Monday, December 2, 2013

"It's Worse Than You Think"

             You can ignore reality, but you can’t ignore the consequences of ignoring reality
                                                          - Ayn Rand
The title quote references the conversation I mentioned a couple weeks ago with a local businessman who knows a retired military General with ties deep into the Pentagon.  The reference is to the U.S. economic and political system, not the condition of the Dept of Defense.

While the Obama regime and the elitist-controlled media seem to never fatigue from telling us that the economy is recovering, the data suggest otherwise.  My latest and freshest data point is the National Retail Federation's estimate that retail sales fell 3% over the 4-day holiday weekend this year.  What's remarkable, if not outright stunning, about that is the fact that this year it was truly 4 days of sales, as many big retailers opened on Thanksgiving.  Given the heavy degree of discounting, and the pervasive ad campaigns advertising the deals, I don't know how you can conclude anything but that the consumer is tapped out.

But let's take a look at two more data points that come from the website of the Federal Reserve.  This first graph shows a plot of real median income and the home ownership rate in the U.S (sourced from Confounded Interest blog, edits in red are mine).:

(click on graph to enlarge)

How can the economy possibly be improving when household income adjusted for the Government's low-ball inflation bogey is rapidly declining.  Moreover, despite the heavy advertisements of a housing recovery, the rate of home ownership is in steep decline.  Yes, I know housing prices are going crazy, supposedly, but this is largely due to a big surge in "investment" buying that has dropped off rapidly over the past few months.  You can see why here, if you have not read this yet:  Housing market black swan coming.

This second chart shows the rate at which the Fed is printing money - please note that the rate of increase is accelerating despite the debate over what and when "taper" means (sourced from St. Louis Fed website, edits in red are mine):

(click on graph to enlarge)

What's most interesting about this is that almost none of that money is going beyond the big bank balance sheets in the form of "excess reserves" being held at the Fed.   Now, why is the Fed printing over $85 billion per month now only to have it sit collecting interesting by our Too Big To Fail banks?   If you have not read this, I explain why the Fed will not taper and that I believe it's because the banks would be largely insolvent if the Fed were not injecting this kind of capital onto their balance sheet:  The Taper Won't Happen, Here's Why

Circling back to my quote from Ayn Rand at the top, most people with whom I discuss the economy/system with are either unaware of just how bad things are getting or they may know but choose to bury their head in the sand and ignore it.  But just because we collectively as a society choose to not look at a problem or pretend it's not there doesn't mean it will go away.  In fact, based on everything I look at, except for maybe sales of high end sports cars, expensive jewelry and rare art, our system is crumbling quickly.  I am willing to bet that 2014 ushers in an era of severe economic pain and Government control over our lives.  Those charts above tell me I'm probably right.


  1. Dave-you did not mention that auto "sales" were driven by higher dealer inventories--Wards auto reports that the dealers had 55 days of inventory in August and 75 days in October and auto sales at mfg level get reported when the car leaves the factory. The dealers and mfg are saying they expect a good winter and spring. But the inventories pile up. If they do not make a big dent in inventory soon, not only will retail sales be in trouble with autos, but they have to cut back jobs through the entire supply chain to cut inventories.

  2. Normalcy bias, cognitive dissonance, whatever. I'm thru getting up on my soap box trying to explain to family and friends what's heading our way. I just get that deer in the headlights look like I'm speaking Mandarin Chinese. Which might be a handy language to learn for the future.

    1. Amen, brother! I have friends and two brothers who largely ignore everything I send and tell them. And I am a CFA and in finance while none of these people know what a bond is. The worst thing about trying to alarm people, especially neighbors, is that they view you as crazy, but know where you live and what you have when the SHTF. It is a bad scenario except if you can do it anonymously like with a flyer in mailboxes or something...

