and institutional investors to invest those dollar inflows into Treasuries.

Some (EWI and others) argue that it's better to invest in short-term Treasuries v.s. long-term due to price volatility inherent in the latter. I personally think a mix is appropriate, because similar to 2008, yields on short-term Treasuries are now approaching 0% and therefore those seeking refuge in the short end of the curve will soon have the distinct pleasure of paying the Government to borrow your money - i.e. rollover risk. This EWI notion that prices (inflation) will crater, the dollar will soar, but long-term Treasury yields will rise is totally speculative and ignores the direct causal connection between dollar inflows and Treasury prices. Contrary to some belief, taking $400 cash increments from an ATM machine is not an institutional option i.e. there is no other "low risk"/highly liquid option for someone moving billions of dollars around.

In addition, institutional investors who are paid based on performance tend not to invest in non-yielding/negative yielding investments...go figure.

Ultimately, whether or not one deems Treasuries to be a "safe haven" depends on your inflationary/deflationary outlook and also the risk of the U.S. Government outright defaulting on its debt in the near-term (2-3 year) time period. I think given the proven propensity for the Federal Reserve to outright buy Treasury debt (Quanititative Easing), then the chance of default is de minimis, as all of the debt is denominated in dollars and the Fed owns the printing press. More to the point, what is the alternative? Gold perhaps is an alternative, if you believe gold prices will hold up through extreme price deflation i.e. for gold to hold its value against dollars it would actually be gaining in value relative to other commodities/assets, since in deflation by definition, the dollar would be gaining in value. I am not betting on it, but that could happen, so some amount of gold is always advisable. Another option may be Swiss Francs, however that country's banks have huge exposure to loans made to Eastern European countries.

The vast majority of ALL other types of financial assets regardless of which country, pose EXTREME LEVELS of counter-party default risk in a deflationary depression.

The other day, Jeremy Siegel, Professor of Finance at Wharton was on CNBC debating this "Are Bonds in a Bubble" issue with Tony Crescenzi of Pimco. At one point, Siegel said the dumbest and most astounding thing I have heard anyone say in the longest time, let alone a Professor of Finance. He said that investors who buy bond funds (v.s. individual bonds) in a rising interest rate environment lock in their losses permanently, because the bond fund is constantly rolling over its maturing investments i.e. the reason you buy a bond fund in the first place. Uh, repeat that please? Professor of what? The sins of stupidity here are many: First off, he didn't bother to mention that the bond fund would be rolling over at ever-higher rates of return which is what you would presumably want to do with your money as interest rates rise. Secondly, he never mentioned that ALL financial assets tend to do poorly in a high inflation environment (to wit stocks in the 1970s). Thirdly, as Tony Crescenzi all too meakly pointed out, these are mark to market investments that trade every day i.e. no one is forcing you to hold these investments forever. If you believe that interest rates are rising, then SELL NOW (i.e. reduce your duration)! His greatest failure however, especially as a Professor of Finance, was to not factor in purchasing power and opportunity cost risk, because while it's technically true that an investor who holds individual bonds (as an alternative to a bond fund) through maturity never has to realize a capital loss, so what? Garnering a 2% return for 30 years straight implies huge loss of purchasing power when the market return is 20% and inflation is running at 18%.

For those who want to protect their assets via Treasuries, the easiest way is to buy a Treasury bond mutual fund or buy the Treasury ETFs in a brokerage account. If your 401k retirement account does not offer a Treasury bond fund, then you may be able to use a "self-directed" account to buy the Treasury ETFs below. If none of these options is available, then you are still better off parked in a Money Market fund and pray Uncle Sam reinstates the insurance plan from 2008, when the shit hits the fan.

The Treasury ETFs:

SHY: 1-3 year maturities
IEI: 3-7 year (probably the best compromise between long and short-term)
IEF: 7-10 year
TLT: 20+ year (most volatile/speculative, but most upside if yields fall)

Globalization is Dead

2010-08-26T04:51:00.000-07:00

If there is one good thing that comes out of this entire economic fiasco it's the fact that Globalization is soon to be Dead. As always happens during times of violent economic turmoil, trade barriers are usually one of the first items on the agenda, as each nation desperately seeks to protect its economy at other nations' expense. Viewed through the lens of a 30+ year trade deficit, the call to close off trade with China and other export mercantilist nations will soon be at a fevered pitch.

The good news therefore, is that the race for the bottom with respect to labour costs and environmental standards will eventually abate, although near-term, the collapse in demand and deflationary forces will bring about a meltdown in wages across the labour spectrum. From an environmental standpoint, extreme competition will lead to even more extreme levels of degradation, however the collapse in overall demand and ensuing supply glut will shutter a substantial amount of resource production and curtail further exploration. Think of the tar sands with oil at $10/barrel i.e. Alberta basically offline.

Looking back on these past decades, export mercantilism coupled with deliberate currency manipulation, suppressed wages across the entire planet and hence did not bring about the equalization in living standards that text book macroeconomics would predict. Throughout this time, the developing nations remained lean and hungry (literally), awash in a bottomless pool of cheap labour, while the West deluded itself that everything was A-OK, even as overall debt levels rose 8-fold in 60 years i.e. from 50% of GDP here in the U.S. in the 1950s to where they are today somewhere in the range of 300-400% of GDP across all Western nations. Therefore, as is the title of my blog, what we have today is not so much an economy, as a debt-sponsored Ponzi Scheme on the verge of violent unwinding.

As we know, asset prices soared throughout this time, as capital was constantly misallocated from one market to the next (stocks, housing, commodities etc.) chasing ever-lower returns and ignoring ever-increasing risks. Once the multi-decade credit/lending bubble bursts with full force, then falling asset prices will force a chain reaction debt liquidation at lightning speed via bankruptcies and defaults.

Politicians meanwhile will lose what little credibility they yet retain as it will become readily apparent that politics can't solve this problem, indeed, politics is the problem.

Likewise, trust in modern macroeconomic theory based on fiscal and monetary policy and open trade (aka. Globalization) will be obliterated, to be eventually replaced by a new economic paradigm that is yet to be envisioned.

In short, belief in the globalized economic pyramid scheme will collapse at the same velocity as the economy itself - rather quickly.

Multi-nationals will bear a significant brunt of the ensuing rage. The soon-to-come trade barriers will put an end to their multi-decade industrial arbitrage even as the cost of capital soars, hence causing profits to evaporate. Meanwhile public sentiment towards country-club CEOs and big business in general will tank amid mass layoffs.

History tells us that ages of moral nihilism lead to decadence, and decadence to anarchy. This has been an unprecedented period of moral degradation and decadence - we are a society over-fed comfort seekers that makes the ancient Romans look like pious monks by comparison.

Brace yourself, anarchy is on deck.

Deflation...Redux

2010-08-04T11:54:00.000-07:00

The specter of deflation is creeping back into the collective consciousness. I just noticed three separate articles on Yahoo discussing the various impacts of deflation on the economy. This is all right on time, because similar to 2008 pre-Lehman, the stock market has come off a retracement high, shuffled sideways for the past 3 months and should now be ready to fall off the next cliff. So, this renewed preoccupation with deflation evidences a psychological shift in mentality from reflation back to contraction, indicating we are fast approaching the next point of recognition, as it finally dawns on everyone that we are headed for a "double dip" of historic magnitude.

Price Deflation
The concept of (price) deflation is not as simple or complex as most people seem to think it is. The fact is that few of us (except my 93 year-old grandmother and others her age) have ever experienced a sustained price deflation. In order to have a sustained price deflation across ALL asset categories at the same time, requires a decrease in the supply of money. Likewise, in order to have a sustained price inflation across the board requires an increase in the supply of money. By contrast, when the price of oil goes up because the Saudis have embargoed oil exports as occurred in 1974, that in itself is not a cause of inflation (assuming no change to money supply), because the extra money used to purchase oil draws down demand from other sectors of the economy and hence lowers prices elsewhere.

Fanatical Libertarians tell us that there is nothing wrong with deflation and that all of the media hype around deflation is simply scare-mongering. Well, unfortunately these Libertarians are fantasizing about supply-side deflation resulting from a fixed money supply and increasing production efficiencies. Whereas, the type of deflation we are about to experience is a demand-side deflation wherein the price of everything drops simultaneously because there is no demand (aka. purchasing power), and where businesses go bankrupt en masse because they can't meet their fixed costs. This leads to mass unemployment and personal bankruptcy as jobs are lost, asset (home prices) crater, all the while debts (mortgages etc.) remain contractually fixed in value i.e. payments stay the same.

Credit deflation
As indicated above, credit deflation axiomatically leads to demand-side price deflation simply because there are too few dollars chasing too many goods. And despite all of the yammering and hand wringing over hyper-inflation, the Fed's unprecedented monetization of debt (~$3 trillion) has failed to yield economic reflation let alone price inflation. Credit deflation is all but inevitable now because there still exist record levels of debt (~ 4x GDP) and the renewed slowing of the economy will bring about a chain reaction of delinquencies and bankruptcies.

Just this week, the Fed announced that it is considering another round of quantitive easing (buying of debt) as a mechanism for further easing credit markets. This is an act of desperation, since the first round of debt monetization did not work, so what makes them believe this time will be different? As long as borrowers are insolvent and unable to borrow and lenders are ever-more cautious, then adding more cheap money to the pile of existing cheap money means banks will just buy up more financial assets (stocks, bonds etc.) sending yields even lower and making the inevitable market crash that much worse.

More to the point, as I explained previously here the money supply, which consists primarily of credit (loans) and to a much lesser extent currency (cash), is a giant Ponzi Scheme all of its own. And when it inevitably unwinds, it will collapse like a cheap tent at a rate that even Fed monetizing couldn't possibly offset, as there is over $50 trillion in credit outstanding (not to say that it will ALL go into default, but the largest part eventually will in my opinion).

Then there are those who believe that all of this debt is not an issue because it's largely money "we owe to ourselves" i.e. American lenders. Despite the trillions in U.S. debt owned by foreigners, it's actually true that most is held here in the U.S., to which I say "so what?" This "owe it to ourselves" argument is illustrative of the type of disinformation now commonplace in the Idiocracy. Simple reasoning shows why...

Let's say I borrow $20,000 from you - thanks buddy ! Then a year from now I've lost my job, declared bankruptcy, and unfortunately you lose the entire loan because I spent every last dime. What happens? According to the "we owe it to ourselves" morons, nothing happens - case closed. Umm, except, here is what happens in the real world: First off, I am bankrupt, so I am shut out of the credit markets - can't get a loan/credit card and my spending drops to nil. Second, the $20k of your money I spent last year was a one shot deal, so GDP was boosted by $20k last year but this year drops by that amount (think of this in the aggregate). Meanwhile, I liquidated your savings, so you too are piss broke, won't/can't spend (due to the reverse wealth effect), have lost confidence in the credit markets and are now hiding what is left of your money in the safest place possible i.e. buried in the forest. That in a nutshell is credit deflation.

The more you think about it, the more you realize it would actually be better to have all of U.S. debt owned by foreigners so that we could leave them holding the bag and not experience the adverse impacts of the reverse wealth effect. Yes, the U.S. dollar would fall relative to other currencies (although all nations will be doing their best to debase their currencies as well), but a lower U.S. dollar would: (1) improve the trade deficit (2) put China out of business (3) put WalMart out of business...i.e. the trifecta !!!

Monetary Policy No Longer Working
As I have said before, monetary policy is no longer working. Fiddle fucking with the price of money only causes the misallocation of capital and does not lead to a long term increase in economic production. It creates perpetual boom and bust cycles, and these latest grand attempts by Greenspan and Bernanke to "smoothe" the economic cycle by side-stepping recessions with ever more monetary "stimulus" just means this bust cycle will be the Mother of All Clusterfucks.

What Now?
The fact that the Fed is once again considering quantitative easing (debt monetization) emboldens my willingness to own Treasury debt of various maturities as I described here , because it's always nice to know that the Federal Reserve is the buyer of last resort for your primary assets.

In addition, until foreigners find an alternative safe haven for their trillions in assets, the dollar and hence Treasuries will continue to be the safe haven of choice and everyone can pretend for a little while longer that we are not borrowing to pay interest on prior borrowing (aka. ponzi borrowing). When we get through this deflation cycle, that will be a different story. As I've said, when you start getting a pack of crisp new $100s in the mail from the U.S. government each and every month (e.g. "Stimulus v6.0" or something like that) , then it's time to worry about inflation....

The Rich Karlgaard Collapse

2010-07-09T19:39:00.000-07:00

I hereby dub this next leg of the ongoing economic collapse as the "Rich Karlgaard collapse". I didn't even know who this guy was until I read about him on Barry Ritholtz's blog. Apparently Rich is an editor at Forbes.

Recently, he (Rich) went on this diatribe against Robert Prechter and all of us so-called "perma-bears". As is typical of most Lamestream media articles these days it was a vacuous piece that focused on a select few data points while totally ignoring the much broader picture and the much more salient facts such as overall debt levels, failed policy response etc. So, just for fun I dissected his piece to show how ludicrous and denialistic the consensus opinion is at this juncture.

So, according to Karlgaard, Prechter is wrong because:

1) He (Prechter) wants to be like Roubini...

Yes, apparently we all want to be constantly derided University Professors wearing Hush Puppies and speaking in foreign accents while Joe ("the troglodyte") Kernan laughs at us...

2) "Americans love debt"...

I couldn't come up with a suitable rejoinder for a statement this stupid

3) I, Karlgaard, predicted Dow 18,000...

Yet the stock market has gone nowhere for 12 years and Treasury Bills (let alone bonds) have outperformed stocks. Dow today? 10,200.

4) "I've given up on formulas and models"...

Right, we get that Rich, now you rely on "interviewing" (on the golf course, no doubt), data mining recent historical trends, and plain old fashioned wishful thinking...good strategy.

5) Interviewing is the way to go. I have interviewed a thousand other Baby Boomers and despite the fact that things are not great now, they are bound to get better any minute now. That's the way it's always been since 1968 and the Democratic Convention...Whoa, sorry, flashback !

