You Should Have Seen It Coming, Larry

Larry Kudlow rightly blasts the wasteful spending related to the rebuilding of New Orleans after it was devastated by hurricance Katrina two years ago.

The problem is that back in 2005, Larry Kudlow attacked the people that criticized the New Orleans spending spree with completely nonsensical arguments. Let's hope Larry and others learn from this that government projects as a rule tend to be very wasteful, with higher costs and less results than private sector projects.

Mark Thoma vs. The Economist

Today, Mark Thoma, who usually don't have much original commentary on his blog but instead publishes the commentaries of others, unusually enough comments and criticizes an article at length. The article in question is the article from The Economist about the benefits of a recession that I told you about recently. Thoma is a leftist Keynesian, so it is hardly surprising that he dislikes the semi-Austrian message of the article. Here is his arguments and my replies.

1. I disagree that we need recessions to have a dynamic economy. Equilibrium means (in simple terms) "no tendency for change" and there is nothing inconsistent with having a constant flow of entering and exiting firms at equilibrium.

When profits are high - as in the traditional price signaling story - there is a rush to enter industries, but the trick is to get there first and take some of the profits before others beat you to it, innovation and technological change are not so important. There are lots of profits to be had by entering with existing technology so, while it does allow the installation of the best and latest technology, there's no strong pressure to innovate. In fact waiting until there is an innovation could be costly.

It's when conditions are tight, i.e. when everyone is making close to zero economic profit, that new cost saving or demand enhancing technological change will pay off. If you have a better product or lower costs than rivals, then you will gain an edge and realize profits. The only way to get ahead is to build a better mousetrap. Sure, conditions will be tight in recessions - that's the traditional creative destruction story - but things are tight in a competitive equilibrium too and the pressure to innovate does not disappear just because the economy is operating at full employment...

...I am not an Austrian economist and I don't play one on the internet, so I won't claim to be able to recite what Schumpeter (or anyone else in the Austrian camp) said about this on a particular page of one of his books, so maybe someone who is an adherent to this "we need business cycles" approach can explain why we cannot wipe out the inefficient while remaining at or very near full-employment.

First, while Schumpeter is an Austrian by nationality, he is not usually considered to be part of the Austrian school of economics, as are for example Carl Menger, Ludwig von Mises, Friedrich Hayek, Murray Rothbard and George Reisman (the latter two aren't even Austrian by nationality). So I won't try to defend Schumpeter's arguments. But in the Misesian version of the argument, a lot of inefficient companies are being artificially sustained through monetary expansion. In order for factors of production to move on to more efficient companies, these inefficient companies have to be destroyed. This requires tighter monetary conditions, which together with the usual time lags in reallocation in resources will produce a short-term decline in production (aka a recession).

2. Overproducing houses is not like overproducing goods that cannot be stored, i.e. perishables. When too much popcorn is produced relative to demand, it goes to waste. Resources that could be used elsewhere are wasted forever since the excess can't be frozen or stored for the future (or at least assume so for the purposes of illustration, there is that stuff in movie theaters). With houses, there is an intertemporal shift in resource use, but since houses don't spoil in a short period of time, and because people will continue to demand them in the future, overproduction today will result in underproduction tomorrow. The houses were built too soon, and that's an efficiency loss because we gave something up, but when we produce less houses later we can recover (some of) the goods that were lost (too many houses and too few cars in year one, but in year two it's the opposite, too few houses and too many cars relative to the no distortion outcome). In the case of popcorn, since it couldn't be stored, lack of storage means we didn't have the opportunity to produce less later, so there is no way to make up for it, even in part, later on.

That is to say, I hope we don't "creatively destroy" the houses that were (over)built. Sure, some can be creatively transformed into restaurants, business offices, etc., to attenuate the misallocation in the short-run, but there's no need to tear them down and replace them. With time, population and demand will grow, and the houses will be filled. Hula hoop factories needed to be creatively destroyed, they needed to be torn down and replaced - it's unlikely demand will return in the future so having those factories around would be a waste, they would never be re-opened - but houses are not hula hoops. With houses, there is no need to "purge the excesses of the previous boom," just wait for population to catch up (and would it be so bad to have low cost housing available in the interim?).

No, the houses need not be destroyed, particularly not in areas where there are positive population growth. In those areas, demand should indeed catch up-at least in that famous long run where Keynesians say we are all dead. There could however be alternative uses for the land which produces a higher value.

And more to the point, what needs to be destroyed are again not necessarily the houses per se, but the companies, building projects and jobs which built the houses. While the houses perhaps need not be destroyed, as the past building of them are sunk costs, what should be eliminated is any further waste of resources by building more of them. In a world without any adjustment costs, that wouldn't cause any recession. But in a world with adjustment costs (such as the one we're living in), it will.

3. I don't understand the reasoning that says the Fed should not stabilize the economy because it will "create a much wider form of moral hazard. If long periods of uninterrupted expansions lead people to believe that the Fed can prevent any future recession."

The reasoning is that if we stabilize the economy, people will then believe recessions are impossible (or underestimate their likelihood) and make bad decisions, so we shouldn't stabilize at all.

People who believe the Fed can prevent all economic fluctuations will be, so to speak, "creatively destructed" the first time there is a recession. But to refuse to stabilize the economy to the best of our ability because we are afraid people might misperceive the degree of stability that is attained seems misguided to me. I would have thought an Austrian response would be to do what's best for the economy and let those who misperceive be weeded out by the market process (or better yet, that they become informed about the true risks - this is a market failure from lack of information and while I'm pleased to see The Economist acknowledge markets can fail, the solution is to provide the information, not to refuse to stabilize).

The only thing right in this part is that first statement about not understanding the argument. So let me explain it to Thoma and others who don't understand. If the Fed through lower interest rates and the implicit or explicit promise of a bail out encourages asset price bubbles and the excess debt and wasteful over-investments, this creates a situation where such behavior is profitable for the investor-but damaging to the overall economy. This is no different from how say massive subsidies of certain farm products makes it profitable to farmers to over-produce but damaging to the overall economy.

This is certainly not a case of "market failure", as the government in the form of the Fed has knocked out the market's weeding out mechanism.

Finally, I note that Thoma fails to comment at all on one of the most important arguments from The Economist: namely, the need to reduce imbalances such as a too low savings rate and excess borrowing.

EMU Money Supply Growth Accelerates

There have been speculations that the ECB might cancel its previously signaled September rate increase due to the credit market turmoil. It remains to be seen whether they actually will cancel it, but this news of a further acceleration in Euro area money supply growth clearly says that they should go ahead with the rate increase.

U.S. House Price Decline Accelerates

And this was in June, before the recent acceleration of credit anxiety.

Who's Next?

With the bursted housing bubble being already an established fact, and a recession coming soon (if not already present, only not yet revealed in the by necessity lagging statistical releases) in America, the question soon arises about who is next. After all, in many countries house prices have increased as much or more than in America. While there may perhaps be special factors in some of these countries justifying the house price increases in a way no fundamental factors could justify America's house price bubble, certainly some markets are significantly overvalued.

The reason why America came first was that it was home made to a much higher extent than in other cases. Alan Greenspan made interest rates go through a roller coaster ride, being first pushed down from 6.5% to 1% and then raised back to 5.25%. During the period of super low interest rates many subprime borrowers were hooked by Greenspan's teaser rate, only to see their personal finances in disarray when interest rates were raised back to more sustainable levels. Also, many near prime and prime borrowers were able to use their homes as ATM's when interest rates were low and house prices rising, something which they are unable to do so now.

In no country has interest rates been reduced and raised in such a dramatic way as in America, which is why it has been hit first. Still, there are other markets where house markets look highly overvalued.

One example of this is certainly Australia, where house prices have increased again after a brief slowdown in 2005. As I've stated before, Australia would likely have fallen into a recession in 2005 if it hadn't been for the commodity price boom. If America's likely recession directly and indirectly causes a significant slowdown in growth in China, this will end the commodity price boom. And with imbalances in Australia being if anything worse than in 2005, then an end to the commodity price boom will certainly mean an end to the housing bubble in Australia. And an end to both the commodity price boom and housing bubble in Australia will certainly mean an Australian recession.

Also, a number of European countries have housing markets look overvalued. This includes among others Britain, Ireland, Spain, Sweden, Denmark and the Baltic states.

Of particular interest is perhaps Britain. Two factors which have driven the housing boom there now look like they are disappearing. First, global financial turmoil will likely reduce or even end the bonuses in London's all-important financial City-district. That will take a heavy toll on the high end housing market in the greater London area. Second, the net inflow of immigrants from Eastern Europe are already starting to decline and will likely continue to decline more dramatically soon, perhaps even ending or even reversing, as economic growth in Eastern Europe is a lot higher than in Britain and as the decline in births in the early 1990s in Eastern Europe will soon translate into declines in the working age population.

Spain's housing market is already showing signs of cooling and could halt even further if there are more ECB rate hikes. This factor could also damage other overheated housing markets whose interest rates are determined by the ECB -either because they are part of the euro are or have pegged their currencies to the euro-, such as Ireland, Denmark and the Baltic states.

Sweden's housing bubble will on the other hand probably get worse next year as a result of the housing tax reform, so I don't expect any downturn in the Swedish house market until 2009 at earliest.

Have Globalization Increased or Decreased Inflation

In light of the increase in commodity prices in recent years as a result of increased demand from China, India and other emerging economies many people have doubted the argument from me and others that globalization has kept down price inflation. The argument, endorsed by Ben Bernanke and others, is that the increase in commodity prices will cancel out the effect of the entry of cheap finished goods from China and others.

Yet there are at least two good reasons to believe that the net effect from globalization is to keep down prices, even though higher commodity prices will somewhat limit the effect. First of all, globalization means that competition is a lot tougher than it would have been under national self-sufficiency. Secondly, globalization also means increased efficency as production for a global market increases the possibility of economies of scale, which will allow companies to lower prices. Thirdly, so far particularly China buys a lot less than it sells, as is reflected in its huge trade surplus. That means that China is increasing global supply of goods and services a lot more than it increases global demand. And if supply increases more than demand, this implies a downward pressure on prices.

Note however that argument three only applies in today's world. If China's politicians were to realize that a much stronger yuan is in their national self-interest, then this means that the price cutting effect of cheap finished products from China would be greatly reduced, while on the other hand commodity demand from China would increase as commodities are cheaper in yuan terms, putting an upward pressure on commodity prices in dollar and euro terms. It would also reduce factor one, as the competitive pressure from China would be reduced. If U.S. politicians were to have their way and the yuan is significantly revalued, this would greatly increase price inflation in the U.S., reducing the room for the Fed to cut interest rates and thus likely destroy a lot more jobs than reduced import competition would save.

Why America Should Have a Recession

While today's reports on durable goods orders and new home sales were relatively bullish, most other reports still indicate a weakening U.S. economy. And the credit crunch this month likely implies that reports for August and September will be a lot weaker. Which is why I still think it is likely that America will fall into a recession this year.

But beyond the descriptive issue of whether America will have a recession or not is another, perhaps even more interesting, discussion. Namely the normative discussion of: should it have a recession?

What kind of question is that, you might ask. Recessions means that production falls and unemployment rises which makes people worse off, so of course recessions are bad.

Well, all of that is true, but it misses the point. While it is not good that the need for a recession has been created, it may just be the case that under the circumstances, a recession is a lesser evil compared to not having a recession.

The Economist, who for long has been my favorite among established magazines, not least because it very often implicitly or explicitly argues for Austrian economic theories, argues this case in its latest issue.

It points out that recessions are processes which weed out inefficient firms and forces a reduction in imbalances. Case in point is the massive counter-cyclicary
policies of Japan in the 1990s which while being successful in avoiding a steep recession/depression, created a nearly permanent stagnation. Another example is in fact America, who despite the positive supply boost from Bush's tax cuts and the housing bubble actually had relatively moderate growth during the recent business expansion, and who will now likely suffer the hang over from the housing bubble.

As the article points out, sometimes downturns get out of hand and get more severe than they need to be. This was certainly the case in America in the 1930s when massive bank failures created a significant monetary contraction. But as long as the recession is the result of the end of monetary inflation, rather than outright monetary deflation, then recessions are a necessary evil to purge out the wasteful excesses of previous inflationary booms.

Not Just Subprime ( Again )

When the financial press discuss the severe (but now perhaps abating) credit crunch, they act as if the temporary panic and the subprime mortgage problem was the only problem for the U.S. economy. But as I told you recently, it's more than that. It is fundamentally a general housing bubble and excess debt problem.

Here is another piece of evidence for this: the market for luxury homes are also weakening dramatically.

And things should get worse for the luxury housing markets, particularly in New York, where financial workers do much of the buying. This is indicated by rapidly increasing financial sector job cuts. So far this year, financial sector job cuts are 75% higher than all of 2006. One quarter of those job cuts was announced during the first three weeks of August, and today Accredited Home Lenders announced another 1,600 job cuts and Lehman 1,200 job cuts. And those numbers do not include the recent First Magnum Financial bankruptcy, which means the loss of an additional 6,000 financial jobs.

Meanwhile, Wall Street bonuses are likely to get cut for the first time in five years.

Statistics No Substitute For Intuition

Ssome investors have come to believe that old-fashioned intuition and rational motive-based economic analysis is obsolete. Instead, what works are advanced mathematical models based on historical patterns. Well, that may work sometimes. But as many of them have come to experience recently, it doesn't always work that way. As the Washington Post notes, these so-called Quant Funds have lost really big money recently, as their "scientific" models failed to predict movements that was 25 standard deviations from the normal.

They Figured That Out Now?

Fed vice chairman Donald Kohn has finally figured out that rising house prices will increase debt levels and suppress savings. The rest of us figured that out years or decades, but better late than never, I guess.

Now on to the next step. What was responsible for the previous rise in housing prices that created the problems of high debt and low savings responsible for the current economic problems in the U.S.? So that we won't have to wait another few years before Mr. bright Fed official figures that out, I'll give him a helping hand and spell it out right now: FED POLICY, or to be more precise, the policy from Federal Reserve of artificially suppressing interest rates.

Hong Kong Growth Accelerating

Economic growth in Hong Kong accelerated to a 6.9% rate in the second quarter, up from a upwardly revised 5.7% in the first quarter, according to the volume measure of GDP. In terms of trade adjusted terms, growth was even more impressive, at 7.7% (Calculated by me using numbers available here)
, up from a upwardly revised 6.4% in the first quarter.

Both private consumption (+6.6% ) and investments increased faster(+11.1%), while trade surplus was flat. Government consumption increased in absolute terms, but continued to decline relative to the overall economy.

Hong Kong's economy benefit both from its strong microeconomic fundamentals -being the freest, most laissez faire oriented economy in the world- and from the boom in its dominant trading partner, mainland China.

