A Real Mess

Ever since I returned from vacation I have been in slow motion. Of course I am out of time again tonight so just a few items and an open thought experiment.

A Real Mess
It is probably better I am out of time because there was plenty of breathless screaming headlines today of all sorts that seemed a bit over the top. Enough confusion for one day. Here are some things I found most important.

via Zero Hedge (among many others):
FOMC Minutes: No Asset Sales Until After First Rate Hike
Take home point:

A majority preferred beginning asset sales some time after the first increase in the Federal Open Market Committee’s (FOMC) target for short-term interest rates. Such an approach would postpone any asset sales until the economic recovery was well established and would maintain short-term interest rates as the Committee’s key monetary policy tool. Other participants favored a strategy in which the Committee would soon announce a general schedule for future asset sales, with a date for the initiation of sales that would not necessarily be linked to the increase in the Committee’s interest rate target. A few preferred to begin sales relatively soon...

No decisions about the Committee’s longer-run strategy for asset sales and redemptions were made at this meeting. For the time being, participants agreed that the Desk should continue the interim approach of allowing all maturing agency debt and all prepayments of agency MBS to be redeemed without replacement while rolling over all maturing Treasury securities. Participants agreed to give further consideration to their longer-run strategy at a later date.

See you in 2013.

One of the more screamer headlines but still worth a look (via The Telegraph):
Germany's 'desperate' short ban triggers capital flight to Switzerland
Case in point, the Swiss intervention in the FX market was very huge and was news. Here is the "capital flight" number:

The short ban set off instant capital flight to Switzerland. BNP Paribas said €9.5bn flowed into Swiss franc deposits in a matter of hours on Wednesday morning.

Is that figure outsized? I am not 100% sure but I would think it is not. Still, worth noting money direction.

The thought experiment for this evening comes from a find by The Illusion of Prosperity on CNBC with Dennis Kneale providing the following quote:

I'm, I'm sorry but update me please... why is it that we've doubled the money supply of dollars around the world... how could we possibly have the opposite of inflation? - Dennis Kneale, May 18, 2010

It is an excellent question. Things to consider:
-By what mechanism is this even possible?
-What would the next step be (if there is one) given this dynamic?

Added:
On a related note:
Japanese GDP Deflator Plunges To Multi-Year Low As GDP Comes Below Expectations
Consider that Keynesians think Japan has failed to stop deflation becasue they simply did not go hard enough and long enough into QE.

Have a good night.

The Big Do Over

This morning it was 38 degrees! I am thinking this will be yet another cool Spring/Summer which does not work for me at all.

The Big Do Over
By now I am sure you have all looked over the massive program put in place this weekend by the ECB/IMF/FED to backstop the Eurozone. The details are not really that important, just take away that about 1 Trillion dollars will be at work to support the Euro banking system and serve as aid packages to struggling countries.

This is almost a carbon copy of the US TARP plan, though I do think the European plan is more than 1 page long. I think it is two and a half pages, though one page is a cartoon. Indeed the old world is more refined than the US.

For a great write up on the particulars and some reading of the leaves I would suggest The Baseline Scenario article:
What happened to the global economy and what we can do about it
Eurozone: The Kitchen Sink Goes In – Now It’s All About Solvency
A great read though I would find fault with one of the summary lines:

To ultimately get out of this mess, the euro zone needs to grow fast enough to allow nations to grow out of debt. The global backdrop here is very positive in the short term. The jobs numbers in the US last week and strong numbers out of core northern Europe suggest the world can grow. No doubt the ECB and the Fed will use the eurozone scare to justify longer loose policies.

What growth rates are assumed here? How can growth at a high rate come if fiscal cuts are made? How long a time frame are we talking? This could have been fleshed out a bit more, but still a great read.

I will leave the heavy lifting to those with more knowledge than I on these matters. I wanted to talk about some macro issues this all presents instead.

I often get into a debate with the author of Illusion of Prosperity about the whole deflation/inflation duel. Deflation has been the name of the game for a while now, but some think inflation has been non existent for about a decade. Of course this depends on what you are gauging inflation by as well as how you view "inflation" generally.

Here is an example from the real world:
Situation One:
Easy credit and no lending standards ignites a condo frenzy in a South Florida coastal community. Lego like condos that were selling for 200k one year now are flipped for 800k just 2 years later. This is a clear bubble and massive inflation of condo prices.

Situation Two:
3 years after the high of the market, the same lego land condo would be selling for 100k if banks were making the mortgage loan and regular loan standards applied. However, the FED has rigged rates at all time lows, the US government makes the mortgage loan, and all the worthless paper from the good old days resides not at the banks but at the FED for safe keeping and hiding of losses. The condos in this market now sell for 400k. This is clear inflation of prices as well.

This brings me to TARP, the Euro-TARP, and all the other circus antics employed by the world up to this point.

I call this The Big Do Over (copyright EconomicDisconnect 2010).

Faced with debt deflation and collapsing asset prices it was the decision on all sides to paper over the losses and replace the lost money with new money. Usually this is both criminal (counterfeiting) and leads to hyperinflation but some cute tricks have coincided with a useful market truth to keep that scenario on hold.