Since Rich tells us he is a student of history (his version at least), here's an overwhelming historical fact: no country in the history of the planet has borrowed its way to prosperity......and guess what, the U.S. will not be the first.

6) We are like Japan...

Except different in every way i.e. the rest of the world cannot bail us out while we are going through the death throes of deflation...We (the U.S.) are not a primarily export-based nation, like Japan, duh !!! and the rest of the world relies (25%) on our consumption...

7) I, Karlgaard, like Barry Ritholtz and Doug Kass because they think like me and therefore reinforce my overwhelming need to believe that the future will be just like the past. I also would like some Google links into their sites, which I just got.

I was going to call this the Kass collapse for that other smug disinformer, but thanks to his timely article Karlgaard got the honour.

The basic overall theme here is that 'ol Rich can't look into the abyss because it's "too scary". I hear this all the time, that the economy can't get worse because that would be really bad. Ralph Acampora just said the exact same thing in the NY Times Article here:

“I don’t want to agree with him, because if he’s right, we’ve basically got to go to the mountains with a gun and some soup cans, because it’s all over.”

So, let's get to the heart of the denialism movement, 50,000 plus children worldwide die every day because we can't come up with a few dollars worth of food and medicine, but the Baby Boomer generation can't face life without Sauvignon Blanc.

Sorry folks, largely owing to the likes of Rich Karlgaard and his comfort-seeking brethren, we are going down again (much) sooner than one would like to think. Those who do not acknowledge or comprehend the overwhelmingly deflationary forces that are gathering at this point in time, do not understand the credit-based monetary system, economics, or even basic math, which unfortunately describes the vast majority of economic commentators at this juncture. Until you get a package of hundred dollar bills in the mail from Helicopter Ben Bernanke, any fears of inflation and indeed fantasies around reflation, are totally unfounded.

Back At the Precipice

2010-06-23T14:17:00.001-07:00

Like groundhog day, the U.S. and other Western economies are once again at the edge of the economic precipice. The nascent economic recovery is stalling out only 9 months since Bernanke declared the "end of the recession". Of course, for those 10% officially unemployed (17% when you include people who have given up on finding employment), the recession never ended. Wall Street as usual is in total denial, because the average expansion since WWII has lasted 40 months, so the piggies are not yet ready to leave the trough this early in the cycle when the consensus is that "there must be" more of that free money left in the Bernanke monetary punch bowl. Won't they be surprised.

Bear in mind that this depressionary relapse is occurring despite policy-makers having applied unprecedented levels of stimulus, both fiscal and monetary. The Federal deficit this year is 10% of GDP (~$1.5 trillion), which means that the Federal government has to borrow 30 cents for every dollar it spends just to propagate the illusion of recovery !!! That is a staggering fact: 10% unemployment despite a 10% of GDP deficit. And yet there are two moronic camps that keep arguing one on the side for more fiscal stimulus and the other on the side for fiscal austerity. These are like two fat bald men fighting over a comb on the deck of the Titanic. The mere fact that the economy is stalling out, despite a 10% GDP deficit means that fiscal stimulus at the margin is no longer working, because it has been overused. This chart below shows the marginal growth effect on GDP from an additional $1 of debt - it's now less than $.20 on the dollar ! Game over, man !

On the other hand, contrary to the tax-fearing "Tea Baggers", none of this money is EVER going to be repaid anyway, since basic math indicates we would need to grow the economy by 30% (assuming no changes to tax rates) just to eliminate the deficit, to say nothing of paying down the additional trillions in debt that will accumulate in the meantime.

So, despite and because of the Federal Reserve giving out free money at 0% and the Federal Government borrowing a third of its annual budget, policy-makers are now completely out of ammo. Even as fresh signs of renewed downturn abound, in the recent horrendous housing numbers, pathetic employment figures, and leading economic indicators , which are all pointing down.

But you don't need fancy data to tell you the economy is slowing. Just today, the yield on the 10-year Treasury bond reached 3.11%, a level it has only touched twice since 1962 ! i.e. bond markets which are usually concerned with inflation are signaling that fear of inflation has left the building. In line with that sentiment, Bill Gross from Pimco (world's largest fixed income management firm) speaking on CNBC admonished the Fed to state that they will keep interest rates exceptionally low for an "exceptionally long" period of time i.e. keep the free money flowing and love me long time Sugar Daddy. No conflict of interest there at PimpCo.

Meanwhile, those few economists lucid enough to even consider a "double dip" recession are just rearranging deck chairs on the fat man's Titanic. Sure, unlike the rest of their irretrievably clueless brethren, they at least have a latent sense of impending downturn, and yet these few are still too conventional in their thinking to realize that the economic ship is already keeled over at 90 degrees and getting set to sink inexorably to the bottom.

And that is the state of the U.S. economy. Hard to imagine that Europe is as bad or worse. Several well known European countries are on the verge of sovereign debt default and one does not have to be a genius to figure out that it will only take one default to fell the others like dominoes. All of these countries (as does the U.S.) rely on well-functioning credit markets to rollover their debts on an ongoing basis. Once risk aversion sets in and interest rates rise beyond a certain point, then default becomes inevitable as the deficit/debt service burden becomes too large and unmanageable. As stated before, it's only because the U.S. dollar is the world's reserve currency and hence the only viable safe haven from a liquidity standpoint, that allows the U.S. government to pursue the profligate path versus the austerity path being forced on Europe. Of course at some point, the U.S. government debt ponzi will collapse as well, when investors repudiate U.S. debt and the dollar, but that will likely be *some time* down the road closer to the end of the deflationary cycle that is still just getting underway.

For those looking to protect their assets through the deflationary cycle, here is what I recommend. And yes, TLT (long-dated Treasuries) are still outperforming well. Even Pimco recently got back onboard the Treasury wagon.

[FYI, for more insight on deflation, Robert Prechter (EWI) recently gave an excellent interview for the web site "The Daily Crux" which you can read for free here]

Drill, Drill, Drill

2010-05-31T19:31:00.001-07:00

Owing to this horrifying BP oil spill, it is now blatantly obvious to all but the thickest observers that America's addiction to oil is the greatest threat facing this country now and in the future. America has sold its soul to the oil industry and the end-game is now unfolding. What was once a secure source of energy that enabled economic growth and progress has now become a massive ball and chain that will severely inhibit all economies rigidly tied to fossil fuel infrastructure.

The threats are overwhelming, with clear linkages between the environment, the economy and national security, three areas that one would think are high priorities to policy-makers. And yet, like the 800 pound gorilla in the room, policy-makers of all stripes still walk on egg shells around the slimy oil industry, even as it sponsors global warming disinformation and fights tooth and nail for more drilling rights in the gulf, not withstanding the current environmental fiasco. Obama now looks like a total fool for having opened new areas to offshore drilling just 3 weeks before this catastrophe started, no doubt alienating a big part of his political base. Meanwhile industry tools Bobby Jindal (Governor of Louisiana) and Louisiana Congressman Charles Boustany are bent hard over opposing Obama's 6-month drilling ban which was intended to give time to investigate the root cause of the oil spill and take corrective action. It's mind boggling that these shills can't see taking 6 months to figure out what happened and how to prevent the same in the future, even as their state's fishing and tourism industries are in the process of being wiped out.

This gulf oil spill disaster is just the latest reminder that the industry as a whole is taking on greater and greater risks in its quest for oil. Rigs are operating at extreme depths using unproven methods without adequate safeguards. All appropriate regulations have been bypassed, as the necessary regulatory agencies were greased up front, assuring swift approval without adequate (any) environmental review. Speaking to an environmental attorney this past weekend, he told me that all of these deep sea rigs were approved on the premise that they posed de minimis environmental risks ! i.e. the lowest level of environmental review was required, basically a rubber stamp.

And if you think this BP gulf spill is bad, clearly this is just business as usual for the oil industry pigs who have left their greasy hoof print in every corner of the globe.

Hurricane Body Blow

Those cruel gods of reality have found a most direct way of punishing the U.S. for its oil addiction. It's a hard fact that the average hurricane is now 50% stronger than it was 40 years ago, and worse yet the occurrence of deadly category 4 and category 5 hurricanes has also increased proportionally. Although, oil industry apologists and everyday morons still deny the linkage between burning fossil fuels and environmental catastrophe, these are the types of people who will deny anything that is not in their own immediate self-interest. They are like a a 400 lb fat man who can't get out of his own way and needs every ounce of energy just to get back into the buffet line.

As for the legitimate scientific community, there is now overwhelming scientific agreement on anthropogenic (manmade) climate change. Even the American Association of Petroleum Geologists has recently shifted stance to a new "non-committal" statement, although also (finally) admitting:

"Climate change is peripheral at best to our science…. AAPG does not have credibility in that field…….and as a group we have no particular knowledge of global atmospheric geophysics".

Oh right, now they tell us, I wouldn't trust these corrupt house boys to tell me the time of day.

Back to the key point, this season NOAA expects 8-14 major hurricanes, which would make it one of the deadliest seasons ever recorded. It's not hard to predict that the growing ubiquity of these deadly hurricanes is going to eventually decimate a majority of gulf coast and Atlantic seaboard communities, causing widespread economic dislocation.

Between oil spills, rising sea levels, deforestation, desertification, droughts and recurring Katrina's, the credibility of the oil industry and its copious disinformers will eventually be lower than Wall Street's. Unfortunately that day will likely come at a time when it will be far too late to do anything of consequence about the problem. Suffice to say that by the time there is political consensus on global warming and the need for immediate action, there will be a lot of bodies buried.

The other blood-stained aspect of this oil soaked faustian bargain we have entered into, is this oil-for-souls economic/military "strategy" that has grown out of control in the Middle East. Apparently squandering hundreds of billions in oil payments to the Saudis, Iranians, Kuwaitis and other corrupt Middle Eastern regimes has not been a great idea. Come to find out, some of the hundreds of billions we gave them, was not just used to prop up puppet governments and corrupt potentates, but it also found its way into the hands of dozens if not hundreds of terrorist groups. Using armed coercion to keep these same terrorist malcontents at bay in the region hasn't been working out great either. These costly, never-ending wars in Afghanistan and Iraq have simply further hollowed out, destroyed, and otherwise destabilized those failed states which will no doubt become renewed hot beds for terrorist activism when the U.S. inevitably pulls out. That will leave the region with two very unstable and hostile nuclear armed regimes in Iran and Pakistan, augmented by two or more totally failed and anarchic states (Iraq, Afghanistan, Yemen etc.) that can be used as training bases. Essentially, it will be a nuclear-armed insane asylum, having a major axe to grind with the West and the U.S. in particular. Meanwhile, from an economic perspective, along with outsourcing, this entire oil import strategy has contributed to the total depletion of the economy and left the U.S. imminently dependent upon the generosity of foreigners for day-to-day funding and rollover of debt.

And yet, for all that, the U.S. is the only major developed nation that still does not have a basic consumption tax on oil, therefore we are essentially subsidizing the entire oil industry with all of its environmental "side-effects" on top of subsidizing the entire Middle Eastern terrorist complex.

Idiocracy Realized

2010-05-25T19:42:00.000-07:00

Ayn Rand would be proud. These past 50 years have been an unprecedented orgy of consumption and self-interest that would make even her blush. Granted, the economy has devolved into a Frankenstein's monster of crony capitalism with a dash of pseudo-socialism. Unfortunately the system of "pure capitalism" that she envisioned currently only exists in Milton Friedman's text books and in those parts of Latin America where it wiped out entire economies and impoverished millions. Here in America, we will get there, but these things take a bit of time.

She would be pleased to see Wall Street firms back at work, following a (very) brief hiatus, busily securitizing and liquidating the country. She would nod approvingly at a growing gap between rich and poor now back to historic levels last seen in the 1920s - further proof that altruism is indeed dead and long buried. She would note the 3 billion plus people across the globe living on less than $1/day and the 50k+ children dying each day for want of a few dollars of food and medicine. She would give a nod to our fortitude to allow these indolents to suffer the inevitable consequences of their laziness and inefficiencies.

She would highly approve of the populist tea party movement enthusiastically railing against its own interests and the "profligacy" of the current Administration, not withstanding the 30 previous years of squandered resources and deficits. Talk about closing the barn door after the horses are out. I cannot fathom the average individual taking to the street to oppose the extension of health care benefits to the unemployed, yet implicitly supporting tax cuts for the ultra wealthy, copious handouts for the Beltway bandits, troops in 140 countries, 18 aircraft carrier groups and 2 totally pointless wars. Go figure.

I also can't reconcile those who seemingly profess a belief in Judeo-Christian values while enthusiastically embracing Ayn Rand's decadent ideology of "rational self-interest". After all, Ayn Rand considered altruism to be immoral, thereby not only bastardizing the term "moral", but also taking a diametrically opposite view to that other well known Jewish philosopher.

All sarcasm aside, I don't think even Ayn Rand could get her demented mind around this current fiasco we call the economy. The fact remains that any economic system that is systematically dismembered by special interest groups will fail, be that Capitalism, Socialism, Communism or any other system we conjure up. Political operators believe that the status quo is sustainable and even desirable - this endless oscillation between one political ideology and then another, each allowing its constituent crony special interests to feast at the public trough. Yet just an ounce of honesty and decency reveals that to be a false and self-serving belief. We could completely swap out and replace the entire current batch of jokers on Capitol Hill with a completely new crew and yet obtain the same deleterious outcome, as long as special interest groups have unfettered access to public money and power.

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The rest of this entry is a time capsule for the future, as a testament against the burgeoning if not fully realized Idiocracy. Following is a list of *some* of the more egregious widespread ideas and practices that years from now the survivors (if any) of the impending Dark Ages will not believe are commonly accepted both here in the U.S. and across much of the developed world:

1) Running fiscal and trade deficits for 30 years straight
(Except for a couple of years during the Clinton Administration when tax receipts from the tech bubble caused a temporary fiscal surplus )

2) Using cheap loans and low interest rates to "grow" the pseudo-economy via over-consumption and misallocation of capital, conveniently sidestepping each financial crisis by adding yet more monetary stimulus, until the entire system finally collapses in a deflationary credit collapse on a scale unprecedented in history

3) Spending Social Security and Medicare tax receipts as general revenues, thereby bankrupting the system and leaving future generations (and the Boomers) with no social safety net

4) Outsourcing an entire manufacturing base to foreign countries along with all of the accompanying managerial and engineering skills and intellectual capital, replacing these industries with Starbucks baristas, mortgage brokers, and bar tenders

5) Using homes like ATM machines

6) Paying Wall Street twenty-somethings millions of dollars to day-trade pieces of paper back and forth in a zero sum game while the real economy and real jobs are outsourced to foreigners

7) Injecting 80 million barrels of oil per day into the atmosphere and then ignoring the advice of the overwhelming number of climate scientists; preferring instead to follow the hack advice of infotainment talk show hosts, oil industry owned pseudo-scientists or Billy Bob next door who has been faithfully assimilating the Op/Ed section of the Wall Street Journal on his way to the Sports section:

- Despite hurricanes growing in force by 50% over 40 years
- Polar ice caps melting at unprecedented rates
- Acceleration in temperatures and growth in atmospheric carbon occurring at fastest rate in all of Earth's history
- Mass extinction of species occurring at fastest rate in Earth's history

8) Funding terrorist enemies in the Middle East via their wealthy oil sponsors who pretend to be our so-called allies in the war on terror, while we pretend not to notice...

9) Fighting two endless and pointless wars in the same region.
(Small hint for policy-makers: The war on terror can't be won; terrorism is a method of warfare, not a specific instance of war, uh duh!)

10) Electing a drug-addled, alcoholic, 'C' student, draft dodging dilettante and Alzheimer-ridden B-actor to the most powerful political office on the planet. More generally, electing smooth talking salesmen with no history of accomplishment who spend half their time campaigning and the other half of the time making fancy speeches promising the impossible.

11) Pumping our children full of factory junk food toxic waste while obesity and diabetes rates skyrocket amongst the young, all in the name of "consumer choice" i.e. the trojan horse for selling more corporate crap

12) Vastly overpaying country club CEOs tens and hundreds of millions of dollar to layoff millions of workers, outsource the most productive part of the economy, and otherwise drive the country into depression. Meanwhile, minimum wage is a measly $7.25, lower than it was in 1974 adjusted for inflation (i.e. 1974 equivalent is ~$10).

13) Producing an overwhelming preponderance of ESPN-addled boy-men too preoccupied with sports games and Xbox to notice the world disintegrating around them.

14) Using 5x as much resources as the average person on the planet and believing this to be a sustainable and scalable way of life, even when confronted with $147/barrel oil

Tsunami Alert

2010-05-07T18:56:00.000-07:00

This week was a harbinger for the near future. The financial crisis and riots in Greece are just the canary in the coal mine for the impending global credit panic and ensuing anarchy that will make 2008 seem like a picnic. Just as the collapse of New Century financial and two Bear Stearns hedge funds was the harbinger of the subprime crisis (totally ignored by Wall Street and the media) so too, Greece is advance warning of this next much deadlier stage of the unrelenting credit crisis. It will likely only take one sovereign default to trigger an avalanche of defaults among all countries that have borrowed heavily and rely on accommodating credit markets to rollover their debt e.g. Spain, Portugal, Italy, Ireland, UK, Japan and a host of Eastern European countries.

The Elliot Waves now show that we are at the forefront of the biggest market decline in U.S. history, aka "Primary 3" (P3). Primary 1 was the market decline that started in 2007 and ended in March 2009 wiping out over 55% of market value. Primary 2 was this past year's countertrend rally. P3 will reassert the downtrend and take the markets far below the P1 low, potentially erasing the past 40 years of stock market gains, according to EWI. Before you dismiss these folks and Elliot Wave Theory itself out of hand as "financial astrology", bear in mind that while their timing was early, they called for a major top in 2007, they precisely called the low in 2009 (to the week), and now have been early (as have I) for calling a top here in 2010. If they are right now again, then that would prove the overwhelming majority of financial forecasters to be drastically wrong once again, and the early timing of the call will be rendered wholly irrelevant by the sheer magnitude of the decline.

Initially here the markets *may* stair-step their way down, as investors continue to "buy the dip", however, the inevitable flight from risky assets will likely cause a cascading panic crash. Yesterday was a small taste of just such a crash, as the market lost ~7% in about 10 minutes and then quickly recovered. We were told that this was a "trading glitch", except there is still no proof of any erroneous trade. The fact is there was no glitch, the mini-crash was simply a function of sellers overwhelming buyers. It was a one-sided market to the downside, which is exactly what we should expect after a year long Fed sponsored liquidity-driven rally intended to prop up Wall Street and propagate the illusion of recovery. Computer trading programs further contributed the problem as up to 70% of market trading volume is now controlled by automated trading programs. Many of these programs use technical (price) indicators to determine the current direction of the market and then drive momentum in the direction of the prevailing trend. Now that the trend has turned down, these programs are clearly exacerbating downside momentum.

Contributing to the inevitable panic will be the realization that the Fed and Governments are powerless to do anything, since they already squandered their resources in 2008 bailing out the investor/speculator class at the expense of the Middle Class. This time there will be no bailouts, not only because they will be politically unobtainable, but also because the scale of the market collapse will dwarf government/Fed resources.

As expected, U.S. Government Treasuries were a safe haven and long-dated Treasuries massively outperformed even beyond my expectations. Already Nassim Taleb's "no brainer" strategy of shorting Treasuries has turned out instead to be a "no brain" strategy. I can't imagine recommending shorting an asset that has proven to be a safe haven throughout the past weeks' turmoil. That is a boneheaded move, even by Ph.D standards. Yes, Gold held up well also, but as I have explained before, I don't see gold being a liquid safe haven during extreme deflation, as the amount of dollars in circulation will collapse, causing the prices of all things dollar denominated to fall. Further to the point, the U.S. dollar screamed higher against all other major currencies (except JPY), which caused further turmoil in the markets, as Wall Street's hot money (hedge funds etc.) are still clearly positioned for the "reflation" trade (short dollar, long commodities, cyclicals, emerging markets).

In short, if you have not already stocked up on food and ammunition, now would be a good time to do so, post haste.

Ayn Rand Gone Wild

2010-04-28T19:28:00.000-07:00

This Goldman Sachs inquiry is beyond sickening. The usual Ayn Rand/Gordon Gecko-like apologists are out in force telling us that what they did was just business as usual and standard operating procedure for the financial markets. Just this week, "The Economist" (4/24, page 13) is saying that Goldman was greedy, but not guilty. That may be technically correct, but this is not just a legal issue, this is a fundamental moral issue, and anyone who does not think that what these pigs did was unconditionally wrong is morally bankrupt. "The Economist" argument is that various market participants go to market for various reasons and seller views of an asset by definition are opposite of buyer views. That is all well and good in a secondary market between parties of relatively equal information. However, these securities were sold in the primary market in which Goldman was the originator of a product certified to be high quality (AAA rated). To not make a distinction between Goldman's role as a market maker v.s. its role as an underwriter is amateur reporting. The underwriter role conveys a fiduciary duty that was clearly abrogated.

