Hotel California

Excellent article on ZeroHedge regarding the total amount of liquidity added to the markets just in the past 3 months.  Once one adds in the effects of earlier Central Bank monetizations, the total figure is $7 trillion of newly printed money having levitated the markets!  And everyone thinks that the markets are going up because the economy is getting better.  The economy is not getting better.  The U.S. government is borrowing 10% of annual gdp to obtain a 2% growth rate !  Yet the Idiocracy at large, which can no longer do basic math, has bought into the fantasy.  From economists, to the media, to the general public - no one questions this strategy.  Borrowing 10% of income to grow the economy by 2% - where the hell did the other 8% go?  It went to pay for a way of life that is no longer (never was) sustainable. It's also being used to get Obama re-elected, by supporting the illusion formerly-known-as-the-economy for yet one more year.   But don't worry, because Mitt Romney says he will cut taxes even further, because apparently paying for 2/3 of the Federal Government (borrowing the rest) is too much for taxpayers.  You can't make this shit up.

Credit Collapse Is Inevitable

While watching Bloomberg Asia this evening, I realized that every other message on the news ticker bore some connection to the impending (2nd) Greece bailout.

"Gold, stocks may fall once Greece deal approved"

"Bombay stock futures fluctuate ahead of Greece deal"

"U.S. stock futures up on word of pending deal" (I know, somewhat contradicts the first headline above)

"Soybean futures volatile ahead of Greece deal"

You get the idea.  With headlines like that, anyone who doesn't acknowledge the breadth and interconnectivity of the global Ponzi economy, is in major denial.  Greece is a country of a mere 11 million people out of 6.8 billion, yet the solvency of just that one tiny country is literally driving global asset price fluctuations, valued in the trillions of dollars.  And the primary reason for that power is leverage.  The globalized system is now so leveraged from Central Bank liquidity injections (QE1, QE2, ECB LTRO, Chinese RRR etc.) that small fluctuations and repricing in the nether regions of the global risk markets can cause massive, outsized reverberations across the entire globe.  Imagine, a global financial system that now requires the ongoing fiscal prudence of the Greeks, in order to maintain its stability!!!  (no offense to any Greeks, but that's a lot of responsibility).

In a liquidity driven environment, disconnected from underlying fundamentals, all asset correlations move to 1:1 and asset allocation decisions become binary:  Risk on.  Risk off.

And the real problem therefore is that Greece is not alone.  Greece is just one of dozens of countries globally that has borrowed itself beyond the point of no return (including the U.S. which is somewhere along that line).  Meanwhile, the fiscal cut backs (austerity measures) being forced on Greece make default absolutely inevitable, by exacerbating the economic downturn and reducing tax revenues.  (Not to say that there is any long-term option, other than default).  So Greece is only the first domino in a long series.  Once that domino holds or falls, the markets will rush towards the next domino (Italy? Portugal? Spain? Hungary?) and await the fate of that country's bail out.  Like a gun pointing at the head of the entire financial system.

Therefore, if global asset markets valued in the trillions of dollars are now so fragile as to be heavily influenced by some of the smallest and least fiscally prudent nations on the planet, then we have truly reached a stage where it won't take much more than for a butterfly to flap its wings in <Insert Country Here> to set off a global credit run.

ICARUS

Some may be wondering if I am reconsidering my overall doom and gloom stance given the spate of recent good news.

No chance.  Recent events and the crowd's group think bullish/denialistic interpretation thereof, have me only further emboldened.

First the (perceived) "Good news":

1) U.S. economic recovery perceived to be picking up steam

2) DOW back at the highest level since 2008

3) European issues, seemingly resolved for the moment

4) Occupy Wall Streeters settled down for a long winter's nap

1) Economy:

First, this can't possibly be considered a sustainable recovery from a debt crisis, when we are adding ever more debt to the pile to sustain that illusion.  This time, instead of consumer debt it's Federal government debt, but it's still money we are borrowing  from the future to pretend that we are wealthy today.

Suffice, to say that if policy-makers since World War II had been willing to borrow as much money (10% of GDP/year) as the current crop of clueless buffoons, then there would have been no recessions in the past 60 years !  Think about that, we could have just papered over every single recession with massive government borrowing and pretended they never happened.  So, any notion that the 2008 recession ever ended is complete denialism.  Believing that the U.S. will be the first nation in history to borrow its way to prosperity is a fool's errand of the highest order.

Meanwhile, on the jobs front, there are still 5.6 million fewer jobs today than there were in 2008, in the face of ongoing population growth.  Only an economist would say we are in a recovery when the average family is worse off now than it was 4 years ago.  

2) Stock Market:

This has been a purely liquidity driven market since 2009.  It's like a race car on nitrous oxide -  good for a few seconds and then it blows the engine.  First QE1 powered the market, then it was QE2 and now it's the ECB's "bazooka". All of these Fed/ECB programs are just central banks adding trillions of dollars and Euros of liquidity into the markets by buying government bonds.  This in turn drives down interest rates and sets off a global "hunt for yield" aka. rally in stocks and other risk assets.  It's a temporary illusion driven by liquidity but not supported by solvency.  Case in point, these Greek "bailouts" will do nothing to improve solvency.  The German government lends the Greek government ~100b euros and forces the Greeks to cut spending.  The Greek Gov't then turns around and uses the money to repay German banks on existing loans.  All the while, the Greek people are now on the hook for another 100b euros and their economy is spiraling into the abyss as the paradox of thrift takes a death grip on their economy.  The only ones being bailed out are the German and other European lenders.

Exhibit A: Effect of Fed/ECB on stock prices

Exhibit B: Apple - the bellwether stock of our time.

As you can see below, this past two weeks, Apple's stock went parabolic and surpassed $500/share and the half trillion market cap mark.  The last technology stock to surpass the half trillion mark was Cisco in March 2000.  I remember it well, because it occurred within days of the all time high in the Nasdaq.  It's not to say that there is anything magical about 500 billion market cap, but Apple's vertical stock price and the valuation accorded to the pending Facebook IPO (100x earnings) are harking back to the lunacy of the Dot Com era.  No thanks.  Been there.  Done that.

3) Europe Resolved

As I said above, "Extend and Pretend" are the order of the day.  The Exhibit A chart above shows the ECB just juiced the market to buy itself some time.  The only question on the table is how long will this rally last?

4) Occupy Wall Street settled down for a long winter's nap

Spring is around the corner...

The Idiocracy Swings

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

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

Attenuation

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

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

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

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

Riskiest time in human history, bar none.

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

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

2012 - The Year of Living Dangerously

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

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

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

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

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

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

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

My predictions for 2012:

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

2) Deep credit deflation, price deflation, economic deflation

3) Gold/silver/commodity collapse

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

5) Global unrest/anarchy - no place to hide

Advice: Follow the ZeroHedge/Anonymous Survival Guide

Happy New Year.

Stock Market Casino

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

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

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

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

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

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

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

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

The Country Club Still Thrives

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

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

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

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

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

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

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

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

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

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

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

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

WTF?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Thought Leaderless

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

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

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

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Doug Kass: Below are 10 reasons for my optimism.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Ponzi Supernova

The global Ponzi scheme is now going All In.  

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

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

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

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

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

Why the Bazooka will Fail Regardless

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

GLOBAL PONZI COLLAPSE - CHAIN OF EVENTS

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

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

But Europe Doesn't Matter, right?

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

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

Ok, so now picture THIS impending scenario: 

- MULTIPLE countries in Europe defaulting in sequence

- Dozens if not hundreds of banks failing globally 

- Dozens if not hundreds of hedge funds failing

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

ALL at the same time.

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

Or not...