I won a bet today.
A few weeks ago I wagered with a coworker that the United States Supreme Court would uphold the Affordable Care Act otherwise known as Obamacare. He reasoned that the federal government has no authority under the Constitution to force an individual to purchase a product from a private company. My reasoning was much simpler. Because the Supreme Court is a functioning arm of the state, it will do nothing to stunt Leviathan’s growth. The fact that the Court declared no federal law unconstitutional from 1937 to 1995—from the tail end of the New Deal through Lyndon Johnson’s Great Society—should have been proof enough. He naively believed in the impartialness of politically-appointed judges. For the first time he saw that those nine individuals are nothing more than politicians with an allegiance to state supremacy.
It was a tough but valuable lesson to learn.
For the past six months we have extensively discussed the topics of asset depletion, aging and encumbrance in Europe - a theme that has become quite poignant in recent days, culminating with the ECB once again been "forced" to expand the universe of eligible collateral confirming that credible, money-good European assets have all but run out. We have also argued that a key culprit for this asset quality deterioration has been none other than central banks, whose ruinous ZIRP policies have forced companies to hoard cash, but not to reinvest in their businesses and renew their asset bases, in the form of CapEx spending, but merely to have dry powder to hand out as dividends in order to retain shareholders who now demand substantial dividend sweeteners in a time when stocks are the new "fixed income." Yet while historically we have focused on Europe whose plight is more than anything a result of dwindling cash inflows from declining assets even as cash outflow producing liabilities stay the same or increase, the "asset" problem is starting to shift to the US. And as everyone who has taken finance knows, when CapEx goes, revenues promptly follow. Needless to say, at a time when still near record corporate revenues and profit margins are all that is supporting the US stock market from joining its global brethren in tumbling, this will soon be a very popular point of discussion in the mainstream media... in about 3-6 months.
There are two significant events that will be decided in the forthcoming days. Each will change the face of the European Union. The first is Greece; a little country with a total debt of $1.3 trillion and likely to default. The calculations in Athens are how to get more money out of Germany and the calculations in Berlin is whether a default is less costly, both politically and economically, than giving Greece more money. Debt forgiveness has never even been mentioned so I think we can rule out this possibility as it would have been floated by the German public for review and reaction. The Troika shows up Monday in Athens, they will find all targets missed, all promises unkempt and all hopes for salvation dashed upon the Greek floor along with the plates. The Greeks will beg and plead and threaten and the Germans will decide. In the end I think Greece will be allowed to stay in the EU to preserve the dream, that they will default, that they will return to the Drachma and that they will receive some kind of debtor in possession financing so that the country does not collapse. That is my best guess. Cheaper tourism and cheaper ships will help with their competiveness but it will be years before Greece is allowed back into the Eurozone as a voting member. The second item on the docket is Spain. They need a total of around $350-400 billion dollars to straighten out their banking system and their regional debt. Money lent to the banks in some fashion, not currently allowable under the various policies but you never know, or money lent to the sovereign to be lent to the banks will be just the first tranche of funding. It will be followed by more money lent to the regions of Spain which may take another novel approach but no matter. Spain is about to be run out of Germany no matter how all of the trivialities play out and so the impositions of the Men in Black are about to be put in place. So long to the importance of Madrid and thanks for all of the entertainment. You have been caught and are about to be hung out to dry and enjoy the ice wine that Germany will provide for your congratulatory dinner. Rajoy was right, a “Great Victory for Europe;” serving ice wine in Madrid.
For those with doubts after a nine-month correction in gold (and especially over the last few days), Brent Johnson of Santiago Capital reminds us that 'nothing has changed'. Starting from the three propositions that: 1) Money is extremely misunderstood; 2) 'Fiat' money is a poor store of value; and 3) Gold is an excellent store of value, Johnson provides, in a little under 10 minutes, a succinct summary of all the reasons to remain long the shiny yellow stuff. As it reverts to being 'the most marketable commodity' once again, with the 'good-as-gold' USD continuing to lose its purchasing power over time, Johnson provides some thoughts on the periods of deflation and how gold plays into that end-game: "If gold were not a good store of value, why do all the central banks of the world store it and hold on to it - even when crises abound?"
The real estate industry announces the housing recovery is finally underway every year. 2012 is no different from previous years: various positive data points are duly cherry-picked (multiple offers are back in West Hollywood, sales are up year-over-year in Las Vegas, inventory is down, etc.) to back up the claim the "bottom is in" and the recovery in sales and prices is rock-solid. We understand the industry's extreme self-interest in attempting to re-inflate housing, but let's begin with the obvious question: what's the housing recovery based on? The standard answer is of course "super-low mortgage rates, courtesy of the Federal Reserve." But people need a sufficient income to qualify to own a house, regardless of rates, so let's look at income by age, and focus on the key homebuying ages of 25 to 44. The only age group whose incomes continued rising during the past five years is the over 65 cohort--the very group who is "downsizing" or selling their homes to live in assisted living. The key homebuying cohorts have seen their incomes plummet since the housing bubble popped.
"The global banking system is functionally insolvent and will fail without exogenous policy action" is how QBAMCO's Paul Brodsky begins his latest treatise noting that asset monetization (and in, particular, gold monetization) would solve many more problems than it would create. The negatives would merely recognize the balance sheet damage already done and beginning to be manifest (first, in the private sector and now, increasingly in the public sector). The global economy is threatened because, in real terms, it continues to misallocate capital and rolling unfunded debts and debating in the political sphere over the merits and risks of unfunded growth or policy-administered national austerity programs is a futile endeavor. The math suggests strongly neither can work. Brodsky is convinced policy-administered asset monetization would stop the global financial system from seizing, restore sorely needed economic balance, and reset commercial incentives so that real growth can once again gain traction.
Initial Claims Beat Expectations, With Prior Revised Higher, As Whopping 105 Thousand Lose Extended BenefitsSubmitted by Tyler Durden on 06/07/2012 08:49 -0400
While it is a number which nobody will care about today, especially if it is better than expected, initial claims printed at 377K on expectations of 378K, the first beat of expectations in 5 weeks. Of course, the claims number next week will be revised to over 380K. Why? Because, as now happens every single week, last week's initial claims number was revised higher from 383K to 389K. As a reminder, last week this number was expected to print at 370K. So only a 19K miss when all is said and done. But at least the mainstream media has its bullish for general consumption headline: "Initial Claims drop by 12,000" even as market participants realize this is still QE-promoting. Continuing claims printed at 3,293K, missing expectations of 3,250K, and down from an upward, of course, revised 3,259K. But the most disturbing observation is that in one week alone, a whopping 104,600 people hit the 99-week cliff, and stopped collecting extended unemployment benefits, the most since December 2011, as those on EUCs dropped by -45,808 while those on Extended benefits dropped by a astounding -58,829. As a reminder, Zero Hedge first noted that shortly 700,000 people will no longer be collecting any unemployment benefits. Here is to hoping those off the dole, are at least collecting disability in the USSA as otherwise these are tens of billions in lost purchasing power.
The end game of this global monetary crisis is the imposition of a 100% digital monetary system that would permanently end what little economic freedoms we still retain today. Educate. Resist. Fight Back. Win.
The housing market is sending mixed signals in 2012.
Short of the complete destruction of a fiat currency, there is nothing that can demonstrate beyond doubt the shallowness of the promise to protect purchasing power that is being made on any day. There is no bright line separating performance from talk. With a gold standard, deception is much more difficult. Creating too much money will lead to redemptions that drain away the official gold stockpile. Everyone can see the inventory shrinking. If it shrinks to zero, then the managers of the system have failed, period. There is no ambiguity about it, and the politicians in charge at the time have little room for denial. The formal adoption of a gold standard holds no magic. It's just another promise. But it is a promise that carries an assured potential for egg-on-face political embarrassment if it is broken, and the only way for the people in charge to avoid that embarrassment is to refrain from recklessly expanding the supply of cash. That's why a gold standard protects the value of a currency, and that is why the politicians don't want it.
There is much hand-wringing about the vast income disparity in the U.S. between the top 5% and the bottom 25%, and precious little offered as a solution. Once again we are told the problem is "complex" and thus by inference, insoluble. Actually, it's easily addressed with one simple act: restore the minimum wage to its 1969 level, and adjust it for the inflation that has been officially under-reported. If you go to the Bureau of Labor Statistics Inflation Calculator and plug in $1.60 (the minimum wage in 1969 when I started working summers in high school) and select the year 1969, you find that in 2012 dollars the minimum wage should be $10 per hour if it were to match the rate considered "reasonable" 43 years ago, when the nation was significantly less wealthy and much less productive. The current Federal minimum wage is $7.25, though states can raise it at their discretion. State rates runs from $7.25 to $8.25, with Washington state the one outlier at $9.04/hour. In 40 years of unparalleled wealth and income creation, the U.S. minimum wage has declined by roughly a third in real terms. "Official" measures of inflation have been gamed and massaged for decades to artificially lower the rate, for a variety of reasons: to mask the destructiveness to purchasing power of Federal Reserve policy, to lower the annual cost-of-living increases to Social Security recipients, and to generally make inept politicians look more competent than reality would allow.
We know the U.S. is a big and liquid (though not really very transparent) market. We know that the rest of the world — led by Europe’s myriad issues, and China’s bursting housing bubble — is teetering on the edge of a precipice, and without a miracle will fall (perhaps sooner, rather than later). But we also know that America is inextricably interconnected to this mess. If Europe (or China or both) disintegrates, triggering (another) global default cascade, America will be stung by its European banking exposures, its exposures to global energy markets and global trade flows. Simply, there cannot be financial decoupling, not in this hyper-connected, hyper-leveraged world.
All of this suggests a global crash or proto-crash will be followed by a huge global money printing operation, probably spearheaded by the Fed. Don’t let the Europeans fool anyone, either — Germany will not let the Euro crumble for fear of money printing. When push comes to shove they will print and fiscally consolidate to save their pet project (though perhaps demanding gold as collateral, and perhaps kicking out some delinquents). China will spew trillions of stimulus money into more and deeper malinvestment (why have ten ghost cities when you can have fifty? Good news for aggregate demand!).
We are constantly told all our problems are too complex to be addressed with simple "big idea" solutions. Complex problems require complex solutions, we are assured, and so the "solutions" conjured by the Central State/Cartel Status Quo are so convoluted and complex (for example, the 2,319-page Dodd-Frank Wall Street Reform and Consumer Protection Act or the 2,074-page Obamacare bill) that legislators say they must "pass the bill to see what's in it." The real "solution" is to see that complexity itself is the roadblock to radical reformation of failed systems. Complexity is the subterfuge the Status Quo uses to erect simulacra "reforms" while further consolidating their power behind the artificial moat of complexity. Over the next three days, I will present three "big idea" solutions that cut through the self-serving thicket of complexity. Nature is complex, but it operates according to a set of relatively simple rules. The interactions can be complex but the guiding principles can be, and indeed, must be, simple. Big Idea One: Radically lower the cost basis of the entire U.S. economy. The cost basis of any activity is self-evident: what are the total costs of the production of a good or service? The surplus produced is the net profit which can be spent on consumption or invested in productive assets (or squandered in mal-investments).
Experienced investors try to avoid the "confirmation bias" trap by asking what supports the other side of the trade. Confirmation bias is our instinct to find data to support our position once it is taken. To counter this bias, we must attempt to build a plausible case against our position. If the effort is sincere, we gain a fuller understanding of the market we are playing (or perhaps avoiding). That the global economy is going to heck in a handbasket is self-evident. If you over-weight anecdotal "on the ground" evidence and fade the ginned-up official statistics, it is obvious the global slowdown is picking up speed in Europe and China, two of the world's largest "linchpin" economies.