Wednesday, November 30, 2011

Here Is What Happened After The Last Global Coordinated Central Bank Intervention....................

Here Is What Happened After The Last Global Coordinated Central Bank Intervention In September

When you flood the market with liquidity, risk assets go much higher in the short term. It never really works out in the long run though, see the chart.



Victory; a matter of staying power.
Victory belongs to the most persevering.
It is the fight alone that pleases us, not the victory. 

I look at victory as milestones on a very long highway. 

A mind troubled by doubt cannot focus on the course to victory. 

Men talk as if victory were something fortunate. Work is victory. 

The moment of victory is much too short to live for that and nothing else. 

The nerve that never relaxes, the eye that never blanches, the thought that never wanders, the purpose that never wavers - these are the masters of victory. 

Far better it is to dare mighty things, to win glorious triumphs even though checkered by failure, than to rank with those poor spirits who neither enjoy nor suffer much because they live in the gray twilight that knows neither victory nor defeat. 

Winners have a particular way to go about things, and that is what differentiates them from the rest. If you want to be a winner at whatever it is that you do, you need to start doing what winners do. Now there are a multitude of factors that can be looked at, but let's start with 5 simple ways to create a solid foundation for developing the proper mindset of being a true winner.

1. Take Action

One of the first characteristics that we will find in winners is that they are willing to take action to solve their problem. Even before that, they acknowledge that there is a problem. Too many people will complain about a problem, and blame it on someone else. Since it is someone else's fault, they should fix it (not me). It is easier to complain than to take action and do something about it myself.

2. Passion

Nothing significant gets done by just thinking that it would be nice to do or to have someday. To be a winner, you must focus on the prize and be committed to accomplishing it. There will be many things that discourage you. Failures and 'knock-downs' will challenge your resolve. Passion is what will get you through to eventual victory.

3. Be Teachable

If you know everything already then there is no need to grow or improve. If you recognize the need to learn more – about everything – then you are teachable. This is an attitude. It is a desire to always learn, always improve. That is the only way to be a winner.

4. Be Willing to Stand Alone

A winner is often alone. It may be because they are hard at work practicing while others are watching TV. It may be because they are following their own vision for success rather than following the crowd. Because of their passion and willingness to take action, they already stand out from the crowd. They have to feel OK about that. Soon they will be alone at the head of their class or their business.

5. Love People

A winner will rarely be the person who avoids other people at all cost. The winner enjoys people. Even if she is an introvert, she will recognize that she can never succeed on her own. She understands that the gifts and inputs of other people will make her a better person. The winner will develop an attitude of caring for other people – both those who have few resources, and those who have more. There love will win people over and help them accomplish their goals in life.

These are just a sampling of some of the characteristics of winners. Hopefully, we can look at these and identify some that are a part of us, and some that we can strive to improve. That is all a part of how to be a winner. It means always moving on toward the goal.

Think about how many books and audiotapes and seminars, as well as all the articles online such as this one, that exist in the world. You'd think we'd have an overload of successful and happy people everywhere with all this information available. Here's the thing though. Most people will read a book or listen to an audiotape once, and get a little bit of a lift out of it, but then it's gone, and they figured that the content just didn't work for them. Let me ask you this, how often do you bathe? Well, that's how often you need to expose yourself to motivation and self improvement material. Motivation is not permanent, and neither is bathing! 

Start thinking along those lines, expose yourself to motivation continuously, and always look for ways to boost your determination and drive. Understand that the boost that you get is not permanent and that you need to keep absorbing motivation on an ongoing basis.

Positive thinking

Yes, we have all been told this over and over, how positive thinking is important. However, you need to look at positive thinking from another perspective. Truth is, positive thinking on its own will not move mountains. You can be the most positive person on earth but if you don't take action or, don't learn from your errors, and such, then it will all be in vain. But positive thinking is important because it is BETTER THAN negative thinking. With negative thinking, you don't even stand a chance to succeed. You are not even in the ballpark to make it happen. At least with positive thinking, the hope is there. A few tweaks, a few actions, a few lessons learned, and you are on your way to becoming a winner. Don't let yourself remain a victim of negative thinking. Embrace positive thinking, not because that in itself is life changing, but because it can provide you with the opportunity to figure out how to change your life and because it is plain and simply better than negative thinking.

Take care of your health

Let me ask you this question: If you had a million dollar race horse, would you feed it junk food and let it slip into poor health, or would you do everything in your power to feed it properly and keep it in the best shape possible? Well guess what, you are that million dollar race horse! Never forget that. Start treating your body and your health with the proper care that it truly deserves. Remember to always work harder on yourself than on anything else in your life. Your body and health is the "battlefield", where everything in your existence happens. Promise yourself to always maintain it in pristine condition and treat it better than you do anything else. Once you start doing that, then you will start being on track to developing the mindset of a real winner.

10 reasons the crisis isn’t over............... AN ABSOLUTE MUST READ!

10 reasons the crisis isn't over

There may be a lot more bad news to come

Stock markets around the world soared yesterday. The Dow jumped more than 300 points.

News out of Europe says they're working on a fix to resolve the crisis there. Reports here say the holiday season may be off to a strong start. Sales on "Black Friday" may have hit a record.

So, is that it? Is the crisis over? Is it time to ramp up your equity exposure, take on more risk?

Here are ten reasons to be skeptical. This sure looks like a dead cat bounce.

1. The market was due a rally. 

The Standard & Poor's 500 index SPX +0.89%   had fallen seven days in a row. But equity markets never fall in a straight line. After a long run of down days, people who've been betting against stocks by selling short get tempted to lock in some of their profits by buying stocks back. Others who want to buy stocks see sharp falls and get tempted to "bargain hunt." This inevitably produces quick, sharp rallies. This one may last a day, a week, a month or more. That doesn't mean a thing about long-term trends.

Black Friday -- the day after Thanksgiving -- alone saw online sales of $816 million, and another strong Cyber Monday could already be in the works, according to comScore, which tracks online holiday spending.

2. The report from Italy, one of the items sparking bullish sentiment, has already proven a crock. 

A news report there over the weekend said the International Monetary Fund was working on plans to step into the European debt crisis with a gigantic $600 billion bailout. The report has been dismissed, on the record, by an IMF spokesman.

3. The reports from northern Europe are absurd. 

Markets are excited by reports that Germany, France and Brussels are working on a new "bailout" plan. But look at the details! Under the proposals, the European Union will help insure the debts of countries in crisis, but in return it will be given veto powers over the budgets of the countries in question. This idea can't survive 10 seconds of serious thought. The Greeks are rioting over budget cuts proposed by their own governments. What possible chance is there that they — or the Italians, or the Spanish — would accept austerity measures imposed by Brussels?

4. Are the Germans suddenly reflationists? 

The only politically feasible way out of the European crisis is to turn on the printing presses. That either means letting the European Central Bank print more euros, or letting countries like Greece drop out of the euro, so they can print their own currencies. But so far neither is on the agenda. Germany won't let the ECB print. And countries aren't ready to drop out of the single currency. Until one of these happens, there will be no resolution to the crisis.

5. Italy is still in trouble. 

Gross government debts are 120% of gross domestic product, and even net of intra-government liabilities they are 100%. Ken Rogoff and Carmen Reinhart, in their sweeping history of financial crises, This Time Is Different, found that 100% was the "tipping point" for serious trouble. No wonder investors are demanding 7.5% annual interest to lend money to Italy for five years — compared to just 1.3% for Germany. And they're demanding more than 6% to lend to Spain.

Companies that provide the plumbing for the $4 trillion-a-day foreign-exchange market are testing systems that could handle trading of previously shelved European currencies,

6. China's real estate market is looking ominous. 

In the past few years, economic growth in China — fueled in part by its gigantic housing boom — has helped keep the rest of the world economy from falling apart completely. Now Chinese real estate prices are tumbling, developers are going bust, and the OECD has warned that this poses a risk to the world's second largest economy. In its latest report the OECD calls the health of China's real estate companies "a prominent domestic risk overshadowing the economic outlook."Read "China may be at a policy turning point."

7. The U.S. consumer is still broke. 

Among the more baffling reasons for cheering yesterday was a report saying that "Black Friday" Christmas sales jumped sharply from 2010, hitting a new record. Investors saw the chaotic — and nationally embarrassing — scenes over the weekend, fistfights, pepper sprays and the like. Bloomberg reported on a woman 12 weeks pregnant camping out in the freezing cold to get a deal on a flat screen TV. If anything, this should make rational people more gloomy. Have we learned nothing? The numbers are not heartening. Despite the lies you read and hear, telling you that American consumers "are repairing their balance sheets," the truth is total household debts in this country have fallen by a mere 4.5% from the record peak at the height of the bubble a few years ago. They are still 20% higher than they were as recently as 2005, and twice what they were in 1999. According to the Federal Reserve, consumer credit levels are rising. And according to the Commerce Department, households are saving less than 4% of their disposable incomes — a fraction of the levels seen decades ago, and well down even from 6% or more seen in 2008-9. Read "Black Friday sales hit record, giving season hope." CONSUMER SPENDING UP ON CREDIT! THIS IS GOOD? BULLSHIT!

8. Millions here are still out of work. 

The unemployment situation is far, far worse than the government is telling you. Forget the official jobless rate, 9%. It's meaningless. Even the so-called "underemployment" rate doesn't tell the full story. Consider this: According to the Labor Department, the number of men age 25 to 54 who are out of work is officially 4.2 million. The reality? Deep in the footnotes the Labor Department says there are 61.6 million men in America age 25 to 54, while just 46.7 million are in full-time work. That leaves 14.9 million left over. Another 3.7 million work part-time. Seven million aren't accounted for at all.

9. Meanwhile equities still aren't cheap. 

This shouldn't be overstated: There are reasonable deals out there, especially among some of the blue chips here and overseas. But U.S. stocks overall trade on 21 times their average earnings of the past 10 years, according to data compiled by Yale economics professor Robert Shiller. This, the so-called "cyclically adjusted price/earnings ratio," has proven historically to be a reasonable yardstick. The average since the 1880s has been about 16 times.

10. The economic outlook is gloomy. 

Western governments have spent the last few years borrowing heavily from the future to try to stimulate growth today. According to the IMF, in the past three years the gross debts of the advanced economies have risen in aggregate from 80% to 100% of their entire GDP. We are likely to see them tighten their belts next. This was the agenda of the budget "supercommittee" here and of austerity plans in Europe. No wonder the OECD warns that it expects world economic growth to slow next.

Demand is the problem. It's a problem for the eurozone, it's a problem for America, and it is a problem for the UK. With the fiscal and monetary cannon pretty much exhausted across all three economies, it's depressingly difficult to see where salvation might eventually come from. At the zenith of the boom in 2007, Gordon Brown boasted that the UK had experienced the longest period of uninterrupted growth in history. And boy, are we now being made to pay for it.  STUPID IS AS STUPID DOES!


This Is The Reason The House Prices Will Fall Another 8% Next Year................... AN ABSOLUTE MUST READ AND WATCH

This Is The Reason The House Prices Will Fall Another 8% Next Year

Bank of America Merrill Lynch senior U.S. economist Michelle Meyer appeared on Bloomberg TV to talk about the housing market recently, and her outlook wasn't too bright.

Meyer named tight credit and poor economic conditions for the housing downturn. She then added that she doesn't expect it to end anytime soon.

In fact, she went on to say that her team's baseline scenario for housing prices is drop of 8% next year, with the only real growth coming from distressed home sales.

"I think the most effective policy we can see is one that deals with the foreclosure inventory after it's gone through the process...there's a lot of homes in the shadows, and an efficient process to clear those homes could really be a win-win with for the market."

Nor will housing construction pick up the slack for new homes. "The challenge with new home sales is that builders are competing with a lot of the existing properties that are selling at a deep discount. So I actually think that housing demand could pick up next year but most of the demand will be for the distressed properties that are selling at a discount rather than new construction homes."

Taken together, she says, the housing industry probably won't turn around for a good two years. IT WILL BE MUCH LONGER THAN THAT! IT WILL BE WORSE IN TWO YEARS THAN IT IS RIGHT NOW!


With the European End Game now in sight, the primary question that needs to be addressed is whether Europe will opt for a period of massive deflation, massive inflation, or deflation followed by inflation.

Indeed, with Europe's entire banking system insolvent (even German banks need to be recapitalized to the tune of over $171 billion) the outcome for Europe is only one of two options:

1)   Massive debt restructuring

2)   Monetization of everything/ hyperinflation

These are the realities facing Europe today (and eventually Japan and the US). Either way we are talking about the destruction of tens of trillions of Euros in wealth. The issue is which poison European powers that be will choose.

I believe we are going to see a combination of the two with deflation hitting all EU countries first and then serious inflation or hyperinflation hitting peripheral players and the PIIGS.

In terms of how we get there, I believe that in the next 14 months, the following will occur.

1)   Germany and possibly France exit the Euro

2)   ALL PIIGS defaulting on their debt

3)   Potential hyperinflation in the PIIGS and peripheral EU countries

Regarding #1, we are already beginning to see hints of this development in the press:


Ministers are understood to be deeply concerned that French President Nicolas Sarkozy and Germany's Chancellor Angela Merkel are secretly plotting to build a new, slimmed down Eurozone without Greece, Italy and other debt-ridden southern European nations.

Well-placed Brussels sources say Germany and France have already held private discussions on preparing for the disintegration of the Eurozone.

Economics professor Karl Smith writes on his blog Modeled Behavior that the situation on the ground is more grim than people realize. It's no longer just about sovereign debt, and the ECB, but about a breakdown in the banking system.

This malfunctioning appears to be down right mechanical with trades regularly not settling on time, collateral not being delivered, awkward interventions by local regulatory agencies and a host of other deep, deep problems.

I don't have it all sorted out but its not clear that there is a fully functioning money market in Europe right now. Well informed opinion suggests that there is literally a shortage of know-how on the ground. That is to say, some large banks or brokers cannot trade in certain types of paper because they don't have anyone on staff who knows all of the relevant institutional details.




John Taylor, manager of the hedge fund FX Concepts, was on Bloomberg TV this morning 

discussing the euro.

As usual, his points are very sharp and worth considering.


Taylor on the outlook for the euro:

"It is absolutely incredible. It's a death struggle for this currency. It is really worse than I could have dreamed it being.  And unfortunately it has a bleak outlook ahead."

On whether there will be a breakup of the euro:

"Probably. Some parts of the euro will have to be out.  There is no way Greece or Portugal can stand it."

On why the euro is not back down to $1.20 given its bleak outlook:

"What's stupid is that the ECB is holding it up.  Why are they holding up the euro? One of the problems, besides the ECB, is the banks are shrinking, and the banks are selling all of their offshore assets and bringing them back to Europe.  That means in fact there is a persistent buyer of euros and it's their own financial institutions."

On why the euro spiked in October and went back down in November:

"It is really hard. For me the outlook is bleak, but there is always the hope that the bleaker it gets the more the governments are going to wake up and do something.  It gets to be this bipolar situation. The worse it is, then by God something will happen.  That is what happened yesterday. We had articles coming out over the weekend saying that Europe had 10 days to live.  The next thing you know, boom, the euro is way up.  If it is that bad, [Angela] Merkel has to wake up and do something."

On the yen: 

"The market does not know what the hell to do with Japan.  Things are very quiet in Japan.  The economy is not growing very much. We have gotten over the earthquake thing.  Toyota made the comment yesterday they will have to move business offshore.  It looks to me like the dollar yen is going to rally slightly.  On the other hand, when Europe collapses, then money will move back into the yen because it is safer than Europe.  People are scared of the United States because God knows what Bernanke is going to do.  Of the four currencies, you've got Europe and England is very close.  The U.S. has Bernanke to worry about.  Japan is just sitting there.  It's like a rock. It is not growing or shrinking, it is just there. It is safe in a way."



WHY BANKS AREN'T LENDING.................

Do you want to know the real reason banks aren't lending and the PIIGS [Portugal, Ireland, Italy, Greece, Spain] have control of the barnyard in Europe?

It's because risk in the $600 trillion derivatives market isn't evening out. To the contrary, it's growing increasingly concentrated among a select few banks, especially here in the United States.  WHATEVER SCARY SOUND THEY PLAY DURING ESPECIALLY SCARY MOVIE SCENES, YOU SHOULD BE HEARING IT AFTER THE PRECEDING STATEMENT.

In 2009, five banks held 80% of derivatives in America. Now, just four banks hold a staggering 95.9% of U.S. derivatives, according to a recent report from the Office of the Currency Comptroller.

The four banks in question: JPMorgan Chase & Co. (NYSE: JPM), Citigroup Inc. (NYSE: C), Bank of America Corp. (NYSE: BAC) and Goldman Sachs Group Inc. (NYSE: GS).

Derivatives played a crucial role in bringing down the global economy, so you would think that the world's top policymakers would have reined these things in by now - but they haven't.

Instead of attacking the problem, regulators have let it spiral out of control, and the result is a $600 trillion time bomb called the derivatives market.

The notional value of the world's derivatives actually is estimated at more than $600 trillion. Notional value, of course, is the total value of a leveraged position's assets. This distinction is necessary because when you're talking about leveraged assets like options and derivatives, a little bit of money can control a disproportionately large position that may be as much as 5, 10, 30, or, in extreme cases, 100 times greater than investments that could be funded only in cash instruments.

The world's gross domestic product (GDP) is only about $65 trillion, or roughly 10.83% of the worldwide value of the global derivatives market, according to The Economist. So there is literally not enough money on the planet to backstop the banks trading these things if they run into trouble. THAT'S EXACTLY WHY NO SOLUTION HAS BEEN FORTH COMING, THERE IS NO SOLUTION, NONE!


5 Charts That Show That Suddenly Something Is Going Wrong With The Consumer.........................

5 Charts That Show That Suddenly Something Is Going Wrong With The Consumer

Today the NY Fed released its quarterly report on consumer credit, and in it is a wealth of charts on the nature of consumer debt.

The charts did contain a red flag: For the first time since the recovery began, there were clear signs that in Q3, consumers started falling behind on paying their debts.

This is notable for the reversal in the pattern.


Fascinating note from Chase to a Hedge Fund : "JPMorgan Chase will no longer provide financial services to Hedge Funds or Private Equity customers."

Before you assume its Dodd-Frank regs, the services in question are 1) Checking account; and b. Savings account.

Astonishing . . .




Tuesday, November 29, 2011



1. Figure out what you're so passionate about that you'd be happy doing it for 10 years, even if you never made any money from it. That's what you should be doing.

2. Always be true to yourself.

3. Figure out what your values are and live by them, in business and in life.

4. Rather than focus on work-life separation, focus on work-life integration.

5. Don't network. Focus on building real relationships and friendships where the relationship itself is its own reward, instead of trying to get something out of the relationship to benefit your business or yourself.

6. Remember to maximize for happiness, not money or status.

7. Get ready for rejection.

8. Success unshared is failure. Give back — share your wealth.

9. Successful people do all the things unsuccessful people don't want to do.


Forget any overly complex and meandering explanation you have heard about today's market action. The real reason for the bounce is simple: oversold market coupled with yet another short squeeze (NYSE Group biweekly short interest data showing shorts spiking in the first two weeks of November due out today). 

Sitting On The Edge - We have been saying for weeks that we, along with Secretary Geithner, are concerned that European leaders have no mechanism in place to handle any sudden acceleration of the crisis. Basically, there is no financial fire department and no sign of one being hired.

Moody's and others are indicating that time is running out and it may be a matter of days. ICAP, the currency trading facilitator, said it is testing its systems for a return to the drachma or even the Deutsche mark. Italian PM Monti admitted that the breakup of the Eurozone has been broached at meetings with top leaders.

Yesterday European stocks and U.S. futures spiked sharply. The pundits are trying to pin the spike on everything from Black Friday sales to an IMF bailout of Italy. We think the spike is the reaction of a very oversold market to the resurfacing of the Sarkozy based rumor of a treaty deal for fiscal linkage. But, even if it's true, can it be implemented quickly enough for a situation thought to be days away from crisis or climax?

The IMF bailout, already denied, was always unlikely since the U.S. is a key player in the IMF. Using U.S. funds for a European crisis is unthinkable in the current political environment. As to Black Friday, look what was said about last year's Black Friday last November. Also, how could it help Europe so much?

Lastly, European bond markets are more placid and skeptical than their equity cousins. That supports the oversold causation thesis.

Stock markets are only just beginning to hint of the hard times that lie ahead. The almost insane world of debt is rolling close to the cliff, and finally sees the increasingly hard times that lie ahead.

Crumbling empires of debt will act like cement rollers, crushing everything in their path. The occasional rebound or bounces on the lows will be sudden and short-lived. 

As of now, both the Dow Jones Industrial Average and the S&P 500 Index are down for the year. I call this Stage One. Stage Two will occur as the Dow sinks into the 10,000s. Stage Two Point Five will occur once the Dow starts trading below 10,000. When the Dow finally trades under 10,000 once more, consumer sentiment will change from hope to fear and anxiety. … who will save us then?



We're in "DEFCON 3, two stages from a financial collapse so huge it's hard to get your 

mind around."

Forget yesterday's rally.

In his opening segment on Mad Money last night Jim Cramer warns that Europe could easily spoil any party we're having in the US due to the collapse in credit.

He walks through a fairly long (but very basic) explanation of what credit is, and how central it is to the economy, before (around the 6:30 mark) declaring that we're in "DEFCON 3, two stages from a financial collapse so huge it's hard to get your mind around."

In the video below, he continues to expound on his point from the first video.



Are corporate balance sheets really the strongest in history?............

Are corporate balance sheets really the strongest in history?

It is freely accepted by investors as fact that U.S. corporate balance sheets are the stronger than ever before in history. This view is largely driven by the significant amount of cash (checking deposits, savings deposits, money market funds, commercial paper holdings) on corporate balance sheets. Our difficulty with this view is that no single line item on a balance sheet is a sufficient indication of "strength." Most useful measures are derived from ratios at the very least, and ideally calculations across a variety of dimensions.

The best line item on corporate balance sheets today is typically "Cash and Equivalents." But while the amount of cash and cash-equivalents on U.S. (nonfinancial) corporate balance sheets has increased significantly, particularly relative to the cash-strapped lows of 2009, corporate cash is certainly nowhere near historical highs relative to debt. As a side note, probably the dumbest use of balance sheet data that we hear from time-to-time is when analysts talk about the P/E multiple of a stock "after you back out the cash," as if the cash line item can meaningfully be subtracted from the market cap of the equity. Really? If a company issues a billion dollars of debt, and then holds the proceeds in cash, does that suddenly make the stock "cheaper" because we can now back out that cash from the company's market cap? Um, no.

While cash holdings are relatively high compared with total assets and net worth, even those figures are in the range of 5-10%, only about 3 percentage points above historical norms. Cash levels are "high" in the sense of being a larger percentage of total assets than normal, but the "excess" cash amounts to roughly $700 billion, versus total assets of non-financial corporations of about $28.6 trillion. The excess is fairly second-order from the standpoint of overall balance sheet "health."

The best that can be said is that corporations are fairly liquid here, but this is a much different statement than saying that corporate balance sheets have "never been healthier in history." In evaluating overall balance-sheet health, it is important to consider the overall debt burden of corporations.

As the following chart shows (based on Federal Reserve Flow of Funds data), the debt burden of U.S. corporations is near all-time highs, having retreated only modestly since 2009. Debt burdens are elevated regardless of whether they are measured against total assets or net worth. Certainly, corporations are presently benefiting from very low interest rates on corporate debt, which substantially reduces the servicing burden of these obligations. But the combination of high debt levels and low servicing burdens does create a potential risk to corporate health in the event that yields rise in future years. Overall, the picture is fairly stable at present thanks to low yields and high levels of cash-equivalents, but it is important for investors to keep in mind that cash can burn fairly quickly during economic downturns, and debt is not spread evenly across corporations.

The bottom line is that at an aggregate level, corporate balance sheets look reasonable, but are certainly not "stronger than they have ever been in history." Cash levels are elevated, but this is at best a second-order factor (with excess cash representing only a few percent of total assets), while debt remains near record levels relative to total assets and net worth. In any event, balance sheet risks should be evaluated on a business-by-business level, rather than accepting the blanket notion that cash levels are so high that nobody needs to worry about corporate credit risk.

In going through the Flow of Funds data this week, I thought a few other features of the data were interesting. First, was the profound decline in tangible assets as a percentage of total corporate assets since 1980. This decline goes hand-in-hand with an increase in financial assets held by non-financial companies. At present, more than half of the total assets held by non-financial companies in the U.S. represent financial assets such as debt securities and equities. This is striking, in that we presently have a menu of prospective returns on financial assets that is among the most dismal in history. While the move toward zero interest rates has certainly been excellent for bonds when we look in the rear-view mirror, the fact that prospective rates of return are now so low suggests that a large portion of corporate assets are unlikely to achieve very much in the way of future returns, barring a decline in those asset prices. Something to think about.

Finally, the Flow of Funds data include two handy series, one representing the total net worth of nonfinancial companies, and the second representing the market value of the equities (stocks) of those companies. Intuitively, if those calculations are any good, one would expect the ratio of equity market value to total net worth to be a reasonable valuation indicator.

In fact, that's just what we see. Though the Flow of Funds data isn't as useful as one would like in practice (since it is only reported quarterly with a lag), it turns out that a low ratio of equity market value to total net worth is a very good indicator of high subsequent total returns for the S&P 500 over the following 10-year period. In contrast, a high ratio of equity market value to total net worth is predictably followed by weak 10-year total returns for the S&P 500.

Let's call this the price-to-net-worth ratio. As of the latest data, the market value of the equities ($15.21 trillion) for non-financial companies was nearly equal to the total net worth of those companies ($15.05 trillion) for a price-to-net-worth ratio of about 1.01. Note that this is NOT fair value - rather, the historical median and average of the price-to-net-worth ratio is just 0.75. The present level of about 1.0 has historically corresponded to a subsequent 10-year S&P 500 total return averaging only about 5% annually, which is fairly close to the estimate we get from a variety of other historically reliable methods, though the recent decline has improved our expectations a bit. Note that the right scale on the following chart is inverted, so higher levels of valuation on the left scale (blue line) correspond to weaker levels of subsequent return on the right scale (red line).

The Root Cause of Market Failure Lies In Higher Education..........................AN ABSOLUTE MUST READ!

The Root Cause of Market Failure Lies In Higher Education

A little noticed Associated Press news story last week reported that China now plans to phase out college majors that consistently produce unemployable graduates. Any program in which 60% of the graduates failed to find work for two consecutive years would face funding reductions until supply was brought back into balance with demand.

This Chinese hand may not be invisible, but it would be one that Adam Smith would recognize. Isn't it amazing that even self-identified communists are figuring out that markets only work when adjustment mechanisms act to reduce surpluses and shortages? Destroy those mechanisms and unemployable college graduates pile up as fast as unsold electric cars.

The back story is a simple one illustrating the old adage: He who pays the piper calls the tune. In a world turned upside down, China's rulers want to make sure the young cadres they educate at the people's expense actually find jobs in the private economy. Here in the U.S., where outstanding government guaranteed student loans have recently passed the $1 trillion mark, education policy is geared not toward maximizing the employability of graduates, but toward garnering votes for politicians.

How so? After years of cultural bombardment, a college education has gone from being a means to an end - a successful career - to an end in itself. Parents who don't send their children to college lose status. American kids feel both entitled and pressured into getting a college education regardless of whether they have the intellectual capacity to profit from it, the work ethic to manage it, or the money to pay for it.

Alternative means of career training, like apprenticeship in trades that remain in demand - because, after all, you can't fly in Chinese plumbers - get no social respect. This despite the fact that skilled plumbers, with a little hustle, can out-earn most liberal arts majors.

Countless politicians now call college education a "right," alongside food, housing, and medical care. They pander to the education establishment, promising to deliver diplomas no matter how much of other people's money they have to spend. Meanwhile, the intelligentsia looks askance when college students are encouraged to choose a major based on practical expectations of future employment, suggesting instead that students should follow their muse.

To finance this so-called "right" to a college education a Government Sponsored Entity known as Sallie Mae, originally the Student Loan Marketing Association, was created in 1972 to issue below market rate student loans guaranteed by the federal government. Like its cousin Fannie Mae in the home mortgage business, lending practices were guided by political considerations, not sound economics. Just as Fannie Mae fueled an unsustainable housing bubble, Sallie encouraged runaway college tuition increases. And just as the federal government was forced to nationalize Fannie Mae when the bubble bust, Uncle Sam has now nationalized the college loan business with an eye on disguising the coming tsunami of student loan defaults.

Such policies have consequences. Too many aspiring young museum curators can't find jobs? The pragmatic Chinese solution is to cut public subsidies used to train museum curators. The free market solution is that only the rich would be indulgent enough to buy their kids an education that left them economically dependent on Mommy and Daddy after graduation. The progressive American solution is to seek increased public funding to build more museums.

When such make-work spending fails - as it must during periods of fiscal belt tightening - do progressives encourage mal-educated kids to look around, see what needs doing, and start businesses of their own? No. They urge them to take to the streets to bang drums and chant slogans.

The system is nearing breakdown, which will come when student loan defaults finally push the federal agency that guarantees such loans into bankruptcy. At that point, we will have to face the fact that capping off adolescence with a four-year party at taxpayer expense is a luxury we can no longer afford.

College participation rates will have to go back down to historical norms. Slots will have to be reserved for students that can actually profit from them, restoring graduation rates to where they were before colleges were flooded with people who don't belong there, including illiterate freeloaders. Selection will have to be based on merit, not social engineering. Loans will have to be restricted to majors that confer capacity to pay the loans back. Dead-end programs used to train the next generation of professors - whose only skill will be to teach more such dead-end programs - will have to be limited, funded not by taxpayers but by ideological philanthropists with a hankering for fineries like literary criticism and gender studies.

This may seem like common sense to most people, but it strikes horror into the hearts of the liberal professoriate. After years of feathering their nests so they can produce students trained only to bite the hand that feeds them, perhaps it's time to serve up a few helpings of horror. 

We can no longer afford to take the snobbery of academics seriously. Taxpayers just don't have the money to keep them or their young acolytes on the dole.



It appears that FineWine is trending, because barely 30 minutes have passed since we posted the correlation chart between wine and gold, that Newedge sends out a comparable correlation chart showing that if one uses Wine as a leading, or even coincident, indicator for overall risk and (alcohol infused) liquidity, then the bottom is about to fallout of stocks. From NewEdge: "Bottoms up! One of our "fringe" indicators, the Fine Wine Index (based on the 100 most actively traded wines at global auctions) continues to sag here, making a fresh 1 year low for October.... Adding to the long list of indicators failing to corroborate the recent "risk on" animal spirits."

Bottoms up pretty much sums up todays equities market as 

well.  So lets toast to the next leg down.



Monday, November 28, 2011


Record low interest rates and record high debt levels are a marriage that history tells us won't last long.


The market is once again shooting first, and doing the math later. While the EURUSD has dropped substantially from its premarket highs,the ES is now much higher, well over 1% more than Friday's close. Looks like the futures are all alone in this latest attempt to ramp everyone on the wrong side and sell to the greater fool. 

Futures are screaming higher overnight on yet more rumors of another European bailout deal for Italy.

According to unverified reports from La Stampa, the IMF is preparing a 600 billion euro ($794 billion) loan for Italy. The paper has refused to state where it got the information.

But that small detail is of no consequence to traders hungry for some green on the screen after November saw $4.7 trillion wiped out from global equity values. If we were to open here, markets would gap up nearly 2%, breaking a seven-day losing streak for US equities. 

The bailout rumors are just that — rumors. Note that the U.S. is a major funder of the IMF, and a bailout of Italy with US Taxpayer dollars wont go over well in an election year.







Britain's Foreign Office Prepares For Riots In Europe; Sees Euro Collapse "When, Not If"

As every major developed economy hits the Keynesian Endgame, the status quo is set to change dramatically. Nowhere is this climax playing out louder than in Europe and the implicit solution of Germany-uber-alles (while seemingly inevitable though nevertheless lengthy in execution) is likely to not sit well with many of the EMU nations. To wit, The Telegraph today reports that Britain's Foreign Office is advising its overseas embassies to draw up plans to help expats should the collapse of the Euro turn explosive. Almost incredibly, a senior minister has revealed that Britain is now planning on the basis that a euro collapse is matter of time.

EFSF Cash For Irish Bailout Running Out.........OOOPS!

Just when Europe thought it would only have to worry about an Italian bailout, we get news that not only is Greece about to renegotiatie its entire debt haircut but that there may not be enough cash to fund Ireland. 

From the Independent: "As EU leaders dither, the European Financial Stability Facility (EFSF) -- the limp pan-euro bailout fund -- may struggle to raise enough money to fund the payments to Ireland agreed under the €67bn IMF/EU bailout package. There is "genuine fear" that the fund may not be able to access the markets as investors shun the euro region, according to UBS." 

European leaders clearly saw how weak the market closed every day last week (futures accelerated to the downside after 4 pm) and are trying to talk up the market. We remain highly skeptical and will continue to use overly optimistic rallies to get shorter.

Why Did The Fed Inject Banks With A Record Amount Of "Other" Cash In The Past Week?

For all its obscurity, the Fed's balance sheet is relatively simple: on the right there are the liabilities such as currency in circulation (which is relatively flat at around $1.1 trillion but rising slowly (for now) every week), and excess reserves, at $1.5 trillion, or the money that is "parked" with banks and is the topic of so much consternation: will it ever spill out into the broader economy, won't it, and if not why not, and if yes, will it cause hyperinflation, and other such tangential ruminations. Then on the left we have the assets, or the "stuff" that backs the currency in circulation and excess reserves, such as Treasurys and MBS, which total $2.6 trillion, and which are the primary variable in every Large Scale Asset Purchase episode also known as Quantitative Easing: should the Fed "print", or said otherwise, "purchase" assets, then the excess reserve number goes up first, with a hope that it will slowly spill over into currency in circulation and other broader monetary aggregates. Lastly, there is also the Fed's capital account or "shareholder equity" for purists, but since the Fed can never in theory be undercapitalized by conventional definitions, this is merely a placeholder. Another broad way of looking at the Fed's assets is "factors that supply reserve funds" or "source of cash", and liabilities as "factors that absorb reserve funds" which is, logically, "use of cash." The key assets and liabilities noted above are the major components of the "flow" - they move glacially up and down, and are priced in well in advance of such moves. It is the marginal, or far small number that matter, and that fluctuate materially from week to week, that are not priced in, and are thus market moving. One such curious liability which we pointed out recently is the Fed's reverse repo agreements with foreign banks: in the week following the MF Global bankruptcy these soared to a record $124.5 billion. Basically, foreign banks scrambled to procure a record amount of US Dollars while repoing Treasurys and who knows what else with the Fed, an indication that other conventional liquidity conduits had frozen in the days following the Halloween MF massacre. Since then the Fed's Reverse Repo balance has moderated to more normal levels as Treasurys have gone out of repo with the Fed. Yet something more troubling has just been spotted. In today's one-day delayed issue of the Fed's H.4.1, literally the very last number on the very last subpage in the weekly update reveals something quite disturbing. Namely the Fed's "other" non-reserve based factors absorbing liquidity. And specifically, the actual number, which rose by an unprecedented $88 billion in one week to an all time high of $115 billion for the week ended November 23! We wonder: in this day and age of trillions in fungible excess reserves, and discount window stigmata, just what was it that caused US banks to demand a record amount of effectively under the table cash from the Fed?

Why is this troubling? Because unlike reserves, this number is effectively not defined, and there is no clear transposition between assets and liabilities, not to mention that "other" could mean virtually anything. So in SOME ways this could simply be a plug to a plug (such as Fed Capital), and reading too much into it may simply be an exercise in futility.  On the other hand, what we do know, is that by the generic definition of factors absorbing liquidity, in the past week, a domestic financial institution (because unlike last time around, this was not a foreign-based need for cash) was the willing and ready recipient of an incremental $88 billion in "reserves" - read cold, hard cash.

We wonder: in this day and age of trillions in fungible excess reserves, and discount window stigmata, just what was it that caused US banks to demand a record amount of effectively under the table cash from the Fed?

Exhibit 1:



"If society consumed no energy, civilization would be worthless. It is only by consuming energy that civilization is able to maintain the activities that give it economic value. This means that if we ever start to run out of energy, then the value of civilization is going to fall and even collapse absent discovery of new energy sources."

                       Dr. Tim Garrett, University of Utah

The New Oil Cycle is Suffocating Economic Growth

There was a time when central bankers used to fight high oil prices with interest-rate hikes. But we are now in a different era with that equation, and central bankers are more likely to lament, as Ben Bernanke quipped in his spring 2011 press conference, that "the FED can't print oil." Yes, precisely. At the zero bound of interest rates and with debt saturation coursing through the private and public sector, the developed world faces not an inflationary restraint from oil prices, but rather an additional deflationary barrier. 


In the old oil cycle, new supply of petroleum was brought online to restrain rising prices. In the new oil cycle, declines from existing fields neutralize this new supply, for a net global supply gain of zero. In the old oil cycle, recessions benefited large consumer countries like the United States as oil prices fell, giving a boost to the economy. In the new oil cycle, the price of oil falls only for a short time before resuming a higher swing. In the old oil cycle, the developed world set the oil price through swings in its demand. In the new oil cycle, the developing world, with its much lower sensitivity to high prices now sets the floor on oil. Most of all, the new oil cycle caps growth in the developed world. The new oil cycle kills the economies of the OECD nations. WITHOUT AN ABUNDANT SUPPLY OF SOME NEW, AFFORDABLE, ALTERNATIVE ENERGY, EVERYTHING WE HAVE KNOWN OVER THE LAST FIFTY OR SIXTY YEARS IS GOING TO END AND IGNORING THIS FACT IS ONLY GOING TO MAKE THE OUTCOME WORSE.  

Peak Autos

Let's take a look then at the multi-decade chart for light vehicle sales from 1967-2011. FALLING LIKE A ROCK!

vehicle sales

Anyone familiar with a chart of the US stock market or US employment will immediately spot the long-arc downward trajectory that begins in a very familiar place: 1982. That was the dark place, after twin recessions and a rude (but healthy) Volkering of inflation, from which the great bull market in stocks was born. This reflects current discussions of 1) how much the stock market could recover, 2) how much the employment market could recover, and 3) how much wages or real GDP could recover. 

The US has made a huge mistake in continuing to invest billions of dollars in public capital into the Auto-Highway Complex. But let's at least disabuse ourselves of the notion that automobile transport has been a free-market phenomenon for nearly all developed nations. Both in Europe and in the US, automobile manufacturing has been a key part of the industrial (and political) structure for decades. And I am merely using this sector as a current example of a beloved and favored means to economic growth that no longer works for economies now that we've entered the new oil cycle.

In the old oil cycle, higher prices would have triggered new gains in MPG standards from the automobile industry, no doubt unleashing a new round of higher automobile sales. In the new oil cycle, sales of new autos are hampered as car owners hold on tight to existing vehicles. There isn't enough growth in the wider economy to turn the fleet over. This is precisely the analytical mistake forecasters of future EV sales (electrical vehicles) continue to make when happily predicting broad adoption of electric power. Adoption is glacially slow because fleet turnover is slow. And fleet turnover is slow because the economy has been reduced to a much lower level of operation.  IT IS ABOUT RISING WAGES AND INCOMES, BOTH OF WHICH ARE CURRENTLY STAGNANT OR FALLING, AND JOBS, WHICH ARE HARD TO FIND. WITHOUT IMPROVEMENT IN ALL THREE OUR ECONOMY IS UNLIKELY TO IMPROVE. IMPROVEMENT CAN'T BE BASED ON OFFICIAL LIES WILLINGLY PUT FORTH BY THE MEDIA.  

I recently showed data which quantifies the dramatic drop in oil consumption since the 2007 highs in the US economy. As usual, the correlation between economic growth and energy consumption is nearly perfect. The drop in European oil consumption has also been quite pronounced. I might add that in the case of Europe -- which enjoys broad coverage in electrified rail transport -- the reduced oil consumption is more notable. The United States entered the current decade with a lot of discretionary oil demand that was fated to come offline, but that was not the case in Europe. The continent has been weaned from casual oil use for decades, mostly through high taxes. But that did not prevent a new low in consumption post-2006, when prices began to soar -- with predictable effects. Stuart Staniford of the Early Warning blog presents the chart below with the latest data. It's notable that Europe's economy, the largest in the world, has shed a million barrels per day (mbpd), from 15.5 to 14.5 mbpd.

oil consumption

The Rescue Myth

Let's pause here and be as frank as we can be about a rather widespread belief in the Western world shared among economists, policymakers, technologists, and corporations:The price of oil will eventually drop, and the global economy will also grow. Is that right? Well, unless you've been living in a cave, OECD countries are currently in the throes of a debt crisis, with at least 15% of the population unemployed or underemployed. Meanwhile, North American oil prices, as measured by the WTI benchmark, have just rejoined Brent at levels at/above $100 a barrel. And Western economies are now supposed to recover from this position? What price of oil are we to forecast, should the vast spare capacity and idle labor of the OECD come back online? I spoke to this issue back in 2009 in a post called Overhead Crush:

A concept that's key to resource depletion is the higher volatility phase, in which both price and supply start to hit ceilings and floors in accelerated fashion. This tends to appear first during the actual peak supply period, or peak plateau period. The pattern has been seen in previous eras in such things as wood, fish, and whale oil. When the post-peak phase gets underway the price amplitude increases even further, playing havoc with supply and demand. As demand gets killed, and then finally collapses, it causes confusion about supply. But then, as demand returns, any questions about supply are soon answered as demand once again bumps up against the supply ceiling.

Vcontracting triangleisually, we can think of demand in this phenomenon as being in a kind of contracting triangle. Every time consumption resumes after a previous demand crash, it hits the ceiling at a lower level. This is the point where, if you find yourself living in the age of biomass and wood, you get rescued by coal. For example. This is also the point where, if you are living in the age of oil, it's less likely you get rescued.

Normalcy Bias and the Problem of Growth

Normalcy bias, rampant in the West, leads most to conclude we'll be rescued. Some magical combination of new technology, new policies, or miracle energy resources will soon arrive. Even on the conventional end of this spectrum, there is still a generalized belief in the inherent ability of the system to resume growth. In a recent paper from the New America Foundation, The Way Forward (Alpert, Hockett, Roubini), we find eminently reasonable solutions that target the system as it once was, but not the way it's operating now. 

While the authors move beyond either purely Monetarist or Keynesian approaches in their solution set, their attention to energy inputs is far too moderate. Only a policy recommendation that foregrounded energy as the primary lever to apply to Western economies, rather than merely including it, would now have resonance. 

It is the energy-intensity of America in particular that must 

be confronted, not only in its domestic consumption but in 

the global energy inputs it commands through its outsourced 


Let's remember that oil, until it is eclipsed by coal, remains the primary energy source of the world, with a 33.56% share (2010, BP Statistical Review).

And now the question: If growth faces nearly insurmountable barriers, absent widespread debt writedowns or even a debt jubilee, then why are German Bunds or US Treasuries currently operating as safe havens? Do Germany and the US not occupy the same economic territory as broader Europe? A demand shock for Asian consumer goods, emanating from a collapsed Europe, would crush Asian demand for the infrastructure goods that Germany produces with such expertise.

Global markets are therefore making an enormous mistake.

In the midst of a sovereign debt crisis now hitting the developed world, they are pricing the risk as though this were like the 1980s crisis that hit countries in Latin America. But this is not a crisis in which banks in Boston, having lent billions to Brazil or Argentina, write down debt while engines of growth in Japan, Europe, and the US move forward. Rather, this is the endgame of post-war growth in the West based on an a paradigm shift in energy. ABSOLUTELY CORRECT! AND IF YOU DON'T UNDERSTAND THIS, NONE OF YOUR INVESTMENT ANALYSIS WILL BE CORRECT. 

And it would seem that even 'safe haven' bond markets have started to price in this reality. As Morgan Stanley shows in this chart of recent action in German Bunds, the price advance (and thus the yield decline) in bunds has started to slow as the recognition phase gets underway on system-wide EU debt.  WHEN THIS IS RECOGNIZED AND PRICED IN FULLY, EQUITY PRICES WILL BE MUCH LOWER, INTEREST RATES MUCH HIGHER AND ECONOMIC COLLAPSE AN UNFOLDING REALITY. WE ARE NOT FAR FROM THIS OUTCOME.

peripheral spreads

Andrew Roberts, rates chief at Royal Bank of Scotland, said Asia's exodus marks a dangerous inflexion point in the unfolding drama. "Japanese and Asian investors are for the first time looking at the euro project and saying `I don't like what I see at all' and fleeing the whole region." The question on everybody's mind in the debt markets is whether it is time to get out of Germany. The European Central Bank has a €2 trillion balance sheet and if the eurozone slides into the abyss, Germany is going to be left holding the baby." 

The Vulnerability of Having Sovereign Debt As Your Core Asset

All across Europe, the sovereign debt of EU nations forms the core asset base of key institutions critical to systemic cohesion. This debt is a call option on future growth -- a call option that most assumed would never decline so catastrophically in value and that could presumably always be rolled over. SO MUCH FOR ARROGANT, HIGHLY EDUCATED, SMART ASSES!

In the old oil cycle, such sovereign debt problems were merely a function of profligacy. In the new oil cycle, a debt crisis is no longer solvable with growth. Devaluation or jubilee are the only options. The loss to society will be borne most directly by those who hold sovereign debt as their savings. But in our present situation, it will not be a sub-set of the West that bears the loss, but the entirety of the West. The time of Containment is over. WE ARE ON THE PRECIPICE OF THE LARGEST FINANCIAL CATASTROPHE THE WORLD HAS EVER SEEN. OUR CENTRAL BANK EMPERORS ARE NOT JUST NAKED THEY ARE INCOMPETENT AND BANKRUPT AS WELL. IF YOU ARE NOT THINKING OUTSIDE OF THE BOX AT THIS POINT YOU HAVE LITTLE CHANCE OF FINANCIALLY SURVIVING WHAT IS ABOUT TO HAPPEN. 

The recognition of dim, future growth has only now begun to unfold. Gold continues to trade along the contours of growth's terminal phase and the unpayable debt now left in its wake. This impending instability, or discontinuity if you like, is what will drive the gold price over the next few years, along with policy maker's response to our decline.