It's Getting Ugly

There will be a time when the middle class gets hit by a 2x4 in the back of the head that they never saw coming - Dave in Denver, circa 2004...That 2x4 is in motion - Dave in Denver, today

Major European bourses were down anywhere from 2% to 5% (Italy).  Italian and Spanish 10yr sovereign bond yields are soaring again.  Large fissures are forming again now that the ECB's latest version of money printing (LTRO/QE) has been applied and the dust has settled.  The problem is that the financial equivalent of Mt. Vesuvius is starting to rumble again.  I visited the ruins at Pompeii last summer.  Until then, I had never really grasped the true devastation caused by the eruption of Mt. Vesuvius.  It's truly horrifying.

The amazing thing to me is how few people understand that the European situation is nothing but one big deflection/cover-up for the catastrophic problems embedded in the U.S. financial and economic system.  If the quantifiable problems in Europe are "x," the quantifiable problems in this country are at least "5x."  Note: that is what's quantifiable.  Note #2:  Not "quantifiable" by what is being reported in the media but what is "quantifiable" by doing intelligent research, including knowing where to look for quantifiability (like applying what we know about true housing market values to the level 1, 2, and 3 assets listed in the footnotes of Bank of America's latest 10Q). 

The black swan on the horizon in this country is that which is not readily quantifiable.  An good example of that is the pension underfunding disclosure announced by the State of Illionois yesterday.   The State of Illinois announced that the State pension fund is underfunded by $83 billion.  Huh?  Here's the LINK  Now, there are two components of unquantifiabilty to this disclosure.  First, I wouldn't trust that $83 billion number any more than I'd trust Rick Santorum with my little nephew.  I would bet my entire net worth that the $83 billion number is not based on a true mark to market assessment of a decent amount of the pension fund's holdings, like real estate, real estate backed assets, derivatives and private equity investments.  The real number is much larger than $83 billion.  Second, as the article states, this number does not include "uncalculated billions in underfunded pension obligations for city, county and other local governments."  Unquantifiable underfunding - just in the State of Illinois.

Now if that's Illinois, imagine how ugly the truth of this particular problem is for California.  And New York, New Jersey, Ohio, Pennsylvania and Michigan are right behind Illinois.  But it's the "unquantifiable" truths that should be scaring the shit out of everyone.  Another example of the unquantifiable is an event like MF Global.  If MF Global is illegally stealing customer funds to use as collateral, I can guarantee you that other bigger brokerages are doing the same.  Jon Corzine is a thief, but he's not clever and he's not an original thinker. 

It's this unquantifiable reality that is the 2x4 that is going to hit most of the people in this country in the back of the head.  I would argue that the swinging of it has begun.   I just don't know when impact will be.  The market definitely senses the presence of this 2x4 that's been put in motion toward the collective heads of the middle class.  When the S&P 500 started dropping like Wile E. Coyote off a cliff, initially the metals and miners started down with it.  But then out of nowhere some "invisible hand" ignited a sharp reversal, first in gold and silver and then in the miners.  Some of the smaller cap mining stocks went from being down 5% at one point to going green on the day.  The S&P/Dow remained on their lows of the day, down about 1.5% each.

What caused this?  Two hours after the reversal occurred I have yet to find any news item or rumor that would have triggered the reversal in the precious metals and miners.  What I will say, though, is that gold (and silver) tend to sniff out big problems well ahead of those problems becoming obvious to all.  It's almost as if gold and silver started sensing that 2x4 in motion...if that's the case, the market will soon truly understand the role gold and silver play as flight to safety vehicles.

More On Housing, Gold, Etc...

The financial system of the United States of America is like the Titanic. Hubris led many to declare it financially unsinkable even as its fundamental design was riddled with fatal flaws and the human pilots in charge ran it straight into the ice field at top speed.  - Charles Hugh Smith, LINK

I want to post some interesting articles without too much commentary.  I hope you read them in their entirety, as they underscore some of the themes about which I've been ranting for the past several months.

First, as has been reported by several non-mainstream media sources, China continues its aggressive accumulation of gold and mining assets.  This is an article about that from Australia's biggest selling national newspaper: 

A very reliable source close to several gold companies tells us Chinese interests are not only taking stakes in explorers and miners, they are also buying gold directly from producers and shipping it home

Here's the LINK (note:  if you have trouble loading the whole article, copy the title of the article into a google search bar and then click on the link that comes up - it should load in its entirety).

This article reinforces the fact that China is looking to diversify a large portion of its dollar-based foreign reserves into physical gold and mining assets and is doing so in ways camouflage the obviousness of overt physical buying in London.  In fact, China seems to think that right now it's cheaper to buy gold in the ground on a per ounce basis by buying mining companies than it is to buy refined bars on the open market.   I happen to agree with that.

Second, I've been ranting about the next wave down in the U.S. housing market.  I have argued that there was a substantial slowdown in bank foreclosures while the robo-signing fraud suit was settled.  FNM and FRE also slowed down their foreclosures so they could figure out how to unload their massive REO inventory.  Here's an article that reinforces my claim.  It quotes a couple of non-Government and non-industry organizations that track the housing market.  As you'll see, foreclosures have started to ramp up again:  LINK

Furthermore, the Fed just established a framework of rules and policies that enable big banks to rent out their housing inventory:  LINK.  Wouldn't you think that if the housing market was recovering the way the Government and the National Association of Realtors are both claiming that banks would want to unload their inventory to buyers?  What I find amusing about this is that the Fed has put its banks in direct competition with the Taxpayers/Govt in renting out housing inventory that can't be sold.  The banks will be competing directly with investor groups who are buying blocks of homes for the purpose of renting from Fannie and Freddie under a new dedicated rental program rolled out by the Government to enable FNM/FRE to unload inventory in order to make room for even more.

Bottom line:  the next year will be a great time to look for a nice home to rent and rental prices should decline considerably as bank and GSE inventory hits the rental market.  Conversely, it looks like this rental supply will soak up a lot of potential buyers and housing prices will start tanking again.  Per the recent monthly Case-Shiller data, prices have already begun to drop.  My bet is that they will drop precipitously over the next 12 months.

Make no mistake about it.  The economy is slipping back into crash mode.  Regarding the Fed and QE3, I'm still waiting for someone to explain to me in detail how the Government will fund its massive Treasury issuance for the rest of this year without creating downside chaos in Treasury prices (causing yields to spike a lot higher) unless the Fed prints up new money to buy the coming supply of Treasuries...

Lefties Of The World Unite!

Another Lefty wins the Masters!!!

Congratulations, Bubba.  What an unbelievable recovery shot on the 2nd playoff hole - wow!

Look Out Below (make sure you watch the video below)

Just a quick one today.  Contrary to the public backscratching campaign over the supposed relative strength of the economy being conducted by the media, the real economy data continues to belie the lies being propagated by the financial journalists, Fed officials and politicians.

First, housing is tanking and now more proof to back up my thesis that foreclosures this year will swamp the market and push prices down even more.

Bloomberg:  Home Prices Seen Dropping 10% in U.S. on Foreclosures: Mortgages  LINK
Reuters:  Americans brace for next foreclosure wave  LINK

Zerohedge:  LINK

In a previous post, I linked the actual, unadjusted housing data from the Census Bureau and NAHB - the stuff that neither gets published by the media nor does makes any headlines - and it shows that the actual number of homes being started and sold, plus the actual number of existing home sales that actually close, is still probing historical lows.  Moreover, an increasingly large number of homes are being purchased by investors who aspire to turn around and rent out these properties.  This will put pressure on rental rates and we'll back into the downward spiral in prices again.

Second, Alcoa announced today that it was shuttering about 4% of its alumina production capacity.  This is on top of a sizable amount of smelting capacity that was shut down in January.  The reason given was that Alcoa wanted to avoid creating oversupply of alumina:  LINK

What this really means is that demand for alumina and aluminum products is starting to dry up.  If there is any commodity that is a good GDP indicator, it's alumina.  Alumina is used in some way in just about every durable good produced.  If demand for alumina is falling, it's indicative of a significant decline in production/economic activity. 

I'm sure when everyone opens up their local newspaper or turns on the nightly local news to catch the weather and sports, the newscasters will be crowing about the decline in jobless claims, which is statistically very suspect.  The public won't be treated to an analysis of Alcoa's alumina production cutbacks.

