If you invest in stocks, then you are familiar with the stock price to earnings ratio. This is a good metric to determine if a stock price is considered expensive – and therefore, a good metric to determine whether or not to buy a particular stock (P/E trends). If we take this a step further and look at the P/E ratio for the entire S&P 500 index – we can get a good idea if it’s a good time to buy into the stock market.

So – there are two, very big questions we should answer when it comes to future stock prices:

1. Is the economy rebounding to the point that company earnings will increase significantly in coming quarters?

2. Are stock prices considered high compared to corporate earnings?

As I’ve said before – I see no indication (based on good, quantitative economic data) that the economy is rebounding. As we’ve seen – the economy continues to deteriorate – continuing job losses, growing residential and commercial loan defaults, home prices continue to decline, wages and income declining, etc. Therefore, I would not bet my financial future on a quick economic turnaround that will increase corporate earnings – based on the economic data that I trust.

Also remember, companies have been able to beat recent earnings estimates due to significant cost reductions – not due to sales/revenue increases. How much more can they cut if revenues continue to decline? Bottom line – I would not expect to see a significant turnaround in corporate earnings any time soon.

This is not exactly good news considering current S&P 500 earnings. Over the past 20 months we’ve watched the biggest earnings drop in the history of the S&P 500. Again, you’re probably wondering – with such a big drop in earnings – why is the S&P 500 up approximately 35% since March? Good question. We’ll answer it after we look at the current S&P 500 P/E ratio.

With earnings plunging, we would expect to see a high P/E ratio if prices haven’t also plummeted. As I mentioned above, since S&P 500 stock prices have increased significantly since March – the S&P 500 P/E ratio is through the roof.
From Nathan’s Economic Edge (http://economicedge.blogspot.com/):
“The higher stocks go without real earnings and without clearing the debts from consumers, the higher price to earnings ratios will go. It is ultimately earnings that underpin the equity markets and the price of stocks has NEVER been so high compared to earnings.

It would take one heck of a lot of growth to pull P/E’s back into a normal historic range, and the only reason they look as “good” as they do is because the financial industry was allowed to go back and mark their assets to fantasy – otherwise the large banks are still insolvent and would not have earned a nickel.”
The answer to question #2 is – stock prices are at historic highs compared to earnings – and not by a small margin. We see the same situation with the DJIA.
Bottom line – we see no real economic turnaround and P/E ratios are at historic highs. What does this tell you? It tells you that it’s a very bad time to invest in the stock market. If you’re not in the market – stay out. If you’re in – get out. The whole house of cards could collapse at any time.
So – the final question to answer is – why are stocks increasing if the economy and earnings are plummeting? It’s not because the economy is rebounding (regardless of what the media tells us) and it’s not because stocks are cheap. As Chris Martenson shows us below – the culprit is – once again – the Federal Reserve.
If you’ve seen the movie ‘The Sting’ (1973), you have some knowledge of how a confidence (con) scheme works. In the movie, Robert Redford and Paul Newman’s characters ‘con’ a big time bad guy (the ‘mark’) out of some serious money. The ‘con’ was broken down into the following acts:
1. ‘The Set Up’ – devise a plan to deceive and then steal a significant amount of money from the ‘mark’
2. ‘The Hook’ – create a situation that ‘hooks’ your ‘mark’ – meaning that the ‘mark’ becomes very interested in what your scheme can do for him
3. ‘The Tale’ – tell a good story that the ‘mark’ believes will make him lots of money. A good tale preys upon the weaknesses of the ‘mark’.
4. ‘The Sting’ – just when the ‘mark’ thinks he’s going to make a killing – pull the rug out from under him and steal his money
What was the most important lesson from this movie? The ‘mark’ can never know that he’s been taken.
The people of the United States have been the victim of the biggest confidence scheme in the history of the world.
By creating bank panics in the late 19th/early 20th centuries, the bankers behind the Federal Reserve set the stage for the Federal Reserve Act of 1913.
We’ve been told a grand tale – that our current banking system is stable, reliable and benefits everyone.
We’re about to experience the ‘Sting’ – when the international bankers behind the Federal Reserve try to take everything from us. This will most likely begin in earnest with a significant stock market crash.
With high stock prices, low corporate earnings and a deteriorating economy – our stock markets have been setup for an historic fall.
It’s going to be epic.
jg – August 7, 2009

________________________________
Fed POMO activity and the Stock Market
Friday, August 7, 2009, 11:38 am, by cmartenson

Today, again, we receive news that Fed is continuing to pour more and more POMO money into the banking system, this time with a ‘mere’ ~$2 billion addition.
August 7 – New York Fed purchases $1.937 billion in agency coupons
As long-time readers here know, I have been tracking the Permanent Open Market Operations (or “POMO”) activity of the Fed for a long time.
As I wrote in The Five Horsemen ( May 31 2009, enrollment required $):
The beginning of the end for nearly every debt-ridden country has always been the attempt to pay for past expenditures with newly-minted money. It always starts innocently enough and seems like the right thing to do, but soon the programs grow and grow, and eventually the currency of the country is destroyed.
Now the Fed is openly and actively buying dodgy debt from the government as well as from the private sector. I covered on this in May (2009) in an “In Session” posting, where I charted the amount of US Treasury debt that was being purchased by the Federal Reserve on a daily basis.

This chart reflects only the Treasury purchases. When we add in agency debt, mortgage-backed securities, and various other corporate debt programs, we find that the Federal Reserve is printing up roughly $15 to $30 billion dollars a day just to keep things limping along.
As for the opening quote by Mises, which I think most accurately reflects how things will turn out, I think it is safe to say this: Any country that is printing up to $30 billion a day just to keep things moving along is not voluntarily abandoning credit expansion.
This means that we are risking a final catastrophe of the currency system involved. Unfortunately, the currency in question also happens to be the world’s reserve currency, so this has enormous, far-reaching implications.
Today I want to update that chart above and provide a little more context by placing it beneath a scaled chart of the Dow Jones index (time periods match exactly so the charts align). Again, what you are looking at is a chart of POMO activity that is being expressed as “billions of dollars per day.” No effort has been made to account for weekends or holidays; this is simply taking each POMO and dividing it by the number of days that pass until the next one.

What we might wonder here are three things:
1. How would the stock markets have behaved without the massive daily additions of billions of dollars?
2. When the stock market turned around in advance of the initiation of the POMO purchases which major bank holding companies, such as GS, were effectively front-running this flood of money?
3. If the stock market is up 40%+ and green shoots are everywhere, why is the Fed continuing to pour gasoline on the fire ($16 billion this week so far)?
Part of the answer may lie in a nice piece of work posted at ZeroHedge which notes that on POMO days that stock markets exhibited some statistically unlikely upward thrusts in the final few minutes of each associated trading day.
Under this scenario POMO money is being shuffled out of the endless thin-air vaults of the Fed and into the banking system where it needs to find something to do. One of those things, it seems, is to goose the stock market, especially late in the day.
The goal, we surmise, is simply to get the stock market to move upwards. This is not an unthinkable idea to me because, frankly, it is exactly the prescription I would write for an economy as dependent on rising asset prices as is the United States’. If a rising stock market helps to get people out buying and spending again then it is a worthy goal in many a policy-makers mind, I am sure.
The only question here is “what does this mean to me?” We’ll be exploring that in some detail later on…

Hello everyone,

As most of you know, I’ve been actively following the current economic crisis for the past 2 years. Since we’re entering the time of year when we’ve historically seen high market volatility (Sept/Oct) – now is a good time to evaluate what is happening with regards to our economy – and what you can do now to protect yourself in the event things get interesting.

If you only listen to most of the mainstream media outlets (CNN, CNBC, Fox News, Wall St. Journal, etc.) – it would seem that things are turning around. If you are someone who studies the data yourself and forms your own opinions – like myself – you see something else.

I have written many articles over the past 2 years on what is happening with regards to the economy and why – but I felt that since we’re again heading into September with deteriorating economic data/activity – now would be a good time to summarize the greatest threats to our economy and what you can do now to help protect your finances.

If you are like most people in our nation today – then you accept what you hear from many of our financial and political leaders and you hope things turn out ok. What I’ve found is that many of the people we listen to everyday are manipulating economic information and ‘spinning’ things to sound more positive than reality. If my conclusion is correct, then we are heading toward a significant economic decline – something that you and I have never seen before. It’s important to understand what’s happening – and more importantly – why it’s happening.

I have attached an article that reviews the most significant current threats to our economy. I hope you find it informative.

Take Care,

John
____________________________________________________

Today is August 25, 2009. There seems to be many positive news articles this week regarding our economy. Here’s a few I’ve seen over the past couple of days:

‘Bernanke, Trichet See End to Global Slump, Caution on Recovery’ – Bloomberg

‘We saved the world from disaster, Fed’s Bernanke says’ – MarketWatch

‘Consumer confidence soars – Sentiment reading increased to 54.1 in August, well above economists’ expectations.’ – CNN

‘Stocks show confidence – Bernanke appointment, signs of stability in housing market and rise in consumer sentiment report push market higher.’ – CNN

“Bernanke: ‘We have been bold’ – Fed chief defends central bank’s response to the economic crisis as Obama says he will nominate him to another 4-year term” – CNN

‘Upbeat Data Buoy Stocks’ – Wall St. Journal

‘Bernanke Wins Vote of Confidence’ – Wall St. Journal

‘Housing Lifts Recovery Hopes – Stocks Soar on 7.2% Spurt in Home Resales; Bernanke Optimistic but Foreclosures Loom’ – Wall St. Journal

‘Central Bankers Breathing Easier’ – Wall St. Journal

‘Stocks, Oil Hit New 2009 Highs’ – Wall St. Journal

‘European Stocks Post Biggest Gain in Month’ – Wall St. Journal

‘Financials Help Stocks Climb’ – Wall St. Journal

‘New-Home Sales Post Strong Gain’ – Wall St. Journal

As I’ve said before – underlying economic data is telling us that our economy continues to deteriorate. I see nothing that would tell me that things are turning around or anything that would restore my confidence in the system.

There is nothing within real economic data (raw data – no ‘adjusting’ or ‘massaging’ or ‘modeling’) that tells me that investing in Stocks, Bonds, Derivatives – would be a good idea at this time (brokerage account, 401(k), etc.). In fact, by investing in any of these types of investments – you are taking significant risks with your money. When I say significant – I mean that you could lose everything.

Since September and October have historically been the most volatile time of the year for financial markets – in this post, we’re going to take a look at some significant risks to our economy that we’ve discussed previously that could cause our entire system to collapse. Regardless of what we’re told by mainstream media – our economy has now reached a point that any one of the items below – or combination of items – could cause our economy to begin a decline much more severe than what happened last year (September – December 2008).

The following is what I (and others who are paying attention) have been watching closely over the past year. Since things are getting much worse below the surface of what we’re told by the mainstream media – the time for you to act is now.

1. Bank failures continue to accelerate – and the FDIC insurance fund is now effectively out of money. There are various ways for the FDIC to replenish their funds – but these options either require more U.S. Treasury debt or more stress on banks (additional fees assessed to banks). Based on current financial conditions – it will not be easy to execute either option. Regardless, there is no way for the FDIC to gain access to enough money to insure the bank failure tsunami that is coming. This means that at some point in the near future – banks will fail – and depositors will not be able to withdraw their money. Contrary to what most people believe – banks only keep a fraction of their deposits (the downside of fractional reserve banking). Banks earn money by lending money at greater interest rates than they pay on deposits – there is no incentive for them to keep deposits. Without the FDIC insurance fund – there will be no money for depositors. This could possibly lead to a run on the banking system – followed by a bank holiday (banks are closed for a period of time by the government).

From Saxo Bank Research (Author: Robin Bagger-Sjoback):

“The current Reserve Ratio of 0.014% strongly indicates how bad this crisis has affected U.S. financial institutions. However, this is not the entire story. If we take a closer look at the non-current loans and charge-offs from banks, one realizes that the FDIC still has a lot of work to be done. Combined non-current loans and charge-offs amounted to nearly $100 billion in Q1 2009 compared to $15 billion/quarter pre-crisis. Moreover, according to analysts at the Royal Bank of Canada, the U.S. still has banking failures in the thousands to face before the crisis is over.”

2. U.S. Treasury debt sales are sky-rocketing due to out of control government spending and recent ‘stimulus’ and ‘bailout’ packages. Two weeks ago the U.S. Treasury auctioned over $230 billion in bills/notes. They are auctioning over $200 billion this week. Just a year ago – weekly auctions were in the $10-$15 billion range.

From Karl Denninger (http://www.market-ticker.org/):

[Treasury Auctions this week]:

“*U.S. TREASURY TO AUCTION $27 BLLION IN 52-WEEK BILLS
*U.S. TREASURY TO AUCTION $42 BILLION IN TWO-YEAR NOTES
*U.S. TREASURY TO AUCTION $31 BILLION IN THREE-MONTH BILLS
*U.S. TREASURY TO AUCTION $28 BILLION IN SEVEN-YEAR NOTES
*U.S. TREASURY TO AUCTION $30 BILLION IN SIX-MONTH BILLS
*U.S. TREASURY TO AUCTION $39 BILLION IN FIVE-YEAR NOTES

“This is the price of supporting the grift and fraud in our banking system.

I count $207 billion, coming two weeks after a $250 billion dollar week.

Let’s annualize – that would be about $5 trillion a year in annualized issuance.

My-oh-my how long can this continue?

Who knows. What I do know is that this is absolutely unsustainable, it is approaching 40% of GDP annually, and yet this is what is required to keep all the balls and plates in the air as a direct consequence of our government’s decision to sponsor and permit massive financial system fraud to continue.”

Keep in mind that current Treasury auctions do not include any additional FDIC funding for future bank failures. If we add in the potential costs for ‘universal healthcare’ – the numbers get even more ridiculous.

3. Foreigners are not purchasing our debt or investing huge sums of money in the U.S. any longer. Based on our current account balance with the world – this is a very bad development.

If Foreigners are not purchasing our debt – who is? This question leads us to item #4.

4. It appears that the Federal Reserve is now directly purchasing U.S. Debt (commonly referred to as ‘monetizing’ debt). The Fed is now printing money out of thin air and giving it to the U.S. Treasury in exchange for U.S. debt. If you’re scratching your head and thinking that this is a very bad idea and could lead to some very bad things – you’d be right – which is why it is forbidden by the Federal Reserve Act of 1913.

We laugh at a country like Zimbabwe where hyperinflation has destroyed the value of their currency (people of Zimbabwe now use gold as money – rings, necklaces, coins, nuggets, etc – whatever they can find) and we think – wow, those guys don’t have a clue what they’re doing. The problem is – if we took the time to look into our own monetary (central banking) system – we would realize that we are using the exact same fiat currency monetary system as Zimbabwe.

 What started Zimbabwe’s final spiral into hyperinflation? The President of Zimbabwe ordered their central bank to print trillions of Zimbabwe dollars to pay off their debts. What are we doing today? We are printing trillions of U.S. dollars to pay off our debts.

 What is one of the first things you learn in Management 101? If you keep doing the same thing – don’t expect a different result.

So – if we look at the value of the U.S. dollar – what do the trends tell us? The trends tell us that the recent actions of the Federal Reserve could very easily cause the value of the dollar to decline significantly in the coming months/years.

Since the Fed’s activity (direct buying of U.S. Treasury debt) is not lawful, you’re not going to see the Fed do this out in the open and you’re not going to see this activity touted by mainstream media. Instead, they must create a grand illusion. Here’s a brief excerpt from a recent blog article by Chris Martenson that shows us their slight of hand.

“In concert with the claims I made in the prior Martenson Insider post, The Fed bought $7 billion in Treasuries today and even more yesterday.

This is at the upper end of their recent range of already exceptional purchasing activity.
If things are so rosy that every single dip is being bought in the stock market with a vengeance, I wonder why these printing operations are really necessary?

This $14 billion plus buying activity by the Fed represents fresh money created out of this air that was exchanged for the sovereign debt of the US. However, since the Fed has, for all practical purposes, never undone its permanent operations (hey, that’s why they are called “POMOs”) we can consider these additions of money as good as permanent themselves.

Looking at the maturity range we can see that these are all long-dated bonds with the one today specifically offering us a tantalizing clue as to how the shell game is being played.

Here’s the Treasury announcement for the 7-year auction that came out on July 30 (last Thursday). Please note the specific CUSIP number circled. Every bond in this auction carries this specific identifying number.

And now let’s look at the detail for this most recent POMO:

Good grief! Just last week, when the auction results were announced it was trumpeted to great fanfare that there was “more than sufficient” bid-to- cover, “strong demand” and all the rest.

And now it turns out that 47% (!) of the bonds that were taken by the primary dealers in that auction have been quietly bought by the Fed and permanently secreted to its balance sheet.

They didn’t even wait a full week! A more honest and open approach would have been for the Fed to simply buy them outright at the auction but this way, using “primary dealers” and “POMOs” and all these other extra steps the basic fact that the Fed is openly monetizing US government debt is effectively hidden from a not-too-terribly inquisitive US press and public.

The speed of the shell game is accelerating.”

Now you know why the Federal Reserve and many of our political leaders are opposed to an audit of the Federal Reserve. They would prefer that we didn’t see behind the smoke and mirrors.

5. What is the real reason our government is bailing out banks and corporations – and providing trillions of dollars in economic ‘stimulus’? We’ve been told that our government needed to do these things or our entire financial system would collapse. Is this true? No. If you’ve read my previous articles on our monetary system – then you know that this system is going to collapse whether or not our government bails out anyone or not.

The truth that our leaders will not discuss and the mainstream media will not expose is that our economy is based on a monetary system that requires exponential debt growth (since our money is created by debt). Our monetary system requires that we create enough new debt each year equal to the aggregate interest on all of our outstanding debt. This number is now over $4 trillion dollars. The United States must now create over $4 trillion dollars of new debt each year – or the system will begin to fail – resulting in increased foreclosures and bankruptcies – leading to the collapse of the system.

This is exactly what we’re seeing today. We’re told that things are turning around by financial and political leaders – but if we ignore the rhetoric and study the data – what do we see? We see increasing numbers of bankruptcies and foreclosures by individuals, businesses and corporations. We see individuals and corporations taking on very little new debt because of the amount of existing debt – which is dramatically reducing the growth of our money supply. Again, the math tells us that this had to happen at some point. It’s happening now.

So, when we see household/consumer debt graphs that look like this……

……we must see government debt graphs that look like this – or the entire system would have collapsed months ago.

Since our money is created by debt and debt growth is now slowing considerably – we would expect to see the rate of growth of our money supply to also slow considerably – and that’s exactly what’s happening.

The blue line below shows our total money supply growth rate.

If you don’t think debt is destroying the system – take a look at this chart by Chris Martenson.

(This chart compares total debt (or “credit”) in the U.S. to GDP (or Gross Domestic Product) on a percentage basis. Current total credit-market debt stands at more than 340 percent of total GDP.)

If you want to understand the basics of our monetary system – how it works, who created it, why we’re currently in a deep recession, why it is unsustainable and what it means for our future – here’s a link to my article:

http://endtimediscussions.blogspot.com/2006/09/our-monetary-system.html

All of the recent Federal Reserve and government actions are simply delaying the inevitable collapse of this system. The debt of individuals, corporations and governments is now crushing the system. As individuals, we don’t want to take on anymore debt because we’re tapped out. The same thing is now happening to corporations and governments around the world. The problem is that exponential debt creation is required to prevent the system from collapsing.

6. What is the next shoe to drop? If you’ve read my earlier article on current stock market price to earnings ratios – then you know that P/E ratios are at all time highs. With the recent stock market run-up and corporate earnings plunging 15-20% this year – this shouldn’t surprise anyone. What is surprising is how high the P/E ratio is. Take a look at the chart below. The S&P 500 PE ratio is approaching 150. Until recently, it’s never been above 60. This would tell you that stocks are priced extremely high compared to earnings. The question you need to ask is – will earnings increase dramatically in coming quarters or will prices decline dramatically? History tells us that one or the other is going to happen – and happen soon.

However, P/E ratios don’t tell the whole story.

There are many people who are saying that all of the recent Federal Reserve actions have pumped billions of dollars into the system – and much of this money has found its way into the stock market.

The following is from Nathan’s Economic Edge (http://economicedge.blogspot.com/)

‘Wondering where the fuel for the recent rocket shot is coming from? Well, as Point put it, “The New York Federal Reserve bought a record $5.6 billion in agency debt today. There’s your fuel for the equity fire today.”’
 Fed buys record $5.6 billion in agency debt

NEW YORK (MarketWatch) — The Federal Reserve Bank of New York bought $5.605 billion in housing-agency debt on Friday, the biggest purchase since it began buying debt in the sector in December in the hopes of capping mortgage rates. It bought about half of the $11.209 billion offered to it by bond dealers, which analysts noted was rather high. The large purchase is a big switch from recent operations, which have slowly gotten smaller. Analysts hypothesized the central bank may have been trying to stretch out its purchases over a longer timeframe to improve the effect. “The size of today’s purchase will lead many to pay greater attention to the next pass to see if the Fed is increasing the speed at which it purchases Agencies,” said Dan Greenhaus, chief economic strategist at Miller Tabak. The Fed has bought $116.6 billion of the originally-stated $200 billion in debt issued by home-finance agencies.

From Chris Martenson (http://chrismartenson.com/):

‘Today [August 7, 2009], again, we receive news that the Fed is continuing to pour more and more POMO money into the banking system, this time with a ‘mere’ ~$2 billion addition.’

“August 7 – New York Fed purchases $1.937 billion in agency coupons”
‘As long-time readers here know, I have been tracking the Permanent Open Market Operations (or “POMO”) activity of the Fed for a long time.’
‘Today I want to update that chart above [Fed Treasury Purchases] and provide a little more context by placing it beneath a scaled chart of the Dow Jones index (time periods match exactly so the charts align). Again, what you are looking at is a chart of POMO activity (Treasury + Agency) that is being expressed as “billions of dollars per day.” No effort has been made to account for weekends or holidays; this is simply taking each POMO and dividing it by the number of days that pass until the next one.’

‘What we might wonder here are three things:

1. How would the stock markets have behaved without the massive daily additions of billions of dollars?

2. When the stock market turned around in advance of the initiation of the POMO purchases which major bank holding companies, such as GS, were effectively front-running this flood of money?

3. If the stock market is up 40%+ and green shoots are everywhere, why is the Fed continuing to pour gasoline on the fire ($16 billion this week so far)?

Part of the answer may lie in a nice piece of work posted at ZeroHedge which notes that on POMO days that stock markets exhibited some statistically unlikely upward thrusts in the final few minutes of each associated trading day.

Under this scenario POMO money is being shuffled out of the endless thin-air vaults of the Fed and into the banking system where it needs to find something to do. One of those things, it seems, is to goose the stock market, especially late in the day.

The goal, we surmise, is simply to get the stock market to move upwards. This is not an unthinkable idea to me because, frankly, it is exactly the prescription I would write for an economy as dependent on rising asset prices as is the United States’. If a rising stock market helps to get people out buying and spending again then it is a worthy goal in many a policy-makers mind, I am sure.’ –Chris Martenson

I believe that this is certainly true – Fed buying activities are pumping up the market – but there also appears to be a certain level of market manipulation taking place. I and others have noticed that there seems to be a lot of overnight futures buying in the stock market that is driving stocks higher.

From Nathan’s Economic Edge on 8/20:

‘As is this manipulated market’s custom, key areas are often jumped overnight and that occurred again last night in the midnight hours. The release of higher than expected jobless claims, however, sent prices back below that level and they are now very close to even’:

…and on 8/21:

 
‘Equity futures rose “in the midnight hours” once again, rising non-stop from midnight eastern at 996 on the /ES to this morning at 1,013 – a leap over resistance’:

This is happening over and over again. These are not people actually buying stocks – these are people placing massive bets that the stock market will rise. With the stock market being extremely expensive at the moment, it seems like a very strange thing to do. Regardless, with all of the money being pumped into the system – the system itself is being manipulated on a massive scale. The question is – what happens when the music stops and the ‘stimulus’ ends? Nothing good for you and me.

If we step back and take an objective look at what is really happening with our economy, we see the following:

1. The banking system is under significant stress (81 banks have failed so far this year) and regulators expect hundreds more to fail in coming months/years.

2. The FDIC insurance fund is at an all time low reserve ratio.

3. The U.S. Treasury is auctioning massive amounts of debt – recent auctions are approximately $5 trillion annualized.

4. Foreign investors and governments are no longer buying massive amounts of our debt. This is required for us to continue to fund our current deficits.

5. The Federal Reserve is stepping in and secretly buying billions of dollars of U.S. Treasury debt to make up for the lack of foreign purchases.

6. Stocks are priced at historic highs compared to earnings.

7. Unemployment continues to deteriorate with hundreds of thousands of jobs lost each month. This continues to adversely affect housing sales/housing prices, etc.

There are a number of possible scenarios that could happen at any time that will result in the beginning of a collapse of our monetary/economic system. The following are the greatest threats to the stability of the system:

1. The #1 threat right now to our economy is a stock market collapse. It’s at historic highs compared to earnings, underlying economic fundamentals are deteriorating, it is highly volatile, Americans have placed their faith in the fact that the market will always rise and it has been manipulated higher due to all of the Fed/Government actions. While the stock market is a horrible indicator of the overall health of our economy – it does hold immense power over our state of mind. If it falls significantly – vast amounts of wealth will vanish overnight – possibly leading to a panic and a complete loss of faith in the entire system.

2. U.S. Treasury auctions begin failing. If the Fed allows auctions to begin failing (bid to cover ratios consistently drop below 2), then the U.S. Treasury will be required to offer much higher interest rates to get the money it needs to fund our deficits. If this happens, interest rates for us will sky-rocket. This, in turn, will have a significant negative impact on the stock and bond markets.

3. The banking system fails. If bank failures accelerate to the point the FDIC cannot back deposits – expect a national bank holiday for a period of time without access to your funds while the government ‘decides’ what to do. Again, all financial markets will be negatively impacted.

4. Federal Reserve actions cause the value of the dollar to plunge. If this happens – all kinds of bad things happen to us. Prices for imported goods (most of what we buy) will sky-rocket. Interest rates for us will sky-rocket. The dollar will quickly be replaced as the world’s reserve currency (there is already a global movement to replace the dollar). Other nations will require payment from us in other currencies – which will be very difficult for us to do.

All of these things will obviously cause a global crisis – not simply a crisis within the U.S.

Here’s what you need to do today:

1. Check on the financial stability of your bank. How is the stock price? Do they own large amounts of illiquid securities and assets? Have they purchased high risk derivatives? Does their loan portfolio contain large real estate holdings that are not marked to market? Are they on the FDIC list of problem banks? Here’s the link:

http://www.calculatedriskblog.com/2009/08/problem-bank-list-unofficial-aug-14.html

2. Diversify your brokerage account, 401(k), retirement funds, etc. For now – shift funds out of stocks and riskier investments. If you can – move to a gold ETF fund or buy physical gold (coins) if you can. At the least – move investments to cash. If you can, stay away from paper assets – stocks, bonds, derivatives, etc. If the crisis does get worse – these types of holdings will rapidly decrease in value.

3. If possible, keep enough cash in your home (out of the bank) for a couple of month’s worth of expenses.

4. Stock your pantry more often.

5. Pay close attention to what is happening and check everything you’re told. Do not blindly accept what our political and financial leaders tell you through mainstream media. Think for yourself.

What we’re witnessing is a perfect financial storm that has enveloped our entire financial system. It’s like we’ve passed into the eye of the hurricane, so things seem somewhat calm – and we’re forgetting that the other side awaits us.

Once things begin to deteriorate – think about all of the positive mainstream media articles you’ve read and all of the positive speeches from our financial and political leaders you’ve listened to and ask yourself – were these people that clueless or was there another agenda at work here?

This is unusual for mainstream media – we normally see articles speak to negatives – only after a negative economic event has occurred. We see very little economic analysis within mainstream media that addresses our true economic condition and then reports the potential for negative impacts to our economy, earnings, markets, etc. In recent months, we’ve been fed a steady diet of positive news (based on bad economic data and horrible analysis) with very little attention given to the severe problems lurking within real economic data.

It has all been positive spin.

So – when I see a few mainstream media articles that speak to a few of the economic issues I have been following closely – I take notice.

Here are a few articles from today from the Wall St. Journal:

Raft of Deals for Failed Banks Puts U.S. on Hook for Billions
• To encourage banks to pick through the wreckage of their collapsed competitors, the Federal Deposit Insurance Corp. has agreed to assume most of the risk on $80 billion in loans and other assets. The agency expects it will eventually have to cover $14 billion in future losses on deals cut so far. The initiative amounts to a subsidy for dozens of hand-picked banks.

Commercial Real Estate Lurks as Next Potential Mortgage Crisis
• Federal Reserve and Treasury officials are scrambling to prevent the commercial-real-estate sector from delivering a roundhouse punch to the U.S. economy just as it struggles to get up off the mat.

Can Rally Run Without Revenue?
• As stock investors turn their focus to earnings prospects for the second half and 2010, they are zeroing in on one of the market’s biggest challenges: lackluster corporate revenue. The market barreled ahead this summer and is hovering near its high for the year, fueled in large part by stronger than-expected second-quarter earnings. But a significant driver of the good news was cost cutting. Many companies posted disappointing sales.

If you’ve read my previous posts – then you know that all three of these issues are going to have a severe negative impact on economic activity (and markets) in the near future. If we continue to see more articles like these – get ready.

