Thought Leaderless

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":

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

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

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

Ponzi Supernova

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

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

[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.

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

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

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

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...

---------------------------------------------------------------------------------------------------
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)

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:

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

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

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.

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

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

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].

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

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.