The Show Must Go On

Saturday was a mad rush of activity because the rain stopped for a 6 hour window. Even though the grass was wet, I had to cut it because it was almost 8 inches tall! Still expecting cruddy weather all week long, the past 2 weeks have been very strange indeed.

Ben Bernanke Detractors and Defenders
I was sure that FED head Ben Bernanke's especially weak appearance in front of Congress last week to discuss the BAC/MER deal would open a debate on his reappointment. The president reiterated his faith in Bernanke, and no serious grumblings were found from the Congress. I found this puzzling because Mr. Bernnke was far from open in his testimony, and his reliance on the good old "I dont recall" line was at best a blatant lie.

Mish Shedlock penned a very harsh piece that was up today and i would ask you to take a look at it. Mish's summary:

Summary:
Bernanke is a disingenuous liar with a memory problem. He is also an economic dunce who does not understand the cause of great depression nor could he spot a housing/credit bubble visible to nearly every blogger in the country. However, like his mentor Greenspan, Bernanke believes that every problem can be cured by throwing money at it. Finally, he is a creative, political power grabbing hack who gives memorable speeches about throwing money out of helicopters.

While the tone of the article is indeed a bit rough, I find it hard to argue with the specific points Mish makes regarding Bernanke's performance.

Of course, not all are of the same mind.

The Mish piece highlights a Caroline Baum article where she sums up the situation:

It would be hard to find someone more suited for the job of Fed chairman than Bernanke. His performance yesterday has nothing to do with his unique qualifications for the position. ... Unless President Barack Obama wants a solo pilot, he would do well to tap Bernanke for a second term.

Mrs. Baum makes no sense with this paragraph. I would wonder if Bernanke being a student of the Great Depression is as much of a bonus as it is claimed. I mean, in what way, shape, or form is the current economic backdrop even remotely similar to the 1929-1940 period?

Also in the "Bernanke is not so bad camp" are Calculated Risk and Jim Hamilton (of Econbrowser). CR related a piece from Econbrowser that he agrees with:

It is one thing to have different views from those of the Fed Chair on particular decisions that have been made-- I certainly have plenty of areas of disagreement of my own. But it is another matter to question Bernanke's intellect or personal integrity. As someone who's known him for 25 years, I would place him above 99.9% of those recently in power in Washington on the integrity dimension, not to mention IQ. His actions over the past two years have been guided by one and only one motive, that being to minimize the harm caused to ordinary people by the financial turmoil. Whether you agree or disagree with all the steps he's taken, let's start with an understanding that that's been his overriding goal.

I can agree that character attacks are over the top, but again we see this idea that just because Ben Bernanke is so smart he must be doing the right thing. As far as I know smart people can make the wrong decisions, it is not a providence for the dumb. Stupid is as stupid does and all that.

My final take: I am not really convinced that Bernanke is doing the things he is to save the ordinary man from turmoil. And if indeed that is his goal he is failing at that anyway. Bernanke and all the powers that be are engaged in an attempt to save the banking system with the minimum pain for those institutions and the maximum risk for the average taxpayer. This much is clear. I think Bernanke is extremely intelligent. I think he is doing exactly what he sees as the best solution to the crisis. I also think he is as wrong as can be.

Wage Deflation in the Current Environment
While readers know my longer term belief that inflation (via dollar devaluation) is on tap in the future, I have no doubt that deflation is ruling the day at present. While deflation can be good in a sense (prices drop as less money is in the system) the worst deflation is wage deflation.

David Rosenberg explains what is happening on the income side of the consumer ruined balance sheet (via Clusterstock):

As wages deflate, workers are looking for ways to supplement their shrinking income base, for example, by moonlighting. Indeed, a poll undertaken by CareerBuilder.com and cited in the USA Today found that one in every ten Americans took on an extra job over the last year; another one in five said they intend to do so in the coming year. These numbers are double for the 45 to 54 year olds who now see early retirement, once around the corner, as an elusive concept.
Most pundits who crow about green shoots and about an inventory restocking in the third quarter giving way towards some sustainable economic expansion live in the old paradigm. They don’t realize, for whatever reason, that the deflationary aftershocks that follow a post-bubble credit collapse typically last for 5 to 10 years. Businesses understand better than the typical Wall Street or Bay Street economist and strategist that everything from order books, to output, to staffing have to now be restructured to adequately reflect a permanently lower level of leverage in the economy.

Faced with evaporated stock market gains, disappearing home equity, and credit that is harder to come by, the average person now will have to contend with wage cuts. I am not sure how this fits in with higher consumption going forward, but I am sure CNBC will have a special show on this topic soon.

The Show Must Go On
I think the surreal serenity of the markets over the past month have resulted in some bored market observers finally coming to grips with reality. While the VIX (a measure of volatility) is at lows not seen in some time it seems people need something to talk about.

It is when they talk that we see what is really going on.

Consider this video (seen on Market Ticker and Zero Hedge) from CNBC where a floor trader quite frankly explains that there is no "market" only government backstopped and manipulated shell of a free market:
Watch It Here. I could not embed, sorry!

Still not convinced?

Consider this post from Zero Hedge which details the country of Norway entering the process the US has made popular, namely having the government buy up mortgages because nobody else will:

Long perceived as a bastion of stability due to their oil-extraction based economy, and socialist system that the US can only dream to emulate, today the Norwegian Central Bank conducted a Dutch auction in which it exchanged NOK10 billion of government securities for residential and commercial mortgage loans. And not just any loans, but including those denominated in SEK, DKK, EUR, USD, GBP and CHF (well, in retrospect, looks like pretty much any loans). Exchange swaps will cover maturities between December 2012 and 2014. But aside from the specifics, it seems that even the Vikings are starting to monetize MBS: a process demonstrated to work phenomenally well at propping up a hollow economy by the likes of economic alchemists such as Bernanke and Geithner.

I am sure Bernanke and Geithner have only the common man at heart, and by extension so must Norway.

Still think the markets are trying to "tell us something" by their rise?

Consider the now scrapped PPIP scheme which will not be used by any bank in their right mind because they cannot scam the system in Bernie Madoff style (via Clusterstock):

When Citigroup heard that the government was planning on financing investors who were willing to buy toxic assets, it came up with the dastardly scheme of using taxpayer dollars to buy the assets from itself. In essence, the Citigroup wanted to recapitalize its collateralized debt obligations with taxpayer dollars. And it would have got away with it too—if not for the heroism of Sheila Bair.
The Wall Street Journal today explains how Citigroup and other banks tried to game the system by buying assets from themselves, their subsidiaries and their parent companies. It was almost the perfect scam, allowing the banks to transfer most of the remaining risk to taxpayers while keeping the upside for themselves. Losses would be socialized, profits privatized and the public befuddled by the complexity of it all.
According to the Journal it was FDIC chair Bair who saw the scam for what it was and put the kibosh on it. And the banks reacted by suddenly becoming unwilling to sell their assets into the public-private partnership program. If it wasn’t a scam, they didn’t want any part of it.

That should about do it.

The markets are not telling us anything other than as long as all assets are backstopped by the government there will be "stabilization" of those asset prices. This effect is of course not built on any foundation. If ever these crutches are removed, the patient will collapse. Those wishfully thinking about a FED "exit strategy" should both take a break from the recreational drug use and wake up.

It seems the show must go on. We have a low volume futures based stock market rally, a government commitment to transfer any and all mortgage losses to the taxpayer, and never ending assistance for the banking sector. That is our market. Any other discussion of things economic must start at this point or the discussion is irrelevant.

I would venture that there was a time limit that the FED/Treasury would have liked to have in place to get out of the market fixing racket. Sadly, I think the idea was that a 3-6 month support would have righted the ship. As with almost every other idea from that duo, they were way off. Government support will now have to remain a structural part of the markets for some time. If history is any guide, this mission creep of government will never really go away. It's time we started talking about that.

Have a good night.

Friday Night Free For All

Entertained the Mom for dinner tonight, so I am out of time for a post. Yes I know it is Friday night! I will leave a few links to item I found interesting and then its open night in the comments if anyone wants to vent. I will check in later.

Friday Night Free For All
Here are the items that caught my attention today.

Reader Comments
Loyal reader Gawain's Ghost had an extremely interesting thought line in the comments section from the last blog. I would point you there and scroll down for his entry at 5:35am. Here is a sample (I assume you do not mind Gawain's, if you do I can remove this later):

In a complex system, the component elements self-organize and emerge into a whole that is greater than the sum of its parts, which then operates at a higher level of complexity independent of the rules governing the lower level components. It becomes its own thing and is now capable of interacting and self-organizing with other wholes to emerge into an even greater whole at an even higher level of complexity, and so on.

In order for this to occur, there must be a medium of communication. In a chemical system, for example, that medium would be energy. In an economic system, it's money.

That is the "tease" and the writer ties it all together with the current economic conditions. Very interesting indeed.

Dangers of Printing Money
I would think that if Time Magazine is publishing a pictorial on inflation dangers this must mean we are going head long into full blown deflation! Still, the pictorial (via The Mess That Greenspan Made) is both terrifying and educational.
See it here.

The USA is Not Japan, So Cool it With the Comparisons
Paul Krugman made name with his analysis of the Japan deflation. Many try to extrapolate the experience of Japan to the US. Jesse's Cafe Americain shows us all in easy to understand graphs and ideas that the two countries only similarity in any respect is that they both have national flags.
Read about it here.

Market Ticker on a Roll with Sesame Seeds
Karl Denninger has been red hot this week. Today Mr. Denninger catches a small but potentially important detail that I could not find any mention of anywhere. Hint: It relates to treasury sales.
Check it out.

Crazy Like a Fox
The Financial Ninja has a very interesting take on the China commodity spending spree that really is worth a look.
So look already!

The Automatic Earth Adds On
As for the Mish and Gary North issue mentioned last post, Ilargi at The Automatic Earth (one of my top sites) has some commentary.
Worth a look.

You Knew it Was Coming
I will end the linkfest with a picture I saw at some point yesterday that has me laughing every time I see it:

Instant Classic!

Have a good night.

Every Little Thing is Gonna be Alright

Well the Sun did make a late appearance this afternoon. I will need much more to ready the fish for the fishing season.

Who would have thought one random Thursday could generate so much news and information? I had a late start tonight (traffic was just dumb heavy) so I cannot spend the time really needed on all the latest developments. I will focus on some less reported areas and of course add a heavy dose of sarcasm. Get your Friday night requests in as well all!

While this is an economics blog primarily, it cannot exist in a vacuum. Today brought some sad news.

Sadly Farrah Fawcett died today after a long battle with cancer. I have seen such fights up close and I can only wish that she is in a better place now.

Late news that Michael Jackson died today at the age of 50. The cause of death is listed as cardiac arrest. Whatever you might think of Jackson, his work did touch so many.

Probably Not a Good Idea
Loyal reader Gawain's Ghost tipped me off to this article by Gary North which looks at the writing record of one of my all time favorites, Mike (Mish) Shedlock as it relates to the deflation/inflation debate.

At first I was confused as to why Mr. North decided that Mish's writings were a particular area of focus. I imagine it is because Mish has such a large and loyal following and Mr. North simply wanted to engage Mish in an open debate. After reading and re-reading the article unfortunately I think it may be more than that.

This is an example of what I am so glad does not happen here in the comments or with those that I exchange email correspondence with: confrontation with the aim to make the other's view either irrelevant or suspect.

Mr. North goes as far back as 2005 to target particular articles, or even just passages where Mish seems to have had a gap in logic or a conflicting idea. I can say with total confidence that in the two plus years of this blog I have been ALL OVER THE PLACE, so this is no surprise. I would also add that I have been reading Mish since his site started and his views certainly have evolved as the data has, but his core themes have not. I think Mr. North makes a huge jump in the wrong direction with what he surmises is Mish's end game ideas as well.

Look, Mish does not need little old me to defend him. His writings speak for themselves. I would even advise him not to answer this article because it is a game of "gotcha" we could all do without. To all the bloggers and any writers anywhere, lets keep it clean and impersonal unless Paul Krugman or Bill Gross are involved, then of course full steam ahead!

Winner of the "Most Terrifying" Headline of the Day Award
Today on June 25th 2009 the winner of the "Most Terrifying" headline award is clearly from Naked Capitalism:
Is Bernanke Toast? If He Is, Summers is a Shoo-In
This is like "The Exorcist" kind of scary. I may need a night cap just to sleep tonight. Maybe two.

Change I Could Believe In; No Seriously
Even though I am a inflation oriented future thinker, I actually hate inflation for all it's slow killer ills. Of course if you hate inflation, your superman is Paul Volcker. Not quite "the sausage king of Chicago" (movie very obscure reference, try to guess!) but more the ultimate champion of inflation destruction.

In these troubled times with so many moving parts, leave it to an over 80 year old former FED head to figure out how to fix everything is a few simple steps:

What is it that Volcker wants?
-Impose capital requirements on trading parties, people familiar with his thinking say.
-Make bigger banks smaller
-Reduce the role of an overstretched Fed
-Force Derivatives to be traded on exchanges
-Transparent investor prices of Derivatives;
-More-aggressive capital reserve requirement
-Bigger role for exchanges.

Yes folks, it really is that easy. So what's the problem?

Note to president Obama: Fire the dummies you have, put Volcker in charge, and I may even go door to door for you next election!

Every Little Thing is Gonna be Alright
Sometimes when I scan the headline page at Yahoo Finance I see things that just hit me as either funny or so sad I want to cry. Today was one of those days.

Here is a screen capture from the Yahoo Finance main page at 9:44 am on June 25th 2009:

The leading headline and summary show just how far we have come.

The headline reads:
Economy Dips at Slightly Lower 5.5 Percent Pace
Which is asinine in and of itself. The assumption here is that you have no idea the last reading of 5.7% is not really any different from the new 5.5% number.

Of course this is pretty standard now, and it was not the headline that hit me. It was the first sentence of the summary:
"The economy tumbled at a 5.5 percent pace in the first quarter, but appears to be doing better now."
And really there you have it. We have reached a point where baby talk is now standard fare in the financial media.

One of the millions with no job and benefits running out? No worries, everything is getting better now.

Credit card rate just got jacked up to pay banking employee bonuses after you got hit with paying for their losses? Forget about, its getting better now!

I could go on all night. This kind of wording from a media outlet is disgusting and it makes me sad for where we are right now.

Please note that the very last headline "FED 'Light years' from a rate hike" you would have already known by reading my blog!

Economic Disconnect Exclusive: Extended Bernanke Testimony Before Congress Today
FED head Ben Bernanke was in front of a congressional panel today to answer questions related to the Bank of America purchase of Merril Lynch. The point was to discern whether the FED and/or Treasury threatened Ken Lewis of BAC into staying the course on the deal no matter how bad Merril losses became.

Here is the unreleased final session from congress today, an exclusive satire from Economic Disconnect:
Dan Issa: Mr. Bernanke am I to believe that you basically "do not recall" any dialogue, written or spoken, related to the BAC/MRL merger?
Ben Bernanke: I'm sorry, I forgot the question already. What?
Dan Issa: You mean to tell me that one of the most earth moving episodes in the financial meltdown is lost from your memory?
Ben Bernanke: Sir, I think you are referring to that film "Total Recall" where the California governor lives two lives with different memories. Or something. I cannot remember.
Ron Paul: Mr. Bernanke, do you recall where your car is parked today?
Ben Bernanke: Why do you ask?
Ron Paul: I was just hoping that you would not get lost in this fine city of DC today after this meeting.
Ben Bernanke: Luckily I have a GPS so if I forget where the car is, it leads me right to it. Sometimes the car is in Argentina. Weird huh?
Ron Paul: Mr. Bernake, do you recall where your hairbrush is today?
Ben Bernanke: Trick question! You know I do not use a hair brush, I just pat what is left down in almost pure "Goldman Sachs" style, except I kept my sideburns. Hahaha, nice question, I'm out-of hair, bye bye!
END OF TRANSCRIPT

Have a good night.

Money Printing Nirvana

Rain and mist all day today. Same story for some time now. Rumor has it the Sun will be out tomorrow and it will be north of 80 degrees. I hope my skin does not burst into flames when the light actually hits it again. Hopefully my melanocyte recruitment cascade pathway is still working after almost 10 days of darkness! Wow, that was kind of geeky.

Blog Notes
With the return of the Sun, I am going to hope for a real start to the summer. What this means is the dreaded "summer posting" type schedule. Right before and then after July 4th it is my fishing season. This usually run into late September, though the NFL takes over then to a large extent. I also will be playing some more tennis more frequently. Add to this my brand new back deck and new front lawn and I think I am going to have a fun and busy summer.

What this all adds up to is less frequent posts. I would say every day will be out for sure, but not once or twice a week either. Friday night is always my favorite blog of the week. Maybe weekend wrap ups as well will be added. Yours truly does have a life outside or writing and the summer time is the right time. I know all the loyal readers understand, and I am sure their blog reading time goes down in the summer months as well. Never fear, I will be here.

FOMC Day
Today had all the drama of watching paint dry. A basic rerun of the same statement from last meeting, though the FED did leave out the actual term "deflation" as not to scare anyone. As usual, the real fun is in the stories that are run after the statement and today was no exception.

Consider this AP story (via Yahoo Finance) which open with an absurd jump of logic, but of course just leaves it on the table as is:

Fed says recession easing, inflation is tame
WASHINGTON (AP) -- The Federal Reserve signaled Wednesday that the weak economy likely will keep prices in check despite growing concerns that the trillions it's pumping into the financial system will ignite inflation.
Fed Chairman Ben Bernanke and his colleagues held a key bank lending rate at a record low of between zero and 0.25 percent. And they pledged again to keep it there for "an extended period" to help brace the economy.
The Fed is sending the message that the economy is making progress toward a path of recovery, that the credit markets appear to be healing and inflation is not going to be a problem," said economist Lynn Reaser, vice president of the National Association for Business Economics. "The bogeyman of deflation also was removed from the Fed's primary risk list," she added.
The Fed in March launched a $1.2 trillion effort to drive down interest rates to try to revive lending and get Americans to spend more freely again. It said it would spend up to $300 billion to buy long-term government bonds over six months and boost its purchases of mortgage securities. So far, the Fed has bought about $177.5 billion in Treasury bonds.
The Fed is on track to buy up to $1.25 trillion worth of securities issued by Fannie Mae and Freddie Mac by the end of this year. Nearly $456 billion worth of those securities have been purchased.

There is a lot of stuff here, so lets start with the smaller items;

-The FED has made it clear that a rate hike is off the table. I will now accept apologies form all those saying the FED would be raising rates in August. You were all dreamers and you are all now proven wrong. The rates will be zero for an "extended" period of time. So unless you cannot read that means ZIRP just got treated with ExtenZe and so knock off the "rate hike" and "exit strategy" talk.

-The FED is truly all powerful as both inflation and deflation are pronounced dead as of today by the FED. They only said inflation was "well contained" (uh oh!) and they did not bother to even mention deflation (uh oh!). The FED has engineered a perfect outcome and one they are in total control of, if you read just this article that is.

Money Printing Nirvana
My last point is the major one. Reread that first line:
"...the weak economy likely will keep prices in check despite growing concerns that the trillions it's pumping into the financial system will ignite inflation."

The FED feels that because wages are static or going lower and the price of an XBox is static or going lower they can create money unabated with no consequence.

Now, Economic Disconnect, you might say "all that money is not going into new credit, hence there is no velocity of money, thus no inflation as it can only cover debt destruction". And of course you are correct and the next step is deflation.

To this I would ask;
-If wages could be kept low (by economic factors or edict)
-If consumer prices could be kept low (by lack of demand or edict)
-If banks will not lend out money, but instead use it to write off debt (this may well be what is going on)

Then would it not be nirvana to simply print enough money to cover all debt, call it "cancelled out" by all the new paper, and start all over again?

Indeed, this seems so devilishly simple I would wonder why every nation in the history of the world has not had this as their economic centerpiece.

And I think this leads me to my "inflation" predisposition. You may define inflation as an increase in the money supply, but I could define it as de facto devaluation. If the US prints say 10 trillion dollars to absorb mortgage losses, credit card losses, commercial real estate losses and other losses not yet known then yes, that money never enters the money supply as new capital. But it was used to pay for the debt that was taken on and could not be paid back in real money. As a creditor you just got paid back with printed money that came from nowhere. At this point the currency has no moorings in reality (not that it does now, but if kept as a slow process the world accepts this as a cost of doing business) and thus any creditor will want either MORE of the dollars, or they will not want them at all and demand payment by other means.

This is the danger of the "printing press", not hyperinflation because of a sea of money, but inflation due to limited desire for a particular money or a lack of belief in a particular money form.

Now I understand that because this has not happened as of yet to the US, nor in it's history many think this will never happen. I also have respect for the "other currencies are worse off, so the dollar will always be strong" argument for what it attempts to imply.

It reminds me of the old line:
"When you owe the bank $100 that is YOUR problem; When you owe the bank 100 Million it is the BANKS problem".
(Aside: this joke needs to be corrected for today's dollars!)

The US owes so much money that indeed it is in the best interests of most of our creditors to play pretend and allow the US to do what it is doing with the money creation. I have discussed the possibility of a debt "Chandrasekhar limit" many times. I think we finally get an answer to that question.

Have a good night.

Gold Sales on Tap Because it is Useless

Guess what? It rained today, all day. Tomorrow it looks like rain. All day. This has been going on for 7 days solid. If the sun does not come out on Thursday, as promised by the weatherman, somebody may get hurt.

Those Were the Days
I do not cover the housing sales and price numbers much anymore because we all already know how they are going to go. I still get a kick that after 2 years of terrible number, the pundits still try to get excited about rising sales going into the spring and summer. Barry Ritholtz highlights the silliness of this idea here.

What caught my attention today was the statements by National Association of Realtors (NAR) chief Larry Yun who basically was whining that appraisals are now having some basis in reality, and this is problematic come loan closing time (via Clusterstock):

"Pending home sales indicated much stronger activity, but some contracts are falling through from faulty valuations that keep buyers from getting a loan."...
"Lenders are using appraisers who may not be familiar with a neighborhood, or who compare traditional homes with distressed and discounted sales,” [Yun} said. “In the past month, stories of appraisal problems have been snowballing from across the country with many contracts falling through at the last moment. There is danger of a delayed housing market recovery and a further rise in foreclosures if the appraisal problems are not quickly corrected."

Of course Mr Yun and his predecessor David Lereah had no issue when appraisal fraud was showing 25% price gains in 3 months during the bubble. Those appraisals were in no way "faulty", just the more recent ones that show home prices are falling.

It is like the line form the intro song to the classic TV show "All in the Family" where they finish "Those were the days!!" Oh to have a free hand in appraisals! That was a good time. It speaks volumes about our current lack of any real ability to feel anything that Mr. Yun both said this out loud and was then not asked to step down. I have Mr. Ritholtz's new book "Bailout Nation" on tap for reading tonight and tomorrow and I hope to have a quick review up later in the week.

Jesse's Cafe Follow Up
Last post I linked to an article that I wish I had written. The post at Jesse's Cafe Americain really fleshed out that inflation and deflation are in fact choices by a government in a fiat system.

Of course this discussion is very heated right now, and I imagine Jesse got quite a bit of input on the piece, as I do when I write about this topic. Jesse must have had quite a bit of feedback because there is a follow up story today that even further develops the thesis. As was the case yesterday, you really should read the whole thing. (Side note: Stagflationary Mark, Jesse sees the risk of Stagflation as very high. No word on Negflation however, but only those in "the know" really have that on their plate!)

Another forward looking fellow is Ilargi at The Automatic Earth. In his last post I think Ilargi offers up some advice that should be taken into consideration, especially as the "green shoot" bombardment has mellowed quite a bit:

The mortally wounded banks that play healthy with the help of the government will get to do so even more if Obama's regulatory reforms plans are accepted. But it's just the most expensive exercise in futility the world has ever known. Not that that comes as a surprise to you anymore, I’m sure. The losses will keep on piling on, and they will come from all sides. Credit cards defaults, commercial real estate, which is plunging at a 30-50% clip as we speak, and has much further downward to go, speculative corporate bonds that are closing in on a 10% default rate,
The World Bank, meanwhile, wants the rich world to cough up $1 trillion to help the poor in other countries. Don't worry, they don't really believe it either. The rich world will have more than enough poor of its own to take care of. Please don't you believe that it will.
And don't believe that there will be a recovery any time soon. Make your decisions based on the assumption that there'll be no recovery for at least a generation. That will save you a lot of hardship.
Makes you think all the world's a sunny day, doesn't it?

If indeed the current crisis is the largest debt debacle in history ( I believe it is) then truer words have never been spoken.

Gold Sales on Tap Because it is Useless
Word out today the the US Congress has passed a bill (link via Mish's site) which included the US approval for the IMF to sell some 400 tons of gold. The IMF is the second leading gold holder with a marker of 3217 tons of gold valued at around 100 Billion dollars.

Mish has some thoughts on the sale:

Some may think that the IMF dumping gold is part of the vast conspiracy to suppress the price of gold. Instead, I propose the IMF sale of gold is sheer stupidity on the part of the IMF. However, given that I do not like the IMF or its meddling, I am glad they are doing it.
Reasons To Cheer IMF Gold Sales
1) If the IMF wants to dump gold in favor of paper assets diminishing in value over time, it's fine by me. I hope they dump it all. It will reduce the amount of meddling they can do down the road.
2) IMF gold sales are a bull market phenomenon. The UK dumping gold at $250 marked the bottom.
3) China is a possible recipient of the gold. If the real reason for this move is to allow China to get rid of some US dollars or treasuries in return for gold I view that as good thing.

Bretton Woods II is coming to an end. That we know. What we do not know is the timeframe or the replacement. However, China may need to accumulate gold for whatever the next agreement might be. IMF gold sales may be a small step down that path.
Gold is consolidating recent gains now. Bear in mind that March to August is generally a seasonally unfavorable period. That is not a prediction of a further pullback, although it is likely. Further consolidation is a good thing that will add fuel for the next leg higher.

I agree on all points though I would say that the FED has on many occasions stated in various minutes and other sources that the price of gold is taken into consideration by them in regards to inflation expectations. When you consider that the FED has now gone "whole hog" along with the Treasury in regards to overt market manipulations, it is no stretch to think they would target gold as well. This is not conspiracy theory, just a logical step forward.

Thinking about Mish's observation that the IMF gold dump "...will reduce the amount of meddling they can do down the road." really got the wheels turning.

"I had a dream, I had an awesome dream"..Lionel Richie "Say You, Say Me"

I too have had a dream, but this was a waking dream, so the sleeper has awoken! (obscure reference)

The Dump Gold It's Worthless Campaign
I would like to invite the entire blogosphere and the mainstream media to get as negative on gold as possible. You can use charts, scare tactics, hand puppets or whatever you like but spread the word that gold is useless. Even worse it is worthless. Sell now, sell all you can. I would ask the holders of gold (physical, or however) to go along and keep all the cash you get, it comes into play in a moment.

After a protracted campaign which should scare the countries of the world (well maybe not the Asian nations, they do love their gold) into dumping their reserves, I would hope to hit a downside target of say $5-$15 dollars an ounce. You do not want to know what silver will be at that point! And now here is stage two...

Goldbugs unite. Deflation callers join hands with the inflation dreamers. Any and all that would see a return to real economics and real responsibility can get on board.

Then we buy it all. Every single ounce. Everything.

The dollar amount required certainly could be attained, well maybe not every single ounce, but the vast share. Then all we have to do is watch the fiat currencies collapse and then WE will have the power! It's simple. It's beautiful!

I just cannot get around how we go about convincing everyone to first sell all their gold, then want it back later. Petty details I say. Who is with me?

For more fun with gold, consider this Onion News Network clip,
US To Trade Gold Reserves For Cash Through Cash4Gold.com:

Funny in a uncomfortable because it is so true sort of way.

Have a good night.

Monday Night and Who Will Stop the Rain?

It has been raining or misting for 5 days now. Enough is enough! No Sun until Thursday. Still waiting for the summer.

I left a comment on the computer post from last night. As of now the wireless is behaving ok, but I would still like to get some kind of upgrade. I will put it off until this weekend, or longer as I am lazy! A little short on time this evening, so a shorter post.

Insider Selling
To me insider selling of company stock can mean many things, but it most often means the people most in the know are abandoning ship. Other reasons like diversification, tax reasons, or many others can be very true at times. When looking at insider selling you want to see some real spikes up (or down) to make an inference for the market direction.

Tim Iacono over at The Mess That Greenspan Made has a write up and a great graph:

What to Make of the Insider Selling?
Bloomberg files this report on the recent rise of insider selling, company executives dumping the most shares since mid-2007, shortly before the broad stock market's peak.
Surely this can't be a good development for retail investors , many of whom have just recently convinced themselves that it's OK to put some money back into stocks again.
Perhaps a visual aid might help...(click for larger view)

Tim notes that the last insider selling top nicely coincided with the top in the market in 2007.

I have been wondering just who in the world has been snapping up all the bank secondary offerings as of late? I mean who would want to step in front of that train wreck? Deep down I have a bad feeling that big investment houses used things like pension money to purchase the shares. I also think the FED/Treasury has provided some kind of downside protection here.

Massive Treasury Auctions Hurting the Stock Market?
The Treasury is on tap to sell $165 Billion in bonds this week. That kind of debt issuance may be sucking up available funds from things like the orchestrated SPY futures gunners near the market close which have suddenly fallen silent.

Of course a nice stock market route is just what the government needs to spread some fear so investors will run for the solid "safety" of US Treasuries. This line of thought will one day be the butt of pointed financial jokes like "Remember when we all ran to US bonds when things got rough?" "Yeah, well we should have kept on running!" HAHAHA.

Anyways, Market Ticker has the goods on what this may mean:

Liquidity Disappearing
I hope you folks who got all giddy about the SPX in the 900s and the DOW up around 8,800 took the opportunity to either sell or hedge.
While there is no guarantee that this pattern will continue the fact remains that liquidity matters and there is little point in trying to argue that the primary fuel for the rally off the March lows has been unprecedented system liquidity provided by Sir Feds-a-lot.

The problem is that Treasury has been and continues to suck all the oxygen out of the room with their unprecedented issuance of debt to fund Obama's silliness in the form of his budget "priorities" and the raw handouts to banking interests, much of which is apparently going to show up in Goldman Sachs bonuses.
Again, to put this in perspective this 7-day window has $165 billion in issuance. The entire S&P 500 - all 500 stocks - has been trading in the $2-2.5 billion a day range for the last month or so. That's the capital flow that is represented by all trades in all 500 stocks.
There are of course lots of other stocks, but in aggregate the S&P 500 posts the largest dollar volume on a typical day by a significant margin.
You simply cannot issue $165 billion in Treasury Debt and expect it not to have a major impact on system liquidity. It is not possible. That which is spent on one thing (in this case Treasury bonds) cannot be spent on another (in this case stocks.)
The Fed cannot "monetize" this debt without creating an instant dislocation in the Treasury market - their games thus far have produced a SMALL rumbling of trouble there, but nothing like an outright monetization campaign would produce.
Bernanke and Obama are backed into a corner, exactly as I predicted would happen. In order to continue to issue like this in the Treasury market while not driving Treasury rates to the moon money will have to be "scared" into bonds - which means blowing up the stock market.
Sorry folks, but those "green shoots" are in fact marijuana plants and our President along with his economic advisers have been smoking 'em.

So either the early part of the week will be rough for the markets to get the needed bond buyers active, or this could be the signal for a lot more weakness going forward. I have argued that the government can either goose the stock market or have a stronger dollar, but they cannot have both. I will be looking forward to seeing how they balance this high wire act.
Disclosure: I had taken a small position in SPY a while back to show my "Split the Distance Bull Market" call. It never got there, and I was stopped out today for a loss. I always said never do what I do!

When Great Minds Think Un-Alike
I was pulled in two directions today after reading two outstanding posts regarding the inflation/deflation debate. Truly this debate is great economic thought exercises, and today I had a full work out!

First up, Mish with his deflation manifesto. I will not excerpt as the entire post must be read.

After reading Mish's article, I certainly appreciated his fine arguments. As I have said, there can be no debate about deflation is on right now. It is the longer term I think it cannot win out. Still, I will admit I was flip flopping after the great read.

Later in the day Jesse's Cafe entered into the fray with a very complete essay on why inflation is going to happen. Again, no excerpts as the article is well worth your time.

I wish I had written that piece. I think Jesse captures exactly what I have been feebly trying to say about how dollar devaluation will have to be the endgame, if not then I am all in the deflation camp.

Use the comments section to discuss the Mish and Jesse's takes. Both high level analysis, both perfectly credible. The articles as a pair really capture the heart of the debate.

Sorry for the short post, but the rain is making traffic terrible! Who'll Stop the Rain?

Have a good night.

Computer Genius Wanted

Rare Sunday night post, but I have a maddening issue that maybe someone out there can help with!

New Computer Same Story
On Saturday I bought a new computer. My wireless connection at the house was pretty bad, and my computer was 5 years old. I thought an upgrade might just be the ticket.

The computer works great, and the wireless receiver is an improvement over the old one. Still I did buy the Linksys PLTK300 powerline system.

The system works by channeling the router signal through the electrical lines. I then plug into an electrical outlet and hook up a adapter which then runs to my ethernet port.

I set it up and after some hand wringing, the thing worked amazing! I had a direct line with great speed and no drop outs. I was in heaven!

This morning I woke up and turned on the computer. The thing does not work. I can "see" the powerline is working, but I cannot use the line to get on the internet and there seems to be no way for my computer to be able to figure it out. NOTHING happened overnight for crying out loud so I have NO IDEA why it does not work now.

What drives me nuts is the product is so new I cannot find any real help online about it.

So here is my favor should you know anything about computers, networks, and wireless systems;
-Why is my PLTK300 not working all of a sudden?
-How can I upgared the wireless network? What is the best way? I have to have the router upstairs, so I need a good signal all over the house.
-Is there any way to have two modems?

Any help is appreciated.

Have a good night.

Friday Night Clarity

Very active comment thread on last night's post both here and at Seeking Alpha. Great ideas and thorough explanations were in abundance, and I would expect no less from the usual crew. Plenty of stories tonight, so an around the world wrap up and then some entertainment.

Gold as an Investment - Final Thoughts
Your author is a big fan of the precious metals, both gold and silver. I have dropped enough pixels with my ideas on the "why" that I will not rerun all that now. I wanted to clarify any misconceptions of ideas any may have about my stance on the metals.
-I am not and have never implied or stated that anyone should run out and convert all of their wealth to gold. I think gold needs to be a part of any portfolio. As a fan of the metals, gold and silver make up about 20% of my investment capital and about 5% of my entire net worth. So in no way am I an all or nothing kind of thinker on this.
-Gold is a terrible "end of the world" play for all the reasons many have noted (Mark and others). If everything goes down, some metal coins or bars may have some value and use, but not really. I do not think the end of the world is coming. I prefer to think of an Argentina type currency issue instead. If you like the whole "end of the world" type thought exercise, take a trip to The Survival Blog and you can find some good stuff. Look, I live about 35 miles north of Boston, if the SHTF I am screwed royally and unless I have a private army I will have to do the best I can.

Hope that clears things up!

Deflation and Inflation Wrap Up
I really liked my simplistic analysis of the common thread of both Deflation and Inflation. The comments section had plenty of great debate, and I would refer you there to see the discussion.

There is no doubt that deflation is going on right now. Nobody can argue other wise, and if they do they are in a losing position. Mish notes today that "Flow of Funds Report Offers Hard Evidence of Deflation", and I totally agree. If any of my posts have implied that I thought inflation was an issue right now, then I am sorry for the confusion.

When I talk about inflation I am of course talking about the longer term. Next year and into the next 3 years I think we will see policies at work to make inflation happen. Remember, Ben Bernanke's whole claim to fame is his paper titled "Deflation: Making Sure It Does Not Happen Here".

While the system has been stabilised, deflation will rule the day unless more is done. Consider that:
-The FED is about to get an extension of powers through which they will have even more room to bypass the US Congress. With no check on their activities, the academic elites may well have a real world blackboard (dry erase for you younger folks)to try out their silly Keynesian ideas.

So deflation is here stay? Not if the leading thinkers on economics have their way. People like Paul Krugman are chomping at the bit for more stimulus. A new $4500 car buying credit is coming out. The new $15000 home buying credit is out, and will get bigger.

Still not convinced spending will be forced no matter the cost? Here are two respected economists asking, no begging for more firepower to be deployed:
-Paul Samuelson; Fiscal Policy Must be Sustained
Key excerpt:

"Back to some middle-term and long-term policy questions..., do you worry about the rising deficit and the potential risk of inflation? There's been a lot of articles on this in the past two weeks -- Paul Krugman and Niall Ferguson and others.

I think it would be surprising if, down the road -- not in the long long run but in the somewhat short run -- we don't have some return of inflation. On the other hand, I'm of the view that if we come out of this with some kind of temporary stabilization at least, and the price level is let's say 10-12% above what it was before we got into the meltdown, I think that's a price I would be willing to pay! ...

A 10-12% inflation end point is just dandy for this guy.

Mark Thoma: Don't "Nullify" Fiscal policy
Key excerpt:

As Brad DeLong notes, if it is the long-run budget you are worried about, ending the stimulus package, say, six months or a year earlier makes little difference to the long-term budget outlook. That being the case, and given the dangers of not doing enough and the dangers of ending the help too soon, why are we in such a hurry to end the stimulus package, and we are we so reluctant to consider doing more?

Not today, and not next week, but at some point panic will hit about deflation and a depression and then the money accelerator will be matted until something changes. It is at that point I envision a dollar crisis or other major event.

The Real Threat of Deflation
The real danger of deflation was revealed to me by a great comment over at the Seeking Alpha print of my last blog:

ejhickey writes;
Another question. If we are still going through deflation and deleveraging , then prices for most things should continue to fall. For anyone who has a lot of assets in cash, why bother to invest in stocks or bonds or anything that has a risk of declining in price? If the deflation theory is correct, a cash based non investor could increase his purchasing power simply by doing nothing . This would not only avoid risk but taxes as well. In the short , medium or long run this is the whole purpose of investing - increasing one''s ability to buy stuff.

ejhickey, thanks for the great insight.

Faced with a new thinking that cash must be preserved and risk shunned, just what do you think is going to happen to America's last industry, the banking sector? Do you think that the Goldman Sachs-FED-JP Morgan-Treasury cabal is just going to sit tight and watch it all unfold?

I think of the line from a Dylan Thomas poem:

"Rage, Rage Against the Dying of the Light!"

Savers are already being punished by obscene low rates on savings. Bond yields are as low as they have ever been. Risk free is also return free. The very system is being set up to dare you to reach for a return.

Now, I do not think the efforts will work, but I am sure they will try. It is when this process kicks into high gear that we will see the "major event" occur. But not this week.

Entertainment Section
A bit short on time, and you all know how much I love the fun section! Lets dive in.

Cipher Texts
A while back I was posting puzzles that were sentences spelled out using DNA bases and amino acid single letter designations. I love ciphers and coded texts. If you like such things, an interesting piece of artwork resides at the US CIA headquarters at Langley.

The puzzle is called "Kryptos" and it has yet to be fully translated. Some think the artist that made it actually made a mistake on the final cipher, and hence it will never be solved. Fascinating item indeed.

LOL Cats
Easy laughs!

Remember the old school yard bully's favorite torture?:

see more Lolcats and funny pictures

If the SHTF and zombies start walking the earth it may look like this:

see more Lolcats and funny pictures

Rock Blogging
A little music ladies and gentlemen!

There is nothing wrong with Bon Jovi and "Runaway":


It is hard to know if the film "The Breakfast Club" was so iconic due to the great story and acting, or the great soundtrack. Here is Simple Minds and "Don't You Forget About Me":


I love the song from Danzig called "How the Gods Kill". Great acoustic work and a nice blending of speeds and beats make a great listen:


Just so you know I am not totally stuck in the past (well, not totally) here is a band I like that is pretty recent, 7 Mary 3. This song is called "Cumbersome" and the video i found was a live acoustic version played on a radio show. Not bad!:


Last Call!

Final tune for the night.

Let's hope you follow Ratt's advice and be "Back for More" when I post my next blog! And yes the girl is the same girl from the Whitesnake videos, Tawny Kitaen:


Have a good night.

Coming Out Swinging

I would not say I am in a foul mood. I mean between the endless cloudy days, rain, and low temps why not feel a bit down. I think it is something else. Ok, I think I am in a foul mood. Combative even. Here at Economic Disconnect I try to look at all kinds of things all kinds of ways and besides for some very pointed comments aimed at Paul Krugman and Bill Gross, I give fair weight to any and all ideas, arguments, and viewpoints. Well today I think I have about had it on many fronts, so this post may be a bit more edgy than normal and I hate that. But here it comes regardless.

Bearer Bonds Story - A Waste of My Time as I was "Snookered"
There were plenty of developments in the story of the 134 Billion Dollars in US Bearer Bonds today, so we will start there.

First off, the bonds have been declared fakes as the Treasury informs us:

June 17 (Bloomberg) -- U.S. government bonds found in the false bottom of a suitcase carried by two Japanese travelers attempting to cross into Switzerland are fake, a Treasury spokesman said.
“They’re clearly fakes,” said Stephen Meyerhardt, a spokesman for the U.S. Bureau of the Public Debt in Washington. “That’s beyond the fact that the face value is far beyond what’s out there.”

So there is that. As Karl Denninger notes:

Ok, let's accept both parts of that statement (yes, there are two) at face value:
The "bonds" seized in Italy are fake.
"The face value is far beyond what's out there."
The latter is exactly what I noted is out there in authorized issuance in my second story on the matter:
Mr. Holmes would be initially puzzled by such a caper. On the one hand we have the impossibility of the bonds being real, because there simply isn't $130 billion of issues remaining outstanding.
As it turns out, the Bloomberg update tells us something surprising:
Meyerhardt said Treasury records show an estimated $105.4 billion in bearer bonds have yet to be surrendered. Most matured more than five years ago, he said. The Treasury stopped issuing bearer bonds in 1982, Meyerhardt said.
$105 billion? Uh, that's a lot more than the DTC estimates I've seen, which were in the area of $3.5 billion outstanding! Suddenly there's thirty times that on deposit with the DTC out there according to Treasury?This also leaves the second part of the question open:
On the other hand we have the impossibility of negotiating a fake $500 million bearer instrument, making the exercise of counterfeiting one expensive and futile.
Finally, what happened to the two gentlemen caught with them?
The latter is a rather important question, I'd think. See, counterfeiting is a serious offense. Just try printing up some fake $100s or $20s and see how amused the Secret Service is (hint: don't try this at home unless you are interested in a free stay at Club "This Ain't Fun" Fed.)

So the Treasury reports that there are 30X more bonds than previously thought out there somewhere, but still less than the 134 Billion amount found on the two guys. So they are fake.

My interest in this story was due to to the obscene amounts being reported. I was never of the opinion that these things were undeniably real, but there was that possibility. The story has so many angles I found it compelling reading. Add to this that it seems the Sicilian Mafia may be behind the bonds and this tale is still a great read. That the treasury has now disclosed the 105 Billion amount was another thing I wanted to come out of this caper; just how many of these things are out there?

But it seems I was wasting my time. One of my most respected bloggers and inspirations to write this blog is the author of Calculated Risk. On a few occasions I have emailed CR asking to use his charts, and he has always been a great help. I was a bit bemused to see CR finally post this about the bond story:

Some mid-day amusement ...
This was funny ... I never posted on this, because it was pretty clear there wasn't any real story. Maybe the post should be titled: "How some blogs were snookered!"
But a false bottom in a suitcase?

Now I would venture that CR really means the blogs that were writing things like "Bonds are real, US is toast" and such things, but really I took the dig a bit personal. I felt, and continue to feel that this story has real merit. If the mafia is using bonds like this on this scale, just who is buying them? How does this fake money relate to the troubles countries under strong mafia influence (think EASTERN EUROPE) have been having financially? There is plenty of stories here, but move along as forgery of US debt instruments on a massive scale can never cause any issues worth paying attention to.

Jobs Numbers and Moving Goalposts
I am not going to parse the jobs numbers, they are still terrible. But hey, getting less terrible at better rates so that's nice. Today my favorite economist who shall remain nameless offered that for unemployment to stabilise and to call the end of the recession, the initial jobless claims will have to come down to -400,000. Today's print was over -600,000. A few years back this guy was railing because employment was only GROWING at about +300,000 jobs a month (a positive 300,000) and said that was not even enough to support workers entering the job force. But now losing 400,000 a month will be just so great. That 700,000 spread is hard to reconcile, but he does have a Nobel prize.

Gold on it's Way to Zero; At Least the Top Will be in for "Gold Stinks" Stories
As gold continues its path towards a new range of 0-$10 an ounce at least I will be spared the avalanche of "gold stinks" stories because nobody writes about anything when it is at zero. We know that gold is going to be worthless in an upcoming metal route because it is going to be sold in gram quantities in ATMs. Also, I find the reasons set forth by this author, on Minyanville no less, so persuasive I have to share them with the readers right this second:

Five Reasons Not to Be a Gold Bug
The arguments for why you should sell your cat, pawn your mother-in-law, and use the proceeds to buy gold are well known: The friendly Fed is printing money faster than you can read this; it will result in inflation; the government is borrowing like a drunken monkey; the dollar will be devalued; all currencies will be debased; the only thing that will save you is that shiny yellow metal, and so forth.
Here are some arguments, however, for why you should think twice before jumping into bed with gold bugs.
1. For investors (not speculators), it's very hard to own gold because they can't put a value on it. Unlike stocks or bonds, gold has no cash flows, and has a negative cost of carry (meaning, it costs you money to hold it). It's only worth something if people perceive it to be worth something.
2. GLD ETF (GLD) is the sixth largest holder of physical gold in the world. If its holders decide (or are forced -- think hedge-fund liquidations) to sell it, to whom will they sell it?
3. In the past, gold had a monopoly on inflation and the fear trade -- not anymore. Now you have newly emerged competition from TIPS, currency ETFs, short US Treasury ETFs, and so on.
4. If gold fails to perform because of reason number 2 or 3, the perception that gold is worth something may be violated.
5. Over the last 200 years, gold wasn't really a good investment. It may yet have its day in the sun, but it also may not. The cost of being wrong is pretty high.

Oh My god! That was some powerful stuff! I mean the reasoning is so solid we could even take another look at it and be awed by the sheer brilliance.

Number 1 is hard to argue against:
"For investors (not speculators), it's very hard to own gold because they can't put a value on it. Unlike stocks or bonds, gold has no cash flows, and has a negative cost of carry (meaning, it costs you money to hold it).It's only worth something if people perceive it to be worth something."
Now this one really opened my eyes. Something only has a value based on perception? Who knew? All those houses in Phoenix Arizona that were selling for $400k in 2005, and now sell at $150k was is based on cash flow? Did the price/rent ratio get skewed that bad in that time?

So you say stocks and bonds can be valued by cash flow? Is GOOG trading on it's cash flow? No? Is it trading on what people perceive some future cash flow may be should GOOG ever really be able to monetize eyeballs? Nah. GOOG is always trading at cash value no doubt. How did the S&P ever get to 666 when the cash flow models were so much better? Who knows, but gold is dead. Great argument.

Number 2 is as mind changing as number 1, only less so:
"GLD ETF (GLD) is the sixth largest holder of physical gold in the world. If its holders decide (or are forced -- think hedge-fund liquidations) to sell it, to whom will they sell it?"
I had never really considered this. For every sell there is a buy, except when gold is sold, then the buyers fail to materialize. I mean, when all that toxic mortgage debt had no takers, the government took it all in. They were the buyers of last resort. I do not think uncle SAM has any need for gold though, so in a forced liquidation gold would have to go to zero, no negative whatever the carrying costs are, in order to be moved. I guess GLD is crap out of luck on this one!

Number three may make you want to sell your wedding ring, so be warned:
"In the past, gold had a monopoly on inflation and the fear trade -- not anymore. Now you have newly emerged competition from TIPS, currency ETFs, short US Treasury ETFs, and so on."
Brilliant! I had never considered that if the US government printed so much money that they were forced to debase the dollar and hyperinflation occurred that I could simply buy more debt instruments, backed by the full faith and credit of the US, to offset that inflation! Amazing! I read that Zimbabwe made their TIPS holders whole, even at 1000% monthly inflation. This is sooooo simple!

Number 4 just scares you with what the writer already said:
"If gold fails to perform because of reason number 2 or 3, the perception that gold is worth something may be violated."
Hard to argue with that. Performance anxiety is an issue for all of us!

Number 5 is a summary:
Over the last 200 years, gold wasn't really a good investment. It may yet have its day in the sun, but it also may not. The cost of being wrong is pretty high.
Obviously if your investment time lime is 200 years you need to stay away from gold. It is far better to go with tulips (think dividends) and cabbage patch kids (think rarity) when planning for the long term.

Very convincing stuff!
Full Disclosure: Long gold and silver and will be all the way to zero for each. As they fall I will simply dollar cost average in (as they suggest on CNBC) so I will be protected. Oh, wait......

Inflation vs. Deflation and the Limits of Rational Discourse
I think the inflation vs deflation debate is an attractive thought experiment with far reaching implications. I will say up front I am pretty strongly in the "deflation now, inflation later" camp and that is no cop out. I never mince what I say or mean. I could care less about pleasing any audience by changing my opinions based on group think. I think the great debates and interactions featured here in the comments section here at Economic Disconnect have been some of the best, most civil, most accepting debates anywhere on the net. I appreciate all for their great ability to keep it intellectual.

That said, there has been a change in tenor from both sides of the debate as of late. Inflationists are calling deflation thinkers "dumb". Deflationists are attacking inflation types with terms like "blind", and "unable to see what is in front of them". This has to stop. I will delete any such comments from this blog, but I doubt I will ever have to police the comments as the crowd here is top notch. We even have outliers in the "Stagflation" camp, though that one has moved to the "Negflation" outlook as of late, but he is a bit crazy anyways! (just kidding Mark)

To see why this debate is hard to reconcile, we should start with the clear fact that NOBODY EVEN AGREES WHAT THE DEFINITIONS ARE for inflation and deflation. Some point to money supply, others to prices paid, and others to random data points.

I would like to put out an idea I have been working on that may help many of us get onto the same page. I have not fully developed this idea, but I thought it would be good to get it out there and get some feedback. Perhaps deflation and inflation proponents are closer in view than they know. Consider:

Classic Inflation Definition: Tons of "cash" (whatever iteration) chasing too few goods pushes prices up. How that cash was made (money supply, easy credit, etc) is not central to the argument. Many cannot keep up and hardship occurs due to lack of ability to buy needed goods/services.

Classic Deflation Definition: Money supply (whatever iteration) normal or low but not being put into purchases of goods, causing prices to fall. This reinforces the pattern and a spiral down ensues that causes hardship through various channels (loss of job, loss of equity in home or investment etc) which feeds itself.

Yes simplistic, but remember I am the easily "snookered" type. (Still burns)

Now consider:
In inflation (be it regular or hyper) you have ever increasing asset values, but the pace of increases of all the things you need are going the same rate or faster. You either go nowhere or fall behind.

In deflation (I think there is only regular) asset values are falling which destroys the equity in them, decreasing money supply as debt is defaulted on. Everything falls in price INCLUDING YOUR WAGES, hence you are chasing necessities that are falling in price, but your assets are worth less and your paycheck getting smaller. You either go nowhere or fall behind.

I think the core issue to think about is how much relative income you have that will have to chase relative prices and here I think the two views are more alike than thought.

Again, this is a theorem in progress and I would ask all readers to offer their ideas in the comments section. I value your opinions and I think this thing has some merit. Or not. Leave a comment anyway!

Ok, enough for the night. I will be online for a bit, so please get involved as I would like to get some feedback.

Have a good night.

Deterrence is Still Lacking in the Financial System

A new deck has been started in the back of the house, and that is going to be very good indeed. Is tomorrow really Thursday? This week has gone by in S-l-o-w motion! Great comments sections as of late. Never fear, any well thought out rant or opinion is welcomed here so post away!

Bearer Bonds Breaking Out
I told you I am not going to quit on this story, and it just gets more weird every day.

First off, even the mighty Bloomberg ventured a piece, and this is the first mainstream media sighting:

Suitcase With $134 Billion Puts Dollar on Edge: William Pesek
June 17 (Bloomberg) -- It’s a plot better suited for a John Le Carre novel.
Two Japanese men are detained in Italy after allegedly attempting to take $134 billion worth of U.S. bonds over the border into Switzerland. Details are maddeningly sketchy, so naturally the global rumor mill is kicking into high gear.
Are these would-be smugglers agents of Kim Jong Il stashing North Korea’s cash in a Swiss vault? Bagmen for Nigerian Internet scammers? Was the money meant for terrorists looking to buy nuclear warheads? Is Japan dumping its dollars secretly? Are the bonds real or counterfeit?
The implications of the securities being legitimate would be bigger than investors may realize. At a minimum, it would suggest that the U.S. risks losing control over its monetary supply on a massive scale.
The trillions of dollars of debt the U.S. will issue in the next couple of years needs buyers. Attracting them will require making sure that existing ones aren’t losing faith in the U.S.’s ability to control the dollar...
This is still a story with far more questions than answers. It’s odd, though, that it’s not garnering more media attention. Interest is likely to grow. The last thing Geithner and Federal Reserve Chairman Ben Bernanke need right now is tens of billions more of U.S. bonds -- or even high-quality fake ones -- suddenly popping up around the globe.

Maybe this will light a fire under so called "serious" journalists.

Clusterstock has not let the tale drop, and has this tidbit to add today:

The Japanese Bond Smugglers Are Missing
At least the Japanese press is still interested in story of the two Japanese men caught with some $134.5 billion in (presumably fake) US bearer bonds.
We can't read Japanese, and Google Translate isn't particularly helpful, but a reader informs us that the gist of this story is that a newspaper sent a reporter to Como, Italy and found that the men had been released, with their whereabouts unknown.
Now, the easiest, most-benign explanation for this whole thing is that it's just a counterfeiting scheme. Fine, but then why do you let them go without tracking their whereabouts.

I am sure it is standard Italian police procedure to release two people that are caught holding counterfeited bearer bonds, even is it is 135 Billion, by far and away the largest such crime in the history of the world. I am sure they would let me go if I counterfeited a few thousand bucks then. OK.

Gold ATM's - Sure Sign of a Top?
This Financial Times story about Germany deploying gold vending ATM's was widely seen as marking a monster top for the yellow metal. The story made Kevin Depew's "5 Things You Need to Know" today as number three.

I have a few thoughts about this. First off, I would prefer the precious metal space stay relegated to fools like me that love the stuff. Right now the distribution of metals as an investment is an almost nonexistent fraction of what most people have "invested" in various forms. I like that. Most investors are panic driven, fearful, and quick to make poor decisions. I say stay the heck away form gold and silver and let the few of us buy it all over the next decade or so.

That said, the instant pairing of a gold ATM and a top in gold is curious. I would say it could indeed be a reflection of a saturated gold market at the end of its run. This will hold if the small gold sales do not catch on. And this is a key point.

Is it so hard to see a scenario where gram sized slivers of gold become a hot item? Supermodels have been asking to be paid in Euros and not dollars, how about a few ounces of gold? I can see small gold pieces becoming a sort of "cool" thing to have, and an entire new money economy coming to life where these little babies get traded for various things. Cover charge for a nightclub? Two grams please. A bottle of tequila for the table? $75 dollars, or 3 grams please.

My personal preference is for that not to happen, but you just never know. Holding real gold (even gram sized bullion) is just so different from holding jewelry. let us hope it does not catch on.

Deterrence is Still Lacking in the Financial System
Loyal reader Gawain's Ghost had a great write up that featured this take away point:

Deregulation, securities, infectious greed, stupidity, the Fed, all had their hand in this debacle. But for my money, the overwhelming cause was the prevalence of fraud. Lending fraud, appraisal fraud, brokerage fraud, I mean, it just got out of hand.

I think Gawain's is correct and this relates to tonight's main point.

Unchecked, people will try to get away with the maximum amount that they can short of getting in real trouble. This can be summarized as Deterrence, which Wikipedia tells us:

Deterrence is but a theory from behavioral psychology about preventing or controlling actions or behavior through fear of punishment or retribution

The legal manifesto of Deterrence:

Deterrence is often contrasted with retributivism, which holds that punishment is a necessary consequence of a crime and should be calculated based on the gravity of the wrong done.
Deterrence can be divided into three separate categories.
Specific deterrence focuses on the individual in question. The aim of these punishments is to discourage the criminal from future criminal acts by instilling an understanding of the consequences.
General or indirect deterrence focuses on general prevention of crime by making examples of specific deviants. The individual actor is not the focus of the attempt at behavioral change, but rather receives punishment in public view in order to deter other individuals from deviance in the future.

While many are wrangling about how new regulations can best protect the banking system going forward, what of the regulations we have had in place? With no enforcement regulations are just lines in a book someplace and not real controls.

I think of the cases of all the "pump and dumpers" of the tech bubble era who were so fraudulent in their calls for Cisco Systems to go to $1000 a share that many had to pay fines and suffered some loss of employment.

Now we see that banks were lending money through channels never ending to people that they knew would never pay it back. Here, the real estate fraud in lending, appraisals and other areas mentioned by Gawain's comes into play.

And through is all we still do not have credible deterrence.

CEO of a huge bank, say mythical Bank of the United States? Lose more money than you made in 10 years on bad loans? No worries. Bail outs and you can keep your job.

Say you are the FED head and have overseen a system that was on the brink of collapse that can be directly attributed to easy money policy and lack of understanding of the real estate market? No problem, reappointment is assured.

And it goes down the line.

I am not saying that all these kinds of players need to be put in jail for 100 years or anything. But real deterrence can be had if those that missed what was going on are removed from their posts. So far we have 1, ONE, indictment against Angelo Mozilo to serve as a warning for poor lending standards. What we need is wholesale firings of entire boards and removal from office of the Treasury and the FED. If failure is not punished, nothing ever changes.

And this was my central argument for not bailing out the banks. Left on their own many would have failed and those lessons would not have been lost. Instead what we have is this lesson;
Lose tons of money, get bailed out and have new cash ready to deploy at great terms for your bank. Maybe even engage withe the government in an orchestrated market rally to help things along.
Great lesson.

Have a good night.

Tuesday Late Night

Home late from a work related function, but some links are in order.

More Bearer Bond News
Oh boy, now the Italians want the SEC to make a ruling on the bonds authenticity. Market Skeptics has the goods.

Krugman Is, and Always was a Keynesian Clown
Mish delivers the knockout blow with this story. Dead to rights line from Krugman himself in August 2002:

The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

Game over. The housing bubble was both done on purpose and finally exposes Keynesian economics for what it is: Useless and Dangerous

Other Stuff
A good friend of Economic Disconnect has plenty of content up tonight, so why not check out Illusion of Prosperity?

Another new stop for me is Accrued Interest.

And of course, if you have not checked out The Automatic Earth, well, you are really missing out.

Have a good night.

One Thing At A Time

Mondays can be rough. Today was one of those Monday's. Either I need a 4 day work week or I need the day to be 30 hours long instead of 24. Not likely!

Bearer Bond Media Note
I am not going to let this story die off, so i will try and find at least one mention of it daily.

Clusterstock's Joe Weisenthal was on the Glenn Beck show and did a small discussion. See video here.

Inflation/Deflation - Another View
An interesting take over at Accrued Interest on the -flation debate:

FED: Deflation? Over My Dead Body
But will we see CPI print below zero? Only if the Fed fails. In other words, sustained deflation remains a remote possibility. But sustained Fed interference in the markets in attempt to avert deflation is a strong probability.
So the bet should be not on deflation outright, but on the fallout from attempts to fight it. Weaker dollar. Higher commodities. Low short-term rates (including buying 2-year bonds as opposed to holding cash). Flat yield curve. Lower mortgage rates (at least from here).
That's is how I'm playing my deflation view.

I left a comment chiming in that would it be possible for deflation to take hold AND have a weaker dollar? An interesting thought experiment. The author seems to be closely aligned with my theorem that in the course of peeing their pants about deflation, the FED will cause all kinds of other damage trying to stop it. Leading to inflation! Eventually.

Dick Bove Sighting
I have spilled pixels on Dick Bove many times over the past 2 years, so I thought I might give the guy some more attention:

Dick Bove: Bank of America Faces “Horrific” Loan Losses (BAC)
"In the second quarter, (Bank of America's) position as the largest lender in multiple sectors of the American financial system will haunt the company as its losses expand," Bove said.
Nonetheless, Bove rates the company a buy, and raised his price target to $19 (from $14). He expects the price-earnings multiple on the stock to rise, and thinks confidence in the bank and its management are improving. This reminds us, of course, of our thesis from this weekend: the government’s guarantee against bank failure is driving up stock prices.

As an investor I try very hard to isolate companies who will "be haunted by expanding losses" and then load up on their stocks. NOT!

One Thing at a Time
Markets took a hit across the board today, with losses reaching their worst sizes since April. There was a ton of noise out there today, so I want to touch upon some things I was looking at.

It seems almost like the same players that are responsible for the two month gunning of futures right before the market close are unable to do two things at once. Today mission number 1 was to get a dollar rally. Helped by the Russian communication (so soon after the 135 Billion in bearer bonds was reported) that the US dollar was King Chit of Turd Mountain (KSTM) spurred the buck higher on the day. Of course a higher dollar is bad for stocks, oil, metals, well everything so everything fell.

As far as specifics, I will likely be stopped out of my SPY position taken a while back if there is further weakness. I have removed stops of my buys of SLV, GLD, and PAAS even though they are looking a bit weak here. Yes, I am a metals addict.

I should know better, and Tim Knight lowers the boom with Broken GLD:

"My precious metals shorts have done well for me; GLD now has broken a major trendline. Precious metals could be in serious trouble now."

Tim is a sharp player and I respect his call. Still, this is the 17th time in the past year that GLD and SLV have broken down on their way to zero and yet they still hang tough. We will see.

It seems the relationship between the dollar and stocks/commodities/metals has become super sensitive. The dollar only moved up from mid 79's to low 81's on the index so the aggressive move on the other end seems a bit overdone.

This relationship is a major contributor to my view that the dollar will have to weaken for any stock rally to continue. There will be one day wonders where the concentrated efforts to push it up occur, but the general market puking reaction will snuff that out.

It is a wild interconnected mess we have here. Balancing the buck and foreign interest in it with the need for a recovering market is a delicate dance. The folks in charge of the music think they can do this without a serious dislocation in one or more of the parts. Who has such a high opinion of their own abilities? From 10 years ago:

I submit the Committee to Save the World. Rubin and Summers are once again at the helm, and while Greenspan has since sailed on, we now have Ben Bernanke in the same position as Greenspan in this picture: The public face while the two behind him hold knives to his back.

I am sure this will all work out well.

Have a good night.

Navigation! Full Stop!

Great comments section and some interesting news out makes a Sunday wrap up post a must.

Reader Comments
Plenty of high quality content in the comments section from the last post. As I have said, the best reward for writing this site is the great feedback and discussion that comes from the readers.

On the Inflation vs. Deflation debate, Anon poster (pick a name, we are all friends here) had some good scores for the deflation call:

New credit? Dude, you are making the assumption that these theoretical borrowers will be *eligible* for credit. Why would anybody lend money to a person who has defaulted? You might argue a government override here, but the scandal of wasted tax dollars would be too much for even this profligate nation to bear. Credit deflation is on the rise. Please point out where you see the contrary to this?
What makes you think the debt load that the US is carrying is too big? One need merely look at what happened in Japan to refute such an idea. Japan tried their damndest to devalue the Yen and, 18 years later, they are *still* failing at it. Obviously, somebody loves Yen even though Japan would appear to have insurmountable problems. Jah?
Furthermore, we are THE nuclear hegemon. As such, we can bear debt levels beyond your wildest imaginings. And we will.

To which I chimed in:

Anon,
people were not "eligible" for credit the last time either, so that should not stop anything this time.

And Anon had this to add:

Credit busts are followed by tighter lending. Persons once eligible to borrow beyond their means can't do that now. If you follow CR, you know this. The days of lettuce pickers buying mansions are over and I haven't seen a single news article to the contrary. Hell, the government has been promising to "fix" all kinds of mortgages for these borrowers. So, there you have the one entity that wants to hand out money and even they are failing. The numbers of "rescued" mortgages from Uncle Sam are trivial.
It takes years for failed creditors to clean-up their credit records. In the meantime, deflation as described by Mr. Practical is a lock.

The points by Anon and the essay by Mr. Practical are extremely persuasive. At this point in time I think deflation is ongoing. Where I differ is that I think the government will get desperate soon (maybe by years end) and use some creative money dropping to get spending going. It is not hard to imagine a "government override" as Anon suggested where banks will be given cash and forced to lend it out, even having lending standards removed backed by a government guarantee. In effect the entire mortgage mess had already been taken on by the government, so the path to forced credit issuance is not that far.

Loyal reader Kevin has my line of thought:

To get the hyperinflation Bernake is going about it all wrong as the problem is too much debt by the public in a system that is based on consumption. Until the money he is printing gets into the hands of the public who would spend it along with paying off debts more then likely I don't see it. That would take a helicopter drop on the consumers themselves.
Giving it to the insolvent banks if there is no desire to borrow isn't going to cut it.
The banks are now using the taxpayer largesses to ramp up the stock market but in order for the public to access that money they have to sell into the banks ramp job. Driving commodities to the moon on dollar debasement hyperinflation fears will put out it's own fire once a certain price is hit and their is no money or increasing wages in the consumers hands just like when gas was over $4, the consumer cocoons and shuts off spending for all but the necessities which are eating up what disposable income they have.
I see the currency ramp in oil prices doing the same thing that happened the last time with similar results on this time unemployment is much higher.

The new "conundrum" for the FED is how to get consumers spending while they are broke. Sadly I think they will come to some plan of action to attack this.

Navigation! Full Stop!
While the run the stock market has been on is clearly a fixed job, there are several other blatant manipulations going on that demand some answers. Add to this missing gold in Canada and the ludicrous situation regarding the seized bearer bonds in Italy and I think that everything should be at a full stop until these issues get some answers.

FED Fixed Bond Auctions
I spent a ton of time last week writing about the bond auctions. Of course they went well, as I knew they would. It seems the FED may have had to try extra hard to makes sure though, as Zero Hedge shows:

As the data indicate on the day of the $19 billion in 10 Yr UST, the Fed was concurrently bidding on almost $11 billion (of which $3.5 billion was accepted) of what most likely were 10 years: more than 50% of the full Treasury auction. Furthermore, the day before, the Fed purchased $7.5 billion in 3.5 - 5 years after submitting nearly $30 billion in bid requests. This is the same day that $30 billion in 3 years Treasuries were auctioned off at 1.96%. Has the Federal Reserve been keep the clearing price conveniently low by purchasing comparable Treasuries on or near the days of critical auctions? Open market purchases seem to indicate that is in fact the case.
In summary - last week's bond market exhibited unprecedented volatility: spreads between USTs and agencies fluctuated drastically, prices were all over the place, the Fed was concurrently conducting OM purchases as the Treasury was auctioning off bonds in the primary market... cats and dogs living together, etc... And keep in mind total activity this past week was under $100 billion. There is still well over $1 trillion in bonds to be auctioned off this year alone. If anyone is foolish enough to predict just what will happen with the long bond, the 2s10s, T-bills, etc. by year end, please speak up.
Well, I will take one stab: the irony is that while Zero Hedge is in the near-term deflationist camp (at least in principle), the supply of bonds will likely be the technical factor that determines price levels over the next 6 months, more so than economic outlook. As such, we expect volatility to persist, and the curve, especially the long dated stuff, to widen, even as household net worth continues plummeting (or as a result of). Inflationists, will, of course, read into this as an inflationary sign and buy every barrel of oil they can find while screaming bloody inflation as CNBC reverberates it to the moon and back since it jives with exactly what the Administration is hoping: that Joe Sixpack goes out and maxes his credit card just like in the good old days. But the last is not and will not be happening... So the conundrum continues. (The only thing certain is death, taxes, and that JP Morgan will forever be gunning those pesky 5k SPY blocks.)

See the link for full details.

Missing Canadian Gold
The Canadian Mint makes some of the most wonderful gold and silver coins. The maple leafs are stamped .9999 Argent which is of course better than .999 pure! Anyways, it appears some of the metals may have been misplaced. Another new blog I have been reading is Market Skeptics who has a great rundown on this story:

Conclusion: Since I first reported on the case of Canada’s missing gold, things have become more serious:
1) Before it was “Several million dollars”, now it is “tens of millions of dollars”
2) Before it was an audit, now it is a criminal investigation.
3) Before it was just Canada’s mint, now “other depositories (vaults) have had an army of auditors descend on them in the last two weeks”
4) Before it was a simple accounting ‘discrepancy’, now the Royal Canadian Mint fears a 'run' on its gold
Is this the beginning of another Gold Rush/Panic? I will closely be following these developments.

If interested, here is a good run down on the real issue with the monster short position in the metals, there simply is not enough real stuff to make the paper contracts anything more than thought experiments:
The paper gold marketer is afraid to look in the vault

Bearer Bonds Situation
This truly bizarre tale needs more attention as soon as possible. Zero Hedge has some thought here:
An Open Letter to the Secretary of the Department of the United States Treasury

Karl Denninger has a great write up on what this MAY mean:
The Saga of the Bearer Bonds

I will keep hitting this story as long as possible until we get some answers, though how effective it will be is doubtful.

More links for this story:
New Evidence Points to Japan (State sponsorship??)

Asia News Story

Must See Video
A man using silver to pay for things at a store:

Cool store!

Seriously, end the night thinking about the fact that $15 worth of stuff at the store can be paid for using 10-13 pre 1965 dimes that are 90% silver.

Still think paper dollars are so great?

Have a good night.