Thursday, July 21, 2011

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.

Thursday, July 14, 2011

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.

Friday, July 8, 2011

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).