Guest Post: Seeing Past The Hologram

Tyler Durden's picture

Seeing Past The Hologram, by Mike Krieger of KAM LP

There is no distinctly American criminal class - except Congress.

Patriotism is supporting your country all the time, and your government when it deserves it.

All you need is ignorance and confidence and the success is sure.

It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.

There are lies, damned lies and statistics.

Courage is resistance to fear, mastery of fear, not absence of fear.

Laws control the lesser man... Right conduct controls the greater one.

- All quotes by Mark Twain

We Need Real Confidence to Return, Not Confidence in a Ponzi Scheme

Last week I pointed out that what I got from Banana Ben’s speech in Jackson Hole was that he realized any major public statement of interference in markets was too risky at this point following his announcement at the last meeting to keep the balance sheet steady by reinvesting MBS proceeds into treasury securities.  The operative word in this sentence being “public.”  Anyone that believes this means the Fed and government will just take a back seat and do nothing behind the scenes is deluding themselves.  Washington D.C. and the Fed still fail to comprehend how to increase standards of living in the real world, rather they remain completely addicted to the short-term buzz of printed money heroin as it flows through the house of cards they have created.  They also think that the only thing that really matters in an economy is “confidence.”  As Madoff can attest to, that is indeed the case when you are running a ponzi scheme and since the U.S. government is basically that I can understand where they are coming from.

 I agree that confidence is a huge part of any healthy economy; however, I do not define confidence in the way these arrogant bureaucrats do.  They think confidence comes from rising asset prices, including stocks and homes.  They think this is enough to spark growth in the real economy.  This is nonsense.  The confidence that is needed more than anything else today is two-fold.  First, confidence that there is the rule of law and there will be the rule of law in the future.  The second is that the money issued by the government will maintain its purchasing power over time.  As I have made clear on various occasions, I do not have confidence in either of these things based on how the government has responded to the crisis.  I do not like buying physical gold.  I do not like feeling the need to write these emails every week to warn people.  I wish I could employ capital into businesses and the real economy.  I hope that one day I will be able to do so, but at the moment I do not trust my government and I certainly don’t trust the fascist Federal Reserve.  So I will hoard what I have as the government prints and let the storm pass me by.  I am not the only one.  People are collectively starting to understand this.  So what happens when the big, smart money takes itself out of the investment and capital allocation game because they don’t trust anything?  What happens when the government’s response to this is to print money to keep up the spending habits of people with no jobs or people with government jobs that produce no goods for the economy?  You get the worst case scenario and that is exactly what is staring us straight in the face.

Is a Trade War with China Coming?

The quicker the dollar is devalued the better.  This is not to say that I think dollar devaluation is a good thing.  It is to say we are past the point of avoiding it.  We could have taken the pain in 2008, but instead it was extend and pretend all over again.  Now the debt and promises are too big.  The behind the scenes manipulations are too entrenched.  There is no avoiding a devaluation relative to things people need (food and energy) and capital goods that are imported.  The best thing would be to get it over with and then change policies and restore the rule of law.  The problem with this is that the main currencies the dollar needs its major adjustment against are those in emerging Asia and China.  What has prevented the realignment from happening in a quick and healthy way is China’s refusal to allow the yuan to appreciate.  This creates a situation where Central Banks throughout emerging Asia take steps to prevent their “free-floating” currencies from adjusting either.  If China does not change its policy I fear that what we are looking at a trade war with China after the November elections.  I think Congress and the Administration will start to introduce aggressive policies to discourage Chinese goods and encourage goods made at home.  Think it can’t happen?  We are a lot closer than you think.  This all goes back to my “think local” theme.  While I am inherently a fan of free trade we do not have free trade in any sense whatsoever.  We have policies that are geared to advantage the multi-national corporations at the expense of the U.S. citizen.  The U.S. consumer has merely been spending borrowed money.  This gave an illusion that the U.S. was benefiting from the global multinational corporate rigged market whose model mainly thrives on companies moving abroad to exploit the labor arbitrage caused by a combination of what was a labor surplus (no longer it seems) and a rigged currency.  As more people realize this, more pressure will be placed on politicians and ultimately this will overpower the corporate lobbyists and a trade war of sorts will begin.  Then the chaos could really ensue as we engage in a trade war with our biggest creditor!

