Reality

When psychologists evaluate human behavior, one of the most prevalent observations regarding any activity is the all too often flawed basis of perceived versus realistic outcomes that dictates our every action. As imperfect creatures, we tend to construct theories that conform with our worldview, which are subsequently reinforced by our confidence (or lack thereof) in the future. This is true in any discipline: finance, politics, gambling, mating, etc. There is hardly a better example of this than the very basis of modern economic theory where assumptions about the validity of fiat currencies determine the actions of central banks, which in turn spill over into every aspect of modern society . Yet what if the very basis of core assumptions is wrong? What if every activity exhibited by humans in the post gold-standard world has a flawed assumption at its core? Austrian economists have, of course, claimed this for ages, usually seeing their efforts conclude with a dead-end as the attempt to change the status quo hits the brick wall of quadrillions of (arguably worthless) pieces of paper which dictate the status quo. However, with the recent turn for the worse, courtesy of sovereign bail outs (as confused as they may be) could the day of reckoning be fast approaching? With each passing the day an affirmative answer seems closer at hand. Today SocGen's Dylan Grice shares his perspectives on popular delusions, and why these may soon be coming to an abrupt end.

Like a buzzing mosquito inside the netting over your bed, wings on the heavy Mustique air, humming a small pinhole of bright light through the dark veil of your dreams of unbridled success, we have been annoyed by the constant propensity of even learned economists to measure the performance of equity markets in nominal terms. "Worst decade for stocks since [horrific period marker]!" is only the most egregious (not necessarily the most common) offender in this respect. In truth, we have long failed to see the logic of measuring performance in nominal terms (our sporadic gold denominated S&P 500 posts are a good example).

Tired of the same old US-based bears such as Nouriel Roubini, Peter Schiff and Doug Kass? Sick of hearing the US is in deep trouble argument from Mark Faber and ex-pat Jim Rogers? Then, for those of you who are not familiar with the most outspoken Australian Nostradamus, let me introduce you to economist Steve Keen.

Everyone who grew up watching James Bond must have had a kick reading the news last night or this morning, and finding out about secret meetings between China, Russia, Gulf countries, France, and Brazil, plotting to organize the demise of the US dollar. Unlike in Goldfinger, the villains this time weren't planning to plant a bomb in Fort Knox, but rather stop using the greenback, and instead price currencies against a basket of currencies composed of (drums please): the yuan, the ruble, a newly created Arab currency, the euro, the yen, and gold. I don't remember reading the Brazilian real but we could throw it in there so we don't hurt anybody's feelings.

Optimism is a good thing: just ask an unstimulated Larry Kudlow. Yet when optimism is the only thing, you have problems. These tend to materialize whenever any event occurs that shows just how disjointed reality and hope are in actuality. Of course, the greater the divergence, the greater the downside shock. And if the Conference Board's numbers are any good, we are set for a recordly harsh reintroduction with reality.

Some of the cause and effect chains ahead of tomorrow's ominous full moon. In other news, voodoo dolls proven an effective shareholder proxy fight defense mechanism.

As of 10 minutes ago, Larry Kudlow would like you to believe that Q2 earnings are so much better than Q1. That is a flat out lie. The chart below, straight out of Bloomberg which we demand all readers with a BBERG terminal replicate using SPX Index EA <go>, demonstrates that Q2 earnings are now in fact worse than Q1. While in Q1 the YoY EPS drop was -31.49%, as of right now the drop is -32.41%. And the drop in revenues is much worse.

Tim Geithner understands bubble peak demand and credit bubble pop supply.