The Big Short (if you haven't read it, I highly recommend it)
By creating synthetic CDOs, Goldman essentially created a casino which allowed speculators (including themselves) to place billion dollar bets against the U.S. housing market. It wasn't enough to create plain vanilla CDOs which were layered packages of real mortgages and therefore had a modicum of investment purpose however foolish and ill-fated, no these "synthetic" CDOs were for pure speculation, a hand picked set of reference mortgages known to be particularly toxic and hence prone to failure. Bear in mind that the entire motivation for buying CDOs was to provide diversification by pooling a random set of mortgages from across the country of varying degrees of risk. Goldman did the exact opposite, they handpicked a pool of the most highly correlated, lowest quality mortgages they could find to guarantee the CDOs would fail. As soon as they sold these CDOs, they then bought insurance against them so they could profit from the inevitable failure. Moreover, by creating synthetic CDOs Goldman inflated a secondary (derivative) market that actually dwarfed the underlying mortgage market, thereby putting the entire system at risk when the whole pyramid inevitably collapsed. In all of this of course there were two main patsies, one of which was the overseas investors who were told these pieces of garbage were "AAA" rated securities which is how Goldman represented them to investors (thanks to the rubber stamp of the corrupt Ratings agencies). The other patsy of course was AIG who actually sold insurance guaranteeing these CDOs would not fail, much of which was not bought by investors to hedge their exposure, but by speculators hoping they would fail. The ultimate patsy however was the American taxpayer who ended up having to bail out AIG to the tune of $180 billion for the most part to pay off the speculators who had been betting against the U.S. middle class. What sick irony that the U.S. middle class tax payer was forced to bail out the scum bags who were betting that ordinary people would lose their homes. Were it not for the bailout of AIG, most of the speculators against the CDO market would have lost their bets and Goldman Sachs might not even exist right now. The fact remains that in the fall of 2008 there was a run on all of the investment banks - not just Lehman Brothers. Goldman Sachs was just a little further up the chain and rescued by the massive Bernanke/Paulson give-away.

So what did Goldman get for all this? In addition to getting $13 billion of the taxpayer AIG bailout money, for the bets they made against the very products they had created, they also "earned" roughly $3.7 billion in fees to originate these "crap products" (their own words from an email); products which had an average shelf life of about 18 months before self destructing and hence jeopardizing the entire financial system. Bear in mind, these were not trades in the secondary market. These were not junk bonds after-the-fact, trading for cents on the dollar, these were junk bonds at the point of origination that were marketed as high quality/high price (low yielding) securities. I submit, in what other industry can a company manufacture what is by their own admission a shit product, take out insurance against its failure and then still be in business two years later making record profits and paying out record bonuses? The analogy would be like Ford manufacturing fire-prone Pintos in the 1970s AND taking out life insurance on the buyers !!!

That there are still cheerleaders in the press and on Wall Street defending this type of destructive rent seeking and greed addled behaviour is a sign of the times and shows that the age of nihilism has reached a new all time low.

Slow...Motion...DISASTER

2010-02-17T17:03:00.000-08:00

According to EWI, the top in the stock market occurred on January 19th. I believe they are correct. If so, then we have also seen tops in oil, gold and "risk" currencies. The safe currencies are therefore now the US dollar and Swiss Franc. The Japanese Yen perhaps as well, but I wouldn't bet that way due to that country's enormous debt load, which on a relative-to-GDP basis makes the U.S. debt look puny by comparison.

Humpty Dumpty
Therefore, the long anticipated 3rd wave meltdown is (very likely) underway. This next leg down in the ongoing financial crisis is starting as a slow motion train wreck, but will soon accelerate as the point of recognition occurs and panic spreads. Panic is inevitable, because everyone will come to realize that the government authorities are completely powerless to stop the meltdown. All of the stimulus, liquidity, credit and facilities put in place in 2008 will fail catastrophically. In the end, the only thing the 2008 bailout will have done is leverage up Wall Street one last time, and give the Greedbots one more bag of easy bonus money just before the house of cards collapses and stays collapsed.

Tallest Midget in the Circus
As expected, the dollar has been rallying for weeks now, especially vis-a-vis the Euro, because the Eurozone (Greece, Spain, Portugal, Italy, Eastern Europe) is likely the next source of financial chaos. So, for likely the last time, the unloved U.S. dollar will once again be the safe haven of choice during the ensuing panic. This will no doubt come as a great surprise to many people, especially the "tea baggers" and the Peter Schiff acolytes, but as EWI have carefully explained, a dollar shortage is exactly what we should expect in a credit deflation, as the supply of dollar-based credit collapses. I say for the LAST TIME, because this will likely be the dollar's last and greatest hurrah, as we eventually transition through deflation to the great printing of paper dollars that will undoubtedly lie somewhere down the road...

From an investment standpoint, EWI/Prechter has long advocated moving the majority of one's assets to short-term Treasuries, and I have advocated the same position on this blog. However, just this week, the self-anointed god of Finance and Economics, Nassim Taleb, recently told Blooomberg that it is a "no brainer" to short (sell) U.S. Treasuries. You may recall, that Taleb is most famous for his "Black Swan" theory, which postulates that rare and unpredictable events cause most Wall Street investment strategies to fail over the longer-term (I paraphrase). Obviously from an outcome standpoint, he has been proven correct, however, I disagree that the turmoil in the financial markets is at all rare or unpredictable i.e. these are more white swan events than black swan events. If anything, extreme volatility has become much more common in the past decade(s) and the inherent short-term/highly leveraged nature of Wall Street strategies makes the inevitable catastrophic outcomes very predictable. The reality is that most Wall Street trading strategies (hedge funds etc.) are like call options - heads I win and take home a massive bonus - tails I walk away and leave the investors, tax payers and system at large holding the bag. Taleb is very naive to think that Wall Street bankers are unaware of the underlying risks they take, considering the short-term incentives that are in place to take huge risks with other people's money i.e. they don't care. Therefore not withstanding Taleb's penchant for profound insight, I was not fazed when he made the "no-brainer" comment, because to believe Treasury interest rates will rise, is an implicit belief in reflation, which as I stated recently, is extremely improbable, if not impossible. If we have learned only one thing in the past 10 years it should be that any time a Ph.D tells us that an investment strategy is a "no brainer", you should run the other way, quickly, before a Black Swan swoops out of nowhere and shits on your head. Yet, magnanimous as always, I will agree to call Taleb's a "no brain" strategy.

Back to investing, the reason for advocating a long Treasury position is the same reason for being long the dollar - as a safe haven during deflation. When money flows out of risk assets and carry trades it will come back to dollars (the funding currency) and it has to be "parked" somewhere. It won't be parked in risky assets such as stocks or "spread products" (corporate bonds, municipals) etc. so that leaves Treasuries. Yes, the national debt and deficit are large, but relative to other countries (e.g. Japan) the debt load is still manageable (short-term) and in addition, the U.S. has options that the Euro countries do not have (e.g. monetizing the debt), explained in more detail below.

