Friday, December 14, 2012

Industrial Production, The Fiscal Cliff And Socialism

It has become crystal clear that Detroit automobile manufacturing employees who live in a home in which the mortgage is underwater are going to be in an economically advantageous position when the Fiscal Cliff is resolved.
The Federal Reserve released its monthly industrial production report for November today.  It came in at a "hot" up 1.1% vs. .3% expected.  As has been the pattern for almost all economic reports this year, October's number was revised lower from -.4% to -.7%.   It high highly probable that today's report will also be revised lower next month.  Here the actual report:   LINK

It is always important to analyze the "sub-index" components that go into producing the headline-grabbing overall index that has the financial media doing cartwheels.  Once you look at the "guts" of the report, you'll see that the overall number is of low quality and not sustainable without a lot more Government spending.  On a side note:  this is one reason I fully expect that one way or another a Fiscal Cliff agreement will be hatched to kick the spending deficit/debt accumulation catastrophe down the road some more.

If you pull up that report and scroll down, you'll find a section called "market groups."  There you'll find this note in reference to automotive products: "the index for automotive products rose 3.4 percent, its first increase in five months."  If you scan through the rest of the footnote, it's obvious that auto parts were the most significant factor in fueling the November over October gain in industrial production.  The November number that will be revised lower next month.  I say this because if you look at this chart posted by Zerohedge earlier this month, you'll see that General Motors has essentially "stuffed" its dealer inventories with a record amount of inventory in November:  LINK

Please understand that General Motors is controlled by the Government and therefore is incentivized to use taxpayer dollars to support sales at General Motors in order keep the massive union labor force employed.  In fact, the Government subsidizes every part of GM auto production from the factory floor to the end buyer.  GM subsidizes production by subsidizing sales.  It does this because the floor financing used by dealers to take delivery of unsold cars is provided by the old GMAC.  GMAC is owned by the Government.  A sale at GM is recorded when the car leaves the factory floor and goes to the dealer, not when the end user buys it.  After the sale is recorded, GM could give a crap what happens because it has received a transfer of money from  GMAC (Ally financial which is owned by the Treasury) and now the dealer is on the hook for unsold cars.

Then, the dealer uses floor financing from GMAC.  If the car never gets sold, GMAC  the Treasury  the Taxpayer is on the hook.  You see how this works?  The fact that there's record inventories of GM cars piled up on the dealer floors is likely the result of the Government triggering production in excess of end user demand.  This is why, in my view, a big part of the reason that the industrial production number looks so robust for November.  I only have the dealer inventory data for GM because that's all Zerohedge tracks and I don't have time to hunt down numbers for Chysler.  But  I would bet that there's a similar dynamic for Chrysler, which is 6% owned by the Government.

This is all part of the insidious socialism that is engulfing our system.  It's a massive transfer of taxpayer wealth that is going into the bank accounts of the upper management at GM and to the giant auto union at GM.  This is not an anti-Obama/Democrat or anti-union rant.  I'm just pulling back the thick cloud of gray smoke away from the headline data to show you what's going on.   Not only does the economy look stronger from a production standpoint, but monthly auto sales also appear to be a lot more robust.

There's a lot more issues with the data in this latest IP report that are highly problematic.  If you are interested you can surf around the site in the "About" section and see what I mean.  I did that and it would put you to sleep if I wrote about it here.

In addition to the massive wealth transfer going on in Detroit, I found a news item earlier this week that I did not see widely reported by the mainstream media.  It turns out that House Democrats are trying to attach legislation to the Fiscal Cliff agreement that would provide mortgage principal reductions for underwater homeowners:  LINK

Interestingly, the biggest impediment to Obama's implementing FNM/FRE mortgage principal reductions, Edward DeMarco, head of the Federal Housing Finance Agency, is about to get replaced by Obama:  LINK  Make no mistake about it, Obama wants this guy around about as much he wants his Portuguese water dog to take a dump in the Oval Office

I don't really know what to say about this other than if everyone wants socialism and a massive transfer of privately earned and taxed wealth to go to underwater homeowners and Detroit auto manufacturing executives and union workers, so be it. But regardless of how you want to view this issue from a public policy standpoint, if they implement widespread FNM/FRE mortgage principal reductions it will be a huge negative for economy and our entire system.


  1. 100% agree with everything you posted. but what can we do about it? I stopped buying GM products, stopped holding dollars, what can you actually do about it? More of the same its just more visible than usual.

  2. TFMR Podcast #35 - Alasdair Macleod of

  3. Roach Motel Monetary Policy

    Monetary policy has become a roach motel – easy enough to get into, but impossible to exit. Bernanke seems pleased to note that inflation presently remains low, but why shouldn’t it? In a structurally weak economy, velocity drops in exact proportion to new monetary base, with zero effect on real output or inflation. The problem is that Bernanke seems incapable of running thought experiments. Suppose the economy eventually strengthens at some point past 2013. At that point, the Fed would have to sell nearly $3 trillion of U.S. debt into public hands in order to reabsorb the money creation he claims “is only a temporary matter.” These sales would add to the stock of U.S. debt already held by the public, very likely while a significant government deficit is still in place. Such a sale would be, by two orders of magnitude, the largest monetary tightening in U.S. history. Is that possible to achieve without disruption? I doubt it.

    So instead, the Fed must rely on the economy remaining weak indefinitely, so it will never be forced to materially contract its balance sheet. To normalize the Fed’s balance sheet without contraction and get from 27 cents back to 9 cents of base money per dollar of GDP without rapid inflation, we would require over 22 years of suppressed interest rates below 2%, assuming GDP growth at a 5% nominal rate. Indeed, Japan is on course for precisely that outcome, having tied its fate 13 years ago to Bernanke’s experimental prescription (stumbling along at real GDP growth of less than 1% annually since then). Bernanke now sees fit to inject the same bad medicine into the veins of the U.S. economy. Of course, a tripling in the consumer price index would also do the job of bringing the monetary base back from 27 cents to 9 cents per dollar of nominal GDP. One wonders which of these options Bernanke anticipates. Psychotic.

  4. My Worst Fear

    In simple terms, Commissioner Chilton’s response to the reader confirms my worst fear – the reason the CFTC hasn’t moved against the silver manipulation is that they don’t understand it. Even though the agency publishes remarkably detailed and accurate data on concentration in their weekly COT reports, they apparently don’t comprehend what it is they are publishing. As a big believer in the premise that recognition of a problem is 50% of the ultimate solution; I also believe that if a problem is not recognized, it is unlikely to be remedied. I’ve always considered Chilton to be one of the “good guys” at the Commission, so it is quite disheartening to see him so misinterpret his own agency’s data.

    This is no small matter. The CFTC’s main mission is to guard against price manipulation, the most serious market crime possible. The reason price manipulation is the most serious market crime is because it distorts the free market, thereby affecting everyone, consumers and producers alike, not just active market participants. The one sure cause of manipulation is a large concentrated position held by one or a few collusive traders. That’s the whole purpose of position limits, namely, to diffuse and prevent concentration. Whether it was the Hunt Bros on the long side of silver in 1980, or the Sumitomo copper trader known as “Mr. 5%” on the long side of copper, or JR Simplot on the short side of Maine Potatoes in 1976, the common denominator of all market manipulations has been the concentrated holdings of one or a few traders. So it is with JPMorgan on the short side of COMEX silver today. What is shocking is that our most important commodity regulator, the CFTC, has seemingly failed to recognize this.

    Of course, perhaps it is not that the agency doesn’t understand what is occurring in silver, but more that it doesn’t want to understand. Perhaps there were some guarantees exempting JPMorgan from future charges at the time of the Bear Stearns acquisition. Perhaps JPMorgan and the CME are so powerful and above the law that the CFTC can’t hope to confront them on such a black and white matter of excessive market share concentration. Most remarkable of all is that more market observers have written to the Commission about silver-related matters than the cumulative total of all other issues. Still, the agency doesn’t get it (or want to get it).

    1. Ofcourse he understands it. The author must be fundementaly challenged to believe in good guys versus bad guys or on the payroll. I suggest you book into the pysche ward and get you head straightened out for posting this nonsense.

  5. Fed's Hotel California

    Inflationary cycles always create powerful constituencies. After all, credit booms and the government printing press provide incredible wealth-accumulating opportunities for certain segments of the economy. Moreover, it is the nature of things that late in the cycle the pace of wealth redistribution accelerates as the monetary inflation turns more unwieldy. Throw in the reality that asset inflation (financial and real) has been a prevailing inflationary manifestation throughout this extraordinary credit boom, and you've guaranteed extraordinarily powerful constituencies.

    By now, "activist" central banking doctrine - with pegged rates, aggressive market intervention/manipulation and blatant monetization - should already have been discredited. Instead, policy mistakes lead to only bigger policy mistakes, just as was anticipated generations ago in the central banking "Rules vs Discretion" debate.

    Today, a small group of global central bank chiefs can meet in private and wield unprecedented power over global markets, economies and wealth distribution more generally. They are said to somehow be held accountable by politicians that have proven even less respectful of sound money and credit. In the US, Europe, the UK, Japan and elsewhere, central bankers have become intricately linked to fiscal management. As such, disciplined and independent central banking, a cornerstone to any hope for sound money and credit, has been relegated to the dustbin of history.

  6. Dean LeBaron ~ Adventure Capitalist ~ Then and Now

  7. Indian government admits 'gold-backed' means just pretending to have gold

    Thanks to the government of India for acknowledging today that the great advantage of "gold-backed financial instruments" is not to their purchasers but rather to the government itself in its campaign to talk Indians out of their gold to reduce the country's current account deficit.

    That is, as the Press Trust of India reports in the story appended from The Hindu, replacing the investment of the Indian people in gold with "gold-backed financial instruments" can reduce gold purchases only insofar as those "gold-backed financial instruments" don't actually have all the gold that has been sold in their name.

    But no thanks to the Indian government for thinking its people to be so stupid.
    "In its mid-year economic analysis tabled in Parliament on Monday," the PTI story says, "the government said gold-backed products would help investors enjoy the benefits of investment in the metal without investing in the physical commodity."

    Government Mulls Gold-Backed Schemes to Curb Imports

    By the Press Trust of India
    via The Hindu, Chennai
    Monday, December 17, 2012

  8. Too big to jail? Execs avoid laundering charges

    "Shame on the Department of Justice. Shame on them," said Jimmy Gurulé, a former federal prosecutor who teaches law at the University of Notre Dame.

    "These are actions that facilitated major international drug cartels to continue their operations," he said. "Now, if that doesn't justify criminal prosecution, I can't imagine a case that would."

    Oregon Democratic Sen. Jeff Merkley shot off a letter to U.S. Attorney Eric Holder after the HSBC settlement, saying the government "appears to have firmly set the precedent that no bank, bank employee, or bank executive can be prosecuted even for serious criminal actions if that bank is a large, systemically important financial institution."

    Bill Black, a former financial regulator who was instrumental in uncloaking the savings-and-loan crisis in the 1980s, scoffed at such a notion. "Seriously, you want to keep felons in charge of a bank for bank stability?" he said.

    To Black and other critics of the government's approach, the HSBC case is a replay of the years immediately after the 2008 financial crisis, when the people most responsible for it were never really punished. No high-profile bankers have gone to jail in the wake of the financial crisis, nor has there been any well-known, large-scale effort to recover the giant bonuses awarded to executives of failed or nearly failed banks.

    "The guy who filed a false tax return, he's probably doing five years in prison," said Notre Dame's Gurulé. "And these guys — transactions with Iran, threatening to jeopardize U.S. national security — they don't even get prosecuted. The fairness of that system is very suspect."

    The government's charges against HSBC are grim. They sketch a picture of a bank that systemically and purposefully skirted the law.

    Henry Pontell, a criminologist who teaches at the University of California-Irvine, was underwhelmed by the $1.9 billion in fines against HSBC, given its $17 billion in profits last year.

    "The notion that 'Oh, they paid a big fine, that will scare everyone else,' is nonsense," Pontell said. "Those individuals that did this, they didn't pay the $1.9 billion. The company did. And that's supposed to be an effective deterrent? A white-collar criminal, the biggest thing they fear is being put into prison."

  9. Glenn Greenwald: Woman Imprisoned for Life for Minor Drug Offense; Banking Giant Immune to Justice for Massive Drug Laundering
    Justice is dead in America.

    This sprawling penal state has been constructed over decades, by both political parties, and it punishes the poor and racial minorities at overwhelmingly disproportionate rates .

    But not everyone is subjected to that system of penal harshness. It all changes radically when the nation's most powerful actors are caught breaking the law. With few exceptions, they are gifted not merely with leniency, but full-scale immunity from criminal punishment. Thus have the most egregious crimes of the last decade been fully shielded from prosecution when committed by those with the greatest political and economic power: the construction of a worldwide torture regime, spying on Americans' communications without the warrants required by criminal law by government agencies and the telecom industry, an aggressive war launched on false pretenses, and massive, systemic financial fraud in the banking and credit industry that triggered the 2008 financial crisis.

    This two-tiered justice system was the subject of my last book, "With Liberty and Justice for Some" , and what was most striking to me as I traced the recent history of this phenomenon is how explicit it has become

    It really is the case that this principle is now not only routinely violated, as was always true, but explicitly repudiated, right out in the open. It is commonplace to hear US elites unblinkingly insisting that those who become sufficiently important and influential are - and should be - immunized from the system of criminal punishment to which everyone else is subjected.

    Worse, we are constantly told that immunizing those with the greatest power is not for their good, but for our good, for our collective good: because it's better for all of us if society is free of the disruptions that come from trying to punish the most powerful, if we're free of the deprivations that we would collectively experience if we lose their extraordinary value and contributions by prosecuting them.

    But this case is the opposite of an anomaly. That the most powerful actors should be immunized from the rule of law - not merely treated better, but fully immunized - is a constant, widely affirmed precept in US justice. It's applied to powerful political and private sector actors alike. Over the past four years, the CIA and NSA have received the same gift, as have top Executive Branch officials, as has the telecom industry, as has most of the banking industry. This is how I described it in "With Liberty and Justice for Some":

    "To hear our politicians and our press tell it, the conclusion is inescapable: we're far better off when political and financial elites - and they alone - are shielded from criminal accountability.

    "It has become a virtual consensus among the elites that their members are so indispensable to the running of American society that vesting them with immunity from prosecution - even for the most egregious crimes - is not only in their interest but in our interest, too. Prosecutions, courtrooms, and prisons, it's hinted - and sometimes even explicitly stated - are for the rabble, like the street-side drug peddlers we occasionally glimpse from our car windows, not for the political and financial leaders who manage our nation and fuel our prosperity.

    "It is simply too disruptive, distracting, and unjust, we are told, to subject them to the burden of legal consequences."

    That is precisely the rationale explicitly invoked by DOJ officials to justify their decision to protect HSBC from criminal accountability.

  10. What arrogant idiots the Gold Bug community is, it's a cult - talking their book. The quite ones are in charge. They will determine down and up moves. The most arrogant is Jim Sinclair. Embry is a bafoon - he's been wrong forever and uses lovely descriptors such as religious experiences etc. Now Pierre Lassonde gives a speech about miners and why they haven't performed - well there have been "lesser" people who have seen this long ago.

    What you need to realize is that none of you are in control. In fact it's best not to read any of the shit that gets written on the net about gold. Bill Murphy is a danger to your health.

    Well here you have QE3 QE4 - Obama re-elected - Japan printing - BOE probably going to print - and what happens.

    This absolute bullshit about moonshots and 100 dollar up moves is rubbish. Dollar is going down and gold is tanking big time. I have only seen these big moves down - never up- never.

    It have been a sheeple reading this bullshit.

    The power is definitely not with any of the idiots who speak these lyrics about gold.

  11. The Fiscal Cliff Is A Diversion: The Derivatives Tsunami and the Dollar Bubble

    The Derivatives Tsunami and the bond and dollar bubbles are of a different magnitude.
    Last June 5 in “Collapse At Hand” I pointed out that according to the Office of the Comptroller of the Currency’s fourth quarter report for 2011, about 95% of the $230 trillion in US derivative exposure was held by four US financial institutions: JP Morgan Chase Bank, Bank of America, Citibank, and Goldman Sachs.

    Prior to financial deregulation, essentially the repeal of the Glass-Steagall Act and the non-regulation of derivatives–a joint achievement of the Clinton administration and the Republican Party–Chase, Bank of America, and Citibank were commercial banks that took depositors’ deposits and made loans to businesses and consumers and purchased Treasury bonds with any extra reserves.

    With the repeal of Glass-Steagall these honest commercial banks became gambling casinos, like the investment bank, Goldman Sachs, betting not only their own money but also depositors money on uncovered bets on interest rates, currency exchange rates, mortgages, and prices of commodities and equities.

    These bets soon exceeded many times not only US GDP but world GDP. Indeed, the gambling bets of JP Morgan Chase Bank alone are equal to world Gross Domestic Product.

    According to the first quarter 2012 report from the Comptroller of the Currency, total derivative exposure of US banks has fallen insignificantly from the previous quarter to $227 trillion. The exposure of the 4 US banks accounts for almost of all of the exposure and is many multiples of their assets or of their risk capital.

    The Derivatives Tsunami is the result of the handful of fools and corrupt public officials who deregulated the US financial system. Today merely four US banks have derivative exposure equal to 3.3 times world Gross Domestic Product. When I was a US Treasury official, such a possibility would have been considered beyond science fiction.

    In other words, the entire economic policy of the United States is dedicated to saving four banks that are too large to fail. The banks are too large to fail only because deregulation permitted financial concentration, as if the Anti-Trust Act did not exist.