Reality

Looks like no more official trips for G-Pap anywhere very soon:

• ECB'S WEIDMANN-IT IS WRONG TO ABANDON ALL PRINCIPLES OF MONETARY POLICY BY CITING A GENERAL EMERGENCY-SPIEGEL
• GERMAN CSU HEAD - IF GREECE CAN'T OR WON'T KEEP TRACK WITH RESCUE PLAN THAN AN EXIT FROM THE EURO ZONE IS CONCEIVABLE-SPIEGEL

Right now, dumpster diving is cute and fun and an interesting way to save money, but in the future there will be millions of Americans digging around in trash cans if we don't get this economy turned around.

One short month ago, when the Jefferson County, AL commissioners sat down to vote on whether or not to file for Chapter 9, they decided to delay the vote by a month. Until today. Follow along as the final vote takes place, only this time the expectation is that the commissioners will agree to the proposed reorganization as JPM and other creditors have agreed to substantial concessions of $750 million of the total $1.1 billion loan. Naturally, if this settlement is rejected, the county will declare bankruptcy. Incidentally, what Jefferson County has shown the world is that a market test on real manageable LTV on muni debt is about 70% lower than currently marked. To Meredith Whitney's Chagrin, however, most municipalities will use up all their cash first before acknowledging reality and pushing for comparable hard line negotiating tactics with creditors.

In news that will likely not surprise many, Greek newspaper Eleftherotypia reports that according to a just terminated member of the Greek Statistical Authority, Greece artificially misrepresented its 2009 15.4% deficit number to Eurostat in order to obtain aid from the EU and IMF. Per professor Zoe Georgantas "The deficit was artificially inflated in 2009 to show that the country had the largest deficit across Europe, including that of Ireland was 14% in order to justify all these severe measures against the country. And we presented in the Eurostat 15,4%." While there appears to be a substantial political back story here, and we would be careful at taking these claims at face value, the last thing Europe needs is for its people to realize that they have been duped (and continue to be so), by the PIIGS countries, which as we pointed out before on several occasions, have figured out that the balance of power in capital extraction is entirely in their favor, and paradoxically see their position strengthened, the weaker they are, as the Eurozone has no alternatives but to keep ploughing ever more capital into these bankrupt nation. As such it would not be surprising if Italy's official deficit has also, like in Greece, been substantially misrepresented in an adverse light recently,after being shown to be far better than reality for years, simply to have a stronger political case for demanding more EU and IMF funding. 

There are two mainstream market assumptions that, in my mind, prevail over all others. The continuing function of the Dow, the sustained flow of capital into and out of the banking sector, and the full force spending of the federal government are ALL entirely dependent on the lifespan of these dual illusions; one, that the U.S. Dollar is a legitimate safe haven investment and will remain so indefinitely, and two, that China, like many other developing nations, will continue to prop up the strength of the dollar indefinitely because it is “in their best interest”. In the dimly lit bowels of Wall Street such ideas are so entrenched and pervasive, to question their validity is almost sacrilegious. Only after the recent S&P downgrade of America’s AAA credit rating did the impossible become thinkable to some MSM analysts, though a considerable portion of the day-trading herd continue to roll onward, while the time bomb strapped to the ass end of their financial house is ticking away. China, being the second largest holder of U.S. debt next to the Fed, and the number one holder of dollars within their forex reserves, has always been the key to gauging the progression of the global economic collapse now in progress. If you want to know what’s going to happen tomorrow, watch what China does today.

On 12 September Iran brought its first nuclear power plant in Bushehr online, connecting it to the country's electrical grid. Iranian officials at the opening ceremony said that the 1,000 megawatt plant has begun generating electricity at 40 percent of its capacity and will reach full capacity by the year’s end following further testing. Quite aside from demonstrating Iran’s touching post-Fukushima faith in nuclear energy despite being a seismically active country, Bushehr represents a Rorschach test of sorts for all the fears and anxieties in the Middle East, in which everyone looking at the facility has his preconceptions reaffirmed. “Axis of Evil” charter member Iran insists that Bushehr represents the government’s determination to husband is vast oil reserves by promoting other energy sources, as its economy has hammered by more than three decades of U.S.-led sanctions. Iran has been subjected to increasingly militant rhetoric from both Tel Aviv and Washington over its civilian nuclear energy program, with thinly veiled threats of possible military action if Tehran does not abandon its efforts, even though they are completely complaint under the terms of the Nuclear Non-Proliferation Treaty (NPT), which Iran has signed and which Tehran pointedly underlines, it’s nemesis and harshest critic Israel has not

Why expend treasure and resources on a propaganda campaign that is doomed to run aground on the sharp reefs of reality? Two reasons: it's cheaper and less risky than real change. The Status Quo has a tremendous stake in maintaining the present structure and hierarchy of control, power and wealth. Enabling real change introduces uncertainty and thus risk, and so the lowest-risk response to devolution is to convince people that the erosion is not actually happening. This is also much less costly than actually introducing potentially destabilizing real change. But reality, unlike perception, cannot be changed by propaganda. The Chinese buying Italian debt, for example, does not make the debt or Italy's insolvency go away. Thus the Status Quo's campaign of "solving" fundamental problems with perception management will necessarily fail. A noteworthy example is the Eurozone's Status Quo attempt to convince everyone that Greece, Portugal, Spain and Italy will not default, when their default is already unavoidable.

We are once again delighted to bring to our readers The Punch Line: the consumate compendium of economic chart porn available, put together by Abe Gulkowitz, this time titled "The Big Swerve" for obvious reasons. As Abe comments: "There's a growing concern among even the most optimistic investors, companies and households that the United States has either entered a new recession, or never really emerged fully whole from the last great downturn. There is also a worse scenario and fear – that growth going forward could be seriously constrained because of a myriad of overwhelming issues with no quick fix. Even though many of the risks are long-term in scope, enough risks have been elevated in the near term. These concerns are centered on the weakness evident in many key indicators here in the U.S. and also overseas. And they are aggravated by the gauntlet of hurdles facing the euro area this month alone. What’s most disconcerting about the euro stress nightmare is that numerous announcements have already heralded the end of the crisis. Where was all the analysis and the review? Has no one reviewed the reality on the ground in Greece and in the other peripheral European countries at risk? And how deep are the exposures across the major banks? Weakness in a sector such as banking is different than weakness in advertising, for example. Rising vulnerabilities in banking and finance could jeopardize the entire financial system and world economy." What has made the usually cheery Gulkowitz so morose? The 18 pages of charts, headlines and factoids below explain it all.

One of the bigger beneficiaries (BNP) of this mile-wide hose-pipe of USD provided by the global central bankers has already retraced more than 75% of the reaction spike. As humans realize the desperation in this move and that solvency and liquidity are two critically different things, we suspect reality will set in further.

The economic data this morning was bad across the board, as it has been for the past month, and without even looking at the futures we are certain that it is green across the board: nothing reflects reality any more, least of all the stock market, which is now trading based purely on short squeezes (as we warned two days ago), and a spike in hopes for QE4 (QE3 is already priced in). Regardless, here is a compilation of kneejerk Wall Street responses courtesy of Reuters.

Some may find it odd that afer all the measures taken to resolve the threat of a Greek bankruptcy and Eurozone explusion, it is just Greek CDS that are actually wider on the day. We suggest those "some" forget about reality and enjoy the latest massive short covering squeeze which will end only when it does and not a moment sooner.

The idea that the economy has grown at roughly 5% since 1980 is a lie.   In reality the economic growth of the U.S. has been declining rapidly over the past 30 years supported only by a massive push into deficit spending. From 1950-1980 the economy grew at an annualized rate of 7.70%.   This was accomplished with a total credit market debt to GDP ratio of less 150%.  The CRITICAL factor to note is that economic growth was trending higher during this span going from roughly 5% to a peak of nearly 15%.  There were a couple of reasons for this.  First, lower levels of debt allowed for personal savings to remain robust which fueled productive investment in the economy.  Secondly, the economy was focused primarily in production and manufacturing which has a high multiplier effect on the economy.  This feat of growth also occurred in the face of steadily rising interest rates which peaked with economic expansion in 1980. As we have discussed previously in "The Breaking Point" and "The End Of Keynesian Economics", beginning in 1980 the shift of the economic makeup from a manufacturing and production based economy to a service and finance economy, where there is a low economic multiplier effect, is partially responsible for this transformation.   The decline in economic output was further exacerbated by increased productivity through technological advances, which while advancing our society, plagued the economy with steadily decreasing wages.  Unlike the steadily growing economic environment prior to 1980; the post 1980 economy has experienced by a steady decline.   Therefore, a statement that the economy has been growing at 5% since 1980 is grossly misleading.  The trend of the growth is far more important, and telling, than the average growth rate over time.

From Eric Sprott: "In many of the funds we manage at Sprott, we’ve transitioned out of gold bullion and into gold equities to better participate in the continuation of the trend indicated above. As long-time investors in this space, we can assure you that the production growth rates will be significantly higher in the junior stocks. They continue to trade at discounted valuations, and we believe they offer the best opportunity to build exposure. Margin expansion is the key metric for this industry, and the market is now acknowledging the miners’ improvement in margin capture – which has occurred despite the increase in capital and operating costs. We meet with a large number of gold mining management teams on a weekly basis, and based on those meetings, it appears that the average cost of producing an ounce of gold today, all in, is now around $800. At $1,200 gold, these companies can capture roughly $400 in EBITDA. At $1800 gold, however, they’re now capturing $1,000 per ounce in EBITDA - representing an increase of 150% in profit margin. That is significantly far above what any other equity sector has been able to generate over the past year. Amazingly – despite this new reality for gold producers, we are still finding opportunities in select gold and silver mining companies that can be purchased today at 2-3 times their 2-year-out forecasted cash flow. These multiples are based on the current gold and silver spot price, and if these companies hit their production targets, and gold and silver continue their appreciation – we may discover that these stocks were trading at less than 1 times 2-year-out cash flow today. Having been in the business for many years, we can tell you that investing in a stock at 1 times 2-year-out cash flow tends to be a winning proposition – let alone in an industry that literally mines the world’s reserve currency out of the ground."

By now only the cream of the naive, Kool-Aid intoxicated crop believes that the US is not in either a deep recession, or, realistically, depression. For anyone who may still be on the fence, here is David Rosenberg's latest letter which will seal any doubts for good. It will also make it clear what the fair value of the stock market is assuming QE3 fails, which it will, and the market reverts to trading to fair value as predicated by bond spreads. To wit: "If the Treasury market is correct in its implicit assumption of a renewed contraction in the economy, then we could well be talking about corporate earnings being closer to $75 in 2011 as opposed to the current consensus view of over $110. In other words, we may wake up to find out a year from now that whoever was buying the market today under an illusion of a forward multiple of 10x was actually buying the market with a 15x multiple." And since we are in the throes of a deep depression and a 10x multiple is more than generous, applying that to $75 in S&P earnings, means that the fair value of the S&P is... we'll leave that to our readers.

Every "solution" to the European debt crisis, whether it is ECB purchase, EFSF, Eurobonds, or BRIC's, fails to account for the fact there are really two types of bonds out there.  There are those that are trading and marked, and those that remain on some bank balance sheet unmarked. That is a key distinction.  If all Greek bonds were marked at 45 (or even had 55 points of reserves held against them) then there would be a lot of potential solutions.