All the money that the FED has made for the banks had been kept under tight wraps. Usually printed cash is deployed by the banks via fractional reserve lending and this expands the money supply. This time banks simply sit on the new cash as it serves as a marker for losses they transferred to the government. Now do not get me wrong, the banks are making out well both by not having losses and they can use this money for some things:
-Buying US government debt and making a huge spread
-Goosing the stock market to the tune of an 80% rally off the lows. The FED likes this because a higher stock market is the only sign anything they have done has worked at all.

Both the US and the Eurozone have or will use the new money to buy their own debt to keep various rates low. Quantitative Easing is easily the most silly thing I have ever been witness too in my life. A government prints cash to buy it's own debt that it issues.....to raise cash and a worldwide market acts like they are some anonymous buyer making a purchase when everyone knows the deal. Some argue against conspiracy by saying there is now way X can happen because how could so many people stay quiet. It's easy, just do it in plain site! QE is a joke and a smack in the face of market players.

The market truth I mentioned above is simply everyone knows everyone is broke but nobody is in any position to do anything about it. While a negative most of the time, fiat currency does have the built in safe guard that if you call out one, you have to call them all out. They are all various degrees of baloney, which is just a big hot dog.

For a sampling of the kind of rhetoric now being used and the commentary that reads more like an Onion article than real life, here is a bunch of views from across the web:
Via The Daily Capitalist (on ZH):

The lead in this morning’s paper WSJ provides all necessary guidance for global wealth holders: “The European Union agreed on an audacious €750 billion ($956 billion) bailout plan in an effort to stanch a burgeoning sovereign debt crisis that began in Greece but now threatens the stability of financial markets world-wide.” This weekend’s behavior demonstrates without equivocation the thesis we have been following: naturally occurring credit deflation will be met with an overabundance of monetary inflation that will hyper-inflate the global economy.
Global policy makers continue to demonstrate that when push comes to shove they will forcefully apply policy that sustains the near term nominal values of financial assets. They continue to choose to use their unique powers to cover all bad bets with paper money and credit that only they can manufacture. In doing so, they claim victory when nominal financial asset prices predictably rise, as they must, and they hide the loss of real wealth denominated in their diluting paper currencies. The stock of real wealth is the same as it was a week ago and at every point between then and now, though there is a trillion more dollars (€750 billion) in the global system.
The EU is effectively proclaiming; “if you pour our brew down the drain we are just going to make more of it.” To defend the Euro, something has to be sold against it. The Fed (the tallest midget) has re-opened the USD swap line to the EU so that newly-digitized dollars can be sold for Euros in the market. Clearly, the bailout is USD bearish – not Euro bullish. If the EU was serious about saving the Euro, then the ECB would have to dump its gold and hike funding rates. They are going “all in” with a six of clubs. In the current backdrop it seems preferable for the Fed to inflate immediately, rather than the ECB, given the relative strength/weakness of the USD/EUR. This is the same playbook global central banks have been following for a while. The mere fact that all major currencies today need to be defended wreaks of fraud. If something is as it seems there is no need to defend it.

Spot on.

John Hussman:

Looking at the current state of the world economy, the underlying reality remains little changed: there is more debt outstanding than is capable of being properly serviced. It's certainly possible to issue government debt in order to bail out one borrower or another (and prevent their bondholders from taking a loss). However, this means that for every dollar of bad debt that should have been wiped off the books, the world economy is left with two - the initial dollar of debt that has been bailed out and must continue to be serviced, and an additional dollar of government debt that was issued to execute the bailout.
Notice also that the capital that is used to provide the bailout goes from the hands of savers into the hands of bondholders who made bad investments. We are not only allocating global savings to governments. We are further allocating global savings precisely to those who were the worst stewards of the world's capital. From a productivity standpoint, this is a nightmare. New investment capital, properly allocated, is almost invariably more productive than existing investment, and is undoubtedly more productive than past bad investment. By effectively re-capitalizing bad stewards of capital, at the expense of good investments that could otherwise occur, the policy of bailouts does violence to long-term prospects for growth. Looking out to a future population that will increasingly rely on the productivity of a smaller set of younger workers (and foreign labor) in order to provide for an aging demographic, this is not a luxury that our nation or the world can afford.

David Rosenberg (on ZH):

The emergency measures just announced buys some time but should help take some of the fear and illiquidity out of the market over the near-term. However, what were not addressed are the intense structural fiscal problems plaguing much of the Eurozone.
In the final analysis, if the EU lends money to Greece or to any other problem country in the zone, debt ratios (including contingent liabilities) in the region will only rise further. It will be interesting to see how the rating agencies end up handling this. It cannot be lost on them, or the global investment community, that while loans, guarantees and central bank provisioning can deal effectively with liquidity issues, they are ineffective in addressing what’s really at stake here, which are structural fiscal issues.

Everyone knows the issues but nothing can or will be done about it.

I take a bit of heat for being a gold and silver lover and a hater of fiat money. Most of the time I get the old "where's the hyperinflation?" call. What's the difference between Zimbabwe and the US? Size. What's the difference between the Eurozone and Argentina? Size. That's it, that's all. If anyone could do anything about any of this they would. If a viable alternative to US manipulation and reserve currency status was out there, we would be left high and dry in about 10 seconds. I guess that makes us very lucky.

I think two scenarios are possible going forward:
-After about 1 more year of bad debts and deflation the panic button gets hit very hard and we step outside the bounds of make believe and do in fact have a real crisis with our dollar
-After another year of the same the FED allows the banks to flood the markets with the money they never wanted really making it's way to regular people's pockets (no wage increases and no jobs after 2 or 3 Trillion in money? Geez, what a raw deal!) and we indeed get the inflation this kind of thing promises to deliver.

It is absurd to me how far this has all gone. I still believe we would be in a better spot if things just went sour a while back. The end of the world? I think not, just the end of the banking iron grip on the world of finance. Instead we muddle on dodging train wrecks.

Have a good night.

Food for Thought

Funny story....

I had a generator installed so that there would not be any more long term power outages after the two in the last two years. Today there was quite the thunder and lightning show and I was inwardly hoping for a power failure so that my new toy would kick on automatically. Of course the power never went out (probably never will again after I bought the thing) but the Comcast went out! Unreal. It is always something.

As things are I am a bit late and not yet into the swing of things on financial happenings. Just a few quick thoughts and then I will direct you to two great though provoking essays.

Bonus points for the person that can identify from what film this quote comes from:
"Just directa your feetsa to Daddy Greens Pizza!"
Good luck.

Free Flow Thoughts
-I really cannot figure out why the market panics some times. The Greece stuff is not news. Now where is that May 2010 Treasury sales schedule again?
-If the FED is spending time lobbying against the transparency legislation what does that tell you?
-Old FED minutes show just how aloof and high minded the FED is; they did not want to discuss a mortgage bubble because it may actually get people thinking about one. Unreal.
-As a gold/silver lover I often get tagged as a hyperinflationist. I have spilled pixels by the millions on this and do not want to go over all that right now. Deflation is what precedes a panic by central banks to open up the money flow. This is what we are seeing right now. The problem with things finance is the glacial pace of things; you have to be able to look ahead a bit. Consider Mish's catch of an ECB panic move to guarantee everything and make it clear there is no end to any possible action:

European Central Bank President Jean- Claude Trichet, who capitulated on a January pledge not to relax lending rules for the sake of one country, may have to sacrifice more principles to prevent Greece from bringing down the euro.

Trichet yesterday diluted rules for the second time in a month to guarantee the ECB will keep taking Greek government bonds as collateral for loans. The central bank may have to extend that to other nations, renew a program of lending unlimited cash to banks for a year, and even start buying government debt if the 110 billion-euro ($146 billion) bailout plan for Greece fails to stem the euro’s slide, economists said.

Lending unlimited cash? Sounds like the housing bubble! More goodies:

The ECB may have to go even further and buy government bonds if it is to stabilize financial markets and avoid a return to recession as governments slash spending to appease investors, said David Owen, chief European economist at Jeffries Group Inc. in London. “There is a good chance the ECB will ultimately have to resort to quantitative easing,” he said.

Harvinder Sian, a senior fixed-income strategist at Royal Bank of Scotland, wrote in a report today that “markets should be alert to the risk of ECB bond buying, as early as today.”

While the ECB is prohibited from buying assets directly from authorities, it can buy them on the secondary market. Trichet said on May 2 that “at this stage, we have absolutely no decision on the purchase of government bonds.”

Central banks buying up their own debt and the markets act like they are an open market buyer and play along. This scam is getting really old.

Two Items for Consideration
The next two items may take a bit of time to wrap your head around; I am still thinking about them as well.

From Jesse:
Why Silver?
Asks why silver is targeted for manipulation and leaves the possibilities open with a great intro. Well worth a look.

From Edward Harrison via Naked Capitalism:
MMT: Fear of Hyperinflation
Uses Modern Monetary Theory (MMT) to look at the possibility of the the US going the hyperinflation route. The structural argument focuses on Wiemar Germany and Zimbabwe.

I will leave that one up to the readers to go over. The work is well done, but I feel the argument lacks any real comparative value at all. A better example would have been Argentina. Anyways, sleep well knowing the US as the reserve currency can print all the money we want and even though 70% of our economy is consumer spending based as well as service based with asset appreciation thrown in the mix it seems nothing can stop our ability to do whatever we want in this arena. Sounds pretty good!

Have a good night.

Cheerleaders and Pom Poms

I had my teeth cleaned today which is never fun....SCRAAAAPPPEE! Still Economic Disconnect prides himself on his teeth (one cavity since 1995!) and a cleaning only takes about 30 minutes. Tomorrow is my Birthday and I am not sure if a Friday night post will be up as I have no idea what I may be doing.

NOTE: Gawains left a comment last post which noted that Freddie Mac offers a 2 year Home Warranty. Gawains, how does that work? What is covered? How is it paid for? I would love to have details on that item.

Isolated Case of Fraud
Look, I am 100% sure some lawyered up market savvy reader/writer can explain away the following clear case of lying, but so did OJ' s defense team so there is that.

Zero Hedge has done some work on the newly released Lehman Failure Report and finds "Repo 105" to be about what you would expect:
The "Repo 105" Scam: How Lehman Fooled Everyone (Including Allegedly Dick Fuld) And How Other Banks Are Likely Doing This Right Now
The post is a heavy duty one and I think it worth your time to check it out. Short version; accounting gimmicks to massage capital ratios gone wild. I am sure they were and still are the ONLY ones doing this. You Betcha!

