Archives for November 2012

Fun and Games and Obvious Manipulation

Fun and Games and Obvious Manipulation

Courtesy of 

Friday's close was the most obviously, nakedly manipulated bullshit close I've ever seen. I have no idea who is behind it but this is not what healthy, well-participated-in markets do. There are too many real players to allow for this kind of thing to be able to happen in a real market. This market we have is shady as hell. I wouldn't even comment on something like the below chart if it were a one-off, but honestly, this feels like it's all the time.

The market is devoid of width and depth, you can jerk it around pretty easily – especially if backed by an institution that borrows free money.  And in the meantime, the powers that be need it to close higher every week to prevent outflows and redemptions. Tyler's take on the close is here, btw:  (Zero Hedge)

That's the way they want it. They get it.

I feel bad for investors and traders who haven't been in this game prior to 2008, when it was real and the mid-day action mattered. Now the whole trading day is irrelevant because the 19 people still left get to close this motherfucker at whatever price they want. On top of which, almost all of the gains this year have come courtesy of gaps in the morning. The whole trading day has just been invalidated at this point.

I don't know…whatever.

Read today's Takeaway at Investment News and have a great weekend!

A Graveyard for Tacticians

A Graveyard for Tacticians

Courtesy of 

Whatever the market historians say about the 2012 stock market years from now, they will certainly have to at least mention how difficult it was for those who practice tactical asset allocation. Not just difficult, actually it was a graveyard.

    I'm going to show you why:

    In 2012, there were very few ways to win and lots of ways to lose if you were doing any kind of market timing at all.

    First of all, you had to have come into the year fully-invested, both barrels loaded.  You also had to have been at least equal-weighted to Apple. Thus, if you had a value-bent (versus a growth-bent) to your allocation, you got smoked. The year's gains are front-end loaded, which means if you lagged that January to April run, you almost never had a chance to catch up.

    Second, there were two major fakeouts for those employing a 200-day or ten-month moving average as a buy/sell signal. The Spring sell-off, driven by Europe, culminated in one of the nastiest bull reversals I've ever seen. You got taken out of stocks only to watch a V-shaped snapback humiliate you within hours – not days but hours!  It was insane.

    By September, the performance chase had pushed the market to a new year high, only to suck everyone back in right before the fiscal cliff / global recession zeitgeist started to make itself felt again.  A horrible earnings season in which "uncertainly" punctuated every conversation had ended with a second fakeout for the tacticians to impale themselves on. Just when it looked as though we were finally going to get a real correction and stocks had broken below the 200-day, the unthinkable happened: The light-volume and shortened holiday week saw one of the most incendiary stock market runs of all time.  In three-and-a-half days the S&P had gained back almost the entire correction in a run that seemingly included no one. Apple alone had ripped from 505 to 590 within what seemed like seconds! Forgetaboutit!

    Once again, trend-followers and timers got smoked before they even knew what had happened. In the time it takes you to open the Yahoo Finance app on your iPad, the reversal had beclowned all but the buy-and-holders.

    Many years from now, people will see the 2012 stock market's 15% return in a box on one of those periodic tables of asset class returns and they'll say, "Hey, 15%, that was a good year."  They will have no idea how terribly tough a year it was for anyone who wasn't aggressively long Apple from January through the spring.

    And here's the worst part, this couldn't have happened at a worst time for tactical managers – just when their premise was finally coming into its own among Wall Street traditionalists, it's been cut down. As a well-known drunk driver and sometime singer-songwriter once said, only the good die young.

    Now let me take one step back for a moment – the events of 2007-2009 proved to the investing public that buy-and-hold wasn't a legitimate strategy for their retirement assets anymore. This meant much recrimination of the fully-invested-always strategies that have dominated the asset management and retirement investing complex for decades. The money was pulled away from those who sat fully-loaded for the peak-to-trough 57% drop in the S&P.

    But in the investment management biz, when a door is slammed shut, a window is opened.

    Enter the Tactical Asset Manager with an idea that appeared to have been perfectly suited for a generation of jittery, post-traumatic stress disordered investors. Some of these tactical managers had track records that had shone like diamonds versus the 3- and 5- year numbers for the benchmark S&P. Most of them, however, did not even exist prior to the crash. It didn't matter, investors grabbed them up like Winona Ryder in a dimly-lit department store.

    Jason Zweig at the Wall Street Journal looked at the the 42 mutual funds that label themselves as tactical asset allocators earlier this month (see: How Practical is Tactical?). He had trouble finding anything positive to say about them as a group. First, he found that of the 42, only 8 of them had been around prior to 2007. In addition, this category of funds had raised 20% of its $4.3 billion in AUM in 2012 alone.  And as with any investing craze, the results have not been great:

    As usual, investors appear to have stampeded into a trend at an inopportune time. Mutual funds with "tactical" in their name are up 6.9% this year—an average of five percentage points less than the various indexes they follow, according to Morningstar. Over the past three years, these funds have gained an annual average of 4.9%, or more than six points a year behind their benchmarks.

    Now of course, the tactical managers will retort with the following:

    1. We're not designed to outperform in every environment
    2. We're seeking a return with lower-volatility than the overall market, which means giving up some upside sometimes.
    3. Had the markets been substantially lower rather than higher in the last 12 months, this article would never have been written.
    4. Tactical is only meant to represent a sleeve of a total portfolio, not the entire strategy.
    5. One or two years do not accurately reflect the true advantage of Tactical over time.
    6. We'll get 'em next year.

    Now of course, these are all legitimate points to varying degree.  Many investors will remain somewhat tactical and allow these funds and vehicles more time for this promise to bear itself out. But many won't.

    In addition, now that the 3-year numbers begin to look unfavorable versus the benchmark S&P, you'll also see much less capital allocated toward them. These are the facts. Don't be surprised if 2012 ends up being the year that killed a few of these things dead given the massive underperformance.

    My guess is that balanced funds become the beneficiary of this.  The return + volatility of a combination stock/bond fund will look like a vastly superior option to the tactical allocator and in many cases its expenses and turnover will put it over the top.  Another door slammed shut, another window opened.

    Read Also:

    How Practical is Tactical (WSJ)

    Study: American Households Hit 43-Year Low In Net Worth

    WASHINGTON (CBS DC) – The median net worth of American households has dropped to a 43-year low as the lower and middle classes appear poorer and less stable than they have been since 1969.

    According to a recent study by New York University economics professor Edward N. Wolff, median net worth is at the decades-low figure of $57,000 (in 2010 dollars). And as the numbers in his study reflect, the situation only appears worse when all the statistics are taken as a whole.

    According to Wolff, between 1983 and 2010, the percentage of households with less than $10,000 in assets (using constant 1995 dollars) rose from 29.7 percent to 37.1 percent. The “less than $10,000? figure includes the numerous households that have no assets at all, or “negative assets,” which is otherwise known as “debt.”

    Keep reading: Study: American Households Hit 43-Year Low In Net Worth « CBS DC.

    Ultimate Fiscal Cliff Cheat Sheet Infographic

    Courtesy of ZeroHedge. View original post here.

    Submitted by Tyler Durden.

    The Fiscal Cliff is the name given for the 2013 increase of Federal Government taxes and budget cuts. The Bush-era tax cuts expire and the 2013 "Budget Control Act" kicks in, among other budget cuts & new taxes. The Fiscal Cliff is set to reduce the 2013 US Government budget deficit by roughly half; will remove $607 Billion from economy (GDP), resulting in 4% drop, pushing it back into recession; it can NOT be avoided. It must happen to fix the budget deficit; any delay must be paid for later; it will NOT reduce the US debt, only slow down the growth. The Fiscal Cliff's (new taxes and budget cuts) size and impact are visualized below in physical $100 bills.



    New Taxes…

    Beginning 2013, Americans are to pay more in taxes.

    Bush era tax cuts, FICA 2% payroll tax cuts & other tax provisions will expire, Obamacare taxes will show up – this amounts for $400 Billion in new taxes.

    Each truck holds $2 Billion, each line is 1.36 miles (7217 feet), for a total truck line length of 2.73 miles, worth $400 Billion.

    This is how it could look if taxes were paid physically, instead of electronically.

    $222.7 Billion Bonus: Corporate Tax Subsidies

    While the taxes are increasing significantly on American citizens, the largest corporations have enjoyed corporate tax loop-holes.

    280 of America's largest companies got $222.7 Billion in tax-breaks between 2008-10, while all of them remained profitable.

    67 of the 207 companies' paid effective three-year tax rate of less than 10 percent– far from the 35% corporate tax code.


    Budget Cuts…

    The Fiscal Cliff will cut $207 Billion out of Government budget: $65 Billion in cuts will come from "Automatic Sequestration", a fancy name for automatic spending cuts that are the consequence of the "Super Committee" failing to come up with a plan to cut $1.5 Trillion over 10 years, which they had to do in order to avoid the "Automatic Sequestration".

    The sequestrations cuts will be divided equally between Defense and Non-Defense spending.

    $26 Billion in cuts will come from the Unemployment Benefit Extension expiring.

    $11 Billion in cuts will come from reduction in Medicare Payment Rates.

    $105 Billion will come from other spending reductions.


    Source: Demonocracy

    Business as Usual: The Next Fiscal Cliff

    Courtesy of Russ Winter of Winter Watch at Wall Street Examiner

    More on the fiscal cliff talks: The Presidente’s opening bid – delivered this afternoon by Tim Geithner – calls for a $1.6T tax increase, a $50B economic-stimulus program, and delivering to the WH the power to raise the federal debt limit without congressional approval.  The White House also wants the payroll tax credit to continue and a “permanent” increase in the debt limit.  Lastly, they want to extend emergency unemployment compensation.  It’s a “step backward,” says Mitch McConnell.

    The Presidente apparently graduated from the Fuck U School of Negotiations. Does a real ethical leader send a crook like Geithner to “open” with this particular irresponsible tract when Congress is adjourning on Dec. 14?  This is a deliberate attempt to obstruct the process.  I think we learned a lot about Obama’s second term here. No spending cuts and a token $42 bn from allowing expiration of the Bush tax cuts on those making over $250k is a spit in the ocean in comparison to the $3.6 trillion the government spends each year. Unless the GOP shows a little spine, deficits are going to blow sky high in 2013 and 2014. The overnight markets barely reacted to this. In fact I think the markets are hoping for business as usual, no austerity, no tax increases, just a phony facade. The Presidente is playing to extend all the items above to the next fiscal cliff.

    Bruce Krasting points out that the Sandy request of $80 bn from New York and New Jersey, exceeds the annual payments of disaster relief of $11bn. So the extra $69bn is going to require a special spending bill. Eric Cantor says this extra spending “will need to be properly considered,”  meaning something must offset, or the amounts could also be questioned.

    If this wasn’t enough a huge “Pineapple Express” is headed toward the West Coast, and will dump double digit rain over a very large region and in particular Northern California. This could require billions more in disaster relief.




    For additional analysis on this topic and related trades subscribe to Russ Winter's Actionable – risk free for 30 days.The subscription fee is $69 per quarter and helps support Russ.s work on your behalf. Click here for more information.

    Copyright © 2012 The Wall Street Examiner. All Rights Reserved. The above may be reposted with attribution and a prominent link to The Wall Street Examiner.

    Japan Manufacturing Contracts at Sharpest Rate for 19 Months; New Orders and Output Plunge; Watch the Yen

    Courtesy of Mish.

    In Japan things have gone from Grim to Grimmer. The Markit/JMMA Japan Manufacturing PMI™ shows Japanese manufacturing sector contracts at sharpest rate for 19 months in November.

    Key points:

    Output and new orders both continue to decline
    Capital goods producers register sharpest falls in production and sales
    Inventories and employment cut amid subdued economic outlook


    Operating conditions in the Japanese manufacturing sector continued to worsen in November. The deterioration was driven by falls in output, new orders and employment as the economic climate remained difficult. Amid an uncertain outlook, manufacturers also cut inventory levels and lowered purchasing activity.

    Investment goods producers also recorded the steepest fall in staffing levels during November. With the consumer and intermediate market groups also registering reductions in employment, a net fall in total manufacturing payroll numbers was recorded for the second month in succession.

    Reduced sales and a subdued economic outlook were reported to have led to the reduction in staffing levels in the latest survey period. Similar factors led to declines in inventories and purchasing activity over the month. The fall in stocks of raw materials and semi-manufactured goods was the steepest in over a year-and-a-half, while input buying was pared to the steepest degree since April 2011.

    Watch Japan’s Current Account and the Yen

    On November 12, in Japan Plunges Into Deep Recession; GDP Shrinks 3.5% Annualized; Japan Current Account Turns Negative First Time in 30 Years I noted that Japan trade deficit hits record as relations with China poisoned.

