FedUpUSA

Archive for December, 2011

As is my usual practice it’s that time of year when I score my “best guesses” from the previous year, and look forward with my next set.  If you’re not inclined to bother with long-winded explanations the title is probably sufficient.  But for everyone else, let’s look at the 2011 list and see how I did.

• We’re not going to get away with spending another $450 billion in deficits on top of the $1.6 trillion we blew last year.  $2 trillion in deficits?  Not a prayer.

Well that “more or less” worked out.  I don’t have the final numbers yet and won’t for a bit as I’m writing this before the end of the year, but we most-certainly did not run a $2 trillion deficit.  As of 12/21 it’s right near $1.1 trillion gross ($1.3ish involving cash adjustments.)  This is a bad number though as the most-recent data isn’t in and neither are the cash adjustments that Treasury usually makes. Nonetheless there’s no way we’re going to see another trillion “magically appear”, so that’s a point.

• Europe will not get their debt situation under control.  I give us a 50/50 chance that Ireland repudiates it’s “deal” immediately following their elections, and the cancer there will spread.  I won’t call a breakup of the Euro – yet – but the possibility exists that one or more nations will leave the common currency next year.  I only see the odds as something around 50% though, so it doesn’t go on the “prediction” board for this year.

Nothing but net on this one.

• The Dollar remains the hooker with crabs while many other currencies have AIDS.  The wildcard is the Pound.  Britain may actually have their act under reasonable control.  We’ll see.  For the Euro, no such luck.  I expect a wide trading range with lots of both euphoria and tears, perhaps as much as 40% or more.  That means we’ll get plenty of whipsaws in the /DX as well.  Nonetheless, the doomers call of a dollar collapse and gold at $3,000+/oz will be wrong.

Nothing but net again.

• Oil is going to $100, and maybe considerably higher – but not on demand, rather on a “safe haven” and speculative play.  Go look at 07/08 for how this plays out.  And get ready for the bad effect on your wallet from higher gas prices.  I expect the $4 line to be breached in high-cost areas by the summer, and we may see $5 gas this year.  But – by the end of the year oil will be on the decline.  Again.  And again, it will be because the economy is in fact going down the crapper.

Again, score.

• Commodities will continue to ramp right up until oil tops as the economic reality that “charge it” can’t fix what’s broken sinks in.  Recognition will come hard and fast, and metals will not be exempt.  When oil starts to roll over beware.  Everyone loves commodities.  When everyone’s on the same side of the boat it usually tips over and there are sharks in the water below.

How’s that gold trade working out for ‘yall?  Topped nicely and sliding now.  Point.

• Fannie and Freddie will get some sort of “resolution” path – and it won’t be positive for them.

Miss.

• “Someone” will pry open the REMICs in MBS-land for at least private-label deals and fun will ensue.

Miss, but I think only on time.  The lawsuits are coming — California and Nevada are leading this charge but I said 2011 and it didn’t happen.  No score when the timing is wrong.

• China will roll over as their attempts to tighten policy have come too small and too late.

Score.  Shanghai market is down about 25% on the year.  They’re not done either.

• Housing is and will “double-dip.”  There’s no bottom.  Those who bought the gamed reflex bounce on the tax credits and faux “stabilization” are in big trouble.  My projection is for a mid-single-digit to 1x% decline in prices nationally in 2011, and even then it won’t be over.

Half-point; we got a massive restatement on sales but the 1x decline in prices didn’t happen.  No bottom though — that’s agreed by pretty-much everyone.

• States will try to tax their way out of pension trouble, and fail.  The Whitney call will be wrong but only because of how she phrased it.  States and municipal governments will be increasingly recognized as insolvent but they will continue to play games to try to stretch cash flow rather than defaulting outright.

Score.  No defaults en-masse but the games and the problem were spot-on.

• Between forced State austerity and semi-forced Federal austerity the rug will get pulled of the master “credit card spending” support chart up above.  The disruption that will become evident, especially in the back half of the year, will be material.  But the worst of it won’t be in 2011 – it will be in 2012 and beyond.

Nope.  Early — this one gets repeated for 2012 though.

• Fed Index price paid/received divergences along with inventory build say we’re going to double-dip in the general economy.  I believe it.  The Fed has of course tried to stop this with their QE games but they’re not getting the effect they claimed they were after.  The Hopium runs out in 2011 and the addict will go through withdrawal.

Eh, no point.  But the earnings flow-through on the PPI is here but I can’t take the point yet.  This one gets repeated for this coming year and I might have only been off by three months.  Nonetheless, early is wrong.

• Margin compression will become realized.  I’m just about the only one who’s been talking about it in the back half of 2010 based on the PPI/CPI reports and regional Fed indices, but that won’t last.  We’ll start to see it in the Q4 earnings and by Q1 people will be talking about it.  This will put a cork into the “multiple expansion” crap that a whole lot of “pundits” have been running over the last year.

It got talked about but didn’t hit earnings until the start of 4Q.  Miss on time, will repeat this one too.

• The inventory build we’ve experienced will prove to have been unwise.  Expect a cycle of write-downs which will further damage earnings.  Unsold inventory is a millstone around your neck.  I’ve been talking about the warnings evident in the data on this for six months or so – the bet the market has made is that this will be sold through.  Nope.

Ditto.  No point.

• The Fed will get neutered, but it won’t be due to Ron Paul.  He’ll huff and he’ll puff and then blow a fart instead of blowing down their house.  It won’t matter.  Bernanke’s credibility will be severely trashed by the end of the second quarter as his monetization will be increasingly seen by The Republicans as nothing more than a way to pander to the profligacy of Congress (which they’ll try to pin in the Democrats, despite their fully-complicit role in it.)  The end result (albeit through the typical partisan BS) will be that QE2 is the last time that happens, period.  I expect an all-on attempt to change The Fed mandate to remove “employment” and possibly define “stable prices.”  These two things, incidentally, would be tremendously positive, and the first might actually succeed.  The second?  Don’t hold your breath.  Dennis Kucinich’s bill would be even better, and it will be reintroduced – and fail to gain any material sponsorship including from the Pauls.  Somewhere around the middle of the year this entire dynamic starts to become interesting in the 2012 Presidential sense.

I’ll take that point.  NO QE3, despite everyone who called for it.

• The TNX will hit 4%, likely in the first quarter. 

Clean miss.

• We won’t get bond auction “fails” per-se (that’s impossible given the Primary Dealer setup) but there will be plenty of “D”s and “F”s in terms of grades, with lots of tail showing.  Again, I expect this mostly in the first half of the year

Clean miss.

• The market will roll over this year.  And not in a small way either.  We may finish the year over 1,000 on the SPX, but we’re going Helium-style diving at some point first.  Since timing is everything in this game I’ll stick my neck out – there will be a sucker sell-down early this year, the market will bounce, and then Hell will rain on earth later in the year and into 2012.

We got a lot of it but not enough.  Half credit – big sell-offs but the ending point is definitely wrong.

• Expect extreme volatility.

Uh, yeah.  Point.

• The potential for a regional war to break out is extremely high.

Nope.

• Civil unrest will spread beyond a few demonstrators in Europe.  This includes the possibility of unrest in the United States.

Miss.  “Occupy” doesn’t count and while there has been some over in Europe in particular what we’ve seen is not what I had in mind.  No point.

Looks like 10 out of 21.  Remember that to be right you have to hit both the event and the time, so I consider this a pretty good score.  You can judge it however you want.

Now let’s look at how things are today.

As this goes to press The ECB has tried to “put out” the Euro debt zone fire for about the 10th time this year.  None of the others have worked and this one won’t either.  There’s simply no “there” there.  The EU banks are ridiculously over-levered, there is no real attempt to force them to cut that crap out and in fact at this point they probably can’t since they’ve geared up on sovereign debt — if they sell it down rates will spike to the moon and the entire EU comes apart.  If they don’t and something goes wrong (anything!) then they blow up, rates spike to the moon and the EU comes apart.

If you’re wondering why there’s been no solution that’s the reason — there isn’t one that doesn’t involve taking these wealth-destroying institutions out back, shooting them, paying off depositors as best you can and then either charging their executives under the law or simply turning them over to the now-very-pissed-off citizens who just saw their pensions and social benefits go “poof” (never mind that it’s really the politicians fault that it all happened in the first place!)

Speaking of that I want to go into a bit of detail, because it seems that people just don’t “get it” in this regard.  It’s convenient to blame the big banksters, and they’re certainly a big part of it.  But the primary blame has to rest with the political class for two reasons: They make the laws under which the banks operate and they love making political promises to spend money they both don’t have and are unwilling to tax someone to acquire.

What Congress spends but doesn’t have Treasury must borrow.  When Treasury borrows it creates the capability for banks (including The Fed) to create monetary inflation and bubbles.

There are three sorts of “money” — actual surplus capital from past economic activity, self-liquidating credit and non-liquidating credit.  All three spend exactly the same but they are not the same.

The first is earned by someone’s efforts and it is what’s left after you pay your costs (including taxes, if any.)  That’s actual wealth — and is the only sort of “money” that one can call “real.”  At least in theory it is supposed to be durable and able to be saved, invested, or spent as you choose.