Knowing how the global elite operate – it’s quite possible these types of articles are pre-empting some significant negative economic ‘events’. Since September and October have historically seen significant market volatility – I believe we’re in for a very rough ride.

Stay tuned.

It’s simply a matter of when – not if – stock markets are going to fall.

When I say fall – I’m talking about a collapse that at a minimum will rival 1929 or 1987. Most likely though – we’re looking at something no one has ever seen before. The coming stock market collapse will most likely result in the suspension of stock trading for a significant period of time – possibly forever.

jg – August 31, 2009
____________________________________

Impending Crash?

Monday, August 31 2009

Posted by Karl Denninger in Editorial at 10:51

[www.market-ticker.org]

You have to wonder when you see statistics like this (through 9:30 this morning):

Remove SPY, ETFC and LEHMQ (none of which trade on the NYSE) from the list and you get 606 million shares.

How many shares have traded in total with one hour in?

1.491 billion.

Forty percent of the volume is comprised of four used dogfood stocks, just as we’ve seen for the last couple of weeks – all people passing shares back and forth among each other, many of it being “computer HFT games.”

The other used dog-food stocks (LEHMQ and ETFC) are really no better; they just don’t trade on the NYSE. Lehman is particularly ridiculous as that’s a formally-bankrupt company!

Fannie and Freddie are two of the most outrageous abuses I’ve seen in a long time, second only to AIG. All three of these should be delisted as their equity value is quite literally bupkis.

This just goes to illustrate – the market is currently being levitated on literal trash. Again today we see the Casino trying to suck in people; I got emails from two more associates over the weekend telling me that their “advisors” are telling them “you have too much cash allocated; now is the time to buy.”

Now is the time to buy, after a 50% move?! Where the hell were these so-called “advisors” at SPX 666!

Nobody – and I do mean nobody – is talking about what this sort of volume pattern means. Well, I will: this is the sort of pattern that precedes an all-on equity market collapse. It strongly implies that the only volume support that the market has is from “hot money” speculators. Lest you think this is sustainable let me point out that just a few weeks ago the very same so-called “commentators” said the same thing about China’s market.

Here’s what happened:

The white box down below is the target on the break downward out of that flag last night – the top of the box is the critical “must hold” level from the first retrace off the bottom and the bottom of the box being the start of the entire move. If they’re lucky the market holds around the 250-275 level, but I wouldn’t bet on it.

That’s nasty – The Shanghai market has already lost roughly 25% from its recent peak, and it took just three weeks to lose what required roughly three months to put on.

How do you like those odds folks? Pay close attention to the lessons from the East, least you get to learn them the hard way right here.

A 25% loss from the recent highs on the SPX places the S&P 500 around 775.

I smell a repeat of 2001/2002, when the very same “analysts” said the bear market was over and everyone jumped back into the pool going into the end of 2001, only to get destroyed in the collapse that followed and took out the 2001 low.

Heh, I might be wrong on this, but those who “believed” in the Shanghai market are missing 1/4 of their money – so far.
______________________________________
Nathan’s Economic Edge

http://www.economicedge.blogspot.com

Debt, Interest Rates, and Monetary Trends – Click…

Inflation or deflation… economy bad, economy better… it’s a massive ball of confusion, so let’s see if we can very simply take a look at the BIG picture to see where we are and where we are heading…

In 1971 President Nixon removed the Dollar entirely from the gold standard. Rapid inflation immediately followed to the point that in 1980, then Fed Chairman Paul Volcker raised interest rates to 20% effectively killing the concept of Usury.

From the peak in interest rates in 1980 until 2008 interest rates where in a structural decline and have now reached zero as seen by this chart of the Effective Federal Funds Rate:

Note that with each recession (shadow areas), interest rates went lower, then lower, then lower, then zero.

They will NOT go below zero (don’t quibble, I know what you micro-managers are thinking, we’re looking at the big picture).

While interest rates were declining, DEBT was GROWING. This is what I call the era of leverage. Debt is financial leverage, and when interest rates are declining, holding debt gets easier and easier. The more debt that everyone has, the more credit dollars they have to drive up the price of houses, of cars, of gasoline, of food, of everything – to a point.

Here is a chart of the gross federal debt from about the late 1930s. Note that the DEBT began its parabolic rise shortly after interest rates began to decline:

Here is a chart of Total Public debt from about 1967. Note that the growth was slow and steady until about the peak in interest rates (1980), it then rose much more swiftly until the year 2000 when the move went parabolic and now is pointing almost literally straight up:

Guess what? That is not going to continue like that forever.

It takes INCOME to service debt. When the income no longer grows, if debt saturation has occurred, then debt must fall as the ability to pay it back falls with income. Here is what personal income is doing:

Personal Income is FALLING.

Consumer Credit is FALLING.

Household financial obligations are falling.

That would be an appropriate response, would it not?

Yet, in our own government, their income is falling:

Yet, their debt is growing exponentially. NOT an appropriate relationship unless bankruptcy is your goal.

Consumers who have less credit available spend less money. International trade falls. Corporate profits, those at least marked to reality, fall… and therefore stocks go up, right?

Of course there’s a historic disconnect there somewhere, if only I could put my finger on it… hmmm. It’s Sooooo difficult to figure out, why heck, NO ONE could have seen any of the financial turbulence coming.

And what are those same “visionaries” now saying about the stock market? Oh boy.

Once again, the people who see near term inflation are looking at the money supply charts, but they are not seeing the destruction in credit dollars which, I believe, is vastly greater than even the government charts show due to the leverage/deleverage of the shadow banking system that cannot be clearly seen. What can be clearly seen is that the big banks, who comprise the shadow banking world, make BIG profits when they MARK their “assets” TO their own MODEL, yet they have losses when they are forced to MARK them even slightly TO MARKET reality.

So, as interest rates have declined to zero, debt and incomes grew until incomes could no longer support further growth in debt and now they are both falling back. After all, the people who actually PRODUCE REAL THINGS in the rest of the world will produce for far, far less than we will. Thus in a more open international trade market, one would expect wages here to fall and wages there to rise, meeting someplace in the middle.

To confuse this otherwise pretty clear picture, the Fed jumps in and begins printing money. Why? Because the real economy can no longer support the paper economy. They have lowered interest rates to zero and so the next thing to do is to print.

Now let’s look at the chart of Federal Funds Rate again…

Note that following each recession and each lowering of rates there is a rebound that requires rates to rise, but in the past 30 years, never as high as they were before. In the 2000 to 2003 recession rates were lowered by Greenspan to just 1% – almost zero but not quite. And he did not have to resort to open printing. The next cycle rates hit zero AND they had to print.

Let me ask you this, what happens on the next cycle? People seem to want to argue with that chart, but zero is zero. There are only two possible paths of motion, sideways or up – OR self destruction. Trust me on this, zero is NOT any more normal than 20%!

We are at the end of an era, the era of leverage. We are now staring down the end of a loaded gun with our own finger on the trigger. We can choose to normalize interest rates and suck up the fact that debts don’t grow forever, OR we can pull the trigger and continue to print and to run up debts that we cannot service. The latter is fiscal and governmental suicide. The latter will lead to a loss of confidence in government and the demise of the dollar. That is NOT INFLATION!! That is a LOSS OF CONFIDENCE in a fiat money system, two different things – they are not just a matter of degree.

And thus CHANGE is COMING. You and I both hope that our leaders do not pull that trigger and commit suicide – so far they are doing exactly that, I can hear the click, I’m waiting for the BOOM.
______________________

Chris Martenson
(http://www.christmartenson.com/)

Three Reasons This Stock Market Rally Is False

Sunday, July 26, 2009

Executive Summary

• Data is either good, murky, or unreliable. The good data says we are not yet at the bottom.

• Stock trading volumes are way, way down.

• High frequency trading (HFT) harmfully obscures true market activity.

• S&P 500 earnings indicate that stocks are still expensive.

• The recent stock market advance is lacking a solid fundamental story to base itself on, it is running on hopes and fumes.

On a recent leg of a flight heading between Denver and Detroit, a kindly, middle-aged woman took the seat next to me and made small talk. As she hailed from Detroit, I had all sorts of questions for her. Did she know anybody who is out of work? How did the city ‘feel’ these days? What had she noticed lately?

When she inquired as to my interest and I told her a little bit about my work, she asked for my prognosis. I said, “Not good, not yet; the base data is very weak.” She immediately replied, “But the stock market has been going up. How do you explain that?”

She said this as if she had just played an undetected trump card; as though I was missing out some incredible secret. Given the power of the stock market to communicate to the masses (as exemplified by this exchange on the plane), and given how easily large, self-interested parties are able to manipulate and influence people, I consider the stock market to be among the least reliable of indicators.

So, understanding that all bull markets climb a wall of worry and that I could well be wrong, here are my three main reasons for discounting the messages implied by the recently rising stock market:

Reason #1: The good data is still bad

As I tell people in my seminars, I divide my data (or facts) into three buckets: good, murky, and unreliable.

Into the good bucket I put all sources of data fitting the following important criteria: The data itself is not statistically massaged before release, it is not ‘sampled’ but rather tallied up in its entirety, and it squares up nicely with other good sources of data.

Good Data

• Sales tax data (still pointing downwards)

• Income tax data (falling sharply, no bottom in sight yet)

• Truck tonnage moved (down 11% yr/yr, but possibly stabilizing)

• Port shipping container traffic (still in a record-setting slump, no bottom in sight)

• Air transport (down more than 20%, industry execs have fingers crossed)

• UPS, FedEx, and other major shippers’ volume (still falling)

Into a bucket of lesser importance goes the murky data. This data is based on sampling, usually conducted by self-interested parties (National Association of Realtors data for example), or is seasonally or statistically adjusted, and/or does not square up with other, better data.

Murky Data

• NAR home sales data (UP! UP! UP! But nearly a third are distressed sales…)

• Continuing claims (said to be moving down, as long as we mysteriously exclude those whose benefits run out)

• Retail sales data (Surprising to the upside! Improving!)

• Trade deficit reports (Improving! Exports from US beat all expectations!)

Into the final bucket goes the utterly unreliable ‘data,’ so bad that I need to use quotes around it. This ‘data’ is modeled or otherwise manufactured out of thin air with no accountability, does not square up (at all) with good sources of data, has massive errors in methodology that have never been explained, consists of survey data for reasons covered in an earlier Martenson Report (Survey Says…), is self-referential (e.g. LEI or ‘leading indicator’ data), and/or has been proven repeatedly in the past to be consistently biased for political or self-serving gain.

Unreliable Data

• New home sales data (Oops. Still slipping)

• Employment data (due to the Birth-Death model, which has added 879,000 jobs since January)

• All survey data (such as builders sentiment – improving!), including all sentiment data (such as consumer confidence, which is now fading a bit)

• Leading indicator data (Up, up, and away! Never wrong!)

My takeaway from all this data-diving is that the hard data still tells a tale of continued economic contraction, while the murky and unreliable data tells a confusingly mixed tale of both improvement and slippage. The reason for this is that the murky and unreliable data is massaged and manipulated by self-interested parties to achieve a particular view, which is, inevitably, always rosier than expected. This leads to mixed messages and confusion.

Back in the 1930′s, our officials similarly attempted to paint a rosier picture, but had to wrestle with much cruder tools of psychological persuasion and a still-intact sense of honesty. But this is not the case now. The current combination of a rising Dow and a synchronized chorus of propaganda from television virtually assures that a majority of people will be appropriately buoyed.

But will they spend more? If not, then these tricks will fail.

Reason #2: Where’s the volume?

One of the keys to a healthy market is healthy trading volume. All solid turns, whether to the upside or the downside, are accompanied by volume that is well above average. Volume implies that there are a lot of participants and is one of the signs that most traders look for when assessing whether a change in trend is afoot.

Curiously, recent stock trading volume is not just down, it’s way down:

Stock Trading Slowdown Is Steepest in Two Decades


July 24 (Bloomberg) — Stock trading in the U.S. hasn’t slowed this much midyear in at least two decades, causing some investors to worry that the steepest Standard & Poor’s 500 Index rally since the 1930s will fizzle.


The CHART OF THE DAY shows 84 percent as many shares changed hands daily on the New York Stock Exchange between May 1 and July 20, compared with the average from Jan. 1 to April 30. That’s the steepest slowdown since at least 1989, according to data compiled by Harrison, New York-based research firm Bespoke Investment Group LLC.

We can see this quite clearly in the chart below of the Dow Jones Industrials Index. Note that the blue horizontal dotted line indicating the volume seen in mid-May is well above the blue line marking the most recent volume. While the recent trail of ‘white candles’ is certainly impressive, the volume is not. This is a quite puzzling turn of events and not at all encouraging for the bull case.

So where’s the volume gone?

High Frequency Trading

Interestingly, this reduced volume is happening even with high frequency trading (HFT) computers running at full steam. Of the volume that is there, nearly three-quarters of it is fictitious in the sense that it represents the activity of black-box computers that have no intention of holding onto the stocks they buy for more than a few minutes or seconds.

For example, high-frequency trading firms, which represent approximately 2% of the 20,000 or so trading firms operating in the U.S. markets today, account for 73% of all U.S. equity trading volume.


These companies include proprietary trading desks for a small number of major investment banks, less than 100 of the most sophisticated hedge funds and hundreds of the most secretive prop shops, all of which operate with one thing in mind — capture profit opportunities by being smarter and faster than the closest competition.

The New York Times has a reasonable description of HFT in a recent article:

Powerful computers, some housed right next to the machines that drive marketplaces like the New York Stock Exchange, enable high-frequency traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else’s expense.


These systems are so fast they can outsmart or outrun other investors, humans and computers alike. And after growing in the shadows for years, they are generating lots of talk.


Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer.


Powerful algorithms — “algos,” in industry parlance — execute millions of orders a second and scan dozens of public and private marketplaces simultaneously. They can spot trends before other investors can blink, changing orders and strategies within milliseconds.


High-frequency traders often confound other investors by issuing and then canceling orders almost simultaneously. Loopholes in market rules give high-speed investors an early glance at how others are trading. And their computers can essentially bully slower investors into giving up profits — and then disappear before anyone even knows they were there.

By way of commentary, while we can be impressed with the technical skill displayed by the operators of these HFT programs, their actions are harmful, not helpful. The HFT programs merely skim money off of the stream of capital that is flowing through the system (possibly yours) and do absolutely nothing to assure that it flows to the right places and does the right things. HFT programs bleed off money put into the market by actual investors. It is a skimming operation.

To speculate a bit, I am concerned that insiders with deep knowledge of how these programs operate can more easily rig the markets to move upwards, should they chose to do that, by simply sending out batches of orders that imitate buying pressure and thereby fool the HFT programs into an orgy of buying. The string of white candles seen in the chart above may represent nothing more than a stampeding herd of computers sent off in that direction to create the impression of improvement. Certainly my seat-mate on the plane ride approved.

The presence of a massive army of programmed computers means that if the Treasury or Goldman Sachs wanted the stock market to go up (for whatever reasons), they could easily arrange this outcome by the application of a relatively minor amount of capital at the right times and places to fool the black boxes into running off in the desired direction. While building confidence through a rising market may be a laudable goal, a false rally is still a false rally, and these always end in tears. Especially for those lured into the markets by rising prices, as always happens.

One significant problem with HFT-driven markets is that they will experience much higher volatility, both on the way up and the way down. This is because the programs operate on millisecond timescales and command an enormous share of the market. Think of an open microphone in front of a live speaker, and you’ll have the idea.

“Good volume” in the stock market is driven by renewed investment interest and comes from pension funds, 401ks, mutual funds, and other sources whose presence brings money to the market. Volume created by HFT programs represents money that has been skimmed out of the markets.

Short Covering

Another source of the “volume” in this market is something called “short covering.” For those who don’t know what this means, some market participants will sell stock shares they don’t have (having borrowed the shares from someone first) in the hope that the price of the stock will fall. A short seller makes money if they can buy the shares back at a lower price than they sold them for. It is the exact opposite of buying stocks ‘long.’

One hallmark of a short covering rally is a brief, intense spike in the stock market like we’ve seen the past few weeks. In the chart below, we see that this rally has been accompanied by a 72.19% decrease in the short interest across all equities. That’s a whopping decrease, and short covering was both a component of the price rise in the market and its anemic volume.

Bottom line: There is no “good volume” in this rally, and what volume there is may be largely due to HFT (and other related black-box programs) and short covering, rather than the sober assessment of millions of individual investors that stocks are a compelling buy here.

Reason #3: Stocks are not cheap

When it comes to the ultimate driver of stock valuations – earnings – we’ve really reached a quite silly level of departure between those who wish to see a new bull market before them and those who see a bear market.

Earnings, of course, drive everything. One would think that measuring earnings would be a relatively straightforward task, but over the past 15 years, earnings have been subjected to some quite ridiculous accounting shenanigans.

Before we move on, let’s get a pair of distinctions out of the way – the difference between so-called “operating earnings” and “reported earnings.”

Let’s just discuss the two main earnings numbers that Wall Street, in general, uses when discussing valuations. They either take the “reported earnings” or “operating earnings”. Typically, the bulls use “operating earnings” and the bears use “reported earnings” because operating earnings are higher and reported earnings are lower.


The only difference in the 2 main earnings estimates used is that operating earnings exclude “write-offs” while reported earnings include “write-offs”. That is the only difference!!!

And:

The top down numbers are reflective of the various strategists on Wall Street who look at the macro economic factors as well as profits and profit margins in general. The bottom-up methodology studies each stock in the S&P 500 by the analysts at S&P in conjunction with consensus estimates of Wall Street analysts.

I tend to gravitate more towards the “reported earnings” side of things, mainly because I’ve observed a lot of companies excluding things as “one-time” write-offs that seem to me to be just a part of doing business. For example most of the Credit Default Swap (CDS) disaster has been written off by the banks as one-time expenses, when it seems to me that making and losing money on financial paper is pretty much the only thing banks actually do.

So I don’t understand why their CDS losses should be excluded from their “operating earnings,” as these losses seem to qualify as a normal part of their business model. If a bank lost money in a failed foray into composite airplane wing construction, in a case like that, I’d say, “Okay, write that one off.” But not in this case and the banks are not alone in the practice of excluding losses that really shouldn’t be.

At any rate, now that we can compare the difference between “operating earnings” (which do not include write-offs) and “reported earnings” (which include write-offs), and “bottoms up” (the sum of individual analyst guesstimates) and “top down” (big guesstimates made by economists based on macro factors), we can decide for ourselves what to make of the latest earnings estimates for the S&P 500, as a proxy for the entire stock market.

Below is a table that I got from Standard & Poor’s (source), showing that the current gap between operating and reported earnings is the difference between a current price-to-earnings (p/e) ratio of 24.29 and 768.73 (purple arrow)! Now that’s some difference.

If we take the “bottoms up operating earnings” (the bullish case), we see that as long as earnings grow by 45% over the next year and a half, the S&P 500 is trading at a quite reasonable p/e of 13.19. However, Wall Street analysts are notoriously optimistic and have missed the mark quite badly the entire way through this recession. If, instead, we use the “top down” estimates, we find that the stock market is anything but cheap and will still have a p/e of over 21, even with a hefty 13% earnings growth built in.

On the other hand, if we take “reported earnings,” we discover that in a year and a half we end up at a P/E of 26.20, which historically was associated with market peaks, not troughs. Additionally, the current dividend yield of the S&P is a measly 2.2% which, again, is a value historically associated with market peaks, not bottoms.

Finally, we might note that operating earnings are now estimated to be roughly 100% higher than reported earnings – one of the largest gaps on record. It’s a huge difference.

Someone’s got it wrong, and so far it’s been Wall Street and their “operating earnings” that has proven to be most wrong over the prior six quarters. Maybe they’ll be better over the next six? Hopefully, but I’d be hesitant to bet the farm on that outcome.

Low ‘Quality of Earnings’

I need to point out here that all of these estimates assume vigorous earnings growth, beginning now and continuing uninterrupted for the next six quarters. A reasonable person might ask, “But what if earnings do not grow as much, or even fall from here?”

It’s true that recent earnings have surprised to the upside (mainly because the bar was set so very, very low), leading many headlines to proclaim such things as “Earnings Reports Give Stocks Big Boost,” but once the dust settled, calmer heads noted that the earnings improvements mainly came from corporate cost cutting, not revenue growth or improved sales. The wrinkle here is that cost-cutting is not really a legitimate profit center, as there’s only so far you can go with that strategy. Eventually either cost-cutting stops or a company goes out of business.

Earnings that result from cuts to the business under duress are said to be ‘low quality earnings’ as they are not as repeatable and robust as earnings resulting from legitimate revenue growth.

Really Suspicious Earnings

One other claim in the prior article (linked above) needs to be investigated:

If you scroll down to the early 1990s on the S&P website you will see that the earnings and PE on both operating and reported earnings were virtually the same. But then we entered the greatest financial mania of all time in the late 1990s (including many write-offs) and the earnings numbers diverged.

This is an interesting claim. Was there some shift in earnings reporting that we can detect in the late 1990′s? It intrigued me enough that I decided to analyze the data to see if it was true and, if so, what we could glean from it.

It is certainly true that if we look at a simple cumulative sum of operating and reported earnings, we can indeed detect that the above claim seems to be true. Up through the mid 1990′s, there was be pretty good alignment between the two, but then things departed in earnest in the 2000′s and went completely off track over the past few quarters.

A different way to view this would be to look at the percentage gap between reported and operating earnings (formula = (reported)/(operating)-1) in each quarter over the same time frame. What’s presented in the chart below is the difference each quarter between reported and operating earnings. A negative value means that reported earnings were less than the so-called operating earnings and vice versa. Recessions are marked by the peach-stripes:

What I see here is simply stunning. To begin with, in the green circle we can see that, up until the early 1990′s, operating earnings were sometimes higher than reported earnings, and sometimes not. They switched places back and forth, which is what we would expect under a system of fair reporting, although we might detect a slight bias in favor of operating earnings being slightly greater than reported earnings.

Next, we might note that recessions seem to trigger some really large departures between reported earnings and operating earnings of -30%, -40% and more. While quite large, this makes intuitive sense, because recessions are when companies typically write off everything they can to clean out the books.

The real finding here, though, is that (with one lone exception in March 1995) from June of 1992 onwards, “reported earnings” have consistently been below “operating earnings.” This persistent bias is not just an occasional thing, it has been practiced with utter consistency and it is cumulatively quite enormous. What does it tell us?

It tells us that corporate management has been “writing things off” for more than 15 years. Isn’t that an awfully long time to have to endure “one-time” losses that would need to be excluded? Shouldn’t the “one-off” exclusions every so often work in the favor of corporation earnings resulting in higher reported earnings than operating earnings? What have our corporations been buying/doing that results in constant write offs of this magnitude?

This information tells us that corporations are not entering this recession in quite as good a shape as we’ve been led to believe. It means that if we want the next 15 years of stock growth to equal the last, we’re going to have to continue this practice of excluding all these “one-time” items from our corporate earnings statements.

Ultimately, we might infer that the numbers we have been fed (thanks, Wall Street!) are detached from reality and are little more than pleasant lies, told in the interest of continuing to sell expensive stocks to unsuspecting investors.

The earnings picture is just one more reason to be suspicious of this stock rally as a signal that a new bull market has begun.

Conclusion

The recent stock market advance is lacking a solid fundamental story to base itself on, at least if we choose to rely on good data. Further, volume is down considerably, the most in decades, and this is another missing component that might make us view the stock market advance more favorably. Finally, earnings suggest that the stock market, even after its run, is not cheap, by any historical measure.

There is growing evidence that the price movements we see in the stock market are best explained by activities that are essentially hidden from public view. High Frequency Trading (HFT) is one example, and it’s not a grand stretch to suspect other forms as well.

Remember, one of the most famous traders of all time said, “The stock market can remain irrational longer than you can remain solvent,” which I am tempted, for anyone considering shorting the market, to paraphrase as, “The stock market can remain manipulated longer than you can remain sane.”

I would caution anyone from jumping in here in an attempt to chase the market, and would further recommend that this would be a good time to lighten up on any stocks, should that be part of your strategy for the year.

I am still holding for another test of the stock market lows, with my favored timing being the Sept/Oct timeframe.

Here’s an excerpt from this morning’s Wall St. Journal:
____________________________________________________

SEPTEMBER 4, 2009, 8:46 A.M. ET

Job Losses Moderate, but Unemployment Rate Hits 9.7%

WASHINGTON — U.S. job losses softened last month but the unemployment rate soared to its highest level since June 1983, proving that it will take some time for the ailing labor market to recover from the worst financial crisis in decades. Nonfarm payrolls declined 216,000 last month compared to a revised 276,000 drop in July, the Labor Department said Friday. The August drop is smaller than the 233,000 decline economists in a Dow Jones Newswires survey had expected.
____________________________________________________

So – the bottom line is that a 233,000 decline was ‘expected’ and job losses just beat this estimate – once again.

As always – we need to take a closer look at how this number was calculated and see if it makes sense.

From the U.S. Dept of Labor CES (Current Employment Statistics) birth/death model:

So – once again – we see that this ‘model’ added a significant number of jobs back into the total. What were total job losses without this model? Approximately 334,000 [I realize that the government's reported number is 'seasonally adjusted' - so we can't simply add these jobs back into the total - but the message here is that the reported number is being manipulated higher - without reason]. What do you think would happen to the markets if we reported a much worse than ‘expected’ job loss total (334K) coupled with an unemployment rate of 9.7%? I think it’s safe to say that stock markets will respond much more favorably to a total of 216.

If you’re not familiar with this model – it doesn’t measure the birth/death of people – it is supposed to account for the birth/death of businesses. Instead of using a quantitative number that can be verified – like payroll tax information (which is declining by significant amounts) – or ADP payroll gains/losses + actual government job gains/losses – our government uses a very confusing method for ‘calculating’ monthly job gains/losses. They use this model to guess how many businesses started and/or failed in a given month. How they do this – no one really knows. This is why many people are now noticing how ridiculous this model actually is – it has added a total of 1,029,000 jobs to the ‘official’ job reports since February. – during one of the worst recessions in decades. People expected the model to subtract jobs for August – based on all of the jobs added to the model since Feb – but no – it just keeps on adding jobs – which makes absolutely no sense in this current economic environment. The model added jobs to every sector in August – construction, manufacturing, mining, finance, services, hospitality, etc. Of course, very few people take the time to explore how the government reports unemployment numbers – so very few people know that this type of smoke and mirrors is going on. At some point, they won’t be able to disguise what’s happening – and you can guess what will happen once the truth gets out.

You might ask yourself – with all of the recent negative media articles related to all of these sectors – how could the government add jobs to each of them? Very good question. It would seem that the BLS modelers are not concerned with reality. It seems that they don’t even agree with other government agencies. Here’s a few I’ve seen over the past few days:

“The U.S. service sector contracted in August for the 11th straight month” (Service Sector) WSJ


“States shut down to save Cash” (including furloughs & lay-offs) WSJ


“Retailers reported that August sales declined 2.9%” (Service Sector) WSJ


“American Airlines lays off 1,200 flight attendants” AJC


“Shipping rates are sinking” (Baltic Dry Index declines 44% over the past 3 months) WSJ


“The [U.S.] service sector is crucial for the job market, accounting for nearly 86% of all nonfarm jobs in the U.S. – and it is still contracting, the ISM reported on Thursday” WSJ


“American Apparel will lay off more than a quarter of its factory workforce in Los Angeles……” WSJ


“Quiksilver profit drops 53% in tough retail environment” WSJ


“Boeing Co. said its commercial jet deliveries fell 22% in August from a year earlier and orders were down 11.5%…..” WSJ


“The long recession and rising joblessness are taking an increasing toll on the nation’s most credit-worthy borrowers, who are now falling behind on their mortgage and credit-card payments at a faster pace than people with poor financial histories.” WSJ


“Unemployment rates in 372 U.S. metropolitan areas continued their upward climb in July, Labor Department figures released Tuesday show. Some 19 metros now have unemployment rates above 15%…” WSJ


“Service-sector employment declined by 146,000 in August, while goods-producing jobs including construction and manufacturing fell by 152,000, according to Automatic Data Processing Inc., a payroll firm.” WSJ

Take note of this excerpt from an article in Thursday’s WSJ:

“The ADP report suggested “some downside risk” to the government’s official August employment report, due Friday, but the ADP figure has been worse than the government’s figure in six of the past eight months, according to economists at Goldman Sachs Group Inc. That is in part because ADP only tallies private-sector jobs. Government hiring has added about 2,000 jobs per month over the past year.” AJC

I would say that the ADP numbers are worse than the government’s unemployment numbers because the ADP numbers are based on reality.

If we calculate the unemployment rate the way it was calculated (total number of unemployed people who would work full time if they could find a job/total working age population) before all of this ‘modeling’ and ‘polling’ used to calculate current unemployment stats – what do we see?

We see a true unemployment rate of over 20%. I wonder what would happen if this was ever reported?

My guess is that if you are in a business that has direct contact with consumers – you are seeing (or are beginning to see) significant sales declines as unemployment continues to deteriorate.

You get the picture. This is just one more way the American people are being misled.

jg

I suppose this is why the IMF has revised its 2010 global economic growth forecast to 3% from July’s forecast of 2.5%. You might ask yourself – how can the IMF accurately ‘estimate’ global growth next year? What really caused their forecast to gain .5% over the past month? I have no idea – and I’m not sure anyone else does either. Most likely, someone at the IMF is taking an official dart and throwing it against an official wall labeled with various percentages. Who knows? Regardless, it seems like someone is trying to allay our fears by printing lots of positive economic news.

Let’s take a look at some of the information in the Wall St. Journal article below (front page headline article) and compare it to reality to determine if mainstream media is telling us the truth or ‘spinning’ misleading data.

The article begins:

“Manufacturing gains in the U.S., Europe and Asia added to evidence the global economy is improving at a faster pace than was widely anticipated a few months ago.”

The article is referencing the recent manufacturing activity index that reported a reading of 52.9. What does this really mean? Is manufacturing improving?

Let’s go to Nathan’s Economic Edge (http://www.economicedge.blogspot.com/) for the truth.
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Tuesday, September 1, 2009

Manufacturing ISM INDEX Shows Growth… or Does it?

The Manufacturing ISM index came in at 52.9 for the month of August, that is an increase from 48.9 the month prior, the headlines will shout that’s a 9% growth in manufacturing! LOL, NO, not even close.

Look, Manufacturing fell off a cliff after being in decline for years and years in this country. An index value of 50 indicates that the fall stopped, at least for now, and anything over 50 means that some growth is occurring over the last reporting period, and that’s what this report says. But it’s misleading for what it doesn’t say, and that’s that manufacturing is at such a low level that even cash for clunkers is enough to bump it up for a short time period. But cash for clunkers is now over. Is our manufacturing economy really now growing, and is a 50%+ market rally really pricing in reality?

Here’s Econoday:

Highlights


The ISM’s manufacturing index burst over the dead-even 50 level for the first time since the beginning of the recession, at 52.9 in August vs. 48.9 in July. New orders led the advance, at 64.9 vs. August’s 55.3 and pointing to rising business activity in the months ahead. Production was also very strong in August, at 61.9 for a 4 point gain and pointing to gains in durable goods shipments and total manufacturing sales. Backlogs also increased, at 52.5 vs. 50.0 in July. But manufacturers are not stocking up, instead they continue to draw down inventories where the index is a very weak 34.4 vs. 33.5 in July. Note that future gains in the inventories index, a seeming necessity given rising production needs, will help give the overall index a big boost. Respondents in fact think inventories at their customers’ firms are too low, with the customer inventories down 3.5 points to 39.0. Deliveries slowed substantially, up more than 5 points to indicate that current production needs are stressing what has become a pared down supply chain. Production activity and the gain in orders has yet to boost employment where the index only inched forward to a still sub-50 level of 46.4.


All the strength here is flowing through to prices where the prices paid index jumped 10 points to 65.0, an indication that buyers are bidding up prices for raw materials. No doubt boosted by cash-for-clunkers and gains in transportation, the manufacturing recovery is on the way and together with the gain in the pending home sales index indicate that two key sectors are on the acceleration. Stocks jumped in immediate reaction to today’s 10 o’clock data.

Wow, look at that chart! Heck, we’re right back where we were, right??? This is how misleading these indexes are… they do not reflect reality as they do not show you what is happening to the base.

Compare the chart above to this chart of manufacturing sector output which is also an index value, but one that’s tied to the manufacturing level in the year 1992:

Or to this chart showing manufacturing sector output expressed in yoy percent change:

You see, the charts above are indexed to a base year, but the ISM index number is based to nothing but the period preceding it. Now, which charts more closely show reality???

There is no doubt that the above charts of manufacturing output paint a far truer picture of what’s occurring because the index value has no connection to the base, it’s just plus or minus over time! So, for real meaningful growth to occur, the ISM must be above 50 and stay there for an extended time.

To confirm that hypothesis, one need only look at the shipping indexes which are simply still scary.

We can also look at the number of people employed in manufacturing durable goods, for example, and when we do we find that the United States currently employs about the same number of people for manufacturing as we did back in 1947! Now, you say that’s because we are way more efficient and productive? But remember that it requires people to earn money to buy things. It takes INCOME to service DEBT. The service sector has been growing while the manufacturing sector has been shrinking. Service sector jobs do not pay, on average, as much as manufacturing sector jobs. Yet DEBT had been skyrocketing until just recently. It takes INCOME to service DEBT.

We can also look at durable goods ORDERS and this is expressed in millions of dollars. Here you can see the cliff dive and the recent turn upwards:

So, you must ask yourself if the market is actually pricing in the future, 50%+ priced in already, or is it actually just disconnected from reality?
_______________________________________________________

Let’s look at a couple of other statements from the article below.

“Businesses and households have been regaining confidence, and economists have revised forecasts upward.”

I don’t know about you and what you’re experiencing – but I don’t see anything in the real economy that affects you and me (business sales/revenue, shipping/freight, employment, home prices, home sales, etc.) that would tell me anyone is ‘regaining confidence’. If you own or manage a business – chances are that sales are struggling and your access to credit is diminished – if not gone altogether. If you’ve lost your job – then you know how hard it is to find employment. If you’re selling your home – chances are that your home value has declined significantly and you’re having a tough time finding a buyer. Bottom line – there is nothing in the real economy that would cause me to ‘regain confidence’.

“U.S. auto sales were the best in over a year……”

Why were auto sales the best in over a year? I think it might have something to do with the ‘cash for clunkers’ program – which is now over. I wonder what auto sales are going to do over the next couple of months? It’s probably safe to say that auto sales are going to tank due to all of the sales pulled forward into August due to the program. I’ve also seen where supplies of new cars are very low due to production cuts and the ‘cash for clunkers’ program. Bottom line – we’re going to see a significant drop in auto sales for the remainder of this year.

Moving on……

“……. the National Association of Realtors index of pending home sales hit its highest level in over two years.”

Here’s a very good article from Chris Martenson that explores a problem with current housing information provided by the NAR.
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House Sales and Mortgage Applications – Something Doesn’t Add Up.

Sunday, August 23, 2009, 7:15 pm, by cmartenson

I was not a good father today.

Instead, I engaged in laboriously hand-entering data to satisfy a question that has been bothering me for a while.

The issue that was worrying at me was the apparent discrepancy I’d mentally noted between the happy-happy increase in existing home sales, as reported by the NAR last week, and what I remembered from the MBS mortgage application releases.

But who could be sure?

Perceptions can be tricked and need to be tested and subjected to fact-based inquiry.

Confounding things, the Mortgage Banker Association (MBA) application reports are notorious for changing their reporting methodology, most recently (during the past 3 weeks) dispensing with reporting of an absolute number in favor of a simple percentage change. Where, for example, the number used to change from 1000 to 1100, it is now only reported as having changed +10%.

After a few weeks, who can remember what +10%, -4%, -3%, +12% is supposed to mean? I certainly can’t.

At any rate, this shift to a percentage basis altered a convention that went back several years. Now we only get to read the weekly percentage and yearly changes, without the confusing benefit of an absolute number to guide our perceptions. So for those without the time or the inclination to dig through the data, it is what it is.

For me? The only way to resolve this was to obtain all the base data, hand-enter it into a spreadsheet, and see what was up.

Well, this is what’s up:

Where the NAR recently reported a gain of +5% in existing home sales for July09/July08, the reconstructed MBA report shows a -22% decline in purchase applications over the same period (in stark contrast to their misleading recent release, which spoke of a yr/yr gain, but was actually referring to a blended gain that included the highly volatile refi apps):

Where the MBA most recently said that purchase applications have been “trending up,” I am at a loss to see the period of time to which they are referring. I’ve boxed in 2009 for reference, but it is difficult to make a case for “trending up” unless one decides to begin randomly at some point after March.

Note that the data I have is all seasonally adjusted and straight from the MBA, so I doubt we are referring to different data.

At any rate, I am simply not in a position to believe that purchase applications are down 22% yr/yr while total sales are up 5%+. This would imply that nearly a third of all national sales are cash-on-the-barrel.

Sorry. No way. Somebody here is lying.

Somebody Not At all Reliable. However, I will retain my judgments – for now.
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The next couple of quotes in the article below are nothing short of ridiculous.

“We had been looking for improvement, but the speed at which it’s come and the magnitude with which it has come is surprising,” said J.P. Morgan economist Bruce Kasman. “We all went down hard and we’re all going up pretty well.”


President Barack Obama called the manufacturing data proof “the steps we’ve taken to bring our economy back from the brink are working.”

Our politicians (Republican and Democrat alike) love to grab onto something that appears positive – and then hope that no one actually checks their statements to the truth.

Are we all coming up ‘pretty well’? No. Does the manufacturing data prove that the government’s stimulus packages are working? No. Are Bruce Kasman and President Obama misleading us? Yes.

Here’s probably the most important statement in the entire article:

“One of the largest unknowns is how well the world economy can fare when the huge fiscal and monetary stimulus supplied by many governments, from the U.S. to China, wears off.”

I can tell you now how the world economy is going to fare when the various stimulus plans end. Since these stimulus packages the world over are currently propping up the world’s debt based monetary system (since household/consumer credit is plunging) – we’re going to see some very serious economic declines that will eventually lead to the collapse of the global financial system.

There’s been a lot of talk about China pulling the world out of recession – but here’s the reason the Chinese economy has rebounded and why their stock market is up 30%+ this year.

“China has been pulling out of the global slump more decisively than any other major economy, thanks to an enormous stimulus program.”

China’s banking system has pumped billions of Yuan into their system. Again – this is debt – and will eventually crush their economy – just like ours.

So – the mainstream media spin machine continues on……
__________________________________

SEPTEMBER 2, 2009

Global Economy Gains Steam

Jobs Still a Worry, but Factory Output Rises in U.S., China, France; Markets Falter

Wall St. Journal

By JUSTIN LAHART, ANDREW BATSON and MARCUS WALKER

Manufacturing gains in the U.S., Europe and Asia added to evidence the global economy is improving at a faster pace than was widely anticipated a few months ago.

For the first time since January 2008, an index based on a survey of U.S. manufacturing purchasing managers crossed a threshold indicating factory output grew. Manufacturing activity in China, France and Australia, among other countries, also expanded in August, separate surveys showed. The pace of contraction in Germany and some other nations slowed markedly.

Stocks pulled back Tuesday, but financial markets in much of the world have been rallying in recent months. Businesses and households have been regaining confidence, and economists have revised forecasts upward.

U.S. auto sales were the best in over a year, and the National Association of Realtors index of pending home sales hit its highest level in over two years.

“We had been looking for improvement, but the speed at which it’s come and the magnitude with which it has come is surprising,” said J.P. Morgan economist Bruce Kasman. “We all went down hard and we’re all going up pretty well.”

President Barack Obama called the manufacturing data proof “the steps we’ve taken to bring our economy back from the brink are working.”

The global economy remains far from healthy, and not all signs are positive. New figures Tuesday showed the U.K.’s manufacturing sector contracted in August. Banking sectors in several nations continue to struggle with bad loans, the latest worries being commercial real estate loans made by U.S. banks. Financial stocks led a broad selloff Tuesday that sent the Dow Jones Industrial Average down 185.68 points, or nearly 2%, to 9310.60. Wednesday in Tokyo, the Nikkei was down was down 2.7% early.

The positive mood about the economy could dissipate with some disappointing data. Economists estimate a report on the U.S. labor market Friday will show a rise in the unemployment rate to 9.5% in August from July’s 9.4%. Continued shedding of jobs acts as a drag on consumer spending, the largest factor in the U.S. economy and a major driver of global demand. Acknowledging the continuing high U.S. unemployment, President Obama promised not to “let up until those Americans who are looking for jobs can find them.”

One of the largest unknowns is how well the world economy can fare when the huge fiscal and monetary stimulus supplied by many governments, from the U.S. to China, wears off.

Yet conditions are better than many had anticipated. At the end of July, forecasters polled by research firm Macroeconomic Advisers estimated that the value of goods and services produced by the U.S. economy would grow at a 1.6% annual rate in the current quarter, ending Sept. 30. By last week, that GDP estimate had nearly doubled to 2.9%.

A senior International Monetary Fund economist, Jörg Decressin, said Tuesday that the agency is revising its global growth forecast to just under 3% in 2010, higher than the IMF’s July estimate of 2.5%. The new forecast will be released Oct. 1. J.P. Morgan economists expect the 16 nations that share the euro will grow at nearly a 3% annual rate in the second half of this year. In June, they were predicting just 0.5% growth.

In the U.S., the Institute for Supply Management’s index of purchasing-manager sentiment rose to 52.9 in August from 48.9 in July, crossing the 50 mark that indicates the sector is expanding. A measure tracking new orders rose sharply, with textile mills, paper products, printing-related products and apparel showing particular strength.

Although the recently ended U.S. “cash for clunkers” program boosted auto sales, that wasn’t the whole story. “There’s obviously some impact from changes in the automotive industry,” said Nobert Ore, who oversees the manufacturing survey. “I think probably the business cycle had as much to do with it.”

New economic data show an economic recovery at a faster-than-expected rate. But will it last? WSJ’s Economics Editor David Wessel reports.

International Rectifier Corp., which makes semiconductors, has seen improved demand across the industries that use its product, including computers, aviation and autos. Last week, the company reported that it turned a profit in the quarter ended June 28 after five quarterly losses. The company has noted “encouraging signs of stabilization” in North America and particularly strong demand in China and Taiwan.

At Ace Clearwater Enterprises, a Torrance, Calif., company that makes parts for the aerospace industry, orders are up 26% from the last year. The company employs about 245, almost 100 more than a year ago, and is still hiring. “We’ve been really fortunate,” said Gary Johnson, the company’s vice president. “And a lot of companies have gone out of business, frankly, that are our size.”

China has been pulling out of the global slump more decisively than any other major economy, thanks to an enormous stimulus program. A survey of purchasing managers at Chinese companies, which signaled expansion beginning in March, moved up to 54 in August from 53.3 in July.

Chinese policy makers now face the challenge of sustaining an expansion after withdrawing government support. There are some signs Chinese corporate investment is picking up. BOE Technology Group Co. and a consortium of other Chinese state-owned enterprises said last week they will spend $4.1 billion to build a new liquid-crystal-display factory in Beijing.

Yet investments from nonstate companies have lagged in China, confidence remains fragile, and the initial euphoria over the stimulus has evaporated. The Shanghai stock market fell 23% in August as investors fretted over a slowdown in the pace of bank lending.

Employees work at a Baldor Electric Co. factory in St. Louis. Reports show an upturn manufacturing activity in the U.S. and in several other nations in August, a sign the global recession is winding down.

Although China’s stimulus now seems to be more than strong enough to meet the official target of an 8% expansion for 2009, officials remain publicly cautious about the world economy, with China’s exports still down 22% from last year.

Japan reported an upturn in industrial production earlier this week. It said industrial production in July rose 2.2% from June, the best monthly gain since the global recession hit.

The euro zone’s purchasing managers’ index rose to 14-month high of 48.2 in August, up from 46.3 in July, closing in on the 50 level that would indicate activity has stopped falling. The surveys showed manufacturing in France is growing again, and has nearly steadied in Germany. But in some countries, such as Italy, Spain and Ireland, manufacturing declines continued.

As in the U.S., European businesses have cut inventories so sharply that even a modest revival of demand is likely to lead to increases in production.

Skeptics point to three weakness in Europe’s German-led recovery. Cash-for-clunkers schemes that have propped the auto sector are due to run out in Germany and elsewhere next year. Banks in the euro zone have done less than in the U.S. to write down their losses in the credit crisis, and are cutting back their lending to businesses to repair their capital ratios.

And third, unemployment in Germany, Italy and some other countries is expected to rise further this year and next. Government measures such as short-shift subsidies have delayed layoffs, but many companies are thought likely to cut jobs over the coming year. That in turn could dent consumer confidence and household spending.

In one respect, Europe is less at risk of a double dip than the U.S., say analysts. It has done less to stimulate growth through fiscal and monetary policy than the U.S., so that the withdrawal of stimulus measures will be a less-significant negative.

Britain could lag behind other regions in pulling out of the global recession, given the U.K.’s heavy debts and reliance on the financial-services industry. British consumers are among the most heavily indebted in the developed world, and their downsizing efforts may put a lid on consumer spending.

That has some U.K.-based companies concerned. Last month, drinks maker Diageo PLC, the maker of Johnnie Walker scotch and Guinness stout, said it doesn’t expect a recovery in the alcoholic-beverages industry anytime soon. It issued a lackluster forecast for fiscal year 2010.

—Paul Glader, Neil Shah and Sara Murray contributed to this article.

Write to Justin Lahart at justin.lahart@wsj.com, Andrew Batson at andrew.batson@wsj.com and Marcus Walker at marcus.walker@wsj.com

It’s probably a shocking revelation to most Americans that the Federal Reserve – the one entity in America that has absolute control over our economy (controlling interest rates and money supply volume) – is majority controlled by banking families of Europe. It’s probably just as shocking for most Americans to learn that JPMorgan-Chase and Citibank control the New York Federal Reserve Bank. Who controls JP Morgan and Citibank? The same people who own the Federal Reserve. It’s an amazing game of smoke and mirrors. On the surface – it seems that the Federal Reserve (by its very name) is government controlled and our largest banking institutions are owned by many different, independent shareholders. The truth is that all of these banking institutions are majority controlled by the same families.

All of the recent banking bailouts make a little more sense (trillions of dollars thrown away into a failing system) when you know the facts behind what is going on. Who benefited from the banking bailouts? The very large banking conglomerates (including Citibank and JPMorgan) were the beneficiaries – while smaller regional banks continue to fail every week. Now we know why. If you’re Citibank and you’re in trouble – why not have the Federal Reserve Bank of New York (which you control) – bail you out. Of course, this truth never ends up in our newspaper headlines.

The fact that our central bank is controlled by private banks – and that ownership/control of the world’s central banking system ultimately resides in Europe – is what really got me looking into the details behind our monetary/economic system. As with any investigation into a crime – a good detective will initially look for an answer to one overriding question – what is the motive behind the crime?

These are the questions that started me on the path to learning the truth:

1. What is the motive behind this system?

2. Why would anyone create a monetary system that requires exponential debt creation/growth?

3. Why would anyone create a monetary system that is unsustainable – that will eventually collapse at some point in the future?

4. What do the people behind this system stand to gain from the failure of the system?

If you want to understand what is happening to the world’s economy – you must be able to answer these questions. If you spend the time to research the answers – like I have – you won’t like what you find. I think that most people – if they were honest with themselves – know something is amiss. The problem is that they don’t want to face the truth – so they never try to find the answers. Unfortunately, in the very near future – ignorance is not going to be bliss.

There are many very intelligent people in the world today trying to explain what is happening to our economy. They fail to arrive at the right conclusions because they only focus on what they’re told – and they ignore the glaring problems right in front of them. They assume that they’re being told the truth by the Fed and our government – and they never search for ulterior motives. As you’ve seen me say before – I don’t see much truth emanating from Washington D.C. these days – so many people are being led astray.

What is truly amazing to me about all of this – is that approximately 2,000 years ago the Apostle John wrote down a Divine Revelation. God inspired John to write the ‘Revelation of Jesus Christ’ on the island of Patmos. In it – God gave us serious warnings about the end of this age. Around 95 A.D. God gives us a description of a ‘beast’ (worldly entity/organization) that would deceptively gain control over the world’s governments and the world’s financial system.

It’s almost as if John has transcended time and handed me the message personally. It’s as though the Lord has handed me the Revelation and said “Interpret this message for My people – warn them about what is to come.” Why do I say this? Because for hundreds of years an evil, deceptive worldly organization has infiltrated the world’s governments and the world’s financial system. The very same people who have infiltrated the world’s political system (including U.S. Presidents, Senators, Congressmen, British Prime Ministers, Heads of State around the world, etc. etc.) – also control the world’s central banking system. This is not a coincidence. Significant prophecies are being fulfilled right before our eyes – and we’re all staring at our blackberries, watching American Idol and playing fantasy football. We have been lulled to sleep – as the beast gains control of the world. I’ll say it again – we have vastly underestimated our spiritual enemy.

There have been countless interpretations of the prophecies of Revelation over the years (some popular and some not) – but there has been no way to confirm many of them until the last 15 years. Now that there are many ways to research who is behind the New World Order and our central banking system (through many people researching independently) – it is becoming clear what is happening and who is behind it.

I have warned people for 4 years about the coming economic collapse – and I don’t think many people have taken the warnings seriously. Even after I have explained the reasons for a collapse from the world’s viewpoint (math doesn’t lie). Maybe after markets collapse and we have nothing – maybe then we will all wake up to reality. We’re going to find out very soon.

jg – September 6, 2009
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Who Controls The Federal Reserve System?
By Victor Thorn

Now that we know the Federal Reserve is a privately owned, for-profit corporation, a natural question would be: who OWNS this company? Peter Kershaw provides the answer in “Economic Solutions” where he lists the ten primary shareholders in the Federal Reserve banking system.

1) The Rothschild Family – London 2) The Rothschild Family – Berlin 3) The Lazard Brothers – Paris 4) Israel Seiff – Italy 5) Kuhn-Loeb Company – Germany 6) The Warburgs – Amsterdam 7) The Warburgs – Hamburg 8) Lehman Brothers – New York 9) Goldman & Sachs – New York 10) The Rockefeller Family – New York

Now I don’t know about you, but something is terribly wrong with this situation. Namely, don’t we live in AMERICA? If so, why are seven of the top ten stockholders located in FOREIGN countries? That’s 70%! To further convey how screwed-up this system is, Jim Marrs provides the following data in his phenomenal book, “Rule By Secrecy.” He says that the Federal Reserve Bank of New York, which undeniably controls the other eleven Federal Reserve branches, is essentially controlled by two financial institutions:

1) Chase-Manhattan (controlled by the Rockefellers) – 6,389,445 shares – 32.3%
2) Citbank – 4,051,851 shares – 20.5%

Thus, these two entities control nearly 53% of the New York Federal Reserve Bank. Doesn’t that boggle your mind? Now, considering how many trillions of dollars are involved here, and how the bankers are WAY above our “selected” officials in Washington, D.C., do you think the above-listed banks and families have an inordinate amount of say-so in how our country is being run? The answer is blindingly apparent.

Where does the money come from?

We all know that the Federal Reserve CORPORATION prints money – then loans it, at interest, to our government. But wait until you see what a total scam this process is. But before we get to the meat of this issue, let’s remember one thing about the very essence of banking – primarily that money should have some type of standard upon which its value is based. In the case of America, we operate on what is called a “gold standard” (i.e. our money is backed by gold).

So, with that in mind, let’s look at how money is actually created, and at what cost. If the Federal Reserve wants to print 1,000 one-hundred ($100) bills, their total cost for ink, paper, plates, labor, etc. would be approximately $23.00 (according to Davvy Kidd in “Why A Bankrupt America”). Now, if you do the math, the total cost of 10,000 bills would be $230.00 ($.023 x 10,000). But, and here’s the catch – 10,000 $100 bills equals $1,000,000! So, the Federal Reserve can “create” a million dollars, then LEND it to the U.S. Government (with interest) for a total cost of $230.00! That’s not a bad deal, huh!

The banking industry calls this process “seignorage.” I call it outright THEFT. Why? Well, regardless of the immense profit margin ($1,000,000 for $230), plus the huge interest payments, our government then needs to STEAL the American people’s money to payoff their debts via a Mob-like agency called the IRS. So the bankers steal from the government, then the government turns around and steals from the people. I’m no genius, but who do you think is getting screwed in this process? Us – the people at the bottom rung of the ladder.

What’s worse is that – now catch your breath – there’s NO MORE gold left in Fort Knox! It’s all gone. In other words, the GOLD STANDARD that our financial system was based upon is now an illusion. We can’t convert our money into gold — only other currency. The entire underlying basis for our money is now a lie – a sham. The Federal Reserve has become so arrogant that they’ve become a literal MONEY MAKING MACHINE, creating currency out of thin air! So that’s where the Fed gets their money – they literally make it, then lend it to us so they can make even MORE money off of it.

Money As A Religion

The above-detailed process has become so ridiculous that William Grieder, former assistant managing editor of the Washington Post, wrote a book in 1987 entitled, “Secrets of the Temple: How the Federal Reserve Runs the Country” that details how the Controllers have conditioned us to accept this absurd situation.

“To modern minds,” he writes, “it seemed bizarre to think of the Federal Reserve as a religious institution. Yet the conspiracy theorists, in their own demented way, were on to something real and significant. The Fed did also function in the realm of religion. Its mysterious powers of money creation, inherited from priestly forebears, shielded a complex bundle of social and psychological meanings. With its own form of secret incantation, the Federal Reserve presided over awesome social ritual, transactions so powerful and frightening they seemed to lie beyond common understanding.”

Mr. Grieder continues, “Above all, money was a function of faith. It required implicit and universal social consent that was indeed mysterious. To create money and use it, each one must believe, and everyone must believe. Only then did worthless pieces of paper take on value.”

Do you get it? MONEY is an ILLUSION! Why? Because the gold standard upon which our money is supposed to be based has been eliminated. There’s no more gold in Fort Knox. It’s all GONE! Now, money really IS only paper!!! In the past, money was supposed to represent something of tangible value. Now it’s simply paper!

Taken one step further, many of us don’t even use paper money any more! Why? Well, here’s a scenario. Many places of employment directly deposit their employee’s paychecks into the bank. Once the money is there, when bill time comes around, the person in question can write out a stack of checks to pay them. Plus, when they need gasoline they use a credit card; and groceries a debit card. If this person goes out for dinner on Friday night, they can charge the tab on their diner’s card. But what about the tip? They simply scribble in the amount at the bottom of the check. So far, the person hasn’t spent a single dollar bill. Plus, if you bring electronic banking into the picture, we’ve virtually eliminated the use for money. And, God forbid, what happens when encoded microchips are implanted into the backs of our hand?

In essence, money has become nothing more than an illusion – an electronic figure or amount on a computer screen. That’s it! As time goes on, we have an increasing tendency toward being sucked into this Wizard of Oz vortex of unreality. Think about it. Americans as a whole are carrying more personal debt than in any other time in history. Plus our government keeps going further and further into the hole, with no hope of ever crawling out. But we have less and less actual MONEY! We’re being enslaved by the debt of electronic blips on a computer screen! And 70% of the banks that control this debt via the Federal Reserve exist in foreign countries! What in God’s name is going on? As author William Bramley says, “The result of this whole system is MASSIVE debt at every level of society.”

We’re getting screwed in a sickening way, folks, and the people doing it are demented magician-priests that use the ILLUSION of money as their control device. And I hate to say it, but if we allow things to keep going as they are, the situation will only get worse. Our only hope … ONLY HOPE … is to immediately take drastic action and remedy this crime.

We are experiencing the collapse of exponential growth curves (debt, money supply). Things will really begin to deteriorate when we see a major shock to the system – most likely a stock market crash. When this happens, what little confidence that remains in the system – will vanish. Then the entire system will begin a ‘free-fall’ collapse – stocks & bonds will continue to rapidly decline in value, interest rates will increase significantly, the value of the U.S. dollar will plummet, derivatives will become worthless, bank failures will increase dramatically possibly leading to a bank holiday, etc.

We hear our financial (Federal Reserve and economists) and political leaders tell us that our economy is ‘stabilizing’ and that we will return to ‘growth’. What is the truth? The truth is that for our economy to return to ‘growth’ – we will need to once again create approximately $4 trillion in debt each year (current aggregate amount of interest on our outstanding debt). Currently, we are no where near this amount – and with our current levels of debt – there’s no way that I can see for us to return to this level of debt creation.

Remember – even if we could create $4 trillion in debt over the next year – our debt must grow exponentially. For our economy to continue to grow and prevent a collapse – debt creation in coming years will need to continue to grow – $5 trillion, $6 trillion, $7 trillion. You see the problem. The current government stimulus packages are only prolonging the inevitable collapse of this system. Our government can continue to implement new stimulus packages – but eventually we all go bankrupt – including our government.

We have reached the end of the line. We’ve been climbing the steep incline of an exponential curve – and now we’re falling. There is no way for us to return to ‘growth’ unless this system changes. Of course, world leaders have a new system waiting for us. Once we begin a ‘free-fall’ collapse – we’ll see the ‘solution’ quickly appear.

jg – September 8, 2009
_____________________________________

From Nathan’s Economic Edge (www.economicedge.com):

Tuesday, September 8, 2009

Consumer Credit Deflating…

While the whole world of “economic experts” are talking about and bracing for inflation, consumer credit (credit being the largest part of the money supply) is CONTRACTING at a RECORD PACE.

That’s what exponential curves do when they have peaked. The math does not allow anything to grow unabated year after year into infinity, that only occurs in the minds of idiot politicians and poorly trained economists who received their education in the land of fiat – America.

Here’s the data according to Econoday… the experts consensus was for a contraction of $4.1 billion, actual contraction was $21.6 billion for July:

Highlights


Contraction in consumer credit reflects rising consumer caution as well as banking efforts to limit lending exposure. Consumer credit contracted $21.6 billion in July, a very severe reading and the largest on record. At $15.5 billion, June’s contraction was also severe ($10.3 billion initially reported). July’s contraction is the sixth in a row for the longest streak since the credit squeeze of 1991. Nonrevolving credit led the decline, at minus $15.4 billion in a surprise given cash-for-clunkers which kicked off late that month. It would be a big surprise if there was another deep contraction in non-revolving during August. Revolving credit in July fell $6.1 billion. The markets may ignore this report but policy makers won’t as it works directly against their efforts to stimulate spending.

So, even with Cash for Clunkers the contraction was the largest on record! What will it be without?

I’ve been warning that we are on the verge of a deflationary spiral, the data keeps coming in to support that view. Below are the latest graphs from the St. Louis Fed. Year over Year numbers below zero mean the supply of credit is shrinking:

Total loans and leases at commercial banks – negative yoy, the most since 1976:

Total Revolving credit outstanding – negative yoy, the most ever recorded by the modern Fed:

Total Nonrevolving credit outstanding – negative yoy, the most since the early 90’s, I’m sure it would far surpass that if not for government loan programs provided by the likes of FNM, FRE, and the FHA:

Total consumer credit is contracting, and the rate of contraction is accelerating:

As far as derivatives of consumer debt… Securitized total consumer loans are falling at nearly a 10% pace year over year:

Sure the government is going to create inflation, right up to the point that all confidence in our currency is lost. Today they auctioned off tens of billions more in public debt. The supposed bid to covers were high, but they were FAKE BIDS made by the Primary Dealers who are buying up the debt and then selling it right back to Uncle Sugar. The game is not enough, the money they create cannot go into the economy because the economy is saturated with debt and all new money simply goes to pay it down. It’s a game that is going to end in tears, and already has for millions of unemployed and their families.

Today’s action took the dollar’s daily chart right to the bottom of a descending wedge formation:

If that normally bullish formation breaks down, it’s likely to be violent and you can see that the next support can be found all the way back down in the 71 area on the weekly chart:

I think we’re seeing the result of these actions with the recent decline in the value of the dollar:

                                      (U.S. Dollar Index)

______________________________________________________
From the Outside In: Polish Bond Auction Failure

Thursday, September 10, 2009, 11:39 am, by cmartenson

In the continuing theme of keeping our eye firmly fixed to the periphery of the financial universe for clues that things are about to change, we note that Poland recently suffered a bond auction failure.

Why doesn’t Poland just print up the money from their central bank and buy them themselves like the US and the UK?

I don’t really know. When the Federal Reserve does this there seems to be no impact on the dollar, interest rates, or bond prices, so perhaps the Polish central bankers should go to the US for a tour of the facilities and see which buttons they need to push and in which order to accomplish the miracle results of the US.

Sell Polish Bonds on Worsening Finances, BNP Says

Sept. 10 (Bloomberg) — Investors should sell Polish government bonds because of a “very dangerous” fiscal outlook for the country, BNP Paribas SA said.


Polish bonds weakened and the zloty fell after investors bought just over half the five-year notes on offer from the Finance Ministry yesterday in the first auction since the government said the budget deficit will almost double next year.

All (slight) sarcasm aside, I would count this as a troubling sign from the periphery; an indication that perhaps difficulty is headed towards the center. For new members, I’ve written about this concept (here) and dedicated a podcast to it (here).

For now the US is managing to print up vast gobs of fresh money (actually its electronic equivalent) and using this to support a truly massive fiscal deficit without any apparent ill effects.

The level of interlocking coordination between Wall Street and the Fed required to pull this off is really something to behold. While interesting, I really only care about when the arrangement will cease to work.

How do I know it will someday end? Because no culture has ever figured out how to print its way to prosperity, only to ruin.

Considering that our money is not backed by anything of value – it’s certainly a valid concern. The value of our money is based solely on people’s acceptance of it as money. No confidence in the dollar – and the dollar’s value will plummet.

I think it was Ron Paul who said it best. If you buried a $100 dollar bill and a $100 gold coin for a hundred years – which one is going to retain its value? Chances are – the $100 bill will be worthless and the gold coin will have increased in value.

This has held true throughout human history. Money that is based on gold/silver and is not debased has retained its value and purchasing power (see the Greek Empire). Money that is debased (reduction in gold/silver content) will always decline in value (see the fall of the Roman Empire). Greek coins continued to be used as currency throughout Asia long after the fall of the Greek Empire because they did not debase their currency (remained constant at 66 grams of gold per coin). When the Caesars of Rome began to debase their currency (reducing the amount of gold/silver in each coin) in order to coin more money to finance their increased spending – inflation sky-rocketed and the value of their currency plummeted.

If you were a Roman businessperson – would you want to receive a coin with 66 grams of gold or 30 grams of gold (regardless of a government decree)? People began to demand a higher number of coins (prices) to pay for the same products/services – so inflation increased significantly and the value of their currency plunged. Sound familiar?

We hear that gold is a good inflation hedge – but it’s really a hedge against the world’s fiat currency system. Gold has always been valuable (it’s rare) and is easily made into coins – so it’s a perfect form of money. On the other hand – current fiat currency is based on nothing of value – it’s either made out of paper, coined from abundant metals (zinc, copper, etc.) or in electronic form (your checking account). So – a fiat currency is only good – as long as people continue to have confidence in the system. No confidence = no fiat currency.

Here’s our problem – every nation throughout history with a monetary system based on a fiat currency that is not on a gold/silver standard – has always printed/coined its way to ruin. Every one. It may only take a few years (Zimbabwe) or it may take decades (us) – but the result has always been the same. Debase your currency and you will eventually destroy your economy over time.

In 1971, President Nixon removed the gold standard from our currency.

What happened? Should we be concerned? History tells us – yes.

From a government spending perspective – all restraints were removed. You’ll notice on the following chart showing the growth of our Federal debt – that we turned the corner soon after 1971.

No need to worry about having enough gold to back your currency (and hold your spending in check) – print all you want. Total money supply growth (M3) also turned the corner soon after 1971.

Same situation with the currency component of our money supply:

We would then expect inflation to ‘turn the corner’ around the same time – and that’s exactly what we see.

Most people believe that inflation is simply a rise in prices – but a rise in prices is a result of an increase in money supply and available credit. Inflation is strictly a monetary phenomenon. Increase the supply of fiat currency – and you are going to increase prices while devaluing your currency.

Definition of inflation from Webster’s Dictionary:

-a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services

From Wikipedia:

When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation is also an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.

This is a very important point – inflation erodes the purchasing power of your money. In a monetary system that requires exponential debt and money supply growth (that’s our system) – prices are always increasing and the purchasing power of your money is always eroding – not a good thing if you want a stable and sustainable economy.

What are the real world effects of this? As more and more money is added to the system – the general population will find it harder to get enough money to pay for the things it needs/wants (bills, consumer goods, etc).

Let’s look at what has happened to the purchasing power of the U.S. dollar since 1971.

Here we see the definition of inflation put into practice. As our currency in circulation has grown – the purchasing power of the dollar has declined significantly. As of 2009, the purchasing power of the dollar has declined over 90% since 1971. This is another deceptive slight of hand that the Federal Reserve will not discuss and does not want known.

The standard of living of Americans has steadily declined in recent decades due to our monetary system. Don’t believe me? We only need to look at the U.S. median income to see the devastating effects of inflation.

When it comes to income – we typically see charts like this:

                                (Source: Censusbureau.gov)

Based only on this chart – it would seem that everything is A-OK. Prices are going up – but our income is also going up – so what’s the problem?

It takes some additional digging to see what’s really happening to us.

Let’s look at our income adjusted for inflation:

                               (Source: Censusbureau.gov)

What does this show you? It shows you that our real income (adjusting for inflation) has barely moved at all since 1973. Now you know why so many households have dual incomes today. We need to make more money to try and keep pace with prices. Another ugly side effect of this is that we’ve taken on enormous debt over the past couple of decades to help make up for the income shortfall. This is why we see household debt charts like this.

Total U.S. household credit market debt is now approximately $15 trillion dollars. When did we turn the corner on this exponential curve? Again – around the same time that we removed the gold standard.

If you really want to see the truth regarding what is happening to our income – take a look at our income compared to gold.

                                (Source: Censusbureau.gov)

In 1970 – our median income would have purchased 240 ounces of gold. Remove the gold standard and introduce high inflation rates – and it’s easy to see the affect on our income during the 1970’s – leading to a significant drop in our income compared to gold (median income would have purchased 29 ounces of gold in 1980). You’ll also notice that today’s trend is not good – the value of the dollar is declining and the value of gold is increasing – so the amount of gold we can purchase today with our median income – is declining.

Also keep in mind that this system does not reward saving money. A constant inflation rate caused by the system – destroys the value of your money over time. Couple this with very low interest rates (dictated by the Federal Reserve) and you’ve got a system that in no way – rewards you for saving money.

We should expect the value of the U.S. dollar to continue declining due to our current fiscal condition (massive budget deficits, negative account balances, etc.) and we should expect to see the value of gold continue to rise over time as investors continue to hedge against a rapid decline of the world’s monetary system (fiat currencies).

The bottom line is that the people behind the world’s monetary system know how this ends and they are very aware that a high degree of confidence is required in their fiat currencies to keep the system running. Without confidence in the world’s fiat currencies – we all turn into Zimbabwe – looking for whatever we can find to use for money. This is why there are many people today telling you to buy physical gold that you can store in your home. This is also why we see so many mainstream media articles bashing gold investors (in order to pump up our fiat currency and slam gold).

Here’s the 1 year gold trend:

Silver is up even more (%) than gold since November:

…and the one year dollar index:

I will say that mainstream media does get it right sometimes. Here’s a quote from yesterday’s Wall St. Journal.

“That gold has broken through $1,000 shows people are still very concerned about paper currencies,” said Howard Ward, chief investment officer for growth equities at Gamco Investors. “Those commodities denominated in dollars will go up as the dollar keeps going down.”

I would say that people will be very concerned about paper currencies until the world’s economy collapses. Then it will be a brand new ball game.

I have attached a mainstream media article about gold investing (today’s paper) after Chris Martenson’s blog post.

jg – September 10, 2009
_______________________________________________

Gold Bashing 101: A Mainstream Press Primer

Friday, September 4, 2009, 11:07 pm, by cmartenson

It is pretty clear that gold has its detractors in the mainstream press, and this next article is so over the top as to be a hilarious object lesson in the art of gold bashing.

It all starts with the title itself and gets funnier quickly.

US gold ends down $1, fails to break above $1,000

First of all, gold ended UP on the day by $2.80, not down. Second of all, you’d never see a similarly worded headline for, say, a favored stock which had just finished the week up 35 bucks. Can you imagine if Google went from $400 to $414 for the week reading the headline “Google fails to break above $415?” I can’t either.

Here’s the rest:

Opening paragraph (all emphasis mine):

NEW YORK, Sept 4 (Reuters) – New York gold futures ended $1 lower on Friday as strong investment demand failed to push prices over the psychological mark of $1,000 an ounce, and traders said the metal could be vulnerable to near-term profit-taking following a sudden rally.

As I already mentioned, gold ended the day up, not down. There’s a difference. And then we might note that gold is characterized as “vulnerable,” and that it failed to push over a psychologically important level. That’s not news; that’s barely even opinion.

* Concerns about equities market, as well as inflation worries after massive government spending to jolt the economy out of recession fueled a highly speculative gold rally – Bruce Dunn, vice president of trading at New Jersey-based Auramet Trading.

Highly speculative? Compared to, say, the 220,000,000 shares of FNM, a company with deeply negative equity (i.e. bankrupt), that traded today? You mean that kind of “high speculation,” or is the purchase of gold worse somehow?

* Gold prices will correct eventually after the fast-paced rally – Dunn.

I guess we should get out now, while the getting is still good!

* Gold futures initially extended losses after the U.S. nonfarm payrolls data in August showed the smallest decline in a year, but unemployment rate jumped to a 26-year high of 9.7 percent.

“Initially extended losses” is just a fantastic use of spin. Unbeatable! Right there in three simple words, we find out that gold had already been on a losing streak and that it extended those losses. And the use of the word “initially” smoothly hides the fact that it quickly recovered those loses. The casual reader is left with the impression that gold was under the gun and in retreat all day. Who would want to buy a ruinous asset like that?

* Demand from jittery investors to diversify assets into gold amid shaky equities markets propelled gold’s sudden rally this week – analysts.

Note that what finally propelled gold today was “jittery investors.” If you bought gold today, you are the jittery sort, prone to turning tail amid shaky markets and running for safety. Clearly, when you hate gold as much as Reuters, there can be no room for the possibility that strong investors might be in the game. Who wants to be in the jittery camp? Not me! This paragraph also featured one of my favorites – unnamed analysts.

All of this is to point out (again) that a good chunk of the mainstream press has an agenda when it comes to gold, but fortunately they are quite heavy-handed, and their clumsy efforts are easily spotted.

I merely raise this to point out that it is really best not to let one’s impressions of markets be shaped by the mainstream media. If the journalists were any good at finance, they wouldn’t be writing for a living.

I often wonder about such articles…do they spring from a legitimate disgust with gold that developed previously for the writers, or are they merely attempting to shape opinion for some other set of reasons (perhaps the publisher’s parent company has a relationship with a trading company that just happens to be short a few tons of gold and supplies some nice quotes)? Who knows?

All I know is that I am very glad I’ve not heeded the advice of the mainstream media on gold and silver over the years.
____________________________________________
SEPTEMBER 10, 2009

Golden Eggs: Danger in the Yellow-Metal Stocks

Wall St. Journal

By DONNA KARDOS YESALAVICH and GEOFFREY ROGOW

NEW YORK — The recent surge in gold futures has been a boon for gold stocks, but all that is gold doesn’t glitter, and a correction is likely near.

Tuesday, a number of gold stocks hit new 52-week highs as gold futures jumped above $1,000 an ounce. The excitement spread quickly, as the psychologically important $1,000 mark hadn’t been hit since February. Gold fell slightly Wednesday, though it remained near that level.

However, now is not the time to jump on the gold bandwagon. A technical analysis of gold stocks, which are up some 12% this month alone, shows that although they are exhibiting positive momentum, they are likely due for a pullback.

“I probably wouldn’t be a buyer at these levels,” said Cleve Rueckert, a research analyst with Birinyi Associates. “It’s gotten very overbought very quickly, and sometimes these things have a tendency to come back down just as fast.”

Gold’s ascent has two primary drivers. On one hand, those figuring the dollar is due for even more of a pullback are wise to place cash in gold. At the same time, gold benefits from global growth and consumption trends.

The climb this week has largely been because of concerns about the dollar, which helped gold stocks push the trend on their 50-day and 200-day averages higher. That is a sign of positive momentum, something that would make gold stocks attractive once again if they correct from their overbought levels.

Measuring gold miners, the Market Vectors Gold Miners ETF closed Wednesday at 44.12, and hit a 52-week high during Tuesday’s session at 47.45. Mr. Rueckert expects the ETF to come back down to “at least 42,” which he sees as a more reasonable place to enter.

The ETF wouldn’t be considered oversold until it got down around 37, but Mr. Rueckert warned that pullbacks don’t always go all the way to their oversold level. “If you wait for it to get oversold, you may miss an opportunity,” he said.

One of the more prominent names in the gold sector is Newmont Mining. The stock closed Wednesday at $44.88, up 12% on the month.

“Newmont had been a laggard, but people look to it first when they want gold exposure in stocks. This is typical,” said Howard Ward, chief investment officer for growth equities at Gamco Investors.

But Mr. Rueckert said Newmont doesn’t exhibit the same kind of positive momentum that some other gold stocks and the Gold Miners ETF do, and has been volatile between $37.50 and $50.

Freeport-McMoRan Copper & Gold, on the other hand, looks better to Mr. Rueckert as a gold play, although it is traditionally thought of as a copper company. The stock’s up trend has been more defined and fairly consistent since the beginning of the year. Mr. Rueckert recommends trying to get in around $65, a bit below its Wednesday close of $67.68, and believes it could run up to $82.80.

“The crisis will happen again but it will be different,” the former Fed chief told the BBC.

You’ve got to ask yourself – why is he making this statement? What is the reason? All we’ve heard from the Federal Reserve lately is how they’ve saved the world and that there are ‘green shoots’ everywhere – and lots of positive mainstream media articles. What is the basis for his comments? Why will it be different? As the journalist below says – we need details. Of course – there are none.

The only thing we get is this ambiguous quote:

“the unquenchable capability of human beings when confronted with long periods of prosperity to presume that that will continue.”

Greenspan is working from the same playbook as many of our politicians. What he’s saying is that a financial disaster is coming – and he’s not going to tell you why.

What is the truth? The truth is that Greenspan knows a financial disaster is coming – because he knows the Federal Reserve (and the other central banks around the world) is causing it. It’s going to be different because the next ‘crisis’ will be the collapse of the world’s economy. He’s very aware of how this monetary system works and he knows it’s going to fail. Of course, at some point in the future he’ll probably look like a genius to most of the world – when he should be locked up for the rest of his life for playing an important role in this disaster.

This is typical of our financial and political leaders – lies upon lies – vague statements upon vague statements. Everyone is saying they’re helping – while the system continues to collapse.

It seems that Bush, Bernanke, Paulson, Greenspan, Obama and many other of our leaders like to tell us lies – and then experience collective amnesia when their lies are exposed.

Let’s look at a Greenspan quote from a previous article.

Lawmakers read back quotations from recent years in which Mr. Greenspan said there’s “no evidence” home prices would collapse and “the worst may well be over”.

So – Greenspan has gone from saying that the worst is over – to telling us that financial disaster is right around the corner. Honestly, I don’t know how these guys sleep at night. Amazing.

jg – September 11, 2009
_________________________________

Greenspan predicts another crisis

Posted Sep 10 2009, 12:17 PM by Kim Peterson

MSN

Alan Greenspan had a little trouble predicting the current global financial crisis. But he’s not going to whiff that ball again. No. He’s putting the message out now: The world is headed for another financial meltdown.

“The crisis will happen again but it will be different,” the former Fed chief told the BBC. The next time, he said, the financial implosion will happen in response to a long period of prosperity. That’s because people always assume that the good times will continue to roll forever.

The source of financial crisis, he said, is “the unquenchable capability of human beings when confronted with long periods of prosperity to presume that that will continue.”

Bing: Can we blame Alan Greenspan?

OK, what? That’s like predicting that another hurricane will hit us, sometime, somewhere. We need details here. Any idea when this crisis is coming, or what’s causing it, or how we can avoid it? Not really.

Greenspan also says the current downturn was set off by the sub-prime mortgage fiasco in the U.S. But really, anything could have triggered it, he added. And the world’s banks should have seen it coming.

“The bankers knew that they were involved in an under-pricing of risk and that at some point a correction would be made,” he said.

And is Greenspan turning any of the blame on himself? Ahem. He has admitted to being “partially wrong,” but he still isn’t saying sorry.

Due to what’s happening to the dollar and gold – Chris advises moving your wealth out of dollars (this includes dollar denominated stocks, bonds, etc.) – and into gold, silver, things you need around the house, etc. I couldn’t agree more. Since I don’t believe our government is going to do what’s necessary to prevent a collapse of the dollar (could happen tomorrow, 1 year, 5 years from now) – it’s better to be prepared now. Since we import much of what we buy – when the dollar begins a significant decline in value – things are going to become very expensive for us from a dollar perspective.

John – September 14, 2009
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Breakout! – A Closer Look at Gold

Monday, September 14, 2009, 7:02 am, by cmartenson

Executive Summary

• Gold had the highest weekly close ever

• UN calls dollar trading a “confidence game”

• US fiscal deficit breaks all records, keeps accelerating

• Brazil, Russia, India, & China (BRICs) have dollar concerns

• China promotes owning gold to its citizens

• Examining US dollar reserve currency status (again)

Normally I like to switch up my analyses each week, but last week’s look at gold already needs some updating, due to a few important occurrences. There was a blistering array of developments and cross currents this past week that make me suspect we may be entering a new inning of this game.

The first of these is that gold just had its highest weekly close ever:

Of course, this is not an inflation-adjusted number. Gold hit $850 back in 1980, and if we bring that number forward into today’s dollars, it would equal more than $2,200.

However, a brand new all-time highest weekly close, even if not inflation-adjusted, is a matter of some importance for the people who watch such things. Heck, nobody ever inflation-adjusts the Dow Jones for comparison purposes, and I don’t hear much complaint about that oversight, so perhaps we can skip it from now on for consistency.

Looking at a slightly longer-term chart of gold, we can see that the breakout we noted last week has carried on and gone a bit further (like a good breakout should):

Part of the reason for gold’s advance is that the dollar has (again) been faring poorly. However, as we can see in the chart below, the dollar is approaching what I would expect to be a heavy band of resistance right around 76.

Also, the dollar appears to be oversold (MACD, below), or approaching oversold (RSI, above), and is therefore due for a bounce. If it happens, then this is relatively normal market activity; if it does not, then there’s potentially something else at work. That is what I want to explore here.

This week we saw a lot of fascinating and seemingly important information coming from all quarters, which, if I could sum it up, would read, “The rest of the world is getting really anxious about the fiscal recklessness of the US.”

Questioning the Dollar

The opening salvo was launched on Monday with this very boldly worded statement from a UN trade conference:

UN Says New Currency Is Needed to Fix Broken ‘Confidence Game’

Sept. 7 (Bloomberg) — The dollar’s role in international trade should be reduced by establishing a new currency to protect emerging markets from the “confidence game” of financial speculation, the United Nations said.


UN countries should agree on the creation of a global reserve bank to issue the currency and to monitor the national exchange rates of its members, the Geneva-based UN Conference on Trade and Development said today in a report.


China, India, Brazil and Russia this year called for a replacement to the dollar as the main reserve currency after the financial crisis sparked by the collapse of the U.S. mortgage market led to the worst global recession since World War II. China, the world’s largest holder of dollar reserves, said a supranational currency such as the International Monetary Fund’s special drawing rights, or SDRs, may add stability.

A new currency? That would be a rather bold departure from 65 years of dollar-reserve supremacy. The timing of this call couldn’t be more interesting.

It’s kind of amusing that the UN group would try and pin the blame for the “confidence game” on financial speculators, who, by definition, take both sides of the trades. Instead, a confidence game is one where the foundation is one of fraudulent intent, which is a better description of most of the world’s existing fiat money systems than it is of speculators.

Where the UN trade commission couched their calls in some feel-good positioning (“we’re trying to save developing markets from evil speculators”), the deeper meaning that most commentators drew here was that the UN group took a firm jab at the US dollar’s role as the world’s reserve currency.

The fact that the UN is now getting into the game of bashing the reserve role of the horribly mismanaged US dollar tells us that there has been a significant shift in the political winds, specifically among the BRIC countries.

Reasons For Being Nervous

The main reason that any creditor nation starts to fear the debtor’s abilities to repay, or begins to suspect that a reserve currency may not be a credible store of value, is when the debtor/reserve nation converts an ill-advised debt spree into a reckless mess.

Speaking of which, September 8th saw the release of yet another grim budget deficit report by the US federal government, detailing the carnage for August:

In the above table, we note that every single category of federal government revenue, even social insurance (it’s never down!), is negative year-over-year by a collective, jaw-dropping 16.2%.

With personal income receipts down twenty percent and corporate income receipts down fifty-six percent, I am again hard-pressed to believe the claim of a one-percent decline in GDP last quarter.

Said more plainly, the GDP report from the BLS is thoroughly unbelievable and useless. It’s useless because it treats an increase in government debt expenditures as “growth.” And it is unbelievable because it is hopelessly debased by the statistically indefensible practices of applying hedonic and imputation adjustments to the tune of some 35% of the total GDP.

But the government deficit story becomes even more alarming when we look at outlays, which have increased by an incredible 19.8% year-over-year.

While I realize that some will say, “But we’re in an emergency!” we should take care to note the increases in the Social Security, Medicare, and Medicaid outlays. These are only somewhat driven by the emergency, and they are up by between 8% and 24%, indicating that the non-discretionary portion of the federal budget is out of control. However, there are certainly more people entering the ranks of Social Security because they lost work and cannot find a new job, thanks to the recession/depression, and have grudgingly opted to begin taking Social Security as a last resort.

This next article is a good read if you want to understand this new social wrinkle:

Out of Work, and Too Down to Search On


They were left out of the latest unemployment rate, as they are every month: millions of hidden casualties of the Great Recession who are not counted in the rate because they have stopped looking for work.


But that does not mean these discouraged Americans do not want to be employed. As interviews with several of them demonstrate, many desperately long for a job, but their inability to find one has made them perhaps the ultimate embodiment of pessimism as this recession wears on.


Some have halted their job searches out of sheer frustration. Others have decided it makes more sense to become stay-at-home fathers or mothers, or to go back to school, until the job market improves. Still others have chosen to retire for now and have begun collecting Social Security or disability benefits, for which claims have surged.

Back to the story line – one of the main reasons that foreign creditors such as Brazil, Russia, India, and China (the “BRICs”) have begun to openly express their reservations about loaning the US any more money is because of a combined 16% decline in revenue and 20% increase in expenditures.

That’s no way to run a country, and if anybody knows this from cold, hard experience, it’s a BRIC country.

So they peer into the endless parade of dismal US budget reports, like the one I’ve shown above, and they see a path to ruin. If ever there was a reason to be nervous about the dollar, the monthly budget deficit report is it.

Finally, China put its money where its words were by buying $50 billion of Special Drawing Rights (SDRs) from the IMF:

China to buy $50 billion of first IMF bonds


China is buying the equivalent of $50 billion of the International Monetary Fund’s first bond sale in a move that might boost Beijing’s standing in the Fund and help its quiet campaign to expand the reach of its tightly controlled currency.


China took the unusual step of paying for the IMF bonds with 341.2 billion yuan — a currency that is not traded on global markets — rather than dollars, which it uses for much of its trade and other foreign transactions.

While we might note that $50 billion is a relative drop in the bucket, given China’s massive foreign currency positions, it is a first step indicating that China is actively seeking an alternative to the US dollar as a reserve currency.

I consider this to be more of a symbolic step than a meaningful one, because the SDRs represent a basket of fiat currencies, of which the US dollar is only one. Essentially, this move actually increased, not decreased China’s dollar exposure as they traded yuan for the SDRs. On the other hand, the IMF now has a big old pile of Chinese yuan, and I am wondering what they will do with them.

So we might also consider this move less in the context of China obtaining SDRs and more in the context of China finally making moves to get its own currency into play on the international stage. If this is the case, this was an important move.

Gold Has a Booster Rocket

The situation is now so obvious that even Alan Greenspan has spotted it:

Gold Rally Signals Move Away From Currencies, Greenspan Says


Sept. 9 (Bloomberg) — Gold prices that jumped above $1,000 an ounce this week are signaling that investors are buying metals to hedge against declines in currencies, former Federal Reserve Chairman Alan Greenspan said.


The gains are “strictly a monetary phenomenon,” Greenspan said today at an investment conference in New York. Rising prices of precious metals and other commodities are “an indication of a very early stage of an endeavor to move away from paper currencies,” he said.


“What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment,” Greenspan said.

I truly do not like to be on the same side of the boat as Alan Greenspan. Over time I have found him to be a nearly perfect fade, meaning that whatever he was up to, it was highly advisable to consider taking the other side. I linked to this article mainly as a cautionary tale help to keep my enthusiasm for gold in check.

I do love that last line in the quote above, about gold as the ultimate source of payment, because to those who have been paying attention, this is not really all that surprising or fascinating at all. Gold is a hedge against the certainty that paper money has been, historically and without fail, mismanaged.

Also, too, I should point out that Mr. Greenspan was hardly the first prominent official to recently propose that gold should be an effective countermeasure against a global epidemic of currency mismanagement.

In fact, the President of Russia said as much last July, but more subtly:

G-8 ‘World Currency’ Coin’s Creator Seeks Russia Participation


July 15 (Bloomberg) — The gold coin displayed by Russian President Dmitry Medvedev at last week’s Group of Eight summit as an illustration of how a future global currency may look, may be made at Russian mints, its originator said.


Medvedev pulled out the coin at a news conference on July 10, saying: “Perhaps one day something similar could appear. You would be able to hold it in your hand and use as a means of payment.” Leaders at the summit in L’Aquila, Italy, received the coin as a gift, said former journalist Alessandro Sassoli, author of a project he calls “united future world currency.”


“We are thinking of involving Russian mints and school students” to find a name for the currency in a competition involving a thousand schools worldwide, Sassoli said by e-mail. He provided Medvedev with a cover letter describing the project and asking for his opinion.


The coin, resembling a euro, is 29 millimetres in diameter and weighs 15.55 grams of pure gold, Sassoli said. As many as 20 gold and 150 silver coins have been minted. Sassoli said the G-8 organizers and Italian Prime Minister Silvio Berlusconi’s government asked for 13 gold and 10 silver coins for the summit.

The story here is quite revealing, as it demonstrates that the Russian President went so far as to commission the Belgian mint to make a set of demonstration gold and silver coins in order to propose an intrinsic gold and silver backing for a new global reserve currency. I absolutely did not expect to hear such proposals from such high levels for another five to ten years from now.

This says quite a lot about the mindset of at least one BRIC country (Russia), and this next article reveals the mindset of another:

China pushes silver and gold investment to the masses


We are indebted again to Paul Mylchreest’s Thunder Road Report for news that will bring big smiles to gold and silver investors everywhere. Apparently China is pushing the idea of buying gold and silver for investment purposes to the general population in the way that Western television sells soap powder. If 1.3 billion Chinese citizens start buying gold and silver, even in tiny quantities, imagine what that will do to the market!


The report notes that China’s Central Television, the main state-owned television company, has run a news programme letting the public know how easy it is to buy precious metals as an investment. On silver investment the announcer is quoted as saying “China has introduced its first ever investment opportunity for silver bullion. The bars are available in 500g, 1kg, 2kg and 5kg with a purity of 99.9%. Figures show that gold was fifty times more expensive than silver in 2007, but now that figure has reached over seventy times. Analysts say that silver has been undervalued in recent years. They add that the metal is the right investment for individual investors and could be a good way to cash in.”


