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Sunday, October 31, 2010 8:30 PM

SEIU Makes Voting Easy

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If you are in doubt of how to vote on Tuesday, the answer is simple. All you have to do is look at SEIU Endorsed Candidates and vote the opposite.

That link is for Illinois, but the SEIU has similar lists for other states. See if you can find one for your state.

The general rule is: Do NOT vote for any candidate endorsed by unions, especially public unions.

Illinois Voters

I am surprised to see a number of Republicans on the Illinois endorsed list, but those candidates are for state, not national choices. The SEIU did not endorse anyone for some races, no doubt because there was no democrat running, or neither candidate was willing to sponsor the garbage the SEIU wanted.

In Illinois, at the National level, simply vote Republican and be done with it. the same applies for all of the high level state positions including Governor, Lieutenant Governor, Attorney General, Secretary of State, Comptroller, and Treasurer.

The most important things to remember are that Governor Pat Quinn has vowed to raise your taxes in a bribe to win public union votes. Senate candidate Alexander Giannoulias will do the same.

California Voters

If you live in California please see How Not To Vote.

In California the process is simpler because public unions have only backed Democrats. However, California does have a number of important propositions to consider, notably proposition 25 which will make it easier for politicians to hike your taxes. Don't fall for it. Vote no on prop 25.

In addition you may want to vote yes on Prop 19, legalizing Marijuana, even though the unions have endorsed it (no doubt because it taxes the stuff).

Other States

If you live in other states and are unsure how to vote, take a look to see if the SEIU or other union has made it easy for you as well.


Bear in mind I am not a Republican. Rather, I am a Libertarian who has openly and actively endorsed those who want to lower taxes, stop being the world's policeman, and in general get government out of the way. Unfortunately there are not many such candidates.

Regardless, we cannot afford cap-and-trade idiocies, expanding public unions, expanding collective bargaining, or more war mongering. In general the Democrats have been on the wrong side of all of those issues, while Republicans are right on many of them.

Simply put, we simply cannot afford 2 more years of disastrous Obama sponsored nonsense and public union handouts.

Mike "Mish" Shedlock
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11:02 AM

"Money’s Already Quite Cheap"

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Quite often simple explanations are the best. There are dozens of reasons why another round of QE will fail, but much of comes down to "Money’s Already Quite Cheap".

Please consider Schwarzman Says Fed Easing Won’t Make Much Difference

Stephen Schwarzman, chief executive officer of Blackstone Group LP, the world’s biggest buyout firm, said another round of asset purchases by the U.S. Federal Reserve won’t have much of an impact on companies.

“It’s not an enormous incentive to do something different with your businesses because rates are down a few basis points,” Schwarzman, 63, said yesterday in an interview with Bloomberg Television’s Margaret Brennan at the UBS Wealth Management Roundtable in New York. “Money’s already quite cheap.”

Schwarzman joins hedge-fund managers Paul Tudor Jones, Clifford Asness and Colm O’Shea in casting doubt on the effectiveness of more so-called quantitative easing. Asness, who runs Greenwich, Connecticut-based AQR Capital Management LLC, said he doesn’t expect any long-term effects from such a move.

“Us printing money to buy our own bonds I don’t think can matter long term,” Asness said this week in an interview with Bloomberg News at the Buttonwood Gathering, a conference organized by The Economist magazine in New York.

Jeremy Grantham, chief investment officer of Grantham Mayo Van Otterloo & Co. in Boston, said in a quarterly letter to investors that the Fed’s quantitative easing will be a “more desperate maneuver than the typical low-rate policy.”

Tony James, president of New York-based Blackstone, said today he wasn’t convinced pushing borrowing costs lower would have a positive effect on the economy.

“I don’t see that lower rates are going to encourage American industry to borrow and build,” James said today on a conference call with reporters. “It has a counter-stimulative effect. I don’t think it works.”
The junk bond market has already gone nuts as noted in Mad Dash Into Junk Sets October Record so what is Bernanke hoping to accomplish other than a bigger bubble in junk bonds, equities, and commodities?

Virtually none of that helps small business owners shut of from the bond market and hurt by rising input prices and collapsing prices for their goods and services.

Cost-Push Inflation?

Someone sent me an email stating that I do not understand push-through inflation and that is why I don't understand hyperinflation.

Well for starters hyperinflation is not caused by rising prices, hyperinflation is a loss of faith of currency (typically caused by some political event). The result (not the cause of hyperinflation) is rising prices. For a further discussion of hyperinflation please see "Straight Talk" with Economic Bloggers

Second the whole idea of cost-push inflation is silly. An excerpt from $30 Billion Offer No One Wants - Small Businesses Hit by Deflation will prove it.
NFIB Small Business Trends

Inquiring minds are taking a look at NFIB Small Business Trends for September.

The weak economy continued to put downward pressure on prices. Seasonally adjusted, the net percent of owners raising prices was a negative eight percent, a four point increase from July. August is the 21st consecutive month in which more owners reported cutting average selling prices that raising them.


The Index has been below 93 every month since January 2008 (32 months), and below 90 for 25 of those months, all readings typical of a weak or recession-mired economy.

Inflation? Not a threat. Far more owners have cut prices than raised them for 21 months in a row. Deflation? It certainly feels that way to a quarter of the owners reporting price declines for the goods and services they produce and sell.
Here are a few charts from the article.

Prices Received

Actual Price Changes

Cost-push inflation? Yeah right.

Meanwhile, QEII is punishing small businesses, the very lifeblood of the job creation engine.

Mike "Mish" Shedlock
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10:35 AM

Happy Halloween: Pumpkins from Readers and Surveys about Ghosts

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Richard D writes ...

Thought you might appreciate this, I carved the scariest thing I could think of this year into my pumpkin.

In a salute to Bernanke and the Fed, FRB stands for Fractional Reserve Banking, and QEII is Quantitative Easing round II.

27% Believe in Ghosts

A Rasmussen poll shows that 27% Believe in Ghosts
Twenty-seven percent (27%) of Americans say they believe in ghosts, according to a new Rasmussen Reports national telephone survey. Sixty-three percent (63%) don't, but another 10% aren't sure.

Belief in ghosts is up slightly from a year ago, when 23% thought they were real.

Men under 40 claim to believe in spirits more than their elders. Unmarried adults tend to think ghosts exist more than those who are married.

Maybe it's just because of the news this election year, but Democrats are twice as likely as Republicans to believe in ghosts.
Mike "Mish" Shedlock
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1:29 AM

Simulation of a US State Defaulting

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At the recent Buttonwood economic conference in New York City, a team of economists addressed the question "What If a State Defaults".

WHAT happens if an individual state defaults? That was the question posed to a panel of luminaries at the Buttonwood gathering in New York, including Robert Rubin, Josh Bolten, Glenn Hubbard, Laurence Meyer and Laura Tyson.

The panel was assumed to be a bunch of Presidential advisers faced with a request for funding from New Jefferson, a fictional state with many of the problems of a typical state - unfunded pension promises, years of fiddling the numbers to balance the budget and a government divided between the parties. New Jefferson is shut out from the markets and asks the Federal government for $1.5 billion to meet a debt repayment due 48 hours away. There could be systemic risks if default occurs with the Chinese government raising the issue of contagion and with some state banks owning a substantial portion of the state's bonds.

The panel reluctantly agreed to provide temporary funding for the state - say for 30 days - but to require the state to sort out its mess. But it suggested a whole series of stringent conditions, including the use of proper accounting and a requirement to fund its pension plans properly. they were divided over what would happened if New Jefferson failed to save its problem within 30 days.

This is a very long video that some readers might enjoy. However, the panel did not address whether the long-term pension problem can be tackled if the courts decided that existing pension rights are legally protected.

Long-term pension issues are without a doubt the most likely reason a state would default.
Mike "Mish" Shedlock
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Saturday, October 30, 2010 2:29 PM

Housing Question From Down Under

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Ben from Australia has a wife who is wondering about the wisdom of staying in cash on the sidelines waiting for Australia home prices to decline.

With and Email header of Advice for an Aussie, Ben writes ...

Hey Mish,

Just wanted to say a quick hello. I love it every day when then email with your latest posts arrives in my inbox about 5:20pm each afternoon (Sydney time).

You are completely right about the property boom in Sydney and Australia. One of my best mates is about to buy a pretty average 3 bedroom unit in Sydney for about A$750,000. It is absolutely crazy. He plans to rent it out (the rent will cover less than half the interest etc) but he is sure it will go up 10-15% a year. “Why?” I always ask. “Because it always does!” he replies. I’ve stopped explaining my position to him. All my mates think I am uncle scrooge.

But my question – I have a young family and a growing business. I’m stashing everything in cash in the bank and waiting to buy a house when the RE market (inevitably) falls – although my wife is getting impatient. The Reserve Bank of Australia is a pretty conservative beast (that’s a good thing in my book) with official interest rates at 4.50% and headed higher. But I look at China and your comments about Australia (and Canada) getting belted in the fallout. Would you suggest anything other than putting everything in the bank?

