Saturday, August 22, 2009

Debt, Interest Rates, and Monetary Trends - Click...

Inflation or deflation… economy bad, economy better… it’s a massive ball of confusion, so let’s see if we can very simply take a look at the BIG picture to see where we are and where we are heading…

Ball Of Confusion (World Of Confusion):


In 1971 President Nixon removed the Dollar entirely from the gold standard. Rapid inflation immediately followed to the point that in 1980, then Fed Chairman Paul Volcker raised interest rates to 20% effectively killing the concept of Usury.

From the peak in interest rates in 1980 until 2008 interest rates where in a structural decline and have now reached zero as seen by this chart of the Effective Federal Funds Rate:



Note that with each recession (shadow areas), interest rates went lower, then lower, then lower, then zero.

They will NOT go below zero (don’t quibble, I know what you micro-managers are thinking, we’re looking at the big picture).

While interest rates were declining, DEBT was GROWING. This is what I call the era of leverage. Debt is financial leverage, and when interest rates are declining, holding debt gets easier and easier. The more debt that everyone has, the more credit dollars they have to drive up the price of houses, of cars, of gasoline, of food, of everything – to a point.

Here is a chart of the gross federal debt from about the late 1930s. Note that the DEBT began its parabolic rise shortly after interest rates began to decline:



Here is a chart of Total Public debt from about 1967. Note that the growth was slow and steady until about the peak in interest rates (1980), it then rose much more swiftly until the year 2000 when the move went parabolic and now is pointing almost literally straight up:



Guess what? That is not going to continue like that forever.

It takes INCOME to service debt. When the income no longer grows, if debt saturation has occurred, then debt must fall as the ability to pay it back falls with income. Here is what personal income is doing:



Personal Income is FALLING.

Consumer Credit is FALLING.



Household financial obligations are falling.



That would be an appropriate response, would it not?

Yet, in our own government, their income is falling:



Yet, their debt is growing exponentially. NOT an appropriate relationship unless bankruptcy is your goal.

Consumers who have less credit available spend less money. International trade falls. Corporate profits, those at least marked to reality, fall… and therefore stocks go up, right?



Of course there’s a historic disconnect there somewhere, if only I could put my finger on it… hmmm. It’s Sooooo difficult to figure out, why heck, NO ONE could have seen any of the financial turbulence coming.

And what are those same "visionaries" now saying about the stock market? Oh boy.

Once again, the people who see near term inflation are looking at the money supply charts, but they are not seeing the destruction in credit dollars which, I believe, is vastly greater than even the government charts show due to the leverage/deleverage of the shadow banking system that cannot be clearly seen. What can be clearly seen is that the big banks, who comprise the shadow banking world, make BIG profits when they MARK their “assets” TO their own MODEL, yet they have losses when they are forced to MARK them even slightly TO MARKET reality.

So, as interest rates have declined to zero, debt and incomes grew until incomes could no longer support further growth in debt and now they are both falling back. After all, the people who actually PRODUCE REAL THINGS in the rest of the world will produce for far, far less than we will. Thus in a more open international trade market, one would expect wages here to fall and wages there to rise, meeting someplace in the middle.

To confuse this otherwise pretty clear picture, the Fed jumps in and begins printing money. Why? Because the real economy can no longer support the paper economy. They have lowered interest rates to zero and so the next thing to do is to print.

Now let's look at the chart of Federal Funds Rate again...



Note that following each recession and each lowering of rates there is a rebound that requires rates to rise, but in the past 30 years, never as high as they were before. In the 2000 to 2003 recession rates were lowered by Greenspan to just 1% - almost zero but not quite. And he did not have to resort to open printing. The next cycle rates hit zero AND they had to print.

Let me ask you this, what happens on the next cycle? People seem to want to argue with that chart, but zero is zero. There are only two possible paths of motion, sideways or up – OR self destruction. Trust me on this, zero is NOT any more normal than 20%!

We are at the end of an era, the era of leverage. We are now staring down the end of a loaded gun with our own finger on the trigger. We can choose to normalize interest rates and suck up the fact that debts don’t grow forever, OR we can pull the trigger and continue to print and to run up debts that we cannot service. The latter is fiscal and governmental suicide. The latter will lead to a loss of confidence in government and the demise of the dollar. That is NOT INFLATION!! That is a LOSS OF CONFIDENCE in a fiat money system, two different things – they are not just a matter of degree.

And thus CHANGE is COMING. You and I both hope that our leaders do not pull that trigger and commit suicide – so far they are doing exactly that, I can hear the click, I’m waiting for the BOOM.

------------------------------------------------

Lately I’ve been showing the latest issues of the St. Louis Fed’s Monetary Trends and they have been popular, so here is the latest issue out for September. A couple of things I want to point out... first is that in each issue the first couple of pages are devoted to an opinion piece by one of their staff economists.

I usually ignore these as they are usually, well... frankly, they are just bologna. And this one is no exception!

However, it’s an interesting subject in which Mr. Wheelock presents a false hypothesis and then, surprise, comes to a false conclusion. Evidently his goal is to tell the world How NOT to Reduce Excess Reserves. His premise is that in the Great Depression they tightened monetary policy too quickly and thus caused another recession in the late 1930s.

Again, he is 180 degrees out from reality regarding cause and effect. Had monetary policy not been far too lose in the 1920s, then the credit bubble they allowed and subsequently collapsed, would have never required them to ramp excess reserves in the first place.

The Shadow Banking system took credit creation to an extreme FAR beyond that of the 1920s. Again, we are at the end of the line and we have a choice. Mr. Wheelock’s choice seems to be that we need to do it all over again, only for longer and on a bigger scale. Great thinking.

The second thing I’d like to point out regarding the Monetary Trend paper is that you need to look at the top of each page to see when the charts were updated. Most of the charts in this issue are the same as I showed last week, but there are a few different chart series in each issue…

September Monetary Trends:


I’ve already thoroughly gone over the contraction in credit and collapse of monetary velocity, those charts have not been updated in this issue over last.

So let’s talk about something else. Something interesting is that back in the 1930s some economic formulas were created that are obviously still in use today and are included in this report from the Fed.

Specifically, there are charts and projections using the Taylor Rule whereby the formula he created predicts an economic growth rate based upon target inflation rates.

In the charts below, first note what’s happening with PCE inflation in the lower right. Then go up and note that the ACTUAL Federal Funds Rate has stayed consistently way beneath the Taylor Target rates… until, that is, just recently. What this chart is saying to me is that the formula is now calling for a sharp reduction in rates. But wait, rates hit zero! So what did we do? PRINT. Will that work to bring everything back in line? If so, for how long? And then what? Hmmm… that’s an interesting chart. I dug around and tried to find some long term historical charts, but they are inconsistent in showing the Taylor calculation. Surprise, the charts presented by people from the Fed seem to suggest that their rates match and follow the Taylor Rule very well, while some others seem to be calculated in a different way. Let’s just watch this chart over time, as long as it’s calculated consistently, then we may be able to glean something from Mr. Taylor’s formula:



Then there’s the McCallum Rule. Here’s how Investopedia defines it:
What Does McCallum Rule Mean?
A monetary policy development guideline developed by economist Bennett T. McCallum. The rule describes the relationship between inflation and the growth in the money supply needed to create that level of inflation. Important inputs in this model are the target inflation rate and the long-term average rate of growth in real GDP.

