Archive - Nov 2013

A dispassionate overview of the investment climate and what to expect this week.  

The MSM did their usual spin job on the consumer credit data released earlier this week. They reported a 5.4% increase in consumer debt outstanding to an all-time high of $3.051 trillion. In the Orwellian doublethink world we currently inhabit, the consumer taking on more debt is seen as a constructive sign. The storyline being sold by the corporate MSM propaganda machine, serving the establishment, is that consumers’ taking on debt is a sure sign of economic recovery. They must be confident about the future and rolling in dough from their new part-time jobs as Pizza Hut delivery men. Plus, they are now eligible for free healthcare, compliments of Obama, once they can log-on. Of course, buried at the bottom of the Federal Reserve press release and never mentioned on CNBC or the other dying legacy media outlets is the facts and details behind the all-time high in consumer credit. They count on the high probability the average math challenged American has no clue regarding the distinction between revolving and non-revolving credit or who controls the distribution of such credit. A shocking fact (to historically challenged government educated drones) revealed by the Federal Reserve data is that credit card debt did not exist prior to 1968. How could people live their lives without credit cards? 1968 marked a turning point for America...

Let’s use a broad guesstimate. One Bitcoin should theoretically be worth 700 ounces of gold or pretty close to $1,000,000, if we adjust existing supply of both to equal eachother. One BTC is currently worth 0.14 ounces of gold. That gives BTC an upside of 5000 times to equal the current price of gold, supply adjusted. Clearly, I and everyone else believes that Gold may well be much higher than here in the next 5 to 10 years, thus versus the US Dollar the upside for BTC could be multiples of that. Now, before you shake your head, simply go back to the chart of Gold versus the US Dollar and just recognise that it has risen 8750% since the 1920s. And just remember that Microsoft rose 61,000% from its IPO to it’s peak. Considering what we know about the world, I personally believe that Bitcoin may well explode in value as more and more people begin to use it. If you stuck $5,000 into Bitcoins and each Bitcoin did go up to a gold equivalent of let’s say, only 100 ounces of gold (not the potential fair value of 700), then at current prices your Bitcoin stash would be worth $3.3m.

While most pragmatists knew well in advance that optimism over an Iran nuclear programme deal emerging out of Geneva was very much displaced, few anticipated what the actual reason for the failure would be. Indeed, most had expected that the staunchest opponent to the deal, Israel PM Netanyahu who moments ago appeared on Face the Nation and made his case (saying Iran would have given up "almost nothing") would have used his influence over the US as a key member of the 5+1 group of nations (US, Russia, China, France, Britain and Iran) to block any Iranian detente with the US, even though none other than John Kerry has been urging for the Iranian deal for weeks. So when news hit that it was France who had scuttled a deal with a last minute block, many were surprised.

With over 10,000 dead in the Philippines, here is a selection of what the survivors in the aftermath of the tragic hurricane saw: "The devastation is so big."... "I don't know how to describe what I saw. It's horrific."..."People are walking like zombies looking for food," said Jenny Chu, a medical student in Leyte. "It's like a movie."..."It's like the end of the world."

A catchy wake up tune...

Having watched Mike Maloney's "Secrets Of Money" series (Part 1, Part 2, Part 3, and Part 4 here), Chris Martenson discusses the critical aspects of the must-watch episodes. Crucially, as we enter a period of apparent Nirvanic equity markets (and dystopian 'real' economics), Martenson's points on the "unnecessarily complex monetary system" that we have today are summed up by his statement that "there is nothing more important that understanding how our money system operates... and why it will fail us."

The chief of the Federal Aviation Administration predicted Thursday that U.S. airspace could be crowded with as many as 7,500 commercial drones within the next five years. As The Washington Times reports, Michael Huerta said his agency would set up six sites across the country to test drone operators and, in an effort to balance privacy/safety with anarchic airspace drone pollution, he added, "we must fulfill those obligations in a thoughtful, careful manner that ensures safety and promotes economic growth, " as dangerous incidents involving drones have already taken place... Although they are expected to be used for peaceful purposes such as firefighting and weather tracking - it's causing a lot of concern, as Huerta warns "we need to be responsive to public concerns about privacy."

We all intuitively grasp the meaning of diminishing returns: Either it takes more effort to maintain a project’s payoff, or the payoff declines even though the effort invested remains constant. The key driver of diminishing returns is easy to understand. We naturally continue to do more of what was successful in the past. As the returns decline, we redouble our efforts, confident that what worked in the past will once again be successful if only we invest more labor, energy, and capital. However, the status quo's default diversion of 'money/credit' to support diminishing returns has two costs: the opportunity costs of what else did not get financed because available resources were poured down the rat hole of failing programs, and the largely hidden increase in systemic fragility as productive investments are starved by the diversion of resources to the rat holes of diminishing returns. This dynamic leads to the final phase of doing more of what has failed spectacularly.

While the so-called "bulk spying" of the NSA is major privacy issue, Mises Media's Mark Thornton explains that the unintended consequences of this surveillance invasion has real economic implications...

In his parting act, Federal Reserve Chairman Ben Bernanke has decided to continue printing some $85 billion per month (6% of GDP per year) and spend those dollars on government bonds and, in the process, keep interest rates low, stimulate investment, and reduce unemployment. Trouble is, interest rates have generally been rising, investment remains very low, and unemployment remains very high. As Lawrence Kotlikoff points out, echoing our perhaps more vociferous discussions, Bernanke’s dangerous policy hasn’t worked and should be ended. Since 2007 the Fed has increased the economy's basic supply of money (the monetary base) by a factor of four! That's enough to sustain, over a relatively short period of time, a four-fold increase in prices. Having prices rise that much over even three years would spell hyperinflation.

Last week, Citi's Tobias Levkovich raised numerous concerns about the state of exuberance and "disconcerting disconnects" that is our new normal market currently. In the week since, Citi's proprietary Panic/Euphoria model is sending a clear warning of substantial complacency - its most "euphoric" since 2008. This is worrisome, he notes, since there is an 80% probability of a market decline in the next 12 months based on the current reading.

"Debt matters... even if it is possible to pretend for many years that it doesn't," is the painful truth that, author of "Avoiding The Fall", Michael Pettis offers for the current state of most western economies. Specifically, Pettis points out that Japan never really wrote down all or even most of its investment misallocation of the 1980s and simply rolled it forward in the form of rising government debt. For a long time it was able to service this growing debt burden by keeping interest rates very low as a response to very slow growth and by effectively capitalizing interest payments, but, as Kyle Bass has previously warned, if Abenomics is 'successful', ironically, it will no longer be able to play this game. Unless Japan moves quickly to pay down debt, perhaps by privatizing government assets, Abenomics, in that case, will be derailed by its own success.

It wasn’t “disenchantment,” explained Euro Disney CEO Philippe Gas, but an “economic problem.”

To many institutional investors, buying the Russell 2000 is merely the highly levered bet with which the bulk of institutions (recall that almost all hedge funds, and a majority of mutual funds, are underperforming the S&P for a 5th consecutive year) seek to make up for losses in their portfolios by chasing high (and even higher with leverage) beta.  Which is why as the next chart below shows, in a furious scramble to catch up by year end, the institutional Russell net futures (i.e. levered) positioning just hit a record high: the biggest investors are now all-in the smallest names.  So is the massively overbought small cap sector due for a correction? With these manipulated, centrally-planned markets, nobody has any idea. However, for those who have once again bet all in, which just happens to be most plain vanilla dumb money, it may be time to reevaluate.