    Japan Current Account Turns Negative

    The trick for Japan is how to finance its national debt, now at a majorly unsustainable 235% of GDP.

    Japan was able to do so for years on account of its current account surplus, of which trade is typically the largest component.

    Continue Here

    Important New Legal Principle

    Courtesy of Mish.

    Yesterday the General Court of the European Union ruled ECB right not to disclose Greece-related documents.

    The European Central Bank was right to refuse access to documents on the economic situation in Greece to a journalist in 2010, because disclosure would have undermined the public interest, the General Court of the European Union ruled.

    “Disclosure of those documents would have undermined the protection of the public interest so far as concerns the economic policy of the European Union and Greece,” the court ruled on Thursday.

    New Legal Principle

    Eurointelligence offered this interpretation of the ruling:

    The European Court has thus established an important legal principle. If you claim to act in the public interest, you can break the law. And the definition of the public interest rate, is, of course, a political one.

    Unfortunately, that is quite an accurate assessment. The ruling can be appealed the the European Court of Justice within the next two months, but I do not have high hopes for a different result.

    Mike “Mish” Shedlock

    Continue Here

    Another Layer of Bureaucracy for Oil and Gas Exploration in the US?

    Another Layer of Bureaucracy for Oil and Gas Exploration in the US?

    Courtesy of Casey Reseach

    On May 11, 2012, the US Bureau of Land Management (BLM) published proposed regulations governing "Oil and Gas; Well Stimulation, Including Hydraulic Fracturing, on Federal and Indian Lands." BLM is a latecomer to this party. Its belated meddling lacks practical or economic justification. Instead, the proposed BLM rule would drive oil and gas developers off federal and tribal lands. Complying with the rules is too complicated and costly. Producers can realize a much faster and much better return on their capital investment by developing oil and gas reserves on adjoining private lands.

    Federal and tribal lands hold large reserves of oil and natural gas. At a time when the United States desperately needs to move toward, not away from, energy independence, it makes no sense to let bureaucratic meddling effectively place these valuable domestic reserves out of reach. The problems with BLM's approach are myriad.

    BLM Misses the Mark

    First, a central, federal, one-size-fits-all approach does not work. The reserves that the oil and gas industry wants to access using hydraulic fracturing occur in areas with different geographic, topographic, hydrological, population, precipitation and umpteen other characteristics. The oil and gas deposits are found at different depths; the water table is at different depths. The surface and subsurface vary dramatically, ranging from the Marcellus Shale Formation in the Northeast to the San Juan Basin in the Southwest. States and tribes have long ago stepped up to the plate with sensible regulations suitable to their individual conditions. They are way ahead of BLM.

    Second, even if states and tribes did not already have this under control, BLM's proposed regulations are inappropriate. The BLM regs are based on inaccurate assumptions, flawed economics and a perceived but actually nonexistent need.

    "[I]t is assumed" (by BLM for its base case) "that a certain number of well stimulation events may result in contamination and thus pose a cost to society." This is the foundation of the agency's flawed estimation of "social benefits" ranging from $11.7 million to $50.3 million per year. We are left to guess what those social benefits might be. Despite hysteria about fracking causing earthquakes, contaminating aquifers and about explosive gases coming from kitchen sink faucets, there is actually no evidence that fracking causes such problems. Indeed, the Association of American State Geologists (AASG) "recognizes that the environmental record of hydraulic fracturing activities over the past 60 years has been overwhelmingly positive."

    Probably the most frequent indictment of fracturing is its potential contamination of drinking water. But the AASG further notes that "geologic data generally show a significant vertical separation between most oil and natural gas reservoirs targeted for hydraulic fracturing and the shallower freshwater aquifers." In other words, fresh water is not typically found anywhere near the fracturing area.


    BLM acknowledges that about 3,400 wells, roughly 90% of all wells drilled on federal and Indian lands each year, use hydraulic fracturing. But it offers no evidence of groundwater contamination as a result of that fracking. As noted by Donovan Schafer in his excellent article, Frack Attack: "Freshwater sources can, in fact, be contaminated by oil and gas activity. However, the contamination is not a result of the actual fracking process. Instead, it is caused by poor drilling practices and surface spills."

    Even Matt Watson, an energy-policy specialist with the Environmental Defense Fund, acknowledged that "the term 'fracking' is being used for all the things in the process that can cause problems. Most of those problems have nothing to do with the actual fracking."

    Elizabeth Ames Jones, chairwoman of the Railroad Commission of Texas, testifying before the US House Committee on Science, Space and Technology, said: "For fracturing fluid or the natural gas or oil to affect the water table in Texas, those substances would have to migrate upwards [through] thousands of feet of rock, sometimes even miles. It is simply geologically impossible. The stories of environmental damage or contaminated drinking water from hydraulic fracturing are simply untrue. You have a better chance, frankly, of hitting the moon with a Roman candle than fracturing into fresh water zones by hydraulic fracturing shale rock."

    That comes as no surprise, since fracking fissures tend to radiate horizontally, not upward. Even if they did radiate upward, those thousands of feet of multiple layers would blunt their progress long before they got anywhere near fresh water. This illustration shows how far the Underground Source of Drinking Water ("USDW") is from fracking operations.


    Prohibitive Costs

    BLM badly underestimates the cost of compliance with its proposed rule. Oil and gas developers already face costly delays in obtaining BLM approval of Applications for Permits to Drill (APDs). The cost of gathering, compiling and submitting the additional information BLM now wants is real, substantial and not realistically tied to any benefits. Operators already submit information on wellbore integrity, casing and cementing programs to the agency, through the existing APD process. The BLM rule adds 10 more categories of information to be supplied.

    BLM is already limited by a shortage of staff having necessary expertise. The proposed rule would compound delays and the resulting expense as BLM struggles to deal with added responsibilities. I am reminded of the sensible admonition: "Never holler 'Whoa!' at a horse race."

    The delays imposed by BLM's unnecessary "cement bond log requirement," for example, complicated by its more stringent requirement to isolate "useable" rather than "fresh" water, will mean that drilling rigs will sit idle at a cost of over $20,000 per day. Let me explain.

    What is a Cement Bond Log?

    Developers already inject cement to fill the "annulus" – the space between the steel pipe called the well "surface casing" and the wellbore (the hole drilled through earth and rock). Fresh water, in groundwater aquifers, is relatively near the surface. Oil and gas production fluids are isolated from that fresh water by the surface casing and the cement in which it is embedded. Cement is injected through the casing pipe into the bottom of the hole where it pushes back up through the annulus until it completely fills the wellbore surrounding the surface casing all the way to the surface. A bond between that cement and the casing ensures that no contaminants from below find their way into fresh-water zones that the well passes through. A "cement bond log" documents data from a probe of the wellbore that uses sonic technology to detect any gaps or voids in the cement.

    The following illustration shows a typical configuration of nested well casings, each cemented within the wellbore, passing through the Sherwood aquifer in the UK. As you can see, the fresh water in the aquifer is thousands of feet above the fractures.

    BLM has dropped its definition of "fresh water," however, and now proposes that producers also protect "useable water" (found at much greater depths) with cemented surface casings. "Useable water" includes water that is in fact not "useable" at all, water containing up to 10,000 parts per million (ppm) of total dissolved solids (TDS). For comparison, EPA's drinking water standard for humans is only 500 ppm TDS. The cost of extracting and treating supposedly "useable" water (that is actually heavily laden with dissolved solids like salt and sulfate) far exceeds the value of any practical usage.

    Furthermore, to protect that "useable" water, drillers would need to extend the surface casings thousands of feet deeper. Then, to comply with the cement bond log requirements, they would need to wait for the cement to fully cure, run the sonic probe, produce the cement bond log, submit it to an inadequately staffed BLM and wait 30 days for approval.

    The time costs would be prohibitive. Drilling rigs can't just sit idle waiting for these preliminaries to be finalized. Instead, they will be decommissioned and moved elsewhere at great expense – greater expense than can be justified. These costs are completely overlooked by BLM. Faced with such costs of developing oil and gas on federal and Indian lands, operators will go elsewhere.

    Indian Country Speaks Out

    BLM is just "occupying the field," making sure it has a hand in this rapidly growing industry, but without regard to the unintended consequences of its actions. BLM's proposed fracking rule would result in reduced domestic oil and gas production generally and a reduction in revenues from federal and Indian lands.

    Indian tribes would be particularly hard hit. The United States government has a solemn, long-standing trust duty to American Indian tribes. That includes BLM. These actions by the tribes' federal trustee wreak havoc with the tribes' opportunities to earn badly needed oil and gas revenues from their reservations. The federal government also has a trust duty to American taxpayers as the custodian of our public lands. American taxpayers, the true owners of federal lands and beneficiaries of federal land management, are probably not as acutely aware, as are tribes, of the irresponsible actions of their trustee.

    Meanwhile, the predicament of both tribes and taxpayers is worsened as wells drilled on neighboring private lands drain common reservoirs. A similar situation is happening off the Florida Keys, where our own domestic oil and gas industry is barred from drilling while foreign operators, as guests of Cuba and with fewer environmental constraints, are free to suck common reservoirs dry.

    I recently attended a meeting at the White House with representatives of oil- and gas-producing Indian tribes at which they urged Obama administration officials to withdraw the proposed BLM fracking rule. Dan Utech, deputy director for Energy and Climate Change on the White House Domestic Policy Council, stated that President Obama's "All of the Above" energy strategy calls for responsible development of oil and gas resources, as stated in his State of the Union address and in later speeches. Dan said it was important to pursue fracking prospects responsibly and acknowledged that BLM may have taken a "crooked path" toward that objective.

    The tribal representatives – seasoned veterans of the real world of oil and gas production – explained why BLM's proposed rule failed to advance that objective. They asked what pitfall BLM is seeking to address. They discussed cement bond logs as an example of how the BLM rule imposes a huge economic burden that is not justified by any corresponding benefits, and without correcting any contamination problem.

    The tribal representatives took issue with BLM's shift from protecting not just fresh water but all "useable" water from drilling. Operators normally extend surface casings down to a depth of 1,500 to 2,000 feet – way more than enough to protect "fresh water." Running the surface casing to the depth of all "useable water" would mean extending the surface casing thousands of feet deeper. These new requirements push tribal oil and gas, and oil and gas on federal lands, out of the market.

    Dan Utech said that the concern about BLM approval delays was at the top of their list and that others from the drilling industry had already brought it to the attention of Obama administration officials. He said, "We want to be damn sure we get this right and take the time to do it right." He did not identify the pitfall the rule was designed to address nor explain what the rule was a remedy for, despite requests that he do so. Nor did he consider the possibility that the "right" role for BLM might be doing nothing at all.

    During mark-up of House Bill 3973, the Native American Energy Act, Don Young, chairman of the House Natural Resources Committee's Subcommittee on Indian and Alaska Native Affairs, successfully passed an amendment that would prohibit the BLM rule from applying to Indian lands unless the Indian land owner gives express consent. Young said: "With their new fracking rule, the Obama administration is doing a real disservice to America's tribes. By giving Indian tribes the option to follow this new rule, my amendment simply increases tribal control over their lands and eliminates this new layer of bureaucratic red tape."

    Although not discussed at the meeting, Congressman Bill Flores (R-TX) has separately introduced H.R.6235, "a bill to delay action on the proposed rule regarding well stimulation on federal and Indian lands until such date as the secretary of the Interior submits a report examining certain effects of such rule." H.R.6235 was referred to the House Natural Resources Committee.

    Just Say No

    I would summarize the message from Indian Country as this: the Obama administration needs to call off its dogs. Tribes are already quite sophisticated with respect to oil and gas development, including fracking. Preferably BLM should withdraw its rule and simply leave tribes alone. By inserting itself at this stage, BLM is just delaying tribal energy development to the detriment of tribes without corresponding benefit. Tribal representatives emphasized that the BLM rule is a solution in search of a problem. They said there has not been one incident of groundwater contamination as a result of fracking. They emphasized that Indian lands are not public lands.

    Perhaps most important, the proposed BLM rule and the method by which it has been promulgated so far lacks respect for tribal sovereignty and authority. Fortunately, nothing in federal statutes requires subjecting tribal lands to the same standards as federal lands where tribes are capable of managing such matters themselves. In fact, the Indian Mineral Development Act protects the right of energy-producing tribes to develop their mineral resources as they deem appropriate. Moreover, federal Indian mineral leasing regulations may be superseded by tribes. Tribes could simply exempt themselves from these proposed BLM regulations unilaterally.

    Tribes may be able to squirm out from under the heavy, dead hand of this federal agency. The American taxpayers, however, still get screwed. There is little question as to whether BLM has jurisdiction over public lands.

    So what does all this mean for oil and gas exploration and development enterprises? If BLM does not back off, developing oil and gas resources on public lands may be more trouble than it's worth. Developers may be able to work with Indian tribes, however, to develop oil and gas resources on reservations without having to deal with BLM.

    None of the Above

    The Obama administration's energy policy is ostensibly "all of the above." That is supposed to mean that, in the interest of energy independence, the administration supports and encourages development of all forms of energy. Of course we know that is simply not true. The administration has engaged in a blatant war on coal, has blocked onshore leases on public lands, has restricted offshore drilling and has blocked the Keystone XL pipeline. The Obama energy policy would more accurately be described as "none of the above," at least with respect to fossil fuels.

    This no-fossil-fuels policy makes no sense. It is a disservice to all Americans who rely on readily available, affordable energy. It is a further disservice in that it hogties an entire sector of the economy, resulting in lost jobs and the reduction of otherwise available federal and tribal revenue.

    No doubt about it: between increasing economic uncertainties and political meddling worldwide, energy investors have their work cut out for them. However, now is precisely the time to get in on the most promising plays, in order to ride the coming "super bull" in energy.

    By Don Groves, an attorney in Washington, D.C.

    The Benefits of Being Ordinary

    Courtesy of Charles Hugh-Smith of OfTwoMinds blog

    Being extraordinary is a terrific bother, truth be told, so please appreciate the benefits of ordinariness if you are so blessed.

    Every hour of every day, we are persuaded that the benefits of being extraordinary in some way are equally extraordinary. This has two propaganda components:
    1. If you buy this product or service (touted by An Extraordinary Person), you will feel the vicarious thrill of acting/looking like you're extraordinary.
    2. Our society is a meritocracy, blah blah blah; if you are naturally talented/bright and if you make extraordinary efforts, you might rise above mere ordinary and start accruing all those fabulous benefits reserved for the extraordinary.
    What if these benefits aren't as wonderful as advertised? That would hurt sales and the drive of those who bought into the meritocracy claim.
    Let's start with those glorified twins, fame and fortune. Fame is actually a huge bother. You have to be polite to strangers or risk your sour rejection of fans being spread over the Web in short order. You find that acclaim wears thin very quickly on multiple levels: any comment might be taken out of context and used to undermine your claim to extraordinariness, and your human foibles are trumpeted as weaknesses.
    People seek some sort of ethical-spiritual perfection in the famous, as if being extraordinary in some field automatically elevates a person to sainthood.
    The demands made on your time and attention cannot possibly be met; all the world's a stage, and you are constantly "on." While the morbidly insecure come to depend on this diet of public adoration, those with any shred of inner security soon find the whole "fame thing" tiresome.
    As for fortune: your focus shifts from reveling in wealth to worrying about protecting it. The average person has a "wish list" of stuff they would buy with a fortune: fancy autos, homes, tropical islands, etc. But all of these properties require maintenance, and so you become a manager–unless you hire a manager, which then opens you up to being ripped off or defrauded. (The list of actors, sports celebrities and rock stars whose wealth has vanished in dubious "investments" and outright fraud is long indeed.)
    After you've spent whatever can be spent, then you have to concern yourself with capital preservation, and in this volatile world that is a major source of anxiety. No wonder so many lottery winners end up broke a few years after their big windfall: the constant appeals for cash and the hassles of managing wealth become too much, and squandering it is the only way to return to a sane, less anxious life.
    Or your $300 million dwindles to $5 million, and the loss deranges you to the point you shoot disruptive neighbors or otherwise snap. Many a dot-com millionaire is haunted by what they didn't do with their brief but glorious wealth.
    Now for the benefits of being ordinary. The temptations to stray are few for the ordinary; those of us with ordinary looks, brains, talent and wealth are not beset with the temptations of impossibly beautiful women/handsome men, nor do dealers approach us with offers of cocaine or other costly illegal substances. No one is willing to give themselves to us for access to our power, because we have no power beyond that residing in our bodies and souls.
    Lacking power and prestige, we are not tempted to lie to protect our power and prestige.
    Since everything we own is also ordinary, there isn't much worth stealing (except if we own older-model Japanese cars that are worth more in parts than as whole vehicles), so ordinary security measures are sufficient.
    As ordinary people, nobody expects extraordinary results or behaviors from us. Expectations of us are also ordinary, which means that good work and politeness will go a long way to meet or exceed expectations.
    The extraordinary, unfortunately, are constantly beset by expectations that are impossible to consistently meet. For example, if you are a top concert pianist, critics will be listening for any slight weakness in your performance, not just compared to others but to your past performances.
    If a money manager generates extraordinary returns one year, he is expected to meet or best that return the following year, and so on, until he quits or expires.
    Your very extraordinariness becomes a liability or a weapon used against you.
    Trying to do extraordinary things is often dangerous, for example, snowboarding Denali. Mistakes can cost you your life at this level. Even in "safe" endeavors, any failure is potentially sufficient to ruin your career.
    Thus academics without tenure must obsess over backstabbing rivals in the department or the "graduate student from Hell" whose parent happens to be a powerful, well-connected dean at a top university.
    Those seeking extraordinary standing, position, accomplishment, recognition or returns are exposed to soul-numbing burdens and pressures as those chasing the same rarefied position will stop at nothing to undermine you or increase their chances by lowering yours.
    The ordinary have no such worries. We tend to have jobs nobody wants badly enough to plot against us.
    The extraordinary must maintain high internal standards that sap the joy from life. Music loses its fun-factor when your internal standards are necessarily performance-level. If nothing less than the corner office and a partnership will do, then life becomes a vacuous treadmill of overwork and anxiety about falling short.
    The ordinary have far fewer such worries. Music remains a joy because advancement from a low level is rewarding, and the freedom from impossible job pressures is true freedom.
    As you may have noticed, I am ordinary/average in every way, with the one exception being the quantity of words I disgorge on an annual basis. I am not sure this is something to brag about, as it may well be evidence of an unhealthy imbalance somewhere in my jumbled mind.
    Otherwise I am blissfully ordinary in all other things: wealth (modest), looks (ditto), power (none), athletic ability (near-zero), musical ability (ditto), talent at learning foreign languages (ditto), stock trading ability (sub-average, constantly beaten by a monkey throwing darts), spiritual attainment (none), author (minimal sales) and so on. Everything I own is also ordinary, and the best thing I own (the Les Paul guitar) is just a production model–nothing custom, rare or fancy.
    Being extraordinary is a terrific bother, truth be told, so please appreciate the benefits of ordinariness if you are so blessed. 
    My new book Why Things Are Falling Apart and What We Can Do About It is now available in print and Kindle editions–10% to 20% discounts.

    Small Businesses Are Essential to the Economy But How Do They Stack Up As Investments

    Courtesy of Pam Martens.

    Performance of the S&P 500, 1929-2010, With and Without Dividends Reinvested

    Congress and the President should rightfully be concerned about the dramatic decline in young, small businesses coming to market as initial public offerings. These are, hopefully, the innovative small businesses that will fuel the jobs of tomorrow.  But as investments to stockholders, they lack a key element. 

    According to the U.S. Small Business Administration, small businesses: 

    • Represent 99.7 percent of all employer firms.

    • Employ about half of all private sector employees.

    • Pay 43 percent of total U.S. private payroll.

    Continue Here

    Washington: Not Serious About the Deficit

    Courtesy of Larry Doyle.

    Where is Pete Peterson when we really need him?

    While America is fed a daily diet of fiscal diarrhea from the politicians and their spokesmen, Peterson remains one of the few adults in and around Washington when it comes to the topic of confronting the fiscal cliff and more importantly our fiscal deficit.

    “Fiscal diarrhea, LD? Did you really have to go there, especially on a Friday morning?”

    Yes, fiscal diarrhea. How else is one to describe the package and remnants left for us recently by Treasury Secretary Tim Geithner, as highlighted in this interview with Bloomberg’s Al Hunt,

    In the course of a conversation I had just the other day, I mentioned that I firmly believe many in Washington on both sides of the aisle have no real interest in addressing our “out of control” spending and subsequent fiscal deficit. Geithner and his pals would point to the debt ceiling as a hindrance. Over and above that, I have often heard that even after the debt ceiling debacle of summer 2011 and the resulting credit downgrade of the United States, our borrowing rates have only come down. If that is the case, then why worry about a self-imposed debt ceiling and the deficit?

    Well, to that question, I would respond with the same question the Lord posed to Noah, “how long can you tread water?” That is, how long do we want the Federal Reserve to print money to fund our deficit while simultaneously monetizing our debt, devaluing our currency, and ultimately our quality of life. We are well on the way to all of these scenarios playing out.

    While the pols will play politics and continue to treat us like that bevy of mushrooms, Peterson continues to bang his drum about this growing problem. In fact, I would more than welcome that we tell the clowns to step aside and allow Peterson to control the reins on these issues.

    Pete Peterson is founder and chairman of the Peter G. Peterson Foundation, a nonpartisan organization dedicated to raising awareness of America’s long-term fiscal challenges and promoting solutions to ensure a better economic future. The Foundation works with leading thinkers, policy experts, elected officials, and the public to build support for efforts to put America on a fiscally sustainable path.

    What does Peterson think we should do? As stated back in 2010,

    Ideally, the country should raise as much government revenue as possible from a progressive consumption tax. Such a tax can be designed so that it won’t overly burden lower-income families but will raise significant revenues and increase our savings rate.

    However, given political realities, it is not likely that we could enact a progressive consumption tax that would raise sufficient revenues to meet our needs. Therefore, I would initiate such a tax in conjunction with a simplified income tax (that would have far fewer corporate and individual credits and deductions)—thereby allowing for lower individual and corporate income tax rates.

    Finally, we should implement a carbon tax that would reduce our dependence on foreign oil and lending, while improving the environment.

    On the spending side, the country needs to address outdated and bloated programs. Why do we spend more on defense than the next 14 countries combined? We should reinstall the tight budget controls that were used successfully in the 1990s, such as caps on discretionary spending and strict pay-as-you-go rules.

    Still, the brute fact is that Social Security, Medicare and Medicaid are projected to account for 100% of CBO’s projected long-term growth in spending (other than interest costs). With so many more elderly living much longer than ever, we have to ask: If all of us, including the relatively well off, are on the wagon, who is going to pull it? To meet these trillions of dollars of entitlement obligations, we would need to double federal taxes. Wouldn’t that be generational theft?

    In my view, any reforms to these vital programs should include reductions in benefits for better-off Americans, including options such as raising the payroll cap and making wage and price indexing of benefits more progressive. We should also gradually increase the retirement age for the able-bodied and index it to longevity.

    So, Barack, John, Tim and others, STEP ASIDE. Let Pete Peterson clean up the diarrhea left by all of you.

    Sorry but that was all too necessary.

    Navigate accordingly.

    Larry Doyle

    Please subscribe to all my work via e-mail, an RSS feed, on Twitteror Facebook.

    Peter Schiff Backs Down from Debate with Mish 3rd Time After Agreeing to Do So

    Courtesy of Mish.

    Peter Schiff was on Capital Account with Lauren Lyster on Tuesday. For that show, he was asked, and he agreed to debate me on hyperinflation. Thus, I semi-expected to be on the show as well.

    I even received email confirmation from Demetri, the Capital Account producer last Sunday.

    The headline of the email was “Peter Schiff is Good“.

    The body of the email was “I let Schiff’s people know that you were the guy he will be debating and they were cool with it so we are definitely on for next Tuesday at 12:30pm your time.

    Minus Mish (which I will gladly explain below), here is the Schiff interview with Lauren Lyster.

    Lauren challenged Schiff with “Whatever happened to hyperinflation?

    I heard an amusing response from Schiff as follows “I still say that hyperinflation is a worst case scenario. I never say we are going to have it for sure.”

    Really Peter? Really? Never?

    Here is a partial transcript of a Schiff Audio On US Hyperinflation

    The whole idea is to get out of the US Dollar. It is on the verge of collapse. The people who don’t get out of the US dollar are going to be completely broke and that is obvious. Look at what Ben Bernanke did. Interest rates are zero. Money is free.

    Bernanke is going to run up printing presses as fast as he can. This is pure inflation Latin American style. This is hyperinflation; this is Zimbabwe; this is the identical monetary policy of the Weimar Republic….

