Archive for August 10th, 2010
Martin Armstrong is probably the top economist in the world. Even Jim Sinclair bows to his prognostications and we all know how smart Sinclair is. Armstrong is presently in jail for refusing to give the government the software he created that was able to uncover the formula for what makes the world markets work and thus predict future market action with accuracy. He writes letters from Jail….when he can. This latest letter needs to be read and understood by all. He tells us what we all mostly know and that is that we are on the verge of the end of western civilization…
Please click on the link for the entire letter. Pdf. File HERE
The purpose of these reports is to broaden the understanding that is so vital to our personal survival. Government cannot save us, and will only assist the very economic disaster we face. This is a Sovereign Debt Crisis that threatens our core survival.
There is no plan to ever pay off debts. The majority of debt increase- is paying interest perpetually to roll over without any long-term plan. What you see in Greece and in the States is that we have run out of other people’s money.
The Socialists keep pointing to the rich. But to fund the deficits, we need to borrow now from foreign lands. We ran out of money domestically and to support the current system, like Greece, we need foreign capital. But all governments are facing the same crisis and we are on the verge of another widespread government default. Adam Smith warned in his Wealth of Nations that in 1776, no government ever paid off their debt and had always defaulted. We will have no choice either.
There is no hope that politicians will save us, for they only form committees to investigate after the shtf. They will NOT risk their career for a future problem that may hit on someone else’s watch. There was a politician and a average man standing on top of the Sears‘ Tower when a gust of wind blew them off.The average man being a realistic pessimist, immediately sees he is about to die and begins praying. The politicians, the ultimate optimist, can-be heard saying -”Well so far so good!” as he passes the 4th floor.
At Princeton Economics, our mission was simply to gather global data and to bring that together to create the world’s largest and most comprehensive computer system and model that would monitor the world capital flows. By creating that model, all the fallacies of market and economic theories were revealed. The world is far more dynamic and every change even in a distant land can alter the course of the global economy.
Just as has been shown with the turmoil in Greece, a CONTAGION takes place and now capital begins to look around at all countries. We can no more comprehend the future by looking only at domestic issues today than we can do so in every other area, such as disease and the spread of flu.
We live in a NEW DYNAMIC GLOBAL ECONOMY where capital rushes around fleeing political changes and taxes just as it is attracted by prosperity. All the people who migrated to the United States in the 19th and 20th Centuries, came for the same reasons as those still coming from Mexico – jobs and prosperity. In the 19th Century, America was said to have so much wealth, its streets were paved in gold. We must now look to both the past and the entire world to understand where we now are today.
Let’s get real. The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills.
What it can and must do is radically simplify its tax, health-care, retirement and financial systems, each of which is a complete mess. But this is the good news. It means they can each be redesigned to achieve their legitimate purposes at much lower cost and, in the process, revitalize the economy.
Last month, the International Monetary Fund released its annual review of U.S. economic policy. Its summary contained these bland words about U.S. fiscal policy: “Directors welcomed the authorities’ commitment to fiscal stabilization, but noted that a larger than budgeted adjustment would be required to stabilize debt-to-GDP.”
But delve deeper, and you will find that the IMF has effectively pronounced the U.S. bankrupt. Section 6 of the July 2010 Selected Issues Paper says: “The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates.” It adds that “closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.”
The fiscal gap is the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years.
Double Our Taxes
To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act.
Such a tax hike would leave the U.S. running a surplus equal to 5 percent of GDP this year, rather than a 9 percent deficit. So the IMF is really saying the U.S. needs to run a huge surplus now and for many years to come to pay for the spending that is scheduled. It’s also saying the longer the country waits to make tough fiscal adjustments, the more painful they will be.
Is the IMF bonkers?
No. It has done its homework. So has the Congressional Budget Office whose Long-Term Budget Outlook, released in June, shows an even larger problem.
Based on the CBO’s data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt. This gargantuan discrepancy between our “official” debt and our actual net indebtedness isn’t surprising. It reflects what economists call the labeling problem. Congress has been very careful over the years to label most of its liabilities “unofficial” to keep them off the books and far in the future.
For example, our Social Security FICA contributions are called taxes and our future Social Security benefits are called transfer payments. The government could equally well have labeled our contributions “loans” and called our future benefits “repayment of these loans less an old age tax,” with the old age tax making up for any difference between the benefits promised and principal plus interest on the contributions.
The fiscal gap isn’t affected by fiscal labeling. It’s the only theoretically correct measure of our long-run fiscal condition because it considers all spending, no matter how labeled, and incorporates long-term and short-term policy.
$4 Trillion Bill
How can the fiscal gap be so enormous?
Simple. We have 78 million baby boomers who, when fully retired, will collect benefits from Social Security, Medicare, and Medicaid that, on average, exceed per-capita GDP. The annual costs of these entitlements will total about $4 trillion in today’s dollars. Yes, our economy will be bigger in 20 years, but not big enough to handle this size load year after year.
This is what happens when you run a massive Ponzi scheme for six decades straight, taking ever larger resources from the young and giving them to the old while promising the young their eventual turn at passing the generational buck.
Herb Stein, chairman of the Council of Economic Advisers under U.S. President Richard Nixon, coined an oft-repeated phrase: “Something that can’t go on, will stop.” True enough. Uncle Sam’s Ponzi scheme will stop. But it will stop too late.
And it will stop in a very nasty manner. The first possibility is massive benefit cuts visited on the baby boomers in retirement. The second is astronomical tax increases that leave the young with little incentive to work and save. And the third is the government simply printing vast quantities of money to cover its bills.
Worse Than Greece
Most likely we will see a combination of all three responses with dramatic increases in poverty, tax, interest rates and consumer prices. This is an awful, downhill road to follow, but it’s the one we are on. And bond traders will kick us miles down our road once they wake up and realize the U.S. is in worse fiscal shape than Greece.
Some doctrinaire Keynesian economists would say any stimulus over the next few years won’t affect our ability to deal with deficits in the long run.
This is wrong as a simple matter of arithmetic. The fiscal gap is the government’s credit-card bill and each year’s 14 percent of GDP is the interest on that bill. If it doesn’t pay this year’s interest, it will be added to the balance.
Demand-siders say forgoing this year’s 14 percent fiscal tightening, and spending even more, will pay for itself, in present value, by expanding the economy and tax revenue.
My reaction? Get real, or go hang out with equally deluded supply-siders. Our country is broke and can no longer afford no- pain, all-gain “solutions.”
(Laurence J. Kotlikoff is a professor of economics at Boston University and author of “Jimmy Stewart Is Dead: Ending the World’s Ongoing Financial Plague with Limited Purpose Banking.” The opinions expressed are his own.)
To contact the writer of this column: Laurence Kotlikoff at firstname.lastname@example.org
For the longest time it was consensus thought that only Wall Street could fuck Main Street. The ride is now turning. After what the FT reports was a 16% decline in fixed income, currencies and commodities trading revenues for Q2, coupled with advisory revenues down 17%, the bank is now “planning to cut up to several hundred employees following a sharp fall in market activity in the second quarter. Sources close to the bank say that the job losses, which could be announced as early as Wednesday, will be spread across BarCap’s sales and trading staff as well as its back office support functions.” Too bad the SEC has not, and will not realize that its only function is to restore the faith of the retail investors in the credibility of the capital markets. Yes, the same retail investor who both on margin and in total has always been the primary driver of stocks. Alas that has not happened and tens of thousands of Wall Streets will soon feel the wrath of Main Street as the boycott of stocks by the broader population comes to fruition, allowing the former “strategists” to experience just how real the difference between the U-3 and U-6 rate is first hand.
News of the cuts is likely to alarm the City as well as Wall Street, where BarCap has a sizeable presence following its acquisition of the US operations of Lehman Brothers at the height of the financial crisis.
It is also likely to raise questions about BarCap’s aggressive expansion in recent years under the leadership of Bob Diamond.
The investment bank generated more than 80 per cent of Barclays’ pre-tax profits in the first half of the year, in spite of a slowdown in activity amid volatile markets and fears of a sovereign debt crisis in Europe.
Without clear signs of a pick-up in client activity, several analysts have flagged concerns about BarCap’s escalating cost base.
BarCap has added almost 4,000 staff since last June – bringing its total headcount to 25,500 – in its drive to join the ranks of the world’s leading investment banks.
That growth, however, has come at a price, with first-half salary and bonus costs across the Barclays group running at nearly £5bn, £1bn higher than the same period in 2009. Most of that growth is attributable to BarCap.
BarCap sources say that, in spite of the cuts, the bank still plans to finish 2010 with a higher headcount than at the end of 2009
And while Barclays may be the first to experience what a complete lockout of retail participation in stocks means, it certainly won’t bet the last.
Headhunters that specialise in financial services have warned that unless there is a substantial pick-up in corporate activity in the coming weeks, many more banks will be looking to trim costs by cutting staff.
Just as several recent campaigns have tried valiantly to get Americans to withdraw their deposits from TBTF banks (an,d unfortunately, have not succeeded…at least not yet), so an ever increasing disclosure into the true criminality of Wall Street’s practices has eroded virtually all the credibility of American capital markets, which incidentally was never deserved to begin with.
We can only hope that as headcounts are eliminated in the tens of thousands, and as NY (and other) city income tax revenues plummet, that more and more people will require that the SEC finally do its work, and regain some semblance of control over stock (and other OTC product) trading. Because, as Zero Hedge discloses day after day, the current jungle is a marketplace only fit for algorithms and primary dealers. And as Barclays has now learned the hard way, neither pay the bills at the end of the day. In the meantime, if nothing changes, we will continue exposing the travesty of US markets day after day, as ever more ill-gotten credibility is destroyed, until the point at which none is left will be the singularity in which Wall Street finally consumes itself.
Whether it is by soft, or hard reset, the change is coming.
(Their statement inset, my translation outset.)
Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months.
We never had a recovery. The Government borrowed a scadload of money and blew it to avoid recognizing what was a severe recession; as a consequence they reported at worst a 2% drawdown annualized, but this is fraudulent – the real drawdown has exceeded 10% now for more than two years.
Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.
Everyone’s broke. Congratulations.
Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract.
Business is broke too. That claimed “record balance sheet cash” is of course offset by debt, and coverage ratios are worse now in terms of assets than any time in the last 50 years. That’s not improving either.
Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.
We believe. Don’t you?
Measures of underlying inflation have trended lower in recent quarters and, with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.
The economy is going through deflation and our attempts to stop it have failed.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.
There’s no growth, the economy is contracting at 10% per year and is likely to continue to do so for the foreseeable future. We know this and we also know that at some point the government’s ability to borrow and spend in order to fraudulently report “growth” will disappear. Of course we won’t tell you that up front, because then Grandma will (correctly) surmise that her Social Security and Medicare will disappear (and she’s rather likely to be unhappy.)
To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.1 The Committee will continue to roll over the Federal Reserve’s holdings of Treasury securities as they mature.
I said there is no recovery! We can’t shrink the balance sheet but we can try to monetize Treasury Debt. Of course there is this tiny problem with that Fannie and Freddie paper – it’s got huge embedded losses in it. We won’t bother talking about the blatantly-unconstitutional act of allocating revenue that we just said we’re going to do – and we hope Scott Garrett doesn’t call us on it (again.)
The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.
We suck and we know it. Ain’t it grand that you let us get away with this crap?
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh.
The criminal cabal.
Voting against the policy was Thomas M. Hoenig, who judges that the economy is recovering modestly, as projected. Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and limits the Committee’s ability to adjust policy when needed. In addition, given economic and financial conditions, Mr. Hoenig did not believe that keeping constant the size of the Federal Reserve’s holdings of longer-term securities at their current level was required to support a return to the Committee’s policy objectives.
And the one man with a brain…..
PS: To Mr. Hoenig: Don’t get in any private planes. Nor take any late-night walks. Nor go bird hunting with anyone named “Cheney.” And for God’s sake, don’t stand up in the bathtub. (Yes, that’s sarcasm, if you’re incapable of understanding it as-written.)
In response to Will Quantitative Easing Spur Inflation? Job Creation? Credit Expansion? Do Anything? (a point-by-point discussion of thoughts from Chris Ciovacco at Ciovacco Capital Management regarding quantitative easing), I received a nice reply from Chris.
Chris writes …
I agree with your comments today. We could have done a better job properly framing our comments on quantitative easing. We added the following to the top of our review to clarify our remarks:
Our interpretation below relates to the asset markets and asset prices. We believe quantitative easing can impact asset prices in the short-to-intermediate term. We do not believe quantitative easing is the solution to the global economy’s problems, nor do we believe it will create long-term prosperity or job growth.
As money managers, our job is to understand the possible impact of Fed policy on the value of our clients’ investments. The short-to-intermediate-term driver of asset prices would be the perception of market participants, right or wrong, that the Fed can create positive inflation.
We firmly believe quantitative easing can impact the prices of stocks, commodities, and currencies in the short-to-intermediate term. In that light, we believe quantitative easing, or even the potential for the Fed to buy Treasury bonds, is an important factor in determining investment outcomes in the next six to twelve months. Financial market performance and the long-term economic impacts of quantitative easing are two separate issues.
Have a great weekend,
Ciovacco Capital Management
My Reply …
That is much better expressed. It is possible we are seeing some up-front effects now. If so, we could see a spike and a sell the news event, if and when the Fed does start QE2.
Moreover, this could be another “bazooka” ploy. So far all such ploys have failed. However, it is conceivable one of these bazooka plays “works” (rather appears to work), temporarily. One must balance that with the possibility QE2 blows up in the Fed’s face if they try it.
This is a very difficult market to judge. I see absolutely no reason to be long here. However, that is not an endorsement to short.
Chris Responds – Deflationary Outcomes Possible:
Appreciate the feedback. These are difficult times for investors and professional asset managers. We agree QE2 could result in another speculative leg higher in the markets or it could backfire.
Your comment “this is a very difficult market to judge” is right on the money. In our view, investors must understand and respect that short-term, primarily speculatively-based, gains are possible in asset prices. However, deflationary outcomes are also possible.
Asset price deflation (stocks & commodities) could take hold near current levels or could occur after another leg higher. We see the threat of a deflationary spiral accelerating if the S&P 500 again revisits the 1,010 to 945 level.
Any sustained break of 945 could open the door to very unpleasant outcomes. I think posting the email (and your thoughts) is a good idea. As I am sure you agree, our objective is to help people understand possible outcomes, over different time horizons.
Ciovacco Capital Management
Inflation Threat is Congress Not the Fed
The real inflation threat in the US is not the Fed. I think the Fed is pretty much powerless here. If quantitative easing seems to work, it will be temporary, just as happened in Japan.
Many people have emailed me stating that the Fed will give away money. No the Fed won’t.
The Fed cannot throw money out of helicopters or give money away. Such talk is nonsense. However, Congress can give money away.
Here are the pertinent questions:
1. How likely is that?
2. Enough to cause a serious bout of inflation?
The answer to #1 is straightforward enough: It is certain. Indeed, Congress has reluctantly agreed to toss another $26 billion at states to “save jobs”. The idea is foolhardy of course. One of the big problems cities and states face is public unions and public union salaries.
Those problems wrecked Greece and in my opinion have virtually bankrupted many major cities and states. Yet, here we are making another policy error, attempting to keep union wages intact and a defined benefit pension scheme alive, both of which desperately needs to be tossed in the gutter permanently.
The more important question is #2. Most think yes. I think no.
For starters the next Congress is going to be a lot more conservative than this one. Already we have seen unemployment benefits delayed for week. Money for the states came out of another pocket so the deficit did not go up.
However, a major reason a massive helicopter drop is not coming in spite of what everyone seems to think, is neither the Fed nor banks wants one! The Fed does not want hyperinflation as it will end the game. Banks do not want hyperinflation for the same reason.
What Do Banks Want?
Leaving aside the issue of hyperinflation, a complete loss of faith in the value of currency (an idea I believe is extremely remote), does anyone benefit from strong inflation?
I do not believe banks want serious inflation for the simple reason they do not want to be paid back with inflation cheapened dollars. Banks who were bailed out by taxpayers, already got what they want. They have nothing but scorn for the average Joe on the street his problems.
Besides, rising prices is no guarantee there will be job growth.
If banks don’t want it, and the Fed doesn’t want it, and Congress is likely to be far more conservative, then how is it going to happen? It is possible of course, but how likely?
That was a hidden theme in Fooled by Stimulus – Structural Problems Still Intact.
Problems Many, Solutions Nonexistent
- Tide of Debt: Consumers are swimming against a tide of debt with no way to pay it back.
- Demographics: Boomers are heading into retirement scared half to death because they did not save enough.
- Jobs: There is no source of jobs
- Wages: Global wage arbitrage
- Attitude Changes: a secular shift in the attitudes of consumers towards housing and risk taking is underway.
- The Fed is powerless to change attitudes.
It is going to be extremely difficult to counteract all of the structural problems in place.
As long as those structural problems are in place, the most likely outcome by far is a long drawn out Japanese style malaise. Whether or not prices as measured by the CPI stay above the zero line or dip below is actually a fairly insignificant point.
Bank lending and job creation are what matters most. The Fed is powerless on both of those scores, and barring massive efforts by Congress (and probably even with massive efforts by Congress), job creation is not around the corner.
Here is the essential question: If $1 trillion in fiscal stimulus did next to nothing, pray tell why would another trillion do anything?
Is another $trillion in fiscal stimulus coming? I highly doubt that.
Might a $trillion in QE2 come? Sure, perhaps even double that. But would it accomplish anything?
Long-term Chris Ciovacco agrees that it will not spur growth or fix any structural problems.
Short-term is more debatable, but perhaps the only response is a move in treasuries or gold.
Many have gotten their heads blown off again shorting treasuries. With all the above-mentioned structural issues, and with the Fed threatening QE2 on top of it, why would one want to be short treasuries here?
Fed Cannot Change the Trend
Let’s return to the revised thesis, that QE2 may cause a bounce in the markets. Chris believes “quantitative easing can impact the prices of stocks, commodities, and currencies in the short-to-intermediate term.”
While possible, please remember …
The Fed can speed up or delay, but not change the primary trend.
Quantitative easing might give a boost to that downward trend in 10-year treasuries, but Fed purchases of treasuries is certainly is not the cause of plunge in 10-year treasury yields. The slumping economy and deflation are the cause.
Fundamentally, yields ought to be falling, and they are. If and when yields are poised to rise, the Fed will not be able to do much to stop it.
Perhaps QE2 causes a bounce in the equity markets, but it will quickly fade unless the market was ready to head in that direction permanently.
To be sure, we are in uncharted territory, not only in treasuries, but in the Fed’s response to the crisis. I called for the Fed’s power grab and willingness to break rules in advance on April 3, 2008 in the Fed Uncertainty Principle.
Nonetheless, I do not know for sure what is coming up next. No one else does either. Yet I see statements every day on the internet such as “I know gold is headed to $2000″, “The bottom is in”, etc.
Well gold may (or may not) hit $2000 but certainly no one knows. It may also fall to $500. The Bottom in the stock market may be in, but there is a very good chance it isn’t.
1. Structural problems (tide of debt, demographics, etc – as noted above) are numerous.
2. Stocks are not cheap if you factor in quality of earnings, dividends, historical PEs, etc. Stocks only “appear” cheap if you believe forward earnings estimates in the face of those structural problems.
3. Buying stocks in the face of such structural issues, at a time when they are not cheap is highly likely to yield poor results.
4. It is difficult if not impossible to time the effect (if any) of quantitative easing. In fact, we may have already seen it in advance.
5. Gold is in a long-term bull market with its monthly trendlines intact. Other than treasuries, not much if anything else is.
Some may debate point number two, but I am willing to state that is what I know. However, knowing stocks are not cheap, and knowing where they are headed are two entirely different things.
We do not know what Congress will do, what the Fed will do, or what foreign central banks will do if the economy heads south again in a major way. We have ideas, but we cannot say we know.
Moreover, it is not what the Fed or Congress does in isolation that will matter most, rather what they do in relation to what other countries is what matters, and we certainly do not know that.
China is a wildcard and its response to the next global slowdown will greatly impact commodities. Does anyone know for sure what China will do? I think not.
The Mideast is another wildcard. Certainly we might see a startling reaction if Israel were to attack Iran or vice versa.
While stocks may rise in this environment, the odds are they don’t. While treasury yields may shoot to the moon, the odds are they won’t. While gold may collapse, the odds are it won’t.
While quantitative easing (assuming it happens) may temporarily effect stock prices favorably, the odds are against someone timing it correctly.
This is is not a call for anyone to short this market as most of those structural problems are reasonably well understood. However, this is quite a good time to be thinking about risk-reward setups, because the odds of a sustained rally sure do not look favorable.
Bear in mind unfavorable and impossible are not the same thing. While one might throw sevens, four times in a row at craps, I would not advise betting on it.
Mike “Mish” Shedlock
Real estate professionals call it “buy and bail,” acquiring a new house before the buyer’s credit rating is ruined by walking away from the old one because it’s “underwater,” or worth less than the mortgage. It’s an attempt to escape payments on a home whose value may never recover while securing a new property, often at a lower price with a more affordable loan.
“Making it possible to pursue people who do this particular kind of default would go a long way to addressing the buy-and-bail problem,” said Jay Brinkmann, chief economist for the Mortgage Bankers Association in Washington.
Sounds good, right? Keep up with your obligations, moral (and ethical) standards demand you do what you can to meet the commitments you made, right?
On Friday, CoStar Group Inc., a provider of commercial real estate data, said it had agreed to buy the MBA’s 10-story headquarters building in Washington, D.C., for $41.3 million. That is well below the $79 million the trade group agreed to pay for the glass-walled building in 2007, near the top of the property bubble, while it was still under construction. The price also falls short of the $75 million of financing that the MBA got from a group of banks led by PNC Financial Services Group Inc. for the purchase.
John Courson, chief executive officer of the trade group, declined in an interview Saturday to say whether the MBA would pay off the full loan amount. “We’re not going to discuss the financing,” he said.
Tell ‘ya what John: I’m willing to listen to the Mortgage Bankers Association bleat about morals and ethical commitments when you honor yours, and not one second before.
Until then, here’s a big fat can of shut-the-%#ck-up – these homeowners who are underwater are in fact following the example that your firm VOLUNTARILY set for them.