The
critical issues in America stem from minimally a blatantly ineffective
public policy, but overridingly a failed and destructive Economic
Policy. These policy errors are directly responsible for the opening
salvos of the Currency War clouds now looming overhead.
Don’t be fooled for a minute. The issue of Yuan devaluation is a political
distraction from the real issue – a failure of US policy leadership. In my
opinion the US Fiscal and Monetary policies are misguided. They are wrong!
I wrote a 66 page thesis paper entitled “Extend
& Pretend” in the fall of 2009 detailing why the proposed Keynesian
policy direction was flawed and why it would fail. I additionally authored
a
full series of articles from January through August in a broadly
published series entitled “Extend & Pretend” detailing the predicted
failures as they unfolded. Don’t let anyone tell you that what has
happened was not fully predictable!
Now after the charade of Extend & Pretend has run out of momentum and more
money printing is again required through Quantitative Easing (we predicted
QE II was inevitable in
March), the responsible US politicos have cleverly ignited the markets
with QE II money printing euphoria in the run-up to the mid-term
elections. Craftily they are taking political camouflage behind an
“undervalued Yuan” as the culprit for US problems. Remember, patriotism is
the last bastion of scoundre s
READ MOREE
The United States is
facing both a structural and demand problem - it is not the cyclical
recessionary business cycle or the fallout of a credit supply crisis
which the Washington spin would have you believe.
It is my opinion that
the Washington political machine is being forced to take this position,
because it simply does not know what to do about the real dilemma
associated with the implications of the massive structural debt and
deficits facing the US. This is a politically dangerous predicament
because the reality is we are on the cusp of an imminent and
significant
collapse in the standard of living for most Americans.
The politicos’ proven
tool of stimulus spending, which has been the silver bullet solution for
decades to everything that has even hinted of being a problem, is
clearly no longer working. Monetary and Fiscal policy are presently no
match for the collapse of the Shadow Banking System. A $2.1 Trillion YTD
drop in Shadow Banking Liabilities has become an insurmountable problem
for the Federal Reserve without a further and dramatic increase in
Quantitative Easing. The fallout from this action will be an intractable
problem which we will face for the next five to eight years, resulting
in the “Jaws of Death” for the American public.
READ MORE
READER ROADMAP
- 2010 TIPPING POINTS aid to
positioning COMMENTARY
POSTS: MONDAY 10-18-10
Last Update:
10/19/2010 02:22 AM
SCHEDULE: 1st Pass: 5:30AM EST, 2nd Pass: 8:00 AM, 3rd Pass 10:30
AM. Last Pass 5:30 PM
Given the negative economic effect of spending cuts being pushed in the UK,
expect monetary policy to be extremely stimulative as a counter-balance. This means one hundred billion pounds of additional bond buying from the central
bank, and no interest rate hike until 'late 2012'. Yet even this may not be enough to stave off an economic contraction:
“We expect the authorities to push the monetary policy
levers hard in the opposite direction to the fiscal policy
levers,” the CEBR said in the statement.
The CEBR’s forecast for economic growth in the
first three months of 2011 is 0.1 percent, which implies
there is almost a 50 percent chance the economy will
contract during the quarter, according to the report.
Remember when the pathetic farce that was the stress
test presumably prevented Europe's collapse, and served as
the inflection point preventing the EUR from hitting
parity with the USD? Well, one of the banks that the
"stress test" uncovered to be solvent was the recently
insolvent Allied Irish Bank, which earlier this month
needed a taxpayer injection of billions to presumably make
sure that European creditors (and likely Goldman Sachs,
very much like the case in Anglo Irish) never see even one
dime lost. And today, an Irish Member of the European
Parliament Alan Kelly said he intends to write to the EU
Competition Commissioner to discover just how it is that
one of Ireland's top banks slipped through the stress test
cracks only to require a bail out mere months later. It
appears that slowly everyone in Europe is starting to turn
against the trillions in German bank liabilities that
stand to be impaired, and lead to a systemic collapse,
unless local taxpayers dutifully reach into their back
pocket and make sure fat bankers continue their worry-free
existence.
As much as this trend is alarming, there is a silver
lining in all this. Japan had near zero interest
rates and deflationary pressures for two decades now.
Property prices have never recovered since the boom years
of the 80s. The Stock Market Index is barely 1/4 of
it's peak in 1990. And yet, the Japanese currency
has continued to make gains against the US Dollar.
It has also performed remarkably well against other
currencies since the financial crisis. Although this
may seem somewhat counter-intuitive, despite near zero
interest rates and essentially no return on Japanese
denominated assets, the currency has remained strong.
If the US were to follow a similar fate as Japan, it
would be a nightmare for property and equity prices.
But there may just be some hope for the US Dollar.
The pressure on the Dollar remains strong, particularly in
view of the ever-mounting US debt burden.
The only thing mirroring the relentless outflow from stocks
these days (now in their 23rd week) is the increase in the M2
money supply: the week ending October 4th was the 14th consecutive
weekly increase in the broadest money aggregate compiled by the
Fed which hit $8,752.4 billion, an increase of $20 billion from
the $8,732.8 billion the week before. Curiously, the Fed decided
to massively revise all previous numbers (as if the amount of
money that goes in and out of a bank, and should be recorded
electronically the second it happens is subject to change). Yet
the strangest number to come out of the huge revision had to do
with with the flow of money in and out of Small Denomination
(under $100,000) time deposits, or in other words the place where
the bulk of Main Street America parks their money for some pursuit
of nominal yield. The kicker - since the beginning of the
year there has not been
one weekly inflow into small denomination time deposits!
(go ahead and
check it) It appears either the less than richest Americans
need to constantly pull money out of the bank, as they give up
yield (and in a Zero Interest Rate environment there is no yield
to be given up) in order to pay their bills, or simply have
decided to no longer keep their money with the big (and small)
banks (as this includes both commercial banks and thrifts). Could
the "starve the banks" campaign be working? If Americans succeed
in pulling enough money from their banks via deposit redemption,
coupled with the stock trading boycott, it will be the end of Wall
Street post haste.
New research from Robert Novy-Marx and Joshua Rauh [PDF]
projects a nearly 50% higher level of unfunded pension liabilities
than most cities acknowledge.
Most cities use Entry Age Normal accounting, which assumes
employees will retire at a normal age and not receive any increase
in benefits.
A more accurate system is Present Value of Benefits accounting,
which assumes employees will retire at a normal age after
receiving typical salary and benefit increases.
What might a banker do if he was sitting on a pile of defaulted
mortgages and now the traditional route of foreclosure was
blocked? Adding to the problems of the bankers is that there is no
assurance that they even have a valid claim to foreclose given
that so much of the paperwork is tainted.
One possible response would be to get all troubled borrowers to
reaffirm their debt, the second is to get the trouble borrowers
back to paying something on the mortgage, even if it were a
fraction of what was formerly owed on a monthly basis. A loan
modification would achieve both results. When a borrower signs up
for a loan mod they sign new papers. A portion of this process
will re-establish any loan balance that is due. The language in
the mod could have new foreclosure terms that eliminate the
banker’s problem with past tainted documentation. Once a borrower
makes a few months of new lowered payments they are, in effect,
confirming their acceptance of the new terms.
Most Mods go bust in six months. So little is accomplished from
the lenders perspective. But what if the lenders motivation for
doing a Mod was not to get a borrower to a loan balance and
monthly nut that they could pay, but rather the motivation was to
circumvent the foreclosure trap the lenders are in? A Mod could
legally resolve the problems.
The story I have been hearing is that tens of thousands of Mod
letters have been sent by servicers in the past few weeks. Anyone
who had an application pending is all of sudden getting the happy
news in the mail.
CNBC predicts Congress will retroactively legalize foreclosure fraud
Raw Story
Congress will pass a bill to "forgive" banks the potentially
criminal errors made in foreclosure proceedings, a senior CNBC
editor predicts.
In a blog column
Friday, John Carney argues that lawmakers in DC won't allow the
country's largest issuers of mortgages to suffer financial losses
following revelations of numerous mishandled foreclosure
proceedings, especially when bailing them out this time "won't
cost taxpayers a dime."
Here’s what is going to happen: Congress
will pass a law called something like “The Financial Modernization
and Stability Act of 2010” that will retroactively grant mortgage
pools the rights in the underlying mortgages that people are
worried about. All the screwed up paperwork, lost notes,
unassigned security interests will be forgiven by a legislative
act....
The [foreclosure] crisis is not driven by
economics. It is driven by legal rights. And there’s simply zero
probability that the politicians in Washington are going to let
Bank of America or Citigroup or JP Morgan Chase fail because of a
legal issue.
Carney predicts that the lame-duck session of Congress
following this November's elections will pass the law. "Every
member of Congress ... who has been voted out of office will cast
a vote for the bill. And the President will sign it."
Euro leaders continue to fret that they're losing the
currency war -- with the euro trading still at around
$1.40 -- and are desperate to convince the world that
they're happy to devalue their currency like everyone
else.
Hence ECB chief Jean-Claude Trichet is out with new
comments rebuking Bundesbank leader Axel Weber, over
Weber's call to end bond buying.
Corporate pension plans that once had almost 70% of their
assets invested in the stock market have reduced that to about 45%
as they seek to reduce volatility.
A Short History of Stock Dividends dshort
The latest Standard & Poor's
earnings spreadsheet (October 6) puts the annualized dividend
yield at 1.93% and the indicated rate at
1.99% (The indicated dividend is the
estimate for the next four quarters, based on what was paid in the
most recent period).
The bottom of the 1982 bear
market
was a major turning point for stock dividends. For more than a
century, the market's dividend yield had averaged nearly 5%. But
since 1982 the yield has been virtually cut in half, falling as
low as 1.1% in 2000 (first
chart). A long-term comparison of the annualized rate of real
growth for price and dividends also highlights the difference (second
chart).
What happened? Investors shifted their focus
from income streams to price appreciation, and the market was only
too happy to accommodate. As a first-wave Baby Boomer, I see this
shift as a result of three things:
A New Investor Class
The 401(k) plan was introduced in 1980. The following year the
Economic Recovery Tax Act permitted all employees, in addition to
those not covered by an employee
retirement plan, to contribute to an IRA. The result has been
the massive growth of a new investor class with a limited
understanding of markets and risk. The bulge of Boomers became a
windfall for Wall Street (the oldest having just turned 35 in
1981).
The popularity of tax-deferred savings vehicles
reduced the appeal of dividend income. The goal of retirement
savings is to grow the nest egg. Thus, the distinction between
dividend yield and price appreciation quickly lost relevance. New
companies saw little need to pay dividends. Many existing
companies reduced their dividends and redirected those earnings to
corporate growth (not to mention executive compensation).
The Disappearance of Risk
From the market bottom in 1982 to the peak in 2000, the S&P 500
increased by an astonishing annualized rate of 15% in nominal
terms. Investor optimism flourished, and the perception of risk
disappeared along with the secular bear that had savaged the
market from the mid-1960s to 1982. The crash in 1987, which seemed
so terrifying at the time, sparked the shortest
bear
market
in modern history — a mere three months in duration with no
accompanying recession.
The Gaming of the Market
With risk in hibernation, these accelerating market gains
triggered an appetite for speculation. "Why invest only in my
company's plan? I need a brokerage account!" For many people,
trading replaced investing, encouraged by the likes of CNBC's
Mad
Money, Fast Money,
and the erstwhile
Million Dollar Portfolio Challenge. In taxable trading
accounts, dividends became little more than a recordkeeping
nuisance. In IRAs, tracking dividends was completely irrelevant.
In-the-know investors moved their
IRA
accounts to online brokerages for easy trading on the Internet.
But, the investment world has undergone a
dramatic after the one-two punch of the Tech Crash and Financial
Crisis. Risk has returned with a vengeance. Aging Boomers may
finally recognize the value of dividend income, especially as
their paycheck days draw nearer to a close. Perhaps dividends will
someday reemerge as a mainstay of investing. The one certainty is
this: it won't happen overnight. But if the flight from equities
continues, publicly traded companies may eventually rediscover the
power of dividends to coax a risk-adverse generation back to the
markets.
There are still some good companies out there
with a history of increasing dividends. But these are more the
exception than the rule.
Percent Buy Index Versus Bullish Percent Index Swenlin
In today's interview with King World News, Art Cashin confirms
that through its endless meddling, intervention and manipulation
over the past two years, the Fed has essentially broken
the market: "You used to have markets that were not
particularly correlated. The asset classes now seem to be so
heavily dominated and in inverse relationship to the dollar, and
in direct relationship to the euro... It's frustrating having
honed my skills over 50 years to be able to interpret news, and
look at a piece of economic data, and try and outwit the rest of
the world by figuring out how it would work, and now all you have
to do is look and see how the dollar is reacting and know how
everything else works. And that huge correlation is not good for
people because if everything is correlated in a basket like that,
it is very difficult for people to hedge and protect themselves,
and therefore when assets move they tend to move altogether." In
other words, step aside Value Investor Congress - meet Lack of
Value Dollar Correlation Congress. But readers have
known that for over three months. Just as
they know that lately the biggest concern on Cashin's mind is
hyperinflation "the difficulty is while you can get what appears
to be nominal benefit out of [hyperinflation], when you try to
convert to a hard asset, or even use it to try to buy a needed
good, and the perfect example is Zimbabwe. If you were from out of
space, and just could get the records of the Zimbabwe stock market
you would say, "wow, they are having a pretty good time down
there." But they are going up because the assets they hold are
going higher and higher in a debased currency." And Cashin on his
hyperinflationaty musings from
earlier in the week: "My hope is that we don't get anything
like that - hyperinflation would be destructive to civilization...
But you are right, not only Zero Hedge, I think that was
the most emailed comment that day all over the country."
He may well be right. And he is certainly right about the
Shazam moment: "Money only gets velocity when you lend it or
spend it. The difficulty with studying things like the Weimar
republic, is that the money supply growing drastically the
initial reaction was small. There was very little doing,
and it went slowly, until it went suddenly, and when it went
suddenly, it went parabolic."
In a stunning turn of honesty, Goldman's David Kostin does a
180 and renounces everything that the Fed wishes the gullible
public would swallow hook line and sinker. But first the facts:
while the strategist has no choice but to raise his 12 month S&P
forecast (this is a new development for all the headline chasers)
from 1,250 to 1,275, which is a token nothing compared to the
recent 12 month gold price boost from
$1,365 to 1,650. This merely reinforces the Zero Hedge view
that gold has now become the natural, higher beta, and unlimited
upside short hedge to stocks. Indeed, a 1% boost in the S&P PT, is
meager compared to the 20% expected gold appreciation. And digging
between the facts, we encounter this stunning admission, that
would force all current and former Fed chairmen to spin in their
graves, assuming a deceased state is attributed them all: "The
economy is not the market and QE2 is not a panacea." Read
that again, because this is only the first time in history a
sellside advisor, especially one who works for Goldman Sachs, has
said this truth so fundamental, that nobody actually dares to
admit it, least of all the public or the Fed. Below, we present
the latest strategy piece by David Kostin which is probably about
the most bearish note released by the traditionally permabullish
successor to Abby Cohen.
CURRENCY WARS
Why the U.S. Has Launched a New Financial World World War Michael
Hudson
What is to stop U.S. banks and their customers from
creating $1 trillion, $10 trillion or even $50 trillion on their computer
keyboards to buy up all the bonds and stocks in the world, along with all the
land and other assets for sale in the hope of making capital gains and pocketing
the arbitrage spreads by debt leveraging at less than 1 per cent interest cost?
This is the game that is being played today.Finance is the new form of warfare – without the expense of a military overhead
and an occupation against unwilling hosts. It is a competition in credit
creation to buy foreign resources, real estate, public and privatized
infrastructure, bonds and corporate stock ownership. Who needs an army when you
can obtain the usual objective (monetary wealth and asset appropriation) simply
by financial means? All that is required is for central banks to accept dollar
credit of depreciating international value in payment for local assets. Victory
promises to go to whatever economy’s banking system can create the most credit,
using an army of computer keyboards to appropriate the world’s resources. The
key is to persuade foreign central banks to accept this electronic credit.
Fed Stance Knocks Down Dollar for 5th Week Newsmax.com
The phrase of the week comes from The Privateer's Bill
Buckler, who has coined the one term that best describes the
lunacy that has gripped the world: "Beggar Thyself."
Unlike the 1930s when the theme of the day was "beggar thy
neighbor" and which culminated in World War 2, this time the
emerging paradigm is one in which the first to defect wins... if
only for a few seconds. Because when the "beggar thyself" process
is complete, it will mark the end of not only the central banking
regime, and the days of excess wealth accrual to the financiers of
the world, but also the termination of the 140 year old
Bismarckian "welfare state" which is the primary culprit for the
creation of trillions of imaginary wealth out of thin paper. When
the fiat system ends, so will end the hallucination that developed
societies are capable of providing for their hundreds of millions
of existing and future retirees. And with that will come the
"social instability" that always marks the closure of a failed
monetary regime and the admission of global bankruptcy.
"The global financial system continues to be unsound in
the same way that a Ponzi scheme is unsound: there are not
enough cash flows to ultimately service the face value of all
the existing obligations over time. A Ponzi scheme may very
well be liquid, as long as few people ask for their money back
at any given time. But solvency is a different matter -
relating to the ability of the assets to satisfy the
liabilities."
John Hussman No Margin
of Safety, No Room for Error
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.ont>
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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
investment commitments.
