A Clockwork Orange

"...our wisdom, too, is a cheerful and a homely, not a noble and kingly wisdom; and this, observing the numerous misfortunes that attend all conditions, forbids us to grow insolent upon our present enjoyments, or to admire any man's happiness that may yet, in course of time, suffer change. For the uncertain future has yet to come, with every possible variety of fortune..." - Solon

Amazing to believe that this incredibly astute and honest observation was from 2500 years ago.  The majority of the "elite" running the present day Idiocracy never stop long enough to question the hubris of their own inane decisions - bad assumptions built on a pyramid of other bad assumptions.  Similar to conditions that attended during the Dark Ages after the Fall of Rome, science and culture are now entering secular decline, as subjectivity and theology are on the rise.  The only known antidote for anarchy is religion (i.e. mind control), and therefore we will soon receive both (anarchy/theology) in large doses.

We are on the verge of experiencing a monumental transfer of power from the 50+ Baby Boomer generation which has presided over the age of decadence, greed and hedonism that started in the late 1960s.  Consider this last forty year period the Age of Greed.  What we are now entering is the Age of Fear.  What is needed in this new age is a set of tools far different than those found valuable in the prior age.  Power in this age will be held by young men between the ages of 18 and 35 who have copious amounts of testosterone, an underdeveloped conscience, and tremendous cardio capacity, attributes amply exhibited in the UFC generation.  Historically, these have been the Wild Boys who have ruled (violently) during ages of turmoil, for obvious reasons.  The Boomers will quickly yield control albeit unwillingly, having long since grown soft and decadent.   These 50-70 year old over-fed comfort seekers raised during the longest stretch of prosperity in human history will be no match for the new younger breed that ironically the Boomers themselves will have raised.  In short, the Boomers were raised to believe in the triumph of optimism over reality, "vision" over commonsense. Poor qualities to bring to a knife fight.

Combined with the predilection towards messianism and religion described above, there will be new "Taliban" springing up everywhere across the globe.  Be they Muslim, Christian, Sikh or otherwise, they will all exhibit very similar goals and methods.  This process is already well underway not just in the Middle East, but here in the U.S. with the burgeoning militia movement.

The bottom line is that some people are prepared for what comes next, others, not so much...

Faux News

I am constantly amazed by the hypocrisy of all of these hard Right Wingnuts reincarnating themselves as Free Market Libertarians.

From Larry Kudlow, to Michelle Caruso Cabrera, Glenn Beck and all of the hypocritical, wingnut demagogues in-between, these newly minted Libertarians have all put their (very) recent past

behind them to jump on the burgeoning Tea Party bandwagon. Beck, Limbaugh, and the various CNBC propagandists (Kernen, Caruso-Cabrera, Kneale, Kudlow etc.) prove daily that there is nothing quite as rabid as a man (or woman) seeking to protect his own pocketbook regardless of who else may be affected. Granted we should not be surprised in the least to see these newly converted Libertarians wanting to put distance between themselves and their profligate Supply Side past, but their 180 degree about face on spending policy is enough to induce whiplash and takes hypocrisy to all new levels.

To review, the central tenets of the Tea Party are:

1) Fiscal conservatism/Reduced Deficits

2) Return to hard money (gold standard)

- Abolishing the Federal Reserve

3) Smaller government/less regulation

4) International Isolationism

- Downsize U.S. military commitments

5) Dismantling and/or Privatization of Social Programs (e.g. Social Security)

6) Anti-immigration

Some of these are good ideas, which should have never been discarded, that I won't deny. What is galling however, is the fact that the very people who now embrace these newfound ideals are the ones who have been undermining them for the past 30 years.

Take fiscal conservatism as the primary example. It's all well and good to talk about fiscal conservatism when the "other party" is in power. The reality is that up until Obama was elected, these newly minted Libertarians were all ardent "Supply-Siders". For all of the past 30 years, starting with Reagan, the key Supply Side mantra has been "Deficits Don't Matter" (a direct quote from Dick Cheney), and as such they spent accordingly. The Supply Siders have always been closely or directly aligned with the Neo Conservatives (Neo Cons) who advocated for a strong American presence on the International stage - a "Pax Americana", if you will. The Neo Cons were the behind-the-scenes architects of the failed Iraq "Strategy" and the egregious over-commitment of U.S. military resources worldwide. It was an asinine policy that went into overdrive during the Bush Administration leading to two simultaneous wars AND a massive tax cut for the ultra-wealthy. That unsustainable tax cut alone increased the national debt by $2.5 trillion !, yet even as I write this is Congress debating whether or not it should be extended! That's like being bankrupt and debating whether or not to take the annual trip to Club Med. The cost of the two failed wars meanwhile, now exceeds $1 trillion in direct costs. Of course this does not count the coming costs from the downstream fallout as these failed nations turn the entire Middle East into a terrorist safe haven and jeopardize the world oil supply. The bottom line is that as long as the ultra-wealthy and Military Industrial Complex are the primary beneficiaries, then the Right Wingnuts really have had no problem with unlimited Federal Government spending.

Clearly, the Neo Con agenda, supported by most conservatives over the past 30 years is at extreme odds with the Libertarian Tea Party agenda, especially with respect to overseas military commitments and fiscal and monetary conservatism. After all, without the unprecedented fiscal and monetary expansion of the past 30 years, the accompanying military buildup would have never been possible. Ironically, it was another venerated conservative, Milton Friedman who was a key proponent for the U.S. severing the last remaining ties to the gold standard in the early 1970s. That closing of the gold exchange window is what set off the past 30+ years of monetary hyper-expansion culminating in this nascent Deflationary Depression. To a hardcore Libertarian advocating any form of currency other than a gold standard is purely heretical, as indicated by this diatribe against Friedman dating back to 1971. In this battle of ideologies, the Tea Party has the benefit of fiscal sanity and reality working for it, so one can reasonably expect the Neo Con thought dealers to be relegated to the historical dust heap of self-important morons masquerading as intellectuals.

Just as likely, the Neo Cons will merely join their conservative brethren as new born Libertarians. After all, it would not be the first time the Neo Cons reinvented themselves. The fascinating book "They Knew they were Right"Neo Cons starting all the way back in the 1930s when they were Trotskyite Communists (yes, you read that right). Not only that, they opposed U.S. involvement in World War II because it was an "Imperialist War" (whatever that means). You can't make this shit up - somehow the "intellectual" founders of the Neo Con movement migrated from the Far Left to the Far Right over the span of several decades, basically reinventing themselves along the way. Talk about pseudo-intellectualism reduced to basically a meaningless parlour game. The U.S. faces off daily against Taliban fanatics who live in caves, shit in buckets and risk their lives daily for their "cause". Meanwhile, the U.S. side is led by shape shifting thought dealers who change their ideologies like a teen girl changes her hair style.

Objectivity is as dead as a door nail

Before you get the idea that I am some sort of Left Wing Liberal nihilist, I don't regard watching CNN and BBC in one ear and Fox News in the other as some form of moderation. I get it that objective journalism is dead on all sides, which is why traditional media is in a death spiral. As the content of newspapers, television news becomes more degraded and biased, viewership becomes polarized and sectarian, with limited outreach. That in turn feeds back into content cuts leading to more hyperbolic propagandists and even less traditional research and journalism. It now literally takes about only about 5 minutes to read the Wall Street Journal once you skip past the three Opinion/Editorial sections, the Letters to the Editor and the Lifestyle section - basically you are left with about 3 pages of hardcore business content, including the front page.

My overall point is that you can't solve a problem unless you objectively face a problem. Yet, with the overall low quality thought dealership we get from all sides, conveniently reinventing history every four years, and pushing simple answers to complex issues, the U.S. is a LONG WAY from ever finding its way out of this mess.

And lest you think this is a politically motivated diatribe, I do not underestimate the Tea Party movement in the least. They will undoubtedly be the dominant political force for the next decade, if not longer. And either Sarah Palin will be the next President or it will be a demagogue just like her, that is a foregone conclusion.

Those Damn Unions

The latest manifestation of escalating social acrimony is in the form of union bashing, especially public sector unions. Certain blogs and far right journalists have taken upon themselves to launch a vindictive crusade against a sector of the economy that is the last bastion of the American Middle Class. We've hollowed out the private sector middles class, so why not get to work on the public sector as well? Amazingly and appallingly, these "journalists" (to the extent such a profession still exists) and bloggers who attack the public sector unions are seeking to blame the sorry state of the economy on organized labour.

I am not a union member, never have been in one and do not personally have use for one. That said, to blame the perceived or real union bureaucratic inefficiencies in any way for this current economic debacle is absolute and total disinformation. Basic commonsense indicates that the incidence of some nurses, teachers and police officers earning $100k/year after 25 years of service is not at the root of this economic disaster. I fully understand that state and local governments are de facto bankrupt. After all, I predicted that scenario 3 years ago and I am constantly amazed that so few have officially declared bankruptcy at this juncture. Therefore, I also understand that public sector unions will no doubt bear their share of the economic pain, however, that does not mean that they share a proportionate share of the blame for this ongoing fiasco, nor should we think that adding more job losses and salary cuts is going to fix the economy.

Here are a few facts to correct the purveyors of this line of bullshit:

1) Unions and their members did not create the Subprime/financial debacle

Remember, that was Wall Street and their well heeled minions who on average make as much in a month as the average American family earns in a year. That's a lot of pay for adding exactly zero value to the economy and yet being permitted to fuck it (the economy) up all at the same time. Wall Street made tens of billions securitizing garbage loans of all types and then stuck the American Tax Payer with the clean-up bill of roughly $11 trillion. How much is $11 trillion dollars you ask? Well, it's enough to pay all 6 million teachers in the U.S. $60k per year for the next 30 years ! i.e. according to the union-bashing bloggers, we can't afford to pay teachers, but Wall Street can get the equivalent of 30 years of teacher salary basically overnight. Is this a great system or what ! There are some serial disinformers who think that $11 trillion is way overestimated because it includes all of the "assets" (shitty loans) that the Federal Reserve purchased and will eventually sell back to the markets. Ok, whatever...I happen to own this bridge over here...

2) Public sector union members make more money than the average worker: This became true only very recently, since for most of U.S. history it was the other way around. This "crossover" in pay scales is more a function of declining private sector pay as it is from rising public sector pay.

Total (private/public sector) union membership has declined steadily for the past 60 years from a peak of around 36% in 1945 to where it is now at around 12%. During this time, public sector union membership has actually risen from 10% to 36% i.e. public sector union membership is the last holdout of what's left of the American Middle Class. Those who decry "high" union wages apparently want public sector employees to suffer the same fate as their private sector brethren i.e. outsourcing, relentless job turnover/job insecurity and stagnant or declining wages. Contrary to popular assertions, forcing all Americans to have their pay checks slashed in half is not going to fix the economy. Back in the Roaring '90s when Dot Coms were all the rage and many private sector employees were enjoying the fruits of their stock options and bonuses, I don't recall too many people wanting to become a teacher at a $30k/year starting salary. Now that the shoe is on the other foot, public sector employees who have been steadfastly working with little or no upside relative to the economy will be obliged to share in the economic pain of the private sector i.e. no upside, all downside.

3) Public Sector Unions did not outsource millions of jobs to China and India and otherwise liquidate the private sector middle class.

Remember, that was the country-club salesmen CEOs (at the behest of Wall Street), who knew nothing about engineering or manufacturing and took the easy way out by handing all of this country's IC (Intellectual Capital) to America's competitors.

Now we have official unemployment stuck at 10% (unofficially at 16%) with absolutely no sign whatsoever of robust job creation on the horizon. Total debt equating to 350% of GDP is just too big a burden to offset, despite having thrown unprecedented fiscal and monetary stimulus at the economy - way beyond anything attempted during the Great Depression ! So, you can full well expect that unemployment will only continue to rise inexorably from here.

I have said it before and will say it again, any country that trades openly with nations that do not have a labour or environmental standard, will itself substantially degrade its own labour and environmental standards. That my friends is called industrial arbitrage.

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Again, I personally don't care about unions, but behind these big bad unions are every day people trying to make ends meet, who do not need to be vilified by half-baked bloggers and pseudo-journalists who are just redirecting vast bottomless reservoirs of rage at the last vestige of the middle class.

Are Bonds in a "Bubble"?

The latest widespread investment thesis is that bonds (fixed income) are in a bubble similar to the Nasdaq stock market in 2000 or commodities in 2007 i.e. an unsustainable price level that sooner or later will collapse.

First off, to lump all fixed income investments together as "bonds" is asinine and reveals an oversimplified bias among the pundits who hold this view. There are a large number of professional investors and amateurs actively shorting the U.S. Treasury market which *may* bias their viewpoint...

Different kinds of bonds

Bonds are delineated based on their level of risk. The "risk free" rate is defined as short-term U.S. Treasury bills (30,60,90 day) which are deemed essentially the closest electronic equivalent to cash (i.e. paper currency). Out from there, you have various maturities of Federal Government bonds up to 30 years. These bonds are deemed equally safe from a default standpoint, however, these carry duration risk also known as purchasing power risk - the risk that inflation (prices) will increase, causing the value of the bond to be reduced and inducing a capital loss. The longer the term of the bond, the more volatile the price, so 30 year bonds are much more volatile than 2 year bonds.

Meanwhile "spread product" are fixed income investments that are deemed to carry default risk, hence they typically have yields that are above Treasury yields of a similar duration hence they have a risk premium aka. "spread" over Treasuries. Spread products include Corporate bonds (both investment grade and junk bonds), Municipal bonds and Mortgage Backed Securities (MBS). To the extent that these risk spreads have been narrowing substantially over the past year, one could argue that "spread products" are in fact overvalued relative to their historic spreads over Treasuries.

This is all very academic, so far. So here is my take on things:

1) Most/all risk bonds (Corporates, Munis, MBS) ARE overvalued although I would not call it a speculative bubble, since investors are hardly frothing at the mouth when envisioning yields of 4% on their bond portfolios i.e. there is no comparison here to the Nasdaq in 2000. The reason, I believe, that these types of bonds are overvalued is because investors are shunning risk after a decade of losses from stocks, housing, commodities and therefore seeking return of capital vs. return on capital. Meanwhile, exacerbating the situation is that the average investor does not fully understand the risk apparent to these types of investments and/or may not have access to Treasury-only investments. Many company 401k (retirement) plans have very limited investment options and offer some sort of "fixed income" option that usually includes a blend of Treasuries, Corporates, Munis and MBSs. Based on my own anecdotal experience at several companies, I doubt the average retirement plan investor has access to a pure Treasury-only bond fund.

Worse yet, many retirement funds offer an enticingly safe "Money market" fund, which we have all been led to believe are cash-like investments. Here again, however, these are short-term funds that typically include a blend of Corporate and Treasury short-term bills. Back in 2008 there was a great panic over the fact that several of these "money market" funds lost money ("broke the buck") wherein the Net Asset Value (NAV) of the fund fell below the benchmark $1/share. The Federal Government stepped in to insure money market funds, to avoid panic withdrawals, however this program had limited funding and has now since expired.

To the extent that these Spread/Risk bonds are overvalued, I still think that these investments are much safer than stocks and commodities; however, in the type of deflationary collapse that I am envisioning, losses on a typical blended "fixed income" fund could exceed 50% depending on the blend of bonds in the portfolio (Treasuries v.s. risk bonds).

Are Treasuries in a Bubble?

When pundits pose the question are bonds in a bubble, they are usually referring specifically to Treasuries, which as we know have been skyrocketing in price of late (yields falling). The answer to this question is again subjective, and depends on whether or not one believes we are heading for pervasive economic/price deflation. During Japan's deflation of the past 20 years, Japanese Government 10-year bonds yields have dipped below 1% several times. By comparison, the U.S. 10-year bond currently yields 2.65% so there is potentially still a lot of room to fall. What about the massive U.S. fiscal deficit and Quantitative Easing (QE)? Here again, it's a question of timing and sequence of events. If Japanese Government bonds can yield less than 1% despite the Japanese debt being ~ 200% of GDP, then surely U.S. Government bonds could hit the same level given that U.S. public debt is "only" ~100% of GDP (depending on whose figures you use...). Meanwhile inflation is quiescent and trending down, despite QE round 1. In addition, in a flight to quality scenario we should expect the dollar to strengthen (as it did in 2008 and has been recently) and institutional investors to invest those dollar inflows into Treasuries.

Some (EWI and others) argue that it's better to invest in short-term Treasuries v.s. long-term due to price volatility inherent in the latter. I personally think a mix is appropriate, because similar to 2008, yields on short-term Treasuries are now approaching 0% and therefore those seeking refuge in the short end of the curve will soon have the distinct pleasure of paying the Government to borrow your money - i.e. rollover risk. This EWI notion that prices (inflation) will crater, the dollar will soar, but long-term Treasury yields will rise is totally speculative and ignores the direct causal connection between dollar inflows and Treasury prices. Contrary to some belief, taking $400 cash increments from an ATM machine is not an institutional option i.e. there is no other "low risk"/highly liquid option for someone moving billions of dollars around.

In addition, institutional investors who are paid based on performance tend not to invest in non-yielding/negative yielding investments...go figure.

Ultimately, whether or not one deems Treasuries to be a "safe haven" depends on your inflationary/deflationary outlook and also the risk of the U.S. Government outright defaulting on its debt in the near-term (2-3 year) time period. I think given the proven propensity for the Federal Reserve to outright buy Treasury debt (Quanititative Easing), then the chance of default is de minimis, as all of the debt is denominated in dollars and the Fed owns the printing press. More to the point, what is the alternative? Gold perhaps is an alternative, if you believe gold prices will hold up through extreme price deflation i.e. for gold to hold its value against dollars it would actually be gaining in value relative to other commodities/assets, since in deflation by definition, the dollar would be gaining in value. I am not betting on it, but that could happen, so some amount of gold is always advisable. Another option may be Swiss Francs, however that country's banks have huge exposure to loans made to Eastern European countries.

The vast majority of ALL other types of financial assets regardless of which country, pose EXTREME LEVELS of counter-party default risk in a deflationary depression.

The other day, Jeremy Siegel, Professor of Finance at Wharton was on CNBC debating this "Are Bonds in a Bubble" issue with Tony Crescenzi of Pimco. At one point, Siegel said the dumbest and most astounding thing I have heard anyone say in the longest time, let alone a Professor of Finance. He said that investors who buy bond funds (v.s. individual bonds) in a rising interest rate environment lock in their losses permanently, because the bond fund is constantly rolling over its maturing investments i.e. the reason you buy a bond fund in the first place. Uh, repeat that please? Professor of what? The sins of stupidity here are many: First off, he didn't bother to mention that the bond fund would be rolling over at ever-higher rates of return which is what you would presumably want to do with your money as interest rates rise. Secondly, he never mentioned that ALL financial assets tend to do poorly in a high inflation environment (to wit stocks in the 1970s). Thirdly, as Tony Crescenzi all too meakly pointed out, these are mark to market investments that trade every day i.e. no one is forcing you to hold these investments forever. If you believe that interest rates are rising, then SELL NOW (i.e. reduce your duration)! His greatest failure however, especially as a Professor of Finance, was to not factor in purchasing power and opportunity cost risk, because while it's technically true that an investor who holds individual bonds (as an alternative to a bond fund) through maturity never has to realize a capital loss, so what? Garnering a 2% return for 30 years straight implies huge loss of purchasing power when the market return is 20% and inflation is running at 18%.

For those who want to protect their assets via Treasuries, the easiest way is to buy a Treasury bond mutual fund or buy the Treasury ETFs in a brokerage account. If your 401k retirement account does not offer a Treasury bond fund, then you may be able to use a "self-directed" account to buy the Treasury ETFs below. If none of these options is available, then you are still better off parked in a Money Market fund and pray Uncle Sam reinstates the insurance plan from 2008, when the shit hits the fan.

The Treasury ETFs:

SHY: 1-3 year maturities
IEI: 3-7 year (probably the best compromise between long and short-term)
IEF: 7-10 year
TLT: 20+ year (most volatile/speculative, but most upside if yields fall)

Deflation...Redux

The specter of deflation is creeping back into the collective consciousness. I just noticed three separate articles on Yahoo discussing the various impacts of deflation on the economy. This is all right on time, because similar to 2008 pre-Lehman, the stock market has come off a retracement high, shuffled sideways for the past 3 months and should now be ready to fall off the next cliff. So, this renewed preoccupation with deflation evidences a psychological shift in mentality from reflation back to contraction, indicating we are fast approaching the next point of recognition, as it finally dawns on everyone that we are headed for a "double dip" of historic magnitude.

Price Deflation
The concept of (price) deflation is not as simple or complex as most people seem to think it is. The fact is that few of us (except my 93 year-old grandmother and others her age) have ever experienced a sustained price deflation. In order to have a sustained price deflation across ALL asset categories at the same time, requires a decrease in the supply of money. Likewise, in order to have a sustained price inflation across the board requires an increase in the supply of money. By contrast, when the price of oil goes up because the Saudis have embargoed oil exports as occurred in 1974, that in itself is not a cause of inflation (assuming no change to money supply), because the extra money used to purchase oil draws down demand from other sectors of the economy and hence lowers prices elsewhere.

Fanatical Libertarians tell us that there is nothing wrong with deflation and that all of the media hype around deflation is simply scare-mongering. Well, unfortunately these Libertarians are fantasizing about supply-side deflation resulting from a fixed money supply and increasing production efficiencies. Whereas, the type of deflation we are about to experience is a demand-side deflation wherein the price of everything drops simultaneously because there is no demand (aka. purchasing power), and where businesses go bankrupt en masse because they can't meet their fixed costs. This leads to mass unemployment and personal bankruptcy as jobs are lost, asset (home prices) crater, all the while debts (mortgages etc.) remain contractually fixed in value i.e. payments stay the same.

Credit deflation
As indicated above, credit deflation axiomatically leads to demand-side price deflation simply because there are too few dollars chasing too many goods. And despite all of the yammering and hand wringing over hyper-inflation, the Fed's unprecedented monetization of debt (~$3 trillion) has failed to yield economic reflation let alone price inflation. Credit deflation is all but inevitable now because there still exist record levels of debt (~ 4x GDP) and the renewed slowing of the economy will bring about a chain reaction of delinquencies and bankruptcies.

Just this week, the Fed announced that it is considering another round of quantitive easing (buying of debt) as a mechanism for further easing credit markets. This is an act of desperation, since the first round of debt monetization did not work, so what makes them believe this time will be different? As long as borrowers are insolvent and unable to borrow and lenders are ever-more cautious, then adding more cheap money to the pile of existing cheap money means banks will just buy up more financial assets (stocks, bonds etc.) sending yields even lower and making the inevitable market crash that much worse.

More to the point, as I explained previously here the money supply, which consists primarily of credit (loans) and to a much lesser extent currency (cash), is a giant Ponzi Scheme all of its own. And when it inevitably unwinds, it will collapse like a cheap tent at a rate that even Fed monetizing couldn't possibly offset, as there is over $50 trillion in credit outstanding (not to say that it will ALL go into default, but the largest part eventually will in my opinion).

Then there are those who believe that all of this debt is not an issue because it's largely money "we owe to ourselves" i.e. American lenders. Despite the trillions in U.S. debt owned by foreigners, it's actually true that most is held here in the U.S., to which I say "so what?" This "owe it to ourselves" argument is illustrative of the type of disinformation now commonplace in the Idiocracy. Simple reasoning shows why...

Let's say I borrow $20,000 from you - thanks buddy ! Then a year from now I've lost my job, declared bankruptcy, and unfortunately you lose the entire loan because I spent every last dime. What happens? According to the "we owe it to ourselves" morons, nothing happens - case closed. Umm, except, here is what happens in the real world: First off, I am bankrupt, so I am shut out of the credit markets - can't get a loan/credit card and my spending drops to nil. Second, the $20k of your money I spent last year was a one shot deal, so GDP was boosted by $20k last year but this year drops by that amount (think of this in the aggregate). Meanwhile, I liquidated your savings, so you too are piss broke, won't/can't spend (due to the reverse wealth effect), have lost confidence in the credit markets and are now hiding what is left of your money in the safest place possible i.e. buried in the forest. That in a nutshell is credit deflation.

The more you think about it, the more you realize it would actually be better to have all of U.S. debt owned by foreigners so that we could leave them holding the bag and not experience the adverse impacts of the reverse wealth effect. Yes, the U.S. dollar would fall relative to other currencies (although all nations will be doing their best to debase their currencies as well), but a lower U.S. dollar would: (1) improve the trade deficit (2) put China out of business (3) put WalMart out of business...i.e. the trifecta !!!

Monetary Policy No Longer Working
As I have said before, monetary policy is no longer working. Fiddle fucking with the price of money only causes the misallocation of capital and does not lead to a long term increase in economic production. It creates perpetual boom and bust cycles, and these latest grand attempts by Greenspan and Bernanke to "smoothe" the economic cycle by side-stepping recessions with ever more monetary "stimulus" just means this bust cycle will be the Mother of All Clusterfucks.

What Now?
The fact that the Fed is once again considering quantitative easing (debt monetization) emboldens my willingness to own Treasury debt of various maturities as I described here , because it's always nice to know that the Federal Reserve is the buyer of last resort for your primary assets.

In addition, until foreigners find an alternative safe haven for their trillions in assets, the dollar and hence Treasuries will continue to be the safe haven of choice and everyone can pretend for a little while longer that we are not borrowing to pay interest on prior borrowing (aka. ponzi borrowing). When we get through this deflation cycle, that will be a different story. As I've said, when you start getting a pack of crisp new $100s in the mail from the U.S. government each and every month (e.g. "Stimulus v6.0" or something like that) , then it's time to worry about inflation....

The Rich Karlgaard Collapse

I hereby dub this next leg of the ongoing economic collapse as the "Rich Karlgaard collapse". I didn't even know who this guy was until I read about him on Barry Ritholtz's blog. Apparently Rich is an editor at Forbes.

Recently, he (Rich) went on this diatribe against Robert Prechter and all of us so-called "perma-bears". As is typical of most Lamestream media articles these days it was a vacuous piece that focused on a select few data points while totally ignoring the much broader picture and the much more salient facts such as overall debt levels, failed policy response etc. So, just for fun I dissected his piece to show how ludicrous and denialistic the consensus opinion is at this juncture.

So, according to Karlgaard, Prechter is wrong because:

1) He (Prechter) wants to be like Roubini...

Yes, apparently we all want to be constantly derided University Professors wearing Hush Puppies and speaking in foreign accents while Joe ("the troglodyte") Kernan laughs at us...

2) "Americans love debt"...

I couldn't come up with a suitable rejoinder for a statement this stupid

3) I, Karlgaard, predicted Dow 18,000...

Yet the stock market has gone nowhere for 12 years and Treasury Bills (let alone bonds) have outperformed stocks. Dow today? 10,200.

4) "I've given up on formulas and models"...

Right, we get that Rich, now you rely on "interviewing" (on the golf course, no doubt), data mining recent historical trends, and plain old fashioned wishful thinking...good strategy.

5) Interviewing is the way to go. I have interviewed a thousand other Baby Boomers and despite the fact that things are not great now, they are bound to get better any minute now. That's the way it's always been since 1968 and the Democratic Convention...Whoa, sorry, flashback !

Since Rich tells us he is a student of history (his version at least), here's an overwhelming historical fact: no country in the history of the planet has borrowed its way to prosperity......and guess what, the U.S. will not be the first.

6) We are like Japan...

Except different in every way i.e. the rest of the world cannot bail us out while we are going through the death throes of deflation...We (the U.S.) are not a primarily export-based nation, like Japan, duh !!! and the rest of the world relies (25%) on our consumption...

7) I, Karlgaard, like Barry Ritholtz and Doug Kass because they think like me and therefore reinforce my overwhelming need to believe that the future will be just like the past. I also would like some Google links into their sites, which I just got.

I was going to call this the Kass collapse for that other smug disinformer, but thanks to his timely article Karlgaard got the honour.

The basic overall theme here is that 'ol Rich can't look into the abyss because it's "too scary". I hear this all the time, that the economy can't get worse because that would be really bad. Ralph Acampora just said the exact same thing in the NY Times Article here:

“I don’t want to agree with him, because if he’s right, we’ve basically got to go to the mountains with a gun and some soup cans, because it’s all over.”

So, let's get to the heart of the denialism movement, 50,000 plus children worldwide die every day because we can't come up with a few dollars worth of food and medicine, but the Baby Boomer generation can't face life without Sauvignon Blanc.

Sorry folks, largely owing to the likes of Rich Karlgaard and his comfort-seeking brethren, we are going down again (much) sooner than one would like to think. Those who do not acknowledge or comprehend the overwhelmingly deflationary forces that are gathering at this point in time, do not understand the credit-based monetary system, economics, or even basic math, which unfortunately describes the vast majority of economic commentators at this juncture. Until you get a package of hundred dollar bills in the mail from Helicopter Ben Bernanke, any fears of inflation and indeed fantasies around reflation, are totally unfounded.

Back At the Precipice

Like groundhog day, the U.S. and other Western economies are once again at the edge of the economic precipice. The nascent economic recovery is stalling out only 9 months since Bernanke declared the "end of the recession". Of course, for those 10% officially unemployed (17% when you include people who have given up on finding employment), the recession never ended. Wall Street as usual is in total denial, because the average expansion since WWII has lasted 40 months, so the piggies are not yet ready to leave the trough this early in the cycle when the consensus is that "there must be" more of that free money left in the Bernanke monetary punch bowl. Won't they be surprised.

Bear in mind that this depressionary relapse is occurring despite policy-makers having applied unprecedented levels of stimulus, both fiscal and monetary. The Federal deficit this year is 10% of GDP (~$1.5 trillion), which means that the Federal government has to borrow 30 cents for every dollar it spends just to propagate the illusion of recovery !!! That is a staggering fact: 10% unemployment despite a 10% of GDP deficit. And yet there are two moronic camps that keep arguing one on the side for more fiscal stimulus and the other on the side for fiscal austerity. These are like two fat bald men fighting over a comb on the deck of the Titanic. The mere fact that the economy is stalling out, despite a 10% GDP deficit means that fiscal stimulus at the margin is no longer working, because it has been overused. This chart below shows the marginal growth effect on GDP from an additional $1 of debt - it's now less than $.20 on the dollar ! Game over, man !

On the other hand, contrary to the tax-fearing "Tea Baggers", none of this money is EVER going to be repaid anyway, since basic math indicates we would need to grow the economy by 30% (assuming no changes to tax rates) just to eliminate the deficit, to say nothing of paying down the additional trillions in debt that will accumulate in the meantime.

So, despite and because of the Federal Reserve giving out free money at 0% and the Federal Government borrowing a third of its annual budget, policy-makers are now completely out of ammo. Even as fresh signs of renewed downturn abound, in the recent horrendous housing numbers, pathetic employment figures, and leading economic indicators , which are all pointing down.

But you don't need fancy data to tell you the economy is slowing. Just today, the yield on the 10-year Treasury bond reached 3.11%, a level it has only touched twice since 1962 ! i.e. bond markets which are usually concerned with inflation are signaling that fear of inflation has left the building. In line with that sentiment, Bill Gross from Pimco (world's largest fixed income management firm) speaking on CNBC admonished the Fed to state that they will keep interest rates exceptionally low for an "exceptionally long" period of time i.e. keep the free money flowing and love me long time Sugar Daddy. No conflict of interest there at PimpCo.

Meanwhile, those few economists lucid enough to even consider a "double dip" recession are just rearranging deck chairs on the fat man's Titanic. Sure, unlike the rest of their irretrievably clueless brethren, they at least have a latent sense of impending downturn, and yet these few are still too conventional in their thinking to realize that the economic ship is already keeled over at 90 degrees and getting set to sink inexorably to the bottom.

And that is the state of the U.S. economy. Hard to imagine that Europe is as bad or worse. Several well known European countries are on the verge of sovereign debt default and one does not have to be a genius to figure out that it will only take one default to fell the others like dominoes. All of these countries (as does the U.S.) rely on well-functioning credit markets to rollover their debts on an ongoing basis. Once risk aversion sets in and interest rates rise beyond a certain point, then default becomes inevitable as the deficit/debt service burden becomes too large and unmanageable. As stated before, it's only because the U.S. dollar is the world's reserve currency and hence the only viable safe haven from a liquidity standpoint, that allows the U.S. government to pursue the profligate path versus the austerity path being forced on Europe. Of course at some point, the U.S. government debt ponzi will collapse as well, when investors repudiate U.S. debt and the dollar, but that will likely be *some time* down the road closer to the end of the deflationary cycle that is still just getting underway.

For those looking to protect their assets through the deflationary cycle, here is what I recommend. And yes, TLT (long-dated Treasuries) are still outperforming well. Even Pimco recently got back onboard the Treasury wagon.

[FYI, for more insight on deflation, Robert Prechter (EWI) recently gave an excellent interview for the web site "The Daily Crux" which you can read for free here]

Drill, Drill, Drill

Owing to this horrifying BP oil spill, it is now blatantly obvious to all but the thickest observers that America's addiction to oil is the greatest threat facing this country now and in the future. America has sold its soul to the oil industry and the end-game is now unfolding. What was once a secure source of energy that enabled economic growth and progress has now become a massive ball and chain that will severely inhibit all economies rigidly tied to fossil fuel infrastructure.

The threats are overwhelming, with clear linkages between the environment, the economy and national security, three areas that one would think are high priorities to policy-makers. And yet, like the 800 pound gorilla in the room, policy-makers of all stripes still walk on egg shells around the slimy oil industry, even as it sponsors global warming disinformation and fights tooth and nail for more drilling rights in the gulf, not withstanding the current environmental fiasco. Obama now looks like a total fool for having opened new areas to offshore drilling just 3 weeks before this catastrophe started, no doubt alienating a big part of his political base. Meanwhile industry tools Bobby Jindal (Governor of Louisiana) and Louisiana Congressman Charles Boustany are bent hard over opposing Obama's 6-month drilling ban which was intended to give time to investigate the root cause of the oil spill and take corrective action. It's mind boggling that these shills can't see taking 6 months to figure out what happened and how to prevent the same in the future, even as their state's fishing and tourism industries are in the process of being wiped out.

This gulf oil spill disaster is just the latest reminder that the industry as a whole is taking on greater and greater risks in its quest for oil. Rigs are operating at extreme depths using unproven methods without adequate safeguards. All appropriate regulations have been bypassed, as the necessary regulatory agencies were greased up front, assuring swift approval without adequate (any) environmental review. Speaking to an environmental attorney this past weekend, he told me that all of these deep sea rigs were approved on the premise that they posed de minimis environmental risks ! i.e. the lowest level of environmental review was required, basically a rubber stamp.

And if you think this BP gulf spill is bad, clearly this is just business as usual for the oil industry pigs who have left their greasy hoof print in every corner of the globe.

Hurricane Body Blow

Those cruel gods of reality have found a most direct way of punishing the U.S. for its oil addiction. It's a hard fact that the average hurricane is now 50% stronger than it was 40 years ago, and worse yet the occurrence of deadly category 4 and category 5 hurricanes has also increased proportionally. Although, oil industry apologists and everyday morons still deny the linkage between burning fossil fuels and environmental catastrophe, these are the types of people who will deny anything that is not in their own immediate self-interest. They are like a a 400 lb fat man who can't get out of his own way and needs every ounce of energy just to get back into the buffet line.

As for the legitimate scientific community, there is now overwhelming scientific agreement on anthropogenic (manmade) climate change. Even the American Association of Petroleum Geologists has recently shifted stance to a new "non-committal" statement, although also (finally) admitting:

"Climate change is peripheral at best to our science…. AAPG does not have credibility in that field…….and as a group we have no particular knowledge of global atmospheric geophysics".

Oh right, now they tell us, I wouldn't trust these corrupt house boys to tell me the time of day.

Back to the key point, this season NOAA expects 8-14 major hurricanes, which would make it one of the deadliest seasons ever recorded. It's not hard to predict that the growing ubiquity of these deadly hurricanes is going to eventually decimate a majority of gulf coast and Atlantic seaboard communities, causing widespread economic dislocation.

Between oil spills, rising sea levels, deforestation, desertification, droughts and recurring Katrina's, the credibility of the oil industry and its copious disinformers will eventually be lower than Wall Street's. Unfortunately that day will likely come at a time when it will be far too late to do anything of consequence about the problem. Suffice to say that by the time there is political consensus on global warming and the need for immediate action, there will be a lot of bodies buried.

The other blood-stained aspect of this oil soaked faustian bargain we have entered into, is this oil-for-souls economic/military "strategy" that has grown out of control in the Middle East. Apparently squandering hundreds of billions in oil payments to the Saudis, Iranians, Kuwaitis and other corrupt Middle Eastern regimes has not been a great idea. Come to find out, some of the hundreds of billions we gave them, was not just used to prop up puppet governments and corrupt potentates, but it also found its way into the hands of dozens if not hundreds of terrorist groups. Using armed coercion to keep these same terrorist malcontents at bay in the region hasn't been working out great either. These costly, never-ending wars in Afghanistan and Iraq have simply further hollowed out, destroyed, and otherwise destabilized those failed states which will no doubt become renewed hot beds for terrorist activism when the U.S. inevitably pulls out. That will leave the region with two very unstable and hostile nuclear armed regimes in Iran and Pakistan, augmented by two or more totally failed and anarchic states (Iraq, Afghanistan, Yemen etc.) that can be used as training bases. Essentially, it will be a nuclear-armed insane asylum, having a major axe to grind with the West and the U.S. in particular. Meanwhile, from an economic perspective, along with outsourcing, this entire oil import strategy has contributed to the total depletion of the economy and left the U.S. imminently dependent upon the generosity of foreigners for day-to-day funding and rollover of debt.

And yet, for all that, the U.S. is the only major developed nation that still does not have a basic consumption tax on oil, therefore we are essentially subsidizing the entire oil industry with all of its environmental "side-effects" on top of subsidizing the entire Middle Eastern terrorist complex.

Idiocracy Realized

Ayn Rand would be proud. These past 50 years have been an unprecedented orgy of consumption and self-interest that would make even her blush. Granted, the economy has devolved into a Frankenstein's monster of crony capitalism with a dash of pseudo-socialism. Unfortunately the system of "pure capitalism" that she envisioned currently only exists in Milton Friedman's text books and in those parts of Latin America where it wiped out entire economies and impoverished millions. Here in America, we will get there, but these things take a bit of time.

She would be pleased to see Wall Street firms back at work, following a (very) brief hiatus, busily securitizing and liquidating the country. She would nod approvingly at a growing gap between rich and poor now back to historic levels last seen in the 1920s - further proof that altruism is indeed dead and long buried. She would note the 3 billion plus people across the globe living on less than $1/day and the 50k+ children dying each day for want of a few dollars of food and medicine. She would give a nod to our fortitude to allow these indolents to suffer the inevitable consequences of their laziness and inefficiencies.

She would highly approve of the populist tea party movement enthusiastically railing against its own interests and the "profligacy" of the current Administration, not withstanding the 30 previous years of squandered resources and deficits. Talk about closing the barn door after the horses are out. I cannot fathom the average individual taking to the street to oppose the extension of health care benefits to the unemployed, yet implicitly supporting tax cuts for the ultra wealthy, copious handouts for the Beltway bandits, troops in 140 countries, 18 aircraft carrier groups and 2 totally pointless wars. Go figure.

I also can't reconcile those who seemingly profess a belief in Judeo-Christian values while enthusiastically embracing Ayn Rand's decadent ideology of "rational self-interest". After all, Ayn Rand considered altruism to be immoral, thereby not only bastardizing the term "moral", but also taking a diametrically opposite view to that other well known Jewish philosopher.

All sarcasm aside, I don't think even Ayn Rand could get her demented mind around this current fiasco we call the economy. The fact remains that any economic system that is systematically dismembered by special interest groups will fail, be that Capitalism, Socialism, Communism or any other system we conjure up. Political operators believe that the status quo is sustainable and even desirable - this endless oscillation between one political ideology and then another, each allowing its constituent crony special interests to feast at the public trough. Yet just an ounce of honesty and decency reveals that to be a false and self-serving belief. We could completely swap out and replace the entire current batch of jokers on Capitol Hill with a completely new crew and yet obtain the same deleterious outcome, as long as special interest groups have unfettered access to public money and power.

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The rest of this entry is a time capsule for the future, as a testament against the burgeoning if not fully realized Idiocracy. Following is a list of *some* of the more egregious widespread ideas and practices that years from now the survivors (if any) of the impending Dark Ages will not believe are commonly accepted both here in the U.S. and across much of the developed world:

1) Running fiscal and trade deficits for 30 years straight
(Except for a couple of years during the Clinton Administration when tax receipts from the tech bubble caused a temporary fiscal surplus )

2) Using cheap loans and low interest rates to "grow" the pseudo-economy via over-consumption and misallocation of capital, conveniently sidestepping each financial crisis by adding yet more monetary stimulus, until the entire system finally collapses in a deflationary credit collapse on a scale unprecedented in history

3) Spending Social Security and Medicare tax receipts as general revenues, thereby bankrupting the system and leaving future generations (and the Boomers) with no social safety net

4) Outsourcing an entire manufacturing base to foreign countries along with all of the accompanying managerial and engineering skills and intellectual capital, replacing these industries with Starbucks baristas, mortgage brokers, and bar tenders

5) Using homes like ATM machines

6) Paying Wall Street twenty-somethings millions of dollars to day-trade pieces of paper back and forth in a zero sum game while the real economy and real jobs are outsourced to foreigners

7) Injecting 80 million barrels of oil per day into the atmosphere and then ignoring the advice of the overwhelming number of climate scientists; preferring instead to follow the hack advice of infotainment talk show hosts, oil industry owned pseudo-scientists or Billy Bob next door who has been faithfully assimilating the Op/Ed section of the Wall Street Journal on his way to the Sports section:

- Despite hurricanes growing in force by 50% over 40 years
- Polar ice caps melting at unprecedented rates
- Acceleration in temperatures and growth in atmospheric carbon occurring at fastest rate in all of Earth's history
- Mass extinction of species occurring at fastest rate in Earth's history

8) Funding terrorist enemies in the Middle East via their wealthy oil sponsors who pretend to be our so-called allies in the war on terror, while we pretend not to notice...

9) Fighting two endless and pointless wars in the same region.
(Small hint for policy-makers: The war on terror can't be won; terrorism is a method of warfare, not a specific instance of war, uh duh!)

10) Electing a drug-addled, alcoholic, 'C' student, draft dodging dilettante and Alzheimer-ridden B-actor to the most powerful political office on the planet. More generally, electing smooth talking salesmen with no history of accomplishment who spend half their time campaigning and the other half of the time making fancy speeches promising the impossible.

11) Pumping our children full of factory junk food toxic waste while obesity and diabetes rates skyrocket amongst the young, all in the name of "consumer choice" i.e. the trojan horse for selling more corporate crap

12) Vastly overpaying country club CEOs tens and hundreds of millions of dollar to layoff millions of workers, outsource the most productive part of the economy, and otherwise drive the country into depression. Meanwhile, minimum wage is a measly $7.25, lower than it was in 1974 adjusted for inflation (i.e. 1974 equivalent is ~$10).

13) Producing an overwhelming preponderance of ESPN-addled boy-men too preoccupied with sports games and Xbox to notice the world disintegrating around them.

14) Using 5x as much resources as the average person on the planet and believing this to be a sustainable and scalable way of life, even when confronted with $147/barrel oil

Tsunami Alert

This week was a harbinger for the near future. The financial crisis and riots in Greece are just the canary in the coal mine for the impending global credit panic and ensuing anarchy that will make 2008 seem like a picnic. Just as the collapse of New Century financial and two Bear Stearns hedge funds was the harbinger of the subprime crisis (totally ignored by Wall Street and the media) so too, Greece is advance warning of this next much deadlier stage of the unrelenting credit crisis. It will likely only take one sovereign default to trigger an avalanche of defaults among all countries that have borrowed heavily and rely on accommodating credit markets to rollover their debt e.g. Spain, Portugal, Italy, Ireland, UK, Japan and a host of Eastern European countries.

The Elliot Waves now show that we are at the forefront of the biggest market decline in U.S. history, aka "Primary 3" (P3). Primary 1 was the market decline that started in 2007 and ended in March 2009 wiping out over 55% of market value. Primary 2 was this past year's countertrend rally. P3 will reassert the downtrend and take the markets far below the P1 low, potentially erasing the past 40 years of stock market gains, according to EWI. Before you dismiss these folks and Elliot Wave Theory itself out of hand as "financial astrology", bear in mind that while their timing was early, they called for a major top in 2007, they precisely called the low in 2009 (to the week), and now have been early (as have I) for calling a top here in 2010. If they are right now again, then that would prove the overwhelming majority of financial forecasters to be drastically wrong once again, and the early timing of the call will be rendered wholly irrelevant by the sheer magnitude of the decline.

Initially here the markets *may* stair-step their way down, as investors continue to "buy the dip", however, the inevitable flight from risky assets will likely cause a cascading panic crash. Yesterday was a small taste of just such a crash, as the market lost ~7% in about 10 minutes and then quickly recovered. We were told that this was a "trading glitch", except there is still no proof of any erroneous trade. The fact is there was no glitch, the mini-crash was simply a function of sellers overwhelming buyers. It was a one-sided market to the downside, which is exactly what we should expect after a year long Fed sponsored liquidity-driven rally intended to prop up Wall Street and propagate the illusion of recovery. Computer trading programs further contributed the problem as up to 70% of market trading volume is now controlled by automated trading programs. Many of these programs use technical (price) indicators to determine the current direction of the market and then drive momentum in the direction of the prevailing trend. Now that the trend has turned down, these programs are clearly exacerbating downside momentum.

Contributing to the inevitable panic will be the realization that the Fed and Governments are powerless to do anything, since they already squandered their resources in 2008 bailing out the investor/speculator class at the expense of the Middle Class. This time there will be no bailouts, not only because they will be politically unobtainable, but also because the scale of the market collapse will dwarf government/Fed resources.

As expected, U.S. Government Treasuries were a safe haven and long-dated Treasuries massively outperformed even beyond my expectations. Already Nassim Taleb's "no brainer" strategy of shorting Treasuries has turned out instead to be a "no brain" strategy. I can't imagine recommending shorting an asset that has proven to be a safe haven throughout the past weeks' turmoil. That is a boneheaded move, even by Ph.D standards. Yes, Gold held up well also, but as I have explained before, I don't see gold being a liquid safe haven during extreme deflation, as the amount of dollars in circulation will collapse, causing the prices of all things dollar denominated to fall. Further to the point, the U.S. dollar screamed higher against all other major currencies (except JPY), which caused further turmoil in the markets, as Wall Street's hot money (hedge funds etc.) are still clearly positioned for the "reflation" trade (short dollar, long commodities, cyclicals, emerging markets).

In short, if you have not already stocked up on food and ammunition, now would be a good time to do so, post haste.