When God desires to destroy a thing, he entrusts its destruction to the thing itself. Every bad institution of this world ends by suicide.
All the forces in the world are not so powerful as an idea whose time has come.
Adversity makes men, and prosperity makes monsters.
A creditor is worse than a slave-owner; for the master owns only your person, but a creditor owns your dignity, and can command it.
Common sense is in spite of, not as the result of education.
The omnipotence of evil has never resulted in anything but fruitless efforts. Our thoughts always escape from whoever tries to smother them.
– All quotes by Victor Hugo
We’re trying to figure out what the future of search is. One idea is that more and more searches are done on your behalf without you needing to type. I actually think most people don’t want Google to answer their questions. They want Google to tell them what they should be doing next.
– Eric Schmidt CEO of Google
Welcome to Reality
Two years ago when I told everyone I knew that the United States was bankrupt and would ultimately default of its debt one way or the other (by inflation or restructuring) I was called crazy and dismissed by 95%+ of the people I met. These days many of the same people still think I am crazy when I say that a political, financial and intelligence elite which has now teamed up with large corporations is attempting to create a global currency and world government (with them at the helm of course), but the notion that the U.S. is bankrupt is now more or less mainstream. Even the corporatist/socialists in power are now unable to merely dismiss questions about the deficit. The public has woken up from its slumber of consciousness and is now starting to see things as they are. This is an extremely positive development and is why as I have said before I think the elite are in their last days as the freight train of consciousness runs them and their twisted illusions of grandeur into the sea. The weakest link in this sick and corrupt financial system that was forced upon many of us before we were even born with its mechanics purposely hidden in the shadows so that we remained ignorant of its preposterousness, is the commodity market. However, within the commodity market the weakest link is gold. This is why any true attempt to force reform should revolve around a movement to dump compromised fiat paper in exchange for gold. It is the weakest link of the controllers of humanity for many reasons but the primary reason is that increases in the price of all other commodities can be explained away by the media and financial pundits in other ways. For example, if oil surges many can say it is global growth. With gold this explanation doesn’t hold water because in theory most of the 160,000 tons that are estimated to be above ground since mankind started mining gold is potentially “for sale.” This is because gold is mainly hoarded and not consumed. Thus, it becomes impossible to say gold rising and hitting new highs is anything less than growing distrust in governments and their counterfeit money. If it was anything else a large percentage of the hoarded gold would be mobilized and sold. Many bears make their argument by using this fact. They opine that since 160,000 is theoretically for sale in a market where annual production is closer to 2,500 tons that there will be a collapse. The truth is that this is the most bullish argument of all. The fact that smart money and central banks are unwilling to part with their gold at records is a function of the reality that the Western world is completely bankrupt and there is no way out of this without a hyperinflation event or a deflationary collapse that ends in restructuring.
Gold vs. Treasury Bonds
Both gold and treasury bonds have performed very well this year. I stand where I have stood for a long time on treasury bonds. I believe it is complete financial suicide to own long-term treasuries. The reason I want to address this issue again is because they have done so well this year and because some people that I have a tremendous amount of respect for are very bullish on them. The one strategist whom I respect as much as any other is David Rosenberg. I read his notes whenever I can and I agree with him on virtually every macroeconomic point. We both agree there was no recovery and that we remain in a depression. We both agree that what most market observers miss is that we are essentially in what Neil Howe refers to as the “Fourth Turning” where social mores and psychology completely change from where they were in the prior epoch. We agree that the governments fudge the data to make things look good. We agree on gold and on equities. The only place we really disagree in a major way is on long-term treasuries. I will make my case below.
First of all when it comes to treasuries in 2010 the bulls have been right and I have been wrong. Let’s just get that out of the way. Now let’s look at this market from a historical perspective. The secular bull has been going on since 1981 so at 29 years this thing is getting long in the tooth. This would certainly not be a reason to be negative in itself but it should be seen as a warning sign because when these trends reverse they reverse hard and don’t look back. In contrast the gold secular bull has been going on since 1999 so close to11 years. It is not a coincidence in my view that the gold bull started just when the tech bubble was about to crash. The gold bull was born out of the ashes of the secular bull market in equities. The end of this bull was so terrifying to the Fed and the government that they did what governments have done since the beginning of time. They started to devalue the currency and create inflation. This was done primarily through artificially low interest rates and rampant crooked deals in the housing market and on Wall Street. However, the key point is none of this would have happened to the extent it did without the Fed’s ultralow rates.
Toward the beginning of the decade Banana Ben Bernanke made his now infamous “helicopter” speech and thus everyone knew what the Fed would do. Thus was born a period of major inflation (underreported by the government the whole way of course) and a credit and housing bubble of catastrophic proportions. Then the inevitable collapse that EVERY Austrian-school economist (yet not one of Obama’s economic advisors is an Austrian) predicted occurred and then government in plain view decided to use the crisis to expand its power and dole out favors to its allies. Notice how under both Bush and Obama the banks and Wall Street were put before everyone else. “If Wall Street does well Main Street does well” they told us. I worked on Wall Street for 10 years. This is the biggest bunch of crap I have ever heard in my life.
Whereas maybe 1% of the population knew what a dollar was and how they are created before the crisis this may be above 10% now. This is huge. People were asleep to the system and now they are awake. It’s extremely simple really. There is no greater power than the power to create money and credit. Since power corrupts and absolute power corrupts absolutely then the absolute control over the world’s money (possessed by the U.S. Federal Reserve) represents the ultimate power and thus will ultimately be completely abused by human beings within any system. This is precisely why a small group of men or women should never, ever in a free society have this power. We now see how they use it. They have destroyed the Western world but make sure to bail out their friends in the end.
So what does this have to do with treasuries you ask? Treasuries are payments in the world’s reserve currency (the U.S. dollar) and are backed by the Federal government. The U.S. dollar in turn has been backed by two things since we defaulted in 1971, the relative strength of the U.S. economy to the rest of the world and the power of our military. We have completely lost the former and everyone knows it so all we have is the latter. Why do you think we are so obsessed that no Middle Eastern nation possesses a nuke? Is it terrorism? Not really, this is a secondary concern used to sell military action to the citizenry. The primary reason is that we must not allow any country in this oil rich region to be able to defend itself against us moving in to defend the dollar. The dollar is all we have left right now as far as keeping our ponzi scheme economy alive, and key to keeping the dollar as a legitimate means of exchange despite the obvious reality that it is not means having a significant presence in the Middle East to make sure oil is traded in dollars.
To assume that the dollar will not be devalued in a major way versus real everyday assets such as commodities (especially real money that is no government’s liability such as gold) is in my opinion counter to all common sense and is logic that a ten year old can understand but escapes the quants on Wall Street. I guess the only real difference between my view and someone like Rosenberg’s is the timing of it all. I have made it very clear that I think this will all be a relatively near-term event (the entire monetary and financial system will be dead within two years and something new where gold plays a major role is created). I think the food, oil and precious metal price surge that is coming has already started and will accelerate since those in political power will print and print and do everything possible to avoid deflationary collapse. This is not to say that I think they can avoid deflationary collapse, what it means is that in a fiat money system deflationary collapse can mean hyperinflation. The entire inflation/deflation debate is in my view asinine. If the debate is between 4% inflation and deflation then I agree, deflation it is. The larger point is that deflation and hyperinflation are not mutually exclusive they are two sides of the same coin.
So let’s say I am correct and the dollar is being devalued already in a major way as we speak versus the real everyday goods people are forced to buy and that this will accelerate rapidly from here. With a 2.57% yield on a 10 year treasury if the basket of goods purchased in a given year starts to accelerate beyond 3% there is a huge problem for the owner of treasuries. You will need to rely on continued appreciation in principal just to keep up. Of course this can happen but the higher the bonds go the tougher the math becomes. Furthermore, why not just buy gold? One asset is being manipulated higher by the Fed through its purchases (treasuries) and one is feared by central banks the world over that are constantly attempting to arrest its rise (gold). As more and more people and investors grow distrustful of their own governments, more and more people will want to bet on its ultimate default one way or the other. This means of the buying of gold not treasuries.
The 0% BLT Economy
This all brings me to the 0% BLT economy. This is actually a phrase a friend said to me the other day and I thought it summed it up perfectly. He said pretty soon a BLT sandwich will cost $12 but at least interest rates will be 0%. Maybe Geithner will provide 0% financing on trips to McDonalds with loans that can then be securitized by Wall Street and sold to some pension fund manager that uses leverage to enhance its yield all with a government guarantee! In a similar vein, I would like to point out the charts for October Cattle and October Lean Hogs. They are soaring. Is anyone talking about this? How about this tidbit:
Wal-Mart Stores (WMT), which for years has touted its prowess at lowering prices, has been doing the opposite as it tries to bolster its bottom line amid stagnating sales.
A JPMorgan Chase (JPM) study of a Walmart Supercenter in Virginia found that the world’s largest retailer has raised prices by nearly 6% on average over the past six weeks, according to the New York Post. Reuters says it was the biggest sequential increase since JPMorgan started the study in January 2009.
Some Prices Hiked Over 60%
Some of the price hikes were considerably larger. For instance, the price of a 32-ounce bottle of Windex household cleaner jumped 50%, a 12-ounce box of Quaker Oats instant grits climbed 65% and a 50-ounce container of Tide detergent rose by more than 50%. A spokesperson for the Bentonville, Ark., company could not immediately be reached for comment.
Or how about this one from Bloomberg this morning:
Aug. 19 (Bloomberg) — The one-dollar dinner from ConAgra Foods Inc., a staple for Americans throughout the recession, is under threat from rising commodity costs.
ConAgra, which gets almost 3 percent of sales from products such as Zesty Smothered Meat Patty Banquet dinners, will have to raise prices or skimp on ingredients to maintain margins, said James Amoroso, a food industry consultant. That will provide an opportunity for Nestle SA, which has lost share to the Omaha, Nebraska-based company, analysts said.
“It becomes a straightjacket because a $1 meal can’t be sold for $1.20,” said Amoroso, who is based in Walchwil, Switzerland. “The only way that manufacturers can cope with that is to significantly cheapen the offering. But if you say it’s spaghetti bolognaise and you’re just selling red spaghetti, consumers will notice.”
Eric Schmidt of GOOG Makes the Most Foolish Statement of the Year for a CEO
Someone sent me the quote from the top of this email earlier today and I almost fell out of my chair. If I was a GOOG shareholder I would be up in arms (I have no position long or short by the way as of this writing). He is quoted as saying:
We’re trying to figure out what the future of search is. One idea is that more and more searches are done on your behalf without you needing to type. I actually think most people don’t want Google to answer their questions. They want Google to tell them what they should be doing next.
Listen buddy, I don’t know what the future of search is but I am certain that you have just proven how completely disconnected you are from the Zeitgeist sweeping the United States at the moment. What Americans today want more than anything else is for the Federal government to STOP telling them what to do. You think they want GOOG to tell them what to do? Ridiculous. And just last month it came out that “The investment arms of the CIA and Google are both backing a company that monitors the web in real time — and says it uses that information to predict the future.” Google is partnering with the CIA to predict the future and now they want to tell us what to do. I am really getting sick of this company. Full article on GOOG and the CIA is in the attached Wired article. http://www.wired.com/dangerroom/2010/07/exclusive-google-cia/
And this company’s motto is “Don’t be Evil.” Double speak if I have ever seen it.
Mike
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