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New Jersey governor Chris Christie has me laughing today with a pair of interviews. Please consider Governor Christie's Advice: Don't Send It To Them In The First Place

Now, some in this chamber may want to return to the days of outrageous state spending growth. To gimmicky programs that take money out of the taxpayers right pocket, and have Trenton keep most of it. Then return far less of it in their left pocket, take a bow and call it tax relief.

Now, New Jersey has seen 30 years of this as Trenton's solution to fix property taxes. It never has fixed a problem and it never will fix the problem. And New Jerseyans will not fall for the same old Trenton politicians' trick again.

We know that the only way to ensure that Trenton politicians will not waste your money is to not send it to them in the first place.

Chris Christie to Warren Buffet

In a CNN interview on Tuesday, Christie has this message for Warren Buffett "write a check and shut up"

Famously outspoken New Jersey Governor Chris Christie says he's "tired" of making the discourse surrounding tax reform all about Warren Buffett - and that if the billionaire investor wants so badly to pay more taxes, "he should just write a check and shut up."

In a CNN interview on Tuesday, Christie sparred with Piers Morgan over the issue, arguing that, as governor, he's "not going to let the most vulnerable suffer." But the Republican governor added that he also is "not going to get into this class warfare business, where certain people are more important than others or deserve more attention than others."

"I'm so tired of talking about Warren Buffet. What are you going to bring up next, his secretary?" asked Christie on CNN.

"He should just write a check and shut up," Christie said, later on in the interview. "Really, and just contribute, OK? I mean, you know, the fact of the matter is that I'm tired of hearing about it. If he wants to give the government more money, he's got the ability to write a check, go ahead and write it."

Christie said that in New Jersey, he's proposed lowering tax rates for everyone, even the highest earners.

"What we're doing here in New Jersey is everyone will get a 10 percent tax cut. Everyone will get their taxes reduced," he said.

If you start sending government more money, I guarantee you politicians will find thousands of ways to waste it.

Christie will be on CBS' "Face the Nation" on Sunday, Feb. 26. It should be entertaining.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

The BBC’s Paul Mason, fresh back from Greece, gives a report on Democracy Now of how living conditions have deteriorated as a result of the imposition of austerity measures. One of the stunners, mentioned in Atlantic Wire (hat tip Lambert), is that not only will some Greeks have to work without pay, some will have to pay for their jobs (yes, that is not a typo). The euphemism is a “negative salary.”

Mason also discusses how this program is radicalizing the public. Communists, Trotskyists and other extreme-left groups are polling at 43%. That’s a strikingly high number. This plus the level of dissent on the street suggests Greece is on its way out of the eurozone. But will the technocrats prevail? As Michael Hudson has stressed here and in other commentary, the banks are succeeding in stripping Greece of assets, an operation that used to be possible only via military force.

From Democracy Now (hat tip Philip Pilkington):

Goldman's David Greely is no Tom Stolper. In fact his recommendations have been correct more often than not. Which is why we believe that when the market learns that the Goldman commodities strategist just opened a long September WTI position at $107.55, it will merely provide that extra oomph to send WTI up, up and away. Or maybe not: this could be another one of the "fade Goldman" calls. Alas, with the real impact of the recent $2 trillion balance sheet expansion becomes truly felt we have a distinct feeling Goldman is quite right on this one. Evil, evil speculators.

From Goldman's David Greely:

Repositioning our trade recommendation as Brent crosses $120/bbl

 

Brent crude oil prices have rallied $11.92/bbl this month, crossing our 3-month target of $120/bbl and reaching their highest levels since last spring. While we continue to see an upward trajectory for crude oil prices, we believe that with Brent prices having crossed our 3-month price target it is an opportune time to reassess our trading recommendation and we believe that the better trading opportunity may currently lie in WTI futures for the contract months following the scheduled June reversal of the Seaway pipeline to flow crude oil from Cushing to the US Gulf Coast. Brent prices have risen above our 3-month target, but we expect them to continue to rise to $127.50/bbl over the next 12 months

 

We continue to expect Brent crude oil prices to rise further this year in order to restrain demand growth, keeping it in line with available supplies. Further, we see the risks to our forecasts as skewed to the upside as world oil inventories have not been building despite Saudi Arabia pumping at its highest levels in 30 years and Libyan supplies returning to the market. This suggests that the increased supplies have been absorbed by the market and leaves the world in the unprecedented situation in which OPEC spare capacity is at a trough rather than at a peak just as the world economic recovery is getting on a more solid footing.

 

Taking profit on our long July 2012 Brent trading recommendation with a potential gain of $13.19/bbl, and opening a long September 2012 WTI crude oil futures trading recommendation

 

The Seaway pipeline is scheduled to be reversed in June to flow up to 150 thousand b/d of crude oil from Cushing to the US Gulf Coast, increasing to 400 thousand b/d by early next year. With the Seaway flowing crude from Cushing to the US Gulf Coast, we expect WTI prices will be closely tied to Brent prices, with WTI likely trading at a $3-$5/bbl discount, reflecting the pipeline tariff economics. Consequently, we expect that WTI prices for the contract months following the reversal of the Seaway will move upward with Brent prices over the next 12 months. However, because these WTI contracts continue to trade at a substantial discount to Brent, we believe they have additional upside from the narrowing of the WTI-Brent spread that we expect following the reversal. For example, the September 2012 WTI-Brent spread is trading at $11.28/bbl, whereas on a 6-month horizon we expect the WTI-Brent spread will narrow to $5.00/bbl.

 

Submitted by David Galland of Casey Research

Ben Graham’s Curse On Gold

It seems that the mainstream investment community only takes a break from ignoring gold to berate it: one of gold’s most outspoken critics, uber-investor Warren Buffett, did so recently in his latest shareholder letter. The indictments were familiar; gold is an inanimate object “incapable of producing anything,” so any investor holding it instead of stocks is acting out of irrational fear.

How can it be that Buffett, perhaps the most successful (and definitely the most well-known) investor of our time, believes that gold has no place in an intelligently allocated investment portfolio?

Perhaps it has something to do with his mentor, Benjamin Graham.

