FedUpUSA

Archive for the ‘United States’ Category

This is amusing to wake up to on a Monday morning….

The strengthening U.S. economy is proving no deterrent to the biggest rally in Treasuries since 2008, and America’s largest bank says it may get even better for bond investors.

Uh huh.  It’s called “fear” and it’s been driving money into the US and, specifically, into Treasuries.  It’s rather obvious with just a cursory look at the FX and Treasury markets.

The rally in Treasuries accelerated since October even as reports showed improvements in everything from consumer confidence to jobless claims to manufacturing.

Uh, no.  The rally accelerated since October since the threat of a Euro zone blowup has gone sky-high.  Money goes somewhere and the “somewhere” is here, at least for now.

The problem with this fear trade is this — if those fears become realized then the so-called “money” evaporates.

Huh, you say?  Yes, I said evaporates.

Remember folks, “money” comes into existence because someone pledges some sort of collateral for the debt that is on the other side of the ledger.  It’s a balance sheet and, as the name implies, always balances.

So let’s ask the question: What happens when there’s no more collateral?

That’s what happened, basically, in 2007 and 08.  The system ran out of people willing to pledge collateral because it had already all been pledged!  The “last and biggest” was in residential real estate, which is a mighty big asset base.  When that was all pledged (among those willing and able to pledge it) the monster started feeding on its own blood and the dollar went up while all those leveraged “asset” prices went down.

Now you’re seeing the same thing in Europe, and people are trying to flee here.  But US Treasuries with duration risk are pretty damn dangerous for the same reason — all lending to a sovereign government is both risky and uncollateralized, as it rests on nothing more than the government’s promise to tax the citizens tomorrow to pay that debt.  That premise, in turn, rests on people being willing to labor tomorrow for money they don’t get to keep as it was already spent!

Well, would you lend to someone making that promise but is already running a 43% deficit to received tax revenues when one looks at the total budget?

I sure as hell wouldn’t.

So for now we look like the best house in a crap neighborhood.  But in fact it’s all crap.  The question that remains is when we’re going to stop being stupid and have the government stop spending more than we make.  The answer is “not tomorrow, and not today.”

This of course leads to the next inconvenient question, which is “how rich are levered assets of all sorts — which means anything supported by a debt directly or indirectly in the market” against fundamental value if and when all of that debt — and the money issued against it — disappears?

The answer is not pleasant to contemplate.

Consider things thought of as “unlevered” such as physical gold.  Of course the problem is that gold is bought and sold using leverage every day on the futures market, at various leverage ratios from 2:1 for those investing in ETFs on margin to 10:1 or so for those using futures.  Remove all that leverage and the price could easily collapse by 90% in nominal terms!

Look at oil.  Same deal due to the same markets.  Stocks?  Same issue; not due to ordinary margin loans but effectively-uncollateralized gambling by HFT robots and futures markets.   Equities are “somewhat” better in that they are at the core supported by dividends — the return of actual capital from operations — but hose dividends rely on a levered free cash flow through the economy to remain payable.  Get rid of all of that and what dividends get paid and where is fundamental value?  Hint: S&P 300 is not unreasonable.

Housing?  What’s the down payment required nowdays?  Have we even gotten back to 20% down requirements?  Well, if we were, then it could be argued that a house is 5x overvalued!  But we’re not, of course.  Now I suspect that even in the worst of times we won’t get to 100% cash buys on houses only, although I can make a cogent market and economic stability argument that we should.

Therefore, expecting another 80% collapse in house prices is probably unrealistic.  But a 50% one?  Entirely possible and reasonable.

I find it amusing that people think this sort of outcome “can’t” or “won’t” happen.  It most-certainly can and likely will.  It has before and there’s no particular reason to believe it won’t this time around.  Indeed, what we continually see through our so-called “leadership” is a refusal to accept fundamental mathematics — specifically, that their overspending has created a debt-fueled overhang that cannot by sustained indefinitely.

Europe has done nothing to solve the essential problem — the political promise of services that cannot be funded with current tax revenues, and the inescapable reality that this must eventually end.  When it does the multiplication effect that this overspending has had on prices and output in the Continent will reverse.  That in turn will force GDP down to where it is supported by actual economic surplus.  Margins, being levered against cash flow, will contract dramatically and as Larry Kudlow loves to say “profits are the mother’s milk of stocks.”

Well Larry, in this case mommy sucked down a drink full of arsenic, the milk is poisonous, and mommy is writhing on the floor in agony as she draws her last breath.

It’s pretty-much over at this point….

This morning Germany had a failed Bund auction.  That’s not particularly noteworthy; it happens from time to time.

But what’s noteworthy is what happened to bond yields everywhere through Europe in response: They blew out.

The Greek and Italian “problem” is no longer about Greece and Italy.  It has been creeping into Spain and more-recently France, but this morning jumped into Germany and everywhere else “all at once.”

Capital has said “no more” to the lies in Europe.  While this does not mean an instant implosion it does mean one important thing: The willingness of capital holders to continue to permit deficit spending is coming to an end, and with it the false “GDP” that this lie has “supported” will also come to an end.

Our lawmakers, for their part, continue to sing a happy song about how we’ll get it done — but not today, since the supercommittee was an abject failure.  Covering up the failure was the fact that there were departments that had 10, 20 even 30% increases in the funding found in the appropriateions bills that were passed in the House even while the “committee” was trying to find a way to “cut” spending.

Folks, this political game of lie, lie and lie some more cannot go on forever.  Eventually the waiter appears with the check and you either pay it, wash dishes, or get arrested for theft.  In the political world that “arrest” comes in the form of capital holders saying that they no longer believe you will ever pay and borrowing costs go up — way up.

The Fed cannot “print” out of this and neither can the ECB.  If either try that they will engender an all-on revolt, never mind that as purchasing power falls the fixed costs of staying alive go up relative to incomes and the war is lost anyway.

Reality must eventually be faced.  That day is here for Europe and it will soon be here in the US.  We have permitted the lies and stealing — both indirectly and now, as we’ve seen, it appears directly through MF Global — to go on for too long.

To those Seniors (and soon-to-be-Seniors) and others who say “but we were promised!” and “I vote damnit – you better give me what you said I’d get” respond: The till is empty and your check is going to bounce.

Occupy Wall Street?  Well sure, but while you’re at it, why aren’t the Seniors encircling the Capitol and refusing to leave?  Why isn’t the underlying truth being discussed and why aren’t the jackals that led to this happening being forced from office and run out of town on a rail?

I’ll tell you why: Because everyone thinks that they can manage to somehow “get theirs” while “someone else” will take the hit.

I’m sorry to tell ou that it isn’t going to work out like that.

There’s no point in continuing to play this game.  MF Global showed us — you’re right, you hedge or you place your bet, you still lose your money!  How many farmers, airlines, industrial producers and other legitimate entities using the market for risk management got screwed by that little game and why is it that Corzine is not in handcuffs?  FINRA?  What’s that — it appears Corzine didn’t have a valid (and required) securities license.  Self-regulation not only failed so has any resemblance of actual law enforcement.

The same game was run over in Europe with sovereign CDS.  You hedge, you bet right, the ISDA declares that you were “voluntarily” exchanging your bonds and the hedges you bought were worthless.  Your “exchange” was as voluntary as is handing over your wallet when there’s a gun up your nose, but that doesn’t matter — the word “is” can be redefined any time the people in charge want, and they want.

Your money, that is.

It will not be long ladies and gentlemen, when the bulk of the folks running the algorithms deduce that they’re exposed to the same risks – they have to post margin too, you know, and if it can be stolen then their capital isn’t safe either.  These deposits aren’t supposed to be “at risk” when there’s no position actively open — that’s a performance bond against possible failure to pay, but is supposed to be exactly as safe as a bank deposit in a checking account under FDIC limits.

Well, it wasn’t.  The CDS you bought on Greece wasn’t.  And it will only take another event like this or two before people conclude that everything is unsound as the jackals running the game will redefine the meaning of words to suit themselves and, failing that will simply steal the money.

30+ years of lawless behavior has now devolved down to blatant, in-your-face theft.  They don’t even bother trying to hide it any more, and Eric “Place” Holder is too busy supervising the running of guns into Mexico so the drug cartels can shoot both Mexican and American citizens.

What am I, or anyone else, supposed to do in this sort of “market” environment?  Invest in…. what?  Land titles are worthless as they’ve been corrupted by robosigning, margin deposits have been stolen, Madoff’s clients had confirmations of trades that never happend and proved to worthless pieces of paper instead of valuable securities and while Madoff went to prison nobody else has and the money is still gone!

Without enforcement of the law — swift and certain — there is no deterrent against this behavior.

There has been no enforcement and there is no indication that this will change.

It will take just one — or maybe two — more events like MF Global and Greek CDS “determinations” before the entire market — all of it — goes “no bid” as participants simply stuff their hands in their pockets and say “screw this.”

It’s coming folks, and I guarantee you this: Whatever your “nightmare” scenario is for such an event, it’s not bearish enough.

Well, that’s not precisely the headline over at Business Insider, but I take exception to theirs; so, I fixed it for them.

ECONOMIST: Bernanke Is Going To End Up Bailout Out All Of Europe

Federal Reserve Chairman Ben Bernanke’s apologetic take on the Fed’s negative  role in causing the Great Depression may translate into a willingness to bail  out Europe, writes economics blogger James Pethokoukis.

Bernanke will not be willing to let the European Central Bank’s  ineffectiveness infect U.S. banks and destroy the global economy.

He points to statements from well-known independent economist Ed Yardeni to  elaborate on that idea:

Given the ECB’s reluctance to act, I suspect  that the Fed will spearhead the formation of a Global Liquidity Facility  (GLF) to avert a global financial meltdown. Fed Chairman Ben Bernanke  demonstrated that he is a master at putting together such emergency measures  back in 2008. In effect, it would act as the world’s central  bank. Mr. Bernanke is clearly very worried about the prospect that the  European sovereign debt crisis is a contagion that could spread to the US, as  evidenced by his bizarre town hall meeting with troops returning from Iraq on  November 10. The GLF would receive deposits from the Fed and other participating  central banks, including the ECB. The funds would be used to buy the bonds of  debt-challenged governments that would be required to accept strict supervision  of their fiscal and regulatory policies by the IMF.

Regardless of Bernanke’s avowed commitment to save the  United States from a repeat of the Great Depression, the political will to truly  prop up the rest of the world doesn’t seem to exist in the U.S.

If Congress is breathing down the Fed’s neck, just wait until the “U.S.  taxpayer” is absorbing the fiscal profligacy of Italy and Greece.

Here’s the problem:  Bernanke doesn’t HAVE anything with which to bailout Europe.  Yeah, yeah, he’s got his ‘printing press’ but you see, the thing doesn’t work without DEBT.  He can only fire that thing up when there is actual demand for debt.  Except no one can afford a loan.  No one wants a loan and no one is going to borrow in this economic depression.  So, Bennie’s printing press has a big old crow bar stuck in it.

So, what will he do?  What bankers have been doing since they came into existence.  Use the governments they control to force the taxpayers to supply the debt demand.  Since 99% of us cannot take on any  more debt, the government will do it for us.  They’ll just spend money they don’t have, creating more demand for debt, and the Federal Reserve, in its benevolence, will oblige and provide the loans.  More debt on the backs of the US taxpayer.  Thus my change in Business Insider’s headline.

One must understand that the Federal Reserve and its member banks (the primary dealers all private, for-profit, institutions), which are responsible for the creation of our money through demand for debt, are lending to our government, which in turn, allows our government to spend money it doesn’t have.  The reason that the private banks do this is because control of the government is how they can get to the taxpayer.   The taxpayer is an ‘infinite’ source for the payment of interest, even as the money for payment of that interest is never created.  In essence, the leverage, from their perspective, is unlmited.  The banks profit off of all Americans regardless of whether or not Americans personally borrow money.  This is why you see our US Treasury Secretaries working hand-in-hand with the Federal Reserve, which is completely contrary to the US Treasury Secretary’s job description, which is supposed to be to protect the assets (that would be the taxpayers) of the United States.

Bankers never intentionally lend at a loss.  Never.

If you haven’t noticed this morning is downright ugly in the stock market, with the futures indicating a more than 200 point down open on the DOW.

The culprit is Italian bonds, which have accelerated their march higher on yield and now the 2yr has inverted as well.

Note carefully that Italy, in “immediate terms”, does not appear to be in distress. That is, while they’re spending a lot on interest they don’t have a coverage problem (ability to pay the interest) – for now.

The market doesn’t care.  The market has discerned that Italy will not enact the actual government spending cuts necessary to bring revenues in line with expenses.

In the end analysis that is all that matters.  Everything else is arm-waving and obfuscation; if you spend more than you make eventually you go bankrupt.  Period.

All the monetarist claptrap is the product of a deluded mind or worse, an intentional lie.  But none of the armwaving changes the perception of the market, and in the end that perception is all that counts.

The lesson from first Greece and now Italy must not be lost on our clowncar brigade in Washington DC: The government cannot spend more than it takes in via taxes.

Let’s face the fundamental facts folks: Government spending is always — without exception — nothing more than a transfer.

That is, every dollar that the government spends on some program is a dollar that the private sector cannot spend or form capital with itself.  When the government taxes and then spends it removes the money from your wallet in order to make a decision that you would otherwise be able to make.

The premise that government can avoid this fact is false.  If government borrows to spend it simply time-shifts when that taxation will take place — it spends now to pay later, exactly as you would were you to borrow to buy a car, a house, or a refrigerator.

The dynamic is exactly the same.  The “monetarist” view that the government borrows money into existence and this “powers” the economy is nonsense.  “Money” in that sense is merely a token; it does not “come into existence” as a consequence of government printing or borrowing it.  Actual money is the fruit of labor and we use tokens such as paper bills and metallic coins to represent money as a means of lubricating commerce — that is, giving the public a convenient way to exchange produced economic activity with desired consumption.

Credit money spends exactly as does produced money.  In the economic parlance they’re fungible; that is, exchangeable without distinction.  As a merchant you have no idea if the person who walks into your shop bearing a $100 bill obtained it by picking strawberries or hitting the ATM outside your shop with his credit card, promising to repay the $100 later.

The economy is only in balance as long as the amount of produced goods and services equates with the amount of “money”, defined as credit money and produced money summed, is in balance.

We have spent 30 years distorting this fundamental fact.  We have done so through intentional overspending as a nation.  Our government has engaged in an orgy of making promises that the lawmakers know cannot be kept, and they have intentionally goaded private citizens into taking on more and more debt that they ultimately will not be able to pay as well.  Like all delusions and addictions when one begins the side effects seem small and the pleasures large, but in fact the costs are large or even permanent while the pleasures are in fact fleeting.

This charade must end.  Europe is self-destructing over this exact paradigm — promising “social benefits” that cannot be paid with current taxes, relying on the bond market to hand out ever more “cheap money.”

Now the market has discerned that this scheme is in fact a racket and will inevitably lead to massive losses.  It is thus withdrawing its support.

There is no option other than to cease the deficit spending — both there and here — right now.

I know what all the “pundits” tell you — we can’t do that right now, we have to wait until the economy is on a better footing and then we’ll do it.

Sorry, that won’t wash; this claim has been made for 30 years every time the economy turns down.  We have never withdrawn the deficit spending.  Ever.

The fact of the matter is that all we had to do was hold government spending constant with tax revenues in 2000.  We refused, because in 2000 when the Nasdaq market collapsed tax revenues from capital gains (which is where Clinton got his “improvement”) disappeared.  Rather than accept that the government had gotten too big, we instead made it bigger with the excuse that we’d stop once the economic downturn was over.

But we didn’t.  We instead expanded government and cut tax rates at the same time.  We went from “hold spending to tax revenues” to a point where government had to contract in size by about 20% in 2007.  Then the collapse came and now on a gross numbers basis it looks like we need to shrink the government by 43% – a doubling in less than four years.

But in truth it’s more than 43%, because when you stop the overspending the follow-through effects will depress tax revenues (and employment) for a time as well. 

This is the death spiral that has taken hold in Greece, where commerce and tax collection has essentially ceased, and now it is threatening to occur in Italy. 

If we do not act now we will cross that line here in the United States — and nobody knows exactly where it is, myself included.  All we do know is that it’s out there and we’re perilously close to the point of no return and may already be beyond it.

Nonetheless we must stop the deficit spending now and try to avoid the cliff.  If it’s too late then it makes no difference whether we act or not.  But if it’s not too late then we must save ourselves while we’re still able.  Today, I believe we’re still able.

Please understand that there is no solution found in tax hikes.  You could literally tax all income over $250,000 (yes, at 100%) and not close the budget deficit.  The primary entitlement programs currently consume all tax revenues — Social Security, Medicare, Medicaid, Unemployment and Welfare/General Assistance (of its various programs) leaving nothing to pay the light bill say much less than dozens of additional departments in the Government.  Nor have tax revenues covered the interest on the national debt.  Worse, Medicare and Medicaid (medical) are growing in cost at 9% a year and have been for the last two decades — which cannot continue as that chart of cost looks like this over the next 40 years, starting with $10,000 per person, per year:

There is no way anyone is going to come up with nearly one million dollars per person per year for medical care, but that is exactly what you are being promised.  It was and is a damned lie.

I understand that today’s Seniors and those who will become Seniors (your author here is pushing 50!) were promised these benefits.  I was promised them too.  That promise was an intentional lie used to buy votes.  The AARP should not be running ads on TV telling politicians “we’ll vote you out if you don’t give us a pony!” they should be calling for Seniors to occupy the Washington Mall and encircling the Capitol building right now demanding heads on plates for the lies that were sold to its members in exchange for votes — political power – over the last three decades.

That which cannot happen won’t happen folks, no matter how many babies some politician kisses or how many slick lies he tells you while wearing a $3,000 suit.  Arithmetic does not care about politics or votes; it just is.

We must stop this charade right now.  Jim Cramer is screaming that “they need to buy some time” over in Europe.  We cannot play the “buying time” game any more; there is no more time.

We must, right now, cut off the deficit spending. 

Now.

Today.

Not promise to do it tomorrow, not promise to do it when unemployment comes down, not in the “intermediate term” and certainly not as was “promised” by Ryan over the next 10, 20 or 30 years.

It has to happen right now; we must accept that the promises made were lies, that the output in the economy over the last three years was false as the government has been borrowing and spending 12% of GDP and this cannot continue.

We must accept that the economy has to be allowed to adjust to the actual output of our people.  This will be a massive and painful adjustment but it is unavoidable. 

As just one further example GM’s pension system is underfunded by more than $10 billion — that’s money that doesn’t exist and won’t.  State and local pensions are in similarly bad condition.

We must accept the truth ladies and gentlemen.  There is no other choice.

But at the same time, there are things we can do to help.  We can fix trade policy.  We can fix immigration policy.  We can collapse the college and medical cost bubbles.  We can fix tax policy so that America earns a place for corporate headquarters to relocate to rather than one firms flee from, thereby bringing us good-paying white-collar jobs.  And we can fix our energy policy allowing us to rationalize our defense spending.

None of this is easy.  But all of it is possible.  And while this may sound like a broken record, and to some degree it is, you can read it all here in the more than 4,000 articles I’ve written over the last four and a half years, or you can find those prescriptions in the book on the right sidebar..

But if we don’t act — and act now — it’s not going to matter what we do, as the choices will be made for us by market forces we cannot avoid.

Spike in US CDS (credit default swaps):