The Matrix

The Federal Reserve's extreme monetary policy has done nothing but repress 'safe' assets to the point of making 'risky' assets relatively cheap. This is of course not the case were you to isolate each risky or safe asset and consider its value standalone. Choosing stocks over bonds because "well, what is the alternative?" is akin to the red-pill/blue-pill choice from The Matrix and the reflationary 'normal' that we are supposed to believe in is what 'apparently' justifies a 1.7x rise (12%!) in multiples since QE4EVA was announced. During that same period, consensus earnings expectations have plunged (merely pushed out one more year for the renaissance) and global trade and growth has collapsed. However, while we have shown many divergences from reality in the past, it is the manic/depressive difference between inflation expectations and stock valuations (implicitly supported by reflation) that is the clearest example of the short-term triumph of hope over reality.

The Matrix was a movie released on 33-11-999, or as more commonly formatted (in the USA), 3-31-1999.  In the 14 years since it's debut it has become one of the most influential cultural icons of any generation, not only here in America but throughout much of the globe.  Everyone, at least those ones in Western sphere societies, somehow, can readily identify with it.  I wonder why?

Events in Cyprus stem from precisely the same source as the surge in US home prices, namely monetary expansion by the Fed.  

The Dow is at a record high and so are corporate profits - so why does it feel like most of the country is deeply suffering right now?  Real household income is the lowest that it has been in a decade, poverty is absolutely soaring, 47 million Americans are on food stamps and the middle class is being systematically destroyed.  How can big corporations be doing so well while most American families are having such a hard time?  Isn't their wealth supposed to "trickle down" to the rest of us?  Unfortunately, that is not how the real world works. But now we have replaced capitalism with something that we like to call "corporatism".  In many ways, it shares a lot of characteristics with communism, and that is why nations such as communist China have embraced it so readily. Today, most big corporations are trying to minimize the number of "expensive" American workers on their payrolls as much as they can. Right now, the system is designed to continually funnel more money and more power to the very top of the pyramid.  The global elite are becoming more dominant with each passing day. The idea of a very tiny elite completely dominating all the rest of us goes against everything that America is supposed to stand for.  In the end, it will result in absolute tyranny if it is not stopped.

As Morpheus said to Neo in the film The Matrix:  You still think that is air you are breathing?

Big name brand banks push 75% loss ponzi schemes, yet everybody still flocks to work, and do business, with them. The term Muppet is a compliment!

Who says necessity is not the mother of invention in the New Normal. While a tiny fraction of the Japanese population is enjoying the transitory effects of Abe's latest reflating "wealth effect" policy (even as China has made it clear said policy will end quite soon), the bigger problem for Japan is that even sooner, more and more of it will be reliant on hamster wheels to generate electricity, as LNG prices have just hit a record high and are rising at a breakneck pace, and as local nuclear power generation has collapsed to virtually zero. Which means one thing: electricity will soon become so unaffordable only those who are invested in the daily 2% Nikkei surges will be able to electrify their immediate surroundings. So what is Japan's solution? A quite ingenious one: as Geek.com and ASR both report, Japan's Fujifilm has created organic printed sheet that harvests energy from body heat, or in other words, converts body heat to electricity. Finally, at least one key part of the Matrix "reality" is now fully operational - the use of human beings as batteries.

The economic collapse is not a single event.  The economic collapse has been happening, it is is happening right now, and it will continue to happen.  Yes, there will be times when our decline will be punctuated by moments of great crisis, but that will be the exception rather than the rule.  A lot of people that write about "the economic collapse" hype it up as if it will be some huge "event" that will happen very rapidly and then once it is all over we will rebuild.  Unfortunately, that is not how the real world works.  We are living in the greatest debt bubble in the history of the world, and once it completely bursts there will be no going back to how things were before. But other than that, everything is rainbows and lollipops, right?

The Bernanke Banking Put enriched the banks, extended the unemployment line, and created a margin call in the retail specialty sector. All in a days work.

In the recent past we noted the somewhat startling reality that "the single mom is better off earning gross income of $29,000 with $57,327 in net income & benefits than to earn gross income of $69,000 with net income and benefits of $57,045." While mathematics is our tool - as opposed to the mathemagics of some of the more politically biased media who did not like our message - the painful reality in America is that: for increasingly more Americans it is now more lucrative - in the form of actual disposable income - to sit, do nothing, and collect various welfare entitlements, than to work. This is such an important topic that we felt it necessary to warrant a second look. The graphic below quite clearly, and very painfully, confirms that there is an earnings vacuum of around $40k in which US workers are perfectly ambivalent toward inputting more effort since it does not result in any additional incremental disposable income. With the ongoing 'fiscal cliff' battles over taxes and entitlements, this is a problematic finding, since - as a result - it is the US government that will have to keep funding indirectly this lost productivity and worker output (via wealth redistribution).

Exactly two years ago, some of the more politically biased progressive media outlets (who are quite adept at creating and taking down their own strawmen arguments, if not quite as adept at using an abacus, let alone a calculator) took offense at our article "In Entitlement America, The Head Of A Household Of Four Making Minimum Wage Has More Disposable Income Than A Family Making $60,000 A Year." In it we merely explained what has become the painful reality in America: for increasingly more it is now more lucrative - in the form of actual disposable income - to sit, do nothing, and collect various welfare entitlements, than to work. This is graphically, and very painfully confirmed, in the below chart from Gary Alexander, Secretary of Public Welfare, Commonwealth of Pennsylvania (a state best known for its broke capital Harrisburg). As quantitied, and explained by Alexander, "the single mom is better off earnings gross income of $29,000 with $57,327 in net income & benefits than to earn gross income of $69,000 with net income and benefits of $57,045."

While some believe tonight is critical to the future of our nation - and well could be - we believe some will need placating as the results roll across the bottom of their screens and are manipulated in an ever-increasing multitude of 10-dimensional holographic charts that we fully expect to work incorrectly at some point. To fulfil that 'need for numbing', we have found three drinking games of varying suspected quantity that we hope will prove useful. From simple and stand-alone, to team-based and punish-your-friends focused, we believe there is a fair-and-balanced approach here for everyone.

What Could Possibly Go Wrong? aka Obama Activates Skynet

No, it is not a glitch in the matrix: we previously used the same title about a month ago when showing the relative imports of crude in the US vs China. This time the topic is slightly different, but the players are the same. The premise: "Japan, US call off joint drill to 'retake' disputed islands fearing backlash from China." At least it is now clear who calls the shots from not only a tactical (see China starts drilling for crude in a US-protected Afghanistan yesterday), but strategic standpoint as well.

As we have explained recently, the US fiscal cliff is a far more important issue 'fundamentally' than the Fed's economic impotence. While most market participants believe some kind of compromise will be reached - in the lame-duck session but not before the election - the possibility of a 3.5% drag on GDP growth is dramatic to say the least in our new normal stagnation. As Goldman notes, the window to address the fiscal cliff ahead of the election has all but closed, the 40% chance of a short-term extension of most current policies is only marginally better than the probability they assign to 'falling off the cliff' at 35%. The base case assumptions and good, bad, and ugly charts of what is possible are concerning especially when a recent survey of asset managers assigned only a 17% chance of congress failing to compromise before year-end. Critically, and not helped by Bernanke's helping hand (in direct opposition to his hopes), resolution of the fiscal cliff will look harder, not easier, to address as we approach the end of the year - and its likely only the market can dictate that direction - as the "consequence is terrible, but bad enough to force a deal."