Open Your Eyes

The following is a video produced by Jeff, a SwarmUSA supporter, to help bring attention to the cause. Jeff is targeting younger folks with this video, appreaciate spreading it around. Thank you, Jeff, people like you keep me hopeful, great job!

Morning Update/ Market Thread 4/7

Good Morning,

Equity futures are down again this morning, below is a 60 minute chart of DOW futures on the left and a 5 minute chart of S&P futures on the right:



The dollar is up, the Euro is down again following a large decline yesterday, oil is down a little, and gold is up, rising above $1,140 per ounce.

This morning the (must preface with worthless) MBA Purchase Index rose .2 percent following last week’s completely bogus 6.8% supposed rise. Today we return to the even more wild & crazy gyrations with their refinancing index falling 16.9%.

Highlights
The Mortgage Bankers' purchase index, up 0.2 percent in the Easter week, added slightly to prior gains. But mortgage rates are the report's big headline, jumping 27 basis points in the week for 30-year loans to 5.31 percent in what the report blames on the end to Fed purchases of mortgage-backed securities. The jump in rates dried up demand for refinancing with the index down 16.9 percent.

The jump in rates will hurt more than refinancing and is certain to limit demand for home purchases at a critical time for the housing sector which is trying to recover from a deep drop following November's expiration of first-round stimulus.

Ridiculous. Go ahead and keep track of what’s occurring without knowing the base, good luck. And that is as heavy as the “economic reporting” for the week gets. Interest rates rising? Yes, watch the long end of the curve, rates have definitely broken out and are signaling higher. Below is a 5 minute chart of the long bond futures showing that it formed a triangle over the past couple of days. It was entered from above and thus we would expect it to break lower producing even higher rates:



The number of people using food stamps increased for the 14th consecutive month with the number of people receiving them at a record 39,430,000! That’s equal to 12.8% of our entire population! No pictures of people in soup lines that extend around the block? There they are.

Yet Lord Blankfein at Goldman Sachs continues to maintain that they are doing “God’s work” and that they are simply doing what’s in their client’s best interest:

Goldman Sachs: No apologies

NEW YORK (CNNMoney.com) -- Goldman Sachs defended its controversial employee bonuses and multi-billion dollar relationship with AIG in its annual report released Wednesday, while downplaying its short-selling in the mortgage market.

Much of the letter was devoted to describing Goldman's (GS, Fortune 500) role in the financial crisis and the recession, praising its own "strong performance" in 2009, which it referred to as a "year of resiliency.

The letter, co-signed by CEO Lloyd Blankfein and President Gary Cohn, also mentioned that Goldman repaid its $10 billion debt to the government in June 2009, as a U.S. Treasury recipient of the Troubled Asset Relief Program.

The letter came after Blankfein and other Wall Street chief executives were subjected to intense scrutiny in a hearing before the Financial Crisis Inquiry Commission in January, when they were blamed for contributing to the economic crisis.

Goldman's (GS, Fortune 500) letter is peppered with the word "client," as the Wall Street firm continuously reiterated its role in serving its investors amid troubling economic times.

"Our first priority is and always has been to serve our clients' interests," read the letter, in one of its opening lines.

Not to mention their own best interests. The question, of course, is who is looking out for everyone else’s best interest? This is exactly where the game went bad. Government is supposed to look after the people’s best interest and is supposed to keep rogues under control. Obviously they have allowed Goldman unprecedented access to run government and thus all representation for the people has been usurped. A story that’s getting old already, I know. Yet nothing has changed, and that is why we are going to pay dearly.

And in Europe it was reported that their overall growth for the fourth quarter was stagnant:

April 7 (Bloomberg) -- Europe’s economy unexpectedly stagnated in the fourth quarter as companies cut spending more than previously estimated.

Gross domestic product in the 16-nation euro region remained unchanged compared with the third quarter, when it rose 0.4 percent, the European Union’s statistics office in Luxembourg said today. It had previously reported a fourth- quarter expansion of 0.1 percent. Corporate investment dropped 1.3 percent instead of the 0.8 percent estimated earlier.

Obviously debt saturated, the union there will have difficulty generating real growth until the debts are cleared. What growth is occuring here in the U.S. is nothing more than accounting fraud, government stimulus, and the effects of destroying one’s own currency.

We are about to enter another earnings season. I’m sure that we’ll see numbers with terrific year over year comparisons. Keep in mind when you see those comparisons what was occurring in the first quarter of ’09. Since that time stocks have zoomed to the moon, and while trailing P/E’s are coming down, they are still at historic levels.

What’s priced into the market, however, might not be as important as the crush of dollars flowing out of debt instruments. We’re likely to see some wild things occurring. One thing’s for certain, the underlying problems were never taken care of, the levels of debt and leverage in the financial system are still at extremes. Proper accounting alone would still bring down the system, and so it festers.

Yesterday’s down then up action produced a small change in the McClelland oscillator, expect a large price move either today or tomorrow. Today is the best fit for a turn date, and the major indices are carving out another potential rising wedge. Obviously those who keep trying to front-run any decline keep getting run over, once again proof that patience is a virtue. Waiting for broken trend lines is always a smart idea.

The VIX set a new low and is just above the bottom Bollinger Band. Call buying is reaching levels that normally produce turns.

You have probably noticed that as I got more active with the SwarmUSA site that my postings have diminished here at Economic Edge. I have been attempting to get volunteers to pick that up more and more, and have had some success there, but it still requires a great deal of attention. Thank you to all who volunteer! On Monday I posted a link here for the first time and ask for people to please join the recurring donation program - $3.50 per month to “Fire the Fed!” No one from here did. The only people to sign up for it so far are the same people who already volunteer their time.

What I do here I do for free and I do it with pleasure, my satisfaction is knowing that I may be helping people understand reality a little better. No high pressure marketing here, I consider that to be a part of the problem. I am disappointed in the response to my subtle requests for help, and even though the size of the Swarms has grown rapidly, I am also disappointed in the number of people who were actually participating in the Swarms.

And so we’re going to talk a little bit about BE-DO-HAVE one more time.

