FedUpUSA

Archive for November 16th, 2011

 
Karl talked with Dylan today about Europe, unsustainable debt and his new book, Leverage.

Visit msnbc.com for breaking news, world news, and news about the economy

Let’s cut it all down to a short, easily-digested set of facts.

• With a few notable exceptions everyone believes that government at some level is good, not bad. (your host is in this group.)
• All governments inherently exist only due to the consent of the governed, as all governments require the active cooperation of the individuals living under that government to perform useful output of some form that they can then tap and distribute.
• Some governments have resorted to slavery (effective or actual) to maintain power but this is a losing proposition over willing cooperation, as a slave doesn’t produce to anywhere near his or her full potential.  Slavery by trickery is far more common than slavery by force for this very reason.

There is only one debate to have in this regard: What services do you wish to demand of your government at all levels — federal, state and local?

Now temper that with the following: Every service you demand must be paid for in current taxes.

Violation of that second precept is why we’re in this mess.  It is why the unholy game between Wall Street and Washington exists.  This violation is exploited by both major political parties (e.g. ads showing Bush “pushing Granny down the stairs”) to play you off the guy or gal next door through intentional lies in this regard.

This scam is now coming to a close not due to the ethics of the people in DC and on Wall Street but simply because mathematical limits have been reached.  We’re seeing the dislocation first in Europe and that should not surprise either — they too made promises they couldn’t pay for with tax revenues, and in general made more expensive promises than we did.

But this is small consolation because of how exponents work.  If you’re only half as bad as the other guy and he blows up you might think you avoided the blast, but in fact all that happened was that you have one more doubling time before you find yourself in the exact same soup he’s in.

Let’s look at another example: The CPI report out this morning claims that health care expenses are up a bit more than 3% annualized over year-ago costs.  That’s a lie: I just got my insurance renewal and it rose by almost-exactly 10% and that increase in cost has been nearly constant on an annualized basis for 20 years going back to when I was the guy negotiating our group plan for MCSNet!

The willful and intentional misconduct from various agencies in our government in the form of false reporting and willful and intentional aversion of eyes from outright scams and frauds, however, does not and cannot change mathematical outcomes.  Arithmetic does not care about political promises.

WE MUST decide as a people, via the political process, exactly what services we want our government to provide.  WE MUST give our government the charge to provide those services only for that which we are willing to pay for with current taxes, without exception.

That’s the beginning and end of it folks.

There is no other answer.  There is no other alternative.  This isn’t about wanting something different, it’s about facts.  The schemes and scams in DC and through the financial system are at their core attempts to avoid the outcome of basic arithmetic.  Medicare, for example, cannot be fixed under our current medical system where costs are escalating at 10% a year and have been for two decades.  Nothing you can do will fix Medicare until the underlying cost escalations stop; wages have not gone up at all over the last decade!

Note that if salaries go up 3% a year (which was a reasonable expectation until the last decade) then they double every 35 years (approximately.)  At 10% a year in cost escalation prices double every 7 years (approximately.) 

In 35 years, when salaries double once, costs double five times, or 2 X 2 X 2 X 2 X 2 = 32 times the original cost while wages have only multiplied by 2!

It doesn’t matter how high taxes are set — there is no tax system you can design that will allow this outcome to occur.

The wonks and “high level” people in DC know this.  Bernanke knows this.  The bankers know this.  In fact the bankers have their own formula for estimating doubling time called “The Rule of 72″ that dates back to before we had pocket calculators and math had to be worked on an abacus, slide rule or pencil and paper.

You had better come to grips with these FACTS and demand that the lies stop, because if we don’t and continue to allow votes to be bought with fraudulent promises that cannot be kept then it is inevitable that our nation’s economy and government will collapse.

That’s not an opinion, it’s a mathematical certainty.

An array of evidence suggests that a crash in equities might be just ahead.

I know, I know, retail sales are up so everything’s wunnerful, but the captain of Global Equities Flight 2011 just instructed the passengers to assume crash positions. It seems the captain has the distinct advantage of being able to see what’s just ahead, not to mention being able to monitor the engines and fuel levels. (Hmm, did the starboard engine just conk out? Not good….)

Levity aside, there are unnerving similarities between the present and the pre-crash 2008 equities market. To make the case, let’s turn to some excellent charts from The Chart Storeand Ron Griess.

In the first chart, Ron has traced out the basic pattern and the percentage of stocks above their 200-day moving average (MA). Notice how weak that is compared to price.

Next, a chart which shows we’re right where the 2008 rally topped and tanked.

Last up, one of my favorites, an analog chart that overlays the present-day rally over the 1907 crash and rally. It is uncannily similar until QE2 saved the day for a few months. That pushed the present out beyond the 1907 line, but then current prices began falling until the most recent “6-week wonder” prop job once again saved equities from collapse.

Apparently we’re supposed to believe that channel-stuffing auto dealers and Americans-self-medicating-with-shopping-on-credit are really going to power the economy to ever greater heights of sales and profits. Anything’s possible, but despite the cheer and the constant calls for a year-end rally to end all rallies, the market is looking a little uncertain here.

Consider the broad-based Russell 2000, which seems to have traced out a beautiful head and shoulders pattern, as good a precursor to a crash as you can get.

The last time the RUT looked this ugly, the Powers That Be pulled one save after another out of their bag of tricks. Despite brave talk from Fed lackeys that “we have more amazing stimulus plans right here,” everyone knows they’ve shot their wad and have been reduced to playing around with Treasury yields that won’t do anything for the real economy. So all that brave talk about the next big Fed-rides-to-the-rescue is just that, hot air and paper-thin bravado.

For a very insightful chart of the RUT from a razor-sharp analyst, please see Technical Perspective: Repetition in the Russell 2000(Chris Kimble).

Zooming in a bit, let’s take a look at the S&P 500, where we see a classic wedge/pennant, the sort of thing that breaks big up or down. Given the abundant evidence of weakness, not to mention the potential for outright panic in global credit markets, does anyone not being paid to lie really think the probabilities favor a breakout here to the upside? Based on what? I know, I know, “seasonal patterns.” In other words, we’re depending on Santa to deliver the rally everyone needs to stay solvent.

It doesn’t take much imagination–none, really–to see the similarities between the July topping-out and the present. If volume is the weapon of the Bull, then everyone betting on the next big rally has to explain why volume has been declining.

Rather than get distracted with how much low-quality crap gets sold at loss-leader prices on November 25, we might be better served to focus on the U.S. dollar.As everyone knows, equities and the buck have been on a see-saw for a long time. If the dollar rises, equities drop. If the dollar rises a lot–for any reason, or no reason, it doesn’t matter– then equities crash.

If the euro weakens, the dollar rises. If the dollar rises, equities weaken. If there is anything else to know about the current equity market, how much can it possibly be worth?

He who sells first sells best. Something to ponder in the weeks ahead.

Charles Hugh Smith – Of Two Minds

A gentleman who has occasionally popped up on the forum unmasked himself the other day and was interviewed in the “mainstream media” — ABC News’ European desk.

ALBERICI: “How certain are you that UniCredit broke the law while you were there?”

JONATHAN SUGARMAN: “A hundred per cent certain and to use the Irish expression, ‘to be sure, to be sure’ that is why I brought in this London based IT company which had a very good reputation in Dublin and the result was pretty horrific because whereas the breach that I’d reported to the regulator was a breach of twenty per cent, whereas the permissible deviation was one per cent, they rang me up one evening soon after they tied into our systems, linked into our systems and said your breach is actually forty per cent”.

ALBERICI: When he raised the alarm with his chief executive, the response was dismissive. It was a systems error. The risk manager was instructed to continue approving the deals. Jonathan Sugarman was in the thick of a reckless banking culture that was on a collision course with disaster.