The latter however constitute the greatest threat to Hong Kong's growth. While China's economy enjoys an enormous structural strength with its massive supply of cheap labor and savings, its quasipeg to the U.S. dollar is creating great distortions, including malinvestments, rising consumer price inflation and an excessive current account surplus. The latter makes China highly vulnerable to a U.S. recession, especially if that would make U.S. lawmakers pass anti-Chinese trade legislation.

And if China's economy would weaken, so would Hong Kong's.

Carry Trade Meltdown

With most of the focus being directed at stock-and bond markets, few have noted the dramatic currency movements. To the extent currency movements have been noticed, it is usually with regards to euro/dollar and dollar/yen movements. Perhaps somewhat surprisingly, the dollar have risen against most currencies in response to the subprime meltdown-despite the fact that this is an American problem. Howerver, the dollar have fallen sharply against one currency-the yen. So, in essence, the previous currency trends where the dollar have fallen against most currencies but risen against the yen, have gone into reverse the last few weeks.

Indeed, the currencies that rose the most in previous months, such as the dollars of Australia and New Zealand, and the Brazilian real, have also been the ones that have fallen the most. The Aussie and Kiwi dollars have fallen roughly 10% and the Brazilian real roughly 13% against the U.S. dollar in a mere month.

But it gets even uglier if you look at the movement of the yen versus the Aussie and Kiwi dollars and the Brazilian real. The yen has risen 22% against the real in a month and 20% against the Aussie and Kiwi dollars.

Take a look at this chart, where we see the New Zealand dollar rise 25% against the yen in four months-only to fall 20% in less than a month. Can anyone seriously in light of that defend the Friedmanite assertion that floating exchange rates will move in relation to economic fundamentals?

But apart from its economic theoretical implications, these movements will further endanger financial stability in the world. With the massive carry trade, investors who borrow in yen and lend in Aussie and Kiwi dollars and real, there's got to be a lot of people who have lost a lot of money on this in the latest month. To some extent that will only mean Japanese households. But it could also mean more hedge funds.

Robert Prechter on Gold…

First of all, please ignore anything the CNBC commentator says – I wish I could screen him out.

I present this video due to the sentiment readings for gold that Prechter points out. I don’t think it’s wise to ignore what he’s saying for maybe the short or medium term. In the long term, until the debt and structural problems with the currencies are cured, the bullish case will continue to make sense to me. Therefore I see both sides of this issue and would probably present their cases as a matter of timeframe (ht RRH):

I will note that gold has obviously had a very steep ascent in this latest move, but it did recently trigger a new bullish target on the gold Point & Figure diagram of $1,310. Perhaps the move continues into that range but then experiences some pullback or consolidation until the fundamental problems underlying the currencies are either resolved or come to the forefront again. Personally I think the issues will keep resurfacing until they are resolved and that technical patterns may give only temporary respite.

A Time To Look For Bargains

Just as I predicted, U.S. stock prices have been extremely volatile and erratic although generally volatile downwards. From Monday to Wednesday they simply declined in line with my trend estimate. They then continued to decline during most of today's (Thursday) session, only to suddenly during just a few minutes of trade erase the losses of the day in line with my volatility prediction.

Today featured unequivocally bearish economic news with rising jobless claims, falling housing starts and a stagnant Philly Fed which is what together with increasing general anxiety is what triggered the decline that lasted through most of today's session. Then for no real reason the losses were suddenly erased at a record time. Again, this sort of extreme erratic volatility up and down is what one could expect in a bear market so bad that people actually consider the utterly useless U.S. government bonds to be a safe haven!

Expect more of that irrationality and erratic volatility in the near future. However, since the fundamentals support the bearish case, the trend will continue to point downwards for U.S. stocks.

Interestingly enough, many European markets have actually declined even more than U.S. stock markets in a bear market triggered by problems specific to the U.S. economy. To be sure, globalization has decreased the link between local economies and local stock markets, which is why some extent of global correlation between stock markets is actually justified. But it is certainly not justified for European stock markets to fall more than U.S. stock markets who still after all remain a lot more exposed to the U.S. economy.

This means that the indiscriminate declines in almost all stock markets have created bargains for investors. They probably exist on all stock markets -including the American ones- but they likely exist particularly on European stock markets where many stocks with limited exposure to America have taken a heavy beating from America-specific problems.

Martin Armstrong – Closing at 10,520…

Not the Great Depression, but a waterfall event… the end is near, but stocks are going to the moon! LOL, trying to make consistent sense of Martin’s writings is a challenge even for me and I truly don’t think it’s because I’m confused, it’s because he’s inconsistent and playing it both ways. Sorry, just have to call it the way I see it. Again, I respect his cycle work, his big picture view of the world and his view of history, but I would not invest real capital based upon his advice – that’s just me.

Something to keep in mind is that capital doesn’t have to just flow, it can also literally just evaporate. I think it’s extremely important to understand that with volatility moves can reverse course very quickly. All these events are driven by debt and the fundamental structure of our currency. Trying to guess government’s or market reactions from day to day or month to month in this environment is a fool’s game. The bottom line is that significant events are continuing to come, they are unfolding faster and with more force. No western country will be spared, and these events will continue to unfold until structural changes to the debt money system are in place.

Martin Armstrong – The Greek Debt Crisis…

According to Martin Greece was “The Preview of What is to Come.” Once again I’d like to point out that I enjoy and respect his work in terms of cycles, history, and some of the big picture concepts like the rule of law. However, I do see inconsistencies in his analysis and caution readers to use his writing to provoke thought and discussion and not as actionable investment information.

Nice Euphemism

Mark Thornton notes today's funny euphemism. In describing what he sees the need for a weaker dollar, Martin Feldstein of NBER, uses the euphemism "a more competitive dollar" to describe dollar depreciation.

Morning Update/ Market Thread 5/14

Good Morning,

Equity futures are down this morning with the dollar up and Euro down. The dollar has risen above its up channel while the Euro broke beneath its bottom trendline but immediately bounced back just above it – the Euro currently sits in the 1.25 area. Below is a daily chart of the dollar on the left and Euro on the right:

Bonds are rising, oil is down and very close to breaking support while gold continues on to reach a new higher high, now just a couple of dimes beneath $1,250 an ounce.

Driving those moves, of course, is DEBT. The entire world is permeated with it, Europe is definitely in crisis and the latest bailout has not worked because it has not changed the underlying structure of debt saturation. Spain just announced a second dip into negative price inflation, a deflation that is trying to re-exert itself. There is more talk of a possible Euro breakup and rumors are circulating that Germany may return to the Deutschmark. Currency changes are something that I’ve been saying are coming for several years. How did I know? Simple… the math of the underlying debt puts strains on the system – debts are growing faster than income’s ability to service them, changes ARE coming and not just to Europe.

Back here in America, Retail Sales were just released as climbing .4% month over month for April. This follows March’s 1.6% rise but is above the forecast which called for .2%. Guess what? I put NO CREDENCE in the official Retail Sales report – are you surprised? This report suffers from survivor bias, measuring sales only at stores that are still in existence. This data does not square with overall tax collections.

For those who have wondered, here’s how the Retail Sales numbers are generated:
The retail sales report is released by the U.S. Census Bureau every month on the 13th day, or on the nearest date if the 13th is a holiday. The report covers the previous month’s developments, and is anticipated eagerly by both economists and traders.

The data included in the release is calculated from the dollar-value of merchandise sold by a sampling of point-of-sale businesses, and other non-store retailers such mail catalogues and vending machines. The Census Bureau sends out questionnaires to approximately 5000 firms across the U.S. in order to measure the retail sales volume which corresponds to about 65 percent of the total sales estimate. The data is not adjusted for those firms which do not respond to the questionnaire. Also, due to the small sampling size, there is a significant sampling error involved in the numbers released with the report.

This is a very inaccurate way to measure overall sales, and it should be taken in more of a context of being “surviving store sales.” A way more meaningful macro statistic is sales tax receipts, something that unfortunately is not reported in a timely fashion. That’s a shame because it would be very easy to do quickly in this day and age. The fact that it’s not leaves one to assume that leaving the public less than fully informed is what the power structure desires.

Industrial Production and Consumer Sentiment are to be released shortly.

I find this fact interesting… the day before yesterday the Puget Sound Business Journal reported that the Seattle area had the nation’s “best economy:”
Study: Seattle has nation’s best economy

According to Policom Corp., an independent economic research firm that specializes in analyzing local and state economies, out of the nation’s 366 metropolitan statistical areas, Seattle-Tacoma Bellevue rates No. 1, moving up from last year’s No. 12 ranking. In 2006, Seattle-Tacoma-Bellevue ranked No. 51 in the country. The company uses 23 different economic factors to create its rankings.

According to Policom, the highest-ranked areas have had rapid, consistent growth in both size and quality for an extended period of time. The lowest ranked areas have been in volatile decline for an extended period of time and Policom has created economic strength rankings since 1996.

Note that their study is based upon “rapid, consistent growth…”

Then yesterday the Business Journal publishes a separate report:
Seattle: No. 1 in U.S. for consumer debt

According to data from information services firm Experian, Seattle has the highest level of average personal consumer debt at $26,646. Right behind are Dallas ($26,599) and Denver ($26,428).

The study calculated debt using all credit cards, auto loans and personal loans. It did not include mortgages.

Rounding out the top 10 are Atlanta ($26,063), Phoenix ($26,035), Houston ($25,790), Washington, D.C. ($25,702), Tampa ($25,603), Philadelphia ($25,544), and Orlando, Fla., ($25,316). Los Angeles had the lowest debt ($24,009).

My, that’s interesting. “Best performing city” and “No. 1 for Consumer debt.” Hmmm. What to make of that?

I won’t try to guess which drives what as there are other factors involved like incomes. However, I would say that in general it says that growth in the area is on the back of debt. Are there incomes to support that debt moving forward? Since I live here I can tell you this; there are a lot of expensive homes in the Puget Sound area that ran up to very high bubble prices and this is the center of where WaMu (remember them?) ran amok with Option-Arm home loans. Those resets are coming quickly and it will be interesting to see if incomes and assets are going to remain able to support all that consumer debt. My bet is that there is pain coming.

BP has been saying the gulf leak is 5,000 barrels a day… now a Purdue University scientist says he can measure the flow and it’s really 70,000 barrels a day, +/- 20%. Yowzaa, that’s a serious difference.

I must admit, however, that after hearing him allow Anderson Cooper to sucker him into talking gallons instead of barrels, I have less faith, but I’m sure that his estimate is probably a lot closer than BP’s. Another thing they didn’t address is that this is just one of two leaks…

Currency moves and fears are driving the market at this stage. If the Euro breaks down in earnest below that channel line, all heck is going to break out and we could see large moves happen quickly. The fact that the market is down to the 1,150 area is bearish, but breaking below 1,140 means that a move to 1,100 is probably in the cards. Be careful going into the weekend, who knows what could happen in Europe. Keep in mind WHO is in control of the markets and play carefully!

Jimmy Buffett – Volcano:

Damon Vrabel with Max Keiser...

Interview with Damon begins at about the 14 minute mark...

Martin Armstrong – The Money

Here’s a short piece on inflation, deflation, and more on velocity…

The Money 5!4!10

Martin Armstrong – Sometimes the Lunatic Fringe Do Get it Right

In this paper Martin is saying not to ignore those who appear to be on the fringe. Gee, is the Economic Edge hanging on the “lunatic fringe,” or is he talking about the people who don’t “do” math and try to solve debt problems with debt? Seems to me the lunatic is clear, but I’ll take it to assume he means us non-tradition thinkers who don’t always buy the mainstream manure.

In this paper he picks up on some of my themes regarding velocity and debt. He clearly explains the difference between what I call real velocity and the velocity created by a loss of confidence. To me they are two different things entirely.

Blame EU For Rising Milk Prices

The increased prosperity of China have led to a sharp increase in Chinese consumption of dairy foods. And while local production is soaring, so is imports. China's increased imports of dairy products have now led to sharply increasing milk prices in Germany, a large exporter of dairy products. This in turn have of course led to angry consumers in Germany. But these consumers shouldn't be angry at China. They should be angry at the EU and its farm policy.

The natural response to this increased demand would of course be for German farmers to raise more cattle and so increase milk production. But as is pointed out in this story, the EU and its quota system forbids farmers from increasing production by more than 0.5% per year until 2015, when the quota system will finally be ended. This proves for the umpteenth time the insanity and evil of farm subsidies which not only cost tax payers a lot of money, makes consumers pay more and even hurts most farmers.

Morning Update/ Market Thread 5/13

Good Morning,

Equity futures are roughly flat this morning prior to the open. The dollar is up significantly and the Euro has broken down below the 1.26 level, now at 1.257. Bonds are slightly higher, oil has broken down further, and gold is slightly higher.

Any further deterioration in the Euro represents a hazard to equities. I would like to point out the recent change in market character regarding the relationship of currencies to gold and equities. Typically a stronger dollar has meant lower equities and lower gold. Since the crash last week and the subsequent intervention, stocks have been higher and gold has also risen despite no change in direction for the movement of currencies. The truth is that the $trillion bailout should not have strengthened the Euro, it should have crashed it (further), and that could still play out. This is exactly what gold is saying. It is a potential setup to the nightmare scenario where gold is the only thing left rising. We’ll see, but the fact that the Euro has failed to even make a half-hearted attempt to rally to the top of its channel is a screaming warning.

Know what else is a screaming warning? According to Jonathan Weil in his current Bloomberg article, Rigged-Market Theory Scores a Perfect Quarter, “It turns out Morgan Stanley posted net trading gains every day during the second quarter of 2007, right before the credit crisis began to hit full-steam.”

My, that’s interesting… is there a lesson there? I’m sure there is, although I think it won’t be clear until viewed through the lens of history.

What’s pretty clear to me right now is that the markets are completely controlled by very few entities – they have been captured. And let’s think about the implications of this, because to me it plays like some James Bond (ridiculous) or Austin Powers (funny) movie, you know there’s always the evil villain in the background whose mission is to RULE THE WORLD, ba, ha, ha! Let’s just say it’s not a coincidence they called him “Goldfinger.”

Well guess what? It’s happened – only sadly this is no movie, it’s for real.

And just think about this. Those four banks that had perfect records are so powerful that should any of the managers of those companies simply turn off their trading computers, the removal of that liquidity would set off a chain of events that could literally collapse the markets of the entire world – just like the taste we got last Thursday but was quickly reversed.

Is this not nearly the power the President of the United States has? We have allowed the power to concentrate into so few hands that we have in effect given them the power to devastate the globe in nearly an instance. The people running these firms did not go through a public vetting process and they do not work on behalf of the people. Think about that – it never should have been allowed to happen and now that it has, we absolutely need to take action.

And PIMCO’s El-Erian reiterated the “new normal” in another Bloomberg interview, ‘“What is happening in Europe is a vivid illustration of an underlying theme of the new normal,” Mohamed El-Erian, the chief executive officer of Pimco, said in an interview. There are “structural forces overwhelming traditional cyclical ones.”’

In other words, the world is saturated with debt and while the cyclical pattern tries to exert itself, the anchor of debt precludes growth from resuming. That is exactly what is depicted on the diminishing productivity of debt chart.

But that still has not sunk into the very closed brains of people like Larry Summers who in response to El-Erian’s new normal comments says he would be, “very reluctant to accept the idea” of an extended period of slow growth for the U.S. economy.

No kidding, he’s very reluctant to accept anything based in reality, and boy has he made reality a mess.

How ugly has he helped to make reality? This ugly:

U.S. posts 19th straight monthly budget deficit

(Reuters) - The United States posted an $82.69 billion deficit in April, nearly four times the $20.91 billion shortfall registered in April 2009 and the largest on record for that month, the Treasury Department said on Wednesday.

It was more than twice the $40-billion deficit that Wall Street economists surveyed by Reuters had forecast and was striking since April marks the filing deadline for individual income taxes that are the main source of government revenue.

Department officials said that in prior years, there was a surplus during April in 43 out of the past 56 years.

The government has now posted 19 consecutive monthly budget deficits, the longest string of shortfalls on record.

For the first seven months of fiscal 2010, which ends September 30, the cumulative budget deficit totals $799.68 billion, down slightly from $802.3 billion in the comparable period of fiscal 2009.

Outlays during April rose to $327.96 billion from $218.75 billion in March and were up from $287.11 billion in April 2009. It was a record level of outlays for an April.

Department officials noted there were five Fridays in April this year, which helped account for higher outlays since most tax refunds are issued on that day.

But for the first seven months of the fiscal year, outlays fell to $1.99 trillion from $2.06 trillion in the comparable period of fiscal 2009, partly because of repayments by banks of bailout funds they received during the financial crisis.

Receipts in April -- mostly from income taxes -- were $245.27 billion, up from $153.36 billion in March but lower than the $266.21 billion taken in during April 2009.

Receipts from individuals, who faced an April 15 filing deadline for paying 2009 taxes, fell to $107.31 billion from $137.67 billion in April 2009.

The U.S. full-year deficit this year is projected at $1.5 trillion on top of a $1.4 trillion shortfall last year.

White House budget director Peter Orszag told Reuters Insider in an interview on Wednesday that the United States must tackle its deficits quickly to avoid the kind of debt crisis that hit Greece.

Too late to avoid looking like Greece… the truth is that we are in much WORSE shape than Greece. How can I say that? Because we are hiding massive amounts of debt, both as a government and in our financial system. Just look at the debt we are responsible for in the GSEs but is kept off balance sheet.

And talk about destroying confidence, this monthly budget report is simply more lies and more false accounting. The true monthly deficit is twice the reported $82.69 billion, it’s actually $175.6 billion! All you have to do to see this is to take a look at the debt numbers reported each month by the Treasury. In the month of April our debts grew by $175.6 billion, that’s an annualized rate of $2.1 Trillion!

So far this calendar year we have run up $637.4 billion in debt, that’s in just 4 months! Annualized, that number is $1.91 Trillion! Talk about exponential growth, wow. Again, compared to what our government takes in, $2.4 trillion (and falling), we are now spending nearly TWICE what we take in. To those who think that’s okay and that because we are the “reserve” currency that we can get away with it indefinitely, I say that you are simply delusional. That’s the polite version.

By the way, did you note personal tax receipts? Down 21%!!

Weekly jobless claims came in at 444,000 on the week, the consensus was expecting 440,000. These numbers are still waaaaay above historic norms – here’s Econoday:
Initial jobless claims show improvement but only mild improvement for the labor market. Initial claims in the May 8 week slipped 4,000 to 444,000, a dip offset by a 4,000 upward revision to the prior week. But the four-week average is improving, down 9,000 to 450,500 for the lowest level since late March and the second healthiest level of the recovery.

Continuing claims for the May 1 week rose slightly to 4.627 million while the four-week average also rose slightly to 4.640 million. The jobless rate for insured workers is unchanged at 3.6 percent.

Though claims at these levels have been consistent with sizable payroll growth in recent months, the lack of significant improvement will limit confidence that payroll growth in May will also prove sizable.

Whatever – the monthly reports are still net negative growth despite throwing so many trillions at the financial system that we have now bankrupted ourselves. Completely delusional, and completely controlled.

Now let’s look at import and export prices which were just released. Import prices up 11.1% year over year? Export prices up 5.7% year over year? Wow. True, these are over a very low period of time, but wow!
Import prices for industrial inputs are on the rise as are export prices for finished goods. Import prices jumped a very steep 0.9 percent in April, inflated by a 3.3 percent rise in petroleum prices. But import prices are up even excluding petroleum, up 0.3 percent and reflecting a 1.1 percent jump in non-petroleum industrial supplies. But a bigger key is that domestic buyers aren't paying more for finished goods with prices of imported consumer goods unchanged and prices of imported capital goods up only 0.1 percent following two months of declines.

The lack of foreign pricing power for finished goods reflects in part the strength in the dollar which gives domestic buyers more purchasing power. The dollar's strength conversely makes domestic goods more expensive to foreign buyers, reflected in this report by sizable gains for finished goods prices: up 0.4 percent for capital goods and up 0.9 percent of consumer goods. Export prices overall jumped 1.2 percent despite a 0.7 percent price decline for agricultural exports. April's overall gain is the largest in nearly two years.

The strengthening dollar should help keep import prices down and will likely increase demand for lower priced foreign goods. Today's data point to pressure for next week's producer price report but, given the benign readings for imported finished goods, no pressure for the key consumer price report.

Large moves in currencies absolutely will affect the flow of capital and goods around the globe. It’s a volatile environment, one that is volatile because of debt saturation.

I haven't updated the Baltic Dry Index in a while, here's the latest chart that puts global shipping into perspective:

Meanwhile oil continues to spew unabated into the gulf, here are the first pictures of the leak itself:

If that makes you feel good, try this:

The government paying down your loan if you are underwater or unemployed? Wow. Anything to keep the game going for the banks – including bankrupting our nation. Moral hazard? The real moral hazard isn’t just how unfair it is to homeowners and people who have done the right thing, the fact that it is squarely to the benefit of the banks makes it a nation ending type of hazard – all to protect those people who have the power to crash the planet at the flick of an HFT switch.

Sadly, there’s more than just one hole in the world…

Eagles – Hole in the World:

Damon Vrabel - The Coming Crash: Usury and the Irrelevant Church

Damon thinks this is one of the most important articles he’s written. I think it’s powerful and should get you thinking regardless of your personal views. I also think it’s important to note that he is addressing religion from this perspective, “We need to avoid dialectical conflict... left vs. right, religion vs. non-religion, black vs. white, immigrant vs. citizen, etc. We need to come together to fight the monetary powers that are bringing us all down together.”

Amen to that.

The Coming Crash: Usury and the Irrelevant Church

By Damon Vrabel
Please, let us stop this usury! - Nehemiah 5:10
It’s been a wild couple of weeks—increasing unemployment, Greek debt crisis, yet another ridiculous bailout, pressure on Goldman Sachs, accusations of commodities manipulation by JP Morgan Chase, and new freakish levels of market volatility that might be signaling the next phase of market collapse. The many day-to-day issues can leave us dazed and confused, so most people ignore them. Huge mistake.

They are all related to the most powerful force on earth that controls our lives because it is the very foundation of our society—usury. We are ruled not by governments anymore but by financial powers that use interest-bearing debt to exert control over governments, corporations, and people. Almost all other political issues with which we concern ourselves are secondary symptoms of or purposeful distractions from this larger narrative that is never reported by the Wall-Street-funded media. Sadly the church has remained silent as well.

Explaining the details can be extremely complicated, but the basic core to understand is that the US government issues no money. Instead all money comes from private banking institutions with interest attached. At times in the past the US government issued real money for people to use—US notes and coins. But today all money comes from the Federal Reserve’s private banking system by putting the US government, i.e. 308,000,000 Americans, in debt. If the US government were not in debt to the banking system, the American people would have no money.

More technically, the Fed and its Wall Street cartel banks like JP Morgan Chase and Goldman Sachs make billions by doing nothing but controlling our money. They have the monopoly license to create the core money in our system from holding US Treasury bonds on their balance sheets. These bonds represent the debt of the United States. Thanks to interest, the bonds pull a large portion of our wages to the banks. The primary purpose of the IRS is to take your wages to pay the interest back to the banks. In effect, Wall Street owns a good bit of your labor. And the more bonds they hold, i.e. the more debt the population is in, the more money they make thanks to the interest flows and the profits from gambling on your debt. The system is very much one of “us vs. them.” Such is the nature of monopoly power and usury.

Economics and Morality

Controlling others and living off their backs by forcing them to borrow with interest in order to have any money is called usury (this does not include standard, self-liquidating bank loans to businesses to fund production). It is a system that ensures everything we do, whether in the public or private sector, feeds Wall Street and the controllers above it. It creates a two-tiered societal pyramid of money pushers on top vs. money users on bottom. The power differential is huge. Everyone is hostage. In doing something as simple as buying food to survive, we contribute to usury because we only have usury-based money, not real money. Like the slaves who built the Egyptian pyramids, today we are stuck building an invisible pyramid of monetary power.

In such a system there is never enough money to pay back all the interest to the money pushers. The only solution is for the money users—government, corporations, individuals—to borrow more. This is the reason our debt continues skyrocketing to increasingly insane levels. It isn’t about politics, but the fundamental exponential math underlying the system—the users must borrow more and more to pay back interest and keep the system afloat. Such math is guaranteed to fail. Iceland and Greece have reached the point of failure. The rest of the Europe and the US will experience failure as well. Then we will see money and assets vacuumed up the pyramid by the money pushers—the banking establishment that owns the collateral and can take your property.

The exponential math not only creates exponential debt growth, but also exponentially increasing:
  • Scale – government and businesses keep getting bigger; we get smaller and local communities lose their meaning
  • Velocity – the hamster wheel keeps spinning faster; human life suffers
  • Consumption – we buy more and more things that break more quickly
  • Production – we make more and more things that break more quickly
  • Inflation – the dollar buys less and less; we can’t seem to make progress

None of these things have to happen in an economic system. They only happen in ours because of debt-based money, usury, that greatly benefits the top of the pyramid while everyone else suffers to a certain degree depending on their level in the pyramid.

So this system is guaranteed to fail due to not only the impossible math, but also the fundamental immorality. Taken together those five issues paint a horrible picture. Republicans blame Democrats and vice-versa. Nope. It’s all a very simple result of a system based on usury, which used to be considered profoundly immoral. It was a fundamental violation of every major religion. It still is for Islam, but Christianity succumbed long ago. They thought a free market economic system would be beneficial, but got snookered into thinking that usury had to be part of that system. On the contrary, monolithic usury kills the free market.

Our monetary system is a top-down controlling machine, not a free market. It is run not by government, but by the most powerful financial interests in the world. Some people feel in their guts that someone must be stealing from them because they just can’t get ahead no matter how hard they work. Well that’s because it’s true—someone is legally stealing from them. The simple math of usury pulls money from people on the bottom of the pyramid who create real value toward those at the top who create no value. MBAs and others serving the system must reckon with this truth rather than remaining blind. Farmers understand it well, having lost their property over the years to the bankers. Families feel it in the fact that it’s difficult to get enough money to feed the kids compared to 50 years ago when one parent could work a standard week and feed a family of five. Everyone in the system will feel it once the debt system collapses as it is doing in Greece.

Living off the backs of others was called feudalism 300 years ago. It was slavery 100 years ago. Today it’s called the “free market” thanks to the propaganda and fraud of neoclassical economics. It completely ignores the truth of our monetary system, the math behind it, and the eventual collapse that will result from it. Greece is giving us a glimpse, but it is only a mild pre-game warmup compared to what’s coming. The world will rue the day it was ever seduced into accepting usury and the illusion of prosperity driven by nothing but debt.

The Irrelevant Church

On this issue of monolithic usury, the issue from which many of our other problems spawn, the church seems to have no voice. Recently, an older church leader told me, “Keep it up, this needs to be addressed, but you have more guts than me, I don’t want to be killed.” Sobering comment, to be sure, but in the shadow of Gandhi, Dietrich Bonhoeffer, Oscar Romero, and Martin Luther King, is the church now impotent? Are its leaders now too afraid to speak truth to power, to stand against darkness? Or is the problem that the church is, like most of us, fooled by the myth that we live in a free market so we don’t realize we are immersed in an immoral system of controlling usury?

Lower class Greek citizens are now learning the painful truth about the mythical free market. A few of them have died as the police brutally repress them to enforce the usury system for the rich bankers like Goldman Sachs. Where is the voice of Bishop Romero? “I order you, stop the repression!” Iceland learned the lesson a few months ago. Several other populations have learned the lesson in the past as the controlling debt peddlers punished, conquered, and restructured their countries (Indonesia, Malaysia, Thailand, India, Argentina, Chile, Mexico, England, etc.). The same lesson is coming to the rest of Europe and the United States. But again, the church seems to be oblivious. It failed to heed Martin Luther King’s warning, “One of the great liabilities of history is that all too many people fail to remain awake…today our very survival depends on our ability to stay awake.” The church has fallen asleep.

The Dialectic of Left vs. Right

A possible reason is that the church has been co-opted by the manipulative left vs. right civil war created by the corporate media. In fact, Protestant denominations have split into conservative vs. liberal camps so they war against each other—Wall Street is brilliant at divide and conquer. Some sermons in conservative denominations sound like speeches from conservative politicians. Liberal Christian magazines sometimes seem to be just liberal political magazines with an added dash of Jesus.

Postmodernism should inform us that the left vs. right narrative is contrived to keep people from noticing the real power structure behind Wall Street that controls our lives. As long as the church submits to the false framework, church leaders will be “safe.” But that means they will also be irrelevant because they are not speaking to the primary narrative in our world that has always caused problems and is getting ready to unleash far more pain and poverty in the near future—the issue of monolithic usury and debt servitude. By not speaking against usury, the church has become a pawn of it. So the church has largely been conquered by the same concocted civil war that has divided society.

Dollar Tyranny

Another reason the church may be silent is the simple fact that it depends on money just like everything else does. Since all money in our system comes from usury, it is difficult to even notice it. And what authority would the church have to speak against it since it is itself complicit in it? Anybody or any organization that uses a Federal Reserve Note or a credit/debit card, which everyone must do, is unknowingly participating in usury because, again, all of that money comes from the bonds held by Wall Street. But knowingly or not, how could the church or any organization speak against the very thing that fuels its own existence?

The church’s tax-exempt status may be another reason for the silence. Tax exemption is one of the powerful ways the financial empire system influences and controls other entities. If the wrong person says the wrong thing, the IRS has the ability to suddenly remove the exemption, which doubles the cost of running that organization. The church never should have submitted to such tyranny over what may or may not be said.

Comfort of the Middle Class Bubble

Finally, it seems the comfort provided by the monetary system for the great mass in the middle, which is a key part of the church, keeps us from wanting to really think about it. The illusion of peace and prosperity that has lasted for so long has been nice. Some of us even thought we had that comfort because we were better people, so God blessed us. Reckoning with the truth will be painful for those who believe this. The fact is that our perceived comfort today is a result of the darkness of usury. The middle can only exist because there is a bottom that keeps our system afloat. They are the only reason the middle class exists. Moreover, the comfort is currently an illusion because most in the middle class don’t realize how indebted they are. Total unfunded liabilities currently hidden on the government’s financials put each American in an extra $300,000+ in debt that they currently aren’t aware of. That debt comes from the fact that, again, our money comes from usury.

Since the bubble was built on usury, its very existence is immoral, and everyone who participates in it becomes infected. It is also flimsy because usury means the bubble is sustained by debt. Many are already aware of the hollowness of the bubble since it has destroyed the fabric of our communities and a sense of deeper meaning in life. But others are able to ignore that and focus on the material comfort. What will happen to them once the material comfort itself crashes? It will soon. Some market forecasters predict the final collapse of our debt system will be worse than the Great Depression. The math is clear—it will be worse. Just like Greece, we will then see Wall Street paying the government to crackdown on the people, cancel social programs, and take their assets from them to hand them over to the upper class behind the banks. That is the end result of usury—using debt to control others and take their assets so they have no equity. At that point it will be too late for the church to save the lower and middle classes from violent repression and the upper class from their narcissistic detachment from the horror.

“Silence is Betrayal”

So is there a wing of the church that has not yet sold its soul? Is there a remaining Christian voice against usury, or are Muslims the only people in the world who stand against it? The church must wake up to the truth of our system and become relevant again. This is the civil rights issue of the 21st century, only this time it is not black vs. white but a few money pushers vs. the great mass of users. The power of the bond market is getting ready to wreak havoc. We’re all in it together this time. As Martin Luther King said, “There comes a time when silence is betrayal….That time has come for us today.” Will the real church please speak up?

Damon added the following commentary, “We are heading toward a very dark future, unless we fix it, because our system is built on a fundamental evil--usury. This force has taken over not just our economic system, but our governments, our lives, and everything else from schools, to nonprofits, to families, and even the church. I hope the word gets out on this one. And if you attend a church, regardless of religion or denomination, I think the leadership needs to be informed about this.”

Health Care Costs rise by Largest Amount Ever - It's all a part of the new economy, GIVE and TAKE

Income doesn’t seem to go as far as it used to? Family health care expenses are a large reason why. A study just released by Milliman Medical showed that their 2010 index for family medical expense rose to $18,074 from 2009’s $16,771, an increase of 7.8% or a record setting $1,303 on the year!

Read the full report here, it is easy to follow and has many good charts:
Milliman Medical Index 2010

Their study adds up the total medical spending costs for the average family – more than $18,000.

Medical costs have increased $4,692 per year over the past 5 years, an increase of 35%! This 35% annual increase since 2006 compares to a 4.9% growth in household income. Sustainable? I think not, it sounds more like bubble dynamics to me.

It gets even worse when viewed over longer time periods. Going back and reviewing Milliman’s report for 2006, we find the following chart going back to the year 2002 when growth rates were running above 10%.

Although 2010’s percentage rise is not as high, the dollar figure is growing exponentially.

Here are the annual cost figures going back to 2002:

Since 2002 family medical costs have risen 96%! Have incomes kept up with that? Certainly not! Incomes and medical expenses are on two different curves, just as are income and debt. It’s certainly no coincident that debt has also grown over the same time period – that is exactly how and why increases in medical costs, housing costs, automobile costs, etc. came about, it was financed. And now here we are, incomes in the same place, expenses soaring, debt saturated.

This year’s $18,000 total annual medical spending compares to the median household income, according to the Census Bureau, of $52,175. That equals a staggering 34% of median household income.

However, of that $18,000+ that is spent, employers pay for 59% of it and following three consecutive years of individuals paying an increasing share of the expense, 2010 actually saw the employer’s share increase slightly.

The 41% of the cost paid by employees equals $7,330 per year, or “only” 14% of household income. In 2006 employee share was 38% of the total.

Here's how the percentage of the national average breaks out by region, sorry Floridians:

Universal health care going to keep costs down? Please. It’s more like the mandatory Gestapo Insurance Vampire Economics (GIVE) program. Insurance company bonuses, bubbles for everyone!

Oh, you’re not in the financial or insurance industries? Sorry, GIVE is not for you. You, my friend, are a part of the Tax And Keep Economy (TAKE).

About The Market Turmoil

It is difficult to know where to start when commenting on the extreme market turmoil of the last few days. A good place would perhaps be to read George Reisman's excellent summary of the background of the crisis. We should never forget to emphasize how this is all Alan Greenspan's fault.

After you've finished reading Dr. Reisman's piece, a few additional points should be noted.

1) Markets are more erratic than ever. I have followed financial markets on a virtually daily basis for more than 10 years and so I have experienced large up and downs in all markets. Yet I cannot remember the markets ever being quite as erratic as this week. This means not only that the short-term mood swings, the sudden swings between extremely bullish and bearish sentiment, are larger than ever. But most importantly that the swings are more detatched from news and rationality than ever.

Two movements were especially noteworthy in this context. On Tuesday, after the FOMC decided to keep a relatively hawkish stance, the stock market first fell on the news as expected. But then after just half an hour or so, it suddenly reversed cause and rallied sharply, a rally which continued on Wednesday. What gives? Well, supposedly Bernanke indicated that he wasn't worried about the subprime crisis and that was supposedly a reason to buy. As if Bernanke's comments had any relevance with regards to the underlying fundamentals.

Similarly, on Wednesday, oil prices first rose after a report showing declining crude oil and gasoline inventories. But then they turned down and finished lower than they started.

Not to mention of course, the swings between the sharp sell-offs late last week, the sharp rally Monday to Wednesday and the sharp sell-off on particularly Thursday.

With the markets behaving so irrationally it is dangerous to engage in short-term speculative movements. The erratic nature of the markets ultimately of course reflects nervousness about the housing bust and its repercussions.

2)The black helicopters did arrive. And not just the Federal Reserve helicopters but helicopters from the ECB and half a dozen or so other central banks and they all flooded the markets with newly created money to force down the interest rate on overnight loans to their target rates.

Note however that this does not represent a loosening in monetary conditions per se, only that the central banks prevented the markets from tightening them on their own.

The markets are now pricing in a Fed rate cut at the next meeting at latest, and perhaps even at an emergency extra meeting next week. I think the latter is unlikely unless we see a further dramatic deterioration in financial conditions, but the former now appears likely.

I have previously not believed in rate cuts anytime soon, but now it appears a lot more likely. I don't think they should cut as inflationary pressures are too strong, and I have a feeling that most FOMC board members too are more skeptical than the markets about the benefits of rate cuts. However, can they really withstand the pressure from the markets and pundits to lower rates? I increasingly doubt it. Not that rate cuts are going to save the day. A recession will likely appear anyway and by not rooting out inflationary pressures now, we are simply likely to see a prolonged recession and a weaker recovery later.

3) As previously noted, the markets are so erratic right now that short-term speculation is dangerous. However, since the underlying fundamentals are so weak we are first of all likely to see these erratic swings continue and any trend movements are more likely to be sloped downward rather than upwards.

Morning Update/ Market Thread 5/12

Good Morning,

Equity futures are higher this morning following yesterday’s mixed close. The RUT led the advance yesterday and is showing relative strength again with the so called “risk trade.” The dollar is down slightly and the Euro is roughly flat. Below is a daily chart of the dollar on the left and the Euro on the right. Note how the Euro has failed to recover despite the Trillion dollars/euros that were just tossed at it:

Should the Euro break beneath the 1.26 level, look out.

Bonds are down, oil is up only slightly and is still resting on support, gold has broken out to new highs and just touched a stunning $1,245 an ounce. The move in gold is very steep, the Point & Figure chart for gold is looking for a price target of $1,310 an ounce:

The worthless MBA Purchase Applications index did a 180 from the week prior with the refi index rising a completely unbelievable 14.8% for the week, and the purchase index falling 9.5%! Why do we not laugh these clowns off the planet? Here’s Econoday:

The end of second-round housing stimulus made for a 9.5 percent drop in purchase applications according to Mortgage Bankers' data for the May 7 week. The drop reverses a run of increases in late April including a 13.0 percent jump in the April 30 week as buyers rushed to get a contract in place before month-end.

The outlook for the housing sector is uncertain but has improved in the last few weeks as mortgage rates have moved unexpectedly lower, the result of Europe's sovereign debt troubles and the resulting flight to safety, specifically flight to U.S. Treasuries. Home owners are taking advantage of the move and are refinancing their mortgages as the refinance index jumped 14.8 percent in the week. Mortgage rates fell in the week led by a 6 basis point decline in 30-year fixed loans to an average 4.96 percent. Next data on the housing sector will be the housing market index on Monday.

Riiiigggt, a 6 basis point rate move causes a 14.8% rise in just one week… pleeeaase, just how gullible do they think we are?

Oh, that’s right.

“Data” like that is exactly why you should have no confidence and is yet another reason gold is hitting all time highs.

Good thing the trade imbalance widened to a one year high or otherwise we’d really be in trouble. Coming in at “only” -$40.4 Billion, that is, after all, a third less than the $60 Billion monthly deficits we used to run:

The March trade gap widened to $40.4 billion from a slightly revised deficit of $39.4 billion in February. Imports and exports jumped 3.1 percent and 3.2 percent respectively. The trade gap, which was smaller than the expected $41.0 billion was due in part to sharp increases in both the price and quantity of energy imports. Trade deficits with most major trading partners widened including those with China, Japan and the European Union.

The petroleum goods gap widened to $24.8 billion from $23.0 billion in February. However, the nonpetroleum gap narrowed thanks to the large export increase. And combined with a larger services surplus it suggests that excluding petroleum, the overall gap would have narrowed. Other imports categories posted solid gains, particularly auto imports. At the same time, exports of industrial supplies, which include some energy products, and consumer goods posted solid gains.

The unadjusted crude oil barrel price rose to $74.32 which is the highest since October 2008, while the volume of crude oil imports rose to 299.5 million.

Did someone mention oil? In a scene that looks like a precursor to the movie Mad Max here’s some amateur video of the Gulf oil slick taken five days ago:

This spill is certainly historic in nature and will indeed impact the economy going forward. It may even turn out to be a turning point in making energy more expensive to obtain. If we were collectively intelligent (we're not), we would be racing for REAL energy solutions, but sadly we are too preoccupied with a collapsing economy due to the decay of the rule of law.

Think back over the first three months of 2010… remember the massive up days on Mondays that turned into a 90% probability? Remember how the majority of the move occurred in the premarket giving the little investor NO opportunity to enter unless they jumped in the Friday before? And then remember how the Monday ramp morphed into the late Friday ramp in order to get in front of the “sure thing” bet? Now think back to the three options expirations weeks and the gyrations in the market leading up to them…

Now tell me what the odds are that any individual investor could have made money on every single trading day of that quarter… being struck by lightning, twice, would be way better odds I’m sure. Yet our big banks are so good that FOUR of them were able to earn money and not lose a single penny each and every single day:

‘Perfect Quarter’ at Four U.S. Banks Shows Fed-Fueled Revival

May 12 (Bloomberg) -- Four of the largest U.S. banks, including Citigroup Inc., racked up perfect quarters in their trading businesses between January and March, underscoring how government support and less competition is fueling Wall Street’s revival.

Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs Group Inc., the first, second and fifth-biggest U.S. banks by assets, all said in regulatory filings that they had zero days of trading losses in the first quarter. Citigroup Inc., the third-largest, doesn’t break out its daily trading revenue by quarter. It recorded a profit on each trading day, two people with knowledge of the results said.

“The trading profits of the Street is just another way of measuring the subsidy the Fed is giving to the banks,” said Christopher Whalen, managing director of Torrance, California- based Institutional Risk Analytics. “It’s a transfer from savers to banks.”

The trading results, which helped the banks report higher quarterly profit than analysts estimated even as unemployment stagnated at a 27-year high, came with a big assist from the Federal Reserve. The U.S. central bank helped lenders by holding short-term borrowing costs near zero, giving them a chance to profit by carrying even 10-year government notes that yielded an average of 3.70 percent last quarter.

‘Implausible’ Proprietary Model
Wells Fargo & Co., the No. 4 U.S. bank, doesn’t disclose how many days it had trading gains or losses, said John Shrewsberry, head of the bank’s securities and investment group. Bank of America declined to comment beyond its filing, according to spokesman Jerry Dubrowski. JPMorgan also wouldn’t comment, spokesman Joseph Evangelisti said. Fed spokesman David Skidmore didn’t reply to an e-mail left after regular office hours yesterday.

At Goldman Sachs, which is contesting a fraud lawsuit from the Securities and Exchange Commission tied to the sale of a mortgage-linked security in 2007, net revenue was $25 million or higher on each of the days it traded. The New York-based firm said it made more than $100 million on 35 of those days, or more than half the time.

The company’s fixed-income, currencies and commodities businesses and equities unit generate those returns by making markets for clients rather than betting the firm’s own money, Chief Operating Officer Gary Cohn said yesterday at a financial services conference in New York.

“There is often speculation that proprietary trading revenues drive our outperformance in these businesses,” Cohn said. “Over the last 12 months, we have only recorded 11 loss days. It is implausible that a proprietary-driven business model could be right 96 percent of the time.”

“Implausible” is right.

Hate to break the news, but skimming 3% off the yield curve isn’t going to produce $100 million DAYS. This fact is THE most illuminating tell on what’s occurring with the markets. They have been completely subverted – they have been destroyed and are now nothing but a controlled simulation.

Since the “banks” obviously now have authority to print cash from the market, you would think that would make them the buy of the century. I mean how could that possibly go wrong?

Don’t worry; the punch line will be obvious when it comes.

The markets have generally been stopped by the 50 day moving average. However, the RUT and the Transports are back over it today. While guessing the direction of the computer simulation by a mear mortal is obviously a fool's game, I continue to believe that this market looks sick. The Euro is not responding to the electro-shock paddles, the coronary continues, confidence continues to erode.

Statistics like the MBA Purchase Index don’t help to inspire my confidence, nor do government statistics like the supposedly 290K jobs that were massaged into being. If you ask me if I think they would lie to you, honey, well…

Eurythmics - Would I Lie To You:

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