Full Retard

We are now going Full Retard across the board - the economy, the ecology, science, geopolitics - all in...

The epidemic of comfort-seeking denialism continues to spread out of control.  Forget about silver, gold and oil, the market for denialism and bullshit is levitating to the sky and beyond.  Amazingly, the purveyors of  denialism cover the socioeconomic spectrum - from the "blue haired" ladies of conservative lore, to the 35 year old Xbox addled boy-men, too soft to face their own pathetic circumstances, much less anything going on around them.  And my favorite variant- the self-consumed Baby Boomer nihilists that come in two equally repugnant flavours: the drug addled hippy turned limousine liberal or the drug addled Born Again Neocon hypocrite - take your pick.  Even more frightening, is the all too common occurrence of the over-educated moron - people with not one but two or three degrees, who despite (or as a result of) their lofty education, can't seem to find their ass with both hands.  I guess this list covers about all of us...

Too many Westerners live in a fuzzy cocoon, insulated from the harsh everyday reality facing the majority on this planet.  A cocoon built wholly upon illusion and temporary circumstance, propagated solely by wishful thinking and sponsored by the dying vestiges of a once strong economy; an economy now in final liquidation by a generation of salesmen.

"You want the truth? You can't handle the truth"

The greatest irony is the fact that never before in the history of mankind have we had so much information and data at our disposal.  The advent of the internet and the digital age has put unprecedented volumes of information at our fingertips, far beyond what any other society has enjoyed.  Clearly, it's not just the quantity of data that matters, but also the quality of data and the way in which that data is processed.

In commonsense terms, the progression of usable intelligence requires that facts and data become constantly refined into ever greater quality.  The first step is the distillation of various facts and data into knowledge.  From knowledge, judgement is required to appropriately discern possibility from probability.  Finally, discipline is needed to take what is learned and put it into practice.

The weak link in this daisy chain seems to be judgement.  All too easily, judgement is derailed by subjectivity, greed, fear and delusion  - all modes of thinking that today are commonly accepted, when they should be roundly derided.  Similarly, discipline is easily derailed by laziness and inertia i.e. I know exercising is good for me, but...

According to this commonsense-based model of intelligence, discipline is the highest form of intelligence and the one least commonly attained.  Without discipline, all forms of higher level theorizing are just mental masturbation - academic parlour games, in the end pointless.

Never Go Full Retard...

The range of issues currently in denial covers a broad spectrum.  I don't pretend to be a scientific expert on each of these subjects and yet I am constantly amazed by the 1+1=3 conclusions drawn by many of those deemed to be experts in their field.  In many cases this is a function of the direct financial incentives provided to lure scientists from reality and truth to propagate obfuscating opinions.  Although, it's usually just a comfort-seeker far too afraid to stare into the abyss, so he pretends the cliff is 1000 miles away rather than next to his feet.

1) Peak Oil

Peak oil doesn't mean we will run out of oil tomorrow.  It means that the marginal cost of oil will continue to rise as discoveries of oil become smaller and harder to obtain.  It also means that ever-increasing demand combined with exhausted supplies will outstrip the rate of new discoveries.  Eventually we will hit a wall at which there is no supply "buffer" and the price of oil will become extremely volatile.  Thirdly, the supply of oil has shifted to geopolitically unstable regimes that cannot be counted on to sponsor the Western consumption-oriented fantasy propagated by low oil prices.  Fourth, the cost of capital to support drilling projects that take years to develop, may not remain artificially low indefinitely.

Lastly, my primary assertion is that oil has been and continues to be under-priced.  Supply of oil in today's lexicon refers to daily production rates i.e. the size of the straw.  Whereas, supply with respect to pricing should take into account the reserves of oil in the ground i.e. the size of the milkshake...

2) Peak Credit

The basic notion that we can't continue to borrow our way to prosperity.  In their infinite wisdom our so called leaders shifted the debt burden from the foundering financial sector to the general public (government) sector.  This propagated the illusion of solvency and allowed creditors to avoid losses on their ill advised investments, shifting all losses to the Middle Class Taxpayer.  One gets a sense, that should "something" untoward cause this Ponzi-based economy to come unglued again, another shifting of liabilities will not obtain politically...

3) Peak Pollution/Environmental Degradation

80 Million barrels of oil per day going into the atmosphere... Fortunately, Faux News tells me man made Climate Change is a big hoax propagated by Al Gore.  Ok then, back to American Idol.  Such is the level of thinking of today's average comfort-seeker, far too lazy to face their own self-inflicted personal issues (diet, health, financial etc.), let alone anything on a global scale.  We as a society have become a 400 pound fat man who can't get out of his own fucking way.

On the bright side, I see Peak Oil doing battle with Global Warming to put an end to over consumption of fossil fuels - Godzilla v.s. King Kong.  Of course if Peak Oil wins, it will only because we will be living in caves, fighting the Taliban with sticks and rocks, so careful what you wish for...

The cold hard reality is that our consumption oriented lifestyle enjoyed by the 20% of the world's population who are consuming 5x as much resources as the rest of the world, is coming to an end sooner rather than later, whether we can handle that fact or not.

4) Peak Military/Geopolitical Illusion of Stability

We live with the illusion of security sponsored by hundreds of global military bases, a dozen aircraft carrier groups, two ongoing wars of occupation and a military budget that at $700+ billion is more than the combined budgets of every other country on the planet !

That is all well and good, except that the return on investment from all that spending is extremely low and heading negative in terms of long-term security that we obtain i.e. The Middle East is not getting any safer these days.  Moreover, that rate of expenditure is totally unsustainable.  The U.S. Federal Government now borrows $.30 of every dollar it spends.  Under QE2, the Federal Reserve now prints (monetizes) $.20 of those borrowed dollars.  Quickly doing the Ponzi math in my head...nevermind, I was wrong, it looks like we just need to print another $.10 on the dollar and everything will be A-Fucking OK !  It just makes me wonder why the Founding Fathers of the U.S. never thought of "Quantitative Easing" (printing money) ?

5) Peak Bullshit

The endgame is Peak Bullshit and it's here big time.  Objectivity is as dead as a door nail.  It's bad enough when you lie to someone else, but when you start lying to yourself, it's game over man...

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Ironically you could argue that my above argument itself is polemic and therefore largely unsubstantiated by hard data.  Granted the raving lunatic diatribe is one of my guilty pleasures, however, I feel no more moved to cite sources for the above imminent realities than to cite a scientific finding on the olfactory properties of manure when I assert that "shit stinks".  Lack of valid citations are a necessary, but not sufficient condition to prove an argument false.  For my part, as always, I am more than happy to let history and reality be the final arbiter.  I write this blog simply as a time capsule to the future - a time when archaeologists will dig down through 10,000 feet of debris to find the remains of our collapsed civilization and wonder - "what the fuck were they thinking?".

Ship of Fools

Time Tripping
Let's time travel back 25 years to when the Idiocracy was still in its infancy.  In 1986, the year I graduated from High School, who would have predicted:

1) The U.S. deficit would reach over 10% of the U.S. economy WHILE the economy was deemed to be in "expansion"

Meanwhile, who would think we could find so many moron economists having the audacity to attest to an "expanding" economy while the U.S. was still borrowing 10% of said economy to maintain such illusion?  

i.e. With a 2% growth rate, an honest man would have to say we are in an 8% recession saved only by the fact of massive Federal borrowing.

2) Who would predict Corporate profits would be at record highs, yet unemployment would be above 9% "officially" and much higher in reality?

In other words, all that money the Federal Government is borrowing is falling straight to the Corporate bottom line, bypassing the real economy and Middle Class entirely.

Yet, who gets stuck with the fucking tab for all that debt?  The Middle Class.

3) Who would predict the U.S. would be monetizing 2/3 of its unprecedented deficit and yet interest rates on 10 year Treasury bond would still be at only 3.5% and core inflation would be quiescent.

A decent car still costs about $15-$20k.  Prices of tv sets have collapsed.  Housing prices are in renewed decline.

I bought a brand new Honda CRX in 1988 and paid $13k (on the road).  I can go out right now and buy a new Honda Coupe starting at $15.5k!!!  Not exactly what I would call heavy duty inflation, thanks to 23 years of relentless outsourcing. 

i.e. the burgeoning signs of deflation are all around us, but silver/gold speculators are so blinded by greed that all we hear about is inflation.  Who doesn't think this precious metals bubble isn't going to end badly, like the last dozen bubbles? i.e. when everyone finally figures out Ben Bernanke is just the fucking Wizard of Oz.

4) Who would predict the U.S. would be monetizing deficits, gold would be at an all time high, half the Middle East would be in revolutionary turmoil, the U.S. would STILL be fighting two multi-year wars in the region and yet oil while breaching $100, would be lower than it was 3 years earlier !!!

i.e. more nascent deflation.  When oil rises, it's not inflationary, it's deflationary, because it sucks money out of the U.S. economy.  The price of oil goes up, the price of everything else goes down.

5) Who would predict that despite all of the above, the stock market would be within a few % of a multi-year high and the "risk trade" would be on in full force?

- Well, given Wall Street's short-term oriented obsession with greed and Bernanke's QE2 feed bag still dangling in front of them, I guess we could have put even money on that one.

Half of Europe is teetering on imminent sovereign default.  All it would take is for one failed debt auction to trigger investor panic and default.  One default will fell the rest like dominoes: Portugal->Spain->Greece->Ireland->Italy->Hungary...etc.  Wall Street is oblivious.

Speaking of stock market lunacy, Dick Arms (creator of the Arms Index/Trin) put out a great report this week at TheStreet.com discussing how the current stock market conditions are very similar to those attending the Crash of 1987 and this past April's "Flash Crash"...except that current conditions are even more precarious...

The financial panic of 2008 was a trivial event compared to what is about to come.  That crisis should have been a wake up call to our dithering policy makers.  And yet, in the meantime not one policy of substance has been changed.  To the contrary, risks have only been amplified substantially, and shifted from the financial sector to the sovereign national level, putting the entire global economic system at risk. 

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In line with my time tripping theme, I was downloading some new iTunes music last night and came across this forgotten gem from my grad year that is most appropriate at this juncture.  

This is dedicated to the late Ayn Rand and all of her godless, greed worshipping Neo Con acolytes.   History will not be kind, nor will the gathering mob...

SHIP OF FOOLS [World Party]
We're setting sail
To the place on the map from which no one has ever returned
Torn by the promise of the joker and the fool
By the light of the crosses that burn
Torn by the promise of the women and the lace
And the gold and the cotton and pearls
It's the place where they keep all the darkness you meet
You sail away from the light of the world on this trip

You will pay tomorrow
You're gonna pay tomorrow
You will pay tomorrow

Save me, save me from tomorrow
I don't want to sail with this ship of fools, no no
Oh, save me, save me from tomorrow
I don't want to sail with this ship of fools, no no
I want to run and hide
Right now

Avarice and greed are gonna drive you over the endless sea
They will leave you drifting in the shallows
Drowning in the oceans of history
Travellin' the world, you're in search of no good
But I'm sure you'll build your Sodom like I knew you would
Using all the good people for your galley slaves
As your little boat struggles through the warning waves

But you will pay, you will pay tomorrow
You're gonna pay tomorrow
You're gonna pay tomorrow

Save me, save me from tomorrow
I don't want to sail with this ship of fools, no 
Oh, save me, save me from tomorrow
I don't want to sail with this ship of fools, no
Where's it comin' from or where's it goin' to?
It's just a - it's just a ship of fools

All Aboard now

-------------------------------------------------------

World Party: Wallinger, Karl

Just a Wafer Thin Mint, Sir

Here is an apt skit, in which John Cleese plays the role of Bernanke and Mr. Creosote plays the role of any number of Wall Street's fat cats:

http://www.youtube.com/watch?v=BlK62rjQWLk


Bottom line, the the boyz on Wall Street pulled off yet another successful bonus season, ass raping the American public.  

The only question now is who will be the bagholder this time?  Many a pundit thinks this rally won't end until the small investor gets sucked in for the umpteenth time this decade just in time for Wall Street to offload its merchandise in one more pump and dump.

I wouldn't be so sure about that.  Except for a month here and a month there, outflows from stock mutual funds have been relatively steady since the March 2009 low.  Also, that's some serious wishful thinking to believe there is a always going to be a greater fool ready to show up and buy your overpriced stock.  For those playing the greater fool game, I would be careful to look in the mirror once in a while and ask if the greatest fool isn't looking you in the eye already.

Bernanke's latest Middle Class Shaft-o-Rama

Still, I acknowledge, owing to Bernanke - the greatest market manipulator in the history of the planet - the  relentless stock rally continues apace as all that fresh printed QE2 money finds its way into stocks, commodities, gold and silver, while totally bypassing the real economy.

QE2 was announced in late August at the aptly named "Jackson Hole" Fed Circle Jerk.  Ostensibly, the purpose of QE2 was to lower borrowing costs to allow households to further gorge themselves on debt and wrap the noose tighter around their necks.  Unfortunately, that has not been the case, since from that exact date, unacknowledged by Bernanke, borrowing costs (which are abitraged to Treasury interest rates) have grown inexorably higher since that date.  No surprise, the easily duped "The Economist" was along for the ride and just this week (January 1st-7th), "Proceed with caution" (page 11), tells us with straight face that the goal of QE2 was "buying bonds with newly created money in order to push down long-term interest rates and stimulate lending".  Ok, so much for the marketing literature, the chart below is the reality:  In red and green ("It's Christmas!") are Wall Street's goodies, i.e. the higher stock market.  In purple, is Main Street's lump of coal i.e. higher interest rates (.TYX) ) (aka. Long bond)

So, for anyone with half a fucking brain or an ounce of honesty, QE2 has done the exact opposite of what it advertised for several months now i.e. raised borrowing rates since the day of inception.  In fairness, QE "Quantitative Easing" is aptly named i.e. a new easing lubricant with which to shaft the Middle Class, in the name of  Bernanke, Wall Street's greatest Bukkake whore, ever.  I suggest "The Economist" starting printing in 4-ply, so I can wipe my ass with it and feel that I am getting something near par value.  The current glossy version isn't giving me enough "traction", if you know what I mean.

Suffice to say if us little guys don't show up soon to throw what little worth we have left at this market, things could get quite interesting.  You see, usually when the little guy shows up, the institutions take full advantage of increased buying volume to unload their positions - a process called distribution.  It's a relatively orderly process of parcelling out a steaming turd from the big hand to many smaller hands.  However, in the event the beleaguered small guy doesn't show up this time, well that would have big guys falling all over each other to get out the same door into a bidless market.  Suffice to say when piranhas start turning on each other, things can get a tad bloody.

When, not If

To some, those of us who are cautious at this juncture are like the Boy Who Cried Wolf - continually sounding the same alarm.  And yet, not withstanding the early warnings, when the wolf came it ate everyone.  Likewise, anyone owning stocks in this artificially inflated market, attending an eroding or at best bottom-dragging economy, is either delusional or trading on the :15 minute boundary.  

Booyah Skidaddy !!!

Faux News in a Nutshell

News by morons, for morons:

http://www.zerohedge.com/article/adventures-cartography-fox

DEJA VU

There is no better example of the complete corruption and failure of U.S. leadership, than events of the past few weeks.

Like the stock market, the cycles of decision making stupidity are attenuating.  The time it takes from the inception of a bad decision until realization of the bad outcome is now becoming inescapably immediate.  Obama commissioned the Bipartisan Deficit Reduction Commission and yet before the ink was dry he had already completely ignored the recommendation.  Meanwhile, Republicans who still pretend to be fiscal conservatives after decades of Supply Side profligacy, by no surprise, completely ignored the same findings and fully endorsed extension of the Bush tax cuts and the additional payroll tax cut.  The Commission recommended a combination of reducing spending and raising taxes.  So, what did the Government do, just days later?  They passed a new bill to increase spending and lower taxes !!!

Welcome to the era of the Dumbest Generation.  You can't make this shit up.

All the while, European countries such as Germany, often derided in the U.S. as "socialist", have exhibited far greater fiscal discipline for the past decade and to a stark degree since the financial debacle.  So much for all of the "capitalist" propaganda and hollow sloganeering by Faux News.  

While other countries are taking the bitter pill and undertaking BOTH fiscal and monetary belt tightening to remove the excesses leading up to the financial crisis, the U.S. is doing the exact opposite - raising spending, lowering taxes AND increasing monetary leverage (QE2) to ensure even more hot money is in the hands of short-term speculators.  What a great fucking strategy; the U.S. economic Dreamliner is losing power and crashing towards earth, so the Morons of the Day just nosed down to increase the angle of attack.  Why crash small time, when you can drill a fucking crater ?

Cynics would say that the U.S. Dealers (aka. Leaders) already have figured out what I explained recently, that the U.S. is already beyond the point of no return debt-wise, so why not just party-on a while longer.  So either they are morons with bad math skills, or liars who understand the gravity of the situation and are just propagating the illusion of solvency - either way, the situation is not good.

What Else is Not New?
Since Bernanke's Fed enacted QE2 in November, the program of further "easing" borrowing costs has had the exact opposite effect.  Over the past 5 weeks, the 30 year mortgage rate has risen from 4.17% to 4.83%.  In addition, oil prices have increased, as have food prices.  Meanwhile, core CPI has been stagnant and or falling.  Core CPI tracks very closely to wages.  Therefore, what has happened since QE2 was launched is that wages have stagnated, whereas the real cost of living has increased across every major dimension - food, energy and housing.  This is by far the worst of all possible worlds for the U.S. economy (outside of Wall Street).  This is Deja Vu, because we had the exact same scenario back in early 2008, as I wrote here.   The Fed back then was a on a rate cutting bonanza to bailout banks and fund speculators all at the expense of average Americans.   We all remember how that worked out.

Market Update
1)Prechter & Co got back on board the all-out bearish bus this week with the latest EWT.  (After a brief flirt with bullish lunacy...)
2) The Arms Index (Trin), reached its most overbought reading in its 50 year history, despite the market still being 20% below its all time peak and unemployment at 10% !!!
3) Silver and Gold look to have put in a solid reversal on extremely high volume.
4) The Euro is impulsing lower.
5) Long-term treasury bonds look to have put in a decent bottom on a five wave impulse and massive volume.
6) Various other sentiment indicators ISEE/II/AAII at multi-year extremes; mutual fund cash balances at decade lows etc...

So...the risk trade is slowly but surely "coming off".  Let's see if the Big Money boyz make it to 12/31, bonus time this year before the wheels come off for good, it's going to be very close...

In a Nutshell

Here is a guy telling it like it is:
http://www.youtube.com/watch?v=koY6kXhQDQo&feature=player_embedded

This gent raises some good points around who did and did not benefit from this ongoing fiasco.  Apologists for the status quo (ardent crony capitalists, CNBS infotainers etc.) tell us that homeowners are equally responsible for having leveraged their homes to the maximum and otherwise taken too much risk.

All along these same jackass disinformers have been extolling the virtues of the (supply side) capitalist model based on incentives.  So I find it a tad hypocritical to blame homeowners for taking advantage of cheap and abundantly available credit which at the height of things was shoved down their throats 24x7.  No sooner did they respond to these "incentives" than the entire scheme started unravelling.  In any other market, we are told that it is normal behaviour for consumers to respond to low prices by increasing their consumption i.e. the demand curve.   Yet, in the case of capital demand, when the price (interest rate) was lowered substantially, we are told that households were foolish for having consumed more debt !  Is the average household now supposed to be a macroeconomic forecaster, able to predict the overall trend in housing prices and interest rates?  Meanwhile, I have no doubt that the average economist has lost money via stocks or real estate during this fiasco.

Gut check.  Let's review the distribution of impacts so far:

1) Government/Regulators:
Role in fiasco:
-Failure to regulate
-Easing of regulations to accomodate banksters (Glass Steagall repeal)
-Overlooking ongoing deficits and trade imbalances
Retribution: None - business as usual

2) Banksters:
Role in fiasco: 
-Extension of credit to those who could not afford it;
-Outright fraud while securitizing  garbage loans;
-Over-leveraging of banks
-Insider Trading on a pervasive scale
-Collapsed investment funds, leaving investors holding the bag
-Leading entire economy to brink of disaster
Retribution:
- Massive $10 trillion+ Industry bail out courtesy of Turbo Flat Tax
- Massive bonuses before, during ("retention" bonuses), and after crisis
i.e. business as usual

3) Federal Reserve:

Role in fiasco:  

-Lowered interest rates to engineer bogus "recovery" and create incentives for households to borrow way beyond their means; 

-Provide leverage to speculators, under-regulate banks 

-Turn blind eye to securitization frauds; 

-Allow banks to become "too big to fail", requiring massive taxpayer bailouts

Retribution: None.  No oversight whatsoever; now via Quantitative Easing finding new ways to increase systemic leverage

4) "Irresponsible" households:
Role in fiasco:  Overconsumption, overleverage on housing and other forms of debt
Retribution:
- Foreclosure/loss of personal residence
- Bankruptcy (divorce)
- Fund taxpayer bailout of banksters
- Top Ramen for Christmas dinner


Is this a great fucking system or what?

Dr. Bernanke or: How I Learned to Stop Worrying and Love the Bust

This week I observed a very rare Double Top fractal at three degrees of trend.  A fractal is a repeating pattern - in this case a double-top.  Each of these double tops attends extreme bullish sentiment towards the stock market and an inverted head and shoulders (triple) bottom between the tops:

The graph below shows the numbered red lines indicating each double-top.  Red up arrows show the head and shoulder bottoms (I only show the largest two fractal bottoms).

Extreme sentiment refers to the AAII and II sentiment surveys which are at similar extremes reached in October 2007 and April of this year.  As well, the ISEE call/put ratio printed 183 yesterday, the highest level since April 15th (just prior to the top).  

The below close up view of this year's action shows the (2) and (3) fractals:

To summarize, the first double-top rally (from 2003-2007) took ~5 years to reach extreme sentiment and a peak.  The rally from March 2009 to April 2010 lasted just over one year and reached a similar extreme in sentiment and a market peak.  The rally from the low this past August to this November's high, lasted 2.5 months, peaked, triple-bottomed earlier this week and is now straight vertical, having already again reached an extreme in sentiment. 

Each rally is of shorter and shorter duration than the last yet attends the same level of investor enthusiasm.  Why are investors equally bullish as October 2007 when the market is 20% lower?  Why are they equally bullish as last April when the market has gone nowhere?  

This effect is called attenuation, the same concept used in electrical engineering to describe a loss of signal.  Or the term used in cardiology to denote the heart's pattern immediately prior to a heart attack...

By the way, for those who do not subscribe to EWI (literally or figuratively), their most recent "December Financial Forecast" sees as the most likely scenario higher prices going into year end, leading to a final top above current levels.  For the most bearish of all published forecasters to have now switched from being full on bearish since April expecting the market to top out imminently, to now being bullish (at least intermediate) term, I regard that as capitulation.  Maybe they will be right this time, but since they have been wrongly bearish for the better part of a year, I am not betting that they will now get it right.  More likely they will be the last fools sucked in at the top, too focused on their ever-changing wave counts and ignoring all other flashing indicators including their own capitulation.  Given that they alter their wave counts continuously after-the-fact, we can be confident they will be "right" eventually, that's guaranteed.

Dr. Bernanke in the house: When all you have is a hammer, everything starts to look like a nail

Meanwhile, in other news, today's jobs report was far worse than "expected".  With 39,000 net new jobs created v.s. 150,000 expected and 250,000 minimum needed to offset new entrants to the labour force.

Copious disinformers still abound to support Bernanke's QE2 (Money printing) scheme, which has done nothing for the real economy to date (hence the v.2 nomenclature, soon to be 3,4,5...)  Those supporting this scheme tend to be of the Wall Street ilk and thereby the primary beneficiaries of being able to borrow at 0% and lend at 4%, risk free - via the various carry trades enabled by this "policy" of basically giving out free money to select wealthy investors at the public expense.  As we have seen before, all of this extra financial leverage makes for extremely spectacular busts when these carry trades are unwound.  

Speaking of which, we learned this week that the Fed extended a total of $9 trillion in loans to the banks during the banking crisis - $9 fucking trillion !  Do you remember all of the hand wringing, Tea Partying, letters to Congressmen that abounded when the Treasury initiated the TARP program in Sept. 2008?  Yet, for all that, the $700 billion TARP was less than 10% of what the Fed doled out - it was chump change.  The Fed on the other hand, faced absolutely zero oversight or intervention while extending the U.S. balance sheet several times beyond historic levels.

2008 was a tremor, next comes the earthquake
What has the Fed done in the meantime to correct the imbalances and mal-incentives that led to the 2008 financial crisis?  All they have done is to further leverage the system by inventing new ways (Quantitative Easing) to put money in the hands of leveraged speculators and thereby kicked the can a few yards down the road towards the next much larger catastrophe.  The odds that the Fed can kickstart the economy and engineer a successful exit strategy by applying even more of the same easy money that caused the first crisis, is exactly fucking zero.
The Fed is run by a bunch of overeducated moronic stooges toiling feverishly at the behest of their moneyed puppetmasters on Wall Street.  Harvard and the University of Chicago do not teach any courses on judgement and commonsense, which is why there are so many fucking morons in high places pissing all over themselves while the fire burns out of control.

The stock market chart below illustrates the only true beneficiaries of Monetary Policy.  On the far left, Greenspan's 1% interest rate policy [June 25th, '03] (at the time, the lowest in U.S. history), that propelled the 2003 "Mission Accomplished" rally and led to the parabolic housing boom that is still negatively impacting a large number of households.  On the right side, Bernanke's Moon Shot showing Stage 1 [QE1], Stage 2 [QE2] and our current juxtaposition, once again in Outer Space.  Oddly, charts like this don't make me optimistic:

The other beneficiaries of Bernanke's doomed munificence are silver and gold investors, who will ride that bullet train until it crashes and burns:

So, do you feel lucky, punk?

These silver investors are seeking shelter from "inflation" even as the core CPI prints its lowest reading ever (since data collecting started in 1957).  Check out this chart.   Wow, that's inflation all right !  Silver investors tell us that core CPI is inaccurate and does not reflect true costs of commodities and precious metals.

Let's see, inflation is "going up", so buy silver.  Silver is going up, therefore inflation is going up !  Buy more silver!

Hi Ho Silver, Away !!!!

;-)

Point of no Return

This week's edition of the The Economist featured an article on Japan and its demographic (ageing) crisis.

Voodoo Economics

Not surprisingly, the article missed out on by far the most important point regarding Japan and a key point that is instructive for all nations currently running deficits.  The point is that once a country starts running structural deficits to fund operating expenditures, it soon becomes mathematically and politically impossible to ever pay off the debt.  Economists like to point to the ability of countries to "out grow" their debt and deficits via Supply Side Economics.  A third grader is smart enough not to believe such a load of rubbish, but not so today's average economist/politician/bankster.

One can easily construct a financial model to indicate the impact to the Japanese economy were it to even attempt to start paying down its debt.

Assumptions:

 - Current Federal debt at 200% of GDP (which it is)

 - Average Duration of debt: 30 years (this is a VERY generous assumption)

 - Average interest rate on debt: 1% (The rate on JGBs fluctuates, but is currently very low)

Now we see why it was so easy to ignore this problem in Japan for so long.  With interest rates at 1%, the conventional wisdom is that "Debt Service Costs" are extremely low, so there is no harm in taking on more debt.  Unfortunately for the purveyors of this "load", there is more to debt service than simply the current interest i.e. principal.

Plug the above figures into Excel and now assume that all of this debt needs to be paid off in 30 years time.  In this model, we are solving for the Payment (a blend of principle + interest) i.e. the true debt service cost and the one that would have saved "The Economist" from devoting a lengthly article to evading the simple truth.

Over 30 years, as a percent of GDP, the payment is: 8%  !!!

Wait, it gets worse.  Obviously in order to pay down debt, a country needs to first stop accruing new debt i.e. first eliminate the annual recurring deficit.  Japan's fiscal deficit for 2010?  10%

The Bottom Line for Japan:

In order for Japan to START paying down its current level of debt over a 30 year period it would have to incur a 16% hit to GDP immediately and that figure will only grow into the future.  (NOTE: 2% of GDP is interest and already included in the deficit).

U.S. Example:

Variables for the U.S.:

 - Current Federal debt at 100% of GDP 

 - Average Duration of debt: 20 years (average duration is currently 5 years, so this is very generous)

 - Average interest rate on debt: 3% 

 - Current annualized deficit for 2010: 10%

Level of GDP that would be removed by paying off debt over 20 years:

[Ongoing debt service cost, amortized over 20 years: 6.7% of GDP] 

Including 10% Deficit: ~14% (after taking out the 3% interest due to double-counting) 

Keep in mind, both countries are applying unprecedented fiscal and monetary stimulus at this juncture and yet there is minimal growth in either country i.e. no sign whatsoever that either country could possibly remove the bulk of stimulus while at same time maintaining a positive economic growth rate MUCH LESS pay down a $1 of debt.

Definition of Recession is Totally Bogus
Officially, according to NBER, the U.S. is out of recession, and has been since June 2009.  Of course, that is totally bogus because the "official" definition of recession does not take into account fiscal deficits, so it is meaningless.  Whether, the deficit was at 0% or 10% of GDP (as it is now), the U.S. would still be deemed to be out of recession.  Currently, as I write, GDP growth is running at ~2% year over year, so in reality, the true economy is running at a negative 8%.  When a country can borrow 10% of its GDP and then declare that the economy is "growing" at 2%, that's the trifecta - bad math, denialism and stupidity all rolled into one.

Legacy of the Baby Boomers
That 14% represents the hole in the economy left behind by the most greed-addled, self-indulgent generation in world history.  Not only are the Boomers spending the wealth inherited from their parents, they've underfunded and raided their own 401k retirement funds, bankrupted Medicare and Social Security, and on top of all that left A GAPING 14% SMOKING CRATER where the economy used to be, for their children and grandchildren to inherit.

As I have said before, GAME OVER, MAN.  We just need Wall Street and the morons with the fancy degrees to wake up and smell the fucking napalm.

Roadmap for Collapse Part II

In the first installment of the Roadmap, I discussed the market implications of the collapse.  With this installment, I gaze further into the abyss to discuss the potential economic outcomes of the collapse.   For this purpose, I created the hypothetical decision model (below).

As you see, I divided the map into three main areas: reflation (economic normalcy), deflation (price, asset, economic), hyperinflation (mainly price).

As far as assumptions, I suppose the fundamental assumption is that without Government stimulus (fiscal/monetary) the economy is not self-sustaining and therefore would quickly succumb to the deflationary forces of the total debt burden.

Therefore, the pollyanna scenario of a self-sustaining economy without ongoing fiscal and monetary intervention is not represented in this model, and I assume anyone reading this blog in the first place, gets that.  

Most likely scenario: Deflation then Hyperinflation
As depicted by the blue lines and as described vividly throughout my posts, I expect another even stronger market event than the one we experienced in 2008, which would be extremely deflationary.  Those who believe it would not be deflationary, forget that both oil and gold tanked during the turmoil two years ago.  Where I indicate that a policy is "blocked", I mean politically blocked.  Given the newly elected Republican-dominated Congress, the likelihood of either the Gov't or the Fed continuing to add "stimulus" unfettered, is highly unlikely.

As you see, I have represented a "Default" scenario under which the U.S. Gov't repudiates its debts, as a potential scenario, given the new political backdrop - a scenario I thought highly unlikely until recently.  I still think that an outright default is unlikely, making the "middle scenario" of MASSIVE fiscal stimulus combined with massive monetization, essentially devolving into de facto currency printing (via FDIC payouts, stimulus checks etc.), as the most likely scenario.

Less likely scenario: "Status Quo", leading directly to Hyperinflation
This is a very popular scenario these days, causing the big run up in gold.  In order to believe this chain of events, you must make certain unlikely assumptions:
1) Assumes no adverse market "event" similar to 2008, which as indicated was extremely deflationary
2) Assumes that an inevitable backup in interest rates, would itself not cause the economy to stall and the markets to collapse
3) Assumes there would be no political intervention in the current stimulus trajectory and that fiscal and monetary stimulus would continue unfettered (seems very unlikely)

Pollyanna (impossible) scenario: Self-sustaining economy and removal of all stimulus
This scenario is extremely unlikely, given:
1) Overall magnitude of Government stimulus, now baselined into GDP
2) No sign of sustainable economic growth, especially in a low/no leverage environment
3) Massive outsourcing which has caused long-term secular unemployment and removed entire industries and skillsets from the U.S. economy i.e. the unemployed have skills that are no longer in demand in the U.S.
4) Massive debt overhang that will continue to put deflationary pressure on the economy
5) Unresolved Social Security and Medicare deficits

Threading the Needle->All paths lead to hyperinflation...Eventually
While, as indicated in the model, all paths lead to hyperinflation, it could take some time to get there.  Keep in mind, there are a whole lot (most) of other countries that will go bust before the U.S., which in the "short-term " will increase deflationary pressures and demand for U.S. dollars as a safe haven.  Any country that does not issue debt in its own currency (i.e. entire Euro area and Eastern Europe) will highly likely default.
A U.S. default, were it to eventually occur would "collapse" the U.S. dollar - relative to what, is the question i.e. other currencies would be similarly debased.  Relative to gold and silver is the likely answer.  Inevitably, what is left of the already-weakened banking system would be obliterated.  That part of the economy supported by borrowing and lending would be gone, along with a substantial negative economic multiplier.  Residual private debts and fixed contracts would be a crushing weight on the economy and likely lead to the "Weimar" scenario of printing currency to eliminate the residual debt burden.  I do not believe any Government on the planet has the will power to keep from printing its way out of a deflationary depression on the order of magnitude we will face, while confronting mass social unrest on an unprecedented scale.
Printing and distributing enough physical currency to even partially offset the amount of derivative "money" in the credit-based system, will not be a trivial ordeal...As one would expect in our Fractional Reserve Banking Model, physical currency currently represents only about 10% of the total "money supply" (M3).  So imagine a world where (even temporarily) the majority of money in circulation, is eliminated  i.e. a cash-only economy - the Euro too, long since having been abandoned.  In this scenario, inflation would build over time, likely very slowly initially and then accelerating.

Timing is Everything
All of this is highly speculative, as the scale of monetary collapse described above will be unprecedented and accompanied by substantial geopolitical strife and domestic anarchy.  Sequence is hard enough, timing is impossible to predict accurately, however, I see the overall scale of the model below in the 3-5 year range, perhaps ten years maximum.  Some things will likely occur faster than expected, whereas other phases will likely drag out much longer than expected.

Invest at your Own Risk

Therefore, given all of the potential paths and scenarios, it's not at all clear how one would successfully navigate a crisis of this magnitude.  Surely some amount of hard cash, gold, rice and ammunition is in order.  For the time being, I still like U.S. Treasuries (all durations) here.  I would also view a (large) pullback in gold as an initial buying opportunity with the goal of scaling in to a substantial position eventually...

For those in Canada, I like 3+ year duration Government of Canada bonds, which you can buy through a brokerage account (NOT Canada Savings Bonds, which are totally illiquid - can't be traded).

Waiting for Godot, in the Pet Sematary

"Clowns to the left, and jokers to the right...Stuck in the Middle with you"- Stealers Wheel

Ho Hum, just another week in the markets:

- Just another European economy on the brink of insolvency 
- Just another brawl between Central Bankers regarding Mercantilist policies
- Yet again, the same fucktard Fed, excoriating U.S. Gov't deficits, while at the same time financing these deficits by printing more U.S. dollars.  That is like a crack dealer telling his customer he has a drug problem.
- The Chinese angry at the U.S. over the fact that inflation is running between 4-10% (depending on who you believe), yet continuing to peg the Yuan to the U.S. dollar to ensure ongoing trade imbalances (guaranteeing inflation).
- And note the accompanying asinine comment from Faber, telling us that the underlying issue is [beleaguered] American consumers borrowing too much, even as their jobs and incomes are systematically being eliminated i.e. nothing to do with China's currency policy !

I could not make up this much self-contradicting stupidity if I sat down for hours and tried...
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Overall, on the "left", we have the usual Tools and Fools trying to propagate the illusion of recovery via yet another Fed prop, QE2.  We have had umpteen Fed actions these past few years now: interest rates at 0%, monetization of mortgage debt (MBS), no less than three rounds of monetizing public debt - QE1 was round 1, then the Fed started rolling MBS security repayments into Treasuries starting this past August, now another $600 billion just in time for Wall Street bonus season, what a coincidence!  Nothing but desperate fools thinking that more cheap money can solve a debt problem brought on by cheap money.  Let's see, if we can only make crack cocaine cheaper, then we could solve the drug problem...that's the ticket !!!  Anyone who defends Monetary policy at this point is an Intellectually bankrupt jackass .  Book smart morons, indicative of the comfort seeking class of Baby Boomers (not all, surely) who lack the intellectual honesty and courage to face reality, much less gaze into the fucking abyss.

On the right -  well, you know, Palin & Co's. demented hillbillies, hellbent on creating the new Fascist state, that surely-be-to-God will rise from the ashes.  An American Taliban that will dispense with the liberal nihilists and Limousine liberals with a sweep of the hand.

Wait for it!  Be patient, it's coming....Rome was not burned in a day...

According to the latest EWT, the markets are at a sentiment extreme exceeding the 2007 high, despite being 20% lower in price and attending a punk, Pet Sematary version of the "Goldilocks" economy, that is rolling over by the minute...

Stuck in the Middle With You.