Wednesday, April 27, 2011

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:


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


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.

Friday, April 22, 2011

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...

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.

Wednesday, April 20, 2011

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.