came to an end at the same time: the administration’s policy to Extend &
Pretend has run out of time as has the patience of the US electorate
with the government’s Keynesian economic policy responses. Desperate
last gasp attempts are to be fully expected, but any chance of success
is rapidly diminishing.
Before we can identify what needs to be done, what the administration is
likely to do and how we can preserve and protect our wealth through it, we
need to first determine where we are going wrong. Surprisingly, no
one has assessed the results of the American Recovery & Reinvestment Act
2009 (ARRA) which was this administration’s cornerstone program to place
the US back on the post financial crisis road to recovery.
We can safely conclude either:
The administration completely under estimated the
extent of the economic crisis, even though we were well into it when the
ARRA was introduced.
The administration was unable to secure the
actually required stimulus amount which was likely 4-5 times that
The administration failed to implement the program
in a timely manner.
The administration failed to diagnose the problem
correctly and that in fact it is a structural problem versus a cyclical
and liquidity problem, as they still insist it to be.
horrific as the gulf environmental catastrophe is, an even more
intractable and cataclysmic disaster may be looming. The yet unknowable
costs associated with clean-up, litigation and compensation damages due
to arguably the world’s worst environmental tragedy, may be in the
process of triggering a credit event by British Petroleum (BP) that will
be equally devastating to global over-the-counter (OTC) derivatives. The
potential contagion may eventually show that Lehman Bros. and Bear
Stearns were simply early warning signals of the devastation lurking and
continuing to grow unchecked in the $615T OTC Derivatives market.
What is yet unknowable is what the reality is of BP’s off-balance sheet
obligations and leverage positions. How many Special Purpose Entities
(SPEs) is it operating? Remember, during the Enron debacle Andrew Fastow,
the Enron CFO, asserted in testimony nearly 10 years ago that GE had
2500 such entities already in existence. BP has even more physical
assets than Enron and GE. Furthermore, no one knows the true size of
BP’s OTC derivative contracts such as Interest Rate Swaps and Currency
Swaps. Only the major international banks have visibility to what the
collateral obligations associated with these instruments are, their
credit trigger events and who the counter parties are. They are
obviously not talking, but as I will explain, they are aggressively
repositioning trillions of dollars in global currency, swap, derivative,
options, debt and equity portfolios.
The latest consumer credit number continues the decline we
have seen in recent months, plunging from $2424.4 billion in April
to $2415.3 billion in May, a $9.1 billion decline, or 4.5%
annualized, on consensus of $2.3 billion. Yet the biggest stunner
was the April revision which was whacked from +$1 billion
to a revised -$14.9 billion! In other words, there has
been a $24 billion decline in consumer credit in the past two
months. The biggest hit was, as usual, experienced by revolving
credit accounts, which fell by a 10.5 annualized rate to $830.8
billion, from $838.2 billion in April, and just north of $910
billion a year earlier. The bottom line is that consumers continue
to retrench as the deflationary wave gets ever bigger. And the
only lender, for the second month, running, is guess who... Yet
stocks, which confirm again they are now completely decoupled from
facts, statistics, or reality in general, jump on this very
My expl of BP spill in The Black Swan II : “don’t give the manager of a nuclear
plant an incentive bonus based on cost savings”.
I spoke with Nassim and asked him to expound upon his tweet.
Here is what Nassim wrote me:
Because security analysts and investment “experts” don’t
understand robustness and redundancy, managers have an incentive
to hide risks of blowups, Black Swan exposures, by cutting corners
they get better numbers and appear cosmetically to be profitable
while sitting on dynamite. This is not too different from banks
stashing their portfolios with more and more hidden risks. So this
condition of increased fragility over time comes from the
incentive system and the bogus risk measures and empirically
invalid business school techniques used by analysts. A manager
collects annual bonuses, and does not pay back his past
compensation in the event of a blowup. There is a mismatch between
the bonus frequency and the time to eventual blowup.
The tragedy is that, in this case, as with banks, there are
externalities and shareholders are not the ones footing the bill,
but society at large
BP Plc is staging a comeback in credit markets as
investors, who three weeks ago priced in more than 40
percent odds the energy company would be forced into
bankruptcy, speculate that mounting costs from the biggest
oil spill in U.S. history will be contained.
Abandoned oil wells make Gulf of Mexico 'environmental minefield'
Yet another data point on why the Obama administration
and BP are both so concerned about media access to spill
areas comes courtesy of this youtube video by jamescfox.
In his own words: "Oil and water samples were taken from
both the Shores of Grand Isle and from 20 miles out. The
preliminary analysis was done at an academic analytical
chemistry laboratory. Looking for the likely pollutants
from the deep water Horizon Oil spill. It was focused on
the detection of benzene and propylene glycol. Benzene and
other highly toxic contaminants were very low however the
concentration of propylene glycol was between 360 and 440
parts per million. Just 25 parts per million is know to
kill most fish and propylene glycol is just one of many
ingredients found in Corexit. In short, the Gulf is being
poisoned by BP's usage of the dispersants even after the
EPA asked them to stop back in May. We are willing to
provide ANY respected/known laboratory these samples or
provide them with more. This is very serious to all people
and marine life in and around the Gulf."
OTHER TIPPING POINT CATEGORIES NOT LISTED ABOVEp style="margin-top: 0; margin-bottom: 0">
Today's Lipper/AMG fund flow data confirmed the ICI data
disclosed earlier: in the week ended July 7, in which stocks have
rallied by who knows how many percent - nobody without Gallium
Arsenide logic gates really keeps track of the market anymore,
equities saw outflows of $11.6 billion. We'll repeat it because it
bears repeating: stocks have surged as mutual funds have
seen one of their biggest weekly outflows in 2010.
The latest market trampoline action on horrendous consumer
credit news should be sufficient to get every last sane person out
of this illegal, yet fully government endorsed, backdoor gambling
operation, or at least those that are stupid enough not to be
trading with other people's money. Today marks the most recent
long white candlestick on almost record low volume for a ramp day.
Note the straight line higher immediately following the consumer
credit collapse and the leak that QE2 is coming any minute. Our
only question is how bad is the news coming this weekend for the
primary dealers to need to surge the market so high on nothing.
Well, that, and also we wonder if after the circus rang the
closing bell on the Nasdaq two days ago, whether today the
Sicilian mafia will be at the NYSE close.
Gold vs the Dollar? Interview with James Rickards
The good folks over at numismaster.com report that, starting
on January 1st in 2012, U.S. federal law will require coin and
bullion dealers to report to the Internal Revenue Service all gold
and silver coin purchases and sales greater than $600. The report
is written by David L. Ganz and is headlined "$600 Sale? Get Ready
for Tax Form." Apparently this little jewel was an add-on to the
national health care legislation. But there’s a new bill being
introduced by Rep. Dan Lungren (H.R. 5141), which has gathered
over 80 members of Congress as co-sponsors to repeal this
section... so we'll see how that turns out. According to the
author of the article Ed references, the rationale for the new
regulations is that the taxocrats believe that people conducting
off-book trading in precious metals are chiseling them out of $17
billion in lost revenue annually. The net result, however, will be
that the government will soon know who’s got the gold. We reached
out to another well-informed source who confirmed that the new
regs would apply to all businesses. For example, under the new
regime a plumber who does work for you in excess of the $600
threshold would be required to file a 1099 report. The
implications of this move transcend just the precious metals.
Rather, this is a deliberate step in the direction of implementing
a VAT – once the government has everyone reporting essentially
every transaction, taking the next step is a snap.
GMO's Edward Chancellor has written what is arguably the coup
de grace of papers analyzing the dynamics of soveriegn default,
together with the conditions required to succumb to this terminal
condition, and is the functional equivalent of months of research
and combing through all the recent literature on the topic. By
initially highlighting the reasons for government default, which
include i) a reversal of capital flows, ii) unwise lending, iii)
excessive foreign debts, iv) a poor credit history, v)
unproductive lending, vi) rollover risk, vii) weak revenues, and
viii) rising interest rates, Chancellor presents the frame of
reference in which every potential sovereign default situation
should be analyzed. Chancellor also highlights several examples
where a sovereign default was all but assured (Britain post the
Napoleonic wars, Sweden in the 1990s), analyzes the opportunity
cost of hyperinflating instead of pursuing default (when inflation
is more convenient, when it resolves political conflicts, when
avoiding inflation is a low priority, and when there has been a
public credit flameout), and makes an exhaustive analysis using
historical parallels of today's sovereign debt crisis. He
summarizes the different view of the current sovereign fiasco as
follows: i) this time is (really) different, ii) we are not all
Greek, iii) posits that the US is not on the verge of a default,
iv) that inflation is more likely than default. He concludes by
analyzing potential tipping points, which in a herd mentality
market such as ours, are all that matters, and suggests that Japan
is precisely on the verge of such a tipping point. Yet his two
most critical conclusions, in our opinion, are the following: "public
finance is a ponzi scheme" and, for all those who are
fans of Rosie's thesis that bonds are the go to investment
currently, "Current yields on government bonds in most advanced
economist are at very low levels. Under only one condition - that
the world follows Japan's experience of prolonged deflation - do
they offer any chance of a reasonable return. But this is
not the only possible future. For other outcomes, long-dated
government bonds offer a limited upside with a potentially
uncapped downside. As investors, such asymmetric pay-off profiles
don't appeal to us." Must read for everyone who wants to
have an intelligent opinion on the matter.
Having rapidly become the only person worth listening to on
CNBC, Rick Santelli's insights on the economy are now far more
valuable than any other guest's on the Jeff Immelt propaganda
station. Which is why we were very happy to find that
Eric King's latest interview was with none other than Mr.
Santelli. The topics discussed are numerous, varied and and very
critical to our economy, covering such concepts as deflation,
deficit spending, bailouts, government spending multipliers, Fed
transparency, spending cuts, austerity, the folly of Keynesianism,
strategic defaults, direct bidders and treasury auctions, and
lastly, tea party dynamics, making this a must hear interview for
anyone still on either side of the economic fence, and who enjoys
listening to Rick for longer than the 45 second segments the CNBC
producers will allow.
Deflation: "deflation is the most
disingenuous argument especially in the current conditions.
[When the bubble process ends prices have to come down to
reality] the process really is deleveraging, but what happens
when prices go down you get the economists call it deflation.
Deflation is always the biggest bogeyman in a central banker's
closet. It also allows them to use the only tool in their
toolbox, which is to spend money, and usually money they
haven't collected yet, so it's usually a deficit form of
spending. Think about what economists are trying to do: we go
up too high in leverage, prices are too high, we try to
correct that process, it's called deflation, and they try to
put money in to prop it up at an artificial price-deleveraging
is the word we should stick to"
Deficit spending: "the only thing that
works is across the board tax cuts because it fuels the type
of small business that does the bulk of the hiring"
Bailouts: "the only regulation that will
ever work is failure. If you don't allow failure what you end
up with is regulators trying to serve when it's time to take
punch bowls away. Regulators never go against the grain. Back
in 03-04 many in the fixed income markets saw it coming but
nobody wants to pull that punch bowl away. Businesses should
fail, that's the way the system was designed"
The Multiplier of Government spending:
"Larry Summers on many occasions has said that the multiplier
of government spending is greater than 1. If that was true,
we'd never have another recession ever again, and I would be
advocating to spend a trillion dollars every hour. It would be
like a perpetual motion machine and all physicists know those
are impossible. Every dollar the government spends comes from
Fed Transparency: "It seems to me we are
making some progress on the financial audit. I absolutely
agree that on all of the issues that take taxpayers' money and
end up being distributed or put on the balance sheet and in
any way used by the Fed, there should be an audit that should
be fully transparent. I am worried about the financial
On Spending Cuts: "Listeners, this is
going to be the most important thing I am going to say: we
need to maintain the focus on spending, the politicians in my
lifetime always spend. If we end up spending way more than we
can take in, in essence the deficit panel becomes a tax panel.
We must stop spending before we talk about VAT taxes or taxing
Americans more, we need to get spending under control. The
retings of congress are the lowest they have been in
On Austerity: "Nobody wants that. But
there is a silver lining - the UK have conditions in their
economy worse than the US, but they came up with an austerity
plan, and we see that their currency has been rewarded. The
GBP has risen about 10% in a very short period of time."
On Keynesianism: "The Keynesians are both
right and wrong. I don't think Keynes advocated the kind of
helicopter-Ben spending that many say he promoted. He
promoted the kind of stimulus that created jobs, that's more
the medicine for a cyclical downturn, we have a structural
issue because of the bubble credit scenario."
On the ECB's Debt Monetization: "I think
that the ECB has a huge issue and they are behind the ball.
They don't have a constitution in the eurozone, they have
cultural and monetary cultural issues to deal with. I think
that buying securities or monetizing or QE is always a bad
idea. Once there is a subsidy in the marketplace, it becomes
the normal pricing mechanism. For the Fed or the ECB to unload
these securities, becomes a destabilizing force and in the
long run does more harm than good."
On Strategic Defaults: "I have feelings
on this that go both ways. I think morally I would have an
issue doing that, but people who did the mortgage, or the
second mortgage, or took a HELOC to pay for cars, pay for the
vacations, I think it is reprehensible that we end up
reshuffling wealth to pay some of that off. But I think the
dynamic is from the government side - I think contracts
between banks and homeowners - if it's unsecured, it's
unsecured, I don't have an issue with that."
On Direct Bidders being a proxy for the Fed (a
much debated topic on Zero Hedge)and
Treasury Auctions in general: "That's the best
question anyone has asked me in a long time. I think there is
a recycling quid pro quo going on: the Fed is making banking
obsolete because a lot of the programs that they have is to
take the cheap end of the curve and invest it in Treasuries.
Well the Treasury needs as many buyers as it can get. I think
the financial institutions are recycling easy money that
should be going into John Q Public's pocket, to those that
deserve credit, all this money is ending up in the forms of
purchases of 10, 7, and 5-Year Notes, and I don't like that
way that's working. That's why I think that raising rates
would be a good thing. Why? Because it would take some of the
easy ways the banks recycle the Fed's cheap money and put it
back in the hands of the public and actually make banking a
relationship between banks and Americans that need it whether
it is for funding a mortgage or funding a small business."
And on Tea Party dynamics: "I think
November 2 is going to be a watershed of Americans letting
Washington know they're the boss."
ZZH - Zero Hedge, BI/strong> - Business Insider,
WSJ - Wall Street Journal, BL -
Bloomberg, FT - Financial Times
Gordon T Long is not a registered advisor and
does not give investment advice. His comments are an expression of opinion
only and should not be construed in any manner whatsoever as
recommendations to buy or sell a stock, option, future, bond, commodity or
any other financial instrument at any time. While he believes his
statements to be true, they always depend on the reliability of his own
credible sources. Of course, he recommends that you consult with a
qualified investment advisor, one licensed by appropriate regulatory
agencies in your legal jurisdiction, before making any investment
decisions, and barring that, we encourage you confirm the facts on your
own before making important investment commitments.
This site contains
copyrighted material the use of which has not always been specifically
authorized by the copyright owner. We are making such material available in
our efforts to advance understanding of environmental, political, human
rights, economic, democracy, scientific, and social justice issues, etc. We
believe this constitutes a 'fair use' of any such copyrighted material as
provided for in section 107 of the US Copyright Law. In accordance with
Title 17 U.S.C. Section 107, the material on this site is distributed
without profit to those who have expressed a prior interest in receiving the
included information for research and educational purposes.
If you wish to use
copyrighted material from this site for purposes of your own that go beyond
'fair use', you must obtain permission from the copyright owner.
Gordon T Long
is not a registered advisor and does not give investment advice. His comments
are an expression of opinion only and should not be construed in any manner
whatsoever as recommendations to buy or sell a stock, option, future, bond,
commodity or any other financial instrument at any time. While he believes his
statements to be true, they always depend on the reliability of his own
credible sources. Of course, we recommend that you consult with a qualified
investment advisor, one licensed by appropriate regulatory agencies in your
legal jurisdiction, before making any investment decisions, and barring that,
we encourage you confirm the facts on your own before making important