The second is credit money that is created to liquify an asset.  An example of this is a letter of credit guaranteeing payment for a shipment from Japan to the United States.  It’s hard to sue someone in the US from Japan, so this is very useful to commerce.  But this credit money goes away when the bill is either paid or defaulted.  The same model exists with a credit card that you pay off every month.  This has no inflationary impact because it disappears when the transaction is closed.

The third is credit money that is created based on nothing other than a promise to produce something tomorrow.  In the case of government that “something” is of only one form — taxes.  In the case of an unsecured private loan it could be anything from a revolving credit card to an OTC derivative trade.  The problem with such a loan is that it does not self-liquidate as it’s never closed — instead, it’s rolled over again and again.  Since this sort of loan permanently expands the number of monetary units in circulation it is a pure act of monetary inflation.  It is important to note that all government deficit spending has been of this form in the modern era — we have never actually run a budget surplus save one year — a tiny one in calendar 2000 (but not fiscal 2000.)

Why is this understanding so important, you might ask?  That’s simple — it is the explicit and intentional acts of the government in their overspending that lends cover to virtually all of the other ills with capital misallocation, trade imbalance and other games.

Let’s take a simple example: Nation “A” and “B” both have floating fiat currencies.  Nation “A” runs a trade deficit with Nation “B”.  What happens?  Capital drains from Nation “A” to “B” since the funds to buy the goods move and never come home.  This makes Nation “B” more wealthy and “A” poorer; that in turn makes the goods “B” is exporting more expensive in “A”s terms and almost-immediately cuts off the imbalance.

So how do you prevent that?  Oh that’s easy — get the government to run a $600 billion budget deficit!  Now you can “replace” $600 billion of capital with $600 billion of non-liquidating (that is, permanent) credit money.  Heh maw, look — my trade deficit didn’t self-extinguish!

But notice what’s going on under the surface: Capital and credit aren’t the same thing.  One is wealth, the other is a promise to labor tomorrow.  In other words one is the product of free men and women, the other is a demand that others submit to slavery — a promise that others will pay taxes in the future!

If you’re wondering where our jobs went, that’s how it happened.  The actual capital flowed out of the country and was replaced by credit which spends the same but isn’t the same at all.  What disappeared was wealth and freedom, and what replaced it was bondage, unemployment and McJobs.  If you’re wondering why despite Congress saying they don’t want to see all of our jobs go to China and Mexico it keeps happening, it is happening precisely because Congress will not stop spending more than they tax!

In other words it is Congress that has drained the capital of our nation through their policies.  They have serially lied to us for thirty years in this regard with those lies really picking up steam in the last decade.  The so-called “Tea Party” along with the Democrats and “mainstream” Republicans are all liars in this regard — every one of them is complicit, as any of these groups could have shut this down at any time. 

Had the Congress refused to raise the debt ceiling in August it would have immediately forced a balanced budget — without the need for a Constitutional Amendment.

Remember too that the House and Senate both have permitted “Continuing Resolutions” to run the government now for two years.  This was agreed to by both Houses, ergo, it’s both of their fault and those claiming otherwise are liars.

This same dynamic has played out over in Europe.  Greece, Spain, Portugal, Italy and others have all made promises they can’t keep with their current tax revenues. The same dynamic has led to the same outcome — they’re just a bit ahead of us on the road to perdition.

Of course the political impetus to spend money you don’t have is strong.  It’s easy to buy votes for a while by promising people things you know you can’t afford, and it is wildly unpopular for a politician to say “No.”  Even the vaunted Ron Paul who claims to be “Dr. No” in his voting record in fact does not honor that when it comes to earmarks — he lambastes them on the floor but when it comes to vote he pushes for, votes for and accepts them for his own district!

The reason of course is simple — he wants to keep his seat.

But overspending is a corrosive act no matter who is doing it.  It eventually bankrupts any entity that engages in this practice, but when governments get involved the results are particularly nasty, as it is the entirety of the nation that suffers.  The more attempts are made to cover up the effects of the stupidity, such as by financial repression of interest rates, the worse the harm and the more-widely that harm is spread across the population.

There’s been no honest attempt to deal with any of these issues, including most-particularly in the United States.  You cannot solve a debt problem with more borrowing any more than you can drink yourself sober.  We continue to believe we can run trillion-dollar+ deficits without consequence and the 10 year Treasury yield seems to agree.  What must be kept in mind is that this is the same dynamic that played out in Europe — including in both Greece and Italy — right up until it didn’t, and when the bond market came apart there it did so with extreme violence.  The same thing can and will happen here.

This, of course, leads to the obvious next question: when?   It is here that math provides a useful degree of guidance.

In 2007 we had to shrink our Federal Government by about 20-25% in order to restore balance to the economy.  Those who have followed The Ticker for what is now approaching five years and 5,000 articles know that I’ve been calling for this realignment incessantly since that time.  Instead we grossly expanded the size of our vote-buying programs with more and more deficit spending.  This led us to today where the required shrinkage is now approaching 50% in size — four years later.

This is an important fact, because that is a geometric progression.  Now let’s go back and see what we have four years previous and see if the progression holds up — to 2003.

In 2003 we ran about a $600 billion deficit against a GDP of $11.5 trillion, which was about 6%.  That is, we tracked under the geometric expectations on a backtest (which were about 10-11%.)

Can we survive a 50% reduction in the size of the Federal Government, a doubling in actual taxes received by the government, or some combination of the two?  I don’t know, but it doesn’t matter whether we can — one of the two or some combination adding to that point is going to happen whether we survive it or not!

The “outside window” on “when” is four years hence.  Of course that’s the “100% reduction” line at which point we simply collapse into civil war and anarchy forced by mathematics, and in truth we’ll blow sky high long before we get there.  You can reasonably expect that there will be attempts to push the line backward, but there is no actually stopping of the process until and unless we run a surplus in terms of economic growth — that is, growth in the economy must exceed growth in government spending (this, incidentally, means that if economic growth is negative the government must shrink at least as much.)

The members of the Simpson-Bowles deficit commission had their own private estimates of “how soon.”  None believe we have more than two years left.  I think that’s about right, and we may not get that far.  History says that these walls always are closer than they appear, just like the T-Rex was in the rear-view mirror in Jurassic Park.  Revulsion tends to come from a “moment of recognition” that precedes the actual hitting of the wall, just as it did in Greece and the rest of the European continent. Thus it will be here if we fail to address the issues facing our nation and defer to political expedience and vote-buying.

Now let’s look at the current macro picture.  We have durables reports showing massive inventory levels — in fact, the December report had inventory at all-time highs.  This, standing alone, is bad — it “pulls forward” GDP numbers but the sustainability of that is predicated on sell-through.  If there is no sell-through you’re in big trouble.

Add to that the earnings misses coming from various companies.  We are now into the maw of the profit impact from the PPI ramps of a year to 18 months back, which I’ve been pounding the table on now since August of 2010.  The PPI has slacked off on the rate of advance, but the damage is done.  That’s in the pipe and can’t be avoided.  In addition the organic profit cycle has almost-certainly peaked in terms of percentages of profit from gross sales.  Those two factors plus the inventory situation are all the ingredients for a severe inventory (conventional) recession while The Fed has already backed itself into a corner with ZIRP and The Federal Government continued to overspend!  In other words the policy tools to “help” are slim and none and Slim is in the bar getting drunk.

Politically we have a huge problem — the premise is “tax cuts good, anything that raises taxes bad.”  At the same time “spend more” remains the mantra of both political parties.  The “Pay For” on the recent FICA deal was spread over 10 years but the impact on the deficit — some $200 billion — is all right now.  Of course in a year nobody will be willing to “raise taxes” either, so the $200 billion over 10 years will be $2 trillion.  To those on the right who argue that “we can’t give more to the government; they’ll squander it” you’re free to run that line when the budget is balanced — until it is you’re just arguing for jamming the accelerator as we approach the brick wall at 100mph, exactly as are those on the left.  “Blow up in one year or blow up in two” still is “blow up.”  Both are stupid and indefensible and we should call them what they are — calls for anarchy — because that’s exactly what we’re going to get on this path.

Now let’s look east — specifically at Japan.  The most-recent budget, accepted by their government, calls for an astounding near-50% deficit — that is, they intend to borrow half of what they spend!  The willingness of the bond market to swallow whatever the Japanese government emits has led them to believe they can continue that sort of game forever.  They’re wrong.  And while I’m at it may I remind everyone that the Japanese stock market remains down more than 75% from its all-time highs — 20 years ago?  How’s that “earnings growth” and “economic progress” thing working out over there?

Finally, China.  The most-recent news is that of large minimum-wage hikes.  Nice idea.  Can they successfully navigate from a mercantile jackbooted exporter that steals anything that isn’t nailed down (and some things that are) to a consumer-led, consumption-based economy that generates actual economic surplus?  I’m not sold, especially when you add to that the need to stop treating the land, air and water like open sewers.

Returning back home we have one final area of contention to consider — it’s an election year.  If you think either major political party is going to do anything that might be perceived as “helping the other guy”, you’re nuts.  They most-certainly will not.  This will lead to some very interesting times in the next few months, given that the second half of the debt increase is subject to vote and as of the 22nd of December we’re a grand total of $113 billion from hitting the wall — again.  January is usually a month that Treasury runs a surplus due to tax payments, but you can still expect the clamoring — and games — to start up pretty much with the drop of the ball in Times Square.

Will the so-called “Tea Party” fold their claims of fiscal prudence once again?  You bet.  After all, they just did vote to blow a $200 billion hole in the deficit with the payroll tax cut extension — a vote that was taken by “unanimous consent” because not one Representative out of 435 thought it was more important to stand on principle and demand a recorded vote than it was to drink eggnog with those providing their bribes — er, “family and friends.”  You got that right folks — not one man or woman stood on principle.

Not one.

So we are consigned to the same sort of cock-n-bull game now that we were back in 2007, and 2008, and last year.  But Mr. Market doesn’t care.  He’s going to do what he’s going to do, and he’s issued his warnings — which were ignored.

So with that, here’s your 2012 Outrage List, and we’ll see how many I get right.

• We’re going down — and this time it’s not “buy the dip.”  The can-kicking will be attempted, of course, but we’re pretty-much out of policy tools — we used them.  Add in a peak in the profit cycle and the PPI pass-through and you’ve got trouble.  Formally, this is “market ends lower than it began.”  (The next four are verbatim repeats, as I said I would; these are marked with asterisks)  Note that there’s no place to hide overseas in equities either (see below.)
• * Between forced State austerity and semi-forced Federal austerity the rug will get pulled of the master “credit card spending” support chart up above.  The disruption that will become evident, especially in the back half of the year, will be material.  But the worst of it won’t be in 2011 – it will be in 2012 and beyond.  (Ed: Repeat from last year.)
• * Fed Index price paid/received divergences along with inventory build say we’re going to double-dip in the general economy.  I believe it.  The Fed has of course tried to stop this with their QE games but they’re not getting the effect they claimed they were after.  The Hopium runs out in 2012 and the addict will go through withdrawal. (Ed: Yes, this is an actual “official” recession call.  Q2-Q4 timeframe.)
• * Margin compression will become realized.  I’m just about the only one who’s been talking about it in the back half of 2010 based on the PPI/CPI reports and regional Fed indices, but that won’t last.  We’ll start to see it in the Q4 earnings and by Q1 people will be talking about it.  This will put a cork into the “multiple expansion” crap that a whole lot of “pundits” have been running over the last year.  (Ed: The reports on this have already started.)
• * The inventory build we’ve experienced will prove to have been unwise.  Expect a cycle of write-downs which will further damage earnings.  Unsold inventory is a millstone around your neck.  I’ve been talking about the warnings evident in the data on this for six months or so – the bet the market has made is that this will be sold through.  Nope.  (Ed: Inventory levels are at record highs — not smart!)
• The fissures — if not outright failure — in the Euro Zone become realized.  I fully expect one or more nations to leave the Euro and there is a non-zero chance of an outright collapse.  Timing is the problem — I’ll go ahead and stick this in 2012 but may be early a year.  We’ll see.  Incidentally because of how I worded this Greece leaving is a “score” but I’m not thinking Greece here — try Spain or Italy on for size.
• A viable third-party candidate emerges and runs for President in 2012.  Viable is defined by votes.  1% doesn’t do it.  Double-digits does.  There’s the marker.
• Serious changes — and charges — will come out of the MF Global disaster.  I don’t know if Corzine will get indicted or not, but the light will go on within the regulatory and Congressional offices and a “burnt offering” will be made.  Maybe more than one or two.  The issue is the risk of a lockup in the commodity forward markets, which would be disastrous for the global economy (consider that such an event would make impossible buying an airline ticket for more than a month or so in advance, as just one example.)  In short this is prediction that we will see actual handcuffs.
• The Dollar will be flat to materially stronger.  Once again those calling for a sub-60 (or worse) dollar index will be wrong.  In short cash will be King.
• Housing will not recover.  That won’t stop government from continuing to try to hold prices up of course. Doesn’t matter — there’s no recovery in the offing on housing.
• There will be severe issues with subgroups who don’t get their “cheese.”  Whether this reaches the formal level of “riots” is open to some question but the impact won’t be.  It will be real and ongoing; the political season will definitely play into this as well.
• Lots of noise will be made about deficits and debt but real, effective moves toward addressing the problem will not be made.  The reason of course is that admitting that we’re addicted means cutting of the games — and that’s unacceptable to both sides of the political aisle.  As such actual effective movement will require the market to act.
• A real shooting conflict breaks out in the Middle East. I’ve got my suspicions on who starts it and why, but the story told in the papers has a less-than-50% chance of being the truth so I’ll leave that out.  Any large-scale shooting conflict counts (not a couple of cruise missiles or similar.)
• The Fed will back off and rates will rise.  The pressure will simply get too be too high; they’re aware of, I’m convinced, serious gaming and risk in the financial system and interconnection (e.g. MF Global) problems but will deduce they’ll never get away with another large-scale bailout.
• The squeeze in state and local funding will get materially worse.  This is going to be an interesting development to watch; the first real cracks of realization that big pension obligations to police, fire, teachers and similar will not be paid is odds-on to show up this year.  The wild card is how everyone involved deals with it; the blast radius is likely to be pretty wide.

Here ‘ya are — 15 for the New Year.  As always I reserve the right to revise and extend until 12/31 at 11:59 PM.

Kabuki financial theatre – Congress net worth up 15 percent from 2004 to 2010 while the average American sees their net worth decline by 8 percent in the same timeframe.  Welcome to plutocrat USA.

We truly have the best government money can buy.  From 2004 to 2010 members of Congress increased their median net worth by 15 percent while the average American saw it fall by 8 percent.  Yet this fall in net worth does little justice to the rising cost of food, energy, healthcare, and college expenses that have eaten away any iota of progress families try to achieve in a prosperous nation.  The fact that Congress presided over a Wall Street pilfering of the middle class and income inequality never seen in the history of the United States, we are starting to get a full understanding of what it is to live in a full-fledged plutocracy.  The reason people are frustrated with government is that it no longer looks out for their own interests and is narrowly focused on promoting the aggregation of wealth into fewer and fewer hands.

The rise of low wage capitalism

It is a fascinating exercise in consumer behavior that Americans are out spending in full force even if it is with other people’s money.  The economy is still in bad shape and those who were fortunate enough to land jobs in this recession are likely in employment that now pays much less.  Most of the jobs that were lost during the recession were higher paying jobs yet most of the jobs that have been added have come from the lower wage sectors:

Source:  NLEP

To sum up the above chart, over 5,000,000 mid-wage to high-wage jobs were lost yet less than 1,000,000 have been added since this recession supposedly ended in the summer of 2009.  Where does this leave most Americans?  It leaves them further and further behind while their elected officials continue to practice an ancient art of dog and pony show yet most Americans are waking up from the fog.  This is why there is so much fragmentation in the current political system.  The mainstream press is built on a clean and simple two party battle.  Ultimately this allows the system to continue to pilfer the majority and keep people as docile spending vehicles.  Yet that game is no longer holding up.

The cracks in the median income

The median household income in the United States is $50,000.  This figure has actually moved backward in the last decade while the cost of things like food, fuel, healthcare, and a college education have all soared.  In other words Americans are much poorer and many are realizing this.  Take for example the cost of fueling up a vehicle.  The days of $20 or $40 a barrel oil are long gone.  Remember when it was affordable to go to a state university?  The nostalgia is largely there because the pangs of a lighter wallet are real.

Read the rest at My Budget 360

Now this is something to wake up to this morning….

The U.S. government received record demand for its bonds in 2011, pushing longer-maturity Treasuries to their best performance since 1995 in a sign that President Barack Obama may have little difficulty financing a fourth consecutive year of $1 trillion budget deficits.

The Treasury Department attracted $3.04 for each dollar of the $2.135 trillion in notes and bonds sold, the most since the government began releasing the data in 1992 during the George H. W. Bush administration. The U.S. drew an all-time high bid-to- cover ratio of 9.07 for $30 billion of four-week bills it auctioned on Dec. 20 even though they pay zero percent interest.

Riiight.  The entire world collapsed around us last year, if you haven’t been paying attention.  The threat of sovereign defaults in Europe, a monster earthquake and tsunami in Japan and the beginnings of a collapse in the credit and equity bubble in China.  When all the other hookers have AIDS, crabs sounds pretty darn good!

I think it’s reasonable to assume that Obama will misinterpret this as some sign of stability, of course.  It’s easily done.  And if it happened it would be disastrously wrong.

“If the last two weeks are any indication of how next year will start, there’s near-insatiable demand,” Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 21 primary dealers that are required to bid at the auctions, said in a Dec. 21 telephone interview. “We have a significantly shrinking supply of risk-free assets in the world and U.S. Treasuries are one of the few left.”

Ira forgot a few things, the most-important of which is that the only way you actually make money sitting in a zero-interest bond is if the market itself is in deflation.

Now if you’re trading long-term bonds you of course make money when the price goes up and the yield goes down.  But zero is a floor, and we’ve been there — and the real monster “demand” has been on the short end of the curve.  There’s no “profit” to be made holding 4 week bills – they’re simply a place to park cash where you’re reasonably sure it will still be when the bond matures.

