I couldn't help but notice, however, how choppy trading was. The Klinger volume indicator turned negative. I also read that the "smart" money is selling right now.
Friday, January 7, 2011
...But Then Rallies Again
The NFP "Fudge Factor"
A picture is worth a thousand words -- I mean JOBS! Amazing graphic thanks to Tyler Durden.
from Zero Hedge:
This is the last chart we will dedicate to today's B(L)S non-far payroll data. It shows nothing less than than just how much of a factor the "seasonal adjustment" has become in every December data series, and is the definitive evidence of why only the most gullible but any credibility in the BLS seasonal adjustment mechanics. Unfortunately far from indicating a one time seasonal adjustment, it is no yet another secular trend policy tool, whose goal is to offset the actual drop in jobs. Indicatively while the number is now well over 2x greater than it was in 2000, the US population has hardly tripled over the past decade, requiring such a dramatic increase in fudge factors.
h/t John Poehling
Thursday, January 6, 2011
Market Manipulation Is Top Priority, Not Jobs
It is therefore too bad the top national priority is and continues to be manipulating stock markets, and creating a wealth effect for some and a poverty effect for most.-- Tyler Durden, Zero Hedge
Retail Sales Disappoint, Stocks Dip Modestly
from FT:
Leading US chain retailers reported sales for December that came in below Wall Street’s expectations for the important Christmas shopping period, although sales for the two holiday months saw the strongest growth since 2006.
Retail Metrics, which tracks the monthly data, said its index of same-store sales data rose 3.2 per cent against a year ago, undershooting the 3.5 per cent consensus Wall Street forecast. Sales rose by 3 per cent for the same period a year ago.
But its index for the two holiday shopping months of November and December was up 4.1 per cent against a year ago, the most robust growth in four years.
Several retailers reported that sales in December had weakened after the strong performance seen in November, as consumers pulled back on spending.
(Reuters) - The Dow and S&P 500 dipped on Thursday as disappointing sales from top retailers dented hopes about the holiday shopping season and energy shares fell with oil prices.
Telecommunications shares, including AT&T (T.N) and Verizon (VZ.N), were among top drags on the Dow.
Several big U.S. retailers missed estimates for December sales after a post-Christmas blizzard that slowed a two-month shopping spree, driving down consumer shares. Target Corp (TGT.N) fell 6.1 percent to $55.33.
The disappointing retail sales contrasted with Wednesday's economic data showing a much stronger-than-expected gain in private-sector jobs for December, which buoyed optimism about Friday's unemployment report from the Labor Department.
The retail weakness "was both surprising and disturbing, but the fact that it was so broadly based makes me think it had more to do with weather than fundamentals," said Walter Todd, who helps manage about $900 million as chief investment officer at Greenwood Capital Associates in Greenwood, South Carolina.
Analysts noted recent market gains have put the S&P 500 in overbought territory, suggesting a temporary pullback could be in store in the near term. The S&P 500 is up about 8 percent since the start of December.
"It leaves the market vulnerable to profit-taking if there's a negative reaction to the jobs data," said Chris Burba, short-term market technician at Standard & Poor's in New York.
The Dow Jones industrial average .DJI was down 36.06 points, or 0.31 percent, at 11,686.83. The Standard & Poor's 500 Index .GSPC was down 0.3 percent at 1272.59. The Nasdaq Composite Index .IXIC was up 3.75 points, or 0.14 percent, at 2,705.95.
Fed Must End Bond-Buying Program
from economics21.org:
In the just-released minutes from the Federal Open Market Committee’s December 14 meeting, the Fed defended its massive bond purchase program (QE2), explaining away the sharp rise in Treasury bond yields and the clear evidence that a rebound from the mid-2010 soft patch was already well underway when the Fed began buying bonds in November. Fed Chairman Bernanke is expected to make some of the same QE2 arguments when he testifies to the Senate Budget Committee on Friday, his first congressional testimony since announcing QE2.
The Fed’s rationale for buying a stunning $75 billion per month of Treasury notes and bonds (almost the entire issuance) has been its fear that the economy was slowing and its hope that Fed bond purchases would lower Treasury and corporate bond yields in a stimulative manner. Neither part of this logic is working. Bond yields have risen sharply, while recent economic data – from rising auto sales to falling jobless claims to ADP’s report yesterday that its customers added record jobs in December – is contradicting the Fed’s thesis of an economic slowdown. The Fed’s December 14 minutes still fretted about deflation even as this week’s two ISM surveys confirmed the surge in prices that is being recorded in global commodity markets.
Under the Fed’s have-it-both-ways logic – buy more bonds if growth is slow (in order to speed it up) and buy more bonds if growth is fast (on the view that bond buying is working) – the Fed’s massive new program will quickly take on a life of its own. Just as Fannie Mae and Freddie Mac became instruments of Congress’s social policy, Fed bond purchases will become one of the Executive branch’s favorite growth policies – “costless” stimulus through a huge expansion of the Fed’s turf, with minimal Congressional oversight.
A growing worry, this Fed program, like almost all other Washington power grabs, may never die. The Fed has now established the precedent that it has the power and, under its reading of its full employment mandate, the responsibility to buy long-term assets to boost the economy. The Federal Reserve System (including the regional banks) already has 22,000 employees. Its assets will soon top $3 trillion if it continues with QE2. That’s way too big for safety. Despite having little in the way of equity capital, the Fed is leveraging itself up using overnight deposits from commercial banks to buy very long-term Treasury, MBS and agency bonds. This is creating what must be history’s biggest, most leveraged maturity mismatch.
Even if the Fed stops buying bonds at its January 26 meeting, as it should, it may take years or even decades for the Fed’s existing multi-trillion dollar bond portfolio to mature and burn off. The Fed’s large bond holdings distort prices, expose the Fed (and the taxpayer) to interest rate risk, and create a conflict of interest for the Fed in setting interest rates (since rate hikes will hammer the Fed’s bond portfolio.)
The Fed is already worrying that a decision by the Fed to not buy bonds risks higher bond yields, a recipe for the Fed to buy all kinds of bonds. The Fed’s minutes from December 14 said: “In the weeks following the November meeting, yields on nominal Treasury securities increased significantly, as investors reportedly revised down their estimates of the ultimate size of the FOMC's new asset-purchase program.” Thus, the Fed staff seemed to be blaming the rise in Treasury yields on the absence of QE3 (rather than the good news that economic growth expectations were rising in contradiction to the Fed’s growth forecast.) Following this logic, the Fed will be inundated with political requests that it buy other assets like muni bonds or infrastructure bonds in order to keep their yields from rising. Every rising bond yield can be blamed on inadequate Fed purchases.