Cheerleaders and Pom Poms
I had a post in mind for tonight and when I was making the rounds I saw that I was scooped by Mark over at The Illusion of Prosperity blog. While great minds do indeed think alike, I cannot lay claim to inventing one of the most successful computer games ever sold! Here is the post:

Credit Cards Being Paid Off?
Not really.
NEW YORK — With unemployment high and personal wealth diminished, how was it that strapped consumers were paying down their credit card debt last year? It turns out they probably weren't.
The bulk of 2009's drop in credit card debt instead came because banks were forced to write off loans consumers failed to pay, according to an analysis of Federal Reserve data.

Most headlines just ran the screamer "CREDIT CARD DEBT FALLS", but of course it helps to did a little deeper.

I was thinking along these lines as it seemed today I was inundated with cheers and cheerleading about how great a recovery is happening right now across all things everywhere all at once. After reading a few articles I was puzzled how headlines did not match up with the substance of the piece. The above catch was one example, but there were plenty of others.

From Calculated Risk:
Flow of Funds Report: Mortgage Debt Declines by $53 Billion in Q4
I picked this one because CR is too smart to not know why this is, but many others jumped to the wrong conclusion very quickly. Mortgage debt written off is not quite the same thing as paid off, like in the above credit card example. From the same CR post comes this amazing stat that is pure scary based on this graph:

The scary part:

Note: something less than one-third of households have no mortgage debt. So the approximately 50+ million households with mortgages have far less than 43.6% equity.

That is not good in case you were wondering.

Some more headline cheerleading that falls apart when reading the actual story? Next up is this one from Yahoo Finance:
Slowly, Americans are regaining their lost wealth
Sounds good. Let's dig in:

WASHINGTON (AP) -- Americans are recovering their shrunken wealth -- gradually. Household net worth rose last quarter, mainly because the healing economy boosted stock portfolios. But the gain was slight. And it was less than in the previous two quarters.

Not exactly a great opening paragraph. Plenty of qualifiers. Why mess with a great headline though? More story:

Net worth had risen by a more robust 4.5 percent in the second quarter of 2009 and an even faster 5.5 percent in the third quarter. Net worth is the value of assets such as homes, checking accounts and investments minus debts like mortgages and credit cards.
Even with the gain, Americans' net worth would have to rise an additional 21 percent just to get back to its pre-recession peak of $65.9 trillion. That illustrates Americans' vast loss of wealth from the worst downturn since the 1930s.
Growth in stock portfolios delivered the biggest lift to net worth in the October-to-December period. The value of stocks rose by nearly 4 percent to $7.7 trillion. Higher home prices helped a bit. The value of real-estate holdings edged up 0.2 percent.

Stocks are not the primary vehicle of wealth for most households, homes are. The housing ATM was the engine that powered consumption to bubble highs, not stocks. See the Technology Bust for an example, but short version: the tech bust did not bother consumer spending or home equity withdrawals at all.

An illustration again from this CR post:

The 2000 Tech Bust made a slight dip but the uptrend in extracting any equity one could was in full effect.

CR notes the following:

Equity extraction was very important in increasing consumer spending during the housing bubble and I don't expect the Home ATM to be reopened any time soon. So any significant increase in consumer spending will come from income growth or a lower saving rate, not borrowing.

Income growth? Are we not in a deflationary environment? I say consumer spending may be facing headwinds, not tailwinds.

The cheerleader pom poms right now are limited to:
- A rising stock market
- Lower continued job losses
- Census hiring sure to feed headline hyperventilating over the next few months on jobs

Stock market gains do not have the same bang as other asset classes for the regular joe, but they do help. I know several people that did the old 401k loan thing to buy a home at bubble peaks and they get the full prize of:
- Paying back themselves the foll 401k loan amount after seeing the 401k drop 50% or more
- Being underwater on their home
I sure hope they get some income growth!

A final word about housing. Home prices will not return to the last peak for at least 10 years. That's TEN years. That is the minimum and it may well be longer. When thinking about the home plans floating around right now, ask if any are really workable over that time span. If I am wrong and homes reach the past peak in 5 years or less, it is likely we have had a currency issue and that is far worse.

Ok, one more housing nugget, found over at Housing Doom. When asked why I am so negative I like that I can always find a story that backs me up 100%. So the home market has bottomed and now is the time to dive in and go nuts? What about this?:
Politics, shaky economy create no rush to restructure Fannie and Freddie
Key quote:

Some analysts say it's an inopportune time to wind down the companies -- or even hint at major change -- while the housing market and economy remain in bad shape.
"Any suggestion now about future changes could destabilize the market," said Karen Shaw Petrou, managing director of analysis firm Federal Financial Analytics and a longtime observer of housing finance policy. "The U.S. mortgage market is so fragile that all Treasury needs to say is 'boo' and it could fall apart."

Nobody say 'Boo' then.

What Kind of News do You Want?
I loved this article from Ultimi Barbarorum blog:
Econobloggers need their crisis back
A well written piece that describes some reasons for the loss of interest in econo blogs after the big panic last year. Worth a read.

Along these lines I have a new poll up which asks what kind of news/stories/content you would like to see now that the recovery is in full swing and all is well in America. Please vote!

