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I was going to write an update for December but there isn’t much to say that hasn’t already been said. The good news is I’ve finished my Christmas shopping so I plan to start wrapping gifts shortly. I admit, that’s really stretching it for good news.

First, a few quick thoughts. The Euro Summit is finished (in more ways than one) and, as usual nothing much was accomplished. Europe has been in the news a lot lately. This is not surprising. All of the major credit rating agencies are American. By constantly downgrading European sovereign debt and then European banks, they keep attention on Europe and off America which is ironic since American debt, proportionate to GDP, is greater than Greece. In other words the U.S. is more broke than Greece. THAT’S saying something.

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What the Greek-Euro crisis fiasco clearly demonstrates is how useless and ineffective governments really are. They can screw things up but cannot fix them.

The UK has been kicked out of the European Union but you’d never know it. Back in Britain they’re spinning it as a voluntary withdrawal. The repercussions of this have yet to be felt. Stay tuned. How long can the UK survive on its own? Time will tell.

Germany, unable to conquer Europe militarily in two World Wars, has now conquered Europe financially. France, the only contender, caved in when it became apparent that France’s finances are in the same shape as America’s oops I mean, Greece. However, both the U.S. and France are having elections next year so this too will be spun as a victory of sorts.

And, don’t worry about the Euro disappearing or any European countries defaulting or withdrawing from the Eurozone. Ignore the media panic. It’s just a distraction and a perverse form of entertainment. Germany needs everyone enslaved to the Euro so they can continue to export their stuff cheaply. As John Mauldin so aptly put it; it’s like the Eagle’s “Hotel California”. You can check out any time you like but you can never leave. The cost of leaving the Euro is far higher than staying in it.

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By the way, we hear about sovereign debt (the debt of nations) and we hear about bank debt. It really doesn’t matter because they’re one and the same. Countries are broke and the banks are broke and the insolvent banks own the sovereign bonds of these insolvent countries. So, in other words, everybody is broke but nobody wants to admit it so they’re all playing a game of ‘let’s pretend’ and ‘look the other way’ and kicking the can down the road which is what the Euro Summit accomplished last week.
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Oh, sure, there was lots of talk about working together and the need to work together and why everyone must work together and how important it is for everyone to work together and … are you getting bored yet? They didn’t solve any of the real problems. They didn’t even mention any of the real problems – too much debt, corruption, unwillingness to uphold contract law, loss of confidence, insolvency, mountains of toxic derivatives and the list goes on and on. Notice I didn’t mention unemployment. That’s because unemployment is a symptom, not a cause of any of these problems. Unemployment is not a problem unless you’re unemployed.

The U.S. Federal reserve injected more liquidity into the European financial crisis – how many times have we heard about liquidity injections over the last four years? If it hasn’t worked for the last four years, does anyone in their right minds think it’ll magically start working now? As I’ve said before, the problem is not liquidity; the problem is insolvency by which I mean the whole friggin’ world is broke.
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Look, one of the most well kept secrets in the banking world is banks, by their very nature, are ALWAYS broke. As Zoltan Pozsar said in December 7th Financial Times, “banking is one large, clever, and finely tuned, confidence trick.” They borrow short term and lend long term. Their borrowing is the money you put in your bank account which you can withdraw at any time. Their long term lending consist of loans and mortgages which are repaid over a long period of time. If too many people want to access their money, banks don’t have it all because they operate on a fractional reserve system. They only keep a fraction of your deposits on hand in the hopes that not too many people demand their money all at once.

Usually, this system works, especially when economies are growing. In fact, it works until it doesn’t work anymore and then it stops working. This is called a ‘bank run’. It’s all based on confidence. Confidence is what makes our financial system work and it’s what con artists use to con you out of your money.

So what’s the difference between the con game a con artist uses and the con game the banks use? Simply, one is legal, the other is not. However, both stop working when confidence is lost.

Four years ago, I said we are facing a confidence crisis. The crisis keeps getting worse. More and more people are losing confidence that our governments can ‘fix’ this financial crisis. Don’t tell the children but, governments cannot fix the problem because governments ARE the problem. They’ve made more commitments than they have cash. Furthermore, tax revenues are down, spending is increasing, debts are climbing and a gazillion baby boomers want to retire except there isn’t enough money for Social Security and Medicare and other entitlements and too few taxpayers to fund it all. We’re royally screwed!

Oh, but that’s not all. If only it were! John Corzine stole $1.2 billion from investors in M F Global and, being one of the good ole boys, former CEO of Goldman Sachs and a good buddy of President Obama, John is a free man; no Grand Jury has been convened, no investigation started, no indictments issued and President Obama has declared no crime has been committed.

So, what’s this doing to confidence? Well, let’s see; commodity and options investors have suddenly realized that they’re all out on a limb and no regulatory agency is going to protect them so they’re pulling out of the markets. Some of the more honest brokerage houses are closing shop. Farmers who used M F Global to hedge their production have lost their cash and are unable to buy seed to plant crops. And, everybody is looking at everyone else and wondering who the hell is in charge? Answer: nobody; the foxes are guarding the henhouse.

Remind me to start wrapping some Christmas gifts. First, a few more thoughts.

What else? Oh, yes – I hope you haven’t jumped on the “China will save us all” bandwagon. There was some media chatter about China buying Euro debt to help bail out the European financial crisis. Do you notice there’s no more such talk? The Chinese aren’t stupid. Why would they buy Euro trash? Beside they have plenty of their own problems. Dozens of empty “Ghost Cities” and “Ghost Malls” aren’t bad enough. Now the latest PMI (Purchasing Managers Index) fell to 49% from 50.4% in October. Anything less the 50% confirms that China is slowing down. So is India. So much for the emerging markets pulling us out of the soup!

Our Stealth Depression

Many people have an image of the last Great Depression that is totally inaccurate. For one thing, there were few color photos at the time so from the pictures we see of breadlines and closed factories we view the Great Depression in black and white photo images.

Not everybody was out of work. The majority of people still had jobs. Not everybody stood on street corners selling apples or pencils. Not everybody rode the rails elsewhere looking for jobs. Yet we have this erroneous image of the whole world out of work and standing in line at soup kitchens and the unemployment office.

Today of course we see and film in color so there’s a visual disparity with black and white Great Depression photos and films that makes it hard to grasp our current Stealth Depression. Today’s breadlines have changed. 45 million Americans are on food stamps. That’s 15% of the population. Food banks in the U.S and many other western countries can’t keep up with increasing demand. And, globalization has closed tens of thousands of factories in Canada and the U.S. over the past two decades. Do you still think this isn’t a depression?

It’s a stealth Depression for many reasons. For one thing, few people talk about it or even use the “D” word. The media doesn’t use the word nor do our leaders. Yet, when I began following this so-called financial crisis in March, 2007 the U.S. National debt was $8 trillion. Today, in less than 5 years it’s almost doubled to $15 Trillion and it’s still climbing. 7 trillion borrowed dollars has failed to stimulate the economy but your children and grandchildren will pay for this debt with a significantly lower standard of living. Do you still think this isn’t a depression?

The U.S. housing market is down 17% on average (some areas have lost up to 80%) and analysts expect it to continue falling another 10% to 15% over the next few years. Europe is in similar shape and Canada’s real estate bubble has peaked and is about to burst. Do you still think this isn’t a depression?

U.S. unemployment, supposedly 9%, is worse than at any time since the Great Depression and that’s using fudged government statistics. ShadowStats, using old-style unemployment parameters calculates U.S. unemployment at 23% by including those whose jobless benefits have run out, those who have given up looking plus part-time workers who want and cannot find full-time work. Do you still think this isn’t a depression?

First week of November, the U.S. posted 80,000 job gains. Good news, right? It’s much better than 800,000 who were losing their jobs a month in 2008. However, just to keep up with population growth, the U.S. needs about 150,000 jobs a month. That’s just to break even. To get back to where it was before the so-called downturn, on November 5, Zero Hedge calculated that 263,000 new jobs a month are required over the next five years. See the chart below. How likely is that to happen? Do you still think this isn’t a depression?

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It gets worse. There were no unemployment records during the Great Depression and the “official” estimate of 25% is wrong because researchers erroneously included 6% for employed government workers. So the unofficial unemployment rate of the Great Depression is actually 19%. In other words, American unemployment is 4% higher today than during the Great Depression. Do you still think this isn’t a depression?

The latest Canadian unemployment figures just released shows a climb to 7.1%. Canada is a resource based country whose resource industries have partially cushioned the decline in manufacturing. Not to put too fine a point on it but Canada’s 7.1% is perilously close to America’s 9% (official figures.) Do you still think this isn’t a depression?

The province of Ontario has long been the ‘engine’ that drove Canada’s economy. No more. Ontario is rapidly becoming one of the ‘have-not’ provinces. Federal spending is decreasing but Ontario’s government spending is out of control. Look at the chart below. Ontario is the black line.
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Gary Gibson of Whiskey and Gunpowder (Agora) on Nov. 5 wrote about the Nash-equilibrium of our current situation. “Businesses don’t hire because people don’t spend and people don’t spend because businesses won’t hire.”

“This equilibrium will continue until consumers have significantly improved their balance sheets (businesses are doing the same). The Obama crew have made things vastly worse, but they are not entirely responsible for the massive balance-sheet adjustment upon which we are now embarked. Every other balance sheet adjustment period in the last 300+ years has come to be called a depression.” Do you still think this isn’t a depression?

What else? Oh, yes, while the media treats us to important news like Paul McCartney’s third marriage and Kim Kardashian’s divorce, the much vaunted revolution in Egypt is turning violent in Cairo and the global economy continues circling the drain. The volatility of stock markets sets new records, the UK announces more quantitative easing (printing money out of nothing) as if it hasn’t already failed a dozen times. In none of the G7 economies, including Germany has industrial output returned to pre-crash levels. The U.S. has stopped QE (for now) and the economy is sinking back into recession. The American debt rating agencies are downgrading one European country after another like vultures circling their victims seemingly unaware that that a European default will trigger another global credit crisis unlike anything we’ve yet seen.

Since the implosion of two of Bear Sterns’ hedge funds in March of 2007, I’ve been tracking this global melt-down for more than four years now. Given the trajectory of events, it is becoming apparent that 2012 may become apocalyptic after all. Although the U.S. dollar, the world’s reserve currency, still has a surprising amount of strength and safe-haven status and it may have several years of life in it before it completely collapses. Many analysts are predicting 2014 to 2016 before the dollar’s demise. And, that’s good news. Oh, it will happen. Of that, there’s no doubt, but it’s good news because it gives you a few years yet to get prepared for the inevitable.

No, “they” are not going to fix it. “They” are losing control of events. The powers-that-be (PTB) have used most of their ammunition. Interest rates have been kept near zero for longer than any time in history. It failed to turn the U.S. real estate market around. It has failed to stimulate economic growth. It has lost savers and pensioners world-wide about $700 trillion in foregone interest and discouraged savers from saving. After all, why make next to nothing by putting money in the bank? The foregone interest has gone to the banks to prop up their failing balance sheets but they still aren’t lending.

Low interest rates have artificially propped up stock markets and fuelled a speculative bubble in commodities; increasing the price of groceries and gas which, incidentally are NOT calculated in our so-called official inflation rate. Trillions of dollars have been created out of thin air and it has only slowed the rate of decline but the direction is still unarguably down. It hasn’t stopped the decline let alone turned it around.

Goodness, why am I so negative? Isn’t there any good news? Well, yes, there is. Paul McCartney got married and Kim Kardashian is available again.

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This never-ending financial crisis (4 years now) could all have been avoided. THAT’S the worst of it. None of this needed to have happened. The failed banks should have been allowed to fail in a controlled fashion. Stock holders and bond holders should have taken their losses thus saving the savers and the taxpayers and their children and their grandchildren; most of whom are now doomed to a lower standard of living.

“Creative destruction” is one of the most important elements of capitalism. Failure ought to be punished. The assets of failed enterprises are supposed to be bought by the successful. Instead, the failures are saved by the taxpayers. The investment bank shysters who peddled their toxic mortgage-backed securities should have gone to jail. Instead, they are allowed to award themselves obscene bonuses. Now wonder the global financial system is falling apart. It’s all based on confidence. Shatter confidence and the whole house of cards falls apart. That’s what we are witnessing in slow motion.

Four years ago, I called it the “Stealth Depression”. I warned that we’d be watching this slow-motion train wreck for a long time. Damn, I hate being right.

This is NOT the 1930s Depression

Governments are evil and incredibly stupid. They are evil because they are coercive kleptomaniacs who rob the output of our labour through excessive taxation in order to bribe us to re-elect them. Incredible as it seems, more than 40% of American households rely on government hand-outs. And governments are incredibly stupid because they keep trying to use Keynesian economics that sort of, almost, supposedly worked during the last Great Depression of the 1930s but obviously do NOT work today.

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The following is taken from UPI Editor Emeritus Martin Walker’s “A Dying Economy”. There has been no recovery because the G7 developed economies are back to where they started when the crash began except the Eurozone is in worse shape and China is slowing. In fact, Agora Financial on Oct 10 reported that China announced its own bank bailout, “Citing their intentions to purchase shares of China’s biggest banks in order to “shore up confidence in the slowing economy… Now you have the world’s two largest economies feeding the biggest financial bubble we’ve ever seen.”

Key strategies enacted three years ago to fix the economic crisis have all failed. They tried to stabilize and re-capitalize the “too big to fail” banks. Central banks lowered interest rates nearly to zero so banks could lend at higher rates and use their profits to replace their capital losses, except nobody was borrowing. The savaging of U.S. and European banks stocks and the end of inter-bank lending across the Atlantic demonstrates this failure.

The second failure was trying to stabilize the U.S. housing market. Yet prices continue falling and foreclosures keep rising. Low mortgage rates and low house prices have not increased demand. In fact, refinance applications are 35% less than a year ago.

And lastly, Job creation has also failed in the G7 countries. Walker gives three reasons for this. “The first is that consumer demand is down by about $500 billion a year in the United States. The second is that corporations have learned to do more with less, to produce goods with fewer employees and thus to cut costs and boost earnings. The third is more worrying: that current and future employment is being depressed not by the economic cycle but by fundamental structural and technological change in the economy.’

Governments have failed to grasp that we are not experiencing an event that Keynesian tactics will resolve but that we are in a state of transition. For example, the success of Amazon in selling hard copy and e-books led to the bankruptcy of Borders book stores and the loss of 11,000 jobs. The increase in email and on-line billing has eroded the need for the U.S. Postal Service which announced 220,000 jobs will be axed in the next 5 years.

Increased computerization is affecting not just blue-collar but white-collar jobs such as newspapers, paralegal and accounting. Educators will feel the axe as cheaper distance learning replaces prohibitively expensive campuses. Healthcare, once a fast growing employment area will feel the effect of smart phone constant and automated diagnosing as well as the increase in electronic health records. Many cashiers and retail staff will be replaced by smart phone electronic payments which Vodaphone predicts will reach 50% in less than 10 years.

Walker says, “We won’t be getting back to ‘normal,’ not ever”.

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“It’s the Debt, Stupid”

From the Wall Street Journal, Sept. 17, 2011 “Kiss of Debt for the Flagging U.S. Economy”

Total U.S. government and household debt exceeds $36 trillion in an economy of $15 trillion. This EXCLUDES unfunded liabilities like Medicare and Social Security.

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It limits growth drivers like consumer spending which accounts for 70% of the U.S. economy because consumers have mortgage liabilities and credit card debt that limits their spending and keeps a lid on job growth. Consumers have been “deleveraging” i.e. paying down debt from 76% to 66% of income but they still have a long way to go to achieve long term levels of 37%.

The Federal gov’t has tried to stimulate the economy and make up for the lack of consumer spending. Federal debt stands at 65% of GDP – a level not seen since the late ‘40s. This huge outstanding debt also limits the Federal Reserve’s flexibility. Attempts by the Fed to drive growth runs the risk of driving interest rates higher and putting a further damper on the economy and makes servicing the mountain of debt more difficult.

The high level of debt, the Feds inability to stimulate borrowing and the fact that we are now in the third year of this so-called “Financial Crisis” shows that we are still in the early stages of this deleveraging (paying off debt) which will go on for a painfully long time. Why? Too much debt.

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U.S. domestic non-financial debt relative to GDP increased from 125% during Ronald Reagan’s presidency to 250% today. Indeed, the U.S. has a long painful slog ahead to bring debt down to manageable levels.

Inflation is too much money chasing too few goods. Deflation is too little money trying to deal with too much debt. As I said four years ago, we will have the worst of both; stagflation. What we own (houses and pensions) will go down and what we owe (gas groceries, bills and taxes) will go up.

Excessive Government Reaches the Point of No Return

The “point of no return” is an aviation terms that denotes the point on a flight at which, due to fuel consumption, a plane is no longer capable of returning to its airfield of original takeoff and thus it MUST continue to its destination. It is a point where action is no longer reversible.

Governments have reached the point of no return. Governments have become so engrained in our lives that they have become our worst enemy. The current economic situation was caused by government meddling. And, the more problems created by governments, the more governments meddle and exacerbate existing problems and create new ones.

Western nations have become vast social welfare states. They work as long as economies grow but growth has to be larger than the parasitic drain imposed by governments. And, that’s the problem. When economies inevitably go into recession, economies stop growing but governments continue to grow to the point where the parasite starts to kill the host. That’s where we are today; past the point of no return.

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When the tech bubble burst, U.S. Fed Chairman, Allan Greenspan lowered interest rates to create an equity bubble to offset tech stock losses. Keeping rates too low for too long created a U.S. housing bubble which burst and took down not only homeowners’ equity but a vast job market in construction, retail, manufacturing of doors, windows, shingles, granite counter tops, air conditioners, furnaces and the logging industry that supplied the wood. His protégé, Ben Bernanke, unable to escape his insane Keynesian training is doing the same thing.

Here’s just one example of government run amok. Fannie Mae and Freddie Mac, the American mortgage giants are insolvent but not yet bankrupt so they are no longer offering zero down payment mortgages. In most cases, home-buyers are required to have a 20% down payment. Zero down helped fuel America’s housing bubble which burst and in many areas still has not bottomed out. Meanwhile, there’s a huge inventory of unsold homes that needs to be reduced before house prices reach a bottom.

Meanwhile, the U.S. Department of Agriculture has billions of dollars at its disposal for mortgages. According to John Mauldin, they are advertising, “Why would you rent an apartment when you can buy a new home for $699 a month with NO MONEY DOWN?” Indeed, there is still an American government bureaucracy that hasn’t got the message. Granted there are income limitations and the homes need to be outside city limits but they are 100% government guaranteed mortgages i.e. the beleaguered taxpayer is once again on the hook. Meanwhile, homes inside city limits are going into foreclosure. Mauldin says it’s, “a situation more or less guaranteed to keep home values down in the rural outskirts, yet we want first-time buyers to snap these up!”

As is usually the case with any government meddling, the unintended consequences are worse than the original problem. This is how government justifies its existence; there are new problems for them to “solve”.

Yet another example of insane regulatory meddling is the Chicago Metals Exchange reducing margin on financial futures by 33% to stimulate demand and offset the crowds heading for the exits while increasing margins on precious metals like gold and silver so speculators are forced to sell which drives down gold and silver prices in an attempt to put tits & lipstick on the failing U.S. dollar. Thus, real precious metals get slammed and phony financial stocks get scammed through the manipulation of margin requirements.

Even the stock markets are being manipulated to appear they are recovering. For example, the stunning recovery in the last hour of Oct. 4 trading day made it look like a key reversal day which occurs when the market records a new low and then rallies to close above the previous day’s close. This has all the fingerprints of the PPT (the President’s “Plunge Protection Team”) because there aren’t many investors with deep enough pockets prepared to catch a falling knife that late in the day.

If even I can see the scam, so can many others. Confidence is the bedrock of financial systems. Without confidence, it all falls apart. Government meddling, manipulation and intervention is destroying investor’s confidence. These are signs of desperation. The whole house of cards is starting to tumble.

Three years ago, I quoted Satyajit Das in my article “A credit crater too big to fill – Nov. 5, 2008”. Satyajit, a banking expert in Sydney Australia, knows what he’s talking about. He wrote a 4,000 page text on derivatives (structured financial instruments). What he said is the most chilling analysis I’ve ever seen:
“Governments are not really trying to save the system anymore. They now realize that’s impossible. They are just trying to manage the decline.”

Events of the last three years have proven him correct. The endless series of financial crises cannot be “fixed” or even prevented. Western economies and financial institutions are in terminal decline, slowly shaking themselves apart. Wild swings in stock markets, commodity markets and bond markets show that ‘the center cannot hold”. And, governments are just trying to manage the decline.

What can you do? If you’ve been following this blog for the past 4 years, I’ve said it all already. If you’re a new reader, start with 2007 Major Article and read each subsequent year’s Major Articles. In short: get out of debt, get into cash and put some of it into gold and canned goods and things you’ll eventually need. Enjoy the coming Christmas. Party like there’s no tomorrow. And put on your crash helmet because 2012 will be one helluva year!

I gotta go wrap some Christmas gifts.

Merry Christmas everyone!

Gerold
December 11, 2011

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