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Ripping off Seniors - 8/30/09

Dear All,

You can choose to believe the barrage of spun government and media reports that purport to indicate that things are bottoming and that there are "green shoots" or you can do your own homework. If you choose the former you'll feel better temporarily because everyone naturally wishes for the best. You'll also get blind sided along with most everyone else.  Optimism and pessimism have no place in this. Both are equal obstacles to discovering the truth and drawing conclusions as to what's to come. There has never been a more concerted effort to confuse and misrepresent. Maintaining social order and getting "Boobus Americanus" (a term coined by Doug Casey) to believe that we're merely in a severe recession that is ending is the federal government's objective. There is more to be ascertained from your own experiences and anecdotal information than the official spin. Amidst all the green shoot talk, even Americans with good credit are having their credit card lines frozen or reduced. This is unprecedented. In a country with a debt-choked, credit dependent population, ask yourself how this squares with the idea of  consumer spending picking up.

For the first time in decades senior citizens will not be receiving any cost-of-living adjustments to their social security checks to which they are legally entitled. According to shadowstats.com, the true CPI inflated at 5.45% for the 12 month period July 2008 through July 2009. The BLS however officially computes the inflation rate at a negative 2.11% for the same period so, there will be no adjustment in social security payments. As the chart below shows, social security recipients have been victims of this federal larceny since the Reagan administration, although under the Clinton administration it was taken to another level entirely. The CPI index has been thoroughly corrupted and bears no resemblance to the real inflation rate. The cumulative effects of these annual understatements is that recipients' social security payments have been regularly decreasing in real, inflation adjusted terms, rather than maintaining their purchasing power as promised, notwithstanding the COLA adjustments which recipients have received.

Click here: The Associated Press: Millions face shrinking Social Security payments

   

Howard Davidowitz is one of the very few Wall Street analysts worth listening to.

Click here: “In the Tank Forever”: U.S. Consumers, Retailers in a : Tech Ticker, Yahoo! Finance

As I've been saying, the Fed has lost it's mojo...Click here: There's no will to fight inflation - MSN Money

A government official has made news by speaking the truth -- and a Fed governor no less!  I can only imagine the admonishment he subsequently received from his brethren for straying off the reservation.

Click here: Real US unemployment rate at 16 pct: Fed official

[Note: the unemployment rate is actually even higher -- currently 20.6% according to shadowstats.com].

It is hard to contemplate what has occurred in this country in such a short period of time. On this ranking of the world's 50 safest banks, only five are in the U.S. and the first U.S. bank doesn't appear on the list until no. 32. Click here: Global Finance Magazine - WORLD'S 50 SAFEST BANKS 2009

The United States abused the privilege of possessing the world's reserve currency and we are entering an era that will no longer be dollar-centric. The dollar is now a currency to be dis-hoarded, rather than accumulated by nations with savings and trade surpluses. If not for it's possession of the world's reserve currency, living standards in the United States would have dropped long ago when the U.S. ceased being an exporting nation and government and household debt levels were still reasonable. Using highly regarded currency, the U.S. was able to export paper (dollars) to Asia -- principally China -- and swap it for imported merchandise of all sorts. Asia would then turn around and invest these dollars by purchasing interest bearing Treasury and government debt. This arrangement sustained a consumer economy in the U.S. without the United States producing any net exports of real goods. So long as our Asian bankers were satisfied with the arrangement, life appeared to be grand here in the U.S.  But Asia no longer likes this arrangement. They now view the dollar as a problem. The trend accelerated with the events of the past two years but the Fed's announcement of it's "Quantitative Easing" policy has pushed it off a cliff.  This means contracting foreign demand for U.S. dollar denominated debt, higher interest rates, a lower dollar, higher costs of imported goods, and the loss of financing for America's profligate and unsustainable debt driven consumption.

It also means among other things, a much higher gold price. No currency on earth has performed as well as gold over the past decade. That trend is going to accelerate and the profit potential for the precious metals and gold and silver equities is as spectacular today as their performance has been over the past number of years.

Patience and steadfastness is the key. 

Jeff

Capital Outflows - 8/22/09

Dear All,

Yesterday Bernanke and his fellow failed economists met in Jackson Hole to announce that world economies were recovering.  The media lapped it up.  Ignore these pronouncements. The Fed is no longer a player and says very little worth paying attention to. It suffers from erectile dysfunction.

The United States is rewarding failure -- not only in the financial sector but by deploying massive amounts of capital to dying industries.  Ultimately we will need to produce our way out of this. The federal government's giveaways of huge quantities of freshly printed currency does not qualify as productivity.

This chart is all you need to view in order to know the direction of the U.S. dollar.  The United States bond market is experiencing unprecedented and alarming capital outflows. Note particularly the steepness of the abandonment.  Not only is there nothing occurring to reverse the trend, it is accelerating to the downside. 

It would not surprise me in the least if the U.S. Treasury is soon forced to commence offering it's debt denominated in currencies other than the U.S. dollar.

 

It certainly is difficult to reconcile Pimco's outlook for the dollar with its role as the largest fund manager of dollar denominated debt.

Click here: Pimco Says Dollar to Weaken as Reserve Status Erodes (Update3) - Bloomberg.com

I've said repeatedly that there is going to be a bailout of the FDIC.  In the interim the FDIC is behaving much like any entity on the brink, feverishly trying to unload assets. The number of bank failures however will soon overwhelm it.

Click here: Pressured by Bank Failures, F.D.I.C. Wants to Bolster Fund - NYTimes.com

Click here: Toxic Loans Topping 5% May Push 150 Banks to Point of No Return - Bloomberg.com

The Washington Post reported this week that the largest share of foreclosures during the first quarter of 2009 shifted from sub-prime loans to prime loans.  The breadth and effects of unemployment are expanding. In the interim, does this sound to you as though the worst is behind us?

Click here: ‘The World Is in Trouble’: Deutsche Bank Chief Economist - Financials * Asia * News * Story - CNBC.com

A few very worthwhile links:

Chris Martenson reveals that during the U.S. Treasury auctions in the first week of August the Federal Reserve secretly bought nearly half of the Treasuries which were auctioned. When the Fed talks about reducing or ceasing their purchases of treasuries it is blatantly lying.

Click here: 7-year - The Fed Buys Last Week's Treasury Notes - Aug. 6, 2009 | Blogs at Chris Martenson - 7-year, Auction, Chri

Here is a recent a lecture given by William K. Black (and follow-up interview of him by BBC journalist Ian Masters),  the former litigation director of the Federal Home Loan Bank Board who investigated the Savings and Loan disaster of the 1980's. Black is professor of economics and law at the University of Missouri and an expert on white collar criminology. He discusses the massive criminal fraud undertaken at the top echelons of finance, the fact that Wall Street institutions knowingly and willingly participated in the fraud and that they remain essentially unpunished, if not rewarded. 

 Click here: Information Clearing House - ICH

This is not an anomaly.  It is ubiquitous and underreported.  Retirement for most Baby Boomers is going to suck.

Click here: Mish's Global Economic Trend Analysis: CalPERS Admits California "Pension Costs Unsustainable" - So What To Do Abo

We are in the midst of a debt collapse.  What makes this one so catastrophic is the unprecedented amount of debt relative to virtually all metrics and the presence of OTC derivatives which move the metrics exponentially.  The only cure is extreme pain. If you insist on holding substantial U.S. dollar denominated assets you're going to regret it. The assets once considered safest will prove to be otherwise. Even holders of U.S. Treasury "TIPS," whose yields correlate to the Consumer Price Index, will find themselves ripped off by the Treasury and inadequately protected from the ravages of inflation (For a tutorial on how the CPI is corrupted go to shadowstats.com).

The action in gold lately feels like watching paint dry but it belies what's building.  In reality gold and silver are coiled springs. The dollar is being propped up for the time being but it's futile, as is the gold and silver price capping.  Silver, gold and the precious metals stocks are screaming bargains and a generational investment.

Stand your ground.

Jeff

Consequences - 8/13/09

Dear All, 

Yesterday the financial world waited for the Fed to issue a statement which would mean absolutely nothing. The Fed did not disappoint.  The U.S. Federal Reserve is merely a passenger in this fiasco although it pretends otherwise. Think of someone threatening and brandishing a gun, which when the trigger is pulled a tiny flag appears with the word "POP!" written on it.  That is the Federal Reserve.

Truth has become passe.

The Fed states that things are "leveling off" when in fact things are deteriorating. Wall Street and Washington's promotion of the idea that decades of mal investment, excessive leverage and unsustainable debt-driven spending can correct itself in a matter of two or three years is cruel. It misleads Americans with a false sense of hope and blindsides them to the reality of what's in store. We are only in the second or third inning of a depression that is accelerating with the most serious pain well ahead of us. The economy is contracting and unemployment, particularly in the private sector is rising.  With all its spending, TARP, clunkers, etc., government has done nothing to address any of the structural problems which caused the collapse. Most significantly, OTC derivatives remain on balance sheets at fictional valuations. Other than printing obscene quantities of currency in the hope of inflating its way out, producing bogus headline economic statistics and nonstop spin, there is nothing the government can do to avoid nature's consequences. Serial market interventions, statistical lies and spinning will all fail --as they always have --and inflation will succeed only in lowering living standards.

Lunatics such as myself are no longer the only ones warning about terrible inflation.  It is working its way into mainstream thinking.

"With policymakers around the world throwing massive conventional and unconventional monetary and fiscal stimuli at their economies, we think that it is worth exploring the black swan event of very high inflation or even hyperinflation. While such an outcome is clearly not our main case, the risk of hyperinflation cannot be dismissed very easily any longer, in our view."  -Morgan Stanley research note, via Financial Times

While I'm at it, it has been apparent to me, going back at least ten years, that both government and private manipulation of our financial markets is widespread. This has placed me squarely in the "conspiracy theorist/space alien" camp. But, slowly this view too is working its way into the mainstream, the ubiquitous negative press relative to Goldman Sachs being the most obvious. Take a look at this from the esteemed Richard Russell, proprietor of the Dow Theory Letter. Russell is one of the deans of investment letter writers and has been at it for about half a century.

"I guess I should come clean and admit it. After reading all about Goldman Sachs and studying Paulson and Geithner and former NY Fed Chairman Friedman, I have become almost hopelessly cynical about the markets. Is anyone ethical? Is anyone honest? I'm starting to wonder. Where money is concerned, is there anything Wall Street or the bankers won't try?   Rumors of manipulation have been around ever since I started writing Dow Theory Letters in 1958. I always pooh-poohed those rumors, believing that it was the losers who always blamed their losses on manipulation. But now I'm not so sure."

Now read what Russell, a great student of markets who has seen much in his lifetime, goes on to say about the long term effect of manipulation and the nature of markets.

"...The market can be manipulated on a daily basis or maybe for a week. But in the big picture, as to the primary trend, I don't believe the stock market or the economy can be manipulated. Although heaven knows that Washington is trying -- throwing unprecedented trillions of dollars at the US economy. It's never been tried before, but won't trillions of dollars be enough to manipulate the great tide or the primary trend of the market? Maybe for a few weeks or even a few months, but I still don't believe that the primary trend can be halted or reversed, no matter who tries and no matter with how many Federal Reserve dollars.....The study of the market is part theoretical and part philosophical, and that is what makes it so fascinating. There are certain forces that are so giant, so irresistible that man has not been able to harness them. The tide of the ocean is one. The revolutions of the moon around the earth is another. And I believe the primary trend of the market is a third. The stock market is an invention of man, but although man invented it, like Frankenstein, the tide of the market, the great primary trend of the market, is beyond the power of its inventors to manipulate."   --Richard Russell, Dow Theory Letter --August 5, 2009 

Gold is the natural enemy of a central bank. It is the canary in the coal mine; the ultimate barometer of financial stress and the only currency that is not simultaneously someone's liability.  A rising gold price measured in a nation's currency is anathema to that currency's brand manager, it's central bank.  A central bank without the restraint of gold backing will do everything possible to prevent gold from being revalued upward against it's currency.

There is one word that should become your mantra as you observe events. The word is"consequence." Continually ask yourself what the consequences are of the madness you see. For every action there is a reaction.  For every bailout, for every act of monetization and for every government program there are unprecedented quantities of fresh currency being printed. The consequence of this is inflation, a lower dollar, lower American living standards, higher interest rates, and a higher gold price. I will not tell you how high a gold price I foresee because you will think I'm even madder than you probably already do.

As gold makes its way higher the Treasury and Fed are going to continue to fight it every step of the way, doing everything in their power to shake your comfort in the one thing most worthy of your confidence .  They will lose because the dollar is terminal and there is no practical weapon with which to reverse that. You'll have to endure what they throw at you though. Your biggest enemy will be your emotions and your intellect your greatest ally. If you can keep your emotions calm and your intellect in control during these attacks and not be shaken out of your gold, silver and gold/silver equities -- you'll be richly rewarded. 

Steve Saville provides pithy commentary in his "Paying People to Break Windows."

Click here: Aug 10, 2009 Paying people to break windows Steve Saville 321gold ...inc ...s

In closing, more evidence that you can always rely on the tyranny of the state to remind that wherever government appears, Kafka collects royalties.

Click here: Courthouse News Service

All the best,

Jeff

Spin Alert! - 8/8/09

Dear All,

I felt it important to put this out after yesterday's "unexpectedly good" employment numbers. The headline number, which is all most seem to pay attention to, showed a fall in unemployment. As usual, the actual report tells a very different story.  Here is some commentary from some who have actually read the report.

 

From Helicopter Economics:

 

"...When deciding how credible this mornings jobs reports is, you only have to look at one number. According to the Bureau of Labor Statistics, employment in the auto industry went UP by 28,000 last month. Nobody believes this, and I mean nobody, not even the biggest government boot looking financial reporters. Even the mainstream media cautioned that this could be a 'statistical quirk', the polite term in the numbers industry for lying. You should assume that finding one 'statistical quirk' in a report is similar to finding one roach in your apartment. In both cases, there's a lot more that you're not seeing."

 

From Shadowstats:

 

 "Adding ['discouraged workers'] back into the total unemployed, unemployment in line with common experience — as estimated by the SGS"-Alternate Unemployment Measure — held at about 20.6% in July....The unadjusted annual declines in the June and July payrolls remain the deepest since a similar decline at the trough of the 1958 recession, but still shy of the 4.9% trough seen in the 1949 downturn. When the 1949 annual low growth is broken, most likely next month, the annual percentage contraction in payrolls will be the most severe since the production shutdown following World War II. "

 

 

To the NY Times' credit, this quote actually appeared in their story  this morning:

 

"If there had been no drop in this [discouraged worker] labor force participation, if all those people had continued to look for work, then the unemployment rate last month would have ticked up, to 9.7 percent" [EMPHASIS ADDED]   --Nigel Gault, chief domestic economist at IHS Global

 

The stock market and dollar of course rallied on this headline with the help of intervention  Americans want badly to be bullshitted and they are getting it.  It is all grotesque but extremely gold bullish.

 

More later in the week.

 

Jeff

 

City Council Meeting - Santa Cruz, CA - 8/5/09

"Give me control of a nation's currency and I care not who makes the laws." -- Mayer Amschel Rothschild 

Dear All, 

I suppose if there were a financial metaphor for this orgy of government waste it would be the "Cash for Clunkers" program. Only in an upside down world populated by Keynesian perverts would the endeavor of giving away money be referred to as a "success."   We now live in a country where the government buys our old cars in order to "stimulate" the economy and "monetizes" its own debt in order to make ends meet. Did none of us have mother's who taught us that money doesn't grow on trees? 

Surely there are more efficient ways of giving away money than through such convoluted processes as dreamed up by politicians and beaurucrats but alas, what function would the government serve if not to create inefficiencies? The steel "Clunkers" by the way will prove to have the same residual value as the worthless "paper clunkers" the Fed took on its balance sheet under TARP (remember?...the assets the Fed assured us might one day make money for the taxpayers?).  Meanwhile the U.S. Federal Reserve is purchasing U.S. Treasuries because there are no longer enough willing buyers, and this final act of desperation is referred to as a "policy." 

This is just madness. Extreme examples illustrate the point best. If the  "Cash for Clunkers" program was a "success", why stop there?  Why not  "Cash for old rusty fridges,"  "Cash for gas guzzling lawnmowers" and "Cash for vibrators?"  What about the apparel industry? Why not "Cash for old smelly tee shirts?" Defenders will argue that the success lies in the particulars, that this was a targeted program for a specific industry in dire straights with an environmental benefit.. Nonsense. If it is absurd in the extreme it is absurd in moderation.

When you hear Bernanke and other Fed members talking about their withdrawal of  the unprecedented liquidity the FED has created when the time comes, it is a complete bluff.  Bernanke has made reference to a variety of tools the FED could make use of as part of it's exit strategy to drain the gargantuan reserves. In fact, there are several tools that could be made use of. "When the time comes" however the Fed will use none of them, for reasons the Asian Times well understands.

 "...Past experience showed that any slightest attempt to drain reserves could easily send interest rates to two-digit levels. Would the Fed pay high interest rates on reserves, say at 19%, which was the federal funds rate in 1981 when the Fed slightly drained banks reserves, compared with 0.25% it is paying now? If it would, that would entail huge subsidies to banks, at the expense of the US Treasury, with serious implications for financing the US budget deficits." 

Click here: Asia Times Online :: Asian news and current affairs

While theoretically an option, the reversal of the massive liquidity injections would send the economy into apoplexy. Moreover, the Fed has become nearly 100% politicized so the notion of an independent Fed is now a quaint one. There is no Federal Reserve exit strategy from it's quantitative easing policy and QE is only going to continue. The Fed's only exit strategy applies to the sweet private sector jobs Fed governors will secure at the conclusion of their tenure.

The FDIC is going to need a massive bailout.  As the deterioration of commercial real estate loan portfolios (which comprise roughly half of the assets at insured institutions) accelerates so too will bank failures.The Pension Benefit Guarantee Corp. will also have to be bailed.  The scope of underfunded U.S. pension liabilities is absolutely staggering and not being discussed. Both entities are barely capitalized. More dollar dilution on the way.

The consequence of this ongoing massive liquidity drop is a sharply lower US dollar, the worst inflation ever to hit the United States, and a gold price that will shock. Most Americans believe that unless they vacation overseas the value of the U.S. dollar is of no consequence to them. They are about to receive a crash course in practical economics.  Americans as a whole, hoping that the worst of this is behind them, are buying into the spin, the phony government statistics, the propped up stock market (a goosed bear market rally on low volume) and clunker talk.  Their only reference points of economic trough are the bottoms of recessions they are familiar with in their lifetime. That's about to change.

In closing I'm including a video of testimony by an apparently concerned citizen at a City Council meeting in Santa Cruz, CA.  The subject she is addressing is secondary. While I cannot discern precisely what it is that's whirling around in her head, as you watch this testimony, tell me if her "thought process" seems to you any less lucid than that of the average economist or politician.  Certainly, she's less disingenuous.

I'd personally be no less comfortable having her as a steward of my tax dollars than I would Barney Frank.

Click here: Brilliant Woman Solves All of California's Problems - CollegeHumor video

 

All the best,

Jeff