Have a good night.

Monday Mixed Bag

I arrived home from work a bit late tonight so I will go over a bunch of random items I came across today that were interesting in one way or another.

It Had to Happen
If you live long enough, you may well see everything eventually. It seems it was always a matter of time until this became real:
Animals with Lightsabers
Sample Picture:

Too funny!

Metal Market Manipulation
Now before you think you know which metal this post is about, it is not gold or silver!

Moving on, I caught this story today via Naked Capitalism:

The mystery investor who is turning the tin market on its head
A single investor – thought to be a hedge fund – is sitting on thousands of tonnes of tin in warehouses across London. According to traders almost the entire stocks of tin on the London Metals Exchange (LME) was bought up by a single, mysterious investor, last week.
One fund has warrants for more than 90pc of all physical tin stocks because the market rules dictate that above this threshold, the buyer must lend out the commodity, if asked, at the cash price with no premium.
Industrial buyers are furious that they are paying up to $730 per tonne for immediate delivery more than it would cost them to buy three-month futures contracts, arguing this stranglehold on the market should not be allowed to happen.

This story is very interesting. I have zero understanding of the tin market, but the buyer here is really gambling on higher tin prices and/or that they are not forced out of this position. I will try and keep an eye on this one.

Thoughtful Missives
A trio of top flight writings this evening.

Mish Shedlock pokes fun at those that are afraid deflation may happen, because it is indeed going on right now!
Deflation Threat? What Deflation Threat?
If you missed the authors write up on how the CPI component of rents is from outer space, he recounts it here as well.

I came across this Gregor Macdonald essay via Clusterstock. I am surprised I had not stumbled onto his writings before now:

The Alignment of Asset Reflation and a Collapsed Economy
You can think of the US economy as a kind of defunct amusement park, over which the FED has poured trillions of dollars of syrupy goo. The caramel candy is there for tasting, but it doesn’t turn the machines back on. The ferris wheel is silent. Since WW2, Washington has always been able to call upon Housing and Autos as the two areas to stimulate, to pull the country out of recessions. Of course, we just did that in super-sized fashion 6-7 years ago, to extract ourselves from the last recession. So, it’s kind of sad to see policy makers trying this again. Failed thinkers promote failed playbooks.

Ouch!

Zero Hedge poster George Washington had this nugget of information up today that is well worth a look:
The Largest U.S. Banks Have Repeatedly Gone Bankrupt Due to Wild Speculation, and the Fed Blessed the Speculation and then Helped Cover Up Their Bankruptcies
With a title like that you really should not need prodding to check it out!

Looking for the Next Bubble
Two pictures that summarize my feelings on the US economy:
Clusterstock Chart of the Day

Coupled with this:

I understand the argument that all those excess reserves are not entering the money system. That is of course true. One line of thought is that banks are going to use those reserves to write off losses. That is absurd, no more writedowns are forthcoming from the banks on bad assets.

I think that the banks are looking for a story that will sell. They are always seeking the next bubble, like Sauron was constantly seeking the One Ring. So far we have seen a 50% move up in the stock indices, but this has not really captured the imaginations of the general populace. What we need is a full blown asset bubble that everyone can get into. The FED/Treasury/Banking system would prefer a fast reflation of both real estate bubbles (residential and commercial) as this is what is killing them right now.

For this to happen, you need a good story. 10% unemployment does not help. A stubborn consumer that actually would like to save maybe 3% of their income is a problem indeed.

I look at all the money running loose right now and I am actually shocked it has not caused an issue yet. Yet.

At some point some braniac with a dry erase board is going to come up with an idea to use massive leverage and relaxed lending standards to ignite some kind of boom. As long as it has a believable storyline it surely has all the ammo it needs to get going. Many say that the US does not manufacture anything anymore, but we do. We proudly build bubbles, and have done so since 1987 and exported them across the globe. You are welcome. Please buy our debt while you are at it.

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.

DOW 30,000! It's Not What You Think

Thanks to all for checking in. The power came back online this morning around 10am. I went to work and got the news from the wife. I am not going to go all into how "we are all to dependant on electricity" speech, instead I will do what any red blooded power addicted American would do: This Spring I will have an exterior generator installed! HA! Take that ice storm!

FED Admits Defeat and Open Season on the Dollar
Today we saw a true inflection point in real time: the FED moved interest rates down to all time low levels and set a "target" rate of 0-.25% for the first time ever. The rate cut bullets are all gone and now Ben Bernanke gets to implement all the creative tools he detailed in a speech from 2002 at the National Economists Club (that sounds like the most boring club ever!). You can read the text here. Note the title is:
"Deflation: Making Sure "It" Doesn't Happen Here"

Now it has been obvious to all that the FED had lost control of interest rates, and that the real rate was zero anyway. A favorite hobby here at Economic Disconnect is to scan over the mainstream media reports of events to see what the commentary is. If you had read Bernanke's speech, and noted the real FED funds rate at zero for some time, would you be surprised by today's announcement? Well it seems plenty of people were shocked!

AP
Stocks surge as Fed pledges broad economic support
Tuesday December 16, 5:13 pm ET
Stocks surge as Fed slashes interest rates to record lows, pledges broad support for economy
NEW YORK (AP) -- A surprised Wall Street bolted higher Tuesday after the Federal Reserve's historic decision to further slash interest rates and pledge broad support to revive the troubled economy.
The Dow Jones industrials surged 360 points, or 4.2 percent, and broader indexes jumped more than 5 percent after the central bank said it will use "all available tools" to jump-start the economy. It also set its target for the rate at which banks lend to each other to a range of zero to 0.25 percent, the lowest level on record.
The idea that the Fed will likely proceed with plans to snap up government and mortgage debt made it easier for investors to place bets that the central bank will do what is necessary to help bring an end to the longest recession in a quarter-century.
"Today was a reminder that the Fed was on the case," said Jim McDonald, director of equity research at Northern Trust in Chicago. "It was a reaffirmation of their willingness to be very aggressive."
Many analysts had expected the Fed would cut its fed funds rate to 0.5 percent from 1 percent.
"In some senses the whole point of this meeting was to say quit watching interest rates, watch the other things that we can and will do," said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland.

Jim McDonald sees today's decision as proof positive the FED is on the case. As they have been on it since last summer with no results I am not so sure Mr. McDonald's confidence is well placed. The FED admitting they have lost control of the economy is hardly some great thing. Bruce McCain thinks that interest rates are old news, and we should all be watching for new tricks. Perhaps Mr. McCain could host a show called "Stupid FED Tricks" where Bernanke and company trot out new financial engineering ideas and callers across America vote on the phone for the best idea! If the FED charges $1.99 a call we might just get somewhere.

The market surging on today's decision just shows that there is still a deep well of confidence that the government will fix things. The feeling out there is one of "The US cannot go bust, so trade accordingly!". Hope is not a good long term investment strategy.

DOW 30,000! It's Not What You Think
Deflation is here. Evidence from all corners says so. Even deflation haters have come around to accept it as here and now. Now even the FED is of the firm belief that deflation has stormed the beaches and begun its invasion. The defense of the homeland has already been planned, just read the Bernanke speech listed above. So what does this mean?

The FED will now begin in earnest "quantitative easing" which is a rare animal last seen in Japan, though never captured on film. The FED will do whatever, and I mean whatever, it can to stop deflation. Troubled mortgage paper buying? Yes. Direct injection of capital to banks without collateral swap? Yes. Expansion of the FED balance sheet, perhaps explosively so? yes. Some of these things have already been happening, and now will accelerate.

There will be a lag for all this stimulus to take hold. I would venture a guess of 8-15 months before the end result begins to be seen. The end result is of course re-inflation on a massive scale. The FED, along with the Treasury and with the clear backing of Congress, will make money rain down from the skies just like in the "helicopter Ben" speech. While I believe this action will not work out anywhere near how the FED would want it to, there will be consequences that bear positioning oneself for ahead of time.

First off, the dollar is going to get bombed. I have read that other countries being worse off than America will keep the dollar strong. Ask yourself what real impact the Indonesian currency debasement will have when scaled against the US dollar equivalent. Try India, Singapore, Arab states, etc and I think you can appreciate that the magnitude of printing the US is going to do will dwarf any on earth.

Hard assets will be king. Gold and to a lesser extent Silver will become stores of value immune to currency issues. Physical delivery and well known storage firms will do well. Miners should get a great run, until the government outlaws owning mining shares that is (I am not kidding). Real estate, while never approaching old price highs, will be in high demand but only available to buyers with the cash or cash equivalents to buy it outright (no loans).

Food will be an issue I think. With shipping becoming a mess, delays and shortages will become commonplace. This poses a real problem for those of us on the coasts who have no real way to produce our own food. I do not have a reasonable idea to combat this, other than hoarding. Hoarding will only get you so far as space becomes an issue.

Tobacco and alcohol should do extremely well, as they always do in tough times. I may caution you that medical insurance is going to skyrocket and the insurance companies may well refuse to insure anyone that smokes, chews, or snorts tobacco. Any arrest for drinking may well render you excluded as well from health coverage.

There are more areas to cover but I wanted to impress upon you how dangerous a move the FED made today. Faced with the decision to let bad debts be defaulted on and destroyed or trying to put some kind of floor under that debt the FED went all in for re-inflation. This sad decision will prolong the agony and keep any real recovery far off into the future.

With dollars all over the place expect to see DOW 30,0000 just like in that year 2000 book. Soaring stock markets will have no positive effect as the currency debasement will make old market highs meaningless. Google at $3000 a share sounds great until you buy a loaf of bread for $2200. Like the title of this piece says;
DOW 30,000! It's Not What You Think

This may sound a bit gloom an doom. I hope I am wrong. Even if I am wrong on the degree and breadth of things, there will be some truth to what I have written. If I am wrong, the US will be in the perfect position: We can print whatever we want and nobody can do anything about it but accept it. Then we are all going to be billionaires and I will not have time to blog anyway!

Full Disclosure: I own gold mining shares Goldcorp (GG) and Kinross Gold (KGC).

Have a good night.

Grasping at the Last Few Threads of Fabric from a Debt Based Economy

Hello all loyal readers, as well as anyone else that stops by. Last week was a very difficult time. It is hard sometimes to try and get back into your routine after losing anybody in your life. Everything can seem unimportant. But alas, we all must go on. I enjoy posting my ideas and thoughts on the economic issues facing us today, so back at it!

Last Week Wrap-up
There was a ton of action last week, and I cannot possibly recount it all here. Technical levels were breached. Talking heads finally were exposed as silly as they were changing their tunes almost daily from "the worst is over" to "second half recovery is a bust". The best full on wrap of the major issues going on right now can be found at Mish's site, this article in particular:
http://globaleconomicanalysis.blogspot.com/2008/06/deflationary-hurricanes-to-hit-us-and.html

Yes, I am on board with Mish in the Deflation camp. His logic is sound and the evidence overwhelming. While oil, gold, and other commodities may rise even higher in price, the definition of deflation is a collapse of credit. That is exactly where we are going.

Indymac Bank Will Win the Dead Pool
In the last poll Indymac Bank (IMB) got two votes for most likely to go bye bye. One of those votes was mine, so there is one other genius out there that voted. The structural issues facing IMB are too serious to overcome. It is now endgame time. Can the FED prop up IMB? It is doubtful with most of their balance sheet already gone. Can some kind of merger be forced? Maybe, but what entity can take on IMB? JP Morgan is already looking pretty smug about their Bear Stearns gift, and Bank of America is going to have to litigate lawsuits for years over CFC. Who is left?

Perhaps the FED may have learned their lesson and will allow a terrible bank to go bust. This bears watching to see how the situation is handled. IMB will not be the last to go, so how the close out is done will be of value information wise.

Grasping at the Last Few Threads of Fabric from a Debt Based Economy
It has long been a central theorem here at Economic Disconnect that last summer the FED, the banks, the home builders, and the entire financial system tried to take a deep breathe and hold it as long as possible in a vain attempt to ride out a collapsing real estate debacle. I can kind of understand. The major players are well aware how ridiculous 80% of the mortgages written over the past 3 years are, they know how bad things will get now that prices are not rising. rather than attack the issue at the roots, everyone tried to pretend a miraculous 2nd half recovery would somehow, someway reignite the housing bubble.

Well, time is up. The FED is empty this summer. IMB is going down, and many others are not far behind. The stock market seems to finally caught a clue and is trending down. Home foreclosures are still accelerating. You know the drill. So what does this mean?

This summer will be a season of many firsts. Creative bank closures. Deleveraging of monoline useless insurance. Massive bank losses. Even more bone head moves by the US Congress.

There are still some out there that think continuing on in the same way that got us here is the answer. Even Robert Shiller, an early housing bubble caller, feels that stimulus plans should just be a perpetual thing to keep demand for junk artificially high. The US financial system is near a crisis because too many people felt they were entitled to live like a celebrity. For some time credit was easy enough to make a stab at it. Now too many are so deep in debt, there cannot be any reasonable expectation of debt payback. Exhaustion has finally been reached by the consumer.

And this will hurt. It will hurt everyone. Nobody likes a mess. I am not happy about what is going on. But the process must happen. It was delayed after the 2000 market bust, and now there is nothing to replace home equity. Nothing. What we need are grown ups that will steer the country through this mess and back to sustainable growth based on solid fundamentals. I have no idea where those people are going to come from, but rest assured none of them are in positions of power today!

I am looking for post ideas and topics as I settle back into writing, so leave a suggestion if interested.

Have a good night.

Level Three Assets - Estimate Your Own Net Worth!

I must say some nice beef tenderloin on an open flame is very good! I was hoping to buy some dry aged high quality steaks and I found some online sellers that seem pretty respectable. Can anyone here comment on meet products from:
Lobels
Niman Ranch
Allen Brothers (not dry aged but seem popular)
Any help is appreciated.

Inflation Indeed Moderating Right on Schedule
The CPI came in pretty tame today at a measly 0.2 reading for April. Except for food prices which moved up a smallish 0.9%, which expanded across the year would mean 9% inflation in food prices! Gas prices fell, as long as you account for seasonal adjustment of the cost. What? Exactly, check out this snippet from the AP article on today's CPI number:

"For April, energy prices were unchanged and gasoline prices even fell by 2 percent, a decline that would strike motorists as strange, given that they have been watching the price of gasoline rise relentlessly in recent weeks.
However, since gasoline prices normally rise in April, the 5.6 percent increase in gasoline prices for the month was turned into a 2 percent drop after the government adjusted for normal seasonal variations -- little comfort to people now paying pump prices that hit a new national record of $3.758 per gallon on Thursday, up nearly 40 cents in the past month."

The lunacy of the inflation figures have been hammered for some time by some observers for some time, but now the tomfoolery is so blatant and incredible that even the MAINSTREAM media is doing some homework and trying to find out what gives. That should scare the powers that be. Even so, the market, which first was in rally mode on the idea that rising inflation was not denting the "real economy", rallied today on the idea that moderating inflation was a good thing. Have it both ways!

Deflation in the Face of Inflation - What Gives?
People that are much (and I mean much) smarter than me about things finance have been harping on the Deflation drum for a while. Well respected writers Mike Shedlock, and a bunch of the crew over at Minyanville are firmly entrenched in the deflation camp. I so strongly agree with their logic stream and evidence presentations that it makes it almost impossible to disagree with their final summation.

How can one reconcile the deflation argument with the stunning rise in energy, food, medical, education, etc prices? Kevin Depew in his splendid "5 Things You Need to Know" had a succinct, and to me, clear explanation of where this thing is right now in today's edition. Here is the relevant text from today's point number 3:

"3. So, What Do We Do Next?
So, the question before us is not, Are food and energy exhibiting symptoms of inflation? The question is what happens as a consequence of those symptoms. And here is where we see a massive disconnect emerging.
Today's "inflation" is illusory. It is the tail end of the Federal Reserve's mirage of economic production; credit creation. The mechanism of transfer between the Federal Reserve and the consumer are banks. (It should be noted that the rise of consumer lending units, and the dependence on them (at least until late last year) by companies in the original business of selling tangible products, companies ranging from General Electric (GE) to General Motors (GM) and at one point even Target (TGT), are illustrative of the efficacy of the credit creation and transfer mechanism between the Federal Reserve and the people). And so the potential for this credit creation to fuel more inflationary symptoms is dependent entirely on the willingness both of banks to lend and consumers to borrow.
That is why this debt crisis is ultimately so deflationary. It chokes off credit at the nozzle while the hose (banks' balance sheets) itself is leaking.
Are you paying more for gas? Yes. Are you paying more for food? Certainly. The question is what are you going to do about it. Our bet is you are not going to borrow and spend more. The consequence of credit creation and a crisis of unproductive debt is deflation. This is not an event; it is a process. Step one is the process of banks unwinding debt. Meanwhile, today's symptomatic inflation in some high profile categories paves the way for tomorrow's unwinding of debt by consumers. If the unwinding of debt and tightening of credit for corporations is merely a whisper of deflation while symptoms of inflation persist, the unwinding of debt by consumers will be a roar."

I think the sentence "The question is what are you going to do about it" in the face of rising prices is most insightful. In the face of falling home prices and a closed home ATM, real world falling wages, and rising costs in things we need, even debt addicted US consumers are going to have to cut back. If banks ever want to make any money they are going to have to stop lending money that is not going to come back. This is deflationary. Kevin is correct yet again with the line "This is not an event; it is a process". This is what has most missing the point; Deflation will not happen next Tuesday in one fell swoop, but act like a slowly growing tumor of credit destruction.

So I guess I am a deflationist! Next step, how to make money in a macro deflation environment. As for that answer I am still clueless! Any help?

Level Three Assets - Estimate Your Own Net Worth!
Freddie Mac tried to add to the "worst is over" hysteria by reporting earnings that were not as loathsome as they could have been. All well and good an not really worthy of ink anymore. What was fun was the massive move to the fictitious LEVEL III asset class that FRE made to make the numbers work for them. From a Bloomberg article:

"Financial Accounting Standard 157 allows companies to estimate a value on holdings that aren't traded. Freddie Mac used FAS 157 to list $156.7 billion in so-called Level 3 assets, a category that indicates the holdings are so illiquid that they can only be priced using the firm's own valuation models.
The Level 3 holdings represent 23 percent of assets and are up from $31.9 billion as of December. "

So FRE goes from 32 Billion to 157 Billion (about 5X) in assets that they themselves can value as they see fit, and this earnings report was seen as strong? The early market action seemed to like it, but check out some quotes from the Bloomberg article:

• "They put a lot of lipstick on this pig including several accounting changes that have given them a one time step-up,'' said Josh Rosner, an analyst at independent research firm Graham Fisher & Co. in New York.
• Credit Suisse analyst Moshe Orenbuch, who has an underperform rating on Freddie Mac stock, said the accounting changes made the company's performance look better and was skeptical of the surge in stock price.
  ``Obviously people liked it,'' Orenbuch said. ``Management was selective as to how they applied certain accounting principles.''
• Friedman, Billings, Ramsey & Co. analyst Paul Miller, who has an underperform on the stock, said investors should be concerned that the company hasn't set aside enough reserves, which pushes some credit losses to future quarters, Miller said.
  ``They're not provisioning in front of it so those losses are going to flow through their income statement for years,'' he said. ``Therefore we don't think that the earnings pickup over the next two or three years is going to be that meaningful.''

Full link here: http://www.bloomberg.com/apps/news?pid=20601087&sid=a75bxyERfFRw

Wowza! Not too nice. What did FRE management think? They took a page from the good old play book of Level III accounting and now apply it to analysts as well! I am serious! If you do not like what some observers are saying, ignore them and focus on the good ones. This is called Level III Market Observation ( I will have the trademark!). Here it is in action, again from the Bloomberg article:

"Freddie Mac spokesman Michael Cosgrove said, ``clearly, based on the comments and reports this morning by the real, substantive analysts who follow this company, the Street is comfortable with our accounting and reporting, and encouraged by the results we presented today.''

So FRE only hears the real analysts that love them! Too funny. I love this stuff.

Vote in the new poll to Level III estimate your own personal worth. Considering my sword collection, some fishing equipment, my car, and a ton of books I will hazard a guess that I am worth about 3.2 Million Dollars. While the assets I have can be easily priced on eBay or at a garage sale, those sales are not MY PARTICULAR ASSETS and thus I will ignore them and instead rely on my own estimates of what my items are worth. What are you worth on a Level III basis? BE HONEST!

Have a good night.