Saturday, March 12, 2011

Friday, March 11, 2011

Let's Face It! The Obama Adminstration Lies About Domestic Energy Production

The propaganda ministry is working overtime:

Last week, Interior Secretary Ken Salazar told Congress that oil production in the Gulf of Mexico "remained at an all-time high, and we expect that it will continue as we bring new production online."  He claimed: "In 2009 there were 116 rigs in the Gulf of Mexico, in 2010 in February, 120, in February 2011, 126."But Salazar's numbers distort the true number of working rigs in the Gulf of Mexico. According to Baker Hughes:
  • Four days before the Deepwater Horizon accident there were 55 rotary rigs actually drilling offshore in the Gulf of Mexico.
  • On May 28, 2010, when the administration announced the six-month moratorium on deepwater drilling, there were 46 rotary rigs operating in the Gulf. 
  • Last week, 25 rotary rigs were operating in the Gulf of Mexico.
So the fact that there is an "all-time high" number of rigs in the Gulf ignores the fact that most of those rigs are not working.  Claiming an increase in idle rigs in the Gulf as a success story is like claiming the job market is great because a lot of people are unemployed and available to work. In the same hearing, the Secretary also claimed that "the production has remained at an all-time high" within the Gulf of Mexico and there is no way to actually make this true.  The Energy Department's Energy Information Administration reports that production in the Gulf of Mexico is in decline, forecasting a decline of 250,000 barrels a day from Gulf production, due partly to the moratorium and restricted permitting.  While the annual production figure for 2010 was greater than 2009, EIA's month-by-month production figures show a peak in May of 2010, and a relatively steady decline since. And EIA Petroleum Engineer Gary Long told trade publication E&E News that the rig count in the Gulf was cut in half after the Deepwater Horizon accident and that it wouldn't rebound to previous levels until the end of 2011 under the assumption that the permitting process is restored to historical rates. Further, since there is a lag time from the time an exploration permit is approved to the time of actual production, and since no only a handful of permits for new wells have been granted since April of 2010, it is likely that Gulf of Mexico production will continue to be hit hard in 2012 and beyond.
We appreciate that, when it comes to selling the administration's energy policy, Secretary Salazar is in a tough position.  Fortunately we are here to help, help provide the abundant and affordable energy that our economy needs, and help create the jobs our workers want.  As API President Jack Gerard said recently:
"Our industry remains committed to working with government to meet our current and future challenges, but we need Congress and the administration on board. Let's stop talking and let's get back to work."

Crude Oil Reloads

Crude is back above $100, but the daily chart trend is now down!

...but so do stocks. This a real tug-of-war!

Crude Collapses Below $100 Benchmark

This should help stocks.

Utah Authorizes Gold, Silver As Legal Tender

from Washington Times:

The Utah Legislature on Thursday passed a bill allowing gold and silver coins to be used as legal tender in the state — and for the value of their precious metal, not just the face value of the coins.
State backers said they hope the move will help insulate Utah from a potential monetary slide as countries question the value of the dollar. Others, casting their eye nationwide, said it could spur a broader move by Congress or states to readopt a gold standard.
"Utah, if the governor signs this particularly, they're going to change the national debate on monetary policy and get us back to basics," said Jeffrey Bell, policy director for Washington-based American Principles in Action. Mr. Bell has been in Utah to help shepherd the legislation through.
Utah's bill allows stores to accept gold and silver coins as legal tender. It also exempts gold and silver transactions from the state's capital gains tax, though that does not shield exchanges from federal taxes.
The legislation directs a state committee to look at whether Utah should recognize an official alternate form of legal tender which could become a path for creating a formal state gold standard.
A spokeswoman for Gov. Gary R. Herbert, a Republican, said he has not yet taken a public stance on the bill.
State Rep. Brad J. Galvez, the chief sponsor of the measure, said he views it as a preliminary step on the path toward securing Utah's business climate.
"If the dollar continues to fall, what this will do will help stabilize the value of the dollar in Utah, so it helps stabilize the economy," Mr. Galvez, a Republican, said.
While similar legislation has been proposed in nearly a dozen states, Mr. Galvez said that if Mr. Herbert signs his bill, Utah will be just the second state to official recognize the coins as legal tender. Colorado has recognized gold and silver for decades, he said.
Opponents questioned why a state would need to come up with an alternative money system. According to the Deseret News, one lawmaker joked that the state should establish salt as legal tender, since Utah has so much of it.
Other opponents said the state capital gains tax break could distort investing decisions and push people to choose gold and silver over other investments.
Utah's move on gold comes at a time when states across the country are seeking ways to push back against the federal government on everything from environmental regulations to health care.
But the instability of the U.S. dollar also has sent some states scrambling to try to come up with alternatives or to pass measures designed to spur federal action.
In Virginia, Delegate Robert G. Marshall, a Republican, successfully pushed through a bill — not yet signed by the governor — that authorizes the state to print gold, silver and platinum coins. He said that there is probably a good market for collectors who would prefer not to have to buy federally minted coins and said state-minted ones would create a backstop against inflation.
"I'm looking at Congress, and I'm looking at what the Chinese are doing, and I don't have a lot of confidence in what's going on there," Mr. Marshall said. "This is one way where Virginia can help our citizens as a security hedge against the inflationary action of Congress."
He also wrote a resolution authorizing a study on whether Virginia should adopt an alternate currency so it would not be dependent on Federal Reserve notes. That resolution did not pass.
The U.S. was on the gold standard and then a gold-exchange standard for much of the 20th century, but President Nixon finally decoupled the U.S. money supply from gold in 1971. Many investors, though, continue to believe it holds value better than other investments.

Thursday, March 10, 2011

New POMO Schedule for March 14 - April 11

Treasuries, USD Skyrocket in Global Run for Cover



Blood Flows at Wall and Broad in New York

After a fervent attempt to rally the stock market, wiping out most losses since the open, a powerful reversal has occurred and we have now hit the lows of the day. There's economic blood flowing at Wall and Broad today.

Goldman Sachs Sees Downside Q1 GDP Risk

From Jan Hatzius:
BOTTOM LINE: Trade deficit much wider than anticipated on higher import volumes; news reinforces our sense of downside risk to Q1 growth, though it's still early in the quarter. Jobless claims higher but Labor Department cites school holidays as a potential distortion.
1. Despite a healthy rise in exports, the US trade deficit widened substantially in January. The entire increase was due to non-petroleum imports, which rose $7bn on the quarter. The vast majority of this import increase was volume rather than price-related, pushing the real goods deficit in January at $49.5bn versus a fourth-quarter average of $45.2bn. Were this (real) deficit to be sustained through the first quarter, trade would be a substantial drag on Q1 growth - about 1 1/2 points (annualized). However, trade data can be revised and Chinese New Year-related distortions can have a significant impact on US import data in the first quarter, so for the moment we would view this simply as an additional source of downside risk to our 3 1/2% real growth estimate for the quarter.

2. The jobless claims report was a significant disappointment on first glance, with new claims back up near the 400,000 mark after a much lower print last week. However, the Labor Department cited the timing of school holidays as a possible influence on the number last week. Continuing claims--the total number of people in their first 26 weeks of jobless benefits--were essentially in line with expectations, and extended benefits fell by about 200,000 (though how much of this drop was due to people exhausting benefit eligibility is unknown).

U.S. Trade Deficit Also Disappoints

Thanks to Zero Hedge:

And another piece of bad news for both the US economy and US exporters in particular, even despite prevailing dollar weakness over the past several months: the January US trade deficit printed at $46.3 billion, on imports of $214.1 billion ($10.5 billion higher M/M) and exports of $167.7 billion ($4.4 billion higher). This was the worst number since August 2010. The December deficit was revised to $40.3 billion from $40.6 billion. The December to January increase in imports of goods reflected increases in industrial supplies and materials ($4.4 billion); automotive vehicles, parts, and engines ($2.7 billion); capital goods ($2.1 billion); consumer goods ($0.9 billion); and foods, feeds, and beverages ($0.5 billion). A decrease occurred in other goods ($0.6 billion). The December to January increase in exports of goods reflected increases in industrial supplies and materials ($3.7 billion); automotive vehicles, parts, and engines ($1.3 billion); and foods, feeds, and beverages ($0.1 billion). Decreases occurred in consumer goods ($0.6 billion); capital goods ($0.4 billion); and other goods ($0.3 billion). And unfortunately for Wall Street, few are importing US financial innovation any more: "Services exports increased $0.5 billion from December to January." So how much lower does the dollar have to plunge before someone actually starts importing US goods? And an amusing discrepancy: according to the US, the January trade deficit with China was $23.3 billion. According to China, the trade surplus with the US in January was $13.6. Just 100% off between two departments of truth. Due to notable weighting of trade data in GDP calculations, look for another round of downward GDP revisions. The Goldman spin is becoming increasingly difficult at this point. Next up: Next up: Hatzius on the Dudley hotline asking for instructions?

Stocks Seeking Support at 50-Day Moving Average

Wall Street is trying to keep its head above the 50-day moving average. It's going to be an interesting period for the next few days. QE3 is likely on the way...

U.S. Data Disappoints Too

U.S. stocks opened sharply lower after disappointing U.S. economic news compounded the market's worries about trade in China, European sovereign debt and continued unrest in the Middle East and North Africa.
The Dow Jones Industrial Average sank 182 points, or 1.5%, to 12030, led lower by Chevron, off 3%, and Exxon Mobil, down 2.6%, which sank in response to a drop in the price of oil. The Standard & Poor's 500-stock index shed 19 points, or 1.4%, to 1301 as its energy, industrial and materials components slumped. The Nasdaq Composite fell 47 points, or 1.7%, to 2706.
Initial claims for U.S. unemployment benefits rose by 26,000 to 397,000 in the week ended March 5, the Labor Department said in a weekly report. The prior week's figures, showing claims fell to the lowest level in almost three years, were revised up slightly, to 371,000 from an original estimate of 368,000.
Economists surveyed by Dow Jones Newswires had forecast claims would rise by only 7,000 in the week ending March 5. The results pressured investor sentiment.
Investors spent much of the morning eyeing overseas developments. Besides continued unrest in Libya and the Middle East, a downgrade of Spain's credit rating and a slowdown in Chinese exports sent global markets lower.
"The market is in a tug of war right now between the recovery and evidence that the economy is slowing, and frankly, [is] dependent on quantitative easing," said Terry L. Morris, senior vice president at National Penn Investors Trust Company.
In separate U.S. data, the U.S. deficit in international trade of goods and services jumped 15.1% to $46.34 billion from a downwardly revised $40.26 billion the month before, the Commerce Department said. The December trade gap was originally reported as $40.58 billion.
The January deficit was the largest in seven months and much bigger than expected, with oil prices playing a key role. Economists surveyed by Dow Jones Newswires had estimated a $41.5 billion shortfall.
European stocks and the euro were each lower after Moody's Investor Services Inc. downgraded its rating on Spanish government debt, a move that throws the euro zone's debt issues back into the limelight. The downgrade comes on the eve of a European Union summit in Brussels scheduled for Friday.
Also helping set the bearish tone, China said that its monthly exports in February grew only 2.4% from the year-earlier period, while imports rose 19.4%. The growth represented a sharp slowdown from January, pushing China's trade balance to a deficit of $7.3 billion in February. Asian stocks finished sharply lower following the Chinese data; the Shanghai Composite index closed down 1.5%.

Global Macro Picture Weakens As China Shocks Market With Trade Deficit

Look out beloooooow! Now I understand why crude oil is down. It's the stock market driving perceived demand for crude instead of vice versa this time around.

from Mish Shedlock:

Equity futures are in the red across the board late Wednesday evening in light of an unexpected trade deficit in China.

Some reports suggest not reading too much into the deficit because February trade numbers are distorted following the Chinese Lunar New Year holiday. However, even the two-month total is negative, so the holiday excuse is a pretty weak one.

Please consider China Reports Unexpected Trade Deficit as Export Growth Cools
China reported an unexpected $7.3 billion trade deficit, the nation’s biggest in seven years, in February after a Lunar New Year holiday disrupted exports.

Outbound shipments rose an annual 2.4 percent, the slowest pace since November 2009, and imports climbed 19.4 percent, according to a report on the customs bureau website today.

Yuan forwards weakened after the announcement, which may deflect international pressure for China to strengthen its currency to redress global economic imbalances. Commerce Minister Chen Deming said March 7 that it’s “totally unreasonable” to say the yuan is undervalued after U.S. Treasury Secretary Timothy Geithner repeated calls for a faster pace of appreciation.

Economists combine Chinese data for the first two months of the year to eliminate distortions caused by the annual holiday. On that basis, the nation had a deficit of about $890 million, compared with a surplus of about $22 billion a year earlier.
Global Macro Picture Worsens

Two months do not a trend make, but a couple more would do it.

As a side note, people frequently write wondering why China does mot buy more commodities with its US dollar reserve. There are a several reasons, one of which should be obvious from the above article.

  1. China's manufacturers are already squeezed, unable to pass on rising import costs.
  2. Accumulating commodities is pro-cyclical. China is overheating already.
  3. Any commodities not bought directly from US suppliers (for example copper from Australia) increases trade distortions elsewhere.
  4. Thanks to loose economic policy globally, commodity speculation is running rampant already. No importers want to add fuel to that fire.

China is overheating, and the global macro picture, especially from a Chinese perspective is far worse than that.

The world may not have noticed yet, but Europe is in trouble. The PIIGS are imploding under austerity measures and the most of the rest of Europe except perhaps Germany does not look very good.

Europe is China's largest trading partner.

Factor in the situation in Libya, rising oil prices, an ECB that seems hell-bent on hiking rates (I bet they back off after at most one hike), state budgets under attack in the US (thankfully), and the whole idea that Chinese growth is going to save the world is Fantasyland material.

Crude Collapses

The price of crude oil has begun to collapse, falling to around $102.50 without any sign of stopping. Perhaps its just profit-taking, the opposite of a short squeeze. That said, I'm surprised we haven't seen a stock futures rally. None of this makes much sense. If turmoil is coming to Saudi Arabia, then crude oil should be skyrocketing instead. Something fishy is brewing. And this from CNBC:

Oil prices are finally retreating from two-and-half year highs but the market is bracing for more volatility as anti-government protests threaten to spread beyond the borders of Libya towards the world's top exporter Saudi Arabia.
U.S. crude futures [CLCV1  Loading...      ()   ] on Wednesday dropped for a second day, offering some relief to global equity markets. Prices dipped below $105 after reassurances from OPEC members of ample spare capacity eased anxiety about export losses from Libya, Africa's third-largest oil producer. As of 1000 a.m. Singapore time, contracts for April delivery fell 61 cents to $104.41 a barrel. Brent crude [LCOCV1  Loading...      ()   ] fell for a third day to below $113 a barrel in early trade.
The message for oil markets this week is unequivocal: watch Saudi Arabia. Inspired by the unfolding 'Arab Spring', there have been Shi'ite marches in the past few days in the Kingdom's oil-rich east. Websites have called for a nationwide "Day of Rage" on March 11 and March 20 despite a move by King Abdullah to pre-empt popular unrest by boosting spending on housing, social welfare and education.
The Saudi government has been releasing Shi'tes detained last week according to activists quoted by Reuters. The move could be aimed at heading off the protests. The government has also warned it will clamp down on any dissent and one source indicated the protests could be called off.
But the markets continue to be jittery about the prospects of turmoil in the Kingdom. A CNBC poll of analysts and traders expect prices to end this week higher overall. Nine out of 10 respondents expect oil prices to rise this week while just one respondent said prices would drop, the survey showed. CNBC's poll correctly forecast the direction of oil prices last week.
"It's fear -- short-term fear of supply disruption," said John Vautrain, a senior vice president of the oil consultant Purvin and Gertz in Singapore, characterizing the current market mindset. "People are not worried that there's no oil in the tank. They're worried that there'll be no oil coming out of the Middle East. For the fear to go away, the revolutions must end."

Tuesday, March 8, 2011

1/3 of Wages Are From Government

from CNBC:

Government payouts—including Social Security, Medicare and unemployment insurance—make up more than a third of total wages and salaries of the U.S. population, a record figure that will only increase if action isn’t taken before the majority of Baby Boomers enter retirement.

Even as the economy has recovered, social welfare benefits make up 35 percent of wages and salaries this year, up from 21 percent in 2000 and 10 percent in 1960, according to TrimTabs Investment Research using Bureau of Economic Analysis data.
“The U.S. economy has become alarmingly dependent on government stimulus,” said Madeline Schnapp, director of Macroeconomic Research at TrimTabs, in a note to clients. “Consumption supported by wages and salaries is a much stronger foundation for economic growth than consumption based on social welfare benefits.”
The economist gives the country two stark choices. In order to get welfare back to its pre-recession ratio of 26 percent of pay, “either wages and salaries would have to increase $2.3 trillion, or 35 percent, to $8.8 trillion, or social welfare benefits would have to decline $500 billion, or 23 percent, to $1.7 trillion,” she said.
Last month, the Republican-led House of Representatives passed a $61 billion federal spending cut, but Senate Democratic leaders and the White House made it clear that had no chance of becoming law. Short-term resolutions passed have averted a government shutdown that could have occurred this month, as Vice President Biden leads negotiations with Republican leaders on some sort of long-term compromise.
“You’ve got to cut back government spending and the Republicans will run on this platform leading up to next year’s election,” said Joe Terranova, Chief Market Strategist for Virtus Investment Partners and a “Fast Money” trader.
Terranova noted some sort of opt out for social security or even raising the retirement age.
But the country may not be ready for these tough choices, even though economists like Schnapp say something will have to be done to avoid a significant economic crisis.
A Wall Street Journal/NBC News poll released last week showed that  less than a quarter of Americans supported making cuts to Social Security or Medicare in order to reign in the mounting budget deficit.
Those poll numbers may be skewed by a demographic shift the likes of which the nation has never seen. Only this year has the first round of baby boomers begun collecting Medicare benefits—and here comes 78 million more.
Social welfare benefits have increased by $514 billion over the last two years, according to TrimTabs figures, in part because of measures implemented to fight the financial crisis. Government spending normally takes on a larger part of the spending pie during economic calamities but how can the country change this make-up with the root of the crisis (housing) still on shaky ground, benchmark interest rates already cut to zero, and a demographic shift that calls for an increase in subsidies?

Monday, March 7, 2011

$223 Billion -- Largest Monthly Deficit in History

A new record high deficit! Well, fancy that! Meanwhile, the 10-year is higher. Makes perfect (tongue-in-cheek) sense!

from Washington Times:

The federal government posted its largest monthly deficit in history in February at $223 billion, according to preliminary numbers the Congressional Budget Office released Monday morning.
That figure tops last February’s record of $220.9 billion, and marks the 29th straight month the government has run in the red — a modern record. The last time the federal government posted even a monthly surplus was September 2008, just before the financial collapse.
Last month’s federal deficit is nearly four times as large as the spending cuts House Republicans have passed in their spending bill, and is more than 30 times the size of Senate Democrats’ opening bid of $6 billion.
Senators are slated to vote this week on those two proposals — both of which are expected to fail — and then all sides will go back to the negotiating table to try to work out a final deal.

Cost of Crude Sends Stocks Scrambling for Cover

Stocks Rise, Then Tumble Again

Crude Surges to $107, Then Backs Off

Rumors abound surrounding Gadaffi possibly leaving Libya.

Sunday, March 6, 2011

Crude Oil Surpasses $105, $106

What Happens When We Revert to the Interest Rate Mean?

When discussing central planning, as manifested by the policies of the world's central banks, a recurring theme is the upcoming reversion to the mean: whether in economic data, in financial statistics, or, as Dylan Grice points out in his latest piece, in luck. While the mandate of every institution, whose existence depends on the perpetuation of the status quo, is to extend the amplitude of all such deviations from the trendline median, there is only so much that hope, myth and endless paper dilution can achieve. And alas for the US, whose 3.5% bond yields are, according to Grice, primarily due to "150% luck", the mean reversion is about to come crashing down with a vengeance after 30 years of rubber band stretching. The primary reason is that while the official percentage of interest expenditures as a portion of total government revenues is roughly 10% based on official propaganda data, the real number, factoring in gross interest expense, and assuming a reversion to the historic average debt yield of 5.8%, means that right now, the US government is already spending 30% of its revenues on gross interest payments! And what is worse, is that the chart has entered the parabolic phase. Once the convergence of theoretical and real rates happens, and all those who wonder who will buy US debt get their answer (which will happen once the 10 Year is trading at 6% or more), the inevitability of the US transition into the next phase of the "Weimar" experiment will become all too obvious. Because once the abovementioned percentage hits 50%, it is game over.
Below Grice lays out the framework for the disinflation delusion that has permeated the minds of all economists to the point where divergence from the mean is now taken as gospel:

What drove the disinflation of the last thirty years? Politicians would say it was because they granted their central banks independence. But the pioneering experiment here didn’t take place until ten years into the disinflation, when the Reserve Bank of New Zealand Act 1989 gave that central bank the sole mandate to pursue price stability. Macroeconomists would site breakthroughs in our understanding. Except there haven’t been any. Today’s hard money/soft money debate is identical to the Monetarist/Keynesian debate of the 1970s, the US bimetallism agitation of the late 19th century, and the Currency vs Banking School controversy in the UK during the 1840s.

Was it the de-unionisation of the workforce? The quiescence of oil markets since the two extreme shocks of the 70s? The dumping of cheap labour from Eastern Europe, China and India onto the global labour market? Technology enhanced productivity growth? Or maybe it was just because the CPI numbers are so heavily manipulated?

Maybe it was all of these things. Maybe it was none of these things … for the little that it’s worth, my theory is that no-one has an adequate theory, other than it being down to the usual combination of luck and judgment on the part of policymakers … or about 150% luck. The problem is luck mean-reverts. The mammoth fiscal challenges (see chart below) currently being shirked by the US political class suggest that mean-reversion is imminent.
Ireland is probably the best example of an entity for which the cognitive dissonance between an imaginary desired universe and a violent snapback to reality has finally manifested itself after a 30 year absence:
Ireland provides a good illustration. Today it’s going through a real and wrenching depression - there is no other word for it and it is heartbreaking to watch – partly because the terms of its bailout are so onerous. And what may well be the seeds of a future popular backlash against the euro can be detected in the election of Fine Gael on a ticket of renegotiating the bailout terms, which currently require them to pay a 5.8% rate of interest.
Unlike Ireland, the US still has the luxury of being able to stick its head deep in the sand of denial.
Look at the following chart showing two hundred years or so of US government borrowing costs. Two hundred years is a lengthy period of time. There have been economic booms and financial panics, localized wars and world wars, empires have risen and empires have fallen, technological change has made each successive generation’s world unrecognizable from that which preceded it. Yet government yields have remained broadly mean-reverting (and the US has been one of the best run economies over that time – other governments’ bond yields demonstrate an unpleasant historic skew towards large numbers). Coincidentally enough, the average rate of interest over that period has been around 5.8%, the rate which the new Irish government today says is ‘crippling.’
And here is the math that nobody in D.C. will ever dare touch with a ten foot pole as it will confirm beyond a reasonable doubt that the US is now well on its way to monetizing its future (read: not winning)
In other words, Ireland is so indebted that it is struggling to pay a rate of interest posterity would barely yawn at. But Ireland isn’t the only one.Take the US government, for example, which currently pays around 10% of its revenues on interest payments. This doesn’t sound too bad. The problem is that those federal government interest payments are calculated net of the coupons paid into federally run programs (e.g. social security) as these are deemed ‘intragovernment transfers.’ Yet those coupons to social security are made to fund a real obligation to American citizens and as such, represent payments on a real liability. On a gross basis the US government pays out 15% of its revenues on interest payments, which makes for less comfortable reading. So the net numbers remain the most widely quoted.
And where the figure gets downright ugly is if one assumes that in order to find buyers for the $4 trillion in debt over the next two years (once the Fed supposedly is out of the picture after June 30), rates revert to the mean. Which they will. What happens next is a cointoss on whether or not we enter a Weimar-style debt crunch.
Suppose the US government had to pay the 5.8% yield it has paid on average over the last two hundred years? The share of revenues spent on gross interest payments would be a staggering 30% (see chart above). If it had  to pay the 6.9% it’s paid on average since WW2, those gross interest payments would account for 37% of revenues. So it’s not difficult to see the potential for a dangerously self-reinforcing spiral of higher yields straining public finances, hurting confidence in the US governments’ ability to repay without inflating, leading to higher yields, etc.
Lastly, Grice makes it all too clear why we are now all screwed, and no matter how many Bernanke dog and pony shows we have, the final outcome is not a matter of if but when.
America’s political class might arrest the trend which threatens their government’s solvency (chart below). They might find a palatable solution to the healthcare system’s chronic underfunding. They might defy Churchill’s quip, and skip straight to doing the right thing. But if they don’t, such a spiral becomes a question of when and not if. And what would the Fed do then? Bernanke says the Fed “will not allow inflation to get above low and stable levels.” He says it has learned the lessons of the 1970s. He’s read the books. He can recite the theory. Yet a lifetime reading books about the Great Depression (and writing a few) didn’t help him spot the greatest credit inflation since that catastrophe any more than reading “The Ten Habits of Highly Successful People” would make him successful. It’s the doing that counts. So before lending to the US government for 3.5% over ten years, bear in mind that when it comes to a real inflation fight, not one of the Fed economists you’re betting on has ever been in one.
Our advice to the good doctor and his minions (not to mention all readers), is instead of reading multitudes of history books on the depression, on Japan, or on midget tossing (for those from the SEC), is to read one book. Just one. Link here.

Comparisons of Classes of Commodities

Apres Nous, Le Deluge

From Egon von Greyerz of Matterhorn Asset Management
Apres Nous, Le Deluge

Happy days are here again! Stock markets are strong, company profits are up, bankers are making record profits and bonuses, unemployment is declining, and inflation is non-existent. Obama and Bernanke are the dream team making the US into the Superpower it once was.
Yes, it is amazing the castles in the air that can be built with paper money and deceitful manipulation of all economic data.  And Madame Bernanke de Pompadour will do anything to keep King Louis XV Obama happy, including flooding markets with unlimited amounts of printed money. They both know that, in their holy alliance, they are committing a cardinal sin. But clinging to power is more important than the good of the country.  An economic and social disaster is imminent for the US and a major part of the world and Bernanke de Pompadour and Louis XV Obama are praying that it won’t happen during their reign: “Après nous le déluge”. (Warm thanks to my good friend the artist Leo Lein).

Moral and financial decadence

A deluge of an unprecedented magnitude is both inevitable and imminent. The consequences of the economic and political mismanagement will have a devastating impact on the world for a very long time. And the consequences will touch most corners of the world in so many different areas; economic, financial, social, political and geopolitical. The adjustment that the world will undergo in the next decade or longer, will be of such colossal magnitude that life will be very different for coming generations compared to the current social, financial and moral decadence. But history always gives us lessons and the one that is coming will be necessary and eventually good for the world. But the transition and adjustment will be extremely traumatic for most of us.
We have reached a degree of decadence that in many aspects equals what happened in the Roman Empire before its fall.  The family is no longer the kernel of society. More than 50% of children in the Western world grow up in a one parent home, either being born by a single mother or with divorced parents. Children are neither taught ethical or moral values nor discipline. Many children consider attending school as optional and education standards are declining precipitously.  Most families do not have a meal around the dinner table even once a week. Sex and violence are common place on television and in real life. Both press and television create totally false values and ideals. Everyone must be young and beautiful often enhanced by surgical or digital means. Old people have little value and their wisdom is not benefitting the younger generations.
The Golden Calf or materialism is the ultimate value that is worshipped and no means are eschewed to attain material goals. Since most of the prosperity that has been achieved in the last 40 years is based on printed money and debt, it is totally false and unsustainable. A major part of the Western world has improved their living standard, by exchanging services and swapping houses at ever rising prices financed by printed paper and credit. The perceived wealth that is created out of this is illusory and ephemeral. We have created a world economy which is based on debt and thin air.

The Gini coefficient of income and wealth is now reaching extremes in many countries. This measures the inequality between the rich and the poor. In the US the Gini coefficient is now at the same level as in the 1920s before the depression. In countries like the US, the rich are getting richer whilst 45 million people live below the poverty line, 43 million receive food stamps and over 700,000 are homeless. With a real unemployment rate of 22% and urban youth unemployment much higher, the US will soon experience social unrest.
But it is not only the US that will experience financial misery, famine and social unrest. This will also hit most European countries and in particular the UK, southern Europe, Eastern Europe and the Baltic States as well as African countries, the Middle East, Asia, yes in fact the whole world.

Are boom and busts inevitable?

Well if you listened to the former British Labour Prime Minster Gordon Brown, he proudly declared that he had abolished booms and busts and thus economic cycles. But he was expeditiously thrown out at the next bust which of course had nothing to do with him since he blamed the US sub-prime market for his ill-fated destiny.
Cycles or ebbs and flows are a natural part of both economic life and nature. And right at the point when something could be done to limit the damage, most nations seem to have the uncanny knack of selecting the political individuals who will put fuel on the fire and make the situation catastrophically worse.
Greenspan was one such individual. During his 19 years as Chairman of the Fed, he could have limited the economic and social damage that the US would suffer. Instead he took every single measure possible to ensure that there would be a catastrophe with uncontrollable consequences. But we shouldn’t just blame the incompetence of Greenspan. It was sickening to watch every sycophantic congressman and senator licking Greenspan’s boots and praising his wisdom. Because Greenspan’s money printing and incompetent interest rate management created one of the biggest financial bubbles in world economic history. But the politicians loved this. It made the stock market boom, and house prices surge. Thus the politicians were all loved by their voters who did not understand the dire consequences that were looming. And Bernanke de Pompadour is continuing the same disastrous policies of creating money out of thin air. When will they ever learn that creating money out of thin air and running astronomical deficits that never will be repaid with normal money leads to the road of total ruin? When will they ever learn? The very sad answer is that they won’t and therefore they are leading the world into a hyperinflationary depression that will have uncontrollable and cataclysmic consequences for current and future generations.

Empty stomachs are rioting

We have for years warned about hyperinflation leading to famine, misery and social unrest. Well, this is exactly what is happening in many parts of the world. The protests and overthrowing of regimes in Tunisia, Egypt and Libya are primarily due to a major part of the peoples of these nations having no job, no money and little food. It is their empty stomachs that are rioting. In addition they are protesting against the leaders of these countries stealing from the people.
It is virtually certain that these riots will spread to many countries in the Middle East, Africa and the developing world. This will lead to new regimes and new political orders that could either be far left or far right politically or religious extremists. But the new regimes will not be in a position to change the root of the problem which is famine and poverty.  In Egypt for example there has been a quiet military coup. It is unlikely that a democratic regime will take over from the military. So the people will protest again and again. And this will be the same in most countries. Eventually the people will take the law into their own hands since no regime will be able to give them the food that they need.

The hyperinflationary deluge is imminent

Although food and fuel inflation is rampant worldwide already, we are only seeing the very beginning. Massive oil price rises are likely to continue as a result of the geopolitical situation as well as peak-oil. The Middle East is a time bomb waiting to go off. Israel is in an extremely precarious position and the involvement or non-involvement of the US in this conflict would both have dire consequences for Israel and peace in the world. Food prices will continue to rise dramatically. Major parts of the world are living below the poverty line today and this will increase exponentially.
The lethal concoction of rising food and fuel prices is already affecting the Western world. The Continuous Commodity Index – CCI, (60% food, 17% energy and 23% metals) has almost doubled since the low in early 2009 and has gone up 42% in the last 12 months. The almost vertical rise of the CCI is one of the best indicators of hyperinflation being imminent. A catastrophe of astronomical proportions is looming. This will hit the world at a time when there is no capacity whatsoever to take any real measures that could alleviate the problems.
(Click image to enlarge)
Most countries are already running major deficits which will increase dramatically in the next few years. The banking system is bankrupt and is only holding together due to false valuations of toxic debt and derivatives. This is done with the blessing of governments since virtually no major bank could face an honest valuation of its assets. Unemployment and especially youth unemployment is currently a problem worldwide and it will get much worse. In 2010, the US government spent 60% more than its revenues. In order to balance the budget individual and corporate income taxes would have to double.
Never before in history has the world run out of real money as well as (affordable) food and fuel simultaneously. But his is exactly what is happening now and it will get substantially worse in the next few months and years.
Financial misery, famine and high unemployment combined with governments that will not be in a position to give real help are a recipe for disaster that will lead to social unrest and revolutions not only in developing countries but also in the West. Hungry people are desperate people and desperate people do desperate deeds. We could see already in 2011 food shortages, and riots both in Europe and in the US.

Hyperinflation Watch

The following are INDISPUTALBLE FACTS:
  • The US dollar is down 82% against gold since 1999
  • The US dollar is down 49% against the Swiss Francs since 2001
  • The Dow Jones is down 81% against gold since 1999
  • The Continuous Commodity Index is up 100% since 2009
The above facts are clear evidence of an economy that has been totally mismanaged. But more importantly most of these trends are now starting to accelerate – a clear sign that hyperinflation is just around the corner.
With years of negative net worth and negative cash flow, the US is bankrupt today. The Federal deficit is forecast to increase by at least another $ 5 trillion in the next 5-7 years.  Add to this the State deficits, the Municipal and City deficits that are rising at a galloping rate and we have a country that is going to haemorrhage to death in the next few years. One wonders when the totally ineffective and clueless rating agencies are going to fathom this. Not that it will matter if they once do.  One also wonders what Mme Bernanke de Pompadour and his court are thinking. “She” and her courtiers should have above average intelligence and could not possibly avoid seeing the facts that we all see today (of course, some of us have seen it coming for over a decade). But “she” has to please her master King Louis XV Obama and her devotion to the king goes above all reasonable common sense, or rationale. So the two of them will continue to crank up the printing press and drown their people and the world in worthless paper.

Stock Market

To believe that the current money printing liquidity boom is real and sustainable would be a very serious and expensive mistake. The temporary and illusionary pickup that we are now seeing in the economy and stock market is the normal initial phase of a hyperinflationary economy. It must not be mistaken for a real improvement in the economy.
The normal pattern at the beginning of a hyperinflationary period is that stock markets surge. This is the result of the increased liquidity and a flight to more inflation proof assets. This was the case in for example the Weimar Republic and Zimbabwe.  Just look at the chart below of the Zimbabwe stock exchange that went from 1,420 in January 2005 to 5.4 trillion in June 2008, a 3 billion per cent increase.  That was of course in Zimbabwe dollars. In US dollars the stock exchange went sideways with major volatility.  So in hyperinflationary terms stock markets could continue to rise initially thus making them a better investment than cash. However, measured against real money, the Dow has gone down 82% against gold since 1999 and 86% against silver since 2001 (see chart above). We are currently seeing a dead cat bounce but we expect the Dow to decline a further 90%, at least, against gold in the next few years. So even if stock market investments will initially give the illusion of protecting investors, it will be a very poor hedge against the ravages of hyperinflation in real terms.

Bond market

In January 2009, we warned investors that long term interest rates were bottoming. Since then the 30 year bond yield is up from 2.6% to 4.6% an 80% rise. But more importantly the 30 year is currently in the process of breaking a 17 year downtrend line which dates back to 1994. This confirms that rates will now start a major and rapid rise which is likely to reach the mid-teens or higher. Governments will attempt to keep short rates low due to weak economies but eventually the rising long rates will put strong upward pressure on the short rates.  So the flight to government bonds that we have seen in the last few years will soon reverse into a massive rush for the exit. This will coincide with rapidly increasing financing requirements by the US, UK, EU and many other governments. The poisonous concoction of rising rates and rising financing needs will create a vicious circle of collapsing bond markets and unsustainably high financing cost. This will continue to drive interest rates even higher which will further increase deficits and necessitate even faster running printing presses. Add to that a collapsing currency and the hyperinflationary picture is complete. It is our very strong view that investors should exit bond markets entirely if they want to avoid a total destruction of their assets.

Currency Market

As we have explained for many years, hyperinflation is created by the government destroying the currency as a result of money printing to finance deficits. This leads to the cost push inflation that we are now experiencing. Add to that, shortages in commodities worldwide, thus creating the perfect hyperinflationary scenario. The Dollar, the Pound, the Euro and many other currencies will continue to decline. They can’t all decline against each other at the same time so the market will take turns in attacking one currency at a time. But all currencies will continue to decline against gold. We believe that the dollar will soon start a very rapid fall against gold and against many currencies. Investors should exit the Dollar and also the Pound and the Euro. There is no currency better than gold or silver but for any small amounts of cash we prefer the Swiss Franc, the Norwegian Krone, the Singapore dollar and the Canadian dollar.

Wealth Protection

A hyperinflationary depression will destroy the value of money as well as most assets that were financed by the credit bubble (property, stock market).  Wealth protection is now critical and urgent. We see no better way of protecting assets against total destruction than physical gold and silver stored outside the banking system. Thereafter, precious metals, energy and food stocks are our preference.  But it must be remembered that any asset including stocks that is held through a bank is dependent on a sound and surviving banking system.
The real move in precious metals is still to come as we have outlined in many articles. Less than 1% of investors own gold. Before this economic cycle is over we are likely to see a mania in physical precious metals that will drive prices exponentially higher. And luckily for investors, this is a mania which is unlikely to end in a collapse since gold most probably will be part of a future reserve currency.
Finally we are again quoting von Mises who clearly understood that “le déluge” is inevitable:
“There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved.” – Ludwig von Mises