As previously mentioned, in order to HAVE and to maintain wealth, you must first BE and DO. This is why the lotto winner seldom holds onto their winnings over time – they skipped right to have.

Everyone’s seen the movie of the spoiled rich kid, right? People who inherit large sums of money often are not good stewards of it, and again, it’s because they didn’t go through the process of BE and DO. Not all are that way, of course, there are self-starters and many had parents who wisely forced their children to build the BE and DO foundation so that their wealth is not squandered.

Freedom works the same way. When born into it, it’s difficult to appreciate the base of how it was obtained and why it is. Most people in the U.S. have not truly had to BE and DO when it comes to freedom, we have just assumed it was a right. We stopped talking about it. We stopped teaching our children about it. Most importantly, we stopped taking the necessary actions to maintain it, and thus we are losing it.

As any parent with teenagers can tell you, you can tell them repeatedly what’s going to happen, but inevitably they won’t really get what you say until they make the mistake for themselves. Perhaps that’s just human nature and perhaps that’s a part of the psychology of economic cycles – I’m sure it is.

The game of reading bloggers write about the problems in the economy has grown very old to me. They either simply report, or they complain. If we’re lucky, we get a new angle on what we already know. Few talk about the real roots of the problems and even fewer still get at workable solutions. We all play the blame game, left/right, union/corporate raider, it’s all their fault and thus the answer must lie over there.

Imagine the power we would have if we all could get together and work on common ground instead. It was Gandhi who said, "A small body of determined spirits fired by an unquenchable faith in their mission can alter the course of history.”

Those people do exist, they are growing in numbers all the time. However, for the majority with regard to freedom we have become a nation of spoiled teens. We fail to realize that freedom begins with us.

I have been working on a concept for what I think will be an important book. I have been contemplating how I devote the time I have been to SwarmUSA, continue to write for the blog, and spend the necessary long hours required to get that done? Something has to give. The lack of response from my blog has made that choice easy. I will be making fewer posts here, and when I do post they will be more meaningful articles, not just playing the role of daily reporter.

My best writing time is early in the morning. Therefore I am temporarily going to only produce the morning updates when there are special circumstances that warrant it. I will return to them on occasion and certainly once the work on the book is done. Again, I feel that this book is important and that I can be most effective concentrating on it for awhile.

Rolling Stones - Time Waits For No One:

Morning Update/ Market Thread 4/6

Good Morning,

Equity futures are down this morning. Below is a 60 minute chart of the DOW futures on the left and 5 minute chart of the S&P futures on the right that show the overnight action:



The dollar is up sharply, while the Euro is down sharply on concerns that Greece’s bailout may be falling apart. Of course it’s falling apart, that’s because it makes no sense and the math is impossible. You cannot save a drowning person by throwing water on them, and you cannot save a person unwilling to help save themselves – more on that concept later. Bonds are higher, both oil and gold were lower overnight but just turned positive again.

Yesterday’s advance to new highs was on the lowest volume of the year. The divergence between price and volume has been in place all year, it is historic in nature, as in there has never been such a large and sustained divergence in modern history. Then again, we are witnessing the collapse of the largest debt bubble in history too and we need to be cognizant of the flow of funds.

The move down in bond prices, up in yields was huge yesterday and left large gaps in the charts. Today’s action indicates that we may get some backfilling. The move did break the very large necklines and long term trendlines on the longer duration charts.

Below is a 2 year chart of TLT, the 20 year bond fund. You can see the smaller Head & Shoulders pattern and the larger H&S pattern, BOTH are now confirmed, doesn’t matter if prices rise back up above the neckline. The green trendline you see is a long term uptrend line that is now clearly broken as well:



Below is a 6 month version of TLT, you can see that prices closed below the lower Bollinger Band and that the move came on very heavy volume. Unlike equities, here volume is confirming price:



The chart of the TNX (10 year Treasuries) is telling the same story. Yields went over 4% yesterday and closed just below. The large inverted H&S pattern is now confirmed, the target is now 6%, but it may take anywhere from a few months to a year or even two to get there, this is a very large pattern, it will take a while to play out:



What will 6%, a 50% increase in interest rates do? It will make houses about 20% less affordable. It will mean that all the people who have Adjustable Rate Mortgages that are rolling over soon, and there is a giant wave of them coming, are facing the prospect of attempting roll-over into higher rates with homes that are likely underwater already. This wave will put them even deeper underwater.



Yesterday equities rose, the dollar rose, oil rose, and gold rose. Bonds (DEBT) lost. That is all about the asset wheel. The supply of debt is a tsunami that has already crested and is now landing on shore. The government is but a sponge placed upon the beach, they cannot stop it, they cannot buy up all the debt.



No word on the emergency meeting on rates yesterday. That’s a weird one, only Market Watch carried it, there has been no release or otherwise mention about the meeting that supposedly occurred yesterday. If anyone sees anything on it, please forward to me, thank you.

Here’s a report on Office Vacancy rates that came out yesterday, the highest in 16 years:

NEW YORK (CNNMoney.com) -- Office vacancy rates are now at their highest level in 16 years, according to a report published Monday, as elevated unemployment levels across the country continue to temper the demand for space.

Roughly 700 million square feet, or 17.2%, of the more than 4 billion of available office space nationwide was unoccupied as of the end of March, according to the real estate research firm Reis. The last time office vacancies were this high was in 1994.

And we are learning more about the stupendous Jobs Report that showed 162,000 jobs were created. More than 48,000 were temporary Census workers, there were 81,000 phantom jobs supposedly created by new businesses using their “birth/death” model (that doesn’t work), and there where another 40,000 temporary jobs, meaning that in reality no meaningful jobs were created at all. And we require 150,000 to 250,000 new jobs each month just to stay even with population growth (depending upon who you ask).

We are now marking the one year anniversary of the return of Mark-to-Fantasy accounting standards. Stock market’s been going up ever since. Imagine that, letting the bankers who own the quant computers, operate “dark pools,” and run the “Federal Reserve” mark their debt portfolios to their own models. And stocks have been going up the entire time. Just wait and see what happens next, it’s what happens when you turn over the money power to private interests. The fact that we allowed it, and the fact that the people have done nothing to stop it means that we deserve what’s coming to us.