There hasn’t been a problem with that of late, has there….. at places like…. oh…. MF Global?

Yeah.

Don’t fall for this as an indication of anything other than abject fear, and don’t misinterpret this as something “good.”  Financial repression irrespective of the cause is bad, as it is lending of capital at a real rate of return that makes lending at all worthwhile.

Until rates normalize and so does the curve there is nothing “normal” being implied or demonstrated in the bond market — rather, what we have here is an indication of severe stress in funding markets overseas, with zero expectation that the Europeans are going to to manage to find their way out of the corner they’ve painted themselves into.

Italians Cut Spending in Worst Christmas in 10 Years; Debt in Spanish City of Gandia 50% Higher than Previously Reported; Harsh Times Ahead for All Europe

Spanish City of Gandia is Insolvent
Courtesy of Google Translate El Economista reports The debt of the City of Gandia exceeds 300 million euros

The Deputy Mayor for Economic and Financial Officer of the City of Gandia, William Barber, has appeared before the media to explain and detail the results of the audit report conducted by Deloitte, commissioned by the new municipal government. The result is 300,066,000 euros, although the municipal government of the PP, initially estimated that out of about 200 million.

In this report, it appeared that the City was in a situation of “negative equity”, which obliged the government to take drastic and quick, and to develop an economic and financial plan, presented the mayor this week in Conselleria, to try to address this situation.

Despite the situation, Barber wanted to reassure the public. “While the situation is difficult, we are working to balance budgets, checking all items, although I can announce them or Social Welfare and basic services will be hurt. Our commitment is also paying suppliers not to complicate the situation further not to raise taxes. “

Not an Isolated problem

Every official in Spain repeats the line they will not raise taxes. In the case of  Gandia which is in a situation of “negative equity” (bankrupt), how the heck does the city propose paying suppliers?
Gandia is not an isolated problem.  Please consider Spanish  Implosion Coming Up; Deficit Up, Receipts Down, a Need to Cut 40  Billion in Expenses from 90 Billion; Spain’s “Hidden Deficit” for another take on “hidden deficits” coming to light.

Italians Cut Spending in Worst Christmas in 10 Years

Bloomerg reports Italians Cut Spending in Worst Christmas in 10 Years

Italian retailers had the worst Christmas in 10 years, consumer group Codacons said, as austerity measures to combat the sovereign debt crisis prompted households to cut spending.

Italians spent 48 euros ($62.75) less per person this holiday season than the average of the past five years, Rome-based Codacons said in a statement on its website. The shoe and clothing sector was hit the most, with sales dropping 30 percent from previous years, it said, adding retailers won’t recover the decline during seasonal promotions that start in January.

The discount period “will be a flop,” with sales declining as much as 40 percent compared with 2010, Carlo Rienzi, the head of Codacons, said in the statement.

Prime Minister Mario Monti secured final passage last week for 30 billion euros of austerity and growth measures as he seeks to cut the euro region’s second-biggest debt. The measures, including a tax on luxury goods, a levy on primary residences and higher gasoline prices, may further sap consumer spending and push the euro area’s third-biggest economy deeper into recession.

The austerity plan will cost every Italian family 1,129 euros, according to consumer group Federconsumatori. Italians spent 4.4 billion euros in the holiday season, 400 million euros less than Federconsumatori’s forecast, the group said.

I am trying to get a handle on the percentage decline and the magnitude of the decline. The consumer group estimates “as much as 40 percent” but believe that appears to be by sector, not overall spending.
Courtesy of Google Translate, here is another link from El Economista: The Italian Christmas spent 400 million euros less than in 2010

The Italians spent this Christmas 400 million less than last year, according to a report by the Consumer Federation of ONF, met with another federation Coldiretti farmers who notes that Christmas dinner and lunch on day 25 spent 18% less than in 2010.
According to the ONF, in this Christmas period the Italians spent four billion euros, compared to the 4,400 million provided for the consumer organization, which means that the average expenditure per household was 116 euros, below the amount projected which were already down.

Austerity Kicks In, Harsh Times Ahead for Europe

Translation is not entirely clear. As measured by a 400 million decline from 4,400 million,  spending is down 9%, not the 18% Coldiretti farmers reference.

Regardless, various austerity measures will take a direct bite out of Spain, Portugal, Italy, France, and Greece via reduced wages, rising unemployment rate and extremely harsh times.

With the rest of Europe pulling back, and with China cutting back, the export machine of Germany is headed for major problems. Thus, austerity will take an indirect bite out of Germany and the trade surplus countries as well.
Mike  “Mish”  Shedlock – Global Economic Analysis

They don’t give up do they?

