Friday, December 28, 2012

Ugly Finish

Wow! Dow futures down over 200 points!

Obstinate Obama Sends Us Over the Fiscal Cliff

Here's the headline:

And here's the result:
 Got it?

Dismal Days for Stocks

Dow down nearly 100 points.

Thursday, December 27, 2012

Stocks Crater; More Americans On Welfare Than Working In 11 States

Dow down 140 now!

In 11 different U.S. states, the number of government dependents exceeds the number of private sector workers.  This list of states includes some of the biggest states in the country: California, New York, Illinois, Ohio, Maine, Kentucky, South Carolina, Mississippi, Alabama, New Mexico and Hawaii.  It is interesting to note that seven of those states were won by Barack Obama on election night.  In California, there are 139 “takers” for every 100 private sector workers.  That is crazy!  The American people have become absolutely addicted to government money, and it gets worse with each passing year.

Aetna CEO Says Obamacare to Double Insurance Premiums

Yesterday on CNBC, Aetna CEO Mark Bertolini said that health insurance premiums could as much as double if Obamacare comes into full effect:
To provide all Americans with health insurance, premiums will have to rise to pay for it, Aetna CEO Mark Bertolini told CNBC’s “Closing Bell” on Wednesday.

“If we’re going to insure all Americans, which is a worthy and appropriate cause, then somebody has to pay for it,” Bertolini said of the expected premium increases under Obamacare.
Bertolini said that insurance premiums could double in some places just on the basis of what types of policies people buy today.
Anticipating a criticism, Bertolini said that higher premiums wouldn’t mean higher profit margins for insurance companies. The reason is that it will actually be more expensive to insure people due to some of the Obamacare mandates.

Sad Summary of America From a Canadian Perspective

On this lackluster Boxing Day dominated by illiquid moves in every asset class, we thought a few succinct minutes spent comprehending the US and European government policies of social welfare and their outcomes was time well spent. Canadian MP Pierre Poilievre delivers a rather epic speech destroying the myths of US and European ‘wealth’ noting that “Once the US citizen is in debt, the US government encourages them to stay in debt,” noting that “the US government encouraged millions of Americans to spend money they did not have on homes they could not afford using loans they could never repay and then gave them a tax incentive never to repay it.” His message, delivered seamlessly, notes the inordinate rise in the cost of all this borrowing, adding that “through debt interest alone, soon the US taxpayer will be funding 100% of the Chinese Military complex.” From Dependence to Debt to the Welfare State and back to Dependence, this presentation puts incredible context on the false hope so many believe in the US and Europe. Must watch.

“By 2020, the US Government will be spending more annually on debt interest than the total combined military budgets of China, Britain, France, Russia, Japan, Germany, Saudi Arabia, India, Italy, South Korea, Brazil, Canada, Australia, Spain, Turkey, and Israel.”

“Through government spending the indulgence of one is the burden of another; through government borrowing, the excess of one generation becomes the yoke of the next; through international bailouts, one nation’s extravagance becomes another nation’s debt”

“Everyone takes, nobody makes, work doesn’t pay, indulgence doesn’t cost, money is free, and money is worthless.”

More Welfare Recipients Than Workers In 11 States

Interesting perspective from

America is rapidly becoming a nation of takers.  An increasing number of Americans expect the government to take care of them from the cradle to the grave, and they expect the government to dig into the pockets of others in order to pay for it all.  This philosophy can be very seductive, but what happens when the number of takers eventually outnumbers the number of producers?  In 11 different U.S. states, the number of government dependents exceeds the number of private sector workers.  This list of states includes some of the biggest states in the country: California, New York, Illinois, Ohio, Maine, Kentucky, South Carolina, Mississippi, Alabama, New Mexico and Hawaii.  It is interesting to note that seven of those states were won by Barack Obama on election night.  In California, there are 139 “takers” for every 100 private sector workers.  That is crazy!  The American people have become absolutely addicted to government money, and it gets worse with each passing year.  If you can believe it, entitlements accounted for 62 percent of all federal spending in fiscal year 2012.  It would be one thing if we could afford all of this spending, but unfortunately we simply cannot.  We are drowning in debt, and we are stealing more than a hundred million more dollars from future generations with each passing hour.  No bank robber in history can match that kind of theft.
Yes, we will always need a safety net.  There are many people out there that simply cannot take care of themselves.  We certainly don’t want to see anyone sleeping in the streets or starving to death.
But if the number of people jumping on to the safety net continues to grow at the current pace, the net will break and it will not be available for any of us.
For example, the number of Americans on food stamps grew from about 17 million in 2000 to more than 47 million today.  It nearly tripled in just 12 years.
What will happen if it nearly triples again over the next 12 years?
The federal government even has a website ( that guides people through the process of figuring out what welfare programs they can take advantage of.
Overall, the federal government runs nearly 80 different “means-tested welfare programs” and more than 100 million Americans are already enrolled in at least one of those programs.
Yes, I realize that figure is very hard to believe.  I had a hard time believing it when I first came across it.
And it is even more shocking when you realize that the figure of 100 million Americans does not even include those who only receive Social Security or Medicare.
Today, there are 56.76 million Americans on Social Security.
To support all of those Americans on Social Security, there are only about 94.75 million full-time private sector workers.
So there are just 1.67 full-time private sector workers to support each American that is on Social Security.
Medicare is also growing like crazy.  As I wrote about the other day, the number of Americans on Medicare is expected to grow from 50.7 million in 2012 to 73.2 million in 2025.
How much farther can we push things before the entire system collapses?
In order to support this exploding entitlement system, we need a lot more Americans to be working good paying jobs.
Unfortunately, millions of good paying jobs continue to be shipped overseas and they aren’t coming back.
We are even losing good jobs to our own prisoners.  The United States has the largest prison population in the world by far, and the exploitation of that low wage labor pool has become a boom industry in America.  Even Microsoft and Boeing are using prison labor now.  Just check out this video.
Meanwhile, there are millions upon millions of law-abiding Americans that cannot find jobs and that cannot take care of their families.
So poverty and dependence on the government are absolutely exploding.  We have a system that is so messed up that it is hard to even put it into words.  The middle class is being viciously shredded, and most Americans just continue to applaud the politicians from both parties that are doing this to us.

Our economy is being gutted at the same time that the welfare state is experiencing unprecedented growth.  Instead of giving us real answers, our “leaders” just continue to borrow, spend and print more money.  We are about to hit the debt limit again, and the Obama administration is saying that we should just do away with the debt limit permanently.
Most of our politicians don’t seem to understand that they are systematically destroying our economy and the bright futures that our children and our grandchildren were supposed to have.
But there are some politicians out there that get it.  Unfortunately, many of them live in other countries.  For example, Canadian MP Pierre Poilievre seems to have a firm grasp on what debt is doing to the United States.  The following are some excerpts from one of his speeches…
“By 2020, the US Government will be spending more annually on debt interest than the total combined military budgets of China, Britain, France, Russia, Japan, Germany, Saudi Arabia, India, Italy, South Korea, Brazil, Canada, Australia, Spain, Turkey, and Israel.”
“Through government spending the indulgence of one is the burden of another; through government borrowing, the excess of one generation becomes the yoke of the next; through international bailouts, one nation’s extravagance becomes another nation’s debt”
“Everyone takes, nobody makes, work doesn’t pay, indulgence doesn’t cost, money is free, and money is worthless.”
You can see his entire speech right here.
And if we continue down this path it is most definitely true that our money will eventually become worthless at some point.  Just today I was down at the grocery store, and a can of chili that I was able to get on sale for 75 cents a couple of years ago now has a “sale price” of $1.69.  If the Federal Reserve keeps recklessly printing dollars, eventually we will be fortunate to get a can of chili for 10 bucks.  Things cost too much already, and the Fed seems absolutely determined to cut the legs out from under the U.S. dollar.
Unfortunately, printing money is the only way that we are going to be able to service the gigantic amounts of debt that we are accumulating.
According to Chris Cox and Bill Archer, two men who served on Bill Clinton’s Bipartisan Commission on Entitlement and Tax Reform, there is no way in the world that we could raise taxes high enough to pay for all of the obligations that we are currently taking on.  They say that even if we taxed all corporations and all individuals at a 100% tax rate on all income over $66,193,  “it wouldn’t be nearly enough to fund the over $8 trillion per year in the growth of U.S. liabilities.
Are you starting to get an idea of how much trouble we are in?
We don’t have enough money to pay for all of this.
We are broke.
Our current economy is a debt-induced illusion, and we will soon be waking up to a tremendous amount of pain.
Are you ready?
Are You Ready?

Another Perspective On Today's News

Dow down 111 at the moment:

Stocks Drop Following Still More Bad News

The Dow is holding above 13,000, and the S&P 500 is holding above 1400. Both are precarious, at best, but I expect them to hold. And just as we were being told that housing had finally bottomed! I think Wall St will dismiss then as one day's news.

Here are the headlines, none of which are good:

And the results:
from Zero Hedge:
"Today's Consumer Confidence data missed by its biggest margin in 7 months, dropped below the year's average, and saw the largest 2-month drop in over 15 months. All age cohorts lost confidence with the eldest most and it appears those earning over $35k are also beginning to worry (as those between $35k and $15k seem more confident). Over 40% expect stock prices to decline and it is expectations that have plummeted from a hope-filled 80.9 to a 13-month low of 66.5. In other news, we got the November New Homes Sales report from the Census Bureau. On the surface the number was good, but like the initial claims dats, below the surface its not as pretty - on an unadjusted, unannualized basis, November saw a tiny 27K houses sold - lowest since Feb 2012. In fact, the only thing that really did soar was the number of homes for sale at the end of the period which rose to 151K: the highest since November of 2011."

Wednesday, December 26, 2012

Worst Christmas for Retailers In Four Years

Stocks, after opening higher early this morning, have now gone negative.

I think that many on Wall St are still expecting a miracle, and it's looking less and less likely.

Monday, December 24, 2012

Over the Cliff, and Through the Woods... Grandmother's house we go...

Meanwhile, we hit a record last month of Americans starting on Social Security Disability.

Fiscal Cliff Dead Ahead

But it's only going to be temporary, of course!

" seems likely that the U.S. will briefly go over the “fiscal cliff,” which will automatically kick in a rash of spending cuts and across-the-board tax increases, which Congress will then likely reverse a few days later with an agreement to both cut spending and also reduce the then-higher taxes for various income groups. Frankly, we’ll be surprised if the GOP agrees to vote for tax hikes before year-end when they can wait a few days and get the identical result by voting for tax cuts in January." -- John Hussman

Our Fiscal Mess on Christmas Eve

Dow down about 45 points on a shortened trading day.

Over the Fiscal Cliff We Go

...and into the economic abyss!

Merry Christmas, from the Obamas! Their gift of the debt black hole -- the death star -- is still being constructed!

Friday, December 21, 2012

Our Destructive Interconnectedness

"Interconnected networks exhibit a knife-edge, or tipping point, property. Within a certain range, connections serve as a shock-absorber. The system acts as a mutual insurance device with disturbances dispersed and dissipated. But beyond a certain range, the system can tip the wrong side of the knife-edge. Interconnections serve as shock-ampli ers, not dampeners, as losses cascade. The system acts not as a mutual insurance device but as a mutual incendiary device." Andrew Haldane via Zero Hedge

Washington Turmoil Sends Stocks Off a Fiscal Cliff

Last night, when Speaker Boehner was unable to find enough votes to pass a tax bill, stocks had another flash crash and the S&P 500 index dropped 50 points for a few minutes. Some relatively benign news this morning on consumer spending and income has given stocks some buoyancy, but the Dow is still down about 150 points.

Wednesday, December 19, 2012

Economic Ennui -- and It's Only Going to Get Worse!

by Brandon Smith at
The markets, as most people reading this should now well know, no longer reflect in any way the true economic health of our country.  If one was to measure the financial “recovery” of this nation by the strength of global stocks alone, he would probably come to the conclusion that the collapse of 2008 was a mere hiccup in the overall success of the worldwide economic system.  However, electronically traded equities with little more to back their value than scraps of receipt paper and numbers on a screen have no bearing on what is going to happen to you, and to me, over the course of the coming year.  The stock market is a sideshow, a popcorn movie, a façade.  The real drama is going on behind the scenes and revealed in fundamentals that mainstream analysts no longer discuss…

The only advantage of a long drawn disintegration of the overall system is that as the years pass, it becomes possible to discover a pattern through which we can gauge where we really stand today and will stand tomorrow, giving us a chance (a narrow chance) to limit the eventual damage.  Unfortunately, the pattern now in motion suggests that the next year will be exactly what we have been predicting over the past several months:  Dismal.

The MSM refuses to discuss it at great length, but all signs show an epic global slowdown in demand and production, especially in the final quarter of 2012.  This slowdown cannot be denied, nor can it be shrugged off as inconsequential.  This development is exactly as I predicted in January of this year using the Baltic Dry Index as a guide.  During that first quarter, the BDI fell to record lows, indicating an extreme decline in shipping demand around the world, which, in turn, indicated a fall in demand for raw goods, which, in turn, indicated a fall in demand for consumer goods.  Mainstream pundits sought to distract the public from this fact by claiming that the BDI was collapsing due to an “oversupply of ships”, not rescinding demand.  This disinformation was proven incorrect in the beginning of the third quarter of this year, when export nations from China, to Japan, to Germany all began reporting abysmal manufacturing numbers and steep faltering in overseas purchases. 

Of course, we all know what happened next:  The markets began to tank when they caught the scent of a slowdown, losing a thousand points within the span of a week.  Not so unpredictably (since I also predicted it at the beginning of the year) the Federal Reserve leapt into action with its announcement of QE3 (QE Infinity).

QE3 has done little to change the problem of falling global demand, but it has certainly defibrillated stocks.  In fact, I think it is safe to say that a majority of QE fiat funds are flowing (directly or indirectly) into the DOW, and not much else.  International trade and consumption is starting to feel the pain, and respective countries are no longer able to hide it.  Keep in mind that this slowdown is occurring right at the height of the Christmas season, when consumption is usually supposed to reignite.

Despite the sugar coated claims of insane Keynesians who only a few years ago were predicting a “resurgence” of American industry and exports due to the Federal Reserve’s ongoing devaluation of the dollar, production in the U.S. has remained pathetically weak, and continues to decline:

This is of course a direct result of slowing global demand, reducing potential markets all over the world, which is something deflation fear mongers apparently didn’t see coming.  The reality is that demand is faltering EVERYWHERE, not just in the U.S., and this begs a particular question:  In an interdependent economic system driven primarily by consumption, who is going to fill the void when all nations are dry of spending cash?  That is to say, who is going to take up the slack, when obviously no one has the wealth to do so?  Without a cultural cash engine, the globalized framework is destined to fail.   

China’s export growth fell far more than expected in November, something which many Chinese economists are attributing to a complete lack of revival in American markets:

Manufacturing in the UK went into steep decline almost simultaneously, showing that sinking demand is striking both the Pacific and the Atlantic:

Germany, the largest economy in the EU and the only country still holding the absurd political entity together, has been shocked to discover that its own Bundesbank is forecasting a contraction in growth to near zero in 2013:

Japan’s economy suffered an annualized decline in GDP in November greater than that which occurred during the Fukushima disaster:

This contraction has recently caused Japan to install a new revamped government during elections this month, which unfortunately will be instituting almost identical policies to the last regime.

Finally, Brazil, a developing export nation with very important significance as a litmus test for world consumption, posted near zero growth in the third quarter of 2012, far below expectations but in line with the bigger picture.  The global financial machine is grinding to a halt right under our very noses…

At the end of 2012, it is undeniable; the system is running out of steam, and not even constant fiat injections by central banks are reversing our current course. 

In order to understand what is happening, I want you to imagine a quickly diminishing cycle.  Imagine that in 2008, America was on the edge of a whirlpool, or a spinning vortex, and was suddenly caught in the outermost current.  Today, we have circled the epicenter several times, each rotation becoming smaller and more volatile than the last.  Eventually, the whirlpool will reach an end, and our economy will be sucked into the destructive funnel.  One can see clear evidence of this decline in the Baltic Dry Index:

Notice how each year since 2008 there is a spike in shipping rates indicating a rise in demand for materials at the onset of the Christmas season, which is the natural progression of things.  Yet, also notice that this spike in demand grows smaller with each passing year.  In 2012, the increase has been almost nonexistent, meaning that we are likely very close to going down the drain.

Some pundits may argue that November’s Black Friday sales were tremendous, and this signals a recovery in spending and consumption.  I would point out that such numbers are deceiving.  High sales during the most discounted day of the Christmas buying season is not necessarily a good thing.  What it really reveals is that a majority of shoppers were looking for the lowest prices possible because of a lack of personal savings.  It is a sign of desperation, not revitalization.  Full season numbers have not yet been released, but when they are, I believe we will see a fantastic spike in sales on Black Friday followed by a complete flatline for the rest of the year.  Obviously high consumption has not been sustained, otherwise, worldwide manufacturing and shipping would be in much better shape. 

The issue here is one of priorities.  With multiplying distractions going on around the globe, including the fear of recent mass murders at home, will the public be able to keep track of the deadly financial tidal waves just off the coast, or will they even care when distracted by so many sharks in the water?  The next two months will be very revealing.  The so-called “fiscal cliff” is on the way, and the question of whether or not the U.S. government should kick the can down the road or take the sour medicine it needs and move on has arisen once again.  This debate is and always has been an illusion.  Whether we continue to increase government spending, taxation, and inflation, or we cut all spending and shut down the fiat presses, there is still going to be a collapse.

However, the “fiscal cliff” could be very dangerous in an entirely different respect…

The coming collapse will not be due to the indecision or partisan bickering of our politicians.  They are in much closer agreement than the MSM would like to admit.  Instead, the monolithic Catch-22 of our age will be the direct result of the actions of the private Federal Reserve and the peripheral international banking cartel; the engineers who gave birth to the toxic derivatives implosion in the first place.  What I fear most is that the results of the fiscal cliff negotiation along with other triggers around the planet (Syria, Iran, the EU breakdown, etc.) will be used to veil the true weaknesses of our already imploding system, and eventually be exploited as scapegoat events for a disaster that has been in the making for decades, not just a few years.  The omens are not good for 2013, and we can only circle the drain for so long…

Tuesday, December 18, 2012

Risk Is Being Ignored, Amplified

Our biggest concern here on the cusp of 2013 is the current odd combination of extreme complacency about the risks presented by extend-and-pretend macro policy making and rapidly accelerating social tensions that could threaten political and eventually financial market stability. Before everyone labels us ‘doomers’ and pessimists, let us point out that, economically, we already have wartime financial conditions: the debt burden and fiscal deficits of the western world are at levels not seen since the end of World War II. We may not be fighting in the trenches, but we may soon be fighting in the streets. To continue with the current extend-and-pretend policies is to continue to disenfranchise wide swaths of our population - particularly the young - those who will be taking care of us as we are entering our doddering old age. We would not blame them if they felt a bit less than generous. The macro economy has no ammunition left for improving sentiment. We are all reduced to praying for a better day tomorrow, as we realise that the current macro policies are like pushing on a string because there is no true price discovery in the market anymore. We have all been reduced to a bunch of central bank watchers, only ever looking for the next liquidity fix, like some kind of horde of heroin addicts. We have a pro forma capitalism with de facto market totalitarianism. Can we have our free markets back please?

Stocks Leap On News Of Possible Fiscal Resolution

Potential Implications of Our Debt

In today's Outside the Box I bring you two pieces that, at first glance, may not seem to have much to do with each other. First, Bill Gross, PIMCO managing director, runs down the fierce structural headwinds that our hard-pedaling global economy faces over the next decade. I am going to deal at length with not only his GDP projections for the rest of the decade but those of Grantham and others in the last two Thoughts from the Frontline of this year. This is a challenging environment for traditional portfolio construction, but it’s par for the course as we slog through the secular bear market I was first writing about in 1999.
Then Charles Gave instructs us on the distortions in the measurement of risk that have been introduced as the "plain, boring and well-meaning economists working in the entrails of the world central banks" have supplanted the Marxist avant garde in the world's shift away from “scientific socialism” to "scientific capitalism."
However, when you think about it, these pieces dovetail in a very convincing – and somewhat frightening – manner. Because what they add up to – if the econocrats are yanking the rug out from under a capitalist system that is already reeling, as Gross says, from debt and deleveraging, a slowing of the locomotive of globalization, and dislocations in technology and demographics – is a profound, ongoing challenge to you and me as investors. Gross and Gave have their own ideas about how we get through this. I don’t agree with all their conclusions – this letter is not called Outside the Box for nothing – but I offer these essays because they’ll make us think through our own presuppositions. However you view their analysis, they do reinforce the idea that we're all going to have to be not only careful but very nimble.
I post this note from 35,000, feet flying back from Cleveland to Dallas. American Airlines has now put internet on nearly all of their domestic flights, and I find the time I spend read and respond without interruption up here some of the more productive time I get. Which is good, since the record shows that I have been on some 110-plus different planes this year, most of which were AA. (Lately, when I am asked where I live, I just say my closet is in Dallas.)
It is not just me but other “road warriors” who have noticed that the staff of AA have markedly stepped up their personal service levels (as opposed to United, when they were in similar financial difficulties). More than a few of their employees have gone far out of their way to make my difficult travel schedule a little bit easier and smoother, from frontline staff to their back-office phone mavens, who often perform a little bit of magic rearranging my schedule. And as they add newer planes to their fleet, seat 5B has almost become my home office. So here’s a tip of the hat to them and all the service people who make life on the road better. And may your own road be a little smoother these holidays.
I spent last night at Dr. Mike Roizen’s home before seeing a few doctors at the Cleveland Clinic. I rode in a limo with him to a speech in Youngstown, Ohio, and we had time to visit at length. Mike has become one of my dearest friends, and our times together are easy ones, deeply treasured. Without this peripatetic life I would not have so many good friends, far and wide. It is the best perk of traveling.
Mike is on the board of the Cleveland Clinic, and he is deeply worried about the fiscal cliff. Even assuming the “doc fix” is passed, as it always is, without an alteration or repeal of the current law, the Cleveland Clinic will be faced with an almost 9% budget cut on January 1. They will lose money on every Medicare and Medicaid patient they see. There are no good solutions other than deep budgets cuts. And since the largest portion of their budget is salaries?...
The CC is held up (rightly so) as one of the most efficient medical organizations in the world. They have no fat to cut. I met the lady, in my walking around at the clinic, who cut $24 million in energy costs and another $2 million in trash-removal costs, at some considerable effort and investment. They leave no dollar stone unturned in the pursuit of efficiency.
Mike and I talked deep into the night and much of the next day, when we could, about our healthcare system. It fills me with deep concern. I have asked Mike to give us an outline of his speech today for an Outside the Box. His five-step “solution” has lowered healthcare costs for the 43,000 CC staff and all firms that have adopted their plan. When you look at his numbers, you understand why the US spends more money on healthcare than Europe. We are indeed that much less healthy. The CC has found out that paying each staff member $2,000 to adopt a healthier lifestyle lowers overall costs by even more than that.
Smoking cigarettes may be your personal choice and God-given right, but it costs the American healthcare system and taxpayers multiple tens of billions. And the same goes for four other lifestyle habits. Want to live long and prosper? And be smarter and have better sex? Just eat right, exercise and avoid a few items. I hope Mike gets me that essay soon, as I want all my closest friends (that would be you!) to stay around with me for a long, long time.
Have a good week. I am looking forward to the holidays and home and family. And while I try to get exercise on the road, my home gym is still the best.
Your ready for a few good nights’ sleep in my own bed analyst,

John Mauldin, Editor
Outside the Box

Strawberry Fields – Forever?

Bill Gross, Managing Director, PIMCO
Living is easy with eyes closed
Misunderstanding all you see
I think I know I mean a yes
But it’s all wrong
That is I think I disagree
Strawberry Fields Forever
The Beatles
You didn’t build that............... 332
I built that ................................... 206
Well, I guess that settles it: you didn’t build that after all. Or maybe you did, but not all of it. Or maybe like the convoluted John Lennon above “you think you know a yes, but it’s all wrong. That is you think you disagree.” Whatever. Rather than an economic mandate, November’s election was more of social commentary on the Republicans’ habit of living with eyes closed. Their positions on what Conan O’Brien labeled “female body parts” – immigration, gay rights and student loans – proved to be big losers, and they will have to amend rather than defend those views if they expect to compete in 2016. I suspect they will. Political parties are living social organisms that mutate in order to survive. We will see straight talking Chris Christie or Hispanic flavored Marco Rubio leading the Republican charge four years from now versus a reenergized Hillary Clinton. It should be quite a show with a “No C ountry for Old (White) Men” caste to it.
But whoever succeeds President Obama, the next four years will likely face structural economic headwinds that will frustrate the American public. “Happy days are here again” was the refrain of FDR in the Depression, but the theme song from 2012 and beyond may more closely resemble Strawberry Fields Forever, as Lennon laments “It’s getting hard to be someone but it all works out.” Why is it so hard to be someone these days, to pay for college, get a good-paying job and retire comfortably? That really was the economic question of the 2012 election towards which very few specifics were applied from either side. “There’s a better life out there for us,” Governor Romney bellowed to a crowd of thousands in
Des Moines, Iowa just days before the election, but in truth he never told us how we were going to achieve it or, importantly, why we weren’t realizing it in the first place. The president’s political mantra of “Forward” was even more vague.
Their words were mum if only because the real cause of slower economic growth lies hidden in a number of structural as opposed to cyclical headwinds that may be hard to reverse. While there are growth potions that undoubtedly can reduce the fever, there may be no miracle policy drugs this time around to provide the inevitable cures of prior decades. These structural headwinds cannot just be wished away as we move “forward” whether it be to the right, the left or dead center. Last month in a major policy speech at the New York Economic Club, Fed Chairman Ben Bernanke concurred that the U.S. economy’s growth potential had been reduced “at least for a time.” He in effect confirmed PIMCO’s New Normal which has been in place for three years now, laying the blame in part on the financial crisis, diminished productivity gains, and investment uncertainty due to the near-term fiscal cliff. We do not disagree. However, there are numerous oth er structural headwinds that may reduce real growth even below the New Normal 2% rate that Bernanke has just confirmed, not only in the U.S. but in developed economies everywhere.
They are:
1) Debt/Delevering
Developed global economies have too much debt – pure and simple – and as we attempt to resolve the dilemma, the resultant austerity should lower real growth for years to come. There are those that believe in the “Brylcreem” approach to budget balancing – “a little dab‘ll do ya.” Just knock a few percentage points off the deficit/GDP ratio, they claim, and the private sector will miraculously reappear to fill the gap. No such luck after 2–3 years of austerity in Euroland, however. Most of those countries are mired in recession and/ or depression. Political leaders there should have studied the historical evidence presented by Carmen Reinhart and Ken Rogoff in a critically important paper titled, “Growth in a Time of Debt.” They conclude that for the past 200 years, once a country exceeded a 90% debt/GDP ratio, economic growth slowed by nearly 2% for both developed and developing nations for an average d uration of nearly a decade. Their work displayed below in Chart 1 shows the result in the United States from 1790–2009. The average annual U.S. GDP rate growth, while clearly influenced by the Great Depression, was -1.8% once the 90% barrier was exceeded. The U.S., by the way, is now at a 100% debt/GDP ratio on the basis of the authors’ standard measuring yardstick. (Note as well the 5_% average inflation rate during the same periods.)

In addition to sovereign debt levels which were the primary focus of the Reinhart/Rogoff studies, it is clear that financial institutions and households face similar growth headwinds. The former needs to raise equity via retained earnings and the latter to increase savings in order to stabilize family balance sheets. The combined need to increase our “net national savings rate” highlighted in last month’s Investment Outlook is a long-term solution to the debt crisis, but a near/ intermediate-term growth inhibitor. The biblical metaphor of seven years of fat leading to seven years of lean may be quite apropos in the current case with the observation that the developed world’s growth binge has been decades in the making. We may need at least a decade for the healing.
2) Globalization
Globalization has been an historical growth stimulant, but if it slows, then the caffeine may wear off. The fall of the Iron Curtain in the late 1980s and the emergence of capitalistic China at nearly the same time was a locomotive of significant proportions. Adding two billion consumers to the menu made for a prosperous restaurant, increasing profits and growth in developed economies despite the negative internal effects on employment and wages. Now, however, these tailwinds are diminishing, producing an airspeed which inexorably slows relative to the standards of prior decades. Is it any wonder that markets now move up or down as much on the basis of policy changes coming out of China as opposed to the U.S. or Euroland? If China and the accompanying benefits of globalization slow, so too may developed economy growth rates.
3) Technology
Technology has been a boon to productivity and therefore real economic growth, but it has its shady side. In the past decade, machines and robotics have rather silently replaced humans, as the U.S. and other advanced economies have sought to counter the influence of cheap Asian labor. Almost a century ago, Keynes alerted the economic community to a “new disease,” what he called “technological unemployment” where jobs couldn’t be replaced as fast as they were being destroyed by automation. Recently, Erik Brynjolfsson and Andrew McAfee at MIT have affirmed that workers are losing the race against the machine. Accountants, machinists, medical technicians, even software writers that write the software for “machines” are being displaced without upscaled replacement jobs. Retrain, rehire into higher paying and value-added jobs? That may be the political myth of the modern era. There aren’t enough of those jobs. A structurally higher unemployment rate of 7% or more is the feared “whisper” number in Fed circles. Technology may be leading to slower, not faster economic growth despite its productive benefits.
4) Demographics
Demography is destiny, and like cancer, demographic population changes are becoming a silent growth killer. Numerous studies and common sense logic point to the inevitable conclusion that when an economic society exceeds a certain average “age” then demand slows. Typically the dynamic cohort of an economy is its 20 to 55-year-old age group. They are the ones who form households, have families and gain increasing experience and knowhow in their jobs. Now, however, almost all developed economies, including the U.S., are gradually aging and witnessing a larger and larger percentage of their adult population move past the critical 55-year-old mark. This means several things for economic growth: First of all from the supply side, it means productivity and employment growth rates will slow. From the demand side, it suggests a greater emphasis on savings and reduced consumption. Those approaching their seventh decade need fewer cars and new homes as shown in Cha rt 2. Almost none of them have babies (thank goodness!). Such low birth rates and a significant reduction in demand have imperiled Japan for several lost decades now. A similar experience will likely turn many developed economy “boomers” into “busters” within the next several years.

Investment Conclusions
I’m fond of reminding PIMCO’s Investment Committee that you can’t buy GDP futures – at least not yet. Hypotheses about real growth rates, no matter how accurate, must be translated into investment decisions in order to justify the discussion. Before doing so, let me acknowledge that these structural headwinds can and will likely be somewhat countered by positive thrusts. Cheaper natural gas and the possibility of reversing or even containing the 40-year upward trend of energy costs may be a boon to productivity and therefore growth. There is talk of the U.S. being energy independent within a decade’s time. Housing as well may be experiencing a multiyear revival. In addition, unforeseen productivity breakthroughs may be just over the horizon. How many gloomsters could have forecast the Internet or any other technical breakthrough before it actually happened? Jules Verne we are not.
But if a 2% or lower real growth forecast holds for most of the developed world over the foreseeable future, then it is clear that there will be investment consequences. Shown below, as recently published in a TIME Magazine article by Rana Foroohar, is a PIMCO list of future Picks and Pans based upon these ongoing structural changes:
·   Commodities like Oil and Gold
·   U.S. Inflation-Protected Bonds
·   High-Quality Municipal Bonds
·   Non-Dollar Emerging-Market Stocks
·   Long-Dated Developed-Country Bonds in the U.S., U.K. and Germany
·   High-Yield Bonds
·   Financial Stocks of Banks and Insurance Companies
The list to a considerable extent reflects the view that emerging economy growth will continue to be higher than that of developed countries. Their debt on average will remain much lower, and their demographic age much younger. In addition, the inevitable policy response of developed economies to slower growth will be to reflate in order to minimize the impact of the aforementioned structural headwinds. If successful, reflationary policies will gradually move 10 to 30-year yields higher over the next several years. The 30-year Treasury hit its secular low of 2.50% in July and such a yield may seem ludicrous a decade hence. Investors should expect future annualized bond returns of 3–4% at best and equity returns only a few percentage points higher.
As John Lennon forewarned, it is getting harder to be someone, and harder to maintain the economic growth that investors have become accustomed to. The New Normal, like Strawberry Fields will “take you down” and lower your expectation of future asset returns. It may not last “forever” but it will be with us for a long, long time.

The Control Engineers and the Notion of Risk

Charles Gave, GaveKal
There is a great movie scene where Harpo and Groucho Marx meet in the “socialist restaurant.” Groucho says, “this food is disgusting and inedible!” To which Harpo replies, “and on top of that, the portions are far too small!” So by the late 1930s and the golden era of the Marx Brothers, it was already obvious that socialism was bad fare in high demand. Yet it took another half century for “scientific socialism” to be finally discredited in rivers of blood, murder and poverty. With the economic disasters wrought by socialism, one might have assumed that policymakers would accept that the future cannot be forecasted. The role of economists, governments and central banks is to promote a stable monetary and legal framework for the risk-takers (entrepreneurs, money managers etc.) to make their decisions as rationally as they could.
Unfortunately this has not happened. Instead, in a new and improved declination of Friedrich Hayek’s "fatal conceit," we seem to be moving away from “scientific socialism” to "scientific capitalism" – where the overconfident and overeducated control-engineers are no longer members of the avant garde of the proletariat, but plain, boring and well-meaning economists working in the entrails of the world central banks. My intent is not to show why these economists will fail (bigger and brighter minds such as Hayek, Mises, Friedman, etc. have already done this) – but rather to review the impact that the misguided manipulation of the price of money (exchange and interest rates) is having on the notion of risk.
In standard financial theory, most practitioners use the volatility of underlying assets as a measure of risk. To some extent, quantitative easing policies have had their biggest impact on this measure. Not only are prices totally artificial for a number of assets (government debt chief amongst them), but the volatility of these prices is also completely meaningless. Volatility no longer indicates the risks involved in holding certain assets, but instead measures the amount of the manipulation that the poor prices are enduring. For example, no-one today could say with a straight face that there is any information in the volatility of the euro-swiss exchange rate, or that this zero volatility adequately measures the risks that a Swiss based investor takes in buying euro-denominated assets.
So as a direct consequence of the manipulations of our well-meaning "control engineers" of market prices, today’s volatility readings have absolutely nothing to do with the underlying risks. From here, it is hard to escape the following conclusions:
·   This will lead to the next disaster, for major financial accidents typically find their source in a misconception of risks, rather than a misconception of returns (e.g., Greek bonds are just as risky as German bonds, levered US mortgage bonds are as safe as houses, etc).
·   Building a rational portfolio, where risks can be properly hedged, is almost impossible when market signals have disappeared (explaining the recent difficulties of so many macro and CTA hedge funds?).
Staying with the above ideas, consider that all the quantitative models and statistical techniques like “value at risk” will prove to be hopelessly wrong when true volatilities re-emerge (as they always do!). And when that occurs, who doubts that many financial institutions will, once again, find themselves in the line of fire. After all, as Karl Popper explained: "In an economic system, if the goal of the authorities is to reduce some particular risks, then the sum of all these suppressed risks will reappear one day through a massive increase in the systemic risk and this will happen because the future is unknowable". The sum of the risks in an economic system over time is a constant and the only question confronting economists is whether we should prefer to take our risk in small doses, or in a massive injection (as occurs when a fixed exchange rate system breaks down, or when a debt restructuring happens etc...)?
So in a world of “suppressed volatility,” the only smart thing a long-term investor can do is to buy the assets which have been sold because of their higher volatilities. This obviously is equities, and in particular, the very long duration equities of companies in technology, healthcare, energy, etc. A well-diversified portfolio of such shares will be volatile, but investors will likely see their money back over time and then some.
In fact, strange as it may seem, the only way to reduce the risk today is to own assets that still sport a "market price" – which will thus automatically have a very high volatility compared to the other assets exhibiting a very low, but artificial volatility. To reduce risk today, one has to build a very volatile portfolio! This is partly because a lot of non-volatile assets are extraordinarily risky. For example, I cannot think of more dangerous assets to own today than French or Japanese government bonds. I could easily imagine Groucho looking at a menu of JGBs and OATs and exclaiming, “these assets are terrible and have no yield”, only for Harpo to reply, “and their aren’t enough for everybody.” This last line will change rapidly when reality hits. Because economic history teaches us that no policymaker can control volatility for ever. The real hedge for portfolios today no longer is government fixed income, or even gold, but is instead volatility strategies.

Monday, December 17, 2012

Hussman: Destined for Economic Malaise

Roach Motel Monetary Policy

John P. Hussman, Ph.D.
All rights reserved and actively enforced.

Reprint Policy

While we continue to observe some noise and dispersion in various month-to-month economic reports, the growth courses of production, consumption, sales, income and new order activity remain relatively indistinguishable from what we observed at the start of the past two recessions. The chart below presents the Chicago Fed National Activity Index (3 month average), the CFNAI Diffusion Index (the percentage of respondents reporting improvement in conditions, less those reporting deterioration, plus half of those reporting unchanged conditions), and the year-over-year growth rates of new orders for capital goods excluding aircraft, real personal consumption, real retail and food service sales, and real personal income. All values are scaled in order to compare them on a single axis.
Strong leading indicators such as the CFNAI and the Philly Fed Index have been weak for many months, and the deterioration in new orders has moved from a slowing of growth to outright contraction in recent months. In the order of events, a slowing in real sales, personal income, and personal consumption expenditure typically follows – these are called coincident indicators. These growth rates generally only weaken materially once a recession is in progress, and reach their highest correlation with recession about 6-months into the downturn. That’s what we’ve begun to observe over the past few months, adding to our impression that the U.S. joined a global (developed economy) recession during the third quarter of this year. The most lagging set of economic indicators includes employment measures, where I’ve frequently noted that the year-over-year growth rate of payroll employment lags the year-over-year growth rate of real consumption with a lag of about 5 months. As a result, the year-over-year growth rate in payroll employment reaches its highest correlation with recession nearly a year after a recession has started – another way of saying that it is among the last indicators to examine for confirmation of an economic downturn.
All of that said, our concern about recession emphatically is not what drives our concern about the stock market here. In early March, our measures of prospective return/risk moved to the lowest 1% of historical data based on a broad ensemble of indicators and consistent evidence of market weakness following similar conditions in numerous subsets of historical data. Those conditions remain largely in place today.
There’s no question that massive fiscal and monetary interventions have played havoc with the time-lag between unfavorable conditions and unfavorable outcomes in recent years, which prompted us back in April to introduce various restrictions to our hedging criteria (see below). Still, present conditions remain strongly negative on our estimates. Meanwhile, the stock market is not “running away” –  at best, these interventions have allowed the market to churn at elevated levels. Only a month ago, the S&P 500 Index was below its level of March 2012, when our estimates shifted to the most negative 1% of the data, and was within about 11% of its April 2010 levels, which is the last time that our present ensemble approach would have encouraged a significant exposure to market risk. Notably, as of last week, an upward spike in long-term Treasury yields took market conditions to an overvalued, overbought, overbullish, rising yields syndrome – which has tended to be anathema to the stock market, even prior to the more limited downward bouts of recent years.  
Beyond that, a natural question is – if recession concerns don’t factor into our present defensiveness in the first place, why should we be concerned about recession at all, and devote so much analysis to this issue in the weekly comments? The first answer is that the foundation of this particular cyclical bull market has rested on the continuation of massive fiscal and monetary interventions, and a new recession would stretch those interventions to untenable limits (and to some extent already have), which should be of concern regardless of one’s stock market views. The second answer is that much of Wall Street’s overbullish sentiment, as well as its “valuation” case for stocks, rests on the continuation of record high profit margins that are largely an artifact of extreme government deficits and depressed personal savings (see Too Little To Lock In). A contraction in sales, coupled with a contraction in profit margins – which is what we presently expect – is likely to devastate the “forward operating earnings” case for stocks, and I continue to expect Wall Street to be blindsided by this fairly predictable outcome (as it was in 2001-2002, as it was in 2008-2009).
The distortions we presently observe in the economy will have significant long-term costs, but it is entirely naïve to believe that these costs should be evident precisely at the point where the wildest distortions are taking place. Federal deficits presently support about 10% of economic activity, and the primary driver of improvement in the unemployment rate has not been job creation but a plunge in labor participation, as millions of workers drop out of the labor force. In a post-credit crisis environment, and particularly with Europe’s sovereign debt in question, it should be no surprise that the world has been willing to accumulate U.S. currency and Treasury debt at near-zero interest rates. That makes debt seem benign and money creation seem without consequence. But it is absurd to point at that happy short-term outcome and dance under the illusion that escalating debt won’t matter in the longer term, or that massive money creation will be easily reversed, or that strong inflation will be avoided if it is not reversed.
We have already accumulated enough government debt to place a broad range of current and future government services under a cloud. Given that most of the publicly held U.S. government debt is of short maturity, there is no way of inflating away its real value over time, because interest rates would adjust at each rollover of that debt. In the event that the sheer size of the U.S. debt results in a loss of confidence (which is a 5-10 year proposition, though not yet a present one), there is no reason that we could not expect the same short-term funding strains that many European countries are facing in fits and starts today.
Meanwhile, last week, Ben Bernanke announced that the current “Twist” program (where the Fed buys long-term Treasuries and sells an equal amount of shorter-dated Treasuries) will be replaced with outright “unsterilized” bond purchases. In doing so, Ben Bernanke has put the economy on course to choke down 27 cents of monetary base for every dollar of nominal GDP by the end of next year – in an economy where even the slightest normalization to interest rates of just 2% would require the monetary base to be cut to just 9 cents per dollar of GDP to avoid inflationary outcomes. The chart below is a reminder of where we are already.
Understand that Fed policy now requires interest rates to remain near zero indefinitely, because competition from non-zero interest rates would reduce the willingness to hold zero-interest currency, provoking inflationary outcomes unless the monetary base was quickly reduced. Given an economy perpetually at the edge of recession, so far, so good. But as interest rates essentially measure the value that an economy places on time, Ben Bernanke's message to the U.S. economy is clear: time is worthless.  
Monetary policy has become a roach motel – easy enough to get into, but impossible to exit. Bernanke seems pleased to note that inflation presently remains low, but why shouldn’t it? In a structurally weak economy, velocity drops in exact proportion to new monetary base, with zero effect on real output or inflation. The problem is that Bernanke seems incapable of running thought experiments. Suppose the economy eventually strengthens at some point past 2013. At that point, the Fed would have to sell nearly $3 trillion of U.S. debt into public hands in order to reabsorb the money creation he claims “is only a temporary matter.” These sales would add to the stock of U.S. debt already held by the public, very likely while a significant government deficit is still in place. Such a sale would be, by two orders of magnitude, the largest monetary tightening in U.S. history. Is that possible to achieve without disruption? I doubt it.
So instead, the Fed must rely on the economy remaining weak indefinitely, so it will never be forced to materially contract its balance sheet. To normalize the Fed’s balance sheet without contraction and get from 27 cents back to 9 cents of base money per dollar of GDP without rapid inflation, we would require over 22 years of suppressed interest rates below 2%, assuming GDP growth at a 5% nominal rate. Indeed, Japan is on course for precisely that outcome, having tied its fate 13 years ago to Bernanke’s experimental prescription (stumbling along at real GDP growth of less than 1% annually since then). Bernanke now sees fit to inject the same bad medicine into the veins of the U.S. economy. Of course, a tripling in the consumer price index would also do the job of bringing the monetary base back from 27 cents to 9 cents per dollar of nominal GDP. One wonders which of these options Bernanke anticipates. Psychotic.
Big picture – my perspective remains unchanged: the long-term viability of the global economy is being increasingly wrecked by short-sighted policies focused on avoiding short-term economic adjustments, and at bottom, on avoiding the restructuring of unserviceable sovereign, mortgage and financial debt. Yet only that restructuring is capable of unchaining the economy from reckless past misallocations; only that restructuring is capable of unleashing robust new demand that would form the basis for sustainable economic activity and job creation. You either pull the bad tooth, or you provide every kind of pain killer and symptom reliever, and let the problem rot indefinitely.
From an investment perspective, we know that the impact of quantitative easing both in the U.S. and abroad has generally been limited to a rally in stocks toward the highs of the prior 6-month period, in some cases moving as high as the monthly Bollinger band (2 standard deviations above the 20-month average). Given that the S&P 500 is within a few percent of its highs, and that conditions have already established an overvalued, overbought, overbullish, rising-yields conformation, much of the “benefit” of QE on stocks appears already priced in, as it has been since October when Bernanke effectively announced the present policy. The downside risk overwhelms the upside potential, in my view, but we can’t confidently rule out some amount of upside potential – which would still seem dependent on the avoidance of negative economic surprises.


Economic Ennui!

Thursday, December 13, 2012


Dow down about 70 points.

Small business investment, according to Gallup, is contracting sharply.

Wednesday, December 12, 2012

Selloff Following Fed Announcement

Fed Announcement Sends Stocks Vertical

Monetary manipulation at its finest. The "fiscal cliff" is forgotten. Who needs an economy? We have printed prosperity now!

Baltic Dry Index Gets Crushed

One of the economic indicators that is one of the most prescient about the direction of the global economy is the Baltic Dry Index. It measures shipping around the world as a predictor of the health of the global economy. When shipping in the world declines, so does economic activity.
from Zero Hedge:
It has been a while since we looked at the Baltic Dry Index, which when normalizing for the excess glut in dry container ship supply (such as right now - 5 years after all the excess supply in the industry - has long been normalized), continues to be one of the best concurrent indicators of global shipping and trade. We look at it today, moments ago it just posted an epic 8.2% plunge, crashing from 900 to 826, or the biggest drop since 2008! Of course, conisdering the collapse in global trade confirmed in past days by both Chinese and US data, this should not come as a surprise, although we are certain it will merely bring out the BDIY apologists who tell us that supply and demand here (like in every other Fed-supported market) are completely uncorrelated.

Waiting For More Feddling

Markets are in a holding pattern as we await an announcement from the Fed which is widely expected to open the monetary spigots still wider. Inflation this way comes!

Tuesday, December 11, 2012

Monday, December 10, 2012

Outsized Inflation Risk Increasing!

When it comes to market experts with decades of insight, we will pick soon to be Second Admiral of his own sovereign navy (comprising of privateered Argentinian schooners, Belize catamarans, and soon, Greek Made in Germany submarines), Elliott's Paul Singer, over those of any fly by night TV talking head, or "information arbitrageur" whose only 'alpha' in the past decade was courtesy of expert networks. The same Paul Singer whose outlook on what the next crisis may look like we posted yesterday.  It is the same Paul Singer, who three weeks ago was a headline speaker at the Archstone Partnerships annual meeting, in which speech he laid out not only the biggest threat facing America - namely the arrogance of the United States "by not realizing that in today's world... you have to be attractive as a country [because] capital will go where it's welcome", but more importantly, the thing that keeps him up at night: "The thing that scares me most is significant inflation, which could destroy our society." In other words, one of the best and brightest investors in the world, is most terrified by the one thing that every central-planning dispensing economist says will never happen: hyperinflation. Our money is certainly not on the theoreticians.
Extracting the key parts from Singer's speech. Highlights ours

Let me make a few comments and observations on the current investment scene. I said before that every once in a while things really are “different this time,” and I thought of a metaphor earlier that might be useful to illustrate an important point. Let’s do a thought experiment: Let’s make believe we are in 1960 and sitting in Germany, and we are a group of German investors and businesspeople, about the same ages as the people here today. The group would be people who had seen the most astonishing changes in the underlying conditions of investing and growing capital—a complete evaporation of savings from 1914 to 1923; complete destruction of society; and a complete change in governance from 1943 until after the War. Keep that image in your mind when you come back to 2012 in New York City today and realize the basic terms and conditions of everybody in this room have not really changed over your entire career. There have been booms and little crashes, you’ve made money and lost money, some people were wiped out and others became wealthy, but the elections come every four years, power is transferred peacefully, and taxes go up or go down.

It concerns me that we might be entering a period—we have to think about this possibility—when the basic terms and conditions of owning capital, making a rate of return, and keeping the money you earned might be in the process of changing. Charles Krauthammer said some time ago that most of American political life is between the 40-yard lines and that this crowd, which has been elected for another four years, is kind of at the 30-yard line. I had thought about it at the 10-yard or 5-yard line, but Charles is more mature than I and I’ll accept what he said. But I’m very concerned about class warfare generated from the top, about the possibility of an extended period of lacking strong economic growth. I think economic growth could be easily achieved in the United States at greater levels, and I’m quite concerned that the current prospects, beyond the so-called “fiscal cliff” and a deal on taxes and spending cuts, will be an extended period of low growth and possibly a recession, the continued bashing of money and success and very large tax increases.

I want to call to mind a micro choice that I think is relevant. If you lived in the upper Midwest, you’d know the difference between Indiana and Illinois. You would know Indiana welcomes jobs and businesses, and finds ways to work with businesses; and Illinois is on a slide to Hades. Illinois—and I suppose Michigan, too—is doing everything possible to support unsupportable expenses, structures and make thing miserable for taxpayers.

By the same token, I think America—and this goes beyond President Obama’s administration—has been quite arrogant for a long time by not realizing that in today’s world, where many countries around the globe can turn out products and services more cheaply than America, and where America has lost so many industries and jobs to other countries, that you have to be attractive as a country. Capital will go where it’s welcome. It is subject to an understandable rule of law, regulation, fair and attractive taxation, and the quality of life. I’m afraid of that, because when you look at the sweep of the booms since the Internet boom and monetary policy, and the extremism that has become embedded in current monetary policy, the United States, Europe, the U.K. and Japan, you do see extreme monetary policy.

They say this is not massive money printing, but first they are wrong; and second, monetary authorities in the United States did not see the crash coming and the unsoundness of the financial system. In fact, right up until the crash they were saying that nothing like what happened could ever happen. So money printing and zero-percent interest rates, which have distorted the economic recovery and the landscape in the United States and Europe, have become a substitute for sound, pro-growth, fiscal regulatory tax policy. As a result, they say they are not concerned about inflation. This monetary policy, $3 trillion of bond buying in the United States, $3 trillion in Europe and another $2.5 trillion to $3 trillion in Japan, is unprecedented. It is not the case that they know the ultimate inflationary potential when this low-velocity money gets back into the system and acquires some velocity. If and when people lose confidence in paper money because of repeated bouts of quantitative easing and zero-percent interest rates—it could happen suddenly and in a ferocious manner in the commodity markets, in gold, possibly in real estate—interest rates could go up at the long end by hundreds of basis points in a very short time.

I’m quite concerned as a money manager that we have to manage money, not just for the boundaries of what’s in front of our faces—maybe we’ll have a little tax increase or not, the fiscal cliff, or the stock market might go up or down 10% or 15%—but for a basic shift. The thing that scares me most is significant inflation, which could destroy our society. Frankly, in my view the recent election has diminished the probability of a strong resurgence of growth, and I’m quite concerned. Others are concerned about the course of the next 12 to 24 months in terms of growth, taxation, regulation and social unrest, a resurgence or larger version of bashing anyone who has made money or makes money and not paying their fair share.
Or, perhaps, the developments over the past several months were geared with precisely this outcome in mind: because there is nothing quite like "social unrest" to resolve decades of untenable economic and monetary imbalance build up...

Stocks Go Positive for Day

This is amazing. Investors are so pleased and so filled with faith in Bernanke, that they believe that stocks are worth more today, than they were on Friday, despite the worsening economic news. Here's the proof! Stocks just went positive for the day.
This sure looks like a bubble to me, when investors ignore all the fundamentals and worsening economic climate and keep buying, despite all of it. That's the very definition of a bubble.

Will the Fed Print Even MORE Money This Week?

Never fear, the Fed (money-pump) is here!
Ben "Bubbles" Bernanke and the Fed's FOMC will meet this week and Wall St is expecting Bernanke to announce a doubling of the Fed's program of monetizing US debt.
Currently, the Fed is monetizing about $40 billion/month in mortgage debt, and has continued its program of monetizing an additional $45 billion/month of US government debt by swapping short-term US debt for long-term US debt under its continuing program (sorry, the name escapes me as I type this).
But this week, due to the on-going weakness in the economy (yes, the same one Michelle Antoinette termed a "huge recovery"), Wall St is now expecting the Fed to begin a NEW program of monetizing even MORE US government debt. It is widely expected that the Fed will monetizing an additional $40-$45 billion/month, to be announced this Wednesday!
This is why, despite worsening economic indicators since this last summer, the stock market has continued near five-year highs, and Wall St has continued its Pollyanna Party, dismissing the endless parade of bad news as just "temporary" ("Hurricane Sandy did it, Mommy") or merely anecdotal singular events.
The Fed has so pumped up the stock market bubble that news, data, and analysis are no longer even relevant in this "bubble" mirage economy. In a November 2010 op ed in the Wall St Journal, Bernanke boasted of his ability to endlessly pump up stocks, even referring to asset bubbles (stocks, housing, and remember the now-forgotten "sub-prime" mortgage bubble?) glowingly as "the wealth effect". Bernanke literally considers all his bubble blowing as a GOOD THING!
When Bernanke, in one of his few interviews with the news media, told Scott Pelley that 1) he wasn't printing money, and that 2) he wasn't monetizing the debt, he was boldly lying to the American people, counting on the ignorance of the vast majority of them.
While technically, he was correct in saying that the Fed doesn't literally "print" money any more, he intentionally misleads people, because the Fed DOES create money out of thin air. They do it in a computer now, not with a printing press. But this same Bernanke gave his now-famous "helicopter" speech by boasting of the Fed's "this thing called a printing press" (HIS own words). He then denied to Pelley what he had previously boasted about?
And in #2 above (Bernanke's claim that the Fed is NOT monetizing the national debt), he blatantly and LIED bold--faced to the American People. The Fed has monetized more than 90% of the issuance of long-term US government debt in the past 4 years, adding nearly $3 trillion of government-issued debt to the Fed's balance sheet, and plans to increase its balance sheet of US debt to more than $5 trillion in the next two years. If that's not "monetizing the debt", Mr. Bernanke, what IS? Ah, that's right! We "sophisticates" call it "quantitative easing" now! We've become so much more svelte in our deceptions, now! As long as it sounds arcane, it just MUST be good, now!
Overnight, when markets tanked again in Europe, stock futures tanked along with them. Here is the result:
But not for long! It's Bubbles Bernanke to the rescue. Stocks were soon pumped higher again beginning at 6 am EST, while nearly all Americans were still asleep, and stocks are now back to flat for the day, just in time for the NYSE to open 30 moments from now. Here is the most recent stock futures chart a few minutes ago:
This endless money pumping ultimately does NOT yield jobs or prosperity. It brings inflation and Dollar devaluation, and it only empowers politicians to engage in still more destructive spending, taxing, and pandering to economic ignoramuses -- Obama's legions of leeching lemmings!

Sunday, December 9, 2012

Food Stamps - 1 Million New Recipients In 2 Months

Meanwhile, but not coincidentally, consumers are reducing spending:

Obliviousness to Risk Increases Risk

Transcribed from a speech given by Paul Singer of Elliott Management
Investing is an art, more so than a science. And for me, what I get paid for is managing the “dark art,” if you will, of risk management and trying to be a visionary and having a dark vision at all times about what can go wrong.
It’s a particularly fruitful and impactful time to be thinking about risk management and the thing I want talk about today is what I’ve described as “The Shape of the Next Crisis.” That doesn’t mean we’re going to be talking about the timing of it or exactly what to short or how to make money from it. But it’s to provoke thought about what the elements are, the current landscape, the various aspects that will shape the timing, as well as the amplitude, the predictability, the suddenness of the next crisis.
It’s not something that I can talk about in any kind of hierarchical fashion. There are a number of elements that are in play, some of which are novel, completely new in virtually the human landscape.
But they combine in what I think of, when I’m thinking of risk management and how to hedge my portfolio, what I think of as kind of “an evil stew.”
But here they are, and it should be obvious when you really think about it, but you have to bring these elements from other facets of life to see how they impact trading and investing.
On Modern Communications and Information Processing

It is increasingly the case (and I’ll give you a couple of recent examples) that people coalesce, form, and reform ideas in a much more powerfully focused, and abrupt, and stark way than they ever have in the past.

One of the most interesting examples of this is the so-called “Arab Spring” where the forces underlying these societies – totalitarianism, security services, violence, oppression, etc. – have existed in the countries that have been affected for decades. All of the sudden it started in January with a singular small event in Tunisia. And now it’s a few months later and there are 11 countries in various stages of more or less similar wide-spread revolts.

And how did this happen? You speak to experts in the Middle East, you speak to experts in that area or in those particular countries, and you don’t get a satisfactory answer. You get “totalitarianism.” The answer, I believe, relates to social media and the way people are connected - it’s the Internet, it’s Facebook, it’s Twitter – and the way people process information enabling people to develop the same thoughts simultaneously and to act and coalesce physically as well as emotionally.

The vector changes with something like this are virtually instantaneous. In 6 months, for 11 countries that have been more or less family run or totalitarian, to be in revolt is a very, very powerful illustration of this point. The Flash Crash about a year ago in stocks, where all of the sudden, the technology of the marketplace and the way the exchanges had their rules about processing orders in relationship with other exchanges, coalesced one afternoon, to have hundreds of stocks virtually evaporate all at once - within seconds or minutes or five minutes or half an hour.

This is a very powerful element and will serve as an accelerant in the next crisis so hold that one up on the blackboard, metaphorically speaking, while I talk about the next elements.
On The Financial System And Leverage
Let’s talk about financial institutions and the financial system. The major message that I want to give you (and I’ve invited challenge on both parts of my thesis here and I’ve never had anybody challenge it): The major financial institutions in the US and around the globe are utterly opaque; and The next financial crisis will happen faster, more suddenly.

We cannot (I have 110 investment professionals), and I surmise that you cannot, understand the financial condition of any bank, major financial institution. You can’t see the actual size of the balance sheet. You have no idea what that derivatives section means…it’s 10 to 100 times the size of the actual balance sheet.

So when people say, “Well, it used to be 40x leveraged,” (some of them were 90x leveraged) “but now they’re 15 to 20 times leveraged.” Well that’s just great. Except you go to the derivatives and see numbers in the trillions and trillions and trillions and there is no clue, you have no clue, no understanding, of what that is actually composed of. Is that composed of trades that are basically unwound where all you have is counterparty risk? Is that composed of actual hedges of upper tranches the way we would have in an admitted hedge fund?

So you are looking at balance sheets without any real understanding of how the balance sheets and the companies would perform in the event of a crisis. Which of these trades or trillions of dollars of trades, which in normal times oscillate like this [very small motion] and that’s why they’re so big, would in really bad times start going like this [large motion]. And if you actually have capital of only half a percent, or one percent or five percent of your actual footings, not just unwound trades that happen to still be on balance sheet, but actual footings, you’re in trouble.

The kind of thing that wound up the financial system three years ago is expected to be different in form than the kind of things that would unwind the financial system the next time. But I’m going to argue that the next time will be faster. If you think back to ’07 and ’08, it was episodic. It wasn’t just suddenly that in the second or third week in Sept that Lehman goes under and that’s the crisis and the whole world collapsed. No, there were several episodes leading up to that.

After that, what kept the entire financial system from coming to a grinding halt was quite simple. It wasn’t that all of the other firms were in much better shape than Lehman. It’s very simple, it’s that governments, here and in Europe, underwrote the entire system. Ben Bernanke, of whom I’m not a fan... at all, has been quoted as saying that in the absence of the government guarantee and underwriting, 12 of the 13 biggest banks in the world would have gone out of business following Lehman. Whether it’s 12/13, or 13/13, or 6 or 8 of 13, is completely imponderable, but the point is actually well-taken. In the absence of that guarantee there would have been a cascading collapse because of the opacity.

There are people in this room that are on trading desks or manage trading operations at investment banks. You know for a fact that you knew nothing about the financial condition of your five biggest counterparties. And so your relationships, and your willingness to trade, with those counterparties was dependent on rumor or credit spreads widening or not widening. And that’s a very terrible place for the financial system to be in.

So take the opacity, take the fact that you can’t really understand the financial condition, and take the fact that the leverage hasn’t really been rung out. And what you realize is that the lessons of ’08 will actually result in a much quicker process, a process that I would describe as a “black hole” if and when there is the next financial crisis.

The next financial crisis obviously can only happen if, believably, the governments either cut loose the major financial institutions - believably and credibly unwound the guarantee - or even more difficult and scary, if the government guarantee were not enough. And that’s one of the next elements in the shape of the next crisis. As you know, risk has migrated upward, it’s migrated from lenders and borrowers really to governments. It’s gone on the balance sheet of the US, the ECB (the various countries of Europe, particularly Germany, France, etc.). That the credit of Europe, the credit of America, is being called into question in the starkest way is part of what will shape the next crisis.

But before I get to that part, and explain how I think that impacts, I want to come back to the trader and trading part of this. The lesson of ’08, which is indelibly stamped upon every hedge fund forehead and trading desk head, is: Move your assets first, stop trading first, sell the paper first, and ask questions later. Those that moved from Lehman days or weeks before the end were happy. Those that sat there thinking that they were protected in prime brokerage accounts or protected in some other ways, or that firms like Lehman wouldn’t be allowed to go under were stuck in the company (of course Lehman is still in bankruptcy) with claims trading at 20-something cents on the dollar, depending on where you are in the capital structure.
On 'Orderly Liquidation' And How Dodd-Frank Has Made The System More Brittle
 So, I want to put one more element in place in the trading and financial institution part of the equation.

And that’s the law that was signed into law a few months ago, Dodd-Frank. I don’t know what it’s actually called, but it is the financial institution reform law and it is designed purportedly to make the system safer. “Safe” actually, not just “safer.”

In my opinion, what Dodd-Frank has actually done is to make the system more brittle and complete the picture, in my mind, of a black hole, meaning a very vicious, sharp and abrupt process if you put together all of the things that I’ve said so far.

So what is it about Dodd-Frank that contributes to this black hole, or contributes to this brittle, unsafe condition? It’s the “Orderly Liquidation Authority,” a very humorously named part of this law because what I think it actually represents is a very disorderly process. Under this authority, which was purportedly designed to provided a “not-Lehman” outcome (you know, no government bailout and a calm resolution of large financial institutions), under this process the FDIC has the authority, contrary to all US bankruptcy practice and law, to seize financial companies which are quote “in danger of default.”

Under previous bankruptcy law, companies had to default, actually default, or managements voluntarily put them in bankruptcy in order for them to be in bankruptcy.

“Danger of default,” if you think about that, plus with the other parts of this that I’ll describe, means that if a company is in trouble, and it’s large and opaque, then it’s in danger of default and can be seized any day. And if I say any moment it’s only a slight exaggeration, because by statute the process of throwing a company into the Orderly Liquidation Authority is about 48 hrs long, and is effectively unreviewable (even though there is an injunction attached to this process with the Treasury secretary and a couple of other people looking at it).

So companies can be seized that are in danger of default, and what is the FDIC ordered to do and what can it do? It is ordered to throw out management…quite bizarre. It is enabled to discriminate among classes of creditors similarly situated... strange. It’s enabled to move assets around and transfer assets to bridge companies. And it’s enabled to go against people in or out of the company who are quote “responsible for the financial condition.”

Let me define Systemically Important Financial Institutions first and then continue on. Under this legislation, the government is supposed to designate certain companies as “systemically important.”

I’ve been quoted as saying that I feel that’s nutty. It’s nutty because no financial institution should be too big to fail. All financial institutions should be governed by the same rules regarding leverage and risk. And companies can become systemically important, or un-become systemically important, extremely quickly in today’s world as a result of taking on leverage, changing their positions.

Let’s put that all together. If you are trading with a big company and that company or other companies have been identified as systemically important institutions, if you are observing a large company getting into trouble, what you know is that you have to pull your assets because those assets can be transferred (regardless of the financial condition of the subsidiary that your assets are a part of, whether it’s a prime brokerage subsidiary or otherwise). You don’t know how your claim will be treated, so you have to sell the bonds that you own; if the guy down the block, Bob’s Big Bank [is a similarly situated creditor and] has been designated as systemically important, that guy may be getting a priority recovery.

So the whole thing militates toward stepping away abruptly from any company that is designated as systemically important. So I think that the opacity, the lessons of ’08, the vicissitudes and thoughtlessness of Dodd-Frank, militate in favor of a very, very abrupt resolution.
On Japan And The Confidence-Destroying Implications Of Monetary Policy
There isn’t time to flesh out in detail the other accelerants of what the next financial crisis might look like, but let me just say a word or two on monetary policy. Monetary policy, which is now doing virtually all of the job creation work in the United States (in particular) and of course in Japan also, has created a very distorted recovery and some people think, including myself, that it’s been at least partially responsible for inflation in commodities and gold.

Quantitative easing which is this duration shortening mechanism, zero interest rates which is extraordinarily unusual and is now in the United States as well as Japan, as well as the long term entitlement insolvency in the United States, are platforms for a possible loss of confidence.
And In Conclusion
I think people who are managing money or investors who are trying to figure out what the next crisis may look like, should be processing these elements and thinking about how they can interact, together with the modalities of modern communications and the way people process information, to create something very sudden.

Nobody in America has actually seen, or most people probably can’t even contemplate, what an actual loss of confidence may look like. What I’m trying to struggle with as a money manager, who really seriously doesn’t like to lose money, is how to protect our capital and how to think about the next crisis.

If you think about some of these elements and how they might interact, you might come up with other paths of transmission or risk and pain. But I wouldn’t go about your business thinking it’s business as usual in a typical post-crisis, post bear market recovery.
Questions And Answers Section...
Q: [Thoughts on Europe]?
A: Yeah, that’s really important. My view about Europe starts with my view 15 yrs ago (and by the way, on Wall St if you’re early, you’re wrong). My view 15 yrs ago was that the Euro was an inappropriate backdoor experiment on quasi-sovereignty. And all it would take would be a stark variation in economic performance or geopolitical or military considerations or interests. And here we are and there’s been a stark divergence and the Euro is in the process of centrifugal force and breaking up.
Will it break up? It’s entirely unclear, and I’m not going to predict that it’s going to break up or whether Greece is going to actually leave it. What I will say is that it doesn’t make sense for the underperforming countries to actually be part of this. Everyone looked like they were getting benefits during the period of time when there was convergence. Exports for Germany, lower interest rates for Greece and Portugal and Spain and the rest.
Big risks were built up, big variations in performance, and now Germany in particular is writing out checks. As long as Germany keeps writing out checks, the euro can limp along, Greece can limp along.
But the answer to your question is the fixes to this, even if to kick the can down the road, are deflationary, they’re harmful to growth despite the fact that a breakup of the euro would fall upon Greece. Pulling out by Greece from the euro would trigger other consequences in several of these other countries, would create a banking crisis which would have to be dealt with.
So there is near term pain in doing, in my view, the right thing. But the medium- to longer-term pain of writing out checks to insolvent countries like Greece (insolvent, it’s not a liquidity crisis, insolvency), is ultimately something that’s going to be dampening growth in Europe, dampening global growth, possibly creating the transmission mechanism for the next banking crisis. So I think we’re watching it. And by the way, how do I think it’s going to actually happen that the situation is resolved? It’s going to be from the bottom up, the political process. It’s going to be on the streets, it’s going to be hundreds of thousands of Greeks, or hundreds of thousands of Germans demonstrating against the bailouts.
The elites want to keep writing the checks because their paradigms, their desire to have this experiment (because that’s what it is, it’s only 12 or 13 yrs old) continue. That’s what their dream was: one Europe - sovereign. And they were going to get to sovereignty through the back door. It isn’t working out at the moment; I don’t think it’s going to work out. And the fact that it’s not working out is quite painful and the way they’re doing it is stretching out the pain.
Q: [Insights on using CDS on sovereign debt to hedge your portfolio]?
A: Very good question. The question was about buying credit default swaps on countries or companies in order to hedge your positions, as a general risk management tool. I think that’s a really great question, it’s one that people like us really struggle with.
One of the things that 2008 (I had forgotten to say this before, so thanks for reminding me) showed us about risk management was that some of the tools that we thought that we had for risk management were actually tools that could be harmed or defeated by the actions of governments. And governments have shown an increasing inclination to push us around, us as a community. Meaning overnight bans on short selling, statements and the beginnings of action against credit default swaps, so-called “naked” credit default swaps.
Credit default swaps in the abstract, or actually in practice up till recently, are very effective at bringing liquid tools for taking judgments long and short about securities, and countries, companies that otherwise would be completely illiquid. Borrowing sovereign debt to sell short is not easy.
When countries and companies get into trouble, it’s very easy and very standard to be blaming speculators and credit default swaps as one of the reasons, or the main reason why a spread is blowing out and why the country or company is in trouble (because when a spread blows out, financing opportunities and possibilities diminish, etc.). Who can say what portion of CDS trading is so big that it actually creates prices rather than just discovers prices?
But one of the very difficult parts about running a portfolio that is aimed to be absolute return or very risk conscious and trying to avoid the consequences of the next crisis, is that it’s very difficult to predict using tools like that, which of these tools will be left unimpaired, or which will be suddenly impaired or destroyed by government action.
One of the things that bothers me about running a gold position is (since gold is, really to me, a thermometer about how people think about real money versus fake money or versus paper money possibly for the first time in people’s lives of anybody in this room), if gold actually is starting to be priced at a price that would represent real fear about paper currencies, what will governments do to derivatives or actual gold to keep themselves from being subject to what they feel is inflation caused by speculators?
So I think everyone who is using these complicated instruments needs to understand that governments have sent out a shot across the bow that they are not in the mood to allow for free markets, when the free markets challenge the “everything-is-fine-and-we-can-kick-the-can-down-the-road” way of governing.