What appears to have happened in China is a total relaxation of strictures on holding precious metals by the individual with the government pushing gold and silver as an investment option, seemingly at every opportunity. This is a far cry from the situation only a few years ago where the distribution of gold and silver was strictly controlled. Now, the Thunder Road Report notes that every bank will sell gold and silver bullion bars in four different sizes to individuals and gold related investments are said to be soaring in popularity.

There are two ways to increase your country’s holdings of gold and silver, if that is an aim. One way is for the central bank or government to buy precious metals in the open market. This naturally tends to have a volcanic impact on the precious metals markets, and it is usually done as surreptitiously as possible. The other way is to encourage your citizens to buy them on their own.

Both result in more gold and silver crossing and remaining within your borders. All indications are that China is now running both strategies for increasing gold and silver holdings within the country.

The Golden Boom

In all the years that I have been watching gold and silver, the above news items constitute about as important a set of developments as I’ve ever seen.

From a monetary standpoint, I am thrilled that some countries are openly questioning the wisdom of allowing individually-managed fiat currencies to dominate and dictate the terms of international trade, and especially that they are questioning the role of the US dollar, which is being managed in a way that would make a third-world dictator blush.

I personally view these developments as the beginning of the end for the US dollar as the world’s reserve currency. If the US government does not read the signs appropriately, it runs the risk of mistakenly losing its vaunted reserve currency status. If that happens, the US will rapidly discover that it did not actually hit a triple; instead, it was granted third base by an overly kind umpire who has been overruled and replaced.

On a related note, I was quite surprised by the news that the US decided now was a good time to hit China with some heavy import tariffs on tires. Given all that’s been going on, I wonder if this is really the best time to be wagging stern fingers in China’s direction.

I track the price of gold because it might give us an early indication about what’s going on behind the scenes.

The smoke signals indicate that a tectonic shift in appetites for and attitudes about the US dollar is underway.

What Happens If the US Loses Reserve Currency Status?

As I wrote this past week in the Martenson Insider, Poland recently suffered a failed bond auction, meaning that investors did not buy all the government securities offered by the Polish government. Naturally this is a terminal sort of event, and the US is not yet (seemingly) near that same fate. If or when it does, everything will change.

The signs that we’ll be looking for that will indicate that the US dollar is losing its grip on the world will be both a decline in the price of the dollar relative to other currencies and a rise in US Treasury interest rates.

For now, the dollar is falling, but Treasury interest rates are holding firm, so according to this pair of indicators, it seems that we are “not there yet.”

But if (or when) this does happen, the most obvious and immediate impacts will be the imposition of capital controls (blocking the flow of money out of the country), an immediate increase in the price of most commodities, a skyrocketing gold price, rapidly rising interest rates, and quite probably a banking holiday (because the big international banks would be quite paralyzed by the capital controls).

One other predictable ‘feature’ of a dollar crisis would be an FDIC funding crisis. For now, the FDIC will insure $250,000 per account, and it has a $500 billion line of credit from the Treasury, so all is well for the moment.

But this means that if the Treasury has a funding crisis, the FDIC has a funding crisis. For this reason, the moment I detect that a dollar crisis is underway, I will personally be removing, converting, or spending my bank-deposited funds as rapidly as I can, in case the banking system seizes up and lacks the funds to operate. While this is a remote chance, it is a non-zero chance.

Needless to say, a funding/dollar crisis would result in another body blow to the US economy, which will, of course, only exacerbate our existing and future problems.

Because I view the probable outcomes of a dollar crisis to be so severe, I would support any and all measures to curtail federal government deficit spending and Federal Reserve monetization of debt. Unfortunately, these actions would undoubtedly be immensely unpopular with politicians and crowds.

However, sooner or later we will have to bite the bullet and admit that we are never going back to our former levels of growth and consumption and that we’ll have to go through a period of austerity, saving, and investment. My strong preference would be to do it now and not further add to our risks by increasing our borrowing and spending, but that’s not even remotely the same tune that DC is currently humming. And China knows it, too.

I am personally concerned by the pressures that I see mounting in the international arena, and I think gold is one signal telling us that something is not quite right.

Conclusion

Gold broke out and closed the week at a new high. This is an important development, both because it has meaning all on its own and because of what it is potentially telling us about things happening beneath the surface.

There’s enough smoke coming from a variety of news sources and foreign countries to suggest that we might even glimpse a bit of flame. Under all of this pressure is the deep-seated concern by creditors to the US that the US is operating in a fiscally ruinous manner and shows no intention of willingly changing course.

Reserve currency status is an “exorbitant privilege” (credit: Valéry Giscard d’Estaing) that has conferred tremendous advantage and latitude to the US. Loss of this privilege would result in a very sudden drop in US standards of living and impose harsh austerity measures to which the US is only accustomed to being on the giving, not receiving, end.

Instead of adopting a humble stance, the US appears to be digging in its heels, most recently exhibited by the imposition of import tariffs on Chinese-made tires.

Meanwhile the BRIC countries are talking about and taking significant action towards limiting their exposure to the US dollar, and they have been extraordinarily vocal in recent weeks and months in their attempts to prompt a serious discussion of the matter by other countries.

The US is playing a dangerous game and risks an even more serious economic and financial adjustment by running deficits that would simply not be tolerated in any developing country. Should this lack of imposition of two-way austerity reach the breaking point, a dollar crisis would be the most likely result.

As always, when I see mounting risks, I would vastly prefer to be a year early than a day late.

This would be a good time to continue to move your wealth out of dollars and into other forms of wealth. I am currently a big fan of direct wealth in the form of productive land (soil, trees, hydropower), gold and silver, and anything that you might need around the house, especially any critical items that are imported.

__________________________

UN Says New Currency Is Needed to Fix Broken ‘Confidence Game’

Bloomberg

By Jonathan Tirone

Sept. 7 (Bloomberg) — The dollar’s role in international trade should be reduced by establishing a new currency to protect emerging markets from the “confidence game” of financial speculation, the United Nations said.

UN countries should agree on the creation of a global reserve bank to issue the currency and to monitor the national exchange rates of its members, the Geneva-based UN Conference on Trade and Development said today in a report.

China, India, Brazil and Russia this year called for a replacement to the dollar as the main reserve currency after the financial crisis sparked by the collapse of the U.S. mortgage market led to the worst global recession since World War II. China, the world’s largest holder of dollar reserves, said a supranational currency such as the International Monetary Fund’s special drawing rights, or SDRs, may add stability.

“There’s a much better chance of achieving a stable pattern of exchange rates in a multilaterally-agreed framework for exchange-rate management,” Heiner Flassbeck, co-author of the report and a UNCTAD director, said in an interview from Geneva. “An initiative equivalent to Bretton Woods or the European Monetary System is needed.”

The 1944 Bretton Woods agreement created the modern global economic system and institutions including the IMF and World Bank.

Enhanced SDRs

While it would be desirable to strengthen SDRs, a unit of account based on a basket of currencies, it wouldn’t be enough to aid emerging markets most in need of liquidity, said Flassbeck, a former German deputy finance minister who worked in 1997-1998 with then U.S. Deputy Treasury Secretary Lawrence Summers to contain the Asian financial crisis.

Emerging-market countries are underrepresented at the IMF, hindering the effectiveness of enhanced SDR allocations, the UN said. An organization should be created to manage real exchange rates between countries measured by purchasing power and adjusted to inflation differentials and development levels, it said.

“The most important lesson of the global crisis is that financial markets don’t get prices right,” Flassbeck said. “Governments are being tempted by the resulting confidence game catering to financial-market participants who have shown they’re inept at assessing risk.”

The 45-year-old UN group, run by former World Trade Organization chief Supachai Panitchpakdi, “promotes integration of developing countries in the world economy,” according to its Web site. Emerging-market nations should consider restricting capital mobility until a new system is in place, the group said.

The world body began issuing warnings in 2006 about financial imbalances leading to a global recession.

The UN Trade and Development report is being held for release via print media until 6 p.m. London time.

To contact the reporters on this story: Jonathan Tirone in Vienna at jtirone@bloomberg.net

Last Updated: September 7, 2009 09:52 EDT

Remember these comments. I wonder what he’ll say when things begin to fall apart? I’m willing to bet that the fault will not lie with the Federal Reserve.

I’m sure we’ll see ‘comprehensive reform’ – but it will be preceded by a comprehensive economic collapse.

We (Americans) are being setup for an historic fall.

jg – September 15, 2009
_____________________________________________
SEPTEMBER 15, 2009, 11:44 A.M. ET

Bernanke Sees Recovery, Defends Fed Actions

By MAYA JACKSON RANDALL

Wall St. Journal

WASHINGTON — U.S. Federal Reserve Chairman Ben Bernanke Tuesday said it’s likely the recession has come to an end, but he reiterated that tight credit conditions and a soft labor market will prove to be a challenge.

Fed Chairman Ben Bernanke answers a question at a Brookings Institution forum.

From a technical point, the “recession is very likely over at this point,” Mr. Bernanke said in a question-and-answer session at the Brookings Institution.

But he added that even if recovery is underway, it’s still going to feel like a very weak economy because credit conditions remain tight and any decline in the unemployment rate will probably only happen gradually. He noted that one risk is that the economy will grow in the second half of 2009, but not enough to trigger a rapid recovery.

If there is only moderate economic growth, “employment will be slow to come down,” he said. “It will come down, but it will take some time.”

Meanwhile, Mr. Bernanke expressed confidence that policymakers will move forward on plans to overhaul the nation’s finance rules.

“I remain pretty optimistic that a comprehensive reform will be coming,” he said.

In response to a question about the securitization market, Mr. Bernanke said he expects the market “will come back.” But he said he’s seen “very encouraging” signs that the market is improving. Still, the market will be “simpler, smaller, less opaque” and subject to more oversight by regulators, all things that could constrain its growth for a period of time, said Mr. Bernanke.

The market probably “will not return to the size it was before,” he said.

Write to Maya Jackson Randall at Maya.Jackson-Randall@dowjones.com

Those that do make the connection – inherently ask the same question.

From the article below:

“It is unclear why the US Federal Reserve has allowed this to occur.”

Indeed. Why would the Federal Reserve allow this to happen? The problem is that you will not find the answer by looking through normal channels – the Fed itself, mainstream media, most economists, etc.

The truth is that the Federal Reserve not only allowed this to occur – it caused it to occur.

As I’ve said many times before – answer the question as to why the Fed would cause this – and you’ll find just how deep the rabbit hole goes.

jg – September 16, 2009
_________________________________
U.S. credit shrinks at Great Depression rate prompting fears of double-dip recession

Telegraph.co.uk

By Ambrose Evans-Pritchard, International Business Editor

Published: 11:59PM BST 14 Sep 2009

Both bank credit and the M3 money supply in the United States have been contracting at rates comparable to the onset of the Great Depression since early summer, raising fears of a double-dip recession in 2010 and a slide into debt-deflation.

Professor Tim Congdon from International Monetary Research said US bank loans have fallen at an annual pace of almost 14pc in the three months to August (from $7,147bn to $6,886bn).

“There has been nothing like this in the USA since the 1930s,” he said. “The rapid destruction of money balances is madness.”

The M3 “broad” money supply, watched as an early warning signal for the economy a year or so later, has been falling at a 5pc annual rate.

Similar concerns have been raised by David Rosenberg, chief strategist at Gluskin Sheff, who said that over the four weeks up to August 24, bank credit shrank at an “epic” 9pc annual pace, the M2 money supply shrank at 12.2pc and M1 shrank at 6.5pc.

“For the first time in the post-WW2 [Second World War] era, we have deflation in credit, wages and rents and, from our lens, this is a toxic brew,” he said.

It is unclear why the US Federal Reserve has allowed this to occur.

Chairman Ben Bernanke is an expert on the “credit channel” causes of depressions and has given eloquent speeches about the risks of deflation in the past.

He is not a monetary economist, however, and there are indications that the Fed has had to pare back its policy of quantitative easing (buying bonds) in order to reassure China and other foreign creditors that the US is not trying to devalue its debts by stealth monetisation.

Mr Congdon said a key reason for credit contraction is pressure on banks to raise their capital ratios. While this is well-advised in boom times, it makes matters worse in a downturn.

“The current drive to make banks less leveraged and safer is having the perverse consequence of destroying money balances,” he said. “It strengthens the deflationary forces in the world economy. That increases the risks of a double-dip recession in 2010.”

Referring to the debt-purge policy of US Treasury Secretary Andrew Mellon in the early 1930s, he added: “The pressure on banks to de-risk and to de-leverage is the modern version of liquidationism: it is potentially just as dangerous.”

US banks are cutting lending by around 1pc a month. A similar process is occurring in the eurozone, where private sector credit has been contracting and M3 has been flat for almost a year.

Mr Congdon said IMF chief Dominique Strauss-Kahn is wrong to argue that the history of financial crises shows that “speedy recovery” depends on “cleansing banks’ balance sheets of toxic assets”. “The message of all financial crises is that policy-makers’ priority must be to stop the quantity of money falling and, ideally, to get it rising again,” he said.

He predicted that the Federal Reserve and other central banks will be forced to engage in outright monetisation of government debt by next year, whatever they say now.

This will re-focus the world on solving the crisis (a crisis created by the central bankers) – and shift the focus away from the actual cause of the crisis – the central banking system itself (including the Fed). This will happen long before Ron Paul (and others) ever has the chance to abolish the Fed.

This is how those in the shadows operate – lie, cheat and steal – deception, deception, deception. Create a problem (as they’ve done many times before) and then solve it in a way that moves the agenda forward.

I don’t have to tell you again where this is coming from. We are dealing with a very powerful spiritual enemy. I see him setting the stage for significant changes in the world. He is about to move in powerful ways.

Although our enemy is powerful – he is not as powerful as the One I serve. I continue to wait until I’m told to move.

The question you must ask yourself is – who do I serve? Do I want to get in the battle? Do I want to have true spiritual knowledge and wisdom? Ultimately – do I want to know my Creator and His plans for me?

Let go of your fear – and embrace the Truth.

jg – September 17, 2009
_______________________________________
SEPTEMBER 16, 2009

Anti-Fed Activists Fuel Push for Audit

By SUDEEP REDDY

Wall St. Journal

At the core of a congressional push to audit the Federal Reserve are activists with a larger purpose: to abolish the central bank.

Thousands of Americans are joining protests and lobbying their lawmakers in pursuit of the ultimate goal of replacing the Fed with a money system backed by gold or other commodities.

A movement to abolish the Fed was largely inspired by Rep. Ron Paul, left, addressing an audience about a health-care overhaul on Aug. 12, 2009.

Largely inspired by Rep. Ron Paul, the Texas Republican whose latest book, “End the Fed,” will be released Wednesday, the movement draws its strength from people who want a sharp shift away from government dependency and toward a truly free-market economy.

Among the activists backing the cause is Isaiah Matos, the superintendent of a luxury high-rise building in New York City. Mr. Matos was an antiwar protester earlier this decade before he became a libertarian. Through neighborhood groups in Queens organized using Meetup.com, Mr. Matos met other Ron Paul backers who shared his distrust for the central bank and a currency backed only by a government’s promise.

“I believe in a commodity-backed currency,” said Mr. Matos, 30 years old. “In college, I didn’t understand how we could move from gold to paper.”

Mr. Paul’s entrance into politics was driven by a similar concern. He decided to run for Congress in the early 1970s after President Richard Nixon ended the U.S. dollar’s ties to gold. His long-term goal is a return to a commodity-backed dollar, allowing the currency to be redeemed for gold. Through his constant attacks on the central bank, Mr. Paul is drawing backers nationwide who also criticize the Fed for supporting Wall Street and bailing out financial institutions.

Mainstream economists generally credit the Fed for moderating economic cycles and mitigating the fallout from financial shocks. The central bank serves as the nation’s lender of last resort, preventing runs on commercial banks by using its ability to create credit. The Fed influences interest rates as part of its mandate to balance inflation and unemployment. Mr. Paul and his followers say all of that should be left to market forces.

After last fall’s election, Mr. Matos helped launch what became a series of rallies outside Fed buildings. The first came on Nov. 22 outside the New York Fed, with a crowd he estimated at 500 after picking up people in a march past Wall Street. He said twice as many people attended a larger rally in April, coordinated with protests outside other regional Fed banks nationwide.

By then Mr. Paul had introduced his legislation to audit the central bank, including its monetary-policy operations, which are now outside congressional scrutiny. To draw a wider base of followers, Mr. Matos’s group changed the name of its rally from “End the Fed” to “Audit the Fed.”

“End the Fed is a little too drastic for the mainstream,” Mr. Matos said. “Sometimes it’s not what you say. It’s how you say it.”

Mr. Matos joined other activists Tuesday in delivering petitions supporting the Fed audit to U.S. Senate offices in Washington and around the country. House lawmakers are planning to include an audit in legislation this fall, but the path in the Senate is unclear.

Fed officials say opening their monetary-policy deliberations to congressional review would cast doubt on their independence and ability to raise interest rates when necessary. That could stoke inflation, they say, raising borrowing costs for the government and consumers.

Mr. Paul’s backers share the view that the Fed’s ability to create money violates the intent of the Constitution. They say fiat currency, which isn’t backed by commodities, threatens civilization by helping governments finance wars and laying the groundwork for financial crises. And they expect the vast expansion of the Fed’s balance sheet during the financial crisis to spur rampant inflation down the road, even though central-bank officials say they can withdraw the money when needed.

“The Fed will self-destruct,” Mr. Paul said in an interview. “This economy is going to get worse and this dollar is going to get a lot worse.”

Campaign for Liberty, Mr. Paul’s main political group, which claims 200,000 members, says auditing the Fed is its top legislative priority this year. The congressman calls an audit a “stepping stone” that would shed light on the central bank’s operations and ultimately lead to a popular backlash. His audit effort has enlisted more than 300 House and Senate backers and a long list of groups, though few want to kill the Fed entirely.

Skip Cook, 63, a roofing salesman in Little Rock, Ark., said he has written to his local newspaper and his lawmakers “incessantly” to cajole his representatives into backing the audit legislation.

Mr. Cook, who spent a decade as a fixed-income broker, said the Fed’s actions create long-term risks to the economy instead of preventing them. “What’s it going to be like next time when they’ve put a couple trillion dollars of fiat money into this economy and the chickens come home to roost?” said Mr. Cook.

Abolishing the Fed may be a long-term goal, but Mr. Cook said more and more people are joining the cause. “The environment now because of the outrage is so ripe for people to entertain this information,” he said. “Pain brings a lot of people into the auditorium.”

Write to Sudeep Reddy at sudeep.reddy@wsj.com

There are a few people in the world who can accurately translate what the Fed says into something we can understand – and Chris Martenson is certainly one of them.

The following blog post by Chris Martenson translates yesterday’s Fed policy statement into something we can all understand.

While the Federal Reserve likes to speak with arrogance and an air of superiority – I am here to tell you that they are fools. I believe the people behind the world’s central banking system feel that they are invincible. They have deceived the world on a massive scale and are on the verge of achieving their goal of global government.

It might seem to you that they are, in fact, invincible. Their members have infiltrated and overtaken the world’s financial system. They have placed their people in the highest positions within the world’s governments. Their power and control reach into every corner of the world. Those who have opposed them and spoken the truth – have been silenced. They sit back and laugh at how easy it is to deceive us.

While they must feel very proud of themselves – they have forgotten one, very important factor. There is Someone present within the world who is not so easily deceived. He has watched them for centuries. He has watched them infiltrate the world’s political and financial systems. He has watched them kill, steal and destroy. He has watched them worship the ruler of this world and revel in their intelligence. He has watched them deceive us. He sees their future plans and what they are planning to do……

……and He has different plans.

“For there is nothing hidden that will not be disclosed, and nothing concealed that will not be known or brought out into the open.” (Luke 8:17)

“He will bring to light what is hidden in darkness and will expose the motives of men’s hearts.” (1 Corinthians 4:5)


“I am sending you to them to open their eyes and turn them from darkness to light, and from the power of Satan to God, so that they may receive forgiveness of sins and a place among those who are sanctified by faith in me.’” (Acts 26:17-18)

jg – September 24, 2009
___________________________________
Decoding the Fed

Thursday, September 24, 2009, 8:06 am, by cmartenson

The Federal Reserve policy statement yesterday was a masterful blend of contradictory words and ideas.

Nonetheless the markets reacted with great volatility to these words as though there was some useful information within them. You can read the entire statement for yourself here at this link.

To save you the trouble, what I’ve done is chopped the whole statement up into smaller sections and applied my unique translating abilities to each of them:
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Item #1

Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn.

Translation: “Yes! In the best spirit of government intervention we’ve turned $3 trillion in direct spending and $ 8 trillion in future taxpayer promises into a barely detectable statistical uptick. Not just anybody could do that.”
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Item #2

Conditions in financial markets have improved further, and activity in the housing sector has increased.

Translation: “Well, housing jolly-well should have picked up considering we bought more than 100% of all issued mortgages in 2009 at market-distorting prices.”
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Item #3

Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.

Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales.

Translation: “Oh, all that other stuff we just said about the economy stabilizing and picking up? We meant it, just not for households and businesses. Besides those two areas, we meant.”
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Item #4

Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

Translation: “Oh, one more thing. About that “economy stabilizing and picking up” stuff? We meant “stabilizing and picking up” to be synonymous with the concept of remaining weak for an extended period. We apologize in advance for any confusion this may cause.”
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Item #5

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability.

Translation: “All those mysterious Treasury purchases from Caribbean banking centers and the economically ruined island nation of the UK are going to continue. And, yes, we will fight being audited tooth and nail.”
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Item #6

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

Translation: “Okay. Forget what we said earlier about the economy stabilizing and picking up. It actually stinks and we’ve just told you twice now, so quit asking us about it. Again, we apologize for any misunderstandings our previous words may have caused. Also, we are going to continue to flood the world with nearly endless amounts of nearly free money. Please plan accordingly.”
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Item #7

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010.

Translation: “They are going to continue forever.”
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Item #8

As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Translation: “We are going to buy a lot more stuff, whenever we feel like it. The Cabella’s Master Trust credit card receivables we accepted a while back should give you an indication of where we are headed with all this. Frankly we headed into this massive program of asset purchases with no exit strategy at all and what we are telling you now is that we still don’t have one. Please plan accordingly.”

Even if we assume that the Federal Reserve is acting in our best interests by printing all of this money – it’s easy to see that this cannot continue indefinitely. At some point, all of the government and Fed programs to support our economy must end. This, in and of itself, is reason enough to be concerned for our future.

As you’ve seen me say before – this goes much deeper than what we’re told by our political and financial leaders. If we look a little deeper into the history of the Fed – the ownership of the Fed – and the underlying motives of the people who own the Fed – we get a true picture of what is happening.

The truth is that we have been setup on a massive scale. The institution that controls our economy – is now in a position to collapse our entire monetary/economic system at will.

The question that remains: will it be everything at once like a house of cards (stock market, housing market, value of the dollar, interest rates and Treasury auctions) – or will it be one at a time – like a bunch of dominoes – with one domino starting the fall of all the others?

I do know that however it starts – it will spread very quickly and eventually affect everything. We are teetering on the edge of a very large abyss.

Pay very close attention to how it starts.

John – September 28, 2009
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Federal Reserve Buys More Than 100% of Mortgages Issued in 2009

Monday, September 28, 2009, 11:13 am, by cmartenson (Chris Martenson)

What follows is a snippet from the most recent Martenson Report (Housing and Wealth: Part II).
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This is important information. What I’ve found and present below is that the Federal Reserve is not just supporting the housing market, it is the housing market.

Just as important as a person’s desire to buy a home is their ability to gain access to mortgage funding.

The mortgage market is a gigantic beast with many moving parts, but it is pretty easy to understand from a high level.

The process works like this: A homeowner secures a mortgage from a bank or mortgage company. Then the mortgage is sold off to another company, with the cash generated by that sale now available to lend to other potential homeowners. Ultimately the mortgage may pass through several sets of hands but ultimately it lands with a terminal holder.

In that chain, the mortgage might get sold off several times, or perhaps sliced and diced by Wall Street wizards, but all that matters is that some company (with cash) is there at the end to buy the mortgage to keep the whole chain moving along.

Lately, the “terminal buyers” in that chain have increasingly ended up being the federal government (through the GSEs) and the Federal Reserve.

And not just by a little bit, but by a lot.

Here are the numbers:

So far in 2009 (through August), a total of 3.2 million existing homes were sold for an average price of $217,000, while 263,000 new homes were sold for an average price of $264,000.

Taken together, and assuming that we live in a world where 10% is the average down payment, we get this table:

That is, a total of ~$686 billion in new mortgages were issued in 2009 (through August).

Now let’s look at how many Mortgage Backed Securities (MBS) and agency debt obligations were accumulated by the Federal Reserve on its balance sheet over the same period of 2009:

(Source)

It turns out that in 2009 (again, through August), the Federal Reserve has bought $624 billion of MBS and a further $98 billion of Agency debt, for a total of $722 billion in money injection into the housing market through Fannie Mae, Freddie Mac, and the FHLB.

In other words, the Federal Reserve alone bought $722 billion of mortgages and agency debt when only $686 billion in new mortgages were issued. So, through August, the Fed bought more than 100% of the entire supply of mortgages in 2009.

That’s not a free housing market; that’s a market bought, owned, and sustained by the Federal Reserve’s willingness to print up three quarters of a trillion dollars out of thin air.

While the individual mortgages issued in 2009 may or may not be the exact same ones purchased by the Federal Reserve, that’s immaterial. All the mortgage issuers care about is that when they issue a mortgage, a purchaser with money exists somewhere down the line. The chain needs a terminal buyer, and that buyer has become the Federal Reserve.

The impact of these purchases by the Federal Reserve is to both provide liquidity and to drive down the rate of interest for new mortgages. By lowering both the long end of the Treasury curve (which the Fed does by actively buying Treasuries) and providing more than sufficient demand for MBS and agency paper, long-term interest rates come down.

Without the Fed’s activities, it is a rock-solid certainty that mortgage interest rates would be higher than they are, and possibly a LOT higher.

What all this means is that when (not if) the Federal Reserve begins to try and unwind itself from all of the magnificent interventions of the past year, it must contend with the fact that it is the housing market.

Where the Fed is hoping that it can gently release the soft chubby fingers of the housing market, which will then toddle off under its own power, it will discover that it is actually carrying a helpless newborn.

As many of you know, I’ve spent a lot of time over the past two years studying economic data – and what I believe it means for our future. You also know my conclusion – our nation is heading toward a significant economic decline. This isn’t simply my opinion – some simple math would tell you that our current monetary/economic system is unsustainable. You cannot have an economic system based on exponential debt growth – and expect this to continue forever in a finite world. Most economists that I hear on major media outlets ignore this little problem because ‘this correction will not happen in our lifetime’. Basically, they are hoping that they can pass the problem on to the next generation – as previous generations have done. Unfortunately, this idea of ignoring the inherent problems with our monetary system and pushing it out into the future – is no longer feasible. The reason is that the system is now collapsing. We are at the end of the line. We must now deal with the repercussions of previous generations ignoring the warnings – and pushing the problem to us. You are watching the acceleration of this collapse everyday now – foreclosures, residential/commercial loan defaults, household/corporate credit declines, unemployment, state and federal tax revenue declines, housing sales/prices, money supply growth rates, U.S. Dollar declining in value, etc. The only thing that has not been behaving in accordance with a collapse of this system is the stock market. My belief is that when the stock market begins its correction – it will be swift and brutal – and it will affect all stock markets around the world. Recent government stimulus plans and bailouts have only delayed the inevitable – while increasing government debt to astronomical – unsustainable – levels.

Honestly, I do not like giving good people bad news. I have always been an eternal optimist. I have always tried to look for the good in any situation because worry and anxiety serve no useful purpose for us – they only result in fear and inaction. However, I have come to the conclusion that the truth is the truth – and my unwillingness to accept the truth – does not change the reality of what is happening. So – instead of running away – ignoring the warning signs – and pretending that things will return to ‘normal’ – I decided a couple of years ago to face the truth head-on. It hasn’t been easy – and as I’ve said before – the hardest part of this is telling good people to prepare for some bad events.

The first reason I am sending this to you today – is because I firmly believe we are on the threshold of the next phase of this economic decline. A phase that will most likely start with a significant stock market decline. It will end with hyper-inflation leading to significant declines in the value of the dollar, failed Treasury auctions, sky-high interest rates, U.S. debt default, the U.S. dollar will be replaced as the world’s reserve currency leading to further problems for us – the list goes on and on – none of it good. There is also the very real possibility of civil unrest. Once stock markets begin a rapid decline – all bets are off. Most people in the world place their faith and hope in money – and they’re about to find out how misguided this is.

The second reason I am sending this today is that you need to prepare. First and foremost you need to prepare yourself spiritually. Do you truly believe that God is in control? Do you know that He watches over you? Are you confident that He can bring you through any crisis? Do you have the faith required to weather any storm? If the answer is no – now is the time to start on a path to knowing your Creator. He asks those who love Him to stand in the midst of the storms and be obedient to His call for their lives – regardless of their circumstances. His children do not panic amidst the chaos – they stand firmly on His Word. When the waters rise and the winds pound against your house – will it stand or will it fall? Where have you built the foundation for your life? Many people in the world have built their foundation on sand (the world) and when the storms hit – their world crashes down around them. I say this – again I’m being honest here – because I know that some of you are prepared and understand what I’m saying here – and some of you are not.

I will tell you again that it would be wise to keep more food on hand than usual and to buy physical gold if you can (coins, etc.). I believe that gold is about to increase significantly in value as the world’s stock markets and fiat currencies rapidly decline in value.

I trust about 3 to 4 people out there studying economic data. Of these people – Chris Martenson is at the top of the list. I started reading Chris’ blog over a year ago and noticed that he was one of the few people who could see the inherent dangers we face – long before the current crisis began. I trust Chris’ instincts and he’s saying the same thing today that I am – prepare yourselves.

Take Care,

John – October 6, 2009
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Tuesday, October 6, 2009, 12:58 am, by cmartenson

Tuesday, October 6, 2009

This week’s report is going to be largely free of data and news snippets and full of my opinions and broad strokes of logic.

As my long-time readers know, I consider my main occupations to be information scout, dot-connector and analyst. But as a side job, I also provide a decisive alternative to the mainstream economic propaganda machine, which is thoroughly dedicated to maintaining the status quo, regardless of cost.

I completely understand why our fiscal and monetary leaders would seek to hide the truth from us all. We live in an economy that is based on growth and debt – which means it is a Ponzi scheme – and there’s nothing more important to such a system than faith and confidence. So economic propaganda is not just a noxious by-product spewed from our economic tailpipe; it is viewed by those in power as a form of fuel, a necessity for our peculiar economic engine. They may have a point.

For my new readers, I want to make it clear that I do not expect or wish you to believe me over anyone else. Heck, trust neither me nor them, if that works for you; instead, trust yourself and your gut instinct about what is right. I began trusting myself several years ago, and I am much better off as a consequence.

This week (ending 10/1/09), despite the massive run up in stock over the past few months, despite the outrageous amounts of bailout and stimulus money applied, despite every attempt to put a positive spin on things, jobs continued evaporating, auto sales slumped to multi-decade lows, bankruptcies soared 41% over the prior year, and tax receipts continued to slide.

States such as California are sliding into fiscal chaos, and some, like Michigan and Alabama, are already there.

We are about to enter another leg of the downturn, and this one will be even bumpier and more uncertain than the last.

While I have numerous articles and data points to support this contention and find myself far less lonely in my view this time around, I don’t think I can fully make my case in a short report such as this one. So instead of building my case like a prosecutor, I am going to simply tell you where I am and what I’m thinking.

Everyone needs to prepare themselves for another round of economic instability, as the nation and world comes to grip with the fact that we are not going to enjoy a V-bottom recovery and that we are not going back to “normal” – whatever that might mean – anytime soon.

Even more critically, it seems likely that the next down leg will prove to be more disruptive than the last one.

Point #1: There’s no possible way to legitimately pay our debts.

The economic damage caused by more than 25 years of excessive debt creation has entered an irreversible period of destruction and adjustment. The future will not be bigger, but smaller, and that spells trouble for not only debts, but for assets (the other side of the coin) as well.

This next downturn is going to be just a little bit worse than the last one, because it will destroy just a little bit more confidence in the system and in the dollar. At the end of all of this, I am expecting that numerous fiat currencies will receive a failing grade by investors and private citizens all across the globe.

The economic damage caused by more than 25 years of excessive debt creation has entered an irreversible period of destruction and adjustment. Even without the arrival of Peak Oil, I believe the chart below would lead to a debt realignment, bringing whole mess down to historically recognizable levels – say, around 180% of GDP.

This alone would have implied the destruction (or repayment) of some $25 trillion dollars of debt, at a horrible economic cost. As you survey the current economic wreckage, bear in mind that barely one-tenth of that amount has gone ‘poof’ to date, and it was entirely offset by new government borrowing. We are where we are.

But with the diminished future that is implied by Peak Oil, GDP will be falling along the way, requiring even more debt destruction to get us to that 180%-of-GDP mark. Perhaps as much as $30 trillion, or even $35 trillion, needs to be eliminated somehow.

Does this mean that I am shifting my stance and calling for an uncontrolled deflationary collapse? No, not yet, and I sincerely doubt that I will have to. Read on.

Point #2: People have never voted themselves poor.

Through all of history, in more than sixty instances in which countries have been faced with a similar overhang of debt, the outcome has been monetary printing, or clipping, or debasement, depending on the century and the regime involved. But all have favored the same approach of initially attempting to preserve the wealth of the holders of the debt by spreading the costs over the entire populace.

Why is this? Because the holders of the debt are nearly always the very same people who are holding the reins of power, and they never do seem to vote to impose a gigantic loss of wealth on themselves. Defaults and deflation would destroy the wealthy and well-connected, who are typically the holders of debt assets.

Given the choice between a certain and immediate loss of wealth and the glimmer of hope that printing might just possibly work (or at least buy some time), it is just simple human nature to opt for printing. And time and time again, that is exactly what has been done.

In fact, that is exactly what is represented by the current trillion dollar deficits and enormous monetary printing efforts of the Federal Reserve and other central banks around the globe. These efforts echo numerous historical periods, all of which turned out more or less the same – with a collapse of the currency involved, and quite often the collapse of the government, as well.

Point #3: There is really only one path before us.

There are only three paths open before us now, and only one of them is truly viable. Although we’ve already dispensed with one of them, let me state all three of them for the sake of completeness:

Option A: The US tries to pay back all of its outstanding debt.


Option B: The US defaults on its debt obligations.


Option C: The US pays off its debts with freshly printed money.

Option A is not even a remote possibility. Our debts are now several times larger than any imaginable level of economic growth that could possibly service them (see chart below).

This chart, which I will use to rebut the inevitable claim that the US government has less debt than other countries, appeared in this week’s Frontline Newsletter by John Mauldin:

Government debt comprises but a tiny fraction of our entire national debt. There is no “us and them,” no government vs. everybody else. Our collective debt belongs to us all.

With our existing debts and obligations totaling over 100% of our GDP, there is no possible way to ever pay off these debts, unless we immediately began an austerity program the likes of which has never been attempted in this country.

Option B is at least remotely probable, and some have already proposed a national default, including some very well-connected financial heavyweights (PIMCO comes to mind). However, I will submit that a country that imports two-thirds of its liquid petroleum, along with a host of other vital goods, cannot ever reasonably default on its external obligations. As for internal obligations such as Social Security…sure, why not? But never its external debts.

If it did, who would ever ship anything to that country again? The currency would get destroyed, goods would stop flowing, international banks would find themselves unable to operate in that country (which, in the case of the US, means they would be unable to operate at all), and the world’s financial system would take an enormous body blow.

I really don’t see mass default as a viable option, either internally or externally, because the impact would be too severe for the ruling classes to accept, and so they would not realistically attempt it.

This leaves us with Option C, printing.

We have already seen the first waves of such printing (trillions of dollars’ worth), which have primarily flowed into stocks and bonds in outlandish quantities that are clearly insufficient to reach the consumer.

Soon reality will set in, it will become clear that the tail (financial markets) cannot wag the dog (consumers), and we’ll begin the next stage. When this comes about, we will see whether the official response is Option A, B, or C. I am quite confident that “C” will be the answer. Or, rather, that “C” will continue to be the answer.

Many observers raise the point that it may not be possible for the Fed to print fast enough during the next wave down, but I think they’ve got a few more tricks yet to try. For now, they’ve been content to shovel money toward the usual suspects – their friends and revolving-door colleagues on Wall Street and big banks – but I have no doubt that they will pour money into the pockets of every man, woman, and child, if that’s what is needed.

Given the fact that most other countries are in a similarly ruinous position, they can all merrily keep printing away, confident in the knowledge that everybody will just have to go along with it. After all, there’s no border to run across this time; no safer country to flee to.

But this entrapment of the masses only works as long as everyone buys into the illusion that fiat money has value. Once that perception is lost, history tells us that money evaporates like water on hot steel, and it cannot be brought back. The currency in question is destroyed forever.

While I cannot predict the exact timing, everything I have come to learn leads me to the inescapable conclusion that a sustained, but possibly unruly, erosion in the value of currency lies before us.

Summary: There’s too much debt to ever pay back, and there’s never been a historical example where the ruling classes have opted for their own immediate and crushing losses over distributing the pain (via inflation) to everyone. Taken together, these two things mean that the most likely path forward involves more and more efforts at printing – until the currency, and by extension the system, breaks.

This is unlikely to happen all at once, but will more likely occur as a series of short, sharp shocks, spread out over a few years. Along the way, most people will be stunned into inactivity during the down strokes, kick themselves for having failed to take action before the breakdowns, and remain paralyzed by the hope of recovery during the intervals. In this fashion, the masses will lose most of their wealth.

The Meme is Spreading

More and more financial observers are coming around to my long-held position that we face quite a serious predicament and that there are no easy solutions, only outcomes. In the same Mauldin piece linked above, he writes:

The current political class and their intentions are dangerously close to killing the golden goose. It is one thing to steal the eggs; it is an altogether different thing to kill the goose through ignorance of the consequences. And the size of the deficit, for as long as they plan to have it, will most assuredly kill the goose.


Just as I was writing in 2006 about the potential for a crisis, and yet the party went on for quite some time, I think the party can limp along now. But there will come a point when the party is over. Interest rates on the long end will rise precipitously, forcing mortgages up and making the deficit even worse. It will be an even worse crisis than the one we have just gone through. And there will be fewer options for policy makers, and none of them will be good or pleasant. And it will take most people unawares. They will see the current trend and project it into the future. And they will be hit hard.

Can we avoid this calamity? Yes, we can wrestle the US budget deficit back under some kind of control, close to nominal GDP or on a clear trajectory to get there within a reasonable time (say, a few years). As noted above, we can run deficits close to nominal GDP almost forever. But there is no political willpower to do that now. And so, the market will at some point force the hand of the political class. That investor in St. Louis, or China or (????) will decide not to buy government debt at such low rates. The avalanche will start. And everyone will be surprised at the ferocity of the crisis. Except you, gentle reader. You have been warned.

Let me re-emphasize that point. If we do not get our act together, the results could be truly serious. And it is not just the US. Japan, as I have written, unless it changes, will hit the wall in the next few years. There are some really sick actors in Europe. You are going to have to be far more nimble and prepared for this next crisis, should it arise, than you were for the last one.

John Mauldin’s view has long been that we’d “muddle through” this crisis, neither growing nor shrinking too much. Now he is wondering about when, not if, the party will be over. He speaks of the suddenness with which it will strike, and notes that it will be heralded by spiking interest rates – all themes that I have been stressing over the past few years.

Like me, he thinks it will end with a massive funding crisis for the US, where the choice will have to be made between draconian cuts to government spending (complete with massive tax hikes, we might guess) and the utter ruin of the dollar. It is technically possible that we could avoid this outcome, but realistically, our political processes (and cast of characters) are wholly unequal to the task.

I especially agree with his last paragraph. I, too, place a premium on being financially nimble and think that the next crisis will be far more severe. You should be prepared.

As Michael Pento recently said in his company newsletter, “The time to get real and behave prudently was yesterday. If we continue to delude ourselves into thinking we are undergoing the healing process and that better days are here to stay, we face the probability that the next crisis will make the previous one look like a picnic.”

Suddenly, like an Internet meme, the idea is spreading that perhaps things are a bit more structurally damaged than can be fixed with stimulus plans and soothing words.

But even these commentators are still looking at the economic system as if it stood all by itself in a corner. What I’ve tried to make clear in the Crash Course is that it does not stand alone. It fully reflects the world around it, and it may even be an ill-fated artifact of the magnificent surplus energy returns we get from fossil fuels.

Staying Nimble

“Whatever you do will be insignificant, but it is very important that you do it.” ~ Gandhi.

So what does one do, when armed with the knowledge that things are broken and that the same authorities who broke it are going to make things worse in their attempts to fix it?

Evidence flows in weekly that ‘the little people’ are being kept intentionally in the dark, even misled, making it our job to not only conduct our busy lives, but also to try and figure out what is real and what is simply government spin.

Report on Bailouts Says Treasury Misled Public


WASHINGTON — The inspector general who oversees the government’s bailout of the banking system is criticizing the Treasury Department for some misleading public statements last fall and raising the possibility that it had unfairly disbursed money to the biggest banks.


A Treasury official made incorrect statements about the health of the nation’s biggest banks even as the government was doling out billions of dollars in aid, according to a report on the Troubled Asset Relief Program to be released on Monday by the special inspector general, Neil M. Barofsky.

The good news is that the sun rises every day. We still have time, and resources exist for you to create a better world for yourself.

Because I do not know when the next break will come, I advise everyone to act as if it might come at any moment.

For me, this has meant taking several steps to secure what wealth I have and keep it largely out of harm’s way.

As I recently wrote, we only just recently found out that the world’s banking system was hours away from a complete meltdown last October.

More than a year prior to that, I had already taken all the steps outlined in my guide on taking control of your finances (found here at ChrisMartenson.com). The main purpose of my advice was (and is) to get yourself into the most liquid and nimble position you can:

The very first step is for you to feel personally in control of your finances. You are responsible for your finances, and nobody else. While I think it’s perfectly OK to work with a trusted financial advisor or planner, that relationship still needs to be a partnership, and you need to get in the habit of authorizing and directing your investments. I know this is a scary proposition for many people, but I’ve learned that the hardest step is the first one. After you’ve moved a few things around it gets easy (and fun). The purpose behind this first step is to remove any barriers to action.


1. Write down the dollar amounts of all of your different assets and liabilities. This would include bank accounts, 401ks, annuities, pensions, Social Security, brokerage accounts, mortgages, real estate, etc. GUARD THIS INFORMATION CAREFULLY. I cannot think of any reasons for you to share this information with anyone outside of your most trusted inner circle. A minor exception (for me) is that I regularly share my percentage allocations of holdings (but not amounts or account information) in a pie chart, so that people can compare their composition to mine, but some will be uncomfortable with even this level of sharing, and I respect that.


2. Record all the relevant information about where those assets are held. Account numbers, phone numbers, contact info (if there’s someone at the other end to call), routing numbers, website URLs, and any other information that would be necessary to either access or move the funds. GUARD THIS INFORMATION CAREFULLY.


3. Determine all the rules, processes, regulations, penalties (if any), and mechanisms that surround your ability to access or move the funds. Understanding the rules surrounding (and often limiting) your access to your funds is often eye opening and essential to scenario planning. Here you need to develop and pose some very specific questions to your account manager or institution. Often it’s a game of “you can get the right information only if you ask the right question.” Here’s a starter set:


• Begin with the terms & conditions of your brokerage, 401k facility, bank, or wherever it is that you hold your money. Trust me, there’ll be a few eye-openers in there.


• Read the prospectus of each of your individual funds. Recently (Feb ’08) I read the prospectus for a Money Market Fund at a major institution for a relative and discovered that there was a rule that allowed the fund to suspend any transaction for any length of time for pretty much any reason such as “a market disruption.” Essentially, this means that during a rough patch the money probably will be unavailable. If this is during a period of time when the market is tanking, it could well be that the holding will be seriously reduced in value by the time the fund is open for redemptions and withdrawals.


• Find out exactly what type of legal entity holds your funds. You may receive a single statement, but it is possible that by holding different funds you actually are participating in several different companies (each with their own financial soundness as well as rules).


• “If I sold this fund/stock,/bond/annuity today, when would the funds actually show up in my bank account?”


• “Do I have everything on file needed to sell (or liquidate) my account and wire the funds elsewhere? If not, what’s missing, and can you send me the entire list of missing documents and a link to the source to obtain those documents?”


• “Name all the possible conditions under which your internal rules would prevent me from accessing my funds at my discretion.”


• “How many of these ways are valid means of me communicating my desire to buy/sell/transfer my holdings: email, phone call, internet order, physical mail, and /or in person at one of your branch offices?”


• “Suppose there is an internet, phone, or quote feed outage, and I wish to make a trade and/or transfer funds? What happens, and what exactly are my options?”


4. Take action: Actually move some funds from one of your accounts to another. This step will ‘break the inertia’ that most of us experience.


Once you are comfortable that you know what you’ve got, where it’s located, how it’s distributed, and the rules and regulations governing access, then you will be in a better position to react to a variety of circumstances/scenarios and take action. These steps are the exact ones I took in my process of becoming financially self-dependent and I swear by them.

And to this list, I will now add the following:

5. Link up all of your main accounts via EFT and practice moving funds between them. Unless you practice, you won’t know how long it takes or what sorts of wrinkles exist. You should also check to see if you can initiate a transfer electronically, by phone, and in person (assuming you have a branch office nearby). In a crisis or emergency, having the ability to rapidly move funds out of one institution to another could be a real wealth saver. All of my accounts are so linked and tested.

The purpose of taking these steps is to assure that your funds can be moved at the drop of a hat, should you, for whatever reason, decide to do so. Even if you start small, just start.

Okay, now that your funds are as protected as they can be, you need to remove some funds from the system entirely. For me, this means having cash and gold in a safe deposit box. Some worry about the safety of such an arrangement, but I don’t feel that I have any other reasonable option. As someone who quite openly writes about the importance of cash and gold, I cannot store any around the house for fear of exposing my family to danger.

However, I am also not worried about the safety deposit box being sealed or seized without me first catching wind of such a possibility and making my way down to the bank to empty it before anything happens.

All I want to convey is that if you have a means of safely storing some money and gold (and silver) outside of the banking system, you should do that. In financial-speak, there is an ‘option value’ in having assets outside of the monolithic monocrop that is the world’s banking system.

Being nimble means not having all your eggs in one basket, having all your baskets at hand, and remaining alert for any changes that might cause you to lose confidence in the system where your funds are stored.

Conclusion

It is my firm belief that there are more economic shocks ahead of us. I base this on my understanding of how our money system actually works, a preponderance of evidence that officials are applying more of the very same medicine that has already made the patient extremely ill, and a feeling of unease that stems from the spreading meme among long-time financial professionals that perhaps all is not well.

Nothing so far has really been fixed. I would describe the official responses to date as a ridiculous blend of denial and blatant looting. While some would argue that a major catastrophe was averted, I would propose that the same result could have been achieved without making the failed institutions even bigger, without actually rewarding the malefactors, and without making the root problem even more severe.

Once we accept the mathematical improbability of ever paying back our debts (Option A) and arrive at the conclusion that the ruling classes will never willingly allow a massive debt default (Option B), we are left with the knowledge that printing and a currency crisis are in the cards (Option C). Once a critical mass of people recognizes this, the cause is lost. A faith-based economy depends on a willing suspension of critical thought and the voluntary turning of a blind eye on historical precedent.

Without knowing when this will occur (because such things are unknowable), it behooves the prudent observer to ready themselves for this event immediately.

History tells us that currency crises strike rapidly and devastatingly, leading to my motto that I’d rather be a year early than a day late. And because I am a father and responsible for a family, I’d rather be prepared and wrong than unprepared and right.

Trying to “game the system” by waiting until the last minute to execute one’s plans is a dangerous strategy. When it is obvious to everyone that a crisis is upon us, options will shrink and opportunities will vanish, as everyone scrambles for the same few lifeboats.

The shocks will come in waves, some small and some large, and most people will be unable to react, because they didn’t see it coming, don’t understand what is happening, and have no plans to execute. They will have no alternative but to rely on a strategy of hope.

Current circumstances are as dicey as any I’ve ever seen, and the gap between reality and what we are being told is as large as any I can recall. My greatest hope is that you’ll consider my opinions alongside those of numerous other sources and make up your own mind accordingly.

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Next time: Beyond finances – the other things you should be doing (or should have already done).

jg – October 6, 2009
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Dollar Falls on Report Gulf States May Stop Using Greenback

Bloomberg.com

By Yoshiaki Nohara and Ron Harui

Oct. 6 (Bloomberg) — The dollar fell the most in two weeks against the euro after the Independent newspaper said Arab states may switch to a basket of assets including the euro, yen and gold for oil trading.

The dollar declined against 15 of its 16 most-traded counterparts as Asian stocks rallied and the Independent reported Persian Gulf states along with Japan and China are discussing dropping the greenback for oil trades, citing unnamed sources. The yen rose after Japan’s finance minister said he told Group of Seven leaders that weak-currency policies were undesirable. Australia’s dollar surged after the nation’s central bank unexpectedly raised benchmark interest rates.

“Eventually there will be a move to non-dollar commodity contracts, and it may be the next big risk for the dollar,” said Ben Simpfendorfer, chief China economist for Royal Bank of Scotland Group Plc in Hong Kong. “At the same time, I don’t want to overplay the importance of the story. There’s no credible sources there.”

The dollar dropped 0.6 percent to $1.4738 per euro at 7:28 a.m. in London, the biggest decline since Sept. 22, from $1.4648 in New York yesterday. The U.S. currency also fell 0.6 percent to 89.01 yen, the most since Sept. 25, from 89.53 yen. The 16- nation euro was little changed at 131.06 yen.

Oil-producing nations are seeking to move to a basket of assets, including the yen, yuan, euro and gold to settle transactions, the U.K.-based Independent said, citing Middle Eastern and Chinese banking officials it didn’t name.

‘Undermining the Dollar’

Meetings to discuss the transition have already been held by finance ministers and central bank governors from Russia, China, Japan and Brazil, the newspaper reported.

“The very fact that such an idea is being entertained is undermining the dollar,” said Dariusz Kowalczyk, chief investment strategist at SJS Markets Ltd. in Hong Kong.

Denominating in a basket of currencies would be a “recipe for confusion” among the oil-producing Gulf Cooperation Council and its customers, said John Vautrain, senior vice president at oil industry consultants Purvin & Gertz Inc. in Singapore.

“If the GCC did, that would just be very messy,” Vautrain said. “If you do something that makes your buyers unhappy they will reduce your price. And that’s not in anybody’s interest in the GCC.”

The greenback pared losses after Saudi Central Bank Governor Muhammad al-Jasser said his nation hasn’t held talks with other oil producers and consumers on shifting away from the dollar.

As many of our states have already discovered – raising taxes to reduce bloated budget deficits only pounds another nail in our economic coffin.

Higher taxes = less corporate/individual disposable income = reduced spending = lower economic activity.

I’ll say it again – our government is leading us to economic ruin.

jg – October 15, 2009
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OCTOBER 15, 2009

The Dangers of a Value-Added Tax

By ERNEST S. CHRISTIAN

AND GARY A. ROBBINS

Wall St. Journal

On its way out of the recession, the economy may encounter a VAT blocking its way.

Last week on PBS’s “Charlie Rose Show,” House Speaker Nancy Pelosi said she thinks “it’s fair to look at a value-added tax.” And the Congressional Research Service just published a lengthy new paper on the value-added tax that tends to obscure the fact that the middle class will bear the majority of its burden.

Even Alan Greenspan is on board, albeit reluctantly, he says. Paul Volcker, chairman of Mr. Obama’s tax reform panel, may not be far behind.

With the deficits at a historic high, these former heads of the Federal Reserve may prefer to pay for President Obama’s spending spree with taxes instead of borrowed money. But tax and spend is no better than borrow and spend. Why not just stop spending so much?

For Mr. Obama, a VAT, which appears on the surface to simply tax goods and services at the cash register, is the ideal tax. At a 17% tax rate, for example, he can quickly increase taxes by $1.5 trillion a year in a partially hidden way. A VAT is by its nature hidden, because no one files a tax return.

The VAT is so slippery that academics here and abroad do not agree on who pays this seemingly magical tax. Some economists still deceive themselves with the old notion that a VAT is simply a tax on consumers. This misperception comes from the European VAT, which uses a system of credits to create the illusion of pushing the tax forward from one business to another and finally to consumers.

Modern economists in the U.S. take the view that consumers bear only about 50% of the VAT, basically through higher prices and fewer product choices. Because of market forces, the rest of the tax ends up back on the owners and the employees of the companies that produce and sell the goods and services subject to the VAT.

Our own simple general equilibrium model suggests that about 33% of the VAT tax is borne by people in proportion to their relative wage levels, about 17% in proportion to their capital, and about 50% in proportion to their consumption. Federal, state and municipal employees escape the implicit wage tax, but otherwise, the VAT is predominantly a tax on middle-class and upper-income earners and consumers.

The VAT also taxes imports, but excludes exports from taxation. But here again there is confusion. For instance, who really pays the import tax?

The old idea was that U.S. consumers would in all cases pony up the import tax in addition to the price of the imported product. In the case of most manufactured goods, however, the modern view is that market competition pushes all or part of the import tax back onto foreign sellers. There is no definitive answer as yet.

Amidst all this uncertainty, just imagine what a master political spin doctor like Mr. Obama could do with vast amounts of additional tax revenues drawn heavily from the wages and savings of the middle class, though widely misperceived to be paid disproportionately by lower-income consumers.

Proceeding from that misperception, he could create a vast new subsidy program that would offset by many multiples the VAT tax actually borne by these newly created welfare recipients. He could also increase the income tax on “the rich,” saying that they and the middle class get a nearly free ride under the VAT compared to less affluent people who must spend everything on purchasing “taxable” essentials. Not so, but the VAT lends itself to spin.

Mr. Obama and Mrs. Pelosi might also use the VAT to fund “free” government-run medical care and hospitals for everyone, as well as “free” college education and “free” home mortgages.

How about a temporary VAT, solely to pay down the federal debt? When was the last time a tax ever went away? Or how about a smaller VAT of only 5%? Obviously, it could quickly grow. Any tax increase big enough to repay much of the huge federal debt would devastate the economy for years to come.

The one certainty about a VAT is its enormous revenue-producing potential. At a rate of 17% to 18%—about average for Europe—it could increase total federal taxes to 30% of GDP or more from 15% now, according to the Congressional Budget Office. In combination with higher federal spending, this could forever alter the balance between the public and private sectors.

America and its economy would be radically changed—and not for the better. The first priority in Washington should be to cut spending, not to add a powerful new weapon to the tax arsenal.

—Mr. Christian, a lawyer, is co-author of “The Value Added Tax: Orthodoxy and New Thinking” (Kluwer, 1989). Mr. Robbins is the chief economist at the Center for Strategic Tax Reform in Washington, D.C.

Michigan is another canary in our economic coal mine. What is our federal government considering to close our historic budget deficits? Reduce the size of our bloated government? No. Significantly reduce federal spending? No. Reduce entitlements? No. Implement new taxes? Yes. We’re being led right off an economic cliff.

Although our leaders in Washington D.C. appear to be incompetent with regards to monetary/economic issues – they are not as inept as we’ve been led to believe. I cannot believe that they really think we can continue to run record deficits due to runaway spending – continually increase taxes to pay for this fiscal mismanagement – and not eventually suffer an economic calamity. The Federal Reserve has created this economic crisis – and now our political leaders are contributing to our demise.

This is a coordinated attack on the American people. It is a highly intelligent, very deceptive plan to lower our standard of living to the point that we will accept any new political/economic proposals – that offer us a return to ‘prosperity’.

Of course, as is always the case when you do a deal with the devil, there are a few things that are not being told to us. Our spiritual enemy will offer us a solution that will appear to be the right choice. What we won’t be told is that this choice will eventually result in our nation’s bondage.

jg – October 20, 2009
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October 20, 2009

The State of Joblessness

The tragedy of Jennifer Granholm’s Michigan.

Wall St. Journal (Opinion)

State lawmakers will soon face large budget deficits again, perhaps as much as $100 billion across the U.S. Here’s some free budget-balancing advice: Steer clear of the Michigan model. The Wolverine state is once again set to run out of money, and it is once again poised to raise taxes even as jobs and businesses disappear.

In 2007 Governor Jennifer Granholm signed the biggest tax increase in Michigan history, with most of the $1.4 billion coming from business. The personal income tax—which hits nonincorporated small businesses—was raised to 4.2% from 3.95%, and the Michigan business tax levied a surcharge of 22%. The tax money was dedicated to the likes of education, public works, job retraining and corporate subsidies. Ms. Granholm and her union allies called these “investments,” and the exercise was widely applauded as a prototype of “progressive” budgeting.

Some prototype. Every state has seen a big jump in joblessness since 2007, but with a 15.2% unemployment rate Michigan’s jobs picture is by far the worst. Some 750,000 private-sector payroll jobs have vanished since the start of the decade. For every family that has moved into Michigan since 2007, two have sold their homes and left.

Meanwhile, the new business taxes didn’t balance the budget. Instead, thanks to business closures and relocations, tax receipts are running nearly $1 billion below projections and the deficit has climbed back to $2.8 billion. As the Detroit News put it, Michigan businesses are continually asked “to pay more in taxes to erase a budget deficit that, despite their contributions, never goes away.” And this is despite the flood of federal stimulus and auto bailout cash over the last year.

Following her 2007 misadventure, Ms. Granholm promised: “I’m not ever going to raise taxes again.” That pledge lasted about 18 months. Now she wants $600 million more. Among the ideas under consideration: an income tax increase with a higher top rate, a sales tax on services, a freeze on the personal income tax exemption (which would be a stealth inflation tax on all Michigan families), a 3% surtax on doctors, and fees on bottled water and cigarettes. To their credit, Republicans who control the Michigan Senate are holding out for a repeal of the 22% business tax surcharge.

As for Ms. Granholm, she and House speaker Andy Dillon continue to bow to public-sector unions. There are now 637,000 public employees in Michigan compared to fewer than 500,000 workers left in manufacturing. Government is the largest employer in the state, but the number of taxpayers to support these government workers is shrinking. The budget deadline is November 1, and Ms. Granholm is holding out for tax increases rather than paring back state government.

The decline in auto sales has hurt Michigan more than other states, but the state’s economy would have been better equipped to cope without Ms. Granholm’s policy mix of higher taxes in order to spend more money on favored political and corporate interests. If any larger good can come of the experience, it is that Michigan is teaching other states how not to govern.

Printed in The Wall Street Journal, page A20

When things really begin to collapse – remember all of these positive articles and all of the positive comments by our political and financial leaders and ask yourself – were they really this blind or was there another agenda at work?

I have added a blog post by Jeff Nielson at the end of this post. Jeff tells us the true state of our economy and where we’re heading.

jg – October 22, 2009
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Transport Stocks Blaze Recovery Path
WSJ – October 22, 2009

China Gains Confidence in Recovery
WSJ – October 22, 2009

[Federal Reserve] Beige Book Sees Stabilization Signals
WSJ – October 22, 2009

Business Spending Looks Up
WSJ – October 21, 2009

Commercial Market Gains Footing
WSJ – October 21, 2009

Construction Industry Forecast to Rebound in 2010
WSJ – October 16, 2009

Dow at 10000 as Crisis Ebbs
WSJ – October 15, 2009

Wall Street On Track To Award Record Pay
WSJ – October 14, 2009

Trade Upturn Hints at a Recovery
WSJ – October 12, 2009

Recovery Hopes Stir Markets
WSJ – October 7, 2009

BHP points to signs of broad global recovery
CNN – October 21, 2009

Google: Worst is behind us
CNN – October 21, 2009
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Greater Depression for U.S. Rebuts ‘Recovery’ Talk

By Jeff Nielson

http://seekingalpha.com/article/167538-greater-depression-for-u-s-rebuts-recovery-talk?source=feed

It has gone from irritating to nauseating listening to media market-pumpers talking about an “U.S. economic recovery” which has supposedly already begun. Indeed, the hype has gone from a debate about whether the “recession” is over, to an inane debate about whether the U.S. is experiencing a “V-shaped recovery” or may suffer a “double-dip recession” or W-shaped “recovery”.

In the real world, however, all that has occurred is that an U.S. economic collapse, which was in a near-vertical drop, has eased to a more moderate rate of decline. The “double-dip” talked about by some semi-realistic analysts is in fact nothing more than the ongoing collapse regaining downward momentum. There is no “debate” here. It is a matter of simple arithmetic that the U.S. economy cannot recover.

First of all, in the “big picture”, the U.S.’s $11-trillion economy (all that remains once statistical “padding” is removed) is much too small to service the more than $57 trillion in existing public and private debt. Even if we pretend the U.S. still has a $14 trillion economy (despite the government’s own numbers that this economy has shrunk by more than 10%), it is still much too small to service its debts. Meanwhile, lurking in the near future are roughly $70 trillion in additional “unfunded liabilities”.

As I have pointed out on a number of occasions, the U.S. can never afford to raise interest rates again (at least not until after the inevitable national default on its massive debts). Every 1% rise in U.S. interest rates drains over $500 billion per year from the U.S. economy, equivalent to roughly a 5% drop in GDP for every 1% rise in interest rates. It is also inevitable that the bond market will impose much higher interest rates on the U.S. economy – as deficits get more out-of-control (and myopic U.S. creditors finally see the total insolvency of the U.S. economy). Thus, the U.S. is guaranteed to go bankrupt – the only issue is when.

The Obama stimulus package is far too small to stop the current collapse in the U.S. economy. Keep in mind that the same propagandists who claim that Obama’s stimulus package would “save” the U.S. economy were saying the same things about the much smaller Bush “stimulus package” – little more than a year ago.

The fact is that the U.S. consumer economy has lost somewhere in the neighborhood of $2 trillion per year in spending power. At the peak of the U.S. housing bubble, home-equity financings injected $840 billion into the economy in one year. Not only has such cash-flow into the U.S. economy completely evaporated, but now the debtors have to pay back the trillions in debt which they squandered.

Contrary to the absurd jobs propaganda, the U.S. economy has already lost somewhere in excess of 15 million jobs already – subtracting at least $1 trillion per year in spending from the economy once the “multiplier effect” is factored in. This disconnect from the real world reached its peak this summer, symbolized by a Reuters article that actually stated that while U.S. unemployment was “improving at the national level” it was getting worse on a state-by-state basis (see “BLS jobs numbers contradict BLS jobs numbers”).

Obviously the U.S. economy is represented by the collective economic performance of its 50 states. Yet in the fantasy-world of U.S. economic propaganda, we are supposed to believe that nationally the U.S. economy can be improving, while state-by-state the economy continues plummeting downward. The only difference between the U.S.’s “national economy” and the “state-by-state economy” is that the federal government has incorporated far more statistical contrivances to distort the numbers.

If the real condition of the U.S. economy is not already evident to people from the information above, certainly the following graphs and data on state tax revenues make things crystal-clear. The Rockefeller Institute (.pdf) recently went back as far as data was available (nearly 50 years) and discovered that the current collapse in state revenues is unprecedented – evidenced by the sickening plunge in these charts.

Again, it is a matter of elementary arithmetic that with U.S. states suffering the worst collapse in revenues on record (and with most states already maximizing their annual borrowing) that only two things can happen. Either U.S. states will have to engage in the most-punishing combination of tax-increases and spending cuts (i.e. lay-offs) on record or the Obama regime will have to dramatically increase federal hand-outs to the individual states.

Currently, in the most-recent fiscal year (ending in June of this year), declines in U.S. state revenues were more than double the amount of “stimulus” they received from the Obama regime. What makes this situation worse, most of this so-called “stimulus” involved either increasing the duration of unemployment insurance in the most-devastated regions and/or providing funds to states whose unemployment benefits were completely spent. There was virtually no money spent on creating jobs (contrary to the promises and claims of the Obama regime).

Given that shortfalls in unemployment insurance funding will be much worse in the current fiscal year, the Obama regime could double “stimulus” hand-outs to the states and still create zero jobs – doing nothing but keeping unemployment insurance payments flowing to the jobless.

This still leaves U.S. states with somewhere around $100 billion in increased deficits which will need to be covered in the current fiscal year (above and beyond their pre-existing structural deficits). Keep in mind that the entire amount of “stimulus” reaching the economy from the Obama “stimulus package” was only about $250 billion this year (using the government’s own numbers). Overall, this replaces little more than 10% of the lost spending power from this economy.

The numbers are unequivocal. There is no “economic recovery” taking place in the U.S. This year is much worse than last year – and 2010 will be much worse still. The only thing currently preventing the debt-implosion of the U.S. economy is the Bernanke printing press, and continued, excessive “monetization” of debt is a guarantee of hyperinflation. All claims to the contrary represent wishful thinking or deliberate deceit.

When you have some time – here are a few recent articles relating to commodity pricing, hyperinflation and the U.S. dollar. They’re somewhat long – but contain accurate information and are worth reading.

jg

October 14, 2009
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When money is worthless

By Martin Hutchinson

The Financial Times on October 6 noted a disturbing new trend – hedge fund and other investors are increasingly seeking to invest in physical commodities themselves, rather than in futures. Given the excess of global liquidity, this is not entirely surprising. It does, however, raise an ominous possibility of a supply shortage in one or more commodities, caused by investor demand that exceeds available mine output and inventory. That could potentially produce a collapse in economic activity similar to that from the 1837-41 and 1929-33 liquidity busts, but with the opposite cause.

The problem arises because of the size of the world’s capital pools in relation to its volume of trade. The total assets of US hedge funds in September 2009 were US$1.95 trillion (down from almost $3 trillion a year earlier). That compares with total US imports of goods and services in 2008 of $2.1 trillion.

However, in addition to the hedge funds, there are other huge pools of money available for deployment in commodities markets. For example, China and Japan each have around $2 trillion of foreign exchange reserves, while Saudi Arabia and the Gulf states have comparable-sized pools of liquid assets available for investment. Since the available inventory of commodities is a fraction of their annual production, we could potentially end up with an extreme case of too much money chasing too few goods.

This would not matter much if investment were concentrated in futures markets. The open interest in such markets is controlled by the traders, who arbitrage to close positions as the settlement date nears. Thus when huge speculative money flows pour into futures markets, they drive up the price of the commodity concerned, but do not significantly interfere with the production of that commodity, nor with the flow of the commodity from producer to consumer.

Normally, commodity investment is confined to futures markets because it is much more convenient. The cost to a hedge fund or other financial investor of holding stocks of a commodity is quite high, normally sufficient to deter investors from attempting to buy commodities directly. They will only buy commodities directly if they are afraid that the normal arbitrage mechanisms between the futures markets and the commodity markets will be overwhelmed by the volume of demand, so that investment in futures will prove less profitable than it “should”.

When investment moves to physical commodities, as it may now be doing, it potentially disrupts trade flows. A ship laden with copper ore that would normally have sailed from Chile to a smelter on the US West Coast is instead parked in a holding area in order that investors can profit from the rise in value of that copper. That reduces the amount of ore available to smelters.

Since the balance between supply and demand of most commodities is quite delicate, and supply cannot be ramped up by more than a modest percentage at short notice, that could result in a physical shortage of the commodity at the smelter, shutting down the smelter for a period and depriving its customers of the copper products they need for their own operations.

Disruptions of commodity flows of this kind can potentially cause both hyperinflation and a major recession. The value of copper to the smelter and its customers is much higher in a shortage than if it is available normally because the cost of closing their own operations is large – hence the price of any spare copper that might be available locally zooms upwards. Equally, the economic cost of shutting down the smelter and its customers far exceeds the value of the copper ore shipment. Products containing copper are suddenly in short supply, while workers lose their paychecks and so are forced to stop consuming at the same level.

The effect of a gross liquidity surplus is thus quite similar to that of a sudden shortage. In the shortage case, as in 1837-41 and 1929-33, prices decline sharply – in those two cases by as much as 20-25% – economic activity is hugely reduced as businesses are unable to obtain financing and workers are laid off. The resultant decrease in demand causes producers to lose money, eventually closing their doors, as well as bankrupting the financial system.

In a gross liquidity surplus, in which investment capital disrupts commodity trade flows, inflation rather than deflation results, probably very rapid inflation rather than the moderate 5% to 10% inflation we became used to in the 1970s. That inflation still further increases demand for commodities, worsening the problem. Businesses unable to obtain raw materials close their doors, workers’ real incomes decline sharply (even when they keep their jobs) and gross domestic product declines similarly to the deflationary case.

We have never experienced a global hyperinflation, in which money is unable to purchase goods, so it becomes worthless. In particular countries, wars have produced this effect, notably in the revolutionary wars in both the United States and France, when the “continentals” and “assignats” became of no value. Similar effects have been produced by excess money printing in Latin America; in hyperinflationary periods citizens of Argentina have starved, even though the country is one of the world’s greatest food producers. However, globally we have experienced nothing worse than the moderate worldwide inflation of the 1970s, in which trade flows were disrupted and incomes and assets affected, but commodities generally remained available in the market and output weakened but did not decline sharply.

The fascination of adding another chapter to economic historians’ textbooks is not sufficient to make global hyperinflation anything other than an event to be avoided at all costs. It might help the Ben Bernanke of 2080 to make better monetary policy decisions than the present Federal Reserve chairman, since he would have the chance to be the world’s greatest expert on the hyperinflationary crash of 2011. However, as far as this column is concerned, future generations can take their chances – we need to avoid hyperinflation happening to this generation.

The cost of avoiding this disaster appears to be steadily increasing. Once articles start appearing in the Financial Times about investors choosing to buy physical commodities rather than futures, many more such investors will be drawn into this activity. A moderate tightening of monetary policy that might well have deflected the forces of hyperinflation if it had been instituted several months ago may well prove ineffectual at this stage.

In determining the necessary monetary policy, the gold price provides a very useful signaling device (and its definitive breakout through previous highs last week provides a stern warning). It does not matter one whit whether investors demand physical gold rather than futures because gold has only insignificant industrial uses and the stocks of gold available in “inventories” such as Fort Knox are far more than sufficient to supply those uses for a decade if necessary.

However, the commodity investment impulse is closely tied to the gold investment impulse; both reflect a well-warranted distrust of fiat money and a desire to hold items of secure long-term value. Hence the gold price is available to show policymakers whether their monetary policy is appropriate.

If, following the recent breakthrough, the gold price continues to increase, heading for $2,400 per ounce, the equivalent in today’s money of the 1980 high, that will be an excellent signal that monetary policy urgently needs tightening.

If, after a first monetary tightening, the gold price retreats for a few weeks and then breaks through its recent highs, that development will be a signal that monetary policy must be tightened further, as the flight to commodities has not halted.

Only when the gold price breaks definitively downwards, dropping 25% or more from its high, will policymakers know that they have succeeded in breaking the commodity investment mania. Such a development is however likely to occur only after a definitive crack in government bond markets, forcing policymakers to address their gigantic budget deficits as a matter of urgency.

Given the predilections of today’s policymakers, it is unfortunately unlikely that they will tighten monetary policy sufficiently to break the commodity flight, whatever the gold price does. Instead, led by the determined Keynesians of the International Monetary Fund, they are much more likely to attempt to control the gold price itself, either surreptitiously by selling off massive quantities of the world’s gold reserves, or openly by imposing limits on gold futures trading and possibly, like Franklin Roosevelt in 1933, making it illegal for ordinary individuals to own gold or to buy gold futures.

That will of course only make matters worse; it would be equivalent to trying to avoid a speeding ticket by smashing the car’s speedometer. Manipulating the gold price to pretend that liquidity is not excessive does not stop liquidity from being excessive. Nor does it lead any but the stupidest institutional investor to believe that his urge to invest in physical commodities is misguided.

Rather, it will cause commodities investment to be carried out through shell companies in tax havens, away from regulators’ radar screens. The effect on global supply chains will be equally damaging, but policymakers will no longer have a straightforward way of determining how to avoid the resulting economic depression.

I wrote last week that tightening liquidity directly by entering into a central bank “exit strategy” is dangerous. However, the Financial Time’s story itself and the gold price breakthrough have significantly increased the size of the hike in interest rates necessary to halt the flight to commodities.

Time is short, and the probability of disaster is rising.

Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005) – details can be found at http://www.greatconservatives.com/.

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Trending Towards Hyperinflation

Economics / HyperInflation Oct 09, 2009 – 02:00 PM

By: Paul_Tustain

Seven short steps to the cost of living doubling or more inside 3 years…

HYPERINFLATION is widely accepted as a period of out of control price rises, doubling the cost of living inside three years.

It occurs when a currency loses its ability to store value, encouraging long-term savings to pour into circulation where they swamp the much narrower supply of consumer money, and cause the whole lot to lose purchasing power.

There is no specific recipe, but the pattern we risk repeating today would be typical.

Step #1: Savers, already aware of very real inflation in the cost of living, find it applies more and more to their non-discretionary purchases, such as food and energy;

Step #2: They become increasingly irritated that their currency assets earn interest at the very low official rates – typically less than 1% in the West. To beat this, they need to take big risks by lending to minor institutions. These are the smaller banks which are insignificant enough to be allowed to fail, and therefore do not get access to cheap central-bank money. They are the institutions which have to bid market rate to get depositors’ money. And of course, they will eventually fail, because they are competing in the loans market against megabanks with unfairly cheap money and a government guarantee to protect them;

Step #3: Savers also begin to understand that the government cannot adjust to higher rates because its own enormous borrowing costs forbid it;

Step #4: Savers then cash in their deposits and steadily sell/redeem their bonds, anticipating that bonds in general will repeat their 1970s’ performance, shedding value continually over the medium to long term. (By 1980 the bond market was a shriveled rump, and it didn’t re-appear until 1986, when inflation was well under control.)

Step #5: Central banks will collect the unwanted bonds (quantitative easing programs have so far collected nearly $1 trillion) and create new cash to pay the sellers – again, large and favored client banks;

Step #6: Savers now re-invest, carefully avoiding things which will repay them nominal dollars (i.e. deposits and bonds). Everything else will go up in price as the new Fed cash seeks better stores of value;

Step #7: More and more savers will reach their inflation pain threshold and start at Step 1 above.

Is this spiral increasingly likely? Below are four important indicators:

 Commodity price inflation;

 Large debts, particularly government debt;

 Long-term low returns for savers;

 A source of new money – usually the printing press.

Unusually, they are all now pointing in the hyperinflationary direction. They are worth looking at in some detail today…
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TIPS Show Bernanke Isn’t Whipping Inflation Concerns (Update2)

By Daniel Kruger

Oct. 13 (Bloomberg) — Treasury Inflation Protected Securities are the bonds money managers can’t afford not to own.

BlackRock Inc., Pacific Investment Management Co. and Vanguard Group Inc., which together manage $3.45 trillion, say investors are pouring money into inflation-linked debt even as consumer prices post the longest series of contractions since Dwight D. Eisenhower was president in 1955. TIPS have gained 7.9 percent this year, according to Merrill Lynch & Co. indexes, while Treasuries overall lost 2.8 percent. That’s the biggest outperformance since the U.S. first issued TIPS in 1997.

After getting bludgeoned by the subprime mortgage collapse, investors are preparing for another potential crisis: a surge in the cost of living spurred by the $11.6 trillion the Federal Reserve and the government have lent, spent or guaranteed to shore up the economy and the financial system. While inflation is tame now, they see danger signs in the doubling of crude oil futures since January, gold trading at record highs and the 14.5 percent tumble in the trade-weighted Dollar Index since March.

“Investors are really taking the long view and trying to hedge inflation risk,” said Mihir Worah, who oversees the $15.4 billion Real Return Fund for Newport Beach, California-based Pimco, the world’s biggest bond manager. “That’s the biggest reason why we’re seeing the flows.”

The Real Return Fund’s assets under management have increased 25 percent this year, Worah said. The fund has returned 16.5 percent since December, according to Bloomberg data. Pimco manages $60 billion in inflation-linked debt.

TIPS Performance

Returns are accelerating, with TIPS rallying 2 percent in September, the most this year after a 6 percent surge in March. Returns are similar elsewhere around the world. Excluding the U.S., a Merrill Lynch index that tracks the performance of inflation-linked bonds has gained 7.63 percent so far this year.

TIPS returned 1.1 percentage points on average more than Treasuries each year since 1999. In each of the five years when the difference was 2 percentage points or more, inflation accelerated the following year by an average of 0.8 percentage point. The biggest rise was 1.2 percentage points in 1999, with the smallest being a 0.4 point gain in 2004. Consumer prices rose after TIPS outperformed in 2003, 2005 and 2008.

Fed Chairman Ben S. Bernanke said at a Board of Governors conference Oct. 8 in Washington that while “accommodative policies” will be in place for an extended period, the central bank will be prepared to tighten monetary policy “to prevent the emergence of an inflation problem down the road.”

‘First Brick To Fall’

Last week’s auction by the Treasury of $7 billion of 10- year TIPS shows the strength of demand for the securities. The Oct. 5 sale drew bids equal to 3.12 times the amount offered, the highest bid-to-cover ratio since January 1999. The notes drew a yield of 1.51 percent, compared with a forecast of 1.56 percent in a Bloomberg News survey of seven of the 18 primary dealers that underwrite U.S. debt auctions.

Pension funds, central banks and individuals are all buying TIPS, according to Brian Weinstein, who manages $9 billion of the securities for BlackRock in New York.

“The first brick in the inflation wall to fall is the expectation brick,” said Weinstein. “If people are calling me worried about inflation it means that they’re acting differently. It means they’re actually starting to worry about inflation, and that should scare the heck out of central banks.”

BlackRock’s TIPS fund for individual investors, the Inflation Protected Bond Portfolio, has more than doubled its assets to $1.75 billion from $800 million at the start of the year, Weinstein said, while the firm’s overall inflation-linked assets have risen to $19 billion from $12 billion. Weinstein’s fund gained 8.2 percent this year, according to Bloomberg data.

Breakeven Rate

By historical measures TIPS remain cheap. The difference in yield between 10-year TIPS and 10-year notes is 1.86 percentage points, compared with an average of 2.18 over the past five years. The gap, known as the breakeven rate, has been 2 percentage points or more for 79 percent of that time, Bloomberg data shows.

Weinstein and Pimco’s Worah both recommend 10-year TIPS because of the risk falling prices still pose for securities maturing in less than five years.

The Labor Department will report on Oct. 15 that the consumer price index rose 0.2 percent in September from August, while declining 1.4 percent from the year-earlier period, according to a Bloomberg survey. It would be the seventh consecutive monthly decline on an annual basis.

Rope-A-Dope

“TIPS are the rope-a-dope strategy of the bond market,” said Mitchell Stapley, the Grand Rapids, Michigan-based chief fixed-income officer for Fifth Third Asset Management. Rope-a- dope refers to boxer Muhammad Ali’s strategy of hunkering into a protective stance against which his opponent would flail, wearing himself out — at which point Ali would strike. “These things perform best when people are talking about deflation.”

The benchmark 1.875 percent 10-year inflation-indexed Treasury note ended last week at 103 4/32 to yield 1.53 percent, according to BGCantor Market Data. The breakeven rate rose 14 basis points, or 0.14 percentage point, in the period, the most in seven weeks. The coupon compares with 3.625 percent on the benchmark 10-year Treasury.

Investors are willing to accept lower yields on TIPS because the principal increases annually at the rate of the consumer price index. The securities pay semi-annual interest on the adjusted principal. Their face value is protected against deflation, because the principal can’t fall below par.

‘Going To Suffer’

Some policy makers say deflation is a greater threat to economic recovery than inflation.

“We would not need much of a decline in inflation to run the risk of an outright deflation,” Fed Bank of New York President William Dudley said in a speech in New York on Oct 5. “Outright deflation, in turn, would be a dangerous development because it would drive up real debt burdens and make it much more difficult for households and businesses to deleverage.”

Investors concerned about falling prices should buy long- term Treasuries, said Alex Li, an interest-rate strategist in New York at primary dealer Credit Suisse Group AG.

The benchmark 30-year bond, a 4.5 percent security due August 2039, closed last week at 104 20/32 to yield 4.23 percent, or 3.26 percentage points more than the two-year note. The so- called yield curve is steeper than the mean of 1.5 percentage points over the last 20 years.

“At the beginning of next year or later this year people are going to realize low inflation’s going to stay with us at least over the near- to medium-term,” Li said. “That’s the time when TIPS are going to suffer.”

TIPS Risk

September’s larger-than-forecast decline in non-farm payrolls indicates the recovery may take more time to take root. A sluggish economy is a negative for TIPS investors, who could lose money if consumer prices rise on average less than the 1.86 percent breakeven rate.

“The risk to owning TIPS would be a double-dip zero percent or negative inflationary period for a number of years,” said Kenneth Volpert, who oversees $180 billion as head of taxable fixed-income at Vanguard Group in Valley Forge, Pennsylvania.

TIPS holders also run the risk of getting burned if the Fed begins raising interest rates “with greater force than is customary,” as Fed Governor Kevin Warsh warned on Sept. 25, when an economy recovery takes hold.

Issuance Boost

The Fed has kept its target rate for overnight loans between banks at zero to 0.25 percent since December in an effort to hold down borrowing costs and boost lending. The seizure in credit markets triggered $1.62 trillion of writedowns and credit losses at financial institutions since the start of 2007, sending the global economy into its first recession since World War II.

Inflation expectations as measured by the Fed’s five- year/five-year forward breakeven rate rose to 2.80 percentage points on Oct. 6 from a low of 2.03 percentage points on Nov. 20. The rate plots forward rates measuring investor expectations for inflation in five years. The gauge was at 3.06 percentage points on June 30, 2004, when the Fed last raised its target rate.

Crude oil futures are more than double their January low of $32.70. Spending by U.S. consumers climbed by 1.3 percent in August, the most since 2001, and followed a 0.3 percent gain in the prior month that was bigger than previously estimated, the Commerce Department reported on Oct. 1 in Washington.
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Dollar loses reserve status to yen & euro

By PAUL THARP

Last Updated: 3:16 AM, October 13, 2009

Posted: 1:44 AM, October 13, 2009

Ben Bernanke’s dollar crisis went into a wider mode yesterday as the greenback was shockingly upstaged by the euro and yen, both of which can lay claim to the world title as the currency favored by central banks as their reserve currency.

Over the last three months, banks put 63 percent of their new cash into euros and yen — not the greenbacks — a nearly complete reversal of the dollar’s onetime dominance for reserves, according to Barclays Capital. The dollar’s share of new cash in the central banks was down to 37 percent — compared with two-thirds a decade ago.

Fed boss Ben Bernanke may be forced to raise rates in order to restore faith in the dollar — and help bring the euro and the yen back to earth.

Currently, dollars account for about 62 percent of the currency reserve at central banks — the lowest on record, said the International Monetary Fund.

Bernanke could go down in economic history as the man who killed the greenback on the operating table.

After printing up trillions of new dollars and new bonds to stimulate the US economy, the Federal Reserve chief is now boxed into a corner battling two separate monsters that could devour the economy — ravenous inflation on one hand, and a perilous recession on the other.

“He’s in a crisis worse than the meltdown ever was,” said Peter Schiff, president of Euro Pacific Capital. “I fear that he could be the Fed chairman who brought down the whole thing.”

Investors and central banks are snubbing dollars because the greenback is kept too weak by zero interest rates and a flood of greenbacks in the global economy.

They grumble that they’ve loaned the US record amounts to cover its mounting debt, but are getting paid back by a currency that’s worth 10 percent less in the past three months alone. In a decade, it’s down nearly one-third.
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Dollar to Hit 50 Yen, Cease as Reserve, Sumitomo Says (Update1)

By Shigeki Nozawa

Oct. 15 (Bloomberg) — The dollar may drop to 50 yen next year and eventually lose its role as the global reserve currency, Sumitomo Mitsui Banking Corp.’s chief strategist said, citing trading patterns and a likely double dip in the U.S. economy.

“The U.S. economy will deteriorate into 2011 as the effects of excess consumption and the financial bubble linger,” said Daisuke Uno at Sumitomo Mitsui, a unit of Japan’s third- biggest bank. “The dollar’s fall won’t stop until there’s a change to the global currency system.”

The dollar last week dropped to the lowest in almost a year against the yen as record U.S. government borrowings and interest rates near zero sapped demand for the U.S. currency. The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, has fallen 15 percent from its peak this year to as low as 75.211 today, the lowest since August 2008.

The gauge is about five points away from its record low in March 2008, and the dollar is 2.5 percent away from a 14-year low against the yen.

“We can no longer stop the big wave of dollar weakness,” said Uno, who correctly predicted the dollar would fall under 100 yen and the Dow Jones Industrial Average would sink below 7,000 after the bankruptcy of Lehman Brothers Holdings Inc. last year. If the U.S. currency breaks through record levels, “there will be no downside limit, and even coordinated intervention won’t work,” he said.

The problem – as we’ve seen time and again – is that very few people are analyzing the details behind the 3.5% gain – and are therefore blindly following the blind.

What is the real economy? Does the GDP number really give us a good indication of what is going on? I believe the answer is no. The real economy to ordinary people (that’s you and me) is employment, consumer & business spending, wages/income & our purchasing power (U.S. Dollar). I don’t know about you – but if I’m out of a job – I could care less what the government says about GDP (whether the actual number is accurate or not). If I don’t have a job – I’m not spending – I’m just trying to survive.

This is what 26 million of us are now doing – just trying to survive.

Because real unemployment is somewhere between 16-22% (depending on how you measure) – it should not surprise anyone that consumer spending is declining.

From the Wall St. Journal:

Spending Tumbles

Spending by Americans took a big tumble in September, as they lost a popular government subsidy and were left with a lousy job market and a credit crunch.

The 0.5% drop in spending was the largest since December 2008, when the recession was at its worst. Most of the drop was in durable goods, which include autos. Outlays on nondurable goods and services posted a gain from last month.

We’ve seen massive amounts of ‘stimulus’ money flowing into our financial system – but little of this is making its way to ordinary Americans. Since our monetary system is based on debt – let’s look at what banks are doing with their reserves.

Are they lending? No. Why? As I’ve said before – banks do not want to lend in this economic environment and as our economy continues to lose jobs – there will be fewer and fewer people and businesses who can qualify for loans.

Since we now know that bank loans directly contribute to our money supply – we would expect our money supply growth to slow considerably based on the charts above – and that’s exactly what we’re seeing.

Personal income is also flat or down.

With nearly 10% of the U.S. labor force out of work, incomes aren’t going up much. September’s flat reading followed a 0.1% August gain, revised from an originally reported 0.2% increase.

So – in the real economy where you and I get the money we need to survive – life is not good and the trends are not good. All of the people out there saying that the recession is ending are living in a fantasy land of government statistics and wishful ‘outlooks’.

For you and me – economic conditions continue to decline. As you’ve seen me say before – we’re rapidly approaching a cliff – and we’re going to be pushed off at some point.

Get ready for significant stock market declines in the near future. Economic fundamentals do not support current stock prices. When everyone wakes up to this economic reality – life in the stock market is going to be chaotic.

I have posted another good blog post by Karl Denninger below relating to the consumer spending report – followed by the Wall St. Journal article mentioned above.

jg – October 30, 2009
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Friday, October 30. 2009

Posted by Karl Denninger in Macro Economics at 09:05

Another Bad Economic Report (PCI/Spend)

http://market-ticker.denninger.net/archives/1557-Another-Bad-Economic-Report-PCISpend.html

How do you get “economic recovery” out of these numbers?

Personal income decreased $0.1 billion, or less than 0.1 percent, and disposable personal income (DPI) decreased $0.2 billion, or less than 0.1 percent, in September, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) decreased $47.2 billion, or 0.5 percent.

That looks like flat income and down spending to me.

Oh wait – we have to read past the first two sentences, right?