Tomorrow the stock markets are closed.  Banks and the bond market are open, but all intents and purposes, tomorrow is a holiday day.  Happy Easter/Passover to everyone observing those celebrations.  Have a great weekend!

This is my good friend Brad, aka "Bulldog" in his rendition of a scene from Dr. Strangelove:

Strictly A Rhetorical Question...

...because the answers is obvious.

How will the U.S. Government fund all of the additional budget deficit spending that has already been built into this year's spending plans if the Fed does not print money in some fashion in order to help finance all of the new Treasury debt issuance in 2012? 

Before you answer this, you need to be aware, and you can use google to find the numerous sources of this data, from the time QE2 commenced until it ended the Fed directly or indirectly purchased over 100% of of all new Treasury debt issuance during that time period.  In other words, it also paid for some of the refunding/rollover issuance.

Furthermore, Operation Twist, was nothing more than a attempt a cleverly disguising the Fed's role in funding Treasury issuance since QE2 formally ended.  With this operation, the Fed simply sold down its short term Treasury holdings to a collateral-starved money market and repo-collateral market and used the funds to buy Treasuries in the meat of funding curve - 7 to 10 yrs - which funded the Treasury plus helped keep a lid - sort of - of mortgage rates.  For all of 2011, the Fed purchased a "stunning" 61% of ALL net Treasury issuance:  LINK
I think we all can see what happens if the Fed does not start printing soon.

I thought I'd throw in a little humor after yesterday's post.  I frequent a news aggregator and excellent market monitor website called Finviz (www.finviz.com).  This morning when I pulled it up to check the list of news items, I found these two headlines posted 1st and 2nd respectively:

"Private sector [adds] 209,000 jobs in March"  LINK
"Yahoo lays off 2,000 employees"  LINK

I just love that.  The 1st metric comes from the monthly ADP payroll report.  This report is commonly understood to be even less reliable than the monthly BLS employment report.  I did some research a while back on how ADP calculates its numbers and discovered that they use similar algorithmic modelling as the BLS.  I think that tells you all you need to know about the ADP monthly report.  Note also that it is clearly stated as an "estimate."

Yahoo, on the other hand, is reporting jobs that have already been chopped.  Now they have to inform the chop-ees.  I suspect we'll see a lot more reports of big companies cutting jobs.  I'm sure Yahoo isn't done yet for the year as well.

I wanted to stop there today, but I came across this revealing blog piece from Felix Salmon.  In terms of systemic liquidity and the question of whether or not the Fed will roll out QE3 (I think we all know the true answer to that), Salmon has a chart you have to look at which shows syndicated bank lending by quarter.  Syndicated bank loans - which is the big corporate loan market - are starting to cliff dive.  This means that corporations are not funding new projects AND that banks are not lending to new projects.  To make this data even uglier, most of the syndicated lending that has occurred - 70% in fact - has been refinancing older, higher interest rate debt.  Not only are the banks NOT providing liquidity to the corporate market, but only a small relative percentage of the lending is "new blood" lending.  Here's the LINK

Batten down the hatches.  It could get really ugly for awhile...

WTF? A Couple Of Irritations Today

So CNBC plus your local moronic financial adviser are trying to convince you that gold is in a bubble?   Barron's online just posted an article in which some shit-for-brains analyst from Piper Jaffray and another one from some bucket shop laid out the case for AAPL to hit a trillion dollar market cap.  I've been wondering when Wall Street was going to start throwing out numbers like that for AAPL.  I think the absurdity of that valuation in relation to AAPL's underlying business and market fundamentals speaks for itself.  I will say, though, if the Fed has to print money in the quantities that will be needed to fund our Government, we could see several stocks hit a trillion dollar market cap, especially the large mining stocks.