The Fed already has a huge self-interested constituency, Wall Street, primed to support broader Fed bond purchases. The Fed’s August preannouncement of Treasury bond purchases gave the bond market a juicy buy-the-rumor, sell-the-news opportunity to buy ahead of the Fed and then use the Fed’s purchases as an exit strategy, taking a huge market profit off the Fed. This strategy also worked on the Fed’s December 2008 MBS purchase announcement, giving Wall Street a huge profit buying MBS in advance of the Fed. The cost to the economy and savers of these concentrated profits is spread across the entire system, and will grow as the Fed expands. There’ll be another round of concentrated profits whenever the Fed buys a new asset class or ultimately tries to divest itself.
The best outcome from this policy nightmare would be for Chairman Bernanke himself to wind down the program in the next few weeks and then try to set the economic history books straight – putting aside whether Fed asset purchases were justified in 2008 when the global financial system was at risk, they are not now an appropriate Fed policy tool. The Chairman has an opportunity to start signaling this on Friday, when he testifies. The only other scenarios that might stop the Fed’s bond purchases are three or more voting dissenters at an FOMC meeting, an unlikely boardroom coup that would undercut the Fed’s credibility; or such rampant inflation that even the Fed won’t be able to ignore it. Since inflation is a deeply lagging data series – the Fed was able to claim throughout the 2003-2007 monetary bubble fiasco that inflation was “moderating” even as the core PCE deflator, upon revision, was rising and always exceeded the Fed’s 2% ceiling -- it’s unlikely that inflation will ride to the rescue in time, nor does anyone other than commodity buyers really want that outcome.
The Fed has a ready-made out-clause. Its December 14 statement promised: “The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.” The latest strong economic data gives the FOMC, and Congress, an opportunity to critically review the whole flawed idea of the U.S. Federal Reserve, one of the world’s bedrock financial institutions, leveraging itself to over $3 trillion in assets in a vain attempt to hold bond yields down.
David Malpass is President of Encima Global and Chairman of GrowPac.com’s Stop the Fed campaign.
Wednesday, January 5, 2011
Food Producers Preparing to Pass on Price Increases
from WSJ blogs:
Roaring commodity prices fueled inflationary pressures in the developing world last year, even as many developed nations fretted about deflation. But as 2011 starts off with stronger economic data in the U.S. and other advanced nations, signs point to a cautious return of pricing power there as well.
Commodities logged some of 2010’s strongest gains as strong demand for crops and materials in developing countries — coupled with a flood of monetary liquidity into the global economy from the Federal Reserve and other developed country central banks — prompted investors to buy everything from soy beans to copper futures. This anticipatory buying helped palladium, which is used in car parts, to gain 96.5% while cotton broke its Civil War record with a 91.5% price increase.
These higher prices manifested in rampant inflation in many parts of the developing world, where robust economic growth is helping a new class of consumers discover the material comforts that developed country consumers are accustomed to. New coffee drinkers in Brazil and China, for instance, helped augment existing demand to lift bean prices 77% last year.
“A buzz word has been the new middle-income class, not from the U.S. or Europe but from China, India and Brazil,” said Yu-Dee Chang, chief principal at ACE Investment Strategists, with around $200 million under management. “They’ve never had a TV or a car so as they’re spending their new wealth they trigger inflation.”
Global food prices rose to a record in December, with the Food and Agriculture Organization of the United Nations’s food price index reporting its sixth straight monthly increase to 214.7. The index tracks monthly changes in international prices of a basket of commodities including meat, dairy, cereals, oils and sugar.
Some developing countries, where one third to one half of the average income is spent on food, are already feeling the political pressure of rising food inflation. In China, the government reined in credit availability and hiked interest rates after double-digit leaps in food prices awakened concerns about economic stability.
Yet fears of runaway price gains caused by the Fed’s loose monetary policy, which pushed inflation hedges like gold to a closing record of $1,421.40 per troy ounce in December, failed to materialize. Three years of economic downturn in the developed world left spending so weak that businesses had to cut prices to attract customers, making deflation a far bigger concern for policymakers than inflation.
Now, that trend could be ending. U.S. retailers, for instance, were able to avoid deep discounting this past holiday season. And in coming months, stronger U.S. growth may finally let companies pass higher costs to consumers and start the upswing in the inflation cycle.
A gangbusters U.S. report on private sector jobs growth Wednesday was the latest indicator of brighter economic times ahead. Meanwhile, Germany’s economy is growing strongly and even the sickly U.K. is seeing a recovery in manufacturing.
A growth acceleration is very likely in 2011, says Lakshman Achuthan, managing director of the Economic Cycle Research Institute, which publishes the closely watched Weekly Leading Indicators. The WLI has been signaling a revival in economic growth.
Achuthan says the WLI has been showing faster growth from private-sector sources well before the Fed’s $600 billion fiscal stimulus or Washington passed the 2011 tax-cut package. As a result, U.S. demand should get a triple boost this year, and growth should be robust enough to let price increases stick.
The ECRI’s leading inflation gauge indicates that inflation is edging up — although not to worrisome levels. Similarly, a rise in yields on longer-dated Treasurys over the past month is thought to reflect a pickup in investors’ inflation expectations.
U.S. companies will welcome the opportunity to charge more because they have so far been absorbing higher input costs. The latest prices-paid indexes from the Institute for Supply Management increased in December.
Indeed, businesses are already expecting to mark up their price lists this year. VF Corp., which makes Lee and Wrangler jeans, and Hanesbrands Inc. have said they will raise apparel prices in 2011 to offset higher cotton prices. A survey released last week by the Kansas City Fed showed that a rising number of regional manufacturers anticipate passing along higher costs to their customers.
Record World Food Prices
LONDON (MarketWatch) — Global food prices reached a record in December, above a previous high set in 2008, according to the monthly Food Price Index published Wednesday by the United Nations Food and Agriculture Organization.
The FAO’s food price index, which monitors the monthly change in international prices of a basket of commodities including meat, dairy, cereals, oils and sugar, rose for the sixth month in a row to 214.7, a record for data going as far back as 1990. 
A combine harvester working in a wheat field.
That surge in food prices was aggravated by a rise in other commodities such as oil but the price spike was short-lived, with prices pulling back by the following season as the world economy tumbled and farmers increased grain plantings on a vast scale.
The FAO’s sugar index rose 6.7% on the month and also hit a record high in December of 398.4, according to the data going back to 1990. The index last hit a record high in January 2010.
Sugar prices have climbed to around 30-year highs due to strong demand fand low inventories around the world.
The FAO’s oils price index also jumped, rising 8.1% to 263 in December from 243.3 in November, while the cereals price index climbed 6.4% to 237.6 from 223.3.
Month-on-month increases in the FAO’s price indexes for meat and dairy were more muted — 0.5% and 0.3%, respectively. Still, the meat price index hit a record high of 142.2 in December 2010.
