Author: Administrator

THE REAL REASON THE U.S. IS PUSHING FOR WAR WITH IRAN

Only a fool would believe the bullshit being spewed by our government and the MSM about Iran’s intentions. They will never launch a nuclear missile at Israel unless Israel does so first. I’m so tired of the propaganda about the Iranians wanting to cause a nuclear holocaust because of their religious beliefs. Their leaders know for a fact that if they ever launched a nuclear missile at Israel, their country would be obliterated within minutes. If this was their intention they could make it happen today by launching missiles at Saudi Arabia and the U.S. Navy in the Gulf. Why haven’t they done so? Because they don’t want to be obliterated. The entire cover story for forcing Iran into war is a crock of shit.

This article makes a great case for why the U.S. and Israel are forcing a showdown with Iran. They don’t need nuclear weapons. Their standard missiles are so accurate, they can actually defend themselves against Israel. The Iranians have proven to be a worthy adversary. They are technologically advanced enough to capture one of our predator drones. Obama and his neo-con friends in Congress think they know what they are doing. Nothing could be farther from the truth. These idiots are pushing the world towards a crisis that could spiral out of control.

Make sure you listen to George Galloway’s excellent rant at a caller into his radio show. When did common sense become such a rare trait in humanity?

The Real Story Versus the Cover Story             …by Mark H. Gaffney

  

Around a third of all oil shipped in tankers passes through the strait, and if this supply were disrupted it would out immense pressure on the rest of the world’s supplies.

 

Recently, President Obama imposed new sanctions on Iran which according to reports have been very effective, causing a sudden major devaluation of Iran’s currency. 

The Iranians correctly understand that they are under attack, and have threatened to respond by closing the strait of Hormuz, through which a large percentage of oil from the Mideast flows to the global economy. 

If the crisis deepens and Iran makes good on its threat to close Hormuz, there is little doubt that the US will intervene to reopen the strait. 

This will lead to a shooting war for which Iran will be blamed, even though the recent US sanctions were tantamount to overt aggression. 

Ed Note: George Galloway vs. the warmonger parrot who is no different to the current crop of warmongering US Republican Presidential contenders: 

 

I believe the US will exploit the situation to attack Iran’s nuclear facilities. But, even more importantly, the US will target Iran’s conventional missiles. Indeed, I believe this is the real reason for US sanctions in the first place, and for the buildup of tensions in recent days. 

Despite public perceptions, and all the rhetoric about nukes, the present crisis has nothing to do with Iran’s alleged nuclear weapons program. In my opinion, that is just a cover story. 

The real issue is the fact that Iran has upgraded its medium range conventionally-armed missiles with GPS technology, making its missiles much more accurate.  

This means Iran can now target Israel’s own nuclear, bio and chemical weapons stockpiles, located inside Israel, as well as the Dimona nuclear reactor.  

In short, Iran has achieved a conventional deterrent to Israel. Therefore, statements by Iranian officials that Iran has no nuclear weapons program are in my view probably correct. Presently, Iran does not need nukes to deter Israel. It can do so with its GPS-guided medium range missiles. 

The Israelis are no doubt gnashing their teeth over this, because they now find themselves threatened by their own WMD stockpiles, and by their own nuclear reactors, especially Dimona, all of which have become targets. 

A few direct hits by Iran could cause a toxic plume, killing thousands of Israelis. A worst case might signal the end of the Jewish state. 

It is important to realize that Iran would never launch a pre-emptive strike on Israel because the Iranians know that the US/Israeli response would be devastating. However, if Iran comes under attack first, all bets are off. Iran will defend itself.

A counter attack on Israel cannot be ruled out because Iranian leaders understand clearly (even if the American people do not) that the crisis has been manufactured, on Israel’s behalf. 

From the Israeli standpoint, the present Iranian deterrent (though conventional) is simply unacceptable. 

Israel’s military strategists have always insisted on total freedom of movement. This is why Israel refused a US offer many years ago to sign a defense pact with the US. Such a treaty would have limited Israel’s freedom of movement, and this was unacceptable. 

Israel’s leaders preferred to remain independent. Israel has always insisted on the “freedom” to intimidate its neighbors, whenever and howsoever it chooses. Iran’s conventional missiles now curtail that “freedom.” 

Israeli officials probably worry, for example, that Iran’s conventional missiles would limit its freedom to attack Hezbollah in Lebanon, in a future conflict. Hezbollah is closely allied with Tehran. 

I believe the present crisis has been manufactured to create the pretext for a US air campaign to take out Iran’s conventional missile sites. The US will also target Iran’s nuclear facilities, but the primary target will be Iran’s conventional missiles. 

The US will be doing Israel’s bidding. The Zionist tail will be wagging the servile US dog. Obviously, you can’t generate public support for such a bombing campaign, on Israel’s behalf. 

Hence the cover story about nukes and the alleged Iranian threat to wipe Israel off the map, all of which is untrue but very effective propaganda nonetheless. 

The problem for the US is that depriving Iran of its conventional deterrent will not be easy to accomplish. Indeed, it will be even more difficult than taking out all of Iran’s nuclear facilities. 

Iran’s conventional missiles are probably dispersed widely. If they come under attack, the purpose of the air campaign will be transparently obvious to the Iranian leadership. Faced with the prospect of losing their deterrent, the Mullahs may well decide to fire their conventional missiles. 

If they do and manage some direct hits on Israel’s nuclear-bio-and chemical weapons stockpiles, the ensuing disaster will prompt an Israeli response.  

Israel may even resort to the Samson Option, and attack Iran with nukes. Words cannot describe the horrific scale of such an outcome. Unfortunately, it is all too possible. 

Early in the war, US naval forces in the Gulf will also come under attack. No mistake, Iran has enough anti-ship cruise missiles to pose a grave threat to the US naval presence in the Gulf. Thousands of US sailors are now in harm’s way, and at risk. 

We must rally to prevent such a war. Peace activists must now marshal every asset for peace that we possess. The American people need to know the truth. This is a phony crisis. Yet the danger is very real. Now is the time to speak out with all of our strength. Tomorrow could come too late. 

Mark H. Gaffney is an environmentalist, peace activist, researcher, and the author of The First Tree of the Day; Gnostic Secrets of the Naassenes and Dimona, the Third Temple? His articles and essays have appeared in numerous journals, magazines, and newspapers. He lives in Chiloquin, Oregon.

BIPARTISAN SCREWING OF AMERICA

I got up this morning and just wanted to relax, read the paper and drink a couple cups of coffee. Then I open up my local paper and read the story below. By the time I was done the story, I thought my head was going to explode as I was cursing politicians across the land. When is this country going to wake up and realize this two party system of government is a joke? It is nothing but a game to distract the masses as both parties jointly screw the citizen taxpayers of this country.

This story proves my point. Just read the first couple sentences and you realize this country is doomed to economic collapse. The public school pension obligation in my state of PA went up 100% in the past year and will go up another 50% this year. That is mind blowing, but no one cares or even understands the implications. HOW COULD THIS HAPPEN?

Well the bastion of GOP conservatism, friend of George W, and the first generalisimo of DHS, Tom “Code Orange” Ridge signed a law in 2001 that guaranteed 50% pension increases for most legislators and 25% increases for more than 300,000 state workers and teachers. He didn’t give a fuck about the future. He was moving on to bigger and better things creating a new agency to strip Americans of their freedom and liberty. This REPUBLICAN dirtbag sentenced the taxpayers of PA to funding massive future deficits to pay union government workers’ outlandish gold plated pensions.

The next governor of PA was the ultra-liberal slimeball from Philly, Fast Eddie Rendell. You certainly couldn’t expect this tax and spend DEMOCRAT to ever cut anything. Just before he left office he signed another law that used the old tried and true method of not funding the pension obligation with cash until after 2030. Just extend and pretend. The American way.

Well, here is some news for the 300,000 government drones. You will not get those gold plated pensions. Promises do not equal cash. The money is not there. It won’t be there when you retire. The taxpayers will not be ponying up to fund your retirement. You’re as screwed as we the taxpayers are screwed.

The politicians of both parties are responsible. They are liars, thieves and traitors. It will get nasty when the clueless masses finally get a clue. The money is all gone.   

Pension costs a big worry for Pa. public schools

By MARC LEVY
Associated Press
January 14, 2012

HARRISBURG, Pa. (AP) — A spike in pension obligations could hardly come at a worse time for Pennsylvania’s public schools.

Gov. Tom Corbett, who has pledged to oppose any tax increase, will be proposing his second state budget on Feb. 7, and public school officials are worried about getting more bad news after working through the most difficult budget year in just about anyone’s memory.

The Corbett administration is projecting that its school employee pension obligations will rise by $320 million next year — or more than 50 percent — after more than doubling in this fiscal year.

Meanwhile, public schools are suffering through cuts of more than 10 percent to state aid. The cuts, approved by the Legislature and Corbett, fell most heavily on Pennsylvania’s poorest school districts, which officials argued get the most state aid.

It seems that no one in the public school community expects Corbett to propose more money for public schools next year, and he may even seek another round of cuts in light of his administration’s projection of a year-end deficit and rising costs in other parts of the budget, such as Medicaid and debt service.

Thomas Gentzel, executive director of the Pennsylvania School Boards Association, said Corbett administration officials have told him that they didn’t plan to cut public school aid again.

“But the question is, what are they counting?” he said.

If Corbett counts pension dollars as part of the state aid that helps keep the lights on and teachers in classrooms, then “there could be some significant cuts in major funding areas, although the overall funding may not be going down,” Gentzel said.

Corbett’s top budget adviser, Charles Zogby, declined to comment.

Rising pension obligations are being driven, in part, by lackluster investment performance on the money being paid into the system and a 2001 law under then-Gov. Tom Ridge that guaranteed 50 percent pension increases for most legislators and 25 percent increases for more than 300,000 state workers and teachers.

There’s not a whole lot that can be done about it.

The state constitution bars curtailing pension benefits for current or retired state employees and teachers. Meanwhile, a 14-month-old state law signed by then-Gov. Ed Rendell is designed to blunt the severity of the pension cost spike by deferring some payments past 2030.

That means that pension obligations shared by the state and school districts will jump to 12.4 percent next year, rather than 29.7 percent — a difference of about $2 billion, according to the Public School Employees’ Retirement System.

This year it is 8.7 percent, which still comes as something of a shock to school budgets after paying under 5 percent for much of the last decade and as little as 1.2 percent one year. School employees pay above 7 percent of salary, and have done so for much of the past decade.

This year, school districts are absorbing the rising cost of pensions while weathering sluggish tax collections and the loss of about $850 million in state aid for instruction and operations. To balance budgets, districts are laying off staff, freezing wages, closing buildings, renegotiating contracts, tapping reserves and using textbooks and computers longer.

In the Brookville Area School District in northwestern Pennsylvania, district officials are projecting a $400,000 increase in pension costs next year — or almost 2 percent of this year’s anticipated revenue from tax collections and government aid — to split between the district and the state. That will be compounded by increases in costs for employee salaries and health insurance premiums, out-of-district placements and cyberschool tuition, business manager Jason Barnett said.

This won’t be the last time school districts must wrestle with pension costs: The school employees’ retirement system estimates that the cost to the state and school districts will triple in four years and then stay at that level until 2035.

If there’s a silver lining, it’s that some school boards began saving for a spike in pension costs that they thought would be higher and come sooner. But because of the Legislature’s efforts to blunt the spike, some districts may have a little surplus cash to help absorb more losses in state aid next year.

“The good thing is they have that cash to weather this storm a little bit,” said Jim Buckheit, the executive director of the Pennsylvania Association of School Administrators. “At least, many have it.”

RECOVERY STORYLINE IS PURE BULLSHIT

John Hussman shoots dozens of holes in the MSM storyline of economic recovery and the avoidance of recession. If the economy is really recovering than why are Federal Reserve governors and the financial press talking about QE3 by the summer? You wouldn’t need more quantitative easing if the economy was really recovering. This is a long detailed analysis of why the storyline is pure bullshit. John is too professorial to say it in such a way, so I did it for him. These two paragraphs capture the gist of his article:

In sum, the balance of leading evidence continues to indicate a very high likelihood of an oncoming recession. We respect the various marginal improvements in the data in recent months, which do take the probability to less than 100%, but that is a far cry from suggesting that recession risk is anywhere close to being “off the table.” Recession is not a certainty, but it remains the most probable outcome at present.

Even if we allow for the possibility of improvement, my impression is that the potential outcomes for the market are very asymmetrical. Investors now expect pleasant, if gradual, economic progress, convinced by a stream of economic anecdotes in recent weeks. That hopeful expectation is already largely reflected in the overvalued, overbought, overbullish condition of the market. If the economy does in fact improve, we may observe further upside progress, but again – this is largely reflected in the advance that stocks have already enjoyed. The asymmetric risk is the potential for great disappointment if the economy does fall into a contraction – as well-correlated leading evidence continues to suggest.

Leading Indicators and the Risk of a Blindside Recession

John P. Hussman, Ph.D.

Over the past few weeks, investors used to setting their economic expectations based on a “stream of anecdotes” approach have seen their economic views evolve roughly as follows:

“After a brief ‘scare’ during the third quarter, economic reports have come in better than expectations for weeks – a sign that the economy is on a gradual but predictable growth path; Purchasing managers reports out of China and Europe have firmed, and the U.S. Purchasing Managers Indices have advanced, albeit in the low 50’s, but confirming a favorable positive trend, and indicating that the U.S. is strong enough to pull the global economy back to a growth path, or at least sidestep any downturn; New unemployment claims have trended gradually lower, and combined with a surprisingly robust December payroll gain of 200,000 jobs, provides a convincing signal that job growth is on track to improve further.”

I can understand this view in the sense that the data points are correct – economic data has come in above expectations for several weeks, the Chinese, European and U.S. PMI’s have all ticked higher in the latest reports, new unemployment claims have declined, and December payrolls grew by 200,000.

Unfortunately, in all of these cases, the inference being drawn from these data points is not supported by the data set of economic evidence that is presently available, which is instead historically associated with a much more difficult outcome. Specifically, the data set continues to imply a nearly immediate global economic downturn. Lakshman Achuthan of the Economic Cycle Research Institute (ECRI) has noted if the U.S. gets through the second quarter of this year without falling into recession, “then, we’re wrong.” Frankly, I’ll be surprised if the U.S. gets through the first quarter without a downturn.

Three basic issues are at play. One is that analysts aren’t making distinctions between leading, coincident and lagging data. The second issue is that there is little effort to measure the predictive strength of a given economic data point (or set of data points) in explaining subsequent movements in the economy. The third is that analysts seem to be forming expectations report-by-report (what I call a “stream of anecdotes” approach) instead of taking those reports in context of the full ensemble of data that is available at each point in time.

Let’s examine the seemingly most “compelling” data point first – the fact that December payrolls grew by 200,000. Surely that sort of jobs number is inconsistent with an oncoming recession. Isn’t it? Well, examining the past 10 U.S. recessions, it turns out that payroll employment growth was positive in 8 of those 10 recessions in the very month that the recession began. These were not small numbers. The average payroll growth (scaled to the present labor force) translates to 200,000 new jobs in the month of the recession turn, and about 500,000 jobs during the preceding 3-month period. Indeed, of the 80% of these points that were positive, the average rate of payroll growth in the month of the turn was 0.20%, which presently translates to a payroll gain of 264,000 jobs.

Likewise, in 5 of the past 10 recessions, the ISM Purchasing Managers Index was greater than 50 just weeks before the recession began, and the new orders component of that index was greater than 50 in most cases, immediately prior to the recession.

Very simply, neither a strong monthly employment gain nor a slight uptick in the PMI are informative signals that recession risk has eased. Both the PMI and the level of payroll job growth are what one might call “weak learners.” It’s not that these figures aren’t useful – just that neither of them has a particularly good record by itself of signaling recessions. As it happens, a PMI below 54, coupled with year-over-year payroll growth below 1.3% is a stronger “learner” than either of the two data points individually (see the 2007 comment Expecting A Recession ). That combination – which is actually alternate Condition 4 of our Recession Warning Composite – remains in place at present, as are the other conditions in that Composite. Our more complex ensemble models also indicate strong recession risk.

The chart below provides a good picture of the behavior of non-farm payroll growth in the months before and after a recession begins, based on all U.S. postwar recessions. Notice in particular that in the month a recession starts, payroll job growth has not only been positive in 80% of cases, but has actually been higher, on average, than the three preceding months. Neither the level of job growth nor its short-term trend had any “leading” information content at all about the subsequent direction of the economy.

Notably however, the month following entry into a recession typically featured a sharp dropoff in job growth, with only 30% of those months featuring job gains, and employment losses that work out to about 150,000 jobs based on the present size of the job force. So while robust job creation is no evidence at all that a recession is not directly ahead, a significant negative print on jobs is a fairly useful confirmation of the turning point, provided that leading recession indicators are already in place.

I’ve discussed the “positive surprises” argument (see When Positive Surprises are Surprisingly Meaningless ) and the negative implications of the European ISM, despite last month’s uptick (see The Right Kind of Hope ) in other recent comments. Suffice it to say that broadly speaking, the recent “surprises” in the data reflect minor fluctuations within overall levels that remain fairly tepid, and more importantly, that remain clearly unfavorable as an ensemble.

How to spot a leading indicator

I want to begin this section with a simple statement – I do not hope for a recession. Rather, that is the expectation that the data forces on us. Frankly, much of my time in recent weeks has been devoted to analyzing data in the hope that a more compelling case could be made for avoiding a recession, since that would free us to be more constructive should market internals improve. But that’s not what the evidence indicates here, and the recent economic data hasn’t reversed that conclusion – not yet at least. I like to think I do a good job of showing you the same things that I am seeing. I don’t challenge rosy outlooks because I enjoy being defensive – I don’t. In fact, I can hardly wait for market conditions where risk is priced appropriately. It’s just that Wall Street’s simplistic cases that stocks are cheap and recession is “off the table” just don’t hold water when we examine the data.

I’ve written a lot in recent months about the distinction between leading, coincident and lagging indicators. One of the ways to distinguish these is to calculate a whole set of correlations between an indicator and what it is intended to predict, using various leads and lags. If a given indicator is correlated with whether or not the economy was in a recession say, 6 months later, we would say that the indicator has a certain amount of usefulness as a “leading” indicator. In contrast, if a given indicator is correlated with whether or not the economy was in a recession say, 6 months previously, we would say that the indicator has a certain amount of usefulness as a “lagging” (or “confirming”) indicator. The stronger the correlation at a given point, the more useful that indicator is as a leading, coincident, or lagging indicator. Importantly, it is the strength of the correlation, not simply where the correlation curve peaks, that defines the usefulness of the indicator. [Geek’s note – it’s more elegant to do this work in the frequency domain, but correlations work nicely for the purposes here].

The chart below is a little bit busy, but presents the correlation profile of a variety of widely followed indicators, as well as an ensemble of recession indicators we track (see Measuring the Probability of Recession in the September 5 comment). In the chart below, month zero represents the start of a recession.

Notice that about 9 months prior to a recession, the Conference Board Leading Economic Indicators, the ECRI Weekly Leading Index and the 6-month change in the S&P 500 often show some weak leading characteristics, but the correlation is too small to make inferences very reliable. Advancing to about 6 months prior to a recession, a few more indicators begin to show a weak correlation with the oncoming recession, including our own ensembles, as well as the average of Fed surveys (such as Philly Fed and the Empire Manufacturing survey) and the ISM Purchasing Managers Index. Still, at that point, the correlations are typically fairly weak. Though none of these indicators are particularly good at anticipating a recession even 6 months out, the Conference Board Index of Leading Economic Indicators (LEI) has historically had a slight edge looking two quarters ahead (the LEI makes a very interesting study on its own here, so more on that below).

Once a recession is within three months away, the strongest leading indicators are our own ensemble and the ECRI Weekly Leading Index (though I expect that an ensemble of ECRI’s other indicators, such as the long-leading and coincident measures would, in combination, give an even stronger overall signal than the WLI alone). The 6-month change in the S&P 500 approaches its strongest correlation with an oncoming recession with only a 1-3 month lead, suggesting that investors wishing to anticipate recession-linked stock market weakness would want to focus on indicators have even better leading characteristics than stocks themselves.

Once a recession hits, our recession ensemble, the ECRI Weekly Leading Index, and the average of multiple Fed surveys have the strongest likelihood of confirming the downturn in real-time. Immediately following entry into the recession, as noted earlier, payroll growth tends to turn negative. Though recessions tend to be preceded by sub-par employment growth over the preceding 3-12 month period, the 3-month growth rate of payrolls actually acts as a bit of a lagging indicator, reaching its highest correlation with a recession – not surprisingly – about 3 months after the recession starts.

New claims for unemployment have very slight short-leading usefulness, but new claims, the unemployment rate, and the slope of the yield curve (flattening) actually have much better lagging characteristics, so these should be used primarily to confirm an ongoing recession (particularly if the NBER hasn’t made an official determination yet), rather than to anticipate a downturn. The yield curve generally flattens significantly coming into a recession, but the change in the yield curve (not plotted) is also most useful as a lagging indicator. Consumer confidence has mixed characteristics, with weak leading characteristics and somewhat greater usefulness as a lagging indicator, but in any case is too much of a “weak learner” to be used in isolation.

At present, our own recession ensembles, as well as ECRI’s official views, remain firmly entrenched in the recession camp. This feels more than a little bit disconcerting, as the entire investment world appears to have the opposite view. My problem is that the data don’t support that rosy “U.S. leads the world off the recession track” scenario. Leading data leads. Lagging data lags. Weak data is weak data. To anticipate a sustained economic upturn here would require us to place greater weight on weak, lagging data than we presently place on strong leading data. It’s really that simple. If the evidence turns, we will shift our view – and frankly with some amount of relief. At present, though, we continue to expect a concerted economic downturn.

The LEI and monetary bias

One of the interesting aspects of present conditions is the apparent disconnect between the Conference Board’s index of leading economic indicators and the ensemble of other economic indicators that we follow (including ECRI’s indices). The LEI is a composite of 10 measures, including the average workweek, jobless claims, new consumer orders, capital equipment orders, vendor deliveries, building permits, consumer expectations, stock prices, the yield curve, and real M2 money supply.

What’s problematic here is that close to half of the weight in the index goes to the two monetary components – the yield curve, and real M2. I suspect that this is a legacy of inflationary business cycles where monetary tightening in response to inflation was the typical event preceding recessions, but it adds noise in the present environment, where the primary economic risks are related to leverage and credit strains. Remember that at present, monetary policy is way out on the “liquidity preference” curve, to an extent that is historically unprecedented (see Monetary Policy in 3D ). Normally, there is a general, if weak, linear relationship between monetary variables, interest rates and economic activity. But given the current scope of monetary policy, M2 velocity has collapsed (and moves as a perfect inverse of M2 itself), and interest rates are at the zero bound, so these variables are essentially detached from economic activity. So you’ve got two highly weighted variables in the index that have gone almost perfectly horizontal with respect to their effect on the economy. The crisis in Europe has triggered a flight of time deposits from European banks to U.S. banks, which shows up as a further boost to M2, which has driven much of the advance in the LEI.

Notably, the Conference Board announced last week that they will replace real M2 with a new “Leading Credit Index” component, among other changes, which will be reflected in the January 2012 release.

That change makes sense. If you’re going to put nearly half of your weight on monetary variables, it’s really only sensible if about half of your predictive power resides in those two variables, but in the case of the LEI, that’s not true at all. Below, I’ve weighted the present components of the LEI in proportion to their correlation with subsequent recessions (using a 6-month smoothed growth rate for the non-stationary ones such as stock prices, capital orders and so forth, and standardizing the values of each to have zero mean and unit variance prior to weighting). The chart also presents the simple average of the non-monetary components of the LEI, as well as the smoothed growth rate of the actual published index, similarly scaled.

Notice that unlike the typical behavior of the LEI in prior recessions, the LEI did not spike down to nearly the same extent as the nonmonetary components during the downturn that began in 2007, thanks to unprecedented monetary policy actions. Likewise, the LEI has held up much better in recent months than either its non-monetary components, or its accuracy-weighted components, also as a result of monetary policy that is outside of historical norms and stretched far along the zero bound.

A troublesome issue here is that once the non-monetary components of the LEI have turned negative to the extent we observe presently (again, on a 6-month smoothed basis), we find only one instance (a brief signal in the late-1960s) that was not associated with an actual recession. Below, the red bands denote official NBER-dated recessions. Downturns in the non-monetary components of the LEI are highlighted in blue.

Our own recession ensembles remained unfavorable last week, and the ECRI Weekly Leading Index deteriorated to -8.2, from -7.6 the previous week. The 3 month growth rate of non-farm payroll employment – despite last month’s employment gain – is among the lowest 13% of all historical observations. The 6-month change in the S&P 500 is among the lowest 20% of historical observations. The current value of ECRI’s Weekly Leading Index is among the lowest 9% of all historical observations. We don’t disregard the marginal improvement in various economic measures in recent weeks. It’s just that those marginal improvements are either too small or too statistically uninformative to be helpful in shifting the evidence.

In sum, the balance of leading evidence continues to indicate a very high likelihood of an oncoming recession. We respect the various marginal improvements in the data in recent months, which do take the probability to less than 100%, but that is a far cry from suggesting that recession risk is anywhere close to being “off the table.” Recession is not a certainty, but it remains the most probable outcome at present.

All of that said, significant new strength in stocks – particularly if broadly based – further contraction in new unemployment claims, well-defined (not just marginal) improvement in a broad sampling of Fed economic surveys, and a reversal in industrial commodity prices, among other factors, would provide a good basis to ease recession concerns. If that was coupled with confirmation by a reversal in ECRI’s measures, the evidence that weighs down our economic views would become dramatically lighter. But that’s what we need – evidence. Well correlated, strong, leading evidence.

Even if we allow for the possibility of improvement, my impression is that the potential outcomes for the market are very asymmetrical. Investors now expect pleasant, if gradual, economic progress, convinced by a stream of economic anecdotes in recent weeks. That hopeful expectation is already largely reflected in the overvalued, overbought, overbullish condition of the market. If the economy does in fact improve, we may observe further upside progress, but again – this is largely reflected in the advance that stocks have already enjoyed. The asymmetric risk is the potential for great disappointment if the economy does fall into a contraction – as well-correlated leading evidence continues to suggest.

Market Climate

As of last week, the Market Climate for stocks remains “hard negative” – characterized by conditions that cluster among other historical instances that usually resulted in “whipsaw” declines on the tail of overbought rallies. About 30% of these instances did resolve into further gains, and we aren’t frozen to a defensive stance. As noted above, there are certainly developments that would mute our economic concerns and even allow for a modestly constructive position despite what we continue to view as an overvalued market from a longer-term perspective. Presently, we would need at minimum a further improvement in market internals – primarily breadth and leadership. The situation would also be helped by clear strength in Fed surveys and a further retreat in new claims. Without this sort of broad-based improvement, the modest “positive surprises” we’re seeing are still too tightly centered in a range that really doesn’t change the picture at all. Strategic Growth and Strategic International remain well-hedged. Strategic Total Return continues to carry a duration of about 3 years in Treasuries, and we used the spike advance early last week to clip a few more profits in our precious metals shares, taking our exposure to a still-constructive but comfortable 12% of assets.

As a final note, given our pointed economic and market concerns, I’ve included a chart below showing the profile of past major market declines, mostly as a tool to display the significant variability of outcomes. The chart shows major U.S. market declines as a “stochastic” – the bull market high being 1.0, the bear market low being zero. Time is measured in days, with the bull market peak set at 100 days in each (denoted by the red arrow).

The main regularity you’ll notice is that the first 6-8 weeks or so off the top are uniformly bad, typically inflicting about one-fifth to one-third of the eventual peak-to-trough loss. That initial decline is then typically followed by a rebound of highly variable duration, lasting anywhere between 2-5 months and usually recovering half to two-thirds of the initial decline (denoted by the green arrow). As a result, by 3-6 months into a major market decline, the market is often not far from its original peak (a tendency I noted last May in Extreme Conditions and Typical Outcomes ). Unfortunately, that is not a rule that one would want to rely on, because when it has failed, it has often failed spectacularly.

Each decline has its own character, so there is no predictable point at which breakdowns occur. Notice that the bottom of the decline is also highly variable, so outside of quoting a broad range from 3 months to 3 years, with the average at a bit less than 18 months, major market declines don’t have a predictable duration. The upshot is that major declines are not diagonal and do not follow well-behaved patterns. It’s exactly that variability that makes it dangerous to “finesse” them excessively, and advisable to stick with the broad evidence, recognizing that there will be a lot of unpredictable short-term volatility. For our part, we remain defensive here.

NEW from Bill Hester: Five Global Risks to Monitor in 2012

2012 – THE YEAR OF LIVING DANGEROUSLY

“In retrospect, the spark might seem as ominous as a financial crash, as ordinary as a national election, or as trivial as a Tea Party. The catalyst will unfold according to a basic Crisis dynamic that underlies all of these scenarios: An initial spark will trigger a chain reaction of unyielding responses and further emergencies. The core elements of these scenarios (debt, civic decay, global disorder) will matter more than the details, which the catalyst will juxtapose and connect in some unknowable way. If foreign societies are also entering a Fourth Turning, this could accelerate the chain reaction. At home and abroad, these events will reflect the tearing of the civic fabric at points of extreme vulnerability –  problem areas where America will have neglected, denied, or delayed needed action.” – Strauss & Howe – The Fourth Turning – 1997

 

In December 2010 I wrote an article called Will 2012 Be as Critical as 1860?, that pondered what might happen with the 2012 presidential election and the possible scenarios that might play out based on that election. Well, 2012 has arrived and every blogger and mainstream media pundit is making their predictions for 2012. The benefit of delaying my predictions until the first week of 2012 is that I’ve been able to read the wise ponderings of Mike Shedlock, Jesse, Karl Denninger, and some other brilliant truth seeking analysts regarding what might happen during 2012. The passage above from Strauss & Howe was written fifteen years ago and captured the essence of what has happened since 2007 and what will drive all the events over the next decade. Predicting specific events is a futile human endeavor. The world is so complex and individual human beings so impulsive and driven by emotion, that the possible number of particular outcomes is almost infinite.

But, as Strauss and Howe point out, the core elements that created this Crisis and the reaction of generational cohorts to the implications of debt, civic decay and global disorder will drive all the events that will occur in 2012 and for as far as the eye can see. Linear thinkers in mega-corporations, mainstream media and Washington D.C. focus on retaining the status quo, their power and their wealth. They believe an economic recovery can be manufactured through monetary manipulation and Keynesian borrowing and spending. They are blind to the fact that history is cyclical, not linear. In order to have an understanding of what could happen in the coming year, it is essential to keep the big picture in focus. As we enter the fifth year of this twenty year Crisis period, there is absolutely no chance that 2012 will see an improvement in our economy, political atmosphere or world situation. Fourth Turnings never de-intensify. They exhaust themselves after years of chaos, conflict and turmoil. I can guarantee you that 2012 will see increased mayhem, riots, violent protests, recessions, bear markets, and a presidential election that will confound the establishment. All the episodes which will occur in 2012 will have at their core one of the three elements described by Strauss & Howe in 1997: Debt, Civic Decay, or Global Disorder.

Debt – On the Road to Serfdom

The world is awash in debt. Everyone is focused on the PIIGS with their debt to GDP ratios exceeding the Rogoff & Reinhart’s 90% point of no return. But, the supposedly fiscally responsible countries like Germany, France, U.K., and the U.S. have already breached the 90% level. Japan is off the charts, with debt exceeding 200% of GDP. These figures are just for the official government debt. If countries were required to report their debt like a corporation, their unfunded entitlement promises to future generations are four to six times more than their official government debt.

Any critical thinking person can look at the chart above and realize that creating more debt out of thin air to solve a debt problem is foolish, dangerous, and self serving to only bankers and politicians. The debt crisis took decades of terrible choices and bogus promises to produce. The world is now in the midst of a debt driven catastrophe. At best, the excessive levels of sovereign debt will slow economic growth to zero or below in 2012. At worst, interest rates will soar as counties attempt to rollover their debt and rolling defaults across Europe will plunge the continent into a depression. The largest banks in Europe are leveraged 40 to 1, therefore a 3% reduction in their capital will cause bankruptcy. Once you pass 90% debt to GDP, your fate is sealed.

“Those who remain unconvinced that rising debt levels pose a risk to growth should ask themselves why, historically, levels of debt of more than 90 percent of GDP are relatively rare and those exceeding 120 percent are extremely rare. Is it because generations of politicians failed to realize that they could have kept spending without risk? Or, more likely, is it because at some point, even advanced economies hit a ceiling where the pressure of rising borrowing costs forces policy makers to increase tax rates and cut government spending, sometimes precipitously, and sometimes in conjunction with inflation and financial repression (which is also a tax)?” – Rogoff & Reinhart

The ECB doubling their balance sheet and funneling trillions to European banks will not solve anything. The truth that no one wants to acknowledge is the standard of living for every person in Europe, the United States and Japan will decline. The choice is whether the decline happens rapidly by accepting debt default and restructuring or methodically through central bank created inflation that devours the wealth of the middle class. Debt default would result in rich bankers losing vast sums of wealth and politicians accepting the consequences of their phony promises. Bankers and politicians will choose inflation. They believe they can control the levers of inflation, but they have proven to be incompetent, hubristic, and myopic. The European Union will not survive 2012 in its current form. Countries are already preparing for the dissolution. Politicians and bankers will lie and print until the day they pull the plug on the doomed Euro experiment.

The false storyline of debt being paid down in the United States continues to be propagated by the mainstream press and decried by Paul Krugman. The age of austerity storyline gets full play on a daily basis. Total credit market debt in 2000 was $27 trillion. It skyrocket to $42 trillion by 2005 as George Bush and Alan Greenspan encouraged delusional Americans to defeat terrorism by leasing SUVs and live the American dream by putting zero down on a $600,000 McMansion, financing it with a negative amortization no doc loan. Paul Krugman got his wish as a housing bubble replaced the dotcom bubble. Debt accumulation went into hyper-speed in 2006 and 2007 as Wall Street sharks conducted a fraudulent feeding frenzy by peddling their derivatives of mass destruction around the globe. By the end of 2007, total credit market debt reached $51 trillion.

In a world inhabited by sincere sane leaders, willing to level with the citizens and disposed to allow financial institutions that took world crushing risks to fail through an orderly bankruptcy process, debt would have been written off and a sharp short contraction would have occurred. The stockholders, bondholders and executives of the Wall Street banks would have taken the losses they deserved. Instead Wall Street used their undue influence, wealth and power to force their politician puppets to funnel $5 trillion to the bankers that created the crisis while dumping the debt on taxpayers and unborn generations. The Wall Street controlled Federal Reserve provided risk free funding and took toxic mortgage assets off their balance sheets. The result is total credit market debt higher today than it was at the peak of the financial crisis in March 2009.

 

Our leaders have done the exact opposite of what needed to be done to address this debt crisis. The country is adding $3.7 billion per day to the National Debt. With the debt at $15.2 trillion, we have now surpassed the 100% to GDP mark. The National Debt will be $16.5 trillion when the next president takes office in January 2013. Ben Bernanke has been able to keep short term interest rates near zero and the non-existent U.S. economic growth and European disaster has resulted in keeping long-term rates near record lows. Despite these historic low rates, interest on the National Debt totaled $454 billion in 2011, an all-time high. The effective interest rate was approximately 3%. If rates stay at current levels, interest will be between $400 and $500 billion in 2012. Each 1% increase in rates would cost American taxpayers an additional $150 billion. A rapid increase in rates to the 7% level would ratchet interest expense above $1 trillion and destroy the last remaining vestiges of Bernanke’s credibility. It can’t possibly happen in 2012. Right? The world has total confidence in pieces of paper being produced at a rate of $3.7 billion per day. Confidence in Ben Bernanke, Barack Obama and the U.S. Congress is all that stands between continued stability and complete chaos. What could go wrong?

Debt related issues that will likely rear their head in 2012 are as follows:

  • A debt saturated society cannot grow. As debt servicing grows by the day, the economy losses steam. The excessive and increasing debt levels will lead to a renewed recession in 2012 as clearly detailed by ECRI, John Hussman and Hoisington Investment Management.

“Here’s what ECRI’s recession call really says: if you think this is a bad economy, you haven’t seen anything yet. And that has profound implications for both Main Street and Wall Street.” – ECRI 

At present, we observe agreement across a broad ensemble of models, even restricting data to indicators available since 1950 (broader data since 1970 imply virtual certainty of recession). The uniformity of recessionary evidence we observe today has never been seen except during or just prior to other historical recessions.-  John Hussman 

Negative economic growth will probably be registered in the U.S. during the fourth quarter of 2011, and in subsequent quarters in 2012. Though partially caused by monetary and fiscal actions and excessive indebtedness, this contraction has been further aggravated by three current cyclical developments: a) declining productivity, b) elevated inventory investment, and c) contracting real wage income. In summary, the case for an impending recession rests not only on cyclical precursors evident in productivity, real wages, and inventory investment, but also on the disfunctionality of monetary and fiscal policy. – Van Hoisington 

  • The onrushing recession will send housing down for the count. With 2.2 million homes already in the foreclosure process and another 13 million homes with negative or near negative equity, the recession will push more people over the edge. As foreclosures rise a self reinforcing loop will develop. Home prices will fall as banks dump houses at lower prices, pushing millions more into a negative equity position. Home prices will fall another 5% to 10% in 2012, with a couple years to go before bottoming.
  • The recession will result in companies laying off more workers. It won’t be as dramatic as 2008-2009 because companies have already shed 6 million jobs. The working age population will increase by 1.7 million, the number of people employed will go up by 1 million, but the official unemployment rate will drop to 7% as the BLS reveals that 10 million people decided to relax and leave the workforce. Surely I jest. The government manipulated unemployment rate will rise above 9%, while the real rate will surpass 25%.
  • The American people rationally increased their savings rate to 6.2% in the 2nd Quarter of 2009. When you are over-indebted and the country heads into recession, spending less and saving more is a sane option. Consumer expenditures accounted for 69% of GDP in 2007, prior to the economic collapse. The “recovery” of 2010-2011 has been driven by Ben’s zero interest rate policy, the resumption of easy credit peddling by the Wall Street banks, and consumers convinced that going further into hock to attain the American dream is rational. Consumer spending as a percentage of GDP has actually risen to 71% and the savings rate has plunged to 3.6%. The 20% drop in gas prices since April bottomed in December. This decline temporarily boosted consumer spending, but prices are on the rise again. With the State and local governments reducing spending, do the Wall Street Ivy League economists really believe consumers will increase their consumption to 73% of GDP and reduce their savings rate to 1%? If you open your local newspaper you will see the master plan. Car dealers are offering 0% financing with nothing down for 60 months. The GMAC/Ditech/Ally Bank zombie lives as subprime auto loans are back. The “strong” auto sales are a debt financed illusion. Ashley Furniture is offering 0% financing for 50 months with no payments through Wells Fargo Bank. When the Federal Reserve provides the Wall Street banks with 0% funding, banks are willing to take big risks knowing that Uncle Ben and the naive American taxpayer will be there to bail them out when it blows up again.

 

  • With recession a certainty as fiscal stimulus wears off, home prices fall, employment stagnates, and consumer spending grinds to a halt, what will happen to the stock market? The Wall Street shills paraded on CNBC and interviewed by the multi-millionaire talking head twits assure you that stocks are undervalued and the market will surely be up 10% to 15% by 2013. It’s a mortal lock, just as it has been for the last twelve years, with the S&P 500 at the same level as January 1999. The fact is the stock market drops 30% on average during a recession. The talking heads declare that corporate profits are at record levels and will continue higher. Not bloody likely. Corporate profit margins are at an all-time peak about 50% above their historical norms. Profits always revert to their mean. These profits are not sustainable as they were generated by firing millions of workers, zero interest rates for banks, fraudulent accounting by the banks, and trillions in handouts from the middle class taxpayers to corporate America.

 

In a true free market excess profits will draw more competitors and profits will fall due to competition. When corporate profits exceed the mean by such a large amount, you can conclude that crony capitalism has replaced the free market. Government bureaucrats have been picking the winners (Wall Street, War Industry, Big Media, Big Healthcare) and the American people are the losers. Corporate oligarchs prefer no competition so they can reap obscene risk free profits and reward themselves with king-like compensation. Mean reversion will eventually be a bitch. Real S&P earnings have reached the 2007 historic peak. To believe they will soar higher as we enter a recession takes the same kind of faith shown by Americans buying a $600,000 McMansion in Stockton with no money down in 2005. The result will be the same. Do you ever wonder how corporations are doing so well while the average American sinks further into debt, despair and poverty?

The brilliant John Hussman captures the gist of an investor’s dilemma in his latest article:

“With 10-year Treasury yields below 2%, 30-year yields below 3%, corporate bond yields below 4%, and S&P 500 projected 10-year total returns below 5%, we presently have one of the worst menus of prospective return that long-term investors have ever faced. The outcome of this situation will not be surprisingly pleasant for any sustained period of time, but promises to be difficult, volatile, and unrewarding. The proper response is to accept risk in proportion to the compensation available for taking that risk. Presently, that compensation is very thin. This will change, and much better opportunities to accept risk will emerge. The key is for investors to avoid the allure of excessive short-term speculation in a market that promises – bends to its knees, stares straight into investors’ eyes, and promises – to treat them terribly over the long-term.”

Ben Bernanke, Wall Street shysters and Barack Obama want you to be drawn in by the allure of short-term gains based on hopes of QE3. The stock market will be volatile in 2012 with stocks falling 20% when it becomes evident the country is going back into recession. Ben will try to ride to the rescue with QE3 as he buys up more toxic mortgage debt. Wall Street will do their usual touchdown dance celebration, but the bloom will fall off this rose fast, as quantitative easing has proven to be a failure in stimulating economic growth.Gridlock in Washington D.C., chaotic national conventions, and the implosion of Europe will contribute to the market finishing down by at least 15% for the year.

  • Even though the U.S. economy has been stagnant for the past year and Europe is back in recession, oil is trading at $102 a barrel (Brent – $113 a barrel). This is a classic Catch-22 for Bernanke and his central banker buddies. The higher the price goes, the more recessionary economies become as energy and food costs rise. This would normally decrease demand and lower prices, but the massive money printing by the Fed and ECB artificially inflates the price of oil. The Canadian oil sands are only viable at $90 a barrel. Saudi Arabia needs $90 oil to balance their budgets. The onset of peak cheap oil, lack of Libyan supply, possible war with Iran, and increased demand from the developing world (China, India) will put a floor of $80 to $90 a barrel under oil. A shooting war with Iran would result in $150 a barrel of oil overnight. The trend in gasoline prices over the last three years is not your friend:

January 2009           $1.65

January 2010           $2.57

January 2011           $3.04

January 2012           $3.29

Gas prices are rising during the lowest usage time of the year. The average price of oil will exceed $100 during 2012 resulting in the highest average gas price in history for American drivers. These high prices, along with various weather related issues will keep food prices elevated, with 5% or higher increases likely. This should spur a few more peasant revolutions around the globe.

  • The question of whether gold can keep its streak of 11 consecutive positive return years in a row intact is an easy one. Will Obama and Congress spend $1.3 trillion more than they bring in during 2012? Will Ben Bernanke and other central bankers around the globe keep printing pieces of paper and calling it currency? If the answer to these two questions is yes, then gold will finish the year higher. As always, it will be volatile and manipulated by the powers that be. A drop below $1,500 in the beginning of the year is possible, but when Ben announces QE3, it will be off to the races. I expect gold to reach $1,900 by year end. Silver will be more volatile, but will likely reach $40 by year end.

Civic Decay – Occupying, Plundering, Capturing

Civic decay revealed itself dramatically in 2011 as millions of young people across the country occupied parks and town squares in a fruitless effort to correctly point out how the ruthless oligarchs inhabiting Wall Street bank executive suites, Mega-corporation boardrooms, the Marriner S. Eccles Federal Reserve Board Building, and the hallways of Congress had pillaged the wealth of the middle class through inflation, taxation, fraud and outright thievery. The majority of over-medicated, lethargic, uninterested, ignorant Americans yawned at this selfless display of courage and civil disobedience as they chose to occupy lines for hours to get the latest iPad or $3 waffle-maker at Wal-Mart. Delusional, non-thinking dolts across the land watched on their 60 inch HDTVs as young protestors got clubbed, beaten, tear gassed, tasered, maced, and brutalized by paid mercenaries for the ruling oligarchy. They treated the horrific scenes of brutality as if it was just one of their 30 favorite reality TV shows like I Didn’t Know I Was Pregnant or Toddlers & Tiaras. They thought this was a new show called Mace A Millenial.

Despite controlling the media, the money and the levers of power in Washington D.C., those in power cannot spin the reality of a middle class being systematically wiped out by the policies put in place by the corporate fascist oligarchs running this country. As Wall Street profits and bonuses flow like honey, the lines at food banks look like the lines at Best Buy on Black Friday and homeless shelters overflow with former members of the middle class. The ministry of propaganda (BLS, BEA) reports improving economic conditions while the number of Americans in the food stamp program has jumped from 38 million when the recession officially ended in late 2009 to 46.3 million today. Having 15% of the population surviving on food stamps is surely a sign of economic recovery.

 

The mainstream media methodically spews misinformation and happy talk about increased consumer spending and retail sales above expectations as if Americans borrowing to buy another laptop, TV, Kindle, or Rolex proves we have a real recovery. Meanwhile, old line mall based retailers like Sears and J.C. Penney die a slow agonizing death as they stagger into the sunset like Montgomery Ward, Circuit City and thousands before them. There is a disconnect in society as high end retailers like Saks, Tiffany, and Neiman Marcus report record sales as the 1% feel confident and flush with cash. Meanwhile, real median income is lower than it was in 2001. It seems tax cuts didn’t lift all boats, just the yachts. The average Joe pays twice as much for a gallon of gas and 50% more for food since 2001 while taking home less pay. The ruling elite can’t figure out why the peasants are getting restless.

 

The wealthy elite have been out in force over the last few months broadcasting their storyline about 50% of Americans not paying taxes. They and their media mouthpieces pound this message home unceasingly. They portray themselves as job creators, when the facts prove they have destroyed jobs here in America. They successfully painted the Occupy Movement as a bunch of lazy good for nothing socialists who needed to get a job. Then they unleashed the full fury of their brute strength upon these citizens practicing their right to assembly and free speech by crushing them with their hired police thugs, while the ignorant by choice public looked away. Controlling the message is essential for the oligarchs to retain their wealth, power and control. Aldous Huxley’s understanding of the American people is as true today as it was eighty years ago:

 “Most ignorance is vincible ignorance. We don’t know because we don’t want to know.”

It is time to not choose ignorance. The storyline peddled to the masses is false. The ruling oligarchy will do everything in their power to obscure and manipulate the truth. It is true that 50% of American workers pay no Federal income tax. It is also true that 50% of American workers make less than $25,000 per year. If these workers are employed in Philadelphia they pay 4% city income tax, 3% state income tax, 7.65% Social Security and Medicare tax, 6% sales tax on everything they buy, 15% state and federal taxes on gasoline, and they pay city and county property taxes whether they own or rent. They also pay the various sewer, trash, and myriad of other fees inflicted on them by government drones. Maybe someone should inform multi-billionaire hedge fund guru Steve Schwarzman that lower income families actually have most of their skin in the game. They can’t hire hoards of high powered lawyers and tax accountants to minimize their tax burden while contributing millions to politicians who write the laws to protect the oligarchs. I wonder why hedge fund managers don’t pay taxes on their profits.

Asked if he were willing to pay more taxes in a Nov. 30 interview with Bloomberg Television, Blackstone Group LP CEO Stephen Schwarzman spoke about lower-income U.S. families who pay no income tax. “You have to have skin in the game,” said Schwarzman, 64. “I’m not saying how much people should do. But we should all be part of the system.”

We are all part of the system, and the system is rigged. The middle class is systematically being obliterated as high paying jobs were shipped to low paying countries by mega-corporations. Their huge cost advantages have driven small domestic “job creating” firms out of business. The middle class has the majority of their wealth tied up in their homes, and they continue to see that wealth decline on a daily basis. The culprits in the housing collapse – the major Wall Street banks – have seen their profits skyrocket as they held the middle class hostage to a multi-trillion dollar banker bailout. Americans don’t hate the wealthy. Wealthy men like Steve Jobs and Bill Gates have been admired and emulated by Americans because they exhibited the true admirable traits of entrepreneurship, creativity, hard work, taking chances, and creating a better society. Wall Street shysters create nothing. They exhibit the worst traits of greed, avarice, and non-existent empathy for their fellow man.

 Gains and Losses in 2007-2009, Average CEO Pay vs. Average Worker Pay

Matt Taibbi summed up how the system is rigged rather succinctly in a recent article:

“And in the bigger picture, of course, you need the state and the private sector both to be functioning well enough to provide you with regular work, and a safe place to raise your children, and clean water and clean air. The entire ethos of modern Wall Street, on the other hand, is complete indifference to all of these matters. The very rich on today’s Wall Street are now so rich that they buy their own social infrastructure. They hire private security, they live on gated mansions on islands and other tax havens, and most notably, they buy their own justice and their own government.

But citizens of the stateless archipelago where people like Schwarzman live spend millions a year lobbying and donating to political campaigns so that they can jump the line. They don’t need to make sure the government is fulfilling its customer-service obligations, because they buy special access to the government, and get the special service and the metaphorical comped bottle of VIP-room Cristal afforded to select customers.”

The wealth inequality in this country did not occur because half the population is lazy and stupid. It didn’t happen because the 1% is intellectually superior, more highly motivated, or more entrepreneurial than the 99%. If any of these statements were true, the inequality would be consistent across decades and centuries. But, as the chart below details, the phenomenon has happened since 1979. Interestingly, it also occurred just prior to the 1929 stock market crash and Great Depression.  

  

The chart reflects the results of three decades of crony capitalism based upon phony tax canards; delusions of a debt based American dream peddled by bankers, politicians and the media; and complete capture of our economic and political system by a self selected wealthy few. Jesse captures the essence of how it happened in a recent article:

“Anyone who has seriously studied applied macroeconomics knows that crony capitalists hate free markets, with all the fairness and transparency that they imply. Competition is a serious drag on enormous profits and introduces significant uncertainty and risk. As soon as the game is underway, successful capitalists are constantly pushing the envelope of the rules, seeking to establish rents, monopolies, unfair advantages, and debt traps to snare the bulk of the players and stifle the profit-eroding tendency of real competition.

This is the basis of all aristocracies, which are merely the institutionalization of privilege.  Once they make it they bloody well want to change the rules to hang on to it, and take the risk out of their equation. They foster a culture of two sets of books, two sets of rules, and two systems of justice. They are given over in their personal and professional lives to the benefits of hypocrisy and cheating, with little conscience to restrain them. There is a predatory class that is nationless, without allegiance to anything, any principle, but their own greed and lust for power.”

What has happened over the last three decades is not particular to the United States. It is a flaw in all humanity. The majority of humans are inherently honest and if raised by good parents will do the right thing most of the time. When society allows psychopaths and evil men to attain high status in government and business through chosen ignorance, lack of vigilance, casting aside the rule of law, or admiration for wealth attained by any means, then wealth disparity reaches extreme levels. The fatal defect of the Wall Street psychopaths is their hubris. Too much is never enough. They are like sharks, always needing more to satiate their hunger. They will eventually go too far and collapse their crony capitalist system resulting in revolution and ultimately their demise. We are very close to the tipping point and 2012 is likely to reveal deep cracks in the foundation of our warped dysfunctional corporate fascist economic system. These are a few things I expect to happen in 2012:

  • The Occupy Movement will become more extreme with more disruptions of the economic system with less warning so the authorities don’t have time to prepare. I expect more cyber hacking into Wall Street, government, and media computer networks, causing disarray and uncertainty regarding financial information. I expect the Democratic and Republican presidential conventions to be overrun by protestors. The authorities will respond with excessive force, resulting in further violent protests in other cities.
  • Two simultaneous trends will eventually result in a domestic conflict. The Federal government grows ever more panicked by the knowledge that its ponzi scheme economy is going to collapse. This is why passage of the NDAA and the future passage of SOPA are so important to them. Imprisonment of citizens without charge and shutting down the only remaining means of truth – the Internet – are essential to retaining their power and control over the masses. At the same time, gun sales are at record levels. Critical thinking Americans can see the writing on the wall and no longer trust corrupt politicians of either party. Arming yourself and buying physical gold and silver is a prudent act in today’s world. If the financial system implodes in 2012 and an MF Global like stealing of customer funds from IRAs, 401ks, and bank accounts happens, all hell could break loose.
  • The ruling elite hand selected puppets for the 2012 presidential election are Obama and Romney. They are virtually interchangeable and both are acceptable to the Wall Street oligarchs. The monkey wrench in the gears is Ron Paul. His message of freedom, liberty, non-interventionism, living within our means, self reliance, and a sound currency are poison to the establishment. His message appeals to young people and a growing number of realists who understand we are already bankrupt. He will run as a 3rd Party candidate and focus a light on the crony capitalism that passes for free markets in America today. He will be vilified by both parties and their media mouthpieces, but if he gains traction I fear an unfortunate accident will befall him. Either way, he will have a dramatic impact on the debate and the outcome of the 2012 election.

The question for 2012 is whether the gaping multitude will come to their senses and respond accordingly against the ruling oligarchy.

“Modern fanaticism thrives in proportion to the quantity of contradictions and nonsense it pours down the throats of the gaping multitude, and the jargon and mysticism it offers to their wonder and credulity.” – William Hazlitt

Global Disorder – War, Oil, Religion

“We do not have to visit a madhouse to find disordered minds; our planet is the mental institution of the universe.” – Johann Wolfgang von Goethe

Disorder is an understatement when describing what is happening on the global scene. It seems like the inmates are running the insane asylum. The beauty of globalization, sold to Americans by the corporate oligarchs, is being revealed for all to see. Besides seeing millions of jobs shipped overseas by mega-corporation executives and our industrial base gutted beyond repair, the other “benefits” are aplenty. The interconnectedness of the global economy insures that a recession in Europe and the U.S. will spread across the world. The producing countries will fall when the consuming countries run out of fiat currency to spur consumption. Federal Reserve created inflation in the United States instantaneously spreads around the world creating revolutions across the Middle East and social unrest in China as food and energy prices surge to levels of pain which cause the poor to revolt against the ruling establishment. People lose it when they have nothing to lose.

But, the biggest gift of globalization has been provided by whom else – the Wall Street banks and the large European banks. The European banks did their part by loaning hundreds of billions to PIIGS that could never pay them back. Next, they leveraged their balance sheets 40 to 1, insuring that a 3% loss on their capital wipes them out. When their losses clearly exceeded 40%, the bankers employed their politician puppets running the insolvent countries across the continent to dump the losses on the taxpayers through austerity measures that insure a deep European recession. Since derivatives of mass destruction link the insolvent Wall Street banks to the insolvent European banks, the Federal Reserve has now stepped into the breach with American taxpayer money by providing swap lines to European banks. The oligarchs are perfectly willing to destroy the lives of hundreds of millions of citizens across the globe to insure their wealth and power remains intact.

The other crucial component of global disorder is oil. The storyline currently being peddled to the masses is the return of energy independence for America. The political class and their lapdog media pundits blatantly lie to the American public with stories of 100 years of oil supply under our soil. GOP candidates declare we can be energy independent in two years if we just drill, drill, drill. Meanwhile, in the real world 33 billion barrels of oil are consumed every year, with the U.S. consuming 7 billion barrels per year, of which 3.3 billion barrels are imported. Total U.S. oil production continues its 40 year decline, despite the shale oil boom in the Dakotas and the massive fracking hype touted by the gas industry. If Americans used some critical thinking skills they would conclude that our oil dependent society is balanced on the head of a pin. The chart below paints a picture of current and future global disorder.

One look at this chart and you begin to understand the War on Terror cover story. The average person in these Muslim oil rich countries wants a chance for a better life, food, clothing, and hope for their children’s future. They are not the evil, freedom hating, religious fanatic terrorists portrayed by the neo-cons and war mongers like Santorum, Gingrich and Romney. American troops are stationed in or around the countries with the most oil. Any dictator that fails to play along with the U.S. and its oil demands isn’t around for long. Hussein and Gaddafi learned the hard way. It’s just a matter of time for Ahmadinejad. Expect the rhetoric about the dangerous Chavez to escalate in the near future. Controlling 300 billion barrels of oil will be essential to keeping our suburban sprawl society functioning. Soccer moms will become irate when they can’t fill up their GMC Yukon with 39 gallons of precious fuel. Our own military clearly documented why the War on Terror will never end in their 2010 Joint Operating Environment report:

 A severe energy crunch is inevitable without a massive expansion of production and refining capacity. While it is difficult to predict precisely what economic, political, and strategic effects such a shortfall might produce, it surely would reduce the prospects for growth in both the developing and developed worlds. Such an economic slowdown would exacerbate other unresolved tensions, push fragile and failing states further down the path toward collapse, and perhaps have serious economic impact on both China and India. One should not forget that the Great Depression spawned a number of totalitarian regimes that sought economic prosperity for their nations by ruthless conquest. By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 MBD.

The likeliest global events which will make 2012 a year to remember include:

  • The disintegration of the European Union with outright default by Greece and the exit from the Union by Italy, Spain, and Portugal. A default and currency devaluation would bankrupt banks across Europe and would guarantee a worldwide recession and possibly depression.
  • It seems more likely by the day that someone will do something stupid in or around Iran and the Persian Gulf will explode into a virtual hell on earth. The unintended consequences of such a development will far outweigh the intended consequences.
  • The revolutions, protests, and brewing civil wars in Egypt, Syria, Libya and Iraq will flare up even if Iran doesn’t explode into a shooting war. The tensions in the Middle East will keep oil prices above $100, despite a world plunging into recession.
  • China’s hard landing will arrive in 2012. Keynesianism on steroids has failed as they’ve built more than enough vacant malls, vacant cities, vacant condo towers, and bridges to nowhere. Property prices will plunge, exports will decline, and peasants will revolt as food and energy prices push them over the edge. Chinese leaders will look for a foreign bogeyman so they can rally their 1 billion peasants around the flag. With 11% of their oil supply coming from Iran, it could get very interesting.

Just as no one saw the most significant events of 2011 (Arab Spring, Mubarak & Gaddafi overthrown, Japanese earthquake, tsunami, nuclear meltdown, and Occupy Wall Street) in advance, 2012 will surely have some surprises. Possibilities include:

  • An earthquake on the New Madrid fault or off the coast of California causing a tsunami to hit the west coast.
  • One or more hurricanes entering the Gulf of Mexico causing widespread oil rig destruction and causing oil and natural gas prices to soar.
  • A new bird flu or swine flu pandemic that spreads around the world.
  • An actual terrorist attack in the United States in a mall, hotel or public venue that provokes a massive over response by our government could change this country forever.
  • The assassination of political leaders and prominent bankers around the world as radicals take retribution into their own hands.

We have now entered the fifth year of this Fourth Turning Crisis. George Washington and his troops were barely holding on at Valley Forge during the fifth year of the American Revolution Fourth Turning. By year five of the Civil War Fourth Turning 700,000 Americans were dead, the South left in ruins, a President assassinated and a military victory attained that felt like defeat. By the fifth year of the Great Depression/World War II Fourth Turning, FDR’s New Deal was in place and Adolf Hitler had been democratically elected and was formulating big plans for his Third Reich. The insight from prior Fourth Turnings that applies to 2012 is that things will not improve. They call it a Crisis because the risk of calamity is constant. There is zero percent chance that 2012 will result in a recovery and return to normalcy. Not one of the issues that caused our economic collapse has been solved. The “solutions” implemented since 2008 have exacerbated the problems of debt, civic decay and global disorder. The choices we make as a nation in 2012 will determine the future course of this Fourth Turning. If we fail in our duty, this Fourth Turning could go catastrophically wrong. I pray we choose wisely. Have a great 2012.          

“The risk of catastrophe will be very high. The nation could erupt into insurrection or civil violence, crack up geographically, or succumb to authoritarian rule. Thus might the next Fourth Turning end in apocalypse – or glory. The nation could be ruined, its democracy destroyed, and millions of people scattered or killed. Or America could enter a new golden age, triumphantly applying shared values to improve the human condition. The rhythms of history do not reveal the outcome of the coming Crisis; all they suggest is the timing and dimension.” – Strauss & Howe

 

  Source: www.williambanzai7.blogspot.com

NDAA AUTHORIZED PREDATOR DRONES OVER AMERICA

So not only can Obama now imprison us with no charges, he can spy on us and if need be fire a missile at us from one of the predator drones that will now be roaming the skies above America. Why the fuck would predator drones be needed in America? The weight of evidence grows by the day. Our government is preparing for an epic collapse and will do everything in their power to retain control over the ignorant masses. Will the ignorant masses ever wake up?

Chances of Central New York drone flights improve as new law allows six national test sites

Published: Thursday, January 05, 2012, 2:00 AM

Washington — The Air National Guard’s 174th Fighter Wing is a step closer to gaining federal permission to fly unmanned Reaper drones out of its base at Hancock Field, according to U.S. Sen. Charles Schumer.

The National Defense Authorization Act signed into law last week by President Barack Obama allows for the establishment of six national test sites where drones could fly through civil air space.

Schumer, D-N.Y., said Tuesday he pushed for the establishment of six spots, instead of the planned four, to improve the chances that Hancock Field would be included. The 174th Fighter Wing has been trying for almost five years to convince the Federal Aviation Administration to allow flights of the MQ-9 Reaper drones out of Hancock Field.

The FAA bans such unmanned flights because of concerns about the remotely piloted drones flying through civil airspace used by commercial aircraft at Syracuse’s Hancock International Airport.

Schumer said he sent a letter Tuesday to FAA Acting Commissioner Michael Huerta, asking for Hancock to be one of the national test sites.

Hancock Field, which will eventually host a full squadron of Reaper drones, has the largest potential training space in the Northeast. Most of the drones assigned to the 174th Fighter Wing are now remotely operated in Afghanistan and Iraq by pilots at the Mattydale base.

Schumer said Hancock already meets FAA requirements for unmanned aerial vehicles because about 7,000 square miles surrounding the airport is designated as “special use” airspace.

He said that “making Hancock a test site for this technology would be a boon for Central New York, creating jobs and bringing new investments to our defense contractors that provide thousands of good paying jobs.”

The senator noted that two Central New York companies, SRC and Saab Sensis Corp., are working on technology to help integrate drones into the national airspace with “sense and avoid” ground-based radars. In addition, the Mattydale base employs more than 1,200 people.

In his letter to Huerta, Schumer said Hancock Field’s assets make it an ideal location, including the large open spaces of Lake Ontario and the Adirondack Park.

“Hancock Field is ideally positioned to be a test site because of its attractive air space, and because the region has two restricted areas, four seasons, a varied terrain, an over water range, air to ground gunnery capability and large airspace volume – all essential to ensuring that our drones and their pilots are able to complete their missions abroad,” Schumer wrote.

FAA officials had no immediate comment.

Col. Kevin Bradley, commander of the 174th Fighter Wing, has said that any Reaper drones that eventually fly out of Hancock would not be equipped with missiles or bombs. No training would take place within civilian air space, Bradley said.

The drones would be armed with live ordnance only when used at firing ranges at Fort Drum near Watertown. Central New York peace activists have protested the Air National Guard’s decision to base the drones at Hancock Field.

2011 Year in Review: Signs of an American Spring and a Fourth Turning

Extremely comprehensive review of 2011 from Dave Collum, posted on the Chris Martenson website: http://www.chrismartenson.com/blog/2011-year-review-david-collum/67586

Dave includes me in a prestigious list of truth tellers. I’m not worthy.

Every year, friend-of-the-site David Collum writes a detailed “Year in Review” synopsis full of keen perspective and plenty of wit. This year’s is no exception. Moreover, he has graciously selected CM.com as the site where it will be published in full. It’s quite longer than our usual posts, but by any measure, 2011 offered an over-abundance of ‘business as unusual’ developments to summarize. We hope you enjoy David’s colorful observations and insights, which are very much his own. — cheers, Adam]

Background 

Governments gambled on a return to growth solving all the problems. That bet has failed.

—Satyajit Das—

Every December, I write a Year in Review. Last year’s was posted at several sites including Chris Martenson’s [1]. What started as summaries posted for a couple dozen people accrued over 13,000 clicks in total last year. It elicited discussions with some interesting people and several podcasts, including a particularly enjoyable one with Chris [2]. Each begins with a highly personalized survey of my efforts to get through another year of investing. This is followed by a brief update of what is now a 32-year quest for a soft landing in retirement. These details may be instructive for some casual observers. I have been a devout follower of Austrian business cycle theory since the late 1990s and have ignored the siren call for diversification. I vigilantly monitor my progress relative to standard benchmarks. The bulk of the blog describes thoughts and ideas that are on my radar. The commentary is largely stream-of-consciousness with a few selected links that might be worth a peek. Some are flagged as “must see”. Everything else can be found here [3].

So why do people care what an organic chemist thinks about investing, economics, monetary policy, and societal moods? I can only offer a few thoughts. For starters, in 32 years of investing I had only one year in which my total wealth decreased in nominal dollars; whatever I am doing has worked. I also ride the blogs hard, am fairly good at distilling complexity down to simplicity, seem to be a congenital contrarian, and am pretty well connected (for a chemist). I am Joe Sixpack, a 99er of sorts with a growing unease.

Every year I feel like Bill Murray in ground hog day. Issues including the housing crises, hidden inflation (of a kind that even John Williams is not discussing), and interest rates have not disappeared, but I hit them hard last year and will not rehash them. I spoke of civil unrest in 2009 but not 2010. That topic has returned with a vengeance. The temptation to say “I told you so” can be irresistible. I have cordoned off a section to get it out of my system. Ad hominem attacks are reserved for jerks and morons, and I will try to avoid trite phrases of little content. I saw “risk on-risk off” so many times that I thought the Fed had hooked the markets to The Clapper. So let’s quit kicking the can down the road and get started.
 

Contents

Investing

Time for this turtle to come home.

—Mr. Wizard— 

2011 in Review.
With rebalancing achieved only by directing my savings, I changed nothing in my portfolio year over year. The total portfolio as of 12/31/11 is as follows:

Precious Metals et al.: 53%
Energy: 14%
Cash Equiv (short duration): 30%
Other: 3%

It was a turbulent year for all hard asset investors, eliciting wild oscillations in my portfolio within a 20% range. An overall return on investment (ROI) of -2% was edged out by the S&P 500 (0%) but bested Berkshire Hathaway (-5%). Precious metals (largely CEF, FSAGX, and physical metals) gyrated throughout the year but finished even over all physical and paper forms (Figure 1). Gains in gold (10%) and silver (-10%) were offset by a drop in the premium of CEF (Central Fund of Canada)—one too many shelf offerings—and profoundly disappointing results for the precious metal equities (-19%). The metals are discussed in detail below.

A basket of Fidelity-based energy and materials funds underperformed from -4 to -12%. These are represented emblematically by the XLE spider (1%) and XNG Amex natural gas index (5%) in Figure 2. My own fund foisted upon me by Cornell’s Fidelity connection (FSNGX), although 10% annualized over the decade, was total garbage this year (-7%) relative to its peers. I keep adding to an already chunky position in natural gas equities for reasons discussed in detail last year [1]; a secular global shift toward natural gas should reward patience but this year was pure patience.

These results were buffered by the cash (0%). In addition to the -2% return on investment (ROI), personal savings equivalent to 29% of my gross income added a couple more percent to sneak me into the black (1%) in units of accumulated wealth (vide infra). College tuition and a new car attenuated what would have been a stellar year for savings. Alas, such exceptions seem to appear every year.

Figure 1. Precious metal-based indices (CEF in red, XAU in green, SLV in purple, and GLD in yellow) versus the S&P 500 (in blue) for 2011.

Figure 2. Energy-based indices (XLE in green and XNG in red) versus the S&P 500 (in blue) for 2011.

32 Years in Review.
My imbalanced portfolio changed in decadal rhythms as follows:

1980-88: nothing but bonds (100%)

1988-99: classic 60:40 equities:bonds

1999-2001: cash, precious metals, shorts (minor), tobacco (minor)

2001-2011: cash, precious metals, energy, tobacco (minor)

My total wealth accumulated through a combination of savings and investment as shown in Figure 3. (I blocked out the absolute dollars.) Years ago I chose to exclude physical precious metals from my analysis using classic gold bug logic that I measure them in ounces not dollars. Over the last dozen years, however, I have steadily bought gold (with cash) a couple ounces at a time. I have been prompted to include them in all analyses.

Avoiding 1987 and 2000 equity crashes and capturing the bull market in precious metals proved fortuitous. You can see that 2008 and 2011 were the only down years. Berkshire has dropped five years since 1991.

Figure 3. Total wealth accumulated (ex-housing) versus year of employment. Absolute numbers of dollars have been omitted. Y-axis omitted intentionally.

I monitor progress by what I call a salary multiple, which is defined as the total accumulated investable wealth (excluding my house) divided by annual salary (line 22 of on the 1099 form ex capital gains). Over the 31-year period my salary rose twelve-fold, which I can fairly accurately dissect into a fourfold gain resulting from inflation and a threefold gain (relative to starting salaries of newly minted assistant professors) resulting from increasing sources of income and merit-based pay raises. My accumulated wealth normalized to the moving benchmark of a rising income is plotted versus time in Figure 4. The fluctuations visible in Figure 4 but not in Figure 3 result from income variations. A quick calculation shows that my 12-year accumulation rate beginning 01/01/00, a period in which the S&P returned almost nothing, is annualized at 12%. My five-, ten-, and fifteen-year rate of wealth accrual also beat Buffett’s. 

Figure 4. Total wealth accumulated measured as a multiple of annual salary versus years of investing.
 

Just Thoughts

More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray we have the wisdom to choose correctly.

—Woody Allen—

2011 may prove to be an historical turning point. In 2008 the visionary James Grant asked “Why no outrage?” [4] In the early spring of this year I sensed rage but thought maybe it was only mine. As the year progressed, however, change was in the air and protracted social crises seemed possible. Many issues owing their origins to economics seem to be metastasizing into social movements. One senses winter is coming. With rich irony, Arabs might call it American Spring. Strauss and Howe predicted it in 1996 and would call it a Fourth Turning. 
 

All the Devils Are Here

Look what they’ve done to my song, Ma. 

—Melanie—

I cannot get that refrain out of my head as I watch the markets. This year the Devils brought us a wealth of nauseating and irritating stories that made you want to hurl (both lunch and laptop.) Here are some of the highlights. Others worthy of elaboration have been allocated their own subsections.

In an op-ed, Joe Nocera (author of a book bearing the title of this section) noted that one guy is in jail as a result of the entire mortgage fiasco: he lied on a liar’s loan. By contrast, Gary Cohn, COO of Goldman Sachs testified to Congress under oath that Goldman went to the discount window only once, for a nominal sum when in reality Goldman went multiple times. I had occasion to ask Joe if Gary would get charged. “No.” Apparently, perjury in Congress is only a crime if you are lying about baseball.

Thanks to Steve Kroft’s 60 Minutes episode we found out that Congress can legally trade on all forms of insider information [5]. (It helps if you write the laws.) The frothy mix of money and politics is simply too awesome to overcome. Congress shirked its stated job of providing leadership by refusing to make even nominal budget cuts. They set up a super committee to make the cuts (and to give the lobbyists a much more focused target for their money cannons.) They failed too. I am sure the money cannons worked.

The NY Bank-Mellon (and, by the cockroach model, many more banks) got caught after a multi-decade crime spree involving back-dating of Forex trades of pension funds—that would be us folks—scalping 0.3% on every trade. I am sure they will be fined pennies on the dollar and not forced to admit guilt.

We found out this year that the SEC destroyed 18,000 files of fraud cases over many years because they were deemed “inactive”, including those emanating from the Madoff case [6]. The magnitude of this blunder, a generous term for absolute corruption, can only be appreciated when you realize that all fraud cases at the SEC are inactive. David Einhorn’s book (Fooling Some of the People; vide infra) includes horrifying tales of SEC corruption. I imagine Markopoulos’ book about Madoff is the Bible on the subject.

There was a brief glimmer of hope. Standard and Poors grew a spine and downgraded US sovereign debt. I am not sure what rating you give to sovereign debt in which the authorities have explicitly stated that they intend to deracinate creditors with inflation, but it certainly is not AAA. Of course, the CEO of S&P was promptly fired, and, in a delicious irony, was replaced by the COO of the completely insolvent Citibank.

In a wondrous moment in journalism, Bloomberg pried over 20,000 documents from the Federal Reserve using the Freedom of Information Act (FOIA). The Federal Reserve fought the suit, but then agreed to “cooperate” with the Supreme Court’s decision. How magnanimous. There emerged a cottage industry to dig nuggets from this treasure trove. We discovered, for example, that most of the $800 billion of Quantitative Easing II, money reputed to boost the US economy, went straight to European megabanks. Matt Taibbi of Rolling Stone described how a few hundred million found its way into the pockets of the wives of two Morgan Stanley executives to purchase distressed assets and shoes. The system sprang into action after Bloomberg’s score and initiated legislation that will allow the Fed to deny a document exists in an FOIA lawsuit if it should prove inconvenient. I guess that’s the FODA (Freedom of Denial Act).

I thought I could get through a year without taking a whack at Alan Greenspan, but I couldn’t let this one go. The Maestro announced that we should burn down houses to alleviate the supply problem. He seems to have forgotten what historians have written about Federally sponsored food destruction programs during the Depression to prop up prices as people went hungry. This clown destroyed lives. Could somebody at least put a sock in his face?

I try to stay non-partisan, but the White House deserves a little scorn. White House pressure to give solar cell company Solyndra $535 million dollars backfired when they went bankrupt. I remember seeing Obama’s speeches and thinking that they were shameless infomercials. I must admit that I like having an intelligent president who formulates full sentences in real time, yet distrusted him from the start for a simple reason: Nobody comes from the Chicago political machine uncorrupted. Once elected, he filled his cabinet with establishment thugs. Chief of Staff Rahm Emanuel then left to become mayor of Chicago and was replaced with the infamous mayor Daley’s son. You can’t make this stuff up.

Hank “The Hammer” Paulson has done a credible job of looking like a good guy, despite his nickname and Goldman roots. There’s no way that an environmentalist and avid bird watcher could be ruthless, right? We found out, however, that Hank had tipped off a bunch of ex-Goldman hedge fund managers about what the Fed and Treasury would be doing. Of course, Hank let guys like Buffett and Gross help design bailouts and then front run them, but a bunch of hedge fund managers? They don’t even have Congressional appointments.

I would be remiss by not noting that the investment bankers got a few IPO scalps. It’s nothing like the glory days, but they came out with Groupon (flush), Pandora (unobtainium-induced flush), and Zynga (nouveau flush). Buyers of GM and AIG, the newest GSEs, got pummeled with 50% losses this year. You should not buy what Wall Street sells.

Forget Bin Laden, we got Rajaratnam! What a score for the authorities—a big-time hedge fund manager making money off leaked secrets. To top it off, he’s a foreigner, so we get a xenophobia boost. And now for the rest of the story. The guy who leaked the information—the guy who should be credited with a massive breach of trust—was Gupta. He’s a foreigner too so why did Gupta get a pass? He works for Goldman (golf clap). One can only wonder how many more breaches of trust can occur before we simply run out of trust.

Paul Krugman knows how to make friends and influence people. He incessantly pleads for another $5 trillion dollars. Please let it go. A 2002 op-ed resurfaced in which Krugman had called for Greenspan to create a housing bubble [7]. OK. It’s not a crime to be wrong (or a buffoon), but somehow they keep publishing his drivel. Krugman also suggested:

If we discovered that space aliens were planning to attack and we needed a massive buildup to counter the space alien threat and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months. [8]

Jeepers Paul: Put down the bong. This box-office-ready variant of Bastiat’s “broken window fallacy” illustrates what a complete Keynesian boob he is. He also waxed philosophically about how the East Coast earthquake in August could have stimulated the economy if only it had done more damage. Why think small? How about global thermonuclear war or an extinction-event asteroid? The earthquake quote is rumored to be a fake, but how would you know? Since socks come in pairs, put one in his face too.
 

Buffett Takes a Bath

You should thank God [for bank bailouts]…Now, if you talk about bailouts for everybody else, there comes a place where if you just start bailing out all the individuals instead of telling them to adapt, the culture dies.

—Charlie Munger, Berkshire Hathaway—

Let ’em eat Twinkies, Charlie! (but I digress). Warren Buffett (WB) claims he decided to invest $5 billion in Bank of America while taking a bath. Total absurdity aside, the last guy who did his thinking in the bathtub single handedly destroyed the global economy with his bubbles. To pilfer Buffett’s Wright Brothers logic, we should have drowned that guy, but I digress (again). 

Buffett lost a little money this year—no big deal—but he took quite a metaphorical bath. WB is possibly the most famous and successful investor of the modern era—a world-class stock jobber, Master of Wall Street, and a hype machine. Come again? Yep. That sweet little old grandfather buying banks while eating ice cream in Dairy Queen in Too Big to Fail is a world-class hoser. In 2009 I caught Buffett in a big lie: he declared a bullishness for equities with interest rates in the basement, completely contradicting his 1999 article in Fortune Magazine declaring that rising interest rates cause secular bear markets in equities [9]. While pondering a blog denouncing this hypocrisy, I discovered Michael Lewis had scooped me by a mere 17 years. In 1992, Lewis’s Temptation of St. Warren excoriated WB; it’s quite a read [10]. I stole Michael’s title, wrote my blog, and moved on [11], but Buffett and the Buffettologists continue to irritate me.

This year WB denounced low taxes on billionaires. Sounds altruistic, but it leaves a bad taste given that his corporate attorneys protect him from taxation while fighting underpayment of Berkshires’ taxes. (Michael Vick denounces dog fighting too.) WB also helped write bailout plans for banks (including Goldman Sachs and Wells Fargo) while scooping up shares of bank stocks (including Goldman Sachs). He’s no Martha Stewart, but this smells. WB defiantly maintains that he couldn’t care less about Berkshire’s share price, yet he spent billions buying Berkshire shares above book value, which smacks of a stock pump (and it worked). He became Obama’s BFF (best friend for you non-teenagers) and then, miraculously, two of WB’s favorite companies, Wells Fargo and Moody’s, somehow managed to slither out of Federal legal actions targeting their peer banks and ratings agencies. It’s good to have friends in high places (and a reputed $10 million dollar lobbying budget.)

People around WB didn’t help his image either. His long time partner, Charlie “Let ‘Em Eat Cake” Munger, certainly displayed a tin ear with his quote. David Sokol, WB’s anointed heir apparent at Berkshire, got caught getting a little on the side to supplement his ample wealth. Of course, you can’t have Buffett’s clone look like a crook so his career at Berkshire was vaporized. Legendary hedge fund manager Michael Steinhardt beat Warren like a rented mule in a must-see interview on CNBC [12]. He said WB “conned the press”, is “thoughtless”, a “snow job”, and even implied dishonesty while WB’s pregnant groupie listened in stunned silence. When pressed about the Sokol affair, Steinhardt indicated that “it is not common for Buffett to get caught.”

Steinhardt also touched a topic that has me conflicted. Buffett and Gates have pooled their gargantuan empires—resources accrued from the miracles of American capitalism—into a single tax exempt organization of unprecedented scale (Catholic Church aside). One lobe of my brain says they are free to do as they please; another thinks that American capital should be plowed back into American soil for the next generation. I keep thinking about a strip-mining metaphor. In any event, a tax-exempt organization will be allocating this massive pile of capital for eternity (or maybe not). Let’s hope it does so efficiently and for good causes.
 

Precious Metals and Currency Wars

Gold standard supporters are lunatics and hacks

—Nouriel Roubini—

Precious metals were in a Utopian bull market for almost a decade. The early bulls lounged poolside, taking the occasional dip and enjoying returns in the high teens. It was a leisurely path to wealth. Predictably, the speculators showed up, a few at first but then in number, forcing repeated chlorine charges of the pool. The high frequency traders began playing digital Marco Polo, causing raucous turbulence. Now the market is anything but leisurely. I miss the sane days when only crazy people bought gold.

The volatility, however, is not just the traders. There were some serious shenanigans at the Chicago Mercantile Exchange (CME). They are charged with maintaining orderly markets, but apparently fell waaaay behind the curve. Five margin hikes on silver in eight days isn’t orderly; it’s a drive-by shooting. Just days later, the new Shanghai metals exchange jumped in with its own margin hike, triggering a 15% flash crash. Mysterious put buying on low volume in the wee hours of the morning while most of Asia was on extended vacation elicited serious gold sell offs. To ensure that commodity traders across the board got the memo, 60 million barrels of oil were released from the strategic petroleum reserve for no apparent reason. (Does anybody believe that actual oil entered the market place?) The message was clear: metals and commodity bulls will be dealt with severely. Those without a position in metals are braying that the bull market is over and have been energized by recent precipitous drops. Others see the margin hikes as an effort to allow an orderly retreat for big-money shorts. There may have been some serious collateral damage, however. I suspect that some of MF Global’s problems may have started from this forced selling.

So where are we, heading back to the barbequed relic era for gold or taking a pause that refreshes? I labor over this question without a definitive answer, but I suspect that we are somewhere in the middle of a secular bull. The damage looks minor when placed in perspective (Figure 5). The retail customer is not yet in the game; I have dozens of smart colleagues who listened to me squeal for a dozen years without ever buying an ounce of gold. My local coin dealer still has only 2 or 3 steady buyers kept on speed dial. Sometimes he can’t move even a couple of ounces of gold. Japan is offering gold coins with the purchase of government bonds, placing gold at the status of a free toaster oven. In what was a spectacular Twitter flame war between Rickards and Roubini, Roubini launched his “lunatic” quote (vide supra). One intrepid reporter denounced gold, indicating that “gold is unbacked whereas the dollar is backed by the US government.” (I blew a snot bubble on that one.) The symptoms of a blow-off top are absent.

Meanwhile, the supply-demand stats look great. HSBC estimates that only 0.14% of investable assets are precious metals whereas Sprott says 0.75%. Both are far cries from the 5% target of traditional portfolio theory. Central banks are buyers after decades of selling. India, Korea, Mexico, Russian, and Vietnam were visibly active. (Rumors abound that big buyers are going straight to the miners, rendering the Comex increasingly irrelevant.) Chavez repatriated his gold to Venezuela, presumably to avoid rehypothecation (vide infra). Jim Rickards is in Northern Europe at this moment discussing similar repatriations. Why would any sovereign state keep their gold elsewhere? The 500 lb gorilla, however, is China. They are rumored to have 1,000 tons of gold with a target of 8,000 tons. How do they buy 7,000 tons? They bid for it like everybody else. Chinese citizens have been encouraged to save using gold (a defacto gold standard and covert accumulation). Although the gold bugs in the US occasionally discuss confiscation, I think the Chinese proletariat are the ones being set up. Last but not least, we have charlatans running the central banks of the world. When they say they are going to debase their currencies to help their banking friends, I take them seriously.

Figure 5

With timing that would make Robert Shiller proud, Jim Rickards published Currency Wars, a carefully reasoned description of past and future mercantilism and currency debasement. The oddest thing about a currency war, however, is that you are said to win if you inflict the most damage to your own currency. This is akin to circling the wagons and shooting inward. To stretch the wild west metaphor a little further, I am reminded of the classic scene in Blazing Saddles when the sheriff (Bart) points his gun at his own head and threatens to shoot himself if anybody moves. As the logic goes, everybody debases their currency to make exports cheap and imports expensive. Of course, consumers pay up, but nobody cares about consumers. Even the Swiss—the Swiss!—debased the Swiss franc by 10% in one Draconian swoop to energize sales of army knives. I have no doubt that this form of mercantilism is driven by greed and avarice of politically connected special interest groups. Those who do not directly benefit but sign off on the ideas (economists and journalists) are cranks in my opinion. (I am not completely sure if that passes for an ad hominem attack.)

I must pay lip service to the precious metal equities. Starting in late 2010, equities and metals began diverging quite markedly as evident in Figure 1. Some argue it’s GLD sopping up demand, which I suspected at the outset was the reasoning behind its creation. My best guess, however, is that some big money players began placing spread trades by going long metals-short equities. If so, this gap will eventually narrow. Many bulls assert that the equities are dirt cheap, should be levered heavily to metal price, and will eventually soar (possibly all the way to the moon!) Despite a chunky position in these equities, I am not so sanguine. I aggressively bought tobacco stocks in early 2000 with p/e’s in the mid single digits and dividend yields of 8-12%. (My best bottom call ever paid for a college education.) The gold stocks do not look dirt cheap by that standard. The notion that there is gold in them thar hills (i.e., assets in the ground) is meaningless if these miners can’t get it out profitably. The darker possibility is that the equities are foreshadowing a downturn in the metal price. I don’t take that too seriously because markets seem pretty damned myopic. 

I can’t exit a discussion of metals without talking about silver, a bi-curious metal with both industrial demand and pornographic appeal for precious metal investors. (I have spittle dribbling down my chin as I type.) The world-renowned CPM group says that annual industrial demand (approximately 900 million ounces) exceeds mine supply by 200 million ounces. The shortfall is made up from above-ground bullion stashes accrued through the millennia and from recycling. Gold-silver price ratios of 16:1 are often cited targets based on 1:16 ratio of gold and silver in the Earth’s crust. The above-ground stashes, however, tell a very different story. Smart guys like Sprott and Martenson are now quoting 1:1 ratios of accessible above-ground supplies (1-2 billion ounces of each). It was claimed by a highly reliable source (the internet) that the global above-ground silver stash has not been this low since the 13th century. Here is the money line: an estimated 14 billion ounces of silver bullion in 1900, bullion accrued over millenia, has been gutted by 90% in one century. As we crank out solar cells, cell phones, and any other electronic devices (all of which demand silver), I gotta figure silver will have its day in the sun. (Catch that solar cell pun?) I lack the bravado to pray for dips; perpetually rising prices suit me just fine. Economic malaise or not, price discovery is coming. (OK. That was the last Game of Thrones play on words.)

Energy and Resources

The stone age didn’t end because we ran out of stones.

—Sheikh Ahmed Zaki Yamani, former OPEC oil minister. —

That’s a pithy phrase with no content—a duck-filled platitude—by an evasive oil minister. It is also a refuge for simpletons. I have been pondering an impending resource depletion—a profoundly consequential global event—for years now, a quest that began with the simple notion of hedging inflation. I am essentially done studying the problem and am sitting back waiting for it to play out. To those not up to speed, there are numerous books and blogs on “peak oil”. The premier presentation is Chris Martenson’s Crash Course [13]. If you don’t have three hours to listen to a vivid description of a civilization-changing process, try his one hour seminar [14]. If you don’t have an hour, then, by all means, put down this document and focus on something important. There were a few contributions to the debate this year that caught my eye. Robert Hirsch, author of The Hirsch Report presented to Congress, recently discussed our complete failure to respond to depletion-based risk [15]. Legendary money manager Jeremy Grantham wrote several reports pleading with his investors and society at large to pay attention [16]. To those who hang on Daniel Yergin’s soothing words, many believe he has lost a step or two since his glory days as author of The Prize.

I have also wondered how one will distinguish two distinctly different causal relationships: (1) a geologically mandated reduction in energy output imparting an economic malaise, and (2) an economic malaise causing decreased energy consumption. One might expect that geological constraints should cause energy prices to rise in the face of economic stagnation. The noise, however, will be deafening. Claims of evil speculators, dastardly Arabs, and stagflation will certainly precede the awareness that we are having trouble getting oil. There may also be subtle hints like when the Saudis cut production this year claiming a glut in the market while prices were rising. Does the massive spread between the price of WTI and Brent (up to $25 a barrel) have any information in it? I asked several prominent geologists and market strategists, and they were completely dismissive of WTI as an indicator of demand; Brent reflects world oil price. Of course, the media focuses on the WTI because it makes oil look cheaper.

I am pessimistic about alternative energy sources: Biofuel will destroy the soils (unless ocean-based); solar is going to be a monstrous scaling problem exacerbated by razor thin energy margins; nuclear looked promising until Fukushima set the industry into meltdown (possibly for decades); tar sands are brutal on the environment with only moderate energy margins. I am wildly bullish on natural gas-based equities as discussed extensively last year [1]. I would like gains now, but patience will be necessary as society re-engineers for a natural gas-intensive world. I hasten to add that fracking will only postpone, not eliminate, the energy depletion issues.

Europe 

If they are lucky they will manage to [push back the Greek default] for say three years. That will give the banks and insurance companies time to unload this debt—sell it off to national banks and the European Central Bank—so that when the default comes it won’t bring down the private banks and private insurance companies.

—Martin Feldstein, Former Fed Governor—

Preliminary attempts to clean it up fail as they only transfer the mess elsewhere.

—Wikipedia on the bathtub ring in The Cat in the Hat—

There is so much written on Europe it is hard to imagine adding more. I am with Kyle Bass [17] and every other bright bulb in this game: Europe must write down their debt. Of course, Greece got most of the headlines at first, but Greece has been in a perpetual default since the first debt jubilee implemented by Solon in the 7th century BC. In this most recent chapter, Goldman did their Jedi mind tricks (currency swaps) to help Greece get into the whole Euro currency regime (and repatriate some serious drachma to 85 Broad Street). That any banks ever lend to Greece is the epitome of moral hazard; these bankers should be euthanized not bailed.

Several years ago I incorrectly predicted that Spain would be the first Club Med collapse. Their real estate market was levered to the hilt, and there seems to be no Spanish translation for “mark-to-market”. I first realized they could become the Rubes of Europe—no small feat—when US banks sold toxic assets to Santander, one of Spain’s megabanks. I doubt Santander was chosen because it was so well capitalized. Some Spanish bankers probably got some personal doubloons (pocket change) for signing off on that deal. Spain is coming.

Will the monetary and fiscal cavalries save the Euro and, by proxy, Europe? Europe spent 2011 in the “buy the rumor-sell the news” mode, except there were only rumors, and the burst of confidence was always short lived. The authorities kept drawing Maginot Lines in the sand. It seems unlikely that Europe can save itself given that those needing the bailouts are precisely those expected to contribute handsomely to the bailouts. Some of the ideas were almost laughable. It was suggested that the EFSF (European Fubar Slush Fund), a piddling few hundred billion Euros largely funded by insolvent states, could be levered. The circularity of this reasoning is dizzying. They tried to ban debt downgrades (and world hunger). The Kabuki theater called “bank stress tests” offered a few minutes of stability and a great punch line: Megabank Dexia got the highest grade of all Eurobanks…and then went from hero to zero (bailed). Serious dysfunction seemed to emanate from the desire to avoid a “credit event”, a euphemism for cascading failures of credit default swaps (CDSs) that would circumnavigate the globe. (In 2008-09, US investment banks briefly delayed credit events by, quite literally, denying their existence.) Successfully negating the protection offered by CDSs may prove a cunning strategy to destroy the global CDS market. Good riddance.  

It would be unreasonable to hope for a prompt solution. The swat team charged with putting together the first Basel Accord took 18 years to get all the signatures during a period of relative calm. Coordinated actions in Europe are largely restricted to military campaigns.

What about help from outside to save the Euro? A concerted intervention by a consortium of central banks bought them some time. There have been discussions of the International Monetary Fund (IMF) fronting the money. That would be largely us, fellow Americans. There was a suggestion that the UK might help, but Prime Minister David Cameron told the rest of Europe to take a hike because the UK is flat broke. He’s not very popular, but his reasoning seems sound. The Federal Reserve is publicly saying they will not bail out Europe (again), but they’ll try (again) because they’ve got bazookas, printing presses, and a “yen” for the kinky.

Oliver Sarkozy (the brother of Merkozy) says European banking system is 4-fold bigger than the US banking system, requiring a 4 trillion bailout (0.80 Krugmans). Australian authorities told its bankers to get ready for a collapse. Europe is starting to look like the board game Risk in which players are trying to get each others’ cards. (Risk players know all too well that nobody ever wins in Europe.) Greece should ignore its bribed politicians and do a total write down. Selling assets is for drug addicts and wusses. Heaven knows Greece’s credit rating couldn’t drop lower. The nuclear option occurs when Germany opens the rumored warehouses of printed Deutschmarks and heads for the hinterlands. Aside from some Slavic carnage, Europe has been militarily calm for 60 years. The previous 3500 years, however, have been relentless tribal warfare. Bright guys are starting to speak in hushed tones of a pan-European conflict again. It could get interesting in a catastrophic sort of way. Analysts might practice typing in fetal position.
 

Federal Reserve, Bailouts, and Bank Reflations

We’re creating money because there’s not enough money in the economy.

—Rudolf von Havenstein—

I was just kidding: That wasn’t said by Havenstein of Weimar fame but rather by Mervyn King—Mervyn King!—current head of the Bank of England! What does this have to do with the Fed? They all suffer the Keynesian affliction. We are so doomed, but let’s refocus.

The Federal Reserve has really been up to no good, using the global economy as a gigantic laboratory for their cockeyed experiments. Unlike some sealed virology lab, these guys release mutant strains into the wild hoping for some positive effect. For starters, the Fed expanded the dual mandate of maximizing bank profits and triggering rampant inflation to include a third mandate of pumping asset markets. And, of course, Ben Bernanke hails from Princeton. Academics should not be allowed to handle sharp objects or run heavy machinery (like a printer) let alone be put at the helm of the global economy. This is folly at its finest.

Bank reflation is a euphemism, which loosely translated means save the banks at the expense of everybody else. When it is declared that the banks either must recapitalize or have been recapitalized, there is no large mattress from which this money comes. Existing money is already on bank balance sheets. They are being called upon to contract credit, which is a death spiral because of the debt-money supply paradox, or central banks will be forced to create more. Just ask Mervyn. Krugman may be right; we may not have inflation right now…but we will…and then he will be wrong.

Here’s my biggest gripe in a nutshell. The Fed, whether it’s a wholly owned subsidiary of the banking cartel or not, is charged with protecting the banking system. Period/full stop. The banking system is global. Period/full stop. Ergo, one does not even know if the Fed’s actions are in the best interest of the United States. Period/full stop. What is to prevent them from sending trillions to Europe, Asia, or any faraway place because bankers got themselves in trouble? Absolutely nothing; they do it relentlessly. (They even sent the missing pallets of $100 dollar bills to Iraq for Christ’s sakes!) Bloomberg’s FOIA suit showed how far off the reservation they had strayed, pumping in at least $7.7 trillion. Bernie Sanders claims the audit shows $16 trillion. The Levy Economics Institute claims numbers approaching $30 trillion. We keep hearing that we made money on the bailouts, including from General Motors! That’s an OMG/LOL/WTF all rolled into one. The $700 billion TARP was put on display for public consumption. It was designed to be paid back in the light of day. The rest of the money entered the system covertly. They saved GM during the crisis by pooling their ample toxic assets, named it Ally Bank, and bailed it. GM cost us a fortune. Bankruptcy lawyers saw alternative strategies and better outcomes as described in an Econtalk interview [18]. They are selling off assets and declaring profits (like junkies selling blood), but have a balance sheet filled with dregs. Bank of America recently dumped its enormous derivatives book into its banking subsidiary to assist the Fed with another profitable bailout in the near future. Hussman outlined in vivid detail the illegality of a number of Fed’s asset purchases [19]. (Stephen Roach had done so years earlier, but neither Stephen nor I could locate the link.)

Occasionally there is higher brain function at the Fed. Governor Poole expressed angst when they attached low interest rates to a distant date on the calendar:

I would describe the [Fed] decision on August 9 as being simply unprincipled. I know of no article, paper – professional paper in the last 25 years, 35 years perhaps, that would justify this approach to policy. All the academic research, including research within the Federal Reserve makes policy dependent on the state of the economy, not the state of the calendar. So I’m flabbergasted, makes no sense to me. [20]

We the People are suffering Stockholm Syndrome in which we are empathizing with our captors, the banking cartel. The Feds, by offering free and unlimited capital, render our hard-earned capital of no value in the market place while concurrently setting us up for destructive inflation. The 0% interest rates are placing the burden squarely on the backs of savers. The losses due to what Carmen Reinhart called “financial repression” [21] have been estimated at $400 billion per year on the treasury debt alone (not to mention secondary costs stemming from other artificially low rates). I could come to terms with such squanderous bailouts if the flaws in the system had been corrected, but they haven’t and won’t in the foreseeable future. As it stands, the diligent will continue to fund the indolent. It is oppressive, wrong, and, in the long term, destructive. An independent Federal Reserve has gone rogue with no safeguards.

Incisive journalist Evan Ambrose-Pritchard of the Telegraph asked, what will bring the bankers to heel? There is no answer yet. On an early morning Squawkbox, Joe Kernan said to Fed Governor Bullard, “I think you guys should read the Hippocratic Oath a few times.” Indeed.

MF Global and Rehypothecation: Leverage in a Fractional Reserve World

We’re pretty darn f***ed. 

—Christina Romer—

John Corzine and the MF Goldman MF Global story is big and getting bigger. Although it is an Enron-scale collapse, it reminds me more of the Refco bankruptcy—IPO in August/bankrupt in October. Unlike Refco, the Wall Street crime families are having a very difficult time burying this story because Corzine is one of the Godfathers. At first it appeared that MFG stole investors’ assets to cover its assets, but soon we were introduced to the previously arcane word “rehypothecation.” To understand this let’s begin with a definition:

hypothecate: To pledge an asset as collateral on a loan without the lender taking possession of the collateral. It especially applies to mortgages: the borrower hypothecates when he/she pledges the house as collateral for payment of the mortgage [22]

Rehypothecation is simply using the same collateral again (and again) for different loans. They are now telling us that everything at MFG may have been legal. I think there is at least one illegal part. JPM anointed itself super senior creditor by confiscating a billion or so, including allocated gold bars. Blogger Bruce Krasting may have been the first to detect their little ploy in the form of suspect reverse wire transfers [23]. (It is merely an optics problem that JPM sold the assets to George Soros.) Some are saying that claw backs will correct this, but I am not convinced.

Isn’t “rehypothecation” just a shell game or Ponzi scheme by another name? Of course, but it’s also the foundation of fractional reserve banking and our increasingly fractional reserve world. Banks used to keep large reserves but with the advent of the Federal Reserve (spawned in the wee hours of December 24th in 1913), banks began shrinking reserves and relying heavily on the lender of last resort. Insurance companies are also fractionally reserved by design. The majority of pension funds are grotesquely underfunded, representing big promises backed by a very small reserves. CDSs are simply credit insurance backed by the good faith and credit of large banks [sarcasm off] whereas others are backed by two guys named Vinnie and Guido. There are still gobs of synthetic CDOs (an estimated bazillion dollars worth) backed by three mortgages in Camden, NJ that have been in default for years. The Comex is a fractional reserve gold storage (backed 2.5% against claims). The prospective for the gold ETF (GLD)—I read it—indicated that the gold is stored “in lots of places, don’t worry, shutup” (although not quite in those words.) There must be some serious hypothecating going on there too. Does anybody seriously believe a bunch of broker-dealers could sit on a pile of bullion without selling it repeatedly? Bob Pisani of CNBC recently toured the GLD gold stash, assuring investors the gold is safe and sound. Zero Hedge noted that the serial number on the bar he proudly displayed was not listed in GLD’s inventory [24].

The MF Global story is very damaging to the public psyche. It showed us that no collateral—not even fully allocated gold bars—is safe in the hands of broker-dealers. When creditors raced for the exits, the politically connected grabbed the loot and ran out the back door, leaving depositors to fend for themselves. (Depositors become junior creditors in this event.) This smash-and-grab tactic is not new. US banks did it to the Europeans during the 08-09 crisis by transferring billions out of German banks in the dead of night. You would be a fool to assume this risk is unique to MFG, and investors are catching on. I diversified my assets in 2006, not by asset class but rather by brokerage in a buckshot pattern, avoiding those active in proprietary trading.

Looking across society you see more promises than assets, setting us up for wild asset grabs going forward. This administration was handed a disastrous economy and given a political mandate for change. Instead, they followed Neville Chamberlain’s lead by appeasing the banks to assure “prosperity and peace in our time.” It’s not working this time either.
 

Nobody Saw It Coming

Experience is a wonderful thing. It enables you to recognize a mistake when you make it again.

—anonymous—

From my investing portfolio you can see that I smelled something and got out of harm’s way. Rummaging through my email box I found an email dated 5/6/02 sent to Rick Sherlund, founder of Goldman Sachs software group. I am succumbing to the dreaded blogger’s disease, the undeniable urge to yell “I told you so!” You can skip this part because it is ten years old, but I think it is a rather extraordinary document from a rank amateur and one that I am quite proud of.

The exchange began when I briefly expressed concerns, which prompted Rick to ask:

“There have always been gold bugs and doom and gloom types and they are right 
in pointing out the risks, but what is it if you put this in a balanced or
 most likely perspective that we should be most concerned about?”

My unredacted response was as follows: 

Date: Mon, 6 May 2002 11:42:02 -0700

To: “Rick Sherlund” <[email protected]>

From: “[David Collum]” [email protected]

Subject: Re:

In response to your questions, I worry most about debt, how it has been spread throughout the system, the mechanism by which it will get unwound, and whether the whole notion that one can insure against interest rate risk through derivatives is even a theoretically sound construct (let alone practically sound). Let me summarize what bugs me in general and then try to get at what’s got me jumpier than usual at the end. (In the mean time, I enjoy consolidating my ideas, the non-scientific writing, and pretending to know what I’m talking about…which isn’t new.)

General Concerns

(1) Mortgages and Refi’s. I see a lot of potential defaults in the housing market. Fannie and Freddie are growing an enormous portfolio and are moving toward the sub-prime loan market during a time of decaying economic fundamentals. Everybody rants about the refi’s being good for the economy (including the Fed) when, to me, Fannie and Freddie look like very dangerous institutions. I’m beginning to spot more main-stream thinkers articulating this concern as well. As a segway to the next point…

(2) “Short-term” Personal Debt. The “average family is looking at a $50K salary and $9K on the credit cards (on top of shrinking home equity). The resilient consumer is akin to the avalanche that has not yet fallen; it looks very tranquil. It is mathematically impossible, however, for the consumer to keep accruing debt. The average family — the heart of the bell curve — must either abruptly stop spending or declare bankruptcy (or both). I don’t think either of us can imagine the total sense of futility and denial these guys are feeling right now. I’ve got a grad student with $10K on his credit card and he keeps spending. The “resilient consumer” is on a bungee jump in which we have no idea how elastic (or strong) the bungee cord is. It is amazing to me that decades after invention of the credit card, personal debt generation has not yet plumbed some sort of equilibrium; it just keeps growing as a percentage of income.

(3) Corporate Debt. As some of these big telcos and other conglomerates start drawing down their lines of credit, the potential for a severe banking problem strikes me as quite high. Is JPM a sitting duck? Maybe. If a financial crisis like the one you guys wrote a big check for in 1998 picks up speed, JPM will be up to their butts in problems. As more corporates (WCOM) head to junk status, forcing re-balancing of bond portfolios, it seems to me that a clamp down on liquidity problems should intensify. (This may already be starting if statements by JPM are an indicator.) A number of seemingly stable companies (like GE) are, in principle, stabilizing their short-term interest rate risk (and investor jitters) by moving into the long term debt market. Best case scenario is that they have a drag on their profits for a long, long time. The problem appears to be trickier than that, however. Bill Gross has been pointing out that at least some (including GE) are doing some pretty dicey-looking derivatives trading to undue this shift and re-assume considerable interest-sensitive risk.

(4) Balance of trade. This is the hardest for me to grapple with. But if one follows the seemingly simple premise that a change in sentiment on the dollar and dollar-denominated assets could cause the foreigners to look elsewhere to put their wealth, interest rates will rise. Then we will find out what really is interest rate sensitive. Some (including Roach) suggest that the balance of trade is at levels that have historically proven to be prefaces to currency disasters. The international perspective on the value of the dollar and the possibility of a fairly large decrease naturally leads to the next topic…

(5) Inflation. As I put all this together, it is hard maintain some semblance of an outline since it is so connected. With that said and quite contrary to popular (almost universally held) opinion, I think inflation is here in a big way. The model for inflation that I find to be most credible (almost a truism) is the three-stage model: (1) rising money supply, (2) increased prices, and (3) increasing interest rates. Inflation is really stage 1 — money creation decreasing the value of existing currency. Where this money goes is a very different story. The latter two stages — rising prices and rising interest rates — are consequences. Stage 1 inflation is undeniable; all metrics of money creation point to serious inflation over the 1990’s. I’ll go a step further and suggest that stage 2 inflation (rising prices) is not under control at all either. The numbers coming out of the Fed look fictitious to me. Measuring cost per gigahertz and gigabytes, hedonic adjustments for consumption changes, and an emphasis on a basket of goods that are weighted toward imports don’t paint an accurate picture. (The motivations for why the distortions are intentional would be long, but keeping inflation-adjusted costs on federal payouts under control would be near the top of the list.) I believe that if you simply do a smell test on the cost of living, you find it’s higher than we are being told. I bet you health care costs alone account for >1% per year price increases. Salaries at the university rose 8% last year. Certainly the cost of the most important asset of all, shares of publicly traded corporations, are outrageous using numerical measures. (I stress numerical measures to distinguish them from evaluations based on optimistic projections and just plain old wishful thinking.) I think the bond guys are seeing inflation.

(6) Derivatives. The model of any insurance is to spread the risk of acute, but localized, events over a broader swath. As long as the event is local and not too bad, the system works well. The problem is that financial crises don’t have to be localized and certainly don’t have to stay small. LTCM put the system in jeopardy, causing you guys to bail them out “or lose billions of dollars in the bond market” (to quote a famous tech analyst aka you). The system seems more fragile now (especially looking at the absolute numbers on the notional value of derivatives.) Everybody seems to be insuring everybody. It’s like a group of neighbors collectively pooling their money to self-insure against floods. The banks raved about how derivatives saved their butt after the Enron fiasco; who’s butt got scorched? Any model based on a cataclysmic financial event would have to be centered on derivatives. I should add that I do not subscribe to a model based on an abrupt change (unless you call 1-3 years abrupt). I do, however, believe that this summer might be more interesting than some.

(7) Hidden costs. Any one of a number of items will put a long term drag on earnings including: options expensing, accountants getting religion, debt servicing, reversals in pension plan returns, and a slow recovery.

(8) Confidence. I own two stocks. I have fished around preferred shares, small caps, limited partnerships, commodities etc. etc. looking for investments. I see credible looking investments that I don’t buy. The harsh reality is I don’t trust what I’m seeing. I know what you’re thinking; “Of course you don’t, you’ve become a total whack job.” This is true. However, I think the average investor is catching on as well. Spitzer is gonna do damage. Buffett, Greenspan, and Gross are all going after options as being a consequence of distortions of earnings resulting corporate greed. Joe six-pack is getting an ear full now. (Joe Sixpack includes a lot of money managers who were not smart enough to get out of the Joe Sixpack classification.) The distorted realities are gonna be hard to hide as companies like WCOM and TYC sporting single digit p/e’s on the Yahoo stock board head for the toilet.

(9) The Dollar. Lord knows I don’t understand this one. I can say that dollars and dollar denominated assets look awful to me during a period of enormous money growth.

(10) Greenspan and rates. To loosely quote Gross: Greenspan is toast. He can’t raise rates to fight inflation without triggering liquidity problems. Gross suspects there are some key trigger points at some pretty low Fed rates. If inflation finally shows up on the radar screens to the point where even the paid economists can see it, we have potential for crises that will not be curable by Greenspan’s favorite toy — loose monetary policy. I’m not sure Greenspan can handle it. If you follow Buffet’s reasoning, you can understand bull and bear markets by simply watching interest rates. We are at record lows. The rate cuts have not done anything. (Worse yet, they may have done wonders and what we have now may be the result.) Historians will write a very different chapter about Greenspan than is currently being written (unless I’m wrong, of course!).

(11) Avoiding recessions. To the extent that recessions purge excesses, you can’t avoid them. Greenspan’s monetary policy is akin to a drunk with a whopping hangover taking a few drinks. It’s akin to providing stimulus to revitalize a 24-hour long Roman orgy. It’s akin to…enough similes. The recession of late purged nothing of consequence thanks to AG. I think we will discover that the bone rattling economic events of last year were not “the big one” because the pressures were not released. That is not the good news. I believe that we will begin to come to this conclusion within a few months. My concern is that we will finally test the stability of all the debt instruments described above simultaneously. Either Greenspan is flunking Econ 101 by trying to avoid the unavoidable or he sees big problems (of his own creation) and can’t fess up without exacerbating them. His efforts to achieve a soft landing, while explicitly designed to be non-Japan-like at the outset, may be quite Japan-like in the best-case (soft-landing) scenario. The Austrian economists would argue that there are a lot of ways to purge booms (sharply or slowly), but if you integrate under curve they all inflict the necessary pain.

(12) Event risk. This is a straw-man risk. I fully concede the long term consequences of non-financial events on the financial markets appear to be irrelevant. (They can act as catalysts, however, accelerating certain inevitable outcomes.)

What’s different right now? Why do I feel jumpy? This was a tough question that may have illustrated my official transcendence from bear to whack job. Here’s my best answer.

(1) Gold is rising. Gold is an irrelevant commodity as long as the price stays low. I am not a gold bug, but do believe that a rising gold price has practical and psychological consequences. It also may be a canary in the coal mine.

(2) The corporate problems in companies like WCOM — supposedly real, big-cap companies — seem unabated. I suspect that disruptions in the debt market must be glaring at this point. JPM is tightening its lending best I can tell. Greenspan has no tricks left. (Of course, he can start buying equities as one of the other Fed governors suggested. Then I’m gonna join a militia.)

(3) Issues number (1)-(11) noted above would be highly manageable problems and easily placed in a “balanced perspective” if they occur in relative isolation. However, it seems (“feels”) like they are coming to a head simultaneously. The risks are highly correlated. This is why economic models based on Gaussian curves fall apart right when you need them the most and you get your butt whipped by fat tails.

In conclusion, you may stop talking to me when I tell you this, but key events that turned me bearish include:

(1) In 1997, you said during reunion weekend that companies not yet starting their y2k fixes may be too late. (Now there was a chapter I’d like to forget.) That was the moment that I began looking at the market through a different lens. (2) In 1998 (or 99), we discussed the LTCM crisis and you explained to me why you guys bailed them out. I saw an analogy with the Cuban Missile crisis that I couldn’t shake; another ratchet clicked. As an aside, in that same conversation, I suggested that going off the gold standard may have sent us on a long slow descent into a monetary mess. I believe the garbled grunt you made was an agreement at least with the principle.

Since then, I have been trying to understand the market as a series of interconnected parts constituting either (1) a complex web with great stability, or (2) a house of cards with great fragility. I guess it depends on how you look at it.

So here we are nearly three pages further and ten years later: Is it true that nobody saw this coming? Let’s put this notion to rest. And with that as a segue, many are seeing the next phase of this crisis coming too…
 

Apocalypse Now—The Sequel: A Casting Call for Colonel Kurtz

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final or total catastrophe of the currency system involved.

—Ludwig von Mises—

Precious few people were taking cover in 1999 nor even in 2006. That is not true today. The old doomers (James Grant, Doug Noland, Bill Bonner, Kevin Phillips, David Tice, Stephen Roach, Doug Cliggott…) have largely not changed their views. Thanks to the detailed analysis of Joe Nocera and Bethany McLean in All the Devils Are Here we find that even the old guard within the ratings agencies and mortgage lending machines saw it coming (and then were sent to pasture.) They also describe how Fed Governor Gramlich tried, albeit unforcefully, to alert Greenspan and remind us how Josh Rosner was all over the subprime crisis in the late 90’s.

There is a gaggle of new Prophets of Doom speaking apocalyptically, and they have some serious street creds. There are measured voices, like that of Mohammad El-Erian, quietly telling us the future will be downsized. But in this putative sequel to Apocalypse Now, who should play Colonel Kurtz, the quirky character driven to the point of madness by the horror of it all? The rogues gallery is listed below. The links are worth a click.

Kyle Bass, Founder and CEO of Hayman Capital. Kyle would have been featured in Lewis’s The Big Short, but Lewis thought he was way too Kurtz-like and left him on the cutting room floor. Lewis recanted in Boomerang, featuring Bass’s dire view of the sovereign debt crisis. A 2011 panel discussion is a must-see, inspiring one my colleagues to start accumulating gold that day [17]. (I was viewer #302; there have been 100,000 now.)

Ann Barnhardt, CEO of commodities trading firm Barnhardt Capital Management. Ann raised some eyebrows when she returned all of her clients money explaining that MF Global has shown that their money is no longer safe in the system. An interview reveals she is livid but not nuts [25].

Charles Biderman, CEO of TrimTabs. The CEO of a company best known for following the flows of money within asset classes previously had announced that the Fed overtly propped the market. This year he announced that the European bank collapses will be accompanied by a “…spiral type collapse of the equity markets, probably with prices approaching the March 2009 lows” [26].

Dylan Ratigan, CNBC. Dylan is the only mainstream network guy willing to call out the liars and felons and crooks (oh my) for their misdeeds [27]. I think he is currently casting for the role of Howard Beale in the sequel to Network.

Paul B. Farrell, Marketwatch and former Morgan Stanley. Paul is the real deal, the original Colonel Kurtz, Paul Craig Roberts’s twin separated at birth. He has morphed from mainstream Wall Street guy to a character out of Road Warrior. His writings at Marketwatch are not for the feint of heart [28].

David Rosenberg, Gluskin Sheff and ex-Merrill Lynch. As one of the big-gun economists on Wall Street, “Rosie’s” casual claims that we are currently in the middle of another Depression are provocative [29].

Larry Lindsey, former Federal Reserve Governor. In a recent interview on CNBC, Larry broke from the script when he noted that the US debt problem places us “about three years behind Italy” in the race to economic and monetary collapse [30]. (I also remember his ramblings in Fed minutes from years ago muttering about Greenspan’s screwy thinking with phrases like “we shall see”.)

Niall Ferguson, Harvard’s market historian and author of Ascent of Money. Niall warns of the coming collapse of the American Empire using vivid Thomas Cole metaphors [31]. He also warns that British Empire analogies—an interminable slide into endless tea parties—is optimistic, instead preferring a short-duration collapse as often happens in metastable systems.

Kenneth Rogoff, Harvard economist and author of This Time It’s Different. As the world’s most well known expert on sovereign defaults, one must pause when Professor Rogoff questions the durability of capitalism [32].

David Stockman, Reagan’s Director of Office and Budget Management. As Reagan’s wunder kid and current Wall Street insider, David witnessed the entire American boom. He now tells an altogether different story of debt and degradation [33].

Jim Quinn, TheBurningPlatform.com and asset manager. Jim is a militant predictor of societal unrest and the onset of a crisis phase and proponent of Strauss and Howe’s thesis in The Fourth Turning. (My review of the book is there [34]).

Paul Craig Roberts, Former Assistant Secretary of the Treasury under Ronald Reagan. (See Paul B. Farrell.) This Paul has been writing of the decline in the American Empire for years [35].

Jeremy Grantham, Founder of GMO. Jeremy, one of the white-haired visionaries with $150 billion under management, sees a host of problems, including low equity prices and dire resource shortages. His resource analyses are must reads [16].

Ray Dalio, Founder and CEO of Bridgewater Associates. The camera shy manager of one of the largest hedge funds in the world painted a particularly bleak picture for Charlie Rose [36].

Chris Whalen, managing director of Institutional Risk Analytics and author of inflation. Chris is a brilliant credit and bank analyst. He suggests both privately and publicly that we may be setting up for a pan-European armed conflict [37].

Felix Zulauf, participant at the elite Barron’s Round Table. Felix sees 2012 ushering in multiple departures from the Euro, civil unrest, possible revolutionary behavior, and excessive money printing, all described in a King World News interview [38].

The Durden Octuplets, Zero Hedge. Another hat tip to the multiple personalities at Zero Hedge. These guys are miles ahead of the mainstream media, offering a unique window into the world of finance and politics—a must-track site for all [39].

James Howard Kunstler, author and peak oil theorist. Jim is a prolific author with an eye on resource depletion and societal decay [40]. With remarkable dexterity and unique irreverence, he has wrapped his ample brain around the financial consequences.

The e-Trade Baby. In a sea of talking Bernank Bears and Hitler parodies, I found this e-Trade Baby (spoof) to be particularly poignant [41].

The Constitution and the Fourth Estate

I have a right, even a duty, to resist, with violence or civil disobedience. You should pray I choose the latter.

—The Great Debaters—

Government is a living, breathing organism that exists to perpetuate itself. There is nothing that says evolution must create a pleasing government better suited to individual liberties. History paints an altogether different picture. Possibly the single largest selection pressure is money. It has always bought political favor. When our government was a few percent of GDP and the industrialists were buying favors while building a nation, government had little power to wield. When money commandeers the machinery of a huge government, however, you have a monstrously expensive and intractable problem.

We should be particularly nervous as money commandeers the press. The media is a critical mechanism by which we transmit freedom of speech: it is an essential tool of a democracy. Mainstream media has collapsed like a dream sequence in Inception. Fox News gets a disproportionate share of the blame. The blogosphere discovered that Roger Ailes’s formulated his plan for Fox News in the 1970’s. It sounds very Orwellian but so what? Different news agencies are privately owned and, consequently, have different angles. The problem I see is that they all appear to be captured. With a remarkable regularity, The Daily Show includes montages in which the different news anchors parrot identical talking points. A severe affliction that first appeared during the 2008 presidential election—Ron Paul Blindness—continues unabated. He’s rocking in Iowa—some claim he’s leading at this moment—but the press want no part of it. Both he and Howard Dean do not fit somebody’s image of a viable candidate. Only journalists with editorial control seem to provide a fair treatment. I find credible news comes from some of the most unlikely sources: Russia Today, Al Jazeera, Asia Times, the London-based Telegraph, Zero Hedge, Rolling Stone, Vanity Fair, and, of course, The Daily Show. That’s pathetic. Thank God for the internet.

At a more micro level, a number of stories caught my libertarian eye and rubbed some nerves raw:

(1) A number of us read former money manager Martin Armstrong’s monetary missives hand published from jail. He was freed this year. Martin was held for a contempt of court charge for 7 years, 5.5 years beyond the legal limit. As he was about to be sprung free, he was finally charged with the original crime (which he seems to have been guilty of) and incarcerated for another 4 years. I would have dismissed the details as internet legend if it had not been told by Pulitzer Prize winning journalist Gretchen Morgenson [42].

(2) A wingnut named Bernard von NotHaus was arrested in 2009 and his assets confiscated because he dared to mint silver coins and recommended people use them for legal tender. This was not counterfeiting, only competition…but not anymore. He was convicted and faces up to 15 years in prison [43]. Utah and several other states, however, have picked up and advanced the ball by passing precious metal legal tender laws. I believe there are significant tax benefits (no gains on inflationary appreciation) when using gold as legal tender, which causes angst in the Halls of Power.

(3) Sergey Aleynikov was given an eight year sentence for stealing software that netted him precisely $0 [44]. His 2009 arrest within hours after the theft must have set a record for the FBI. The real crime was heinous: he stole the software from Goldman. At his arraignment, Goldman’s attorney requested Sergey be held without bail, asserting that he could “use the software to manipulate markets.” That was a world record for the fastest confession from a non-defendant.

(4) Spyware showed up in the Nasdaq to monitor trades. There have been no indictments; it’s all just Wall Street hijinks (or somebody is Too Big to Jail.)

(5) The highest court in Indiana ruled that a guy could not defend himself against a forced, warrantless entry into his house. How does one distinguish the authorities from the criminals?

(6) JP Morgan donated $4.6 million to the police department in NYC just as the Wall Street protests picked up speed. They are taking cues from Roman emperors who would immediately bribe the Praetorian Guard to insure allegiance.

(7) Louisiana banned cash transactions for used goods. If you remove cash from the system, every transaction will go through banks mandatorily. I’m sure they’ll keep the fees low (or not). All snickering aside: Cash is a civil liberty. It was protected in metallic form under the constitution until 1933, at which point the Supreme Court decided restricting the money supply infringed upon the civil liberties of the money printers.

(8) The Senate passed a law by a vote of 91:9 to allow US citizens to be detained indefinitely without trial if they are suspected to be involved in terrorist activities. The House passed it subsequently. Let me be blunt here: the perpetrators of this law are treasonous. They should be tried with full access to the courts. If you lock me up for saying this, you had best throw away the key. Jefferson was credited with the following:

The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants.

 

I am well aware that fertilizing the tree of liberty is not a resume-boosting career path and not easy for us old guys.
 

Where to From Here? 

Never in the history of the world has there been a situation so bad that the government can’t make it worse.

—Henry Morganthau Jr., 1939—

We have a massive global debt problem that will take years to unwind. Some think it is a zero-sum game, but I disagree. The World is blanketed with people fully aware of what has been promised to them but oblivious to their share of the tab. The average tax payer in the US, for example, is unaware that they owe $30,000 simply to pay off the state pension liabilities to some average tax payers. Larry Kotlikoff, the undisputed World’s expert on unfunded liabilities, estimates there are $211 trillion [45]. This is approximately $2 million per taxpayer. Do you think taxpayers have budgeted for that one?

Let’s go off shore. Billions of nouveau capitalists in the emerging world are expecting the American Dream, but who will provide all those goods and services? Americans? The problem is one of a massive misalignment of perception and reality on a global scale. Years ago I wrote a blog on this and believe that it still rings true [46]. This impending deleveraging will occur in the face of massively aging populations in the industrialized world. Demographic shifts are considered a profound determinant of future economic activity.

The student loan crisis may seem small when compared with these global issues, but it’s a big one for us. The current graduates are starting out in a hole from which it will be difficult to exit. Discharging debts seems distasteful, but so do decades of undischargeable debt with ballooning penalties hanging over a large portion of a generation. I worry, however, about the select group of really brainy folks expected to change the world. Think Steve Jobs. Some will be forced to work for corporations to get a paycheck and “three squares a day” rather than forge off into the great unknown and create wealth on monstrous scales. How many of those guys do you need to divert down a more conservative path before you hurt the economy? Possibly just a couple.

The democratization of the markets provided a cornerstone to this malaise we face. We replaced defined benefit plans with defined contribution plans, which, in conjunction with the wildly popular index funds, moved both the risk and oversight responsibility from titanic pension managers to countless millions of individuals. This sounds great so far, but there was nobody of any clout to watch the store. The shareholders have, in practice, no say whatsoever over corporate governance. This, I believe, is the root cause of the considerable corporate malfeasance. CEOs began stacking corporate boards with friends and boards appointed their friends as CEOs, all sharing the one common belief that compensation, not returns to shareholders, should be maximized. It opened the floodgates of greed and avarice. I had occasion to present this blasphemous notion to John Bogle—the creator of index funds—and he agreed. Knock me over with a feather.

Wealth disparity (for want of a better term) is at record levels. Of course, even mention of that will cause those with wealth to fear an imminent government-based wealth redistribution that can’t possibly work well (because government can’t possibly work well.) There are pragmatic issues independent of moral concerns, however, that should not be dismissed. A well-oiled economy distributes wealth in ways that may seem unfair to some but are efficient. I suspect there are hallmarks—characteristic distributions—that are emblematic of growing wealth and prosperity. A decades-long growing disparity is probably not one of those hallmarks. The clock is ticking.

The populace is beginning to wake up to this reality. Unrest began with one incredibly flammable Tunisian. While on foreign shores, we gave it cute names like “Arab Spring”. When unrest migrated to London it became decidedly less refreshing. Social change has now washed up on US shores superficially as Occupy Wall Street (OWS). At its inception, OWS appeared almost comical, but somehow it simply would not go away despite efforts to dismiss it by those attempting to preserve the status quo. Take a volatile mix of young adults—the demographic at the center of all revolutionary social movements—add a little pepper spray, stir it with some Billy clubs, post videos on YouTube, and you have the beginnings of social upheaval. OWS is said to be a highly disjointed group with no common denominator or even well-formulated gripes. I completely disagree. Admittedly, some are asking to be relieved of pain from self-inflicted wounds, but there is one theme: They all perceive that the system has become decidedly unfair. It’s not about equal opportunity; wealth and power necessarily accrue disproportionate opportunities. We all work hard to give our kids an edge. It is about a perceived absence of opportunity for a growing segment of the population. It would be incorrect to do a head count at street level and conclude the movement is small. Millions are watching from the comfort of their homes and offices in what I believe is silent support. This movement could get legs as it percolates up through the social strata.

Figure 6

Strauss and Howe’s predicted Fourth Turning crisis phase may have arrived. But there is already a nasty mood in the air. Watch the following soccer video [47]. The hooligan runs around the field and, when grabbed by the police, gets roughed up a little. The players and fans beat the tar out of the police. Something has changed. Some think maybe it started on 9/11. This may be true for Iraqis, but not for us because we dusted ourselves off and moved along. Others say it was the financial crisis. Closer but that is still not quite right. I think the societal rollover occurred when the financial crisis arrived and abated, yet absolutely nothing changed. We are in a big hole as illustrated by US employment stats in Figure 6. If this recovery stalls, promptly unplug all fans.

To reduce my concerns to traders jargon, I look at the S&P 500 over decades and ask: Is that a head and shoulders formation? Is that just an equity index, or is there something more ominous lurking? One should be concerned because traders know that a head and shoulders eventually gives way to knees and toes (knees and toes).


Books

An educated mind can entertain a thought without accepting it.

—Aristotle—

For those who made it this far—avid readers to say the least—I’d like to offer thoughts on what books shaped my thinking. Despite an overdose on crisis books for over a decade (beginning with crisis foreshadowing books), I succumbed to the temptation a few more times. The following are the notable ones:

All the Devils Are Here: The Hidden History of the Financial Crisis by McLean and Nocera.
This is a particularly poignant slice through this interminable crisis by describing the slow, methodical mutations that morphed the key players—the ratings agencies, mortgage brokers, investment banks, politicians, and GSEs—into destructive forces. It offers a great view of the mortgage world. McLean and Nocera deftly illustrate how any barrier can be removed or corrupted given enough political influence, financial resources, and persistence. One also realizes, however, that regulation and enforcement would be like enforcing drug laws at Woodstock.

Fooling Some of the People All of the Time by David Einhorn.
After an hour meeting with the author, I read this 2008-vintage book to understand the inscrutable guy and was blessed with much more. Einhorn tells a horrifying tale of a multi-year effort to short Allied Capital, a highly corrupt financial institution. The complete and utter failure of the system to cleanse this cancer reveals the corruption within the SEC, politics, the press, and even the Small Business Administration. The take home message for me was that Markopoulos was defenseless against Bernie Madoff and the SEC.

The Fourth Turning by Strauss and Howe.
This 1996 cult favorite discusses Kondratiev-like generational cycles and predicted the onset of a protracted (several decade) cathartic crisis—a so-called fourth turning—coming in…wait for it…2005-10. Although the social science may be a little soggy, their logic seemed secure and their predictions about the arrival of the crisis phase proved hauntingly prescient.

Currency Wars by James Rickards.
This treatise describing chaos in the currency markets arrived on the bookshelves just as tremors shook Europe’s foundations, fiat currencies came under fire, and central bankers furiously fought to debase their currencies. The book may serve as a roadmap going forward. He describes the growing sense that we are working toward some variant of the gold standard…the hard way. Excellent timing, Jim. The only part of his book I had a gripe with was about SDRs (special drawing rights). Jim makes a case for SDRs in the global currency system of the future. Through the eyes of an amateur, SDRs look like an über fiat currency of some New World Order. They could name this currency “the crock.”

The Collapse of Complex Societies by Joseph Tainter.
As an anthropologist Tainter takes a look at several complex societies that collapsed (underwent marked simplification). It has a similar feel to Jared Diamond’s Collapse but is more scholarly. Hat tip to Rickards for recommending this one.

Inflated: How Money and Debt Built the American Dream by Chris Whalen.
Despite the title, Whalen describes the monetary and fiscal history of the United States. It is a very nice, admittedly typo-rich, treatise of the slow march to the dollar’s current status as the reserve currency. I inferred that reserve currency status is a suicide mission. I followed up on this point with Chris but wasn’t sure I got the answer.

Endgame: The End of the Debt Supercycle and How It Changes Everything by John Mauldin.
John’s 2004 book, Bull’s-eye Investing, described in lurid detail why we were headed for trouble. My only criticism was that he said markets would get so crazy that we would all need hedge fund managers, whereas I thought investors would simply take cover. In Endgame, he paints a similarly vivid picture of how we are now completely toast. He dredges up every ounce of his ample optimism to describe admittedly ugly paths out of the mess. Sorry John, but your critique was way too convincing; we’re toast.

Boomerang: Travels in the New Third World by Michael Lewis.
Lewis returns to his style exemplified in Liar’s Poker with hysterical descriptions of how those zany Europeans have managed to completely self destruct (suicide by two shots to the head). Some will recognize content from articles written in Vanity Fair. Lewis is a hoot.

Unbroken: A World War II Story of Survival, Resilience, and Redemption by Lauren Hillenbrand.
This has nothing to do with markets but is brilliant. Hillenbrand describes the truly extraordinary progression of Louis Zamperini from directionless hooligan to world-class distance runner, WWII bombardier, world-record holder of survival in a rubber raft (47 days), Japanese POW under the “tutelage” of the 18th ranked Japanese war criminal, and a lifetime of salvation and healing. It’s gripping.

For those with a particularly cynical view of the American Dream, you might try the writings of octogenarian Peter Dale Scott of Berkeley. As a youngster, he began studying drug cartels, only to discover nefarious influences by Western powers. (Recall the BCCI scandal?) His writings about Deep Politics, the pipes and infrastructure embedded deeply beneath the familiar political structures, are scholarly, thoroughly referenced, void of hyperbole, and terrifying to those with an Aristotelian ability to entertain disturbing ideas. I have just begun American War Machine. For those who call this “conspiracy theory” with derision in your voice, you betcha. Trillions of dollars and the quest for resources would never find a way to corrupt the system (head slap), and building 7 fell due to fire [48].

Acknowledgement

I have had the pleasure of exchanging ideas with money and hedge fund managers, academic and Wall Street economists, journalists, authors, bloggers, geologists, peak oil theorists, Federal regulators and TARP overseers, central bankers, and historians, some of whom are mentioned above, and many in the fever swamps called chatboards. I am exceedingly grateful.

– David Collum

David B. Collum is a professor of Chemistry and Chemical Biology at Cornell University. In addition to his academic interests, Dave authors an annual macroeconomic assessment. 

 

Links  

1. http://www.chrismartenson.com/forum/david-b-collums-2010-year-review/50352?#comment-99043

2. http://www.chrismartenson.com/blog/mappi…

3. http://lmgtfy.com/?q=How+do+I+google+something%3F

4. http://online.wsj.com/article/SB121642367125066615.html

5. http://www.cbsnews.com/8301-18560_162-57323527/congress-exempt-from-insider-trading-laws/?tag=currentVideoInfo;videoMetaInfo

6. http://finance.yahoo.com/news/SEC-says-i…

7. http://www.businessinsider.com/krugman-in-02-greenspan-needs-to-create-a-housing-bubble-2009-6

8. http://www.huffingtonpost.com/2011/08/15/paul-krugman-fake-alien-invasion_n_926995.html

9. http://money.cnn.com/magazines/fortune/f…

10. http://www.retro.ms11.net/LewisBuffett.pdf

11. http://www.financialsensearchive.com/editorials/collum/2009/0129.html

12. http://www.youtube.com/watch?v=RPZHWLlCNB4

13. http://www.chrismartenson.com/crashcourse/chapter-1-three-beliefs

14. http://www.zerohedge.com/news/chris-martenson-lecture-why-next-20-years-will-be-marked-collapse-exponential-function

15. http://www.financialsense.com/financial-sense-newshour/guest-expert/2011/12/15/robert-l-hirsch-phd/we-are-staring-directly-into-energy-storm-in-next-2-3-years

16. https://www.gmo.com/America/CMSAttachmentDownload.aspx?target=JUBRxi51IICeBY%2bw647w%2b
8yc1qw89rRWuey6UVkZcqOnBQRhvyPRCnLyVzPUi0O5g1UqS1NM%2fpFFF8Fngaxz44dhmRat65AjEMJq
CcCI5t%2fq7KUqhLxzPuhOAOHRHA1u

17. http://www.youtube.com/watch?v=5V3kpKzd-Yw

18. http://www.econtalk.org/archives/2011/07/skeel_on_bankru.html

19. http://www.hussmanfunds.com/wmc/wmc111010.htm

20. http://www.zerohedge.com/news/former-fed-official-poole-sees-risk-astonishing-rise-inflation

21. http://www.imf.org/external/pubs/ft/fandd/2011/06/reinhart.htm

22. http://financial-dictionary.thefreedictionary.com/Pledging

23. http://brucekrasting.blogspot.com/2011/12/on-corzine-and-question-re-ms-i-watched.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+BruceKrasting+%28Bruce+Krasting%29

24. http://www.zerohedge.com/news/some-observations-bob-pisanis-visit-glds-vault

25. http://www.netcastdaily.com/broadcast/fsn2011-1201-1.mp3

26. http://www.zerohedge.com/news/inevitable-spiral-equity-collapse-bidermans-better-early-late-call-sell-strength

27. http://www.dylanratigan.com/2011/08/09/dylan-ratigan-mad-as-hell-his-epic-network-moment/

28. http://wallstreetwarzone.com/

29. http://www.zerohedge.com/news/david-rosenberg-depression-ecb-mf-global-canary-coalmine-all-surprise-ending

30. http://video.cnbc.com/gallery/?video=3000059875

31. http://www.niallferguson.com/site/FERG/Templates/GeneralArticle.aspx?pageid=439&cc=GB

32. http://www.project-syndicate.org/commentary/rogoff87/English

33. http://media.chrismartenson.com/audio/david-stockman-2011-09-30.mp3

34. http://www.theburningplatform.com/?p=1568

35. http://www.lewrockwell.com/roberts/roberts-arch.html

36. http://www.charlierose.com/view/interview/11957

37. http://kingworldnews.com/kingworldnews/Broadcast/Entries/2011/12/21_Chris_Whalen.html

38. http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2011/12/12_Felix_Zulauf.html

39. http://www.zerohedge.com/

40. http://kunstler.com/blog/

41. http://www.youtube.com/watch?v=AYrpROr9Gmk

42. http://www.nytimes.com/2007/02/16/business/16jail.html?pagewanted=all

43. http://en.wikipedia.org/wiki/Liberty_Dollar

44. http://www.loansafe.org/former-goldman-sachs-computer-programmer-gets-97-months-to-prison-for-stealing-companies-computer-code

45. http://www.npr.org/2011/08/06/139027615/a-national-debt-of-14-trillion-try-211-trillion

46. http://adserver.financialsense.com/editorials/collum/2009/0120.html

47. http://dailybail.com/home/revenge-police-brutality-handled-in-the-right-way.html

48. http://www.youtube.com/watch?v=bWorDrTC0Qg

SUBURBAN SPIRAL OF SUFFERING

Everyone knows about the poverty in our urban war zones. I’ve detailed the squalor of West Philly for three years on this blog. What you don’t hear too much about is the rapidly spreading poverty in suburbia. You need to look closer to find it, but it is there. I’m always observing while driving around my community. The hottest new retailers in the suburbs are SPACE AVAILABLE and VACANCY. Strip malls across suburbia have more empty stores than operating stores. You notice large single family homes with overgrown front lawns. You notice that home repairs are being deferred. You see nice houses sitting vacant for years.

There are millions of people still living in homes while not having made a mortgage payment in two years. A million people fell off the unemployment rolls after using up their 99 weeks in the past year. Food banks are booming. Manna on Mainstreet in Lansdale, near my home, had to move to a location three times the size of its former location. I do feel sorry for people who have caught a bad break. My favorite Christmas gift from Avalon was a note saying that a contribution to Manna on Mainstreet had been made in my name.

The people I don’t feel sorry for are those who bought twice as much house as they could afford and now are reaping what they sowed. I don’t feel sorry for those who borrowed against their houses so they could take exotic vacations and drive the latest BMW. In suburbia it is virtually impossible to distinguish between those who deserve help and those who deserve to get it good and hard. We have a stealth depression, as food stamps, unemployment compensation, and welfare payments are all done electronically. No lines. No evidence of suffering. We’ve really improved our depressions.

America’s Dirty Little Housing Secret Is Rocking The Suburbs

Michelle Hirsch, The Fiscal Times

For years, the food pantry in Crystal Lake, Ill., a bedroom community 50 miles west of Chicago, has catered to the suburban area’s poor, homeless and unemployed.

But Cate Williams, the head of the pantry, has noticed a striking change in the makeup of the needy in the past year or two.

Some families that once pulled down six-figure incomes and drove flashy cars are now turning to the pantry for help.

A few of them donated food and money to the pantry before their luck soured, according to Williams.

“People will shyly say to me, ‘You know, I used to give money and food to you guys. Now I need your help,’” Williams told The Fiscal Times last week. “Most of the folks we see now are people who never took a handout before. They were comfortable, able to feed themselves, to keep gas in the car, and keep a nice roof over their head.”

Suburbia always had its share of low-income families and the poor, but the sharp surge in suburban poverty is beginning to grab the attention of demographers, government officials and social service advocates.

The past decade has marked the most significant rise in poverty in modern times. One in six people in the U.S. are poor, according to the latest census data, compared to one-in-ten Americans in 2004. This surge in the percentage of the poor is fueling concerns about a growing disparity between the rich and poor — the 99 percent versus the 1 percent in the parlance of the Occupy Wall Street movement.

But contrary to stereotypes that the worst of poverty is centered in urban areas or isolated rural areas and Appalachia, the suburbs have been hit hardest in recent years, an analysis of census data reveals. “If you take a drive through the suburbs and look at the strip mall vacancies, the ‘For Sale’ signs, and the growing lines at unemployment offices and social services providers, you’d have to be blind not to see the economic crisis is hitting home in a way these areas have never experienced,” said Donna Cooper, a senior fellow at the Center for American Progress, a progressive think tank.

In the wake of the Great Recession, poverty rolls are rising at a more rapid pace in the suburbs than in cities or rural communities. Between 2000 and 2010, the number of suburban households below the poverty line increased by 53 percent, compared to a 23 percent increase in poor households in urban areas, according to a Brookings Institution analysis of census data.

Last year, there were 2.7 million more suburban households below the federal poverty level than urban households, according to the Bureau of Labor Statistics. That was the first time on record that America’s cities didn’t contain the highest absolute number of households living in poverty. There are many reasons for the dramatic turnabout in the geographic profile of poverty.

While many once depressed urban areas are being revitalized in an effort to draw in more affluent residents, other areas are attracting lower-income families who have moved to the suburbs in search of more affordable housing and better schools. This shift in low-income families to the suburbs coincided with a move of low-wage, low-skilled jobs to those same suburban areas between the 1970s and early 2000s, experts say.

Meanwhile, the introduction of new commerce and high-cost housing in the urban neighborhoods pushed overall prices upward, providing added incentive for low-income people to head for the suburbs.

“These are families that were living on the edge in the city, but in many cases over the last 20 to 30 years, regained some stability when they found affordable housing in the suburbs,” said Cooper. “Now, the economy tanks, they lose their jobs, they’re poor, and they’re out in the suburbs on the edge once again.”

Both urban and suburban America were badly hammered by the financial meltdown and recession, leading to stubbornly high unemployment, widespread foreclosures and “underwater” homes, high food and gas prices and sharp cutbacks in government and private social services. But the overall impact has been worse in suburban areas, because many low-skilled jobs disappeared along with the plants and businesses that once provided employment. Other companies shifted their business strategy towards developing a high-skill, high-tech labor force.

To be sure, the picture of poverty in American suburbs is an uneven one. According to the census analysis, some suburban regions took bigger economic hits than others. Poverty rolls increased 121.8 percent in the Atlanta suburbs between 2000 and 2010, compared to a 6.8 percent increase in the city. Chicago and Seattle saw similarly large suburban-urban splits in poverty. The poverty rate increased by 76.3 percent in the Chicago suburbs compared to only 9.7 percent in the city during that period. In Seattle, the number of people living below the poverty line rose 74.4 percent in the suburbs versus 26.1 percent in the city proper over the decade.

The 10-year surge in suburban poverty is putting enormous budgetary pressure on county and local governments and non-profits, which are struggling to meet a rising demand for social services, counseling and financial assistance. The number of students qualifying for subsidized lunches in Conyers, an Atlanta suburb, grew by 63 percent this year, compared with a 46 percent increase in 2006. Many suburban areas of Columbus, Ohio have also seen their subsidized lunch enrollment more than double over the past five years, the Columbus Post Dispatch reported earlier this year.

This post originally appeared in The Fiscal Times.

Read more: http://www.thefiscaltimes.com/Articles/2011/12/27/Americas-Best-Kept-Secret-Rising-Suburban-Poverty.aspx#page1#ixzz1i3ikOb8K

2011 – CATCH-22 YEAR IN REVIEW

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” – Mark Twain

 

I published my predictions for 2011 on January 3, 2011 in my article 2011 – The Year of Catch-22. Humans evidently enjoy being embarrassed by how pitiful they are at predicting the future, because we continue to do it year after year. The mainstream media pundits don’t dare look back at their predictions or the predictions of the Wall Street shills that parade on CNBC and get quoted in the Wall Street Journal, eternally predicting 10% to 15% stock market gains. The multi-millionaire Wall Street strategists like the spawn of the squid, Abbey Joseph Cohen, have used all of their Ivy League brain power to predict at least a 10% stock price gain every year since 1999. The S&P 500 stood at 1,272 on January 6, 1999. As of this writing it currently stands at 1,261. ZERO appreciation over the last twelve years.

The Wall Street mantra of stocks for the long run is beginning to get a little stale. If Abbey Joseph Cohen had been right for the last twelve years, the S&P 500 would be 4,000. For this level of accuracy, she is paid millions. Her 2011 prediction of 1,500 only missed by16%. The S&P 500 began the year at 1,258 and hasn’t budged. The lowest prediction from the Wall Street shysters at the outset of the year was 1,333, with the majority between 1,400 and 1,500.

The same Wall Street clowns are now being quoted in the mainstream media predicting a 10% to 15% increase in stock prices in 2012, despite the fact we are headed back into recession, China’s property bubble has burst, and Europe teeters on the brink of dissolution. They lie on behalf of their Too Big To Tell the Truth employers by declaring stocks undervalued, when honest analysts such as Jeremy Grantham, John Hussman and Robert Shiller truthfully report that stocks are overvalued and will provide pitiful returns over the next year and the next decade.

I will take my chances with a few predictions for 2012 after reviewing my lack of foresight regarding 2011. I declared 2011 the year of Catch-22 because no matter what happened, it would not translate into a positive result for the American people. This was my thesis:

The United States and its leaders are stuck in their own Catch 22. They need the economy to improve in order to generate jobs, but the economy can only improve if people have jobs. They need the economy to recover in order to improve our deficit situation, but if the economy really recovers long term interest rates will increase, further depressing the housing market and increasing the interest expense burden for the US, therefore increasing the deficit. A recovering economy would result in more production and consumption, which would result in more oil consumption driving the price above $100 per barrel, therefore depressing the economy. Americans must save for their retirements as 10,000 Baby Boomers turn 65 every day, but if the savings rate goes back to 10%, the economy will collapse due to lack of consumption. Consumer expenditures account for 71% of GDP and need to revert back to 65% for the US to have a balanced sustainable economy, but a reduction in consumer spending will push the US back into recession, reducing tax revenues and increasing deficits. You can see why Catch 22 is the theme for 2011.

My predictions for 2011 were as follows:

  • The first half of 2011 is guaranteed to give the appearance of recovery. The lame-duck Congress ”compromise” will pump hundreds of billions of borrowed dollars into the economy. The continuation of unemployment benefits for 99 weeks (supposedly to help employment) and the 2% payroll tax cut will goose consumer spending. Ben Bernanke and his QE2 stimulus for poor Wall Street bankers is pumping $75 billion per month ($3 to $4 billion per day) directly into the stock market. Since Ben gave Wall Street the all clear signal in late August, the NASDAQ has soared 25%. Despite the fact that there are 362,000 less Americans employed than were employed in August 2010, the mainstream media will continue to tout the jobs recovery. The goal of all these efforts is to boost confidence and spending. Everything being done by those in power has the seeds of its own destruction built in. The Catch 22 will assert itself in the 2nd half of 2011.

The payroll tax cut, extension of unemployment benefits and Bernanke’s gift to Wall Street criminal banks did nothing to help real Americans in the real world. The government manipulated GDP has languished between 0.4% and 1.8% in the first three quarters of 2011. Using a true measure of inflation, as detailed by John Williams at www.shadowstats.com, GDP has remained at a recessionary level of -2% to -3%.

 

Easy Ben accomplished his goal of pumping up the stock market with his QE2 gift to Wall Street bankers during the first six months of 2011, with the S&P 500 peaking at 1,364 in late April. The market began to fall the second Ben stopped handing Jamie Dimon and his friends $4 billion per day, with the market dropping 18% in three months. The market has risen back near the breakeven level for the year based on Ben’s promise to keep interest rates at zero forever and the hope of QE3.

  • A new perfect storm is brewing for housing in 2011 and will not subside until late 2012. You may have thought those bad mortgages had been all written off. You would be wrong. There will be in excess of $200 billion of adjustable rate mortgages that reset between 2011 and 2012, with in excess of $125 billion being the dreaded Alt-A mortgages. This is a recipe for millions of new foreclosures.

The brainless twits on CNBC will dutifully report the number of completed foreclosure sales plunged by 24% in 2011, giving the impression to their non-critical thinking viewership that all is well on the housing front. What they will fail to point out is that the number of foreclosures in process went up in 2011 and now stands 59% ABOVE the level in 2009 at the height of our recession. The reason that completed foreclosures have fallen is twofold. The criminal Wall Street banks can’t prove they hold the mortgage notes on hundreds of thousands of homes and they have a few legal issues related to the massive robo-signing fraud they committed. Kicking old ladies and Iraq War veterans out into the street using fraudulent documentation has caused the Wall Street Too Evil To Believe Banks some public relations issues. Secondly, the Wall Street Plutocrats have these mortgage loans valued at 100% on their balance sheets due to the FASB gift of mark to fantasy accounting rules. Foreclosing actually reveals their assets to be overvalued by at least 50%. This may explain why millions of Americans are still in their homes after not making a mortgage payment for two years, as detailed by economist Tom Lawler:

Given the number of loans either seriously delinquent or in the process of foreclosure at the beginning of the year, the number of completed foreclosure sales in 2011 is almost absurdly low, reflecting the complete screw-up of the mortgage servicing industry, and the resulting dramatic slowdown in foreclosure resolutions. As of the end of October, 2011 LPS estimated that there were 1.759 million seriously delinquent loans with the average number of days delinquent at 388 (compared to 192 days in January 2008), and there were 2.210 million loans in the foreclosure process that had been on average delinquent for 631 days.

Completed Foreclosure Sales And Short Sales/DILs (thousands, estimates)
  2008 2009 2010 2011(E)
Completed Foreclosure Sales 914 949 1,070 815
Owner-occupied N.A. N.A. 785 608
Non-owner-occupied N.A. N.A. 285 207
Short Sales/DILs 105 270 354 380
Foreclosures plus Short Sales/DILs 1,019 1,219 1,424 1,195
Outstanding first liens: Jan-08 Jan-09 Jan-10 Jan-11
Seriously Delinquent (90+) 1,016 1,983 3,061 2,168
In Process of Foreclosure 860 1,386 2,110 2,203
 
The concerted effort to not complete foreclosures did nothing to slow the continued descent in home prices. As you can see in the chart below from http://www.calculatedriskblog.com/, real home prices will have fallen another 5% in 2011. Obama and his minions threw $50 billion of your tax dollars at the housing market in 2009 – 2010 with tax credits, loan modification programs, homebuilder tax loss carry-backs, and a myriad of other Keynesian claptrap solutions. They succeeded in pissing your tax dollars down the toilet as prices have declined another 12% in the last 18 months. Prices have fallen 42% nationally since 2006. I wonder who missed the boat on that development?
 
“We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit.” – Ben Bernanke – July 2005
 
 

There are approximately 48.5 million homes with mortgages in the United States and 10.7 million of them have negative equity. Another 2.4 million have less than 5% equity. Considering it costs more than 5% in closing costs to sell a house that means 27% of home occupiers with a mortgage are trapped like rats in a cage. With 2.2 million foreclosures still in the pipeline and a looming recession, home prices will continue to fall another 10% to 20% over the next two years and one third of all home occupiers will be underwater. That sounds like a recipe for 10% to 15% stock market gains.

  • Quantitative easing has benefited only Wall Street bankers and the 1% wealthiest Americans. The $1.4 trillion of toxic mortgage backed securities on The Fed’s balance sheet are worth less than $700 billion. How will they unload this toxic waste? The Treasuries they have bought drop in value as interest rates rise. Quantitative easing’s Catch 22 is that it can never be unwound without destroying the Fed and the US economy.

Bennie and his Inkjets did a bang up job in 2011. He was able to expand his balance sheet from $2.47 trillion to $2.95 trillion in twelve short months. According to Ben and his Federal Reserve friends, increasing your balance sheet by $480 billion isn’t really printing money out of thin air and handing it to their Wall Street owners for free, so they can prop up the stock market and enrich their executives. Ben is now leveraged 57 to 1. He should move to Europe, where this level of leverage is commonplace. In comparison, Lehman Brothers and Bear Stearns were leveraged 40 to 1 when they went belly up.

There is absolutely no way that Ben Bernanke could ever reduce the Federal Reserve balance sheet to the pre-crisis level without destroying the U.S. economy. He knows that and will never sell off those toxic mortgage assets. Not only won’t he reduce the Fed balance sheet, but by mid-2012 he will institute QE3 and buy another $600 billion of mortgage debt. His hubris knows no bounds, as his reckless illegal actions thus far have not driven interest rates sky high – YET. He has only destroyed the finances of senior citizens, savers and people who eat food and use gasoline. He will surely go down in history, but not the way he envisions.

  • The rise in oil to $91 a barrel will not be a top. The Catch-22 of a declining dollar is that prices of all imported goods go up. If the dollar falls another 10%, the price of oil will rise above $120 a barrel and push the economy back into recession.

As Bernanke printed like a drunken sailor during the first six months of 2011, the USD fell by 9% and the price of oil did exactly as expected, rising to a peak above $125. The NATO “intervention” in Libya also added a few bucks to the price of a barrel of sweet crude.

                  DXY

One-Year Chart for DOLLAR INDEX SPOT (DXY:IND)

The complete implosion of Europe and the ensuing weakness of the Euro have given the false impression that the U.S. dollar is a safe haven. The USD has regained its losses and will end the year exactly as it started versus a Euro heavy basket of world currencies. With annual deficits equaling 10% of GDP, a national debt now exceeding 100% of GDP, and Ben Bernanke in perpetual printing mode, the USD is destined to reach its intrinsic value of zero. With Brent crude still above $108 a barrel, employment still weak, and double digit food and energy inflation slowing consumer spending, the ECRI knows a recession during 2012 is baked in the cake.  

 

  • The imminent collapse of the European Union as Greece, Ireland, Portugal and Spain are effectively bankrupt. Spain is the size of the other three countries combined and has a 20% unemployment rate. The Germans are losing patience with these spendthrift countries. Debt does matter.

It seems I was wrong about Europe. It turned out to be much worse than anyone envisioned, with Italy now the likely fuse that blows the whole thing sky high. The ECB has made Ben Bernanke look like a lightweight by increasing their balance sheet by 44% to over $3.5 trillion in a futile effort to solve a debt crisis with more debt. It seems central bankers are programmed to print until the very end (see Weimar). The European Union will not survive 2012. Too many countries, too much government debt, too many zombie banks, too many bureaucrats, too much austerity rammed down the throats of citizens, and not enough honesty or reality based solutions.

  • State and local governments were able to put off hard choices for another year, as Washington DC handed out hundreds of billions in pork. California will have a $19 billion budget deficit; Illinois will have a $17 billion budget deficit; New Jersey will have a $10.5 billion budget deficit; New York will have a $9 billion budget deficit. A US Congress filled with Tea Party newcomers will refuse to bailout these spendthrift states. Substantial government employee layoffs are a lock.

State and local governments have laid off 535,000 workers since 2008. With borrowed Federal government stimulus handouts evaporating into thin air during 2011 – 2012, this total will reach 800,000 by the end of the next year. The U.S. Postal Service will do their part by cutting 28,000 jobs in 2012, even though they need to cut 100,000. States and municipalities based their budgets on the revenues produced by the fake debt driven housing boom from 2003 – 2007. The tax revenue dried up, but the union jobs added are a gift that keeps on costing taxpayers billions. States and localities can’t print, so layoffs will continue.   

 

  • There is a growing probability that China will experience a hard landing as their own quantitative easing has resulted in inflation surging to a 28 month high of 5.1%, with food inflation skyrocketing to 11.7%. Poor families spend up to half of their income on food. Rapidly rising prices severely burden poor people and can spark civil unrest if too many of them can’t afford food.

According to official government statistics China’s economy continued to boom in 2011. But, of course Chinese government reports make the BLS look honest. The fact is the Chinese stock market has fallen 28% since April as the property bubble deflates. If their economy has truly grown at an annual rate of 8% to 10% over the last five years, why is their stock market down 62% from its 2007 high?

   SHANGHAI INDEX

One-Year Chart for Shanghai Stock Exchange Composite Index (SHCOMP:IND)

The price inflation in food and energy prices, along with the property bubble bursting has led to breakouts of civil unrest across China. China’s two biggest markets – Europe & the United States – are in or near recession and are buying less of their crap. They can only build so many vacant cities and shopping malls to create the appearance of growth. The hard landing is about to get harder in 2012.

  • The Tea Party members of Congress are likely to cause as much trouble for Republicans as Democrats. If they decide to make a stand on raising the debt ceiling early in 2011, all hell could break loose in the debt and stock markets. 

It seems I got the timing wrong on this prediction, but the August showdown was a doozy. The threat of a government shutdown resulted in the stock market collapsing by 18% in a matter of weeks in August. Our beloved politicians then came up with another bullshit non-solution by creating a commission which, after months of negotiations, failed to do anything. The $1.2 trillion of automatic spending cuts will never happen. The slime that inhabit the hallowed halls of Congress will pretend to cut, while actually increasing spending. And so it goes. The stock market has risen from its October low based on Easy Ben’s assurances to keep interest rates at zero forever and the anticipation of QE3 in the new year.

  • Will the consensus forecast of a growing economy, rising corporate profits, 10% to 15% stock market gains, 2 million new jobs, and a housing recovery come true in 2011? No it will not. By mid-year confidence in Ben’s master plan will wane.

Corporate profits did rise, mostly due to Ben Bernanke providing free money to the Wall Street Mega-Banks so they could generate risk free profits on the backs of senior citizens getting .15% on their savings. It also helps when the same Wall Street banks can make accounting entries declaring that future loan losses will be minimal and the toxic mortgages on their books aren’t really worthless. Who knew accountants could do so much for America? Abbey Joseph Cohen only missed her stock market projection by a smidgeon. The S&P 500 is essentially unchanged for the year, while the NASDAQ and Russell 2000 will finish in the red.

The country did not add 2 million new jobs. It added 1.4 to 1.5 new jobs. Too bad the working age population went up by 1.7 million people. But our friends at the BLS, when they aren’t manipulating away the inflation that real people in the real world experience every day, have the gall to declare the unemployment rate has fallen from 9.8% to 8.6% in the last twelve months. How could this be you might ask, since the working age population went up by more than the number of people who found jobs. Easy if you are a BLS government drone. Everyone knows that things are so good out in the real world that 1.8 million Americans decided to kick back and enjoy the good life by leaving the workforce. It wasn’t because they gave up looking for the jobs that were shipped to the Far East by the mega-corporations making record profits and paying record bonuses to their executives. It’s just a rumor that those long lines at food banks around the country have a few of these “lucky” non-members of the workforce in them.

The housing recovery is just around the corner. Larry Yun, chief liar for the National Association of Realtors, assures us that it’s the best time to buy. We all know that the NAR is a bastion of honesty and truth. Just because they reported 3 MILLION more home sales than actually occurred between 2007 and 2010, you can’t scorn, ignore and treat everything they say as a bald faced lie. If Larry says the housing recovery has arrived, it must be true.

  Revised Previous % Change
2007 5,022,000 5,652,000 -11.1%
2008 4,124,000 4,913,000 -16.1%
2009 4,334,000 5,156,000 -15.9%
2010 4,182,000 4,907,000 -14.8%

When the pundits on CNBC sum up the year, they will not be touting the fact that gasoline prices went up 10% in the past year and the average price for a gallon of gas was the highest in U.S. history. They will not be proclaiming that even the government manipulated CPI shows food prices up 6% and clothing prices up 5% in the last year. I’m sure glad Ben Bernanke doesn’t see any inflation on his radar. Maybe he should ask his chauffer about his inflation. Lastly, the stocks for the long run crowd will not be yakking about the fact that gold finished up 10% for the year and has been up for TEN consecutive years. I wonder whether the numbskulls on CNBC can look at the chart below and figure out why gold is up ten years in a row. The national debt reaching $20 trillion by 2015 is a given. I wonder whether the price of gold will be higher. Maybe I’ll give Abbey Joseph Cohen a call and ask for her prediction.

Overall, my assessment of what would happen in 2011 wasn’t too far off. But, it was the things that I and virtually everyone on the planet missed that will reverberate in 2012 and for the next ten years. Our 20 year Crisis deepened, became more violent, and clearly revealed that the establishment will use all their power to put down protests and crush opposition to their corrupt crony capitalistic policies. The major developments I missed regarding 2011 included:

  • The self-immolation of a young Tunisian man set off revolutions around the globe, toppling U.S. supported dictators in Tunisia and Egypt. Dictators attempted to retain power by killing citizens by the thousands. The self-immolation of a man in New Hampshire in front of a courthouse was completely ignored by the mainstream media. I wonder why.
  • The Arab Spring has resulted in revolutions in Yemen, Bahrain, Syria and Libya. Depending upon how much oil was at stake, the U.S. has supported the dictator or the people whenever it suited them. This is called democratic principles.
  • Young people across the U.S. were inspired by the Arab Spring and began to Occupy Wall Street and many other streets in 97 other U.S. cities this past Fall. The spirit of these protests was against Wall Street criminality, Washington corruption, and corporate malfeasance. Peaceful civil disobedience by citizens of this country was met with beatings, tear gas, mass arrests and bulldozing their encampments. Students were maced while sitting in front of a college building. Ultimately a Department of Homeland Security coordinated attack on all the protests squashed the movement. The American people were too distracted by Dancing With the Stars and the latest iGadget to notice. The corporate media did their part by spewing misinformation and propaganda about the Occupy Movement, while the Wall Street Elite giggled with delight from their NYC penthouse suites.
  • Shockingly, no bankers were prosecuted despite clear unequivocal evidence of the greatest financial fraud in world history. The former head of Goldman Sachs, U.S. Senator, and NJ Governor continues to eat caviar and drink champagne in his glorious mansion after stealing $1.2 billion directly from customers’ accounts. These funds now reside in the pocket of Jamie Dimon and his upstanding JP Morgan institution.
  • The Federal government methodically moved closer to a totalitarian regime by passing legislation that will enable them to imprison U.S. citizens without charges. The only remaining area that has allowed critical thinking Americans to find the truth – the Internet – is on the verge of being locked down by the Feds. Pending legislation will allow them to shut down any website that may inconvenience their agenda. We inch ever closer to Orwell’s vision of the future.
  • No one in the MSM or government anticipated that the only truthful, honest, forthright politician in Washington D.C. – Ron Paul – could possibly win the Iowa caucus. His message of freedom, liberty, self reliance, and non-interventionism has struck a chord with young people and those capable of distinguishing between MSM propaganda and reality. The establishment is terrified of Ron Paul and is now on a mission to destroy him. What they don’t realize is their time is coming to an end. The existing social order will be swept away in a violent manner. The youth of this country will lead the charge. 2012 should be a real doozy.

I’ll take another shot at predicting the unpredictable with my next article:  2012 – The Year of Living Dangerously.

SEARS – I TOLD YOU SO

Anyone remember my SEARS = TOAST post from May of this year? Here is a snippet:

Jesus Christ himself couldn’t save Sears. Has anyone on TBP actually bought anything at a Sears/Kmart in the last five years? They are the worst run retailer in America. They are dead and don’t even know it. These morons have added 247 new stores since 2006 but have managed to decrease their annual sales by $10 billion. Eddie Lampert is truly a retail genius. Over the next five years you will see a battle of retail zombies. Every big box retailer is part of the walking dead.

Sears will be the first victim and the stronger zombies – Home Depot, Lowes, and Wal-Mart will destroy them by underpricing appliances and tearing their heart out. Target, Kohls, and Wal-Mart already destroyed their apparel and general merchandise business.

A forward thinking realist would take a look at his 4,038 stores and close the 1,000 worst performing stores and try to conserve cash for the rough years ahead. They will not do this. They will go out in a blaze of glory with the biggest retail bankruptcy in history. There will be 4,038 rat infested vacant hulks rotting in our communities for decades.

You know I hate to tell people I told them so, but after yesterday I’m afraid I have to do it again. The demise of Sears is baked in the cake. Remember the stories in the MSM about Eddie Lambert being the new Warren Buffett. They were right. Buffet and Lambert have both proven to be dumbasses. Buffet’s brilliant investments in Goldman Sachs, GE and Bank of America have all sucked.

Eddie Lambert bought K-Mart and Sears as asset plays. One problem – the asset values of the properties have been cut in half. The fact that Sears and K-Mart are the worst managed retailers in America hasn’t helped. Sears started the year with $1.3 billion in cash and has burned through $600 billion in twelve months. This Lambert is a fucking genius. He is butt brothers with Jimmy Cramer. They worked together at where else but – GOLDMAN “THE VAMPIRE SQUID” SACHS. Cramer has been pumping this stock for years. Let’s assess his brilliance as an investment guru.

The stock traded at $192 per share in early 2007. Jim Cramer rated it a buy at this level. Today it trades at $34 a share. That is a NEGATIVE 82% return in just under five years. That is about par for the course for Jim Cramer. It traded at $95 earlier this year. It dropped 27% yesterday alone.

Here’s the deal. These bozos opened 247 new stores since 2006 and now they announced they are closing 120 stores. That is a piss in the ocean. If they really got serious and closed their 1,000 worst stores, they would have a chance to survive. But the ego of Eddie Lambert will not allow that decision to happen. He thinks he is smart. He’s a graduate of Goldman University for Christ’s sake. His reluctance to accept the facts will result in the bankruptcy of this piece of shit retailer and will leave the rotting carcasses of 4,000 rat infested hulks across suburbia. This stock is going to zero.

Thanksgiving Day Massacre: Sears Slaughtered On Collapsing Margins, To Shutter Hundreds Of Stores, Provides Revolver Update

Tyler Durden's picture

Submitted by Tyler Durden on 12/27/2011 06:24 -0500

That retailer Sears, aka K-Mart, just preannounced what can only be described as catastrophic Q4 results should not be a surprise to anyone: after all we have been warning ever since the “record” thanksgiving holiday that when you literally dump merchandize at stunning losses, losses will, stunningly, follow. Sure enough enter Sears. What we, however, are ourselves stunned by is that as part of its preannouncement, Sears has decided it would be prudent to provide an update on its credit facility status as well as availability. As a reminder to anyone and everyone – there is no more sure way of committing corporate suicide than openly inviting the bear raid which always appears whenever the words “revolving credit facility” and “availability” appear in the same press release. Just recall MF Global. And here, as there, we expect shorting to death to commence in 5…4…3…

From Sears:

Sears Holdings Corporation (“Holdings,”  “we,” “us,” “our,” or the “Company”) (Nasdaq: SHLD – News) today is providing an update on its quarter-to-date performance and planned actions to improve and accelerate the transformation of its business. 

Comparable store sales for the eight-week (“QTD”) and year-to-date (“YTD”) periods ended December 25, 2011 for its Kmart and Sears stores are as follows:

K-Mart

QTD  -4.4%

YTD  -1.8%

Sears Domestic

QTD  -6.0%

YTD  -3.3%

Total

QTD  -5.2%

YTD  -2.6%

Kmart’s quarter-to-date comparable store sales decline reflects decreases in the consumer electronics and apparel categories and lower layaway sales.  Sears Domestic’s quarter-to-date sales decline was primarily driven by the consumer electronics and home appliance categories, with more than half of the decline in Sears Domestic occurring in consumer electronics.  Sears apparel sales were flat and Lands’ End in Sears stores was up mid-single digits.

The combination of lower sales and continued margin pressure coupled with expense increases has led to a decline in our Adjusted EBITDA.  Accordingly, we expect that our fourth quarter consolidated Adjusted EBITDA will be less than half of last year’s amount.  For reference, last year we generated $933 million of Adjusted EBITDA in the fourth quarter ( $795 million domestically and $138 million in Canada ). 

Due to our performance in 2011 we expect that we will record in the fourth quarter a non-cash charge related to a valuation allowance on certain deferred tax assets of $1.6 to $1.8 billion .  Although a valuation adjustment is recognized on these deferred tax assets, no economic loss has occurred as the underlying net operating loss carryforwards and other tax benefits remain available to reduce future taxes to the extent income is generated.  Further, we may recognize in the fourth quarter an impairment charge on some goodwill balances for as much as $0.6 billion .  These charges would be non-cash and combined are estimated to be between $1.6 and $2.4 billion . 

“Given our performance and the difficult economic environment, especially for big-ticket items, we intend to implement a series of actions to reduce on-going expenses, adjust our asset base, and accelerate the transformation of our business model. These actions will better enable us to focus our investments on serving our customers and members through integrated retail – at the store, online and in the home,” said Chief Executive Officer Lou D’Ambrosio.  Specific actions which we plan to take include:

  • Close 100 to 120 Kmart and Sears Full-line stores.  We expect these store closures to generate $140 to $170 million of cash as the net inventory in these stores is sold and we expect to generate additional cash proceeds from the sale or sublease of the related real estate.  Further, we intend to optimize the space allocation based on category performance in certain stores.  Final determination of the stores to be closed has not yet been made.  The list of stores closing will be posted at www.searsmedia.com when final determination is made.
  • Excluding the effect of store closures, we currently expect to reduce 2012 peak domestic inventory by $300 million from the 2011 level of $10.2 billion at the end of the third quarter as a result of cost decreases in apparel, tighter buys and a lower inventory position at the beginning of the fiscal year.
  • Focus on improving gross profit dollars through better inventory management and more targeted pricing and promotion. 
  • Reduce our fixed costs by $100 to $200 million .

In addition to the specific store closures listed above, we will carefully evaluate store performance going forward and act opportunistically to recognize value from poor performing stores as circumstances allow.  While our past practice has been to keep marginally performing stores open while we worked to improve their performance, we no longer believe that to be the appropriate action in this environment.  We intend to accentuate our focus and resources to our better performing stores with the goal of converting their customer experience into a world-class integrated retail experience.

We currently expect the store closure and inventory reduction actions to reduce peak inventory in 2012 by $500 to $580 million and reduce our peak borrowing need by $300 to $350 million in 2012 from levels that may have resulted in 2012 without such actions. 

At December 23rd , we had $483 million of borrowings outstanding on our domestic revolving credit facility leaving us with over $2.9 billion of availability on our revolving credit facilities ( $2.1 billion on our domestic facility and $0.8 billion on our Canadian facility).  There were no borrowings outstanding last year at this time.

During the fourth quarter through December 23, 2011 , we have not repurchased any of our common shares under our share repurchase program.  As of December 23, 2011 , we had remaining authorization to repurchase $524 million of common shares under the previously approved programs.

IRAN IS BIG

Another good article from http://www.theoildrum.com/. Some interesting charts and maps. The first chart shows that Iran produced 6 million barrels of oil per day in the 1970s. The Islamic revolution and the brutal war with Iraq resulted in a collapse of their oil production. It has barely reached 4 million barrels per day since the early 1990s. They are unable to ramp up production due to sanctions and the lack of technological expertise. More than 60% of their exports go to the far east. China, Japan and India will not be happy if Israel and the U.S. decide to teach Iran a lesson.

I’ve always been geographically challenged. I never realized the size of Iran. Take a really good look at that map. Iran dominates the Middle East. Take a long hard look at the Persian Gulf and the Strait of Hormuz. Approximately 15 oil tankers per day, carrying 34% of the world’s oil supply, must traverse a 6 mile wide traffic lane. Imagine what would happen to worldwide oil prices if this Strait was shutdown. The Iranians aren’t stupid. This is their trump card.

Imagine how many soldiers it would take to subdue a country this large. Cruise missiles and B1 bombers aren’t going to defeat Iran. We’d just be killing thousands of innocent Iranians. The neo-cons like Gingrich and Romney act like taking out Iran will be a piece of cake. When have the neo-cons ever been wrong? The sanctions and embargoes are designed to force Iran to do something stupid. They will be attacked no matter what they do. The unintended consequences will likely lead to the next phase of this Fourth Turning.

Iran – Possible Implications of an Oil Embargo

Posted by Euan Mearns on December 6, 2011 – 6:30am
Does Thursday’s announcement that the EU is considering to ban oil imports from Iran epitomise the draining of power from west to east? The big winners here will be China and India, who do not fear rising Iranian influence and who will gladly soak up any additional oil exports they may have to offer. However, ending this small dependency upon Iranian oil imports in Europe (Figure 2) does clear the way for military action without the need to ponder the immediate consequences on oil imports.

 


 

Figure 1 Iran displays export land traits where growing domestic consumption is eating into the oil available for export that has been declining slowly since 2003. Data from BP. Y-axis is barrels per day (1000s). Balance = production less consumption which is a proxy for net exports. Production = crude+condensate+NGL whilst consumption may include refinery “gains” and bio-fuel. In many countries there is also an active two-way trade in crude and refined products. 

In a week where the UK embassy in Iran was overrun and the two countries are breaking off diplomatic ties, on the back of heightened concern about Iran’s nuclear weapons program and an unexplained explosion at an Iranian missile launching site, the EU has decided to flex its muscles and to ban Iranian oil imports. The big winners here are the other countries importing oil from Iran – Japan, China, India and South Korea. Does the EU really believe that in today’s extremely tight oil market that oil sanctions against Iran will worry them in the least? 


 

Figure 2 Table from a worthy article on Iranian oil and demographics posted on Crude Oil Peak details the countries importing oil from Iran in 2008. The four EU countries to be affected by any embargo will be Italy, Spain, Greece and France. Given that Greece and Spain are already in recession and that Italy and France are heading in that direction, it seems likely that their oil consumption will already be on the wane and that losing these relatively small amounts of Iranian imports will have little consequence. 


 

Figure 3 OPEC net exports (production consumption balance from BP) showing the importance of The Gulf states. 

With the risks of armed conflict against Iran increasing with every week that passes it is important to grasp what this may mean for global oil markets. Two end points seem to exist. The first is where “the West”, i.e. NATO or some other looser alliance ± Israel launches a cruise missile attack (conventional) against Iran’s nuclear facilities. destroying them. In that eventuality Iran, with current leadership, would be unlikely to ever again export oil to “the West”, but since at that point The West will not be importing any oil from Iran this would not matter. 


 

Figure 4 Iranian oil infrastructure, setting in the Arabian or Persian Gulf and the linch pin location of The Straights of Hormuz. Map from Wikipedia. 

The second more extreme scenario is that armed conflict spreads, compromising oil exports through the Straights of Hormuz. Oil exports from Saudi Arabia, Kuwait, The United Arab Emirates (UAE), Qatar, Iraq and Iran all pass through Hormuz. Data is not available for Iraq, but exports from Saudi, Kuwait, UAE and Qatar stood at around 12,805,000 bpd in 2010. The global net export market stood at around 35,173,000 and so these 4 countries alone account for around 36.4% of the global export market (excluding Iraq and Iran). Should these exports cease, albeit temporarily, the oil price will go through the roof, causing severe trauma to the global economy, including China. 

In addition, there are significant liquefied natural gas exports from Qatar that pass through Hormuz on a daily basis. According to BP, Qatar exported around 96 BCM of gas in 2010 (Figure 5) to the countries shown in Figure 6. In Europe, the UK, Spain, and Belgium would be most affected by disruption to LNG supplies from the Gulf whilst in Asia, India, S Korea, and Japan would be most affected. This highlights the increasingly exposed nature of OECD energy supplies where electricity supplies may be threatened by armed conflicts on the other side of the world. 


 

Figure 5 Production / consumption balance for natural gas in Qatar. 


 

Figure 6 Destinations of LNG exports from Qatar in 2010. 

IT’S GOOD TO BE A MEGA-CORPORATION

The 30 mega-corporations in the chart below generated $164 billion of profits in the last three years and paid no taxes. Not only did they pay no taxes, they received $10.6 billion in tax refunds. Not a bad return on their $476 million lobbying investment. This was all done legally. You see when their lobbyists right the laws for Congress and the tax rules for the IRS, things tend to fall in your favor. I’d love to see the compensation amounts for the CEOs of these organizations.

Did you pay any taxes between 2008 and 2010? If so, you paid more in Federal taxes than 29 of these 30 mega-corporations. You should fire your lobbyist.

Remember this information the next time you hear Gingrich or Romney declare that corporate tax rates are too high.

Country’s Largest Corporations Spend More Money On Lobbying Than Taxes

 

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In a “remember me, three years ago?” speech in Kansas yesterday, President Obama told the crowd, “This country succeeds when everyone gets a fair shot, when everyone does their fair share and when everyone plays by the same rules.” A new report [pdf] from the non-profit organization Public Campaign shows that 30 of the country’s largest corporations—including GE, Wells Fargo, Verizon, and Fed Ex—paid more to lobby Congress from 2008 through 2010 than they did in federal income taxes. What country was the president referring to?

Of the 30 companies, only one actually paid any federal income taxes: FedEx. The rest received nearly $11 billion in rebates. And even FedEx only paid 1%, 34% less than the statutory rate. As for lobbying, the 30 corporations spent a combined $476 million—or $400,000 a day every single day of the year, to ensure their interests were represented in Congress. GE led with way with $84 million in the three-year period (wonder why?) Verizon spent $54 million, and Boeing spent $52 million.

We can hear Eric Cantor crying now: “But these companies create jobs!” Of the seven companies that would make their employment records public, the report shows that over 50,000 Americans were laid off by these corporations, despite them turning a profit.

If you’ve been weeping uncontrollably if you even attempt to pick the paper up from your stoop following the news, the results of this report shouldn’t surprise you. But hey, a few more speeches in Kansas should straighten things out.

A COUPLE FASCINATING HOURS WITH NEIL HOWE

I had the pleasure of spending two hours with Neil Howe today. On his way back to Washington DC from a meeting with a client in NYC he stopped at 30th Street Station and we grabbed a bite to eat and chatted for a couple hours. Neil’s background is fascinating. His grandfather was astronomer Robert Julius Trumpler. His father was a physicist and his mother was a professor of occupational therapy. I know there has been a dominant opinion on this site that liberal arts degrees are worthless. I don’t think any college degree is worthless. I realize we need more engineers and scientists, but many people are not wired for these professions. We need writers, historians, and thinkers too. Neil Howe is a perfect example. His undergraduate degree from Berkley was in literature. He then earned graduate degrees in economics and history. His well rounded education has given him a much broader view of the world. And he’s a Boomer. Proof that all Boomers aren’t bad.

I had never met Neil. We have had occasional email correspondence and he was the star of Generation Zero, in which I had tiny part. He is a famous man. He’s written or co-written 15 books.  He runs a very successful company called Lifecourse Associates. Based on my two hours in his acquantance you would never know he was a famous person. He is extremely down to earth. He is a nice guy. I never felt intimidated, even though his brain power is out of my league. He was actually interested in my background and my opinions.

But enough small talk. You want to know what he thinks about our current Fourth Turning. He was proud that some distinguished institutions had agreed with the Strauss & Howe dating definitions for Boomers, Xers, and Millenials. His starting point for this Fourth Turning is 2007. We are only four years into this Turning and haven’t reached regeneracy yet. I asked him why regeneracy had begun in the last two Fourth Turnings by year four, but hasn’t begun yet. He said that each Turning has its own flow. We agreed that something huge would need to happen in order to create a regeneracy in this country. It could be an economic collapse or it could be war.

He believes the situation which has the biggest potential to blow up the world is Iran. He thinks people are underestimating the implications of a conflict with Iran. He thinks Israel will act unilaterally to keep Iran from getting a nuclear bomb. I asked him if he thinks there will be a world war during this Fourth Turning. He doesn’t think it will be a world war. He expects regional conflicts in the Middle East.

I asked him why the Boomers didn’t seem to be supporting and leading the Millenial generation. He said that within families Boomers and Millenials are very close. This will ultimately exhibit itself. He thinks Boomers will eventually choose to sacrifice some of their entitlements in order to give Millenials a fighting chance at a future. We discussed the upcoming presidential election. He had some nice things to say about Ron Paul. He has been surprised by Newt Gingrich’s rise in the polls. Neil has known Gingrich for 20 years since he has worked on public policy in DC. He believes his past will come back to haunt him. He thinks Romney is likely to win the Republican nomination by default. If the economy stays in the dumper, Romney will be our next President. He is a Prophet/Boomer leader. Neil doesn’t think Bloomberg could win as a 3rd party candidate because of his association with Wall Street. Anyone associated with Wall Street is toxic.

His opinion about OWS was interesting. He says that the movement is made up of 50% Millenials. He thinks the creators of the movement are actually anarchist Boomers trying to use the Millenials for their own purposes. He thinks the movement has a lot of passion but not a lot of depth. His firm has done surveys and he found that most Millenials don’t even know there is an OWS movement. I asked him whether libertarians are likely to be happy with this Fourth Turning. He said that libertarians have an impact early in a Fourth Turning (Ron Paul, Tea Party), but once the regeneracy occurs people rally around the central authority and government is likely to take on more power and control. Not a happy thought.

Neil lamented what a great opportunity was missed in early 2009 by Barack Obama. The situation in the country was awful. He had both Houses in Congress. His popularity was at its peak. He could have done anything. The country could have accepted short term pain and began to fix our structural problems. He could have had an orderly liquidation of the Wall Street banks. He could have combined short term stimulus with a long term fix for our entitlement programs. But instead he rolled over for Wall Street and dished out Keynesian pork to his supporters. A once in a lifetime chance was missed.

He believes the Federal Reserve policies are disastrous. Zero percent interest rates have sucked the vitality from our economy. The policies are exacerbating our debt problems. People have no incentive to save with zero interest rates. I told him that TBP members are anxious to know what happens next. Here’s where you’ll be disappointed. Neil doesn’t make predictions of events. There will always be dramatic events as time passes, but it is how generations react to those events that matter. There is no doubt that it will take a dramatic event to create a regeneracy of spirit in this country. The triggers for this Crisis were clearly visible in 1997 when Strauss and Howe wrote their classic book – debt, civic decay, and global disorder. The toxic combination is still roiling the world. We can only guess at the timing and specific events that will push us into the next phase of this Crisis. 

I told Neil that I end many of my posts these days with, “Fourth Turnings sure are interesting.” He thought that was funny. With Neil’s train due to arrive in a few minutes we got up to say our goodbyes. We agreed that we are living in interesting times. He joked that at least we know how this will end, which is more than most people. He is going to revive his Fourth Turning blog and asked if I would contribute articles. I told him I’d be honored.

All in all, it was a fascinating and enlightening two hours having a great discussion with a brilliant man.

HMMM. HOW CONVENIENT – DEBT, DRONES & DEMAGOGUES

So Iran shoots down one of our drones. Now the questions. Are we flying spy drones over Iran in order to provoke them into doing something stupid? Did we purposely allow it to be shot down? Will Iran’s blustering and threats to retaliate allow the U.S. to create a foreign conflict in order to take the focus off our imploding economy? China declared last week that they would be willing to go to war in support of Iran. Are we approaching an Archduke Ferdinand moment when countries are forced to choose sides in order to not lose face? Could our Fourth Turning War be just over the horizon? If conflict starts with Iran, what will happen to the price of oil? How many more liberties and freedoms will be sacrificed when the oligarchs lead us into another undeclared war of choice?

If you don’t fly spy drones over foreign countries that we are not at war with, they can’t get shot down. How would we react if China or Russia was flying spy drones over the U.S.?

The ignorant masses will be convinced that Iran is at fault and deserves to be obliterated. Comfortably numb.

Iran Military Shoots Down US Drone, Threatens Response

Tyler Durden's picture

Submitted by Tyler Durden on 12/04/2011 10:05 -0500

From PressTV:

A senior Iranian military official says Iran’s Army has shot down a remote-controlled reconnaissance drone operated by the US military in the eastern part of the country.

The informed source said on Sunday that Iran Army’s electronic warfare unit successfully targeted the American-built RQ-170 Sentinel stealth aircraft after it crossed into Iranian airspace over the border with neighboring Afghanistan.

He added that the US reconnaissance drone has been seized with minimum damage.

The RQ-170 is a stealth unmanned aircraft designed and developed by Lockheed Martin Company.

The US military and the CIA use the drone to launch missile strikes in Afghanistan and in Pakistan’s northwestern tribal region.

The unnamed Iranian military official further added that “due to the clear border violation, the operational and electronic measures taken by the Islamic Republic of Iran’s Armed Forces against invading aircraft will not remain limited to the Iran’s borders.

The report comes as the United States has beefed up its military presence in and around the Persian Gulf region in recent months in the wake of popular uprising in Bahrain.

The US Department of Defense says Washington is closely monitoring the developments in Bahrain, which is the headquarters of the US Navy’s Fifth Fleet and holds some 4,200 US service members.

From Reuters:

Iran’s military said on Sunday it had shot down a U.S. reconnaissance drone aircraft in eastern Iran, a military source told state television.

“Iran’s military has downed an intruding RQ-170 American drone in eastern Iran,” Iran’s Arabic-language Al Alam state television network quoted the unnamed source as saying.

“The spy drone, which has been downed with little damage, was seized by the Iranian armed forces.”

Iran shot down the drone at a time when it is trying to contain foreign reaction to the storming of the British embassy in Tehran on Tuesday, shortly after London announced that it would impose sanctions on Iran’s central bank in connection with Iran’s controversial nuclear enrichment programme.

Britain evacuated its diplomatic staff from Iran and expelled Iranian diplomats in London in retaliation, and several other EU members recalled their ambassadors from Tehran.

The attack dragged Iran’s relations with Europe to a long-time low.

Washington and EU countries have been discussing measures to restrict Iran’s oil exports since the United Nations nuclear watchdog issued a report in November with what it said was evidence that Tehran had worked on designing an atom bomb.  

And from AP:

Iran’s semiofficial Fars news agency says the country’s armed forces have shot down an unmanned U.S. spy plane that violated Iranian airspace along its eastern border.

The report says the plane was an RQ170 type drone and is now in the possession of Iran’s armed forces. The Fars news agency is close to the powerful Revolutionary Guard.

Iran is locked in a dispute with the U.S. and its allies over Tehran’s disputed nuclear program, which the West believes is aimed at the development of nuclear weapons. Iran denies the accusations, saying its nuclear program is entirely peaceful.

It appears Iran plans to retaliate:

Iran’s response to the downed U.S. drone’s violation of its airspace will not be limited to the country’s borders, a military source told state television.

“The Iranian military’s response to the American spy drone’s violation of our airspace will not be limited to Iran’s borders any more,” Iran’s Arabic language Al Alam television quoted the military source as saying, without giving details.

Iran said in July it had shot down an unmanned U.S. spy plane over the holy city of Qom, near its Fordu nuclear site.

As a reminder from Stratfor, here is how the US navy was deployed most recently as of Wednesday. Looks like life for the Stennis boys is about to get exciting.

FESTIVUS FOR THE RESTIVUS – ADMIN RUBBING ELBOWS WITH 1%

I’ll be pretty much out of touch until Sunday afternoon. Avalon & I are headed to NYC tomorrow for a couple days. We’ll be rubbing elbows with some of the 1% tomorrow night at the annual Minyanville Festivus shindig at the Hill Country Barbecue Market at 30 West 26th Street.

I’ve been to this annual charity event two out of the last three years. It benefits Todd Harrison’s Ruby Peck Foundation for children – https://rpfoundation.org/donate.asp

I get to attend for free since I’m an occasional contributor to their Minyanville website. It’s a laid back country and western themed party. Free beer and grub from 7:00 until 3:00 am. There will definitely be some 1%ers at this party. I’ve met John Mauldin at a previous party. They have cover bands playing rock and roll all night long. It should be fun.

We’ll be checking out Zucotti Park on Saturday. I think they plan a protest in Times Square on Saturday. Hopefully it gets out of hand. If they fire tear gas, I’ll be sure to duck.

Maybe we’ll replay our engagement by taking a carriage ride in Central Park just like we did in December 1989 when I proposed to Avalon. She said yes the last time.

NYC is really fun to visit at this time of year. Hopefully seeing the Christmas tree at Rockerfeller Center will get me in the Christmas spirit.

And of course we’ll have to get the won ton  soup at Ruby Foos.

Hopefully, some people can step up and make some posts in the next few days. We might have sporadic internet access and can release the posts that people want to make.