PARIS — The head of the International Monetary Fund said the world economy was in danger and urged Europeans to speak with one voice on a debt crisis that has rattled the global financial system.

….

“The world economy is in a dangerous situation,” she told France’s Journal du Dimanche in an interview published on Sunday.

The debt crisis, which continues into 2012 after a European Union summit on December 9 only temporarily calmed markets, “is a crisis of confidence in public debt and in the solidity of the financial system,” she said.

That’s because it’s a public fraud, and you’re a big part of it.

Lagarde added: “National parliaments grumble at using public money or the guarantee of their state to support other countries. Protectionism is in the debate, and everyone for themselves is winning ground.”

“Protectionism”?  It is hardly “protectionism” to refuse to spend your hard-earned money to bail out the profligacy of some other nation.  That’s called prudence and the right to make that decision is called sovereignty.

Of course the IMF doesn’t believe in either.  But Lagarde ought to pay attention to her history; she is French after all.  And I do seem to remember that at one time in French history there was a wee revolt among the people who got damned tired of aristocrats deeding themselves effectively unlimited funds from the productive for their own puerile ends and the fiscal profligacy of the state.

What came next Christine?  Do you recall your history classes?  I seem to recall that things didn’t work out quite as anyone planned, and that the best laid plans for an alleged Constitutional Republic instead devolved into mass executions and violent revolution — well, maybe more than one of them, if you get into the technical.  From the standpoint of the aristocracy as well as the common man this outcome could be reasonably considered a failure, yet it all came from one root — a refusal to heed the fundamental reality that a government cannot spend more than it is able to tax.  This over-reach, which has arisen continually through the ages, almost-always results in the destruction of the government involved, and more frequently than one would like mass bloodshed and loss of civil order comes with it.

There seems to be this quaint notion that today we are immune from such foolishness.  Of course we are not; the “aristocracy” is now the banksters, who have through their schemes and frauds ripped off literal millions of people.  It is not just dodgy mortgages and similar trickery in the pedestrian manner; this behavior rises to high crimes and misdemeanors.  Jefferson County Alabama anyone?  How about Greece, which was “helped” to produce outright fraudulent statements of account on a national level, with the ill-gotten profits, of course, retained by those very same banksters.

There is no reason for the nations that have been abused by these tactics to “cooperate” in the saving of those who embarked on such foolishness, nor should one penny be allocated to those nations and their governments that have given protected status to and refused to prosecute the fraudulent edifices upon which this pyramid of schemes has been built.

Indeed, the wiser choice is to force those institutions, whether public, private, or quasi-governmental, to eat their own cooking, and to withdraw any alleged “protection” from both civil and personal criminal liability for their acts.

I would cite Christine’s pronouncements as a latter-day version of “Let them eat cake!”, but there is question as to the provenance of that alleged statement.  Therefore, I will simply observe that aristocratic privilege through the ages is one that tends toward abuse, and that in both the case of the French and America, those abuses eventually gave rise to upheaval, convulsion and great harm.

One would think that being French Lagarde would have a respect for the lessons of history and not be inclined to risk a repetition.  But then again, history also teaches us that aristocracy by any name never outgrows the unwise arrogance that is its inevitable companion.

This video says it all.  Personally, I live in an upper-middle class area, at one time, even considered ‘wealthy.’  I now see precisely what is shown in this video all around me.  On my block alone, there are 3 empty houses, the result of the owners’ job losses and failure to be able to continue to pay on their mortgages.  This was not a ‘subprime’ loan area.  Some of these people weren’t even underwater on their mortgage, they just couldn’t pay ANY mortgage any more.  Some people had been looking for work for more than 2 years and had been trying to get by on various minimum wage jobs.  Most had fallen off unemployment and are now not even counted as part of the statistics.

Anyone still believing we have a 9% unemployment rate needs their head examined.  Many of the jobs that have been lost in the past 5 years are never coming back.  Should we just dispose of these jobless people like we do their statistics?  What is a life worth?  Our government seems to think that bailing out big corporate interests and insolvent banks is a much more worthy endeavor than protecting our GDP and industry.  You see, every bit of debt created in order to provide money for the banks is taking away production (jobs) from the REAL economy.  The REAL economy is not about banks or selling debt to create money – the REAL economy is about people.  People creating something of value.

Our government is not interested in creating anything of value.  It wants to continue to create debt which in turn, is leveraged to create more credit/money for the banks.  This is the unsustainable evil of our monetary system.  Until this system is destroyed, what is shown in this video will spread and grow until it reaches enormous proportions.  Maybe then people will wake up and realize what our government is doing to us.  We are debt slaves.  Maybe we should get off the plantation?