    Continue Here

    Japan approves $10.7 billion stimulus package

    Japan approves $10.7 billion stimulus package (via AFP)

    Tokyo on Friday approved $10.7 billion in fresh spending to help boost Japan's limp economy, just weeks before an election the ruling party is expected to lose. The 880 billion yen ($10.7 billion) in spending was more than double a package announced in October as the country gets set for polls that…

    [Read more…]

    Hyperinflation and the Pernicious Myth of Modern Monetary Theory: Dollar Vigilantes

    Hyperinflation and the Pernicious Myth of Modern Monetary Theory: Dollar Vigilantes

    Courtesy of Jesse's Cafe Americain

    "One might argue that when the government has to find a private sector buyer for its debt first, rather than selling the debt directly to the central bank, that imposes a certain degree of market discipline on fiscal policy. But it’s hard to see that there is all that much of a disciplinary bonus here. 

    When a central bank announces that it is prepared to buy government securities, the announcement automatically guarantees an eager private sector market for the securities – if there wasn’t one already. If dealers know that they can promptly re-sell newly purchased securities to the central bank, at some amount over the purchase price no matter how low, then they know they can make a profit from the purchase…

    This is why we have no need to worry about those dreaded bond vigilantes in a country like the US that controls its own currency and monetary operations. To the extent that the Fed signals it is willing to buy US debt aggressively, the Treasury can set almost any price it wants for its debt. So it’s not just that there is no insolvency threat haunting US public debt. There is also not a bond vigilante attack threat – not unless the Fed allows that attack to occur."

    New Economic Perspectives, Neoliberal Mythologies

    The limit of the Fed’s ability to monetize sovereign debt is the value of the dollar and its acceptance, at value, for the exchange of goods in a non-compulsory environment.   And there is nothing neo-liberal about this. I don't like the neo-liberal approach, but this notion of pain-free monetization is nuts.

    If one chooses to not worry so much about the ‘bond vigilantes,’ history suggest that they may well have a care for what I would call the ‘dollar vigilantes.’ 

    The Fed may be hard pressed to buy dollars with — dollars.

    The problem with such an approach is that one can ignore the risk for a time, trusting to probability and chance, but when the possible becomes more likely with repetition, it often results in a disaster. It is sort of like driving while texting, a tourist eating street food in Asia, or a small speculator being a non-insider customer at the Comex. 

    In a increasingly Machiavellian way, they could set up a reciprocity with another central bank or two, say, the BofE and BofJ, and perhaps even the ECB, and I think this has been done even if informally in the past.   

    But the limitations are still there, even if hidden in a fog of financial engineering.   Such an arrangement, which I think exists somewhat informally today,  is merely kicking the can of currency failure down the road.  

    "This is why we have no need to worry about those dreaded bond vigilantes in a country like the US that controls its own currency and monetary operations."

    Overt monetization only works for a protracted period in a system in which one has political control over everyone who uses that currency. The logical outcome of a global dollar regime with unilateral monetization is an eventual bid for a one world government where a false vision of reality can be enforced with — force. Force and fraud are the perennial instruments of economic tyranny.  

    Hence we are in what is called 'the currency war' wherein the US dollar monetarists are attempting to increasingly impose their will on the rest of the world, and a portion of the rest of the world defers to accept that arrangement.

    Blatant exposure is the most dreaded pitfall of any Ponzi scheme.  A fiat currency is based on faith and confidence, and the monetary magicians can hardly show their hand, directly monetizing debt without any independent restraint, for fear of provoking a panic, first at the fringes and then at the core of the nation, or empire.

    That is the policy error that is also known as 'hyperinflation,' a break in confidence in a currency that is analogous to a 'run on the bank.'  It is the case for hyperinflation which I am watching, and still give a low probability.   I am fairly sure that even Zimbabwe Ben would not fall for such an obvious trap.  But the craven dissembling of Alan Greenspan was also hard to imagine, until it happened.

    Instances of Hyperinflation from Diocletian to Bernanke

    There are other ways to deal with unpayable debts than merely printing money.  A novel idea is to make the issuers and holders of the bonds bear the negative effects of their bad judgement, as in the case of Iceland.  But the Banks will always try to shift the burden, which they have created, to the financially illiterate and the weak.    

    And the problem is not even so much the Fed's propensity to stimulation in the manner of Keynes.  The problem is that they are pouring the stimulus into an unreformed rathole of corruption, in the manner of sending aid to a country where it is intercepted by thieves and regional warlords, with little reaching the people.

    The US does not have a spending problem so much as it has a 'corrupt financial system problem,' a 'wealth inequality problem with a stagnant wage base,' an 'unsustainable healthcare model problem,' and 'a free trade without adequate domestic policy based boundaries problem.'   It was not all that long ago that the US was holding a small annual surplus.  What changed was financial deregulation with the financialization of the economy, the easing of trade conditions, concentration of corporate power, tax cuts for the wealthiest, a corrupting political campaign bubble, and unfunded discretionary wars with their associated profiteering.

    Forcing small business and workers to compete with state directed slave labor while maintaining a social system founded on private business and median worker wages is insane.  The capitalists are not yet selling them the rope, but they are certainly selling them the 97%, and with them the bulk of their customer demand over time.

    Perhaps the biggest problem is, as Lord Acton observed, that when you have a concentration of power, men with the mentality of gangsters have taken control. And the US financial system and corporate structure are highly concentrated based on historical standards, resembling the worst of the gilded age of robber barons, or some third world oligarchy in which the people live in voiceless misery.

    In summary, I call this 'just monetize the debt without restraint' alternative  the “pernicious myth of modern monetary theory.”   There are quite a few examples of how this sort of other worldly myth, like the efficient market hypothesis, the Black-Scholes risk model, and the benefits of unrestricted trade, have turned out in the past.  When you crush the reality out of a model with a few key assumptions that allow you to obtain a license to do what you will, you often open a Pandora's Box.

    The real shame is that an economic tragedy is not outside the plans of some of the worst of the country's elite. Crisis provides opportunity if one is powerful enough, positioned for it, and egotistically twisted enough to think that they can control the madness once it is unleashed. I suggested that the Bankers would make the country another 'offer that they think it cannot refuse' as they did in the manner of TARP. The so called fiscal cliff may be the wrapping paper for it.

    I am not suggesting that the current debt based currency system is optimal, not at all.  The continual theme here is that the financial system is broken, and that it is based on an unsustainable US dollar regime, and the excesses of money creation through credit expansion by private banks.  But to merely shift the corruption from the banks to their partners in the government Treasury is hardly a viable solution.

    The answer, as I calculate it, is transparency and reform, and equal justice for all, with malice towards none, in the rule of law.   That is an ideal never fully achievable, but that is the benchmark, and one that is worth pursuing,  It is sustainable if held close, and continually renewed.   That is the spirit of the American experiment in equality and freedom, and is something worth fighting for.

    “The man who is admired for the ingenuity of his larceny is almost always rediscovering some earlier form of fraud. The basic forms are all known, have all been practiced. The manners of capitalism improve. The morals may not.”

    John Kenneth Galbraith, The Age of Uncertainty 

    "Gentlemen! I too have been a close observer of the doings of the Bank of the United States. I have had men watching you for a long time, and am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. 

    When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! 

    Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I have determined to rout you out, and by the Eternal, (bringing his fist down on the table) I will rout you out."

    Andrew Jackson,  Andrew Jackson and the Bank of the United States (1928) by Stan V. Henkels

    "Do not forget that every people deserves the regime it is willing to endure! 

    Please make as many copies of this leaflet as you can and distribute them.

    The White Rose, First Leaflet, Munich, 1942

    GDPhursday – Fiscal Cliff Progress Good for 200 Points Ahead of GDP

    GDPhursday – Fiscal Cliff Progress Good for 200 Points Ahead of GDP

    By Phil of Phil’s Stock World


    Wow, what a move!

    The Dow opened yesterday and quickly dropped to 12,760 but finished the day at 12,984 as both John Boehner and President Obama made nice noises about the ongoing Fiscal Cliff talks.  Since then, we’ve had another 100 points of follow-through in the Futures and, as I commented in Member Chat yesterday, this is all very, very brave action ahead of the 8:30 GDP report, which is expected to show Q3 growth of 2.8% but, based on yesterday’s Beige Book (see our commentary here) may come in closer to 2.4%.

    If we can avoid or get past that disappointment, THEN we can put a rally together on happy talk out of Washington. Other happy talk comes from John Hilsenrath, who claims the Fed is nearing a decision at the upcoming meeting to create an additional bond-buying program to replace Operation Twist with something in the $500Bn range – and we know how the makets love rumors of More Free Money!




    As you can see from Dave Fry’s intra-day SPY chart, the bears were severely punished yesterday and this morning we move back within striking distance of closing out November back where we started – at S&P 1,420 – and we’d have to call a flat month a huge victory for the bulls at this point but still a long way to go before we work our way back to the October highs (1,470).

    8:30 am Update:  GDP was indeed a little lighter than 2.8% expected but 2.7% is not too bad and the Futures are only taking a small pause on that release.  Inventory builds, which are considered a positive, were the main contributor to the bump and now the question is whether or not we actually sell that stuff in Q4.  Private Business Inventories jumped $61.3Bn in Q3, adding 0.77% to the GDP while Real Final Sales of Domestic Products only increased 1.9% – leading to the pile-up in inventories.

    Goldman Sachs is clearly trying to engineer a big finish to November, releasing a report detailing their 1,575 price target for the S&P next year.  Expecting better growth than most, the firm likes cyclical over defensive sectors, and tech over staples, telecom, and health care. A “grand bargain” in D.C. along the lines of Simpson-Bowles “would spark a PE multiple expansion and a higher target.”


    goldman 2013 forecast


    S&P 500 sales, which are measured in nominal terms, will rise by 4.4% in 2013 and 4.7% in 2014,” wrote Goldman Equity Strategist David Kostin. “We forecast net margins will remain static as they have for the past 18 months, hovering in the 8.8%-9.0% band through the end of 2014. Given this environment, S&P 500 EPS will rise from $100 in 2012 to $107 in 2013 and $114 in 2014.”

    Goldman’s strategies to capture growth:

    (1) Stocks will outperform Treasuries;

    (2) Equities will beat credit returns, although not on a risk-adjusted basis;

    (3) Cyclical sectors will beat defensive sectors (Materials, Industrials, Information Technology will outperform Consumer Staples, Telecom, and Health Care);

    (4) Double Sharpe Ratio stocks offer both high risk-adjusted earnings growth and prospective returns; and

    (5) Stocks with high BRICs sales exposure will beat domestic-facing firms.
    We certainly don’t disagree with Goldman – I’ve been advocating staying long-term bullish and doing some bottom-fishing all through the November downturn.  It’s just their timing is very interesting – as they seem to be trying to put a little top-spin on this move into the close of the month as Blankfein also had nothing but happy talk yesterday coming out of the fiscal cliff meeting at the White House.  Clearly this situation ain’t going to be over until it’s over but, for today – everyone seems pleased – at least until someone says something else this afternoon…

    Meanwhile, we’re right back to testing our strong bounce lines at Dow 12,950, S&P 1,400, Nasdaq 3,000, NYSE 8,100 and Russell 805 and this time we need to hold them all to stay bullish.  We expected a pump job to end the month and it’s what happens after the weekend that counts – meanwhile, we’re generally bullish and well-positioned to sit back and enjoy the show while it lasts.


    Try Phil’s Stock World FREE here >


    NY Fed Mortgage Debt Data Says No US Recovery

    Courtesy of The Automatic Earth.

    Let me try to keep this short and still make the point I want to make. Lately, I've seen a huge amount of people talking about an economic recovery, certainly in the US, so much so that people who disagree with that assessment are labeled "doomer" or things like that. Again. It's an easy thing to do.

    I'll start with a graph from this New York Fed report. It depicts the – almost – 10-year development of US household debt, which culminates in a total of $11.31 trillion at the end of Q3 2012.


    The conclusion many people draw from the graph is that total debt is "still" falling. And that is supposed to mean that things are going well, or better if you will. But when I look at the graph, that's not the first thing I notice. What I see is mortgage debt at around $5 trillion in Q1 2003 and, after a peak just over $9 trillion in Q3 2008, slightly lower, at $8.03 trillion (the report provides the exact number), in Q3 2012.

    Which means that mortgage debt may have come down by about 11% over the past 4 years (while home prices, mind you, fell 33%, as per Case-Shiller), but it's still 60% (!) higher than it was in 2003. And one thing is certain: it can't stay there, and it won't. We can discuss till we're blue in the face how much it still has to go on the way south, and we can argue about how long that will take, but I would think the main point is very clear.

    That is, an economic recovery in the US is not possible when households still have to deleverage to the tune of $2-3 trillion. And no, it's not different here, or this time, and no, Americans cannot carry a 40% mortgage debt increase in 10 years either, so another $2 trillion move south is really the minimum.

    Home prices are rising a little, says Case-Shiller now. If that were to last, mortgage debt would even rise again. Unless enormous amounts of the old existing debt were cancelled, forgiven, restructured. Well, it took more than four years to shave off 11%. So you tell me, where would that sudden drop come from?

    It's not going to happen, is it? So unless you would want to argue that $8.03 trillion is the new black, something's got to give. Rising home sales and rising home construction only serve to increase the debt. While the graph leaves no doubt that the debt must decrease. By about 25-30% from where it is now ($2-3 trillion of $8 trillion), and 40-60% of the $5 trillion it was in 2003.

    Now, you could argue that people will simply need to spend a – mostly substantial – larger part of their income on paying off their mortgage debt. And many undoubtedly do exactly that as we speak. But that tears into their disposable income. And personal consumption is good for 70% of US GDP. Poof! goes your recovery.

    Wait, talking about GDP, today's GDP report from the BEA came in at +2.7%. Everybody happy! Not ideal, but not at all bad either, right? I mean, compared to Europe, compared to a few years ago, it spells recovery all over. So I couldn't help laughing when I read this quote at Business Insider:

    "The uptick in economic activity was driven almost entirely by the sharp upward revision to the estimate of inventory accumulation," wrote TD Securities Millan Mulraine. "The upswing in inventory alone contributed a chunky 0.89ppt to the increase in headline GDP, more than offsetting the 0.53ppt drag from personal consumption activity – which was revised lower from 1.9% to 1.4%, marking the slowest pace of consumption growth since Q2 last year.

    " ..Sharp upward revision to the estimate of inventory accumulation". I'll be the first to admit I don't even really know what that's supposed to mean. But I do have an idea. And that idea is that someone's trying to make a fool out of me. Estimate? Who's doing the estimating? Based on what? An upward revision of 0.89% of headline GDP compared to last quarter, just in that inventory estimate? Is that all new stuff, or has existing inventory gone up in value? Any shadow inventory involved?

    It's sort of like this quote that struck me in an interview Joe Weisenthal ran with Bill McBride of Calculated Risk last week. Which contains a lot of the very happy news I have my doubts about and that I wanted to write this article for:

    … I’m pretty sure about the timing that auto sales were going to collapse a lot further, and he had some arguments on it and I went and looked and thought “auto sales also can’t go too much further, people have to replace their cars.” And so I wrote this article that says look, auto sales are near the bottom – we were at a 9 million annual rate then- I said there’s just no way – we have to be selling 12, 13,14 million because people need new cars every 5-7,8 years.

    I do like Bill McBride, and his work, and I do like Joe Weisenthal, but I'm sorry, I simply don't think you can say things like that. It harks back all the way to the dry semantic discussion of what it is that people may a) need, b) demand and c) want. You can't say that people will buy cars because they need a new one every 5-8 years. Because they will still need to have the money to buy them. Demand is what people can afford, not what they want.

    And if you look at overall household debt levels, as I've been doing here, you realize that there's no way a bottom or even uptick in US car sales is NOT paid for with more credit/debt. And at this point in the game, with debt levels where they are, that can hardly be a good idea. Sure, it may lift stocks for a bit, since everyone still thinks the S&P reflects something real, but that one simple graph hammers any recovery conclusion you may draw from that.

    What a graph like the NY Fed one above tells you is that the low-hanging fruit has been picked when it comes to household deleveraging. On top of that, the fact that the debt itself has come down only a third of the drop in actual home prices, tells you there's much more to come on the way southbound. Or, rather, in this day and age, the way underwater.

    Anyway, I just meant to say that I think this drive towards promoting the idea of recovery is way premature. All Optimism Bias all the way. People like Bill McBride may claim they simply follow the data, but I think they simply pick the data they follow. That said, if anyone has a better, re: more positive but still credible, interpretation of the NY Fed data – and graph – , I'm all game.
    I can do with some good news. It's been a while. But that by itself doesn't make me a doomer. I'm just not as desparate for good news as some people seem to be. I still prefer reality. For now.


    First Time Unemployment Claims Drop After Sandy, But Jobs Growth Rate Slows

    Courtesy of Lee Adler of the Wall Street Examiner

    The Labor Department reported that seasonally adjusted (SA) first time claims for unemployment fell by 23,000 to 393,000 from a revised 416,000 (was 410,000) in the advance report for the week ended November 24, 2012. The number was better than the consensus median estimate of 390,000 reported by Bloomberg in a survey of economists. The effects of Superstorm Sandy began to wash out of the data stream the week before.

    Along with the headline seasonally adjusted data, which is the only data the media reports, the Department of Labor (DOL) reports the not seasonally adjusted data. It said in today’s press release, “The advance number of actual initial claims under state programs, unadjusted, totaled 357,015 in the week ending November 24, a decrease of 46,541 from the previous week. There were 372,640 initial claims in the comparable week in 2011.”  [Added emphasis mine] The year to year decline was at the rate of -8.5%.

    There was an extraordinary increase in the data in the opposite direction of a persistent 3 year trend of improvement after Hurricane Sandy. That was largely reversed in the week ended November 17.  However, the rate of year to year improvement has slowed. While this may be partly due to the after effects of the storm, it also appears to be part of a trend of slightly slowing improvement that’s been underway since 2011.  That rate of jobs growth seems to be losing momentum.

    Note: The DOL specifically warns that this is an advance number and states that not seasonally adjusted numbers are the actual number of claimants from summed state claims data. The advance number is virtually always adjusted upward the following week because interstate claims from many states are not included in the advance number. The final number is usually 2,000 to 4,000 higher than the advance estimate. I adjust for this in analyzing the data.

    Normally the increase between the advance number and the final number the following week has been around 2,500-4,000. Last week it was 6,000 and the week before 12,000, due to reporting delays caused by the storm. I adjusted this week’s reported number up by 5,000 because I expect the initial undercount to gradually drop back to the usual range of 2,500-4,000. The adjusted number that I used in the data calculations is 362,000, rounded. On this basis, the year to year decrease in initial claims was approximately -10,500 or 2.9%.

    Note: To avoid the confusion inherent in the  fictitious SA data, I analyze the actual numbers of claims (NSA). It is a simple matter to extract the trend from the actual data  and compare the latest week’s actual performance to the trend, to last year, and to the average performance for the week over the prior 10 years.  It’s easy to see  graphically whether the trend is accelerating, decelerating, or about the same.

    The week to week change was a decline of 42,000, reversing much of the massive bulge in the aftermath of the storm. Over the prior 10 years, the Thanksgiving week has usually had large decreases in claims.  The average change for the 10 years from 2002 to 2011 was a decrease of approximately 52,000. The range was +1,000 to -78,000.  Last year that week had a decline of  68,000 and 2010 saw an drop of  52,000.  By these standards, this year was a bit weaker than each of the last two years, and weaker than the average for the past 10 years. While this may be partly due to the after effects of the storm, the chart below also suggests that it may be part of a barely perceptible trend of weakening growth as the “recovery” progresses.

    The annual rate of change in initial claims has ranged from -3% to -20% every week since mid 2010, with a couple of temporary minor exceptions. Since mid 2011 the annual rate of change has been within a couple of percent of -10% in most weeks. The trend has been remarkably consistent. But a second trend is now also visible on the annual rate of change graph at the bottom of the chart  that shows a clear channel of slightly higher lows and higher highs indicating a slowing rate of improvement as the trend moves toward zero year to year change. This week’s annual rate of change at -2.9% is right at the upper limit of that channel.

    Initial Unemployment Claims - Click to enlarge

    Initial Unemployment Claims – Click to enlarge

    Plotted on an inverse scale, the correlation of the trend of claims with the trend of stock prices over the longer term is strong, while allowing for wide intermediate term swings in stock prices. Both trends are largely driven by the Fed’s operations with Primary Dealers (covered weekly in the Professional Edition Fed Report; See also The Conomy Game, a free report). The chart below has suggested for a while that as long as the trend in claims is intact, the S&P would be overbought at approximately 1450, and oversold at roughly 1220.  On that basis it became overbought in mid September.

    The market has pulled back since then, but whether it’s headed all the way to 1200 is doubtful, given that the Fed’s QE 3 purchases began to settle just in mid November. If the program continues at its current rate it will grow the Fed’s balance sheet by 20% and send lets of cash toward the market over the next 12 months. The FOMC October meeting minutes suggest that the Fed will expand QE. I expect it also to attempt to paper over the “fiscal cliff” just as it did with Y2k. I call the prospective anti fiscal cliff money printing, the “fiscal cliff notes” program.  The Y2k papering episode helped to trigger the final blowoff of the internet bubble in Q1 2000. If no “Grand Bargain” is reached on the fiscal cliff, I expect Fed policy and the result to rhyme with Y2k in Q1 of 2013.

    Some bubble jobs will likely be created in the process.  But at the same time, the inflation that accompanies the money printing, whether in asset prices, commodities, or in consumer prices will force the Fed to stop QE. At that point the markets and economy will deal with the hangover from the program. In the meantime the market is likely to party on.

    [I cover the technical side of the market in the Professional Edition Daily Market Updates.]

    Initial Unemployment Claims and Stock Prices - Click to enlarge

    Initial Unemployment Claims and Stock Prices- Click to enlarge


    Get regular updates the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market, in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Click this link to try WSE's Professional Edition risk free for 30 days!

    Copyright © 2012 The Wall Street Examiner. All Rights Reserved. The above may be reposted with attribution and a prominent link to the Wall Street Examiner.

    Doug Casey: The US Is Now the United (Police) State of America

    In this interview by Louis James, Doug Casey makes a strong case that the United States has become a police state.

    Doug Casey: The US Is Now the United (Police) State of America

    Louis: Doug, after conversations like the one we had last week, we often get letters from angry readers who accuse you of hating America, disloyalty, and perhaps even treason. These people don't know or understand what I do about you – that you love the idea that was America. It's the United State it has become for which you have nothing but contempt. Perhaps we should try to explain this to them?

    Doug: I doubt it would work; it's a tough row to hoe, trying to explain things to people who are so set in their thinking that they truly and literally don't want to hear anything that might threaten their notions. A person who feels threatened by ideas and who responds with emotion is acting irrationally. How can we have a discussion with someone whose emotion trumps their reason? How do we even begin to untangle the thinking of people who will gather this week to give thanks for the bounty produced by freedom and hard work – the famous puritan work ethic – by eating a turkey bought with food stamps?

    But we can outline the ideas, for the record.

    Louis: I'll bring a copy if they ever do put you on trial for thought crime – which is frighteningly close to being real these days and called treason to boot.

    Doug: It's not just close; it's here. Just try telling an unapproved joke in a security line in an airport these days.

    Louis: True enough. Where to begin?

    Doug: At the beginning. America was founded as a confederation of independent countries – that's what a state is. Or was, in our language. The original United States of America was a confederation of countries that banded together for protection against larger and more powerful countries they feared might be hostile. This is not a disputed interpretation of history, but as solid a fact as the study of history produces – and yet a largely neglected one.

    Louis: We did cover this ground briefly in our conversations on the Civil War and the Constitution.

    Doug: So we did… the short version being that the US Constitution was essentially a coup; the delegates to what we now call the Constitutional Convention were not empowered to replace the existing government – only to improve upon the Articles of Confederation between the then-independent states. The framers of the Constitution drafted it with the notion of a national government already in place, but calmed fears of loss of state sovereignty by calling the new government the "United States of America" – a verbal sleight of hand that worked for over half a century. Then the southern states decided to exercise what these words imply, their right to leave the union. While slavery was and is a wholesale criminal activity I object to in every way possible, the southern states did have the right to secede, both legally and ethically. But the question was settled by force, not reason, and the wrong side won.

    Louis: Another coup?

    Doug: More like an exposure of the first one for the whole world to see. But by then it was way too late. Despite this, the relative freedom of the US – because it was for many years far freer than other countries – made it possible for artists, engineers, inventors, and businesspeople to flourish and create a society more wealthy and powerful than any the world had ever seen. This is what I call the idea of America – the America That Was.

    But the seeds of destruction were already sown at the very beginning – with the Alien and Sedition Acts being perhaps the first highly visible step in the wrong direction. Then came the forceful assertion of one national government, with states reduced to administrative regions via the War of Southern Secession, from 1861-'65. I'm no fan of state governments, incidentally, but at least they're smaller and closer to their subjects than the federal government. Another major step in the wrong direction occurred with the Spanish-American War of 1898, where the US acquired an overseas empire by force. The next major step downhill was the creation of the Federal Reserve and the income tax, both in 1913, just in time for World War I. It took time for these things to make the system crash, because it was still a fairly free economy.

    Louis: But crash it did in 1929…

    Doug: Yes. And it led to the Great Depression of 1929-'46, which lasted so long entirely because of the unmitigated disaster of the New Deal (which we discussed recently). The New Deal injected socialist-fascist ideas into mainstream American thought like a poisonous acid, corrupting the heart of the idea of America that once made the place great. The process was completed with Lyndon Johnson's Great Society, which really established the basis of the welfare-warfare state. It truly set the stage for the total ethical, economic, social, political, and even military disaster now unfolding before our eyes.

    Still, the beating heart of the idea of America – which is to say both social and economic freedom – took time to corrupt. Like a strong man who doesn't know he's headed for a heart attack, American culture didn't really peak until the 1950s. The bullet-finned 1959 Cadillac is a symbol of this peak, in my mind.

    Louis: Then we had Johnson and his "guns and butter" policy – War in Vietnam and War on Poverty at the same time – followed by tricky Dick kicking the last leg out of under the stool by taking the dollar off an even theoretical gold standard.

    Doug: Yes. Nixon was arguably even a worse president than Johnson, with the devaluation of the dollar in 1971 and his creation of the War on Drugs. Things have spiraled out of control since then. In The Casey Report, we've written reams about these last decades and how they led to and shaped what's happening now. But I have to say, the focus has been largely financial.

    Louis: Which is as it should be, in a publication designed to help investors navigate these turbulent times.

    Doug: Yes, but the corruption goes way beyond that, beyond even the senseless wars and idiotic foreign policy we discussed last week. America, once the land of the brave and the home of the free, is well on its way to becoming a police state – worse than any we've seen in the past, including the Soviet Union and Nazi Germany.

    Louis: How could it get worse than that?

    Doug: Because Big Brother has better technology now, allowing possible manipulation and control of the population that Stalin and Hitler never dreamed of. And because the US used to be such a great place, a lot of people have been tricked into believing it's the same as it was. But there's no more resemblance between the America of old and the US of today than there was between the Rome of the Republic and the Rome of the later emperors. Furthermore, most Americans have conflated the government with society. They're not only different things, but often antithetical.

    Louis: I thought you said you're an optimist!

    Doug: I am. But that's for the survivors who make it through the wringer the global economy – and every person on this planet – is about to go through. I keep telling you that the coming Greater Depression is going to be even worse than I think it is. You may think I'm joking, but I'm not. I do think that, primarily for reasons we discussed in our conversation on technology, what comes next will not only be even better than I imagine, it will be better than I can imagine… but first we have to go through the wringer. I see no way around it. I truly don't.

    Louis: Okay, I know you believe that. Can you substantiate the police-state claim?

    Doug: Well, rather than give you anecdotal evidence – of which there are masses more each day – let me refer to a rather perceptive blog post by a George Washington law professor named Jonathan Turley, titled 10 Reasons Why the US Is No Longer the Land of the Free. I'm sure I don't see everything the way the professor does, but the list struck me as quite accurate and very important for people to understand.

    Louis: I'm sure I don't want to hear this, but okay, shoot.

    Doug: [Chuckles] Maybe you don't, but I know you value the truth. These points underline something I've said for years: the Bill of Rights is a completely dead letter. It's essentially meaningless and rarely even gets the benefit of lip service. Quoting it will result in derision, if not arrest as a dangerous radical.

    Frankly, I didn't think the civil liberties situation could get worse than it was under Cheney-Bush, but it has. Obama has repealed none of what they did – and added more. So, let's go through the list. First:

    Assassination of US citizens: "President Obama has claimed, as President George W. Bush did before him, the right to order the killing of any citizen considered a terrorist or an abettor of terrorism."

    Of course the very concept of terrorism is highly malleable, with over 100 definitions floating about – as we've discussed. But apart from that, it's now accepted that the president and his minions have the right to kill almost anyone. This conceit will get completely out of control after the next real or imagined major terrorist incident.

    Louis: This reminds me of the extraordinary powers given to government agents to battle the War On Some Drugs – like the RICO statutes – which have now been turned against ordinary citizens who have nothing to do with the drug trade.

    Doug: Exactly. Once you give the state a power – for whatever good reason you imagine it needs it – it will use that power for whatever those in charge feel is in their interests. And those in charge are never saints.


    Indefinite detention: "Under the law signed last month, terrorism suspects are to be held by the military; the president also has the authority to indefinitely detain citizens accused of terrorism."

    This was a precedent set by Guantánamo, where scores of the accused continue to rot without even a kangaroo-court trial.

    Arbitrary justice: "The president now decides whether a person will receive a trial in the federal courts or in a military tribunal, a system that has been ridiculed around the world for lacking basic due process protections. Bush claimed this authority in 2001, and Obama has continued the practice."

    As the government becomes more powerful, it's completely predictable that everything – including the justice system – will become ever more politicized. And government very rarely relinquishes a power it's gained. I particularly like the Supreme Court ruling in April 2012 that allows anyone who's arrested for anything – including littering or jaywalking – to be strip-searched.

    Louis: Note to readers: you can't hear Doug's voice, but I assure you that his use of the word "like" is sarcastic.

    Doug: Just so. Moving right along:

    Warrantless searches: "The president may now order warrantless surveillance, including a new capability to force companies and organizations to turn over information on citizens' finances, communications and associations. Bush acquired this sweeping power under the Patriot Act in 2001, and in 2011, Obama extended the power, including searches of everything from business documents to library records."

    Privacy is now a completely dead concept, from both a legal and a practical point of view. If you want to retain privacy, you now have no alternative to relocating outside the US.

    Louis: Or any advanced Western country. I've read that there are more surveillance cameras per square mile in London than anywhere else.

    Doug: I've heard that too. The opposite being true in rural Argentina is one of the things I like about it. Back to the list:

    Secret evidence: "The government now routinely uses secret evidence to detain individuals and employs secret evidence in federal and military courts. It also forces the dismissal of cases against the United States by simply filing declarations that the cases would make the government reveal classified information that would harm national security…"

    "National security" essentially amounts to nothing more than government security, which amounts to cover for the individuals in the government. Nazi Germany and the USSR were national-security states. As I've tried to explain in the past, once a critical mass is reached, it's impossible to reform a government. I believe we've reached that state in the US.

    War crimes: "The world clamored for prosecutions of those responsible for waterboarding terrorism suspects during the Bush administration, but the Obama administration said in 2009 that it would not allow CIA employees to be investigated or prosecuted for such actions. This gutted not just treaty obligations but the Nuremberg principles of international law."

    Torture by field operatives under the stress of combat is one thing; torture as official policy is something else again. But torture is now accepted in the US. Worse, there are far more serious war crimes than torture being committed in the name of the US that are going unpunished.

    Louis: This is, after all, a far darker version of the same US government that deliberately infected black US citizens with syphilis just to see what would happen, and sent US citizens of Japanese descent to concentration camps during WWII.

    Doug: Exactly. The next point is:

    Secret court: "The government has increased its use of the secret Foreign Intelligence Surveillance Court, which has expanded its secret warrants to include individuals deemed to be aiding or abetting hostile foreign governments or organizations. In 2011, Obama renewed these powers, including allowing secret searches of individuals who are not part of an identifiable terrorist group."

    You no longer live in a free country when there's zero privacy for citizens, but 100% secrecy for the government and those it employs.

    Immunity from judicial review: "Like the Bush administration, the Obama administration has successfully pushed for immunity for companies that assist in warrantless surveillance of citizens, blocking the ability of citizens to challenge the violation of privacy."

    The government has outsourced some of its functions – not least the use of contractors in war zones. Increasingly, being associated with the government gives you a "get out of jail free" card. In the USSR they called this a "krisha" – a roof.

    Continual monitoring of citizens: "The Obama administration has successfully defended its claim that it can use GPS devices to monitor every move of targeted citizens without securing any court order or review."

    Bad as this is, it's just one example. There's also the use of domestic drones, and hundreds of thousands of cameras that take pictures of everyone everywhere.

    Extraordinary renditions: "The government now has the ability to transfer both citizens and noncitizens to another country under a system known as extraordinary rendition, which has been denounced as using other countries, such as Syria, Saudi Arabia, Egypt and Pakistan, to torture suspects."

    Yes, if someone is kidnapped, there's plausible deniability if the torturing is done abroad by a third party. And they're likely to have even fewer compunctions.

    Louis: That's a pretty depressing list, Doug.

    Doug: And this is just the beginning. As I've said before, I don't call the shots – just try to tell the truth as I see it. The point is that you couldn't assemble a list like this even 15 years ago. But now it's part of the firmament. Worse, it's going to grow. As the economy turns down over the next few years, the people – acting like scared chimpanzees – will ask the government to "do something." And it will. The trend is going hyperbolic.

    Louis: I can't argue… and I agree it is not likely to be stopped. So if this is a sure trend, are there investment implications?

    Doug: This just goes to reinforce what I've been saying for some time. As great as a US citizen's risk is in the marketplace these days, the greatest single risk to their wealth and health is the government. People simply must internationalize to diversify their political risk. I can't stress that strongly enough.

    Louis: Would you go so far as to say that being a taxpayer in the US now is like being a Jew in Germany in the mid-1930s?

    Doug: That's a good analogy. It's costly and upsetting to uproot, but the risk if you don't is unimaginably worse. And I would warn people in other countries to take the same precautions. All of these nation-states are dying dinosaurs that will cause a lot of damage as they thrash about in their death throes. No place is completely safe, but you improve your odds by not putting your eggs all in one basket.

    Louis: Okay, I guess we've covered that plenty of times. Is there a "police-state play" – any investments one could make before the new Iron Curtain slams down? Handcuff manufacturers?

    Doug: Nah – they have those plastic zip-binder things now; they're so cheap that I doubt the manufacturer can even make big money in volume. But I do remember a speech I attended in the '90s given by William Bennett, the ex-Drug Czar, who recommended investing in prisons. I excoriated him as a sociopath at that meeting – but he was right. However, that ship has sailed; it's hard to believe the US can incarcerate more than the current 2.3 million people. Besides, I find it morally offensive to capitalize on what I consider to be criminal enterprises. No, for now the only absolutely crystal-clear imperative is as above: You've got to have a Plan B ready in case you need to get out of Dodge – and you need it pronto.

    And to those who celebrate Thanksgiving, I urge you to remember that it was hard work and the freedom to profit from it that created the bounty the pilgrims celebrated. It was this enterprising spirit and the liberty to exercise it that was the heart of the idea of the America That Was – the idea that made America great. Those corrupt politicians who have been undermining these values for so long and the willfully ignorant ideologues who support them are responsible for turning this country into the United (Police) State of America. They should be criticized and opposed at every opportunity.

    Louis: Okay, Doug. Thanks for another challenging but enlightening conversation.

    Doug: My pleasure.

    Doug Casey –a renowned contrarian investor and speculator, and a highly respected author and public speaker – has never been afraid to speak his mind. His staunch free-market advocacy make his ideas a welcome respite from the ongoing calls for more government interference for many. Agree or disagree with Doug, he will give one something to think about… and on subjects as diverse as the TSA; health and the state of health care in the US; speculative fiction; capitalizing on corruption; war; charity; and many more.

    Right now you can get a terrific deal on Doug Casey's ideas and insights: his first book in 15 years, aptly titled Totally Incorrect, is due out in early December. Learn more about Totally Incorrect and pre-order your copy – plus a few for gift-giving – today at a great discount.

    New Meaning of the Word Voluntary; Bond Buyback Balancing Act

    Courtesy of Mish.

    It is a deep stretch of the imagination to twist arms and appeal to “patriotic duty” in an effort to coerce someone to do something they really do not want to, then call the action “voluntary”.

    It is yet another thing to claim something is voluntary yet tell them it is “required”. The latter has happened (again), when it comes to Greek debt.

    The Financial Times reports Athens banks told of debt buyback ‘duty’

    Yiannis Stournaras made clear the country’s four largest banks, which together hold about €17bn of government bonds, would be required to sell their entire holdings even though the buyback is billed as “voluntary”.

    It was the “patriotic duty” of Greek bankers to ensure the success of the buyback, due to be launched next week by the country’s debt management agency with up to €14bn of additional European funding, Mr Stournaras said on Wednesday.

    Yet Athens bankers appeared reluctant to be forced into a sale that would weaken their balance sheets and discourage local investors from participating in rights issues expected early next year as part of a €24bn recapitalisation of the sector.

    “The banks stand to lose some €4bn by having to sell their bonds at around 33 cents on the euro,” said one Athens banker.

    About half the €62bn of bonds issued in a partial restructuring of Greek debt last February are held Greek banks, pension funds, state entities and individual investors.

    The debt management agency is set to announce details next week of the buyback scheme, which would be completed by December 12, the day before eurozone finance ministers are due to give the green light for disbursing the Greek aid payment.

    “Voluntarily Forced”

    Whereas Greek banks may be “voluntarily forced” (as if such a ludicrous idea even exists) into steep losses, anyone else holding such debt sure will not be.

    Once again this whole notion of “voluntary” rests on arbitrary decisions as to what will trigger credit default swaps.

    In that regard, please recall that in October 2011, the labeling of labeling 50% haircuts on Greek debt as “voluntary” proved many “Standard” Credit Default Swaps on Greece Are a Sham….

    Continue Here

    In 1929, Deflation Started in Europe Before Overtaking the U.S.

    In 1929, Deflation Started in Europe Before Overtaking the U.S. 

    What Happens in Europe Will Not Stay in Europe 

    By Elliott Wave International

    More than 1,500 years after the fact, scholars still debate the causes of the Roman Empire's fall.

    What historians do agree on is that the crumbling empire's final days were marked by economic contraction, a struggle to fund Rome's routine affairs and excessive debt.

    Sound familiar?

    Mark Twain said, "History doesn't repeat itself, but it does rhyme."

    That quote seems to apply when economically comparing the Roman Empire and the United States.

    Today's superpower also faces a mountain of debt and a slow economy.

    Unlike then, however, the modern economy is global.

    So an economic downturn in one major area of the globe is likely to affect another. In fact, even during the Great Depression (long before the phrase "global economy"), Europe was exporting to America.

    But one historic export was not the kind that the U.S. welcomed.

    The economy is clearly vulnerable to a debilitating wave of debt deflation. The threat is approaching quickly from an important source: Europe. The same sequence of events occurred in 1929, when deflation started overseas before lapping onto U.S. shores.

    The Elliott Wave Financial Forecast, January 2012

    The Financial Forecast has long kept a careful eye on the threat Europe's debt crisis poses to the U.S. economy.

    The economic slowdown that EWFF characterized in January as Europe's "top export" is finally reaching foreign shores. Several financial news outlets report that the U.S. and China are now "slipping in sync" with Europe.

    The Financial Forecast, June 2012

    And recent news registered the economic slowdown.

    • Small Businesses Grow Wary; See Fewer Hires — Reuters, Oct. 9

    • IMF Slashes Forecasts for Global Economic Growth — CNBC, Oct. 8

    • World Bank Cuts East Asia GDP Outlook, Flags China Risks — Reuters, Oct. 7

    • Europe's Richer Regions Want Out — New York Times, Oct. 7

    • Entrepreneurship is 'weaker than ever' — CNNMoney, Oct. 5

    • The U.S. unemployment rate tumbled to 7.8% in September but a broader measure was flat at 14.7%. [emphasis added] – Wall Street Journal, Oct. 5

    • Orders to U.S. Factories Plunge — Bloomberg, Oct. 4

    • Spain's Tax Take Tumbles as Companies Go Abroad — Reuters, Oct. 3

    • Trade Slows Around World — Wall Street Journal, Oct. 1

    Indeed, the European Central Bank recently initiated a new bond buying plan, the Bank of Japan just expanded its asset purchase and loan program, and the Federal Reserve announced QE3.

    But don't count on central bankers to rescue the global economy.

    Consider what Robert Prechter said in the July 2012 Elliott Wave Theorist:

    The Fed's actions are short-term inflationary but are setting up a bigger crash than would happen otherwise.

    Why do The Fed and other central banks around the world keep making these types of mistakes? You can find out for free. See below for details.

    Take An Important Step Toward Understanding the Federal Reserve System

    In the free 34-page eBook, Understanding the Fed, you'll learn how the Federal Reserve controls the money supply, you'll pin-point a few critical points in Federal Reserve history, and you'll uncover several important myths and misconceptions, like who owns the Federal Reserve Bank.

    This eye-opening report, which represents more than 10 years of research, goes beyond the Fed's history and government mandate; it digs into the Fed's real motivations for being the United States' "lender of last resort."

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    This article was syndicated by Elliott Wave International and was originally published under the headline In 1929, Deflation Started in Europe Before Overtaking the U.S.. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

    Paul Krugman’s Dangerous Misconceptions

    Courtesy of Pater Tenebrarum of Acting-Man blog

    How to Deal with Economic History

    In a recent article at the NYT entitled ‘Incredible Credibility‘, Paul Krugman once again takes aim at those who believe it may not be a good idea to let the government’s debt rise without limit. In order to understand the backdrop to this, Krugman is a Keynesian who thinks that recessions should be fought by increasing the government deficit spending and printing gobs of money. Moreover, he is a past master at presenting whatever evidence appears to support his case, while ignoring or disparaging evidence that seems to contradict his beliefs.

    Among the evidence he ignores we find e.g. the ‘stagflation’ of the 1970’s, or the inability of Japan to revive its economy in spite of having embarked on the biggest government deficit spending spree ever in a modern industrialized economy. Evidence he likes to frequently disparage is the evident success of austerity policies in the Baltic nations (evident to all but Krugman, one might say).

    As readers of this blog know, we are generally of the opinion that it is in any case impossible to decide or prove points of economic theory with the help of economic history – the method Krugman seems to regularly employ. This is why we listed the evidence he ignores or disparages: the fact that there exists both plenty of evidence that contradicts his views and a much smaller body of evidence that seems to support them at an unreflected first glance, already shows that the positivist approach to economic theory must be flawed.

    An economist must in fact approach things exactly the other way around, but then again it is a well-known flaw of Keynesian thinking in general that it tends to put the cart before the horse (examples for this would be the idea that one can consume oneself to economic wealth instead of saving and investing toward that goal, or that employment creates growth; it is exactly the other way around in both cases).

    So how must one approach the ‘evidence’ of economic history? As we have shown on numerous occasions, an especially dumb method is to look at prices in financial markets and then conclude that these markets ‘know’ something about the future. The proper method is to have a tenable, causal-realist economic theory first, and then employ that in interpreting the facts of economic history. Most historians, even so-called economic historians, have failed in this task. The reason why one must use this approach is that economics is not like physics: there are no repeatable experiments one could conceivably conduct to ‘test’ a hypothesis.  Human beings are not rocks, they have minds and volition, they pursue goals and must employ scarce economic means to attain them.  One therefore requires a theory of human action before embarking on the task of interpreting economic history.  Every incidence of economic history is unique, and subject to a myriad of disparate factors that are interlocking and producing the outcomes observed. It is not even possible to isolate all these factors with precision. And yet, underlying each episode are undoubtedly the laws of praxeology and economics – they constrain both our interpretations of the past as well as our forecasts of the future.

    What Do Financial Markets Know?

    As noted above, financial markets really don’t ‘know’ anything. It is certainly true that their prices convey signals to actors in the economy, but given the fact that money is centrally planned by a bureaucracy, these signals are more often than not grossly distorted and misleading.

    In his article Krugman discusses the fact that both the UK and the US currently  have very low government bond interest rates – and complains that some observers ascribe the UK’s low level of interest rates to ‘austerity’. If that’s the case, so Krugman asks, then why are they also low in the ‘non-austere’ US? Of course the whole point of the exercise is to disparage fiscal restraint. Krugman already  makes a major misstep by taking it as a given that there is actually ‘austerity’ in the UK. In reality, there is only talk about austerity; the thing as such doesn’t yet exist. Here is for instance a recent Bloomberg report entitled: “UK Deficit Unexpectedly Swells on Spending Gain”. We read there:

    Worse-than-expected public sector borrowing in October has put the pressure back on the chancellor,” Robert Wood, an economist at Berenberg Bank in London who was advising Bank of England policy makers until earlier this year, said in an e- mailed note. “Stalling growth means the deficit is likely to overshoot official forecasts this year, while the growth forecasts in the last budget are likely to be scaled back.”

    (emphasis added)

    Does this strike anyone as an example of ‘austerity’? In the UK is has never been more than a hollow phrase, a political slogan. The reality has so far failed to live up to it.

    Krugman also cavalierly omits the not insignificant fact that the Bank of England has bought some £375 billion of outstanding UK gilts, almost 30% of the long term government debt in issue. Could it be that this might have had an effect on their interest rates? Similarly, in 2011, the Fed bought some 60% of the treasury debt issued that year in the course of ‘QE2’. With ‘Operation Twist’ it has continued to remove long term debt from the market.

    However, Krugman does of course mention that possession of the printing press is an advantage in these matters. Let us look at what he writes:

    “There’s an interesting mix of contrast and similarity between the policy debates in Britain and the United States right now. In both countries — as in every country that retains its own currency and has debts denominated in that national currency — interest rates are near record lows.

    “However, Very Serious People tell very different stories in the two nations. In the United States, we supposedly have low borrowing costs despite our budget deficit — and if we don’t implement Bowles-Simpson immediately, the bond vigilantes will attack. Really! This time we mean it!

    Meanwhile, in the UK, the official line is that the low rates are a reward for all that fiscal austerity — and VSPs get upset and abusive if someone well-informed points out that a much better explanation is that investors expect the economy to remain weak, and hence for short-term rates to remain very low, for a long time.

    Let’s unpack this a bit. It’s very hard to come up with any reason why either the US or the UK might default, since they can simply print money if they need cash. And given the absence of real default risk, long-term interest rates should be more or less equal to an average of expected future short-term rates (not exactly, because of maturity risk, but that’s a fairly minor detail).

    So if you expect the US and UK economies to be depressed for a long time, with the central bank keeping rates low, long rates will be low too — end of story.

    But won’t that money printing cause inflation? Not as long as the economy remains depressed. Budget deficits could lead people to expect higher inflation down the road, once the slump finally ends — but that would be a good thing for the economy in the short run, discouraging people from sitting on cash and weakening the exchange rate, thereby making exports more competitive.

    The point, then, is that the whole “credibility” argument is incoherent.”

    Let’s for the moment leave aside the absurd contention made at the end of his post that ‘inflation’ (here meaning rising prices of goods and services) and a depreciating currency are somehow ‘good’.

    First, here are a few things we agree with:

    Krugman is correct that expectations regarding the economy’s future performance play a role in keeping interest rates low. It would be more precise to state that the associated ‘inflation expectations’ (i.e., the market’s estimate of the future rate of change of CPI) are affecting long term interest rates. Moreover, there is the fact that a large group of investors has been scared of investing in assets deemed risky since the 2008 crisis. This can be seen by looking at yields on highly rated government bonds everywhere. Since 2008 there has also been a growing shortage of highly rated debt, which plays an important role as collateral in repo markets. This is yet another reason why such debt is being bid up. Some countries even enjoy negative nominal interest rates on the short end of the maturity curve. So rates are kept low  not only due to the fact that central banks are shrinking the supply of debt with quantitative easing.  Krugman is also correct that ‘austerity’ isn’t what keeps UK interest rates low, not least because there simply is no ‘austerity’ in the UK.

    However, he then commits a grave error: for one thing, he concludes that the markets ‘know’ something, and that therefore one shouldn’t worry about how big the public debt mountain becomes, especially not if the country concerned has its own money printing press at its disposal.

    To this we would counter: 5 year credit default swaps on Greek government debt sold for 35 basis points in 2007. Four years later, Greece defaulted and the same CDS had soared to more than 26,800 basis points. What did the market ‘know’ in 2007? It ‘knew’ that no sovereign debtor in the developed world would ever default. What did it know four years later? That Greece would default with absolute certainty.

    It is the same story with the ultra-low interest rates on the government debt of countries that is currently rated AA or AAA. Today, the markets ‘know’ that this debt is ‘safe’ . This fact per se tells us precisely nothing about future states of knowledge. A few years hence, the markets may ‘know’ decidedly otherwise.

    Defaults and the Printing Press

    However, so Krugman would counter, taking a leaf from the chartalist ‘State Theory of Money’ (today called ‘MMT’), Greece didn’t have control over the printing press! Surely it would never have defaulted if it did!

    We would say that depends on one’s definition of ‘default’. In all likelihood, given the size of Greece’s debt and the intractable corruption and inefficiency of its administration, it would have inflated its currency into oblivion. That would effectively have been a default as well, even if not a ‘formal’ one. The bonds would still have been repaid; only with money worth perhaps one tenth of what it was worth when the debt was contracted. For bond holders it makes no practical difference if they get 10 lepta on the drachma after a ‘formal’ default or after the value of the drachma has been destroyed.

    Krugman then compounds his error by asserting that there is an ‘absence of default risk’ in the rest of the developed world (ex the European periphery, one presumes). That is a big leap of the imagination; in fact, if nothing is changed about the ‘mandatory’ portion of government spending on future entitlements, default – one way or the other – seems all but certain.

    Not content with making such sweeping pronouncements about an unknown future, Krugman then asserts that “But won’t that money printing cause inflation? Not as long as the economy remains depressed”.

    As Kyle Bass noted in a recent letter to investors in Hayman Capital, this entire train of thought – that governments who have their own printing press won’t default and that there can be no inflation in a depressed economy – may be one of the most dangerous misconceptions of our time.

    Leaving aside that every single housewife in America and Europe would gape at Krugman’s statement about inflation in recessionary times with incredulity (after all, just because the effects of inflation on prices don’t show up in government’s ‘CPI’ statistics does not mean that such effects are not noticeable), Krugman seems to have completely forgotten that Keynesians said the same thing in the 1950s and the 1960s, and then found themselves completely unable to explain the ‘stagflation’ of the 1970s. In fact, this episode almost buried the Keynesian dogma for good. It is no coincidence that people like Milton Friedman and Friedrich Hayek rose to prominence during the decade. Krugman has conveniently forgotten it ever happened.

    However, if one thinks things through properly, one should realize that a weak economy is by no means a ‘guarantee’ for tame ‘price inflation’, given that central banks indeed print a lot of money whenever the economy weakens. Assume for instance that the credit boom preceding the bust has weakened the economy’s pool of real funding to such an extent that it is no longer possible to divert resources toward various bubble activities. The production structure will have to be shortened then, no matter how much additional money is thrown into the economy, as the real resources necessary to keep the existing length of the structure intact simply won’t be there. As Ludwig von Mises reminds us (in Human Action, ch. XX, 6 ):

    “However conditions may be, it is certain that no manipulations of the banks can provide the economic system with capital goods. What is needed for a sound expansion of production is additional capital goods, not money or fiduciary media.”

    By necessity this will over time lower the economy’s output. Then, at some future point, there will arise a situation when fewer goods are chased by a massively grown wall of money. In short, recessions actually have an inbuilt long term tendency to negatively influence the purchasing power of money both from the monetary policy side as well as from the goods-induced side.

    Moreover, one thing that Krugman always completely ignores are the highly variable and often very large lag times involved (another reason why today’s low interest rates tell us absolutely nothing about the future).

    After all, we know for a fact that the true broad US money supply stood at $5.3 trillion on January 1 2008, and stands at nearly $9 trillion today. There has already been massive inflation.

    As Ludwig von Mises writes about the manner in which inflation and its effects on the purchasing power of money proceed (in Human Action, ch. XVII, 8):

    The course of a progressing inflation is this: At the beginning the inflow of additional money makes the prices of some commodities and services rise; other prices rise later. The price rise affects the various commodities and services, as has been shown, at different dates and to a different extent.

    This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation.

    There are still people in the country who have not yet become aw-are of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.

    But then finally the masses wake up. They become suddenly aware  of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The  crack-up boom appears. Everybody is anxious to swap his money against “real” goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.”

    (emphasis added)

    Clearly, we are at the point in time where only the prices of ‘some commodities and services have risen‘, the ‘first stage that may last for many years’. The demand for cash balances still remains high, and there is therefore in theory still time for the monetary authority to abandon the inflationary policy before things get out of hand. It should be obvious though that the rate at which government debt increases will influence the decision making of the monetary authority, regardless of its nominal ‘independence’. Once public opinion about the inflationary policy changes – i.e. the point in time when the Fed’s vaunted ‘credibility’ goes up in smoke because the ‘masses wake up’ – it will be too late.

    Krugman is certainly correct that the government will then not necessarily formally default on its previously contracted debt; but the holders of the debt will get paid in ‘scrap paper’.


    Paul Krugman – coming to wrong conclusions about the future on the basis of cherry-picked slices of the recent past …

    Tom Cloud: Wholesale Gold Inventories Evaporating

    Courtesy of John Rubino.

    In this week’s interview with gold dealer Tom Cloud of National Numismatic Associates, we cover one very timely topic – the sudden decline in gold inventories – and one perennial question – how can an individual put physical precious metals in an IRA.

    DollarCollapse: Good to talk to you again Tom. Let’s start with your observation that the major gold wholesalers don’t seem to have their usual level of inventory. Why the sudden tightness?

    Tom Cloud: Of the seven or eight major wholesalers that send me price sheets, almost every one is having supply issues. Some [coins and bars] I can get right away, but most take between a few days and two weeks.

    The wholesalers don’t necessarily know why this is, but some speculate that the 58 tons that China’s central bank purchased in September was responsible, and that [the Chinese] purchased at least that much more in October. When a big seller elects to sell something they don’t even put it in the market any more, they just call up China’s central bank, and we see the report four weeks later, if we see it at all.

    And it’s not just China. Central banks in general are buying. Until 2011 central banks were selling gold but in the last two years hardly any are selling and many are buying. I’ve been doing this for 35 years and last month made my first sale to a central bank.

    Another factor is the new Basel III agreement in which gold counts for what it’s worth rather than 50% of what it’s worth, which makes it a more attractive asset for banks.  And the final factor is that more Americans are moving into metals, which is producing more small orders to go with the big orders from central banks. It’s different for each wholesaler, but the overall effect is to tighten inventories.

    DC: That’s great news for gold bugs. Now, for those who have money in an IRA and want to convert some of it to bullion, how can they do that?

    TC: We’re starting to see people actually move physical gold out of these ETFs. GLD, for instance, has been trading at a big discount. Why would GLD be selling at a discount if there wasn’t anything wrong with the fund? Of course there’s plenty wrong with it, as Andrew McGuire has testified.

    Instead of bullion ETFs, a lot of people are choosing to set up self-directed IRAs that can hold bullion directly. The first step is to find a government-approved custodian. There are ten or eleven out there but I find the two most user-friendly to be Sterling Trust and Goldstar Trust. You get an application online, along with a rollover or transfer form, fill these out and submit them, and your existing IRA is transferred to the custodian. Then you use those funds to buy metals and have them stored.

    You have two fees per year: a custodian fee of around $75 or $80 annually, in return for which they send you quarterly statements and 1099s for the years when you take a distribution. Then you pay the depository, generally Delaware Depository Service Corporation (DDSC), which  stores the physical metal in your allocated account, with your name on it. Their fee is $125 per year for anything between zero and $100,000. For example, if somebody transferred $20,000 into a precious metals IRA then they’ve got about $200 in fees, or about 1% a year. The more you have the lower the percentage would be. When you get to $100,000 they’ll charge 60 basis points on each dollar after that.

    DC: Can you deposit your own bullion in this kind of an account?

    TC: Yes, but the amount has to be below what you can put into an IRA in that year. The amounts differ for SEP and traditional IRAs.

    DC: What if you want to take possession of your metal?

    TC: They’ll deliver it to you. If you’re old enough to take IRA distributions there would be no penalty but it would be taxable and they’d 1099 you. Here’s an interesting point: Many dealers will pay above spot for Gold Eagles and other major coins and bars. So let’s say you want to liquidate five gold eagles. You can ask the custodian to convert them to cash at spot and send you a check. Or you can take delivery and sell them yourself for the extra 2%.

    For more information or to place an order, call 800-247-2812 or email Tom Cloud at Mention for free shipping and insurance.

    Visit John’s Dollar Collapse blog here >

    Let’s Revisit: Will Uncle Sam Takeover Your IRA? Part II

    Courtesy of Larry Doyle.

    With so much attention on the fiscal cliff and how Congress might address the issues surrounding our deficit, this commentary from this past April is going absolutely viral throughout the blogosphere today. I welcome reposting it. LD

    Those engaged in massive strategic maneuvers know all too well that progress is typically made not in one fell swoop but painstakingly inch by inch.

    With deficits beyond the scope of imagination but oh so very real, I cautioned people to keep a watchful eye on Uncle Sam. Where might the old man go to beg, borrow, or steal money to fill that enormous fiscal hole? Your retirement accounts.

    I first broached this topic in early 2010 in writing, Blueprint for Government Takeover of IRAs and Will Uncle Sam Takeover Your IRA?.

    Fast forward and we now witness rumblings around Washington that the drunken sailors disguised as our political leaders are discussing how to make a move on your retirement savings. 

    This tactical assault deserves to be front page news on every credible financial periodical. Regrettably, but not surprisingly, the only outlet which I could find carrying this story is The New York Post which wrote, Feds Eye Retirement-Fund To Cut $16 Trillion-Plus Deficit:

    Uncle Sam, in a desperate attempt to fix its $16 trillion-plus deficit, is leering over Americans’ retirement nest egg as its new bailout fund.

    Capitol Hill politicians are assessing tax changes that could let the Internal Revenue Service lay claim to a portion of the $18 trillion sitting in 401(k) accounts and other tax breaks used by middle-class workers, including cutting the mortgage tax deduction.

    A commission looking for ways to close the deficit, and, noting the extent of 401(k) tax breaks, recommends an examination of the system as one way to prevent government bankruptcy.

    Under current 401(k) rules, total employee/employer contributions can’t exceed $50,000. In the proposed rule change, employer/employee contributions would be limited to 20 percent of the employee’s compensation, with a maximum of $20,000, the so-called 20/20 proposal.

    This component strikes me as merely a tax on savings. When will the nitwits in Washington realize that our nation needs to increase its savings rate, not decrease it. But, please, now break out your vomit bag and then rally the neighbors.

    Another proposal being discussed in Congress says all tax deductions on 401(k)s and IRAs to be replaced with an 18 percent credit. The credit, according to a proposal that has been endorsed by economist William Gale, would be placed directly in a person’s retirement account.

    What does this mean? You will pay a tax NOW on your retirement savings and be granted a government credit which kicks in LATER. This tactical assault is little more than another government scam. Do you want a government credit which can be massively devalued over time by inflationary policies implemented by the Federal Reserve?

    “Unlike the current system,” Gale told Congress, “workers’ and firms’ contributions to employer-based 401(k) accounts would no longer be excluded from income and would be subject to taxation, contributions to IRAs would no longer be tax-deductible and any contributions to a 401(k) plan would be treated as taxable income.”

    In other words, the employee and employer would no longer get a deduction under the Gale plan, they would qualify for a credit. And the credit would “increase [government] revenues by about $458 billion,” Gale says.

    My immediate reactions to learning about these discussions last evening are two-fold:

    1. Taxation without representation is tyranny.
    2. Get the pitchforks ready and clean out the back of the trucks so we can haul the charlatans behind these assaults out of our nation’s capitol….(stated figuratively of course!!)

    How many people out there who have played by the rules, saved, paid in, and supported our government have had enough? Do not think for a second that these maneuvers by Uncle Sam are the end of his assault on our savings. We are supposed to blindly and willingly accept a change in the rules of the retirement savings operation while the dysfunctional elitists in Washington squander OUR money on prostitutes, boondoggles, gallivanting, and largesse to THEIR political supporters.


    If you agree with my sentiments, I hope you will share this story so we can draw the line and make our stand.

    What do you think?

    Larry Doyle

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    ECRI Sticks With Recession Call

    Courtesy of Mish.

    The ECRI is sticking with its “US is already in recession” call based on four coincident indicators. Very few agree, but for what it’s worth (perhaps nothing) I am one of those in agreement.

    Here is a Bloomberg video to consider.

    Also consider The Tell-Tale Chart by the ECRI.

    Following our September 2011 recession call, we clarified its likely timing in December 2011. Based on the historical lead times of ECRI’s leading indexes, we concluded that, if it didn’t start in the first quarter of 2012, it was very likely to begin by mid-year.

    But we also made it clear at the time that you wouldn’t know whether or not we were wrong until the end of 2012. And so it’s interesting to note the rush to judgment by a number of analysts, already asserting that we were wrong.

    So, with about a month to go before year-end, what do the hard data tell us about where we are in the business cycle? Reviewing the indicators used to officially decide U.S. recession dates, it looks like the recession began around July 2012. This is because, in retrospect, three of those four coincident indicators – the broad measures of production, income, employment and sales – saw their high points in July (vertical red line in chart), with only employment still rising.

    If you look at the size of the simultaneous declines in industrial production and personal income since July, that combination has never occurred outside a recessionary context in over half a century – but it’s occurred in every recession. This leads us to conclude that we are most likely already in a recession that began around mid-2012.

    Now, please remember that, following our recession call, central banks really ramped up their efforts, and have literally been pumping more money into the economy than at any time in the history of humanity – and this is the upshot. No wonder the Fed is now all in.

    So how come hardly anybody recognizes the recession? Perhaps it’s because of real-time data showing positive growth in GDP and jobs, and the lack of a recent salient shock.

    Revisionist History

    Some of that is revisionist history, notably the idea that in September 2011, the ECRI gave itself until December of 2012 to be proven correct. Rather, the ECRI kept changing dates waiting for data to match its call….

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