Thursday, July 30, 2009

Sherman Okst - Reality Lags Perception…

Sherman Okst, AKA “Davos” at (AKA “Fear Monger,” LOL), wrote a very interesting piece that I am proud to share with all my readers. Sherman has been a big supporter of my site and I appreciate that very much!

Of course it helps when he sends me emails with things like, “…What you brought to light I think is the most important piece of news of the century.” LOL, yeah, not being able to fund our debts will, in fact, lead to the eventual demise of the current version of the United States, so yes, very important!

How we get from here to there, though, is obviously a matter of debate, one that Sherman and I will voice differing views on. And that’s okay, we BOTH have open minds about it as we know we don’t control the decisions of policy makers and thus the PATH to the ultimate destination is still an open question…
Reality Lags Perception

That isn't my line, I didn't coin it - though I wish I did. But I'd like the opertunity to expand on it.

I read it in Secretary Paul O'Neill's book, he was our 72nd Treasury Secretary and I would say he was the best Treasury Secretary we ever had.

Mr. Cheney fired him.

Thanks Dick!

Mr. O'Neill recommended massive tax hikes, massive spending cuts and an attempt to balance a deficit before it got to $500,000,000,000.00. As of March 2009 the CBO is forecasting a deficit of $1,850,000,000,000.00.

It got away. We went from 500 billion to close to 2 trillion in just a few years. Like Dr. Al Bartlett says, 'Most people do not understand exponential growth, yet the concept is of fundamental importance.'

Mr. O'Neill, like I and many other bloggers, believe that deficit's DO matter. We are now at a point where one week of bond auctions amount to half the budget deficit that Mr. Oneill advocating containment of.

You might want to pause a second to reflect on that statement.

In his book Paul O'Neill revealed that 'Reality lags perception' was actually a guiding principle of the past administrations. If your not familiar with a guiding principle I read a book 'Fast Company' on them, they are a jig that anyone in the organization can run data through to make a decision without a boss having to delay the yes/no process.

We are going to war for:

Perception #1 Weapons of Mass Destruction,

Perception #2 to democratize Iraq,

Perception #3 to fight terrorism.

I think terrorism is the most recent reason, I might have missed a few or lost track. There have been so many reasons that I can't keep up. Regardless of the perception de jour, the reality is that 5,000 of our soldiers have died and many more are still in harms way. Of course, I must be geographically challenged because I thought that the kin to the people who they let fly on 9.12.2001 (when everyone else was grounded) was in Pakistan or Afghanistan, not Iraq.

Personally, I'm a big boy, I can take the truth and I imagine everyone else can, I think we are in Iraq because if we weren't there would be a lot less oil on the market and the world's economy would be suffering even more.
...if we continue along the present course, the safety of American troops in the region, of our friends and allies like Israel and the moderate Arab states, and a significant portion of the world’s supply of oil will all be put at hazard.

Oil, to the State Department is a matter of National Security.

I would not dissagree with them on that.

But I digress, I'm not writing a political statement, I'm simply stressing that we go to war for a reason not reason's that change when proved false. The Gulf of Tonkin incident that was later proved false, it created a war where 58,000 soldiers died - however the reason for going to war didn't change like underwear changes.
....and that the Gulf of Tonkin incident may well have been fabricated as a means of drawing the U. S. into the Vietnam war. All these things have been rumored for years, but Bamford draws upon all sorts of official sources to nail them down.

Again, this is how reality lags perception. And, if the perception is changed each week then the reality can lag even further behind. My 17 year old daughter is great at this when it comes to progress reports and school work. Keep on her, keep the perception from becoming fluid and we get a 3.95 grade average and advanced placement courses, let her change the story and the D+'s appear on the reality report card.

Today I shun the TV, I don't have cable or for that matter even a digital converter box. I try to stay away from the mainstream media and focus on 25 of what I consider to be the best economic blogs.

Jim Rogers, one of the world's greatest investors can say in 15 words what took me 45 words: "Getting your investment advice from the government or TV [and] you are bound to go bankrupt."

Until I heard him say that, I have to admit, I felt a little bit alone in my views on where I get my financial information from. Many friends would question me about this. Blogs to them are like yellow journalism. When a successful author and billionaire endorse what I believed to be true it is very reassuring.

By the way, that link I found on Michael Covel'sl b[l]og, it is part of his new movie "Broke, the New American Dream."

And, in case you missed it here is what I consider to be two better resons why I shun cable financial "reporting." I mean come on, when we have to go to a comedian for acurate financial data then who is the joke really on. Who is really the clown here?

Reality lags perception.

Today, when I visit the blogs I see two camps. Inflation and Deflation. Black and white, "A" or "B."

I myself see "C." We can and I think likely will have "hyper-inflation" as the result of a dollar collapse. I think it is underway right now. I'm talking a Zimbabwe style dollar collapse.

Austrian Economics taught us that if we increase (inflate) the money supply that the value of the money decreases and prices rise. To me this is the true meaning of inflation. I think the seashell story expounds on this.

Right now Camp A and Camp B seem mired in where the money is. If "we" destroy our dollar will it matter if the money leaves the banks or stays in the banks?


Which brings us to the reality of the situation: We can not sell enough bonds to service our debt. Bond sales are anemic. They can not sustain a weekly offloading of a quarter of a trillion dollars of debt! When Paul O'Neill was fired $230,000,000,000.00 was pretty close to half of the entire projected deficit. Now we are exceeding a $1,850,000,000,000.00 deficit. A 1.85 trillion dollar deficit, and we can't find enough foreign or domestic bond buyers to service that massive shortfall.

We can't pay our bills!

One word, and one word only comes to my mind: Insolvent.

Nate Martin has recently compiled a series of excellent readings about this weeks bond sales. After reading his articles which pointed out that foreigners were becoming net sellers I was on Barry Ritholtz's "The Big Picture" blog, another top blog in my Google RSS Reader. Barry had posted a piece by David R. Kotok, here is some of it:
1. Fed policy is on hold at Quantitative Easing (QE), which means short-term interest rates near zero and plenty of liquidity in the financial system. The Fed has said it will continue this posture for a period of time. Markets do not expect any change until well in to 2010 at the earliest.

2. The much-feared Obama healthcare initiative seems to be stalled. Markets are relieved, because this initiative, as it was presented, amounted to a huge transfer payment that would be funded by future tax increases. The tax hikes would come on top of those already discounted by markets. Lifting the double tax whammy has given stocks a boost.

3. Foreigners are buying US Treasury securities again, and that has quieted the fearmongers who have been crying that the US will be abandoned and the dollar will face a crisis. That may still occur, but the day of reckoning for our fiscal profligacy seems to be postponed. Markets like dodging this bullet.

I agree completely with point 2. Jim Puplava of the Financial Sense News Hour with John Loeffler has explained in detail that a 1.6 trillion dollar health care plan with no means of funding will not have a positive effect on our economy. While I'm sure that initially point 1 will keep rates down I'm less certain that Quantitative Easing is optional. I totally disagree with point 3. So I emailed David seeking clarification. He differs with Nate's view, but wasn't specific as to why.

Nate was quite specific and offered facts or substance to the tune of $15,600,000,000.00:
Another Piece of the Money Trail…

As I’ve been mentioning in my reports on the flow of Treasury International Capital (TIC Flows), foreigners have been net sellers of our debt. This last report, released July 16th, shows a net outflow of foreign private capital of $82.2 billion and the outflow of foreign official flows were $15.6 billion.

[TIC Whitepaper on page]

Call me names, call me a fear monger - but the bottom line is I stand behind Nate's question: If the primary dealers are buying then where is the money coming from? It is a most valid question. If "we" have to counterfeit money to service our debt I have to be very honest - that frightens me. A lot! Maybe, just maybe I'd feel a little bit better if we didn't have falling revenues or if hiring was taking place where I was assured that revenues would pick up. But that isn't the case, and a good part of the bond sales are for the Regan era debt. In other words foreigners who bought bonds then - now have instruments which have matured - and we have to borrow money from them or print it to pay them. We do not have the money to pay them back. Instead we have a deficit that is many times larger.

Printing money inflates the money supply, it causes prices to increase.

I continued reading David's piece and I saw something that stood out. To me it had PERCEPTION written all over it:
At the end of next week, Peter Demirali and John Mousseau will join us at another sweet spot, in the village of Grand Lake Stream, Maine at Leen’s Lodge for the annual Shadow Fed fishing retreat (nicknamed Camp Kotok by Becky Quick). CNBC will be broadcasting live on Friday, August 7, starting very early in the morning and running for much of the day. We are 34 attendees, plus Steve Liesman, Matt Greco (a Squawk Box producer), and the CNBC crew. The attendees are by invitation only and have traveled from as far east as Abu Dhabi to as far west as Vancouver and Newport Beach and from as far south as Dallas. We have booked the entire camp and will be testing its capacity.

Like Jim Rogers said: "Getting your investment advice from the government or TV you are bound to go bankrupt." Like Mr. O'Neill said: "Reality (insolvency) lags perception (good market news)."

Take care, D. "Davos" Sherman Okst AKA a Fear Monger

Well, Sherman, all I can say in regards to Tokot’s piece is as I tell my kids, “You are who you hang around with!” Of course I say that to remind them to be careful or they may wind up hanging around drug dealers, and *that* would be exactly the shady type of characters he’s befriending on his little fishing expedition.

Very interesting piece, my only contention is that the hyperinflationary outcome is not assured in my opinion. Yes, I agree that the dollar in its present form is dead, well currently dead like a zombie, but its ultimate demise may occur differently than say Zimbabwe’s.

For that to happen, we must first get past the DEBT that is keeping the VELOCITY of money at historic lows, and we must see wages rise for the spiral to begin. Right now the risk is still a downward spiral in my opinion, despite the current moonshot in equities. But we’ll see… I would like to read more of your thoughts, you put them together well! Thanks for sharing!

Each day Davos shares his thoughts and best links with the readers of . Here’s today’s daily digest , I read it everyday and get a lot of my information there, I would politely suggest that you do likewise. You can find the link under my favorite blogs listing that automatically updates when Davos posts.

And you know that we have to give Davos the Royalty treatment here… so I think it’s only fitting that we royally “tune him up.”

Tom Petty – All the Wrong Reasons (ht Raven):

Trouble blew in on a cold dark wind
It came without no warning
And that big ol' house went up for sale
They were on the road by morning
Oh, the days went slow, into the changing season
Oh, out in the cold, for all the wrong reasons

Well she grew up hard and she grew up fast
In the age of television
And she made a vow to have it all
It became her new religion
Oh, down in her soul, it was an act of treason
Oh, down they go for all the wrong reasons

Where the sky begins the horizon ends
Despite the best intentions
And a big ol' man goes up for sale
He becomes his own invention
Oh, the days go slow into the changing season
Oh, bought and sold, for all the wrong reasons
Oh, down they go for all the wrong reasons

While I love Petty’s lyrics, finding decent videos of his is extremely difficult. Some artists/labels are keeping their music tight, while others, like the Eagles, are very loose with letting the public share their videos. While I sympathize with their right to protect their income stream, I think we all like the access to their art.

So, I am taking a new tact as videos get harder to find, namely when I can’t find the tune I want, I’m going to start using some of the good “cover” music from amateurs that I find. Some it may not be as good, but some of it is better. Here’s an example of a piece of music from an amateur who did all the tracks himself… nice evening music and you can even understand the lyrics!

All the Wrong Reasons – Tom Petty “Cover”