Here's the Barron's article if you want either a good chuckle or feel a need to be irritated:  LINK

The second source of irritation for me today was when I woke to the reports that Obama accused the Supreme Court of judicial "activism" if they struck down Obamacare.  He referred to the SCOTUS as "unelected" officials.  Here's a link that's not from Fox News:  LINK

Ummm, what I am I missing here?  I thought that we learned in like 9th grade that we had three branches of Government in our system in order to provide checks and balances within the Governmental process.  I thought that the Supreme Court's function was to determine the constitutionality of legislation created by Congress and signed by the President.  If the Supreme Court strikes down Obamacare, isn't the Supreme Court doing what it's supposed to do?  If a President can influence the way in which the Constitution is meant to be applied, then isn't our system failing?

It seems to me that the only "activism" taking place here is by Obama.  Quite frankly, I find it hard to believe that he is supposedly a Constitutional law expert.   But then again, we have already seen by his actions - as opposed to and contrary to his campaign promises - that Obama is systematically putting what's left of the Constitution - that which wasn't destroyed by his predecessor - through a paper shredder.  In truth, we should not be surprised that a politician who skated through the system on affirmative action programs and who has lived on public largess his entire career doesn't give a rat's ass about the Constitution.  Let's call Obama a "Con" law expert, as he conned a lot of people into voting for him to be the POTUS.

The bottom line is that our system is quickly collapsing into a state of Governmental totalitarianism.  The signs are abundant.  Just look at the way in which the MF Global catastrophe is being handled by the Justice Department.  It's not and that's the problem.  The Obama Administration is looking the other way while the JP Morgan and Jon Corzine walk away from looting at least a billion in customer funds. 

And what's with Obama signing a law the gives the Government the right to take control of the entire infrastructure and resource base of this country AND to implement martial law WITHOUT the exigencies of a national emergency.  I'm referring to the recent National Defense Resources Preparedness Executive Order signed by Obama a couple weeks ago.  Think he's not serious about this?  Check out the recent ammunition procurement by the Department of Homeland Security:  LINK.   Those are not crowd control rubber bullets.  Those are hollow-points designed for efficient killing.  What is our Government worried about?

I guess in the context of the enormous power that has been consolidated into the Executive Branch of Government, first by W and then by Obama, we shouldn't be surprised that Obama is trying to verbally usurp the authority of the SCOTUS to do its job the way it was laid out by Founding Fathers and the Constitution.  But then again, with a name like Barack Hussein Obama, we know our POTUS does not have much in the way of American heritage, so why should he respect or heed the system set up by the people who started this country...

Hunger Games

 A bankrupt empire still trying to police the world is the ultimate act of hubris

- quote is from the article linked below

I woke up today in a bearish mood for some reason and the commentary below from The Burning Platform blog was perfect fuel: 

•We’ve increased our national debt by $5.6 trillion in the last three and a half years. It took from 1789 until 2000, two hundred and eleven years, to accumulate the first $5.6 trillion of debt.

•Our average annual deficit from 2000 through 2008 was $190 billion. Our average annual deficits since 2008 have been $1.3 trillion. Our deficits never exceeded 4% of GDP prior to 2008, but now they exceed 9%.

•The national debt will reach $20 trillion by 2015 and if interest rates normalized to the same level they were in 2007 (5%), annual interest expense would be $1 trillion, or 45% of current tax revenue.

•There are 242 million working age Americans and 100 million of them are not working. But don’t concern yourself. The Federal government reports that only 13 million of these people are actually unemployed. The other 87 million are just kicking back and living off their accumulated riches.

•The economic recovery has been so great that the 7.5 million people added to the Food Stamp rolls since the recession officially ended in December 2009 isn’t really an indication of severe stress among the 99%. Only 46.5 million Americans (15% of the population) need food stamps to survive.

•The unfunded liabilities of Medicare, Medicaid and Social Security exceed $100 trillion and cannot possibly be honored, leaving future generations to fend for themselves.

I'm not bearish, mind you, on the prospects for the markets, especially the precious metals.  The Fed will print plenty of money to accommodate the Government's deficit spending and debt accumulation.  The prospects are hopeless for new leadership that will do what is needed to start saving this country.  The Republican choices are beyond dismal (except Ron Paul) and Obama is really nothing more than an extension of his predecessor.  Any Obama apologist who believes otherwise is a complete idiot.

With that, I hope everyone takes the time to read thru this commentary from The Burning Platform:  LINK

Just for the record, the entire precious metals sector is fundamentally and technically set up for its next big cyclical move to new highs.