When the economic statistics of the 1970s are used to back-test the McCallum rule, it shows that at least part of the effect that contributed to that era's economic downturn was the fact that it grew too rapidly, which ultimately lead to high levels of inflation.

However, the McCallum rule only describes one part of the story, as other economic models determined that the interest rates set by the Fed were also too low. Because the cost of borrowing was not high enough, individuals would simply borrow to spend instead of saving.

So, Taylor’s rule describes the relationship of interest rates to economic growth, McCallum’s rule describes the relationship between interest rates needed to produce a specified rate of inflation. Let’s see how that’s working:



The top chart seems to suggest that in order to create, let’s say, 2% inflation, that the Fed would have to increase the money base by a whopping 55%, LOL!! And that’s what they’ve done, and then some – currently to the tune of over 95%!!!



Note, however, what happens to monetary base velocity growth when you throw that much money into the system. And then note what has actually happened to Real Output Growth, a number I would contend is vastly overstated.

Bottom line to me is that these rules are obviously not perfect and that the further you go into the realms of extremes, the further they break down. WHY? DEBT is why. There must be sufficient income to service debt, and it is not there.

The next step out in the scale of the extreme will be when people lose CONFIDENCE in the monetary system and in our government. That will NOT be INFLATION, that will be the end of the system. Don’t pull the trigger.

Did that help, or are you still a ball of confusion?

The Temptations - Ball of Confusion:

Alex Jones on the Edge with Max Kaiser…

Alex Jones is painted as a radical, but in the first part of the interview he is explaining a basic concept about the military industrial complex and how they are slowly overstepping their legal bounds. On that point he is correct. He is also correct about the relationship between the central banks and the military industrial complex.

As he gets into the second half of the interview, he is definitely “on the edge” and sounds even more radical in his assertions (I wish he would speak less emotionally to get his point accross). I normally do not want to fuel wild accusations, but I think there are some grains of truth in what he is contending. Therefore, I am posting this interview anyway in the interest that perhaps in hindsight his assertions will indeed be proven to be largely correct. I’m just posting it, you decide.

He mentions Google video going away and I do want to note that there are many new startup businesses that you can upload your video to, but now, in general, they are charging a small fee to do so… Google is also now placing ads on Youtube videos and it is becoming a profit center for them, so I doubt you'll be seeing that go away any time soon.

Max Kaiser interviews Alex Jones Part I (8:33):


Max Kaiser interviews Alex Jones Part II (8:05):

John Bougearel of Structural Logic…

Posted at Zerohedge , this short technical piece looks at potential Fibonacci resistance levels that we are very close to. Interesting and short, well worth looking over.

Elizabeth Warren - Listen Carefully...

Seemingly the only voice of sanity, Elizabeth pretty much tells it like it is but in a polite and politically acceptable way. I would be much more blunt.

Note how she admits that the toxic waste is still on the balance sheets, something Meredith Whitney is no longer talking about. Warren also nails the mark-to-fantasy illusion.

Meredith Whitney – More than 300 Bank Failures this Year…

Meredith is too bullish on the economy, in my opinion, but correctly identifies the consumer who does not have access to the credit that they did.

There were four bank failures yesterday.

Also, the large institutions ARE INSOLVENT, even with all the bailout money. Like nuclear weapons, they still possess enough toxic waste debt derivatives to kill themselves many times over. Do not be fooled.

Meredith Whitney (5:50):

Friday, August 21, 2009

What Happens when the Hot Money Ends?

Wondering where the fuel for the recent rocket shot is coming from? Well, as Point put it, “The New York Federal Reserve bought a record $5.6 billion in agency debt today. There's your fuel for the equity fire today.”
Fed buys record $5.6 billion in agency debt

NEW YORK (MarketWatch) -- The Federal Reserve Bank of New York bought $5.605 billion in housing-agency debt on Friday, the biggest purchase since it began buying debt in the sector in December in the hopes of capping mortgage rates. It bought about half of the $11.209 billion offered to it by bond dealers, which analysts noted was rather high. The large purchase is a big switch from recent operations, which have slowly gotten smaller. Analysts hypothesized the central bank may have been trying to stretch out its purchases over a longer timeframe to improve the effect. "The size of today's purchase will lead many to pay greater attention to the next pass to see if the Fed is increasing the speed at which it purchases Agencies," said Dan Greenhaus, chief economic strategist at Miller Tabak. The Fed has bought $116.6 billion of the originally-stated $200 billion in debt issued by home-finance agencies.

Oh yeah, this is what happens:


Oh yeah, that also happens in China:

Searching for the Rule of Law - The Roller Coaster that is China…

For capital to form and concentrate IN A HEALTHY MANNER, the rule of law must be spelled out AND FOLLOWED. If the rules change over time, then those who have capital will look elsewhere to put their money to work.

One bad example would be Hugo Chavez in Venezuela who just up and decided to nationalize the oil industry there… then the mines… then the telecommunications… then the utilities… then the_____, and so on. I can’t think of a better way to drive away capital, can you? A person would be nuts to do business in that environment.

People forget that China is still a communist country – central planning and CONTROL. Sure, they are “embracing” some free market principles in an attempt to draw in capital to produce employment, but the rule of law is not really settled there, is it?

You will find an interesting discussion on the rule of law in Wikipedia where some basic principles are spelled out:

-That laws should be prospective rather than retroactive.

-Laws should be stable and not changed too frequently, as lack of awareness of the law -prevents one from being guided by it.

-There should be clear rules and procedures for making laws.

-The independence of the judiciary has to be guaranteed.

-The principles of natural justice should be observed, particularly those concerning the right to a fair hearing.

-The courts should have the power of judicial review over the way in which the other principles are implemented.

-The courts should be accessible; no man may be denied justice.

-The discretion of law enforcement and crime prevention agencies should not be allowed to pervert the law.

I would contend that some of these rules are slipping right here at home, such as the “independence of the judiciary.”

The rule of law is what led the world out of the dark ages. The concepts began to form about that time and really solidified with the signing of the Magna Carta, a document that underpins our own founding papers. But the rule of law really took shape in regards to the economy and how it allowed capital to form and concentrate in the 17th century as described by Wikipedia:

...two of the first modern authors to give the principle theoretical foundations were Samuel Rutherford in Lex, Rex (1644) and John Locke in his Second Treatise of Government (1690). Later, the principle was further entrenched by Montesquieu in The Spirit of the Laws (1748).

In 1776, the notion that no one is above the law was popular during the founding of the United States, for example in the pamphlet Common Sense by Thomas Paine: "in America, the law is King. For as in absolute governments the king is law, so in free countries the law ought to be king; and there ought to be no other." In 1780, John Adams enshrined this principle in the Massachusetts Constitution by seeking to establish "a government of laws and not of men."

I would contend that capital forming and concentrating is a great thing – it has advanced the human race and without it exploration and stunning new technologies would not be possible. BUT, it definitely can be overdone – as with most things in life there is a balance. When capital becomes too concentrated in the hands of just a few, bad things tend to happen after greed takes over.

That’s why the original intent behind corporations was a good one. Limited liability allowed capital to concentrate. But once concentrated, WHO decides where and how it should be put to work? That’s where governments who get too involved get in and muck up the works as they are terrible at choosing the areas where capital would best benefit society. I know that sounds terrible because that’s pretty much what you “elect” your representatives to do. In the United States corporations have become so powerful that they tell your representatives what to do or else they will not get the money to get reelected.

