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.

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:

HOUSING MAY NO LONGER BE VIEWED AS SECURE INVESTMENT

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.

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.

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.

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 better.  LINK

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.

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 should 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, zerohedge.com 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).

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: