Deflation is Dead, Long Live Deflation

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.

Clowns to the Left, Jokers to the Right

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

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

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

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...

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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

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. 

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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

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

News by morons, for morons:

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

DEJA VU

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

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?