Let’s do that.

Private wage and salary disbursements decreased $11.2 billion in September, in contrast to an increase of $10.1 billion in August. Goods-producing industries’ payrolls decreased $7.8 billion, compared with a decrease of $6.3 billion; manufacturing payrolls decreased $1.5 billion, compared with a decrease of $4.1 billion. Services-producing industries’ payrolls decreased $3.4 billion, in contrast to an increase of $16.4 billion.

Wait a minute. I thought that income was flat? We have a decrease, a decrease, a decrease and a decrease. How do we get to flat with those?

Supplements to wages and salaries increased $0.1 billion in September, compared with an increase of $2.0 billion in August.


Proprietors’ income increased $0.7 billion in September, compared with an increase of $3.4 billion in August. Farm proprietors’ income decreased $1.6 billion, compared with a decrease of $1.2 billion. Nonfarm proprietors’ income increased $2.3 billion, compared with an increase of $4.6 billion.


Rental income of persons increased $5.4 billion in September, compared with an increase of $5.2 billion in August. Personal income receipts on assets (personal interest income plus personal dividend income) decreased $13.8 billion, the same decrease as in August. Personal current transfer receipts increased $17.3 billion in September, compared with an increase of $9.6 billion in August.

Ah.

Small business income was down compared to August, rental incomes were basically flat (compared to prior month), but income receipts on assets (dividends + interest on assets) decreased. Those are bad comps too.

The big Kahuna was government handouts, which was up big m/o/m. There’s the entry that kept PCI and DPI from collapsing.

Real PCE — PCE adjusted to remove price changes — decreased 0.6 percent in September, in contrast to an increase of 1.0 percent in August.

Consumers are not spending.

All in all, another bad report. Not a disaster, but certainly not the stuff of which “economic recovery” is made.

The evidence continues to pile up……

_____________________________________
OCTOBER 30, 2009, 8:58 A.M. ET

Consumer Spending Tumbles

Wall St. Journal

by JEFF BATER

Spending by Americans took a big tumble in September, as they lost a popular government subsidy and were left with a lousy job market and a credit crunch.

The 0.5% drop in spending was the largest since December 2008, when the recession was at its worst. Most of the drop was in durable goods, which include autos. Outlays on nondurable goods and services posted a gain from last month. Spending rose 1.4% in August, revised up from a previously estimated 1.3% increase. That gain was driven by “cash for clunkers,” which let motorists swap gas guzzlers for newer models. The car-rebate program started in July and ended in late August.

The subsidy helped push the economy to what the government reported this week was a 3.5% increase during the third quarter, seen as an end to the recession. But the recovery is expected to be slow, and questions abound to its sustainability once government stimuli fade. Another popular incentive, the first-time homebuyer tax credit, lapses in November, although the housing industry is trying to push an extension through Congress.

Commerce Department data Friday showed personal income flat compared to August while spending last month decreased by 0.5%. A key gauge of prices reiterated inflation wasn’t an immediate threat, as the economy fights to recover.

Economists surveyed by Dow Jones Newswires had forecast income held steady during September and spending fell 0.5%.

With nearly 10% of the U.S. labor force out of work, incomes aren’t going up much. September’s flat reading followed a 0.1% August gain, revised from an originally reported 0.2% increase.

Personal saving as a percentage of disposable personal income was 3.3%, compared to 2.8% in August.

As for price gauges in Friday’s report, the price index for personal consumption expenditures excluding food and energy, year over year, rose 1.3%. The year-over-year gain in August was also 1.3%. The Federal Reserve watches this core PCE index closely for signs of inflation pressures. Fed officials define their statutory goal of price stability as inflation of 1.5% to 2%.

On a monthly basis, the core PCE increased 0.1% in September compared to August. It has climbed at that rate five months in a row.

The PCE price index rose 0.1% in September compared to August. It rose 0.3% in August. Year over year, the PCE price index was down 0.5% in September. It fell at the same rate in August.

Write to Jeff Bater at jeff.bater@dowjones.com

It’s time to take your money off the table and go ultra-conservative. By ultra-conservative – I mean gold/silver and cash. At this point – leaving your money in anything else is tantamount to ‘letting it ride’, betting it all on black and rolling that little white ball – one more time.

Let me explain.

As you know, I’ve been watching financial markets closely over the past year. You also know that I believe we’re heading toward a significant economic decline based on the fact that our monetary system is unsustainable and what I see happening in the economy/markets today. Since I believe that we are very near some type of stock market ‘correction’, I have been closely watching markets for hints of anything out of the ordinary that could signal the next phase of this crisis.

I’m sending an email to you today because strange things have started happening. I have attached a couple of articles below from Chris Martenson that explains some of the market shifts we’re seeing – but he is certainly not the only one noticing. Many people are beginning to understand that markets are not behaving in a normal manner.

Before we get to Dr. Martenson’s blog posts – let me give you a few good reasons to get out of the market at this time.

1. Unemployment. For most of us, employment is the economy. Depending on how you measure unemployment – real unemployment in America is somewhere in the neighborhood of 16-22% if you count everyone who would work full-time if they could. Based on unemployment data released this morning for October – it appears that our economy lost another 200,000 jobs last month. Regardless of what economists & politicians tell us – no job recovery = no economic recovery. No economic recovery = no sales/revenue recovery for private/public companies.

2. Housing. Based on many mainstream media articles – it would appear that housing is rebounding somewhat. I believe that whatever positive news exists in the housing market is a direct result of the government’s $8K tax credit and artificially low mortgage rates (due to Federal Reserve actions). What happens when the tax credits expire and the Fed raises rates? The Federal Funds Rate will not hover near 0% forever. Based on our current Federal fiscal policies (massive budget deficits) – interest rates will rise dramatically at some point. What affect will this have on the stock market? Not good. We also should consider that many ‘option arm’ mortgages ($ billions) will reset in 2010 & 2011. I’ve read where the defaults on these exotic mortgages will be even worse than the sub-prime mortgage mess.

3. Commercial Real Estate. Two of the largest commercial real estate & small business lenders filed for bankruptcy last week (Capmark & CIT). This alone is very bad news for commercial real estate. With retail stores closing and retail/office vacancy rates increasing significantly – this isn’t going to turnaround quickly. When a billionaire real estate investor (Wilbur Ross) says that a ‘huge commercial real estate crash is beginning in the U.S.’ – it’s time to pay attention. With housing and commercial real estate in distress – bank failures will continue to accelerate. To date – 115 U.S. banks have failed since the beginning of the crisis. I’ve seen estimates that say anywhere from ‘hundreds’ to ‘thousands’ of banks are going to fail before this is over. Add in the fact that the FDIC insurance fund is effectively out of funds – and you have the beginning of a serious banking problem.

4. Dollar down – Gold up. We are watching the world’s confidence in fiat currencies slip considerably – and the U.S. dollar is leading this trend. Gold is no longer simply a hedge against inflation – it’s a hedge against the world’s fiat currency/monetary system. Gold hit its all time high this week and is approaching $1,100 an ounce. This is one of the recent market shifts – Gold has continued its march upward regardless of what is happening in other markets (currencies, stock/bond markets, etc.). This is the biggest indication that the world is losing confidence in our current monetary/economic system. If you’re worried about buying gold at a high – don’t be. $1,000 is going to look cheap – very soon.

                           U.S. Dollar Index

                            Gold

5. Over the past 7 months, we have watched the largest bear market rally in our history. After the crash of 1929 – there were many bear market rallies followed by significant declines. The DJIA did not recover to pre-1929 crash levels until the 1950’s. The current stock market rally dwarfs all of those rallies. Does a 30-50% stock market increase (depending on the index) really make sense – long term? Do corporate earnings support the increase in prices? Current Price to Earnings ratios are at all time highs. If you leave your money in the stock market – then you are betting that corporate earnings are going to increase significantly – and soon. History tells us one of two things will happen – prices are going to fall or earnings are going to rise. Based on the current state of our economy – you know what I believe is going to happen. I believe you’re looking at a bubble about to pop.

6. Corporate Insider Stock Selling is at all time highs. Corporate officers of publicly traded companies are selling their own stock (vs buying) at ratios of 30-40 to 1. This is an all-time record and it gives you good insight into what corporate officers believe is going to happen. Would they be selling at this magnitude if they believed their stock price was going to increase? Absolutely not. Do you think that you, your broker or your financial advisor has better information than the people running the largest companies in the world?

7. Large companies are hoarding cash. If everyone is confident in an economic rebound – why are so many companies increasing cash on their balance sheets? What does this say about their views regarding future sales/revenue and earnings?

From the Wall St. Journal (yesterday):

Jittery Companies Stash Cash
After Crisis, Big Businesses Hoard Most Bucks in 40 Years; Google’s $22 Billion Cache

In the second quarter, the 500 largest nonfinancial U.S. firms, by total assets, held about $994 billion in cash and short-term investments, or 9.8% of their assets, according a Wall Street Journal analysis of corporate filings. That is up from $846 billion, or 7.9% of assets, a year earlier.

8. If you are monitoring 3rd quarter earnings reports – then you’ve noticed that sales/revenue declines continue for most large companies. While many companies have beaten their ‘expected’ earnings – we see that sales/revenue declines of 5-30% (YOY) continue. Many companies continue to reduce expenses to meet earnings expectations – but I see no top line sales/revenue rebound. Can earnings increase significantly over time without top line growth? What does this say about current stock price to earnings ratios? What does this say about future stock prices? Couple this with corporate insider trading (selling at all-time highs) and that companies are hoarding cash – and we begin to see what people who know are thinking.

9. Our monetary system will continue to crush our economy until we have nothing. Honestly – a couple of very simple charts tell us all we need to know (below). Our monetary system requires our debt to grow – forever. If our debt stops growing – and our money supply begins to decline – all kinds of bad things start happening (loan defaults, foreclosures, bankruptcies, etc.). This is what you are watching today. Everything that is collapsing around us is happening because of our current monetary system (Federal Reserve – Fractional Reserve Banking System).

The U.S. needs to create approximately $4 trillion dollars in debt this year – just to keep the music playing. We simply can’t do it anymore. Our incomes have not kept pace with our debt and inflation is destroying the purchasing power of the dollar. The game is over. Most of us haven’t realized this because there are much more important things going on – like fantasy football and American Idol. I wonder what Paris Hilton is up to today?

We’re playing our fiddles while Rome burns.

       (Source: chrismartenson.com)

      (Income Adjusted for Inflation)

10. You might ask – will our political and financial leaders do something before markets collapse? Let me ask you – do you see anything changing in Washington D.C.? We’re already borrowing over $1 trillion dollars this fiscal year to meet our current budget obligations – and our political leaders are trying to push through a new healthcare bill that will cost an additional $1 trillion dollars – as if the rules of finance do not apply to the Federal Government.

If you think that our political leaders have the knowledge and wisdom to prevent something catastrophic from happening – I think a quote from Joe Biden from earlier this year should sum up our expectations – ‘We must spend more money to prevent bankruptcy’. Enough said.

How about financial leaders? The Federal Reserve is promoting government stimulus programs while flooding the financial system with new money. Can we borrow our way out of this mess? Of course not. The U.S. Government is currently insolvent (liabilities far exceed assets) and heading straight down a path to cash-flow bankruptcy (unable to pay our debts as they come due). Printing massive amounts of new money will eventually destroy the value of the dollar – and we’re already seeing this trend today.

Bottom line – if you would like to place a bet that our current leaders will somehow solve this crisis before something catastrophic happens – I’ll take the bet and give you great odds.

If your 401(k) or IRA does not have a cash/precious metal investment option – you may be wondering about taking a penalty if you remove your cash.

Let me put it this way. Let’s say you got lucky in Vegas and doubled your money over a short period of time. The house then gave you two options. You can take 70% of your money (initial money plus winnings) off the table and give them 30% or you can put it all in play and let it ride again. What would you do? What do you think the house wants you to do? Our current situation is obviously not a game and there is much more at risk. Whether you realize it or not – you would have better odds in Vegas. The deck is stacked against us.

Don’t let pride and/or greed blind you from logic and reason. Don’t ignore the warning signs because you are trying to get all of your money back from last year’s market decline. It’s time to cash in our chips and go home.

My guess is that there are lots of brokers and financial advisors out there touting the recent market gains and telling people to continue to invest in stocks/bonds. If you have a broker/financial advisor saying these things – then you need to ask yourself a few questions. Does past performance have any bearing on tomorrow? The correct answer is no. How is your broker and/or financial advisor paid? Do they make money by selling more stocks and bonds? Do they lose money if you cash out stocks and bonds? Are they doing what’s best for you or only trying to make more money?

If you feel confident that your advisor passes these tests – then you have one final question to answer. Do you and your advisor understand our monetary system? Does your advisor know that our system requires exponential debt growth – forever? The quick way to know if someone understands the system is a very simple question – do you know how money is created in our system? If your advisor gives you a strange look and scratches his/her head – you have your answer. I say this because most people have no idea how the system really works – and even fewer have the analytical ability (or take the time) to understand the consequences of the system.

Well – that’s it. This is the last email you’ll receive from me on the financial system/crisis. I would really like to believe that markets will not decline significantly – but math doesn’t lie. Apples will always fall to the earth when dropped and exponential systems in a finite world will always fail when given enough time.

In theory, exponential systems continue on into infinity. In the real world exponential systems follow an exponential growth curve and then eventually suffer a catastrophic collapse. Theory has a funny way of failing when it bumps up against this thing called reality.

Chris Martenson used this example to explain the dangers of exponential growth:

Bacteria grow by doubling. One bacterium divides to become two, the two divide to become 4, become 8, 16 and so on. Suppose we had bacteria that doubled in number this way every minute. Suppose we put one of these bacterium into an empty bottle at eleven in the morning, and then observe that the bottle is full at twelve noon. There’s our case of just ordinary steady growth, it has a doubling time of one minute, and it’s in the finite environment of one bottle. I want to ask you three questions.

Number one; at which time was the bottle half full? Well, would you believe 11:59, one minute before 12, because they double in number every minute?

Second Question; if you were an average bacterium in that bottle at what time would you first realize that you were running out of space? Well, let’s just look at the last minute in the bottle. At 12 noon it’s full, one minute before its half full, 2 minutes before its ¼ full, then 1/8th, then a 1/16th. Let me ask you, at 5 minutes before 12 when the bottle is only 3% full and is 97% open space just yearning for development, how many of you would realize there’s a problem?

Exponential growth is sneaky. It doesn’t matter if you’re talking about bacteria or debt. One minute – everything’s fine. The next minute your world is collapsing. This is our world today. It’s 11:59 and we’re acting like everything is A-OK. If you want something else to keep you up at night – take a look at a graph of the world’s population growth over time. It’s the most important exponential graph in the world – affecting everything on a planetary scale (in the example above we’re the bacteria and the world is the bottle). Once again, we see something today climbing the steep incline of an exponential curve – but that’s a subject for another time.

When things eventually fall over the edge economically – there will be lots of people who will find out where they placed their faith. The most important of all questions you need to ask yourself now is – where is my faith? Who do I serve? Does my well-being rise and fall with the stock market? Does the world toss me around – or do I have a firm foundation for my life?

Most of the world has no idea what is coming. You are not one of these people.

Be Prepared.

John – November 4, 2009
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Market Shift – Something Is Coming

Sunday, November 1, 2009, 8:36 am, by cmartenson

Executive Summary

• A break in past relationships between the stock market, the dollar, and gold, along with a breakout in the VIX, could be signaling the beginning of an important turning point

• Capmark declares bankruptcy (CIT is next).

• A commercial real estate emergency is upon us.

• Is gold signaling a continuation of the financial crisis, or something more?

As you know, I spend a great deal of time combing the available market information for clues about what is happening in the economy and where it may be leading us. This past week (October 24 – October 31, 2009) showed some amazing developments indicating that a major turning point is once again upon us.

This assessment is based on several key events, including the bankruptcy of Capmark Financial, which kicked off the week, the return of volatility to the stock market (reminiscent of past tops), and the bizarre strength in the price of gold on Friday, even as the Dow peeled off nearly 250 points.

Let’s take a look at these events one at a time…

Capmark Goes Belly Up

On Sunday, Capmark, one of the largest commercial real-estate lenders in the US, declared bankruptcy.

Capmark Seeks Chapter 11 (Wall Street Journal)

Capmark Financial Group Inc. has been one of the biggest lenders to U.S. investors and developers of office towers, strip malls, hotels and other commercial properties. An independent company that used to be the commercial lending unit of GMAC LLC, a financing affiliate of General Motors Co., it has been in financial straits for months and warned in September that it might have to file for Chapter 11 reorganization.

The filing comes amid similar troubles in the commercial-property arena. Mall-giant General Growth Properties and hotel-chain Extended Stay Inc. filed for bankruptcy in the past year, and more commercial-company real-estate ventures could fail, amid an inability to refinance debts and reduced customer traffic as consumers continue to pull back.

The difficulties are a blow to Capmark’s private-equity owners. In 2006, a group led by Kohlberg Kravis Roberts & Co., Goldman Sachs Capital Partners and Five Mile Capital Partners paid $1.5 billion in cash to acquire lender GMAC’s commercial real-estate business, which they renamed Capmark.

While the hundreds of billions in CRE loans that Capmark either made or serviced are now in jeopardy, the real problem here is that Capmark was up to its eyeballs in complex CRE derivative products:

The world changed this week (and most people have no idea).

I believe that the “temporary structural I-beam” that has supported our financial system for the past 8 months CRACKED on Sunday night with the bankruptcy of Capmark Financial. Capmark was THE ring leader in the Commercial Real Estate derivatives markets. Two days later GMAC declared they needed many more billions from the government. CIT will likely go down this weekend.

But the key to all this is that the Commercial Real Estate Derivative market is now IMPLODING. Everyone talks about the imploding Credit Default Swaps at AIG…which were bad but they are dwarfed by the derivatives related to Commercial Real Estate.

The Commercial Real Estate derivatives are the largest and most structured of all the derivative products. Just look at this 2007 presentation at a Mortgage Bankers Conference and you can see the insanity of these structured products.

http://www.mortgagebankers.org/files/Conferences/2007/CREFFebruary/DarrenEsser.pdf

For the curious, the linked PDF document in the above snippet provides a crystal-clear description of the mud that is a CRE derivative. If you can make any sense of that document, please call Fed right away, because they badly need to find someone who can.

While we wait for those complicated derivative products to blow up, and for Goldman Sachs to somehow make money on this badly failed investment of theirs, the more immediate issue is the more than $7 billion owed to unsecured creditors:

Capmark Files for Bankruptcy With $21 Billion in Debt

Capmark and its units owe $7.1 billion to the 30 largest creditors without collateral backing their claims, according to court documents.

The three biggest are Citibank NA, as administrative agent under the $5.5 billion credit agreement, with a claim of $4.6 billion; Deutsche Bank Trust Co. Americas, with claims of $1.2 billion and $637.5 million, respectively; and Wilmington Trust FSB with a claim of $500 million, according to court papers.

The bank with the largest exposure is Citi, possibly explaining their recent desperate move to jack up consumer credit card interest rates to 29.99%. Let’s see…how has the stock of Citi been doing lately?

Not too well, as it turns out.

Also possibly connected to this is the news that GMAC is reportedly seeking an additional $5.6 billion from the US government.

GMAC seeks $5.6 billion more from government

The money that will probably go to GMAC raises another critical issue: what happens if financial institutions that have already received government funds need more money to continue operating or lending money to consumers and businesses? It is currently assumed that the largest banks like Citigroup and Bank of America are now on the mend and will be able to pay the government back the money that they have taken under TARP.

The driving forces behind this blow-up are not all that complicated to understand:

U.S. office vacancies are at a five-year high, apartment vacancies have hit a 23-year record, and retail centers are showing the greatest share of empty storefronts since 1992, according to real estate research firm Reis, Inc.

The US overbuilt commercial and retail space, and much of it is now sitting idle and burning cash at horrific rates. A recent trip to a mall in Holyoke, MA revealed a few empty storefronts and so few mall shoppers with bags of purchased goods that I actually felt out of place carrying mine.

One of the bigger and better investors in this arena recently said this about CRE:

Wilbur Ross Sees ‘Huge’ Commercial Real Estate Crash

Oct. 30 (Bloomberg) — Billionaire investor Wilbur L. Ross Jr., said today the U.S. is in the beginning of a “huge crash in commercial real estate.”

“All of the components of real estate value are going in the wrong direction simultaneously,” said Ross, one of nine money managers participating in a government program to remove toxic assets from bank balance sheets. “Occupancy rates are going down. Rent rates are going down and the capitalization rate — the return that investors are demanding to buy a property — are going up.”

U.S. commercial property sales are forecast to fall to the lowest in almost two decades as the industry endures its worst slump since the savings and loan crisis of the early 1990s, according to property research firm Real Capital Analytics Inc. The Moody’s/REAL Commercial Property Price Indices already have fallen almost 41 percent since October 2007, Moody’s Investors Service said Oct. 19.

Ouch.

Given the size and complexity of the CRE market, the Federal Reserve, Treasury, and regulatory agencies will need to do some serious mopping up of this mess.

The problem is, the Fed is looking for ways to lighten its bloated balance sheet, not get in deeper right now. But I suspect that they will get in deeper. Not because they want to, but because they have to.

At any rate, I think that the Capmark situation was a key trigger event this week and that the ripples are just now lapping through the financial markets. One might think that we must be in a better position to handle such an event because we’ve been cleaning up the system for more than a year now. However, the reality is that there are more outstanding derivatives now than when we started. Even as the Fed and the Treasury were busy mopping things up over here, Wall Street was busy adding new risks over there.

Next up on my radar screen is CIT Group, which provides funding for small and medium-sized businesses. A freeze-up there would be catastrophic for tens of thousands of such businesses.

This company looks to be all but cooked at this point.

The size and scope of these disasters (Capmark and CIT), each of which would have individually rattled markets to their core just a few years ago, are now being shrugged off as “normal” – but they are not. These are extremely large, interconnected lynchpins of our overly-financialized economy.

A Change in Trend

In the markets this week, we saw some exceptional movements in the main stock indexes. The S&P 500 essential ground down all week from 1090 to 1040, losing 50 points by Thursday when the “miracle GDP report” was released, launching a 23-point gain.

This proved to be another sucker’s rally; the next day, it gave up all of those 20 points, plus 7 more to boot.

Inquiring minds would like to know: Has the stock market topped? Was this all a bear market rally that has now ended?

One indicator I watch for signs that a change in trend is upon us is the so-called Volatility Index (VIX).

VIX Explanation

VIX is the ticker symbol for the Chicago Board Options Exchange Volatility Index, a popular measure of the implied volatility of S&P 500 index options. A high value corresponds to a more volatile market and therefore more costly options, which can be used to defray risk from this volatility by selling options. Often referred to as the fear index, it represents one measure of the market’s expectation of volatility over the next 30 day period.

When the VIX is very low, there’s a good chance of a market selloff, and when the VIX is high, there’s a good chance for a market rally. When the VIX changes from low to high or vice versa, it is usually a pretty good mark of a change in trend.

Recently the VIX has been very low, and this week it broke out of its former down channel in a convincing fashion, leading me to wonder if a change in trend in stocks is finally upon us.

More qualitatively, volatility tends to mark market tops as opposing sides (belief systems) duke it out, often quite violently in the end. This was true in 2000 and 2007, and we may be seeing it here as well.

The breakout in the VIX certainly looks convincing. I will wait to see what Monday brings before making any moves. I am very close to reapplying my market shorts, which have been on the sidelines (in a bond fund) since January of 2009, but I will wait to see what sorts of rescues are attempted this week before going “all in.”

The Strange Behavior of Gold

What really stuck out for me this week was that gold, which has been tracking the stock market practically tick-for-tick for months, recovered in the afternoon, even as the stock market remained pinned to the floor.

The red arrows and the blue arrows cover the same time periods in both charts (which are at slightly different scales):

This was an unusual turn of events and got me thinking that perhaps there is something lurking in the background…another financial breakdown, or an Israeli attack on Iran, or something.

I have found that keeping a close eye on the behavior of gold is one of the better ‘early warning’ indicators out there. While it doesn’t ever tell us what is happening, it does inform us that something is happening. It has been unusually reliable for me over the years, but one has to watch it closely.

What I mean by this is that looking at just the daily close would not give quite as much information as looking at the intraday behavior. It is highly unusual to see that the break-away occurred at 1:00 (on a Friday!), because it means that it happened right at the close of the London Physical bullion market for the weekend and because Friday post 1:00 is nearly always a sell off to the close (I don’t know why, that’s just an observation).

If we compare the S&P 500 to gold on a percentage chart (below), we see that they have recently been tracking each other tick-for-tick, and even percent-for-percent…until this week.

In particular, the largest percentage spread occurred on Friday of this week, with gold only losing $3 while the S&P 500 gave up 29.

For those keeping track at home, the price of gold has once again closed higher than the price of the S&P 500 ($1044 vs. 1036).

Of course, we could also look at gold compared to the dollar, specifically the USD index, as it has been trading in near-perfect opposition to the dollar for quite some time as well. In fact, stocks, commodities, and currencies have all been trading in a quite unnerving manner, with upticks in the dollar being associated with downticks in everything else. I cannot recall a time like this in all my years of watching the market, but I’d have to do an exhaustive data analysis to see if this observation is accurate.

Dollar up; stocks, commodities, and gold go down. And not just in the US either – but all over the globe, in near-perfect lockstep. It’s almost as if the entire world’s collective asset markets are trading as a single, gigantic blob. Like an enormous ocean liner without a single bulkhead. If the hull is ever pierced, the entire thing will sink.

In this next chart, we can see the relationship between gold and the dollar. If you trace each dotted line carefully you’ll notice the near perfect “anti-dollar” behavior of gold (or is it the “anti-gold” behavior of the dollar?).

That last white candle for the dollar should have resulted in a pretty big sell-off for gold, but it did not. As I’ve already said, this is enough to make me sit up and begin watching everything with just a bit more vigilance and alertly scouring the weekend news.

Conclusion

Given the apparent lack of media concern over the bankruptcy of Capmark (beyond noting the facts), and given the odd strength of gold over this past week, my strongest suspicion is that we’ve got another financial crisis in the works. I believe that this is a ruined family weekend for many a Fed and Treasury staffer.

The stock prices of BAC, JPM, C, CIT, insurance companies, and other financial players are all signaling the same sorts of troubles I saw last spring before the big sell-off. While there always the possibility that another rescue will be engineered, we should be prepared for the possibility that one might not.

Speculating a bit, I think gold might be indicating that another Fed rescue is in the works, which will result in yet another round of dollar devaluation, as the world glumly concludes that the US is simply going to print its way out of every problem instead of taking its lumps.

Why the world has not already come to this conclusion is a great mystery.

I think that there is undoubtedly something brewing in the background, larger even than the nine bank failures announced this weekend. Something on the order of a renewed issue of insolvency for Citi, or perhaps a nasty derivative accident on the heels of the Capmark bankruptcy, is touching the core of the financial system.

The fact that the world’s paper-asset markets are trading in such tight correlation (and have been for months) is additionally worrisome, because it means that an uncontained derivative accident will spread through all markets, leaving none untouched.

I strongly advise keeping a portion of your holdings in gold, in your physical possession, and always maintaining a sharp eye on your bank to assure that it is safe from entering FDIC receivership. While there have been no issues so far with any FDIC-insured accounts, I think that there is a strong possibility that we will see much greater difficulties going forward, including the possibility of actual losses (should a funding crisis develop).

My sense is that something is (again) seriously amiss. But as always, you should trust yourself and your own assessment of the situation above all else.

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Severe Market Dislocation

Tuesday, November 3, 2009, 11:13 am, by cmartenson

This insider has been opened to allow for intra-day commentary on what is going on in the markets. As I see it there’s something quite profound going on at the moment, I just don’t know what it is yet.

As I wrote in the last Martenson Report, the behavior of gold was quite note-worthy as it ran counter to both the dollar and the stock market.

As of this writing, gold has suddenly vaulted to a new, all-time high even as the dollar remains in positive territory and the stock market is negative. Silver is following.

Here are the relevant charts.

That 60 cent move in silver over only 20 minutes is one for the books. I’ve not seen a move to the upside like that before, only the downside. Is it possible that stops work in both ways now in the metals markets? (note: that last sentence is said in jest…sort of…I’ve seen a lot of stop-clearing runs to the downside in silver over the years, this may be the first to the upside).

The Euro has broken down out of an intermediate uptrend channel (meaning it is weakening against the dollar) and this would ordinarily have resulted in an immediate gold (and silver) thumping. The stock market, inversely correlated with the dollar lately, is selling off as expected.

But not gold and silver. What gives?

Perhaps it’s the emergence of a surprise buyer for half the IMF gold sales?

India buys half of IMF’s gold for sale

MUMBAI/WASHINGTON, Nov 3 (Reuters) – The International Monetary Fund has sold 200 tonnes of gold to the Reserve Bank of India for $6.7 billion, quietly executing half of a long-planned bullion sale that has threatened to slow gold’s ascent.

The deal, which surprised traders who expected China to be the most likely buyer, will relieve the gold market of some uncertainty over how and when the IMF would sell 403.3 tonnes of gold, about one-eighth of its total stock. The deal will increase India’s gold holdings to the tenth largest among central banks.

Perhaps the movement in silver is related to the GATA report that several million ounces had been recently withdrawn from the Comex warehouses?

Perhaps there’s another monetary/fiscal crisis in the works?

What are you seeing?