There are 3 major types of risks related to owning Treasuries:

1) Default Risk: Risk that the borrower (U.S. Government in this case) will simply not repay bonds at face value. I see Default Risk for Treasuries as being ZERO. The U.S. government's debt is all dollar denominated, which gives it the option to monetize its debt by having the U.S. Fed buy Treasury debt directly. If you think this can't happen, you are wrong, because it already happened last year to the tune of $300 billion under the aegis of "Quantitative Easing".

Keep in mind that if there is default risk, then it should be the same for all maturities of debt i.e. if the U.S. government decides not to repay its bonds, then logic dictates that all bonds will be affected not just select maturities. If anything, short-term bonds "could" be more at risk, since they need to be "rolled over" (re-paid) far more often than long-term debt.

2) Purchasing Power Risk: aka. inflation risk. The risk that market yields will rise, causing bond prices to fall. In a deflationary environment, inflation risk will be ZERO and if anything, nominal interest rates could be negative and still provide a positive real return. Imagine a scenario where GDP is down -20% year over year and prices decline by the same amount -20%. In that case, a market yield of -15%, would still net the holder 5% adjusted for "inflation" (deflation).

3) Rollover Risk: Rollover risk is the opposite of inflation risk, it's actually deflation risk. As indicated under the hyper-deflationary scenario above (-20% inflation) it's very possible that yields would go negative across the entire yield curve (all maturities). At that point you would be PAYING the U.S. government to borrow your money !!! At one point during the Lehman crisis in 2008 T-bills went briefly negative, so this is more than a hypothetical scenario. Now, would short-term yields go 15% (annualized) negative? That seems unlikely, but who wants to pay the Government to borrow their money? Fortunately, there is an easy way to protect against rollover risk, by simply buying longer dated maturities that do not roll over as often. Also, longer dated bonds will actually increase in value (potentially substantially) as yields fall, and you don't have to hold longer-dated bonds through to maturity (nor would you want to), you can sell them at any time i.e. they are highly liquid...

In summary, though I have long "advocated" the EWI party line of owning only short-term Treasury debt only during the deflation phase, I personally also own longer dated maturities to guard against Rollover Risk and provide some upside in the event of an anticipated major move down in yields. Given that Default Risk is assumed to be zero and/or at least the same for all maturities, Inflation Risk is zero (assuming deflation), and Rollover Risk favours long-dated, maturities, I cannot explain EWI's preference for short-dated Treasuries.

That said, the easiest way to own Treasury debt of all maturities is through the iShare ETFs which trade like stocks:

SHY: 1-3 year maturities
IEI: 3-7 year (probably the best compromise between long and short-term)
IEF: 7-10 year
TLT: 20+ year (most volatile/speculative, but most upside if yields fall)

Good luck !

MELTDOWN is INEVITABLE

2010-01-13T07:48:00.000-08:00

Looks like the boyz on Wall Street got paid after all. So while the lucky few count their million dollar '09 bonuses compliments of the 2008 tax payer bailout, let us reflect on the year ahead.

One thing that I am continuously amazed by is the general widespread ignorance of history or insight that predominates current thinking about the economy and the ongoing crisis. This is true of the Mainstream Media, the Government and even to much extent the "alternative" (blogosphere) media that seems to have absolutely no consensus on how we got here or what is likely to happen next. As I have stated before, part of the reason for the conflicting viewpoints is purely due to greed and the never-ending desire to find some way to profitably "trade through" this fiasco - be it in gold, stocks, emerging markets etc. Another key reason seems to be that people extrapolate from their own past into the future which precludes them from envisioning any type of economic paradigm shift occurring in their lifetime, regardless of overwhelming facts and data all pointing in that direction. As an example, even Nouriel Roubini who is constantly being derided as "too bearish" and "Dr. Doom" is really not that bearish in the grand scheme of things. He is by no means predicting a deflationary depression or an event that would put in question the Western economic system as we know it. Compared to EWI, Roubini's predictions are outright tame yet both parties often reference the exact same data. Clearly, someone has to be wrong in this equation, and my money for being wrong is on those pseudo-bears (Roubini, Ritholtz, Shedlock etc.) who somehow conclude that one plus one can equal three.

Therefore, in an effort to maintain my own sanity and to prove that the rules of cause and effect have not been permanently suspended, I will elucidate what I believe at this juncture are the plainly evident and immutable facts which will lead to the inevitable if not imminent economic meltdown:

Fact #1: Monetary Policy is a latent catastrophe that has reached its predictable bad ending
The use of Monetary policy to stimulate the economy by encouraging debt accumulation was a stupid fucking idea in the first place and doomed to fail from the very beginning. Thanks to this officially sanctioned Ponzi Scheme, all Western nations are now saddled with enormous debts by all constituents: households, corporations, governments. Still, as evidenced by widespread and increasing foreclosures and bankruptcies, the marginal ability to stimulate the economy by tempting households to take on still more debt has reached its physical limit. The Zero Interest Rate Policy (ZIRP) used between 2001-2003 led to the housing bubble, subprime meltdown and the financial collapse of 2008. Now we witness a renewed preponderance of leveraged speculation, carry-trades and narrowed risk spreads evidencing that the current ZIRP policy will lead to a similar meltdown, only likely much sooner and of MUCH GREATER MAGNITUDE. Moreover, all of the debt-related jobs that were created during the Bush years (construction, mortgage finance) have evaporated, yet the debts accumulated during that period still remain. So, this time around the Bernanke Fed has all it can do to stimulate the economy in the short-term let alone pretending to create a sustainable economy in the longer-term.

Careful what you ask for: The reason why the Monetary Policy Ponzi Scheme was able to become the largest Ponzi Scheme in world history, is because the U.S. dollar is the reserve currency. It's every central banker's and politician's dream to control a reserve currency, because then they can collect seigniorage which is a fancy term meaning revenue derived by printing money. Government is the primary beneficiary of seigniorage, because it takes time for prices to adjust to the new level of money supply i.e. those parties closest to the printing press benefit while the majority at large suffer the effects of inflation. And while seigniorage seemed like a good idea at the time, maintaining the U.S. dollar as reserve currency allowed U.S. policy-makers to ignore the growing fiscal, monetary and trade imbalances to the point that they have grown to totally uncontrollable and lethal proportions, where they are right now. In other nations this could never happen. In Canada during the early 1990s, that government was forced to adopt austerity measures to defend the C$ which was losing substantial value due to concerns over the sovereign debt load. By contrast in the U.S., China and Japan have been more than willing to finance the trade imbalances and inevitable debt build-up to keep the dollar relatively stable and thereby give U.S. policy-makers the cover they needed to bankrupt their nation. What did China and Japan get in return for their inevitably worthless US dollar reserves? They got the majority of the U.S. manufacturing base and all of the related R&D and intellectual capital that goes along with it.