Seeing Past the Hologram

The past couple of weeks have been extraordinarily interesting and some of the moves appear to be extremely important.  Although a lot of people like to point to the treasury market and then extrapolate out as to what this means to equities and the ability of the government to increase spending, I think this is the most USELESS market in the world to watch.  If anything is a hologram and a PR tool it is the U.S. treasury market.  How can people with a straight face come out and extrapolate anything from a market where the Federal Reserve is buying the debt of its own government!  The Fed is merely the fiat drug dealer to a government addicted to spending and false promises.  The equity market is the second most useless market in my opinion.  There is no doubt in my mind that a huge part of the government’s “strategy” to build confidence is to keep this thing from doing what it should be doing.  Thus, I am not surprised at all that since I last wrote the S&P500 was +1.6%, -1.5%, flat, and then +3.0%.  So what you have seen is high volatility with no real direction.  How can anyone have confidence this that thing is for real?

So what markets do I watch?  I get the most from the FX markets and the commodity markets.  While these markets are no doubt manipulated heavily as well, I think this is where the players that really understand the macro are playing.  The first currency I check in the morning is the dollar/yen.  The reason for this is that the yen is back to the highs of 1995 and if it does not stop appreciating around this level I think the Bank of Japan is going to absolutely panic.  While the yen has not broken higher yet as market participants are afraid of such intervention, unless the BOJ does something extreme soon the market may test their resolve and push this thing further.  I guess the main point I am trying to make is that with the Chinese yuan NOT strengthening and the yen threatening to break out we could be in for some major fireworks.  Meanwhile Japanese 10 year government bond yields have really started to spike lately (chart GJG10 Index on Bloomberg).  Something big is happening in the land of the rising sun.  In the back of my head I think that any panic move from the BOJ could be the spark that breaks government bond bubbles globally and ushers in a period of massive global commodity driven inflation as every country tries to devalue their way to prosperity.  Essentially, a fiat money version of the 1930’s beggar thy neighbor policies.  When this begins the rush into gold and silver that we have seen thus far will look like a trickle.  I don’t think people will be able to find supply anywhere near the quoted price on comex (or as some like to call it “crimex”).

This brings me to silver which potentially experienced a game changer last week.  I can’t remember the last time silver bounced back almost immediately after every attempted raid.  I am starting to wonder how much physical silver is available.  What we do know is that Central Banks do not store silver to manipulate markets.  Even if it doesn’t break out right now, there is no asset in the world that has more upside than silver.  Don’t buy SLV either.  Buy physical silver not something with JPM as a custodian. 

I also continue to watch food prices very closely.  Wheat, which has come off of its high now seems to have found a base at a price that is 50% higher than the end of June.  Corn prices are threatening to break above resistance at levels 30% where they were at the end of June.  Rice looks like it could have a long way to go on the upside as it is only 20% off of its June low.  If I were a foreign government I would be using this opportunity to buy every single grain of rice I could in order to feed my people when things get dicey in the months ahead.  After strong performance in recent months lean hogs and live cattle also look set to make another push to the upside.  How people in the investment world still focus on the government inflation statistics is beyond me.  It was the rampant commodity inflation, trucker strikes and food riots that played a key role in ending the game in 2008.  This is because it forced the emerging markets to raise rates and cool growth as the Western world imploded under a pile of debt.  It seems the whole play is starting again and people remain focused on deflation.  Deflation in some things yes I agree (discretionary things like homes, technology, stock prices, etc), but not in the things you NEED to buy!!!

Onto oil which is also exhibiting some strange moves.  The Asian benchmark Tapis has not experienced the recent volatility and weakness that WTI has and is currently trading at $80/b.  The Asian price is the one I really pay attention to since that is where the demand growth resides.  The spread between the two now is back above $6/b, which is toward the high end of the range for the past two years.  This tells me that one price is wrong and the spread should narrow.  Given what I think about currency debasement and lack of appropriate investment in the space I think WTI should rally.  We shall see…

A Primer on the Federal Reserve

For those that read my commentary on the Federal Reserve as an immoral an fascist institution and think to themselves “what is this guy talking about,” I have attached a video from G Edward Griffith (the author of The Creature from Jekyll Island).  It’s a great description of how the Fed was formed and who it answers to when push comes to shove.

Also in case you weren’t aware of the power grab that the “Financial Reform” legislation allowed the Fed, read this Bloomberg article.

All the best,

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Boilermaker's picture

What time is the bogus NFP number released to the front runners?

I'd like to snap up some SPG, VNO, BXP, IYR, and *of course* some DRN before they ramrod it 10% higher in a single trading session.

Robslob's picture

True can't trust a damn thing anymore.


It's like they knew in advance of the ISM (cough) so they ramped up...this time they know it will be bad and start to ramp (people will believe news was leaked) pile on then get creamed if they are bad...


What is up is down because down was up to begin with?

Freebird's picture

Sound perspective imo.

Widowmaker's picture

One of the best Mark Twain quotes is, "always do what is right.  In doing so, you will gratify some and astonish the rest."


By no means is this applicable to the united states of fiscal collusion by the rich and robbery of the poor.

Big Corked Boots's picture

The concept of moving the USA back to a manufacturing economy is troubling. New manufacturing plants can be built with a much higher level of automation, such that human labor is needed less or not required at all. The electric power generation business has been doing this for years and the pharma industry is doing it now as well. Automation and robot technology is becoming less expensive, as tech usually does, and the only reason China has high manufacturing employment is that it hasn't become cheap enough to replace dollar-an-hour workers. I don't think the supply of cheap labor will move to Vietnam or Africa long term; I think labor simply won't be necessary. WTF do we do then? Go on welfare? We need a better plan. I think manufacturing is a panacea, an attempt to turn the clock back to a system that worked 50 years ago.


Bearster's picture

As long as the question is what do "we" (i.e. the government) "do" (i.e. coerce people by force), then the question is invalid and it cannot be answered.

With every improvement in the productivity of labor, going back to the industrial revolution (at least), people have fretted over what this will do to the wage earner.  What it will do is free up people who are currently needed to produce, say, food.  So then they can be hired to produce hovercraft, or unmanned mining vehicles to send to the asteroid belt, or nanomachines that automatically find cancer cells in the body and eliminate them.


crosey's picture

What concerns me is that the next leg (nanotech, etc.) will require even greater levels of debt/capital to enable.  These resources no longer exist.

The only solution I clearly see is a massive rightsizing of the labor supply, and reduction in entitlement recipients.  Workers will have to go abroad or live at the poverty level; and we baby-boomers will be encouraged to die quickly.

Caviar Emptor's picture

Work expands to fill the time available 

Shiznit Diggity's picture

Don't worry, we can all go work on farms. Peak oil will soon turn agriculture back into an increasingly labor intensive industry.

anony's picture

See Kurt Vonnegut for a vision of the future. Try, "Player Piano", for a glimpse if you haven't alrealdy.

Azannoth's picture

We are still 100's of years from star to star space travel and you want to go back to the caves

doolittlegeorge's picture

This is an excellent post.  Once we go "flying off to government universe" we are truly "Lost in Space."  There are "things" in that area that truly do not exist even though you see it with your own eyes.  The focus therefore must be "what will the banks do."  Do I sound like I am repeating myself?  If so it is because I AM.  The fact that "the government didn't know the trillion would disappear" should be found.........troubling.   In short "forget the fucking stimulus....the BAILOUT was catstrophe!" though I would argue "like slavery just one of those things your gonna have to do."   Insofar as what passes for "Wall Street" or obviously ANY street for that matter--WHO CARES!  For "the mulitude" of course they don't matter.  No news there.  It's the "minutiae-tude" that the Fed is focusing on...and how ironice noneother than Alan Greenspan himself said "We need to support the equity market."  GEE THANX YOU EQUITY MARKET DESTROYING AS;LDFJASLKJGLJSADG;;LSAADS;LFGJS;J!!!!!!!!!!!!!!!!

Moonrajah's picture

Great point BCB. After the last decade or two of using cheap labor no manufacturing business in their right mind will relocate back to USA. Especially in the current environment of instability,a whacko corporatist-socialist goverment, expiring tax cuts and the monstrosity that is the Healthscare legislation to name but a few. That won't happen if the major population wouldn't agree to working for doggy snacks instead of a decent salary. And that ain't gonna happen voluntarily.

The only solution for US is to be a provider of quality services, and first of all in science and innovation in order to keep it's influence. Unfortunately with the situation in education (a lot of high-quality education is being effectively exported via visa-students to emerging markets, while many local ones are too depraved and have a redneck-IQ and understanding of the way things work in the actual world coupled with the fun-angle of education) I don't see this happening.

If some radical change doesn't happen (war, a new authoritan leader who doesn't bend for WallSt) then US is in for a slow and sad decline.


DarkAgeAhead's picture

Of course it's real.  The FED proves it every day.  It may be a fleeting moment in time, but that makes it no less "real."

Economics, on the other hand, is fiction at its worst.

Invisible Hand's picture

I am coming around to your viewpoint on inflation of things we need and deflation of things we don't have to have.

I also am beginning to think the dollar will drop significantly from here.

I agree that watching the mess that the FED and our govt has made of our economy and our future is distressing but please keep writing about things as you see them.

Very helpful, thanks

Caviar Emptor's picture

Been saying here for months: Inflation of things you need (cost of living and doing business), deflation of individual net worth (real incomes, employment opportunities, real property, retirement assets (including SS and Medicare) ). 

This applies to individuals as well as small businesses (margins hit with increased input costs, decreased consumer discretionary spending). And that's exactly the two ingredients missing from this "Recovery". The engine of "growth" has been emasculated in a consumerist economy. The engine of employment (small business) is seriously constrained. Multinationals are moving the center of gravity abroad (to wit, the banks are hiring abroad, firing domestically). 

tony bonn's picture

as i read my heart leapt and sung....finally someone who is willing to attack the criminal elements within.....expose evil....

money belongs in the hands of the people!! open the mint to gold!!

aux armes, citoyens

formez vos bataillons

marchons, marchons....

LeBalance's picture

"How can people with a straight face come out and extrapolate anything from a market where the Federal Reserve is buying the debt of its own government!"

The Federal Reserve is ex-US government organization.  In my book it is supervising a receivership, since at the very latest 1932, but probably much earlier.  Even perfunctory research will allow understanding of this point.

In addition, absolute surety in Silver's Direction and upside is certainly interesting.  While "fundamentally" that may be true, what fundamentals are we following at this point?  And we believe that we are following the "fundamentals of a sane market," well is that true?  Does the power source we line up against (Big Brother) by owning specie, just shrug and scratch itself and act as it wishes to?

In summary, certainty in outcome is a wonderful thing.  It must be so that Silver and Gold will go to da moon.  I am also quite interested in the possibility that they might not.

DarkAgeAhead's picture

Exactly, it is well past time to at least question how 'fundamental' the fundamentals are as we know/knew them.  These days, trust in the firmness of the past is risky, if not an inherent folly.  From economics to ecology, shit is changing, and faster than most will be able adapt.

The only trust I have left may be in the laws of Nature, as well as those best and worst common characteristics of Humanity as a species.

cyclemadman's picture

I am going to put my faith in thousands of years of human history that have viewed gold and silver as valuable.

DarkAgeAhead's picture

Under reasonably "normal" circumstances, definitely a great bet.  And probably a good one for the next 25 years or so. 

But once the immensity of ecological shit unleashes, it will be about food and water, as it was before silver and gold.

crosey's picture

+100.  Observe our 3rd world brothers and sisters, and see our future, in terms of the value of food and water.

doolittlegeorge's picture

you all are failing to understand the "cross purposes."  the Fed's job is to support the banks/the Fed's job is to support the government.  Rinse and repeat.  In short your thesis that the Fed's job is to support the government doesn't work.  It's job is to support the banks.  The fact that the government is obliterating the banks is not a surprise--least of all the Fed.  The government can eliminate the Fed.  Okay.  That says SUPPORT THE BANKS.

uno's picture

From Bloomberg via Gata


PBOC Researcher Says Gold May Slump on Central-Bank Selling, News Reports

Investors should be alert against a gold price slump as overseas central banks like the U.S. may dump gold while the global economy is facing uncertainties, the Financial News reported, citing Zou Pingzuo, a researcher with the People’s Bank of China.

RockyRacoon's picture

Our Central Bank (Federal Reserve in this case) cannot sell off the gold supposedly held at Ft. Knox.  The gold is under the "control" of the U. S. Mint and audited (ha!) by the Treasury.  Since none of the above is the actual state of affairs, who knows?

uno's picture

I think it may be another BIS swap with unallocated gold from western banks and also the IMF dumping.  Good to see the warning being broadcast.

Caviar Emptor's picture

Hehe. And these rumors have been circulated every couple of months since 2007. Every time that has only resulted in huge central bank Buying by central banks from developing economies. China and India made huge purchases (and have already profited hugely). Middle East countries are trading in their ocean of paper dollars for gold (and noe have gold ATMs !). Indonesia, Sri Lanka, Mauritius, Malaysia etc etc etc the list is long. 

Meanwhile individuals in Asian countries are officially encouraged to buy physical gold (China). In Asian cultures ownership of gold is considered divine. That won't stop any time soon as gold becomes dearer. And then we have the problem of peak gold production. For over a decade, gold production has failed to increase despite mega price appreciation. Figure it out.

prophet's picture

TPTB know the smart money will only force the issues so far, as they know its in their best interest to keep the whole thing from collapsing.

prophet's picture

<<'500 error double posted>>

Hunch Trader's picture

So we're living in the age of hoarding. Hoard food, gold, oil.

Cavemen are back.


doolittlegeorge's picture

this is no ordinary form of hoarding IF it is occurring.  We know Santelli said the "H" word relative to treasuries.  Other than that "we know nothing."  If the "H" word is spreading then obviously that is not you or me.  That would be institutions and most importantly government itself.  There is no clearer definition of "policy failure" than that the government itself feels a need to "hoard" things.  Should the United States ITSELF decide to hoard (aka PROTECTIONISM as mentioned above) you really, Really, REALLY have a problem.  We do know "industrials have REALLY perked up."  That's a Depression era signal...argumentatively I would agree with that.  Of course "how many lawyers are there on the floor of the NYSE"?  The word "zero" comes to mind.

MachoMan's picture

The uncertainty is what keeps everything from shooting to the moon, but also from falling to hell.  The uncertainty is what keeps us range bound.  As soon as we take some of the cogs out of the wheel of uncertainty, everyone piles onto one side of the island and it tips over.  The uncertainty is necessary to perpetuate the status quo and the uncertainty will be defended at all costs.  Some people may think they know about the extent of gold in fort knox, fed actions with foreign governments or future QEasing, or intervention/suppression of the PM markets, but they do not have confirmation of this extent.  This is why you have mixed signals...  e.g. crazy up days on no good news, selling of IMF gold, threat of QE, etc.

Expect more uncertainty.

anony's picture

Sports guy chest bump.

Theta_Burn's picture

Sorry for the off topic

Another fucking rig explosion

zaknick's picture

Very nice.


I was unaware of this:


"It was the rampant commodity inflation, trucker strikes and food riots that played a key role in ending the game in 2008.  This is because it forced the emerging markets to raise rates and cool growth as the Western world imploded under a pile of debt."


Is this correct?

Caviar Emptor's picture

Yes. It's all there for the reading. Food riots spooked markets. The worst was in the Philippines and Thailand. Rice is a sensitive subject throughout Asia. 

doolittlegeorge's picture

there were no trucker strikes, no.  There was a "drive by" around the beltway but believe you/me there was no trucker strike.  There COULD be a trucker strike because THERE IS NO TRUCKING INDUSTRY right now.  Interestingly "sign on bonus' are soaring."  And needless to say "food riots" are complete falacy insofar as "mom and Apple Pie" land are concerned.  There were some issues in India as I recall....

Caviar Emptor's picture

Even Wallmart's food prices surged last month. Survey of a basket of their items showed higher prices and no rollbacks.

Apple pie won't taste too nice if it craters a weekly family budget: check wheat prices? Sugar?  Corn challenging all time highs. 

Food inflation is only resuming its uptrend. Dollar policy over the last 30 years is coming back to haunt.

SheepDog-One's picture

Its all imaginary, based upon FED buying the govt debt and stocks too, so how anyone can extrapolate out from that BS is beyond me!
Retail is gone, markets or dead so all you can glean from 'markets activity' is the FED is playing with itself in the corner.

doolittlegeorge's picture

banks, banking, banksters, bankorama, bankerball, bank-wanky, burbanky.  call it what you will--"The Song Remains the Same."

doolittlegeorge's picture

they got dollars in that bank?  I'm making the call right now....