ETC

Minutes ago the January Consumer Credit report was released. It was expected to post an increase of $14.7 billion. Instead it rose by $16.2 billion. On the surface this would be great: consumers are spending more, levering up confident in the future, etc, etc. Alas, as always in the New Normal, the story was below the surface. Specifically, of the $16.2 billion rise, a tiny $106 million was due to revolving, or discretionary spending credit card, debt. The balance, or 99% of the total, was non-revolving debt, best known as student loans, and less known as GM NINJA car loans. And here is the scary math: in the past 12 months, of the $153 billion in total consumer credit increase, just $6.4 billion was in revolving credit. The balance: student and car loans.

Though much has been written about the popping of the housing bubble in the U.S. and Ireland, remarkably little has been written about the many housing bubbles that remain unpopped. As a rule, speculative bubbles pop and revert to their pre-bubble levels, so we can anticipate the eventual popping of all remaining housing bubbles. Given the dearth of investment options open to households in China seeking to invest their prodigious savings, it is unsurprising that China's housing bubble continues expanding. Every proponent of housing during bubbles confidently proclaims that "this time it's different," and a decade later the dazed survivors shift through the financial rubble, wondering what went wrong with "guaranteed" fundamentals, trends, valuations, collateral and wealth.

Rampant malinvestment is creating scarcity of capital, energy & justice. All the sordid and spellbinding rackets working their hoodoo on the financial scene have obscured a whole other dimension of the fiasco that America finds itself in, namely the way we have arranged the logistics of everyday life on our landscape: the tragedy of suburbia. I call it a tragedy because it represents a sequence of extremely unfortunate choices made by our society over several generations, and history will not forgive the excuses we make for ourselves, nor will it shed a tear for the tribulations we will induce for ourselves by living this way. Politically, all this mischief has manifested as a campaign to sustain the unsustainable, to keep all the rackets running at all costs, including most particularly the suburban way of life. It is unlikely that we will succeed at that - though it does account for the desperation running through the national zeitgeist these days. 

Hauser's law contends that Federal tax revenues rarely rise above 20% of GDP, regardless of where nominal tax rates are set.  The implicit dynamic here is that when taxes exceed 20% of GDP, participants modify their behavior to lower their taxes. Corporations will shift operations overseas. Some high-wage earners will simply work less, reducing their income to lower tax brackets. Small business owners will decrease their compensation, cut back their workload, or simply bail out. Others will leave the high-tax market and slip into the cash/informal economy where the tax rate is zero. In a $15 trillion economy, this suggests the maximum Federal tax revenue that can realistically be collected is around $3 trillion. Currently, Federal tax revenues are around $2.5 trillion, and Federal spending is about $3.8 trillion. That leaves a $1.3 trillion deficit that is filled with borrowed money. Tradeoffs will have to be made. That is the essence of adulthood. Too bad we've become a nation of spoiled adolescents.

Throughout history, bankrupt governments in decline almost ALWAYS fall back on a time-tested playbook. This includes imposing controls on everything - wage and price controls, trade controls, capital controls, border controls, people controls. Everything. And this idea goes back to the dawn of human civilization. From Mesopotamia to Rome and from France to Argentina, these policies have been a complete disaster for the country. But as the rest of the world looks on, people in ‘rich’ countries foolishly believe that ‘it can’t happen here.’ So, again, if you think that gold criminalization, price controls, and IRA/pension confiscation could never happen where you live, think again. This is wishful, ignorant, dangerous thinking. It can happen. It is already happening.

The following five charts reflect the hollowing out of the private-sector employment. This has profound implications for education, taxes, housing and inequality. What no one dares admit is that the U.S. economy is burdened by overcapacity (too many malls, restaurants, MRI machines, etc.) and too much debt, much of which was taken on to fund mal-investments. We suffer from a systemic failure of imagination. The financial and political Aristocracy that rules the neofeudal, financialized economy have no other model other than debt-based misallocation of capital and endless growth of debt-based consumption. That this model is broken and cannot possibly get us where we need to go does not matter; they will continue to do more of what's failed because they have no alternative model that leaves their power and wealth intact.

One of China's wealthiest men, Zong Qinghou - founder of the privately listed beverage empire Hangzhou Wahaha Group - is hunting fort deals overseas as the WSJ reports, he believes “The capital markets suck in China.” Since China's stock market bubble burst (after running up from 1000 in 2005 to 7000 in 2007), it has never recovered from its collapse, loitering around 2,000 points ever since. Plagued by too many offerings (run by the government) and a slowing economy, WSJ notes that a common complaint is that the only investors who make money from China’s stock markets are those with inside information. The retail investors that fueled the bubble in the first place remain scarred by the experience, and have mostly stayed away, as Zong concludes: "When the ordinary people invest in it, the market should reward them with some benefits. But it does not." This has driven the desire to 'invest' or speculate in real estate - a topic we discussed yesterday - leading to a looming bubble there also.

A few days ago Bloomberg mag did all it could to aliante virtually all racial minorities residing in the US (which in three decades will be the majority) by insinuating that Bernanke's second housing bubble is the sole source of riches for those not of the Caucasian persuasion. Now it is The Economist's turn to provoke well over half of Italy, by alleging that in not voting for technocratic, Goldman-appointed oligarchs who promote solely the banker backer interests, Italy has made a horrible mistake and has ushered in the circus...

Italian electors’ rejection of Brussels-imposed economic diktat is an extraordinarily important moment in the history of modern Europe - perhaps the best political news since the fall of the Berlin Wall. Given the power of unelected technocrats, it is easy to forget that sovereignty in Europe still resides with the nation state as expressed through elections. The problem for those unelected officials who conspired to capture the political system - think Jacques Delors, Jean Claude Trichet or Mario Monti - is the obvious failure of their great project. For the first time a majority of electors has decisively voted against the euro and rejected policies imposed by technocrats. What the eurocrats offer under the banner of "reform" is nothing of the sort but just an increase in their power and the destruction of the incredible diversity which made Europe an endlessly fascinating place. It is time to return to market prices and democracy and to accept that technocracy cannot work.

Washington is laying on the malaise pretty thick lately over automatic budget cuts set to take effect in March, with admonitions and partisan attacks galore.  Of course, those of us who are educated in the finer points of our corrupt puppet government are well aware that the public debate between Democrats and Republicans amounts to nothing more than a farcical battle of Rock’Em Sock’Em Robots with only one set of hands behind the controls.  The reality is, their decisions are scripted, their votes are purchased, and they knew months ago exactly how America’s fiscal cliff situation would progress.  The drama that now ensues on the hill is meant for OUR benefit and distraction, and no one else. There are plenty of irrelevant federal appendages out there that could be amputated, but probably won’t be, while other more useful programs will come under fire.  In the end, the budget cuts are not about saving money; they are about social maneuvering and political gain.  They will be used as an excuse for everything, and will produce nothing favorable, not because cuts are not needed, but because the people in charge of them are not trustworthy.

Chris Martenson is issuing an official warning of a major stock market correction within the next few months. He's only done this once before (in 2008). He's seeing a convergence of both technical and fundamental data that are flashing oversized risks to the downside for asset prices, despite the Federal Reserve's money printing mania (which is showing signs of hitting diminishing returns). He expects the fall in equity prices to happen within the May-September window. This downdraft will be characterized by lots of volatility, formed by market routs and Fed-inspired rescues, alternating until some form of bottom is reached. Along the way there will likely be a flight for "safety" into the dollar and Treasury paper, but only during the first stage of this crisis. Once a bottom is reached - he expects anywhere from 40% to 60% lower than the current ~1500 level on the S&P 500 - the process will begin to be dominated by rising government borrowing which will cause interest rates to begin to rise. When that happens, expect capital to flee the paper market for hard assets. In particular, that's when the upwards price revolution in the gold and silver markets will kick into high gear.

A successful entrepeneur's take on the European sitaution...

The U.S. health care system is a giant money making scam that is designed to drain as much money as possible out of all of us before we die.  In the United States today, the health care industry is completely dominated by government bureaucrats, health insurance companies and pharmaceutical corporations. At this point, our health care system is a complete and total disaster.  Health care costs continue to go up rapidly, the level of care that we are receiving continues to go down, and every move that our politicians make just seems to make all of our health care problems even worse. At the same time, hospital administrators, pharmaceutical corporations and health insurance company executives are absolutely swimming in huge mountains of cash.  Unfortunately, this gigantic money making scam has become so large that it threatens to collapse both the U.S. health care system and the entire U.S. economy.

Europe's dual problems of low growth and weak profit margins combined with this week's vote in Italy are likely to usher in another period of European underperformance, but as JPMorgan's Michael Cembalest notes, that is the least of it as Italy overtook Japan with the worst real GDP growth of all advanced economies since 1991. In fact, other than wartime, the last few years in Italy have been the worst for growth since Italian unification in 1861. But, before the rest of Europe gloats that 'they are not Italy, or Greece', he reminds us that the slowness of French GDP growth in recent years is the slowest in over 80 years. As he warns, all things considered, from an investment standpoint, caution continues to be warranted as problems appear to be taking their toll on EU profitability.

We addressed the systemic ills of U.S. healthcare, a.k.a. sickcare most recently here. Nobody likes any of the practical solutions because everyone wants unlimited care and unlimited choice. Expectations in a system where the government can just borrow another $1+ trillion to pay the bills are high, and the feedback from reality, i.e. price, has been eliminated in the cartel/fiefdom system that is sickcare. Everyone talks about "reform," but real reform is impossible in a bought-and-paid-for "democracy" like ours. There is no one solution to something as complex and costly as healthcare; the solution is to let 100 solutions blossom and compete openly for citizens' money and trust.