Thursday, October 4, 2012

Form vs. Substance

Unless we begin to close this gap [the widening Govt spending deficit as a percentage of GDP], then the inevitable result will be that our debt/GDP ratio will continue to rise, the Fed would print money to pay for the deficiency, inflation would follow and the dollar would inevitably decline. Bonds would be burned to a crisp and stocks would certainly be singed; only gold and real assets would thrive within the “Ring of Fire.” -  Bill Gross, Pimco Asset Management
I have nothing to say about last night's Presidential debate other than that Romney cleary kicked Obama's ass - thoroughly.   The reason I have nothing to say about it is that there was absolutely zero substance behind the statements and rebuttals.  I heard nothing concrete, with specific examples, of how either candidate would specifically address the catastrophic fiscal and economic problems we face.  Great, Romney got an "A" in debate class and Obama got a "D."  I will be surprised if it makes much of a real impact on support for either candidate from actual voters and it will likely not move the "needle" on the distribution of electoral college votes.  But it sure sells a lot of advertising for all the network news programs who broadcast and dissect the empty rhetoric.

Having said that, do not make the mistake of believing the mass media myth that the stock market is staging a big rally today because Romney won the debate.  That's just outright silly.  To begin with, from a percentage standpoint, gold, silver and mining stocks are up significantly more than the broad equity indices.  The reason the markets are higher is seeded in my comment about the lack of actual details or gameplan for the implementation of fiscal and economic policy.  In fact, in that absence - beneath the platitudes and empty campaign slogans - was the implication that the market can expect a whole helluva lot more money printing and Treasury debt issuance. That is the reason the precious metals and mining stocks are leading the markets higher and why the dollar is getting hammered today.

Now that I've got that out of the way, I will focus on the real issues affecting our system.  The biggest issue is the strength - or lack thereof - of our economy.  Yesterday a "touchy feely" economic report, the "services" ISM index, was released and it showed a slightly better gain than expected.  Of course the commentators and analysts jumped all over this as a signal that the economy is improving.  Of course, when you look at the individual components of the index, a different picture emerges.  The prices component jumped 3.8% - vs. a 1.8% gain overall for the index - and the employment component declined 2.7%.  Not sure how that can interpreted as anything but grim.  But since Bernanke has pegged his QE policy to employment, it means we will see more QE than was announced after the last FOMC meeting.

Today the factor orders metric for August was released.  It showed 5.2% drop.  Orders for aircraft and computers plummeted.  Not mentioned in the media about the report is the fact that the 2.8% gain for July was revised lower to 2.6%.  The Government loves to play this game of reporting a number and then revising that number down the next month, knowing most eyes are focused only on the current month's metric.  They are really notorious for doing this with the jobless claims number.  In fact, just today the weekly jobless claims number was reported 367k in jobless claims, a little lower than expected but higher than last week's number.  It just so happens, that last weeks number was revised higher by 4k to 363k.  The Government plays this game every week with the jobless numbers.

Just a note ahead of tomorrow's non-farm employment report for September.  The mean expected number is a 113k gain in jobs.  I would not be surprised to see the number reported to exceed this estimate.  Every four years there's a seasonal gain from temporary employment connected with the Presidential election.  Because a good number will benefit Obama, I'm sure the brain trust at the BLS has been instructed to conveniently leave out the "seasonal adjustments" that might otherwise be used to account for the temporary election-related hiring.  Just speculation on my part, but I bring it up in case a "good" number is reported. 


  1. Financial Fukushima: US Big Bank Derivative Bets Double in Six Years To $236 Trillion

    Big Bank Derivative Bets Nearly Double In Six Years
    By Peter G. Miller
    October 4th, 2012

    America’s major banks now hold derivatives with a notational worth of $225 trillion – about a third of the world total. No kidding. Trillion.

    And that’s up from a mere $120 trillion six years ago. Rather than being weened off derivatives, America’s big banks are more deeply entrenched then ever.

    Hopefully Wall Street has it figured out just right and there won’t be any major losses, say a few billion here or there. After all, when has Wall Street ever been wrong about financial instruments?

    “Derivatives are dangerous,” says Warren Buffett. “They have dramatically increased the leverage and risks in our financial system. They have made it almost impossible for investors to understand and analyze our largest commercial banks and investment banks.”

    While many in Washington would like to limit derivatives trading, make such trades open to public scrutiny or both, Wall Street is vehemently against regulation.

    In fact, there’s a simple way to resolve derivative worries. Allow unlimited derivatives trading — but only by individuals and partnerships willing to personally take the risk of profits and losses...

    According to the Bank for International Settlements (BIS), the notational value of derivatives at the end of 2011 was $648 trillion.

    The gross credit exposure from these securities was believed to be $3.912 trillion according to the BIS — that’s up from $3.5 trillion at the end of 2009.

    But what if the estimates are wrong?

    1. Don't worry derivatives will continue to expand until they chew way through the whole of the depositor of the US. Since MFG we have gone from looking at the equity of financial institutions to looking at all the on balance sheet footings (customer accounts) and off balance sheet footings (custodial accounts) as available "security" that can be demand and liberated by the derivative trading accounts.

  2. Geez, Dave, you really are a cynical hard ass with this particular blog entry, aren't you? (translation: I like it!). Insofar as the Presidential debates are concerned, whatever. Sure, Mittens slapped the teleprompter-in-chief silly, but so what? I wouldn't be surprised if Okenya comes back in the next debate and wipes the floor with Mittens, and back and forth it goes, like a Stanley Cup playoff that goes the full seven games just to keep the sheeple dazzled so that they buy into the whole sordid spectacle. Ugh. At any rate, I'll say that Mittens wins on November 4th since Wall Street rules the country and he's definitely Wall Street's puppet.
    As per the economic reports and indicators, and today's market action, you're spot on as usual. No doubt the boys at the BLS will massage tomorrow's non-farm payroll number so that shit looks like shinola, and who cares about a month from now? A whole month is forever to the average joe sixpack. Sordid, sordid, sordid.

  3. Back to gold - eventually

    No less an authority than Goldman Sachs CEO Lloyd Blankfein said at the Clinton Global Initiative last week that the United States could risk its status as the world’s reserve currency if congress fails to act and the “fiscal cliff” program of spending cuts and tax increases is enacted January 1.
    Actually Blankfein’s statement was the reverse of the truth; enaction of the “fiscal cliff” program, halving the US budget deficit at a stroke, is one of the few outcomes that could AVOID the US losing its reserve currency status. But on the assumption that the politicians continue to misbehave after November 6, that trillion-dollar deficits continue, and the US does indeed over time lose its reserve currency status, what will a world without a reserve currency look like?

    There is no relatively recent historical parallel we can examine to answer that question. The world has had the dollar as undisputed reserve currency since 1945, or really since 1939. Between 1914 and 1939 there were two reserve currencies, the dollar and sterling, with sterling more used in the 1930s than the 1920s, because that decade, once Britain went off the Gold Standard, was a period of robust health for the British economy, while the United States was mired in depression and isolationism. For more than a century before 1914, the world's undisputed reserve currency was sterling, although there were various regional alternatives.

    To see a world with multiple reserve currencies, you thus need to go back to a world before sterling's sway, which in practice means before Britain's smashing victory in the Seven Years War (1756-63) took it to both military and economic supremacy.

    The world's reserve currencies will thus primarily be smaller units, whose importance will swell as their sponsors see the opportunity to obtain massive seignorage revenues from having their currency circulate worldwide. There are likely to be several varieties of reserve currency, each tailored to the needs of particular users.

    Asset-only investors will be in despair at the difficulty of finding a unit that does not cause their assets to shrivel like icebergs under a Mediterranean sun; consequently they will demand reserve currencies that pursue Volckerite monetary policies and behave as far as possible like Gold Standard vehicles.

  4. Dave - I personally enjoyed watching BO get taken behind the woodshed last night. Even better was seeing all the MSM lapdogs just lose it. Our current TMZ/affirmative action president was challenged for the first time in a long long time, if ever, and couldn't handle it.

    Did anyone hear anything said about the Fed last night? Nope. Or about the dollar losing value, etc... Nope. That said,I'm still writing in Ron Paul on election day.

    1. I'm writing in "Dave in Denver".

    2. LOL. Please don't. I'll for sure end up on the NSA watch-list if I'm not already.

  5. Hi Dave
    Who do you think will win the election? Although neither of them can address the fundamental problems, it still matters if you trade.

    1. I think Obama has it won and he could lose all three debates and it won't change the outcome.

  6. Hi Dave

    Everything is fine!

    Il Folletto

  7. Torino

    Not very fine!

    Il Folletto

  8. Central Banks Gone Wild: Money Is Now a Total Fiction

    In the past four years, central banks have attempted to resurrect economic health by adding new charta to the system with perfect exclusivity biased to institutions and businesses that have destroyed their past stores of capital, despite the very visible fact that said destruction of capital is the quintessential measure of real economy inefficiency. If the destruction of money has meaning, then so does the creation of money, or at least the methodology of determining how money is acquired. Bernanke's theory, shared by all the major central banks on this globe, is that economies can only recover when capital is disadvantaged in favor of meaningless money. This is not just the theory he espouses in public speeches, it is the operative theory put in practice by central banks in every major economy.

    The primacy of meaningless money is such that the entire system of savers, the majority of which have created actual capital and acquired value, need to be hamstrung by ZIRP in favor of institutions that destroyed real capital in the inefficient pursuit of the very policies that central banks directed in the first place. Success is to be shunned and disfavored in the socialized and institutionalized process of debt creation from the very firms that have proven beyond a doubt that they are not capable of maintaining economic efficiency. The ascendancy of chartalism is the only manner in which such a backward system could actually exist.

  9. Wall Street Mafia

  10. Cadavers Collateralized Debt
    In the second half of the show, Max Keiser talks to Dr. Michael Hudson, author of The Bubble and Beyond: Fictitious Capital, Debt Deflation and Global Crisis, about Timothy Geithner's role in facilitating the takeover of the banking system by the Wall Street mafia and about the oligarchic counter revolution against democracy in Europe.

    watch it

  11. The banking systems is rigging the system with QE to get Obama re-elected since he has done them so many favors. I'll have fun after the election telling my Obama worshipers that the banks re-elected Obama. What irony.