Archive - Nov 15, 2012

In his farewell address to Congress yesterday, Ron Paul blasted the dangers of what he called 'Economic Ignorance'. He's dead right. Around the world, economic ignorance abounds. And perhaps nowhere is this more obvious today than in the senseless prattling over the US 'Fiscal Cliff'. US government spending falls into three categories: Discretionary, Mandatory, and Interest on Debt. The only thing Congress has a say over is Discretionary Spending. But here's the problem - the US fiscal situation is so untenable that the government fails to collect enough tax revenue to cover mandatory spending and debt interest alone. This means that they could cut the ENTIRE discretionary budget and still be in the hole by $251 billion. This is why the Fiscal Cliff is irrelevant. Increasing taxes won't increase their total tax revenue. Politicians have tried this for decades. It doesn't work. Bottom line-- the Fiscal Cliff doesn't matter. The US passed the point of no return a long time ago.

It would seem that the downswing into this economic slowdown has been considerably faster than many expected (as it always seems to be). Since we first introduced Goldman's Swirlogram indicator the business cycle (in May 2012), helped by the promise more and more liquidity, we have rotated remarkably from slowdown to contraction to recovery to expansion and now - in November - the leading indicators are pointing to a rapid shift into a slowdown phase. The Global Leading Indicator (GLI) is losing momentum fast and has made lower cycle highs each time since the 2009 'recovery' began. While Goldman caveats some of this with 'Sandy'-related impacts, the GLI seems to confirm what Global PMIs are hinting at - that global growth is slowing.

While we largely enjoy Dallas Fed's Dick Fisher hawkish, non-conformist thinking at the FOMC, and his willingness to come up with amusing cartoon names to explain the Fed's monetary policy (we are currently on Toy Story, and specifically Buzz "To Infinity and Beyond" Lighyear), we certainly do not miss when even said faux Fed bad cops telegraph hypocrisy so gruesome it shows demonstrates beyond a shadow of a doubt just how fake the facade of the Fed's "contrarians" truly is. To wit:

• FISHER SAYS U.S. LAWMAKERS HAVE BECOME `PARASITIC WASTRELS'

Riddle us this, Dick: just who is it that enables the US Lawmakers to fund trillion dollar deficits year after year at less than prohibitive terms, and more importantly, who is it that since 2009 has monetized virtually all 10 Year and longer gross issuance, thereby allow Congress to be a parasitic wastrel. Would you call that someone a "Wastrel enabler"?

In the current Bernanke-Obama-Keynes toxic triangle (defined previously here) economy, blink too long and you will miss the latest bailout. While 4 years ago, it was America's M.A.D.-hostage taxpaying middle class that had no choice but to fund the trillions in direct Fed cash handouts and guarantees to bail out the banks, in the process saving and preserving the trillions in wealth for America's uber wealthy (the "1%") class, ever since then it has been the government's turn to rescue the country's lower and lower-middle classes (the "47%"), who, with no gun to their heads, decided to splurge during the height of the housing bubble (insurmountable mortgage payments and $0 down notwithstanding) and buy that aspirational McMansion that would make them so much more appealing in the eyes of the next door neighbor (who too could never afford their house in the first place). This has happened courtesy of a progressively more pervasive mortgage forgiveness plan, which has seen the total amount of debt funding a given home purchase shrink little by little each day. However, since there is no free lunch anywhere, certainly not when a bank's balance sheet is being impaired, like in 2008, someone is once again on the hook for this latest bailout. That someone, not surprisingly, is again America's middle class that lived within its means, that saved money while others splurged, and even put cash away for retirement, handing it over to various Pension investment vehicles.

The FHA has been the key element to the phony “housing recovery” the government has been trying to create.  In the wake of the collapse of 2008, Fannie Mae and Freddie Mac blew up and what was left to pick up the pieces was the FHA.  No private player would issue loans with down payments of 3%, but this was no problem for the FHA! Well - yes! "The Federal Housing Administration is expected to report this week it could exhaust its reserves because of rising mortgage delinquencies" This is a big deal.  The FHA is already in trouble despite a miraculous “housing recovery” and we haven’t even hit a severe cyclical economic slowdown yet, which is almost certain to occur in 2013.  What shambles do you think the housing market will be in once that happens and the last backstop to housing is broke?

Moments ago Ben Bernanke released a speech titled "Challenges in Housing and Mortgage Markets" in which he said that while the US housing revival faces significant obstacles, the Fed will do everything it can to back the "housing recovery" (supposedly on top of the $40 billion in MBS it monetizes each month, and/or QEternity+1^?). He then goes on to say that tight lenders may be thwarting the recovery, and is concerned about high unemployment, things that should be prevented as housing is a "powerful headwind to the recovery." In other words - the same canned gibberish he has been showering upon those stupid and naive enough to listen and/or believe him, because once the current downtrend in the market is confirmed to be a long-term decline, the 4th dead cat bounce in housing will end. But perhaps what is most amusing is that the Fed is now accusing none other than the US household for not doing their patriotic duty to reflate the peak bubble. To wit: "The Federal Reserve will continue to do what we can to support the housing recovery, both through our monetary policy and our regulatory and supervisory actions. But, as I have discussed, not all of the responsibility lies with the government; households, the financial services industry, and those in the nonprofit sector must play their part as well." So "get to work, Mr. Household: Benny and the Inkjets, not to mention Chuck Schumer's careers rest on your bubble-reflation skills."

In a brief four minutes this morning, CNBC's Gary Kaminsky summarized what many have suspected (and we have pointed to again and again) that investors should as the talking-heads are doing and NOT as they are saying (or writing). We have opined vociferously on this topic of the divergence between sentiment surveys and real money positioning, but the outspoken 'real money manager' is gravely concerned that what he is seeing now from the guests and newsletter writers is very similar to what took place in 2007: "Everyone saying they would stay fully invested, that they loved equities, that the housing boom was nothing to worry about (recovery now); while at the same time they were short-selling the market. People are saying one thing and doing another." Kaminsky nails it when he points to the obvious that everybody knows that the last four years have not been about the White House or 'recovery', but about Central Banks; and the last few weeks (post QE-Eternity) the realization of this fact has really sunk in along with a belief that the next four years are not positive for stocks. Not quite a Jeff Macke meltdown of truthiness but the veil has been lifted.

It was only a few short weeks ago when we noted the interesting analogs between AAPL's rise and the exponential exuberance of MSFT in the late 90s and NFLX this year. Sadly, for the long-suffering momentum-chasers, things have gone a little pear-shaped for Apple as it has followed, far too accurately, the same path from exuberance to realization. Where to next? MSFT says 'a bounce to be faded'; NFLX says 'dump it all'...either way $400 is in play for AAPL - back to the start of the year... cue fundamental defense of what is quite clearly a behavioral exuberance having played out.

Countless pages have been written about why Lehman caused the system to almost implode. However, the reality is that Lehman nearly took down the entire financial system for two reasons... and Spain will be far far worse.

When you hear Republican politicians pointing figures at Jon Corzine for his “alleged” acts of fraud in the MF Global collapse, ask them why they changed the bankruptcy code in 2005 to allow such acts of fraud to go unpunished.  

Update: the following tweet from Israel's ambassador to the US, Michael Oren, will hardly help: "ALERT: Tel Aviv area was just hit by a rocket attack from #Gaza"

Despite having lost its prominent headline position in the global media, the things in Gaza are going from bad to worse with news reports that Israeli ground forces are preparing to enter the Gaza Strip which will take the confrontation to an effective ground war level, even as a separate news report claims that Egypt has now closed its border with Israel, in yet another escalation. It is unclear how soon until Egypt also halts gas supplies to Israel as it did back in April - we assume not too long. So as the world awaits the next major step in a conflict that has a Katyusha rocket's chance in the Iron Dome of going away on its own, we present the latest clip provided by the handy, if oddly boastful, Israeli Defense Forces, this time showing how a rocket warehouse in Gaza just became one with the ether. Tangentially, and once again, we can't help but lament how a Plan X involving the US military would be an option here, if only the entire US military and intelligence hadn't become a gonzo reality TV show virtually overnight.

In the short run (and this is what is so insidious about the Fed’s artificially low interest rates), all we are seeing is an illusion of economic progress. The choice for the status quo made in last week’s presidential election was an uninformed one—at no fault of the voters—made in the fog of monetary distortion and Federal Reserve Chairman Ben Bernanke’s continuous campaign of disinformation. Thus, investment in this illusory economy is malinvestment, or investment that always unravels with the intervention’s inevitable end, due to either untenable credit levels (such as today’s corporate debt-to-asset ratio, still at historic highs) or a resource crunch (rising commodity prices) that eliminates any advantage from printing money; and one or both of these scenarios is unavoidable. This is our grievous position in the United States today, trapped in the status quo by first consequences, by what we can see, due to a cause that we cannot even see. And so we are left to learn from experience, an eventual tragic unfolding of our collective malinvestment. As Bastiat said, “Experience teaches effectually, but brutally.”

A number of economists and economics writers have considered the possibility of allowing the Federal Reserve to drop interest rates below zero in order to make holding onto money costlier and encouraging individuals and firms to spend, spend, spend. This unwillingness to hold currency is supposed to stimulate the economy by encouraging productive economic activity and investment. But is that necessarily true? No — it will just drive people away from using the currency as a store of purchasing power. It will drive economic activity underground and banking would be turned upside down. Japan has spent almost twenty years at the zero bound, in spite of multiple rounds of quantitative easing and stimulus. Yet Japan remains mired in depression. A return to growth for a depressionary post-bubble economy requires a substantial chunk of the debt load (and thus future debt service costs) being either liquidated, forgiven or (very difficult and slow) paid down.

That the biggest government source of employment just posted a record $15.9 billion loss (bigger than the $15 billion expected previously), is no surprise to anyone: after all most are openly expecting the USPS to fold, the only outstanding question is whether it will transform into a company that is actually competitive with the private sector (unlikely), or liquidate (also unlikely in an era where government jobs are becoming the only form of employment available). Sadly, keeping this zombie alive costs all other taxpayers $250 million each day: money that could be used much more effectively in other areas of the economy, but won't. Because there are USPS votes that have to be purchased at cost. Perhaps the biggest surprise is that while the USPS had a total of 607,400 employees in October, this was the lowest number of total employees for the non-profit (but certainly loss-driven) government run organization since the 1960s! Perhaps most shocking is that the USPS peaked at over 900K employees in 1999 when it was still if not profitable (as it doesn't need to be by its charter) then certainly breakeven. Sadly those days are now gone, and the next thing to go will be all the promised benefits for the 600K or so employees.