That’s how capital becomes misallocated in this country. It’s concentrating all right, but it’s concentrating in all the wrong places – the central banks.

Here’s a PATRIOT who understand this basic premise and gave Nancy Pelosi a serious piece of his mind!




BRAVO! And well deserved I might add. However, Mr. Guthrie, like most good Americans, still has not figured out that the wars he and his son so bravely fought, were wars designed and extended by the manufacturers of the fractional reserve, interest bearing, fiat money system - you know, the purveyors of debt! “Credit” equals debt, DEBT equals control. These are the same people who manufacture the weapons of war, and now the same people who control the media and the other three branches of government – you know, the executive, legislative, and judicial. What, you call that a conspiracy? I don’t, I call it fact, and I call it concentration of capital taken to an extreme.

So, what’s all this have to do with China?

What really got me thinking about this piece was the following article:

China Said to Plan Rules Tightening Capital of Banks

Aug. 21 (Bloomberg) -- China plans to tighten capital requirements for banks, threatening to curb the record lending that’s fueled a 60 percent rally in the nation’s stock market, three people familiar with the matter said.

The China Banking Regulatory Commission sent draft rule changes to banks on Aug. 19 requiring them to deduct all existing holdings of subordinated and hybrid debt sold by other lenders from supplementary capital, said the people, who have seen the document. Banks have until Aug. 25 to give feedback, said the people, declining to be named as the matter is private.

As a result, banks may need to rein in lending or sell shares to lift capital adequacy ratios to the 12 percent minimum. Chinese stocks briefly entered a so-called bear market this week on concern the government would stymie new loans that exceeded $1 trillion in the first half. A news department official at the regulator declined to comment by phone and didn’t immediately respond to a faxed inquiry.

“This move will cut one of the most important funding sources for banks,” said Sheng Nan, an analyst at UOB Kayhian Investment Co. in Shanghai. Banks will “have to either raise more equity capital or slow down lending and other capital consuming businesses to stay afloat.”

Hong Kong’s Hang Seng Index slid 0.6 percent at the 4:00 p.m. close, after having risen as much as 0.5 percent. China’s benchmark Shanghai Composite Index rose 1.7 percent to close at 2960.77, paring earlier gains of as much as 2 percent.

Debt Sales Triple

China’s banks have sold 236.7 billion yuan ($34.6 billion) of subordinated bonds so far this year, almost triple the amount issued during all of 2008. The banking regulator estimates about half of the subordinated bonds in circulation are cross-held among banks.
“We understand the regulator’s concerns about the proportion of subordinated debt,” Shenzhen Development Bank Co. Chairman Frank Newman said on an earnings conference call today. The bank hopes that any new rules are applied only to future debt sales, Newman said.

The subordinated debt sales came as new loans rose to a record 7.37 trillion yuan in the first half. Lending in July fell to less than a quarter of June’s level. About 1.16 trillion yuan of loans were invested in stocks in the first five months of this year, China Business News reported on June 29, citing Wei Jianing, a deputy director at the Development and Research Center under the State Council, China’s cabinet.

Cheap Money

“I’m worried about a correction in a market that has been driven by cheap money,” Devan Kaloo, who oversees $11.5 billion as head of global emerging markets at Aberdeen Asset Management Ltd., said Aug. 19.

The Shanghai Composite Index almost doubled during the first seven months of this year through Aug. 4, after falling 65 percent in 2008. Since reaching this year’s high on Aug. 4, it’s plummeted 15 percent. The index on Aug. 19 briefly fell 20 percent from this year’s high, the threshold for a bear market, before ending the day down 19.8 percent. The gauge rebounded yesterday, rising 4.5 percent.

Regulatory Concern

The banking regulator has indicated it’s concerned about excessive credit creation. Last month, the commission ordered lenders to raise reserves against non-performing loans, to ensure loans for fixed asset investments go to projects that support the real economy and announced plans to tighten rules on working capital loans.

Banks are allowed to count subordinated bonds they sell as supplementary or lower-Tier 2 capital. In the event of bankruptcy, holders of subordinated notes receive payment only after other debt claims are paid in full.

The regulator’s rule change requires banks to subtract all existing holdings of subordinate bonds issued by other lenders from their own subordinated bonds being counted as supplementary capital. The Wall Street Journal and Reuters reported earlier that the regulator was considering this measure.

In addition, the new rules also limit the amount of subordinated or hybrid bonds banks can hold, the people said. A bank’s holding of subordinated and hybrid bonds issued by a single bank can’t exceed 15 percent of its core capital, the people said. Holdings of all subordinate and hybrid bonds issued by banks can’t exceed 20 percent of core capital.

Capital Adequacy

The regulator has called on small publicly traded banks to have a minimum capital adequacy ratio of 12 percent by year’s end, up from the current 10 percent. The ratio, a measure of how much in losses a bank can absorb, is calculated by dividing capital by risk-weighted assets. A bank’s risk-weighted assets are comprised partly of loans.

After deducting subordinated bonds issued by other banks, lenders must either raise core capital or reduce their loans to meet the capital adequacy ratio requirements.

“It’ll be hard for commercial banks to sell subordinate bonds because much of the debt is sold to their counterparts,” said Xu Xiaoqing, a bond analyst at China International Capital Corp. in Beijing. “This rule would tighten lending by commercial banks, especially small and medium sized banks that have relatively less capital.”

So, let’s review the past… a huge stock market bubble was blown in China, a result of a massive world wide credit bubble started by the geniuses on Wall Street who managed to end Glass-Steagall and create the unregulated and untracked shadow banking system that was behind all the financial bubbles. China just happened to be seduced by all the cheap and easy money and opened themselves up to it.



Later, long after it was painfully obvious that their entire markets were fueled by speculation and hot money, the central planners of China intentionally pricked their bubble by repeatedly raising capital requirements.

Then, seeing the aftermath of a popped bubble, they loosened everything up again and now, surprise, they have fueled a massive reflexive bounce…

Only to prick it again and to reenter another bear market. We would never do anything like that would we, because we are WAY different than China, right?



Oops.

I mean after all, we’ve neeever seen anything like that in history before, have we?

NASDAQ


Oops.

WILD GYRATIONS are caused by economic “pilots” who make their inputs out of synch with the economy – in the world of airplanes these are called Pilot Induced Oscillations (PIO). The problem with PIO is that if you let it go too far, eventually the wings will literally break off. That’s what China is doing, and that’s what we’re doing. What we’re NOT doing is keeping the swings small by letting FREE MARKET FORCES correct the gyrations early.

But here’s another clue for all the central bankers of the world… free market forces will only dampen out the cycles naturally when the system is built with DYNAMIC STABILITY to begin with.

DYNAMIC STABILITY is the tendency that once the current state is “upset” that it tends to dampen and return to neutral ON ITS OWN.

Dynamic Stability:


This contrasts with Dynamic INstability which, when upset, will tend to DIVERGE from neutral, producing larger and more violent swings.

Dynamic Instability:


Interest Bearing Fractional Reserve Money by Fiat is NOT built with dynamic stability in mind. It is built with never ending growth via inflation in mind, because that’s how the people who produce it (central banks) make their riches. Never ending growth leads to exponential math which produces a parabolic curve that ends in a blow-off top and then collapse.

And here’s the thing about stability… it’s always a tradeoff. The jet fighter trades stability for maneuverability. The same is true for the Corvette. Your family mini-van, however, is built to be stable and not too maneuverable.