Those who think that gold and silver are honest money are going to get what’s coming to them too. They in fact are the opposite of “honest” money, they are the most manipulated commodities on the planet. Today it is very likely that there has been many times the amount of gold and silver sold on paper than exist in reality. My caution to you is that there could easily be a run on the metal should that fact be fully realized. If you are “hedging” via the metals, we are at the stage of the game where taking physical possession is simply the smart thing to do.

Using only precious metals to back our money? Utter catastrophe. The central bankers are the ones who hold the vast majority of it now, the private bankers have stolen and swapped away a large portion of our reserves from us and from the entire world. The IMF, for example, is now the world’s third largest holder of gold. If you create a gold money system, you are simply giving control right back to the same people who already control it via debt. Debt, gold, they don’t really care, they own you either way. If you are tired of being owned and you seek true freedom, you will find it, it is there waiting for you to take it if you dare.

Jefferson Airplane – Volunteers:

Morning Update/ Market Thread 4/5

Good Morning,

Equity futures are higher than they were on Thursday’s close, but lower than the Friday morning employment situation ramp. Below is a 60 minute chart of the DOW futures on the left and a 5 minute chart of S&P futures on the right:



The dollar is higher, bonds plummeted on Friday and are sitting right on support once again, oil is now pushing $86 a barrel and gold is higher as well.

The Senate went on recess again without approving another extension to the Emergency Unemployment benefits:

(CNN) -- Extended unemployment benefits will temporarily expire for thousands of Americans on Monday because the Senate went on its spring recess without approving a one-month deadline extension.
The extension, which had bipartisan support, would have cost about $10 billion, but a lone Republican, Sen. Tom Coburn, said no until the costs are offset.

The Oklahoma senator objected to a commonly used unanimous-consent agreement to pass the bill under emergency conditions, even if it increases the federal deficit. Coburn wants to eliminate additional government spending to pay for the bill.

"The legitimate debate is whether we borrow and steal from our kids or we get out of town and send the bill to our kids for something that we're going to consume today," Coburn said on the Senate floor.

It's the second time a Republican has blocked a so-called "emergency extension" of jobless benefits.
Kentucky Sen. Jim Bunning objected to adding to the deficit back in February.

This, after reading even more horror stories over the weekend about the condition of real Americans. Matt Taibbi wrote another good piece, Looting Main Street, well worth a read.

On Saturday the “Federal” Reserve announced an emergency meeting of the Board of Governors to be held today at 11:30 Eastern. Here is their meeting notice: Advance Notice of a Meeting under Expedited Procedures

This meeting is to, “Review and determination by the Board of Governors of the advance and discount rates to be charged by Federal Reserve Banks.”

That is different. They are going to consider raising rates because the employment situation report was so “good?” LOL, I can feel a huge mistake coming on. Real unemployment is over 20% according to Gallop, it is 22% according to John Williams and it’s over 17% according to the U6 data from our own government. Taxes are going up in spades, oil is rising to new recovery highs, both of which are anchors to the velocity of debt, rising interest rates will be another anchor to debt. Of course they never should have lowered them in the first place, but now that we’re saturated and rates have hit zero, ending the interest rate support programs AND actually raising rates will produce results that I think are going to be very, very interesting indeed.

We’ll have to see what comes out of this meeting. I note that the general and even business media did not pick this up over the weekend. Holding emergency meetings and performing intermeeting rate hikes is a sure fire way to keep the market skittish, it is not a confidence builder. However, investors need to be careful in thinking that it will produce an instant downfall in equities. Rising rates will mean falling prices for bonds. Many of the insiders are already gone. As more people begin to flee debt, they are forced to evaluate other asset classes to put their capital to work. If you go back and look at times of rising interest rates you will find that in general stocks RISE or are flat during rate raising campaigns. Stocks are falling generally during rate lowering campaigns. Below is a 3 year chart of the 10 year Treasury, TNX, with the SPX the black line in the background:



The correlation is clear over the past three years, however, if you go back further in time you will find that the correlation is not always so clear. And remember, we hit ZERO after rates descending for the past 30 years. During those 30 years, we blew the biggest credit bubble in the history of mankind and saturated the globe with debt and derivatives. Meaningfully higher rates will eventually produce negative results. Since all money is debt, if people flee from debt, this can cause our supply of money to decrease and could force governments into taking measures that are even farther outside the rule of law.

There is a turn date on April 7th according to McHugh. He is rightfully cautious about timing here, however. Obviously the markets are still dramatically overbought. There are new divergences setting in on the daily charts with prices drifting higher while RSI drifts lower. All the prior divergences remain and are historic in nature.

The economic data will be light this week. At 10 Eastern today is Pending home sales and non manufacturing ISM, it only gets lighter from there.

Hey, the boys are back to supposedly consider interest rates, that’s going to be of interest that’s for sure. If you would like to end their Reign of Terror, we have set up a “Fire the Fed” recurring donation program over at SwarmUSA. Your donation of only $3.50 per month can help us continue to spread the word and create leverage for politicians who are willing to fight back. There is much power in small numbers, please donate to the American Party PAC if you can by clicking on the “subscribe” button at the following link to “Fire the Fed,” thank you!

Subscribe in order to Fire the Fed!

Thin Lizzy - The Boys Are Back In Town:

Jeremy Rifkin: More Empathy in the Global Economy?

Jeremy Rifkin, from the Wharton School's Executive Education Program, believes that we are on the cusp of a third industrial revolution. He correctly believes that society must make an empathetic leap FIRST, and that then technology and communication will combine to move the human race forward. This is another way, probably much more eloquent than me, of laying out the foundation of economies - rule of law first, only he talks in larger societal terms. This is the same progression in history, again stated more eloquently, that I have been talking about.

Terrific food for thought, those who are into sustainability should appreciate what he has to say. Don't get hung up on the details of global warming, focus on the larger picture that he is saying and stand back and look at the progression of mankind. We are at a crossroads. Are we going to slip backwards, or are we going to march forward? I say forward is possible, but we need to get busy. There are solutions out there, Freedom's Vision is a very large part of progressing to those solutions.

Morning and Employment Situation Update 4/2

Good Morning,

Equity markets are closed today but futures are trading and the bond market is open - must keep that debt flowing after all. The futures rose sharply on this morning’s March Employment Situation Report, below is a 30 minute view of DOW futures on the left and 5 minute S&P on the right:



The dollar is rising on this report, while bonds are dropping like a stone and are right back on support at the large neckline.

The headline number came in with an increase of 162,000 and the rate remained steady at 9.7%. Let’s start with Econoday’s take:

Highlights
Census hiring was not as strong as expected but private payrolls were healthy, posting a third consecutive gain. Nonfarm payroll employment in March rebounded 162,000, following a revised 14,000 decline in February and revised rise of 14,000 for January. The March gain came in below analysts' forecast for a 200,000 jump in employment. Importantly, the February and January revisions were up a net 62,000, inclusive of moving January from negative to positive territory.

While the headline payroll number was disappointing, the detail was positive. Private payrolls (which discount Census hiring and other government changes) jumped 123,000 in March, following an 8,000 rise in February and a 16,000 gain in January.

More specifically, Census hiring was up 48,000 in March, meaning that ex-Census, payroll jobs were up 114,000 for the month.

Sector detail was encouraging. Goods-producing jobs rebounded 41,000 after a 47,000 drop in February. Manufacturing employment was up 17,000, following a 6,000 boost in February. Notably, construction jobs rose 15,000 after a 59,000 drop the month before. This was the first gain in construction since June 2007. Mining advanced 8,000 in the latest month.

Private service-providing employment jumped 82,000 in March, following a 55,000 gain the month before. Temp jobs were up 40,000, following a 37,000 rise in February. Health care jumped 37,000 in March while leisure & hospitality gained 22,000. Retail trade increased 15,000 in March as wholesale trade was up 9,000. On the negative side, financial activities fell 21,000 in March.

On a year-ago basis, payroll jobs improved to minus 1.8 percent in March from minus 2.4 percent in February.

The big negative in the March report was for average hourly earnings. Wage inflation in March fell to a 0.1 percent decline from a 0.2 percent gain the month before. The consensus had expected a 0.2 percent advance. The average workweek (traditional series for production and nonsupervisory workers) improved to 33.3 hours in March from 33.1 the previous month. For all workers, the average workweek edged up to 34.0 hours from 33.9 hours in February.

From the household survey, the unemployment rate was unchanged at 9.7 percent in February and matched expectations.

Overall, today's report net was close to expectations. Stock futures rose somewhat and Treasuries rates firmed on the news.

It’s quite noticeable how they are skipping over anything even remotely negative. Let’s start with the fact that the economy needs to generate a quarter million new jobs each month just to keep up with population growth. Now let’s look at some aspects they didn’t cover, below is the full report:

Employment March

Only four paragraphs in we learn, “The number of long-term unemployed (those jobless for 27 weeks and over) increased by 414,000 over the month to 6.5 million. In March, 44.1 percent of unemployed persons were jobless for 27 weeks or more.”

In one month the long term unemployed increased 414,000! How bad is that 27 week figure and how does it compare to say, oh, the post WWII era? How about this:



Just another cycle, same as the others, right?

Okay, here is where you read the human part of what’s happening at the margins.

The number of persons working part time for economic reasons (sometimes referred to as involuntary part-time workers) increased to 9.1 million in March. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job. (See table A-8.)

About 2.3 million persons were marginally attached to the labor force in March, compared with 2.1 million a year earlier. (The data are not seasonally adjusted.) These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey. (See table A-16.)

Among the marginally attached, there were 1.0 million discouraged workers in March, up by 309,000 from a year earlier. (The data are not seasonally adjusted.) Discouraged workers are persons not currently looking for work because they believe no jobs are available for them. The remaining 1.3 million persons marginally attached to the labor force had not searched for work in the 4 weeks preceding the survey for reasons such as school attendance or family responsibilities.

Now let’s head to the alternate data table where we find the numbers that most closely relate to numbers how they used to be tracked:



Here we find that U6 is still running in the 17% range. The unadjusted data showed a slight decrease while the seasonally adjusted data increased.

Remember, positive numbers do not mean the trend of job losses has stopped. We must create more jobs than the population is growing. Below is the latest chart of the Employment Population Ratio. Clearly we have a long way to go to get anywhere near where we were. How does the economy do that when it is saturated with debt?



Our manufacturing employment is so decimated that despite doubling our population, we now employ the same number of people in manufacturing than we did in 1942.



Yes, we are efficient at manufacturing, but we are importing from the rest of the world instead of exporting. Place the blame for that where you may, but the ability to create real and meaningful jobs here boils down to a return to the fundamentals on building an economy based upon the rule of law.

Below is the ShadowStats.com chart John Williams produced. His way of measuring shows nearly 22% unemployment.



Want to see how the rule of law, or lack thereof, can destroy jobs? Look no further than the recent “healthcare”/Insurance Industry Bail Out Act. Verizon just announced it is taking nearly a billion dollar charge, and the companies writing down earnings continue to mount. Here’s a quote and chart from the Wall Street Journal:

Verizon Communications Inc. said Thursday it expects to record a one-time noncash charge of $970 million in the first quarter, to account for the anticipated impact of the recently enacted U.S. health-care overhaul.

The telecommunication company, which disclosed the charge in a Securities and Exchange Commission filing, is the latest company to take a charge to account for increased costs related to changes that will come from the health-care law. Specifically, the overhaul prevents companies from deducting tax-free subsidies it receives from the federal government for providing retirees with prescription-drug benefits.

Hey, want to create jobs by ramming massive amounts of debt into the economy? Okay, then when the economy “improves” and interest rates rise then you must pay the price for carrying that debt. There is no free lunch and rates are headed higher on this report. Pay me now or pay me later, you cannot fool Mother Nature.

Walter Trout - They Call Us the Working Class:

Guest Post and More on “THE Most Important Chart of the CENTURY”

On March 20th, I posted the now famous Diminishing Marginal Productivity of Debt chart that I dubbed THE Most Important Chart of the CENTURY.



This chart has literally been passed around the globe, published in major newspapers, and its significance debated on YouTube. Of interest to me is how the mainstream media won’t touch a chart like this, yet foreign press will. That fact alone should be disturbing.

There were a lot of people who understood the premise of the chart and its implications and meaning in perspective to history. Then again it was obvious that it left others bewildered and looking for more answers. This article is an attempt to reach both upwards into the higher levels of thinking, and yet also an attempt to explain what’s happening on a more rudimentary level so that more people understand how this chart is made and what in the world it means.

Let me begin by stating that the use of the term “Chart of the Century” in the title was very purposeful. It’s meaning, though, could be read several ways. Some people interpreted that to mean that I meant “of the 21st Century,” while others thought of the past 100 years. I mean both. And I stand by the claim that this chart, when fully understood, debunks modern economic theory; it is the result of the very misguided Federal Reserve Act that was passed into law in the year 1913, almost exactly one century ago. The outcome of what happens will be the greatest influence on what occurs in the 21st century. I do not believe this to be hyperbole.

Those who have studied economics, monetary systems, and history know that the major events of history are almost always preceded by economic upheaval and usually by collapses in credit or in monetary systems themselves. To see this picture for yourself, simply look at what events preceded within one decade WWII, WWI, the Revolutionary War, the War of Independence, and then keep on going back in time looking in the decade prior to major events throughout history, all the way back to the fall of the Roman Empire. The events wind up in history books, but the underlying tensions, the root causes are often overlooked.

Is it simply coincidence that there was a credit bubble of massive proportions in the “Roaring Twenties” that led to an economic collapse and Great Depression in the 30’s? And that that collapse was followed in the next decade by WWII? Why is that pattern repeated time and again? If you can dive deeply enough into this chart, you will discover the WHY and the WHO.

The math doesn’t lie. The math of debt-backed money doesn’t work, and the Diminishing Returns chart reflects this. In my previous article I said that the chart was a very simple one, and it is. Understanding the calculation and grasping the concept is obviously more difficult, so I invited Chris Rupe, who actually performs the calculation and builds the basic chart following the formula developed by Legg-Mason, to take a shot at explaining the calculations for those wanting a more in-depth understanding.

Lost? Hang on, normally I write for the middle, here we are going to cover a wide path. I will add more of what I believe to be common sense explanations afterwards…

Chris Rupe - My Thoughts on the Diminishing Productivity of Debt

Recently, I shared this graph with Nathan Martin and he has since made it famous. It has been showing up on dozens of other blogs (here, here, here, here, here, here, here, here for example) and there are continuing questions as to the source of the data as well as the methodology used to calculate it.

The data sources are the Federal Reserve Z.1 Report, specifically, the Total Credit Market Debt figure and the annualized quarterly Nominal GDP number from the Bureau of Economic Analysis. I was sort of the progenitor of resuscitating this graph according to the original Legg Mason format and methodology.

Total Credit Market Debt includes all public debt (federal, state, local) and private debt (mortgages, auto loans, credit cards, etc.). It does NOT include the unfunded public liabilities such as Social Security, Medicare, etc.

Since I have the dataset, and have been compiling and thinking about it for a year and a half, I feel compelled to give my opinion on what I think it means.

The chart is not hard to reproduce, although a bit tedious.

The specific methodology is simply a 4 quarter moving average of (GDP(t) – GDP(t-4))/(Debt(t)-Debt(t-4)), where ‘t’ is in reference to the quarter in question.

That in and of itself isn’t so tedious, however, quarterly data disappears once you go back a few years and all you have left is annual data. So, you have to do a linear interpolation between each of the annual datapoints in order to generate the quarterly data. Incidentally, if you want to get rid of the simple moving average, you of course get a noisier chart with a deeper plunge:



The plunge goes to -0.91. So, that’s really all there is to the method, although there are a number of other ways you can calculate and plot a chart to get the gist of what is occurring here.

For example, Karl Denninger has also done a version of this chart on his own with his “Ponzi Finance Indicator Chart”:

Karl’s chart has some advantages over the other presentation. For example, I believe Karl’s chart uses a year over year % change format for his data rather than a year minus year format. Thus, his chart is not as susceptible to the problem of dividing by very small (close to zero) numbers that the other chart is. Indeed, if you go back in time far enough (I have this data back to 1916) this problem occurs more than once.

Now, there has been some debate as to the significance of this chart. Some think it is not very significant since it is recognized that if either the numerator OR the denominator goes negative, then the chart goes negative. If both are negative, then the chart yields a positive number. Others think that correlation is not causation w/r/t the impact of debt on GDP. Obviously, some think it is very significant. Nathan Martin referred to it as the ‘Chart of the Century’.

I agree with the detractors insofar as this is not a perfect metric of our predicament. GDP, for example, is kind of a fuzzy number. Not just because of tabulation games the government plays along with the constant revisions, but because GDP doesn’t even have a universal definition. Different countries calculate GDP in different ways.

I flatly disagree that debt and GDP are not correlated. Indeed, I view this chart as a measure of the Marginal Velocity of Debt in the economy. I have referred to it as such before. In this view, Total Credit Market Debt is synonymous with the Total Money Supply. All money is debt, and this debt has value and has varying degrees of liquidity. To the extent that debt loses it’s value or becomes totally illiquid (Home Equity Loans anyone?) it ceases to be money. To the extent that debt is paid back or is defaulted on, money supply shrinks!

This is an unconventional view of money. There would be howls of protest against this view ranging from mainstream (keynesian/monetarist) economists to the austrian economists. Gary North might disclaim me.

However, I have never liked any of the monetary statistics as compiled and named, M0, M1, M2, MZM, etc. I find them too narrowly focused on the liability side of U.S. bank balance sheets. A lot of money is missing in that view. Much of it is obscured by multiplier effects due to the advent of off-balance sheet entities. Some is not counted. Cash held by foreign central banks for example.