Everyone says that what is happening now in Italy with their banks, and with Irish Unicredit, was some sort of accident, just as the claim has been made that this was true in America.  But we have plenty of information that either is an admission or strongly suggests that there was nothing accidental about any of these events — that they were nothing more than a willingness by executives to overlook or even intentionally bury bad conduct simply to rob the taxpayer by taking risks they knew they could manage to foist off on everyone when — not if — their institutions blew up.

The worst of this is that it’s still going on!

JPMorgan Chase & Co. (JPM) and Goldman Sachs Group Inc. (GS), among the world’s biggest traders of credit derivatives, disclosed to shareholders that they have sold protection on more than $5 trillion of debt globally.

Just don’t ask them how much of that was issued by Greece, Italy, Ireland, Portugal and Spain, known as the GIIPS.

As concerns mount that those countries may not be creditworthy, investors are being kept in the dark about how much risk U.S. banks face from a default. Firms including Goldman Sachs and JPMorgan don’t provide a full picture of potential losses and gains in such a scenario, giving only net numbers or excluding some derivatives altogether.

Got that?  JP Morgan has a market cap of $124 billion while Goldman has a market cap of about $50 billion   Both have less than a trillion of balance sheet size.  Between them they have more than twice their balance sheet in credit exposure and well more than 20 times their market cap in written credit protection.

This is ridiculously dangerous and the obvious question is “how in the hell can you possibly do that?”

The answer is that we learned nothing and have refused to end “too big to fail”: As a consequence these institutions are still playing “heads we win and keep the money, tails the taxpayer loses.”

And lose we have.  We’ve lost jobs, we’ve got the government presenting roughly 10% of the economy in borrowed money and thus creating false demand that does not actually exist in the economy and our Congress continues to chug along trying to argue over whether they will increase spending by $200 or $500 billion a year.  There has been zero reckoning against the facts presented here:

This cannot work over the intermediate or longer term and yet this is what we’re continuing to try to do!

The entire world is caught up in a gigantic Ponzimania but the world’s demand for pretty colored candy-emitting unicorns will not make them appear as unicorns are mythical creatures.

Nobody — simply nobody — is dealing with this in an honest fashion.  Neither side of the aisle will put a stop to it, despite it being factually certain that it will blow up in our faces.  As nations in Europe teeter on the brink of disaster we find that once again our financial institutions have levered up and hidden their exposure — it is just a matter of time before we start hearing “nobody could have seen it coming” again.

We must stop this and start applying handcuffs to these people, not coddling them.

Then there’s Congress and the blatant insider trading that they engage in.  While it has been argued that this is technically legal there’s a new law review paper out that argues the opposite – that this practice is a black-letter criminal and civil violation of the law.  The argument is quite persuasive too — but who’s going to appoint the special prosecutor and start cuffing Congressmen and women (like, for example, Pelosi?)

Oh please.  That will happen only when “Occupy Wall Street”, The Tea Party or both together decide they’re going to “occupy” Washington DC and refuse to leave until the indictments issue.

For those on the right who say that “OWS” is wrong and a bunch of freeloaders while they’re the “rule of law” group: That above paper contains all you need to demand that every member of Congress involved in this practice go straight to prison and that an immediate felony investigation take place right now — and to find a lawful and peaceful means to force the investigation to take place.

Folks, it’s really quite simple: We’re to the point where either we, as a nation, stand up and insist that the raw corruption stop or we will not have an economic recovery, we will not have jobs, and we will not resolve the fact that we have a handful of financial institutions that four years on are still holding our nation (and the rest of the world) and every individual living on the planet hostage.

I see no evidence of a willingness to deal with the facts in DC, in Brussels or anywhere else.  At its most-basic level the underlying financial fact is this: You cannot spend more than you take in over the intermediate and longer term.  The mathematical fact of exponential growth makes attempting to do so impossible.

It is this attempt and the utter refusal to face that fact that has underlay all of the mess that we find ourselves in – both here in the United States and internationally.

There is only one question remaining: Will we cut it out before or after our entire economy collapses?