Economist Sees Greek Debt Default Soon, Urges Investors to Carry Cell Phones On Vacation

Greece will eventually default on its debt because the country is highly indebted and the euro zone's approach towards saving it is the wrong one, Carl Weinberg, chief economist at High Frequency Economics, told CNBC Friday.

A restructuring of Greek debt could happen as soon as August, when the Balkan country is due to receive another tranche of funds from its lending agreement with the International Monetary Fund (IMF) and the European Union, according to Weinberg.

"You can't take a country that's over-borrowed and make it more creditworthy by lending it more money," he said. "They're throwing Greece further and further and further in the hole by not addressing the problem directly and properly."Asked when a Greek default could happen, Weinberg answered: "at High-Frequency, we are advising people to take their cell phones on their August vacation." He said a Greek default would be "harsh" for the euro.

Soft Retails Sales Put Stocks in Bad Mood

WASHINGTON (MarketWatch) -- U.S. retail sales declined for the first time in eight months in May, tumbling a surprising 1.2%, the Commerce Department estimated Friday. 

Seasonally adjusted sales were mixed across sectors, dominated by large declines at hardware stores, auto dealers, gas stations, department stores and clothing stores. Modest gains were found in most other types of stores.
The results were much worse than expected, as economists surveyed by MarketWatch were forecasting a 0.2% gain in sales. It was the first decline in sales since September 2009; the seven-month winning streak was the longest since 1999
The disappointing results are sure to provoke more talk about a possible double-dip recession following on the heels of the past week's discouragingly weak payrolls report for May. Read the economic preview.
Consumers face many constraints on spending, chiefly weak income growth against a very weak labor market. Credit is tight, and household wealth is likely falling again in the second quarter.

WASHINGTON (AP) -- Retail sales plunged in May by the largest amount in eight months as consumers slashed spending on everything from cars to clothing. The big drop raises new worries about the durability of the economic recovery.
The Commerce Department says that spending fell 1.2 percent last month. Auto sales were down 1.7 percent but there was weakness in a number of areas. Excluding autos, sales fell 1.1 percent.
The big decline cast new doubts about the strength of the economic recovery. Consumer spending accounts for 70 percent of total economic activity. Economists are concerned that households will start trimming outlays as they continued to be battered by high unemployment and a swoon in stock prices.

Gordon Long: A Minsky Melt-Up

 EXTEND & PRETEND:  Manufacturing a Minsky Melt-Up!

  

A distracted and preoccupied amateur is no match for a determined, organized professional with a strategy. Though the collapse of the shadow banking system was a near fatal miscue for the global bankers, they have been quick to adjust their strategy. With an army of MBAs, quants and lobbyists they have reworked their strategy at the expense of the still comatose and shaken taxpayer.

 

It is the first anniversary since April 2^nd when FASB 157 was suspended and with it the suspension of ‘mark-to market’ accounting. The US congress held a gun to the head of the Financial Accounting Standards Board a year ago. Congress left FASB no choice but to change their guidelines under the perception that it was a deferral allowing time for the banks to adjust the toxic and devalued assets on their books. Where are we a year later with Mark-to Market still ‘on hold’ and Mark-to-Myth endorsed by the Federal Reserve Bank examiners? Frankly, the ‘happy face’ media doesn’t want to talk about it, so I will. As an investor, unlike politicians and the media, I must face reality or I will pay the ugly consequences.

 

 

 

In January's EXTEND & PRETEND - An Accounting Driven Market Recovery, I outlined the accounting changes that had been implemented to ignite a market reversal and rally from the March 2009 low. These accounting changes ranged from the deferral of FASB 157 in March 2009, the Commercial Real Estate Loan Workout Policy in October 2009, the three cauldrons easing in November 2009, the deferral of FASB 166 and 167 in December 2009 and the System Wide Federal Bank Examiner Reinforcement Training in January 2010. The changes were executed in a controlled and almost militaristic operation. The market has reacted with a 58.4% retracement of the 2008 decline and a 70% increase from the lows in the DOW industrial, trumpeted eagerly by the nightly news. This was Stage I.

 

Before we discuss Stage II, which will be the manufacturing of a “Minsky Melt-Up”, let’s briefly review the extent to which Stage I has created distortions in the accounting of public traded financial fiduciaries. We will then be able to see clearly how they have created the launch pad for Stage II.

 

 

 

STAGE I – AN ACCOUNTING ORCHESTRATED RALLY

 

The Friday Night Lottery

 

Almost every Friday night the FDIC seizes from 1 to 5 local or regional banks as insolvent failures. Saturday morning we wake to find these bankrupt banks have been magically merged with another bank. It all seems so normal. But does that speed and ease sound realistic to you?

 

According to Karl Denninger at The Market Ticker who follows these matters very closely, on March 6^th he reported:

 

 

I am constantly amused by those people who claim there is some vast "conspiracy" in this country when it comes to banks, balance sheets, and fraudulent lending and accounting. There is no conspiracy. It is, in fact, "in your face" fraud. The FDIC does us the courtesy of explaining it virtually every Friday night, right on their web page. I am simply going to take last night's bank closures, which numbered four.  One of them has no "deposit insurance fund" estimated loss available, because they didn't find someone to take the assets - they're just mailing checks.  But the other three do.

 

   1- Waterford Bank, Germantown MD: $155.6 million in assets, $156.4 in insured deposits.  They were "underwater" by $800,000, right?  Wrong:  Estimated loss, $51 million.  That is, the assets of $155.6 million were overvalued by approximately 30% at the time of seizure.

 

   2- Bank of Illinois, Normal IL: $211.7 million in assets, $198.5 million in deposits.  They were "underwater" by $13.2 million (which is why they were seized), right?  Wrong: Estimated loss $53.7 million.  That is, the the assets of $211.7 million were overvalued by more than 25% at the time of seizure.

 

   3- Sun American Bank, Boca Raton FL:  $535.7 million in assets (so they claimed anyway), $443.5 million in total deposits.  Heh, why did you seize them - they have more assets than liabilities?  Oh wait: Estimated loss: $103.8 million, so the actual assets are worth $443.5 - $103.8, or $339.7 million.  That is, the assets of $535.7 million were overvalued by a whopping 37% at the time of seizure.

 

This isn't new, by the way.  In August of 2009 I went through Colonial Bank's failure based on BB&T's presentation to its shareholders on the "merger" - and gift it was given by the FDIC.  It too showed that Colonial had been carrying assets on their books at a ridiculous 37% above where BB&T ultimately marked them as a whole.

 

Folks, your bank is being assessed deposit insurance premiums to pay for these losses.  You are paying these losses through increased fees and interest expense on your credit cards and all other manner of borrowing. You are paying for outrageous, pernicious and endemic balance sheet fraud. There is no conspiracy.  It is right under your nose.  One of these three banks, based on their balance sheet, wasn't even underwater - it was "to the good" by nearly $100 million dollars. The balance sheet was a flat, bald-faced lie. You want to sit for this? Why should you?

 

Now let's ask the inconvenient question:

 

Are the big banks - specifically, Citibank, Bank of America, Wells Fargo and JP Morgan - all similarly overvaluing their assets?

Why should we believe they are not?  You can go through more than a year's worth of FDIC bank seizure information and in essentially every single case you will find that overvaluations of somewhere from 20-50% have in fact occurred, yet not one indictment for book-cooking has issued.

 

So let's be generous and assume that the "big banks" are over-valuing their assets by 25% - the lower end of the range of what the FDIC says is, through actual experience, what's going on, and add it all up.

 

    Bank of America shows $2.25 trillion in assets.

    Citibank shows $1.89 trillion in assets.

    JP Morgan/Chase shows $2.04 trillion in assets.

    Wells Fargo shows $1.31 trillion in assets.

 

This totals $7.49 trillion smackers.

 

The FDIC's experience with seizing banks thus far suggests quite strongly that all four of these entities are lying about these valuations, and that were they to be seized the loss embedded in them (and for which you, the taxpayer would be responsible) is somewhere between $1.49 and $2.99 trillion dollars.

 

Incidentally, neither the FDIC or Treasury happens to have either $1.49 or $2.99 trillion laying around, and it is highly questionable if they could raise it, should that become necessary. Now of course neither you or I can prove this is correct.  However, we can look at the FDIC's own published bank closing statements, and derive from them a pattern stretching back more than a year now that has disclosed that in essentially each and every case the banks in question have overvalued their assets by anywhere from 20-40%, and that as of the day of the seizure such an overvaluation was in fact a continuing and ongoing practice. (1)

 

 

This was precisely what was in the process  of happening, as I outlined in EXTEND & PRETEND - An Accounting Driven Market Recovery. 

 

If you were a bank, why would you lend to small business or the consumer with their inherent risks when you could play the Friday Night Lottery? As A bank CEO you would ensure that you have plenty of cash ready to buy and take over the depositors (whose assets you desperately need), while having most of the bad debt written off and then likely getting very favorable FDIC guarantees for quickly taking the banks off FDIC’s highly depleted balance sheets. I imagine every US bank CEO & his/her Board of Directors watch these results closer than the March Madness basketball rankings!

 

To facilitate these bankrupt banks being taken over so quickly, there is obviously a considerable amount of very secret negotiations (non transparent, non public bidding) taking place behind the scenes. Like we saw with TARP (Troubled Asset Relief Program), it is amazing how much money gets spilled when everyone is in a frenzy to feed at the government trough.

 

It’s Only Going to Get Worse

 

The biggest financial issue with local and regional banks is their commercial real estate loans with building and construction loans being the worst.

 

The official government stance as stated in the February report from the Congressional Oversight Panel makes for sobering reading. It forecasts $200 to $300 billion in losses coming from commercial real estate (CRE) loans. The report notes these were not considered in the famed stress tests, since that process looked only through 2010, when the losses from CRE will peak later.  It outlines that:

1. Between 2010 and 2014, about $1.4 trillion in commercial real estate loans will reach the end of their terms. Nearly half are are presently underwater, that is the borrower owes more than the underlying property is currently worth.
2. Commercial property values have fallen more than 40 percent since the beginning of 2007.
3. Increased vacancy rates, which now range from 8 percent for multifamily housing to 18 percent for office buildings, and falling rents, which have declined 40 percent for office space and 33 percent for retail space, have exerted a powerful downward pressure on the value of commercial properties.
4. The largest commercial real estate loan losses are projected for 2011 and beyond; losses at banks alone could range as high as $200-$300 billion.
5. The stress tests conducted last year for 19 major financial institutions examined their capital reserves only through the end of 2010. Even more significantly, small and mid-sized banks were never subjected to any exercise comparable to the stress tests, despite the fact that small and mid-sized banks are proportionately even more exposed than their larger counterparts to commercial real estate loan losses.
6. A significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every American.
7. Empty office complexes, hotels, and retail stores could lead directly to lost jobs. Foreclosures on apartment complexes could push families out of their residences, even if they had never missed a rent payment. Banks that suffer, or are afraid of suffering, commercial mortgage losses could grow even more reluctant to lend, which could in turn further reduce access to credit for more businesses and families and accelerate a negative economic cycle.
8. It is difficult to predict either the number of foreclosures to come or who will be most immediately affected. In the worst case scenario, hundreds more community and mid-sized banks could face insolvency. Because these banks play a critical role in financing the small businesses that could help the American economy create new jobs, their widespread failure could disrupt local communities, undermine the economic recovery, and extend an already painful recession.

The Chair of the Congressional Oversight Panel, Elizabeth Warren, in an interview with Charlie Rose on NPR stated:

 

CHARLIE ROSE:  Commercial real estate, what are we looking at. 

ELIZABETH WARREN:  Oh golly -- 2,988 banks that by the terms of their own regulators are too concentrated in commercial real estate.  These are the medium size banks.  By the end of this year, half of all commercial real estate loans will be underwater, and they are coming in ‘11, ‘12 and ‘13. 

The reason this is such a bad problem anyway -- think about that, nearly 3,000 banks out of a total of 8,000 -- it’s the very banks that do  small business lending who are about to get socked in the nose on real estate, commercial real estate losses. 

CHARLIE ROSE:  So we’ll see banks going under because they’ve got too many loans out there are not being repaid? 

ELIZABETH WARREN:  We’re seeing banks that don’t want to lend because they see every dollar that comes in the door and say "I’ve got to hold on to it to try to fill my commercial real estate hole or else I will be gone." 

 

Home Equity Loans (HELOCS)

 

I find it amazing that with all the talk about government programs to keep people in their foreclosed homes, with government incentives to increase home sales, with new home construction at a near standstill and home prices finally reaching some sort of bottom (near term), we never talk about the billions of Home Equity Loans that were taken out from 1996 onward. Does it pass your common sense test that people would stop paying their mortgage, car payments, credit cards and yet still pay their Home Equity Loan? I don’t think so. But the banks have written down next to nothing here. This is the issue with Mortgage write-down. If you write down the mortgage, by definition the Home Equity Loan is now a 100% write-off. Ouch! Doesn’t anyone remember this graph which was so prevalent only a few years ago?

 

 

This is an absolute huge problem and is presently being hidden behind all the mortgage foreclosure coverage. Amherst Securities, according to Reuters " has said "commercial banks hold approximately $767 billion of the total $1.05 Trillion of second mortgages outstanding, with the Big 4 holding over $400 billion alone." Reuters estimates that if the banks mark down the entire portion of home equity debt that exceeds home value values, the net of estimated reserves would be:

 

$37.2 billion for Wells Fargo

$29.9 billion for JP Morgan

$28.6 billion for Bank of America

$11.5 billion for Citi

=====

$107.2 billion

 

If we were to write down these unsecured home equity lines by only 40%, then the potential increase in regulatory capital for these 4 banks increases by: $3.1B for Wells Fargo, $1.3B for JP Morgan, $2.1B for Bank of America and $1.0B for Citigroup.  Nothing is being done, nor is anything being forced by Federal Reserve Bank examiners to be done.

 

I could go on about shadow housing inventory, ‘jingle’ mail and ‘strategic defaults’, the python in the pipe with Option-ARMS, the failure of HAMP etc., but I am sure you have heard all you want to hear about housing to know the banks have yet to effectively address the issue. Like landmines the issues still lay on their balance sheets.

Because of this situation, the banks still minimally require 40% higher collateral values. So how are they going to get it?

STAGE II -- MANUFACTURING A MINSKY MELT-UP

 

My grandfather, who was proud to keep his farm during the depression, had an expression that I haven’t heard in a long time. He was fond of warning that: “Banks lend you an umbrella when it is sunny and then demand it back when it starts to rain!” It has been a long time since we have had a ‘rainy’ economy for any protracted period of time, but to this prairie farm boy the economic weather forecast doesn’t look that good.

 

We therefore need to remember some basics of banking. First, banks make money borrowing short and lending long. This strategy is inherently risky. This is why banking requires extensive regulatory laws and ever vigilant bank examiners. Neither are to be ‘tampered’ with, which our politicians now seem oblivious to.

Secondly, inflation and deflation are different for banks. The Consumer Price Index and how much food, energy, consumer staples etc have increased is not highly relevant to banks. Inflation or deflation to banks is about asset price increases or decreases. It is about whether their collateral positions are increasing or decreasing. I don’t mean to be too simplistic here since cost of money is critically important, but it serves to make the point that bank strategy is driven by their view of the direction of asset prices and whether their loans are covered, their capital ratio requirements are secure or what a new risk adjusted loan is worth to them.

What does this chart to the right say about where banks view asset prices to be headed?

 

Banks win on asset inflation. Banks potentially lose on asset deflation.

Rising asset prices:

1- Make Collateral more valuable or easier to secure for banks

2- Raise borrowing levels with which to finance higher priced asset prices which increase interest payments and fees.

 

If banks thought collateral values were headed lower, here is what they would do:

1- Freeze new loans secured by collateral that will potentially deflate	In Process
2- Seize existing loan collateral on defaulted loans before collateral falls below book value	In Process
3- Demand higher collateral levels for loans	In Process
4- Charge higher rates and tighter terms	In Process

                                                                   

Banks need asset values to continue to climb. Now that the markets have reached ‘nose bleed’ levels and appear to be at the stage of looking for a consolidation, the banks need another strategy to ignite asset prices further. The banks must see higher asset prices to have any hope of achieving satisfactory Capital Ratios with the known amounts of bad and toxic debt still on their books. Is it any wonder banks are now making their profits primarily in their trading operations driving asset prices higher and with their Interest Swap where they are squeezing collateral call levels? (see: SULTANS OF SWAP: The Get Away!)

MANUFACTURING A MINKSY MELT –UP

If the banks wanted to get collateral values up, and manufacture a ‘Minsky Melt-Up' here is what some of their strategy elements would call for:

 

1- Have the Federal Reserve reduce Fed Funds Rate to Zero	Done
2- Have the Federal Reserve hold down rates for a historic length of time i.e. a “very extended period”	Done
3- Have Federal Reserve flood market with money (i.e. Quantitative Easing)	Done
4- Have Government initiatives that support asset appreciation (i.e. housing, auto programs)	Done
5- Have accounting changed that forced asset liquidation for mal-investments  (see Accounting)	Done
6- Change Margin requirements or Leverage Pricing
ISE had instituted special rebates for specific option liquidity providers – April 1	Done
NYSE Euronext's U.S. Options Exchanges Announce New Pricing and Fee – April 5	Done
ISE to Introduce a Modified Maker/Taker Fee Schedule  – March 29	Done
New interest rate futures contracts and futures options on Eurodollar & US Treasuries	Done
7- Spin or exaggerate economic news through the media in a positive manner only	In Process
8- Decrease risk premiums and increase levels of speculation	Returning
Phantom volume at 3 am on Sunday night	In Process
Is volume merely hiding in plain sight, dark pools and structured notes?	In Process
The obvious overhang of CFTC position limits	In Process
The cross-pollination of inter-continental routing capabilities	In Process
9- Establish a Carry Trade that will flow monies to US assets (i.e. re-establish Yen Carry Trade)	In Process
Market Melt Up? More Like Yen Meltdown	In Process
10- Weaken the US$ to solidify Carry Trade returns and reduce currency risk	Expect
11- Give the market a surprise jolt - like China revising it's currency peg (China biggest US collateral holder)	Expect
12- Increase the Velocity of Money by instilling an inflation worry in the public	Mixed
13- Place restrictions on market shorting (i.e. shortages on key dates)	Expect

                                                                

I am not saying that a successful Minsky Melt-Up will be achieved or in fact could be successfully manufactured. Frankly, I would be very skeptical if it weren’t for the fact that former Federal Reserve Chairman Alan Greenspan specifically said this could not happen (He also stated that market bubbles could not be identified by the Fed nor addressed with Monetary Policy (yeh right)). His views have typically been my contrarian indicator which has given me an investment edge over the years. Before reading Alan Greenspan’s ‘Greenspeak’, consider that we presently have unstable economic policies, risk premiums have been high and the Fed has successfully inflated a bubble in the Bond Market over the last 20 months through QE (Quantitative Easing).

 

…Greenspan said “because the markets themselves are asymmetric: they melt down, but don’t melt up!” Mr. Greenspan argues:

(1) the ironic result of successful stabilization policies is a journey to excessively-thin risk premiums, and if
(2) history has not dealt kindly with the aftermath of protracted periods of low risk premiums, and if
(3) asset prices do not tend to melt up but do tend to melt down, then
(4) logic implies that the fattest fat-tailed secular risk to price stability is deflation, not inflation.

How so? If bubbles are the ironic externality of successful stabilization policies, then those policies can be successful only so long as there are asset classes that the central bank can inflate into a bubble. When there are no more free and clear assets to lever up, the game ends in a debt-deflation. As the great Hyman Minsky intoned, stability is ultimately destabilizing!  That is the logical consequence of too-successful inflation stabilization. Don’t call it a conundrum, but rather a dilemma, if the Fed were to set and achieve a too-narrow target zone for inflation. (2)

If according to Hyman Minsky, protracted periods of market stability leads to instability and a market meltdown, does this preclude therefore that protracted periods of market instability negate the possibility of a market melt-up (per Greenspan)? I intentionally phrased the logic for this argument in perfect ‘Greenspeak’ fashion so we can all remember exactly how we got ourselves into this global predicament in the first place.

 

CONCLUSION

This is a well executed strategy. It has been almost militaristic in its execution - all the elements from a solid communications program (i.e. CNBS hype), accounting and regulatory changes (FASB 157, 166, 167 deferrals et al ), government statistics (does anyone actually still believe the CPI, Labor Report or other government statistics any more?), and public’s sentiment through the controlled market perception barometer pumped at them every evening on how well the DOW Industrials are doing.  The US economic and financial situation has now reached a point where the potential crisis could be referred to by our government interventionists as a matter of national security. This is precisely why I am leaning towards a Minsky Melt-Up being successfully manufactured.

 

There is an old market saying: “Don’t fight the Fed!”  This market guideline has never been truer. In fact today it is more appropriate to say:

 

 

“It is impossible to fight central bank planning”

To fight the central party planning (i.e. shorting an artificial market) exposes your wealth to being officially confiscated!

 

Sounds like something Karl Marx would have said?

 

 

 

Gordon Long: A Guide To the Road Ahead

EXTEND & PRETEND:  A Guide to the Road Ahead

 

It will likely surprise you but like a trolley car we are now locked into economic tracks that determine our financial destination. Unfortunately, it isn't a place anyone would choose knowingly other than possibly the Bilderberg elite.

 

Financially and economically we are lurching along, rocking from side to side with the occasional unexpected jarring flash crash jolt. But unlike a trolley line, for some reason no one seems to know what the destination is. Many are asking but few are willing to tell.

 

This road is well traveled and documented if you were to take the time to study the maps and not rely on the happy face media spin doctors for directions.  Since the route of the current global economic path is now locked in, we need to either accept the ride or hastily exit. 

 

I’m up from my seat and headed for the door. What are you going to do?

HISTORICAL FACT: A Financial Crisis is almost always followed by an Economic Crisis which is subsequently followed by a Political Crisis.

                                        FINANCIAL CRISIS      =>       ECONOMIC CRISIS       =>        POLITICAL CRISIS

                                              Banking Crisis                      Sovereign Debt Crisis                     Currency Crisis

 

When the financial crisis arrived in 2008, those who foresaw it in 2007 were not only prepared to capitalize on it, but ready to position for the economic crisis that they knew lay ahead. We are currently still in the midst of the economic crisis as evidenced for some time by slowing global trade, unemployment, falling tax revenues and more recently, a sovereign debt crisis.

Have you prepared for the soon to emerge financial opportunities as the Stage 3 - Political Crisis unfolds?

I want to lay out the roadmap as simply and clearly as I can. Some no doubt will dispute it. What the nay-sayers need to fully understand however is that the roadmap, which this is part of, has served me remarkably well and resulted in a highly profitable decade. Maybe even more importantly, it has allowed me to sleep peacefully at night. The major market drops for the most part have been ‘buying opportunities’ and market spikes have been excellent exit points.

Knowing the trend and destination has made all the difference.

.

 

 

THE ROAD AHEAD

The soon to unfold political crisis will be marked with beggar-thy-neighbor policies that foster political conflict, a currency crisis which dramatically impacts standards of living and a broad curtailment of entitlement programs that will devastate generations of retiring lower and middle income citizens. We are early in what the future may possibly label as the Age of Rage. Paradyn adjustments in expectations and sense of entitlement lay ahead for those living in the developed G7 democracies.

Let me show you why a Political - Currency Crisis is just as predetermined as the tracks of our trolley ride and will have serious consequences for your investment strategy.

See: Roadmap Process for further details

EXPLAINING STAGE III

Though we are still in the midst of the full emergence of Stage II, Europe has recently overtaken the US in the rate of the expected, unfolding events.

 

There is no mistaking the fact that the US has a sovereign crisis as measured by many indicators such as: Debt to GDP, deficit percentage, balance of trade, state, city and local government financial imbalances, underfunded pension plans and excess unfunded entitlement programs. However, relative to Europe, the US is still lagging and therefore is not currently getting the media attention that it will soon receive.

 

What will mark the beginning of Stage III is a major shift in political policies. In Europe, early signs were witnessed with the European bailout of Greece and the  $1 Trillion Euro “TARP” like program. Both political decisions decisively diverged from the basis upon which the Maastricht Agreement was constitutionally approved. The level and urgency of the crisis forced this structural shift. Though this level of political shift has not yet occurred in the US, it soon will (the ‘Tea Party' advocates would likely vehemently suggest we are well on our way).

The $61 Trillion unfunded entitlement problem associated with Medicare / Medicaid and Social Security is presently a monster on the door step now that baby boomers are beginning to retire at accelerating rates each month. No longer can the government obscure the true size of annual budget deficits through the use of payroll entitlement payments. State, city and local governments are increasingly in crisis as more and more can no longer fund what Americans have taken for granted as basic necessities such as police, fire, K-12 education and public works.  Without greatly increased and urgently needed tax revenues, these programs will be drastically cut. We read of 100,000 to 300,000 teachers being cut which less than 18 months ago would have been thought unimaginable in America. With 40 million Americans on food stamps, tax revenue deficits are making what is a monumental problem even more intractable. All of this and more will lead to political decisions that will lead to major social unrest and public policy initiatives which will be startling breaks from the past.

I fully expect to see a new $5 Trillion Quantitative Easing (QE) program marking the upcoming shift in the US to Stage III.

 

This will be what kicks off an accelerating increase in Velocity of Money that many inflations have been expecting. This has the potential to ignite a Minsky Melt-Up (Read: EXTEND & PRETEND - Manufacturing a Minsky Melt-Up), though definitely not a certainty. The present rate of collapse in MZM, M1, M2  and M3 which supports the deflationists views, which I have held, is the 'oil in the ointment'. The $5T QE program will be a desperate attempt aimed at reversing this.

 

Massive monetization will eventually lead to a US currency crisis in the US by 2011- 2012.

 

  

Europe will continue to accelerate with problems associated with currency pegs and Euro denominated lending finally coming home to roost for Central and Eastern Europe (CEE). The CEE as the ‘sub-prime” of Europe will be the final catalyst to tip the UK and France over the edge, into a sovereign crisis and subsequent major political domestic confrontations. The new government in the UK is already warning the British electorate on an almost daily basis of the gravity of the situation and the degree to which changes in social entitlement expectations will need to change in the near future. Like France they are afraid to be specific – yet!

 

The US is experiencing a major shift with government employment becoming the primary creator of jobs. The fundamental shift is most evident through a movement towards larger government with more regulation and control.

 

 

POLITICAL SHIFT- It will be about choices which this generation has never had to confront.

The political shift is not primarily a shift from right wing to left wing politics as many in the ‘party oriented’ media might suggest or debate.  It is rather a shift that the current generation in western developed nations haven’t witnessed - a shift in direction that is other than left or right and is more about a movement in Economic freedom versus Personal freedom. 

 

NOLAN CHARTS:  Personal Freedom versus Economic Freedom

 

It would make this particular article too long to explain the above Nolan Diagrams to show how and why these changes will occur (I will do so in the next Extend & Pretend series article entitled: “A Matter of National Security” – sign-up). But suffice it to say that there will be clear tell-tales that will emerge.

 

SIGNALS & TELL TALES

You must be alert to and carefully watch for these tell-tale signals in the not too distant future.

 

LEGISLATIVE REGULATION

 

           NEW PUBLIC POLICY INITIATIVES                                                 TARGET                       POLITICAL EXCUSES

Must hold government Debt Instruments (Bonds, Bills, Notes)                    Banks                            ‘LIQUIDITY’     

Must hold government Debt Instruments (Bonds, Bills, Notes)                    Pensions                        ‘SAFETY’          

Caps on Private Interest Rates – Ceilings                                                 Lenders                         ‘USERY’

Capital and Exchange Controls                                                                Investors                       ‘SPECULATION’ [Escape]

 

CONCLUSIONS:

 

Expect the unexpected going forward since markets hate uncertainty and nothing creates more uncertainty than political decision making and policy legislation. Markets will experience increasing levels of volatility with steeper rates of price movement both up and down. Flash Crashes and Flash Dashes will be common as millisecond advantages separate the dynamic hedging winners from losers.

 

Hard assets such as physical gold and silver have traditionally been the ideal vehicle for an environment of high inflation coupled with a currency crisis. I fully expect governments will strip these assets from holders either directly or through predatory taxation, fees or other trading limitations. They will be classified somewhere in the four categories discussed above. Alternatively, if it is not done in this fashion it will be controlled through intervention similar to national currencies in the forex arena. I personally suspect it is already being controlled in some fashion based on the March 25th CFTC whistleblower testimony by Andrew Maguire. It is a matter of national security in a beggar-thy-neighbor environment since gold and silver are the only real money in a fiat based system. Protect yourself accordingly.

 

The only protection from the future storms will be unencumbered, revenue producing assets. The trick is knowing which investments will sustain their ability to produce inflation adjusted free cash flow in the midst of a contracting economic environment. They may not be in the publicly traded or manipulated markets.

 

Thinking for yourself and thinking outside the box is paramount if you are to capitalize on this bumpy trolley ride.