Fact #2: Fiscal (Keynesian) policy has been overused and is no longer effective
In Econ 101 we learned that Fiscal policy (government deficit spending) is intended to provide a source of counter-cyclical demand to mitigate reduced private sector demand during a recession, thereby reducing unemployment and keeping businesses solvent. No, it was not intended as a funding source for wars of misadventure nor to buy votes during elections. In addition, common-sense dictates that a nation must run surpluses during expansions to offset the deficits accumulated during recessions and thereby keep debt levels manageable. However, since Reagan took office with his gang of Neocons and Supply-side Fucktards, the U.S. has run deficits non-stop throughout recessions and expansions (except for a few of the Clinton years). Not surprisingly, now that the U.S. really needs a fiscal stimulus, the marginal impact of fiscal stimulus is substantially muted by the continuous deficits which have become baselined into GDP i.e. the 3% drop in GDP experienced in 2009 occurred despite Bush's $400 billion war deficit which was carried forward from 2008!!! So the Obama Administration was left to dig a hole within a hole in order to keep the economy out of depression in 2009. This is how $2 trillion dollar deficits occur. In addition, the accumulated debt and debt service costs are another source of permanent drag on the economy as money spent on debt service does not boost the economy. Of course there are all sorts of disinformers out there now saying that Fiscal (Keynesian) policy does not work at all (and never did), which is a lot like taking antibiotics for 30 years straight and then declaring that they don't work.

Fact #3: Reported GDP has been massively inflated
All of the approximately $50 trillion of actual debt that has been accumulated by households, corporations and government AND the money raided from social security and medicare has massively inflated recent years' GDP to an overall tune of around $100 trillion in total liabilities. With annual GDP of around $13 trillion, that gives an idea of the extent to which all of the debt and borrowing from the future has inflated past years' GDP. Clearly the "gap" between the GDP we have become accustomed to and long-term sustainable GDP is enormous. More to the point, once the credit deleveraging cycle goes into high gear, that gap is going to get closed rapidly, causing severe economic "dislocations". Many people underestimate the impact of raiding Social Security and Medicare, but its a lot like losing your job, taking a part time job, and then raiding your 401k retirement plan to prop up your lifestyle. It seems like a good idea at the time...

Fact #4: The U.S. outsourced its manufacturing base and ate its seed corn
One of the dislocations that will be caused by the GDP gap getting closed, will be the need to rebuild the economy from the ground up and to create new industries and real jobs that last longer than one election cycle. Unfortunately much of the U.S. manufacturing sector and its associated managerial skill base, R&D capability, engineering mind-share, and intellectual property has been outsourced or retired. This is the biggest tragedy of the past 30 years - that one generation could literally sell-off an entire nation's collective intellectual and manufacturing capital that took hundreds of years and tremendous amounts of hard work and determination to build. This fire sale was an inevitable consequence of a nation too lazy and greedy to confront its declining global competitiveness and a declining standard of living. In fact, most Americans did face reality through their stagnant wages, foreclosed homes and recurring job losses; however, the 20% or so of Americans who own and run the U.S. opted to trade the entire manufacturing sector for a 30 year consumption binge that in the final accounting will leave nothing left to show for it.

Suffice to say, the days of the multinational reaping massive profits by building toys in Asia for $2 and selling them in the U.S. for $30 are soon-to-be-over. This entire strategy was supported by a global vendor-take-back financing scheme in which the Chinese were willing to recycle their profits back to U.S. consumers to borrow to buy more junk.

Fact #5: Likelihood of inflation extremely remote if not impossible
Those who are betting on inflation, apparently do not understand how money is created under the current system. Money is created when the Federal Reserve lends money to the banks who in turn lend to consumers and businesses. However, at this juncture most banks are in survival mode, using operating profits to offset relentless loan losses that are bleeding their balance sheets. So the banks as a whole cannot take any additional loan losses and therefore are in capital preservation mode. On the other side of the coin, most borrowers are already underwater on their mortgages and consumer loans and/or have impaired credit ratings, so the demand for new loans is extremely low, except by those who have impaired credit ratings and can't get approved anyway. All indicators show that reserves at banks are piling up instead of being lent, so the likelihood of expanding the money supply is extremely remote, making the prospect for sustained inflation likewise remote. Back in the 1970s when inflation took off, overall debt levels were low and the U.S. labour market was relatively rigid - prior to the advent of widespread outsourcing. Today, circumstances are the exact opposite, debt levels are at a historic extreme and labour markets are wide open. Domestic labour is under constant deflationary pressures from outsourcing and foreign import competitors.

Ironically, we have already been through 100 years of inflation and the dollar has lost 95% of its value since 1913, so those holding out for hyperinflation remind me of a man in the middle of the ocean looking for water. Considering that price inflation is dependent upon further credit expansion, the bet now is whether the credit bubble will keep growing or burst. I am clearly in the ready-to-burst camp and we all know that when a bubble bursts it does not get bigger it gets a whole lot smaller.

Fact #6: Hyper-Deflation is likely imminent
A final bursting of the credit bubble is likely imminent at this point, as the system is very fragile and the Fed can only keep so many balls in the air at one time. The collapse will be precipitated by a sudden loss of confidence in the financial markets and a stampede away from risky assets. As I have mentioned before, there are many potential catalysts for a near-term panic, but the largest one is the threat of sovereign debt default and an associated currency crisis which would start in one corner of the globe and quickly spread worldwide. Once that happens, credit will be withdrawn from the markets, risky financial assets will fall, demand will collapse, prices will deflate, profits will deflate, unemployment will rise, loan defaults will rise, more credit will be withdrawn - i.e. it will be an inexorable downward spiral. And prices won't be cheaper as in "hey, let's go buy a new computer" cheaper. Prices will cheaper be as in "hey, I don't have a job and can barely afford to eat" cheaper. At that point, it will become painfully clear just how far ALL prices for all goods, services and assets have been overinflated by the Monetary Ponzi scheme, as there will be way too little money chasing way too many goods.

This deflationary collapse will usher in the era of the cash-only economy in which everyone will trust only physical cash even though it still won't be backed by anything tangible such as gold. It's not clear how long this next phase will last as there will be many cross-currents and severe geopolitical dislocations to occupy policy-makers. Also, expect that the Federal Reserve's role and powers will be modified if not curtailed entirely which will only greatly exacerbate the crisis. As always, human beings will do the exact wrong things at the wrong time in over-reacting to the crisis, which will only make the crisis a lot worse.

In summary, all talk of economic recovery and the end of the recession is totally premature and unfounded. That the "best" and "brightest" minds of the day have all been fooled into thinking that the worst part of the crisis has passed is beyond staggering. When one considers the basic facts I laid out above, along with the key fact that we are now applying the same monetary and fiscal "fix" that actually created the problems in the first place then the truth is self-evident. As they say, you can't patch a dam with water, yet here we are trying to solve a debt problem by encouraging more borrowing. How many times do we have to see this movie before we remember the ending? Even in the just the past 10 years, we had the Nasdaq/dotcom bubble and crash, the housing bubble/crash, the commodity bubble/crash (remember oil at $150?), the 2008 subprime/Lehman clusterfuck/crash and now here we go again thinking this time it will be different. One can only conclude that we are due for one hell of a hard lesson that won't soon be forgotten.

Yes, you should hope that I am wrong about all of this.....but don't count on it.