Weekly Articles 2012

The Most Important Chart in the World

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Fill your bowl to the brim and it will spill.  Keep sharpening your knife and it will blunt.  Chase after money and security and your heart will never unclench.  Care about people’s approval and you will be their prisoner.  Do your work, then step back.  The only path to serenity. – Tao Te Ching It … Read more

Reality Bites

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The difference between [socialism and fascism] is superficial and purely formal, but it is significant psychologically: it brings the authoritarian nature of a planned economy crudely into the open. The main characteristic of socialism (and of communism) is public ownership of the means of production, and, therefore, the abolition of private property. The right to … Read more

Go Back to Sleep

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Whenever the legislators endeavor to take away, and destroy the property of the people, or to reduce them to slavery under arbitrary power, they put themselves into a state of war with the people, who are thereupon absolved from any farther obedience. – John Locke When it gets down to having to use violence, then … Read more

Where Food Stamps Go to Die

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Anyone who has the power to make you believe absurdities has the power to make you commit injustices. No snowflake in an avalanche ever feels responsible. Common sense is not so common. I have never made but one prayer to God, a very short one: “O Lord make my enemies ridiculous.” And God granted it. … Read more

TWISTED

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Zealotry of either kind — the puritan’s need to regiment others or the victim’s passion for blaming everyone except himself — tends to produce a depressing civic stupidity. Each trait has about it the immobility of addiction. Victims become addicted to being victims:  they derive identity, innocence and a kind of devious power from sheer, … Read more

Remember the Words of Joseph Stalin

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Everyone imposes his own system as far as his army can reach. Ideas are more powerful than guns. We would not let our enemies have guns, why should we let them have ideas. It is enough that the people know there was an election. The people who cast the votes decide nothing. The people who … Read more

China Will Blink and Gold Will Soar

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Republics are created by the virtue, public spirit, and intelligence of the citizens. They fall, when the wise are banished from the public councils, because they dare to be honest, and the profligate are rewarded, because they flatter the people, in order to betray them.
– Justice Joseph Story

When it becomes serious, you have to lie.
– Jean Claude Juncker, Luxembourg PM and Head Euro-Zone Finance Minister in 2011

The Game Continues
I have no idea why anyone is making a big deal about The Bernank’s testimony to Congress today.  There was no way he was going to come out with anything meaningful.  The only thing our favorite Keynesian sorcerer wants to do is get through the session in as painless a manner as possible.  It would be completely foolish to rock the boat in any way during such testimony, as it would just invite all sorts of aggressive questions and make the entire thing more of a spectacle than it already is.  It would also increase the likelihood of a verbal blunder, so there is just no need.  In fact, I am 100% certain that The Bernank merely wants to toe the line as carefully as possible and at the same time get some nice propaganda out there to the sheeple.  In that sense, I think he achieved his goal.

Mapping the Next Five Months
Everyone has an opinion and on days like today people really like to come out and spout theirs so I suppose I may as well join the club.  In a recent article, I wrote that The Big Print is Coming and in this piece I want to follow that one up with exactly how I think it all will manifest between now and the election.  Of course, no one can predict the future, but what I want to do is attempt to outline how I think Central Planner policy will unfold from now until the U.S. Presidential election in early November.

Ok so let’s start with the FOMC meetings.  Between now and election day there are four.  The first one as everyone know is June 20th, followed by August 1st, September 13th and then October 24th.  Many pundits claim that if the Fed is going to act they may as well do so well before the election so as not to appear to be “influencing the election.”  I’m not so sure about that.  Maybe in times past, when the power structure was a bit more reserved and less blatant about their corruption and manipulations.  They don’t hide that stuff anymore.  The “elites” in America today are simply gangsters.  We have already been officially christened as a Banana Republic.  The criminal behavior that now governs our political and economic system is now all out in the open for anyone with eyes to see.  They don’t care.

What I want to make clear in this piece is that just because I think a massive wave of liquidity is coming from the Central Planners, that doesn’t mean I expect it to happen in June.  There is no doubt that The Bernank is now doubting all of his academic theories of the past and is scared out of his mind to “do more.”  He is afraid it won’t work, he is afraid of the demand for physical gold and silver that it might spark, and he is also afraid to use the bullets now with asset prices where they are.  He wants to save it for when he needs it and he knows he will need it.

So the game continues.  Talk up the economy, talk down printing and pray.  The beige book and today’s testimony represented textbook Fed strategy in 2012.  Strategy that I have discussed many, many times in months prior.  They can talk all they want and give all the reassurances they want but talk from monetary magicians does not alter the reality on the ground.  As I have stated repeatedly in the last two weeks, I think the Fed is more behind the curve than at any point since 2008.  Back then, The Bernank assured us that there was no housing bubble and that subprime was contained.  Big bank CEOs were pimped out on CNBS to claim their solvency weeks before going under or needing a bailout.  The only strategy left was to lie.  Despite the fact that it didn’t work then doesn’t stop them from trying now.  Why?  They are insane.

Barring a market catastrophe in the next two weeks I do not expect the Fed to act at the June meeting.  With rates where they are and stocks where they are there is little upside to action; however, this lack of action is precisely what will set the stage for the massive action that must come later.  One of the main things that has allowed the Fed to kick the can down the road as long as it has is the fact that ever since 2008 they have acted aggressively on the first hint of weakness.  While the beige book pointed to relatively rosy conditions for the U.S. economy, I think that is because they were looking at data from early April through late May together.  If you look at the U.S. economic statistics, the data didn’t start turning for the worse in a serious manner until late in the second half of the month of May.  The Fed knows this but they are purposefully misleading the market.  In reading a Bloomberg article about the beige book the following quote stood out to me:  “’The Beige Book is clearly at odds with the hard data we’ve been seeing,’ said Millan Mulraine, senior U.S. strategist at TD Securities in New York. ‘We’ve seen a dramatic slowdown in economic growth momentum that you’d think would be reflected in a few, if not the majority, of districts.’”  Move along folks…nothing to see here.

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Saudis Pump All Out as the Global Economy Crumbles

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It is a mindless philosophy that assumes that one’s private beliefs have nothing to do with public office. Does it make sense to entrust those who are  immoral in private with the power to determine the nation’s moral issues and, indeed, its destiny? …. The duplicitous soul of a leader can only make a nation … Read more

The Big Print is Coming

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We are discreet sheep; we wait to see how the drove is going, and then go with the drove. We have two opinions: one private, which we are afraid to express; and another one – the one we use – which we force ourselves to wear to please Mrs. Grundy, until habit makes us comfortable in it, and the custom of defending it presently makes us love it, adore it, and forget how pitifully we came by it. Look at it in politics.
– Mark Twain

Humanity’s most valuable assets have been the non-conformists.  Were it not for the non-conformists, he who refuses to be satisfied to go along with the continuance of things as they are, and insists upon attempting to find new ways of bettering things, the world would have known little progress, indeed.
– Josiah William Gitt

The media I’ve had a lot to do with is lazy.  We fed them and they ate it every day.
– Michael Deaver (Former top aide to President Reagan)


Has The Fed Waited Too Long?
Those that know me understand clear as crystal that I don’t approve of massive money printing.  I think it is theft, plain and simple, and represents an egregiously deceptive manner of transferring wealth from the poor to the wealthy and from the productive to parasitic financial oligarchs.  That being said, the world we live in is being led by a bunch of crooked banksters and the Central Planners that do their bidding.  At the top of the Central Planning global ponzi pyramid, is our very own Federal Reserve, headed by master Keynesian magician, the Wizard of Eccles, Ben Bernanke.  For the vast majority of 2012, the Federal Reserve has been playing a very, very dangerous game.  This game has been to pretend that they will not be printing any more money in an attempt to get commodity prices down as low as possible before they proceed with the inevitable.  While they have done this on a smaller scale many times in the past, this particular game of chicken has in my opinion gone dangerously wrong.  You see, ever since the 2008 debacle the Fed has been quite aggressive and more or less “ahead of the curve” when it has come to feeding new liquidity into the system…until now.

All of the prior programs were ready to go at the first hint of economic weakness.  Even if they weren’t launched right away, the intention to print was made clear and this stabilized the system in the short-term.  Not this time.  This time the Fed realized that their models weren’t working.  Employment continued to be weak as inflation picked up.  Everyone was starting to complain about gasoline and the public was increasingly making the connection between Central Banking/fiat money and the rise in their cost of living.  Occupy Wall Street emerged on the scene.  All of these things put Bernanke and all his other vampire brethren on the defensive, and indeed in a box.  They increasingly had to rely on less effective, more opaque means of providing liquidity.  The Fed swaps to Europe was one example.  The European LTRO was another.  All of this has been done and all of it has now proven to be a failure.  The periphery of Europe is in mired in an all out Depression and many of the BRIC countries are much closer to being in a collapse than many want to admit.  That said, there is still this consensus that the U.S. is experiencing decent growth that will continue and perhaps accelerate into 2H12.  Not only do I not agree with this, I think there is a good chance the U.S. is now experiencing negative growth.  I think May represents the first month of real domestic weakness.

Stocks are Collapsing on Bad News                        
What I have noticed this quarter more than in any other in recent memory is that names are vaporizing on even the hint of bad news.  Let me show you some frightening examples.

Fossil  

Dell

Cisco Systems

JC Penney

If the market was confident that this was just a blip I do not think these stocks would have responded this way and then barely rebounded.  Similarly, there are many names that have put up strong results, only to have sold off on the news.  HD, COH and RL come to mind.  To me this is evidence of the market sniffing out economic weakness ahead, and more importantly a Fed that is behind the curve for the first time since 2008.

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China Better Have a Plan

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Big Brother in the form of an increasingly powerful government and in an increasingly powerful private sector will pile the records high with reasons why privacy should give way to national security, to law and order, to efficiency of operation, to scientific advancement and the like.
– Justice William O. Douglas (1898-1980), U. S. Supreme Court Justice

Those who take the most from the table, teach contentment.  Those for whom the taxes are destined, demand sacrifice. Those who eat their fill, speak to the hungry, of wonderful times to come. Those who lead the country into the abyss, call ruling difficult, for ordinary folk.
– Bertolt Brecht (1898-1956) German dramatist, stage director, and poet

Idealism is the noble toga that political gentlemen drape over their will to power.
– Aldous Huxley

China Better Have a Plan
The fact that the Central Planners in China are basically standing around like deer in headlights as their economy plunges into the abyss is nothing short of astounding.  Sure they have lowered the bank Reserve Requirement but so what?  That is an epic joke of a move in light of the gargantuan problems that economy is facing, and is blatantly pathetic in its irrelevance.  I’m not going into detail for the thousandth time why China’s economy is nothing more than a Keynesian Centrally Planned house of cards on steroids with mal-investments that make the U.S. housing market look benign.  I have done that too many times over too many years to exert energy on that topic once again.  That said, what I do want to do is look back at the post 2008 period and try to figure out why they never really took polices to rebalance the economy away from fixed asset investment toward consumption.  In fact, not only did they not rebalance but they doubled down on the prior strategy!  Well now the chickens have come home to roost and we are about to find out if China has any real “long term” plan to get themselves out of this mess.

Although I never bought the “China bull” story over the last few years, where I did agree with a lot of these pundits was the notion that the Chinese currency, the yuan, was inevitably going to strengthen materially.  The primary reason that I agreed with this notion was the fact that I believed it to be the most effective means for the government to transfer global purchasing power to their citizens and also rebalance its economy more toward consumption.  Well the yuan did appreciate from mid 2010 to December of 2011, but the appreciation was a measly 8%.  That is basically nothing and in no way could have done anything to rebalance the economy in any way shape or form.  The lack of appreciation has been one of the biggest surprises to me, and indeed, now represents one of the scariest aspect of the macro backdrop globally.

As I mentioned recently in another piece, the cessation of the strengthening trend in the yuan back in July 2008 foreshadowed the collapse of the global economy.  Is the same thing happening now?

Chart of the Chinese Yuan (inverse so a decline represents strength vs. the U.S. dollar).

I have thought over and over again in my head why they didn’t allow the yuan to appreciate more, and at the end of the day, it comes down to one main point in my mind: Political Power.  As we all know, China is run by a very small group of bureaucrats that are fabulously wealthy and fabulously corrupt.  As is the case back here in the United States of Banana Republic, the Central Planners, politicians and financial/corporate oligarchs have made themselves fantastically wealthy and powerful through the parasitic controlled crony capitalist economy that they have put in place.  This is why they fight tooth and nail against reform.  Reform would restore power to the people and away from them; and of course, they don’t want that.  China and the United States are exactly the same in that regard, and since the old model has worked so well for the few in power they have been reluctant to change the model.  Indeed, they haven’t.

So here we are today and things are much different for China.  In fact, from a fundamental perspective it is now difficult to argue for a yuan appreciation.  The terms of trade have started to go against China and go against it strongly.  The entire export model was driven by the mobilization of rural workers from the interior to the coasts.  This seemingly endless cheap labor coupled with an undervalued currency made the cost of mass producing manufactured good exceedingly cheap relative to the rest of the world.  Factories in the West packed up and moved to China, the trade surplus boomed, and the rest is, well, history.

Those days are over.  Chinese wages have been skyrocketing and with global commodity prices elevated China’s trade surplus is not what it used to be.  There may even be a dollar shortage in China as the government foolish put its dollars into treasury bonds for some insane reason.  Why the government there would take a currency that is doomed in the long run and then put it in to an asset they will never be able to liquidate in an orderly manner is beyond my comprehension, but that is what they did and now they are stuck with that garbage.  There was a great article on this topic yesterday at FT Alphaville by Izabella Kaminska that I suggest everyone read.  You can find it here.

The following paragraphs I consider to be the most important part of the article:

The sad truth that many don’t realize is that these moves to internationalize the currency have less to do with Beijing’s wish to modernize and much more to do with a need to draw dollars into the system to cover the country’s growing “dollar short” position.

But what happens if the strategy fails? What happens if foreigners decide the last thing they want is yuan exposure (due to China economic bubble fears), and would much prefer to keep hold of their US dollars?

What happens if instead of a dollar inflow you get a mass capital outflow from China, with as many Chinese as possible converting yuan-denominated assets into dollars, seeing the yuan fall in value versus the dollar due to what is now an over-valued position?

Recent developments in offshore/onshore markets and forward markets, unfortunately, seem to suggest this is exactly what’s happening.

Wow, so if this article is correct then we have just made a 180 degree turn from where we were just a few years ago.  Rather than the market assuming a major appreciation in the Chinese currency, it seems as if financial players are becoming terrified of the currency considering the reversal in the terms of trade and the much more negative prospects for the economy going forward.  Believe me when I tell you that this is an absolutely terrifying scenario to be faced with for all of us.  If this is correct, the risk from China is likely to be as great if not greater than anything happening in Europe.  Here’s why.

The reason I say this is because I think there are two options from here, and both of them would have seismic effects on the global economy for the foreseeable future.  The first scenario assumes that China has a plan to deal with a loss of faith in its currency.  That plan in my view would be that they would come out with a gold backing to their currency.  This is something many people have written about for many, many years, including myself.  If China has enough gold to pull this off, they would immediately become the one currency in the world that everyone wants.  Capital would flee to China and the Chinese consumer would receive an overnight boost in purchasing power that will be written about for centuries to come.  This fits into the theme that I wrote about last year in my piece “Does China Need the U.S. to Collapse.”  The basic premise is that in a resource constrained world the only way China can ever actually utilize the massive excess capacity it has built is through a massive transfer in purchasing power to its citizens.  The West could collapse into third world status if this were to happen (it’s already on that path anyway).

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