Graham, author of Security Analysis (1934) and The Intelligent Investor (1949), is correctly respected as one of history's most knowledgeable investors. Over a career spanning 1915 to 1956, he refined his investment theories, in time becoming known as the father of value investing. Much of modern portfolio theory is based upon Graham’s work.

According to Graham, while no one can tell the future, there are periods when the valuations of stocks and bonds would deviate from fair value by becoming excessively over- or undervalued. To enhance returns and reduce risk, investors should alter their portfolio allocations accordingly. A quick look at a long-term chart supports Graham's theory clearly shows periods when one asset class offered a better value than the other:

(Click on image to enlarge)

But what of the periods when both stocks and bonds stagnated or fell together? For much of the 1970s and again from 2001 through today, any portfolio allocated solely between stocks and bonds would have at best treaded water and at worst drowned in a sea of stagflation. To earn any real return, an investor would have needed to seek alternatives. 

It’s clear from this next chart that gold was exactly that alternative, a powerful counter-trend investment for periods when both stocks and bonds were overvalued. Yet gold is conspicuously absent from Graham's allocation model.

(Click on image to enlarge)

But this missing asset class is entirely understandable: for most of Graham's adult life and the most important years of his career, ownership of more than a small amount of gold was outlawed. Banned for private ownership by FDR in 1933, it wasn't re-legalized until late 1974. Graham passed away in 1976; he thus never lived through a period in which gold was unmistakably a better investment than either stocks or bonds.

All of which makes us wonder: if Graham had lived to witness the two great bull markets in precious metals during the last 40 years, would he have updated his allocation models to include gold?

We can never know.

We can know, however, that given Graham's outsized influence on investment theory, there is little question that his lack of experience with gold, and therefore its absence from his observations, has had a profound effect on how most investment professionals view the yellow metal. This, in our opinion, goes a long way toward explaining the persistently low esteem in which gold is held by the mainstream investment community. And, as a consequence, its widespread failure to even be considered as an asset class.

A couple of takeaways: first, perhaps now you can stop wondering why your broker, the talking heads in the financial media, and Warren Buffett continue to misunderstand gold as a portfolio holding. More importantly, however, is that in order to have sustained, long-term investment success, one must accept that an intelligent portfolio allocation needs to include not two but three broad categories of investment – stocks, bonds and gold, with the amounts allocated to each guided by relative valuation.

Investors who understand this tenet have an almost unfair advantage over other investors as it allows them to get positioned in gold ahead of the crowd and enjoy the bulk of the ride, while others sit on their hands.

So when you hear commentators ridiculing gold as a barbarous relic, lamenting that they cannot eat it or smugly asserting that it produces nothing, rest contently in knowing that they’re operating with a severe handicap in their own portfolio. Meanwhile, we’ll prosper, armed with the understanding that gold fulfills a very important and specific purpose in a portfolio, namely as real money that protects net worth during periods marked by excessive government debt and currency debasement such as we are currently experiencing.

Given the powerful influence of Ben Graham and his disciples, his curse on gold will not go quietly into the night. But it should.

I got a laugh out of this headline:

 

 

Delta Airlines and the Pilots Association are suing the Exim bank for financing Air India. I think they have a great case. I hope they win.

Exim gives cheap money to India so it can buy Boeing planes. This story “sounds” good as exports mean jobs and business is booming at Boeing. You can count on Obama showing up in Seattle sometime, and crowing about all the jobs he has created thanks to the cheap money deals.

I wonder what he will be saying to the folks who work for the airlines. They don’t get cheap money, so they can’t buy the new aircraft they need to compete with the likes of Air India on the profitable transatlantic routes. (The basis for the suit.)

The only winners in this story will be the lawyers. The losers will be “us”. We will pay for it in the form of higher airfares, more debt and deficits.

Is this an example of an unintended consequences, or just stupidity?

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A Greek, a Portuguese and a Spaniard are talking to god:

The Spaniard and the Portuguese ask, “When will our countries be free of debt?”

God answers, “In 100 years for Portugal and 150 years for Spain.”

The Iberians respond in dismay, “But, our children's children will be dead by then.”

When the Greek asks God the same question for his country, God answers, “I don't know — I'll be dead by then.”

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Lee Adler at Wall Street Examiner has some interesting data on the amount of printed money outstanding:

 

 

Two things caught my eye. The recent percentage rate of increase has not been seen since the crisis days of 2008. The second thing is just the sheer amount of paper money “out there”.

I have only questions regarding the rate of increase. Are these 100-dollar bills ending up in the USA? Or are they going out of the country? Are they being used to transact business? Or are they being used as a store of wealth? I believe it is all of the above.

The $1.05 Trillion of outstanding currency comes to 7% of GDP. That is up from 5% in 2007. The increase of $300 Billion represents a 40% increase while the economy was basically flat. If this was all in 100-dollar bills it would stack up 700 miles high. Didn't Bernanke say the Fed wasn’t printing money?

He's increased that pile by 250 miles. He's printed enough to carpet all of D.C.

Gold has had a nice goose of late. There are many reasons for it to repricing higher. Deep in the corner of the demand is all this paper sloshing around. Sooner or later, it will seek  to hide somewhere safer than in paper under a mattress. I suspect some of it did today.

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With the masses screaming their lungs of about hyperinflation, something that is highly unlikely at best, Hugh Hendry of Eclectica Talks About Hyperdeflation, why China might have a hard landing, and various off-the-beaten tracks Japan plays.

Here is clip from a Barron's interview.

Barron's: Where do you find yourself outside the existing belief system today?
Hendry: In 2009, I made a YouTube video of the empty skyscrapers in Wuhan, China. Goldman Sachs and others articulate a very reasonable and compelling argument of being invested in China. With the evidence of my own eyes, I concluded that China had a very robust system of creating gross-domestic-product growth, but forsaking the creation of wealth.

When America was having its China moment in the 19th century, it occurred against the backdrop of a gold standard, a hard-money regime, with a public sector that was minuscule versus the overall size of the economy. As an entrepreneur, if your project failed to generate a sustainable level of cash flow, you failed.

If you talk about a hard landing in China, you talk about GDP growth of 5%, not minus 5% or minus 15%. The Chinese government prints money. It can build superfast railways and overbuild airports, because the rest of the economy can subsidize it. China's swollen public sector is directing asset allocation, rather than pursuing profit maximization. They see [their system] as a success. But it creates a bubble, which can prove quite damaging.

Barron's: You've already had a hard landing—in the Chinese stock market.
Hendry: I should add something else that is contentious—U.S. quantitative easing [that eventually sent more money flowing to China], promoted because America had two sharp recessions and pursued orthodox policies, and had very little to show in the creation of jobs.

The policy was very successful. China now has inflation. Minimum wages have grown 20% annually for the past three years. This has encouraged the Chinese to tighten monetary policy. When you have bubbles and you tighten, bad things happen. China's stock and property markets are weak, a side-effect of quantitative easing. We may now have the pricking of the Chinese bubble. A year or two down the line, it could have enormous repercussions for the global economy.

Barron's: How does one play it?
Hendry: The world is very fearful of hyperinflation. Pension schemes have a preponderance of real assets, from forestry to gold to TIPS [Treasury inflation-protected securities], because they are very fearful. The road to hyperinflation is via hyperdeflation. That is why it's proving so difficult for hedge funds to make money. How does the rational mind that anticipates hyperinflation own 10-year government Treasuries yielding less than 2%? It can't. That's why people are struggling. To lay the seeds of hyperinflation, you need really, really bad things to happen. I thought the U.S. housing market having a massive crash would be hyperdeflationary. But then my Chinese friends pumped $1 trillion of credit into their $5 trillion economy, and created a global recovery, which has just come to an end. I'm speculating that hyperdeflation happens before hyperinflation. What's the worst that could happen? But the sum of all my fears would be China having a real hard landing of minus 5% or minus 10% GDP growth. If we had that—and Europe—the Fed would be printing $20 trillion, and I would have gold at $5,000. You can have a modest amount of gold, but you can't have all your assets in real assets, in case we get that hyperdeflation event.

Barron's: So how do you make money?
Hendry: Would you believe that the AIG strategy of selling too much credit protection in risky assets like mortgage-backed securities is alive and booming today in Japan? It doesn't concern mortgages. It is credit-default swaps on individual Japanese corporations.

Barron's: Do you seriously believe Japanese corporations are going to fail?
Hendry: Clearly, they can and do go bust. I'm buying the CDS on investment-grade Japanese corporations because of the overpricing anomaly. Japan had a bust 20 years ago, and yet today the banking stocks, relative to [Japanese bourse] Topix, are making fresh lows.

If I'm a Japanese bank and I lend money to a new business, I get 1% on 10-year paper. Then the bank gets a call from me, and I'm willing to pay 50 basis points for five-year protection on this same company. So suddenly, the yield has gone from 1% to 1½%. Compare that to five-year Japanese government bonds, yielding 30 basis points. The bank thinks: This is a great trade! Japanese steel companies are investment-grade and won't go bankrupt. So, the bank gets this huge yen yield, and thinks it is not taking any risk. You'd better believe it will sell way too much of that good thing.

One of my partners told me about Japanese steel: Here is a country with no energy, no iron ore or coal, yet it's the largest exporter of steel in the world, exports half its output. To put that in context, China manufactures 700 million tons of steel and exports perhaps 30 million. Japan produces 110 million tons and exports 40 million. As long as Asia is strong, they are fine. But if Asia hiccups or reverses, plant-utilization rates go from very high to very, very low very quickly.

Then we discovered that Warren Buffett owned shares of South Korea's Posco [5490.S. Korea], and that Korea was the biggest importer of Japanese steel, but Posco and Hyundai [5380.S. Korea] are building huge, integrated steel plants. They have a surplus of steel capacity and—guess what?—they're exporting to Japan, because the yen is so strong.

Initially, I wanted to buy a three-year, out-of-the-money put on Nippon Steel. My broker said, "I've been in a 20-year bear market; my boss will kill me." Then I thought, being long credit protection is being long volatility. I redialed his credit counterpart. I said: "I'm thinking of purchasing up to a billion yen of five-year credit-default swaps in Nippon Steel." The first thing he said was, "Would you consider 10 billion?" So one part of the bank is banned from selling volatility, and the other part is having a party. I bought reams of the stuff.

Barron's: We've barely discussed Europe.
Hendry: We are partly playing it through Japan. If events kick off again in Europe, the correlation across all [global] asset classes will go to one. So the steel CDS is 130 basis points, while to insure against default by the French government, I'd be paying the same amount. Which is riskier? A very leveraged steel company that can't tax you? Or a government that can? Our bearish bets are largely outside Europe. As for Greece, the end game will be the Greeks rejecting austerity. The euro is nothing but a gold standard lacking flexibility, and all the onus is on private citizens to take the pain. Eventually, a Greek politician will say, 'Vote for me, and I'll get us out of this system.'

I certainly agree with that last comment above.

I as I have said and repeated Eventually, Will Come a Time When ....

Eventually, there will come a time when a populist office-seeker will stand before the voters, hold up a copy of the EU treaty and (correctly) declare all the "bail out" debt foisted on their country to be null and void. That person will be elected.

The Barron's interview is well worth a read in entirety.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

When it comes to labor-wage parity, nowhere has this topic been more debated than in the context of China and the US. Specifically, with US wages declining consistently for the past 3 years despite commodity price inflation spiking with a 2-3 month lag following every coordinated central bank printing episode (such as the one we are experiencing now), many have proffered their predictions as to when Chinese secular inflation would make wage pay equivalent on both sides of the Pacific, and stop the exporting of jobs from the US to China (a good discussion on the topic can be found in "With China Forecast To Reach Wage Parity With The US In Five Years, Is A New Manufacturing Golden Age Coming To The US?"). And while labor equivalency between China and the US likely still has a ways to go, we have now crossed a critical Rubicon, as Chinese and European wages, at least in one part of European Union, have caught up. Net result, as Spiegel reports, carmaker "Great Wall this week became the first Chinese automobile manufacturer to open an automobile assembly plant inside the European Union in the latest move suggesting the country's carmakers are seeking to establish a beachhead into the European market." Yes, that's right: it is now cheaper for China to make cars in the European Union: "It used to be that European carmakers opened plants to assemble their cars in China. Now the Chinese have turned the tables with the opening of their first factory in Bulgaria, an EU country with low labor costs and taxes. Increasingly, Chinese carmakers are setting their sights on the European and American automobile markets." The ramifications of this landmark development are massive for virtually every aspect of the economy: for domestic labor migration, for inflation, for the trade balance, and certainly for US workers.

From Spiegel:

Bulgarian Prime Minister Boyko Borisov on Tuesday attended the opening of Great Wall's new factory in the northern Bulgarian village of Bahovitsa. The plant is to be operated jointly by Great Wall and the Bulgarian firm Litex Motors.

 

For years, European carmakers like Volkswagen have established large joint ventures in order to gain footholds in the Chinese market, but now the tables appear to be turning.

 

"Stepping on the European market is our strategy," Great Wall CEO Wang Fengying said at the opening festivities.

 

Within three to five years, the company plans to produce an entire line of models in Bahovitsa to be sold in Europe, she said. Test assembly of the Voleex C10 and the Steed 5 pick-up truck, which sell for 16,000 to 25,000 leva (€8,200 to €12,800), began already in November.

 

In the midterm, Great Wall plans to assemble around 50,000 automobiles per year at the 500,000 square meter plant. The number of workers is expected to grow from the current total of 120 to 2,000. Initially, the company plans to sell its vehicles primarily in Bulgaria and neighboring Eastern European countries like Serbia and Macedonia, but it later plans to expand into other EU countries.

...

Great Wall is China's largest manufacturer of sports-utility vehicles and operates plants in around a dozen countries, including Russia, Indonesia, Egypt and Ukraine.

Yesterday Bulgaria, a poor EU member, but an EU member nonetheless...

Bulgaria, the EU's poorest country, is attractive as a labor market because it is an oasis of cheap wages and low taxes. Workers are considered well educated and the country is ideal as the site for a company like Great Wall to launch. Given that wages for factory workers have risen considerably in China in recent years, assembly sites abroad have become increasingly attractive for some manufacturers.

...today Greece

...And tomorrow all of Europe, and then America?

So the real question is if Chinese wages can no longer compete with those in a poor EU member, just how high are they? And how long before China, for so many years a happy mercantilist importer of Bernanke's monetary inflation courtesy of its currency peg, is no longer competitive with ever growing parts of the EU, and then America? Does this mean that China's cheap labor force has pleateaued and the labor migration of peasants moving from the periphery to the cities no longer provides cheap labor? This was the topic of an extended analysis by SocGen from early January (posted here), of which the salient chart is presented below. Today's news will certainly force everyone to have a second long, hard look at the chart in the top left as it means that the Chinese labor force may indeed have topped out.

Aside from demographics, the macroeconomic implications on foreign trade and capital flows are monumental: most immediately for the US, it puts today's Wal Mart miss in a very different perspective, as it means that China is no longer the source of cheap commoditized produce, which in turn means that the entire discount retail vertical may have entered the secular sunsetting phase. It also means that Chinese producer margins are about to turn negative, and China is about to replay all the same EPS boosting gimmicks that America has gone through in the past 3 years, only in China, where there is no safety net, no jobless insurance claims, no EUCs, and no extended benefits (not to mention anything else), a wave of terminations will lead to far more unpleasant consequences than a bunch of unemployed people sitting on their coaches playing Xbox and watching GOP presidential debates. Most importantly, it means that going forward China will have zero tolerance for Fed monetary expansion as any hot money will immediately set off an inflationary forest fire as China suddenly finds itself with absolutely no output gap slack (unlike America which allegedly has more than enough, even though it is really just a secular regression to the mean shift).

In short, the implications, both good and bad, are huge.

And while this may be merely the proverbial canary in the Bulgarian coalmine for now, it will soon be followed by a murder of crows and then a kettle of vultures. Because the Pandora's box has just been opened.

Warning: Not for the faint of heart.

Washington, D.C. – Democratic Leader Nancy Pelosi released the following statement today on the rising gas prices across the country:

 

“Independent reports confirm that speculators are driving up the cost of oil, hurting consumers and potentially damaging the economic recovery. Wall Street profiteering, not oil shortages, is the cause of the price spike.  In fact, U.S. oil production is at its highest level since 2003, and millions of acres have been cleared for additional development.

 

“We need to take strong action to protect consumers from this speculation.  Unfortunately, Republicans have chosen to protect the interests of Wall Street speculators and oil companies instead of the interests of working Americans by obstructing the agencies with the responsibility of enforcing consumer protection laws.  They have also repeatedly opposed our efforts to end billions of dollars in outdated taxpayer subsidies for oil companies enjoying record profits.

 

“We support efforts by the Obama Administration to expand domestic energy resources, including natural gas and renewable sources like wind and solar that create jobs in America and will end our dangerous dependence on foreign energy supplies.  This can be achieved because today, the United States currently has more oil and gas rigs at work than the rest of the world combined, and imports of foreign oil have decreased.

 

“We call on the Republican leadership to act on behalf of American consumers and join our efforts to crack down on speculators who care more about their profits than the price at the pump even if these spikes harm the American consumer and our economy.”

Speculators? Such as the Federal Reserve and other central banks who have pumped $2 trillion of "liquidity" into the capital markets in the past 3 months just so Italian BTPs don't implode to fair value and so Europeans can continue living in a socialist "paradise" even as the bankers steal their gold?

Or is it the same congressional speculators who until recently had every right to front run the public on advance knowledge that the SPR would be tapped due to Democrat insistence to sacrifice America's last energy backstop only to win the election?

Or is Nancy simply pissed off that she can no longer trade ahead of any market moving news?

Whatever the reason for the gas surge, with these idiots in charge one thing is certain - the situation is about to get far, far worse.

Solyndra4eva!

Would you support a war against Iran if you knew that:

• Iran has one of the largest Jewish populations in the world, and the second-largest in the Middle East behind Israel

• Jews are protected by the Iranian constitution, and are guaranteed seats in the Iranian parliament

• The CIA admits that the U.S. overthrew the moderate, suit-and-tie-wearing, Democratically-elected prime minister of Iran in 1953. He was overthrown because he had nationalized Iran's oil, which had previously been controlled by BP and other Western oil companies. As part of that action, the CIA admits that it hired Iranians to pose as Communists and stage bombings in Iran in order to turn the country against its prime minister

• If the U.S. hadn't overthrown the moderate Iranian government, the fundamentalist Mullahs would have never taken over. (Moreover, the U.S. has had a large hand in strengthening radical Islam in the Middle East by supporting radicals to fight the Soviets and others)

• The U.S. armed and supported Iraq after it invaded Iran and engaged in a long, bloody war which included the use of chemical weapons. Here is former Secretary of Defense Donald Rumsfeld meeting with Saddam Hussein in the 1980's, several months after Saddam had used chemical weapons in a massacre:

• The U.S. has been claiming for more than 30 years that Iran was on the verge of nuclear capability

• The U.S. helped fund Iran's nuclear program

• The U.S. has been actively planning regime change in Iran - and throughout the oil-rich Middle East and North Africa - for 20 years

• The decision to threaten to bomb Iran was made before 9/11

• America and Israel both support a group designated by the U.S. as a terrorist organization which is trying to overthrow the Iranian government

• Top American and Israeli military and intelligence officials say that Iran has not decided to build a nuclear bomb

• Top American and Israeli military and intelligence officials say that - even if Iran did build a nuclear bomb - it would not be that dangerous, because Israel and America have so many more nukes. And see this

• American military and intelligence chiefs say that attacking Iran would only speed up its development of nuclear weapons, empower its hardliners, and undermine the chance for democratic reform

• The people pushing for war against Iran are the same people who pushed for war against Iraq, and said it would be a "cakewalk". See this and this

• Well-known economist Nouriel Roubini says that attacking Iran would lead to global recession. The IMF says that Iran cutting off oil supplies could raise crude prices 30%. War with Iran would kill the American economy. And see this and this

• China and Russia have warned that attacking Iran could lead to World War III

While Iceland is now known as the country that is the closest earthly approximation to banker hell, it is safe to say that Greece is the terrestrial equivalent of banker heaven. Because as explained earlier today, the country's population is about to get a worse deal than your average run of the mill slave - they may get whipped, but at least never have to pay for the privilege, unlike the Greeks. Hence negative salaries. As also explained, the European bailout of Greece, is now formally a Greek bailout of Europe, funded by the country's already negative primary surplus, or better said - deficit (don't try to make mathematical sense of that - a scene out of Scanners is guaranteed). Hence, negative bailout. But the piece de resistance, and the reason why Greece is the in situ version of bankster heaven is the news from the NYT that Greece is also about to have negative gold.

Ms. Katseli, an economist who was labor minister in the government of George Papandreou until she left in a cabinet reshuffle last June, was also upset that Greece’s lenders will have the right to seize the gold reserves in the Bank of Greece under the terms of the new deal.

Well, they may be broke, and they may be bailing out Europe, but at least they'll have no gold: sounds like a sweet deal - it makes perfect sense that Greeks are taking every incremental humiliation from a syndicate of few fat, bald types who have access to a digital money printer, with the supine determination of an Oliver Twist.

NYSE volume was the 3rd lowest of the year so far (while ES was just below average) as stocks leaked lower all day to small net losses by the close. Financials led the drop in stocks as they start to catch up the credit market weakness we have been pointing to for over a week but while HY (the high yield credit spread index) continues to underperform (and stocks following at a lower beta), IG (investment grade credit spread index) modestly outperforms (the up-in-quality rotation) but HYG (the high-yield bond ETF) surged today into a world of its own once again. We suspect this is driven by 'arbitrage' flows between HY's recent richness and HYG's cheapness (as well as potential HY new issue impacts). Gold (and to a lesser extent Silver) was the story of the day as it exploded (perhaps on the Greek gold-collateral news) over $1780 intraday (now up over $55 in the last 3 days) although the USD did nothing (FX was quiet with JPY inching lower and EUR small higher as DXY leaked higher on the day to -0.25% on the week). The rest of the commodity complex jumped also (with WTI losing ground into the close even as Brent kept going - suggesting the spread decompression was in play). Treasuries rallied from early in the European day with yields dropping 6-8bps from the peaks and shifting the entire curve into the green for the week now (10y and 30Y around 1bps lower in yield). ES couldn't get significantly above VWAP today and CSFB's fear index (which tracks equity option skews) is at record highs which both suggest a preference to sell/cover is appearing (even as VIX diverged modestly from stocks today with implied correlation rising).

HY credit spreads (red) continued to widen from the snap back recovery last Thursday and stocks (blue) are leaking back to that same reality. IG credit spreads (dark red) are staying with stocks for now and modestly outperforming as we see HY-IG decompression (or up-in-quality rotation) showing up. HYG (green) opened exuberantly, tried to get back to reality and failed as it closed at its highs. While flows have been very big drivers in this ETF, we note there was some HY issuance today that may have been soaked up by the ETF and that rotation from old to new could have impacted the underlying portfolio (as comparing HY to HYG over the last week or two shows a notable divergence of real credit spreads decompressing and illiquid bonds underlying a beta-chasing ETF rising).

We suspect however, that this HY-HYG 'arbitrage' as the chart above highlights as the credit derivative market had got a little ahead of itself in the exuberance settings (remember we pointed out how rich the index had become relative to its underlying portfolio of names a week or two back). Therefore, we would not be getting too excited about HYG's performance today as a trend, as we appear to be very close once again to fair value.

Gold snapped higher today (following Oil and Silver's snap yesterday) as Copper, Silver , and Gold are all now over 3% higher this week (from Friday). WTI managed to get over $106 but the rise in Brent from the middle of the European market day (on rising rhetoric and tensions with Iran) as it made it over $123 and the spread broke $17 on the day kept a modest lid on WTI for now.

 

Treauries rallied handsomely from early this morning...

and while FX remained relatiovely calm (as in DXY did not move much broadly), the dispersion among the majors is becoming large - and notably EURUSD is having less impact as GBP and JPY drop away rapidly.

Finally, the CSFB Fear Index (which tracks how far out of the money a call option must be relative to an equivalent put option - i.e. a proxy for how skewed the option prices in the S&P 500 are becoming towards negative sentiment) reached record highs today. As is clear, it is somewhat coincident but certainly seems like a trend change is overdue and the vol, credit, and even stock moves of the last few days suggest momentum is slowing (as are the analogs to  1997 and last year). 

Of course so many are pinning hopes on next week's LTRO but we are afraid that this will not achieve the goldilocks feeling everyone hopes for - too large a draw is very worrisome (more subordination for example) and too small is very worrisome (not enough money printing) leaving a small window for 'just right' that unfortunately will not satisfy the monetary expansion hoarding equity market.

 

Charts: Bloomberg

WTF Did All That Printed Money Go?

Courtesy of Lee Adler of the Wall Street Examiner

In my investment letter, Addison Wiggin’s Apogee Advisory, we spend a great deal of time, money and resources looking for new investment ideas that our subscribers can act on independently. Sometimes what we find instead is outrage.

For example, the federal government is about to dump millions of the foreclosed homes at fire-sale prices to hedge funds and private-equity firms with government connections. If you’re an individual investor who might like to get in on the action, forget it! You’re shut out of this deal.

Homeowners who might be interested in buying the foreclosure property next door? Out of luck. And retirees hoping for a return on their money more than 1.8% on a five-year CD find another avenue closed off.

Prior to the calamity of 2008, we might have thought the deal we’re profiling today unthinkable. But now we’re becoming as immune to new instances of blatant cronyism as American babies are to diphtheria.

If you’ve got the hammer for it, we may as well get down to brass tacks: As many as 10,000 properties might be unloaded in a single transaction during the first quarter of 2012 — thanks to a government program so new it doesn’t have a catchy name yet, only the working title “Enterprise/FHA REO Asset Disposition.”

Roger Arnold, chief economist for Pasadena, Calif.-based ALM Advisors, has a different name for it — “the largest transfer of wealth from the public to the private sector.”

As of last September, there were about 800,000 “real estate owned” or REO homes in the United States — homes repossessed and on the market. Close to one-third of these — 250,000 — sit on the books of Fannie Mae, Freddie Mac and the Federal Housing Administration. That is, 250,000 homes are owned by you and me, the US taxpayers.

But that number is about to explode: According to Ken Harney at the real estate industry publication Inman News, “The three agencies face a tsunami-sized shadow inventory that is now heading their way — a combined 1.4 million delinquent loans on their books, at least half of which, they estimate, will end up in foreclosure.”

So now we’re talking that 250,000 number suddenly ballooning to nearly a million. The early-warning waves of the tsunami started lapping at the shore in November, when foreclosure auctions reached a nine-month high. The final numbers might end up even higher: Late-stage delinquencies tallied by Lender Processing Services in January approach 2 million.

Thus, the hypothetical excuse for the fire sale: “Even with heroic efforts,” Harney says, “Fannie, Freddie and FHA won’t be able to handle that level of REO volume using their current systems of individual sales, directed at owner-occupants and small investors.”

Thus, “You and I will not be allowed to participate,” says Roger Arnold of the newprogram. “These [new] investors will come from the private-equity and fund community, Goldman Sachs and its derivatives, as well as foreign sovereign wealth funds that can bring a billion dollars or more to each transaction.

“The US taxpayer will get pennies on the dollar for these homes, and then be allowed to rent them back at market rates.”

The groundwork is being laid right now. During the first week of January, the Federal Reserve issued a white paper on housing: “A government-facilitated REO-to-rental program,” it said, “has the potential to help the housing market and improve loss recoveries on REO portfolios.” Three Fed governors put the word out in speeches the same week.

The big boys can smell the money and they are lining up to play.

Among the players that expect to profit big from this government-sponsored scam are the private firms that already manage properties for the government. The Department of Housing and Urban Development calls them “management and marketing contractors.” Their principal owners and officers tend to consist of former high-ranking officials with HUD, the Treasury, FHA and so on.

There are 20 of these “M&M” firms, according to a list on HUD’s website. On the theory that perhaps you could reclaim some of your tax dollars by investing in these firms — the same theory with which we suggested ITA, the defense and aerospace ETF — we examined whether any of them are publicly traded. None are. Sorry.

No, the only way you’ll be able to make any money off these insider deals will come long after the feast is over and you’re allowed a few crumbs. “Once the privatization has occurred,” one analyst observes, “and the properties are generating rental income for the investors, the initial investors will cash out by forming real estate investment trusts (REITs), real estate operating companies (REOCs) or limited partnerships that will be made available to retail investors.”

Alas, by then, the easy money will have been made…at your expense. Feels pretty good, doesn’t it?

That’s why, increasingly we find ourselves casting our gaze overseas, longing for returns in foreign lands in places where the governments are somewhat less corrupt and the playing field slopes somewhat less directly toward the pockets of crony-capitalists.

Regards,

Addison Wiggin,
for The Daily Reckoning

Uncle Sam’s Fire Sale. Minimum Investment: $1 Billion originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Sherry Hunt, a Citigroup quality-assurance vice president turned in evidence of purposeful fraud against Fannie Mae and Freddie Mac and now stands to gain as much as $31 million as her share of the fine.

Please consider Citigroup ‘Defrauded' Fannie, Freddie.

Citigroup Inc. (C), which last week admitted breaking Federal Housing Administration rules and paid a fine, also violated regulations for home loans sold to Fannie Mae (FNM) and Freddie Mac (FRE), according to a whistle-blower's complaint.

The bank "defrauded, falsified information or misled federal government entities" by selling or securing insurance for mortgages with defects such as improper appraisals and not reporting them as required, Sherry Hunt, a Citigroup quality- assurance vice president, said in her complaint, which was unsealed yesterday. It was filed under the False Claims Act in federal court in Manhattan in August.

Hunt's charges formed the backbone of the U.S. Justice Department's case against Citigroup, which paid $158.3 million in a Feb. 15 settlement and admitted that it certified loans for FHA insurance that didn't qualify. Her complaint provides additional details into the bank's broken mortgage-processing system. In last week's agreement, the government reserved the right to pursue criminal and other charges related to mortgages originated or underwritten by Citigroup and not insured by the FHA.

As a whistle-blower, Hunt's share of the settlement will be $31 million before taxes and attorney's fees, she said in a Feb. 15 interview.

For Citigroup, the third-largest U.S. bank by assets, the high defect rates could be costly. It might be forced to buy back substandard mortgages sold to government-controlled Fannie and Freddie, who buy or guarantee most U.S. mortgages.

Last year, Citigroup repurchased 6,600 loans from government buyers, an 89 percent increase from 2010, according to a presentation on its website. The bank set aside $1.2 billion to buy back defective mortgages as of the end of 2011. That's the most ever, and up from $969 million in 2010.

Hunt said Citigroup knowingly vouched for the quality of loans that were "deficient" in income documentation, had incomplete borrower job histories, appraisal problems, errors in closing paperwork, missing credit reports and miscalculated maximum mortgage amounts, among other flaws.

Some managers' compensation was tied in part to reducing the defect rate, Hunt said.

For certain types of home loans, Citigroup's "defect rate" -- the rate at which the underwriting raised questions -- was 80 percent, said Hunt, 54.

Taxpayers are on the hook for over $180 billion in bailouts to Fannie and Freddie. Citigroup got off the hook with a $158.3 million fine, of which Hunt gets a bonanza jackpot of $31 million.

Meanwhile, fraud is everywhere, and no one has gone to prison or held remotely accountable.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

The S&P 500 has had the best start to the year since 1997, and Gas Prices are accelerating rapidly. Two interesting analogs may be useful to think about the next moves in these markets and whether we see divergence.

S&P 500 2012 performance (green) compared to 2011 (orange) and 1997 (blue) signals perhaps a roll-over is due?

and while gas prices have risen rapidly, they are on the same pace (in percentage terms) as they were last year (incredibly). The difference obviously is the much higher base price.

What triggered last year's rollover? High energy prices acting as a drag? European dysphoria re-emerging? US growth hope fading?

Charts: Bloomberg

By Tom Whipple, posted Feb 22, 2012:

Gasoline prices in the U.S. are off on another tear. The national average just went by $3.57 for regular and due to a little problem of several major refineries that serve the U.S.'s East Coast shutting down, here in Northern Virginia we are running 20 to 25 cents a gallon higher than normal. The wisest of the prognosticators say we should seeing circa $4+ a gallon by late spring so the Washington area will likely be seeing circa $4.50. In case you missed it, they are already getting $5 for regular down by the Kennedy Center. Somebody in Congress is sure to notice this soon.

While the record corporate profit bonanza (if now declining) is still the fallback argument for any bearish allegation that the only reason why the market is up 20% in 3 months is due to $2 trillion in liquidity dumped into markets by central banks, this may be about to end quite abruptly, especially if Europe is a harbinger of things to come. As the following chart from Credit Suisse shows, the number of large companies (>500bn market cap) that lose money on an LTM basis (so not just in the quarter, and thus with a much longer lasting effect) has risen in Q4 for the first time since Q3 2009. And while in nominal terms the change is still relatively modest, the actual change in "losing companies" is a doubling from under 5% to 10%, as for the first time in years the percentage of European money losing companies matches that of the US.

Since economic decoupling, while completely flawed, can last as long as recently printed money makes its way to the "hottest" markets on the margin, in this case the US, corporate decoupling as a theory is just to naive to even propose. At best the US will be hit with precisely the same lag that David Rosenberg mentioned in early January. The reason for the corporate profitability deterioration: surging input costs courtesy of the recent commodity spike. In other words, the only upside case for stocks, as their earnings are about to turn far more negative is multiple expansion. The same "multiple expansion" that will likely prove to be the same mirage as decoupling once the market digests what David Rosenberg discussed just yesterday in the context of the tax shock already unleashed by the administration.

$100 billion down…

$40 trillion left to go!

Hey, don’t hold us to those figures. But yesterday European sages cut another deal to stave off the truth. Instead of defaulting openly and honestly — as Greece has done over and over again ever since 1827 — the Greeks will be ‘rescued.’

Sayeth Lucas Papademos, the technocrat leading Greece through its vale of deceit:

“It’s no exaggeration to say that today is a historic day for the Greek economy.”

He’s right. It’s no exaggeration. It’s an outright lie!

What’s historic about the 15th rescue?

And as soon as the Greeks are fished out of the water, they’re to be given a shave and a haircut. No kidding. They’re supposed to shave off more public employees, more spending, and more benefits.

Already, one of 5 people is out of a job…with 2 out of 5 unemployed among young people. In November alone, 126,000 Greeks lost their jobs — the equivalent of 3.5 million job losses in the US, in a single month.

But the Greeks aren’t the only ones who are suffering. Their creditors are supposed to suffer a $100 billion haircut, too. Sounds like a default to us.

And what’s important about Greece’s 6th major default on its foreign debt? It defaulted for the first time in 1827. Since then, it’s made a habit of it.

The important thing, from our point of view, is that the Europeans are de-leveraging…getting rid of debt — at least a little, around the periphery of Europe.

Trouble is, there’s a whole lot more. And the level of debt, generally, is still increasing — thanks to the very same officials who just cut the latest Greek deal.

Here is where the numbers get a little unreliable. No, heck, they’re totally unreliable. But at least they give us a sense of the scale of the problem.

If you have debt equal to 100% of your income you can probably handle it. If the interest rate is 5%, you devote one twentieth of your revenue to debt service.

But if your debt goes to 200% of your income, the burden of the past begins to weigh on the future. You have to cut spending and investing, because so much of your income must be used to pay for things that have already been produced and consumed. Growth slows. The economy groans.

At 5% interest, you’d have to devote a full 10% of your income just to pay the interest. At 10%, you’re in real trouble…with one of every 5 dollars already spoken for, even before you get it.

The world produces about $50 trillion worth of output per year. Some countries — usually poor ones — have very little debt, for the simple reason that no one would lend them money. Others — such as the UK and the Netherlands — have total debt burdens over 500% of GDP. (Much of it is mortgage debt, which is a special case…since it may be considered an on-going expense, a substitute for rent.)

Even at 200% of GDP, debt doesn’t have to be a permanent and irreducible drag. If the economy grows faster than the debt, the burden becomes lighter over time. That is what happened in the US, for example, after WWII…and again, during the Clinton years.

The problem now — grosso modo — is that the growth is in the countries with little debt…and the debt is in the countries with little growth. In the US, for example, debt increases two to three times faster than GDP.

Most of the developed world is not so different from Greece. Some have more debt. Some have less. Overall, they have government debt equal to 100% of GDP. Household debt adds another 200% of GDP…or more; the typical developed country has total debt somewhere around 300% of GDP.

Total GDP is about $40 trillion. So in order to get total debt even down to 2 times GDP they need to wipe out $40 trillion of debt.

A long way to go…a tough row to hoe…

Austerity comes to the USA?

Not exactly. But The Wall Street Journal reports that taxes are set to go up:

First, the top marginal personal tax rate rises to 39.6% from 35% as the Bush tax cuts expire at the end of 2012.

Second, a limit on itemized deductions will add a further 1.2 percentage points to the top rate.

Third, a new 0.9% Medicare tax on incomes over $200,000 gets imposed ($250,000 for joint filers).

Fourth, the top 15% rate on long-term capital gains rises to 20%.

Fifth, dividends will once again be taxed at ordinary rates — 39.6% for the top income earners.

Sixth, a new 3.8% tax on investment income gets introduced for incomes over $200,000 ($250,000 for joint filers).

Seventh, the top estate tax rate goes from 35% to 55% (60% in some cases).

The estate tax exemption falls to $1 million from $5 million (the gift-tax exemption also drops to $1 million and the rate adjusts hither to 55%).

Unless action is taken, these tax increases will take some of the metal out of America’s already-anemic ‘recovery.’

And here’s something else that’s blocking the path to genuine recovery: Young people no longer start off in life with a clean slate. They’re heavily burdened with debt. They can’t spend. They can’t buy.

Bloomberg reports:

As outstanding student debt approaches $1 trillion, it’s one more reason record-low interest rates aren’t doing more to boost housing. The tighter lending standards that have emerged in the wake of the recession weigh particularly on younger, first-time home buyers, according to a Federal Reserve study sent to Congress on Jan. 4. These households tend to be younger, often have relatively new credit profiles, lower-than-average credit scores and fewer economic resources to make a large down payment, the report said.

“Potential first-time homebuyers have been disproportionately affected by the very tight conditions in mortgage markets,” Federal Reserve Chairman Ben S. Bernanke said at a homebuilders conference last week. “First-time homebuyers are typically an important source of incremental housing demand, so their smaller presence in the market affects house prices and construction quite broadly.”

The Fed’s white paper said 9 percent of 29- to 34-year-olds got a first-time mortgage between 2009 and 2011, compared with 17 percent 10 years earlier. “These data suggest a large decline in mortgage borrowing by potential first-time homebuyers due to not only weaker housing demand, but also the effect of tighter credit conditions,” the Fed said.

Outstanding education debt surpassed credit-card debt last year for the first time, according to Mark Kantrowitz, publisher of FinAid.org, a student loan website. Recent college graduates carry an average debt load of more [than] $25,000 each, which can limit their ability to qualify for mortgages even if they’re fortunate enough to land a job in a market with an unemployment rate of 9 percent for 25 to 34 year-olds.

Calling it a “student-loan debt bomb,” the National Association of Consumer Bankruptcy Attorneys warned Feb. 7 about the effects of rising student debt on recent graduates, parents who cosigned their loans and older Americans who have gone back to school for job training.

“Just as the housing bubble created a mortgage debt overhang that absorbs the income of consumers and renders them unable to engage in consumer spending that sustains the economy, so too are student loans beginning to have the same effect, which will be a drag on the economy for the foreseeable future,” John Rao, vice president of the NACBA, said on a conference call.

Normally, the housing ‘escalator’ works like this. Young people buy starter houses from older people. The older people move up to the family homes, buying the houses of people who are selling out so they can buy retirement houses. If the starter houses aren’t bought, the escalator stops. Young people can’t buy; so, older people can’t sell.

The other part of the story — not widely reported — is the enslavement of the young to the old. In effect, instead of families paying for their children’s education, they force the children to borrow the money from the government. Then, paying it back, the money is recycled to old people — through Social Security, Medicare, and so forth. Meanwhile, the government borrows trillions more to fund their giveaway programs. In the US, the total is over $15 trillion and rising — most of it destined to pay benefits for people over the age of 50.

And guess who’s supposed to pay for all this debt? The young, of course!

How long before they revolt?

Regards,

Bill Bonner
for The Daily Reckoning

Opposing Trends in Debt and GDP Growth originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Louis Woodhill, Forbes contributor says he applies "unconventional logic to economic issues". He proves it with this headline report Gasoline Prices Are Not Rising, the Dollar Is Falling

Forget the "logic" and skip straight to reality.

Crude Monthly



US Dollar Monthly



That's "unconventional" thinking for sure.

As for why the price of gasoline is rising, how about a discussion of ...

1. Peak oil
2. Supply disruption in the Mideast
3. Unsustainable growth in China
4. Liquidity spigots in the US, Europe, Japan, and China

... because the falling dollar theory sure is not the right answer.

Nor does this statement from the article make much sense "At this point, we can be certain that, unless gold prices come down, gasoline prices are going to go up—by a lot."

Really? Why can we be certain of that?

I get the fact he likes gold, and so do I. However, while the factors driving gold and oil overlap to a degree, they are not identical, and as I have pointed out gold can rise in deflation (it already has).

Woodhill's comment "because the dollar is currently a floating, undefined, fiat currency, there is no inherent limit to how far the price of gold in dollars can rise, and therefore no ultimate ceiling on gasoline prices" is technically true, but only in the context of hyperinflation.

Otherwise there is indeed a practical limit on the rise of the price of oil. Moreover, and as I have explained many times, many ways, the odds of hyperinflation in the US are extremely small.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List