Meltdown

A mixed picture is starting to emerge from the Middle East in terms of oil production. Several members of the 12-member OPEC oil cartel are embroiled in turmoil or struggling to ensure post-war political gains. Oil production from the Middle East declined by 1.5 million barrels per day in 2009. Production from most Middle East countries has slowed down or leveled off, though gains from Iraq have offset some of those declines. With economic recovery seemingly on the horizon, a new OPEC may be developing from the ashes of the recession.

Few others are better equipped to comprehend both the insider's and outsider's perspective on what the government, the Fed, and the banks are doing in this so-called 'recovery' we are experiencing than David Stockman. Nowhere does he detail this better than Chapter 31 of his new book 'The Great Deformation'. In this first part (of a four-part series), he explains just what happened after the US economy liquidated excess inventory and labor and hit its natural bottom in June 2009. Embarking upon a halting but wholly unnatural "recovery," doing nothing but igniting yet another round of rampant speculation in the risk asset classes. The precarious foundation of the Bernanke Bubble is starkly evident in the internal composition of the jobs numbers.

Why do the debt crisis in Cyprus and the subsequent "bail-in" confiscation of bank depositors' money matter? They matter for two reasons: 1. The banking/debt crisis in Cyprus shares many characteristics with other banking/debt crises. 2. The official Eurozone resolution of the crisis--the "bail-in" confiscation of 60% of bank depositors' cash in an involuntary exchange for shares in the bank (which are unlikely to have any future value)--may provide a template for future official resolutions of other banking/debt crises. In other words, since the banking/debt crisis in Cyprus is hardly unique, we can anticipate the resolution (confiscation of deposits) may be applied elsewhere.

Stock-market crashes saw the light of day more and more as the world became industrialized. The 19th century saw a rapid increase in their numbers.

"Part of my advantage, is that my strength is economic forecasting, but that only works in free markets, when markets are smarter than people. That’s how I started. I watched the stock market, how equities reacted to change in levels of economic activity and I could understand how price signals worked and how to forecast them. Today, all these price signals are compromised and I’m seriously questioning whether I have any competitive advantage left. Ten years ago, if the stock market had done what it has just done now, I could practically guarantee you that growth was going to accelerate. Now, it's a possibility, but I would rather say that the market is rigged and people are chasing these assets, without growth necessarily backing confidence. It's not predicting anything the way it used to and that really makes me reconsider my ability to generate superior returns. If the most important price in the most important economy in the world is being rigged, and everything else is priced off it, what am I supposed to read into other price movements?" - Stanley Druckenmiller

What assets will the core/Empire protect? Those of the core. What will be sacrificed? The periphery.

Bank of America, Wells Fargo and JPMorgan Chase control 67.87% of 1-4 Family First Liens NPLs yet only had 32.62% of the charge offs in the quarter.

It is immeasurably easier to digitally create claims on real-world assets than it is to create real-world assets. The Fed can digitally print a trillion dollars at no cost, but that doesn't mean the money flows into the real economy. Once again we are compelled to ask: cui bono, to whose benefit?

India should monetise their huge gold stockpiles of over 20,000 metric tonnes according to the World Gold Council (WGC) as reported by Bloomberg this morning.

“In the long term gold could be monetized as a financial asset," Aram Shishmanian, the CEO of the WGC said in India overnight.

The World Gold Council has approached the Reserve Bank of India (RBI) to work with it so that bullion could be used as a financial asset, rather than just a physical asset. 

Bulls and Bears. It’s all about predicting when that upturn or that downswing in the market is going to take place and when you need to sell or buy that stock to hit the jackpot and make the millions. People have been doing it for centuries and that doesn’t look like it is going to stop right now. There have been dozens of financial crises over the centuries and each of them has had an effect on the lives of people to varying degrees.

Here's the challenge the Status Quo monetary and fiscal authorities faced in the 2008 global financial meltdown: how do we maintain the power structure and keep the masses passive while masking the fact that the Status Quo is broken? The solution: sell bonds to fund benefits to the masses, lower interest rates to zero to keep the explosive rise in fiscal deficits affordable, and rapidly inflate new bubbles in assets that painlessly enrich the top 25% of households who then increase their borrowing and spending, i.e. the "wealth effect." The political calculus is simple: the bottom half of households don't vote, don't contribute to political campaigns and don't have enough income to borrow huge sums of money to enrich the banks. They are thus non-entities in the fiscal-monetary project of maintaining the power structure of the Status Quo. All the Status Quo needs to do is borrow enough money to fund social programs that keep the masses passive and silent: food stamps, Section 8 housing vouchers, Medicaid, Medicare, Social Security, SSI permanent disability, unemployment, etc. Unfortunately for the Powers That Be, the cost of placating the rapidly increasing marginalized populace is rising much faster than tax revenues.

In these troubled times, there are things that are much nicer to think about or look at as indicators of how business is going and who’s buying what and who’s off-loading where. It’s not all boring traders sitting behind desks and beads of sweat dripping down foreheads, and scoffing sandwiches and choking on pretzels as the dollar takes a dive or we learn that the bond sell-off is underway as the Federal Reserve pulls the plug. Have you had enough of Abenomics? Have you had enough of the Obamanometer to measure economic growth?

It is not just the massive short positioning in Gold futures that has BofAML's commodity strategists concerned; but the regime changes in the precious metal's volatility structures suggests risks are significantly mispriced relative to equities, rates, and other commodities. Following the most abrupt price collapse in 30 years, near-dated implied volatility in gold spiked dramatically in the past month. The term structure of implied gold volatility has also changed shape and the market now shows a marked put skew. Even then, the spike in precious metals volatility had remained a rather isolated event until this week’s sharp drop in Japanese equities. As the following chartapalooza demonstrates, while large-scale QE has tempered volatility across all asset classes for months, we remain concerned about the recent sharp price movements in gold or Japanese equities, and see a risk that other bubbling asset classes may follow.

What is going to happen when the greatest economic bubble in the history of the world pops?  The mainstream media never talks about that.  They are much too busy covering the latest dogfights in Washington and what Justin Bieber has been up to.  And most Americans seem to think that if the Dow keeps setting new all-time highs that everything must be okay.  Sadly, that is not the case at all. Right now, the U.S. economy is exhibiting all of the classic symptoms of a bubble economy. What we are witnessing right now is the calm before the storm.  Let us hope that it lasts for as long as possible so that we can have more time to prepare. Unfortunately, this bubble of false hope will not last forever.  At some point it will end, and then the pain will begin.

As Japan has indicated, when bonds start to plunge, it’s not good for stocks. Today the Japanese Bond market fell and the Nikkei plunged 7%. The entire market down 7%... despite the Bank of Japan funneling $19 billion into it to hold things together.