It's a Commodities Tug-of-War
Crude Oil tug-of-war
Food Inflation Is Here, and Going to Get Worse
For the first time since 2008, inflation is hitting consumers in the stomach.
Grocery prices grew by more than 1 1/2 times the overall rate of inflation this year, outpaced only by costs of transportation and medical care, according to numbers released Wednesday by the U.S. Bureau of Labor Statistics.
Economists predict that this is only the beginning. Fueled by the higher costs of wheat, sugar, corn, soybeans and energy, shoppers could see as much as a 4 percent increase at the supermarket checkout next year.
"I noticed just this month that my grocery bill for the same old stuff - cereal, eggs, milk, orange juice, peanut butter, bread - spiked $25," said Sue Perry, deputy editor of ShopSmart magazine, a nonprofit publication from Consumer Reports. "It was a bit of sticker shock."
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While overall inflation nationwide was 1.1 percent, grocery prices went up 1.7 percent nationally and 1.3 percent in the Bay Area, said Todd Johnson, an economist for the Bureau of Labor Statistics office in San Francisco. "The largest effects on grocery prices here over the last month were tomatoes, followed by eggs, fish and seafood."
Produce steady
Across the country, the price of produce has remained fairly steady. But the U.S. Department of Agriculture predicts that next year the price of fruits and vegetables, like many other food commodities, could go up. The government agency is forecasting a 2 to 3 percent food inflation rate in 2011 - a pace that is not unusual in a rebounding economy."We usually err on the conservative side," said Ephraim Leibtag, a senior economist with the USDA, adding that "2011 holds a bit of uncertainty, so I wouldn't be surprised if it goes higher. If it goes to 6 percent, then we should be worried."
Michael Swanson, an agricultural economist at Wells Fargo, said that as long as corn, soybean and energy prices continue to climb, food inflation could reach 4 percent in 2011.
"The USDA always plays it safe," he said, adding that the nation is likely to see the biggest increases since 2008, when the food inflation rate was a record 5.5 percent.
The global demand for corn - used for food and ethanol - has swelled so much that feed costs for farmers and ranchers are being passed on to the consumer, Swanson said.
Gas, diesel play a role
Gas and diesel prices also are playing a role. Wheat costs went through the roof this year when 20 percent of Russia's crop was destroyed by drought and wildfires, causing the country, the third-largest producer in the world, to ban exports of the grain. The price of sugar, also used for ethanol in parts of the world, is priced at a two-decade high.Kraft Foods Inc., one of the world's largest food producers, has already announced plans to increase its prices because of mounting ingredient costs and flagging sales. General Mills, maker of everything from flour and baking mixes to cereal and Yoplait yogurt, has said it, too, will raise some of its product prices in January. Experts said consumers can expect the same from Kellogg's and Nestle.
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"Food is a high-frequency driver," he said. "So if stores like Walmart and Kmart want to get shoppers in the door, it's to their benefit to keep prices low."
Smart Money Bets on Stock Market Sell-Off
from Barrons:
A wall of worry is building in the options market as the stock market surges higher at the onset of a new trading year.
Sophisticated investors are actively buying call options on the Chicago Board Options Exchange's Volatility Index (VIX) that would likely increase in value if the Standard & Poor's 500 index falls sharply by the middle of February.
These VIX call options will pay off if the VIX spikes to 27.50 in February from its current level of about 18. Such dire expectations are sharply at odds with bullish reports from major banks and news organizations detailing why the stock market will rise sharply in 2011.
The bearish posturing in VIX is ample evidence that some investors have not forgotten that the stock market never advances in a straight line, and never misses an opportunity to hurt the most people, most of the time.
"We're moving toward a euphoric peak where the market in aggregate will start acting like a bunch of rare-earth stocks," says Jim Strugger, MKM Partners' derivatives strategist.
Rare-earth stocks, like Molycorp (ticker: MCP), are viewed as little more than momentum trades propelled by a compelling thesis that prices will increase because China controls most of the world's rare-earth minerals and will increasingly limit exports. (Rare-earth minerals are increasingly in demand for their use in a wide range of electronic products including smartphones.)
Everyone intuitively understands the rare-earth logic just as everyone gets the idea that it makes sense to buy U.S. stocks because the Federal Reserve's latest phase of quantitative easing has demolished the prospect of returns in the bond market.
It is easy to sound Pollyannish about the stock market's recent strength, but the concerns evidenced in the options market are more than just naysaying.
January is traditionally a strong month for the stock market as investors, big and small, reposition portfolios for a new year. Inevitably, though, the stock market loses its upward momentum, and declines.
The retreat could be caused by a number of potential market hobgoblins including tension between North Korea and South Korea, European sovereign debt crisis or even serious financial troubles that could roil the municipal debt markets in the U.S.
The expected decline will likely not be the typical garden-variety correction. The drop will be sharp and quick, and more of a tradable event than a major maelstrom.
If expectations were for a more profound decline, the options market would be filling with large swaths of bearish trading, and it is not.
Strugger thinks that the VIX will tumble to 15 by the end of January but will then spike to 30 in February.
His view is reflected by VIX's trading patterns. Investors are buying VIX January 27.50 calls and February 27.50 calls. They are active in other VIX calls, including the February 30 and 35 strike price, but the action is less an indication of a future volatility spike, and driven more by a desire to lower the cost of buying 27.50 calls that cost just under $1.00.
Economic Consequences of Soros' New World Order
By Giordano Bruno
Neithercorp Press – 1/05/2010
A common misconception among less aware segments of the American populace is that the phrase “New World Order” was concocted by attention seeking “conspiracy theorists” in dank basement apartments and sinister mountain shacks across the country. In reality, anti-globalists and Constitutionalists had nothing to do with the term’s creation (and most of us have decent digs, too). The truth is that mumblings of a “New World Order” have been floating around various elitist circles for decades, and every once in a while, those mumblings are publicized in the mainstream media. Globalists created the warped ideal; we just point out that it exists. Lately, we haven’t had to try very hard…
As most readers here are probably already privy to, elitist spokesman George Soros (who for some reason reminds me of the bloated floating Baron Harkonnen from the movie ‘Dune’) recently let spill all kinds of NWO gossip in a candid interview with the Financial Times. If you have not seen it yet, or you believe only kooks talk about the New World Order, I suggest you watch the below interview twice for good measure:
http://www.youtube.com/watch?v=Ki4cqqMZ7JE&feature=player_embedded
What is most interesting about this interview is Soros’ focus on the fate of the dollar in the NWO. He openly confirms nearly everything I and many others have been warning about for the past three to four years in the span of only ten minutes! Why would Soros make such admissions? Well, I suspect that some elites believe that they should not have to hide their pet project for a “new order” from us lowly serfs, while others perhaps have been given the green light to start selling the masses on the supposed benefits of greater centralization. Soros literally tries to paint the collapse of America as “necessary”, and the devolution of the dollar as “healthy”, though I doubt that many people will be swayed by his charms. It’s hard to trust a guy that leaves a slime trail…
While Soros may not be the best used car salesman on the lemon lot, there are plenty of establishment media lackeys and fraudulent pundits that do have a knack for refining globalist talking points and making them more palatable to the public. What alternative economic analysts are now discovering is that there are actually two economies; the one that the MSM and the government presents, and the one we all actually live in. The year of 2010 was highly representative of this strange developing duality. So many malfunctions in terms of employment, debt, inflation, and bonds (especially municipals), and yet, so much “good news” pouring out of the networks. This is rather similar to the media frenzy just before the final market plunge of the Great Depression; government reports and mainstream news were overwhelmingly positive, right before the entire system took its last flaming nose dive into the gutter and stayed there for a decade.
If we are to take anything from the recent Soros interview, it would be that the globalists are closing in on their target for the implementation of their new world order, or “new economic order”, or whatever interchangeable label they happen to be using at the moment. But what does this mean for the rest of us? When George Bush Sr., Bill Clinton, Barack Obama, Henry Kissinger, Nicolas Sarkozy, Vladimir Putin, Gordon Brown, and so many others mention their desire for a “New World Order”, what exactly are they referring to? In terms of the economy, how will this elitist philosophy change our lives, and our nation? To know our destination, we must first examine the path we are currently on. What have been the results of globalism and centralization so far? What is the most likely next step? Let’s review where the elites have led us up until now, and where they have expressly proclaimed they would like to take us in the future…
Harmonization: The Economic Sucker Punch
“Harmonization” is a very pleasant sounding term for a very insidious financial practice, and it is also something we will be hearing a lot about if the NWO design is allowed to continue. In order to understand what economic harmonization entails, one should research the mechanics and purpose behind monopolies. Monopolies are formed first and foremost to remove a very particular free-market factor; competition. Competition allows for the organic growth of markets by relying on the general populace to decide which business and financial models work best. Those models that do not pass the social test are ignored and allowed to die away, while those that pass are supported by the public and allowed to carry on. This natural order of commerce is supplanted when the largest suppliers (businesses or countries) form unions, fix prices, and squeeze out smaller entrepreneurs before they find an opportunity to present a superior idea or business model. By removing competition, monopolies take away the citizen’s ability to choose, or to even participate in the economy in any capacity beyond the role of mindless consumer.
Global harmonization works in a similar way, except in this case the monopoly is not over a specific product or resource, but the resources of entire continents. Competition among nations is squashed. As in the European Union, more successful countries are forced through unilateral trade agreements to transfer their wealth to faltering nations. Not only this, but the economic policies which once made them more competitive are scrapped and replaced with policies that deliberately stunt national growth. Decisions on what kind of commerce works best are no longer made by the citizenry, and are instead centralized into the hands of a select few. Any state that resists or strives for sovereignty is branded irresponsible, or even dangerous; a threat to the so called “balance”.
While globalists like Soros maintain that there are long term benefits to harmonization, including a better standard of living for everyone, in effect, harmonization only seems to make all countries equally poor.
IMF and World Bank lackeys love to bring up the plight of Africa when peddling harmonization and certainly African countries would benefit temporarily by siphoning capital from richer nations, but ultimately, it is the IMF, World Bank, and the UN that ravaged Africa in the first place with their loan sharking, resource theft, and attempts to interfere with African industrialization in the name of unsupported global warming arguments. (Hey, as soon as NASA or the Climate Research Unit in East Anglia makes the source data for their experiments available to the public instead of copping out and claiming national security privileges, I’m perfectly willing to give them a fair shake.) In the FT interview, Soros boasts about IMF allocations of SDR’s to needy African countries, as if they do it out of the kindness of their hearts. Anyone who has studied the history of the IMF knows that they do not do charity.
In the end, dirt poor nations might progress, but never enough to actually prosper, and all at the cost of finding themselves beholden to the IMF. This is the essence of the New World Order. This is the dark side that elitists never openly delve into; total centralization, total poverty, total control, no other options…
Middle-Class Beheaded
In a centralized global economy, financially secure classes of common people become a problem. The less the masses have to worry about everyday survival, the more time they have to question the system’s validity, or its leadership. Therefore, the globalist hierarchy benefits by removing such subsections of the population like the middle-class altogether. This process has already commenced in the midst of the engineered credit crisis, as well as the continued devaluation of the dollar that Soros speaks of so fondly.
Private wages fell to historic lows at the beginning of 2010:
http://www.usatoday.com/printedition/news/20100525/1aincome25_st.art.htm
Prices on essential goods and energy are now inflating, despite falling demand:
http://articles.sfgate.com/2010-12-16/news/25193927_1_wheat-costs-ephraim-leibtag-food-inflation
The U.S. housing market lost $1.05 trillion in value in 2009, $1.75 trillion 2010, and is expected to lose $9 trillion before it bottoms:
http://www.reuters.com/article/idUSTRE6B84X720101209
Real unemployment remains at a relentless 20%, while welfare benefits have been extended up to 99 weeks. Such a large portion of Americans have remained jobless for so long, that the Bureau of Labor Statistics has now increased the upper limit of how long someone can be listed as jobless from two years, to five years:
http://www.usatoday.com/news/nation/2010-12-28-1Ajobless28_ST_N.htm
As forced globalization continues, “lucky” countries will see a complete disintegration of private home ownership, two working parents in every family, wage reductions to counter low demand, and price spikes in food and energy. In places like China with a long history of wage slavery, this is actually a step up! So it all evens out according to George Soros. Unfortunately, the U.S. is more likely to see hyperinflation, rather than a mere reduction in our standard of living. Currency destruction would decimate the middle-class in America. Soros hints at this probable future, but then glosses over it as a “painful but needed” change.
One question that no interviewer seems to put to these parasites is, who really “needs” the New World Order? Who benefits from its proliferation? Certainly not the middle-class, and certainly not the poor. So, who’s left to reap the spoils? Ask Soros. He knows…
Dollar On The Highway To Hell
Not to harp about the past, but in 2007/2008, stating that China was going to drop the dollar and dump Treasuries while converting to a consumer based economy causing the greenback to lose its world reserve status while the IMF introduced SDR’s as the new global currency did not exactly win me any respect in financial circles. I still get arguments from devout deflationists and random green-shoots proponents on occasion. Now, here’s George Soros TELLING YOU, for the most part, what is going to happen to the dollar, and sounding a lot like Neithercorp. It’s enough to give me the heebie jeebies.
Soros mentions the pending bilateral trade agreements being used by China to rout the dollar in Brazil and Argentina, but for some reason fails to point out Russia’s agreement to abandon the Greenback. He also fails to mention China’s numerous interest rate hikes or increased bank allocations which have utterly failed to stem inflation, leaving the government with only one other option; dump U.S Treasuries, allowing the Yuan to quickly appreciate giving Chinese consumers greater buying power to compete with rising prices. All that’s left is for our Treasury Dept. to finally release that delayed report accusing China of currency manipulation. Retaliation ensues, and down goes the dollar.
It’s not a question of IF this will happen, but WHEN? How long can the dollar truly hold out while interest rates remain at near zero, the private Federal Reserve continues its QE2 madness, and our national debt continues to grow beyond all imagining? Something has to give, and that something will be the rest of the world’s patience with the dollar.
Stall tactics are beginning to lose their effect. Rumors yesterday of a possible Fed rate hike did cause quite a stir, and even hit commodities, but frankly, I’ll believe that when I see it. A meaningful rate hike would make the Fed’s quantitative easing programs pretty difficult to pursue and knock the wind out of the Dow, considering the only thing propping up the whole farce is the constant flow of cheap fiat. When the central bankers turn to interest rate gossip to keep investors smitten with the dollar, it might be time to question whether or not foreign banks may be preparing for a policy change concerning U.S. Treasuries soon. This is, of course, all by design.
The bottom line is that the dollar has no place in the NWO. Soros admits it. Most other globalists have openly demanded it. I think in this case, they aren’t just feeding us propaganda.
Global Currency, Global Government, No More Fairytales
With all the talk in the MSM of global currency lately, I still have yet to see a viable argument for its usefulness. Just as with globalism, no real debate is pursued on global currency, only the presumption that such a step is “inevitable”. Sorry, but globalism is not inevitable, and neither is the rise of Special Drawing Rights (SDR’s). These are economic tools and methods which are enacted by a relatively small group of men. They are not universal laws of physics handed down by the gods.
A global currency changes nothing in terms of the problems already associated with our current collapse. It definitely doesn’t make anything better. While the IMF does claim to have ample gold reserves to back the SDR, almost every new paper currency starts out backed by PM’s or some other resource. The problem is that every currency under the control of central bankers and not the people ends up losing all tangible backing and becomes yet another fiat prison. The only purpose behind a global currency would be to streamline the centralization process; to perpetuate the psychology of globalism in the masses, making the construction of global government easier to introduce.
Would global government be as wondrous and as Utopian as it is always presented? Will we finally get our Star Trek uniforms and flying cars? Not a chance. Global governance will not be Utopia; not under men like Soros, and certainly not under the IMF. The promise of paradise has always been used to make people do stupid and horrible things, from the Assasseens of Iran spoken of by Marco Polo, to the Russian communist disaster of Lenin and Stalin, and beyond. Blind collectivism and feudalism has never led to peace, prosperity, wisdom, or spaceships propelled by dilithium crystals. What it HAS led to, consistently, is death, destruction, mayhem, and sometimes the loss of entire chapters of human knowledge. It leads not to enlightenment, but to the dark ages.
Once a system like this is instituted, its hold over younger generations is vicious. We have all grown up in the midst of the globalist experiment, and while many of us have broken free mentally, we still have never experienced life without the constant poison of elitist politics and prattle. Imagine a colonialist from the American Revolution visiting our time and witnessing all the freedoms, cultural and economic, that were stolen away from us before we were ever born. They would shriek in absolute horror and run for their musket!
There is a certain innocence and a certain joy inherent in true freedom, not just freedom of the mind as we have so far settled for today, but freedom of daily life. To live without someone always out to dominate you or your family; that is something I would like one day to witness, or at the very least make possible for tomorrow’s Americans. If the NWO is not confronted and dismantled, who knows how long it will be before another common man thrives free.
Breaking The Circle, Starting Anew
Stopping the advancement of the New World Order, at least in terms of economics, does not require a “magic bullet” scheme, a busload of lawyers, or even an audit of the Federal Reserve (though one would be nice). What it does require, is an alternative. Do most Americans participate in the corrupt establishment system because they like it? No. They participate because they feel there are no other viable options, and since very few government officials seem to be coming forward with said options, there is nothing to do but build a better system for ourselves.
This means average people starting their own alternative economies in their own communities based on trade, barter, and sound money (precious metals), in conjunction with fiat until the bottom finally falls out of the dollar. It means cutting down the weekly trips to Walmart and buying as many goods as you can from local Liberty Movement based providers. It means setting up statewide networks of micro-industries, farm and garden co-ops, and gold and silver distributors, and turning away from the NWO completely. It means a return to true free markets owned and operated by the people, without any interference from corporations or government.
If they want a centralized economy, then we decentralize the economy. If they want to break up legitimate community, then we support legitimate community. If they want to break down 10th Amendment rights, then we support the Constitutional imperative of the states to determine their own internal matters. If they want us to rely solely on the dollar, then we convert our dollars to gold and silver, and trade with each other. Neithercorp is now working on a project with Oathkeepers which we believe will make these alternatives a reality.
If anything is going to turn for the better, ever, that change is going to start with regular people. There is no other way around it. When the colonies of the American Revolution rebelled against the British Empire, they did so first by dumping the corrupt British economic system, and setting up their own free markets. They did not just declare independence; they took concrete actions which removed their dependency on their enemy. They forced the British to choose; accept that the colonies had their own system and move on, or attack the colonies, try to force them to conform, and expose British tyranny for all the world to see. The British chose the latter, bit off more than they could chew, and the rest is history. The point is that the colonists created a win-win scenario. We must do the same.
Some might claim that times have changed and circumstances are different, but this is irrelevant. The concept still applies, and is actually in use by the Liberty Movement already. The alternative media is a perfect example of how offering a better option to the public can destroy a controlled mainstream system, like that of the MSM. Their numbers are plummeting, while ours are skyrocketing. They are becoming obsolete, while we become more necessary. And all we had to do was offer the truth, and free participation. Imagine that…
As Soros points out in the FT interview, now is the time to act. We know what the globalists plan to do to our currency and our economy, so why wait around for the leaky ship to sink when we could be using that time to build a better boat? Now, it is our turn to act. We must set the pace. We must take matters into our own hands, before someone else makes the important decisions for us. We must determine our own destinies. There is precious little left to lose, and everything to gain.
You can contact Giordano Bruno at: giordano@neithercorp.us
If you would like to contribute to Neithercorp’s new solutions based project with Oathkeepers, visit our donations page here: http://neithercorp.us/npress/donate/
Tuesday, January 4, 2011
Yield Curve Debate
fantastic from Zero Hedge:
Rich Bernstein who while at BofA used to be one of the few (mostly) objective voices, today got into a heated discussion with Rick Santelli over yield curves and what they portend. In a nutshell, Bernstein's argument was that a steep yield curve is good for the economy, and the only thing that investors have to watch out for is an inversion. Yet what Bernstein knows all too well, is that in a time of -7% Taylor implied rates, QE 1, Lite, 2, 3, 4, 5, LSAPs, no rate hikes for the next 3 years, and all other possible gizmos thrown out to keep the front end at zero (as they can not be negative for now), to claim that the yield curve in a time of central planning, is indicative of anything is beyond childish. A flat curve, let alone an inverted curve is impossible as this point: all the Fed has to do is announce it will be explaining its Bill purchases and watch the sub 1 Year yields plunge to zero. Yet the long-end of the curve in a time of Fed intervention is entirely a function of the view on how well the Fed can handle its central planning role: after all, the last thing the Fed wants is a 30 year mortgage that is 5%+ as that destroys net worth far faster than the S&P hitting the magic Laszlo number of 2,830 or whatever it was that Birinyi pulled out of his ruler. As such, Santelli's warning that a steep curve during POMO times is just as much as indication of stagflation as growth, is spot on.
Furthermore, to Bernstein's childish argument of "where is the stagflation" maybe he should take a look at commodity prices, unemployment levels and double dipping home prices, and the answer will suddenly become self evident. But either way, the point is that during central planning the shape of the curve does not matter at all, and certainly not to banks. The traditional argument that banks make more money on the long end breaks down when nobody is borrowing on the long-end, and with mortgage apps, both new and refi, plunging to fresh lows, that is precisely what is happening. But who cares about facts: all one has to do is roll one's eyes and smile flirtatiously at Becky Quick (making sure of course that Warren is nowhere to be found).
The video of the argument between the two is below:
Regardless, while Bernstein's objectivity is now sadly very much under question, if understandably so as his new business requires a bullish outlook no matter what, here is a primer on curves that was posted on Zero Hedge previously for all those who may have been confused by today's debate.
Posted on Zero Hedge in June 2010:
Why the Yield Curve May Not Predict the Next Recession, and What Might
Gone Are the days when "green sh#%ts" was bleated daily on CNBC amongst a chorus of permabull snorts. Even the experts now recognize the recovery as a BLS swindle, and it is important to reintroduce the possibility of not only a low growth future, but one of outright and persistent contraction. As “double dip” has recently worked its way into the popular lexicon, we will explain why a traditional forecasting tool of recessions may not flash a warning this time around. Afterward, we explore why even “double dip” may not be an accurate term, as well as what a cutting edge-new economic indicator is forecasting.
Gary North wrote an excellent article explaining why yield curve inversions predict recessions. It is instructive now to illustrate how the fundamental backdrop has changed amidst unprecedented government intervention.
The interest rates for more distant maturities are normally higher the further out in time. Why? First, because lenders fear a depreciating monetary unit: price inflation. To compensate themselves for this expected (normal) falling purchasing power, they demand a higher return. Second, the risk of default increases the longer the debt has to mature.
In unique circumstances for short periods of time, the yield curve inverts. An inverted yield occurs when the rate for 3-month debt is higher than the rates for longer terms of debt, all the way to 30-year bonds. The most significant rates are the 3-month rate and the 30-year rate.
The reasons why the yield curve rarely inverts are simple: there is always price inflation in the United States. The last time there was a year of deflation was 1955, and it was itself an anomaly. Second, there is no way to escape the risk of default. This risk is growing ever-higher because of the off-budget liabilities of the U.S. government: Social Security, Medicare, and ERISA (defaulting private insurance plans that are insured by the U.S. government).
We are no longer in a persistently inflationary environment, despite the best multitrillion-dollar reflationary efforts to the contrary. Disinflation and outright deflation keep popping up in critical areas of the economy. While the central banks will likely overshoot in the end, resulting in an hyperinflationary spiral, for the time being, lenders are not worrying about inflation. And, while one may doubt the BLS’ calculation expressed by the Consumer Price Index, the below chart of CPI year-over-year is nonetheless striking, as it indicates the recent crisis brought it into the most negative territory since inception.
On the rise are medical and food costs, but continued deleveraging by banks and consumers are offsetting deflationary drags. Banks are writing down (and off) private and commercial real estate loans, and consumers will remain in spending retrenchment as long as they continue to work off credit in a high unemployment environment. Indeed, year over year consumer credit is in the most negative territory post-WWII.
Though headline civilian unemployment from the BLS’ household survey is ticking down from the ominous 10% level, this is largely a result of the birth/death model adjustmentand the removal of so-called discouraged workers from the counted pool. When viewed from the larger perspective of the civilian employment to population ratio, the job losses are staggering and unprecedented in the modern era. When the economy eventually does show improvement, these discouraged workers will reenter the job market and keep the headline unemployment rate persistently high.
Finally, creation of money supply, as expressed by non-seasonally adjusted year-over-year M2, continues to reflect slow money growth, notwithstanding the trillion or so in excess bank reserves sitting at the Fed earning interest at 0.25%. The very fact that banks are content to earn interest at this absurdly low rate indicates risk aversion and little fear of inflation.
North continues:
What does an inverted yield curve indicate? This: the expected end of a period of high monetary inflation by the central bank, which had lowered short-term interest rates because of a greater supply of newly created funds to borrow.
The obvious failure of the central banks to reflate the economy has now renewed fears that monetary inflation will not return for some time.
This monetary inflation has misallocated capital: business expansion that was not justified by the actual supply of loanable capital (savings), but which businessmen thought was justified because of the artificially low rate of interest (central bank money). Now the truth becomes apparent in the debt markets. Businesses will have to cut back on their expansion because of rising short-term rates: a liquidity shortage. They will begin to sustain losses. The yield curve therefore inverts in advance.
On the demand side, borrowers now become so desperate for a loan that they are willing to pay more for a 90-day loan than a 30-year, locked in-loan.
Aside from government darlings, businesses and critically, small businesses, have largely stopped expanding and are in defensive retrenchment. The problem is a reduction in both the supply and demand for new loans. There is definitely a liquidity shortage, but it is being expressed unconventionally as central bank quantitative easing and government stimulus are directed into non-productive parts of the economy. It is these zombie behemoths in the financial and transportation sectors that are most desperate for funds, yet they are not penalized for it. Instead, they are encouraged to feed at the government trough even as their smaller (and more productive) competitors are edged out through oppressive regulation and inability to access loans at a similar rate. This will continue to be a drag on overall growth, and without small business growth, the threat of recession relapse is greatly heightened.
On the supply side, lenders become so fearful about the short-term state of the economy -- a recession, which lowers interest rates as the economy sinks -- that they are willing to forego the inflation premium that they normally demand from borrowers. They lock in today's long-term rates by buying bonds, which in turn lowers the rate even further.
Though long term US Treasurys are benefitting from safe haven flight-to-quality status, short term Treasurys are similarly benefitting to a greater degree, thus widening the spread between the two. As stated above, banks are content to park over a trillion dollars in excess reserves at the Fed earning interest at 0.25%. A combination of a (currently low but slowly rising) fear of eventual US default, extreme desire for short term safety in T-Bills, and low fear of inflation is keeping the spread wide. Also troubling is the recent disconnect between short term Treasury yields and the borrowing rates actually available to businesses with excellent credit.
North concludes:
An inverted yield curve is therefore produced by fear: business borrowers' fears of not being able to finish their on-line capital construction projects and lenders' fears of a recession, with its falling interest rates and a falling stock market.
Indeed, these are the fears being expressed, but in different manners that are not immediately obvious. Small productive businesses are throwing in the towel as their larger competitors build Potemkin villages.
A further problem is that nearly all yield curve studies look back no further than the mid-1950’s, the inception of Fed data on US Treasury rates. Inasmuch as every recession since then (save the last) has been manufacturing based as opposed to credit based and has occurred in an overall inflationary backdrop, there lacks a crucial window into prior deflationary times concurrent with extreme government meddling—in particular, the Great Depression.
Many economists from the Austrian school follow M2 money supply as a harbinger of economic growth or contraction, as it tracks the creation and destruction of money through economic activity at the margins. As noted previously on EPJ, Rick Davis and others at the Consumer Metric Institute have created a novel indicator that tracks, in real time, consumer demand for capital goods. Accordingly, it should and does reflect similar activity, though with enhanced granularity. Indeed, it anticipates US GDP by an average of 17 weeks. A future post will explore this aspect of their data and possible uses for market timing. For now, Davis tells a different story than the governments that collude to forge a statistical recovery:
Our 'Daily Growth Index' represents the average 'growth' value of our 'Weighted Composite Index' over a trailing 91-day 'quarter', and it is intended to be a daily proxy for the 'demand' side of the economy's GDP. Over the last 60 days that index has been slowly dropping, and it has now surpassed a 2% year-over-year rate of contraction.
The downturn over the past week has emphasized the lack of a clearly formed bottom in this most recent episode of consumer 'demand' contraction. Compared with similar contraction events of 2006 and 2008, the current 2010 contraction is still tracking the mildest course, but unlike the other two it has now progressed over 140 days without an identifiable bottom.
As we have mentioned before, this pattern is unique and unlike the 'V' shaped recovery (or even the 'W' shaped double-dip) that many had expected. From our perspective the unique pattern is more interesting than the simple fact of an ongoing contraction event. At best the pattern suggests an extended but mild slowdown in the recovery process. But at worse the pattern may be the early signs of a structural change in the economy.
While confounding the average GE cheerleader, this new normal of increasing destructive intervention is intuitively understood by the consumer, who responds to this reality by pocketing the debit card. So what can we expect in the ensuing quarters?
Davis aptly describes what has happened so far:
[I]t has instead, unfolded so far as a mild but persistent kind of
contraction, more like a 'walking pneumonia' that keeps things miserable for an
extended period of time.
Until governments stop punishing innovation, stop rewarding incompetence, stop distorting economic signals with arbitrary econometric targeting, stop coddling failures--we will continue to walk with this pneumonia indefinitely. The solution, as always, is nothing. Stop intervening and let the chips fall where they may. Markets will correct things faster than you might think.
And here is a useful primer from Fidelity on the various shapes of the yield curve and what they indicate:
Normal and Not Normal
Ordinarily, short-term bonds carry lower yields to reflect the fact that an investor's money is under less risk. The longer you tie up your cash, the theory goes, the more you should be rewarded for the risk you are taking. (After all, who knows what's going to happen over three decades that may affect the value of a 30-year bond.) A normal yield curve, therefore, slopes gently upward as maturities lengthen and yields rise. From time to time, however, the curve twists itself into a few recognizable shapes, each of which signals a crucial, but different, turning point in the economy. When those shapes appear, it's often time to alter your assumptions about economic growth.
To help you learn to predict economic activity by using the yield curve, we've isolated four of these shapes -- normal, steep, inverted and flat (or humped) -- so that we can demonstrate what each shape says about economic growth and stock market performance. Simply scroll down to one of the curve illustrations on the left and click on it to learn about the significance of that particular shape. You can also find similar patterns within the past 18 years by running our "yield-curve movie" and -- by clicking the appropriate box -- you can compare any shape within that time period to both today's curve and the average curve.
Normal Curve
Date: December 1984
Date: December 1984
When bond investors expect the economy to hum along at normal rates of growth without significant changes in inflation rates or available capital, the yield curve slopes gently upward. In the absence of economic disruptions, investors who risk their money for longer periods expect to get a bigger reward -- in the form of higher interest -- than those who risk their money for shorter time periods. Thus, as maturities lengthen, interest rates get progressively higher and the curve goes up.December, 1984, marked the middle of the longest postwar expansion. As the GDP chart above shows, growth rates were in a steady quarterly range of 2% to 5%. The Russell 3000 (the broadest market index), meanwhile, posted strong gains for the next two years. This kind of curve is most closely associated with the middle, salad days of an economic and stock market expansion. When the curve is normal, economists and traders rest much easier.
Steep Curve
Date: April 1992
Date: April 1992
Typically the yield on 30-year Treasury bonds is three percentage points above the yield on three-month Treasury bills. When it gets wider than that -- and the slope of the yield curve increases sharply -- long-term bond holders are sending a message that they think the economy will improve quickly in the future.This shape is typical at the beginning of an economic expansion, just after the end of a recession. At that point, economic stagnation will have depressed short-term interest rates, but once the demand for capital (and the fear of inflation) is reestablished by growing economic activity, rates begin to rise.
Long-term investors fear being locked into low rates, so they demand greater compensation much more quickly than short-term lenders who face less risk. Short-termers can trade out of their T-bills in a matter of months, giving them the flexibility to buy higher-yielding securities should the opportunity arise.
In April, 1992, the spread between short- and long-term rates was five percentage points, indicating that bond investors were anticipating a strong economy in the future and had bid up long-term rates. They were right. As the GDP chart above shows, the economy was expanding at 3% a year by 1993. By October 1994, short-term interest rates (which slumped to 20-year lows right after the 1991 recession) had jumped two percentage points, flattening the curve into a more normal shape.Equity investors who saw the steep curve in April 1992 and bet on expansion were richly rewarded. The broad Russell 3000 index (right) gained 20% over the next two years.
Inverted Curve
Date: August 1981
Date: August 1981
At first glance an inverted yield curve seems like a paradox. Why would long-term investors settle for lower yields while short-term investors take so much less risk?The answer is that long-term investors will settle for lower yields now if they think rates -- and the economy -- are going even lower in the future. They're betting that this is their last chance to lock in rates before the bottom falls out.
Our example comes from August 1981. Earlier that year, Federal Reserve Chairman Paul Volker had begun to lower the federal funds rate to forestall a slowing economy. Recession fears convinced bond traders that this was their last chance to lock in 10% yields for the next few years.
As is usually the case, the collective market instinct was right. Check out the GDP chart above; it aptly demonstrates just how bad things got. Interest rates fell dramatically for the next five years as the economy tanked. Thirty year bond yields went from 14% to 7% while short-term rates, starting much higher at 15% fell to 5% or 6%. As for equities, the next year was brutal (see chart below). Long-term investors who bought at 10% definitely had the last laugh.Inverted yield curves are rare. Never ignore them. They are always followed by economic slowdown -- or outright recession -- as well as lower interest rates across the board.
Flat or Humped Curve
Date: April 1989
Date: April 1989
To become inverted, the yield curve must pass through a period where long-term yields are the same as short-term rates. When that happens the shape will appear to be flat or, more commonly, a little raised in the middle.Unfortunately, not all flat or humped curves turn into fully inverted curves. Otherwise we'd all get rich plunking our savings down on 30-year bonds the second we saw their yields start falling toward short-term levels.
On the other hand, you shouldn't discount a flat or humped curve just because it doesn't guarantee a coming recession. The odds are still pretty good that economic slowdown and lower interest rates will follow a period of flattening yields.
That's what happened in 1989. Thirty-year bond yields were less than three-year yields for about five months. The curve then straightened out and began to look more normal at the beginning of 1990. False alarm? Not at all. A glance at the GDP chart above shows that the economy sagged in June and fell into recession in 1991.
Unemployment Rates Rise in U.S. Metro Areas
WASHINGTON — Unemployment rates rose in more than two-thirds of the nation's largest metro areas in November, a sharp reversal from the previous month and the most since June.
The Labor Department says unemployment rates rose in 258 of the 372 largest cities, fell in 88 and remained the same in 26. That's worse than the previous month, when the rate fell in 200 areas and rose in 108.The economy is strengthening, but employers have been reluctant to create jobs. Hiring will pick up in 2011, but not enough to significantly lower the unemployment rate, economists forecast.
Many laid-off workers are giving up. In states such as Michigan, unemployment rates are falling because more people have stopped looking for work. Once they do, the government no longer counts them as unemployed.
Will Bank Runs Hit Europe?
from Fortune:
Is a bank run about to bring Europe to its knees?
Some market watchers say yes, pointing ominously to the torrents of money pouring out of Ireland.
Not such a good bet
The deposit flight compounds the stress on a financial system whose massive property-lending losses already have driven the government to accept an unpopular bailout from the European Union and the International Monetary Fund.
Worse yet, it shows that the solutions policymakers slapped together in the fall of 2008 helped in some cases to create even bigger problems -- ones that are now coming due.
Unconditionally guaranteeing bank deposits is just such a policy, in a country where loan losses made the banks insolvent, job loss left many taxpayers peniless and deposits now at least double annual economic output.
And this time, given the unpopularity of bailouts and dysfunctional European politics, there is ample reason to fear the banking mess won't so easily be swept aside.
"Facing facts like these, each morning when I wake up I have to wonder, 'Why is today not a good day for a wholesale run on the Irish banking system?'" asks Scott Minerd, chief investment officer at Guggenheim Partners. "And if there is a wholesale run on the Irish banking system, then what stops the same scenario from cascading into Portugal, Greece, Italy, and most importantly, Spain?"
That is very much the question being asked in bond markets, where the cost of borrowing surged in all the so-called peripheral European countries in the second half of 2010. The yield on Irish 10-year government bonds, for instance, surged to 9% at year-end from around 5% in August.
The high cost of market borrowing ties the hands of government officials who have promised to ride to the rescue of the bubble-ridden banks. Ireland has already ponied up outlandish sums to keep the banks afloat. Officials have said at every turn they believed they had the ability to stabilize the system, but stability has remained beyond their reach.
Now, with the state locked out of the bond market and the banks losing depositors, who is going to lend in an economy that already has shrunk drastically from its bubbly size of just a few years ago?
Bank runs "will seriously undermine the prosperity of this country for a generation," Pimco's Mohammed El-Erian said in November. He said the first steps to stemming the run would include "a big external aid package and steps by the Irish government."
The IMF, the EU and the Irish government committed to those steps this fall. But there is still no sign people in Ireland or elsewhere believe the $113 billion bailout package will keep their money safe. Among many other things, there has been a rush out of the euro for the Swiss franc, not to mention the ever-present embrace of gold.
On Minerd's mind
Some 20 billion euros ($27 billion) of overseas deposits fled the country in November alone, according to the Central Bank of Ireland. The level of foreign deposits has plunged 28% in the past year and is down 42% from its bubbly peak.
But don't blame just the foreigners. Domestic deposits tumbled by 6.3 billion euros in November, in their steepest decline since August 2009.
All told, the Irish banking system's deposit base has contracted by 15% over the past year -- which isn't making it any easier for taxpayers to keep the deeply troubled banking sector afloat.
Meanwhile, the aid the Irish banks took from the eurosystem more than doubled over the past year, to 97 billion euros from 45 billion in November 2009.
The flight of deposits from troubled Irish banks is an unhappy irony because Ireland was lauded in some quarters in 2008 when it became the first state to guarantee bank deposits. That decision led to a short-lived surge of funds into the Irish banks -- not that the money stuck around for long. Since the late 2008 peak, more than 100 billion euros of overseas deposits have left the Irish banking system.
When you consider that similar trends could easily play out in the other euro countries, you have the recipe for a hangover-inducing New Year that is likely, in the view of Minerd, to see the euro plunge anew against the dollar. He expects the euro to test its decadelong low against the dollar of 85 cents before all is said and done, compared with a recent $1.33.
"As sovereign credit downgrades continue to flow in and deposits in Europe's weakened banking system flow out, a broader crisis in Europe appears to be imminent in 2011," says Minerd.
It's a Commodities Wild Ride
Commodities backtracked big time today, almost across the board.
NYBOT Commodity Index wild ride
Gold wild ride
Corn wild ride
Crude oil wild ride
Economists Are the Worst Prognosticators
"Attempting to invest on the back of economic forecasts is an exercise in extreme folly, even in normal times. Economists are probably the one group who make astrologers look like professionals when it comes to telling the future." -- James Montier, GMO
Baltic Dry Index Plunges Again
from ZH:
When we noted last night that there was a Baltic fat finger index, we thought we were joking. Appears not. The BDIY has plunged by 4.5% overnight from 1,773 to 1,693, easily the biggest one day drop in a long time. And, more importantly, the index has just taken out the 2010 lows hit on July 15, when the BDIY last traded at 1,700. So in a normal world, one could argue, the fact that there no demand for shipping may actually indicate something. However, in this bizarro "5 year plan" politburo reality, this will likely result in futures once again surging as QE4.5 starts getting priced in.
Chart shows data as of most recent prior update.
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