Saturday, December 5, 2009

John Williams Interview…

“There is no way to save the current system…”

Evidently John knows basic math! Yes, I agree with him on that point, our monetary system is in a terminal phase, debt backed money is destined for that outcome from the start.

The question then becomes, can we transition to a new system without crashing the global economy. I used to answer that it was not possible, much like John Williams. However, I now see a way to make the transition without taking decades, I’ll be laying that out pretty soon, I know I’ve been saying that for awhile, thanks for your patience. The point here is that the NEED FOR CHANGE IS REAL. It would be nice for people to understand and push for real change BEFORE the end game arrives!

Williams sees the end of our currency through hyperinflation… we are going to have a wild ride regardless of the path taken. Worth a listen, this interview is about 30 minutes long.

John Williams interview, mp3

Link to King World News

Chart of U.S. Unemployment

Chart of Growth in U.S.Gross Domestic Product (GDP)

Chart of U.S. Consumer Inflation (CPI)

Chart of U.S. Money Supply Growth

The State of the Union – in charts…

Simply perusing the updated St. Louis Reserve Bank’s latest charts over the past couple weeks gives one some pretty good insights into the strength of our economy. While there are indicators that have come back up a small amount, there are still many, many signs that underlying strength has not returned, at least to the degree that you would conclude by listening to our government officials and main stream media sources.

NOTE: As you view these charts, please take a moment on each one to read the left hand scale. Some are year over year (yoy) percent change, some are yoy change in Billions of dollars, and some are simply the index value or raw data. Charts and data can be displayed in many ways, so you must think about what each means. Keep in mind that we are now two years from the peak in the markets, so year over year data is change from the point that was one year into the decline already…

Before you get started with these charts, please take the time to follow this link and view the charts recently produced by Morgan Stanley in their article Here Comes A Brutal 2010 (ht Dan).

Let’s begin with a quick discussion of what occurred in the markets at the end of this week. On Thursday we had an outside reversal where the markets opened higher and closed below the previous day’s lows – this is usually a sign of weakness and came about as a result of rumors about Japan selling U.S. Treasuries which was later officially denied (it’s never official until it’s denied). Japan is a serious problem, deflation is picking up steam there and the Yen has been strengthening despite massive debt loads, now totally 200% of their GDP, second in the world only to Zimbabwe, that is no joke. So, the Japanese to get the Yen down announced that they are printing another 10 Trillion Yen! That and the rumor are likely an attempt to force the Yen lower, the result being that the U.S. Dollar goes higher.

Thus, yesterday, despite a very large spike in equities on the unemployment release, the dollar rose and broke out of its descending wedge, producing both a daily and weekly close above the upper trend line:

This is what happens during a race to the bottom – a dueling carry trade between the number 1 and number 2 economies of the world. If our current dollar carry continues to unwind sending the dollar higher, it will likely kick off deleveraging round two. The ultimate destination, I believe, is that all debt backed currencies will share the same fate, that is their own destruction. And thus the world has a very large transition period ahead, do not be fooled by the purveyors of debt, they are destroying economies, certainly not rebuilding them.

Note that in the past two weeks we had a crisis in Dubai, one in Greece, and one in Japan. All are crisis of debt. And these crisis events are coming in closer proximity. That’s because they are all related. Analysts poo-pawed the Dubai default saying that it was isolated – remember what they said about subprime? These crisis are not the problem, they are symptoms of the problem. The real problem is the way that our money systems are backed by debt. More money equals more debt. This produces unsustainable math, plain and simple. This system appears to work okay until debt saturation occurs. Debt saturation is the state where incomes can no longer support and sustain the growth of debt – that’s where we are, and it’s where most of the world is.

Yesterday’s employment massaging caused a spike in equities followed by a reversal. The Transports produced a new high and market internals were largely favorable. But for the SPX and the Industrials, the 50% retrace level of the entire bear market has so far contained prices. Sentiment has reached an extreme with Investor’s Confidence showing zero percent bearish. Yesterday’s spike and collapse was on very heavy volume, the type of volume spike that often signals exhaustion.

Below is a 9 month chart of the DOW. Note that we have failed to get over the rising wedge. We are producing an expanding wedge formation that is usually the mark of a top and has not been broken in either direction, including yesterday’s spike that touched it and immediately was repelled. While I don’t know what direction the very short term has in store, if you look at the last spike in upside volume you will see that it was just a matter of a couple of days before a correction began. The current pattern is also something new for the B wave, the only similar pattern was shorter and also led to a correction in early June.

I think the market is at a crossroads, it’s a place to be careful, that is why I currently hold no positions but believe that we are nearing an important top.

Again, we must watch all four major markets, currencies, debt (bonds), commodities, and equities. Stress manifests itself in different ways. In a highly manipulated world, such as ours currently is, attempts to control one market will produce outcomes in another. They cannot, however, change the inevitable outcome, it is nature’s law that all debts get repaid with interest in one way or the other. Those debts can only be repaid through productive efforts, and there is no way around that. Attempts to fool the nature of money will only cause repayment to come via one of the other major markets.

Also, as you reach debt saturation, attempts to add more debt into the system actually lead to higher unemployment. Note as you look through the following charts, how overall debt has gone exponential alongside money supply, and that in general as debt has risen unemployment has also risen, each cycle producing a higher low and a higher high.

Onto the State of the Union via the Fed’s own charts…


Six more banks failed yesterday costing the FDIC another $2.4 Billion, bringing the total failure count for the year up to 130. The FDIC is functionally broke and must get most new funds from the Treasury - that means either more debt or more printing to pay for the losses. Due to the massive amount of failures waiting in the wings, the FDIC is not shutting down problem banks early enough. The entire system is a picture of disease… we keep picking at the wounds while our government and officials keep fueling the underlying condition. Truly the entire banking and money system are at risk should actually losses be acknowledged. Thus, it is my opinion that we either need to radically cleanse the system (my upcoming proposal does this) or we need to tear the system down and start over. Failure to do so is going to result in a TERMINAL cycle of printing, debt pushing, and good old fashioned hide and seek.

In terms of bank health, we know that a bank’s Allowances for Loan and Lease Losses (ALLL) must be able to accommodate risk. Well, as you can see in the chart below that the number of banks whose ALLL exceeds their non performing loans has never been lower:

Total non performing loans is 4 times that which occurred during the last recession, and I believe that non performing loans on this chart are actually vastly understated as this chart does not capture hidden and deferred assets, assets owned not by banks but by the institutions that hold bad derivative paper, and also all the nonperforming loans held by the GSE’s:

If you are interested, the Fed breaks down non performing loans by bank size. Below is a chart showing Total Non Performing Commercial Loans:

Net charge offs at banks is high, but I believe will need to go even higher. This statistic will not let up until people’s balance sheets are repaired. The debt pushers want to repair the banks balance sheets, but not the people’s balance sheets and thus they have it backwards. If they helped clean up the people’s balance sheets, then the banks balance sheets would clean themselves up.

Below are two charts, one showing the average return on bank’s Assets, the other on bank’s equity. They are both very near zero:

In regards to the money aggregates, we find that M2 and the more broad MZM are both still positive, but when viewed in terms of yoy change in billions, you can see that the rate of money growth has peaked and now is slowing:

In terms of credit supply, here we find that total bank credit is falling in terms of yoy change in billions of dollars:

Commercial Paper of non financial companies continues to plummet in yoy percentage terms, accelerating downwards now more than 40% yoy:

Total Consumer Credit outstanding is now down more than $120 billion yoy:

Consumer credit is broken into Revolving and Non Revolving:

Total Loans and Leases at all Commercial banks is likewise plummeting yoy in terms of billions of dollars. This drop is more than half a trillion dollars in just the past year:

Retail and Institutional money funds are down substantially in terms of dollars:


First of all, the population of the United States is growing steadily, having just passed 307 million:

If I could show only one chart that tells the story of what is happening in terms of employment, it would be this chart that Point dug out of the BLS website showing the Civilian Employment Population Ratio. This ratio is simply telling you what portion of the civilian population is employed. You will not see any trend change here whatsoever:

Below is the same chart but from the Fed dating back to the late 1940s. We are currently back to the same percentage as we were during the late 1970s:

The flip side of the Employment Population Ratio is the number of people NOT in the labor force. No change of trend here, either:

If you want to see if Ross Perot was right about that giant sucking sound you hear (jobs going overseas), then the following charts are proof that he was absolutely correct. Let’s start with a chart showing the total number of employees in all goods producing industries. Here, despite a huge growth in the population, the number of people employed to produce things is no greater than it was back in the year 1942:

Manufacturing employees are back to the same numbers as 1942:

The number of employees producing durable goods is also back to the same numbers that are were found in 1942. Our population then was less than half the size it is now. You can call that a miracle of productivity, or you can call that outsourcing with financial engineering behind it, or you can call it a mass exodus of what was middle class wages:

The total number of people manufacturing non durable goods is now the smallest recorded since the Great Depression:

Now, you may say that it’s a good thing that all the cheap stuff is made overseas, that it’s our miracle of finance that we can afford such things without having to produce goods ourselves! But that is a fallacy, we have been running huge trade deficits that have produced a massive imbalance of production. We are now paying for that imbalance and will continue to pay for it in the future.

The total number of employees in Construction is back to pre year 2000 levels, one has to wonder how much more construction our current economy needs:

Here’s the chart showing the civilian U3 Unemployment rate, you know, the one on teevee. Yep, there is a trend change there, I took the liberty of circling it for you:

Please keep in mind that during the Great Depression there were periods where the rate of unemployment decreased and GDP increased, one period of positive growth lasted an entire year. Nothing moves in a straight line in any direction.

Here is the number of unemployed, nearly 16 million in all:

No trend change in those unemployed for more than 27 weeks:

But you can see that in the short time frame there has been a trend change that is actually viewable in those unemployed 5 weeks or less:

The mean duration of unemployment has never been higher:

Continuing Claims for unemployment has indeed turned down, but you have to ask why. In this case, because of the duration of unemployment there are now thousands of people falling off the unemployment roles:


To say that our Federal Government finances are a mess would be an understatement of historic proportions.

Our receipts as a nation are plummeting, what was $2.7 Trillion in receipts is now only $2.2 Trillion. That half a trillion dollars in lost income represents a nearly 19% plunge.

Of course, any sane person would cut back their expenditures if their income falls, but no, no, not our government, they think they are special and that the rules of money do not apply to them. They are wrong, they are being spanked for their insanity and will be spanked even more severely in the future. Check out our current government expenditures, now more than $5 Trillion just this year:

So, $2.2 Trillion in income, $5 trillion in expenditures equals a deficit of $2.8 Trillion, RIGHT? Wrong! In the government’s EnronO’Wonderland world of accounting, you get a deficit (Net Federal Savings) that is ONLY $1.4 Trillion, as if that were not bad enough:

Speaking of funny accounting, here is a chart showing non defense gross investment, something less than only $50 billion!

And here is a chart showing nation defense gross investment, more than DOUBLE the amount of non defense investment:

Obviously neither figure is close to the amounts “invested” in defense or non defense, but the ratio of dollars spent may very well be.

And when you take all of the Current account deficits and add them together, we just broke $12 Trillion dollars, an amount equal to $39,000 for every man woman and child in the United States, $156,000 for my family of four – and, of course, this is a VAST understatement of the facts:

Nearly $3.5 trillion is now held by foreign investors:


No rebound in housing starts. If you ask me, that’s a good thing. Sales have been up slightly and inventories are coming down, all that is good. However, the number of option ARM resets coming is as big a problem as subprime was.

Personal Income is down more than $200 Billion when compared to last year:

Personal Consumption Expenditures are down more than $130 Billion from this time last year:

Gross Private Domestic Investment is down nearly $600 Billion in the past year, more than half a Trillion:

Exports are STILL down nearly 20% year over year, already two years from the peak in the markets:

Imports are STILL down nearly 30% year over year:

Capacity Utilization is up off the bottom, but is still deep into depression territory, there is simply too much capacity around the entire globe. This will prevent investment for some time to come in tools and other equipments of production:

And finally, net Corporate Dividends are down more than $130 Billion from one year ago, this is despite mark to fantasy and record bonuses on Wall Street:

All in all, there are signs of a cyclic upturn in many of the economic indices. These upturns, however, have not gotten the economy anywhere near to peak levels and have been outpaced by the equity markets tremendously. While there is a short term cyclical upturn, what you’ll see when looking at the charts is that each upturn now produces a lower high, and each downturn produces a lower low, all the while debt and deficits continue their ascent into the exponential heavens. Choosing to attempt more credit (debt) growth on top of saturated levels is a decision to usher in a new currency. While I can’t say when, it’s coming quicker and quicker.

As if that weren’t enough charts, what follows is a nice compilation for those paying attention, the latest update of the St. Louis Fed’s Monetary Trends. In it you will find a picture of contracting consumer credit, other deflationary indications, a money supply that was up sharply but is now not up as aggressively, but nowhere in it will you find what is happening in the shadow banking world, which I contend is also contracting rather dramatically – keep in mind that the OCC reports only a fraction of derivatives and that derivatives as reported by them are up, but only because of the commercial bank conversion of Goldman and others.