FINAL THOUGHT OF THE YEAR.............

On the last day of the year, I like to think back about the truths I learned this year. Some were revealed accidentally, others were the work of challenging data analysis. We happened upon some Truths during deep contemplation, and occasionally stumbled across them accidentally.

Regardless of your method, if you sought the Truth, with a little digging, you could find it. Its not pretty, and it has destroyed some long held cherished myths. But if you are an investor, you should go through this process on a regular basis.

If you can identify where the masses subjective view of reality is wrong, and then time when they begin to realize this, there are good investment returns to be had. A bonus of this process is some small measure or personal enlightenment.

Corporate America took over the political process via their exhaustive lobbying efforts. What was once a Democracy is now without a single doubt a Corporatocracy.

The corrupt US Supreme Court provides a sympathetic venue for creating corporate rights never envisioned by the Founding Fathers; Congress is a wholly owned subsidiary of America, Inc. The White House talks a good game of smack, but genuflects in order to beg for job creation.

Politicians do the bidding of the people, but for the corporate establishment. Those people who want to blame the barking, snarling government for all the woes of the world do not want you to look further up the leash to see who is giving the commands. These corporate apologists pretend to be philosophers, but in reality they are mere Fellatrix, bought and paid for by their lords and masters.

Fearing a corporate takeover of the nation isn't nearly as radical as it sounds. Thomas Jefferson reviled the idea of big corporations: "I hope we shall…crush in its birth the aristocracy of our moneyed corporations, which dare already to challenge our government to a trial of strength and to bid defiance to the laws of our country." Jefferson knew the influence bankers could have on a nation's soul, and he was horrified by it.

No less a figure than Dwight D. Eisenhower — five-star Army general, Supreme Commander of the Allied forces in Europe during World War II, responsible for planning and supervising the successful invasion of France and Germany, who then became the 34th President of the United States from 1953 until 1961 — warned that "we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex."  He knew it was not just the military, but the entire existing corporate structure that sought to take advantage of their influence in order to thwart legitimate competition, skew Federal contracts, and exempt themselves from taxation and regulation.

 

What might Eisenhower have said about the bailouts, and enormous decrease in banking competition?

The surprising thing about this anomaly is that there are enormous incentives to find the objective truth. Often, it seems like the reality gets buried under a mountain of conflicting interests, with power and money and influence on one side and we the people on the other. Because of debt this can't and won't go on for much longer, we are all about to discover a great many truths we have been ignoring for far to long.

However, the credit crisis and collapse has taught us one very important lesson: If you continually search for that nugget of reality, if you are willing to roll up your sleeves and sift through the vast mounds of horse shit that Wall Street and Washington regularly serve up, there is indeed, a pony in there somewhere.

 

Your job as an investor and as an American in 2011: is to go find that pony.

HAPPY NEW YEAR, 2011, TO ALL............... MAY IT BE SAFE, PROSPEROUS AND FULL OF JOY FOR YOU AND YOURS!

HAPPY NEW YEAR, 2011, TO ALL...............

 

MAY IT BE SAFE, PROSPEROUS AND FULL OF JOY FOR YOU AND YOURS!

 

 

Why Home Prices Will Now Drop Another 20%................... AN ABSOLUTE MUST READ

ARTIFICIAL SOLUTIONS SUCH AS STIMULUS, BAILOUTS AND QE WILL NOT SOLVE OUR ECONOMIC PROBLEMS EVER, THEY ARE LIKE BANDAIDS ON A SEVERED LIMB. UNEMPLOYMENT WILL CONTINUE TO RISE AND THE TOXIC SLUDGE ON BANKS BALANCE SHEETS WILL FESTER AND THIS INFECTION WILL EVENTUALLY KILL THE PATIENT ECONOMY UNLESS WE ALL FACE REALITY AND TAKE THE NECESSARY MEDICINE PRETTY QUICKLY.

 

READ THE FACTS FOR YOURSELF..........

 

Why Home Prices Will Now Drop Another 20%

 

Housing: Great Expectations vs. Reality

Last spring, many believed that not only was the housing collapse over but that a robust rebound was underway. Investors were crowding into foreclosed house sales and bidding up prices in California, often the bellwether state for new trends. The tax credit of up to $8,000 for new homebuyers that expired in April spurred buyers and promised to kick-start housing activity nationwide. TheHomeAffordable Modification Program was trumpeted by the Administration to help 3 million to 4 million homeowners with underwater mortgages by paying lenders to reduce monthly payments to manageable size and then paying homeowners to continue to make those payments.

But then a funny—or not so funny—thing happened on the way to housing recovery...

Yes, with mortgage rates so low, houses look "cheap". And for a while this seemed to be helping...

 

With low mortgage rates and collapsed house prices, the National Association of Realtors' Housing Affordability Index had leaped to all-time highs.

Earlier this year, sales of existing homes skyrocketed (temporarily)

 

The revival of home sales early this year proved to have less follow- through after the tax credit expired in April than did the previous expiration last November. Existing home sales subsequently fell to a new low, so the tax credits had only "borrowed" sales from future months with no lasting impact.

And housing starts finally bottomed

And house prices seem to have bottomed, too. But...

Don't forget about unemployment. Old measures of "affordability" no longer apply...

 

It's also become clear that the NAR's Housing Affordability Index in the earlier post-World War II years is not relevant to today's conditions. Back then, unemployment rates were usually much lower than now (Chart 7, page 4) and the current threats of layoffs, wage and benefit cuts and being forced into part-time jobs were almost nonexistent. Who ventures into homeownership if he doesn't know the size of his next paycheck or even if he'll have one?

Also, with almost a quarter of all homeowners with mortgages under water with their mortgage principals exceeding the value of their houses, many can't sell their existing abodes even if they wanted to buy other houses.

Mortgage refinancings are up, and they're helping, but most homeowners can't refinance

 

About 60% of all borrowers with 30-year fixed-rate mortgages could lower their interest costs by one percentage point at current rates.  But only 38% could actually refinance due to tighter lending standards.

Nevertheless, lower mortgage rates have encouraged many whose mortgages aren't under water to refinance them. Some are even paying down their mortgages to bring them above water so they can refinance at lowerinterest rates.    Mortgage applications to refinance have jumped lately, but remain well below the levels of early 2009. Closing fees in refinancings, however, are an important offset to the reduction in mortgage rates. Closing costs in July were 37% higher on average nationwide than last year's $2,739. BECAUSE THE RISK IN REAL ESTATE IS RISING AND THE BANKS KNOW IT.

And don't forget that we now have MUCH TIGHTER lending requirements -- so much so that Fannie and Freddie and FHA now have to underwrite almost all mortgages

 

At the same time, the house price collapse and subprime mortgage meltdown has led to a drastic tightening in lending requirements. In contrast to the no-document loose-lending practices of yesteryear, just listen to what it takes today to qualify for a mortgage. You'll need a job and at least two recent paystubs, two years of W-2 forms, proof of other assets you own and your tax returns.

Then there is the property appraisal, which has morphed from ultra-liberal to excruciatingly conservative. So the appraisal may be well below your purchase price, especially in markets with falling prices, so you'll have to come up with more cash for the downpayment or convince the seller to cut his price.

Downpayments have also leaped from the zero or even negative levels of the housing salad days, and Federal Housing Administration-insured loans as low as 3.5% require up-front mortgage insurance payments of 2.25%. Your alternative is essentially a loan insured by Fannie Mae or Freddie Mac since the Government-Sponsored Enterprises account for almost all new mortgages today (see chart above).

Mortgages with downpayments under 20% require mortgage insurance and mortgage insurers insist on FICO credit scores of at least 680 out of 850 and charge $300 to $1,000 per year for every $100,000 borrowed. Estimates are that almost a third of Americans can't qualify for a mortgage because of low credit scores.

And now everyone knows that house prices CAN actually fall

 

Most of all, the NAR's Housing Affordability Index is largely irrelevant today because in contrast with the earlier post-World War II years, prospective buyers know that house prices can, and do, fall. Who wants to buy an expensive asset with a big mortgage that may be worth much less shortly? And the financial leverage created by a mortgage magnifies the risk tremendously. Someone who buys a house with 5% down sees their equity wiped out if the price falls only 5%. So the fall in house prices and mortgage rates, which have driven up the NAR's measure of affordability, have been offset by stronger forces.

So, too, will any future increases in the affordability index in all likelihood. The Fed may embark on further purchases of mortgage securities, which could reduce mortgage rates further, but the central bank will probably only act in response to additional economic weakness that will discourage homebuyers. The further declines in house prices we foresee will make them cheaper, but also convinces prospective owners that they are even worse investments.

The rebound in house prices is also suspect and may have peaked out (see chart above). Furthermore, both the previous decline and subsequent reversal probably overstate reality. Earlier, the many sales of foreclosed houses or by distressed homeowners tended to be lower-priced houses and, therefore, depressed average prices. The recent swoon in Los Angeles house prices compared with the early 1990s drop suggests this is true. Conversely, the recent rebound may be overstating reality since, as our good friend and great housing analyst Tom Lawler has noted, the homebuyer tax credit may have induced some to pay up to beat the deadline and to favor higher priced "traditional" house sales over "distressed" homes.

Tom also points out that the Case- Shiller price index for July, which showed increases in 13 of the 20 metro areas (not seasonally adjusted), was based on transactions from April to June and, therefore, included tax credit- related settlements in May and June. Also, seasonally-adjusted data reveals declines in 16 of 20 metro areas and a small 0.1% fall from June to July. Another Home Value Index compiled by Zillow reports that prices nationwide fell in July from June, the 49th consecutive monthly fall. That puts them down 24% from the May-June 2006 peak, similar to the 28% drop in the Case-Shiller index.

And then there's the still-massive number of foreclosures, which will keep pressure on prices

 

The Administration's HAMP initiative, introduced in April 2009, has been a huge disappointment...

But while mortgage modifications were attempted, lenders and servicers were basically forced by the government to suspend foreclosures. Now, as that program unwinds, foreclosures will again jump (Chart 12). Ironically, foreclosure rates have moderated recently because lenders tightened their standards in mid-2008 when housing and mortgages were in free fall. In 2009, two-thirds of all FHA- guaranteed new loans were to borrowers with credit scores over 660, up from 45% in 2008.

Nevertheless, lenders have been loosening in recent months. In January, Fannie initiated a program that allows first-time homebuyers to put down $1,000 or 1% of the purchase price, whichever is greater. In the first half of this year, credit card companies sent out 84.8 million offers to American subprime borrowers, up from 43.7 million a year earlier. In the second quarter of this year, 8% of new car oans were to borrowers with the lowest rank of credit scores, up from 6.2% in the fourth quarter of 2009.

The percent of mortgages past due is still climbing...

 

Nevertheless, look for delinquencies (Chart 13) and foreclosures to spike in the slow economic growth, high unemployment quarters that probably lie ahead.

The number of bank-owned houses is still climbing (more future inventory)

 

Already, Real Estate Owned by lenders due to foreclosures—perhaps the most hated term among bankers—is climbing (Chart 14). Estimates are that a major share of the 7 million houses that have delinquent mortgages or are in some stage of foreclosure, as well as those yet to come, will be dumped on the market, adding to the already huge excessive inventory glut. Some 4.5 million loans are now in foreclosure or at least 90 days delinquent.

Mortgage delinquencies are linked to job losses... and the number of weekly unemployment claims is still too high

 

Mortgages delinquent 30 days, many of which will probably end in foreclosure, have risen lately. They peaked in the first quarter of 2009 at 3.77%, then fell to 3.31% at the end of 2009, but have since risen to 3.51%, according to Tom Lawler.

He goes on to observe that 30-day delinquencies are linked to initial claims for unemployment insurance, which fell last year but subsequently leveled off and are now rising (Chart 15). Also, the delinquencies are rising as weak borrowers with modified loans again miss payments. Fitch Rating believes that 65% to 75% of mortgages modified under HAMP will redefault within 12 months.

"Distressed" sales are still high (prices slashed to move inventory)

 

Indeed, bank-owned houses for sale jumped 12% in August from July when newly-initiated foreclosures jumped 25% to a six- year high.

Unlike most homeowners, banks tend to slash prices to unload REO quickly. As a result, average prices fell rapidly in 2008 when lenders sold foreclosed houses at low prices, as noted earlier. By January 2009, the share of distressed sales leaped to 45% of the national total (Chart 16). With the default moratorium on foreclosures due to HAMP, the distressed share has fallen on balance more recently, coinciding with the flattening in prices. But now with HAMP unwinding, foreclosures will probably leap, REO sales at low prices jump, and average prices resume their slide.

The homeownership rate (percent of households that are homeowners) continues to decline, probably headling back to its long-term average

 

Back in the salad days of 10% annual price appreciation, a homeowner and/or investor who put down 5% enjoyed a wonderful 200%return on his investment per year, neglecting taxes, interest and maintenance. But that hapless homeowner who bought at the peak lost all of his downpayment six times over as prices fell 30%.

No wonder that the homeowner rate, which spurted from its 64% norm to 69%, is now back to 66.9% in the second quarter and probably on its way back to 64% (Chart 18). PROBABLY LOWER AS FOLKS REALIZE THAT HOMES ARE EXPENSIVE BAD INVESTMENTS. HOMES ARE SOMETHING YOU LIVE IN NOT INVEST IN. THERE ARE AND ALWAYS HAVE BEEN MUCH BETTER INVESTMENTS THAN REAL ESTATE.

Meanwhile, household formation is lower than it was during the boom

 

The converse of the ownership rate is the rental rate, which obviously fell from 36% to 31% and is now back up to 33.1%. We'll explore the newfound zeal to rent vs. own later.

Meanwhile, we'll consider another important component of the equation, household formation. Many believe that household formation and, therefore, demand for either owned or rented housing units is closely linked to population growth. A Beazer Homes official said recently that demographics would normally produce household growth of around 1.5 million a year.

But note that those trendless series are extremely volatile, ranging from a peak of almost 2.3 million at annual rates in the current cycle to less than 500,000 recently. Household formation is similarly volatile (Chart 19), not surprising since a household is defined as one or more people living in a separate dwelling unit and not in jail, college, an institution or an army barracks. So household formation is affected by the lust for house appreciation, income growth, employment prospects, family size, mortgage availability and all the other factors that determine the desirability of owning or renting.

 

With the negative zeal for homeownership of late and weak incomes and high unemployment deterring renting, household formation has been weak. No wonder that the vacancy rate for single- and multi-family housing units remains high (Chart 21).

 

As they lose their jobs and houses, many Americans are "doubling up"--moving in with friends and relatives. This further reduces demand for housing.

 

Of course, homeowners thrown out of their abodes by foreclosures can continue to be separate households
by renting houses and apartments, but many of those and other discouraged folks are shrinking
households—and adding to vacant housing units—by doubling up with family and friends.

The Census Bureau reports that in the last two years, multi-family households jumped 11.6% ( Chart 22) while total households rose a mere 0.6%. Those aged 25-34 living with parents—many of them "boomerang kids" who have returned home—increased by 8.4% to 5.5 million.  Not surprising, 43% of those were below the poverty line of $11,161 for an individual.

The number of houses for sale is still abnormally high... and house prices, like everything else, are a function of supply and demand

 

Excess inventories are the mortal enemy of house prices. And those excess inventories are huge.   

Notice (Chart 23) that, over time, new and existing inventories listed for sale have averaged about 2.5 million. So, we reason, that's the normal working inventory level and anything over and above 2.5 million is excess.

At the peak of 5 million reached in October 2007, that excess was 2.5 million. It subsequently fell but with the recent jump, the total is 4.0 million, implying excess inventories of 1.5 million.

That's a lot considering the average annual build of 1.5 million houses. So the inventories over and above normal working levels equals one year's average demand. But wait! There's more!

As noted earlier, as foreclosures pick up with the ending of the mortgage modification-related moratorium on lender takeovers, "shadow" inventory will become visible as many of those bereaved of their abodes join friends and family.

Furthermore, if we take the Total Housing Inventory numbers published by the Census Bureau at face value—and Tom Lawler, a very careful housing analyst concludes that it takes more than the faith of a mustard seed to do so—there are a lot of housing units that are likely to be listed for sale as owners give up trying to wait out the housing bust.

Recently, my wife told me of a friend who finally listed her house for sale right after Labor Day and got nary a nibble in the following three weeks. Then she was further discouraged when two other similar houses in her neighborhood were listed.

When you count "shadow inventory", the imbalance looks even worse

 

Between the first quarter of 2006, the peak of house sales, and the second quarter of this year, the number of housing units, net of teardowns, conversions to non-housing uses and other removals, rose 5.7 million.

Of that total, 1.1 million were added to the pool of vacant units listed for rent or sale, 2.8 million were occupied by new households and so on down the list. Of the 1.3 million increase in those Held Offthe Market, the 1.1 million rise in the "Other" category is the one of interest. This component has leaped from the earlier norm of about 2.6 million to 3.7 million in the second quarter (Chart 25).

This rapid rise, coinciding with the collapse in housing, suggests strongly that many of these houses are indeed shadow inventory, units withheld in hopes ofhigher prices but highly likely to emerge from the woodwork sooner or later.

If we assume that half the 1.1 million increase since the housing peak in the first quarter o f2006 are shadow inventory, the total excess jumps from 1.5 million to 2 million at present, and is likely to rise further.

THE BOTTOM LINE: House prices probably have another 20% to fall

This huge and growing surplus inventory of houses will probably depress prices considerably from here, perhaps another 20% over the next several years. That would bring the total decline from the first quarter 2006 peak to 42%.

This may sound like a lot, but it would return single-family house prices, corrected for general inflation and also for the tendency of houses to increase in size over time, back to the flat trend that has held since 1890 ( Chart 26).

We are strong believers in reversions to the mean, especially when it has held for over a century and through so many huge changes in the economy in those years—two world wars and the 1930s Depression, the leap in government regulation and involvement in the economy, the economic transformation from an agricultural base to manufacturing and then to services, the post- World War II population shift from cities to suburbs, the western and southern transfer of population and economic strength, the movement from renting to homeownership and the accompanying spreading of mortgage financing, etc.

Furthermore, our forecast of another 20% fall in house prices may be conservative. Prices may well end up back on their long- term trendline (Chart 26), but fall below in the meanwhile. Just as they overshot the trend on the way up, they may do so on the way down, as is often the case in cycles. Furthermore, another big house price decline will spike delinquencies and foreclosures leading to more REO sales by lenders,which will further depress prices. Our analysis indicates that a further 20% drop in prices will push the number of homeowners who are under water from 23% to 40%, resulting in more strategic defaults, more REO, etc.

If house prices DO fall another 20%, a lot more homeowner equity will be wiped out

 

At that point, the remaining home equity of those with mortgages would be wiped out on average (Chart 27. That, in turn, would impair already-depressed consumer confidence and their willingness and ability to spend, to say nothing of residential construction.

In California, epicenter of the housing boom-bust, construction jobs dropped 43% from June 2006 to June of this year, compared to a 28% decline nationwide, and the un employment rate in the Golden State jumped to 12.3% in June, far above the 9.5% rate nationally.

No wonder REALTORS are so depressed

 

It's not surprising that the confidence of those involved in residential real estate is low and declining. The NAR Realtor Confidence Index is again plunging (Chart 30). A neutral reading for this index is 50, and it's now 24.1. In June, 42% of realtors expected prices in their areas to fall in the next 12 months compared with 33% in May.

Fannie and Freddie are ending up owning more and more foreclosed houses (at taxpayer expense). This is prolonging the problem...

 

Fannie and Freddie are also allowing homeowners who face foreclosure and qualify for mortgage modification to stay in their houses for up to a year by renting them. The goals are to help those folks, keep the homes occupied to avoid deterioration, realize some positive cash flow and keep more houses off the market. The rents, at market rates, are often lower than their monthly mortgage payments. Still, these programs simply add to shadow house inventory, which will be revealed as those one-year leases mature and foreclosures are implemented.

Due to foreclosures, Fannie and Freddie owned 191,000 houses at the end of June, double the year- earlier total (Chart 33). And the inventory is growing as they take back houses faster than they sell them. Newly-initiatedforeclosures at Fannie and Freddie rose to 150,000inJuly,up60%fromApril, as borrowers failed to qualify for loan modifications. And they are encouraging the lenders of the mortgages they guarantee to seize foreclosed houses more rapidly to avoid them deteriorating or being trashed. Fannie took a $13 billion charge in the second quarter for cleaning pools, mowing lawns ad other carrying costs on the properties it owns.

Given all this, it's not surprising that few folks are planning to buy new houses...

 

As noted earlier, traffic through new homes by prospective buyers is again falling, according to home builders (Chart 37).

And that new mortgage applications remain back at 1990s levels

 

New mortgage applications for home purchases continue to drop (Chart 38).

And that the number of people planning to buy a house in the next six months continues to drop

 

And those planning to buy a home within six months persist in declining (Chart 39).

2011 IS GOING TO BE A YEAR OF FACING FACTS NOT A CONTINUATION OF 2010s DELUSION.

FIVE IMPORTANT LESSONS FOR ALL INVESTORS...............

FIVE IMPORTANT LESSONS FOR ALL INVESTORS

1. how wrong conventional wisdom can be;

2. that uncertainty will persist;

3. to expect the unexpected;

4. that the occurrence of Black Swan events are growing in frequency; and

5. with rapidly changing conditions, investors can't change the direction of the wind, but we can adjust our sails (and our portfolios) in an attempt to reach our destination of good investment returns.

Looking at history, there was no better example of misplaced optimism than in the period leading up to the Great Decession of 2008-2009, providing a vivid reminder of the poor forecasting ability and investment risks associated with the crowd's baseline expectations and the value of a surprise list that deviates from that consensus.

Many of those who are now expressing the most extreme levels of optimism were the most wrong-footed two years ago and experienced not inconsequential pain in the last investment cycle. Perhaps the recovery in equities was so swift in time and sizeable in magnitude that memories simply have been erased to the risks that are still omnipresent today.

Many investors appear similar to victims of Plato's allegory of the cave, a parable about the difficulty of people who exist in a world shaped by false perceptions to contemplate truths that contradict their beliefs. This is why so many investors were blindsided by the last downturn and continue to remain conditioned to wearing rose-colored glasses today.

 

Investing Fads and Themes guide 1996 - 2010 ..................

Investing Fads and Themes guide 1996 - 2010 

 

 

So what was 2010 about?

Well, it was basically about the mobile web and the tablets and smartphones we use to access it.  Everything became an app and everyone's phone got real smart.  Devices were the must-have item from Apple's summer iPad launch straight through through Christmas.  We're even hearing that Amazon may have sold 8 million Kindles this year, way above the 5 million estimate.

We also went berserk for metals and mining stocks this year.  Silver stocks as an industry group are up 88% year-to-date, an astounding performance both on an absolute basis and versus the 14% or so that the S&P 500 will probably finish with.

Lastly. we'd be remiss not to point out that one of the hottest (and faddiest) investing themes this year was venture capital.  Everyone, it seems, was an angel or an expert in venture finance.  As of this writing, Facebook is being valued at $65 billion – and coming public could actually be detrimental to that valuation!

Anyway, here is my updated guide to the Investing Fads and Themes by Year, 1996 – 2010.  Enjoy!

SNAPSHOTS OF OUR ECONOMY...........

A GOOD OVERVIEW OF 2010

 

HOLIDAYS BY THE NUMBERS.........

STOCKS vs BONDS

 

 

 

 

The chart above, courtesy of Bianco Research, gives you a sense of how much enthusiasm there has been for Bonds, at the tail end of a 30 year bull run in fixed income, following the 2008 credit crisis and market collapse. Note that even after the equity market began to rally, it was still sold off by the public.  A REAL GOOD SIGN OF WHAT WILL HAPPEN TO STOCKS AS INVESTORS REALIZE THAT DANGER LIES AHEAD NOT PROFITS. THE CRASH THAT LIES AHEAD IS GOING TO BE MASSIVE BECAUSE OUR STUPIDITY AND DELUSION HAS KNOWN NO BOUNDS.

IMPORTANT ECONOMIC AND FINANCIAL THOUGHTS, QUESTIONS AND QUOTES...........

aut viam inveniam aut faciam : I shall either find or make a way.

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Y

ou only get out of life what you put into it. Nothing great is achieved easily or effortlessly. Knowing what you want in life and then having the right mix of patience and preparation will make the difference between success and failure. Once you understand that, anything and everything you desire is within your reach.

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I doubt that any of the returns of recent months will prove to be durable.

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The way the news is portrayed in the mainstream news is hardly proportionate to the truth.

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The simple fact is that Fed-induced bubbles do not change the long-term mathematics of investment returns, which are based on deliverable cash flows. Over the short-term, Fed actions can undoubtedly postpone market declines. But as we've repeatedly observed, the Fed can do so only by making those losses far worse when they arrive.

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Fed purchases have simply added to the already massive and idle pool held by banks. Unless one twists logic into a pretzel so that up is down, one can identify nothing of substance in the Fed's policy that is supporting the markets. Stocks are being buoyed solely by a combination of words, sentiment and superstition. As Stevie Wonder put it, "When you believe in things that you don't understand, then you suffer."

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We are observing what can only be described as a Fed-induced speculative blowoff. While this has been avidly encouraged by the Fed, it is important to recognize that there is no actual economic mechanism at play here other than words. Investors are chasing stocks because Ben Bernanke told them to, and despite the fact that we have seen two plunges of more than 50% each over the past decade, investors are at least temporarily willing to believe that the Fed will "backstop" their risk-taking by preventing the market from falling.

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MANKIND HAS LOST HIS COLLECTIVE WAY AND IS CURRENTLY SEARCHING FOR MEANING IN EVERYTHING EXCEPT FOR THE TRUTH,WHICH IS JESUS, THE ONE TRUE GOD,HIS FATHER AND GOD's HOLY WORD,

THE BIBLE.

JUST AS HISTORY HAD A BEGINNING, SO IT WILL HAVE AN END. UNLESS MANKIND TURNS BACK TO GOD, FROM OUR IMMORAL WANDERINGS, THE END OF HISTORY IS VERY NEAR. I SUGGEST YOU SEE / STUDY REVELATION; RAPTURE, TRIBULATION AND CHRISTS RETURN AND 1000 YEAR RULE. HUMANKIND DOES NOT LIKE CONTEMPLATING THE TRUTH OF THESE THINGS, EVEN IF THEY ARE THE CREATORS PURPOSE. MANKIND IS A SELFISH RACE WHO WOULD RATHER BELIEVE IN HIS OWN PURPOSE AND SOLUTIONS, RATHER THAN GODS.

AT THIS POINT WE ARE CLEARLY IN THE END TIMES, CONFUSION IS EVERYWHERE, WE HAVE A LACK OF ANSWERS, SEVERE PROBLEMS ARE BUILDING AND HUMANISM IS UTTERLY FAILING IN THE SENSE THAT MANKIND CAN'T SOLVE THESE PROBLEMS BY A LONG SHOT AS WE SLIDE DOWN DEEPER AND DEEPER INTO THE IMMORAL SEWAR OF OUR OWN MAKING.

IT IS ONLY GOING TO GET MUCH WORSE IF WE AS A NATION DON'T TURNBACK TO GOD AND REPENT. I SEE NO SIGN OF THIS HAPPENING AND SO YOU CAN BE CERTAIN THAT A NATION THAT HAS TURNED IT'S BACK ON GOD, HAS MUCH FARTHER TO FALL, AND OUR CURRENT GOD, MONEY, WILL INDEED BE AT THE CENTER OF THE COMING COLLAPSE AND SLIDE INTO THE TRIBULATION OF THE FINAL BOOK OF THE BIBLE. GOD WILL NOT BE MOCKED!

THE GOOD NEWS IS THAT THOSE THAT HAVE ACCEPTED JESUS, THE TRUE CHURCH OF CHRIST, WILL BE CALLED OUT OF HERE IN THE RAPTURE, PRIOR TO THE REALLY AWFUL STUFF HAPPENING. THAT IS WHERE WE ARE IN THE BIBLICAL SCHEME OF THINGS. THE STAGE IS CLEARLY BEING SET FOR THE FINAL BATTLE BETWEEN ABSOLUTE TRUTH AND EVIL, LOVE AND HATE, FEAR AND THE PROVIDER OF ALL THAT IS SECURE.

THE FINAL STAGE OF HISTORY IS BEING SET IN MOTION AND MOST ONLY WANT TO AVOID THESE TRUTHS AND FIND THEIR WAY BACK TO COMFORT AND EARTHLY SECURITY. SATAN HAS INDEED BEEN DEFEATED BUT YOU CAN BE SURE THAT HE WILL RESIST TO THE VERY END. THE BEST INVESTMENT ADVICE THAT ANYONE WILL EVER GIVE YOU, ESPECIALLY IN THESE TROUBLED TIMES IS TO FIND AND ACCEPT JESUS AND MAKE SURE THAT THOSE YOU LOVE AND CARE FOR HAVE DONE SO AS WELL.

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"Too Big To Fail" is living proof that capitalism is dead.

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The size of our deficit requires that we counterfeit "money" to service our debt payments.

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Corporatocracy: A government that serves the interest of, and may de facto be run by corporations.

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Wall Street is a murky underworld of insider trading, criminal activity and Fed-sanctioned grand larceny.

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The size of our debt and our inability to revive capitalism and cut the waste in government will be the cause of our demise.

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The world knows the Federal Reserve is compromising the country's credit rating. The more money the Fed prints, the higher the interest rate bond holders will demand to compensate them for the risk taken, the lower bond prices will fall.

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Our economy is operating on steroids right now, organically we don't really know how the economy is operating, because of the stimulus measures brought on by Bernanke and the Fed. What happens in the second half of the year if there is no QE3?

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The "official" unemployment rate will likely be over 9% at the end of 2011, despite the miraculous GDP growth we are about to see. If they can't spur a real economic recovery, the government will settle for a statistical recovery instead. And then they will try to convince you that it's the real thing.

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AN IMPORTANT VIDEO CLIP

The Deliberate Dumbing Down of America

http://www.youtube.com/watch?v=eZJoCfgAEuE&feature=player_embedded

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A VERY COOL CLOCK; PERHAPS THE COOLEST CLOCK YOU WILL EVER SEE

It's automatically adjusted to your time zone. It gives you the EXACT TIME of the DAY in seconds, minutes, hours, the day, month and year. It's automatically adjusted to your time zone.

1st Line is Seconds

2nd Line is Minutes

3rd line is Hours.

4th Line is Days

5th Line is Months

6th Line is Years

http://home.tiscali.nl/annejan/swf/timeline.swf

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MARKET REVIEW

It is inevitable that when you have a market run up like we have had which is driven mostly by liquidity and the Santa Claus Rally, that markets will see pullbacks in the New Year.

An 86% market rise in 21 months has already discounted a lot of good news----some of which will not happen. The market looks overbought and overextended, and is showing signs of an imminent top with lagging breadth, a lower number of new highs, overenthusiastic sentiment, higher-volume down days and a more frequent number of late-day selloffs. At this juncture I think that potential upside progress is limited while downside risk is high.

CRUDE OIL

Crude-oil futures ended further past $91 a barrel on Thursday, bringing weekly gains to about 4%, as investors bid up the contract on the back of expectations for stronger global demand. Oil for February delivery ended up $1.03, or 1.1%, at $91.51 a barrel by the close of floor trading on the New York Mercantile Exchange. That's the highest settlement for a front-month contract since Oct. 3, 2008. U.S. commodities markets closed early Thursday and are closed Friday in observance of the Christmas holiday.

Crude oil futures on the New York Mercantile Exchange advanced 14 percent this year, and traded today at $90.70 a barrel. Prices will return to $100 for the first time in two years during 2011 amid rising global demand.

Oil prices will climb to $100 a barrel,

Shokri Ghanem, chairman of Libya's National Oil Corp., said, as Arab oil ministers and officials gather in Cairo for a weekend meeting.

US Dollar Analysis:

The Dollar rally has been plagued by distribution volume, and now looks like it will rally only slightly higher before declining again!

Study the volume on my chart. The power volume of this move is happening on dollar selling! Big Volume equals Big Money Flows.

The Federal Reserve's action is deluding the Dollar's fans.

The Fed Balance Sheet, if it was ever really audited, would probably give Ron Paul a real heart attack. It is unacceptable that Ben Bernanke would not even admit QE is money printing. That tells me a lot about how far down this road we are now, to US dollar perdition.

The Fed protects the banks, and inflation helps the banks. Inflation could spiral out of control.

Crude Oil refuses to pull back in price, along with pretty much all commodities.

The street called for $55 oil, even $45. It's $90! This is not the stuff of major dollar rallies. It is the stuff of a coming dollar collapse.

Gold is going dramatically higher over the next several years.

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"Never make predictions, especially about the future."

Casey Stengel

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Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.

William Shakespeare, Hamlet

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"A good moral character is the first essential in a man..."

--George Washington

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"Those who cannot remember the past are condemned to repeat it."

George Santayana

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"You cannot exaggerate about the Marines. They are convinced to the point of arrogance that they are the most ferocious fighters on Earth. And the amusing thing about it is that they are."

Kevin Keaney, US Navy chaplain, Korea 1951

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"We're faced with broken financial markets, underperformance of our economy and a fractious political climate" because we no longer have "a successful governing model" that the rest of the world admires. Absent radical restructuring and a new regulatory regime, the dollar will be unable to maintain its "exceptional role" as the world's reserve currency. It's only a matter of time."

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"The growing sense around much of the world is that we have lost both relative economic strength and more important, we have lost a coherent successful governing model to be emulated by the rest of the world. Instead, we're faced with broken financial markets, underperformance of our economy and a fractious political climate.....The question is whether the exceptional role of the dollar can be maintained."

Paul Volcker

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"If the dollar does indeed lose its role as leading international currency, the cost to the United States would probably extend beyond the simple loss of seigniorage narrowly defined. We would lose the privilege of playing banker to the world, accepting short-term deposits at low interest rates in return for long-term investments at high average rates of return. When combined with other political developments, it might even spell the end of economic and political hegemony."

Economist Menzie Chinn

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In the famous simile of the cave, Plato compares men to prisoners in a cave who are bound and can look in only one direction. They have a fire behind them and see on a wall the shadows of themselves and of objects behind them. Since they see nothing but the shadows, they regard those shadows as real and are not aware of the objects. Finally one of the prisoners escapes and comes from the cave into the light of the sun. For the first time, he sees real things and realizes that he had been deceived hitherto by the shadows. For the first time, he knows the truth and thinks only with sorrow of his long life in the darkness.

Werner Heisenberg, Physics and Philosophy

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"The Fed's increased presence in the market for long-term Treasury securities also poses nontrivial risks. The Treasury market is special. It plays a unique role in the global financial system. It is a corollary to the dollar's role as the world's reserve currency. The prices assigned to Treasury securities--the risk-free rate--are the foundation from which the price of virtually every asset in the world is calculated. As the Fed's balance sheet expands, it becomes more of a price maker than a price taker in the Treasury market. And if market participants come to doubt these prices--or their reliance on these prices proves fleeting--risk premiums across asset classes and geographies could move unexpectedly. The shock that hit the financial markets in 2008 upon the imminent failures of Fannie Mae and Freddie Mac gives some indication of the harm that can be done when assets perceived to be relatively riskless turn out not to be."

Kevin Warsh

This is an astonishing admission for an acting member of the Fed.

Warsh is basically conceding that the Fed is price-fixing on a global scale ("more of a price maker than a price taker") and he worries that this could undermine confidence in the bond market. The danger, as he sees it, is that investors will see through the ruse of government guarantees (like those for Fannie and Freddie) and exit the asset class altogether sinking the dollar on their way out.

ECONOMIC BITS AND PIECES................

FIVE IMPORTANT LESSONS FOR ALL INVESTORS

1. how wrong conventional wisdom can be;

2. that uncertainty will persist;

3. to expect the unexpected;

4. that the occurrence of Black Swan events are growing in frequency; and

5. with rapidly changing conditions, investors can't change the direction of the wind, but we can adjust our sails (and our portfolios) in an attempt to reach our destination of good investment returns.

Looking at history, there was no better example of misplaced optimism than in the period leading up to the Great Decession of 2008-2009, providing a vivid reminder of the poor forecasting ability and investment risks associated with the crowd's baseline expectations and the value of a surprise list that deviates from that consensus.

Many of those who are now expressing the most extreme levels of optimism were the most wrong-footed two years ago

and experienced not inconsequential pain in the last investment cycle. Perhaps the recovery in equities was so swift in time and sizeable in magnitude that memories simply have been erased to the risks that are still omnipresent today.

Many investors appear similar to victims of Plato's allegory of the cave, a parable about the difficulty of people who exist in a world shaped by false perceptions to contemplate truths that contradict their beliefs.

This is why so many investors were blindsided by the last downturn and continue to remain conditioned to wearing rose-colored glasses today.

YOU HAD BETTER UNDERSTAND THESE THINGS IN 2011!

　

SUDDEN, STEEP, ABRUPT LOSSES LIE AHEAD.........

The main effect of QE2 has not been monetary but has instead been rhetorical - and that rhetoric may very well be nearly empty.

The key event related to QE2 wasn't its formal announcement, but was instead the Op-Ed piece that Ben Bernanke published a few days later in the Washington Post, which essentially advanced the argument that the Fed was targeting a "wealth effect" in stocks and other risky assets, in hopes of getting people to consume off of that perceived wealth. At that moment, Bernanke unleashed a speculative bubble in risky assets, and a selloff in safe ones. This has rewarded risk-seeking and punished risk-aversion, but it has also unfortunately driven the markets into an overvalued, overbought, overbullish, rising-yields condition that has historically ended in steep and abrupt losses.

　

THE MARKET IS WAY OVERVALUED IF YOU USE REALISTIC ASSUMPTIONS BASED ON FACTS........

Suppose we look back over history, and at each date, add up all the dividends the S&P 500 actually delivered over the subsequent years, discounted at a long-term rate of return of 10%. We could literally check whether investors got what they paid for. Of course, the more recent the date, the more we'd have to project some future dividends. But that's not a terribly difficult matter. As it turns out, the average dividend growth rate since 1900 has been about 5%, the average since 1940 has been 6%, and the highest growth rate for any 30-year period has been 6.4%. We also know that S&P 500 earnings growth has displayed a very, very durable 6% growth rate measured from peak-to-peak across economic cycles. So assuming anything between 6% to 7% long-term dividend growth will give us a very robust series of likely future dividends.

Even if we assume a future dividend growth rate of 6.7%, which is the fastest growth rate observed over any 25-year span during the past century (and again, includes the impact of share repurchases),

the S&P 500 would currently have to stand at 748 in order to be priced to achieve long-term total returns of 10% annually. Of course, with the S&P 500 at about 1256 despite a contraction in dividends over the past few years, this analysis would imply that fair value is again about 40% below present levels.

"The latest calculation by Andrew Smithers, the smart Brit who runs the eponymous London-based investment firm Smithers & Co., is that

U.S. equities are more than 70% overpriced, according to q, his favorite yardstick and essentially a measure based on replacement value."

Alan Abelson's latest piece in Barron's

I would not be inclined to share this data if it didn't have a strong historical record. The first criticism of these valuation implications is undoubtedly that they imply P/E ratios on forward operating earnings that seem far "too low."

On this note, it's important to recognize that profit margins are currently about 50% above the historical norm. Moreover, while a multiple of 15 may be appropriate for trailing net earnings on normalized profit margins, it is a wholly inappropriate multiple to apply to forward operating earnings on elevated margins.

It is one thing to factor that reality into valuations - if margins can remain 50% above the norm for a full decade before contracting, it's easy to show that stocks should be valued about 15% higher than otherwise.

But it is entirely another thing to assume that profit margins will remain 50% above historical norms forever, ignoring every bit of historical evidence that they revert to the norm over time. Analysts who blindly apply a multiple that "feels right" to next year's projected operating earnings are implicitly assuming that margins will remain permanently elevated at record levels. The common practice of blindly applying an arbitrary multiple to the coming year's projected earnings is an error that reflects profound misunderstanding of how securities are priced.

Corporatocracy Has Replaced Capitalism

Capitalism Fixes Problems & Preserves Democracy: Capitalism is what we should be relying on to fix our problems. Capitalism has it's own ecosystem, just like biology's ecosystem. An economic ecosystem that weeds out the weak, has parasites that eat the failures and new bacteria that evolves and grows replacements for that which failed. A system that keeps everything in balance.

The problem is we are no longer a capitalistic society.

What we were taught in school is now utter and absolute nonsense. Capitalism is a thing of the past. We created two back to back bubbles. The air out of the Tech Bubble was sucked up for fuel by our next stupidity crisis: The Housing Bubble.

Now, after the second Stupidity Crisis there isn't a third bubble to inflate.

If we still lived in a capitalistic environment the banks and financial institutions that created loans for folks who should have remained renters and then sold those loans as investments to pensions and countries would have been cleansed by capitalism's ecosystem.

But that isn't what happened.

In a very anti-capitalistic move the government decided that stupidity and criminal activity should be rewarded.

I'd say they took our money, but it is worse, we didn't have that much money. So they borrowed the money in our name. The loan has a variable rate. They borrowed so much money that our kids cosigned the loan. In fact, our kid's future kid's signed on the dotted line.

That is unequivocally immoral.

For anyone who still believes we live in a free country where capitalism reigns please show me one economic textbook which states that failure, and fraud get rewarded with borrowed taxpayer money. For anyone who believes we live in a democracy please show me a textbook that says the government will en-debt you and your kids and their kids to pay for a failed business. How is that democratic?

With so much debt and a failed capitalistic society our democracy is now at risk. Serious risk.

　

THE DOLLAR IS GOING LOWER OVER TIME.........

There are real threats to the dollar, and they're getting more serious all the time. For example, if the deficits continue to balloon as they have recently ($1.3 trillion in 2010) or

if Fed chairman Ben Bernanke follows QE2 with QE3, QE4, QE5 ad infinitum, then foreign investors and central banks will begin to lose confidence in the US's ability to manage its finances and they will begin to ditch the dollar. That will increase the cost of funding government operations by many orders of magnitude. In fact, it looked like something like that was happening just last week when President Obama announced his approval for extending the Bush tax cuts. The markets figured that extending the cuts would swell the deficits which would force the Treasury to issue more debt. That triggered a flight out of USTs that sent yields up sharply. The bond market suffered its biggest 2-day selloff since 2009. The incident provided a snapshot of what's in store when the economy begins to recover and the government has to pay higher rates to service the debt. In any event, the one-two punch of bigger deficits and QE cannot help but push the dollar lower.

　

THERE IS LITTLE FOREIGN SUPPORT FOR OUR DOLLAR POLICY........

The administration's support for Bernanke's "weak dollar" policy (QE) is evident in the way that Obama keeps reiterating his promise to double exports in 5 years. This simply can't be done without ripping the dollar to shreds, which appears to be Obama's intention. QE will lower the dollar's value against a basket of currencies which will make US exports cheaper than the competition. Bernanke sees it as a way to narrow the output gap and lower unemployment by cranking up the printing presses.

Foreign trading partners see it as beggar-thy-neighbor monetary policy at its worst, and they are deeply resentful.

If the US economy continues to underperform, there will be less reason for foreign investors and central banks to stockpile dollars.

The Fed's QE, Obama's export strategy, and the GOP's plan for debt consolidation are creating ideal conditions for an unexpected plunge in the dollar.

CRONY CAPITALISM..........

A full 90 members of Congress who voted to bailout Wall Street in 2008 failed to support financial reform reining in the banks that drove our economy off a cliff.

But when you examine campaign contribution data, it's really no surprise that these particular lawmakers voted to mortgage our economic future to Big Finance: This election cycle, they've raked in over $48.8 million from the financial establishment. Over the course of their Congressional careers, the figure swells to a massive $176.9 million.... When it comes to dealing out economic damage, no special interest group has been able to wreak more havoc than Big Finance.

　

A Ton Of Bailed-Out Banks Are On The Brink Of Collapse........

98 American banks that received $4.2 billion in bailout money are teetering on the edge of collapse, according to the Wall Street Journal.

WALL STREET IS A SEWAR...............

Wall Street is the epicenter of global corruption; the world's biggest sewer.

It's multi-trillion dollar Ponzi-mortgage scheme brought down the global financial system which was hastily resurrected by blanket Fed guarantees on fraudulent bonds and securities generated by undercapitalized financial institutions. But as bad as the bailout was, the Fed's ongoing meddling in the equities markets is even worse because shows to what extent the markets are being juiced. Consider this excerpt from an article on Bloomberg on Monday that shows the connection between the Fed's purchases of US Treasuries (QE) and the predictable surge in stock prices:

"Nine of the S&P 500's 10 main industry groups, led by shares of financial companies, rose more on days when the Fed opened its checkbook for, or announced results of, what it calls Permanent Open Market Operations. The group of 81 banks, insurers and investment firms, including New York-based JPMorgan Chase & Co. and Wells Fargo & Co. of San Francisco, climbed an average 0.32 percent, compared with a 0.04 percent drop on non- POMO days....

Stocks rally when Bernanke purchases bonds as QE buoys S&P 500. How long can this continue is the only question we really need to answer, because when this ends the market tumbles like humpty dumpty.

　

EVERY AMERICA SHOULD REALIZE THE FOLLOWING........

"Law of Morons":

Years ago, while serving on a committee I came to a sad realization. Like gravity, there is the another invisible force which I dubbed "The Law of Morons". Put a group of very intelligent, well meaning people in a room together, put them on a committee or some governmental body that is devoid of guiding principles or merit-based decision making and "The Law of Morons" will prevail. The collective IQ will drop to the smallest shoe size in the room. And hope for loafers, because collectively this body won't be able to tie anything together - not even a single shoelace.

Government Creates Problems:

Basically our government is comprised of many well meaning intelligent people who for whatever reason, re-election, greed the "Law of Morons", corporate puppet strings (read: lobbyist), self interest, corporatocracy or whatever else, do nothing but create massive problems.

　

MOST PEOPLE ARE BLIND TO THE TRUTH.............

"This I say therefore, and testify in the Lord, that ye henceforth walk not as other Gentiles walk, in the vanity of their mind, Having the understanding darkened, being alienated from the life of God through the ignorance that is in them, because of the blindness of their heart."

Ephesians 4:17-18

A question that troubles many Christians is why most highly educated leaders in science and other fields--even theologians--seem to find it so difficult to believe the Bible and the gospel of Christ. The answer is in the words of our text: They are "alienated from the life of God" because of self-induced ignorance. It is not that they can't understand, but that they won't understand! They "walk, in the vanity of their mind, having the understanding darkened . . . because of the blindness of their heart." They don't want to believe in their hearts, therefore they seek an excuse not to believe in their minds. They are "men of corrupt minds, reprobate concerning the faith"

2 Timothy 3:8

The sad truth is that Satan himself controls their minds. They may be ever so intelligent in secular matters, but the gospel, with all its comprehensive and beautiful simplicity, remains hidden to them. "If our gospel be hid, it is hid to them that are lost: In whom the god of this world hath blinded the minds of them which believe not"

2 Corinthians 4:3-4

Is there a remedy?

Yes. "For the weapons of our warfare are not carnal, but mighty through God to the pulling down of strong holds; Casting down imaginations, and every high thing that exalteth itself against the knowledge of God, and bringing into captivity every thought to the obedience of Christ"

2 Corinthians 10:4-5

In this verse, the word "thought" is the same as "mind." The weapons of truth, of prayer, of love, and of the Spirit can capture even such minds as these!

DO YOU SEE THE SOLUTIONS OF MEN SOLVING OUR CURRENT PROBLEMS OR MAKING MOST OF OUR PROBLEMS WORSE? THE ONLY HOPE MANKIND HAS IS GOD AND MOST MEN HAVE TURNED AWAY FROM GOD.

"There is one body, and one Spirit, even as ye are called in one hope of your calling; One Lord, one faith, one baptism, One God and Father of all, who is above all, and through all, and in you all."

Ephesians 4:4-6

　

　

　

THE COMING ECONOMIC PROPAGANDA BLITZ................ A MUST READ

The Bureau of Economic Analysis (BEA) within the Commerce Department is going release the advance estimate for 2010 4th quarter Gross Domestic Product (GDP) on January 28, 2011. This estimate is likely to show the economy growing at a 4% (or better) annual rate. But that won't be the end of it—not by a long shot. Due to the Fed's bond buying (QE2) and the massive tax cuts just enacted by Congress, growth in subsequent quarters is also going to be considerably higher than it would have been.

Well, you might say, isn't that a good thing? Doesn't that indicate that "The Economy" is finally kicking into gear? That's certainly what the Powers That Be want you to believe. The problem is that there are two economies, not one. There's the economy where the well-off and the rich folks dwell, and there's the other one where ordinary Americans live. If the former is thriving, and it is, and the official statistics lump the two together, it will appear that everybody is better off.

At economicpopulist.org, Robert Oak took a tour through the BEA's personal income and outlays report for November, 2010. Before I present some of the data, let me jump to Robert's conclusion, which I have edited slightly for clarity—

For the first two months of the three which make up Q4 GDP, or October, November and December, it's looking like at least 4% growth in the Q4 GDP report for PCE (Personal Consumption Expenditures). PCE was 2.4% in Q3 2010 GDP.

I calculate that if there is no PCE growth for December, PCE would still show 3.97% growth in Q4 2010 GDP.

The only good news in this report is PCE, once again, but in reality, the middle class is getting squeezed so one must wonder where the money is coming from to increase PCE.

PCE accounted for 71% of GDP in the last (3rd quarter) report.

Let's look at some data. First, the personal savings rate is going the wrong way. The graph and quote below are from Doug Carey's The Savings Rate Is On The Decline.

Lost in all the hype over stronger consumer spending and GDP numbers is the fact that the U.S. personal savings rate, which had been on the rise, is now falling. The Commerce Department reported today that consumers saved 5.3% of their disposable income in November, down from 5.4% the previous month and down from 6.3% in June of this year. The savings rate had hit a recession high of 8.2% in May of 2009...

... Many thought that the savings rate would blow through 7% and stay there for several years. But they underestimated what the Federal Reserve can entice people to do.

Part of the Fed's goal in pushing down short-term interest rates was to goad people into stopping their new-found frugality and begin spending again. It is much tougher for people to save money when their money market and checking accounts pay them 0%. Therefore, instead of rebuilding their balance sheets, consumers appear to have taken a break and begun their spending ways again. Ben Bernanke is a Keynesian through and through and he believes that real economic growth can come from consumers overextending themselves and spending more. So far his plan seems to be working, at least in terms of the mathematics of GDP.

The drop in the savings rate from 8.2% to 5.6% has added over $30 billion to the consumer spending side of the GDP accounts, which results in an extra 2.5% of GDP growth over one year.

Whether or not this can or will last is yet to be seen...  IT ABSOLUTELY CANNOT BE SUSTAINED FOR ANY LONG PERIOD OF TIME, IT IS SIMPLY ROBBING PETER TO PAY PAUL. 

Disposable income is income less taxes.

I think we can safely assume that the 77% of American workers living paycheck-to-paycheck have virtually no savings, and they certainly aren't socking away some money every week. However, those among the other 23% who have substantial checking or money market accounts paying 0% interest have indeed picked up their spending, having been goaded into abandoning the new frugality by the wily chairman of the Federal Reserve. The rising stock market has helped in this regard. Here again, clever Ben has helped push stock prices higher. At least on paper, many among those who had some savings feel richer than they did a year ago. REALLY STUPID WHEN YOU LOOK AT THE MARKETS PRICED IN GOLD.

The first graph shows nominal personal income (PI, in billions of dollars). The second shows real (inflation-adjusted) PI minus transfer payments (in billions of chained 2005 dollars).

If you look at only the first graph showing total personal income, as most people do, you could claim that income has been soaring since the recession officially ended at the end of the 2nd quarter in 2009. However, if you take a look at the second graph showing personal income excluding transfer payments, you get a different story. Transfer payments include social security, unemployment insurance, welfare, veterans benefits, Medicaid, Medicare, food stamps and so on. Once transfer payments are taken out of the equation, personal income is flat at a level well-below what it was in 2008.

The great thing about transfer payments from the government's point of view is that people receiving them spend them, thus boosting Personal Consumption Expenditures. The government simply prints or borrows some money, passes it along to you, and you spend every penny. It's a Wonderful Life! Needless to say, the income data does not paint a picture of a economy that can stand on its own two feet.

 

Throughout the coming year, the government and its media lapdogs are going to tell you that the economy is growing, that the nation is saved, that we went through a bit of a rough patch but everything is OK now. I wish it were so, but for those living in the "lesser" of our two economies, this propaganda blitzkrieg will be a Big Lie easily contradicted by everyday experience.

 

MOST FINANCIAL TYPES WILL WANT YOU TO BELIEVE THIS AS WELL BECAUSE THEY WANT TO GET PAID.

 

I will return to this theme repeatedly in the future because it's important. Nothing has fundamentally changed in America's economy. All of the deep structural flaws that plagued the economy before it blew up still exist. If you take away the various stimulus programs, the huge increase in transfer payments, and the abnormal financial conditions put in place by the Fed, the economy you live in would suck even more than it does. Even with them, the economy you live in still sucks big time.

The "official" unemployment rate will likely be over 9% at the end of 2011, despite the miraculous GDP growth we are about to hear about. If they can't spur a real economic recovery, the government will settle for a statistical recovery instead. And then they will try to convince you that it's the real thing.

 

MOST AMERICANS ARE IGNORANT ENOUGH TO BELIEVE WHATEVER THEY HEAR FROM OFFICIALDOM. THIS WON'T SOLVE OUR REAL PROBLEMS, IT IS IN FACT ONLY MAKING THEM WORSE. BASED ON ALL THE ARTIFICIAL MANIPULATION OF OUR ECONOMY I WOULD CONSIDER HOW LARGE THE NEXT CRISIS / CRASH IS GOING TO BE AND THEN I WOULD WONDER WHO WAS GOING TO BE THERE TO PICK UP THE PIECES IN A WORLD WHERE THE FED IS DISCREDITED AND OUT OF AMMO. FICTION WILL NEVER OVERCOME FACTS IN THE LONGRUN.