  3. Hi Dave,

    Appears we were thinking along the same lines this morning. Just posted a couple of interesting interviews with John Ralston Saul and Barbara Ehrenreich. I think they fit nicely with the theme of what we are experiencing. I find it interesting that we are ignoring facts of bubbles staring us in the face when so many markets are priced for perfection. I think we would be better served by preparing for the resulting chaos to come. Ehrenreich does a great job tuning into our collective delusion, well worth watching.

  4. Fletcher Hedge Funds Like A 'Ponzi Scheme,' Trustee Alleges

    Davis, who previously accused Fletcher of using nearly $1 million from the Fletcher International Fund to pay legal bills from his lawsuit against the famed Dakota Apartments, where he lives, was appointed last year, after Fletcher put the International Fund into bankruptcy. That move followed years of litigation with three Louisiana public pension funds, which invested $100 million with Fletcher but received IOUs when they sought to redeem.

    Davis lays out what he sees as the reasons why: Fletcher "held only one assets of undisputed value—Helix stock—worth less than $8 million," Davis wrote. But Fletcher said the fund was worth $352 million when it filed for bankruptcy.

    The difference is due to "the extensive use of wildly inflated valuations, the existence of fictitious assets under management numbers, the improper payment of excessive fees" and "misuse of investor money," Davis alleges. He said that Fletcher generated "cashless notes" as part of a scheme to bilk the funds of more than $30 million in fraudulent fees and to attract new investors.

    "In many ways, the fraud here has many of the characteristics of a Ponzi scheme where, absent new investor money coming in, the overall structure would collapse," Davis wrote.

    they ignored it until they couldn't....I kind of doubt this guy is the only one playing this game....

  5. Fed fails to learn

    My objective is not to rehash history but to offer insight to help explain today's confounding environment. Top Fed officials have stated their objective of focusing monetary policy on system reflation, while relying of regulatory means to ward off potential asset Bubbles. They have apparently discerned no Bubbles in bonds and fixed income over recent years. Now, with U.S. stocks having become a primary recipient of QE3 liquidity, the Fed's policy doctrine has turned more openly suspect.

    While there's a good book to be written on late-stage Credit cycle dynamics, I'll attempt a few pertinent insights. In general, things really run amuck late in a Credit boom - and policymakers extend the Bubble's duration at all of our peril. To be sure, finance is over-issued and misallocated. The poor allocation of Credit throughout the real economy ensures maladjustment and progressive stagnation (i.e. less economic bang for the Credit and speculation buck). And as we've witnessed, if policymakers throw only looser "money" at the problem the end result will be more speculative asset markets and runaway Bubbles. Maladjusted economic structure coupled with asset Bubbles ensure a problematic redistribution of wealth toward a small segment of society. Meanwhile, the mountain of suspect financial claims grows ever taller.

    Today's conventional economic thinking ("inflationism") believes that so-called "insufficient demand" can be rectified by monetary policy. Yet the additional late-cycle "money" printing gravitates predominantly to inflating securities markets. At the corporate level, various forms of financial engineering are employed with the objective of supporting higher stock prices. On the one hand, little of the liquidity makes its way to the type of sound investment necessary to support sustainable wealth creation. On the other hand, that much of the population fails to benefit from monetary inflation becomes an important facet of late-cycle economic stagnation.

  6. Dude, why are you such a bummer? Cant you see your killing my buzz!

    1. One thing the American people must understand is the sooner we get rid of The Fed, the better it will be for all Americans. Since the inception of the Fed in 1913, the dollar has lost 98% of its purchasing power. The Fed has accumulated trillions in debt for future generations to pay. Put your children's and grandchildrens' faces on the bills. The main purpose of the Fed is to serve the interests of Wall Street and the banksters and not that of ordinary Americans. The bastards kept the reality of the Fed being a private company from the American people. Only until recently thanks to the internet have the masses discovered the truth about the Fed. This private company has the right to print an entire nations money supply and amazingly is not accountable to congress or the American people. How can the American people allow this insanity ?

    2. Dude!, I don't understand, you lost me. My financial planner told me the stock market has averaged eleven percent since the great depression ended and I need to be fully invested. Cramer says to BUY,BUY BUY! One of the titty monsters on Bloomberg was all giddy and said her mutual funds in her 401k were having their best year. EVER! I'm so confused right now.

  7. The Micawber Principle: "something will turn up"

    Last year – the 200th anniversary of the birth of Charles Dickens – we recalled the Micawber principle: “Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

    In that context, it is ironic that the central banks of the two largest English-speaking countries are engaged in massive quantitative easing (QE) to spur lending in an effort to violate the Micawber principle. Appropriately, the two-pound coin issued to celebrate the bicentennial of Dickens’s birth had one of Mr. Micawber’s more hopeful maxims inscribed along its edge: “something will turn up.”

    Many firmly believe that the global industrial growth outlook has brightened significantly, largely because of the improvement in a variety of widely-followed surveys, including purchasing managers index (PMI) data, in recent months. How accurate are such perceptions?

  8. wow, great stuff Dave. The monetary base is up over 400% since 08 and I read today the Fed owns a 1/3 of the US bond float.
    mania is back.

  9. US Black Friday sales dip for first time in seven years

    "Sales on the year's biggest shopping weekend dipped for the first time in seven years, according to the National Retail Federation.

    US consumers spent around $1.7bn less over the holiday weekend, with the average shopper spending $407.02 from Thursday to Sunday.

    That's down from $423.55 in 2012.

    Retailers blamed stagnant wages and economic uncertainty for keeping wallets shut, as they slashed prices to lure reluctant shoppers.

    In total, the National Retail Federation estimates that US shoppers spent around $57.4bn this year, down 2.7% from $59.1bn last year.

    Sales on Black Friday itself were down, as retailers opened stores on Thanksgiving Thursday and offered more details earlier in the week to entice shoppers.

    According to ShopperTrack, a market research firm, Black Friday foot traffic was down 11% and sales slumped by 13%."

    1. Yea but cyber Monday was up 19% from last year so Im thinking people stayed home and shopped online instead. Most of the sheeple havent a clue what is going down around them and are in a normalcy bias. Will hit them like a 2X4 smack between the eyes. Im still waiting to pull the trigger on some more SRS...

    2. Online sales represent less than 6% of total retail sales:

      I knew it was low, but I didn't know it was that insignificant

  10. You wrote: "Now, why is the Fed printing over $85 billion per month now only to have it sit collecting interesting by our Too Big To Fail banks? ... the Fed will not taper and that I believe it's because the banks would be largely insolvent if the Fed were not injecting this kind of capital onto their balance sheet ... "

    Is that money being "shoved down the throats" of the Too Big To Fail banks to muffle their screams about too much government involvement in the economy.)?

    1. No. It's been fed to the big banks like babies at mommies tit gulping milk to prevent from dying.

  11. Every so often I go back in my mind to a moment in 2008 where observed on the news an outburst of joy by individuals who ran the markets on Wall Street. They had a microphone stuck in their faces being question after having walked out from the exchange. The question posed was "what was worthy of the chase for the day?" The answer by most was silver...PAPER silver .
    At that moment I knew that any opportunity for the real thing, namely physical silver would be overshadowed by bullshit.
    Move ahead to today - Physical's still being overshadowed by bullshit.
    Absolutely amazing !!
    Well, may as well make the best of it ! Keep stackin !!!

  12. Japan’s Secrets Bill Turns Journalists Into Terrorists

    The leader benefiting most from the controversy, though, may be Japan’s Abe. With his own populace furious over China’s unilateral decree, the prime minister is seizing the opportunity to rush a chilling official-secrets bill into law.

    The entire process has echoes of George Orwell. If enacted, the secrecy law would allow government ministries to declare just about anything they want classified. It now even appears that trying to cajole information from someone privy to a state secret could warrant jail time. In other words, if I grab a beer with a bureaucrat and ask the wrong question, could I end up in handcuffs? Ambiguity reigns.
    ‘Terrorist’ Act

    Last week, the No. 2 official in Abe’s governing Liberal Democratic Party, Shigeru Ishiba, issued a dark warning to anyone like me who might dare to question the bill. In a Nov. 29 blog post, the LDP secretary-general likened any such challenge to “an act of terrorism.” He’s since stood by his ominous statement.

    “How can the government respond to growing demands for transparency from a public outraged by the consequences of the Fukushima nuclear accident if it enacts a law that gives it a free hand to classify any information considered too sensitive as a ‘state secret’?” Reporters Without Borders asked in a Nov. 27 statement. Essentially, the group argued, Japan “is making investigative journalism illegal, and is trampling on the fundamental principles of the confidentiality of journalists’ sources and public interest.”

    “Welcome to the land of the setting sun. Let’s see how much darker it will get,” Tokyo-based investigative reporter Jake Adelstein wrote in a Nov. 30 Japan Times op-ed. As Adelstein pointed out, the secrecy bill bears a resemblance to Japan’s pre-World War II Peace Preservation Law, which gave the government wide latitude to arrest and jail individuals who were out of step with its policies. Parts of the bill also echo the George W. Bush-Dick Cheney power grab that was the Patriot Act.

  13. Risk and Reward: China's Golden Hammer

    There are 35,274 ounces in a metric ton of gold. Let’s say that China’s actual total gold holdings are now around 5,000mt as reported in this Reuters article. Five thousand metric tons would be about 176 million ounces. As I type, the price of gold is roughly $1,250 per oz, meaning that China’s 176 million ounces would have a current market value in US Dollars of $220 billion dollars. Meh. No biggie.

    But what would happen if the Chinese prominently announced their gold holdings publicly? Surely such an announcement would shock the financial world, and even more so if they then publicly called into question the status of US gold reserves (unaudited since 1952, probably for good reason). What if China made the claim that they now have the largest amount of gold reserves of any nation on earth, and dared the US to prove them wrong with a fully public audit? What if they announced this fact while at the same time prominently noting all of the separate trade agreements they have signed in the last two years that cut out the US Dollar from trade settlement- you know, the agreements they have signed with Russia, India, Japan, France, Australia, Brazil, and others? It seems quite probable, in such a scenario, that gold priced in USD would reset quickly some multiples higher.

    I do not think that, in the resulting turmoil that would surely be caused by this scenario, a revaluation of gold to $10,000 per oz would be an unreasonable outcome. If so, what would/could this mean?
    A revaluation of gold to 10,000$ per oz would make China’s “stack” worth 1.76 trillion in USD- a gain of 1.5 trillion dollars over its present worth. Not too shabby, but wait- there’s more.


  14. Cancer Patient and ObamaCare Critic Says He Now Faces an IRS Audit
    If this is true, it would be just another example added to the long list of examples demonstrating the rampant cronyism and complete lack of morality that has characterized the Obama Administration from the beginning. It would also serve as further confirmation that the status quo intends to use the IRS as a political weapon against anyone they do not like, or perhaps just ruin people's lives arbitrarily as was done to a Michigan grocer a few months ago.

    Such behavior represents a defining characteristic of the out of control, corrupt Banana Republic nation we have devolved into. More info from CNS:

    A cancer patient, who publicly discussed the cancellation of his insurance under ObamaCare, now says he has been informed by the Internal Revenue Service that he is going to be audited.

  15. Can I just check something - How does QE improve a bank's balance sheet? My understanding is that, the bank in question purchases securities from the market on behalf of the Fed i.e. Dr Asset Cr Securities owners account. Then the Fed takes the security of the bank i.e. Cr Reserves Dr Securities. Net effect is less cash more reserves but net effect on balance sheet is zero. Am I wrong?

    1. I don't believe I ever said that QE "improves" bank balance sheets. The QE is being done to prevent big banks from going insolvent.

    2. Dave after days, weeks, months and now over 2 years of getting crushed can you comment on the gold and silver miners please?
      Tom the Hecla guy.

    3. Wish I had answers. Because of the extreme degree of intervention going on right now by the Fed and the Exchange Stabilization Fund in order to cover the magnitude of the deterioration of the economy, the ballooning fiscal risks and political catastrophe in DC, I am not issuing any outlooks, either way.

      I will say the contrarian indicators are now even more lopsided than they were at the end of June and just about everyone is either issuing a sell or short recommendation on the metals, just like the last of the bear holdouts have turned bullish on equities.

      At this point it's anyone's guess.

      What is happening right in all of our markets is beyond the extreme irrationalism fueled by Wall St. fraud and DC corruption that far exceeds what we saw in 1999 leading into 2000's market crash. It will not end well for just about everyone except those who stand to benefit from the fraud and corruption.

    4. Dave , All the more reason to be owning the physical metals , both gold and silver , aye ?!

  16. HUI hits 2003 levels...gutted


    In India, smugglers move gold like narcotics

    (Reuters) - Indian gold smugglers are adopting the methods of drug couriers to sidestep a government crackdown on imports of the precious metal, stashing gold in imported vehicles and even using mules who swallow nuggets to try to get them past airport security.

    Stung by rules imposed this year to cut a high trade deficit and a record duty on imports, dealers and individual customers are fanning out across Asia to buy gold and sneak it back into the country.

    Sri Lanka, Thailand and Singapore are the latest hotspots as authorities crack down on travellers from Dubai, the traditional source of smuggled gold.

    In a sign of the times, whistleblowers who help bust illegal gold shipments can get a bigger reward in India than those who help catch cocaine and heroin smugglers.

    "Gold and narcotics operate as two different syndicates but gold smuggling has become more profitable and fashionable," said Kiran Kumar Karlapu, an official at Mumbai's Air Intelligence Unit.

    "There has been a several-fold increase in gold smuggling this year after restrictions from the government, which has left narcotics behind."

  18. Madoff Lieutenant Says It Was 'Impossible' Not To Know Firm Was A Fraud

    Dec 3 2013 | 12:37pm ET

    Frank DiPascali, in his first day on the stand in the trial of five former Madoff employees, said that each of them were intimately involved in deceiving Madoff's investors and regulators—a deception that kept the wraps on a $65 billion Ponzi scheme for decades. DiPascali, who worked for Madoff for more than 30 years, told the jury that the fraud went on "as far back as I can remember" and that "it was virtually impossible not to know what was happening."

    The five former employees—Daniel Bonventre, Annette Bongiorno, Joann Crupi, Jerome O'Hara and George Perez—have said that they had no idea Madoff was a fraud, in part because DiPascali hid it from them. But DiPascali regaled the jury with anecdotes about close calls averted with the help of each of the defendants, with whom he said he worked closely on the fraud.

    In one case, an auditor for KPMG asked to see daily trading logs. DiPascali said that the defendants had prepared trading records for one day, but that the auditor asked for another.

    So, DiPascali said, he called O'Hara and told him to fetch the non-existent records from "the archives." He and the others than spent several hours dummying up the records, which they then put into a refrigerator—to cool down the hot-off-the-printer documents—and then tossed them around "like a medicine ball" to create creases and give a patina of age to the new records.

    "We all got a big chuckle out of that," DiPascali said. He added that he and his staff "literally" created trades out of thin air.

    In another instance, a feeder fund run by an accounting firm founded by Madoff's father-in-law found itself in hot water with the Securities and Exchange Commission. The only problem was, the trading records they had were full of red flags.

