Wednesday, February 29, 2012

Ron Paul Brutalizes Bernanke

Some of the highlights are when Ron Paul asks Bernanke if he does his own grocery shopping.   Bernanke says he does, which I don't believe.  Paul also explains that the Fed is lying about inflation.  So I'm not the only one calling Bernanke a liar.  Then Ron Paul holds up a 1 oz. silver eagle and goes through the same exercise with gasoline that I did with oil on Monday to illustrate why silver/gold is real money that holds its value over time (video sourced from zerohedge - my only complaint about Ron Paul is that he has an opportunity to really hold Bernanke's feet to the fire in this forum twice a year and instead lets Bernanke escape without having having to directly answer the criticisms or pressing Bernanke for truthful answers):

A Few Passing Observations

Just a quick update and follow-up on my recent housing commentary.  I'm sure everyone saw that the Case-Shiller 20 metro area home price index dropped 1.1% on an unadjusted basis on a trailing 3-month basis for December vs. November LINK.  The overall index is back to its 2002 level.  I remember in 2005 telling people that home prices in general would eventually revert back to early 1990's levels (before the Clinton/Reuben/Greenspan strong dollar/money inflation policy was implemented) and I was laughed at heartily.  A couple years later I decided we could well see 1981 levels, which are really the same as early 1990's levels (a boom/bust in between fueled by S&L money fueled by Drexel junk bonds).  I'm still good with my forecast.

On another note, I had made the observation that banks were dragging their feet on foreclosing on underwater McMansions financed with jumbo loans.  The reason for this is that once a big home is foreclosed, either the bank will have to price it to move and take a huge hit to its tier-1 capital or the bank will sit on home and try to minimize losses, but will have to pay for the high taxes and maintenance.  Either way it's a huge cost to the bank vs. small homes that can be flipped without hurting the bank's capital on a relative basis (we also know that banks like Bank of America and Wells Fargo have stuffed Fannie Mae and Freddie Mac with a lot of the troubled conventional mortgages - and some jumbos).  Ironically, the Wall Street Journal published an article about this:  LINK  (requires a subscription for the whole article, but you can cut and paste the headline in a google search bar and get "free pass" to view the whole article).

For anyone freaked out by the big hit in the metals today, please be aware that the action did not start until Bernanke was in front of Congress with the Fed's formerly known as the semi-annual Humphrey Hawkins testimony.  He issued a comment that the Fed was evaluating "mixed" signals about the strength of the economy and pointed at the recently announced 8.3% unemployment rate as his "evidence" that the economy may be stronger than we think LINK.  The market of course took this as a "QE3 is off" signal and immediately sold off gold and especially silver.  Forget about the fact that today is first notice day for March silver on the Comex and typically when there's a big slug of open March contracts around delivery time, the price of silver seems to coincidentally sell off hard.  Move along, nothing to see there.

But let's examine Bernanke's view that the unemployment rate is signalling potential economic strength.  Anyone buy that?  Quite frankly, given the overwhelming avalanche of articles and blogs which have very openly dissected the BLS employment report for what it is, it is hard to imagine that Bernanke does not know the truth about the validity of the BLS report or the truth about the true employment conditions in this country.  Even the more comprehensive BLS report that gets buried by the media shows unemployment running at over 15%.  And it's not really improving.   So I have to conclude that Bernanke is either some kind of idiot savant with some kind of "Rain Man" type skill that enabled him to become an economics professor and then Fed head, and therefore has a primarily functionally retarded brain, or he's lying to us.  As much fun as it is to speculate on and discuss the former, if I had to bet I would bet on the latter.  And therefore his comment about the economy was issued as means of using the Fed's power to jawbone the markets, which was perfected by Greenspan and used effectively Bernanke for nearly 6 years.

Finally, Fannie Mae and Freddie Mac are becoming what I said they would become two years ago when the Obama Government decided to let the Taxpayers become the financiers of the housing bubble:  a bottomless pit of losses and endless cost to the Taxpayers.   Please note that most of the paper sitting on the balance sheet of these two catastrophe's was sourced, ultimately,  by mortgage brokers and big banks.   There was no regard for credit standards and trillions in fraud perpetrated.  It was the ultimate example of the moral hazard fostered by Government intervention.

Fannie reported its latest quarterly results LINK and, no surprises here, posted a $2.4 billion loss and requested another $4.6 billion of Taxpayer money.  I don't get it.  The math doesn't add up.  How can it lose $2.4 billion but need another $4.6 billion?  Where's all that cash flow going?  I'd sure love to know.  In fact, I'd love to see an independent audit and study performed by an accounting firm with NO ties to the big banks.  The politicians and big banks will never agree to that, as they would rather see a meteor hit Southern California and destroy some of the evidence - like a meteor that seems to have hit and destroyed any money wire traces and emails connected to MF Global.

The cost of bailing out both Fannie and Freddie - so far, mind you - is over $152 billion.  Just three months ago, the Federal Housing Finance Authority issued a new estimate for total cost thru 2014 would be $124 billion LINK.  I don't even know what to say about that.  Theatre of the Absurd at its finest.  Back in June the CBO issued a statement that said the true ultimate cost of bailing out FNM/FRE would be $317 billion.  That's still absurd.  I originally said the cost would run into the trillions.  I stand by that estimate.  For now I'll just say over $1 trillion. 

Anyone still think the Government can fund it's operations without massive QE3?  E tu, Ben?

Monday, February 27, 2012

The Curious Warren Buffet

Warren Buffet is so 1980's.  His aura peaked in the 1990's.  He should've sold out and moved to the South Pacific.  By the time he dies, he will have made himself look like a complete jack-ass, especially with regard to his comments about gold.
Before I start in on my commentary, I wanted to post a little update to the housing data that has been released over the past few days.  I think these numbers further support claim that the housing data is misleadingly manipulated and fraudulent and that the housing market is headed a lot lower.  New home sales were reported on Friday for the month of January to be a better-than-expected "seasonally adjusted" 321,000 annualized rate.  Here's the real data:  Only 22,000 new homes were contracted for in January;  in total, 4,000 new home sales actually closed;  6,000 were vacant lots - 12,000 have not started in construction.  Now how does the new home sales report look?  You can draw your own conclusions.

For me, Warren Buffet epitomizes everything about myth vs. reality and the power of the media's ability to influence the perceptions of large masses of the population.  The mainstream public and it's penchant for instant gratification will typically, at best, catch only brief snippets of real news, preferring to feed any thirst for news and gossip with "reality tv" and shows like Jersey Shore and The View.  What better way to shape perception than to flash ads with images of a smiling Warren Buffet sipping Cherry Coke?  The myth that, despite his billions, he lives in the same small red brick house in Omaha, Nebraska with his wife is just that - pure myth.  He hasn't lived in that house or with his wife for many years.  He has beautiful homes and mistresses all over the country in places where the very wealthy "quietly" congregate, like Sun Valley and Santa Fe.  I remember back in the mid-1990's reading an article that outlined the man vs. myth about Buffet which detailed how his simple "wrinkled, cheap sack suit" look was in truth very expensive Italian suits tailored for that look in order to give Buffet the Willy Loman veneer.  It's also pure bullshit that he's going to put all of his wealth in a charitable trust when he dies rather than pass it on to his heirs.

There have been several recent examples that have slipped out of the "do as I say, not as I do" reality of Warren Buffet.  A few years ago he wrote a piece that famously referred to derivatives as being financial weapons of mass destruction and said that he avoided them in his course of business.  But then not too long after that one of Berkshire Hathaway's large insurance companies, General Re, revealed that it was sitting on huge derivatives losses.  Executives at the company subsequent to that were prosecuted for accounting and business fraud.   In the latest reported quarter Berkshire's earnings were directly affected by big derivatives losses.  And how about Buffet talking big about how the very wealthy should pay more taxes, and yet Buffet's personal marginal tax rate is significantly lower than that of the secretaries who work for him.  To paraphrase NJ Governor Christie, Buffet should either shut the f_ _ k up or write the Government a big check.

I am going into all of this because I want to underscore the true lack of credibility Buffet has when he uses his annual shareholder meeting, in part, as a forum to make derogatorily incorrect statements about the investment value of gold.  How many of you reading this knew that Warren Buffet's father was a 4-term Congressman from Nebraska who championed the use of gold as a currency anchor?

Buffet spent - dare I say "wasted?" -  a considerable amount of space in his widely read shareholder letter explaining why gold is not a good investment.  You can see his thoughts on the matter  HERE.  In one sense, on a superficial level (of course, everything about Buffet's public display is superficial), his thoughts make perfect sense.  I'm not going to "invest" in gold to produce something useful in the same manner that I would invest in farmland or invest in a plant to produce widgets. 

But "investing," in that context and meaning of the term, is not why you buy gold.  In fact, you don't really buy gold.  When you acquire a holding in physical gold that you control, you are really doing no more than exchanging fiat dollars - which are used as a currency - for gold, which is the world's oldest currency.  It just so happens that over the last 10 years the number of dollars it takes to exchange into an ounce of gold has increased.  Why?  Because fiat dollars are rapidly being devalued by catastrophic public policy AND the dollar appreciation of gold - gold as currency - is not going up in value the way a successful investment might but instead is merely reflecting the fact that the market demands more paper fiat dollars in order to exchange gold for those fiat dollars.

Here's an interesting way to look at it.  In 1971, right before Nixon closed the gold window and took the $35 fixing off of the price of gold, oil was roughly $3/barrel and an ounce of gold would buy 11 barrels of oil.  Today, with gold at $1750 and West Texas oil around $109, an ounce of gold will buy 16 barrels of oil.  If the world was on a currency exchange standard that was based just on oil and gold, does it look like the price of gold is in some kind of investment bubble, as Buffet would have you believe?  That example shows the remarkable stability of gold as a currency versus the remarkable depreciation of fiat dollars, as it takes slightly less gold in 2012 to buy a barrel of oil than it did in 1971 BUT it takes 36 times more fiat dollars to buy the same damn barrel.  Which would you rather hold in your pocket to use as a currency?

But perhaps this is why Buffet is so unhappy with gold:

This chart shows the number of ounces of gold it takes to buy 1 share of Buffet's Berkshire Hathaway class A stock.  In 1999, at the peak of the internet bubble (which was fueled by Greenspan's money printing/dollar devaluation), it took 280 ounces of gold to buy one class A share.  Currently it takes just under 70 ounces of gold.   A picture says 1000 words, huh?  In less that 1000 words, and in summation of the chart, a market participant would be about 400% wealthier if they had exchanged their investible fiat dollars for gold in 1999 and simply held it until now than if they had invested in Warren Buffet.  No wonder he's coming out of his Depends over gold.

As you can see, gold is not an investment at all.  It's a currency that embodies relative purchasing power in the same way that the U.S. dollar or the euro contain relative purchasing power against each other and against the goods and services these currencies are used to procure.  The relative purchasing power of each global paper fiat currency pretty much fluctuates on daily basis.  But it is a fact that the relative purchasing power of each currency against gold has been rapidly declining over the past 11 years. 

So gold isn't even an investment, contrary to the notion of gold which Buffet absurdly attempts to explain.  Gold is a nothing more than something that possesses decorative value as jewelry, but more significantly has functioned for over 5,000 years as a remarkably stable currency for the purposes of commerce.  Looked at properly, Buffet's long-winded written pontification on why gold is not a good investment seems absolutely silly.

Friday, February 24, 2012

IS The United States Bankrupt?

"it depends on what the meaning of the word 'IS' is"  - Bill Clinton

Have a great weekend.  I hope everyone has been accumulating gold and silver at these fire sale prices.

Thursday, February 23, 2012

Feast or Famine

It's famine time for most people in this country, but the bankers and financiers who feasted on fraud during the last decade are now feasting on the avalanche of corruption that has hit our system at the highest levels of Government (see MF Global and Solyndra, for example). 

I wanted to do a quick follow-up on yesterday's post with some more data.  First, based on NAR data - which we know is typically bloated with overstatement - the median home price in this country has hit a new 10-year low (median = half of all sales are above that level and half are below)  LINK  I have a feeling that the data is skewed by some of the very high end sales that have occurred in NYC and I would bet that the mean, or average, sales price is lower than the median since there has been a preponderance of distressed sales at levels which occur well below the median but are "poo poo'd" by the industry as "distressed one-time events" lol.

It's mainly been the low-end that has "pulled down" market values since the financial crisis hit in 2008.  But now, for several reasons, I believe that there will be a literal flood of mid to high-end foreclosure properties that will hit the market over the next 12-24 months which will literally crush home values to even lower levels.

To begin with, banks and Fannie Mae/Freddie Mac primarily foreclosed on the large base of lower end homes over the past 4 years, as it was easier to move the REO inventory into distressed buyer hands because typically financing is not required and those homes are more easily "flipped" or rented.    Moreover, we've seen big banks like Bank of America unload large blocs of distressed property onto the balance sheets of FNM/FRE.  And we know FNM/FRE are overloaded with REO inventory because now the Fed and Obama Admin are in the process of converting a large portion of that inventory into rental units.   That move in and of itself will place downward pressure on market values because the new flood of rental space will once again skew the economics of renting vs. buying toward renting, thereby forcing home prices lower - the 'ole "income and substitution" effect we learned in Intro to Economics.

But there's another phenomenon that's witheld a lot of high end foreclosures from happening.  Banks have been allowing people who have technically defaulted on jumbo mortgages to remain in their homes without making any mortgage payments for anywhere from 1 to 3 years.  There's a mathematical reason for this.  Most jumbo mortgage paper still sits in one form or another (outright mortgages or in the form of "put backs" written into securitization documents) on bank balance sheets (off-balance sheet when in the form of a "put-back," which requires the bank to back mortgages on properties below a specified loan-to-value ratio or are non-performing).  If a bank forecloses on a $250k home with a $200k mortgage that it can unload for $200k, the bank eats only $50k.  But if a bank has to foreclose on a $2 million mortgage on a home worth maybe $1.2 million (these are real life data points), the bank eats $800k.   That write-down is a direct hit to the banks tier 1 capital ratio, which is the equivalent of cyanide to a bank.  Moreover, it's significantly more difficult for a bank to move a high 6-figure or 7-figure home.   And the number of people who can actually afford to buy a home like that is shrinking.  It's this dynamic that has created a massive "shadow inventory" of high-end homes (remember the McMansion craze?) that do not show up in the inventory numbers yet:
A huge "shadow inventory" is building of elite homes that are in default but have not been put on the market...The backlog reflects the pent-up flood of foreclosed properties of all price ranges that are expected to hit the U.S. market this year, especially after five major banks reached a $25 billion settlement last week with the U.S. over fraudulent foreclosure practices  LINK
I'm sure everyone reading this knows at least one person living in what was originally a 7-figure home and who hasn't made mortgage payments for at least a year and hasn't been contacted by the bank about foreclosure or short-sale requirements.  But this is changing, as there is now pressure on the banks to start monetizing the big base of hopelessly delinquent jumbo mortgages.  Even though banks are reporting impressive GAAP/phony earnings, they are being squeezed for actual cash flow by low interest rates and lack of lending opportunities that make economic sense and terminally delinquent jumbo mortgages are a huge cash drain to the big banks.

What really irritates me about that this whole thing is when I have to listen financial advisers, idiots on CNBC and other various "experts" proclaim at every step-down in housing values that we've hit a bottom.  We've had zero interest rates in this country for quite some time and we keep hitting new record lows in mortgage rates.  And yet, the housing market continues to plummet further into the abyss.  The only purpose served by the intervention of the Fed and the Government in the housing market has been to keep banks from choking to death on bad mortgages and, even worse, to prevent the market from freely reaching a price point which will clear the massive imbalance between true supply and real demand.  By the time we see the housing market finally "clear," - and I don't expect it to happen in my lifetime - the language of choice in our school system will be Mandarin.

Wednesday, February 22, 2012

The Homes Sales Reporting Tragedy

In the end the Party would announce that two and two made five, and you would have to believe it. It was inevitable that they should make that claim sooner or later: the logic of their position demanded it. Not merely the validity of experience, but the very existence of external reality was tacitly denied by their philosophy  - George Orwell, 1984
The data reporting by the National Association of Realtors really blows my mind.  I'm not sure why any news source who expects to be treated with any kind of respect even bothers to report the data anymore.  I guess the explanation lies in between the lines of the quote above...
"Sales of existing homes jump more than 4% in January,"  "Home sales hit 2-year high in January" are just two of the headlines out there.  Let's look at the magic of simple arithmetic to see how this "gain" in existing home sales was calculated.  In December 2011, the existing homes sales number was reported to be 4.61 million annualized, up 5% from November.  The existing home sales number for January 2012 was just reported at 4.57 million.  Simple math would say home sales dropped, right?  The NAR conveniently revised down the December number from 4.61 million to 4.38 million, thereby enabling it to report a very headline-friendly 4% gain from December to January.  They pulled the same trick in December from November.  Of course, none of the headlines will ever reference this fact and everyone who just looks at the headline reports will come away with the impression that existing home sales are recovering in robust fashion.  The NAR has methodically shaped the perception of most people who actually follow the news (rather than watching Jersery Shore or The View).
And the fact of the matter is that I wouldn't have a problem with an occasional downward revision with data like this.  But with the NAR it has become systematic and methodical.  It enables them to deliberately control perception of the housing market for the masses who don't pay attention to the truth.
I'm sure everyone reading this is aware that the NAR recently revised lower all existing housing sales as reported from 2007 through October 2011 by 14%.  Think about that for a minute.  It means that over 14 of every 100 home sales reported over a nearly 5 year time span was total bullshit.  They didn't exist.  Poof.  Think about the implications of that.  Housing market finance businesses and realtors got rich off of that fraud because the NAR systematically created a perception of relative strength in the housing market that NEVER existed.  Hundreds of thousands of people likely bought homes during that period because they thought the housing market was healthy and a good investment based on this data. 
The NAR is a total fraud.  In fact, nearly all of the "official source" economic data that is reported in this country is fraudulent.  One good way to test the NAR numbers is to watch the mortgage application data from the Mortgage Bankers Association.   It's skewed by the fact that people often file more than one application to shop deals, but in general I believe the trend over several months is indicative of the real condition of the housing market.   That number just so happened to be reported earlier today (every Wednesday at 7 a.m. EST).   It showed a 2.9% decrease in mortgage purchase applications week to week, ending last week.  The four-week moving average is down 3.2% and the index is down about 12% from a year ago.  This paints a completely different picture of the housing market than the one presented by the National Association of Realtors and its prozac-addled Chief "Economist," Lawrence Yun.
Oh by the way, the headline as reported by the NAR is "Existing home sales rise again in January."  I think that headline, in the context of my analysis above speaks for itself.  George Orwell is smiling from his grave today...

Tuesday, February 21, 2012

Quick Update

Gold represents a little less than 1% of the total value of global investments [stocks, bonds, money markets].  Think about what will happen if that percentage moves up to 2 or 3%.  In 1968 it was 5%.  In 1980 at the last peak in gold it was 3%.  - Felix Zulauf, Swiss money manager
Busy trading today.  Wanted to unload a few points of irritation.  It was reported locally that Michelle Obama spent the long weekend in Aspen with her daughters, courtesy of the Taxpayers, of course.  I don't recall the Obamas ever spending time in expensive resorts when they had to pay for it themselves.  Of course, until Barack became a national politician, he barely had a pot to piss in (like Clinton).  What really irritated me was the report in the Denver Post that the Aspen Sheriff "donated" several patrolmen to help with security.  I'm sure that "donation" cost the Federal taxpayers a couple hundred thousand dollars.  By the way, Michelle looked like a total dork in her ski outfit in the picture that was published in the Denver Post.  I wonder how many of the people who voted for Obama could actually afford to spend even one night in Aspen...

10 of the 15 richest counties, including the richest, are located near Washington, DC, in Maryland and Virginia  LINK.   Four of the top five counties.  The standard of measurement is household income.   This makes sense because the primary source of "household income" in the DC region is Government contracts and Government employee payroll and, of course SuperPac lobbyists/lawyer pay.  This factoid underscores even further the discrepancy between those who live off the Government and those who try to make a living privately.  I'm sure people who live in Fairfield County in Connecticut (Greenwhich) or Santa Clara County in California (high tech/venture capital) are surprised by this report.  But please note the standard of measurement is "income" and not "wealth."  The people who build and prosper from creating wealth are a completely different breed from the piss-ant sycophants and scum who prey on wealth by living off of Government largess. 

It's Big Government/Banking that is sucking the wealth of this country dry and ultimately will be what causes The Collapse.  Speaking of funding Government largess, the Treasury issued $35 billion in new 2-yr. Treasury notes today, taking the "official" Treasury debt load up to $15.4 trillion.  I say "official" because this number does not include some $7 trillion of Fannie Mae/Freddie Mac debt - I still don't know why this isn't included - nor does it include "special" Treasury paper issued, such as "IOU collateral" to entities like the social security trust ($2.5 trillion last I read).  This $15.4 trillion represents 101% of officially calculated GDP.  But if the manipulations were stripped away, I guarantee that the real number would be more like 120% of GDP - just like Greece...

Friday, February 17, 2012

Classic Obama "Screw The Public" Move

When the public finally figures out just how much they've been screwed by the banking system, in collusion with the Government, there's going to be a violent revolution  - a friend of mine last night

The $40 billion settlement deal the Government struck with the big banks over foreclosure fraud is not exactly what Obama is promoting it to be.  In fact, it turns out that $30 billion of it will actually be paid for by the taxpayers.  Did everyone see that particular detail being discussed in any of the U.S. media?  Here's the Truth as reported by The Financial Times (London): 
However, a clause in the provisional agreement – which has not been made public – allows the banks to count future loan modifications made under a 2009 foreclosure-prevention initiative towards their restructuring obligations for the new settlement, according to people familiar with the matter. The existing $30bn initiative, the home affordable modification programme, or Hamp, provides taxpayer funds as an incentive to banks, third party investors and troubled borrowers to arrange loan modifications.
Here's the link, which might require a quick registration in order to read the whole article:  LINK

Under the HAMP program, another Obama taxpayer funded beaut, the banks reduce dead-beat mortgages by $30 billion and get reimbursed by the Taxpayers.  The real cost of the "punishment" Obama doled out to the banks for foreclosure fraud is $10 billion.  Nice huh? 

Is this what all you Obama supporters voted for?  Direct subsidy of dead-beat homeowners and big banks using your money?  And all the while Obama flashing his grin, reading from the teleprompter and telling us how much he punished the banks on behalf of the public.

The country is being hijacked right in front of anyone who's actually paying attention.  Most of the public is conveniently distracted by things like Whitney Houston or American Idol concerns.  But once they've figured out that the Rule Of Law is destroyed, we'll hopefully decide to turn to our 2nd Amendment remedies. 

Thursday, February 16, 2012

Quickie Thursday

The power of accurate observation is commonly called cynicism by those who have not got it  - George Bernard Shaw
Whoever controls the volume of money in our country is absolute master of all industry and commerce…and when you realize that the entire system is very easily controlled, one way or another, by few powerful men at the top, you will not have to be told how periods of inflation and depression originate.” – President James Garfield, 2 weeks before his assassination  (sourced from Zerohedge)
One quote really leads nicely into the other....The Linsanity continues (seven in a row for the Knicks without Carmelo Anthony and with Jeremy Lin)...

Was busy trading this glorious volatility today, including buying a bunch of silver eagles for myself below $33.  Agnico-Eagle (AEM) was subjected to quite blatant downside manipulation at the open.  AEM reported a messy headline income number several hours before the market opened and someone big on Wall Street wanted to buy the stock or cover a big short.  It gapped down hard over $2 (8%) at the open.  I scanned through the earnings report about 3 minutes after the open and realized that, if you backed out all of the non-cash cash charges taken - which the market was told about months ago - the earnings report was actually quite strong.  I doubled the position in the fund near the lows of the day and now the stock is up trading up nearly 7% on the day.   The opening manipulation was a classic "plunge and buy" operation.  Amateur stuff if you know how to read it...

Anyone who thinks that a stock that behaves this way is not being subjected to nefarious and illegal trading manipulation is extremely ignorant or naive.  Anyone who thinks I'm being cynical, please re-read the opening quote.

Wednesday, February 15, 2012


Gold is a reflection that there is no other escape out of this problematic situation we are trapped in than printing money to prevent systemic collapse - Felix Zulauf, Swiss money manager
Everyone else is jumping on the Jeremy Lin promotional hype...why shouldn't I?  But I'll poke at it from a slightly different angle.  Maybe from the perspective you might get on CNBC if it were gold instead of a New York Knick basketball player with an Ivy League degree.  Is the sudden meteoric media interest in Jeremy Lin a bubble?

One bubble the Government is definitely trying desperately to re-inflate is housing.  Today it was reported that new homebuilder sentiment had reached a 5-month high of 29.  Anything below 50 reflects overall poor sentiment but the media was spinning it into housing market Disneyland:  "Builder mood best in years" - Marketwatch.  Well here's a pin to prick that bubble-attempt:  "Mortgage applications down as purchase demand falls" - The Mortgage Bankers Association reported today that mortgage purchase applications tanked over 8% from week to week for the week ending Feb 10.  That's a real data sample of what's going on in the real economy, as opposed to the happy prozac-induced "sentiment" reading.  It's like looking outside and seeing a bright blue sky and sunshine and then stepping outside without a coat on and discovering that it's 10 degrees...Ironically, we are starting to head into the part of the housing seasonality in which purchases should be increasing, not decreasing.   Call me insane, but with mortgage rates at record lows and median pricing hitting new lows every month, isn't demand supposed to be increasing?

The other bubble that is starting to lose air is the Treasury market bubble.  I've been commenting for quite some time that eventually China/Asia is going to start aggressively reducing its exposure to U.S. Treasuries.  Of course, like everything else I was a bit early.  But over the last year China has reduced its exposure by $60 billion.  This is exceeded only by Russia's dumping $63 billion.  Of course, Russia has cut its exposure by nearly 50% in the last 12 months.  Eventually we'll see China show a 50% reduction as well.  But that would mean selling over half a trillion in Treasuries. The question is, how will the Government finance its massive projected spending deficit (i.e. the debt ceiling is already going to be breached two months earlier than originally projected back in September per Obama AND per this blog way before Obama admitted it)  if China reduces its investment in Treasuries by over half a trillion?  If you want that answer, see the opening quote.

