Ares
7th December 2010, 06:52 PM
At first, we were told the American economy was a freight train; invincible. After the derivatives and mortgage crisis began in 2007-2008, we were told the problem was a mere blip in our financial timeline; nothing to be concerned about. In 2009, we were told that the recession was over, and that “green shoots” were on the way. Later, they said we were “turning the corner”, whatever that means. In 2010, we were told it was time to get used to the “new normal”, which of course has yet to be clearly defined. Now, at the cusp of 2011, the year which many establishment economists originally claimed would bring a bright new era in U.S. employment and finance, it has become clear to much of the public that we are being deliberately herded with empty words and false promises towards a very dangerous and uncertain future.
We have discovered that there is no “new normal”. The word “normal” denotes a certain consistency, a set of rules to the system which are generally understood, yet we have seen nothing consistent except the continued downward freefall of our fiscal infrastructure and the end of anything remotely resembling stability.
I feel quite a bit of empathy and maybe even a little remorse for those who blindly believed the mainstream nonsense of the past few years. I can’t imagine being so lost and so utterly disappointed on such a regular basis. The only good to come out of this dashing of false hopes is that it has caused many to begin questioning what the hell is really happening. Why have things only become worse? What about all the government legislation and stimulus? When is it finally going to produce the effects that were once guaranteed? In fact, what are the benefits of ANY action the government or the private Federal Reserve has taken so far?
Let’s look at financial conditions across the globe and here at home, and perhaps we can gain a true understanding of the situation before us, and find answers for some of these questions…
Europe: American Instability With An Accent?
How many times over this summer did we hear about the bailout that “saved” the EU? About as much as we heard about the bailouts that supposedly saved America.
In spring, the MSM was warning of complete disintegration of the European Union. After the Greek bailout, all was suddenly well. The turnaround in rhetoric was enough to give me whiplash. I’m curious now as to where all that candy-coated bubbly adoration for European bonds and the Euro went. When I warned during the “summer of bailout love” that nothing had changed in the EU accept the media’s coverage of the problem, this is what I was talking about…
As we have been pointing out for the past two years, the debt default problems in the EU are not going away, nor are they likely to go away for quite some time. Greece, for instance, is now under review for yet another ratings downgrade by the S&P:
http://www.bloomberg.com/news/2010-12-03/greece-s-credit-rating-may-be-cut-by-s-p-as-eu-rules-threaten-bondholders.html
All the exuberance over the IMF/EU bailout of Greece this spring was for naught, as the country continues to falter with no end to their debt woes in sight. The bailout changed nothing (because bailouts never do). This lesson in Greece has apparently made no impression on mainstream media analysts and international investors, who now applaud a similar bailout of Ireland, and who will probably applaud the bailouts of Portugal, Spain, and Italy, once it finally becomes evident to the public that those countries are in equally terrible financial conditions.
Credit-default swaps for Portugal and Spain have risen to record levels as their debt exposure, which has been ignored by the MSM until this past month, is slowly revealed:
http://www.bloomberg.com/news/2010-11-29/corporate-bond-risk-falls-in-europe-credit-default-swaps-show.html
This means that the cost of insuring Portuguese or Spanish debt securities is becoming untenable. Like a couple of convicted drunk drivers, the risk of insuring them is tremendous. The likelihood of a crash is simply too high.
Italian bank refinancing costs are also exploding due to the unsustainable debt of the government, meaning an expanded credit crisis is looming for Italians (could this signal a coming bank holiday?):
http://www.bloomberg.com/news/2010-12-02/italian-banks-refinancing-costs-soar-on-contagion-concern-nation-s-debts.html
Ireland and every other EU nation’s response to this disaster will, obviously, be the implementation of austerity measures in order to pay off their IMF creditors. Ireland has already announced a possible 20% cut in overall spending and the simultaneous raising of taxes; a double whammy for Irish citizens who will now lose many government aid programs while at the same time losing valuable income out of their pocket:
http://www.bloomberg.com/news/2010-11-24/ireland-plans-to-reduce-spending-20-raise-taxes-as-rescue-talks-climax.html
Countries that find themselves this indebted to the IMF rarely if ever actually improve conditions enough to pay off their liabilities, and that is not an accident. Global bankers have no intention of ever releasing EU nations from their clutches. The debt cycle must go on forever…
The debt crisis across the Atlantic is culminating in a massive destabilization of jobs markets, which is something we rarely hear about in terms of Europe. Eurozone nations have hit an overall record high “official” unemployment rate of 10.1% (double that for the REAL unemployment rate):
http://english.peopledaily.com.cn/90001/90777/90853/7216710.html
The point? Just under the surface Europe is in a shambles, the Euro is in almost as much danger as the Dollar, and this development will come to a head very soon. Already, the EU is moving to enact a “European Stability Mechanism”, which will effectively divide core EU nations like Germany and France from ‘peripheral’ countries like Greece or Portugal:
http://news.yahoo.com/s/ap/20101203/ap_on_bi_ge/eu_europe_debt_rules
More fiscally stable nations such as Germany will no longer be required to foot the bill for those members of the EU that show signs of default. Even now, Germany is refusing to boost aid to EU bailout funds:
http://www.bloomberg.com/news/2010-12-06/eu-officials-debate-larger-bailout-fund-to-stem-sovereign-crisis-contagion.html
This is something we talked about with great concern at the beginning of this year, as richer European countries tie their economies to China and let the rest of the West rot. On one hand, it seems practical for sovereign countries to protect themselves and refuse to pay for the mistakes of others. However, the primary point of all of this has been ignored by the MSM, which is the fact that the EU should never have been formed in the first place. So far it has resulted in nothing but calamity for most participating countries. Surely, the IMF will drop by to pick up the pieces and “save” the union that was never wanted or needed, after the people are sufficiently desperate.
What this shows is that nearly all of the crises we are confronted with daily here in the U.S. are also striking Europe; there’s just much less talk about the EU disaster from local economic analysts. Regardless of what the MSM claims, Europe as we know it is about to change dramatically. In the U.S., the metamorphosis could be even more shocking…
The Recession That Ate America!
The jobs report from the Labor Department last week underlined the breadth of the collapse in America. Establishment economists were heralding the Christmas season as a turning point (yet again) in the U.S. economy, for jobs, and for sales. Predictions for job creation ranged from around 150,000 to 400,000 openings. Traditionally, they would be correct in expecting such a spike in employment, but we are not living in typical times. The jobs report revealed only 39,000 newly employed, and being that Labor Department numbers are generally manipulated, we could safely suggest that almost no jobs were added. All in the midst of the Holidays, when temporary hiring is supposed to boom:
http://money.cnn.com/2010/12/03/news/economy/november_jobs_report/index.htm
Now, some analysts are beginning to suggest that the U.S. is heading “back” into a recession. The problem is that in order to go into a second recession, we would have to actually exit the first recession before hand:
http://www.reuters.com/article/idUSTRE6B52NK20101206
Whether or not you believe that we are facing a double dip, or that we are caught in one long economic death spiral, one must ask the question: where did all that bailout money go that was supposed to stop this? Recently, we received a pittance of a glimpse at the Federal Reserve balance sheet for part of the stimulus program. What little data was made public was not comforting…
If you thought that stimulus packages from the Fed would actually go into the U.S. economy, you were greatly mistaken. The largest recipients of bailout dollars from the Federal Reserve (paid for with your tax dollars) were FOREIGN BANKS. That’s right, the liquidity injections that have put the very health of the dollar at risk and stoked a growing trade and currency war across the planet did not even go towards the economy in which you live! Overseas banks such as UBS and Barclays received the largest portion of the $3.3 trillion in emergency stimulus that was outlined in documentation the Fed was forced to release due to lawsuit:
http://www.bloomberg.com/news/2010-12-02/federal-reserve-may-be-central-bank-of-the-world-after-ubs-barclays-aid.html
Remember, this $3.3 trillion is just what the central bankers openly admit to. We haven’t even scratched the surface of Fed accounts or Fed secrecy yet. One factor in stimulus injections that often goes under the radar is overnight lending. It has been revealed that the Fed has created at least $9 trillion which was then pumped into major banks over the course of the past two years. Merrill Lynch alone snapped up $2.1 trillion:
http://money.cnn.com/2010/12/01/news/economy/fed_reserve_data_release/index.htm?source=ft
This brings up another important question: if the major banks have been privy to so much capital, why aren’t they lending to the public? Maybe because they are still broke, even after all that Fed liquidity! Currently, top U.S. banks still face a $100 billion to $150 billion shortfall according to Basel III rules (again, this is just the amount that has been admitted):
http://www.reuters.com/article/idUSTRE6AL0A220101122
This amount of capital retention would suggest a ‘deflationary’ crisis, but instead, we have so far witnessed a falling dollar and rising prices on most goods and commodities. Gold is hovering near $1420 an ounce as I write this. Silver has broken the $30 an ounce mark. Oil is flirting with $90 a barrel, and is firmly entrenched above $3 a gallon, very close to where we predicted during the summer (we still have three weeks to hit $100 a barrel). Other base goods are spiking much faster…
The most recent and disingenuous talking point used by the MSM to explain away rising prices is that it is a result of “demand” by growing developing nations like China. Below are a couple examples, including an article which blames rising cotton prices on demand from China, and rising oil prices on “economic recovery”, which is an unbearable load of media manure:
http://www.bloomberg.com/news/2010-12-02/cotton-soars-as-growers-can-t-ship-fast-enough-to-meet-chinese-demand.html
http://www.reuters.com/article/idUSLDE6AA0XV20101206
Anything to avoid the word “inflation”, and most especially the word “hyperinflation”. The problem with the demand argument is that while there is growing need for materials in places like China, this is certainly not at all the driving force behind the explosion in prices. A good way to gage this is by examining the BDI (Baltic Dry Index).
The BDI measures the cost of shipping raw materials across the ocean as well as the amount of goods being shipped. It is one of the few economic indicators that cannot be manipulated by international banks or governments. A dramatic drop in the BDI shows a sharp decrease in demand for global shipping and thus reveals a slowdown in the overall economy. This is exactly what occurred at the beginning of the credit crisis in 2007-2008. However, the BDI can also be measured in comparison with the values of stocks and commodities. Under normal conditions of supply and demand, if the BDI were to drop (or deflate), then the value of most stocks and goods should also drop. This has not been the case, as the below graphs illustrate:
BDI vs. S&P 500
<img src="http://neithercorp.us/npress/wp-content/uploads/2010/12/bdi_sp2.jpg"/>
BDI vs. CRB Index
<img src="http://neithercorp.us/npress/wp-content/uploads/2010/12/bdi_crb2.jpg"/>
BDI vs. Crude Oil
<img src="http://neithercorp.us/npress/wp-content/uploads/2010/12/bdi_crude2.jpg"/>
BDI vs. Gold
<img src="http://neithercorp.us/npress/wp-content/uploads/2010/12/bdi_gold2.jpg"/>
BDI vs. Copper
<img src="http://neithercorp.us/npress/wp-content/uploads/2010/12/bdi_copper2.jpg"/>
BDI vs. Soy
<img src="http://neithercorp.us/npress/wp-content/uploads/2010/12/bdi_soy2.jpg"/>
We have discovered that there is no “new normal”. The word “normal” denotes a certain consistency, a set of rules to the system which are generally understood, yet we have seen nothing consistent except the continued downward freefall of our fiscal infrastructure and the end of anything remotely resembling stability.
I feel quite a bit of empathy and maybe even a little remorse for those who blindly believed the mainstream nonsense of the past few years. I can’t imagine being so lost and so utterly disappointed on such a regular basis. The only good to come out of this dashing of false hopes is that it has caused many to begin questioning what the hell is really happening. Why have things only become worse? What about all the government legislation and stimulus? When is it finally going to produce the effects that were once guaranteed? In fact, what are the benefits of ANY action the government or the private Federal Reserve has taken so far?
Let’s look at financial conditions across the globe and here at home, and perhaps we can gain a true understanding of the situation before us, and find answers for some of these questions…
Europe: American Instability With An Accent?
How many times over this summer did we hear about the bailout that “saved” the EU? About as much as we heard about the bailouts that supposedly saved America.
In spring, the MSM was warning of complete disintegration of the European Union. After the Greek bailout, all was suddenly well. The turnaround in rhetoric was enough to give me whiplash. I’m curious now as to where all that candy-coated bubbly adoration for European bonds and the Euro went. When I warned during the “summer of bailout love” that nothing had changed in the EU accept the media’s coverage of the problem, this is what I was talking about…
As we have been pointing out for the past two years, the debt default problems in the EU are not going away, nor are they likely to go away for quite some time. Greece, for instance, is now under review for yet another ratings downgrade by the S&P:
http://www.bloomberg.com/news/2010-12-03/greece-s-credit-rating-may-be-cut-by-s-p-as-eu-rules-threaten-bondholders.html
All the exuberance over the IMF/EU bailout of Greece this spring was for naught, as the country continues to falter with no end to their debt woes in sight. The bailout changed nothing (because bailouts never do). This lesson in Greece has apparently made no impression on mainstream media analysts and international investors, who now applaud a similar bailout of Ireland, and who will probably applaud the bailouts of Portugal, Spain, and Italy, once it finally becomes evident to the public that those countries are in equally terrible financial conditions.
Credit-default swaps for Portugal and Spain have risen to record levels as their debt exposure, which has been ignored by the MSM until this past month, is slowly revealed:
http://www.bloomberg.com/news/2010-11-29/corporate-bond-risk-falls-in-europe-credit-default-swaps-show.html
This means that the cost of insuring Portuguese or Spanish debt securities is becoming untenable. Like a couple of convicted drunk drivers, the risk of insuring them is tremendous. The likelihood of a crash is simply too high.
Italian bank refinancing costs are also exploding due to the unsustainable debt of the government, meaning an expanded credit crisis is looming for Italians (could this signal a coming bank holiday?):
http://www.bloomberg.com/news/2010-12-02/italian-banks-refinancing-costs-soar-on-contagion-concern-nation-s-debts.html
Ireland and every other EU nation’s response to this disaster will, obviously, be the implementation of austerity measures in order to pay off their IMF creditors. Ireland has already announced a possible 20% cut in overall spending and the simultaneous raising of taxes; a double whammy for Irish citizens who will now lose many government aid programs while at the same time losing valuable income out of their pocket:
http://www.bloomberg.com/news/2010-11-24/ireland-plans-to-reduce-spending-20-raise-taxes-as-rescue-talks-climax.html
Countries that find themselves this indebted to the IMF rarely if ever actually improve conditions enough to pay off their liabilities, and that is not an accident. Global bankers have no intention of ever releasing EU nations from their clutches. The debt cycle must go on forever…
The debt crisis across the Atlantic is culminating in a massive destabilization of jobs markets, which is something we rarely hear about in terms of Europe. Eurozone nations have hit an overall record high “official” unemployment rate of 10.1% (double that for the REAL unemployment rate):
http://english.peopledaily.com.cn/90001/90777/90853/7216710.html
The point? Just under the surface Europe is in a shambles, the Euro is in almost as much danger as the Dollar, and this development will come to a head very soon. Already, the EU is moving to enact a “European Stability Mechanism”, which will effectively divide core EU nations like Germany and France from ‘peripheral’ countries like Greece or Portugal:
http://news.yahoo.com/s/ap/20101203/ap_on_bi_ge/eu_europe_debt_rules
More fiscally stable nations such as Germany will no longer be required to foot the bill for those members of the EU that show signs of default. Even now, Germany is refusing to boost aid to EU bailout funds:
http://www.bloomberg.com/news/2010-12-06/eu-officials-debate-larger-bailout-fund-to-stem-sovereign-crisis-contagion.html
This is something we talked about with great concern at the beginning of this year, as richer European countries tie their economies to China and let the rest of the West rot. On one hand, it seems practical for sovereign countries to protect themselves and refuse to pay for the mistakes of others. However, the primary point of all of this has been ignored by the MSM, which is the fact that the EU should never have been formed in the first place. So far it has resulted in nothing but calamity for most participating countries. Surely, the IMF will drop by to pick up the pieces and “save” the union that was never wanted or needed, after the people are sufficiently desperate.
What this shows is that nearly all of the crises we are confronted with daily here in the U.S. are also striking Europe; there’s just much less talk about the EU disaster from local economic analysts. Regardless of what the MSM claims, Europe as we know it is about to change dramatically. In the U.S., the metamorphosis could be even more shocking…
The Recession That Ate America!
The jobs report from the Labor Department last week underlined the breadth of the collapse in America. Establishment economists were heralding the Christmas season as a turning point (yet again) in the U.S. economy, for jobs, and for sales. Predictions for job creation ranged from around 150,000 to 400,000 openings. Traditionally, they would be correct in expecting such a spike in employment, but we are not living in typical times. The jobs report revealed only 39,000 newly employed, and being that Labor Department numbers are generally manipulated, we could safely suggest that almost no jobs were added. All in the midst of the Holidays, when temporary hiring is supposed to boom:
http://money.cnn.com/2010/12/03/news/economy/november_jobs_report/index.htm
Now, some analysts are beginning to suggest that the U.S. is heading “back” into a recession. The problem is that in order to go into a second recession, we would have to actually exit the first recession before hand:
http://www.reuters.com/article/idUSTRE6B52NK20101206
Whether or not you believe that we are facing a double dip, or that we are caught in one long economic death spiral, one must ask the question: where did all that bailout money go that was supposed to stop this? Recently, we received a pittance of a glimpse at the Federal Reserve balance sheet for part of the stimulus program. What little data was made public was not comforting…
If you thought that stimulus packages from the Fed would actually go into the U.S. economy, you were greatly mistaken. The largest recipients of bailout dollars from the Federal Reserve (paid for with your tax dollars) were FOREIGN BANKS. That’s right, the liquidity injections that have put the very health of the dollar at risk and stoked a growing trade and currency war across the planet did not even go towards the economy in which you live! Overseas banks such as UBS and Barclays received the largest portion of the $3.3 trillion in emergency stimulus that was outlined in documentation the Fed was forced to release due to lawsuit:
http://www.bloomberg.com/news/2010-12-02/federal-reserve-may-be-central-bank-of-the-world-after-ubs-barclays-aid.html
Remember, this $3.3 trillion is just what the central bankers openly admit to. We haven’t even scratched the surface of Fed accounts or Fed secrecy yet. One factor in stimulus injections that often goes under the radar is overnight lending. It has been revealed that the Fed has created at least $9 trillion which was then pumped into major banks over the course of the past two years. Merrill Lynch alone snapped up $2.1 trillion:
http://money.cnn.com/2010/12/01/news/economy/fed_reserve_data_release/index.htm?source=ft
This brings up another important question: if the major banks have been privy to so much capital, why aren’t they lending to the public? Maybe because they are still broke, even after all that Fed liquidity! Currently, top U.S. banks still face a $100 billion to $150 billion shortfall according to Basel III rules (again, this is just the amount that has been admitted):
http://www.reuters.com/article/idUSTRE6AL0A220101122
This amount of capital retention would suggest a ‘deflationary’ crisis, but instead, we have so far witnessed a falling dollar and rising prices on most goods and commodities. Gold is hovering near $1420 an ounce as I write this. Silver has broken the $30 an ounce mark. Oil is flirting with $90 a barrel, and is firmly entrenched above $3 a gallon, very close to where we predicted during the summer (we still have three weeks to hit $100 a barrel). Other base goods are spiking much faster…
The most recent and disingenuous talking point used by the MSM to explain away rising prices is that it is a result of “demand” by growing developing nations like China. Below are a couple examples, including an article which blames rising cotton prices on demand from China, and rising oil prices on “economic recovery”, which is an unbearable load of media manure:
http://www.bloomberg.com/news/2010-12-02/cotton-soars-as-growers-can-t-ship-fast-enough-to-meet-chinese-demand.html
http://www.reuters.com/article/idUSLDE6AA0XV20101206
Anything to avoid the word “inflation”, and most especially the word “hyperinflation”. The problem with the demand argument is that while there is growing need for materials in places like China, this is certainly not at all the driving force behind the explosion in prices. A good way to gage this is by examining the BDI (Baltic Dry Index).
The BDI measures the cost of shipping raw materials across the ocean as well as the amount of goods being shipped. It is one of the few economic indicators that cannot be manipulated by international banks or governments. A dramatic drop in the BDI shows a sharp decrease in demand for global shipping and thus reveals a slowdown in the overall economy. This is exactly what occurred at the beginning of the credit crisis in 2007-2008. However, the BDI can also be measured in comparison with the values of stocks and commodities. Under normal conditions of supply and demand, if the BDI were to drop (or deflate), then the value of most stocks and goods should also drop. This has not been the case, as the below graphs illustrate:
BDI vs. S&P 500
<img src="http://neithercorp.us/npress/wp-content/uploads/2010/12/bdi_sp2.jpg"/>
BDI vs. CRB Index
<img src="http://neithercorp.us/npress/wp-content/uploads/2010/12/bdi_crb2.jpg"/>
BDI vs. Crude Oil
<img src="http://neithercorp.us/npress/wp-content/uploads/2010/12/bdi_crude2.jpg"/>
BDI vs. Gold
<img src="http://neithercorp.us/npress/wp-content/uploads/2010/12/bdi_gold2.jpg"/>
BDI vs. Copper
<img src="http://neithercorp.us/npress/wp-content/uploads/2010/12/bdi_copper2.jpg"/>
BDI vs. Soy
<img src="http://neithercorp.us/npress/wp-content/uploads/2010/12/bdi_soy2.jpg"/>