So why was our money system “designed” to be inherently “unstable?”

Here’s an observation that may help you answer the “why…” Those who are closest to inflation gain, while those being whipped at the opposite end of inflation lose.

I’d call those at the end of the inflation “whipping boys,” they are also known as the “sheeple.” Or, they are also known as you and me!

China = Central Planners? America = Central Bankers!

Speaking of wild gyrations… They are the “hound dogs” and they ain’t no friends of mine.

Well they said you was high-classed
Well, that was just a lie
Yeah they said you was high-classed
Well, that was just a lie
Well, you ain't never caught a rabbit
And you ain't no friend of mine


Morning Update/Market Thread 8/21

Good Morning,

Equity futures rose “in the midnight hours” once again, rising non-stop from midnight eastern at 996 on the /ES to this morning at 1,013 – a leap over resistance:



And the dollar was getting pounded, breaking down beneath short term support and losing .5% of its value overnight. Of course that’s the Inflation trade, dollar down, gold up, oil up, stocks up. The disconnect between the market action and the deflationary data is truly stunning. Keep in mind that there is a point where the dollar losses so much of its value that trade collapses. Hmmm… I wonder what Joseph Stiglitz would say about that…
Aug. 21 (Bloomberg) -- The dollar’s role as a good store of value is “questionable” and the currency has a high degree of risk, said Nobel Prize-winning economist Joseph Stiglitz.

“There is a need for a global reserve system,” Stiglitz, a Columbia University economics professor, said at a conference in Bangkok today. Support from countries like China should ensure orderly discussions on a new reserve system, he added.

Now that’s CHANGE, it’s coming in some form, that may be one of them. Almost an anti-American statement?

Naw, everything is fine here. We only have to auction off $197 billion in DEBT next week (ht Point, [check the “upcoming auctions” tab]):

*U.S. TREASURY TO AUCTION $27 BILLION IN 52-WEEK BILLS
*U.S. TREASURY TO AUCTION $42 BILLION IN TWO-YEAR NOTES
*U.S. TREASURY TO AUCTION $31 BILLION IN THREE-MONTH BILLS
*U.S. TREASURY TO AUCTION $28 BILLION IN SEVEN-YEAR NOTES
*U.S. TREASURY TO AUCTION $30 BILLION IN SIX-MONTH BILLS
*U.S. TREASURY TO AUCTION $39 BILLION IN FIVE-YEAR NOTES

The dollar is down just beneath the 78 level this morning. Here’s a weekly chart of the dollar showing that once support is broken at about 76, then the next stop would be the prior lows, and it’s clear air beneath that.



The Point & Figure chart shows a dollar bear target of 69, just beneath the old lows:



So, the current run up is still based on hot money and manipulation while the underpinnings of the economy get further eroded away. Once the rug is pulled on the hot money, and that is coming, the nonsense in the markets will end, and it’s likely to end suddenly in my opinion.

All the short term stochastics are currently overbought again… the long play is way long in the tooth, it’s one that Goldman is welcome to have all to themselves.

I’ve been watching the NDX closely because the daily Bollinger bands have been necking down on the price.



That’s a condition that usually indicates a rapid and large movement is about to happen. Up? Down? I’m still not betting either way in the short term, far too much manipulation in the markets for me (QE and such). I still think that the deflationary forces overcome the hot money… I know I’ve been saying that for a while, I’m almost always early!

McHugh has another turn date next week. Not that his turn dates have been producing turns lately, they haven’t because it’s been a nonstop rocket-shot again on the back of manipulation and money printing.

You know… a drug addict can get worse and worse until one day they just collapse to the floor. That’s usually a clue to stop doing drugs and hopefully they get cleaned up. The alternative, of course, is that a drug addict pumps themselves so full of drugs that their systems simply stop to function and they die. Frankly, I hope we hit the floor soon to prevent the latter.

Goldman, an Evil Woman drug pusher?

ELO – Evil Woman:


You made a fool of me, but them broken dreams have got to end...

...Rolled in from another town,
Hit some gold too hot to settle down,
But a fool and his money soon go separate ways,
And you found a fool lyin' in a daze,
Ha Ha woman what you gonna do,
You destroyed all the virtues that the Lord gave you,
It's so good that you're feeling pain,
But you better get your face on board the very next train

Evil woman how you done me wrong,
But now you're tryin' to wail a different song,
Ha Ha funny how you broke me up, you made the wine now you drink the cup,
I came runnin' every time you cried,
Thought I saw love smilin' in your eyes,
Ha Ha very nice to know, that you ain't got no place left to go
.

Thursday, August 20, 2009

David Rosenberg on... DEflation

It would seem to me that Rosenberg is viewing the current situation pretty clearly… here are some snippets I took from his most recent interview (ht Ozzy):
Rosie On Inflation

We have said often that just as society couldn't spell ‘inflation’ in 1937, it has no clue what causes deflation now. That's beginning to change in the aftermath of the housing and credit collapse, but try to explain the deflationary forces contained in debt liquidation or global manufacturing over capacity or a socio-economic trend towards savings, and the notion of ‘deflation’ gets fuzzy for most thinkers (even Warren Buffet). That doesn't change the fact that the deflationary forces are enormous (and current) and the policy-induced reflationary forces are a partial antidote.

…To repeat — three variables: rents, wages and credit — will ultimately determine the trend in inflation. Down, in other words. If you are not yet convinced of that in the consumer arena deflation remains the primary intermediate-term risk, then go the article on page B8 of the WSJ and see if that changes your mind — discount coupon redemptions are up nearly 20% this year (Club Stores Accepting Coupons: Sam’s Club Joins BJ’s, Costco in Issuing Discount Chits to Members).

…We should probably add here that even though the moves by the Fed have provided ample liquidity, they have not stopped the underlying fundamentals from deteriorating — see Corporate Bond Defaults Hit Record on page 19 of the FT. (S&P just reported that 201 companies with $453 billion of debt have defaulted this year, exceeding the entire tally of 126 defaults covering $433bln in ALL of 2008). The 12-month speculative-grade corporate default rate has risen to 8.58%, as of July, from 8.25% in June (the rating agency is forecasting that the default rate will rise to 14.3% by the first quarter of 2010, taking out the prior record of 12.54% set in July 1991).

…From our lens, there is always a catalyst or a spark for the next economic expansion and bull market. In 2003, it was leverage and a housing boom. What is it today? Cash for clunkers? Digitized medical technology? Chinese consumption? Government incursion into the economy and capital market? Perhaps we should also recognize that heading into the post-recession environment of 1991, there was a tailwind from sub $20/bbl oil; and heading into the 2003 rebound, we had sub $30/bbl oil; so it may pay to ask the question as to how $70+ oil is going to play in the recovery, unless we are talking about recoveries in Saudi Arabia, Qatar and the UAE?

"To repeat — three variables: rents, wages and credit — will ultimately determine the trend in inflation. Down, in other words."

B-I-N-G-O

“Leading” Indicators a Sucker Play - on the Streets of Philadelphia…

Let’s take a look at this released on the minute article, the consensus was for a .7% increase, it rose less than expected to .6%:
U.S. Leading Economic Indicators Index Rose 0.6 Percent in July

By Bob Willis

Aug. 20 (Bloomberg) -- The index of U.S. leading economic indicators rose in July for a fourth consecutive month, another sign the worst recession in seven decades is almost over.

The Conference Board’s gauge of the economic outlook for the next three to six months rose 0.6 percent, less than forecast, after a revised 0.8 percent increase in June, the New York-based group said today. The July gain marks the longest series of increases since 2004.

Fewer job losses, rising stock prices and a renewal of factory output all indicate government efforts to stem the financial crisis and revive the economy are paying off. Even so, a jobless rate forecast to reach 10 percent and falling home values are a reminder that any expansion will be muted as consumers rein in spending and boost savings.

“The recession has bottomed,” Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania, said before the report. “The focus is no longer are we going to get out but what the recovery is going to look like.”

The index was forecast to rise 0.7 percent, according to the median of 52 economists in a Bloomberg News survey, after an originally reported increase of 0.7 percent in June. Estimates ranged from gains of 0.1 percent to 1 percent.

Six of the 10 indicators in today’s report added to the index, three subtracted and one was neutral.

Interest Rates

The biggest lift came from a positive spread between long- and short-term interest rates,
followed by drops in jobless claims, a longer factory workweek, rising industrial supplier deliveries, stock prices and orders for capital goods. Weaker consumer expectations, declining money supply and falling building permits pulled it down. A gauge of new orders for consumer goods and materials held steady.

New applications for unemployment benefits fell to an average of 559,000 in July from 616,000 in June. Figures from the Labor Department today showed that claims unexpectedly rose to 576,000 last week from 561,000 the week before, indicating companies are trying to cut costs further.

The factory workweek rose to 39.8 hours in July, the highest since January, from 39.5 in June, the Labor Department said Aug. 7. Automotive plants are boosting output in response to signs that demand is recovering as they benefit from government incentives of up to $4,500 for consumers who trade in gas guzzlers for fuel-efficient vehicles.

A 1 percent gain in the average level of the Standard & Poor’s 500 Index in July from the prior month contributed to the leading index. The S&P 500 has soared 48 percent since March 9, when it reached its lowest level in more than 12 years, as data signaled the economy may be turning around.

Meanwhile, consumer expectations for the next six months fell in July and continued falling this month, according to the Reuters/University of Michigan survey of sentiment released last week.

Seven of the 10 indicators for the leading index are known ahead of time: stock prices, jobless claims, building permits, consumer expectations, the yield curve, factory hours and supplier delivery times.

The Conference Board estimates new orders for consumer goods, bookings for capital goods, and the money supply adjusted for inflation.

Coincident Indicators

The Conference Board’s index of coincident indicators, a gauge of current economic activity, was unchanged after falling 0.4 percent the prior month. The National Bureau of Economic Research, the arbiter of when recessions begin and end, follows this index to help it time downturns. The index tracks payrolls, incomes, sales and production.

The gauge of lagging indicators fell 0.3 percent following a 0.7 percent decrease in the prior month. The index measures business lending, length of unemployment, service prices and ratios of labor costs, inventories and consumer credit.

Economists surveyed by Bloomberg this month said the economy will grow at an average 2.1 percent pace in the second half of this year after contracting over the previous 12 months. The anticipated expansion won’t be enough to prevent the unemployment rate from reaching 10 percent for the first time since 1983, the survey also showed.

The recession may already be over, according to Edward McKelvey, a senior economist at Goldman Sachs Group Inc. in New York. A July gain in industrial production, the first in nine months, and the likelihood that output will keep growing because of depleted inventories is “the best” sign the contraction is over, McKelvey wrote in an e-mail to clients on Aug. 18.

Nonetheless, he said, “a lot has to happen before we can state this conclusion with conviction.”

Last Updated: August 20, 2009 10:00 EDT

Look at that time stamp. Bloomberg had this article mostly written before hand but still was able to fill in the blanks and got it out on the same minute of its release? Come on, no one should see the data before the release.

Now, let’s talk about what’s really leading and what’s not.

Is the stock market really a leading indicator, or is that just another MYTH? I SAY MYTH. Did the stock market predict the current economic malaise? NO? Myth busted.

While I’m at it, I want to point out the MYTH that stocks have returned on average 7 to 8% annual returns over the “long haul.” BS! Here’s the truth, and it is heresy to all the people who make their living from Wall Street – ALMOST ALL STOCKS EVENTUALLY GO TO ZERO in the long haul. The only thing that does go up in the long haul are the manipulated stock indices which replace failed companies with new ones. For example, the DOW Industrials has 30 companies - the only one still in existence is GE, a company that has made itself functionally insolvent due to its involvement with finance and derivatives. That’s called substitution bias, and that’s the truth about stocks – in the long haul.

How about interest rates being a leading indicator? Perhaps, when the FREE MARKET is setting rates… But that’s NOT what’s happening now. On the contrary, the FFR is now ZERO and has been for quite some time. Treasury and other market rates are being MANIPULATED via the Fed’s “quantitative easing” and other manipulations via the Primary Dealers, such as making false bids to create the appearance of strength in the debt markets. MANIPULATION does not make a leading indicator, it makes a contrary indicator.

Now, the next most influential indicator within this “leading” indicator is the jobs data! We have highly manipulated numbers there and we have tons of people falling off the rolls as their benefits run out. Please read Employment Situation in Chart Form – Damn, I knew I should have moved to New York and found a job on Wall Street!

The other considerations of this index are mostly negative, the most important one being consumer credit which is a true leading indicator. And from my position, once a society is saturated with debt, the one and only TRUE LEADING ECONOMIC INDICATOR is the ratio of DEBT TO INCOME. Incomes are falling, debt is rising, and that spells trouble for the future.

Believe what you want to, to me this “leading indicator” is nothing but a sucker’s prayer.

Now, the Philadelphia Fed Survey, came in better than expected at an index value of 4.2 versus the expected -1.0…

Philadelphia Area Manufacturing Unexpectedly Expands

By Shobhana Chandra

Aug. 20 (Bloomberg) -- Manufacturing in the Philadelphia region unexpectedly expanded in August for the first time in almost a year, a sign the economy is pulling out of the recession.

The Federal Reserve Bank of Philadelphia’s general economic index climbed to 4.2, the highest level since November 2007, from minus 7.5 in July, the bank said today. It was the first positive reading, signaling expansion, since September.

Manufacturing may contribute to a recovery in coming months as factories speed assembly lines after cutting inventories at a record pace in the first half of 2009. The government’s cash-for-clunkers plan has stabilized auto sales, leading to production gains at General Motors Co. and Ford Motor Co. that may ripple through the economy and lift other industries.

“As manufacturing firms reduce inventories to more comfortable levels, they will start to look at increasing output and employment in the next several months,” said Zach Pandl, an economist at Nomura Securities International Inc. in New York. “We’re moving towards growth in the third quarter.”

While this is the first positive growth in over a year in this index, keep in mind that the overall business activity fell dramatically and that a zero reading means that it has simply leveled off. A small month over month uptick at this stage to me is simply noise, it does not mean the trend has changed. While the collapse has been arrested for now, it is built upon government stimulus (that is adding to the debts). That’s again called MANIPULATION and as those drugs wear off the people on the Streets of Philadelphia are going to be left with one heck of hangover.

Ask yourself this… What has changed to the positive for the economy for REAL? I see changes to financial accounting rules. I see a willful government who has bankrupted itself in the name of security and on behalf of the central bankers. I see a Fed who prints money and manipulates the bond market. I see statistics that are manipulated. I have a real hard time seeing REAL growth that’s going to last and is going to provide good jobs for the indebted people on the Streets of Philadelphia…


Morning Update/ Market Thread 8/20

Good Morning,

Yesterday the S&P finished just below the 1,000 level, an important area of resistance. As is this manipulated market’s custom, key areas are often jumped overnight and that occurred again last night in the midnight hours. The release of higher than expected jobless claims, however, sent prices back below that level and they are now very close to even:



The Dollar is mostly flat, bonds are up again, gold is down and oil futures are down.

One of the few people I pay to follow, Jim Shepherd, has an economic model that he uses that takes in all sorts of inputs (proprietary) from things like the PPI, velocity, money aggregates, interest rates, etc. and his model BOTH when back tested and in operational use has been nearly perfect with its calls. It is looking for the big picture things that will trigger market crashes or will trigger inflationary spirals or deflationary spirals. He confirmed yesterday that indeed, the latest PPI release WAS SUFFICIENT TO TRIGGER A DEFLATIONARY SPIRAL.

There’s a fly in the ointment, though, from his perspective, and that is how much of the historic drop in PPI that was attributable to energy. He is carefully examining the ramifications in his model to be certain that the energy component is not sending a false signal. My personal belief is that oil was driven higher by speculation and rose on demand caused by the largest credit bubble in history. The credit bubble burst, and thus, so too did the price of oil. It’s what was and is expected when shipping and trade throughout the world collapse at a historic pace – as they have.

During this trumped up hot money rally, however, oil and energy in general have been very strong with oil just yesterday producing a technical breakout above resistance. I think that anyone shorting the market needs to be careful and look for oil to break back down, which I believe it will eventually do. However, at this stage during the Great Depression, it was not long before equities continued their descent following the point at which the deflationary spiral signal was triggered.

Here is the latest weekly chart of oil. You can see that it is in the $73 range and that a break above will not encounter much resistance until its back above the $90 level. Maybe it gets there, but I’m doubtful as of right now.



And this is the latest P&F chart of oil, you can see that it triggered a bullish price of $87 just yesterday:

OIL:


And to contrast with the deflationary spiral signal, McHugh believes that we still have large chunks of wave c up of B up to come! So, we have oil sending a breakout signal, a market that can only move sideways (with a little help from Ben’s friends) but at the same time we have a Deflationary spiral signal in Shepherd’s model.

Getting the market right at this stage will not be easy, but it is my belief that the deflationary forces are going to win that battle. It may take a little bit of time, but it won’t be THAT long.

In fact, just this morning we had weekly claims for unemployment jump again. Gee, I thought we had already run out of workers to lay off! The weekly number rose from 558,000 to 576,000 when the consensus was saying 550,000. Here’s Econoday’s take, this time with no excuses, now that’s a surprise:
Highlights
Jobless claims data are a disappointment, showing increases in both initial claims and continuing claims. Initial claims for the Aug. 15 week rose 15,000 to 576,000 with the Aug. 8 week revised 3,000 higher. The result is well above expectations for 550,000. Continuing claims for the Aug. 8 week rose 2,000 to 6.241 million for a second increase in three weeks. There are no special factors skewing the data. The four-week average for initial claims rose for a third straight week and is now trailing the latest week at 570,000. The four-week average for continuing claims offers some good news, at 6.266 million for a 3,000 improvement in the week and well down from 6.548 million a month ago. The unemployment rate for insured workers, unchanged at 4.7 percent, also offers some good news. But the headline rise in initial claims is a disappointment pointing to no improvement for August payroll data. Stocks and commodities dipped in immediate reaction to the news.



Both the index of Leading Indicators and the Philly Fed Survey come out at 10 Eastern. I’ll bet the Leading Indicators will be cheered, and it may be just enough to produce yet another move to suck in more fiat dollars that will ultimately be destroyed.

I’m thinking the manipulators just can’t wait for the midnight hour! This could be Goldman’s new theme song…

Wilson Pickett – In the Midnight Hour:

Wednesday, August 19, 2009

Two Beers with Steve - After Hours... hic…

This is the second half, hic, of my two beers interview with Steve, Braaap! Just kidding, I was sober, I swear, but I was ranting, maybe just a little… that’s generally what happens when you get me on a roll about our economy, lol!

Here’s part II, the “After Hours Segment…”

“After Hours Segment”

If you missed part I, “Unsustainable Treads Eventually End,” here’s the link to that segment…

Nathan’s Interview on Two Beers with Steve…

And here’s a link to the Two Beers with Steve site:

Two Beers with Steve

Fed Borg, Thornton, Asks the Wrong Question…



Daniel L. Thornton, Vice President and Economic Adviser of the St. Louis Fed, has been so thoroughly assimilated that he has absolutely no idea what question to ask… as evidenced in this latest piece of Fed sponsored “research.”



The Conclusion from Mr. Thornton?
"A possible lesson from these events is that financial markets and the economy might be better off if, in future financial crises, the Fed first increases the supply of credit available to the market. Additional actions can be taken if there is evidence that quantitative easing alone is insufficient.

"Of course, this means that the Fed must be willing to promptly, albeit temporarily, abandon its funds rate target.

"The inflationary consequences of quantitative easing can be mitigated by informing the market that the increased monetary base will be reduced systematically at the first signs that the economy is improving and the financial market crisis is abating."

Tell you what, Mr. Thornton… next time you tackle a research paper, I would respectfully submit that you frame it around the following question:

“Would the elimination of the Fed allow the free markets to remove economic excesses before knuckleheaded policy makers decide to manipulate natural economic forces leading to the buildup of massive and unsustainable credit bubbles?”

Now THAT is an appropriate question to be asking. Guess I have yet to be fully assimilated like Mr. Blue Sky from the Fed…

ELO - Mr. Blue Sky:


PS – Your tax dollars pay his salary!

Grim Forecast for L.A. and Long Beach Ports - Smoke on the Water...

While the financial geniuses on Wall Street engineer more mark to model fantasy profits, the results in the real economy are HISTORIC. Four years to recover? Talk about optimistic! However, you will find evidence in this article that at least someone understands the psychology at work once a credit bubble bursts…

Import and Export PRICES are tumbling. The GDP numbers and inflation statistics can be manipulated all day long, but what’s happening in terms of real traffic numbers cannot.
Grim forecast for L.A. and Long Beach ports

The busiest U.S. seaport complex won't fully recover from the economic downturn until 2013, a report says. Imports at both facilities fell in July from a year earlier.

By Ronald D. White
August 17, 2009


[photo caption reads: Cargo containers at the Port of Long Beach last month, when imports at the nation's second-busiest port fell 18.6% to 221,719 containers compared with a month earlier. Overall cargo traffic there is down 26.8% for the year.]

As the ports of Los Angeles and Long Beach post another round of dismal monthly import statistics, a new assessment finds that the nation's busiest seaport complex will need at least four more years to fully recover its momentum -- not to mention the jobs, incomes and revenues that went with it -- after the worst global recession in 60 years.

The recovery will be so slow and painful that a return to the pace set during the economic boom year of 2006 -- when the ports handled 15.8 million cargo containers bound for most parts of the U.S. -- won't come before 2013.

That is the grim conclusion of a new report produced for the local ports but not released to the public.

"It's going to take a long time to climb up out of this," said John Husing, an economist and cargo expert who has read the report. The comeback "is not going to look like a V, which would be an equally sharp recovery. It's going to look like a very wide check mark."

The force of the recession can be seen in what has been lost along the supply chain.

In 2006, dock jobs were so plentiful that longshoremen could count on working multiple shifts. Even part-time "casual" dockworkers were working nearly full-time hours. And warehouses in the nation's fastest-growing cargo distribution network had tenants before their construction was complete.

Now, full-time longshoremen have days without work. Vacant warehouses spend months on the market.

according to the report, produced for the ports by consulting firms Tioga Group and IHS Global Insight.

"The plummeting values of homes, stock portfolios and other assets is expected to result in a permanent reduction in wealth and a concomitant reduction in disposable income. Absent a phenomenal rebound (which no one is predicting), the U.S. population will have less to spend on imports in any given year than was previously forecast," the report said.

Moreover, the recession and its multiple roots have caused a jolt to the collective psyche of consumers, such that even when their fortunes begin to recover they will be more reticent about their spending than in times past, it said.

"The marginal saving rate in the U.S. has increased greatly since the start of the recession. While still low compared to many nations, a greater propensity to save and a low propensity to spend will likewise reduce demand for imports," the report said.

The report tracks with what economists at the Los Angeles County Economic Development Corp. have been predicting and leads experts there to question whether international trade "will be the big engine of growth that it once was" for the region.

The absence of easy credit also will slow the recovery of international trade, said Jack Kyser, an economist at the business group.

"The easy credit spigot that was running full blast in 2004 through 2006 has been turned off," Kyser said. "Credit card companies are much tighter with their qualifications. Lenders have an ultra-cautious attitude."

Mike DiBernardo, director of marketing for the Port of Los Angeles, acknowledged that the days of double-digit cargo growth are gone for a while, to be replaced eventually by annual increases of 4% to 5%. But, he added, the port still has to prepare for additional traffic.

That's why, DiBernardo said, port officials have moved ahead with expansion plans for its TraPac terminal, which includes more space, a longer wharf and an on-dock rail where cargo can be loaded directly onto trains.

"We're not stopping," he said. "We're going to continue to develop our terminals and we are talking to other customers about their needs."


The slump was again evident in the July trade numbers for both ports.

Imports at Los Angeles, the nation's busiest port, were down 16.9% to 305,226 cargo containers compared with a year earlier. Overall for the year, traffic is down 15.9% to 3.77 million containers, counting imports, exports and the number of empty boxes that leave the port bound for Asia.

Imports at the nation's No. 2 port, Long Beach, were down even more sharply in July compared with a year earlier, by 18.6% to 221,719 containers. Overall cargo traffic at Long Beach is down 26.8% for the year to 2.77 million containers.


But sluggish recovery from the recession isn't the only thing that threatens the amount of business at the two ports.

The report said that a larger number of freight shippers will prefer to move more cargo via a wider Panama Canal channel that is expected to open in 2014, bypassing the Southern California ports' rail connection for moving freight to other parts of the U.S.

Also, retailers will be increasingly willing to divert their goods to other trade gateways should congestion develop in the L.A. and Long Beach ports, the report said. In addition, any resumption of growth in Latin American and European trade favors East Coast and Gulf Coast ports.

For those reasons, "there has been a pendulum swing in favor of the East and Gulf Coast ports," the report said.

The one bit of good news from the report is that the massive amount of economic stimulus generated in the U.S. and abroad will slowly begin to have an effect.

"A Great Depression or Japan-style lost decade appears unlikely," the report said. "The forecast calls for a modest recovery in 2010, and a stronger rebound in 2011."

I love government officials who continue to build massive projects in the face of historic declines. They admit that they can’t even find tenants for the warehouses they have, yet they are building more.

And in the face of numbers that can only be seen during a great depression, "A Great Depression or Japan-style lost decade appears unlikely."

Imports:


Exports:


Import/Export PRICES (watch the left scale):



Is that smoke I see coming from across the Long Beach waters?

Deep Purple - Smoke On The Water (ht Leeland):

A Lesson in Media Editing - Oh, and a Self-Righteous Idiot...

When I went to insert what appeared to be a belligerent Barney Frank berating his own constituents, instead of the clip I had just viewed, the following clip appeared instead:



Not so bad, it almost made him seem reasonable and the sheeple unreasonable. But wait, I was able to find and get the first clip I saw, it’s more raw, less edited, and does not have the reporter’s spin.



Same town hall meeting, two different feels.

Oh, and here's some more footage from a different network:



Nice arguments, Barney. We are bankrupt because of guys like you. Oh, and who supported the housing bubble? See the video below.

Normally I wouldn’t pick on Barney, but let’s face it, he’s an arrogant prick and he deserves it. Wait, better yet the best way to highlight Barney is to let him highlight himself:

Barney Frank in 2005: What Housing Bubble?

Morning Update/ Market Thread 8/19

Good Morning,

Equity Futures are down this morning:



The Dollar is up slightly and bonds are up strongly.

Very little in the way of economic data today, just the MBA purchase index. Here’s what Econoday has to say:
Highlights
MBA's purchase index rose 3.9 percent in the Aug. 14 week for a third straight gain (index levels not provided). The refinance index rose 6.9 percent. The report said the refinance index has been swinging back and forth in line with changes in mortgage rates while the purchase index has been moving gradually upward. Mortgage rates swung lower in the week with 30-year loans down nearly 25 basis points to an average 5.15 percent.
Tomorrow is the Philly Fed, Leading Indicators, and Jobless Claims. Existing Home Sales will wrap up the reports on Friday.

Since there’s not a lot of data this morning, I thought I would share a lot of Hot Air and exactly how much heat the idiot bought and paid for politicians are beginning to take from the public… Barney Frank, what a piece of work:



The headline on Bloomberg said that China entered a “new bear market.” That’s right, down 20% from its 2009 peak already. Who would’ve guessed? And look around, who was it that just last month was touting their markets? Pay attention to the “experts,” if they do not talk about bubbles and risk, it’s probably because they don’t see them or they are paid not to.

The /ES is down in the 980 area this morning… 970 is support and there is the next lower pivot at 961. McHugh actually was calling yesterday’s rebound a small wave 4 and is thus looking for a wave 5 down, but he is unsure of the degree. Right now I believe that we’re just going to have to be patient and watch the deflationary forces remove the excesses, hopefully those forces will be strong enough to remove the likes of Barney Frank!

Eagles – Wasted Time:

Tuesday, August 18, 2009

More Overwhelming Deflationary Evidence in Chart Form – Impact Imminent!

The Bureau of Labor Statistics (BLS) this morning released data for the Producer Price Index (PPI). The PPI indicates (or is supposed to indicate) what is occurring on the wholesale level. The Consumer Price Index (down 2.1% yoy) reflects (or is supposed to reflect) what is occurring on the Consumer level. Wholesale prices translate into consumer prices and thus the PPI tends to lead the CPI slightly.

The verdict? The BLS announced the following, “From July 2008 to July 2009, prices for finished goods fell 6.8 percent, the index for intermediate goods decreased 15.1 percent, and crude goods prices dropped 44.8 percent, all of which are record 12-month declines.”

RECORD DECLINES! Finished goods down 6.8% in one year!

While it’s true that if you strip out crude energy costs that the PPI was slightly positive, I believe it is delusional to do so. Energy underpins the cost of everything, from the manufacturing process all the way through to delivery. It is a huge component of the economy and needs to be fully considered. We now have a collapse in the Baltic Dry index, we have a collapse in truck and rail traffic, and we have a collapse in container and port traffic. Thus, the demand for oil is down, inventories are at historic highs and it is appropriate that the price of oil and related products are down.

Here's the full BLS release of PPI data:



Here is the chart of PPI for all finished goods expressed in year over year (yoy) percentage change. Why year over year data? Because month over month swings are noisy, they do not reflect the longer term trend and should, in my opinion, be mostly ignored:



People who believe that we are experiencing inflation need to look at that chart REAL HARD. It is HISTORIC, as in NEVER in modern recorded history has the PPI fallen at this rate, never.

This past weekend I presented The Week in Charts – Buckle the Heck Up! Today a slug of confirmatory charts were released, confirming that, in my opinion, we are entering a deflationary spiral. This is roughly the same point in time that the same thing occurred in 1930 following the crash of 1929 and then 50% rebound in the markets. Now, like then, prices began to collapse and the equity market followed by grinding lower over the next year and a half before finally reaching the real market bottom. That leg down was FAR more painful to the people than the prior crash in equities – that’s the period that’s “depression.”

Now I’m going to show you a series of charts from the St. Louis Fed that were all updated and released as of today. When I say buckle up, impact is imminent, I mean it. Never before have you ever seen a collection of charts like this – they are truly historic.

Of course we know that housing starts collapsed, but many mistakenly believe they have recovered. They have not and they were down further with this morning’s release. We still have far too many homes and we will have for quite some time to come. This chart shows clearly that support over the past 50 years was in the 800,000 unit level, we are still way beneath that:



DEBT has saturated everyone and everything at all levels. Deflation occurs when the total supply of REAL AND CREDIT dollars contracts. For inflation to be sustainable, INCOMES MUST INCREASE TO SERVICE HIGHER CREDIT (DEBT) LEVELS. You are going to find in the following charts that EXPENSES, particularly in government, are rising while INCOME at all levels is FALLING. For those following along (are you with me so far?), dollars created in the United States do not have to say here. It is an OPEN SYSTEM, capital is still free to leave (as seen in the past 3 months of net negative TIC flows). Also, DEBT drives the velocity of money down as I showed this past weekend. Base money velocity has collapsed, falling 75% year over year.

Those who can use a review of exponential math and parabolic curves, I invite you to please Spend some Time with the Good Dr. Bartlett… You see, growth begins slowly and controlled, but then enters a steeper growth phase where the compounding math begins to take hold, and finally a parabolic growth phase tops it off, leading to collapse as all parabolic growth eventually does.

The one and only TRUE leading indicator in an economy saturated with debt is the relationship of debt to income. Let’s look at our Government first…

GOVERNMENT

The following is a chart of Current Government Expenditures. A classic parabolic growth curve, this is destined to collapse but is still rising exponentially. I have highlighted this classic curve in red and segregated it into it’s three growth phases. Note that the more rapid middle phase began right at the same time that then President Nixon removed us from the gold standard entirely – 1971. The parabolic blow off phase began just as the NASDAQ began to top and crash:



While expenditures are skyrocketing in an exponential growth phase, you can see that Federal Government Current Receipts also grew in an exponential manner but have now rolled over and are quite negative year over year. Thus we have ramping expenses and plummeting income:



Next is the same data presented in yoy percent change. The rate of fall in income has not been this great since the early 1950s:



Another way to view our nation’s income is, believe it or not, called the National Income. Here is the chart of National Income, negative for the first time since the 1950s:



Of course when one takes IN more than goes OUT, we can call that SAVINGS. Or in the case of our Federal government, we call that a trillion dollar plus hole in the wall/national embarrassment:



Here’s where a large chunk of the hole in income is located, Federal Tax Receipts on Corporate Income. At no time since 1930 has the collapse been this great, a 40+% year over year collapse:



A sane and rational person cuts their expenses when their income falls. Not our politicians, no, no. Please admire the shear beauty of parabolic expenditures at work in this chart showing Federal Grants to State and Local Governments:



Now let’s examine how the states get their money (besides as grants from the Federal Government) – State and local sales taxes are a large part of it. NEGATIVE for the first time since the early 1940s:



CORPORATIONS

We know that corporate tax receipts are cliff diving, that is primarily because corporate profits are cliff diving. Anyone in the stock market remember that? Apparently not…

Here’s an updated look at Corporate Profits after tax. Another classic parabolic curve that has topped and is now collapsing. A small bounce, yes, but I will contend that the blip you see upwards is due primarily to FASB’s change in allowing the financial industry to resume marking their toxic portfolios to their own models. Without that, I believe overall corporate profits would be much smaller, but is still historic as it stands:



Here’s the chart showing Corporate Profits after tax for NONFINANCIAL companies… The drop is more severe, you can thank your paid for Congressman for allowing/pressuring FASB to continue accounting rules that make former Enron executives blush by comparison:



Here are Corporate Profits After Tax expressed in yoy percent change. You will see that the most recent collapse is the largest in history and is still down more than 25% yoy, and one year ago they were way down from the year before that. Is that a bottom bounce? Want to bet your hard earned dollars on it?



That’s the picture for corporate profits, how about corporate dividends? Can you say, “HISTORIC COLLAPSE?” I thought you could:



When the Fed speaks of “private” what they mean are “nongovernmental.” Speaking of historic collapses, here’s a chart showing Real Change in Private Inventories expressed, as the Fed presents it, in billions of dollars (chart not available in yoy percent change):



INDIVIDUALS

Of course it is private business that provides jobs to individuals. That’s how they earn their income. No income, no spending. No spending, no corporate profits, and certainly no inflation.

Here’s a chart showing Compensation of Employees… at no time since 1949 has it been more negative on a yoy percent change basis:



Here’s another way of looking at the same thing, Personal Income:



And yet another metric for income is the Disposable Personal Income, negative for the first time since the late 1940s:



Despite overall falling income, we all know that the personal savings rate has done a 180 degree turn and is now climbing rapidly. It continues to climb sharply expressed in billions of dollars:



With both incomes plunging and savings soaring, that leaves less for Personal Consumption, right? Below is a chart of Personal Consumption of Services. Note the structural downtrend that has occurred since 1980 (same year interest rates peaked) when expressed in yoy % change:



Next is Personal Consumption Expenditures for Durable Goods:



And here is the Total Personal Consumption Expenditures, NEGATIVE for the first time in modern history:



This must mean that sales are in the gutter, right? Well, take a look at the chart showing Final Sale of Domestic Products… other wise stated, sales of domestic products. NEGATIVE for the first time in modern history. Think there’s something going on there?



And that’s different than Final Sales to Domestic Purchasers, that’s looking at just people who buy things from within the United States. Again, NEGATIVE for the first time in modern history:



Anyone seeing a trend here? Incomes down across the board, government spending insanely up, but overall Producer Prices making a historic plunge.

Tax revenues are destined to fall appreciably more in my opinion, and that will make the already historic deficits that much worse.

Once again I do not see any inflation as I look through the charts. I see deflation and I believe that the total amount of credit is in contraction despite the sky high money aggregates and Federal money pumping. The Shadow banking system is FAR, FAR bigger than the Federal government, and while it was a miracle at pulling future income forward in time, overall income is falling and simply cannot service even more debt.

Keep looking for inflation, eventually you’ll find it, but not before the debt is cleared from the system in earnest.

Hello, is there anybody home?

Pink Floyd – Nobody Home: