Monday, April 18, 2011

Morning Update/ Market Thread 4/18 - Confidence Waning, Outlook Negative Edition…

And you thought it couldn’t get this surreal…

Just prior to the open this morning, Standard & Poor’s put the United States on “outlook negative.” Stocks are falling, the dollar is falling (but bouncing mechanically later), bonds are falling, gold & silver are setting new records, oil is falling, and most food commodities are slightly lower.

From S&P:
Because the U.S. has, relative to its 'AAA' peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable.

We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer 'AAA' sovereigns.


The negative outlook on our rating on the U.S. sovereign signals that we believe there is at least a one-in-three likelihood that we could lower our long-term rating on the U.S. within two years. The outlook reflects our view of the increased risk that the political negotiations over when and how to address both the medium- and long-term fiscal challenges will persist until at least after national elections in 2012.

Some compromise that achieves agreement on a comprehensive budgetary consolidation program--containing deficit reduction measures in amounts near those recently proposed, and combined with meaningful steps toward implementation by 2013--is our baseline assumption and could lead us to revise the outlook back to stable. Alternatively, the lack of such an agreement or a significant further fiscal deterioration for any reason could lead us to lower the rating.
What we have here is two things; one is a large step towards admission of our impossible math, and two is political pressure to act. That pressure to act is exactly the type of pressure that can lead to another wave of deflation as austerity measures are “the cure” when operating inside of the central banker debt money box. My take is that any deflation, while potentially significant, will be overrun with the impossible math and thus a complete “restructuring” of our debt and money systems is going to occur.

I’ve been saying that for quite some time, and that’s exactly the way it’s heading, this admission/ veiled threat by S&P is a major step along the way. Keep in mind that the rating agencies aren’t going to do anything rash, their livelihood depends upon it. S&P is owned by McGraw Hill (MHP) which in turn is owned by some of the largest funds in the world. I’m certain that those fund holders want to reel in what they see as an unsustainable path. Of course as is usual for the rating agencies, they will only pronounce that the horse is in trouble AFTER the barn has burned down. Look for things to heat up over the debt ceiling debate and for progress to be made there and on next year’s fantasy budget where they will be touting how much they “saved” while continuing to feed the impossible math.

The Housing Market Index will be released at 10 Eastern this morning, while this light release week brings more housing data, and “Leading Indicators” later in the week.

Meanwhile interest rates continue to blow out on European debt, as the Fins vote out those in favor of a Portugal bailout, and the Greeks seek to restructure their debts into something longer term in order to fend off outright default.

Bizarre enough world for you? Thank a central banker. Oh yeah, it gets even more weird…
Gov. Scott Walker Reportedly Planning Financial Martial Law In Wisconsin

Following the lead of Michigan GOP Governor Rick Snyder, Walker is said to be preparing a plan that would allow him to force local governments to submit to a financial stress test with an eye towards permitting the governor to take over municipalities that fail to meet with Walker’s approval.

According to the reports, should a locality’s financial position come up short, the Walker legislation would empower the governor to insert a financial manager of his choosing into local government with the ability to cancel union contracts, push aside duly elected local government officials and school board members and take control of Wisconsin cities and towns whenever he sees fit to do so.

Such a law would additionally give Walker unchallenged power to end municipal services of which he disapproves, including safety net assistance to those in need.
Sieg Heil, Mein Fuhrer! …as if national level Czars weren’t bizarre enough, the financial chaos is breeding mini Hitlers who feel their bizarre actions are justified by the impossible math they are forced to deal with.

Oh yeah, as nuts as Czars are, our glorious exalted grand leader decided to take matters into his own hands (handler hands, of course) by flat out ignoring the direction of Congress who had passed a law that included provisions to defund many of the Presidential appointed “Czars.” Obama is flat out ignoring those provisions via adding in a Presidential “Signing Statement” which says surreptitiously that he is going to ignore that part of the law. In this manner he is CIRCUMVENTING THE RULE OF LAW. In other words, he is circumventing the checks and balances set for in this nation’s Constitution. He is overpowering the legislative branch and the legislative process.

Of course he is not the first to do so, that title goes to the former central banker Puppet-in-Chief. Note, however, this is yet another act on his part where he says one thing and then does the other – something for which I’m sure he must be on track to hold the political record. Surreal.

Did I say surreal? Oh yeah, it gets better. This weekend we learned that the University of Texas converted all their endowment’s paper gold holdings into physical gold – as in 664,300 ounces! Worth is nearly a billion dollars at today’s $1,500 an ounce, but that billion dollars represents only 5% of the University’s Endowment.

The University of Texas possesses the nation’s second largest endowment at $19.9 billion. Harvard’s is over $25 billion (but was over $30).

So, what does this ACTION on their part say? It says to me that they are no longer CONFIDENT that their paper gold holdings possess real value. It says that they understand their money is being devalued by reckless bankers and politicians and that they want to protect their huge portfolio.

Now then, this is just one institution that is losing confidence. S&P stated they are losing confidence. What happens when ALL the endowments seek to convert paper gold into physical? Seems to me that this is a game of first come, first served. Could it ignite a run on the physical metal? You bet it could, it seems to me that’s already in progress. Is this a sign of a top? Let me know when most the endowments have done likewise – and just imagine what would happen if all the large investments funds did the same!

Oh, and I have another issue here. Why on earth does the University of Texas endowment fund possess so damn much money?! With the cost of education soaring, the Universities are sitting on billions and billions while they jack up the cost of tuition and force students to bury themselves in central banker DEBT. Currently on Wikipedia there are 58 university endowment funds with values above a billion dollars (Wikipedia – Endowments > $1 billon)!

So, effectively the universities are robbing Peter (students) to pay Paul (Endowment and its managers), while putting the taxpayer on the hook to guarantee it all through the student loan process (which is not dischargeable in the bankruptcy process by the way – thanks to central bankers writing these “laws”).

How much educating could the University of Texas endowment do? Go ahead and get out your Cray calculator and divide $20 billion by whatever you think it should cost to educate one of our youth through college – the number is HUGE, and that money is simply not being used as intended. Greed comes to mind.

To refocus the discussion – all of these events point to a loss of confidence, and just look at today’s market – equities down, bonds down, dollar down (then bouncing mechanically on deleveraging), gold up. Loss of confidence is in progress.

How do you invest for that? Seems like the University of Texas is onto something.

And if those events are not surreal enough for you, think about the violent breakdown occurring now in Mexico, and then try reading about the fallout of the impossible math right here in the good ol’ U.S. of A… Crime and police work in Flint, Michigan:
Riding Along With the Cops in Murdertown, U.S.A.

A sign taped to the entrance of police headquarters says it all: “Closed weekends and holidays.” Every weekday, the doors are locked at dusk.

It’s not that the cops here are scared; it’s just that they’re outmanned, outgunned and flat broke.

…“Sometimes, we don’t get to a call for two days,” he says. Last fall, an elderly couple called after being held up at gunpoint in their driveway. The police arrived on the scene five hours later.
Go ahead and give that one a read.

And I can’t pass a day without emphasizing the dire situation in Japan – do not forget that every day more and more radiation from Fukushima is spilling into the environment and is continuing to accumulate into our food chain. The “roadmap” presented this weekend by the Japanese is complete fantasy. You will find that progress as they are discussing will not happen as they will be unable to reestablish containment as they dream. Again, it is my opinion that the number one priority be containment on site. In this regard they are talking about building a giant concrete walled structure to enclose the reactors in, but that is a dream until they get the fission reaction to stop taking place – this is because the fission reaction produces hydrogen and they risk blowing up any ordinary walled structure they place over them. No, they should be burying the cores and the pools in sand and boron, and then entombing them – at least get rid of TEPCO and bring in some outside experts to brainstorm and take action on behalf of humanity!

Each new aftershock seems to stir the corium and produce another large release of particles that is promptly covered up by the Japanese removing the radiation data as if it did not happen. Again, this is the type of cover-up that occurs when special interests are in charge – it is the exact same type of cover-up practiced daily in our markets and with our economic data.

And that is exactly why the University of Texas is converting to physical gold, and why the S&P put the United States of America on watch Negative.