The way I see it, all loans must be originated by U.S. banks whether or not they are held on or off balance sheet. This is a distinctly asset side of bank balance sheet view of money. And ALL of this money is accounted for in the Federal Reserve Z.1 as Total Credit Market Debt. So, I have sometimes referred to this statistic as ‘Mtotal’.

This velocity measure thus follows the familiar equation of exchange: Velocity = GDP/(Money Supply) and Marginal Velocity = Delta(GDP)/Delta(Money Supply). Not just correlated, but plain old related as can be seen.

My own view overall is that the chart indicates (however imperfectly) that something significant has occurred. Indeed, nothing like it in 65 years. Anyone can check the Z.1 history and see that Total Credit Market Debt has never had a year over year decline in the postwar era.

Until now.

I view it as confirmatory (in our unique circumstances) that we have ‘hit The Wall’ with the amount of debt that the economy can carry (debt saturation). Politicians and policy makers have been able to keep the game going by continually and incrementally debauching lending standards.

Think about it this way. A large reason why we have emerged from every postwar recession and renewed the credit cycle to grow to ever greater heights is because the policy response has been to allow, nay, promote the decay of lending standards.

• In the ’60s you had to have a 20% downpayment. PMI applied to tiny fraction of mortgage loans. Credit cards required either a security deposit or were secured by a savings account. The point is, they had some kind of collateral.


• In the ’70s, PMI grew, especially encouraged by policies like the CRA


• After the early ’80s recession, Usury laws began to go away so credit cards eliminated their collateral requirements now that they could charge very high interest rates. Also, the law was changed to take Social Security surpluses and use them to buy government debt. This effectively lowered the lending standards to the government since they now had a guaranteed buyer. Incidentally, this change plus the continued growth in credit set up a feedback loop to artificially lower rates on Treasury securities.


• After the ‘91 recession, reserve requirements on most bank accounts were eliminated and Adjustable Rate Mortgages began to really grow as a % of home loans. FICO scores were developed in lieu of having any actual collateral for loans. Credit cards were now given away freely to any college kid with no job. Banks begin to financially innovate ways to originate loans but package them into off-balance sheet trusts which are sold, not counting against their capital requirements.


• After the 2001 recession, the gloves come off and anyone can get a loan for anything, no downpayments, bad FICO score, no job. Sometimes the bank will even loan more than the asset is priced at.

In this way, the policy makers took down the artificial barriers (read safety net) of prudence in lending because no politician wants to deal with a nasty recession or perhaps fewer campaign contributions from Wall Street. So, we eventually reached the point where there were simply no safety nets left and all that remained was ‘The Wall’. You just can’t stuff anymore credit into the system.

We have crashed into the wall.

Marginal Velocity has collapsed.

For the rocket scientists in the audience who really want to understand the exact numbers and calculations, Chris started a thread on Ticker Forum where he walks people through the calculation and shows how the numbers become negative – Ticker Forum posts on Diminishing Returns Chart.

What Chris is describing in his bullet points above is “how to build a massive credit bubble.” Look at the second chart, the unsmoothed version, and see just how bad the math was at the end of 2009. While you’re up there looking over those charts, note how ever since the post WWII era that the productivity of debt has been diminishing the entire time, producing lower high after lower high. This reflects the anchor of carrying ever increasing amounts of debt.

The Federal Reserve Act of 1913 placed our nation, and then rapidly the world, into a debt-backed money box. Since that time the world’s productive efforts have been siphoned off in ever increasing amounts as the chains of debt-backed money began to bite harder and harder. The math of debt grew exponentially since that time. We transitioned from working with millions, to billions, and now trillions. No monetary system and economy has ever successfully made it to the next higher level. It’s literally impossible to because incomes have not grown at nearly the same rate. It requires income to service debt, and once you have pulled all your future earnings into today, it’s impossible to pull even more forward. That’s where we are today on the macroeconomic level. Income cannot service existing debt.

Yes, the numbers have been negative before and they have snapped back to produce a lower high. This chart will most likely make a turn back upwards, however, it is very likely to make yet another lower high. How long can the cycles continue? Not too much longer, once in the parabolic growth phase, the crush of the math happens quickly. It is non-linear and thus events that seem to come quicker are actually occurring quicker, that is an expression of the exponential function as is the chart below. Crazy and before unheard of swings in the market? A symptom. Riots in Greece? A symptom. No more mail service on Saturdays? A symptom. Massive underemployment? A symptom. The central bankers at the IMF “rescuing” countries with debt? A root cause.



The PRIVATELY owned and controlled central banks place everyone and every nation into a debt backed money box and an impossible math situation that drains the productive efforts from the societies placed into that box. To understand how that FACT is related to the diminishing returns chart, let’s examine three different rooms – A, B, and C.

In each room there are exactly 10 people: 1) A construction firm owner, 2) a hardware store owner, 3) a carpenter, 4) a restaurant owner, 5) a chef, 6) a school teacher, 7) clerk for the Hardware store, 8) a waitress for the restaurant, 9) a barber, and 10) a poodle – hey, dogs are people too and mine drives an entire economy all on his own!

In Room A, we are going to create an environment where there is no debt – zero. Then we are going to introduce an eleventh person who enters the room and hires the construction firm to build a house for $15,000 (think 1950’s). Thus new money enters the room.

The Construction firm owner is thrilled, he immediately turns to the hardware store owner placing a large initial order for supplies, he hires the carpenter who now has money to get something to eat at the restaurant. He in turn tips the waitress, and so on, right on through their little economy. Since there is no debt, the amount of money only decreases on each transaction as taxes are taken from it. Otherwise the rest of the money circulates creating what is termed “velocity.”

In that very simple example, it is easy to see how increasing taxes decreases velocity. What if the first transaction was taxed at the rate of 100%? Then the velocity would be zero as no money would pass to the first set of hands. What if there were NO taxes? Then there would be no friction and the money would continue to circulate around the room.

In Room B, we create an environment where the ten people in the room all possess an amount of debt to service that equals say 20% of their income. The eleventh person enters the room and hires the construction firm owner under the same terms. He passes $15,000 to the construction firm owner who, being 20% of his income in debt must immediately send $3,000 to the bank to service his prior existing debt. Thus $3,000 exits the room, leaving $12,000. He makes a deposit to the hardware store owner who also must send 20% of what he just took in to the bank, plus he must pay taxes. You can see where this is going… Duh, it’s only common sense, right? Of the money injected, the PRODUCTIVITY of the money is diminished, and by the time it filters down, there may not be enough left for the poor poodle who is likely going to go hungry.

In Room C, we take it to the other extreme where everyone in the room owes 100% or more of their income in debt. The eleventh person enters the room and hires the construction firm owner who owes so much of his income to the bank that when handed the $15,000 he MUST use it to make a payment on his debt with the bank. The $15,000 thus immediately leaves the room, no money makes it to the carpenter or anyone else, and everyone in the room subsequently goes hungry. It doesn’t matter how much money you pour into this room, debt will always outpace incomes. There is thus no economy. Money/ debt is created and it simply circles right back around to the bank.

Obviously this is an extreme. But let’s say that the room reaches a point that’s in-between room B and room C, say 70% of income in the room is used to service debt. Then let’s say that the Construction firm owner takes out a big loan. If the size of his income fails to increase to service the increased debt load, then it places greater strain on the velocity of the new money that enters the room and it affects not only him, but everybody in the room. In fact, if he takes on too much unserviceable debt, he may have to lay workers off, especially if his income falls. Macroeconomic debt saturation occurs well before it reaches 100% debt to income. Once you cross that fine line then adding more debt into the system results in insolvency and also in lower employment.

This is why in the 1940s, the nation only 30 years past the Federal Reserve Act, was able to generate a recovery without the quantity of money exploding into an exponential growth phase. Here we are nearly a century past and we are living through an explosive exponential money growth phase.

Remember, the Central Bankers created a system in which all money is backed by a liability. We’ll get back to that (why, who).

Okay, so now you get the picture, the Marginal Productivity of Debt is really a tale about the marginal velocity of debt. Debt is money. Economists don’t talk about the velocity of debt, they talk about the velocity of money. They have charts and formulas that work pretty well in room A and even in room B. But where they fail miserably is approaching room C – the room where debt saturation has occurred.

This is because their way of thinking, whatever you call it – Keynesianism, neo-modern economics, deficit spending, stimulus, deficits don’t matter, must get credit flowing, solving a debt problem with debt, lunacy, insanity, whatever – is simply erroneous and does not work in a 100% debt-backed money system. Modern economist’s calculations for the velocity of money, for example, do not take into account the very mechanical action that is plain to see happening in the rooms above. They have failed to take out their basic calculators and add up all the debts to see what level of saturation has occurred throughout the entire room.

When we examine an individual’s creditworthiness, for say an automobile loan, in the olden days of lore the credit industry used to examine individual’s debt-to-income ratio to ensure that a typical level of say 33% or less of a person’s income was being spent on debt. Then it became 38%, then 40%, and now what? Well, these ratios are typically calculated using gross incomes, not net. But wait, over the decades local governments grew, state governments grew, the Federal Government became a behemoth. To feed these governments, taxes grew. But taxes have the exact same effect as debt on the economy. That’s because they are a debt!!

When your state decides to build a bridge or a school, it will either finance it directly with a tax levy, or it will finance it with bonds that come from the very same central banks that lend money to our Federal Government. They issue bonds from nothing creating new credit money that did not previously exist (no productive effort). The people in the state are thus being indebted by their state, and it is their productive ability that is required to service the state’s debts. Thus the same people who are in debt for their homes, their cars, their credit cards, are also in debt to their city, their county, their state and to their federal government. The total burden of all those debts and obligations now stands well over $300,000 per man woman and child, nearly 750,000 per worker in America and it is growing very rapidly with new burdens such as the latest “healthcare” bill.

This bond and debt money system was developed for the benefit of the Central Banks, not the people. They profit from interest and fees for the use of the people’s money system – that is the WHY. Congress did not constitutionally have the power to assign that right away, but it was done regardless and the Judicial system is co-opted by the same money influence removing the check and balance designed into the system. If our nation were to go back to spending non debt-backed money into existence instead, the American public would not be burdened with the carrying costs of all that debt. This is the WHO part of the equation, and why what is more important than WHAT backs your money is who controls it. This saturation would not happen if the United States issued her own sovereign money, created as an asset, not a liability.

The Diminishing Productivity Chart is a very useful tool to gauge the level of saturation inside a country. All countries should develop and track this metric. We need good data to make that happen and I would like to point out that I believe the situation is actually much worse in the U.S. than even that chart shows due to the inaccuracies in the way our own GDP is calculated. In fact, if the effects of speculative derivatives and mark-to-fantasy accounting were removed from our financial industry, GDP would plummet back to the reality that it should reflect.

There are other very simple metrics that can and should be measured to track debt ratios but they are not. One method is to calculate an overall debt to income ratio for the mean working American. The $52 Trillion Z1 figure (what Chris referred to as MTotal) divided by our working population (140 million) equals $371,000 of total system credit per worker, not counting future liabilities. what does the median worker over the age of 25 earn? $32,000 is all. That leaves the amount of credit per worker to service at 1,160% of income... is all, not counting future liabilites. Can he even keep up with the interest? Of course not, it's ridiculous and that metric should have never been allowed to get so out of control.

If you don’t wish to reside, or for your children to reside, in room C or in a debt-backed money box, then please visit SwarmUSA.com, register and participate in the Swarms. It’s completely possible to step outside of the box in which we have been forced to live, and it’s possible to avoid the events which history says may be coming.

Morning Update/ Market Thread 4/1

Good Morning,

Equity futures are higher this morning, no it’s true! I wouldn’t fool you just because it’s April Fool’s day, everything in this report is true, no joke. And if you examine the 30 minute chart of the DOW on the left, or the 5 minute chart of the S&P on the right, you will see that I’m not pulling your leg, as hard as it is to believe that the quants could run the market still higher. No, 76% isn’t enough, there are still people who have yet to say “I better get in or otherwise I may not get another chance.”



In the DOW chart, above left, you can see that the no volume overnight ramp took prices above the latest overhead resistance. This puts a run to about 11,100 on the DOW, or to 1,200 on the S&P on the table. There is a turn date on April 7th, we are entering the window for that soon, and the employment situation report comes tomorrow – not that turn dates have meant anything in the past year.

The dollar is about flat after touching the uptrend line from last November. Bonds are down, oil is setting a new rally high near $85 a barrel, and gold has broken up and out of its latest formation, now about $1,125 an ounce. Below is a chart of oil on the left and gold on the right. Oil is making what appears to be a rising wedge and is at the top of that wedge now. Gold is breaking out, it is either from a smaller flag, or it is breaking out of an even larger wedge/ triangle formation:



The Monster Employment Index edged up in March 1 point to a reading of 125.
The weekly jobless claims fell from 442,000 to 439,000. The consensus was 440K, here’s Econoday:

Highlights
Fewer Americans are filing jobless claims in what is a key signal for underlying improvement in payrolls. Initial claims for the March 27 week came in at 439,000 vs. 445,000 in the prior week (revised from 442,000). The four-week average fell 6,750 to 447,250 and is down roughly 20,000 from levels in February. There were no special factors in the week.

Continuing claims for the March 20 week fell 6,000 to 4.662 million with the four-week average, at 4.680 million, down roughly 100,000 from a month ago. The unemployment rate for insured workers is unchanged at 3.6 percent.

Claims levels are the lowest since late 2008, reflecting improving economic demand and the need for firms to expand their output of goods and services. Stocks are rising in reaction to the data, data which should bolster confidence for a strong employment report tomorrow.

What, no weather excuses?

From the Department of Labor’s report, “States reported 5,894,337 persons claiming EUC (Emergency Unemployment Compensation) benefits for the week ending March 13, an increase of 267,012 from the prior week. There were 2,172,852 claimants in the comparable week in 2009.”

That’s an increase in Emergency Unemployment Compensation of only 267,012 people in just one week! And it’s an increase of 3.72 MILLION in the past year. No joke.

And how about the the Challenger Jobs Cuts report? Oh, it only rose a whopping 61% in March… no joke. Note the lack of comment from Econoday:

Highlights

Challenger's count of layoff announcements rose to 67,611 in March vs. 42,090 in February. Layoffs at the postal service accounted for the majority of the month's layoffs. Hiring announcements rose in the month, to 13,994 vs. 8,300 in February.

Let’s see if we can put a little more color on that, shall we?

Job cuts surge 61% - Challenger

NEW YORK (CNNMoney.com) -- Job cuts accelerated in March, driven by planned reductions on government payrolls, a report released Thursday showed.

Employers announced plans to cut 67,611 jobs in March, according to outplacement firm Challenger, Gray & Christmas Inc. That's up 61% from February, when 42,090 jobs were lost, the lowest level in nearly four years.

"Unfortunately, many people are still jobless and many businesses still shuttered," said John Challenger, chief executive officer of the firm, in a statement. "This combination is having a significant negative impact on state and local tax revenues and, in turn, leading to continued downsizing in this sector."

Government job cuts led March's surge, accounting for nearly 75% of the total jobs shed. Year to date, government job losses have made up about a third of all announced cuts.

There were 50,604 announced government job cuts in March, and the United States Postal Service alone plans to reduce its workforce by 30,000 workers this year through retirement and attrition. The rest of the government jobs will be shed by state and local agencies suffering from budget shortfalls.

Aha! Remember how the primary creator of jobs for the past two years has been the government? Well it appears that’s finally coming to a screeching halt – as you knew it had to. It was inevitable because government revenue has been crashing while at the same time their expenses are skyrocketing. States and many levels of government are running huge deficits and simply need to be shrinking their size, not growing it.

Can you see the economic path of destruction? Credit bubble, subprime, housing collapse, stock market collapse, commercial real estate collapse, massive unemployment, and now the crisis is rippling into government. No more Saturday delivery, but we can send $450 Billion directly to the bankers to pay for the privilege of using our own money system, and we can spend trillions more cheating interest rates lower.

Remember, the chart of government spending is parabolic, it is heading straight up:



Now watch, as governments are no longer able to keep that rate of growth going, they will be pressured into interrupting the exponential rate of growth and that curve will begin to roll over. It doesn’t have to collapse to severely impact the economy, all that has to happen is for the rate of growth to diminish. The bankers were able to take their insolvency (they are still insolvent at market prices), and they pushed their insolvency onto the public.

Who has the money to make the rules?

Wall Street cabal seen derailing serious swap reform

(Reuters) - A major crisis is building in the derivatives market yet a cabal on Wall Street is blocking the formation of a clearing house that could stop the next financial meltdown, a senior official with the Kauffman Foundation said on Tuesday.

The need for disclosure in the swap markets is enormous, yet the will to act is missing because of a small cadre of special interests, said Harold Bradley, who oversees almost $2 billion in assets as chief investment officer at Kauffman.

"There is no incentive from the moneyed interests in either Washington or New York to change it," Bradley told the Reuters Global Exchanges and Trading Summit in New York.

"I believe we are in a cabal. There are five or six players only who are engaged and dominant in this marketplace and apparently they own the regulatory apparatus," he said. "Everybody is afraid to regulate them."

U.S. and European officials are trying to craft new rules to regulate the $450 trillion private derivatives market in broad efforts to avoid another financial crisis.

Policy-makers generally agree that most standardized derivatives should be traded on exchanges or cleared through a clearinghouse, which would assume the risk of a default.

Bradley said those efforts fall short. There needs to be a national market system for fixed income and credit with displayed prices and the posting of open interest and market positions, he said.

Instead, he said regulators have found a boogeyman in high-frequency trading, which has taken the focus off the highly levered derivatives market. After falling in 2008, the nominal value of derivatives is now greater than ever at about $204.3 trillion, according to Ned Davis Research Inc.

Let’s face it, any way you slice it, the joke’s on us. Happy April Fool’s. Support Freedom’s Vision and become an active member of the Swarm!

Supertramp – Fool’s Overture: