Wednesday, February 29, 2012
You can do it, when you have a good and meaningful reason. You can do it, if you commit to it and act on it and persist until the goal is reached.
You can start with what is, and make it into whatever you would like it to be. You can begin from where you are, and get to where you want to be.
Instead if idly letting the moments pass by, you can make full use of each one. Instead of complaining that you don't know what to do, you can experiment with different approaches until you get it right.
You don't ever have to settle for less than the very best from life. Because you can envision what you desire and you can work diligently to make it so.
For it is the necessity of effort that enables you to dream your most treasured dreams, and then to make them real. You have the power to do it, and right here, right now, is when you can.
Wish for good luck, and you'll likely end up disappointed. Make your own luck, and you'll make it as good as you can imagine. Fulfillment does not just come to you out of nowhere. The fulfillment you experience in your life is the fulfillment you choose to create.
It might be comforting to chalk up your failures to bad luck. However, it is much more empowering to quickly and eagerly accept responsibility for all your outcomes.
Sure, it is helpful to have outside factors working on your behalf. And the best way to make that happen is to get your own committed efforts working on your behalf.
Let go of the notion that luck is something that randomly happens to you. Embrace the powerful reality that comes from making your own luck.
The life you long to live is as close as your next action. All you have to do, is to do what matters.
The fulfillment of your most beautiful dreams can begin right now. All you must do, is to do what truly matters.
You are not here to live out someone else's idea of a satisfying life. You have your very own unique perspective on what is important and meaningful.
If you're continually frustrated with what you're doing, the answer is clear. End your frustration by investing your time and effort in what matters.
When you know you're doing what truly matters, the challenges and obstacles will still come your way. However, you will absolutely have the energy, the commitment, the drive and fortitude to successfully work through every difficulty.
Life is always best when you do what matters most to you. In all you do, do what matters, and bring your very best possibilities brilliantly to life.
I attribute this to a state of cognitive dissonance, which unfortunately appears to affect the vast majority of society. Basically, most individuals when confronted with an unpleasant issue that is at odds with what they choose to believe go to great pains and extreme lengths to deny it. They are hugely biased to think of their choices as correct, irrespective of any concrete contrary evidence which is provided.
I think a fascinating example of this phenomenon appeared in Michael Lewis' latest book, "Boomerang," which I highly recommend. The hedge fund manager Kyle Bass, had arrived some time ago at the same conclusions about sovereign debt that I have just described to you. He took his findings to the Harvard professor Kenneth Rogoff, who along with Carmen Reinhard, was just preparing to release a new book, "This Time It's Different," about national financial collapse. When Bass revealed his numbers on the subject to Rogoff, the professor responded, "I can hardly believe it is this bad." Bass' reaction was: If this guy is the world's foremost expert on sovereign balance sheets and he isn't prepared to deal with reality, what hope is there? Bass was astounded.
Finally, I can't make a speech about our terminal financial state without a couple of points on derivatives, which continue to proliferate. The justly reviled ex-Fed Chairman Alan Greenspan used to extol derivatives as vehicles for spreading risk and making the system more resilient while he strenuously opposed any attempts to regulate OTC derivatives. This was just one of his many damaging initiatives and history has completely refuted him. In fact, derivatives have tended to concentrate risk as a large majority of them has ended up in a few hands, creating too-big-to-fail financial entities that are imperiling the whole system.
The idea that they net out and thus it is really a zero-sum game is equally ridiculous. Since every derivative has a counterparty, to suggest that an investor is satisfactorily hedged because derivatives offset a long with a short is simply wrong. If the counterparty fails on either the long or the short, the entire notional value is at risk. Given that the notional value of all outstanding derivatives would easily exceed a quadrillion dollars had not the Bank of International Settlements changed definitions to intentionally understate the true amount, the toxicity of this garbage is obvious.
It wasn't without reason that Warren Buffett many years ago termed them "Financial Weapons of Mass Destruction." If sufficient liquidity is not continuously made available in the entire global system, a potential implosion of derivatives would be activated and rapidly annihilate the entire global banking system.
Just another reason why quantitative easing to infinity is virtually assured.
I believe that investors can't own enough gold and silver. Don't be concerned about daily fluctuations in price. Focus only on how many ounces of gold and silver you own and, above all, make sure it is in physical form. Avoid at all costs paper gold and silver, which isn't what it purports to be and is, in effect backed by gold and silver that has been hypothecated and rehypothecated so many times that there is almost no backing whatsoever.
By Jeffrey Snider
Last week's payroll report had me thinking of Alexander Pope's 1733 "Essay on Man", particularly the well-known line of "Hope springs eternal in the human breast." Pope's book was a critique of science, particularly the hubris that was seeping into it as it unlocked knowledge of the governing dynamics of the world and universe (those bristling days of Enlightenment). For the "science" of modern economics, and its unshakable belief in its ability to manage the unmistakably unscientific system that is the real economy, last Friday was the latest spring of eternal hope.
In the context of a recovery from a steep recession, one that saw an economic dislocation of dizzying proportions, that payroll report showed just how far the bar has fallen in terms of what may constitute hope (or a recovery for that matter). Two hundred thousand plus jobs should be the norm, not the cause for celebration, particularly given that there are only slightly more jobs in this country in January 2012 than January 2005. And I could beat the dead horse of the labor force participation rate, but I don't think the statistical machinations of how employment is calculated and then perceived is really what is driving this latest incarnation of hope.
Economics, always deriving itself from math, is essentially the study of second derivatives - not just rates of growth, but changes in those rates, especially accelerations (not so much decelerations). One month does not make a trend, but it can lead to hope that such an accelerating trend is unfolding. Perhaps in isolation this might be a worthwhile assumption, but the hard truth is that this is actually the third "spring" of second derivative hope in as many January's.
It seems like ancient history, unfortunately, but the discussions of January 2010 were centered on the letter "V", as in V-shaped recovery. Again, second derivative statistics provided much of the spring of hope back then, though the single quarter sample size proved inadequate for a trend. The initial estimate for Q4 2009 GDP was nearly 6% growth. It "confirmed" that the recovery had arrived, and was about to zoom ahead, solving all manner of lingering, unsolved financial problems. The internals of that calculation did not seem to matter, particularly since 80% of that GDP growth was from inventory not-shrinking-as-fast as previous quarters. Inventory was still shrinking, ironically, but in the world of second derivatives the slowing decline was enough to calculate a healthy GDP number. IN OTHER WORDS, BULLSHIT! IT IS AMAZING HOW MANY SO CALLED EDUCATED PEOPLE STILL FALL FOR THIS KIND OF MANIPULATION. STUPID IS AS STUPID DOES!
At the same time, Census hiring was providing additional job-based "stimulus", as was a promise that the tax-credit-driven housing rebound would eliminate the negative trend in housing (it was believed to be the best housing season in years). Monetary policy saved the financial system from certain ruin, and stimulus was everywhere, making it appear that the science of economics had gotten it all right. Treasury Secretary Geithner proclaimed it the "Summer of Recovery". BUT IT WAS REALLY NOTHING BUT THE IDEAL COMBINATION OF BULLSHIT, CLUELESS FOOLS AND LIES THE FOOLS WANTED TO BELIEVE.
Except that all of that hope was a mirage. By the time of Secretary Geithner's op-ed proclamation, the bloom was off the second derivative rose. That nearly 6% Q4 growth? Revised downward all the way to 3.9% (not a bad quarter, but not V-shaped). Census hiring faded, FAS 166 & 167 hit consumer credit hard (credit card master trusts that were off-balance sheet prior were forcibly repatriated, tightening the equity-capital noose of credit issuers), and the fiscal stimulus failed to deliver any positive lasting effects.
On top of all that, the financial system was not even close to "normalized". A tiny country in the Aegean that mattered little to the mighty euro became household knowledge, as did the word "contagion". And the stock market nearly crashed again, reflecting the volatility and menacing correlation that was erupting in every marketplace.
By the end of the Summer of Recovery, recession fears had returned, the spring of hope withered in the sun of economic and financial reality. So Chairman Bernanke gave us QE 2.0.
Hope returned and blossomed. All the dark days of that summer faded into the awe of monetary muscle, all $600 billion of it. Economic statistics improved, as second derivatives suddenly shifted from deceleration back to acceleration. By December 2010, fiscal stimulus in the form of the "Bush" tax cut extension and payroll tax reduction was added to the monetary stimulus making its way through highly correlated marketplaces. By January 2011, this second well of hope had convinced economists that the recovery was on, though they were noticeably more subdued this time (no talk of the "V", though there was some cursory discussion of a "U"). Estimates at that time for Q1 GDP 2011 averaged about 4.25%. Economic science and its models can only see exuberance when so much stimulus is added.
It did not last long, as first Q1 2011 GDP came in well below those expectations. By the end of July 2011, final revisions admitted that Q1 2011 GDP actually came in at 0.4% . Worse than that, the Bureau of Economic Analysis had reconstituted its statistical understanding of all its data to conclude that both Q3 & Q4 2010 GDP were well overstated too. It essentially meant that all the QE-inspired hope was entirely unjustified. BUT IT SURE WAS FUN WHILE IT LASTED AND PROFITABLE FOR TRADERS.
Once again, by the summer of 2011, talk had returned to recession. The financial crisis, centered on Greece in 2010, had now enflamed all of the PIIGS (with four of them having been bailed out at some point), causing utter havoc in the global banking system. Both QE's were supposed to ensure ample liquidity for any circumstance, but the global wholesale money markets were dangerous liquidity deserts on par with some of the worst days of 2008. Volatility and correlation had, somehow, risen even further. I HOPE YOU ARE NOTICING A PATTERN, PERHAPS EVEN COMING TO THE CORRECT CONCLUSION THAT THE GOVERNMENT CAN'T SAVE US, THEY CAN ONLY MAKE THINGS WORSE.
By September 2011, markets had expected QE 3.0, but collateral shortages forced the Fed to the sidelines, rolling out only Operation Twist. Yet the second derivative economic data changed again, as recession chatter subsided with "better than expected" headline results. The consumer was proclaimed (for the third time) to be back. Holiday traffic was up, as was sentiment. Manufacturing surveys showed noticeable rebounds. And employment saw, seemingly, two good months in a row.
There is a distinct pattern here that should be obvious to nearly every observer. End of year optimism carries into the new year as inventories rise, buoying manufacturing, even manufacturing employment, only to falter by spring or summer of the next year. Businesses that built inventory find themselves unable to shed it, primarily because consumers were just binging at Christmas. The bills start coming due, or savings have to be rebuilt (no thanks to zero interest rates on savings balances and investments), and activity falls off dramatically. Sentiment shifts decidedly negative, only to be reversed by autumn as the binge cycle reappears - as businesses that lay dormant during the lean spring/summer lull suddenly start preparing for the Christmas season. Activity returns, though the actual amount is debatable, but sentiment turns decidedly positive. It all crashes again once the holiday bills come due the following year. Rinse. Repeat.
I think that is where we are today. The Christmas "high" is still in effect, and the bills have yet to be fully digested. This week's release of consumer credit is particularly troubling to that end. The enormous jump in the use of consumer credit in December should not be so re-assuring to economists, especially since Q4 2011 GDP was relatively weak from the consumer perspective (once again, most of the growth was inventory). After exhausting savings, consumers appear to be re-leveraging just to maintain spending rates, not advance or grow further. There is no acceleration despite the impoverishment.
The gyration of consumers around the Christmas season can be seen in the savings rate. In Q4 2009, the savings rate remained between 4% and 4.5%. While economists were busy pondering the upward slope of the V, the savings rate rose rather steadily all the way to 5.8% by June 2010. It remained near that level through August 2010 (5.6%), coinciding with the renewed fears of recession in 2010. It was as if the economy was one giant Christmas club savings plan.
The savings rate then fell again, remaining near 5.1% for all of Q4 2010, optimism returned and it seemed as if there might be a recovery after all. From there it remained close to 5% for the first six months of 2011. Since there was no significant decline in the savings rate, there was no real strength in the economy and recession fears returned. After a 5% rate in June 2011, savings again dropped dramatically, all the way to 3.5% for most of Q4 2011, dousing recession fears as the Christmas-focused savings were released, and re-imposing economic hope.
There are seasonal adjustments made to all this data, some of them more infamous and potentially confusing than others. But in the context of the roller coaster savings rate, it is not really surprising that mainstream statistical analysis cannot see these fluctuations and account for them. Part of this blindness stems from the very nature of statistical analysis itself, wedded to the data series upon which everything is based. In our current case, the statistical agencies are using procedures and extrapolations of pre-crisis data, even though pre-crisis patterns in the data are no longer valid. The math is blind to the paradigm shift that has occurred since 2008, yet its dependence on a statistically diverse dataset guarantees that it has to use data from the previous paradigm whether it is valid or not. THERE IS NO WORD IN THE ENGLISH LANGUAGE TO DESCRIBE HOW DIM MOST GOVERNMENT EMPLOYEES ARE.
Despite the elevated employment report, there is really nothing that has fundamentally shifted the economic background. Consumers are not back, and whatever growth in consumption these past two years is a function of that unevenly declining savings rate, gyrating around the Christmas spending season. This is not the basis of a full, self-sustaining recovery. Instead, it speaks more to desperation or recession fatigue than anything of strength.
This third iteration of this pattern strikes me more as the last legs of our so called recovery, rather than the foundation of a new growth phase. The savings rate can fall only so far, there is only so much room for spending absent full employment and robust wages.
Real disposable personal income reached a high of $10.5 trillion in May 2008. As of December 2011, real disposable personal income was $10.16 trillion (seasonally adjusted annual rate). Now that is up from the depths of the Great Recession, $9.8 trillion in October 2009, though a lot of that improvement is just a large drop off in tax payments and people not paying mortgages, but it still shows just how weak the circulation of money has been, and why a falling savings rate is needed just to register a weak growth rate in consumer spending. ECONOMICALLY SPEAKING, WE ARE IN BIG TROUBLE. WHEN THE NEXT CRISIS MOMENT ARRIVES THERE WILL BE NO ONE LEFT TO PUT HUMPTY DUMPTY BACK TOGETHER AGAIN OR EVEN PROP HIM UP AND FAITH IN OUR OBVIOUSLY BROKEN SYSTEM WILL BEGIN TO PLUMMET.
Traditional, self-sustaining recoveries feature dramatically rising household income. The Federal Reserve has guaranteed that household income from assets will be declining at least through 2014 (and likely beyond because, as Japan has amply demonstrated, the zero lower bound of interest rates is like a roach motel, once you check in you can never check out), so that is not an avenue.
That leaves real wages as the only possible channel, but the weak dollar and elevated commodity prices leave little incentive for businesses to expand domestically (while giving them a powerful incentive to channel internal resources overseas or into non-productive stock repurchases). What resources that have been deployed and spent for business capacity have been focused on capital equipment (especially computers), meaning the one segment that has actually been a positive economic force is focused on increasing labor productivity, meaning businesses are focused on making due with even less labor involvement.
Backstopping all of this is, of course, a European recession in full swing and a possible Greek default (followed closely by Portugal and Ireland, especially if Greece benefits from it). Though many commentators dismiss the economic collateral damage to the U.S. economy, there is no doubt that the interconnected system of global finance ensures that any transmission of euro-centric banking difficulties are spread into U.S. markets through these high price correlations (see October 2008, January & February 2009, May 2010, August 2011). These are not and will not be the seeds of economic recovery.
We don't have to look to far back in history to find another "jobless" recovery, one that struggled to find its footing before taking off. Our last recovery (2002-03) parallels much of the travails of our current predicament (minus the persistent, ongoing banking panic), particularly the inability to create jobs and produce sustainable wage growth. Indeed, it was not until mid-2003, nearly two years after the mild recession ended, that the full recovery finally appeared. But it was not wages that led the way, it was a debt bubble ($7 trillion).
There is no such bubble to rescue this recovery. The consumer economy is dying, though it is not yet dead.
The new economic pattern has been established, economic potential without artificial stimulation is far less than the science of economics wants to admit. Hope springs eternal, but only before the Christmas bills come due in spring.
The self-interest of the alcoholic is to keep drinking. Is this truly in his best interests? The answer illuminates the pathology of power in America.
If we ignore the lip-service showered on "reform," we find that there is really only one strategy in America: extend and pretend. Individuals, households, communities, cities, states, enterprises and the vast sprawling Empire of the Federal government and its many proxies--all are engaged in extend and pretend.
The closest analog is a seriously ill alcoholic who tells himself he just has a hang-over when it's abundantly clear he is suffering from potentially terminal cancer. With a hang-over, extend and pretend is the only strategy that works: you can try various "magic potions" to relieve the symptoms, but the only real cure is to give the body enough time to cleanse itself of the toxins you've created and pretend to be functioning in the meantime.
In the case of aggressive cancer, then extend and pretend is the worst possible strategy: ignoring the rapid progression of the disease only makes eventual treatment more difficult and uncertain.
The only way to treat cancer is to face it straight-on, learn as much as you can about the disease and the spectrum of treatments, consider the side-effects and consequences of various treatment strategies, and then get to work radically transforming your entire life, mind, body and spirit to effect the cure.
Why do we perpetrate the delusion of a hang-over when it's painfully clear we have cancer? We're afraid, of course; we fear the unknown and find comfort in the belief that nothing has to really change. We call this denial, but it arises from fear and risk aversion.
In the moment, amidst all the swirling chaos of fear and uncertainty, we choose extend and pretend because it seems to be in our self-interest.
This is the ontology of extend and pretend: a delusional view of our self-interest. The drunk is terrified of not being able to drink himself into a stupor; in that dysfunctional state of being, then he perceives his self-interest as denying he has cancer because he knows that treatment will require him to stop drinking.
In effect, what he perceives as acting in his self-interest is actually an act of self-destruction. Political and social revolutions occur when the productive classes realize the Status Quo no longer serves their self-interests. In other words, the revolution is first and foremost an internal process of recognition and enlightenment: all the propaganda issued by the Status Quo, i.e. that it serves the best interests of the productive classes, is finally recognized as false.
As this awakening begins, a divergence between the definitions of self-interest by the Power Elites (financial and political) and the productive classes begins to open.
The Power Elites' time-honored strategy to protect their own wealth and grip on power has three components:
In addition to "the system is working for you" social control myth, the wealth/power aristocracy also invokes various fear-based social control myths: external enemies are threatening us all, so you ignore the debt-serfdom and powerlessness memes.
In the ideal Power Elite scenario, a theocracy combines faith and State: not only is it illegal to resist the Aristocracy, you will suffer eternal damnation for even thinking about it.
Ask yourself this: how much influence do you as a citizen, voter and taxpayer have over the Federal Reserve?
This is the definition of an aristocracy, oligarchy (a power structure in which power is held by a small number of people), kleptocracy, etc.
The Power Elite has a key advantage over the citizenry: its own self-interest is clear.The citizenry must entertain this question: is the Status Quo really working for me or not? The Power Elite aristocracy has no such confusion: the Status Quo is working beautifully for them, and the only threat to their wealth and power is the possibility that the productive classes might opt out and stop paying the taxes and debt service which funds the parasitical Power Elite.
Thus the Power Elite has a single goal: to persuade and coerce the citizenry into accepting their powerlessness and debt-serfdom as a pathological form of self-interest.
There is another dynamic to the Power Elite aristocracy's grip on concentrated wealth and power: the self-selecting, self-perpetuating pathology of the aristocracy and the Upper Caste that so slavishly serves them.
Look how people have allowed their names to be changed. They have gone from being called citizens to consumers. A citizen is a very human word which denotes awareness, involvement, and participation. It's a word that sounds active and conscious in its very nature. A consumer by contrast sounds far more passive. A lot of other animals and even inanimate processes consume things. A consumer sounds like sheep grazing.
Once a populace accepts a self-definition that strips out their participation as anything but passive consumers, then the maintenance of power boils down to test-marketing new social control myths and fear-mongering.
This sophisticated level of marketing and predation requires a highly trained class of servants: an Upper Caste of technocrats, middle managers, marketers, lobbyists, "creatives," engineers, etc. who do the heavy lifting that keeps the Power Elite's wealth and status not just intact but expanding.
The reward for this service is a hefty salary that enables the purchase of the signifiers of upper-middle class existence and an intoxicating proximity to power and status visibility, i.e. some measure of recognition as "being somebody important."
Until very recently I reckoned this Upper Caste of loyal servants comprised about 20% of the American populace, but upon closer examination of various levels of wealth and analysis of advert targeting (adverts only target those with enough money/credit to buy the goods being offered), I now identify the Upper Caste as only the top 10% (the aristocracy is at most the top 1/10th of 1%).
Wealth and income both fall rather precipitously below the top 10% line, and as globalization and other systemic forces relentlessly press productivity into fewer hands, then the rewards aggregate into a smaller circle of laborers.
You cannot aggregate healthy, thrifty, honest, caring and responsible people into a group that is dysfunctional, spendthrift, venal and dishonest unless those individuals have themselves become dysfunctional, spendthrift, venal and dishonest.
This is the ontology of the pathology of power: If you want to join the elite levels of the Upper Caste, where "doing God's work" is a daily practice of fraud, embezzlement, misrepresentation, collusion, purposeful obfuscation, all in service of a pathologically self-destructive notion of self-interest, then you must become dysfunctional, venal and dishonest.
Since non-pathological people will quit or be fired, then these fractals of corruption are self-selecting and self-perpetuating. This is true not just of financial America but of elected officialdom. Anyone who is still naive or delusional enough to think that getting elected to Congress or the state legislature will empower "doing good" will soon learn the ropes: the next election is less than two years away, and if you want to retain your grip on power you're going to need a couple million dollars.
And if you want to "get something done," you will need to take orders from your party leadership and service your donors.
I once had a friend who by extraordinary effort got himself elected to the state legislature. Being a young idealist, he actually refused to vote as his party leadership directed: thus identified as a rebel, he was predictably out two years later.
So much for "working within the system." By the time all the donors, lobbyists, leeches and parasites have been properly serviced, the "reform" bill is 2,000 pages long.
As a result of the feudal structure of wealth and power in America and the self-reinforcing, self-propagating fractals of pathological servitude, the citizenry are increasingly remote from power. The aristocracy, like feudal lords in distant, fortified castles, demands obedient service of the powerless citizenry-- work hard, pay your taxes and service your debt--and fears any awakening of true self-interest.
Just because a devoted member of the Upper Caste is allowed to enter the castle to do his work doesn't mean he is part of the aristocracy. That glow of proximity to power is his reward for dutifully slaving away as a higher-order serf.
The American Revolution was triggered not by a sudden upwelling of noble ideals, but by the realization of the landed nobility and productive classes that the commercial and political domination of Great Britain was placing their wealth and liberty at risk.
Put another way: they awoke to the fact that the Status Quo no longer served their essential self-interests. When the Upper Caste and productive classes reach this same conclusion, then perhaps they will elect a transformational third party to sweep away the corrupt political class.
This new party must embody a moral imperative that acts as a social fractal: retaining power is not the goal.
By Andy Xie
The outlook for the global economy is gloomy and leaders lacking vision are to blame. Eventually, this will come back to haunt all of us
Recently, stock markets around the world have performed remarkably well. This may even continue for a few months. The U.S. Federal Reserve's promise to hold interest rates near zero until 2014 and signal of a third round of quantitative soon, combined with an improving U.S. labor market, have emboldened risk-takers. Financial markets are seeing more risk-on trade.
However, the fundamentals for the global economy remain dire. The West is mired in debt troubles, declining competitiveness and unsustainable social overheads. The East is struggling to build up robust consumer demand to balance its manufacturing prowess. So far, world leaders have used liquidity and fiscal measures to prop up demand without addressing structural problems. In essence, they are continuing to treat the global economy as a car with a dead battery rather than a bad engine.
So, 2012 will be an extremely difficult year. The global economy is likely to slip into recession, as Europe and Japan are mired in deep recession and emerging economies stall. Black swan events, such as a sovereign default in Europe, an emerging market crash, a surge in oil prices due to conflict in the Middle East, and a selloff in Japan or the U.S.'s sovereign debt market, will haunt the fragile global economy.
At the annual World Economic Forum in Davos we again saw familiar faces from the West, but some different characters from emerging economies. Some of the last year's bunch went to jail amidst the revolutions engulfing the Middle East. They were discussing how to fix capitalism. Apparently, the same people who blew up the world and got their governments to bail them out are now again making millions and talking about how to fix things. Not many people see the irony in this. The tragedy of the global financial crisis is that it didn't sweep away the old order.
During an economic boom people who are good at ingratiating themselves with the establishment tend to rise to the top. After a boom of two decades, leaders are already two to three generations into such a process. These people pretty much make a living by just looking the part. This is why the global crisis will last for years to come, until a new generation of leaders rises through a competitive process.
The Fed's announcement sparked a 10 percent rally in stock markets around the world. By promising to keep money cheap and holding down bond yields through asset purchases, despite the inflationary impact of cheap money, it is pushing investors into risk assets. I believe that the Fed is targeting the stock market.
Playing with expectations works temporarily. The risk-on trade is a mini bubble, as today's buyers want to be ahead of the slower ones. The buying trend is sustainable only if the global economy strengthens, which is unlikely. The stocks aren't cheap. Desirable consumer stocks are selling for twenty times earnings. Banks are cheap for a reason. Internet stocks suggest another bubble in the making. The Fed is trying to inflate an expensive asset. The rally is quite fragile. As soon as a shock like Greece defaulting or bad economic news unfolds, the market will quickly head south.
There is a saying that one shouldn't fight the Fed. Because the Federal Reserve keeps money cheap, other assets become more attractive. This logic works as long as the Fed knows what it is doing. But, can it predict three years out? Newly released information tells us that it was laughing at the troubles in the housing market in 2006, right before the crash. This shows that the Federal Reserve couldn't see events a few months ahead, let alone years.
I believe it will have to raise interest rates way before 2014, as inflation becomes a problem. The Fed and most analysts believe that a weak economy wouldn't suffer an inflation problem. However, I think that labor markets in the emerging economy and energy shortages will turn monetary excess into inflation around the world. One can shield from these forces by running a strong currency like Japan. But, this kills the economy through weakening exports and the balance of payment. The US dollar isn't strong like the yen.
Recent statistics give hope that the labor market in the United States is recovering. In the past six months, the U.S. economy has added 2.2 million jobs. However, the improvement may not be sustainable or sufficient. The country's under and unemployed is still close to 20 percent of the labor force. The improvement hasn't come quick enough to overcome the crisis in the labor market. Further, the improvement may not be sustainable because the recent improvement is due to a declining savings rate and the debt overhang remains unaddressed.
First, the U.S.'s debt overhang largely remains. It is well known that the U.S. government has run up a lot of debt, doubling that not held by the social security trust in four years. The 2008 financial crisis with its origin in overleveraged U.S. households hasn't made them cut debt. Household savings surged to nearly US$ 1 trillion per year after the crisis, but has declined by more than half since to $429 billion. The savings rate is too low to bring down debt to sustainable level, probably half of the current level, any time soon.
Also, the financial sector has a current debt level of US$ 13.7 trillion, about the same as four years ago. I suspect that financial institutions couldn't get rid of their dubious assets and are waiting for a rising tide to bail them out. Hence, the financial sector cannot help the economy, but is instead waiting for help from the economy.
Second, household savings don't have much room to fall before hitting zero. This means the U.S. economy cannot rely on this force for long. Before the 2008 crisis, household savings dipped below zero because they could tap into capital gains in first the stock market and then the property market. Neither source is possible now. In short, U.S. consumption cannot lead the economy now.
Third, the virtuous cycle of employment, income, consumption and corporate investment doesn't work well in today's global economy. To put it bluntly, the U.S. labor force isn't that competitive in today's world. It is not just a wage issue. A big chunk of its labor force is less productive than its counterparts in emerging economies. The market clearing wage for them is insufficient for supporting basic living needs. Such workers are better off relying on welfare. This is not a new issue. It was covered up by the housing bubble that exaggerated the bargaining power for the domestic labor force. I suspect that the U.S. unemployment will remain much higher than before the crisis for many years.
Fourth, the U.S.'s exports will suffer when Europe and Japan are in recession and emerging economies are slowing sharply. One benefit from a loose monetary policy is a weak currency that boosts exports. This trick isn't likely to work in 2012 or in the years to come.
But U.S. companies have plenty of cash. If they invest the money, the country's economy could boom for a year or two. But, anticipating its unsustainability, they won't do this. There isn't a second channel for the U.S. economy to boom.
A chronic crisis
Euro zone leaders have agreed to adopt tougher rules to limit the fiscal profligacy of its members. This sounds good. But, the old treaties for establishing euro were already tough enough. However, the rules were not followed. It is unclear whether new rules that strengthen a monitoring and sanctioning capability would make a difference. Anyway, the rules are not relevant to the debt mess that the region is in now. If they work, they might prevent a future crisis. However, the current crisis requires urgent measures today.
Europe's debt problem began with Greece two years ago. It has a much bigger one now. Its austerity measures have caused the economy to plunge, making the debt overhang look bigger. Greece, even if it is sincere in tackling its problems, may not find a viable path forward. Its equilibrium living standard, supportable by its productivity, may be a fraction of what it experienced before the crisis. Greece isn't more productive than an average developing country. So its downward spiral won't stop for the foreseeable future.
Euro zone leaders are forcing Greece to cut more for the current bailout round to avoid default in March. The settlement will cut its debt by 50 percent in face value and 70 percent in net present value due to lower interest rates. Still, Greece's debt will be above 100 percent of GDP. As its economy continues to shrink to a sustainable living standard, the debt load will soon become too big again. It is in Greece's best interests to default and stay in the euro. Kicking Greece out isn't a credible threat. No one can tell Greece what currency to use.
If Greece defaults, it will hit the balance sheets of many big banks in Europe. The current restructuring plan is for a 50 percent haircut in face value and 70 percent in net present value. When it comes to capital accounting, a 50 percent loss needs to be booked now. If Greece defaults, the accounting loss will be doubled, which will require a greater capital infusion for the region's banking system. Considering how chaotic the region has been in handling the crisis, the shock to the banking system will likely cause chaos again.
Its low growth potential and the massive deleveraging needed by its banking system will hold down the region's economy for years to come. The weak growth will, of course, hold down fiscal revenues for its members, which will expose their debt problems repeatedly.
The only way to stabilize the situation is for the European Central Bank (ECB) to engage in massive quantitative easing to stabilize the debt market. Germany is opposed to this. The ECB lent half a trillion euro to the zone's banks at 1 percent for three years. It was backdoor quantitative easing. It works if the banks are willing to use the money to buy bonds. Considering that the banks are overleveraged already, the strategy won't work over time. The euro zone crisis won't be solved until Germany accepts quantitative easing.
What is Japan waiting for?
Meanwhile, Japanese exporters are losing billions of dollars. Japan's economy is probably in recession again due to poor exports. But the yen is reaching historic highs. The governor of the Bank of Japan recently said that the fundamentals for the yen were strong.
Japan has the highest government indebtedness, over 200 percent of GDP, in the world. It also has a shrinking nominal GDP. The debt bomb isn't blowing up because the interest rate is so low. That is because the Japanese hold all the debt and their strong currency compensates for the low interest rate. The latter, of course, keeps the economy depressed. This is a vicious cycle, though spiraling down slowly. The endgame is that the strong yen leads to a trade deficit, which makes domestic financing insufficient for supporting rollover of the existing debt plus the new debt from the deficit.
Japanese savings display an unusual bias. Despite a near zero interest rate and scary debt levels, Japanese savers keep money at home. Financial market believes Japanese savers are just loyal. It is a cultural phenomenon. Economics can't explain it. I think that the strong currency is equally important to keeping money at home. The yen has nearly doubled against the US dollar since Japan's bubble burst in 1989. Staying home has worked so far.
But, when the yen turns around due to Japan's poor corporate profitability and weakening exports, the home bias may not be so strong. Japan is setting up for a currency crisis. This is another dark cloud hanging over the global economy. If the yen crashes, it would impact the whole economy, especially the ones that live on eating away at Japan's market share, like Germany and South Korea.
China may take a long pause
China has contributed greatly to global economic growth since 2008. Much of this is due to the bubble at home. As the bubble bursts, the process reverses. China's weak imports point in that direction. Commodity exporters like Australia and Brazil will be significantly affected.
Unlike Western economies, China can restructure its economy to create another growth cycle. The wage level is still low by international standards. Hence, making the supply side more efficient can increase China's market share in the world. The household debt level is low. There is no problem turning labor income into consumption.
However, China is not showing the resolve to restructure its economy. The resolve must begin with a meaningful tax cut that redistributes one trillion yuan to the household sector. The Chinese government has consistently shown preference for increasing its share in the economy. This is a political phenomenon. It requires political reforms to change. These don't look forthcoming. Hence, China's economy may experience slow growth for years to come.
Emerging economies have done well in the past decade, mainly due to rising commodity prices. And that is due to a tenfold increase in China's fixed-asset investment (FAI) in a decade. The odds are that China's FAI will stagnant or even decline in some years in the next decade.
I'm bullish on energy and agriculture because neither is recyclable. As China shifts to consumption, the demand for both will continue to rise. But, for industrial metals, the story could be very negative. The price of iron ore has risen tenfold in the past decade. It is likely to spiral down in the next decade. Countries like Brazil will likely slow down.
The risk appetite is now rising. We have seen several such episodes in the past three years. None lasted. The driving force for risk-on trade is the Fed's threat to depreciate money through its policy. It's the fear of paper money rather than optimism for the future that drives such rallies in risk assets.
The risk-on trade is pushing hot money into emerging markets and at least keeping it there. So some vulnerable currencies, like the Indian rupee and Brazilian real, have bounced. However, economic fundamentals will come back to haunt such trades. Declining commodity prices will worsen the balance of payment for countries like Brazil and India. When the trade data hits market confidence, the rally will reverse.
The world is a dangerous place because it is being led by the wrong people like the Davos crowd. Monetary and fiscal measures merely prolong the stagnation and stoke inflation down the road. This muddling-through equilibrium will blow up in our faces when inflation causes social turmoil.
The Grand Game of Perception Management
It all boils down to perception--that's the insight at the heart of the Grand Game of Perception Management. Economists speak of magical "animal spirits" that fuel economic expansion, but this is simply a colorful term for perception management: when people perceive others reaping outsized gains in profits or pleasure from taking risky bets and freely spending borrowed money, then they will feel an overpowering urge to follow the herd and leverage their capital (if any) and disposable income (if any) into risky bets and zealous over-consumption, i.e. "animal spirits."
Conversely, when said risky bets blow up and participants have lost their ever-loving derrieres by following the herd, then "animal spirits" quickly dissipate as the herd thunders off a cliff to its financial demise.
The task of the financial/political/media Status Quo is to convince Americans to overlook the abundant evidence of economic deterioration and focus on heavily juiced "evidence" of robust "growth."
The game plan is this: if the Status Quo can convince you that the economy has righted itself and from here on in everything will get better and better, every day and in every way, then we will abandon financial rationality and start buying homes we can't afford on credit, cars we can't afford on credit and boatloads of stuff from China that we don't need on credit (of course looking cool is a "need," i.e. having an iPad to carry around).
In other words, believing it is so will make it so. That is the essence of the campaign to stimulate "animal spirits" confidence: even though the economy is actually tanking, if they can only convince us the Dow is moving to 15,000 and then on to 20,000, jobs are being created left and right and things are looking up everywhere, then the resulting piranha-like shopping-feeding-frenzy will create the expansion that is currently chimerical.
This "feel-good" promotion of "growth" is also designed to persuade the millions of holdouts earning nothing on their IRA funds to drop all that cash back into the stock market, which is "breaking out to new highs." (Remember that's exactly what they said in January 2000 and as real estate peaked.)
And just in case this propaganda campaign fails to do the trick, the Federal Reserve has destroyed the return on savings and cash, all in the hope that the decimated, income-starved herd will turn from rationally avoiding risk to irrationally embracing it out of sheer desperation. IN MY BOOK THIS IS EVIL PLAIN AND SIMPLE!
"Perception management" can be usefully shortened to a one-syllable word: "con." (I HAVE A BETTER TWO SYLLABLE WORD: BULLSHIT.) The confidence-man's most basic tool is to create the surface sheen of success with minimal investment of time and capital. Thus the con-man buys a couple of designer suits, rents a cubbyhole office with a prestigious address, leases a 500-series Mercedes vehicle, counterfeits some diplomas or other signifiers of Elite status and achievement, and then goes to work conning his credulous marks.
This exactly describes the strategy being pursued by Ben Bernanke, Tim Geithner, the financial media, and America's scabrous political class. Consider one of the Status Quo's most valuable cons, the unemployment rate as calculated by the Bureau of Labor Statistics (BLS).
If we look at the chart below from the St. Louis Federal Reserve, we see that employment--the actual number of people with jobs, as opposed to those who are without jobs--we see that the number of people with jobs has declined recently and is now at the same level of 3rd quarter 2009.
The official unemployment rate was 10% in October 2009, when about 140 million people were found to have some sort of job, and now that the same number of people have been found to have some sort of job (140 million), the unemployment rate is now only 8.3%, even though the nation has added roughly 6 million residents to the workforce. PLEASE FEEL FREE TO TO UTTER THAT TWO SYLLABLE WORD HERE!
Huh? How can 140 million jobs generate an unemployment rate of 10% in 2009 and 8.3% in 2012 while the workforce and population have grown by 6 million?
Feb. 3: Nonfarm Payroll +243,000; Unemployment Rate 8.3%; Those Not in Labor Force Rose an Amazing 1,177,000.
The labor force and the unemployed have magically declined by millions since the recession was declared over in mid-2009.
The Status Quo con-men are careful not to mention that $6 trillion in Federal borrowing has been squandered since 2009 just to return employment to 2004 levels. And that sum rises by $1.3-1.5 trillion every year as unprecedented quantities of money are borrowed to prop up the Status Quo.
A few years ago, deficits of $300 billion were considered unsustainable; now deficits of $1.3 trillion are accepted with little more than routine political jockeying.
Then there's the con-men's masterwork of perception management, the U.S. stock market. As noted earlier this week, much of the stock rally since March 2009 has been attributed to rising corporate profits. Yet a significant share of those profits were smoke-and-mirror illusions created by the Federal Reserve actively depreciating the nation's currency.
Another chunk of those fabulous profits resulted from household incomes declining--that is, people earning less from their labor and savings as corporations kept any net increases for management and shareholders.
For almost 100 years we have lived on a system based on debt which has created a false prosperity as well as false values. The transfer of capital from private enterprise to government by massive taxation is approaching 50% in many countries (see table below). The average for 18 industrialised countries is almost 40%. This means that on average 40% of the productive economy is transferred to a non-producing entity (government) which wastes most of the money in the process of redistribution. Not only that but, since the state has taken over up to 50% of the economy in these countries, the desire to work, to strive, to take risk and to invent has been taken away from a major part of the population.
For a great many people it is now totally natural to rely on the state for their needs rather than on themselves – and the state needs to borrow/print ever increasing amounts to perpetuate this economy based on an illusion. This situation is totally untenable. Since any additional money printing will only exacerbate the crisis and make the final collapse so much greater, the swiftest solution would be let the financial system implode now. We need to reset the world to a level which is sustainable.
The consequences of this implosion would be a collapse of the financial system and a reset of debt to zero. Although this is unthinkable to any government or politician, it would be by far the quickest way to get the world back on its feet with no major debts, minimal government interference, and no central bank that can print money. It would be like a forest fire getting rid of all the dead wood. Out of that would rise masses of green shoots in the form of strong unchequered growth. The transition will of course be traumatic and the current generation will experience enormous hardship but not voluntarily abandoning the money printing now will just delay the inevitable and the consequences will be dramatically greater and affect many future generations.
Governments worldwide are totally incapable of stopping the money printing. This is their only means of staying in power and buying votes. Not only that, this is the only method they know. This has been their patent solution to all economic problems in the last decades. Not that this is new in history. Most empires have resorted to diluting the value of money by reducing the gold/silver content of coins or printing paper money. But as far as I know it has never before been done by so many countries simultaneously to such an extent.
Since there won't be any voluntary abandonment of credit creation what will the likely outcome be?
We have been used to measuring currencies and economies on a relative basis i.e. against each other, but this is a total fallacy since all major currencies have been in a race to the bottom for the last 100 years. Most currencies have lost between 97% and 99% against real money – GOLD – since 1913.
How will the currency system collapse? The answer to this question is very simple – through endless money printing. There will be no lasting austerity programmes in any country that can print money. Governments are incapable of sticking to austerity measures since in the end that is a guaranteed way of losing power. As power is the main purpose of all governments, they will use any method to retain it.
Italy and Spain alone will require €1 trillion in the next 4 years and, of that, 1/2 trillion Euros in 2012. Only printed money will take care of that.
For many years it has been absolutely crystal clear (sadly a very small minority) that many major sovereign nations are bankrupt as well as the world financial system.
The netting is only valid when the counterparty pays. When there is a counterparty failure, which is very likely in the coming financial collapse, gross remains gross and the $700 billion or more remains $700 billion or more .
A major part of the derivatives are worthless or not protecting the investors as we have seen with, for example, Freddie Mac, Fannie Mae, Lehmans and, lately, MF Global. MF Global had bought CDs to hedge their investment in Greek debt but they hadn't understood what they had bought and it turned out it offered no protection at all.
The "final or total catastrophe of the currency system" will occur as a result of the QE or unlimited money printing that will very soon start in the EU, USA, UK, Japan and many more countries…which will lead to hyperinflation. Throughout history, substantial government deficits leading to money creation or printing have always been the cause of hyperinflation because hyperinflation is always the result of a collapsing currency.
To any thinking individual, it is totally incomprehensible that governments and central banks believe that an insolvent world can be saved by debt issued by bankrupt nations and then bought by the issuers themselves as there is no other buyer. This is the perfect recipe for self-destruction and "total catastrophe of the system." I don't think that even Mises envisaged at the time that this could involve a major part of the world rather than just one country. This is why this catastrophe will be unprecedented in world history and have consequences that will affect the world economically, socially and geopolitically for a very long time to come.
The world is in a total mess and there is absolutely no reasonable solution to this unprecedented crisis. The hyperinflationary depression that we will experience in the next few years will totally destroy the majority of the credit based wealth that has been created in the last few decades.
Tuesday, February 28, 2012
Don't base your attitude on what you've already experienced in the past. Choose your attitude based on what you would most like to experience in the future.
The way you decide to see the world determines what kind of world you see. Decide to see, and to live in, the very best world you can imagine.
Don't waste a lot of time complaining about what has already happened. Put your time and energy into envisioning and planning and acting to create the life you truly wish to live.
Look forward with eager anticipation, see life at its best, and smile about what you see. What's ahead is what counts, because that's what you have the opportunity to choose right now.
There's never any reason to be discouraged. No matter where you are or where you've been, you can choose a positive future for yourself.
Look forward, and see the positive possibilities. Look forward, and step decisively toward the best of them.
Silence in the face of evil is evil itself. God will not hold us guiltless, not to speak is to speak, not to act is to act.
Where are the pastors?Why aren't they teaching their flock?Are we so comfortable that we won't do anything because we don't want to stir up any trouble.Can you imagine if the Body of Christ mobilized and said NO to all this, what it would do for our country, our world?
"You are my witnesses," declares the LORD, "and my servant whom I have chosen, so that you may know and believe me and understand that I am he. Before me no god was formed, nor will there be one after me. I, even I, am the LORD, and apart from me there is no savior."
Banks were complaining that some of their holdings were difficult to value, thinly traded, tough to mark. So 157 passes and it allows the accountants at banks to mark these to a model rather than the last trade.
Derided as "Mark-to-Make-Believe" it leads to this unfortunate situation: The same models that led to the unfortunate money-losing purchase decision in the first place are now being used to actually value these holdings. regardless of the obvious flaw in the model in the first place.
As these bad buys plummet in price, investors in banks have no insight into the loss potential — they are hidden from view, along with the true financial condition of the company. This sort of accounting would never be tolerated in a nation where investors mattered more than insiders and bankers. Instead, it rewards the incompetent and allows near insolvent banks to pretend they are solvent, thereby allowing the granting of huge bonuses.
Almost three years later, we see the results of the Accounting Board's move. The large bailed out banks remain weakened. Like all wounded animals, they are very dangerous. They have institutionalized fraud,made forgery a business expense. ZIRP exists for the primary reason of allowing these banks to rehabilitate their faulty balance sheets. Savers get punished.
The same could have been accomplished much more quickly and cheaply through prepackaged bankruptcies. That would have required an uncorrupted Congress, an honest Accounting board and a willingness to allow capitalism in America. Instead, we had foisted upon us a convoluted form of Socialism for Financiers.
If you want to know why the Fed has maintained zero interest rates, you need only look at who remains employed at banks, at who gets blamed for their failure. The record low approval rating of Congress at least imply that the public isn't utterly blinded by the scam.
All to save the asses of a few reckless, incompetent bankers. Something is very, very wrong with this system.
Are we expected to be bullish in order to prove that we are patriotic? ............AN ABSOLUTE MUST READ
The U.S. market was terrible for the last 10 years, gaining a pathetic 0.5% per year overall, after inflation adjustments and even including dividends. Without dividends, the index itself has not gone up a penny in real terms from mid-1997 to end-2011, or 14½ years. This is getting to be a long time! Are we expected to be bullish in order to prove we are patriotic? 14½ years!