came to an end at the same time: the administration’s policy to Extend &
Pretend has run out of time as has the patience of the US electorate
with the government’s Keynesian economic policy responses. Desperate
last gasp attempts are to be fully expected, but any chance of success
is rapidly diminishing.
Before we can identify what needs to be done, what the administration is
likely to do and how we can preserve and protect our wealth through it, we
need to first determine where we are going wrong. Surprisingly, no
one has assessed the results of the American Recovery & Reinvestment Act
2009 (ARRA) which was this administration’s cornerstone program to place
the US back on the post financial crisis road to recovery.
We can safely conclude either:
The administration completely under estimated the
extent of the economic crisis, even though we were well into it when the
ARRA was introduced.
The administration was unable to secure the
actually required stimulus amount which was likely 4-5 times that
The administration failed to implement the program
in a timely manner.
The administration failed to diagnose the problem
correctly and that in fact it is a structural problem versus a cyclical
and liquidity problem, as they still insist it to be.
horrific as the gulf environmental catastrophe is, an even more
intractable and cataclysmic disaster may be looming. The yet unknowable
costs associated with clean-up, litigation and compensation damages due
to arguably the world’s worst environmental tragedy, may be in the
process of triggering a credit event by British Petroleum (BP) that will
be equally devastating to global over-the-counter (OTC) derivatives. The
potential contagion may eventually show that Lehman Bros. and Bear
Stearns were simply early warning signals of the devastation lurking and
continuing to grow unchecked in the $615T OTC Derivatives market.
What is yet unknowable is what the reality is of BP’s off-balance sheet
obligations and leverage positions. How many Special Purpose Entities
(SPEs) is it operating? Remember, during the Enron debacle Andrew Fastow,
the Enron CFO, asserted in testimony nearly 10 years ago that GE had
2500 such entities already in existence. BP has even more physical
assets than Enron and GE. Furthermore, no one knows the true size of
BP’s OTC derivative contracts such as Interest Rate Swaps and Currency
Swaps. Only the major international banks have visibility to what the
collateral obligations associated with these instruments are, their
credit trigger events and who the counter parties are. They are
obviously not talking, but as I will explain, they are aggressively
repositioning trillions of dollars in global currency, swap, derivative,
options, debt and equity portfolios.
Chinese authorities have a completely
different approach in dealing with maters of asset bubbles, credit
bubbles…they are preemptive, the U.S. is reactive. China wants to
build firewalls between the asset markets and the real economy so
they certain do have, or they did have, I should say, a high-end
property bubble…in April they took extremely tough actions to
curtail multiple purchases by speculators and they stopped! And
they did that before the housing bubble got bigger and ended up
distorting the real economy, so they’ve done a good job. […] I
think it’s really wrong to view China as an enormous macro
If you subtract out government transfer payments to
Americans (such as unemployment checks) and lower taxes paid
by Americans (due to breaks or lack of income), then you can
wipe out all of the consumer spending growth since
Lehman went bust in 2008.
Sans government support, there wouldn't have been any new
Econompic astutely highlights.
Own a small business dependent on the U.S. consumer right
now? You might just have discovered yourself as a die-hard
Keynesian. Not receiving much of the spending support shown
below? Then here's your charitable donation for the decade:
Econompic for more, chart uses BEA and Federal Reserve
The household misery index is leveling off. Unfortunately,
that leveling is somewhere just beneath the all time high
experienced in December of 1982.
Formerly, the misery
index was calculated by adding the rate of inflation to
that of unemployment. The blog
says that that no longer explains reality, considering CPI's
inability to factor in the real rising costs households are
The ECRI’s leading index continues to hit new lows this
week despite the equity market rally (via Reuters):
“A measure of future U.S. economic growth fell to the
lowest since July 2009, indicating that the economy will
continue to slow, a research group saiD on Friday.
Economic Cycle Research Institute, a New York-based
independent forecasting group, said its Weekly Leading Index
fell to 121.5 for the week ended July 2, down from 122.3 in
the prior week. That was the lowest level since July 24,
2009 when it stood at 120.3. The index’s annualized growth
rate fell to -8.3 percent after a -7.6 percent growth rate a
Illinois is expected to sell $900 million in taxable municipal
bonds in the coming week, just days after its comptroller said the
state finished its fiscal year on June 30 in the worst cash
position in its nearly 200-year history.
CENTRAL & EASTERN EUROPE
BANKING CRISIS III
ITS STILL NEGATIVE!!
Media would say, in describing this chart: "Things are getting better"
But when it is NEGATIVE it should be described: "Things are getting worse
at a slower rate"
The difference begs the question: " How long can it go on before another
crisis is triggered?"
Just curious: was the swoon in the stock market
just a function of the oil spill? Note that
the peak came just after the April 20th oil spill.
And considering that it took several days for
people to catch on that this was A BIG DEAL, would
make sense. And now the market is
rebounding, and there are reports
that on Monday the well could be capped.
What, you thought this fall had something to do
with double-dip fears?
No volume melt ups have become the norm under the Bernanke
regime - everyone is forced to expect the most ridiculous,
manipulated excreta possible from the primary dealers. When people
realize, soon enough, that the fair value of their 401k are about
95% lower, maybe, just maybe, something will change about this
broken record. Until then, just bet on the chopper - Benny will
make it all good until everything ultimately blows up.
As we close on another week replete with ugly economic data and
the usual bizarro counterintuitive market, here is a summary of
the 50 most underreported facts about the state of the US economy,
the Coto report. After reading these it almost makes sense
that the market has become completely desensitized to the sad
reality now pervasive in this country. Readers are encouraged to
add their own observations to this list. Surely if the list is
doubled, the market will go up to 72,000 instead of just 36,000.
#34) According to RealtyTrac, foreclosure filings
were reported on 367,056 properties in March 2010, an increase
of nearly 19 percent from February, an increase of nearly 8
percent from March 2009 and the highest monthly total since
RealtyTrac began issuing its report in January 2005.
#31) The Mortgage Bankers Association recently announced that
more than 10 percent of all U.S. homeowners with a mortgage had
missed at least one payment during the January to March time
That was a record high and up from 9.1 percent a year ago.
#23) To make up for a projected 2010 budget shortfall of $280
million, Detroit issued $250 million of 20-year municipal notes in
March. The bond issuance followed on the heels of a warning
from Detroit officials that if its financial state didn’t improve,
it could be forced to declare bankruptcy.
#16) U.S. government-provided benefits (including Social
Security, unemployment insurance, food stamps and other programs) rose
to a record high during the first three months of 2010.
39.68 million Americans are now on food stamps, which
represents a new all-time record. But things look like they
are going to get even worse. The U.S. Department of
Agriculture is forecasting that enrollment in the food stamp
program will exceed 43 million Americans in 2011.
#13) U.S. law enforcement authorities claim that there are now
over 1 million members of criminal gangs inside the country. These
1 million gang members are responsible
for up to 80% of the crimes committed in the United
States each year.
#12) The U.S. health care system was already facing a shortage
of approximately 150,000 doctors in the next decade or so, but
thanks to the health care “reform” bill passed by Congress, that
number could swell
by several hundred thousand more.
#4) According to a new report based on U.S. Census Bureau data,
only 26 percent of American teens between the ages of 16 and 19
had jobs in late 2009
which represents a record low since statistics began to be
kept back in 1948.
According to the Tax Foundation’s Microsimulation Model, to
erase the 2010 U.S. budget deficit, the U.S. Congress would have
to multiply each tax rate by 2.4. Thus, the 10 percent rate
would be 24 percent, the 15 percent rate would be 36 percent, and
the 35 percent rate would have to be 85 percent.
Having rapidly become the only person worth listening to on
CNBC, Rick Santelli's insights on the economy are now far more
valuable than any other guest's on the Jeff Immelt propaganda
station. Which is why we were very happy to find that
Eric King's latest interview was with none other than Mr.
Santelli. The topics discussed are numerous, varied and and very
critical to our economy, covering such concepts as deflation,
deficit spending, bailouts, government spending multipliers, Fed
transparency, spending cuts, austerity, the folly of Keynesianism,
strategic defaults, direct bidders and treasury auctions, and
lastly, tea party dynamics, making this a must hear interview for
anyone still on either side of the economic fence, and who enjoys
listening to Rick for longer than the 45 second segments the CNBC
producers will allow.
Deflation: "deflation is the most
disingenuous argument especially in the current conditions.
[When the bubble process ends prices have to come down to
reality] the process really is deleveraging, but what happens
when prices go down you get the economists call it deflation.
Deflation is always the biggest bogeyman in a central banker's
closet. It also allows them to use the only tool in their
toolbox, which is to spend money, and usually money they
haven't collected yet, so it's usually a deficit form of
spending. Think about what economists are trying to do: we go
up too high in leverage, prices are too high, we try to
correct that process, it's called deflation, and they try to
put money in to prop it up at an artificial price-deleveraging
is the word we should stick to"
Deficit spending: "the only thing that
works is across the board tax cuts because it fuels the type
of small business that does the bulk of the hiring"
Bailouts: "the only regulation that will
ever work is failure. If you don't allow failure what you end
up with is regulators trying to serve when it's time to take
punch bowls away. Regulators never go against the grain. Back
in 03-04 many in the fixed income markets saw it coming but
nobody wants to pull that punch bowl away. Businesses should
fail, that's the way the system was designed"
The Multiplier of Government spending:
"Larry Summers on many occasions has said that the multiplier
of government spending is greater than 1. If that was true,
we'd never have another recession ever again, and I would be
advocating to spend a trillion dollars every hour. It would be
like a perpetual motion machine and all physicists know those
are impossible. Every dollar the government spends comes from
Fed Transparency: "It seems to me we are
making some progress on the financial audit. I absolutely
agree that on all of the issues that take taxpayers' money and
end up being distributed or put on the balance sheet and in
any way used by the Fed, there should be an audit that should
be fully transparent. I am worried about the financial
On Spending Cuts: "Listeners, this is
going to be the most important thing I am going to say: we
need to maintain the focus on spending, the politicians in my
lifetime always spend. If we end up spending way more than we
can take in, in essence the deficit panel becomes a tax panel.
We must stop spending before we talk about VAT taxes or taxing
Americans more, we need to get spending under control. The
retings of congress are the lowest they have been in
On Austerity: "Nobody wants that. But
there is a silver lining - the UK have conditions in their
economy worse than the US, but they came up with an austerity
plan, and we see that their currency has been rewarded. The
GBP has risen about 10% in a very short period of time."
On Keynesianism: "The Keynesians are both
right and wrong. I don't think Keynes advocated the kind of
helicopter-Ben spending that many say he promoted. He
promoted the kind of stimulus that created jobs, that's more
the medicine for a cyclical downturn, we have a structural
issue because of the bubble credit scenario."
On the ECB's Debt Monetization: "I think
that the ECB has a huge issue and they are behind the ball.
They don't have a constitution in the eurozone, they have
cultural and monetary cultural issues to deal with. I think
that buying securities or monetizing or QE is always a bad
idea. Once there is a subsidy in the marketplace, it becomes
the normal pricing mechanism. For the Fed or the ECB to unload
these securities, becomes a destabilizing force and in the
long run does more harm than good."
On Strategic Defaults: "I have feelings
on this that go both ways. I think morally I would have an
issue doing that, but people who did the mortgage, or the
second mortgage, or took a HELOC to pay for cars, pay for the
vacations, I think it is reprehensible that we end up
reshuffling wealth to pay some of that off. But I think the
dynamic is from the government side - I think contracts
between banks and homeowners - if it's unsecured, it's
unsecured, I don't have an issue with that."
On Direct Bidders being a proxy for the Fed (a
much debated topic on Zero Hedge)and
Treasury Auctions in general: "That's the best
question anyone has asked me in a long time. I think there is
a recycling quid pro quo going on: the Fed is making banking
obsolete because a lot of the programs that they have is to
take the cheap end of the curve and invest it in Treasuries.
Well the Treasury needs as many buyers as it can get. I think
the financial institutions are recycling easy money that
should be going into John Q Public's pocket, to those that
deserve credit, all this money is ending up in the forms of
purchases of 10, 7, and 5-Year Notes, and I don't like that
way that's working. That's why I think that raising rates
would be a good thing. Why? Because it would take some of the
easy ways the banks recycle the Fed's cheap money and put it
back in the hands of the public and actually make banking a
relationship between banks and Americans that need it whether
it is for funding a mortgage or funding a small business."
And on Tea Party dynamics: "I think
November 2 is going to be a watershed of Americans letting
Washington know they're the boss."
ZH - Zero Hedge - Business Insider,
WSJ - Wall Street Journal, BL -
Bloomberg, FT - Financial Times
Gordon T Long is not a registered advisor and
does not give investment advice. His comments are an expression of opinion
only and should not be construed in any manner whatsoever as
recommendations to buy or sell a stock, option, future, bond, commodity or
any other financial instrument at any time. While he believes his
statements to be true, they always depend on the reliability of his own
credible sources. Of course, he recommends that you consult with a
qualified investment advisor, one licensed by appropriate regulatory
agencies in your legal jurisdiction, before making any investment
decisions, and barring that, we encourage you confirm the facts on your
own before making important investment commitments.
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Gordon T Long
is not a registered advisor and does not give investment advice. His comments
are an expression of opinion only and should not be construed in any manner
whatsoever as recommendations to buy or sell a stock, option, future, bond,
commodity or any other financial instrument at any time. While he believes his
statements to be true, they always depend on the reliability of his own
credible sources. Of course, we recommend that you consult with a qualified
investment advisor, one licensed by appropriate regulatory agencies in your
legal jurisdiction, before making any investment decisions, and barring that,
we encourage you confirm the facts on your own before making important