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...

Another Glance Into the Abyss

What would you do?

The dreaded question I get from my poor Mom after she has been staying with me a while and enduring all of my ranting diatribes (I try to hold back, but can't really help myself).

Like most people she is familiar with most of the issues and has heard most of the facts and data, but also like most people she wants to conclude that things are going to be more or less the same in the future with some fine tuning.

For my part I first explain that the vaunted political system is not the answer, it's the problem.  Voting for one of two (or three) political parties that serve the same special interest groups is the fundamental problem with the system.   This is why, unlike most Libertarians, I am not a stark raving Ron Paul fanatic, because he has deluded himself into thinking that once he becomes President he can change the system from within i.e. change the Washington and Wall Street "Machine".  Yeah right.  Unfortunately old Ron would be eaten alive by the Borg,  if not neutered and lobotomized.  His ideas would be stillborn.  Even in the best case scenario, if he took over with a Republican majority in both chambers, Ron Paul has absolutely no plan for getting us from Point A where we are, on the edge of the cliff, to Point B, where we need to get to on the other side of the valley.  Between those two points is the beckoning economic abyss that will put to lie any notion that a 76 year-old codger can lead us through this mess.  The fact that he is willing to stand on that stage campaigning with a pack of sociopathic lying buffoons is another huge problem.  All of these politicians are campaigning v.s. doing, which is at the heart of the problem with the current political system.  Campaigning is rent seeking and a dead weight loss to society and a zero sum game.  So while I would gladly like to jump on the Ron Paul train, I can't buy that fantasy.  

As you can tell by from this blog, my party is the Anarchy Party, not by choice, but by lack of alternative.  The Anarchy Party, has no leader, no campaign, and no funding.  It doesn't need any of that bullshit.  It has only one constituent - a constituent which is far more powerful than anyone on this planet: aka. Reality.  If reality has its way (and it always does, it's just a matter of time), then the Anarchy Party will be duly elected in the foreseeable future.  

However, upon taking control, the Anarchy Party will be quickly challenged by the neo-Fascist Party that does not exist yet, but that will rise up out of the Tea Party base with the goal to eliminate the Anarchy as quickly as possible.  And via various police-state measures, the Fascist Party will eventually win out, although it's not going to be pretty, I can assure you that.  Recent efforts by Occupy Wall Street to recruit returning Iraqi war veterans to their cause were duly successful and forebode poorly for the future.  Go figure - young people who have been sitting around at home for the last 3 years Facebooking with their friends/family in Iraq, still have a lot in common with their brothers, sisters, cousins and high school buddies who are just getting out of the service only to find they too have no job.   So, the first thing the neo-Fascist party will do is look to re-employ as many returned veterans as possible in the nascent police state.  After all, you can't have too many well trained machine gunners running loose in Militia-Land.  This sets up an Arab Spring scenario in which armed forces are essentially turned on their own populace.  Will they fight and do the bidding of the establishment or will they join the rebellion?  Too early to know...

So let's say all that plays out and by some grace of God some of us survive the next 5-10 years, ok now I can answer my Mom's question "then, what would you do?".  Most of what I would do at that juncture does derive from the Ron Paul Libertarian guide book, but with my own twist:

1) Elevate the constitution and make it inviolable by any branch of government

2) Reform campaign finance 

- Limited donations from all donors

- Complete transparency on "soft" donations

3) Implement a hard money currency w/a 3rd currency for trading w/other nations

- One currency for domestic transactions and savings

- A "3rd" currency for trading with other nations that trades independently of the domestic currency 

4) Balance of trade policy with all trading partners

5) Balanced budget policy

- Budget needs to be balanced in year of election when averaged over previous 4 years or budget cap is automatically applied

6) Greatly reduced level of regulation and laws

- This would be the hardest to implement given the decades of accumulated junk legislation

- Ideally we would move to a system of regulation by exception not by rule

7) Flat tax w/reverse flat tax for working poor

- All tax code changes need to be approved by the electorate via referendum

8) Make it a lot harder to go to war

In other words apply common sense and most importantly, keep the self-nominated "elites" out of the cookie jar.  

The above list would be a good start and take us 95% of the way towards fixing the underlying problems that got us into this situation; however, like I said before, it's all pure fantasy until the Special Interest Groups are obliterated.  Neither Ron Paul nor Abraham Lincoln can fix the system as long as the SIGs are still fully in charge and empowered.  They represent the status quo and will do everything in their considerable powers to retain control over the political and economic system so that they can continue to ass rape the general public and otherwise reach into the register whenever they feel like it.

So, apart from being inevitable, the only benefit I see from turmoil and anarchy is that the SIGs and their 1% sponsor will be in for one hell of a ground and pound that hopefully will dislodge them for good.  

Unfortunately, we will all be in the ring at the same time.

Borrowed Time

[Dec. 5, 2011] I got the Elliot Wave numbering wrong (reversed 1s and 2s) on the original version of the chart below; so this is a re-posting.

[Original Post Nov. 30, 2011]
Another day, another hope-filled parabolic stock rally based on desperation, wishful thinking and Central Bank machinations.  This time it's an overnight China rate cut combined with a better-than-expected ADP jobs forecast on top of globally coordinated Central Bank interventions in credit markets.  Regardless, it's just more of the same "elixirs" that have at best just kicked the can down the road a bit and at worst are the root cause behind this ongoing economic fiasco.  I am not talking about the good jobs number which is always a welcome sign, I am speaking of the ongoing monetary policy manipulation that so obviously is meant to fuel the markets and otherwise perpetuate the illusion of recovery for yet another few hours or days.

I have mentioned before the concept of attenuation - a series of lower highs in the stock/risk markets, each of shorter and shorter duration.  The trend actually started in 2000, but even since 2007, as indicated in the chart below, the downtrend is acutely apparent.  The 2007 high was followed by a collapse to 666 (I know) in the S&P 500 market index.  The 2009/2010 rally retraced 77% of the former high, culminating in a high this past May.  The 3 week rally in October retraced 74% of the May high and this latest spike is now at ~67% of the October high and running on fumes as I write.  These steep upward retracements have a way of lulling everyone into a sense of complacency.  It's a truly diabolical market with a goal to lock in as many greedy fools and fools' dollars as possible.  By all accounts it's succeeding mightily.

The coloured 1s and 2s, starting with blue on the left, are Elliot Wave notation indicating degrees of trend and wave structure.  If this labeling is correct or near correct, then we are heading for a 3rd wave down at multiple degrees of trend, euphemistically known as "The Point of Recognition" - a very rare occurrence, and likely portending the largest collapse in risk assets, in U.S. history.  In any case, you don't have to be a market technician or an Elliot Wave believer, to see that we are in a downtrend and the market is losing upside momentum, not withstanding Bernanke flailing around like a cub bear playing with his dink.

About those Fundamentals

Despite today's improved ADP report, which is inherently volatile, there is no reason whatsoever to believe that the fundamentals of the economy are improving.  While watching CNBC the other day, it struck me  that Wall Street, having ass raped the rest of the world, has finally gotten around to screwing itself.  In one segment, there was a discussion by James Altucher the most clueless 1%er this side of Kudlow, talking about "record high profit margins", only to segue directly into another segment as to why revenue growth is so anemic, and likely will be for the foreseeable future.  The connection between these two seemingly incompatible occurrences is called the "paradox of thrift", which means that if one person saves more money he becomes wealthier, whereas if we all try to save more money, the economy tanks.  As usual, you can't make this shit up - imagine being an overpaid MBA consultant out there telling your umpteenth client that by cutting costs, you can grow your business;  wouldn't you eventually have some sort of epiphany that in aggregate the strategy is not going to work?  

Likewise, one of my favourite anecdotes is of Henry Ford parading through one of hist newest plants ~70 years ago...  he stops at one point to embarass the one union leader in attendance, by pointing at the nearest assembly line and saying: "See those people working over there?  Eventually, they will all be replaced by machines".  To which the union leader, not skipping a beat, says "Sure, but then who will buy your cars?".  In the end they were clearly both right, yet I have a sense that old Henry was rolling over in his grave when his company's stock traded for the cost of a $1 Oh Henry! bar at the nadir two years ago.  Nor would he be consoled to know that neither machines nor underpaid foreigners buy his cars, therefore the stock will likely be trading back below the candy bar level in the not-too-distant future.

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That leaves the most important question of all i.e. who the hell will lead us out of this mess, and rebuild the economy?

Is it a President who spends 50% of his time campaigning and otherwise has no business experience whatsoever?  A Congress that likewise campaigns non-stop and otherwise spent us into this fiasco ?  A Federal Reserve that keeps trying to lower the cost of borrowing so we can pile up ever more debt?  Or the 1% self-nominated "best and brightest" country club who outsourced all of the jobs and yet can't figure out why profits are so high and revenue growth so low ?  The fact is that none of the fools who got us into this mess, will be the ones who can get us out.

Let's face it, the real "Point of Recognition" will not just be when Wall Street shits another brick and gets pink slips instead of bonuses in the Christmas stocking this year - it will come when everyone finally realizes that today's "best and brightest" are neither.

Zero Unemployment In Sight

Good news !  Unemployment will soon be at zero for the first time in U.S. history.  

Allow me to explain...

On Friday, the Government announced that 120,000 net new jobs had been created and that the unemployment rate (U3) had dropped from 9% to 8.6% - so far, so good.

Unfortunately, the primary reason that the unemployment rate dropped to 8.6% is that 487,000 people decided to quit looking for work.  In other words, for every one person who found a job, four people gave up looking.

Now, I have no idea what these 487,000 people are doing to get by right now, and part of me doesn't even want to know.  Suffice to say, we can expect a lot more ad hoc meth labs and volunteers to the French Foreign Legion to crop up in the coming months.

Also, don't ask me by what fucked up math the Government arrives at a reduced jobless rate when people give up looking for work.  Suffice to say, someone in the Idiocracy decided that as the unemployment situation goes from bad to worse, that the unemployment rate should go down instead of up.  And everyone just went along with the *new* math, especially the Lamestream media which is always fully on board with printing the (U3) number in the headline as good news.  

The real story is that given all of the discouraged job seekers, the labor force participation rate - at 64% -  has dropped to a level last seen in 1984, back when there were a lot fewer women in the workplace.  So, it's Back to the Future to Mr. Mom, I suppose.  If I had to stay at home and watch my kids I would jump off the nearest bridge - one less seditious blogger for the Government to fret about...

The real unemployment rate (U6) which gets buried at the back of the report is 15.6%, reflecting the reality of the current situation i.e. not what Big Brother wants us to dwell upon.  

So back to my main point, extrapolating that 4:1 ratio above into the future, I will give it about 2 more years until unemployment, as indicated by the headline (U3) statistic, goes to zero.  Watch the lamestream media spin masters start scratching their heads like Chimpanzees as the unemployment rate drops like a stone while the streets burn like it's the Fourth of July.

You read it here first.

Goodnight Moon II - Fiscal Policy Fiasco

Continuing the archaeological "how the hell did this happen" series, we now turn to that other Oz-like lever in the grand illusion formerly-known-as-the-economy: Fiscal Policy.

Unlike Monetary Policy which subsidized the accumulation of debt by ALL constituents, Fiscal Policy has specifically elevated Federal Government debt to now out-of-control levels.

The (Other) Biggest Lie Ever Sold 

The biggest lies are never the conspiracies or the ones no one know about.  The biggest lies are the ones squarely in front of our face that no one wants to acknowledge.  The 800 lb elephant in the room.  

In this case, the biggest lie is that the economy is in recovery when in fact it's still in a major recession.  

The fucked up logic of the day is that no matter how much money the government borrows, as long as the economy is growing sequentially, then we must be in recovery.  This ignoring of the deficit logic puts Spinal Tap's "This one goes to 11" seem intelligent by comparison.  Yet somehow almost every economist, financial pundit and politician is onboard with pretending that the economy is out of recession and recovering.

Put it this way, if the Federal Government was an average person, it would be a guy who lost a well paying job of say $75k a year.  He now has a part-time job paying $25k a year and has worked his way through his life savings and retirement savings.  He tells himself that he can catch back up on his retirement savings later, even though he is already 58.  Having worked through his savings, he now props up his lifestyle back to previous levels by tapping a line of credit on his home.  Yet, like the Fed, when people ask about his job situation, he tells them he has a new job and has "recovered" from his setback, albeit he is behind on his savings...

Obviously any honest depiction of a recovery would adjust for increased borrowings, yet not one economist of note seems to make this simplistic calculation.

The numbers are frightening:

GDP for 2008, the year the recession started was: $14.27 trillion

GDP for 2009, was $14.01 trillion indicating the year-over-year recession

GDP for 2010 was back up to $14.55 trillion, giving everyone the false comfort that the economy was recovering, because GDP in 2010 was now $281 billion higher than 2008.  That is the standard story that is propagated to the masses.

But the key (missing) question is what happened to the deficit (borrowing) during those 3 years?

The deficit in 2008 was $458 billion

By 2010, the deficit was at $1,455 billion 

Therefore, even though GDP was $281 billion higher in 2010 than 2008, net new borrowings had increased by $997 billion !  i.e. if not for new borrowing, 2010 GDP would have been $13.55 trillion (assuming 1:1 multiplier), which is 6.8% lower than the reported amount.  That's the new math baby, just borrow your way to prosperity !!!

Meanwhile, these figures don't take into account inflation over those two years, which further deflates these figures by roughly 4% over those two years.

Lastly, adjust for immigration, because the U.S. had almost 5 million more people in 2010 than in 2008, so adjusted for the number of people, and GDP is further reduced.

Wow, what a great recovery.  To think that we pay these idiots to lie to us constantly.  Which came first, them lying to us, or us needing to be lied to?  One begins to wonder...

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FWIW, I still like Treasury bonds (invest at your own risk) as the ultimate safe haven, not withstanding these massive deficits.  I own them knowing that the Federal Reserve will always come along and buy them from me in some future iteration of QE "n".  And when that inevitable moment comes and we are staring into the economic abyss, the streets en fuego - there will be nary a Tea Partyer to stand in the way.