Anyway, hope you’re having a good weekend. Just wanted you to know that your efforts are appreciated around the world.


Response to "Down Under"

Hello Ben, that home prices in Australia keep going up is all the more reason to wait. The bigger the bubble the bigger the crash when it happens. Home prices always revert to the mean. Australian home prices are standard deviations above the norm in terms of price-to-rent and price-to-wages.

The bubble will pop and the crash will be spectacular, no doubt as soon as every conceivable person on the sidelines is sucked in.

"No Bubble?" Don't Believe It

The central bank says there is no bubble. Don't believe it.

Moreover, I laugh when I read articles like No house price bubble: RBA
RBA deputy governor Ric Battellino said today house prices in Australia, relative to income, were reasonable.

"People feel that house prices in Australia are quite high and that’s quite often because the ratio of house prices to income that are published for Australia tend to focus mainly on prices in the cities, and they are quite elevated,’’ Mr Battellino said in response to a question at a business function in Sydney. ‘‘But, if you look across the whole country, the ratio of house prices to income is not that different from most other countries."
What Battellino seems to be suggesting is to look across the Outback and average prices and there is no bubble. This is like suggesting there is no bubble in San Diego because there is no bubble in Danville, Illinois.

Well, there may not be a bubble in the central Illinois farm belt, but not many people live in widely dispersed small farm towns of a few thousand people each.

It makes no sense to measure prices this way. The bubbles in Australia are where the vast majority of the people live.

Ben Asked "But I look at China and your comments about Australia (and Canada) getting belted in the fallout. Would you suggest anything other than putting everything in the bank? "

His question is in reference to Misguided Love Affair with China; China's Massive Monetary Expansion and Crackup Boom.

One thing Australians have going for them is treasury rates of 4.5%. The second thing is they do not have to worry about currency fluctuations, something that carry trade investors do have to worry about.

Australia Dollar Weekly Chart

The Australian dollar has been on a tear. Yet, where to from here is of primary concern to carry trade players seeking 4.5% in interest but assuming the risk in the slide of the Australian dollar.

Australians have no such concerns, and that does open up another play. Instead of sitting in cash, Australians can consider buying longer term Australian Central Bank notes on the expectation that when the housing bubble bursts, the RBA will respond by lowering rates.

For someone living in Australia with expenses and wages in Australian dollars, long-term Australian Central Bank bonds looks like a very good opportunity.

Those are my thoughts as to what looks attractive from this side of the ocean where 5-year treasury notes yield a mere 1.17% and 10-year notes a paltry 2.6%.

Mike "Mish" Shedlock
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2:56 AM

Mad Dash Into Junk Sets October Record

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The mad dash into junk bonds continues. Please consider Junk Sets October Record, Mortgage Bonds Rally

Sales of junk bonds in the U.S. set a record for October as returns topped investment-grade debt and more borrowers were raised than cut. Government-backed mortgage bonds may beat Treasuries by the most in at least 10 years.

Fortescue Metals Group Ltd. and Calpine Corp. led speculative-grade companies issuing $33 billion of debt this month, according to data compiled by Bloomberg. The notes have gained 2.32 percent on average in October, compared with a loss of 0.16 percent for high-grade securities, Bank of America Merrill Lynch Index data show. Not since March have high-yield, high-risk securities outperformed by such a wide margin.

Investors have driven relative yields down to the lowest in five months on confidence the Federal Reserve will flood the economy with money, allowing the neediest borrowers to access capital and refinance debt. The rally is robust enough to extend into next year, said James Murren, chief executive officer of Las Vegas-based casino operator MGM Resorts International, which sold $500 million of notes rated CCC+ on Oct. 25.

“The bond market will get better,” Murren said yesterday in an interview at Bloomberg headquarters in New York. “People are going to start to have a more positive outlook toward 2011. They’re going to be searching for yield and they’re going to go down the rating scale and that’s going to benefit companies like us.”

U.S. junk bonds have gained 14.4 percent this year, compared with the record 57.5 percent in all of 2009. The 1.96 percent increase this month in the Bank of America Merrill Lynch Global High Yield & Emerging Markets Plus index exceeds gains on the Global Broad Market Corporate Index by 215 basis points, after outperforming by 233 basis points last month.

Global corporate bonds have lost 0.19 percent in October, after rising 0.22 percent in September and the worst performance since losing 0.4 percent in May. Year-to-date returns total 8.84 percent.
Lehman High Yield Bond ETF

S&P 500 Weekly Chart

Buy the Dip?

The last two downturns in January and May of 2010 were buying opportunities. Will buy the dip work next time? Fundamentally I see no reason it should, but that does not mean it won't.

I have been saying for 18 months that the stock market is unlikely to break hard as long as corporates are strong, but buyer beware, sentiment can turn on a dime.

Extreme Sentiment

We have a possible warning signal in that the corporate rally for the last two months has been US only.

We have another type of warning signal with the CEO of MGM Resorts International proudly proclaiming “The bond market will get better.”

Will it? He does not know, no one does. Moreover, I see no reason to think it will.

Finally, we have Richard R.S. Smith, head of high-yield capital markets at Royal Bank of Scotland’s RBS Securities unit touting “We’ve pushed many of our clients into what we view as a very attractive market from a refinancing standpoint. We think it’s going to continue as long as the U.S. government maintains a 10-year treasury rate below 3 percent.”

RBS just happened to pimp $500 million of MGM bonds rated CCC.

This is exactly the kind of sentiment it takes to make a top. However, please remember that sentiment, no matter how extreme, can always get more extreme.

Mike "Mish" Shedlock
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Friday, October 29, 2010 1:47 PM

Double Dip Delayed, Not Derailed; Understanding Consumer Spending

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The BEA Advance GDP for Third Quarter 2010 came in at +2.0%. However, Table 2. Contributions to Percent Change in Real Gross Domestic Product shows that Change in private inventories contributed +1.44 while real final sales contributed a mere .6.

How sustainable is that?

The answer is not very. This is likely the last hurrah for inventory replenishment even without factoring in upcoming cutbacks at the state level.

Not a V-Shaped Recovery

In terms of real final sales, this "recovery", is the weakest on record. Dave Rosenberg has some thoughts on that in Lunch with Dave.


The major problem in the third quarter report was the split between inventories and real final sales. Nonfarm business inventories soared to a $115.5 billion at an annual rate from the already strong $68.8 billion build in the second quarter — this alone contributed 70% to the headline growth rate last quarter. If we do get a slowdown in inventory investment in Q4, as we anticipate, it would really not take much to get GDP into negative terrain. We estimate that if the change in inventories slowed to about $94.0 billion in Q4 (about $22 billion below Q3 levels), GDP would contract fractionally. In other words, it won’t take much for GDP to slip into negative terrain.

The recession may have technically ended, but outside of inventories, and the best days of the re-stocking process look to be behind us, this has been a listless recovery. At 60 basis points above zero, real final sales are just a shock away from double-dipping — a shock like looming tax hikes, accelerating fiscal cutbacks at the state/local government level or the millions of “99ers” about to fall off the extended jobless benefit rolls at the end of November.

In terms of components, the good news was that consumer spending did accelerate to a 2.6% annual rate from 2.2% in the second quarter — the best performance since Q4 2006. Non-residential construction eked out a 3.8% annualized gain, the first advance since Q2 2008. But the good news pretty well stopped there.

It is also no surprise to see imports bulge when inventories did the same, but what caught our eye in the external trade portion of the GDP report was the sharp slowing in export growth, to a 5% annual rate trend — half the pace we saw in the first half of the year. Weren’t the overseas economies supposed to be providing a big lift to the U.S. economy?

Finally, state and local government spending dipped 0.2% — the fourth decline in the past five quarters. At a 12% share of the economy, this sector is nearly twice as large as business spending, and can be expected to be a dead-weight drag on the economy as far as the eye can see.

Here is the bottom line: the double-dip has been delayed but not derailed; despite widespread cries from the economic elite to the opposite. The economic recovery is extremely fragile and unless we get an improvement in real final sales, all it would take would be a modest inventory drawdown to pull real GDP back into contraction mode.
Consumer Spending up 2.6 Percent? - No Not Really

Rosenberg mentioned the one bright spot was consumer spending was up 2.6%. Indeed Table 2 in the BEA report shows Personal Consumption Expenditures were +2.6%.

However, it is important to understand what components make up PCE.

I talked about PCE on August 3, 2010 in Personal Income Flat, Private Wages and Salaries Decline in June; Is Consumer Spending 70% of GDP? Checkmark Recovery Revisited
Understanding PCE and Consumer Spending

To understand the discrepancy, we have to know what goes into PCE in comparison vs. retail sales. Here is an interesting article written in August of 2009 that addresses the issue.

Is Consumer Spending is 70% of GDP?

Economist Michael Mandel's article Consumer Spending is *Not* 70% of GDP not only addresses the above question, he also explains the apparent discrepancy between retail sales and consumer spending. Let's take a look.
I opened up this morning’s NYT and see the big headline “Retailers See Slowing Sales in a Key Season.” And I just know that we are about to have another round of “consumer spending is 70% of gross domestic product, so blah blah blah blah of course we can’t recover unless consumers start spending again.” (Not in the NYT story, to their credit, but you can find similar quotes everywhere you look).

Blah blah indeed. As a textbook author, there are few things that frost me more than hearing “consumer spending is 70% of gross domestic product,” because it perpetuates two very large and very misleading untruths.

First, the category of “personal consumption expenditures” includes pretty much all of the $2.5 trillion healthcare spending, including the roughly half which comes via government. When Medicare writes a check for your mom’s knee replacement, that gets counted as consumer spending in the GDP stats.

At a time when we are wrangling over health care reform, it’s misleading to say that “consumer spending is 70% of GDP”, when what we really mean is that “consumer spending plus government health care spending is 70% of GDP.”

Second, an awful lot of those back-to-school dollars are going to imported clothing and school supplies (how many of those laptops and iPods do you think are made in the U.S.?). A dollar of consumer spending does not translate into a dollar of domestic production.

In fact, the whole way that the BEA presents the GDP statistics points the public debate in the wrong direction. GDP stands for “gross domestic product”—that is, domestic production. But the breakdown of GDP is into expenditures categories—personal consumption expenditures, government consumption expenditures, etc.

I think we need to move towards presenting GDP in terms of production, rather than spending. We need a shift from the consumer to the producer as our main unit of analysis.

But for now, we need to stop being so darned obsessed with consumer spending.
Why Consumer Spending Is Important

I disagree with Mandel's last statement because sales tax revenues are extremely important to state budgets.

However, Mandel's excellent article helps explain many things even alleged "productivity" issues of the US vs. Europe.
Personal Consumption Expenditures

The above chart courtesy of the St. Louis Fed, shows one of the biggest distortions of reality you will ever see. Someone looking at the chart might actually get the idea that "consumer spending" has recovered above pre-recession levels.

However, state sales tax revenue (the only valid measure of consumer sales), is still far below 2007 levels and states are in serious trouble over it.

So no, consumer spending (in the real sense) is not soaring, and given the need for consumers to deleverage, it would not be a good thing if it were. For more on consumer spending and sales tax collections, please see Retail Sales Rise More Than Forecast; Once Again I Ask "Really?"

Mike "Mish" Shedlock
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3:39 AM

Misguided Love Affair with China; China's Massive Monetary Expansion and Crackup Boom

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China is pointing the finger at the US, complaining about "Out of Control" US dollar Printing by the Fed.

Dollar issuance by the United States is "out of control", leading to an inflation assault on China, the Chinese commerce minister said in comments reported on Tuesday.

"Because the United States' issuance of dollars is out of control and international commodity prices are continuing to rise, China is being attacked by imported inflation. The uncertainties of this are causing firms big problems," Chen was quoted as saying by the official Xinhua news agency.

Chinese officials have criticised U.S. monetary policy as being too loose before, but rarely in such explicit language.
Decoupling Theories Renewed

I will get to loose monetary policy in just a bit, but first consider More than decoupled, China is in league of its own
Two years on from the global financial crisis, the contrast with the rich world is striking. In the United States and Europe, growth is sluggish, a slump into outright deflation is a real risk and central banks look set to loosen policy further.

So the evidence is in: China is decoupled, influenced by, but ultimately independent from other major economies.

"The crisis was a test and China passed the test. Decoupling has become a much more solid thesis now than three years ago when we only talked about it hypothetically," said Qing Wang, Morgan Stanley's chief economist for greater China.
Chinese Money Supply Numbers from People's Bank of China

Money and Quasi Money Jan 2009 - 496135.31
Money and Quasi Money Sep 2010 - 696384.86

"Out Of Control" Monetary Expansion Irony

I am certainly not about to defend the Fed's misguided policies, but the complaint from Chinese commerce minister that US monetary printing is "out of control" is the ultimate in "pot calling the kettle black" irony.

Over the past few weeks I have exchanged quite a few Emails regarding China with my friend "BC" who writes ...
Total Chinese money supply is up over 4 times since '03, a 17%/yr. rate at a doubling time of just 4 years; up 66% since Jan. '08, a 19%/yr. rate at a doubling time of 43 months; and up 40% since Jan. '09, a 20%/yr. rate at a doubling time of 40 months.

Knowingly or otherwise, China has experienced a textbook faster-than-exponential money and debt/asset blow off or crack-up bubble that mathematically cannot continue. All faster-than-exponential bubbles burst and collapse, with prices falling back to the levels at which the differential rate of GDP and money began to diverge at an order of exponential magnitude, which was around early '02.

Ironically, Bubble Ben bashers claim the Fed is going off the rails with debt-money reserve growth?! Imagine what would happen to the Renminbi were the currency to be floated/convertible with money growing at arguably near hyper-inflationary rates in China!

Do Schiff, Faber, or Rogers ever talk about China's reckless, hyper-inflationary money supply growth? This kind of money supply growth is banana republic-like, making our feeble efforts appear benign by comparison.

This situation is INSANE, and the crash coming in China-Asia will be unprecedented in world history.
Credit Expansion in US vs. China

One might think that a country whose money supply is doubling every 40 months and growing exponentially since 2003 would not be pointing the finger elsewhere, complaining that others are "out of control".

One might also think those screaming about hyperinflation would scream about happenings in China, not just the US.

One would be wrong on both counts.

Moreover, unlike US monetary expansion that sits as excess reserves, China's money supply growth has spawned massive lending sprees, property bubbles, and asset bubbles in general.

I spoke briefly of this in Massive Inflation in China, US Inflation Nonexistent

In a fiat credit-based society, credit-expansion not reserve-expansion is the key to understanding inflation. Credit is contracting in the US but running rampant in China. It should be no wonder China shows signs of an inflationary crackup boom and the US is mired in deflation.

Peak Oil and the Demand for Resources

In my recent interview with Chris Martensen (see "Straight Talk" with Economic Bloggers) a pertinent question came up regarding energy.
2. Many of our readers have subscribed to Chris' position that the economy must be increasingly interpreted through two other lenses; energy and other environmental resources. Can you comment on the Three E's?

Mish: I am a firm believer in peak oil. I don't know how anyone can deny it. Given peak oil, and given the demand from China for oil and other commodities, the world is on a crash course of demand that cannot be filled.

China is growing at 8-10% a year (assuming you believe the stats). Can China keep growing at that rate forever? For even 10 more years? What about India? Brazil?

Either we get some serious energy breakthroughs, China slows, or the standard of living drops in the US, UK, and Europe. Well China does not want to slow, and the US and Europe are fighting hard to maintain a standard of living that is not sustainable.

Historically these situations end up with war. That is an observation, not a prediction.

Something has to give, perhaps many things, but all of the people who think China will soon be the number one economy in the world and that China's growth is sustainable, better start thinking about the implications of what I just typed above.

Preparation For War?

My friend "BC" writes ...
China's behavior since 9/11 and the invasion and occupation of Afghanistan and Iraq by the US is reminiscent of nations' war preparations of the past.

Then again, given Peak Oil, China's increasing dependency on imports of oil and other mineral resources, and the extent to which the US imperial military is arming the Middle East, encircling Iran and Pakistan, and encroaching deeper into Central Asia and towards China's western frontier, why would the Chinese not be preparing for war (or at least war-like conflict in regards to trade and resources)?
Runaway Printing Fuels Crackup Boom

It is important to understand the drivers behind China's growth.

1. Rampant monetary expansion
2. Property bubbles including completely vacant cities
3. US and European outsourcing
4. Malinvestment in infrastructure

Those who claim China's growth is internal fail to factor in points 2 and 4.

"BC" writes ...
China's runaway growth is derivative of US firms' massive investment in China-Asia, which has occurred recently coincident with Peak Oil, peak US Boomer and EU demographics, and now China reaching terminal velocity of investment, production, and credit growth.

That the US and EU economies (60-65% of world GDP) can no longer grow because of demographics and Peak Oil, and China is heavily dependent upon global markets for continuing US firms' investment and derivative growth of Chinese domestic investment, production, and exports, Peak Oil and China's terminal velocity occurring for the largest credit bubble per GDP in history implies that China faces an unprecedented contraction, with the risk that GDP per capita will fall at least 50% in the coming decade.
China bank profits defy loan problems

Much the same way the US housing bubble did not matter until it did, China bank profits defy loan problems
Bank of China and Agricultural Bank of China both reported rises in net profit of nearly 30 per cent in the third quarter in spite of government attempts to slow new lending and rein in asset prices.

The banks are the first of China’s state-controlled lenders to report profits for what is expected to have been a bumper quarter for most of their competitors as well.

However, the banks face problems involving bad loans resulting from a government-directed lending binge launched to combat the financial crisis.

Analysts, regulators and even the banks warn that the big expansion in lending, with the volume of new loans doubling from a year earlier to Rmb9,600bn in 2009, will almost certainly lead to a large rise in non-performing loans as many borrowers eventually default.

With credit still relatively easy to obtain and with economic growth still above 9 per cent, many of those asset problems are yet to materialise.
Love Affair Will End Badly

Parabolic expansion of housing prices, credit, or asset prices never ends well. Yet because the US bubble has burst while the various Chinese bubbles have not, various economic pundits are chanting nonsense once again about decoupling scenarios, even in the midst of currency wars and competitive currency debasement.

This love affair with China will not end well for the US, for China, and especially for the commodity producers like Australia and Canada, each in huge denial about their own property bubbles.

Mike "Mish" Shedlock
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Thursday, October 28, 2010 3:26 PM

Congressional Testimony on Foreclosure Mitigation and Mortgage Fraud

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Inquiring minds are considering the October 27, 2010 Testimony of Katherine Porter Before the Congressional Oversight Panel Hearing on the TARP Foreclosure Mitigation Program

Flawed foreclosures

Robo-signing is only one of a number of alleged deficiencies in foreclosure practices. Several courts have determined that there were serious deficiencies in the foreclosure process.

The concern being raised is that during the securitization process that the transfers from originator to sponsor to depositor to trust (to generalize the parties in a typical process) were not performed or were not performed correctly. A related issue is whether the physical paperwork or electronic records can be located and are accurate. These records are needed to sort out whether the transfers were completed and valid.

I believe the law is somewhat unsettled on what actually must be done via a securitization to complete the transfers correctly. Some have argued that the traditional processes govern. This would mean the note must be negotiated (if a negotiable instrument) or endorsed (if bearer paper) and that the mortgage must be assigned to each party in the securitization process. The latter issue implicates MERS, the Mortgage Electronic Recording System and whether its efforts to declare itself the nominee for the mortgagee and not make public recordation of the assignments are valid. Others believe that the primary issue is whether the note was transferred correctly, on the theory that the “mortgage follows the note” (but it is not clear whether the same rules applies for a deed of trust). But even here, there is disagreement on whether the transfer of the notes needed to have occurred individually, by endorsement (negotiable instrument) or by transfer of possession (bearer paper), or whether the pooling and servicing agreement somehow suffices to effectuate the transfer of the notes to the trust.

The implications of problems with transfer are serious. If the trust does not have the loan, homeowners may have been making payments to the wrong party. If the trust does not have the note or mortgage, it may not have standing to foreclose or legal authority to negotiate a loan modification. To the extent that these transfers are being completed retroactively, it raises issues about honesty in creating and dating the assignments/transfers and about what parties can do, if anything, if an entity in the securitization chain, such as Lehman Brothers or New Century, is no longer in existence. Moreover, retroactive transfers may violate the terms of the trust, which often prohibit the addition of new assets, or may cause the trust to lose its REMIC status, a favorable treatment under the Internal Revenue Code. Chain of title problems have the potential to expose the banks to investor lawsuits and to hinder their legal authority to foreclose or even to do loss mitigation.

How Serious and Widespread are the Deficiencies in Foreclosures?

The major unanswered question at this time is the extent and severity of any foreclosure deficiencies. Despite the proclamation of James Dimon, President of JP Morgan Chase that no one has been “evicted out a home who shouldn’t have been,” there seems to be near universal agreement that at least some homeowners have lost their homes without adherence to legal procedures, that the validity of many pending foreclosures is in question, and that servicers may face much more extensive examination of their grounds for future foreclosures.

The banks have repeatedly tried to minimize perceptions about the materiality of their foreclosure deficiencies. JP Morgan Chase has tried to narrow the characterization of the allegations, describing them as “process-oriented problems that can be fixed.”

But Mr. Moynihan’s facts are also completely irrelevant to the concerns about foreclosure process. As I have explained recently:

“Just because the homeowner hasn’t paid his mortgage doesn’t mean anybody in the world can kick him out,” said Katherine Porter, a visiting law professor at Harvard. “The bank has to have the standing to do that.” She added that the bank’s argument was a little like saying that someone who committed a crime shouldn’t receive a trial because he’s so obviously guilty. ...


For at least three years (and probably closer to five years), there have been well-publicized and repeated allegations that mortgage servicers, trusts, and others in the securitization process have engaged in misbehavior or committed mistakes. The concerns about shortcomings in documentation, procedure, and substantive rights are not new. In fact, the current “crisis” has existed for years, as homeowners’ and investors’ rights have been ignored in the foreclosure process. It is very likely that there are thousands, and possibly hundreds of thousands, of families who already have lost their homes were deprived of procedural or substantive rights.
But America does not have to continue in a “crisis.” We do not have to tolerate abuse of the legal system, systematic errors, bloated fees, and chaos in the housing and financial sector. As a society, we have the tools to guard against wrongful foreclosure going forward. These tools include legal reforms and regulatory intervention. The fixes are not simple or cheap fixes, but they are possible. The banks and servicing industry designed and implemented the practices that allow inaccurate and unfair foreclosure procedures to flourish, and it is entirely right that they should have to shoulder the cost, in both time and money, of designing and implementing improved procedures.

Permitting the current situation to continue threatens to undermine the fragile recovery in the financial sector and to further erode the weakness in the housing market. The key task going forward is to provide transparent measures of the depth of deficient paperwork and to provide reliable monitoring of foreclosure processes. Without additional information and reassurance, prospective homebuyers and prospective investors in financial institutions are likely to be reluctant to join together in rebuilding the damage of the housing economy created by the failure of foreclosure mitigation.
The document is a good read (there is much more than the above snips) but I hate reading from Scribd. Instead, I downloaded the document from Scribd and viewed straight from the PDF. There is little new in the document, but it does provide a nice summary as to what the issues are, without a lot of the hype seen in most places.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

1:44 PM

Cash-In Closings: 33% Of Homeowners Who Refinanced In 3Q Cut Principal

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Consumer deleveraging continues in the housing market, and not all of that is via foreclosure or default. Freddie Mac reports 33% Of Homeowners Who Refinanced In 3Q Cut Principal

One-third of homeowners who refinanced their mortgage terms in the third quarter lowered their principal balance through so-called cash-in at closing, according to Freddie Mac (FMCC).

It was the second-highest total since Freddie began keeping records of refinance patterns in 1985. The revised cash-in rate in the second quarter was 23%.

Rates on 30-year fixed mortgages dropped during the third quarter to levels not seen since the early 1950s, according to Frank Nothaft, Freddie's chief economist.

The median interest-rate reduction was about one percentage point, or at least 18%. During the first year of the refinance loan life, those borrowers will save over $1,400 in principal and interest payments on a $200,000 loan.

Cash-out borrowers, or those that increased their loan balance by at least 5%, represented 18% of all refinanced loans -- the lowest since Freddie began tracking. Freddie said $7.4 billion in net home equity was cashed out during the quarter, down from $9.4 billion in the second quarter and less than 10% of the peak volume that was seen in the second quarter of 2006.
Cash-In Trend

Michael Becker, a mortgage banker, sent me this note just a bit ago ...
I can confirm that "cash-in" refinancing is a new trend. I have many borrowers who are bringing money to the closing table in order to be able qualify for a refinance at today's low rates.

Isn't this another example of how the US consumer is deleveraging?

A few years back cash-out refinancing was used to buy cars, boats, granite countertops, and take vacations. This new trend shows a market now turned 180 degrees from consumption and risk to frugality and risk avoidance.

This is a good thing, but foolish central bankers do not see it that way.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

11:12 AM

"Straight Talk" with Economic Bloggers

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Chris Martenson asked his readers which bloggers they would like to learn more about, and what questions the readers had for those bloggers. I was one of the bloggers on Martenson's list.

The questions (in red below) range from who I learned from (the answer is a mile long), to peak oil, risk management, gold, China, hyperinflation, and pretty much all the hot topics of the day.

I would like to share the Q&A with my readers as well.

Here is a repeat of Straight Talk with Mike Shedlock (aka "Mish") as appears on ChrisMartenson.com, with slight differences in formatting but otherwise the exact content.

1. You’ve gone from mainframe computer programming analyst (in 2005) to being one of the most widely-read econobloggers in the world today. To what extent do you attribute your competitive advantage to holding a non-traditional background vs. the more ‘classically’ trained analysts and commentators?

Mish: It certainly helps not having a background in economics as taught by academia today. Nearly everyone in academia is a Keynesian or Monetarist.

It is safe to say that Krugman is the high priest of the Keynesians. In current academia, Greg Mankiw is arguably the high priest of the Monetarists. If we include the Fed, then the Monetarist high priest is without a doubt Ben Bernanke, whose background just happens to be academia, as opposed to any real world experience.

I find it amusing to see the battles between the two camps when they are both wrong about their proposed solutions. The only thing they are ever right about is when they attack each other.

In contrast, I had some very good teachers with non-academic backgrounds in self-taught Austrian economics. One of them is a friend for going on 10 years. I refer to him on my blog by his initials "HB". He has done a couple guest blogs on my site under the name "Trotsky".

Those posts are Misconceptions about Gold and Why does fiat money seemingly work?

"HB" now has his own blog under yet another pen name, Pater Tenebrarum. The Blog is called Acting Man, with a perspective of Austrian economics.

I also need to thank Barry Ritholtz at the Big Picture Blog for early on promoting my work, Todd Harrison at Minyanville, and of course Calculated Risk who actually created the first template for my blog.

Interestingly, Barry, CR, and I have been 1-2-3 (in various orders) in terms of page counts according to Traffic Rankings for individual, non-corporate sponsored blogs.

Marc Faber has influenced me a lot and I consider his book Tomorrow's Gold to be required reading. Marc is also a friend even though we disagree on the inflation/deflation debate.

There are two other must-read books and the electronic versions come at the great deflationary price of zero.

Both of those are by Murray Rothbard, with thanks also to the Mises Institute for making them available at no cost.

In addition, I have certainly learned a lot from John Hussman who writes a great column every week, and more recently from David Rosenberg who writes a great column nearly every day.

Certainly Bloomberg is a great source of information and to pick a single Bloomberg author it would be Caroline Baum. Baum's mentor happens to be economist Paul Kasriel who also has taught me a lot. So has Australian economist Steve Keen.

Thanks go to an Austrian-minded friend who simply prefers to be known as "BC".

I also need to thank Krugman and others I violently disagree with. It helps clarify my thinking debating those I disagree with, even if they never respond.

Finally, I get a lot of interesting stories and commentary from my readers. Those readers are real people, doctors, business owners, scientists, and technology wizards, most of whom operate in the real world, and thus have more street smarts and common sense than anyone on the Fed.

Looking at my answer now that I have typed it out, my competitive edge is to do one hell of a lot of reading, thinking, and typing, day in and day out, even weekends. I entertain all points of view, even if it seems like I don't in my finished posts.

2. Many of our readers have subscribed to Chris' position that the economy must be increasingly interpreted through two other lenses; energy and other environmental resources. Can you comment on the Three E's?

Mish: I am a firm believer in peak oil. I don't know how anyone can deny it. Given peak oil, and given the demand from China for oil and other commodities, the world is on a crash course of demand that cannot be filled.

China is growing at 8-10% a year (assuming you believe the stats). Can China keep growing at that rate forever? For even 10 more years? What about India? Brazil?

Either we get some serious energy breakthroughs, China slows, or the standard of living drops in the US, UK, and Europe. Well China does not want to slow, and the US and Europe are fighting hard to maintain a standard of living that is not sustainable.

Historically these situations end up with war. That is an observation, not a prediction.

Something has to give, perhaps many things, but all of the people who think China will soon be the number one economy in the world and that China's growth is sustainable, better start thinking about the implications of what I just typed above.

3. You’re a vocal deflationist. What do you see as the most convincing data points (the top 1-3) for your position and why?

Mish: Before we can discuss inflation and deflation it is imperative to define the terms. Not everyone will agree with my definitions, not even those who claim to be followers of Austrian economic theory. Yet my definitions have a solid theoretical and practical foundation.

Inflation and Deflation Definitions

Inflation is an expansion of money and credit, with credit marked to market. Deflation is a contraction of money supply and credit with credit marked to market.

The "marked to market" bit is my own addition. I use it because it explains a lot of things that are happening. Indeed, the entire definition is predictive of things that will happen. For example, if credit contracts and there is demand to hold money, treasury rates are going to drop.

Contrast that with a definition that says rising prices constitute inflation. What will treasury rates do?

It was easy to see the housing bubble would collapse and in turn credit would plunge and writeoffs would soar. That was the basis for my prediction that interest rates across the entire yield curve would make all-time lows.

When I made that call, oil was near $140, and nearly everyone thought I was nuts. But it happened. Recently we made new lows in 2- and 5-year treasuries and credit continues to contract.

Bernanke and various Fed members talk about preventing deflation, but that talk is always in terms of the CPI.

However, it is impossible to measure prices of consumer goods accurately enough, housing prices are not in the CPI (I think they should be), but most importantly, we are in a fiat credit-based economy.

In a credit-based system, where credit dwarfs money supply, it is foolish to look at inflation through the myopic eyes of either prices or monetary inflation alone. Sure, the Fed can print, but if there is no demand for credit, what does $1T or even $10T of excess reserves do? The answer is nothing other than to make the Fed's exit problem down the road a nightmare.

Money Multiplier Theory is Wrong

It is important to understand that widely believed money multiplier theory (the Fed prints and the money makes its way into the economy 10 times over) is wrong.

The reality is credit expansion comes first, reserves come second. I discussed this at length, using some charts from Steve Keen, in Fiat World Mathematical Model

Yet, talk is all the rage "just wait till all those reserves come pouring into the economy, it will cause hyperinflation". I have to laugh because the thinking is ass backwards.

What Really Happened?

  1. Greenspan lowered interest rates fueling housing speculation and a credit bubble.
  2. The housing/credit bubble burst.
  3. Credit plunged as did credit marked to market.
  4. In the wake of plunging credit the Fed stepped in to provide reserves for banks.
  5. Consumer psychology changed and there is no demand for credit so it sits there as so called "excess reserves", earning slight interest for banks to help them cover losses still to come from foreclosures, credit card losses, and commercial real estate losses.

Looked at in this fashion there are not really excess reserves at all.

Please see Fictional Reserve Lending And The Myth Of Excess Reserves for further rebuttal to the notion that monetary printing will soon have the inflation genie flying out of the bottle.

2009 Recovery

Credit continued to contract in 2009 but the stock market soared. This happened because the corporate bond market freed up, which in turn gave a new lease on life to hundreds of corporation otherwise headed for bankruptcy.

In response, value of debt "marked to market" on the balance sheets of banks went from pennies on the dollar to full value. Credit did not expand but credit marked-to-market sure did, even if it is impossible to say precisely how much.

Thus my model suggests 2007 to February 2009 were periods of deflation, March 2009 to May 2010 were periods of inflation, and now we are likely back in deflation but it is hard to say given institutions do not mark assets to market. Extend and pretend is massive.

Looking ahead, my model suggests we go in and out of deflation for a number of years, just as Japan did, without the economy ever picking up any steam.

4. Your position has called for a deflation first but then a probable transition over to inflation at some point. We won’t hold you to this, but what triggers do you see for this shift and, again with great latitude, when might this happen?

: With fiat currencies, the probability of inflation approaches 100% given a long enough timeframe. However, we need to fix numerous structural issues, write off enough bad debts, and get to the bottom in housing before there is a serious chance of sustained inflation.

I am not calling for consumer prices to collapse (except in unneeded junk), but that could conceivably happen. By the way, because energy and food prices have been sticky compared to housing, we hear the statement all the time, "we have inflation in things we need and deflation in things we want."

No we don't. The statement is inaccurate because it defines inflation in terms of prices. With a proper definition one does not have inflation and deflation at the same time.

Critical Player is Congress, Not the Fed

The longer the Fed and Congress fight deflation, the longer it will take to play out. It could take 2 years or 10. The attitude of the next Congress, and the Congress and President after that will be crucial.

I believe the next congress will throw around fewer stimuli than the current one. I could be wrong. But 2 years will not seal the fate. There will be a presidential election in another two years.

Will we get a Chris Christie or another Obama? That is an undecided factor very much in play.

The critical point of this discussion is everyone's misguided focus on the Fed. The Fed arguably has a role, but Congress is a far bigger player than the Fed in determining the length of the path we take.

Interestingly, Bernanke, a Monetarist, recently chastised Congress over budget issues. This likely has Krugman going bananas.

5. In your own or in others’ forecasts of how the future will play out, do you think that the difficult-to-predict Human Crowd Psychology factor is underrepresented? If so, what could be done to better incorporate it.

Mish: Few understand the deflationary impacts of the entire gamut of trends that is playing out, or the stress those trends place on families.

It is futile to fight changing social trends, but that has not stopped the Fed with reckless proposals on top of reckless proposals. Please see Inflation Targeting Proposal an Exercise in Blazing Stupidity; Fed Fools Itself for details.

Demographic Pendulum in Motion

As I stated in June of 2008, we are now on the back side of peak consumption and Peak Credit. Regardless of what Bernanke of the Fed does, the demographic pendulum is in motion. There is no going back.

That the Fed cannot change attitudes is at the very heart of the deflation argument. Japan certainly tried and failed, Bernanke will fail as well.

The Fed can provide liquidity but it cannot not determine where it goes, or if it goes anywhere at all.

The important point here is the pendulum has just barely moved from peak risk taking to risk aversions. With that in mind, and given the Fed and Congressional propensity to fight a battle that cannot be won, it will be years before the pendulum gets to the other side.

Asymmetric Pendulum

I have not mentioned this before but the pendulum is actually asymmetric, at least in terms of time, not necessarily price or attitude.

We spend far more time in inflation and risk taking than deflation and risk avoidance. Moreover the cycle swing takes so long time wise from one end to the other, that by the time we get to peak risk taking, most do not even think deflation is possible.

Everyone thinks deflation is impossible, much the same way everyone thought housing prices would rise forever. There were wrong about housing and they are wrong about deflation.

6. How the heck do you find the time to write so much? Our members are amazed by the output on your blog and by the fact that they’ve received personal answers to questions they’ve emailed you.

: I certainly love what I am doing. I also believe I am helping people. I have stacks of emails to prove that point, mainly in regards to getting people out of housing, out of the stock market on time, into gold, and not betting against treasuries.

To be sure, I get some hate mail, mostly in regards to my stance on public unions, but that volume is small compared to everything else. I can get as many as 300 emails a day, and I try to answer any pleas for help. I have spent as long as 2 hours answering calls for help, even when I cannot possibly get anything out of it.

If someone sends me a link to an article I use, they may only get a one word response of "thanks". If I get a question, I try to answer. I certainly appreciate when some thoughtful people send me a link or a comment and say "no response needed".

Many days I am reading and writing for 15 hours. I can spend 3 hours just answering emails from readers and clients. On weekends, in the summer, I can spend as little as 2-4 hours, but 3 minimum is more like it.

I am often laughing my head off over things I write. So I am having fun.

Bear in mind my role at Sitka Pacific is advisory, client services, and general manager type functions. Those are part of the 15 hours mentioned. I do not trade. Fortunately I have a fantastic partner who shares the same risk management and customer first attitudes. We have grown from about $15 million assets under management to about $75 million under management in the last few years.

That is small by Wall Street standards, but I expect to double or triple that in a few years, the right way, by putting client interests first.

7. Which assets do you see as being the being the ‘most hated by the most people’? Which are ‘most beloved’? In your opinion, are these perceptions well-deserved and if not, what opportunities do they represent?

: Certainly US treasuries are universally despised. People were shorting 10 year notes at 4%. Yikes!

However, after this rally it is hard to be super-bullish on them now. Bullish yes, super-bullish, no. I would advise not shorting them.

I do not think the gold story is fully understood yet. It may not be hated, but it is not loved like technology or housing was. Thus I think more will come from gold but it will not necessarily be from here. We can easily have a sharp correction first.

The one thing not despised but universally ignored is Japanese equities. For a long-term hold perspective, I like Japan. Apathy is a great setup. Otherwise, there is precious little to like about anything.

This market, including corporate bonds, is way over-loved. Sentiment is extreme, and earnings expectations will not happen. The market can keep going up, but the risk-reward setup is horrendous.

8. If you knew that the purchasing power of your existing assets and income would disappear one year from today, what would you invest in during the coming year to prepare?

: The question left out a critical aspect of "how" assets would "disappear". For example, equity and housing assets might crash because of deflation, or theoretically the dollar could fall to zero in hyperinflation. How one would best profit would be quite different.

In regards to hyperinflation, the odds are minuscule. First we need to define the term.

Hyperinflation is a complete loss of faith in currency. Some think this will happen out of the blue, others think the Fed will print and print and print. Let's look at a few examples.

Zimbabwe Hyperinflation

In the case of Zimbabwe, a loss of faith in currency occurred before the printing occurred. The Weimar Republic is a different story.

In Zimbabwe, the Mugabe government initiated a "land reform" program intended to correct the inequitable land distribution created by colonial rule. Ultimately, Mugabe's attempt to bail out the poor at the expense of the wealthy is what triggered capital flight and loss of faith of the currency.

His reforms not only caused a flight of capital and human capital (the wealthy), they also led to sanctions by the US and Europe. In response, Mugabe turned on the printing presses but the loss of faith in the currency had already occurred.

Weimar Hyperinflation

In Weimar Germany, printing for war reparations kicked off hyperinflation.

War reparations were a political event. So was the invasion of Germany to enforce payment of those reparations.

Argentina Hyperinflation

Argentina based its currency on the US dollar, a political mistake. When Argentina could no longer hold the peg, its currency collapsed.

Hyperinflation is a Political Event

The commonality between Zimbabwe, Weimar, and Argentina is they are both political events. In Zimbabwe a political event triggered capital flight, in Weimar a political event started massive printing, and in Argentina everything collapsed when a foolish peg could not be sustained.

In each case, a collapse of faith in currency (hyperinflation) led governments to massive printing campaigns, not the other way around.

US Comparison

The US compares to Zimbabwe how?
The US compares to Argentina how?
Is anyone going to force the US into war reparations?

The idea that we are going to wake up one day and suddenly out of the blue face hyperinflation may be theoretically possible but it is extremely unlikely in practice.

Moreover, and it is important to keep coming back to this point, we are in credit-based system. The Fed is not going to cause hyperinflation by printing.

Besides, the Fed cannot give money away. And as I have pointed out, Bernanke is even chastising Congress about fiscal spending. The Fed would not give away money even if it could!

Sure, the Fed can provide liquidity, but it cannot force businesses or consumers to borrow. Yet people tell me the Fed will cause hyperinflation. It does not add up.

Congress can give money away, but the next Congress will look a lot different than this Congress. I discussed the political and some economic consequences of that reality in Obamacare Career Ending Votes; Republican Chance to Win Senate; Expect House Blowout; Stimulus Appetite Greatly Diminished

Here is one more point about hyperinflation. If the US dollar goes, every fiat currency on the planet will follow. The idea that hyperinflation will hit the US alone is preposterous. The Euro, the Yen, the Pound would all go up in flames at the same time.

The way to protect against that situation is to have gold. Holding gold also works against the other extreme, deflation, on the basis that gold is money.

Gold does not do well in all circumstances, however. Gold did very poorly from 1980 to 2000, a period of ordinary inflation. There is no guaranteed play anywhere.

9. What's the question we should have asked, but didn't? What's your answer?

: I guess it would be: "Does your crystal ball have a forecast for the stock market? For Gold? The US Dollar?"

Let's start with gold. I see articles everyday by some prominent people saying things like "I know gold is going to ... whatever".

The thing is, they don't know and neither do I. Only a charlatan or a fool can make such a claim. Of course the fools and charlatans may be right, but it is not because they "know" anything.

One thing I do know is that I don't know things of that nature. That puts me ahead of all those who claim to know the unknowable.


I prefer to look at things in terms of probabilities. It is highly likely the Fed embarks on Quantitative Easing. That should be good for gold, but short term that QE may easily be priced in.

Moreover, the Fed may go slower than what the market thinks.

Thus, there could be a huge "sell the news" event in both gold and the stock market on the QE announcement, no matter what that announcement is.

Should that happen, given that gold is in a long-term bull market, and given that Bernanke will likely go back to the QE well, I expect buying the next big dip in gold would be a higher probability event than buying a 10% correction in the stock market.

There is a lot going for gold, but it is by no means a "sure thing".

Is the Equities Bottom In?

Many people claim the "Bottom is In"?

Is it? How can they know? I am not even sure if the bottom is likely in. Look at the half-dozen 50% or greater rallies in the Nikkei over the course of two decades, all taken back and then some.

How many "knew" that would not happen. How many in the US "knew" that housing prices could not possibly collapse.

I am quite sure that stocks are richly priced, but that sure does not mean stocks cannot rally further from here.

We are in a credit bust scenario with enormous deflationary pressures, even if outright deflation is not sustained. As such, the risk in equities is a lot higher than most think.

Faith Bubble

There is a lot of confidence in the Fed's ability to produce inflation. Indeed, I think there is a bubble of confidence in the Fed's ability to produce inflation.

Should that bubble burst, equities can collapse far faster than most think possible.

Risk Management

Hyperinflation is theoretically possible, but highly unlikely in practice for reasons stated above. But what if Prechter is right? Actually I think the grand-supercycle collapse he is calling for is also highly unlikely, although it too is certainly possible.

Is worry over such extremes or attempts to profit from such extremes at this stage a waste of energy? I think so.

Unless you are a day-trader, it is important to be aware of such possibilities, while focusing on the more likely probabilities.

The bottom may be in, but a test of 850 or even the 700-800 area of the S&P sure seems likely enough. How many are prepared for that?

Anti-dollar sentiment is once again extreme. It is quite similar to the extreme anti-Euro sentiment a few months back. Look at what happened. Are we setup for another reversal?

How many are prepared for the market to go sideways for 5 years or longer, as earnings catch up with valuations. This happened in the 70's and there is absolutely no reason it cannot happen again.

Sadly, most aren't prepared for those scenarios, just as they were unprepared for the collapse we saw in housing and the collapse we saw in global equities.

Some questions to ponder are: Do you really want to be long after this runup? How long? What are appropriate hedges? What happens if the dollar rises? Is it possible, if not likely to get a reasonably strong move up in the US dollar here?

The important point is not whether or not you agree with my probabilities; the key point is to be thinking about risk management and opportunities. It is far easier to make up for lost opportunities than lost cash.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

4:30 AM

How Not To Vote

Mish Moved to MishTalk.Com Click to Visit.

All you need to know to determine your vote in November is that a vote for any candidate endorsed by unions is a vote for higher taxes.

I am pleased to report that UAW 2865 Los Angeles has provided a perfect list of who NOT to vote for with this endorsement

Dear UAW 2865 members,

The November 2nd election is just around the corner. This election will decide the future of our state for many years to come. As educators, students, and public employees, we have a lot at stake in the election of Jerry Brown as Governor. Brown has been a champion of both higher education and labor rights, signing the first legislation that allowed public employees, teachers, and farm workers to organize and bargain collectively. Brown oversaw the expansion of the UC and CSU systems. These are difficult times for our state and for the University of California. Much of this difficulty is from a lack of leadership in Sacramento and the refusal of Republican lawmakers to vote for fair tax policies that reinvest in the public sector.

We need to make our voices heard at the ballot box. Below you’ll find the candidates endorsed by UAW as well as our local’s recommendations on the propositions.

Governor: Jerry Brown(D)
United States Senator: Barbara Boxer(D)
Lieutenant Governor: Gavin Newsom(D)
Attorney General: Kamala Harris(D)
Secretary of State: Debra Bowen(D)
Treasurer: Bill Lockyer(D)
Controller: John Chiang(D)
Superintendent of Public Instruction: Tom Torlakson(D)
Insurance Commissioner: Dave Jones(D)

Board of Equalization
District 1: Betty Yee(D)
District 2: Chris Parker(D)
District 3: No Endorsement
District 4: Jerome Horton(D)

Proposition 19: YES
Legalizes, taxes Marijuana: Prop 19 would generate millions of dollars in tax revenue, while addressing many of the core causes of the explosive growth of California's prison population.

Proposition 20: NO
Expands Unelected Redistricting Commission: Backed by big business, this initiative would extend the expensive and unwieldy new system of drawing state legislative boundaries to the US Congressional districts. It would require that lines be drawn along "economic interest", dividing the state into "rich" and "poor" districts. Opposed by labor and environmental organizations.

Proposition 21: YES
Keeps State Parks Open: Prop 21 establishes a modest vehicle licensing fee to fund state parks, making them independent of the general fund and insuring they stay open even during budget crises.

Proposition 22: NO
Ballot Box Budgeting: This initiative prohibits use of local redevelopment agencies and transportation funding by the State. While we support adequate funding for both these sectors, the California budget process is already overburdened by complex restrictions and protections. We need more, not less, flexibility in our budget process. Opposed by education unions, health care providers and firefighters.

Proposition 23: NO
Suspends Air Pollution Control Laws (AB 32): Proposition 23 is a very dangerous initiative, funded by out of state Oil and Petrochemical corporations that would overturn landmark climate change legislation. In addition, if passed, many environmental protections would be suspended if state unemployment dips below 5.5% for four consecutive quarters. Opposed by environmentalists, labor, and politicians, including Jerry Brown, Meg Whitman, and Arnold Schwarzenegger.

Proposition 24: YES
Repeals Corporate Tax Loopholes: Sponsored by the California Teachers Association, Proposition 24 would repeal a series of tax loopholes for multistate corporations that were crafted behind closed doors as part of recent budget negotiations. Supported by labor, education advocates and the California League of Women Voters.

Proposition 25: YES
Majority Vote Budget: Simply put, this is the most important initiative on the ballot for state employees and higher education. Proposition 24 would establish a simple majority threshold for enacting a budget in California, eliminating the 2/3 requirement for budgets and the tyranny of the minority which has rendered the state dysfunctional over the past several decades.

Proposition 26: NO
More 2/3 Restrictions: Another corporate-sponsored initiative, Prop 26 would actually -extend- the 2/3ds requirement for raising fees or levies at both the state and local levels. Currently, extending existing fees, if they are overall revenue neutral, require only a simple majority. This would end even this small bit of majority-rule from our broken budget system. Opposed by health care advocates, labor, environmentalists and the California League of Cities.

Proposition 27: YES
Restores Democratic Control of Redistricting: In 2008, Californians adopted a new system that took control over redistricting from elected representatives and created an unelected "independent" commission to draw new boundaries. Proposition 27 would bring this process back to elected officials who can be held accountable. It also gives voters a final say on the map created by the state legislature.

U.S. Representatives in Congress
District 25: Jacquese Conaway(D)
District 26: Russ Warner(D)
District 27: Brad Sherman(D)
District 28: Howard Berman(D)
District 29: Adam Schiff(D)
District 30: Henry Waxman(D)
District 31: Xavier Becerra(D)
District 32: Judy Chu(D)
District 33: Karen Bass(D)
District 34: Lucille Roybal-Allard(D)
District 35: Maxine Waters(D)
District 36: Jane Harmon(D)
District 37: Laura Richardson(D)
District 38: Grace Napolitano(D)
District 39: Linda Sanchez(D)

California State Senate
District 20: Alex Padilla(D)
District 22: Kevin De Leon(D)
District 24: Ed Hernandez(D)
District 26: Curren Price(D)
District 28: Jenny Oropeza(D)
District 30: Ron Calderon(D)

California Assembly
District 36: Dual Endorsement Shawntrice Watkins (D) and Linda Jones(D)
District 38: Diana Shaw(D)
District 39: Felipe Fuentes(D)
District 40: Bob Blumenfield(D)
District 41: Julia Brownley(D)
District 42: Mike Feuer(D)
District 43: Mike Gatto(D)
District 44: Anthony Portantino(D)
District 45: Gilbert Cedillo(D)
District 46: John Perez(D)
District 47: Holly Mitchell(D)
District 48: Mike Davis(D)
District 49: Mike Eng(D)
District 50: Richard Lara(D)
District 51: Steven Bradford(D)
District 52: Isadore Hall(D)
District 53: Betsy Butler(D)
District 54: Bonnie Lowenthal(D)
District 55: Warren Furutani(D)
District 56: Tony Mendoza(D)
District 57: Roger Hernandez(D)
District 58: Charles Calderon(D)

Los Angeles County Assessor: John Noguez
Santa Monica City Council: Terry O’Day
The above Email was sent to me by reader "Chris who writes ...
Dear Mish

UAW Local 2865 is a public employees union. It represents teaching assistants at UCLA. I was a member last year, and still get their emails. Funny to begin with that grad students are represented by the auto workers union, but I was blown away by the last sentence of the intro paragraph to the "voting guide," which warns us to vote the straight Democratic ticket because of "the refusal of Republican lawmakers to vote for fair tax policiesthat reinvest in the public sector."

We pay 9.75 percent sales tax in Los Angeles County, and the 9.55 percent state income tax bracket starts somewhere around $48,000. We pay the highest gasoline tax in the nation. Add property taxes, ten percent transient occupancy taxes on hotel rooms, vehicle licensing fees, business license fees, and on and on -- and our union concludes that the problem is not enough taxes.

How much would be enough? There's no such thing. I'm absolutely certain that at 20 percent sales tax, AFSCME and ATLA and the UAW Local 2865 would still be blasting out messages condemning the state's failure to levy sufficient taxes.

Oh, if only we had politicians who were willing to tax us!

Prop 25

Note that the one thing most wanted by UAW 2865 was a vote for Proposition 25. That means the very last thing you want to see happen is a vote for Proposition 25.

It is very nice of UAW 2865 to provide this valuable service.

Moreover, they have made it easy by endorsing only Democrats. That means all you really need to know in the upcoming election if you live in California is to vote straight Republican with a "NO" vote on proposition 25.

Mike "Mish" Shedlock
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Wednesday, October 27, 2010 9:06 PM

G-20 Currency Agreement to Agree Collapses Already

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So much for the G20's agreement to agree on currencies. South Korea, Indonesia, Columbia, Thailand, Brazil and now Europe and South Africa are all bitching about the strength of their currencies.

Every Man for Himself

Bloomberg says it's ‘Every Man for Himself’ on Currencies After G-20

Finance chiefs from South Korea to South Africa signaled they may act to slow gains in their currencies, just four days after the Group of 20 vowed to soothe trade tensions in the $4 trillion-a-day foreign-exchange market.

Asian currencies fell to a one-week low after Bank of Korea Governor Kim Choong Soo said today that measures to mitigate capital flows could be “useful.” Hours later, the rand dropped as South African Finance Minister Pravin Gordhan said his government will use part of higher-than-expected tax revenue to build foreign reserves as it attempts to weaken the currency.

The shifts suggest G-20 members will keep trying to defend their economies from the slide of the dollar and capital inflows even after the group promised Oct. 23 to refrain from “competitive devaluation” and to increasingly embrace market- determined currencies.

Bank Indonesia will “guard” the rupiah at its “fundamental” level of 8,900 to 9,300 against the dollar and buy foreign currencies to limit volatility, Governor Darmin Nasution said today. Bank Negara Malaysia Governor Zeti Akhtar Aziz told Bloomberg Television yesterday she favors a gradual strengthening of the ringgit.

More currency measures may be on the way. President Juan Manuel Santos has said Colombia may take additional steps this week to ease the peso’s rally and Chilean President Sebastian Pinera said Oct. 25 that his government plans to increase foreign investment limits for institutions.

Having already removed a 15 percent tax exemption for foreigners on income from domestic bonds, Thailand Finance Minister Korn Chatikavanij warned on Oct. 25 that regulators are “keeping an eye” on speculative inflows.

While he didn’t advocate action by European governments, Luxembourg Prime Minister Jean-Claude Juncker, who chairs the group of euro-area finance ministers, also said today the dollar is “undervalued” against the euro.

“Europe is the victim” of global currency policies, Juncker said at a conference in Frankfurt.
Everyone a Victim

It would be easy to mock Juncker but truth be known, everyone is a victim of Bernanke's misguided Quantitative Easing strategy and interest rate policies.

It's an international currency war says Brazil’s finance minister as noted in Pied Piper Politics; Krugman and Candle Makers Complain about the Sun; Global Trade Wars

For more on competitive currency debasement including capital controls, please see Emerging Market Economies Turn to Capital Controls; Forex Market in State of Disarray; Gold's Message; Life Imitates Art.

Mike "Mish" Shedlock
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12:33 PM

Bill Gross' Arrogant Endorsement of Fed's QE Policy he calls History's Most "Brazen Ponzi Scheme"

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It is not often you see bond managers openly embrace Ponzi schemes, but that is exactly what Bill Gross did in his post Run Turkey, Run.

There’s another important day next week and it rather coincidentally occurs on Wednesday – the day after Election Day – when either the Donkeys or the Elephants will be celebrating a return to power and the continuation of partisan bickering no matter who is in charge. Wednesday is the day when the Fed will announce a renewed commitment to Quantitative Easing – a polite form disguise for “writing checks.” The market will be interested in the amount (perhaps as much as an initial $500 billion) as well as the targeted objective (perhaps a muddied version of “2% inflation or bust!”). The announcement, however, has been well telegraphed and the market’s reaction is likely to be subdued. More important will be the answer to the long-term question of “will it work?” and perhaps its associated twin “will it create a bond market bubble?”

The Fed’s second round of QE, therefore, more closely resembles an attempted hypodermic straight to the economy’s heart than its mood elevator counterpart of 2009. If QEII cannot reflate capital markets, if it can’t produce 2% inflation and an assumed reduction of unemployment rates back towards historical levels, then it will be a long, painful slog back to prosperity. Perhaps, as a vocal contingent suggests, our paper-based foundation of wealth deserves to be buried, making a fresh start from admittedly lower levels. The Fed, on Wednesday, however, will decide that it is better to keep the patient on life support with an adrenaline injection and a following morphine drip than to risk its demise and ultimate rebirth in another form.

We at PIMCO join with Ben Bernanke in this diagnosis, but we will tell you, as perhaps he cannot, that the outcome is by no means certain. We are, as even some Fed Governors now publically admit, in a “liquidity trap,” where interest rates or trillions in QEII asset purchases may not stimulate borrowing or lending because consumer demand is just not there. Escaping from a liquidity trap may be impossible, much like light trapped in a black hole. Just ask Japan.

Ben Bernanke, however, will try – it is, to be honest, all he can do. He can’t raise or lower taxes, he can’t direct a fiscal thrust of infrastructure spending, he can’t change our educational system, he can’t force the Chinese to revalue their currency – it is all he can do, and as he proceeds, the dual questions of “will it work” and “will it create a bond market bubble” will be answered. We at PIMCO are not sure.

Still, while next Wednesday’s announcement will carry our qualified endorsement, I must admit it may be similar to a Turkey looking forward to a Thanksgiving Day celebration. Bondholders, while immediate beneficiaries, will likely eventually be delivered on a platter to more fortunate celebrants, be they financial asset classes more adaptable to inflation such as stocks or commodities, or perhaps the average American on Main Street who might benefit from a hoped-for rise in job growth or simply a boost in nominal wages, however deceptive the illusion. Check writing in the trillions is not a bondholder’s friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme. Public debt, actually, has always had a Ponzi-like characteristic. Granted, the U.S. has, at times, paid down its national debt, but there was always the assumption that as long as creditors could be found to roll over existing loans – and buy new ones – the game could keep going forever. Sovereign countries have always implicitly acknowledged that the existing debt would never be paid off because they would “grow” their way out of the apparent predicament, allowing future’s prosperity to continually pay for today’s finance.

Now, however, with growth in doubt, it seems that the Fed has taken Charles Ponzi one step further. Instead of simply paying for maturing debt with receipts from financial sector creditors – banks, insurance companies, surplus reserve nations and investment managers, to name the most significant – the Fed has joined the party itself. Rather than orchestrating the game from on high, it has jumped into the pond with the other swimmers. One and one-half trillion in checks were written in 2009, and trillions more lie ahead.

The Fed, in effect, is telling the markets not to worry about our fiscal deficits, it will be the buyer of first and perhaps last resort. There is no need – as with Charles Ponzi – to find an increasing amount of future gullibles, they will just write the check themselves. I ask you: Has there ever been a Ponzi scheme so brazen? There has not. This one is so unique that it requires a new name. I call it a Sammy scheme, in honor of Uncle Sam and the politicians (as well as its citizens) who have brought us to this critical moment in time. It is not a Bernanke scheme, because this is his only alternative and he shares no responsibility for its origin. It is a Sammy scheme – you and I, and the politicians that we elect every two years – deserve all the blame.

A Sammy scheme is temporarily, but not ultimately, a bondholder’s friend. It raises bond prices to create the illusion of high annual returns, but ultimately it reaches a dead-end where those prices can no longer go up. Having arrived at its destination, the market then offers near 0% returns and a picking of the creditor’s pocket via inflation and negative real interest rates. A similar fate, by the way, awaits stockholders, although their ability to adjust somewhat to rising inflation prevents such a startling conclusion. Last month I outlined the case for low asset returns in almost all categories, in part due to the end of the 30-year bull market in interest rates, a trend accentuated by QEII in which 2- and 3-year Treasury yields approach the 0% bound. Anyone for 1.10% 5-year Treasuries? Well, the Fed will buy them, but then what, and how will PIMCO tell the 500 billion investor dollars in the Total Return strategy and our equally valued 750 billion dollars of other assets that the Thanksgiving Day axe has finally arrived?

We will tell them this. Certain Turkeys receive a Thanksgiving pardon or they just run faster than others! We intend PIMCO to be one of the chosen gobblers. We haven’t been around for 35+ years and not figured out a way to avoid the November axe. We are a survivor and our clients are not going to be Turkeys on a platter.
Grossly Arrogant

Gross openly endorses Bernanke's admitted Ponzi scheme because "to be honest, all he can do".

Excuse me for asking but why does the Fed have to do anything? Better yet, why can't the Fed and politicians admit the truth. The truth is there is no easy way out of this mess, and it is beyond foolish to attempt Ponzi schemes because there is nothing else to try.

Please remember that Ponzi schemes must collapse by definition. Yet Bill Gross arrogantly believes PIMCO can avoid such a collapse even though he also thinks the bond bull market is over. Yes, PIMCO has a great track record over the years, but making money in bond bull markets is a lot different than making money in bond bear markets and collapsing Ponzi schemes.

Fed's Morning After Pill

The morning after the election the Fed will at long last announce exactly what its QE policy will be. Allegedly the Fed picked that date so as to not interfere in the election, yet the result has been massive speculation in stocks and commodities with economic pundits tossing around ever-increasing QE targets up to $4 trillion dollars.

In hindsight, the Fed's self-induced guessing game was arguably more election manipulative than if it had done whatever it was going to do in advance. Whether on purpose or not, I suggest the Fed got more bang for the buck by encouraging speculation about what it would or would not do.

Sell the News?

Several weeks ago I suggested it might be a sell the news reaction. Instead, the runup in commodities and equities has been so massive it would not surprise me one bit to see a massive selloff before the news is even announced.

How can anything under $4 trillion not be priced in by now?

Liquidity Traps and Black Holes

For more on liquidity traps please consider Liquidity Traps, Falling Velocity, Commodity Hoarding, and Bernanke's Misguided Tinkering

Fore more on black holes in which intelligent thoughts struggle to escape, please read Bill Gross' mind.

Mike "Mish" Shedlock
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