A lot of analysts/bloggers have said in the past that even though China may show an occassional month to month reduction in Treasury holdings, they are likely replacing these sales by buying them through UK banks.   Not to lift my leg on this view, which I never placed credence in anyway, but China unloaded a massive $30 billion in December and the UK banks unloaded another $9 billion...LINK  The fact of the matter is that, given that interest rates are at historical lows and have nowhere to go but up - which means that Treasury bond prices have nowhere to go but down - the sane, rational investor would logically not want to own any Treasuries except maybe T-bills.  The question is, where do you put your money?  Again, see the quote at the top of the page.

Finally, I was chatting with a friend of mine yesterday evening who happens to have probably 20-30% of his net worth in physical gold/silver and GLD.  He commented that it seems like "you goldbugs who have gone all-in with gold/silver/miners" are cheering for the demise of our system because you'll make a lot of money on your holdings.  I almost fell of my bar stool.  First and foremost, if the reasons we ultimately own physical gold and silver fully materialize, yes our "investment" portfolio will soar in value.  But, quite frankly, it also means it won't do us much good because there's a "Mad Max/The Road" situation going in the world at large.  It would be insane to be cheering for that.

The reason the people who "get it" have 90% of the their investibles in gold/silver/mining stocks is that our Central Banks and Government leaders have given us a "Hobson's choice."   A Hobson's choice is when you are given a free choice but only one option is offered.  It implies that you only have one option and that option is likely not a desired option.  It's a no-opton "choice."  To put that in the context of why goldbugs have chosen the optional non-option of going "all in" in the metals sector, see the opening quote.  In other words, for everyone not substantially invested in physical gold and silver (not paper ETFs), the only choice is complete wealth destruction.

Tuesday, February 14, 2012

An Economy That's Gone Off The Cliff

But first, I wanted to unload on AAPL.   AAPL has run up $74 billion in market cap since releasing its earnings a couple weeks ago.  That's a 20% move.   The stock has gone parabolic (and the media morons call gold an investment "bubble?").  The market cap of AAPL is now close to $470 billion.  At first glance the earnings and cash flow are quite impressive.   It has amassed a cash hoard of almost $100 billion.  It's trading at 14x trailing earnings and a hefty 10x cash flow.  That is a very pricey cash flow multiple for a company that has "sustainability of franchise" issues now that the founder and creative genius behind all historical growth has passed away.  And the relatively low p/e ratio - a  heftly discount to the S&P 500 p/e ratio (22x), is suggestive of a market that expects a material decline in revenues, margins and earnings in the future.  Anyone paying for this past rate of growth is clearly not placing any risk on the sustainability of this growth.  But let's revisit an old tech "monopoly."  Remember Microsoft in the 1990's?  It was on a similar growth trajectory and it had amassed a massive hoard of cash.  And once investors started focusing on the "reinvestment risk" of all this cash, the stock started to decline.  From it's peak in late 1999 to its bottom in March 2009, MSFT cratered 75%.   Currently it trades 50% below its 1999 peak.  I would suggest that the odds are high that AAPL will follow a similar path of decline.  In a way it's the 'ole law of diminishing marginal returns (note: that is a law of nature).  And now that I believe the U.S. economy is taking another cliff-dive - along with the global economy - I fully expect AAPL's unit growth and pricing margins to reflect this fact over the next several quarters.  In other words, if your investment advisor is calling to get you to buy AAPL, or your favorite mutual funds have a large holding in AAPL, hang up the phone or get rid of those funds.

Why do I say the economy is in cliff-dive mode, despite the robust Government-reported economic data?  Let's look at some real grass-roots data, unadjusted from seasonal adjustments, etc.  First, take a look at retail gasoline deliveries:  LINK 

(click on graph to enlarge)

You'll note the steady decline since 2006, consistent with our shrinking real, inflation-adjusted GDP figures.  But then note the absolute free-fall starting in 2011.  These numbers are in gallons and not affected by price.   I think most would agree that gasoline sales are a pretty accurate reflection of the relative strength or weakness in the economy. 

Second, per zerohedge, you'll note that the retail sales number reported today on an unadjusted basis (i.e. without the "seasonal adjustments/manipulations) shows the biggest sequential (month to month) plunge in history:  LINK  The seasonally adjusted number for January came in well below expectations.  Furthermore, December's number was revised down to a flat number.  Anyone remember all the hype over holiday sales?   Those "robust" sales estimates are being revised away and will ultimately likely show a decline in holiday sales, especially after returns are factored in.

Finally - and I've been waiting to use this chart - the Government likes to report monthly gains in income.  But let's take a look at the real numbers (I apologize to whomever, I can't remember where I sourced this chart).   Here's a chart of the real rate of change of monthly personal income AFTER excluding Government transfer payments (welfare, social security, various other benefits):

(click on graph to enlarge)

That is not a pretty chart and the implications for the economy are quite ominous because, after stripping out the Government's largess, it turns out the real personal income in this country has actually been declining on a monthly basis since the end of 2009.

Consumer credit numbers have resumed expanding at a very (un)healthy rate, especially student loans and auto finance credit.  It is also likely that consumers are using a lot credit that has recently been made available to pay for necessities.  You know, the stuff like food and energy that the Fed/Govt like to exclude from the "core" rate of inflation metrics.  Regarding the expansion in credit that's been occurring over the past few months, I'll I can say is that this will end badly, with banks threatening to collapse and the Taxpayer once again taking on the liability.  Wash, rinse, repeat until eventual systemic collapse.

I guess I come away from looking at the data by concluding that, in fact and reality, the economy has gone off a cliff again.  As zerohedge points out, the last time we had a hat trick in sequential retail sales missing Wall Street estimates was in July 2008.  Need I remind anyone what happened after that?  I will remind everyone that in October 2008 the price of gold bottomed out after a big correction at $700 per ounce.  I don't think I need to fill in the dots to that statement.   Circling back to my opening paragraph, if I'm correct about the true state of the economy, AAPL stock has a big decline ahead of it.

Friday, February 10, 2012

Some Friday Humor

The significant problems of our time cannot be solved by the same level of thinking that created them  - Albert Einstein
Clearly Einstein did not consider the element of Governmental and banking system fraud and corruption in implying that significant problems can actually be solved. 

Someone sent me a news link which reported that the Greek deputy foreign minister resigned in protest over the "tough" austerity measures being demanded before Germany and the IMF will sign off on bailing Greece out with German and U.S. taxpayer money.  This is hilarious.  What the hell do these politicians want?

With Greece you have a big portion of the population living off of Government handouts and the labor force getting subsidized pay.  Those transfer payments have to be paid for in some way.  Unless Greece can figure out how to suddenly generate a massive amount of economic growth, then either the Government handouts have to be cut back drastically, forcing people either to work or become more impoverished, OR they can print money.  What's it gonna be, Greece?  Italy, Portugal and Spain are barrelling toward the same brick wall and the scope of the same problem in each of those countries is even bigger. 

Funny thing is, the dilemma as I just described it in Greece is identical to the same dilemma facing the United States.  Only the problem here is bigger than the entire EU combined.  The only difference between Greece et al, individually, and the United States is that none of those EU Governments can unilaterally crank up the printing press and monetize their debt.

Ironically, Obama just announced that the budget deficit forecast will be even bigger in 2013 than for 2012, which is bigger than 2011.  Obama is thus telling us that the debt limit ceiling will have to raised several more times during his next term.  At some point the rest of the world is going to stop recycling their U.S. dollars back into Treasury bonds and that's when the real fun begins in this country.  At that point in time, the Government can cut back drastically on welfare/entitlements and defense spending - and thereby throwing a massive number of people into destitution - or print trillions.  I would be on the latter and you can do that by moving as much of your fiat paper dollars into physical gold and silver - not GLD, SLV, CEF or GTU.

And now for the ultimate Friday comedy:  Bernanke gave a speech LINK to the National Association of Home Builders today and made this statement:
Hmmmm...Bernanke is a real Einstein there with that statement.  I wonder if Bernanke thinks of himself as having figured out something there along the same lines as figuring out how split the atom...Enjoy your weekend.

Thursday, February 9, 2012

Wall Street Takes "Nuclear" Option In Fighting New CFTC Regulations

Who do you think will win this battle?   The ink is barely dry on Dodd-Frank - and the volumes of associated bureaucratic multi-hundred page "handbooks" are just now rolling off the Government's other printing press LINK - and already Wall Street is employing the highest level of influence and firing lethal legal weapons in order to protect its "family" and its license to steal.

(You think I'm kidding about the mushrooming bureaucratic paper being generated?  Here's an excerpt from that link, which everyone should read: 
Dodd-Frank isn’t all rule-making in order to act the legislation — it’s also about actual homework assignments, like that assigned by Section 719(c) which:  requires the Commissions jointly to conduct a study (“Study”) and then to report to Congress (“Report”) on how swaps and security-based swaps (collectively “Swaps”, unless otherwise indicated) are regulated in the United States, Asia, and Europe and to identify areas of regulation that are similar and other areas of regulation that could be harmonized. The above is from the introduction to the 153-page study itself — just published on January 31st and which gives an exhaustive amount of detail on existing regulatory frameworks and proposals for swap regulation.)
It turns out that Wall Street is attacking the new CFTC limits on speculative positions - and thereby fighting limits on their ability to manipulate the gold and silver markets - using none other than Eugene Scalia as their lead attorney.  For those of you don't recognize that last name, Eugene is the son of Supreme Court judge Anthonin "I hunt with Dick Cheney for favors" Scalia  LINK.    Now,  of whom in hell do you think the justice system is going to rule in favor?  Quite frankly, on Federal litigation matters there should be absolutely no connection between any of the legal representation and the judicial system.  This particular connection is absurd.  How many of you actually would believe that there won't be influence pedalled here?  Then again, I guess mob organizations like Wall Street are best served by hiring mob attorneys like Scalia...

And then again,  it turns out that the facts belie the rhetorical garbage spewing from Obama's mouth: 

Obama Prosecuting Fewer Financial Crimes Than Under Reagan or Either Bush  LINK

(click on graph to enlarge)

It turns out that the "grassroots reformer" elected by this country to clean up DC/Wall Street and restore Rule of Law is actually trampling all over the laws that are already in place.  If Obama won't enforce the laws that exist, then why in the hell do we need new ones like Dodd-Frank?

I'll tell you why.  Read thru the link in the opening paragraph above and you'll see that all of this new legislation is designed to do nothing more than create massive piles of paperwork and "studies" in order to deflect any possibility of the Government bureaucracy from actually doing its job of enforcing laws and prosecuting the big banks and corporations who are stealing our wealth.  By the way, Obama supporters, how's that new healthcare legislation working for you?   It's all frighteningly Orwellian...but then again, Atlas shrugs.

Wednesday, February 8, 2012

The Debt Bubble

There are two ways to conquer and enslave a nation. One is by the sword.. The other is by debt.  - John Adams 1826
I wanted to revisit an older post in order to unload a massive source of irritation.  This was triggered by commentary by the widely read Charles Hugh Smith, who was speculating on whether or not "derivatives deleveraging" is causing a rally in the stock market.  In addition, since my last discussion of this topic, I have seen several news reports which referred to system "deleveraging" and "consumer deleveraging."  Hmmm....

This was yesterday's headline on Marketwatch after the consumer credit report was released:
Consumer credit surges again in December  U.S. consumers increased their debt in December by a seasonally adjusted $19.3 billion, the Federal Reserve reported Tuesday. The increase is just below November's $20.4 billion pace which was the biggest gain in a decade. Monthly debt rose by a 9.4% pace in December, after a 9.9% pace in the prior month. The increase in consumer credit in December was much larger than expected by Wall Street economists  LINK
Where the hell is the deleveraging to which everyone alludes?  For the year, consumer credit rose 3.7%, the largest increase since 2007

Here's a chart of total non-financial/non-Government debt in our system (this would everything but banks, insurance companies, etc, Treasury debt and State/local Govt debt):

The last time around on this topic I showed Federal Govt debt and total consumer debt.  The consumer debt for sure showed a very small decline over the 2 years but it was more than offset by the increase in Treasury debt.  It can be argued convincingly that a majority of the consumer debt "decline" was simply an accounting game in which the banks wrote down some of the mortgage debt that was ultimately transferred to the Government and the Fed.  The Fed transfer is of course back-stopped by the Treasury.  In other words, consumer debt in Truth never really declined.   I'm still scratching my head over why all these analysts and media morons keep referring to "deleveraging" in reference to the consumer...

Here's a timely quote from the latest issue of the Privateer: 
From October to November 2011, US household borrowing on credit cards, car loans, student loans etc jumped 10 percent. This burst of “consumer spending” was welcomed by many as a sign of returning economic “health.”  In reality, it is an infallible sign of growing desperation in the US middle class. This spike in borrowing, which includes a huge increase in borrowing from retirement plans, is being done simply for day to day expenses. The result so far has been the biggest one month increase in US consumer indebtedness in a decade. Without income growth, this cannot continue.

As for Charles Hugh Smith's reference to "derivatives deleveraging,"  it's utter nonsense and results from sloppy due diligence.  By the last figures I saw, the amount OTC derivatives being held by Too Big To Fail banks increased by over 25% since the 2008 financial crisis.  Supposedly the Dodd-Frank abortion was supposed to make the bank derivatives business more transparent and less risky, but the big banks are already finding ways around it - as predicted by this blog.  In fact, I said at the time Dodd-Frank was being finalized that the legislation would actually enable more bank risk-taking because regulators and the public in general would carry on as if Dodd-Frank provided needed protections - which is does not.  Dodd-Frank will ultimately end up costing the middle class taxpayer $100's of billions if not trillions after the next big round of bank bailouts from debt and derivatives disasters ensues.  Do your god damn homework, Charles.  I stopped reading him several years ago because I think his commentary has no value-added and his analysis and fact-checking sucks.

The Truth of the matter is that both domestically here in the U.S. and globally, the amount of outstanding obligations is going up at an increasing rate - it is accelerating.  When you unwind all of the gimmicks being employed to mask part of this increase - like asset hypothecation/rehypothecation - the rate of increase is going parabolic.   A global debt/liability bubble.  It's truly frightening.  The tautological "offset" to this frightening rate of debt accumulation will be BOTH the parabolic increase in the "de facto" money supply AND a parabolic increase in the price of gold/silver.  I say "de facto" because I am referring to both the currency in circulation plus the amount of money made available by credit.  The ECB balance sheet has spiked higher than the Fed balance sheet.  Make no mistake, the Fed will correct that shortly in order to devalue the dollar in relation to the euro.  That's why the big banks are record short the euro via futures.  Japan is printing to infinity, as is China.  It's going parabolic.

Given that we are now in the serious "bubble" phase of money printing and debt accumulation, it makes sense that the serious "bubble" phase for the rise in the price of gold and silver is still ahead of us.

Monday, February 6, 2012

Bureau of Lying Statistics

There are three kinds of lies: lies, damned lies and statistics - Benjamin Disraeli, Lord Courtney, et al
Before I get to the employment report fraud, I had to unload two observations:  1)  Yesterday's Super Bowl was an epic game, especially if you like to watch hard-hitting defensive battles - AND the Super Bowl ads on TV were probably the worst in memory.  2)  The metals got hit on Friday as the jobs report was being released with the idea that a number as strong as the one released might delay more Fed money printing and therefore the report was bearish for gold and silver and there might be some downside action for a while.  I mentioned to a colleague, though, that the number was total bullshit and that if smart money examined the number with scrutiny over the weekend, we might see some surprising strength in the metals this week.  Well, as you may have already read and I will further detail below, the jobs report in truth was extremely negative.  It also shed more light on just how manipulative of statistics the Government has become.  In fact, Government economic reports are so distorted from the truth now that it brings to mind both recollections of 1970's Soviet-style political gamesmanship and frightening Orwellian visions.

The Government's Bureau of Labor Statistics (BLS - take the "L" out of "BLS" and you get "BS") released its version of this country's employment situation last Friday for the month of January.  The reported number was a massive and unexpected increase in employment, with the BLS making the claim that 243,000 thousand people found jobs in January and the unemployment rate dropped to 8.3%.  However - there's that "notwithstanding" conditional term again, as in "these numbers notwithstanding the truth" - a close look beneath the reported and appallingly cheered headlines reveals a very ugly truth about the quality and reliability - or lack thereof - of Government statistical reporting - especially in a Presidential election year.  My friend "Jesse" provides an excellent description of data manipulation that occurred in order to produce this latest "jobs" report:
Back in Stalinist Russia, they had whole departments of people that were responsible for rewriting history and documents in order to support the latest Party lines. When a particular person fell out of favor, for example, they not only altered the documents, but even went so far as to air brush them out of important historical photographs. Today the US reported a remarkably high Non-Farm Payrolls number, well in excess of even the most optimistic estimates. 243,000 jobs added, and unemployment has dropped to only 8.3 percent. Isn't that good news indeed. If one tracks the data closely, and keeps their own copies of the records, what we see instead are revisions, sometimes going back as far as ten years, that most greatly affect the 'seasonally adjusted' numbers, but also affect the raw numbers as well. The Obama Administration, as well as the previous Administration, have been going back and tinkering with history, rewriting the numbers here and there, in most cases 'rolling jobs forward' to the current months to make the current headlines look betterLINK
The real laugh comes when you look at the full BLS report and see that two sets of data:  the seasonally adjusted report that gets reported by the media and promoted by Wall Street and the not seasonally adjusted actual amount of jobs outstanding.   The Soviet-style manipulated seasonally adjusted number to which everyone is doing the Soul Train boogie shows 243,00 new jobs in January and 446,000 jobs over the last two months.  Compare this to the actual number of jobs, not seasonally adjusted, which shows a massive reduction of 2.9 million jobs over the last two months - 200k in December and 2.7 million in January. 

Now consider that there isn't anyone outside of the BLS statisticians that knows how the seasonal adjustments are calculated.  I guarantee that the massive historical revisions discussed by "Jesse" in the link above were part of the formula.  One reality check against the jobs report is to look at actual income tax collections for January 2012 were $308 million lower than for January 2011.  That certainly is not consistent with the idea that the economy added 243,000 wage paying, tax producing jobs.  You can check the number here:  Jan 2011 and Jan 2012  If those links fail, you can recreate them HERE  Also note that part of the "seasonal adjustments" used by the BLS include assumptions about the strength of the economy.  In this regard, the BLS assumptions are in direct contradiction to the snapshot of the economy as delivered by the FOMC two weeks ago.  Furthermore, that the economy in truth shed 2.9 million jobs is consistent with the view that the economy is actually in a recession, which is what most of us who examine the data on a daily basis believe.  This would also be consistent with the rapidly deteriorating home sales numbers and the cliff dive that is occurring in the Baltic Dry Index:  LINK  The BDI measures the supply and demand for dry bulk shipping cargo by sea.  It is considered a measure of the relative strength or weakness of the global economy.  When it plunges, like this it is good indicator that the world economy is in trouble.  It's now lower than where it was at it's lowest point in Sept 2009.

The point here is that many real-time economic indicators are directly in conflict with the employment report released by the BLS.  For those who still want to place faith in the BLS, here's an excellent presentation of the facts by Trim Tabs' Charles Biederman:  LINK  It's worth spending the 4 minutes to listen to what he has to say on the matter.

The other headline number that was cheered heavily was the unemployment rate, which "fell" to 8.3%.  This was accomplished by the BLS adding 1.17 million people to the "not in the labor force" category of  the population.  The labor force is defined as the "those employed plus those not employed but actively looking to be employed."  The BLS decided that 1.17 million people no longered wanted to work and thus removed them from the labor force.  Since the unemployment rate is defined by the those in the labor force who are not employed but looking for a job divided by the total labor force, reducing the size of the unemployed by removing them for labor force data will lower the rate of unemployment, which is how the BLS produced a lower unemployment rate.  If you look at the more comprehensive "u-6" calculation found in Table A-15 of the employment report, it shows an unemployment rate of 15.1%.  This is unequivocally NEVER reported by mainstream media and it was suspiciously absent from Obama's remarks about Friday's jobs report.   The "u-6" calculation includes a lot of the people that the BLS eliminates with the stroke of a pen from the numbers which get reported in the headlines.  Here's a description of the "u-6" number:  LINK

Those of you who are familiar with John Williams and his Shadow Stats report know that his alternative calculation of the BLS statistics yields a more comprehensive 22.5% unemployment rate. This calculation includes a much more comprehensive definition of "long term discouraged" workers, which are the people who have been looking for work for more than a year and but have given up for now and live off of Obama's extended jobless benefits welfare program. Speaking of Williams, this was his commentary on Friday's payroll report: LINK
In any event, beyond the revisions, the headline numbers for January 2012 generated by the revamped systems simply were not believable. New online help-wanted advertising fell sharply in January, indications from the January purchasing managers survey were mixed, and anecdotal evidence still is running to the contrary of happier numbers. Accordingly, I would expect reporting in the months ahead to revise and weaken with the payrolls, and would expect deterioration in the headline unemployment rate ahead, assuming some catch upfactors, if that is an issue...As an aside, there is precedent for direct political manipulation of headline economic data, from a number of administrations—both Democrat and Republican from the early 1960s and from the onset of modern economic reporting, into the 2000s. A down economy is extremely difficult for an incumbent party to overcome politically in a presidential-election year. During the first Bush Administration, with George Bush up for re-election, the economy was in recession. An administration official approached an individual in the computer industry about boosting reporting of computer sales to the Bureau of Economic Analysis (BEA), which reported the GDP. The sales reporting was boosted, the reported GDP improved, but the public viewed the administration's improving economic claims as being out of touch with reality.
Circling back to how I see the action in the metals unfolding in light of Friday's tragicomedy, the metals were technically set up for a pullback correction after January's torrid rally, especially in silver. We were a bit cautious going into this week, but not because of the jobs report. The "strong" jobs report gave the technical traders a reason unload their positions and take profits and there's no doubt this dynamic was aided and abetted by the big banks who seek to manipulate the metals. The metals once again sold off at the open of London trading but have rebounded sharply from their lows in the Comex session. Again, I think a close assessment of the employment report has further convinced smart money that the economy is weaker than is being promoted by Obama/Wall Street and at some point soon the Fed will be forced to unleash the printing presses again. In this regard, smart money will be adding to positions on all price takedowns. Although I think we'll consolidate January's move for awhile, the metals are set up fundamentally for a massive move this spring.

Thursday, February 2, 2012

Got Gold?

"Gold, unlike all other commodities, is a currency...and the major thrust in the demand for gold is not for jewelry. It’s not for anything other than an escape from what is perceived to be a fiat money system, paper money, that seems to be deteriorating." … Alan Greenspan, ex-US Federal Reserve Chairman, August 23, 2011
Just had an interesting conversation with a long-time good friend of mine who has spent most of his career in wealth management for big banks and knows a lot about financial theory. He commented that the only solution that makes sense for wealthy people is to put their money into very short duration Government bonds and don't worry about rate of return because anything else that might pay a higher yield is just too risky right now.

WRONG! The best answer for someone who is wealthy and looking for a place to invest is that they s
hould be putting at least 1/2 of their wealth (really more) into physical gold and silver.  Ultimately any paper "investment" is only as good as the guarantor behind that investment. Does anyone really ultimately trust the U.S. Government? Seriously. At some point the Government will have issued so much debt that in order to pay it back, it will have to restructure. This can come in many forms. But here's one very plausible scenario: let's say that you are invested in 3 month T-bills and it is obvious to everyone that the Government can't pay these off unless they print money. Well, they don't have to print money. They can hold the equivalent of a gun to your head and offer this deal: they exchange your 3 month paper for a new piece of paper that matures in 10 years and pays a coupon that increases each year, but starts at zero. You'll have no choice but to take this deal because otherwise the Government will default, rip up the bond
indentures and start over. You get nothing. The problem is that the new bond will trade at something like 30-50 cents on the dollar, because the market will price in heavy default risk and the fact that it will pay little or nothing to start. Now how does it feel to have all your money in short term Government paper?

Think this can't happen? 10 years ago did you think ANYTHING that's happening now couldn't happen? Look at Greece. Spain, Italy and Portugal are next. It just so happens that as I was composing this commentary, posted a report that contained a Treasury pitchbook for issuing floating rate debt:  LINK  Clearly the Treasury is looking for gimmicks to induce demand. And, quite frankly, the outsized demand for short term Treasury debt issuance is largely coming from European banks who buy the short term paper and then turnaround and use it as collateral to obtain 3-yr financing from the ECB.

At the end of the day, ANY paper claim is only as good as the entity that issues it and promises to repay it. There are plenty of other ways for the Government to devalue the claims against it. The most likely next step in this country will be something like the 3-yr LTRO program going on in Europe right now. This is essentially a program that lets Governments print up more bonds, sell them to banks and then the banks turn around and put them up as "collateral" for 3 yr "repo" financing at the ECB. Technically its not "QE" but in reality it is and it's a de facto non-transparent mechanism for the Fed to finance the enormous bond issuance requirements of the Obama Government.

How is this different from just an extension of the perpetual Ponzi financing going on at all levels of the economy? In fact, it's really just money printing in disguise because the Governments over there simply print up bond certificates, sell them to the banks who then monetize them at the ECB. The only reason its not considered an expansion of the money supply is because it's "debt." For now. But defaulted debt becomes "equity" which has to be monetized. At the end, it's still money creation - and the creation of it is going parabolic. 
(M2 - Money Supply) 

(U.S. Treasury Debt Outstanding, as reported.  Does not include $7 Trillion In Agency Debt)

Tautologically, the devaluation of the U.S. dollar is in the formation of an inverse parabola.  If you own dollars, that's what's happening to your wealth - the value of it is in inverse parabola formation.  Still like short term Treasuries?  At the end of the day, debt issued by any Government that is either "restructured," defaulted on or devalued via inflation/QE is nothing more than fraudulent money.  Gold is the only true, honest form of money.  So says "The Maestro" himself (see opening quote).

Wednesday, February 1, 2012

R.I.P. Don Cornelius

The master promoter of Motown died today from a self-inflicted gun wound.  I recently saw a special on Don and Soul Train on VH1 and it brought back a lot of fond memories of those days.  I would find it hard to believe that anyone born in the late 1950's or 1960's did not turn on Soul Train at least for a few minutes every Saturday in order to check out the outrageous fashion and dancing and to hear the latest funky music (c'mon man, we all had bell-bottom jeans and ugly shirts).  Every huge disco/Motown star in the 1970's performed live on Soul Train, including Stevie Wonder, The Jackson Five, Aretha Franklin and James Brown.  I really miss the 1970's in many respects - at least this country still had a chance back then: