Rained Out

It has been raining pretty heavy the past two days which means two things:
-It's wet outside
-Massachusetts drivers park their cars on all the major highways

Thus I am home way late and have no time to write anything worthwile. This is good as you get to save 5 minutes of your life and I get to dig into the second half of American Apocalypse II; Refuge written by Nova of the Calculated Risk comments section fame. I read half last night and this sequel has really been excellent and I hope to finish tonight.

Rain Drops
A couple of blurbs.

-Former Minyanville regular Mr. Practical had a rare item up today that is a must read:
We're All in a Race to the Bottom
This guy is one of the very best out there.

-I did have a whole post outlined in my mind that was built on this Paul Krugman item:
Krugman or Paulson: Who You Gonna Bet On?
Krugman is happy to point out Paulson saw a recovery on the way while The Krugmonster just knew the stimulus was too puny to work. My article was to be centered around the idea that Krugmonster thought the stimulus measures were too small by a factor of 3 or 4X. If he is so right then should there not have been a structural recovery in housing, unemployment, etc only 3X smaller than he would have thought? As there has been no such thing, how does the Nobel winner explain this?

-Final item concerns robots once again. I find it funny that when I said the next bubble was to be in robots, I was all alone. Well here is another serving:
NASA Tests First Cylon
A new human like robot to assist in space walks. Just don't put him in charge of the bay doors whatever you do!

In a while when over investment in robotics blows up I fully expect to be remembered as a predictive luminary like Nostradamus and Joe Namath. Fear not, we can stash a couple of robots in all the empty houses to perform maintenance to keep the paper value of the homes inflated. Word of caution to all squatters; here is the future of empty in-home robotic security:


Have a good night.

Monday Snippets

I am a bit under the weather this evening and will take the night off from a full post. I am armed with second generation antibiotics, so I hope to make some progress against my sinus infection.

Over 100 Articles on Seeking Alpha
Over the weekend my Seeking Alpha article count reached past the 100 mark. I am happy to have material posted over there, and the readership of that site is a pretty savvy crew. A personal milestone.

Mr. Practical Article
You know things must be crazy because Mr. Practical is posting more than usual. In today's missive on Minyanville, Mr. Practical again covers deflation in response to a pointed reader email he received. Well worth a look:
Money Can Indeed Perform Vanishing Acts
The title is misleading, I know full well money can vanish; it is what happens to most of my investments!

Job Creation Reality Check
I had this post up in the comments section last night, but in case you missed it it is very important. Clusterstock covers the math of John Mauldin about jobs, namely we will need to create over 250,000 a month to return to 5% unemployment in 5 years. As a reference the average 30 year monthly job creation number is 50,000. Even during the go go tech boom (1991-2000) job creation ran at 150,000 jobs a month. This seems like it may be a problem, but I am the alarmist sort.
Another Reason We Won't Have A V-Shaped Recovery: Jobs

Gold Manipulation in History
Zero Hedge had this leading headline on this morning:
Exclusive Smoking Gun: The Fed On Gold Manipulation
Naturally I was very excited.

The post covers in detail that the US FED, along with the Treasury, and strangely enough, the CIA, were indeed engaged in plenty of gymnastics in regards to gold prices and allocation. The only problem is this information is from the mid 1970's! While the content was clear and provocative, it is also seriously outdated. Sadly, we will have to wait another 20-30 years to find out what is going on behind the scenes today. Where's the Flux Capacitor when you need it most? Where is my Leonora Christine?

I am of the firm opinion that world central banks care very much about the price of gold. I am also of the firm opinion that gold over $1000 an ounce is not desired for the most part because of what that means in regards to fiat currencies. I think it is beyond question that gold plays a large role in top level government banking policy. And yes, my lead lined tin foil hat is on straight.

Have a good night.

10 Year Yields Moving Up; Why the Bears Cannot be Right

A little short on time this evening. I am in the process of picking a contractor to build a stairway/deck in the back of the house and I am collecting estimates and had to meet with a builder this evening. Why everything has to be so expensive I will never know!

Processed Meat Debate
Economic Disconnect has been having a back and forth with the fun blog Illusion of Prosperity as of late concerning a certain processed meat known as SPAM. I eat salads 3 times a week (Mon-Wed-Fri) and include SPAM as my lunch meat of choice. It seems that there is a basic lack of understanding of the wealth of products offered by the Hormel company in this space, so I thought I would wade in.

First off, there are many SPAM's. There is turkey SPAM, Lite SPAM, Low Sodium SPAM, and SPAM made with Bacon, which really is a masterpiece. You may also be interested to know that SPAM now is available in single serve packs so you do not have to open an entire can! Its true, see them here. SPAM is the perfect guilty addition to my salads as I hate salad dressings but find I need a little substance to the lunch.

The company Hormel Foods (HRL) and I can offer my full endorsement of SPAM. The stock as things stand I like as well and am thinking about taking a small position to protect my SPAM source. Of course, if I like a stock then Tim Knight hates it, and so HRL is a leading short candidate for Mr. Knight. I say buy what you like!
Full Disclosure: Love SPAM and this may influence my judgement on the stock; looking to start a position soon.

Mr. Practical from Minyanville
I really miss the writings of Mr. Practical on the Minyanville site. While he still offers posts from time to time, his writing has dropped off in frequency. Today his insights were spot on as usual:

Those declaring the economy is now recovering do not understand (still) the problem: we are stuck with too much debt. The government’s solutions are to create more debt, as their next to be announced PPIP does. But an economy grows from production, not lending at the wrong price. This is a long term problem; the government has only addressed the short run symptoms.
Let me give you an example. Sixty to 70% of our economic growth depends on consumption. In order to “reflate” an economy (still the wrong way to do it but I will give the bulls the fact that you can drive up nominal asset prices by devaluing a currency), you need people to borrow money and spend it. In 2002 consumer debt as a percentage of disposable income was an all-time high of 90%
Apparently that was still low enough to spur consumers into borrowing money against their houses and spend it. This drove the ratio up to 135%! By the first quarter of 2009 the ratio dropped to about 130%. Just look at what damage that did as consumers tried to get out of some debt. The ratio is still at least 125% (we will know for sure in at the end of June as the numbers are quarterly). There's no way to know for sure, but logic says to reflate from that high level of debt is going to be virtually impossible.

Mr. Practical hits the nail on the head.

Trying to reflate assets prices may have worked if those asset prices were at some lower to medium level. As things stand, homes and many stocks were at all time highs and thus cannot participate in a reflation campaign. At least not with an intact dollar. Simple analysis often is the best, see Occam's Razor.

10 Year Yields Moving Up; Why the Bears Cannot be Right
The big story of the past two days has been the monster move up in yield (lower price) for the 10 year treasury (^TNX). A 20% move up is very substantial, though it is from extreme lows.

The coverage of this move has been very broad, with both bloggers and mainstream media joining in. From the blogroll, Jesse's Cafe had these comments and this chart:


And Mr. Denninger at Market Ticker had this to say and had this chart:

To start let me say that I agree in total with what Jesse and Karl are saying. I think that the move up is a repudiation of US debt and signifies a bond market revolt against money printing. Let me be clear, that is what I think.

And thus, I am most likely totally wrong.

For this kind of reasoning to be the catalyst behind the drop in 10 year prices would amount to something making sense in the markets.

We know by experience that this is unlikely. Perhaps impossible.

The FED's plan is to keep loan rates (especially mortgages) depressed at all time lows to allow further debt expansion and roll over. They have been explicit on this point. We can debate the merits of such a plan ( I hate it) but it is what it is.

So how does this fit in with the current market action? Is this the bond market dislocation many (myself included) have been looking for?

I say it is not.

In last Friday's post I linked to work done over at Housing Doom that showed foreign buyers for debt were on a record tear as of late. We know that for foreign debt holders to grow a brain in regards to the dollar and their overweight treasury holdings would signal a real change in thinking. I cannot imagine anything of the sort is going on. So what is?

My first hint comes from a blip in this Yahoo Finance story from today:

Some traders fear demand for Treasuries could weaken as the government issues massive amounts of debt to fund its financial and economic rescue programs. The Federal Reserve has said it would buy up to $300 billion in Treasury debt this year as part of its efforts to keep borrowing costs low. But investors are now concerned that the central bank isn't buying as much as some had hoped.

Catch that?

Traders are concerned that Ben Bernanke is going Quantitative Easing lite, and not QE on steroids with protein shakes on hand!

Now there is a "market" reason I can understand!

The 10 year is going up in yield (and down in price) because the market wants Bernanke to really get the money printing going. The market wants lower rates. The markets needs lower rates. The market wants an open ended commitment to lower rates. That this process is self destructive and may outright collapse has no meaning to the market, those are rational thoughts.

Any two day span in any instrument is too short a time to make a firm judgement. At this point I would attribute the jump in 10 year yields to market forces putting pressure on the FED to make good on their promise to go "all in" with QE. With green shoots flying up all over the place, the recovery must not be disturbed, less anyone really start to look at the stock markets valuation against expected earnings. I mean, no serious disconnect there, yes?

So what I think is happening is the FED is being gamed into buying as many treasuries as the market deems necessary to ensure low rates. The recent examples of profligate spending by the US seems to have made many think we can indeed spend (borrow) whatever we want and there will be no one to do anything about it. Maybe they are right.

Today, the bears are wrong. Next week they may be right. When they are right, things are going to get all post Lehman-esque in a hurry.

Have a good night.

Must Read Mr. Practical Article

After a couple of very nice days, it is going to rain for 2 days straight. I hope this Spring and summer is not a parallel of all the snow from last winter. One can hope.

Fannie Mae Pulls Things From their Fanny
Imagine you are truly "too big to fail". Imagine you have your hand in a business so deeply, anything and everything will be done to bail you out. If you had that kind of safety net, you may behave and communicate in ways that no other entity could ever do. That is the only way a company can have around 45 Billion in hard capital backing, get this 2.27 Trillion in mortgage obligations. That is too funny. In the face of this, regulators have approved FNM to hold even LESS, yes less, cash in reserve for losses right at a time when FNM is being asked to buy up the latest crap mortgages out there. I am really sure this is all going to end well, really.

Along this line of thought, Minyan Kevin Depew's "5 Things You Need to Know" was dedicated to FNM yesterday, and it was a must read:
http://www.minyanville.com/articles/index.php?a=17042
In the article Kevin used FNM's own charts to show how without a clue the management is. What I loike the best is that even after so called "historical models" have been shown to not work at all when lending standards do not conform to historical stringency, FNM is still using viciously flawed models to estimate losses. In their chart for home price growth (or contraction) in the US chart, their is a ton of fine print at the bottom which harbors a real whopper; Fannie Mae deems sales of foreclosures as non important to their price assumptions! Seriously, enlarge the graph and read the fine print! FNM even states that foreclosure sales cause prices to drop even more than they estimate, but exclude them anyway! I give up. You could not make up a better story. Why this graph and FNM metric is not a huge story amazes me.

So FNM has 45 Billion backing 2.27 Trillion, they are using estimates that are obviously screwed, and they are backed by the US taxpayer. WONDERFUL. I agree the worst is behind us, it is behind us getting ready to slam us from behind and not in a fun way!

Must Read Mr. Practical Article
Sorry to rip things off again! I read a piece form the Minyanville writer Mr. Practical today that captures everything that I think and feel about the current fiasco PERFECTLY. Link is here:
http://www.minyanville.com/articles/S-tax-nationalization-interest-stabilization-citizen/index/a/17062

I am not sure what the rules are for these kinds of things, but I want to make sure this gets seen as much as possible, so here it is:

Fed Chooses Wall Street Over Main Street
"It took from 1914 until November 2007 for the Federal Reserve to accumulate $800 billion worth of Treasury debt. It has taken from December 17 to the end of April for the Fed to divest itself of $260 billion of this portfolio, a decrease of one-third. In its place, it has placed AAA-rated mortgages. At the current swap rate, the Federal Reserve System will be out of Treasury debt in December of 2008. But by adding car loans to the list of eligible paper, the Fed will most likely greatly accelerate this.” - Economist Gary North

To the average person this is gibberish. Perhaps this is why the Fed is able to do what it's doing: slowly nationalize the banking system. The stabilization that everyone is giddy about has its cost. The private market, with the encouragement of the Federal Reserve, has manufactured vast debt that cannot be repaid. Banks used up their capital long ago, so the Fed has to take those bad loans away from them and give them capital back.

Stabilization is not a working banking system. When you hear all the CEOs of Wall-Street say the crisis is nearing an end, it has no implication for a working banking system that will create more credit.

The Fed adds a new twist everyday. Now it's going to pay interest on reserves banks must keep at the Fed. This will allow the Fed to expand its balance sheet even more and buy even more bad loans from banks. Again, this isn't a positive: It illustrates just how bad things are.
By the way, it's the U.S. taxpayer that will be picking up a good portion of this interest they will now pay to banks.

Chairman Ben Bernanke has been given high marks for saving the system. But just what are we saving? The average person does not understand that what they are really saving is the bankers and Wall Street at the expense of the middle-class standard of living. A devalued dollar of 50% hurts the middle class much more than a 50% decline in the stock market. Why not let a failed system fail, thus re-distributing savings and income back to the middle class? Of course, everyone will suffer but in the long run that will happen anyway and saving the system will disproportionally hurt the middle class more.

The system is broken. Every action by the Fed says so. Those that anticipate a shallow recession still do not understand this. The credit crunch has barely begun affecting the real economy. We're in the very early stages of this process and the government wants to boil the proverbial toad (the middle class) as slowly as possible.
Risk is very high.

Nuff said! Perfect encapsulation of where we are.

California City Fails to get Bailout
Vallejo California has announced that the city council has voted to pursue filing for bankruptcy protection due to insolvency. Citing enormous pay for police and fire fighters, as well as escalating pension obligations the city will run out of cash by the end of June.

I think this is a pretty big deal. Huge even. What does this mean for the muni bond markets? Probably not good things. What does this mean for similar California, Florida, Arizona, and Las Vegas cities faced with the same kind of issues? Probably not encouraging things.

Almost right on cue when Hanky Paulson said the worst of the credit crunch was over, this big city default news was out. Funny if it was not so sad. This story bears serious following.

Have a good night.