Moral Depravity

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

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

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

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

Key facts: 

1) This fighter was intended to be low cost 

2) The project is 6 years late

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

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

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

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

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

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

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

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

3) Average "benefit" is $133/month

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

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

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

Batten down the hatches.

Reality Check 2011

(Barely) time for one more reality check.

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

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

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

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

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

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

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

Life after heroin

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

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

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

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

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

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

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

Not a Game

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

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

Survival Strategies (Invest at your own risk)

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

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

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

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

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

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

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

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

Good luck, we all need it.

Fiddling While Rome Burns

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

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

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

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

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

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

Deflation is Dead, Long Live Deflation

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

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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 !!!