Thursday, June 30, 2011

THE CURRENT RALLY OR BOUNCE IS A MIRAGE..................


THE CURRENT RALLY OR BOUNCE IS A MIRAGE

With 6 of the past 7 weeks in the red, the markets have managed to string together a series of winning days. Daily gains both this week and last have ranged between 0.50% and 1.25%. Indeed, the Dow's gains on Monday and Tuesday represent the first consecutive triple digit gain for the Industrials  since December 1- 2, 2010. This was the fourth triple digit rally since the April 29th highs.

Are we making a major turn? Has psychology become so bad its a contrary indicator? Has the 200 day moving average proved to be inviolable?

Perhaps any of those explanations might prove to be the case, although I have my suspicions otherwise. I suspect it is simply a case of funds marking up stocks into the close of the 2nd quarter.

What data supports this thesis? I would point to 2 things: Psychology and Trading Volume. Most metrics are showing psychology is either neutral or optimistic. This tends to be supportive of a short term trading bounce, and not a longer-lasting rally.

Second, the volume has been anemic, even by the unusually low levels we have seen all year. The overall volume on Monday was well below the 30-day average on both NYSE and Nasdaq. Tuesday was even lower. Rallies on increasingly lighter volume are not signs of aggressive institutional buying. Rather, it supports the Window dressing thesis.

Explaining the short term noise is often a Fool's Errand,. In my experience, it tends to reveal more about the speaker's book than it says about the market conditions. But in the present case, I cannot help but be concerned that the long side trade is a bit of a suckers bet much beyond June 30th . . .

REGARDLESS OF HOW MUCH OIL IS RELEASED FROM OUR SPR, HIGHER OIL PRICES ARE COMING

THE PRESIDENT THINKS VOTERS ARE SO STUPID THAT THEY WILL BELIEVE THAT RELEASING 30 MILLION BARRELS OF OIL IS IN THEIR BEST INTEREST AND WILL RE- ELECT HIM COME NOVEMBER  OF 2012. EVERYTHING WE DO TO MITIGATE SHORT TERM PAIN MAKES THE LONGER TERM OUTCOMES MUCH WORSE.  

As long-term investors, we're less concerned with the game of "cat and mouse" the IEA, OPEC and global politicians are playing with short-term supply and we're focused on the positive long-term structural supply/demand dynamics. BCA Research forecasts that "further downside is limited" and says that "one-time stock release should have little impact on cyclical or medium-term horizons, as the flow demand for oil from emerging countries keeps steadily growing year after year."  WE ELECT INCOMPETENT IDIOTS, NOT LEADERS! 

Barclays argues that the IEA decision to implement the SPR "sends the wrong signal" to the market and will likely result in lower Saudi oil production over the long term, perhaps even by the end of 2011. "The use of SPR, particularly when Saudi Arabia has restated its commitment to supply customers with the crude they need, sends the incorrect signal," says Barclays. 

This is partly due to the fact that Saudi oil production doesn't have much room to grow before it is maxed out. You can see from the chart below that Saudi Arabia's spare capacity is down roughly 25 percent from its peak around this time last year. Forcing additional Saudi production to market means this spare capacity could dry up even further. 


 

Deutsche Bank (DB) says medium-term supply/demand fundamentals signal relatively tight markets going forward, which could easily return prices to $100 per barrel or higher. In fact, DB thinks the temporary drop in oil prices could relieve pressure on emerging market governments to reduce or eliminate fuel subsidies. Eventually, the IEA and consumers around will have to "surrender" to higher oil prices, says DB. 

"The ultimate effect of the IEA's decision may not just be a few months delay in market tightening, it could exacerbate that tightness, given the need for the SPR to be refilled at some stage," says Barclays. 

Broadly speaking, energy stocks were down 1 percent this week but the long-term appeal remains attractive. BCA cautions to not view the announcement as a reason to sell the S&P energy sector, but as a catalyst to remain bullish, especially given current "attractive" valuations. 

We think one of the best opportunities in the market is in the oil services sector and we've adjusted our Global Resources Fund (PSPFX) portfolio accordingly. We see sustained higher energy prices as the catalyst for producers and the large, integrated oil companies to spend large amounts of capital on additional rigs, facilities and infrastructure. 

One way to measure demand for new equipment is to look at the backlog of orders at construction & engineering firms. BCA said in a May 31 report that "backlog growth is still accelerating…while global leading economic indicators have declined and warn of a global soft patch." As of the beginning of June, the project backlog for C&E companies was up over 20 percent from the year before-the highest rate since late 2007. 

Additionally, this group has strong earnings growth potential because they haven't yet seen their margins expand to match energy's current price levels. BCA says "this group is likely to demonstrate significant earnings outperformance, especially as margins in the broad corporate sector begin to narrow." In addition, higher commodity prices will encourage additional production and give these companies pricing power. 

BCA has looked back at the previous 30 years of performance for oil service stocks during rising, falling and flat markets. They found that the S&P Energy Equipment & Services Index handily outperformed the S&P 500 Index during market moves upward. Performance dipped significantly when the credit crisis hit but returned when the market started to rise again. 

Although we expect volatility to continue, we believe that an active hurricane season, strong seasonal demand or an additional uprising in the Middle East region all have the ability to further constrain supply and keep prices at historically elevated levels.  

This and the factors laid out by BCA make a strong investment case for the oil services group. 


Recession Wisdom That Has Failed This Time..............

Recession Wisdom That Has Failed This Time

The current economic crisis has turned a lot of common wisdom about recessions on its head. Hence, I wanted to make a short list of these ideas. Despite the ideas' faults, many are still followed to the detriment of those who follow them. 

1. Hide from a recession in school - Unless one is getting a doctorate, this strategy has completely failed. Anyone entering a Master's degree in 2008 or 2009 should be done with the degree by now. Unfortunately, in the meantime, the employment situation has not improved.

In some ways, the situation for the students could actually be worse than prior to acquiring the degree. These students are now unemployed with huge loans. If this recession continues into 2012 and 2013, even the PhDs will lose on this strategy.

2. Don't hire overqualified workers - This is pretty standard recession advice for companies. Sure, the overqualified person might be great for the job and a good deal for the moment, but as soon as the economy recovers, the employee will leave the company. And the company is left holding the bag without an employee in a more competitive job market. It's a bad deal.

However, in this recession, the companies that hired overqualified workers scored big. The job market hasn't recovered at all. Furthermore, it takes unemployed workers about six months on average to find a job. If one hires an overqualified employee, they likely wouldn't be able to locate a better job searching part-time for a whole year or more. This has been a great time to get some amazing workers on the cheap.

3. Bet on the next boom - Many investors had a textbook version of a recession in their mind. There's a crash followed by yet another roaring boom. Sure, stocks recovered from their lows, but there's no raging boom taking place now. A bunch of folks are holding bank stocks ready for a leveraged play on the economy, but the banks are doing nothing but collecting dust.

This view has kept many investors away from gold as they still believe in an oversimplified version of the business cycle. As soon as the economy recovers, supposedly gold should collapse. Well, where's that recovery?

4. Fiscal and monetary stimulus creates jobs - Never has the United States government spent so much money and created so few jobs. The stimulus didn't even put a dent in the unemployment rate, and even the president has admitted that those shovel-ready jobs weren't so shovel-ready after all. Some have called this crisis the failure of capitalism, but with these sorts of results, big government abysmally failed even more so.

5. The effects of monetary policy are relatively quick - Admittedly, this took many free-market types by surprise. The Fed printed tons of money, and it has taken inflation nearly three years to show its ugly face. Many were expecting hyperinflation as early as 2008. Even the textbooks cited two years as the time frame for monetary policy to filter through to the economy. In this case, it's taking much longer.

6. Wait out the real estate market - This one is pretty self-explanatory. No, house prices don't always go higher, but many still hold on to this hope.


The Housing Double Dip ACCELERATES...................

The year-over-year declines for the broad 20-city Case-Shiller composite index shows things getting worse, not better.


chart of the day, case-shiller, 10-city composite vs 20-city composite -- april stats, june 2011




JAPANS LOST DECADE........... COULD IT HAPPEN HERE?

JAPANS LOST DECADE........... COULD IT HAPPEN HERE?

10-year JGB first broke under 3% 16 years ago, on June 23, 1995, according to Japan's Ministry of Finance.  It first happened here in November 2008, so we're 2 1/2 years from that event.

Below is a chart covering the ensuing period for each subsequent to the first break under 3%.  I'm unclear as to what, specifically, would prevent us from replicating the Japanese experience.  To be clear, I'm not suggesting we will, only wondering what, if anything, would make our following in their footsteps impossible.

WE CLEARLY DON'T HAVE MUCH SEPERATING US FROM ECONOMIC DISASTER.

By 2 to 1, Americans say the country is pretty seriously on the wrong track, and nine in 10 continue to rate the economy in negative terms. Nearly six in 10 say the economy has not started to recover, regardless of what official statistics may say, and most of those who say it has improved rate the recovery as weak.  I believe the majority of Americans view ours right now as a "moribund, dead, lost-decade kind of economy."  And the numbers of late support that assessment.

World’s Wealthiest Richer Than Before Credit Crunch!................ HOW STUPID ARE WE????????????????/

World's Wealthiest Richer Than Before Credit Crunch!

image.png

Wednesday, June 29, 2011

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

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

************************************************************************************************************************

You 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.

************************************************************************************************************************

I write this newsletter with the full knowledge that many will reject it because the subject matter is so often very uncomfortable to deal with. The purpose of these emails has always been to encourage investors to open their eyes to the truth so they can begin to see what is really happening around them and protect their families and investment capital from the very dangerous consensus point of view, which is usually wrong, but never in doubt.

Unfortunately, we live in a time when most people would rather escape reality than face it. Money decisions require realistic scenarios and not hope for benign outcomes or responses to extreme fear. I hope I can help you find the truth and in doing so more realistic investment opportunities. Wouldn't you prefer to know what is happening rather than remaining ignorant of the events and issues that really matter and offer the best opportunities for both safety and profit in todays market.

************************************************************************************************************************

People will only change their habits when the pain of their current situation is greater than their perceived pain of adopting a possible solution.

THINK HARD ABOUT WHAT THIS MEANS FOR OUR FUTURE.

************************************************************************************************************************

The more you know, the less you need.

************************************************************************************************************************

Mankind's money mirage has reached it's limit.

************************************************************************************************************************

If you're not catching flak, you're not over the target.

**********************************************************************************************************************

Many long-running secular trends and developments are coming to an endpoint.

************************************************************************************************************************

There is no reason to be optimistic about the second half. The recovery, assuming you think we had one, is dead.

************************************************************************************************************************

America is drowning in debt and choking on lies.

************************************************************************************************************************

Awareness is the first step toward solving any problem.

************************************************************************************************************************

We're about to see one of the greatest power shifts in geopolitical history.

************************************************************************************************************************

Today's leaders have divested themselves of the responsibilities of duty and prudence, resulting in an aristocracy of incompetence.

************************************************************************************************************************

The world will soon wake up to the reality that everyone is broke and can collect nothing from the bankrupt, who are owed unlimited amounts by the insolvent, who are attempting to make late payments on a bank holiday in the wrong country, with an unacceptable currency, against defaulted collateral, of which nobody is sure who holds title.

************************************************************************************************************************

A lack of policy bullets is reflected in most advanced economies' embrace of some form of austerity, in order to avoid a fiscal train wreck down the line. Public debt is already high, and many sovereigns are near distress, so governments' ability to backstop their banks via more bailouts, guarantees, and ring-fencing of questionable assets is severely constrained.

************************************************************************************************************************

THE ABILITY TO THINK OUTSIDE OF THE BOX IS GOING TO BE A VERY USEFUL SKILL GOING FORWARD.

************************************************************************************************************************

MUST SEE VIDEO CLIP.

DON'T MISS THIS

David Stockman: Ben Bernanke is finished!

http://www.youtube.com/watch?v=GHLjoAI2-iQ&feature=player_embedded

************************************************************************************************************************

MARKET REVIEW

The market was in prime time for a 13 week cycle upturn last week, and it failed miserably.

The up phase is now in imminent danger of an early abort that could lead to a severe short term decline. At best it looks like they would only be able to hold the trading range for a couple more weeks. A weak bounce or two could be the rigor mortis rallies...

The Treasury market buying continues to be driven by fear and loathing of everything else, which is entirely rational, but ignores the fact that Treasuries are no safer than the paper that investors are fleeing.

The only thing keeping the Treasury game going, as with any Ponzi scheme, is that people are still buying the stuff. It sure has nothing to do with the fundamentals of US government finance, which are a complete joke. The US government uses the incoming funds from its debt sales to pay off earlier investors, and it skims the cream to pay its bills. We all know where this is headed, but first there's a real likelihood that yields could head lower for a few more weeks.

This week's calendar will be a real challenge, with

a heavy slate of notes settling on Thursday and only $18-20 billion in POMO left to go to support it. This will be a critical test. If the market doesn't hold up well, and in particular if the FCBs again show a pattern of weak buying indicated by the indirect bid, it will only get worse with the Fed out of the game. The technical indicators say that the Treasury rally will continue. That's very bad news for stock market.

While many investors are focused on the precarious situation surrounding Greek debt, and whether the rest of the so-called PIIGS (Portugal,

Italy, Ireland, and Spain) might follow closely behind, there is a less-publicized yet equally dangerous element in the mix:

If Greece defaults, who will be holding the bag?...

Recent publications have pointed, as one example, to the exposure of big U.S. money market funds that hold large amounts of short-term European bank debt.

Sovereign debt swaps are the gorillas in the PIIGS room, but no one really knows if they are just 800-pound gorillas (large but manageable) or King Kongs (think AIG).

I'm not sure what will drive the market after QE ends on Thursday, but a little panic usually begets even more panic.

U.S. money market funds hold roughly $1 trillion of debt issued by big European banks.

There is no reason to be optimistic about the second half. The recovery, assuming you think we had one, is dead. The entire global economy is slowing and Bernanke has not figured that out, nor does he understand why.

It's difficult to perfectly hedge against the market, but being liquid during a major downturn is a great way to take advantage of disaster.

************************************************************************************************************************

"To see what is in front of one's nose requires a constant struggle."

George Orwell

************************************************************************************************************************

"An imbalance between rich and poor is the oldest and most fatal ailment of all republics."

Plutarch

************************************************************************************************************************

"The more stable the currency was, the more stable society would be – And the more successful as well."

Friedrich Hayek

************************************************************************************************************************

"If the machine of government is of such a nature that it requires you to be the agent of injustice to another, then, I say, break the law."

Henry David Thoreau

************************************************************************************************************************

"There is no Left or Right -- there is only freedom or tyranny. Everything else is an illusion, an obfuscation to keep you confused and silent as the world burns around you."

Philip Brennan
************************************************************************************************************************

"When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes… Money has no motherland; financiers are without patriotism and without decency; their sole object is gain."

Napoleon Bonaparte, 1815

************************************************************************************************************************

"When you see that in order to produce, you need to obtain permission from men who produce nothing - When you see that money is flowing to those who deal, not in goods, but in favors - When you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you - When you see corruption being rewarded and honesty becoming a self-sacrifice - You may know that your society is doomed."

Ayn Rand, "Atlas Shrugged", 1957

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

Mankind's money mirage has reached it's limit........

A significant shift is occurring in the perspectives of policymakers and powerbrokers around the world. They have begun to think more pointedly and openly in terms of endpoints and endgames.

How so? The earth to them is now increasingly seen

as a finite, crowded, under-resourced little planet. As such, the objective must be to secure natural resources ... to hoard and stockpile them. Farmland and arable land must be staked and contracted to ensure long-term food security. No matter that such actions might drive up the prices of sustenance materials such as grains and energy.

In short, no longer is "open market" capitalism seen to be producing a bigger pie that can allow all of the world's populace to share in a bigger piece of said pie.

Rather, the dominant economic systems of mankind's world are now sputtering — the Keynesian "endpoint" having been reached.

The Keynesian policies of pump priming demand through heightened government spending—now culminating in massive budget deficits in the advanced-nation world—have become impotent and destructive (meaning the stimulative manipulations and deficit spending of governments have reached their effective limits).

Mankind's money mirage

of what is termed "gross domestic product (GDP) is failing to provide sufficient economic growth to preserve the solvency of an over-indebted world. Therefore, attitudes and strategies have changed. Gamesmanship and brinksmanship —in other words, endgames—become the necessary strategies in the eyes of geopolitical strategists and many investors. A culture of hoarding and predation comes to the fore. For some to prosper and advance; others must therefore bear the costs.

This shift to a rather carnivorous and desperate market behaviour ranks on the same level as the "laws of the jungle."

CHANGE IS COMING, THE ABILITY TO THINK OUTSIDE OF THE BOX IS GOING TO BE A VERY USEFUL SKILL GOING FORWARD.

OUR SURVIVAL ECONOMY...............

"The spadefoot frog makes its home in Australia. It is an explosively breeding, desert-dwelling amphibian. It may burrow underground for years, waiting for a seasonal rain or flood. However, when this "liquidity event" arrives, a period of frenzied mating ensues. Incredibly, in a space of as little as a month, its eggs advance through the tadpole stage to full metamorphosis. It needs to quickly reach adulthood before the pools of water again dry up. Fascinatingly, as the water puddles begin to get tepid, murky and shallow, the tadpoles grow teeth … 3 rows of them.

They then start eating each other to accelerate the growth of the survivors. Eventually, the frog must go back underground in order to survive the next dry season. Sound a little like today's capital markets?"

It only follows that such endgame

"winner-take-all" strategies currently found in the commodity and money world, can only be pursued by a small minority. Countries such as Saudi Arabia and China have been buying or leasing vast tracts of agricultural land (mostly in Africa). Large (and small) financial institutions and private investors have been charging into commodity markets over recent years.

The problem, however, is this: Commodities such as food and metals (i.e. copper, aluminums, silver … etc.) are an extremely small asset class. Compared to the value of global financial securities (these valued perhaps as high as $200 trillion) commodities represent little more that a drop in the bucket. For example, consider that the entire consumption of wheat in the world (even at recently elevated prices) amounts to only perhaps $250 billion per annum, the equivalent to one-eighth of a percent of worldwide financial wealth.

Generally, commodities are materials that are consumed and not items of wealth to be hoarded. They are "flow items" and not "assets." The point to realize, then, is that hoarding short-life commodities with the objective of profiting from their rise in price has an unfortunate and destructive side effect.

It disadvantages those who can no longer afford their purchase for living needs.

Consider that for most people in the world, food purchases account for between 25 to 50% of a household's budget. Comparatively, the average North American household spends only 10-11% of their budget on food.

Therefore, when asset managers begin to hoard commodities or manipulate their price upward, it causes excruciating hardships for billions around the globe. In this late, great era of advanced globalization and financialization, virtually all commodities are priced uniformly around the globe and their price can be manipulated though various financial instruments and the actions of a very few.

We see that in their endgame actions, wealthy countries, investors and/or large financial institutions

disadvantage the majority—namely those that are relatively poorer or already disadvantaged. Yet, it is an accepted tactic in the investment world.

THE WORLD IS HEADED FOR A VERY DESTRUCTIVE AND PAINFUL PERIOD. THERE WILL BE NO AVOIDING IT IF YOU ARE STILL HERE!

THE BIBLE IS CLEAR.............

"Now listen, you rich people, weep and wail because of the misery that is coming upon you. Your wealth has rotted, and moths have eaten your clothes. Your gold and silver are corroded. Their corrosion will testify against you and eat your flesh like fire. You have hoarded wealth in the last days. Look! The wages you failed to pay the workmen who mowed your fields are crying out against you. The cries of the harvesters have reached the ears of the Lord Almighty. You have lived on earth in luxury and self-indulgence. You have fattened yourselves in the day of slaughter"

James 5:1-5

Clearly outlined here is "hoarding" and a global condition

where the rich prosper at the painful inconveniences of the masses. Finally, in Revelation is mentioned, that the cost of food will soar so high that it will require a full days wages for a subsistence level of calories.

"Then I heard what sounded like a voice among the four living creatures, saying, "A quart of wheat for a day's wages, and three quarts of barley for a day's wages, and do not damage the oil and the wine!"

Revelation 6:6

We, of course, certainly cannot conclude what the cause of this condition of high food prices will be in that future Tribulation period. Nevertheless,

it is not without significance that today we can already discern just how possible are such outcomes … and possibly very soon.

FINANCE AND THE BIBLICAL BOOK OF REVELATION ARE MERGING AND SOON A DAY UNLIKE ANY OTHER IS COMING.

A WORLD OF DENIAL.............

The suggestion that there is anything remotely approaching a recovery in the United States, or the world economy, is pure cow pie, as evidenced by the requirement for more borrowing, more easing, and more deterioration in employment and housing.

But its not just America. I'm referring to the heads of state around the world. Apparently too busy jetting back and forth from Washington, New York, Vienna, Athens, Berlin, London and Paris to have anything approaching a grip on reality, we're delivered surreality by world leaders immersed in total Denial of Economic Truth. Now the banks in Europe are carving up the assets of Greece as vig for continued lending.

THE MATH JUST DOESN'T ADD UP............

Since the Lehman Brothers collapse, the Fed has fabricated $2.3 trillion in counterfeit dollars and handed it over to the banks. In that same time frame the 'economic recovery', which officially started in June 2009, saw the United States economy grow by 4.9%, according to Sebastian Mallaby, Director of the Maurice R. Greenberg Center for Geoeconomic Studies and Paul A. Volcker Senior Fellow for International Economics . But since total U.S. GDP was US$14.26 trillion in 2009, and according to estimates, the 2011 total U.S. GDP will be $14.62 trillion, that figure is more realistically 2.52%. But the amount of cash fabricated and dispersed into the economy so far is, as stated, $2.3 trillion, or 16.1% of 2009 GDP.

So there's a discrepancy, on a macro scale, of $1.94 trillion missing from the national balance sheet.

I don't know about you, but if I'm going to borrow money to put into my business, its becasue I'm convinced that my rate of business growth and therefore profit will increase at an exponentially greater rate than the cost of servicing and maintaining the loan. Otherwise, the bank comes and takes away my business, and boots me out of my house, and sells my car. If the bank lends me money at 10 points per annum, then I better come up with a personal GDP increase of at least 11 points, but preferably more like 20 points, after the cost of servicing the debt is factored in. Otherwise, what's the point?

So if the Fed borrows, fabricates, conjures, prints, or however you want to refer to their unequivocally fraudulent creation of money to the tune of $2.3 trillion to obtain a growth in gross output of only $0.36 trillion, what does that say about the real state of American finance.

FOR HOW MUCH LONGER CAN THE SIZE AND SCOPE OF THE ECONOMIC LIE BE HIDDEN? THAT IS THE ONLY QUESTION THAT REALLY MATTERS.

MASSIVE SOCIAL UNREST IS COMING...............

Certain truths are increasingly held to be self-evident by we the people.

First of all, everybody can see that the economist class that owns banks and governments are a despicable breed of human being who feel that by virtue of their privileged birth and education they can steal from the public at will. The second is that this whole sovereign debt charade is just a continuation of that mentality in the pockets of every last citizen for the remaining drachmas pesos dollars and pounds that are slowly but surely accruing at the top of that putrid food chain. And the third emerging reality is that the game will continue until governments are toppled by the people from whom they are stealing.

There is no 'economic recovery' underway, and there has been worse than 0 economic growth, and that what is underway is the biggest fraud in the history of the human race. As this reality filters downward, and the economic circumstances of the average American householder continue deteriorating, look for increasing protests, attacks on government property, and a broad increase in civil disobedience.

A LITTLE REALITY.................

US sovereign debt currently stands at slightly over $14 Trillion - the allowable ceiling. Moreover, the federal government is presently running an annual deficit of $1.7 Trillion with deficits of similar dimensions projected into future years.

As such, Congress is now playing political games for voter consumption which will lead inevitably to raising this debt head room by a further $2 Trillion, thereby allowing current politicians to get re-elected in November 2012. Given the fact that 42 cents of every dollar spent by the federal government is borrowed money, not tax dollars, the debt ceiling is going to have to be lifted, year after year, by Billions of additional dollars.

That is not the worst of it, however. Projected future deficits are even more overwhelming in that

promises to citizens for Social Security, Medicare, Medicaid and other obligations for other services are mind numbing in scale. The worst part is that these promises are dramatically underfunded. Depending on whose numbers are used, what assumptions are made about future economic growth, inflation, rates of interest and similar considerations, unfunded future liabilities range from $60 Trillion to over $100 Trillion. Obviously, growth of the economy and massive tax increases are totally incapable of meeting the debt challenge.

Incompetent people cannot or will not face the truth, until it is too late!

ANYONE WHO TELLS YOU THAT THEY ARE HOPEFUL OR OPTIMISTIC ABOUT AMERICAS FUTURE IS A FOOL. CONTINUED DELUSION IS THE ONLY BRIGHT SPOT!

THE FINAL OUTCOME...............

The US is the world's largest economy, the only remaining super power and it owns the world's reserve currency.

Alpha nations like the US don't willingly declare the public sector equivalent of a private bankruptcy.

Instead, the US and other first world economies that are reaching similar zombie debt status, will adopt

brutally tough austerity measures starting with painful reductions in social security and health care benefits. Tax and interest rate increases should be expected too, as well as ever more digital dollar printing.

The end result will be rampant price inflation and permanently lower living standards.

IMPORTANT INFO....................

Americans spent in May at the weakest pace in 20 months

, a sign that high gas prices and unemployment are holding back the economy.

Hiring slowed considerably this spring after a strong start at the beginning of the year. The economy created only 54,000 jobs in May,

the lowest amount in eight months.

ON MANAGING RISK....................

It appears that once again, bankers have shown themselves to be incapable of assessing risk properly. And why should they? Every time they screw up, most of them get rescued, while a tiny percentage are allowed to ignominiously whither and die.

The lesson these banks have learn is not to be more prudent with their risk taking, but rather, to

make sure they are not amongst the smallish group of financiers who are unconnected in DC. The credit crisis taught them that Risk Management is for Suckers, and the real money s in pol;itical lobbying and owning a Congressman or two.

We are once again, looking at systemic risk of the banks and money market funds, who once again, made some very ill-advised lending. Only this time, instead of giving money to home buyers who could not ever pay it back, they lent money to Countries, who will not ever be able to pay it back.

Moral Hazard anyone?

THERE ARE VERY FEW FINANCIAL ADVISERS WHO ARE AWARE OF THE VERY DANGEROUS GAME THAT IS BEING PLAYED AND ALSO REALIZE AND HAVE POSITIONED FOR THE VERY NEGATIVE FINANCIAL OUTCOMES THAT LIE JUST AHEAD.

WHO CARES ABOUT THE TRUTH, THE CONSTITUTION OR THE LAW..........

To avoid the potentially untidy embarrassment of being insolvent on paper, the Fed quietly made

an accounting change several weeks ago that will allow any losses to be reported as a new line item – a "negative liability" to the Treasury – rather than being deducted from its capital.

Now, technically, a negative liability to the Treasury would mean that the Treasury owes the Fed money, which would be, well, a fraudulent claim, and certainly not a budget item approved by Congress,

but we've established in recent quarters that nobody cares about misleading balance sheets, Constitutional prerogative, or the rule of law as long as speculators can get a rally going, so I'll leave it at that.

INCOMPETENCE..............

An aristocracy of incompetence exists and has flourished, in which a self-crowned ruling class plays by different rules, rules that reflect their dim view of voters. This system of double standards must attract a very different person, one looking for an angle and a low path. Different because no mature or thoughtful person would be drawn to a scenario in which their standards might be lowered, ethics diluted or personal disorder increased. This aristocratic opportunity then attracts an already irresponsible and vain sort.

If a public sector actor violated these standards, corrective penalties would apply. These penalties would range from a public censure, to cease and desist orders, temporary or permanent bars from public service (yes, immediately) and even financial penalties in the case of gross negligence or intentional misconduct.

It is a revealing sign of the widely disparate treatment currently applied to public and private actors.

Incompetent people cannot or will not face the truth, until it is too late! There will be nowhere to run nor hide when the time for accounting for their actions comes due.

MORE THAN A TEMPORARY SOFT PATCH...........

Economist Nouriel Roubini says that the current economic slowdown is much more than a temporary soft patch.

"If the latest global economic data reflect something more serious than a hiccup, and markets and economies continue to slow, policymakers could well find themselves empty-handed," Roubini writes;

If that happens, the risk of stall speed or an outright double-dip recession would rise sharply in many advanced economies.

Economic growth in the United States and worldwide may be slowing sharply.

ANOTHER SIGN OF THE TIMES................

WASHINGTON —

The financially troubled Postal Service is suspending its contributions to its employees' pension fund.

The agency said Wednesday it is acting to conserve cash as it continues to lose money. The post office was $8 billion in the red last year because of the combined effects of the recession and the switch of much mail business to the Internet. It faces the possibility of running short of money by the end of this fiscal year in September.

Sen. Tom Carper, D-Del., called the announcement "the canary in the coal mine moment for the Postal Service."

"If we don't heed this warning and act quickly, the Postal Service as we know it will cease to exist in the very near future," said Carper, chairman of the Senate subcommittee with jurisdiction over the agency.

The post office needs reforms "to cut costs and protect taxpayers from an expensive bailout," said Rep. Darrell Issa, R-Calif., chairman of the House Committee on Oversight and Government Reform.

The USPS is hanging by a thread, along with 8 million private sector jobs that depend on the mail.

NONE OF THIS WORKS OUT WELL WITHOUT LEADERSHIP AND WE HAVE ALMOST NO LEADERSHIP POINTING TOWARDS SOLUTIONS THAT WILL SOLVE OUR PROBLEMS.

WATER AND FOOD WILL BE HUGE PROBLEMS GOING FORWARD...............

The biggest challenge going forward may be finding sources of water.

For months, south and central China have been suffering from drought. In the spring, Beijing sent deep well-drilling teams from all over the country to these parched provinces. The aquifers these regions relied on were dry. They needed to drill deeper. This required more specialized equipment.

Unfortunately, drilling deeper wells is only a short-term fix.

Deep- underground aquifers can take hundreds of years to replenish. Tapping these wells is merely a kind of advance on the future. You have to pay it back later when you can't tap the water anymore.

This is the idea, too, behind "water-based food bubbles."

You tap a nonrenewable water supply that gives you the boost you need to grow food, but as with a financial bubble, it is bound to pop. Then, food production collapses.

WE SHOULD ALL GO SWEDISH.........

Sweden understands what to do in a financial crisis.

They do not rescue banks, they rescue the banking systems. They do not bailout creditors but instead, ensure credit can move freely through the economy. Lastly, they do not place the burden of failure on taxpayers, but rather leaves it where it belongs — with bond and equity holders.

Five economic lessons from Sweden;

1. Keep your fiscal house in order when times are good, so you will have more room to maneuver when things are bad.

Prior to the 2008-09 recession, the U.S.and Britain had budgets deficit equal to 3% of GDP. Sweden had a 3.6% surplus. Sweden's gross debt is ~45% of its economy; the US is nearly 100%. This left the government with lots of flexibility to engage deficit spend when the economy hit a crisis.

2. Fiscal stimulus can be more effective when it is automatic.

Sweden's response to the crisis was provide income, health care and other services to people who are unemployed. That prevented a paradox of thrift from making a minor redcession something much worse.

Their spending programs cushioned economic blows, and can be designed to taper off when the economy turns.

3. Use monetary policy aggressively

As aggressively as the Federal Reserve has responded to the financial crisis, the Swedish central bank was even more aggressive. The Riksbank lowered its target short-term interest rate nearly to zero, but it expanded the size of its balance sheet even more than the Fed did relative to the size of its economy. In the summer 2009, the Riksbank balance sheet was more than 25% of GDP. The Fed, never got over 15%. And, Sweden was much faster to normalize their footing versus the Fed, who is still zero bound. Swedish central bank have already raised rates.

4. Keep the value of your currency flexible.

The Swedish krona was a helpful buffer against the economic downdraft of the past few years. It fell in value against both the dollar and the euro during the crisis, making Swedish exporters more competitive.

5. Bankers will always make blunders; just make sure they don't doom the economy.

Swedish banks made mistakes, just like the rest of the world. But their losses were more manageable. And due to their crisis in the 1990s, where Sweden's major banks were temporarily nationalized, Bankers were not cushioned from the consequences of their unwise decisions. They did not learn the ruinous lesson of privatized profits and socialized losses that US Bankers have turned into a motto.

THAT'S ALL FOR CHINA FOLKS................

As the world watches the Greek credit crisis unfold, a Sino-debt disaster is brewing halfway around the world.

Most recently, China's top auditor said that loose lending standards and a sharp rise in local government borrowing (for building projects, of course)

may have created a mountain of debt that cannot be repaid, reports the New York Times. All it will take is a fall in housing, or some sort of economic slowdown, to reveal an untold number of bad loans.

"China's local governments had amassed 10.7 trillion yuan ($1.65 trillion) of debt by the end of last year, Liu Jiayi, auditor general of the country's National Audit Office, said Monday. That's equal to more than a quarter of China's 2010 gross domestic product of 39.7983 trillion yuan.

Debts assumed by local governments have become a key risk factor for China's financial system following the country's post-financial crisis stimulus package, which was fueled by bank lending and infrastructure spending.

According to Credit Suisse, "China could suffer a "perfect storm" of crises when falling property prices are matched by a slowing Chinese economy and rising debt defaults among local governments, cause sour property loans to climb as high as 921 billion yuan (US$142.5 billion)".

That groaning sound is toppling of the world's financial system.

Soon it will sound more like a 'whoosh!' before the final sound of the big thump as it hits the ground hard.

What's happening in China should sound familiar because it is reminiscent of what happened here in the US. Confronted by an economy that couldn't deliver real wealth to the people, our bureaucrats loosened borrowing standards in the 1990s.

The result: an uptick in local government spending, a real estate bubble that made investors feel artificially wealthy, a construction boom that created jobs, and debt that can't be repaid.

China has made the same lend-and-pretend-that-the-loans-are-good gamble that the world's largest economies have all made. And as you can see from what has happened in the US and all over Europe, it's a losing bet. The question is not whether China will hit the debt wall, but when.

STUPID IS AS STUPID DOES, EVERYWHERE!

THE WORLD ECONOMY IS A JOKE...............

The top 8 economies in the world are essentially So Big that they Won't Fail, not because they will ultimately and miraculously get their financial houses in order,

but just becasue there's nobody to force them to sell their assets in exchange for a bailout. They're the top of the heap, the Big 8, the G8, and with each member approaching or exceeding debt loads in excess of 100% of GDP (Japan's at 225%!), it is mathematically impossible for a balanced check book to materialize anywhere in that mix. Unless of course GDP for each of the countries were to miraculousy double, or in Japan's case, triple. But they're the main conspirators in this wealth agglomeration exercise, and they've divied up the booty already in exchange for a nudge-nudge, wink-wink understanding when it comes to voting on certain matters in key organizations such as the IMF, the World Bank, and of course, in their own Treasury departments.

Of course, the banks holding the bag on Greece are highly motivated to keep the flow of payments in a condition that is optically acceptable to their shareholders. If they forced Greece into default, they'd have to write down large chunks of their own books, which would in turn affect their valuations and credit ratings negatively. In many cases, a Greek default would, in the case of France and Switzerland anyways, precipitate a restatement of loans in the amount of US$79 billion each.

No wonder the French banks announced today an initiative to voluntarily re-invest maturing Greek bonds. According to the Bloomberg report, "Fifty percent of the redemptions would go into 30-year Greek securities, with the remaining 20 percent invested in a fund made of "very-high quality" securities that would back the 30-year bonds".

Apart from the high-priced asset sweep and obvious continental fees that are pocketed from the Global Debt Farce, what motivation based on logic could possibly justify the 'rolling over' over a debt load that constitutes 145% of that nation's GDP? It's a giant fraud in progress that only exists to keep the emasculated banks propped up, and their shareholders from having to sell off works of art, cars and European chateĆ¢us.

If I was Greek and not a member of the elite class, I too, would protest. This is the stuff that revolutions are made of.

UNDERSTANDING OURSELVES.............

Psychologists tell us that some people are inner-directed and some are other-directed. That is, some people focus on their own internal guidance system for making choices about how to spend their time and energy. Their own self-interest ranks very high on their list of priorities. "What's best for me?" is a key guiding principle in determining where they focus their attention and how they make day-to-day decisions.

And some people are other-directed, which means that their primary focus is external, not internal. They are primarily concerned with relationships, especially people they care about. "How can I help others?" is a key question in how they spend their time and energy. Building and nurturing relationships with loved ones, family, friends, neighbors, and coworkers is the guiding principle in their lives.

Research indicates that, in general, men tend to be more inner-directed, while women tend to be more other-directed.

There are exceptions, of course, but as a group, men are focused on themselves while women are focused on other people. Men like to build things while women like to build relationships.

Tuesday, June 28, 2011

Dallas Disaster: Texas Regional Index Plunges To -17.5 ........................ SOME RECOVERY!!!!!!!!!!!!!

Dallas Disaster: Texas Regional Index Plunges To -17.5

The number:

Really bad.

The final number of -17.5 is WAY worse than the anticipated -3.2 reading, and well below the -7.4 it printed at last time.

The number of employees part fell to 5.3 from 11.6 last time.

The prices paid index, meanwhile, remains at a sky high 45.1.

Here's the key summary from the Dallas Fed. What's interesting is that production expanded, while perception of general business activity really plunged.

Texas factory activity expanded in June, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, remained positive but fell from 12.7 to 5.6, suggesting output growth slowed this month.

Other measures of current manufacturing conditions indicated flat activity, while new orders picked up. The capacity utilization index slipped into negative territory but was near a reading of zero, suggesting little change over the prior month. Similarly, the shipments index fell to zero with about 60 percent of manufacturers noting no change in shipment volumes. The new orders index rose from 1.1 in May to 6.4 in June, its eighth consecutive month in positive territory. Nearly one-quarter of firms said order volumes increased from May levels. The growth rate of orders index turned positive after dipping into negative territory last month.

Perceptions of general business conditions were mixed in June. The general business activity index pushed further negative, falling from –7.4 to –17.5. Twenty-eight percent of respondents said activity weakened this month, the highest share in nine months. However, the company outlook index rose from 3.2 to 7.2, suggesting manufacturers were more optimistic about their firms' prospects for the near future. More than 85 percent of respondents said their outlooks were unchanged or improved from last month.

It's been one weak regional Fed survey after another........................

AS THE FED STOPS PUMPING MONEY INTO OUR ECONOMY GUESS WHAT HAPPENS. OUR ECONOMY IS BROKEN AND WILL NOT RECOVER UNTIL WE MAKE MAJOR CHANGES. ONE OF THE CHANGES MUST BE THAT WE QUIT ELECTING IDIOTS! I SEE NO SIGN OF THIS BEING THE CASE. WITHOUT THE ACCEPTANCE OF FINANCIAL PAIN AND DISCOMFORT BY CITIZENS AND SOME REAL LEADERSHIP OUR ECONOMY IS GOING TO REACH A MONUMENTAL CRISIS PHASE WHERE NOTHING SEEMS TO WORK, THERE ARE NO SOLUTIONS AND SOCIAL UNREST BECOMES COMMON PLACE. WE ARE HEADED TOWARDS FINANCIAL AND ECONOMIC DISASTER. 




A REALLY SOBERING CHART.................... AND THE SAD THING IS THAT IT'S GOING TO GET WORSE

Household equity as a percentage of household net


worth is down to 11% from about 23% at the peak.


chart of the day, households owners' equity as % of net worth, june 2011




THE SITUATION IN GREECE................

Greece has a population of just over 11 million people. Compare that to the New York City metropolitan area population estimated at 18.9 million. It may seem strange that Greece's travails might greatly affect the global economy, but the potential repercussions from a Greek default become more significant when considering leverage and derivatives. Data from the International Monetary Fund (IMF) show that German banks are heavily leveraged, holding 32 Euros of loans for every Euro of capital they have on hand. Other banks are leveraged to the hilt as well. Belgian banks are leveraged 30-1, and French banks are leveraged 26-1. Lehman's leverage at the time of its collapse was 31-1. U.S. 

France and Germany are the countries most exposed to Greek debt through bank and private lending and government debt exposure. 

Derivatives present another potential minefield.

It's the $616 billion question: Does the euro crisis have a hidden A.I.G.? No one seems to be sure, in large part because the world of derivatives is so murky.

The possibility that some company out there may have insured billions of

dollars of European debt has added a new tension to the sovereign

default debate.

The Greek protesters have had their fill of neoliberal learned ignorance that austerity, unemployment and shrinking markets are the path to prosperity, not deeper poverty.

30 Million Barrels - A Drop In The Bucket...................

30 Million Barrels - A Drop In The Bucket

Recently the administration released 30 million barrels of crude from the nation's strategic reserve. This represents about a day-and-a-half of our current usage, so it is really just a drop in the bucket and not likely to have a significant effect on the price of oil or gasoline.  IT IS AN ACT OF DESPERATION MEANT TO MANAGE PERCEPTION.  

On the daily chart below you can see that there was a sharp one-day drop that touched the $90 level, but it closed slightly above Monday's low. More important, we can see that crude has been falling in price for about seven weeks, and a declining trend has been established.  ENERGY PRICES ARE FALLING SIGNALING HOW WEEK THE MARKET AHEAD WILL BE!  


image.png

Taking a longer-term look with the weekly-based chart, we are looking for lower oil prices and get more encouragement as we see that the long-term rising trend line has been penetrated, and the weekly PMO is falling below its EMA -- both indications that the decline should continue. Currently, prices are sitting on top of a support zone between 70 and 90, and, while lower prices may be coming, it will probably take some work to eat through that support. IF PRICES FALL THROUGH THAT ZONE THERE WILL BE NO DOUBT THAT WE ARE LIVING THROUGH A MODERN DEPRESSION. 

image.png

Bottom Line: Releasing some of our strategic oil reserve was a tactical move that will probably have little effect on the long-term movement of oil prices. Fortunately, prices were headed lower well ahead of yesterday's announcement. We can't argue, however, that the move will probably give the down trend a temporary nudge. 

Why The Release Of Oil From The SPR Is A Doomed Idea............ A MUST READ

Why The Release Of Oil From The SPR Is A Doomed Idea

Last week's news about the coordinated release of strategic oil reserves by several countries helped to push crude oil futures prices down sharply.  

While this release of oil from the Strategic Petroleum Reserve (SPR) has helped to push down the near month prices of oil futures, it has not had much of any effect at all on the out month contract prices.  As an example, one week ago the August 2011 oil futures contract was at $93.29/barrel, and it closed on June 24 at $91.23, down 2.2%.  But the June 2012 contract fell just 1.1% from a week ago.  All of the expiration months have been falling since a peak in early June, but the out months were not much affected by the SPR release this week.  That difference in response is interesting.

Back in February, I talked about how a huge contango had developed in crude oil futures prices, with the near month contract well below the distant months' prices.  February's big contango got resolved when the near month prices shot higher in response to unrest in Egypt, Libya, etc. 

Just recently, contango completely disappeared, as the near month prices were at exactly the same prices as those 11 months out, which is something we have not seen since 2008.  That lack of contango correctly said that a topping condition was at hand for oil prices.

chart

But now with the SPR release producing a sharp drop in near month oil prices, a big contango is getting reestablished, and that condition is likely to prevent the goals of the SPR release from being achieved.  The reason is that big contangos create an incentive to take away short term supply, because a trader can make money buying up the product on the spot market and storing it for future sale at a higher price.  And that trader can even lock in the price at which he will sell the oil in the future by selling a contract for future delivery. 

The ability to use such storage arbitrage is limited by the costs of storage.  And so there has to be a big enough difference between the near month and far month prices to pay for the transaction and storage costs.  Back in early 2009, there were stories about traders renting supertankers at $50,000 a day or more, just to use as floating storage tanks to take advantage of the big price spread.  If the price spread is big enough, the rental of the tankers, or of storage tanks, can be more than made up for, provided that risk-free interest rates are kept low. 

Interestingly, if the powers that be really wanted to drive down crude oil prices in a meaningful way, there is a more effective way: just raise short term interest rates.  While the first derivative thinking is that higher short term rates hurt the economy by raising the cost of capital, second derivative thinking would show that higher rates would take away the profit potential from storing oil.  That would push down spot prices without having to raid the nation's emergency supply. 


STUPID THINKING ALL THE WAY AROUND.

30 MILLION BARRELS OF OIL IS 1.5 DAYS OIL SUPPLY FOR THE UNITED STATES, NOTHING.

THE HOPE IS THAT PUBLIC PERCEPTION WILL BE POSITIVELY INFLUENCED BY RELEASING THIS OIL. THEY WILL NEED TO KEEP DOING THIS ON A REGULAR BASIS IF THEY WANT TO KEEP HOPE ALIVE.

WE ARE ONE MAJOR MIDDLE EASTERN CRISIS AWAY FROM AN ENERGY PROBLEM THAT COULD DESTROY THE VALIDITY OF MOST ECONOMIC MODELS THAT OUR ECONOMY IS BUILT ON.


Contango


What Does Contango mean?

When the futures price is above the expected future spot price. Consequently, the price will decline to the spot price before the delivery date.

The opposite of backwardation.  

Backwardation


What Does Backwardation Mean?

A theory developed in respect to the price of a futures contract and the contract's time to expire. Backwardation says that as the contract approaches expiration, the futures contract will trade at a higher price compared to when the contract was further away from expiration. This is said to occur due to the convenience yield being higher than the prevailing risk free rate.

When backwardation does occur in a futures market it has been suggested that an individual in the short position would benefit the most by delivering as late as possible.

Backwardation in futures contracts was called "normal backwardation" by economist John Maynard Keynes. This is because he believed that a price movement like the one suggested by backwardation was not random but consistent with the prevailing market conditions.

Backwardation is the opposite of contango.