    "They were in essence the wrong faked trades," DiPascali said, so he and the others whipped up a new set of monthly records, covering three years, hiding suspicious transfers and inventing $86 million in Treasury investments to demonstrate that the feeder fund was, as it said it was, invested conservatively.

    well at least we know what the regulators can't do,,,??

  19. America in Worse Fiscal Shape than Detroit-Professor Laurence Kotlikoff

    Dr. Kotlikoff explains, “The bill has been endorsed by over 1,000 economists, including 15 Nobel Prize winners in economics . . .Never in the history of this country have this many top economists from all political persuasions endorsed a piece of legislation like this.” Dr. Kotlikoff and his fellow economists all contend, “The country needs to do honest accounting.” The professor charges the government is “disguising the true problem.” Dr. Kotlikoff says, “The government is printing mountains of money to pay its bills. The Fed is printing 29 cents of every dollar that Uncle Sam is spending.” What happens if this continues? Dr. Kotlikoff says, “Eventually somebody recognizes this and starts dumping the bonds, and interest rates go up, and inflation takes off, and were off to the races.”

  20. “Implicit” Government Guarantees To Bail Out Bank Creditors Tighten Their Grip On US Taxpayers

    The bailout of investors has created, he said, “two mutually reinforcing expectations”:

    First, many financial institution creditors feel protected by an implicit government commitment of support should the institution face financial distress. This belief dampens creditors’ attention to risk and makes debt financing artificially cheap for borrowing firms, leading to excessive leverage.

    In its 2013 estimate, using 2011 data, the Richmond Fed found that there were $44.5 trillion in total liabilities in the financial system, such as bank deposits and bonds. Of them, $10.6 trillion (23.8%) carried explicit guarantees, such as FDIC deposit insurance. And a stunning $14.83 trillion (33.4%) carried implicit guarantees. Unlike FDIC insurance, these guarantees are issued for free to the beneficiary, and when they come due during a bailout, all Americans are forced to pay, through either government or Fed action, to protect the wealth of the creditors. These implicit guarantees in 2011 amounted to 97% of GDP!

    They have done nothing but balloon. The Richmond Fed’s first estimate, using 1999 data, found that implicit guarantees amounted to $3.4 trillion (18% of the liabilities in the financial system). A mere 27.6% of GDP. Another screaming data point – as if we needed anymore – in how Wall Street’s risks have been wrapping their ever larger tentacles around the US economy and the taxpayer.

    How could this happen? How could these expectations of creditor bailouts balloon so fast so much? Who encouraged it? Well, the Fed and the government. “Through gradual accretion of precedents,” Lacker explained. One bailout followed by a bigger one, followed by an even bigger one, etc., followed by the massive bailouts during the financial crisis. It has been going on for four decades, he said.

    While these implicit guarantees have altered risk-taking on Wall Street, banks have become fewer and bigger. In the mid-1980s, there were over 18,000 federally insured banks. Now there are 6,891. Of the goners, 17% collapsed; the rest were mergers and consolidations, based on FDIC data cited by the Wall Street Journal.

    Of the survivors, 98.6% are banks with $10 billion or less in assets that control 12% of all assets in the banking industry. Then there are 70 regional banks with up to $250 billion in assets. They make up 1.2% of all banks but control 19% of all bank assets. Should any of them fail, it would entail private-sector losses and ownership changes with minimal governmental intervention. And then there are 12 megabanks – 0.17% of all banks that control 69% of the banking assets!

    Their “owners, managers, and customers believe themselves to be exempt from the processes of bankruptcy and creative destruction,” Dallas Fed President Richard Fisher pointed out when he once again vituperated against TBTF banks that, as “everyone and their sister knows,” were “at the epicenter” of the financial crisis. They “capture the financial upside” of their bets but are bailed out when things go wrong, “in violation of one of the basic tenets of market capitalism.”

  21. Re BitCoin
    What is your take on BitCoin?
    And, BitCoin vs Gold and Silver?