Eat Your Bird and Keep Quiet

Whatever this is, don’t call it inflation. Government does its best to hide the effects of Mr. Bernanke policies, but reality has an inconvenient way of intruding.

From The Washington Post:

Nov. 10 (Bloomberg) — The cost of a Thanksgiving dinner in the U.S. will jump 13 percent this year, the biggest gain in two decades, as prices rose for everything from turkey to green peas to milk, the American Farm Bureau Federation said.

Lack of economic opportunity

Ron Hera describes How the U.S. Will Become a 3rd World Country:

Fundamental characteristics that define a 3rd world country include high unemployment, lack of economic opportunity, low wages, widespread poverty, extreme concentration of wealth, unsustainable government debt, control of the government by international banks and multinational corporations, weak rule of law and counterproductive government policies.  All of these characteristics are evident in the U.S. today.

Other factors include poor public health, nutrition and education, as well as lack of infrastructure.  Public health and nutrition in the U.S., while below European standards, stand well above those of 3rd world countries. American public education now ranks behind poorer countries, like Estonia, but remains superior to that of 3rd world countries.  While crumbling infrastructure can be seen in cities across America, the vast infrastructure of the United States cannot be compared to a 3rd world country. However, all of these factors will rapidly deteriorate in a declining economy.

The Problem

Bill Bonner describes how the government, with too many of the people’s blessings, got us into this mess. According to Mr. Bonner this interaction between the governed and their government was responsible for an impoverishment of the masses:

They demand that the feds ‘do something!’…not realizing that the feds — more than anyone else — are responsible for their misery:

The feds tricked them into spending more than they could afford — with artificially low rates and EZ credit.

The feds loaded them up with mortgage debt — thanks to their federally subsidized mortgage industry.

The feds practically invented sub-prime mortgage debt; and directed lenders towards the poorest and most vulnerable parts of the society.

The feds enticed old people into complete dependence — with the Social Security, Medicaid and Medicare programs.

The feds led the young into debt too — with easy student loans that effectively transferred money from them to the education industry.

The feds jimmied the health system into such a mess that Americans now spend 45 times as much as Cubans…and have the same life expectancy.

The feds’ funny money system caused the export of millions of good jobs to emerging markets.

Many other items could be added to this list.

The Daily Bell has their own opinion:

One would think after a century of the most vicious kind of regulatory democracy that things would generally be better. But are they? No, of course not.

They are much, much worse. The reason for this is that the concept has root that people need “leaders” and that only government – the bigger the better – can provide prosperity and create the conditions necessary for civil society. Nothing could be further from the truth.

As we are seeing now, governments do not create wealth; they drain it. Governments do not provide peace; they ruin it. Governments do not guarantee the perpetuation of civil society; they abrogate it. These are the unfortunate facts.

Government cannot be fixed by better government. Government cannot be fixed by the right leadership. The only way to make government better is to make it smaller. The best government in our view governs the least.

Suffice it to say that President Reagan described the problem long ago when he declared that government was not the solution but the problem.

How this economic crisis will play out

No one knows how this economic crisis will play out. For sure, it will have an ending that few can imagine.

From Zerohedge comes this rehash of our crisis and a possible development of future events:

Here is the compare and contrast courtesy of South of Wall Street:

• April 2007 | New Century goes down  SEC Filing
• June 2007 |  Bear Stearns suspends redemptions from its High-Grade Structured Credit Strategies Enhanced Leverage Fund  – (With that name, who put money in this thing? Enhanced Leverage…)
• July 2007 |  Bear Stearns liquidates said funds U.S. Bankruptcy Filing -
• August 2007 | Countrywide borrows the entire $11.5 billion available in its credit lines with other banks. Fitch Ratings downgrades &    SEC Filing
• January 2008 | Countrywide goes down – BofA ‘buys’ them
• February 2008 | Northern Rock goes down UK Treasury Release  
• March 2008 | Bear Stearns goes down – JPM ‘buys’ them  Federal Reserve Press Release
• July 2008 |  SEC bans naked short selling in the securities of Fannie, Freddie, and banksSEC Press Release
• September 2008 | Fannie and Freddie are wiped out
• September 2008 | Lehman goes down – Merrill is ‘bought’ buy BofA
• September 2008 | SEC bans on short selling in the stocks of all companies in the financial sector PR
• September 2008 | All types of facilities, guarantees, and swap lines are extended (TAF, AMLF)
• September 2008 | JPMorgan ‘buys’ Washington Mutual
• October 2008 | Wells Fargo ‘buys’ Wachovia
• October 2008 | TARP comes to life  H.R. 1424 | Public Law

Where are we now?

• February 2010 |  EU and Greece reach austerity plan
• April 2011 | Portgual asks for a bailout
• October 2011 | Greece ‘haircut’ ruled voluntary – MF Global Goes Down – CDS now meaningless
• December 2011   |  Greek default no longer the world’s focus as Italy collapses
• January 2012 | Greece defaults
• March 2012 | Germany to leave the EU
• June 2012 |  French banks fail – French yields soar as bond auctions fail

How reasonable this forecast is, remains to be seen.

Not included is the effect on the US. Europe will not collapse without precipitating a similar event in the US.

History moves slowly, especially for those living through it. However, when these or similar events actually begin, they are likely to come faster than this timeline suggests. The entire world will change in a week!

Federal Reserve “Living in Age of Black and White TVs with Rabbit Ears”

Jim Grant speaks about money and the Fed:

 

Central banks try to dismiss gold

Despite how governments and central banks try to dismiss gold, Zerohedge points out that actions speak louder than words:

… we learn that gold after all is money, after the G-20 demanded that EFSF (of €1 trillion “stability fund” yet can’t raise €3 billion fame) be backstopped by none other than German gold. Per Reuters, “The Frankfurter Allgemeine Sonntagszeitung (FAS) reported that Bundesbank reserves — including foreign currency and gold — would be used to increase Germany’s contribution to the crisis fund, the European Financial Stability Facility (EFSF) by more than 15 billion euros ($20 billion).” And who would be the recipient of said transfer? Why none other than the most insolvent of global hedge funds, the European Central Bank.

Hello Welfare State, Goodbye Greece!

There are any number of areas that could be listed reasons for the collapse of Greece. This graph, from Dan Mitchell, is telling enough that it is probably not necessary to go any further in the autopsy of this country.

From the graph, government employees increased by substantially over 100% during a period when the population of Greece grew about 16%. That represents a shift of workers from the productive sector of the economy to the unproductive, leaving fewer wealth creators and more wealth consumers.  Hello Welfare State, Goodbye Greece!

The US is headed down the same path. Our government employees have also increased disproportionately to population growth. More important, instead of hiring people to do nothing (government jobs), we pay them for doing nothing in the form of food stamps, unemployment benefits, etc. While this outcome might be considered more honest, the result is the same — a welfare state no longer supportable in its current form.

Greece is little different from the US. The primary difference is that the US has a printing press which they have used to cover their deficits. Market forces will eventually nullify that US advantage and we will experience failure similar to Greece.

Reports like the following show just how serious the US government is about correcting the problem:

WASHINGTON (MarketWatch) — The U.S. Treasury expects to borrow $305 billion this quarter and $541 billion in the next three-month period as the government struggles to bring down future budget deficits despite a weak economy.

Treasury on Monday said its new estimate on debt issuance for October through December is higher than an earlier estimate of $285 billion. The increase in borrowing was related to lower government revenues and higher spending.

In January through March, Treasury expects to issue $541 billion in debt, the second-highest borrowing figure for a quarter. It borrowed $286 billion in July through September.

The problem in the US is likely still solveable, although not via the political process. A financial turnaround specialist could make the mathematics of revenues and debt match via primarily ruthless cost cutting. Those actions could likely save the dollar and the economy. Whether society would hold under such circumstances is unlikely.

Today’s market euphoria

The talking heads on CNBC this morning are excited about the ECB rate cut. I assume it is because they are paid to generate viewership, although ignorance and/or stupidity should never be ruled out as an alternative or joint hypothesis.

Jim Cramer is one of several who believes this rate reduction improves the outlook. Soaring markets seem to agree with his position. But nothing of substance has changed. The underlying economic problems of Greece, the other PIIGS, Europe or the US for that matter have not been addressed. Today’s market euphoria is akin to celebrating the provision of more alcohol to an alcoholic. Temporary pleasure has been purchased at the cost of worse suffering ahead. The hangover from hell has been deferred, not avoided.

Michael Krieger interpreted the action properly:

Nothing has changed and absolutely nothing has been accomplished.  There is no “solution” to the crisis that will not result in massive pain, confusion and wealth decimation.  The reason is patently obvious.  At least half the continent is completely and helplessly bankrupt.  There are only two outcomes to the entire situation.  Either the sovereign debts are written off aggressively and the banking system declared insolvent and restructured or the ECB decides to turn on those printing presses to the tune of trillions and destroys the purchasing power of the union in Zimbabwe-like fashion.

Useful from an investing perspective

Alan Abelson of Barrons is always a colorful and entertaining read. Frequently I do not find him particularly useful from an investing perspective. His recent reporting on John Williams’ take of our third quarter economic results I thought was valuable. Of course, I think Williams’ work is usually spot on, so that is likely why I appreciated Abelson’s report.

Or perhaps I liked Abelson’s report because it runs counter to the giant propaganda machine that our media and government operate. Then again, it might even be simpler than that. It has been said that you cannot learn what you don’t already know. Or that you always think someone is brilliant when they agree with you. The latter is especially dangerous for investors or others making important decisions.

With that caution in mind, here is Mr. Abelson’s commentary:

ALWAYS ALERT TO THE SUNNY SIDE of events, it occurs to us that one of the most positive aspects about the crisis in the Old World is that, by comparison, it makes our own economy look pretty darn good. Gosh, didn’t the Bureau of Economic Analysis report on Thursday that gross domestic product in the third quarter grew at a reasonably decent annual rate of 2.5%, nearly twice the previous quarter’s anemic pace?

But wouldn’t you know, no sooner did we start to swell with a smidgen of patriotic pride than along comes the astute John Williams, the main man at Shadow Government Statistics, who, after his usual painstaking analysis, declares the supposed 2.5% gain “outright nonsense.” And, indeed, he sees it as fresh proof of his contention that GDP is the most “heavily biased, heavily guessed at, heavily politicized and most worthless” measure of the economy foisted on us poor peasants by the powers that be.

John’s convinced that, in truth, the economy is limping badly. And while we believe that the consensus view that the recovery is still inching ahead is quite arguable, our conviction on this score doesn’t rise to the fierce and noble level of John’s ire. What makes us especially uneasy is less the manifestly flawed optimism inspired by some of the dubious data, than the very real yawning gap between consumer income and outgo.

In September, by way of illustration, personal income rose all of 0.1%, while consumer spending climbed 0.6%. To keep shelling out more than they earn, Jane and John Q. used plastic a bit more aggressively and chipped away at their nest egg. In the process, personal savings shrunk from 4.1% to 3.6%.

And, as virtually any working stiff can personally attest, wages are either rising by minuscule amounts or, for the most part, not at all. The latest Employment Cost Index reading showed a teeny uptick, 0.26%, the smallest since the measure’s debut in 1982.

Logic, which is not prominent in the investment lexicon, would suggest that a pinched consumer, whose house is often underwater, whose job is anything but secure and whose paycheck is unremittingly eaten into by sharply escalating medical costs and painfully higher food and gas prices, is destined to cut down on his spending, even as he pauses in his deleveraging.

Since no little part of the lukewarm recovery is the result of an anticipatory inventory build by business, a reluctant consumer could obviously be a damping influence on even the most rabid bull. In any case, it makes for a gathering cloud over the investment environment that you ought to keep a cautious eye on, especially with animal spirits strongly on the rise.

Gold can reach heights

Bud Conrad believes that Gold can reach heights others do not even imagine. He lays out his case in a  lengthy analysis for those interested.

In Mr. Conrad’s opinion, the case rests on the following:

… until there are fundamental changes in government fiscal and monetary policies – and a recognition that the sovereign debt is unpayable and therefore needs to be restructured – there is no reason to fear gold pullbacks and every reason to expect even more positive returns in the gold mining stocks that are still catching up to the rapid gold rise.

Even higher prices than mentioned here are possible from the flight to safety out of the euro, the seasonal rise into the new year, and the accelerating action of gold from a shift in sentiment of the investment public to a relatively small market. Gold is by far the best “answer,” and now is still the best time to invest.

For many of the reasons outlined by Mr. Conrad I look for gold to be a reasonable place to put a portion of one’s portfolio. It is attractive if for no other reason than it appears safe. No other asset class does.

In my opinion, gold will reward in the long term. In what may be near-term panic markets, gold may sell off with financial assets.  Investors may get caught in margin spirals where they have to sell what they can rather than what they want.

During the last couple of weeks stocks and gold have sold off together. In my opinion, this represents a few factors:

• Margin squeezes
• Latecomers to gold getting scared out
• Panic selling
• Rush to liquidity

The same negative performance for gold (on a larger scale) occurred in 2008 – 2009 when the stock market declined and gold went with it. The coming decline may be bigger for stocks when markets fully realize there is no way out of the financial hole that governments have dug.

The stock market sell-off presents both risk and opportunity for gold. Thus far, gold and stocks have moved together in a downward direction. That is unlikely to continue much longer.

At some point, fiat currencies will be viewed as being in a Voltairian cycle (on their way to their intrinsic value — zero). Then, gold will become the true save haven as it will be the only asset left standing.

I am looking for gold to diverge from stocks soon. Yesterday, as an example, gold was up and stocks were down for the first time in a while. Today, at least pre-market, it appears both are headed down again. Until a divergence trend becomes apparent, I have lightened up on gold. Once that relationship returns, I shall become more aggressive.

This is not investment advice, merely how I react to these markets. Consult your financial adviser rather than reacting to internet noise.

The banking system and the politicians

The political corruption in this country is no longer whispered about. It is out in the open and fairly well recognized. Productive society is getting plundered by the parasite class in Washington DC and their friends.

The MF Global collapse is merely the latest scandal that has harmed citizens. The lack of prosecutions in the banking system and the politicians who made the thefts possible only provides signals to others that such behavior is acceptable, so long as you know the right people and pay the proper favors.

The linkage between Wall Street and Washington is goes well beyond traditional lobbying. Both sides are getting rich off insider information, favors and special deals. The MF Global implosion (and theft) is a real inconvenience for the political class. As described by Kevin Hayden:

MF Global collapsed while under the leadership of Jon S. Corzine, who was previously governor of New Jersey, a U.S. senator, and the head of Goldman Sachs. MF Global made costly bets on European government bonds.

Mr. Corzine was rumored to be the next Treasury Secretary. He also was a key economic advisor to the Obama Administration.

We may never learn whether Mr. Corzine is guilty of any crimes or not. Thus far, there are no signs of an investigation. Just like all the other questionable Wall Street matters.

The cozy relationship between politics and Wall Street is not capitalism. It is crony capitalism, or less politely, the exploitation of the many by the political class and their buddies. The arguments of the OWS movement, as misguided as many of these folks are, have some validity when the maligned 1% is dissected.  Many in the 1% have earned their money honestly and competitively by providing goods and services and jobs.

The other part of the 1% makes its money not via free markets and competition but via political corruption and connections.  These people are not representative of capitalism; they are part of the nexus between politicians and cronies. These people do not make money by providing goods and services, they make it off of insider information and favoritism. They are part of the political exploitation scam that has ruined the economy and the country.

The following diagram was developed by Dave Cohen:

This diagram of the political process is mostly self-explanatory. The process is self-contained. The only real participation allowed to the general public is rubber-stamp voting every 2 years.

Mr. Cohen’s article details the appalling deterioration of honesty, ethics and morality in the political class. This corruption has now progressed so far that in his opinion:

All we can do now is document the decline and fall. Economic theories regarding how to proceed don’t matter much at this point. The political “debate” about current and economic policy has become almost wholly irrelevant to the nation’s future.

Chalk Mr. Cohen up for someone who (at least now) believes in what Albert J. Nock observed many decades ago:

Taking the State wherever found, striking into its history at any point, one sees no way to differentiate the activities of its founders, administrators and beneficiaries from those of a professional-criminal class